泰瑞達 (TER) 2008 Q1 法說會逐字稿

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

At this time I would like to welcome everyone to the quarter one 2008 earnings conference call.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Newman, you may begin your conference.

Thank you, Ashley.

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 first quarter of 2008, as well as our outlook for the second quarter.

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

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

Copies are available on our Web site or by talking Teradyne's corporate relations office at 978-370-2221.

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

Note that during this call, we will be providing some slides on our web site that will summarize and re-enforce 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.

The 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 pass code for both numbers is 43456405.

A web replay is also -- 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 7th of May.

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 additional information concerning these non-GAAP financial measures, including a reconciliation to the most directly comparable GAAP financial measure where available on our web site.

To view them, go to the investor portion of our web site, 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 be participating in the Merrill Lynch Tech Conference in New York on May 6 through May 8, the Credit Suisse First Boston Conference in Boston on May 13, the Friedman, Billings, Ramsey conference in New York on May 28 and May 29, the conference -- the Colin 20/20TMT conference in New York on May 28 through the May30, the Oppenheimer Tech Conference in Boston on June 3 and June 4, a luncheon in New York on June 19 hosted by Eric May, and a luncheon in Boston on June 25, again hosted by Eric May.

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

First our CEO and President, Mike Bradley, will review the state of the company and the industry in the first quarter of 2008, and will provide guidance for the second quarter of 2008.

Then our Vice President, Treasurer and CFO, Greg Beecher, will provide more details on our financial performance for the quarter and on our guidance in Q2 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?

Thanks, Tom.

Morning, everyone.

Thanks for joining us.

I'd like to cover three topics as we kick off the discussion today.

First, a description of what's behind our increased revenue guidance in Q2.

Second, what's the status of new product penetration in the market.

And third, how much headway have we made on the drive to model profitability that we outlined in our January call.

On the revenue guidance, we're off to a very promising start to the year, led by strength in SOC tests, where total bookings were up 9% sequentially, with SOC system orders up 14% over the fourth quarter.

Our memory test business also posted solid results in its first quarter as part of Teradyne.

And despite continued slowness in commercial board tests and automotive tests, we're raising our revenue guidance in Q2 to the $310 million to the $330 million range.

We're very pleased with our momentum in the SOC test this past quarter despite a cautious buying environment.

Led by exceptional demand in wireless applications, coupled with strong microcontroller and power management buying, we posted FLEX orders in excess of 120 units, as well as our high SJ 750 demand in the last year and a half.

So, both of those products are in full stride as we move into this second quarter.

This year, we'll cross the 2,000 unit mark in FLEX systems and also break through 3 ,000 units on the J 750.

So we have got a very strong one-two punch going.

I'd add that we'd had some important competitive wins in the quarter.

In addition to socket wins and image sensors, motor controllers and consumer storage applications, we had two platform decisions in our favor from customers in the automotive and ASIC spaces.

There's no top-line impact from those two platform selections to date, but they should make a contribution to our revenues later this year.

It's important to note that many of our design wins this quarter were from existing products.

So I feel good about the competitive landscape and our chances for continued market share gains this year.

Let me elaborate a bit on our wireless demand situation.

Two things are happening here.

First, we've seen very strong ordering for our existing wireless solutions on the FLEX.

This is what's called our GEN 4, generation 4 instrument.

There are over 350 of those RF systems installed worldwide, and we saw sizable added demand for that product this past quarter driven by cellular transceiver and blue tooth applications.

In addition, our new fifth generation offering, the Ultra Wave 12 gigahertz subsystem saw orders for ultra wide band, higher frequency and higher port count applications.

You'll recall, in the last quarter's conference call, that we were optimistic that this product would generate a lot of interest due to its frequency headroom and port expendability, and that's certainly been the case so far.

So we've actually got strong demand for both wireless products, and that's what's behind our momentum in that segment.

I also mentioned last quarter that the ultra wave product was part of a set of five new products that we're projecting to deliver $150 million to $200 million in new business in calendar 2008, about a third of which would be into new customer applications.

The story on that front so far is quite positive.

We added a number of new installs for our latest image sensor test product, the IP 750 EX and expanded our customer base for the J 750 EX in micro controllers.

Our new LCD tester was endorsed by a major Taiwan LCD driver -- player with first units installed.

And our new high density UltraFLEX and related instrumentation had some significant ordering in Asia.

So we're off to a very good start on the new product pipeline.

And, therefore, reiterate my projections for business from those new product this year.

And we had a 60/40 split in specifier to OSAT business this quarter with specifiers.

That's the fabless companies and IDMs accounting for the 60%.

That's moved from 70/30 in the fourth quarter.

So the OSATs drove our growth with their third highest bookings in the last eight quarters.

The memory story was also solid with strong demand for our Magnum product in our major Asian customers.

Our goal is to grow the Magnum business by 35% plus this year and our business in this first quarter puts us on course to do that.

Although the demand in the memory sector is very, very unpredictable at this juncture, even more so than an SOC.

As you know, the value proposition of the Magnum product is a very economical test to flash memory devices.

The majority of our applications are now in final test, but we hope to extend it to wafer test during this year and into 2009.

So we feel that this ambitious growth projection this year is within reach.

I should add that we're pleased with the integration of Nextest into the company.

Our field organization is consolidated and our engineering teams are collaborating well.

As I mentioned before, the Magnum product and the engineering and support teams behind it are first class.

So we're making sure that we give our memory teams solid backing with their customers and with their product development efforts.

Our system test product demand was mixed, with continued strong demand in Air Force, marine and commercial airline test sectors.

Commercial board tests remain soft, and automotive tests had its typical first quarter low-demand level.

The profile in these businesses remains lumpy as programs are multi-year program driven, but we continue to make some key investments for future growth within the most promising sectors.

Finally, the drive to model profitability, which we outlined last quarter is on track.

Greg will give you the details on this, but the short form is that, one, we remain committed to achieving a 15% model profit level as we exit the year, and two, we're doing much of the work in the first half of the year to ensure that we meet that goal.

I'll let Greg flesh that out to you further in his comments.

The bottom line, then, is that we're off to a very good start to the year.

We've got strong new product momentum, a solid start in memory test, and early progress on the financial model.

All of this sets the year up very well so far.

Now let me turn things over to Greg.

Thanks, Mike.

And good morning, everyone.

I'd like to start off by providing an update of our progress in achieving model profitability by year end, which we outlined in our last call.

I'll then discuss first quarter results and highlights which include Nextest from January 24 to the end of the quarter.

Lastly, I'll provide some details around our second quarter guidance.

In our last conference call, we described the major elements of our plan to achieve 15% operating profit by year end.

For quick clarification, this 15% target excludes the Nextest purchase accounting, amortization and any special items such as restructuring costs.

It is also mid cycle versus trying to call the cycle at the end of 2008.

So, what's the progress report in getting to this average 15% model by year end as we enter the second quarter?

The short answer is that we are on our plan.

First, on lowering our break even level by about $20 million a quarter to get us back to the same break even level of about [$250] million a quarter before the addition of Nextest.

We're about halfway there.

As you recall, there were further break-in reductions from moving the FLEX family to out sourced manufacturing partner in China that come in largely in the second half of the year of 2008.

It's important to highlight that we will be unique in having border assembly through final configuration and test all in one site for the FLEX family, giving us advantages in logistics and oversight costs, responsiveness and less in transit inventory.

Last year, we completed the move of FLEX on schedule while maintaining the same high quality through some very good work by our operations team.

The final leg of moving UltraFLEX to China should be completed by the end of the third quarter.

On our overall breakeven target, there will also be some further improvements in operating expenses that are scattered across the company with no large standouts.

Underneath the covers, though, I do want to highlight that the semi-test engineering spending is expected to be lowered from the recent run rate, not only from the completion of a flurry of new products that are now fielded and at customer sites which Mike has talked about, but also from a set of engineering product initiatives that have shortened product development cycle times, established future technology building blocks that can be carried forward and efficiently leveraged, and also accelerate the ability to write software test programs and convert programs to multi site tests.

Later in 2008, to free up engineering talent and dollars to drop to the bottom line and to attack additional adjacent markets.

So in short, we're on offense both in our SOC tests, core market and investing in near adjacencies at a rate much higher than at any point in our recent past.

We'll talk more about the adjacencies that we are currently funding as they find their way to customers.

The other key contributors in getting to model come from new SOC test products and Magnum's growth in flash memory tests.

I am quite pleased to report that we are off to a good start on both.

Starting, though, with flash memory tests, on a full-quarter stand-alone basis, there was about $20 million in flash memory test revenue in the first quarter.

Our 15% target is counting on about $25 million a quarter from flash memory test by year end.

This is up from about $18 million a quarter in the average of 2007.

We believe this growth can largely be accomplished with a new higher-speed version of Magnum.

This higher-speed version opens up a larger addressable market.

This higher-speed version is currently in qualification at several customers, and should start to contribute revenue in the second half of 2008.

On the SOC test front, you may have noted that some recent press releases highlighted an important recent endorsement in LCD driver testing, which is one of the major adjacencies we were investing in 2007 and another very key share gain with FLEX for automotive testing.

As Mike has talked about the semi-test new product strength momentum, I won't comment any further.

Our system test group is currently in a lull, with strengthening expected as we get further into 2008 from new program buying and automotive tests and a return to more normal levels of demand in our in-circuit test business.

Now to the first quarter financial headlights.

Sales were $297 million, up 14% from the fourth quarter, which includes $21 million from Nextest, while earnings per share totaled $0.12 on a non-GAAP basis, and $0.01on a GAAP basis.

Moving to gross margins, non-GAAP gross margins were 47.7% of sales, up from 45.3% in the fourth quarter due primarily to higher volume and favorable product mix.

R&D expenses were $55 million or 18.5% of sales compared to $50 million or 19.4% of sales in the fourth quarter.

Nextest added $2.3 million to our R&D spending.

The balance of the change in from higher variable employee compensation and some investments in adjacent markets.

SG&A expenses were $65.2 million or 21.9% of sales as compared to $60.8 million or 23.4% of sales in the fourth quarter.

Nextest added $5.5 million of SG&A spending.

SG&A cost reductions in the quarter exceeded the otherwise quarterly increase in variable compensation.

Our net interest and other income was $5.1 million, down from $8.1 million in the fourth quarter due primarily to lower cash balances as a result of the Nextest acquisition.

We had $4.1 million of income tax, expense in the quarter, our quarter ending head count was approximately 3,700 employees.

In the first quarter, semiconductor test sales were 83% of the total, and the system test group was 17%.

On a geographic basis, our first quarter sales broke down as follows: Asia, 57%, U.S., 20%, Japan, 10%, Europe, 8%.

The rest of the world, 5%.

Our book to bill ratios for the first quarter, adjusting for a full quarter of Nextest results were 1.05 for the overall company, 1.06 for semiconductor tests, and .96 for the system tests group.

At the end of the quarter, our backlog stood at $374 million, of which 82% is scheduled to ship within the next 6 months.

On a geographic basis, our bookings for the quarter were distributed as follows: Asia, 61%; U.S., 18%; Europe, 11; Japan, 9; and the rest of the world, 1%.

Now, moving to the balance sheet.

We ended the first quarter with cash and marketable securities of $441 million.

Since last quarter, we used $280 million of net cash to acquire Nextest and $39 million of cash to repurchase approximately 3.3 million of our shares at an average price of $11.83.

As we speak, our remaining share buyback authorization totals 349 million.

In the first quarter, capital additions, net of sales of related capital equipment were $21 million, primarily for additions connected with new products.

Depreciation, amortization for the first quarter was $29 million, including $5 million of stock-based compensation, $4 million of accelerated depreciation for real estate, and $3 million for the Nextest intangible implementation.

Accounts receivables stood at $202 million for 62-day sales outstanding, an improvement of four days over the prior quarter.

We ended the quarter with product inventory of $104 million, an increase of $21 million from the fourth quarter due to the Nextest acquisition.

Sales for the second quarter are expected to be between $310 million and $330 million.

This excludes about $3 million of deferred revenue from Nextest that would otherwise be recognized but for the purchasing accounting rules.

Earnings per share for the second quarter on a non-GAAP basis are expected to be between $0.14 and $0.19 and on a GAAP basis between $0.07 and $0.12.

The differences between non-GAAP and GAAP EPS are the exclusion of amortization of acquired tangibles and special items, primarily restructuring costs and accelerated depreciation.

I'd like to very quickly reconcile how we go from Q1 reported non-GAAP EPS of $0.12 to a second quarter range of $0.14 to $0.19 on a sales increase of $13 million to $33 million.

Normally, our earnings per share would increase by more than we are guiding to on this sales increase.

However, though, please note that included in this increase is a full quarter of Nextest sales.

So we add another $10 million in for Nextest, and after accounting for the loss interest and the profits from Nextest, it's neutral to our EPS.

The other EPS improvements in the quarter are from a normal drop through in breakeven improvements.

Now, turning to the P&L details, we expect gross margins to be between 47% and 48%, R&D and SG&A should run between 17% and 18%, and 20% and 21%, respectively.

Our 2008 tax rate should be applied to our non-GAAP results is expected to be about 17%.

Our longer-term tax rate remains at 28% to 30%.

Our share count is approximately 172 million as we close the quarter, and for diluted EPS, we would estimate about 175 million shares for the second quarter.

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

Thanks, Greg.

Ashley, we would now like to open the call to questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster.

Our first question comes from the line of Timothy Acuri with Citi.

Hi, guys.

Several things.

First of all, with respect to the longer term model, have you fixed on what a revenue level might look like for that 15% out margin by the end of the year?

I think you were talking about $340 million.

Is that still the right number that you are thinking about?

I would use $345 million for that model.

345, okay.

Yes.

And then, there was some -- there's been some discussion about there being a falloff in the business at Nextest later on this year.

Do you think that this is a kind of two-quarter -- while business is good out of the gate, do you think that, NAND becomes a head wind as you move into the back half of the year?

Tim, it's hard to call out the visibility on memory for us is actually a bit tougher than in SOC.

There are projections about softness in the second half.

The thing we're trying to do is to get some new product trials, the momentum on those going so that we would have some help in the second half if the core NAND business does soften.

Okay.

And then, last thing for me, is the pickup in bookings in the semi-test business, is it program-specific?

And, does it at all relate to the fact that it seems like last year, there was a lot of extension of the installed base.

So there wasn't a lot of upgrade activity last year.

So is there -- are customers going in and specifically upgrading their, platforms because they didn't do it last year?

Or is it more broad-based?

Tough question.

I don't actually have handy here how much upgrade business there is.

It doesn't strike me that there's a very dramatic difference between last year at this time and this year with regard to augmenting existing platforms.

I think the thing that stands out a bit for us in this past quarter is we're starting to harvest some of the individual socket efforts that have been going on and that continued to go on as we tried to broaden the FLEX applications.

But in addition to that, there is some platform decision making that's going down.

Now, as I said in my comments, that isn't contributing to the top line yet, but I don't think it's got -- there's nothing aside from momentum around socket -- grinding it out socket work.

So you think it's Teradyne specific?

Well, it's hard to be totally Teradyne specific.

When I think about that, I'd say there are -- in this total space of $2.5 billion to $3 billion, we look at almost, I think between 25 and 30 segments.

In any one of those segments, we've got anywhere from zero share or single digits of share to 60%, even 70% share.

So most of the segments that we're in, if those move, we probably get a dollar, and the market -- the other suppliers get a couple of dollars worth of growth.

So, I think, it would be hard to say it's totally us, but I do think we have some pretty good market share and socket design in momentum.

Okay.

Thanks a lot.

Our next question comes from the line of Gary Hsueh with Oppenheimer.

A couple of questions from me.

First question is, just a kind of high-level simple question on $150 million to $200 million in new product business in 2008.

Given your guidance for Q2 and what you did in Q1, how much of that have we seen already?

Gary, let me tell you what our plan and then I'll just tell you whether we're on plan or off plan.

I think you can triangulate on it.

Okay.

That $150 million to $200 million would be a break down between a third of that in the first half of the year and two-thirds in the second half.

Okay?

It isn't linear, obviously, as you get new products that go in in single units.

Then as they move into production, you get multiples.

So we're on plan for achieving that trajectory this year.

Okay.

Great.

And then, my second question is just looking at book to bill.

Normally, don't kind of look at ratios, but can't help but notice that in Q1 as well as Q4, we're running meaningfully above parity book to bill, and if I look historically just back in the last two years, whenever you run above a book to bill of one, you tend to kind of come back down to earth next quarter.

Has anything structurally changed in terms of lead times in your business where we're running at a sustainably higher book to bill over the last two quarters?

Yes.

These last two quarters have more service bookings in them than you'd otherwise expect.

Normally, we have a very large service booking in Q4.

Some of those bookings also ended up coming into the first quarter.

So I think that is different from perhaps the other periods you might be referring to.

Okay.

Fantastic.

Thank you.

Our next question comes from the line of Christopher Blansett with JPMorgan.

Yes.

Along the lines of the question of broad-based demand, how did utilization rates on your SOC business trend during the quarter?

Chris, they've been pretty steady, 80% plus, over the last two plus years, they've tended to be -- I don't think there have been more than a couple of months where we've seen in our own install base had ticked down a little bit below that.

But they've been very steady, 80% to 90%, and I think that's indicative of how our customers are managing their capacity now, is that they are able to operate with the short lead times from us and from other suppliers, so they can manage the utilization pretty well.

So do you think that just in general, we've had such a low investment rate for such a long time, we kind of have a support level here in general?

Well, let's see.

The level of business right now in SOC is operating at about $600 million a quarter market.

So that translates into --if it stays at this level, it's $2.5 -- a little less than $2,5 billion.

So I think there's an argument that's a little bit softer than what some would be expecting.

So it feels like that's a sustainable level.

Certainly, it is for us through this next quarter, which is as far out as our visibility goes.

Right.

Now, when you think about it, you've indicated there are certain areas of strength, particularly wireless, you mentioned.

Are there areas of weakens that were offsetting these, or is it too difficult to parse that out?

Let's see.

The ups and downs -- a strong pieces, as I mentioned were for us in, the very short term in, the last quarter, were in RF, power management, micro controllers.

A lot of other things were about at parity to what they were in the fourth quarter.

So it's been a case where there have been fewer weak segments.

Base stand was down a little bit for us.

Going forward in this next quarter, we think that wireless stays strong, power management, I think, is going to stay pretty steady for us, and we would expect a little more strength in automotive, and the very short-term picture is that base stand could be stronger for us.

In terms of weakness, probably micro controllers get a little bit weaker here in the -- the lens and the lead time on our visibility would say microcontrollers gets short term softer than it was in Q1, because it was a very strong Q1.

Alright.

Thanks, guys, I appreciate it.

Yes.

Our next question comes from the line of Patrick Ho with Stifel Nicolaus.

Thanks a lot.

Your performance the past few quarters obviously, have been very good and appears very company-specific.

What do you see in terms of the overall SOC industry trends?

What are customers telling you?

Because obviously, some of it appears to be market-share gains.

But what's the overall business like in the industry as a whole?

Well, two things.

The one I mentioned before is, it's so fast turn, that the amount of conversation about trends is a lot lower than it would have been a couple of years ago.

The one thing we do see as a consistent trend is utilization is just constantly reiterated as a major issue for our customers, both subcons and IDMs.

And as such, they're trying to stretch their test platform products across as wide a portion of the landscape as they can get.

Now, in some subsets, they go more specific.

For example, this LCD space, microcontroller space, image sensor space and some automotive applications they have been willing to move to a more dedicated solutions, dedicated platforms.

But I think the trend of utilization just pushes everybody in the direction to try to put as many sockets onto a platform as possible.

Okay.

Great.

That's helpful.

In terms of gross margins, is the swing factor for gross margins in the near term just some of the integration efforts you're trying to do, or is higher volume still the biggest contributing factor to gross margins over the next few quarters?

This is Greg.

The contributors to gross margins looking forward are really twofold.

One is completing the movement of UltraFLEX to China.

That will get us a little less than one point in gross margin.

The other is this set of new products should also enable us to get healthier margins.

Those are the two principle components of getting us to our 50% gross margin target.

Great.

And final question, is probably more longer term, looking out going forward over the next few years, the integration of Nextest, you know, you've done a good job transitioning your test manufacturing to China for your SOC products.

What are your initial plans for Magnum and, I guess, the manufacturing process for that product line?

This is Greg again.

Initially, we have no plans to move Magnum offshore.

Over some period of time, we'll look at that if that makes sense.

What we're most focused on is getting the new products out to existing customers and 99% of our energy is going into growing the business and making sure the products come out on time.

We're less focused on the cost aspect of lowering manufacturing, and they do have a relatively low manufacturing cost.

We have, though, found that some of the commodities that they buy we also buy, and we're able to immediately get lower prices for them, and some of these, it's a couple million dollars a year savings for them in terms of what goes into their costs of goods sold.

So where it makes sense, we are using the muscle of Teradyne, but we're not disrupting the plan they have.

Great.

Thank you.

Our next question comes from the line of Steve Pelayo with HSBC.

Yes.

Two questions.

Mike, last quarter, you mentioned that you thought the SOC market was still likely to grow about 10% this year.

Do you still stand by that?

You just said a more a cautious demand environment and unpredictable behavior.

Do you still think that 10% is good?

Steve, I'll have to look back at my comments to see how much I couched it.

But last year it was a $2.4 billion market.

It's running at that rate right now.

So obviously, if it stays flat, we don't get the 10%.

I think what I was trying to do was share with you that the overall movement of a CapEx rate would argue that it would not jump a little bit this year.

But quite honestly, we're not making plans here that depend upon that.

We're trying to drive this model and our market share momentum so that we're able to get to model profitability independent of what the market is going to do.

Okay.

Two more quick ones here.

I think Greg made a comment about the 15% being once you enter the mid cycle.

So you guys do believe you can exceed that if revenues go above $345 million or so and if that $345 million is mid cycle to you, I mean, are there multiple (inaudible) out there that you can exceed $350 million in this kind of environment?

This is Greg.

The answer is yes.

I firmly believe that is the case.

We have modeled each of the businesses, and it would not take significant growth to go beyond $345 million.

We are gaining market share in our core businesses, and as you know, the wild card in some of this is what is the market size that we're starting from?

But if I use normal market sizes from history and haircut those to provide a buffer, we can get there.

If my haircut from history is not enough, then that raises another set of issues.

Last one for you.

Greg, actually.

You spoke about where you get the incremental 200 basis points or so on the gross margin line.

It looks like you're guiding roughly about 10% operating margin here.

So, it would be about 300 basis points coming up from the operating expenses.

Do you actually need the revenue growth to get to that, or the absolute dollar level of OpEx, where do you think that tracks over the next couple of quarters?

Well, on OpEx, over time, it's going to go down, particularly in the latter part of the year in engineering, and what happens in OpEx is, as we improve our profit rates, we put more profit sharing in those lines.

So we have a set of actions all teed up that will take place that will get us to -- I think we've talked in the last call, operating expenses about $118 million.

So we want to get to that level.

We have a plan to do that.

If you looked at the numbers right now, you'd say, "Geez, you guys are pretty close to that, at 120." But those numbers don't have the full profit sharing that would be in there if we were at model.

So we have a bigger task than just getting 2 million out, and we have plans to do that.

Alright.

And if I can just sneak in here, your 2008 expectations for depreciation, amortization and CapEx.

Last one for me.

We may do that offline with you.

Okay.

Our next question comes from the line of Tom Diffely with Merrill Lynch.

Good morning.

You talked about the OSAT players leaving a bunch of the up size in the first quarter.

Do you see similar trends in the second quarter, or what kind of visibility do you have between the OSATs and IDMs, current business levels?

Tom I don't have that handy.

My guess is that it is likely to be pretty close to that in the second quarter.

Okay.

I can look at that separately.

I didn't do that in anticipation of this.

But in general, do you see a different level of visibility between those two customer types?

No.

Our lead times go by product.

They span anywhere from five to eight weeks.

Obviously, we talk to customers and try to move their horizon out so we can understand what their sense of the market is, but they're pretty similar between IDMs, the fabless companies and the OSATs.

One thing that does happen and that is there's always a bit more cloudiness in the OSAT side, because they're negotiating for business with the specifiers.

So you have to weed out how much double-dipping -- double counting there might be out there.

Okay.

Would you say, though, that if there is an upside to price, at some point, it typically comes from the OSAT players, just from a volatility point of view?

Probably, because when this kind of spot market demand that usually -- and utilization is high, they usually get called upon to stretch, and they would come back harder and faster to us.

Okay.

Switching gears for a second here, when you look at the wafer test potential for your Magnum, does that require new tools, or is it just the higher speed has enabled you to go into that market?

Yes.

We only have in the Nextest memory business, the Magnum business, I think it's under 5% of our business is in the wafer test side of things.

So,the new product and the higher speeds there would allow us to address multi-chip packages.

So combinations of DRAM and NAND and that would give us an entree into the wafer side of the business.

So, it's the higher speed capability that does that.

There's nothing other than that that holds us back.

There been a limitation in terms of breaking into that segment of the business.

Okay.

Great.

Thanks.

Our next question comes from the line of C.J.

Muse with Lehman Brothers.

Hi.

Good morning.

Thank you for taking my question.

I guess, based on the commentary that you made on the SOC industry, it appears that the strength you're seeing is entirely market share gains.

So, I was hoping you could highlight maybe what segments this is coming from and where you might be taking share from?

Let's see.

C.J., it's always quite broad.

The segments that have been moving share for us gradually over the last few quarters, there have been consumer applications, Asia-based consumer applications.

The microcontroller business, some of that coming from Japan has been a segment for gains for us, and in power management and base band, we have also made head way in those segments.

There isn't a specific -- it's not a one-trick pony in terms of where we're able to gain share and because they come socket by socket, they tend to be sprinkled around.

Those would be the major ones, though.

Great.

That's helpful.

I guess moving over to your new UltraWave product, how important was that in terms of the strength in wireless bookings in Q1, and then I guess, thinking out through 2008, I would think these are a little bit more strategic investments and less turns.

Is your visibility here better?

Let's see.

I got your first one.

I'll answer the first one.

The UltraWave, as I said in the opening comments, the fourth generation product there was very, very strong.

And that's based upon design-in work that took place during the course '07.

So they are really capacity buys there.

So that outweighed the UltraWave, the fifth generation 12 gigahertz product.

But we had business from, multiple unit business in the quarter.

So it's fanning out, but it's a high multiple between the GEN 4 and GEN 5 on a unit basis over this last quarter.

Give me your second question again.

Yes.

I would think that perhaps the UltraWave would be maybe a little bit more in terms of a strategic investment, and that your visibility there might be better than the other products?

Yes, because we're very hand to glove with customers who are doing the design-in work there.

So your question was how --

Well, is the visibility there in terms of part of that $60 million plus of gains you foresee in 2008.

How much will come from this fifth generation product?

Oh, I get it now.

We're actually not going to decompose that.

It's a significant piece.

I should say RF -- our wireless share is very strong.

So, a big piece of what we do with UltraWave will be to build on top of what we have with our existing customers, but it will be a piece of that $45 million to $60 million of new business, and it's not an inconsiderable piece of that.

But for competitive purposes, we're not going to break that down.

We may next year at this time give some greater clarity as to how that breaks down.

But at this point, we're going to hold back on it.

Okay.

And last question for me.

I don't know if you break this out, but can you tell us what the semi-test service revenues were in Q1?

Okay.

We'll get that.

Hang on.

Yes.

About 20%, I think, but what's the number?

Why don't we loop back to that and insert it?

Do you have it there?

Here it comes.

$45 million, total services.

Thank you.

Our next question comes from the line of Raj Seth with Cowen and Company.

Mike, you've talked in the past about sort of socket to socket battles for share takes a while.

I'm curious, are there any, over the next 18 months large chunks of share up for grabs?

And specifically, I'm wondering about what's going on in the microprocessor space.

I heard there's a potential shift in strategy and maybe ultimately platform at the largest.

I'm not sure how evolved this thinking is there, but I recall last time when this particular customer shifted to an Asian supplier, I don't even think you even bid on that.

I'm just curious about what's going on there, and if there's a potential opportunity for you at either of the two large microprocessor suppliers.

Raj, I'd have to decline commenting.

It's so obvious who those players are.

We don't have any business to speak of in the MPU side of their business.

We always stay on touch on that as evaluations take place.

Obviously, if they are seriously looking for alternatives, we are in the game on those.

Outside of that space, it's hard to accumulate more than fractional points on platform or socket wins.

We have had a couple of platform decisions this past quarter, but again, those would be portions of a point of share.

But we hope to make those annuities for multiple years, because when platform decisions are made versus tactical socket decisions, you do get greater security with it.

But on the MPU side, I'll just hold my comments to what I said.

Okay.

I mean, can you comment about whether or not there are platforms up for grabs on the MPU side, or is that in itself too sensitive?

I will say that there is some evaluation activity going on, but I can't say whether that's leading to something or not, but there is some evaluation work that is going on, and the ones that are truly serious evaluations that we're obviously, would try to participate in those.

Okay.

Got it.

Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Gus Richard with Piper Jaffray.

Thank you for taking my question.

Just a couple quick questions on utilization rates on the test four in the industry.

How did that trend in Q1 from Q4, and how is that looking to you in Q2?

It doesn't really look very different Q4 to Q1 for us.

It's -- if it moved, it's only moved a point or two in utilization.

So we're in the 80 to 90 band.

Okay.

And then, thoughts on utilization in Q2?

Hard to project that.

The industry projections say the utilization is moving up, and we watch that as something of a leading indicator, but we think we can catch up to that anyway with the shortness of lead times that we've got with the products.

So if it does tighten up, we've got the ability to expand our shipments to meet that.

Okay.

And then, a different topic.

You talk about customers wanting to drive utilization on the tester, and you need to add more resources, more functionality under the tester, but wouldn't be used in any given test, sort of, how do you balance the cost of the tests with the need to increase the utilization of the platform with the cost of the platform?

Could you talk a little bit about how you build flexibility or whatever into the system in order to accommodate a lower overall cost of per test?

Well, the main thing that we have done with this product is to make it, what's called the universal slot architecture, which means you can mix and match a lot of different options in the product.

Having said that, customers really do take different approaches to it.

Some customers, for example, will take our MicroFLEX product, which is a smaller test that has fewer slot configurations, and they'll pack that full and use that for a subset of their devices.

At the same time, they'll take a portion of the higher-end products with more slot counts, and they'll put a more flexible mix of instruments and then they'll go for more of a high parallel test configuration.

So, the architecture tries to lend itself to either of the two tastes and the customers really are the ones who are determining how those configurations take place.

What you tend to see is in large install bases, you tend to see a diversification where they'll put more dedicated configs in place along with some general purpose ones, whereas if you have a small install base, they'll tend to be more general purpose.

Got it.

Makes perfect sense.

And then just finally, you mentioned that the power management side of your business is strong.

Is that a market share gain, and can you give a little more color on what sorts of power management devices you're testing?

Gradually, it's been a market share gain.

And the power management segments are tied into the mobile devices, so they tend to be things that are obviously better management devices in the cell phone and PDA space.

So primarily low voltage, low current?

Yes.

Got it.

Alright.

Thanks so much.

Our next question comes from the line of Steven Pelayo with HSBC.

Just a clarification.

You mentioned service was about $45 million, that a revenue or bookings number in the quarter?

That was revenue.

That is down significantly quarter-over-quarter.

If that were the case, then that would apply the mix --

Right.

But that was semi-test.

I think the question was semi-test.

Yes.

Okay.

That was total service then?

Hang on, I'm sorry to stumble on this.

We've got it here somewhere.

Okay.

That's okay.

And then my other question would be, rather than exclude this Nextest amortization in your P&L, I was really trying to think of it more from a cash basis.

Do you guys have some targets on operating cash flow or free cash flow as a percentage of revenue, something like that?

You've got service at $64 million, $64 million of service compared to $62 million last quarter.

$64 million versus $62 million last quarter in service revenue.

So you were right.

We were just giving you SOC.

Okay.

So that works out well.

And then, do you have a target there for operating cash flow or from cash flow as a percentage of revenue?

Some way I can think of cash flow targets?

As a percent of revenue, it would be probably 17%.

It looks like the way your depreciation amortization increased this year, it would probably be more in the 20s, I would have thought.

When you do the cash flow -- I'm doing it after capital additions.

Are you doing it before?

Okay.

There it is.

Alright, great.

Thanks.

Okay.

Our next question comes from the line of Christopher Blansett with JPMorgan.

Christopher, your line is open.

Sorry about that.

I had a quick question on how we should think about the growth of the NAND flash test business.

If you look at the units for NAND to date, just for the first two months, they're up something like 38% year-over-year.

Is there some way we can look at NAND unit growth and kind of correlate that to Nextest system sales?

Chris, we're working on the same thing, to try to do that.

It's very tough in this space because of the very dramatic growth rates in bits and in units, and the offsetting work that's being done in parallelism and throughput and different test techniques on it.

I don't have a lot to offer you in correlation on those numbers at this point.

As we do that work, we'll share that with you in subsequent calls.

Alright.

Thank you.

That's all the questions I had.

Okay.

Thanks.

And there are no further questions at this time.

Do you have any closing remarks?

I think we're all set, Ashley, and we want to thank everybody for participating, and we'll see you next quarter.

Thank you.

Thanks, everybody.

This concludes today's conference call.

You may now disconnect.