泰瑞達 (TER) 2009 Q1 法說會逐字稿

Good morning, my name is Allison, and I will be your conference operator today. At this time I would like to welcome everyone to the Teradyne Q1 2009 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)

I will now turn the conference over to Mr. Andy Blanchard, Vice President of Investor Relations. Thank you. Mr. Blanchard, you may begin your conference.

Thank you, Allison. 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 details of our performance for the first quarter of 2009, as well as our outlook for the second quarter of 2009.

First I'd like to address several administrative issues. The press release containing our most recent financial results was sent out via business wire last evening. Copies are available on our website or by calling Teradyne Corporate Relations Office at 978-370-2221. This call is being simultaneously webcast over our website at Teradyne.com.

Note that during this call we are providing slides on our website that may be helpful to you in following the discussion. To view them, simply access the Investor portion of the site and click on "live webcast", followed by "click here for webcast".

In addition, replays of this call will be available starting approximately 24 hours after the call ends. The phone replay numbers in the U.S. and Canada is 800-642-1687. Outside the US and Canada, the number is 706-645-9291. The pass code for both numbers is 95502319.

A web replay will also be available in the same time frame. You can find it by going to Teradyne.com and clicking on "Investors". The replays will be available along with the slides through the 14th of May.

The matters that we discuss today may include forward-looking statements about events or future financial performance of the Company. Such statements involve risks and uncertainties. There can be no assurance that the management's estimates of our future results or other forward-looking statements will be achieved.

Actual results can differ materially from such forward-looking statements. Important factors that can cause actual results to differ materially from those presently expected include conditions affecting the markets in which we operate, including decreased product demand, delays in new product introductions, lack of customer acceptance of new products, unanticipated delays in and costs in and expenses relating to the implementation of cost reduction plans, and other events, factors, and risks disclosed in our filings with the SEC, including but not limited to the Risk Factors section of Teradyne's annual report on Form 10-K, for the year ended December 31st, 2008.

Additionally those forward-looking statements are made as of today, and we do not take any obligation to update them as a result of developments occurring after this call. 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 reconciliation to the most directly comparable GAAP financial measure, where available on our website. To view them go to the Investor portion of the website, and click on "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 Cowen and Company 37th Annual Technology Conference in New York on May 27th; Eric May luncheons in New York on June 4th and Boston on June 25th; and the UBS Global Technology and Services Conference on June 10 in New York.

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 2009, and will review our outlook for the second quarter. Then our Vice President, Treasurer, and CFO Greg Beecher will provide more details on our financial performance in the first quarter, and on our guidance for the second quarter of 2009. We will then answer your questions.

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

Thanks, Andy. Good morning everyone. Thank you for joining us today.

I'm going to leave the financial details on the first quarter to Greg, and will only say that our first quarter numbers were in line with our revised guidance that we gave on March 23rd. What I'd like to do this morning is to give you a picture of what's unfolding in the market, to add some color to the new market initiatives we've got in place, and to summarize the tradeoffs we have made in our new cost structure. What I hope you'll take you away today are some very early signs of a turn in the market.

Now, it's easy to overdo this subject since most companies in the capital equipment sector are eager for any signs of a turnaround, no matter how small, so let me give a balanced view, but one that is slightly more optimistic since our last call. It starts of course with the fact that our SOC test business in the first quarter was at rock bottom levels. It couldn't get much lower from a new systems demand standpoint. System bookings were about what we saw in each of the last two quarters of 2001, and you know what the market was doing then.

On our last conference call, installed equipment utilization was at 50% or 60% levels in IDMs and in our OSAT install base, with some products running at even lower levels. Virtually all of our customers were focused on trying to utilize existing equipment and make no [out lies] of new capital.

As we enter this quarter, the tone has shifted a few degrees. New silicon product ramps are being discussed for the second half, and we're doing some slot planning to respond to it. May not seem like much, but the flattening to slightly up slope of our Q2 revenue projection is being done in anticipation of some short-term CapEx moves in both IDM and OSAT customers.

Now, the absolute utilization rates at customers don't justify much enthusiasm at this point, but the fact is that utilization has started to shift upward and that's promising. We have good traction in the Power Management area, and that's the segment plus Wireless where we're seeing signs of life.

Market share moves are difficult to measure in a period like this, of course, when there's so little buying. So the real issue right now is new silicon test development. We've got between 400 and 500 Teradyne Applications Engineers focused on these efforts, so we ensure steady momentum to extend the share gains made over the last three years.

Our Eagle Test business is fully connected at this point, so we're actively selling the ETS product line with our combined distribution system. And we've already got initial results there as we've sold our first ETS88 system in Asia. This is a compact system that can test multiple device types in parallel, and that we think will have great appeal in the low cost, high productivity Analog segment.

In our Systems test group, it's steady as she goes, with revenue down slightly from the fourth quarter level. Our Defense business is the most stable with orders and shipments driven primarily by deployment within the Air Force's BDAPs program. Diagnostic Systems had new orders in both Automobile and Truck sectors in Europe, and In-circuit Board Test saw continued low ordering from contract manufacturers in Asia.

In our new market initiatives, we did book a $31 million multi-system hard disc drive order in the first quarter. As you know from our last call, we have multiple units installed in Asia, and we now expect final acceptance and revenue recognition on those systems in the third quarter. As we've said before, this first chunk of 2.5-inch hard disc drive business has very high product and development costs, so it won't make a meaningful impact on the bottom line. We do expect to a gradually improving margin picture in this area for follow-on business, as we're aggressively working on a number of fronts including lower cost components and sourcing alternatives.

Since I'm on the subject of new products, I mentioned last quarter that we shipped our UltraFLEX High Speed Memory System for evaluation. That work is proceeding on plan, despite a very tough memory CapEx environment. As I've said before, we do expect to see revenue for that product in the second half of this year.

I also want to comment on our earnings leverage going forward. Greg will take you through some of the details, but the central point is that we've made very significant structural changes in the Company this last year. The danger in aggressive actions is of course that you mortgage the future if you make the wrong calls in the short term.

We've put great focus on customer support and product development in our new structure. While we have much greater earnings leverage in the recovery, we've been careful to preserve the heart of our business at the same time that we funded some new growth engines. I'll ask Greg to expand on this subject shortly.

Finally, I want our investors to know that the workforce at Teradyne has shown great backbone you through this downturn. Our people have adapted to some very tough choices on workforce sizing, and have joined to cut back on pay and benefits during this period. I'm grateful for the leadership at so many levels in the Company, as it's a strong demonstration of their belief in our long-term strategy.

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

Thanks, Mike. I'd like to cover three topics with you today, in addition to providing details on the first quarter. ,First is our guidance for Q2 which reflects a modest increase in our Semi-test revenues off our Q1 trough level. Second is our cash flow projection and improved balance sheet flexibility. And third is our operating leverage with our current cost structure.

As you can see in our release, we have increased revenue guidance in the second quarter to $120 million to $130 million, and decreased our non-GAAP loss to $0.26 to $0.23 per share. We're coming off the bottom of some exceptionally low order rates these last few quarters, and are positioning ourselves to respond to potential turns business through the quarter. We're staging some finished goods inventory so we have flexibility in responding to the inherent mix uncertainty.

Our Systems Test business will remain about flat to Q1 levels. Cash consumption in this past quarter was slightly better than projected, with good performance on receivables and capital expenditures. We ended the first quarter with $321 million of cash and marketable securities.

Our $190 million in convertible debt offering was well received, and closed on April 6th, the first day of the second quarter. So we've paid down our bank debt and are operating with about $360 million in cash as we enter the second quarter. And with the significant cost reductions, we should be about cash flow neutral at about $155 million of quarterly sales, excluding balance sheet changes.

We expect to exit the second quarter with about $320 million in cash and marketable securities. Our longer term intent is to settle the convertible principal in cash in 2014, and use net shares to settle the option element. Economic dilution from the convert will occur when our stock price exceeds $7.67.

The important story going forward is the leverage of our new model. As you can see in the exhibits we have provided, 15% model profits are now achieved at $275 million in quarterly sales. That's down from $345 million per quarter just six months ago. I should quickly note that the $275 million per quarter is slightly higher than our initial projections, as we've decided to invest a bit more in R&D than earlier planned.

With the market at a trough, it's of course very difficult to project the slope of the recovery or when we'll hit new mid-cycle revenue levels, but our steady gains in SOC test market share combined with new market revenue growth, should enable us to meet this new performance level going forward. I do want to emphasize that we believe the vast majority of our work on the cost side of the equation is behind us.

We've made great progress in lowering and [variablizing] our cost. We've transferred significant amounts of work to our lower-cost offshore centers, whether in board repair, IT support, material sourcing, application engineering, and so on.

The demands on the organization to reduce costs, while we also maintained our R&D road map and customer support, have been immense. But I firmly believe these actions are behind us, and we can focus on growth opportunities into the future.

Of the $190 million of annual cost reductions, 80% are permanent reductions, and they are in place now. These reductions are consistent with the principles Mike described around growth, customers, and of course, cost. As Mike said, we now have a significant first round of 2.5-inch hard disc drive test business in hand. While the contribution margin on this first run of business is very low, we do expect to make gradual progress on margin improvement going forward.

Now to first quarter results. Sales were $121 million, and non-GAAP EPS was a $0.38 loss per share. The sales were just above the high end of our revised guidance, and the non-GAAP EPS was $0.02 better than our revised guidance, primarily due to income tax benefits.

Now, moving through the P&L, sales were down $74 million or 38% from $195 million in the fourth quarter. Semi Test accounted for all but $6 million of the sequential decline, as the System Test group held up better, with our Mil/Aero division actually growing with its very strong position in Defense Program business.

Non-GAAP gross margin was 29%, down 11 points from 40% in the fourth quarter, primarily due to lower volume and higher provisions for slow moving inventory. Inventory provisions were $9 million in the first quarter, versus $4 million in the fourth quarter. R&D expenses were $47.2 million, or 39.1% of sales, compared to $52.2 million, or 26.8% of sales, in the fourth quarter. SG&A expenses were $55.4 million, or 45.9% of sales, compared to $58.5 million, or 30% of sales, in the fourth quarter.

Operating spending of $102 million was down $8 million, or 7% from the fourth quarter. Operating spending should bottom out further to about $85 million, once the impact of the recent cost reductions are in place for a full quarter. This also includes the benefit of about $8 million from temporary salary-related reductions.

Our net interest and other expense was $5.1 million. We recorded an income tax benefit of $7.8 million, primarily due to benefits from foreign operating losses. And our headcount after the most recent 350 person reduction will total about 2,900 people.

In the first quarter, Semiconductor sales were 65% of the total, and the Systems Test group was 35%. Our book-to-bill ratios for the first quarter were 1.13 for the overall Company, 0.83 for Semiconductor Test, and 1.68 for the Systems Test group. At the end of the quarter, our backlog stood at $252 million, of which 67% is scheduled to ship within the next six months. We booked $31 million for hard disc drive testers that are expected to be recognized in revenue in the third quarter.

Cash flow used in operations totaled approximately $72 million; net capital additions for the quarter were $1 million; depreciation and amortization for the first quarter was $31.6 million, including $6.1 million for stock-based compensation, $8.2 million for acquired intangible asset amortization. Accounts receivable stood at $67 million, or 51 days sales outstanding. We ended the quarter with product inventory of $165 million, about flat with $168 million at year end, as new product inventory in the quarter offset the inventory burn and write-down for existing products.

As noted earlier, sales for the second quarter are expected to be between $120 million and $130 million. Non-GAAP loss per share for the second quarter is expected to be between $0.26 and $0.23, and excludes amortization for acquired intangibles, the non-cash imputed interest on the convertible debt, and any special items such as further investment write-downs.

Now turning to the P&L details, we expect gross margins to be between 36% and 38%. R&D should be between 30% and 32%. And SG&A should run between 38% and 41%. The tax provision should provide a benefit of about $2 million.

So in summary, we have significantly improved our operating leverage, strengthened our balance sheet, and we are also making very good progress on our new market expansion plans. Now I'll turn the call back over to Andy.

Thanks, Greg. Allison, we'd like to take some questions, please.

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question is from C.J. Muse with Barclays Capital.

Yeah, good morning. Thank you for taking my question. I guess first off, I was hoping to run through some of the line items for the March quarter. In the Semi Test product area, can you shed some light or core SOC versus Eagle versus the Memory side?

This is Greg. In the first quarter, the Flash Memory was very low, it was about $1 million. And the SOC we'll speak to in total. The SOC in total was $64.5 million. I'm sorry, I just read you [bookings], excuse me. The sales - - I apologize. The sales for Flash were $2.5 million, and Semi Test was $76 million, so the Semi Test in total was $78.5 million.

Okay, and then I guess on the Semi Test service side?

Semi Test service was $38.2 million in the first quarter.

Okay. I can figure out the rest off of that. All right. And then I guess second question, on the convert front, can you talk about the mechanics of the hedging and how that can impact both cash flows and the income statement?

Okay. Let me first say how it works economically, and then I'll get into the income statement. There are 34.8 million shares that are connected to the convertible note, and that's based upon $190 million divided by 5.475. And those shares, based upon the convertible note hedge that we entered into, we basically would have economic dilution if the stock gets above 7.665 at maturity in 2014.

Now, that's different than how it gets accounted for, but let me just make sure that that's first understood again. 34.8 million shares and if the stock goes above 7.665 there's basically an option. So if the stock goes to $10.00, let's just say there's a gain of $2.30 times 34.8 million shares, and we could settle that with net shares in the future.

Now, from an accounting basis it gets a little more complicated in terms of how the EPS works, and that depends upon what is our EPS level, when is it dilutive, not dilutive, and I think it's a little too complex to get into that in this call. We can certainly do that offline.

Okay. And then I guess last question. You talked about slotting for the second half of 2009. Can you talk about where you're seeing strength, and whether that is IDM based or OSAT based?

The slotting that we're seeing, that we're doing, is we're talking about second quarter slotting, our capacity planning obviously is relatively short, given customer lead time requirements and backlog. But it's in areas like Wireless, Power Management; those are the two main ones where we're seeing some capacity planning activity in our customer base.

The breakdown between IDMs and the OSATs, or the specifiers in the OSATs, this quarter, was 75/25; last quarter it was 85 IDMs, this quarter 75 IDMs, and the OSATs were 15% last quarter, this quarter 25%. Because the total changes, the important thing is the OSATs actually have a slight uptick in their Q1 bookings. We don't forecast bookings, so we don't break down what's happening. But both sides, IDM and OSATs are participating in the slotting activity.

Great. Thank you.

Your next question is from Brett Hodess with Bank of America/Merrill Lynch.

Hi, good morning. I'm wondering if you could talk a little bit about on the SOC side, you talked earlier about applications and application wins, and if you could give us an update on what you're seeing there in terms of new design wins and the timing that you think those will translate into customers needing at least by their initial units for capability?

Brett, you know, it's such a low level of activity that when we're talking in this context, it tends to get exaggerated, but I'll give you some flavor of what's gone on in the first quarter and what we're seeing going forward. The segments that have held up for us, have been the strongest in the first quarter, and again, it's very, very low level, have been in RF, Power Management, and the Microcontroller segment.

As we go forward in this coming quarter, the quarter we're in now, we expect some strengthening in RF, additional strengthening in Power Management, Image Sensor, which has gone down to pretty low levels in Q1 is going to come back a little bit, and then the Automotive sector we expect to see some demand.

Now, the design in activity that we're working on over these last 13 weeks, we've had some activity and some design win activity at the socket level in Automotive Power, Power Management, the Mobile space, Medical Instrumentation, Embedded Flash; so those are the places.

But I wouldn't want to, as I have this discussion, it's so anecdotal, it's socket by socket at this point. We just have a lot of activity going on in that area, because we know that the long-term share gains will come as some of those Sockets in our customer base win in the marketplace. But those are the anecdotal points that I can share with you.

Quick follow-on, if I could. If you look at where in those areas you're getting some Socket wins, do you think that when we do get growth, whenever that is, hopefully sooner than later, that the mix of your Semiconductor Test business will be different in such a way that it will change the margin profile? In other words, do you think you'll have a higher mix of Flash and Eagle Test and some the other Power Management areas versus, say, some of the traditional higher end SOC or vice versa, that would have an impact on what your margins would look like, positively or negatively?

The short answer is no, I don't think so. We're not anticipating a big mix shift. We've got 2,000 FLEX products out in the marketplace now, 3,000 J750s; I think 1,400, 1,500 Eagle Testers. So I think we're not going to see a big margin shift, nor are we anticipating a big shift in the mix on those products.

I guess the important point to say is that the addition of the Eagle and the Nextest products does not rationalize or change the product set that we're offering. So we're not taking products out of the market as a result of that, and we don't think we're going to get cannibalization across the boundaries because they basically are complementary products. So the short answer is I don't think we're going to see much in terms of mix shift, and therefore margin shift.

Okay. Thanks for taking my questions.

Your next question is from Gary Hsueh with Oppenheimer and Company.

Hi, guys. Thanks for taking my question. Greg, I'm just looking at your guidance. I'm not sure if I really got a great explanation on exactly why gross margin is jumping up 10 percentage points for, at the midpoint, only a 4% or 5% increase in revenue. I mean, that's a monster move in gross margin. If you could kind of talk around and explain how we're getting 36%, 38% gross margin on 125, when we only got 29% gross margin on 120, that would with helpful.

Got it, Gary. The single biggest reason is the inventory provisions we took in the first quarter were about $9 million, and we're not anticipating taking a charge of that magnitude at all in the second quarter. So let's just say there's a seven layer [sell] from lower inventory provisions, and then we're going to take out further operations costs, consistent with some of the cost cutting we've done with other lines. This latest round of letting go about [350] people also (inaudible - microphone inaccessible) the operations group and some of the (inaudible - microphone inaccessible) as well. I apologize for the phone interruption.

I heard you. No worries. So just to be clear, I mean, there's really nothing else happening, like beneficial mix shift to more instrumentation cards in the June quarter, that would not make that 36% to 38% gross margin number on 125 sustainable? I mean, that is a hard, sustainable number moving forward in our models in September and December?

It is, Gary. It is. And again, the biggest piece is [Imaging] revisions. The only thing, I'm not changing my answer, only just want to add is, when there are brand-new products which we're introducing this year, if they ramp faster, generally speaking, the new products have lower margins at the outset, but then they work their way to attractive margins. So that's the only other thing I would say that, depending upon when some of the new products hit, that could impact the margins a bit at the outset.

Okay. Great. And just to kind of understand the mechanics here, in terms of bookings and revenue recognition, we haven't recognized any revenue from HDD test. You said that we would recognize the majority of the revenues in Q3. And so when I look at your bookings numbers, and with no HDD test contributing to revenues in Q2, is it safe to assume basically the rest of the core organic business in terms of bookings is going to hit roughly around 120, 130 in the June quarter, and then in terms of revenue in the September quarter, we would just basically on top of that tack on another $30 million, so something like a 150 for the September quarter for revenue?

Is that kind of how - - just because of the lumpiness of this $30 million HDD test, just want to make sure I've got the mechanics of how that rolls out in terms of revenue in bookings in June and September?

Gary, we're anticipating that revenue in the third quarter, as we had said and as you reinforced. The revenue for second quarter, I don't want to comment on bookings, but the revenue in second quarter that we're projecting as a function of backlog and of a view that we're going to see more strength there than we saw in the first quarter, that is a pretty low bar, since the first quarter was so low. But tonally it is moving up.

Our early quarter demand is more favorable than it has been in the last two quarters. So that's what's behind the 120 to 130, is some strengthening in the Semi Test space. But I think you're correct. Think about the addition of the $30 million of hard disc drive tester on top of whatever the run rate is for the standard business in Q3.

Okay. Great. And just a final question. You know, now that we've gotten one kind of inorganic growth mechanism or driver here materializing, what about the other two ? I was wondering if you could give us a little more color or you light on what the potential range of revenue contribution would be from the DDR3 High Speed DRAM Tester in the second half, and any commentary on LCD Driver IC testing. I hear it's getting relatively tight on the panel side. Was wondering if there's any hope for the the LCD Driver IC Tester actually contributing to revenue this year as well?

In reverse order LCD Driver is still very quiet for us, so there's not anything we're commenting on in terms of an uptick that we can see in the short-term. On the High Speed Memory area, a little more color than when we talked last quarter, and that is, I'll reinforce that we're anticipating revenue in the second half. We're not projecting the size of that revenue, because there's a lot of turmoil in the memory CapEx space in the heavy, heavy pressure that customers are exerting on their own installed base to try to reuse equipment.

The added color is, as I said last quarter, we have an evaluation unit in the field now with our target customer, and that system was a beta unit that's been upgraded to a full production configuration, so they're evaluating now the product they would put into production. We're hopeful that will occur in the second half of this year, but no sizing in terms of the revenue forecast on that. We'll have to wait until we get out into the third quarter to be able to comment in that area.

Okay, great, and by the way, great job here on execution. Thanks a lot.

Thanks, Gary.

Your next question is from Satya Kumar with Credit Suisse.

Just a quick clarification. On the DRAM testing, what's the breadth of your customer engagements right now, is it at multiple sites, or is it at one site? How should we think about that?

Satya, just a tiny bit, we're talking to lead customers in the space. We're focusing our energies on a couple of those customers in the early going here, to make sure that we're sizing the product, and the performance evaluations are done thoroughly with those target customers.

And will these customers have systems right now that are production systems? Is that the status right now?

No, we have system out with our initial partner.

Okay. And the other one is sort of an engagement (inaudible - microphone inaccessible)?

Right.

Okay. On the hard drive business, you said that the margins initially will be low. I was hoping if you could help quantify that. Is it sort of break even gross margins, or how should I think about that relative to your current margin levels?

You should think about that as break even gross margin on this first $30 million, and we would expect to improve that with subsequent buys, but the first round is break even. We met an incredibly aggressive schedule, and the down side of doing that was we didn't optimize enough around cost, so we've gotten much of the product performance and the design in, but we fell short on cost and we're off correcting that now.

And if you look at the subcons that have reported so far, they're guiding 60% to 70% of their CapEx to be spent in the second half. You mentioned that there was a little bit of an uptick in the subcon bookings but it's still pretty low levels on an absolute level. Is there much of the subcon revenue that's baked into your second quarter? How is the mix in the revenue IDM subcon in the second quarter?

It tracks what the bookings mix was in the first quarter, and likely would be similar to that. I honestly don't have the breakdown from a bookings standpoint but as you said, it's at a very low level now. Our customers are Fabless IDM customers, and so we'll expect that any capacity expansion would be spread across the IDMs and the OSATs proportional to the way we've been booking.

Lastly, just a model question. What should we be modeling for interest expense and taxes in Q2?

For Q2, taxes will be about a $2 million benefit, and interest would be about $2 million as well.

Thank you.

Your next question is from Jim Covello with Goldman Sachs.

Great. Good morning. Thanks so much for taking the question, and congratulations. Couple kind of follow-ups to other questions that have already been asked. Just relative to additional customers for the DRAM Test segment, I heard what you said about where you are with the first couple of customers, but what's a reasonable time frame to expect orders from multiple customers in the DRAM Test segment? Is that in H209 or is that more of a first half 2010 phenomenon?

Jim, it's probably a 2010 phenomenon.

Okay. Okay. For multiple customers, or just even for the initial customer?

It really depends on the rate which the acceptance work and the qualification work goes on, combined at the rate at which they're ramping. Just to try to be straight, the efforts right now are very, very concentrated.

Yep.

And we think the long-term success is to do well with the significant customer that's we're currently targeting. We'll obviously fan out but I think it's fair to say that that fan-out probably comes late in the year and into 2010.

Okay. That's helpful. And then I heard what you said about wanting to be careful to size the revenue opportunity in the segments in the near term, but can you help us understand maybe at the peak of the next cycle the magnitude of one versus the other HDD test versus the DRAM test? Which one do you expect to be bigger at the top of the next cycle, whenever that is?

That's a good question, but a tough one. The Hard Disc Drive, both are very concentrated markets, and therefore it's just a few customers that represent the total market. In Hard Disc Drive, the forecasts for growth in the 2.5-inch drive space are 40% plus compound annual growth rate.

We think that the tooling in that space could be sized anywhere from a market standpoint between $100 million $200 million a year. Maybe it's a little bit below 100 at the low end, and up to 200 at the high end. And in Hard Disc Drive, based upon the trajectory of DDR3 and so on, that is probably the 200 plus, $200 million to $400 million per year, as you go out and get far enough out in the growth cycle. So depending on our ability to penetrate those markets, it's probably 1.5 times to twice the buying power in the High Speed Memory space.

Terrific. Well, thank you so much and good luck.

Thank you.

Thank you.

Your next question is from David [Dooley] with Steelheads.

Yes. Thanks for taking my questions. I was wondering if you could give us the breakout of the orders and revenues during the current quarter, as a housekeeping question? And then if you could talk about what you think your market share was in SOC and in Flash in 2008?

Okay. Do you want to do the breakout, Greg and I'll get the market share.

Okay. Breakout of bookings in the first quarter was SOC Test was $64.5 million, Flash was $1 million, and STG made up the balance. The sales were $75.9 million for SOC Test, $2.5 million for Flash, and STG made up the balance.

And then, I would imagine given your commentary that both the bookings and the sales number for SOC product inside this was what, $15 million, $20 million.

I'm sorry, I'm not sure I understood that.

The actual product side of things inside SOC, I imagine because the service number's a pretty big number, that these were numbers were, as you've mentioned, rock bottom earlier in your commentaries.

The product side of Semi Test was $40 million in the first quarter.

Okay. Anything else on that, David? I'll talk about market share.

I'd love to hear the market share numbers.

I'll break it down between SOC and Memory as you asked, and I'm going to put all of Nextest and Eagle Test and Teradyne all together. One quick front end comment. As I think I said last conference call, in this last year the estimates we have for market share movements is that the companies that gained share in the SOC space were Teradyne, Verigy, and Eagle Test, and that in Memory, also Nextest gained share. So we were able to combine with some good share gaining momentum plays with Nextest and Eagle.

Total share position as we exited '07 was about 36%, and as we exit '08 when we put everyone together, we've got about 42% share in SOC. And our share position in Memory is, last year, and remember, the Memory market last year went through the floor, so it went from over a $1.5 billion market to about half that, and our share position was about, we think it's about 8% in that overall market space, and obviously higher in the Flash portion.

Okay. One final question is, obviously with the Semi bookings number and product side being $40 million, you could easily see a very large sequential increase in this upcoming quarter because the number's so low. Care to give us any guidance on what the book-to-bill number might be in the upcoming quarter?

Sorry, can't do it. The main reason is the visibility is just so short that it's hard to do that, and as you know, we don't guide on bookings, but we do guide on the revenue projections. So it's very tough to do that with any accuracy.

All right. Thank you.

Your next question is from Timothy Arcuri with Citi.

Hi. Couple things. I would think that that slug of HDD bookings in March was somewhat of a one-timer, so can you kind of tell us what the right sort of run rate there is moving forward on that business?

Tim, that is hard to say, and the reason is that the customers that we're engaged with, most of the customers do big slugs of tooling at a time, so it's very tough to project how much that could be on an annual basis. I think as they tool on an annual basis, it could be about this level, a single customer could account for anywhere from $20 million to $40 million per customer in a year. But we honestly don't have enough track record here with those customers to see whether they're going to buy in a different pattern than once a year or twice a year. We'll just have to wait and see how that works out, but we do know that certainly the individual order we got at the front end was a large multi-system order, and it looks as if that pattern is going to continue going forward, versus the Semi Test market where you get one or two systems at a time.

Okay. And so that was, just so I'm clear, so that was from one single customer; right?

That's right.

Okay. And do you have penetration at customers beyond that customer?

Not yet.

Okay. And can you give us an update on the lawsuit there? I believe that there's a lawsuit going on. Can you kind of give us some color on that?

I'm unfortunately going to give you a [pat] answer on that is that we are engaged in that, and we are planning to defend our position as that moves forward. I can't comment with any color on it beyond that.

But I'm just wondering, Is it kind of going to trial? What stage is it at?

It's at the discovery stage at this point.

Discovery. Okay. And then I found your DDR3 Tester numbers interesting. If you compare the Tester opportunity for DDR3 relative to, say, kind of the Probe Card opportunity, and you look at what the delta was at DDR and DDR2, the Tester opportunity was much bigger than the Probe Card opportunity at DDR and at DDR2, yet based on the numbers that you gave, it seems like that tester opportunity is going to be about the same as the Probe Card opportunity at DDR3.

Is there some sort of structural dynamic that's happening that's making, or that's kind of cannibalizing the Tester opportunity, vis-a-vis the Probe Card opportunity at DDR3, versus, say, DDR or DDR2?

I think the thing that's clouding the picture, and I know the question was asked about get past the cloud and into the normal run rates, so I don't think we're adding anything to this that says here's a fundamental discontinuity that's occurring. It's more that how customers use their installed base and reuse their installed base is a factor in this, and that is accentuated in the current market. We don't know for sure how that plays out long-term, but we think that market is a multi hundred million dollar market that we can participate in.

Okay, I guess I'm just wondering whether you feel like at DDR3 that it's more important that have you to move into the Probe Card business, or you have to have some sort of a foothold in the Probe Card segment because it becomes much more important?

Not at this point.

Okay. Thanks.

Your next question is a follow-up from C.J. Muse with Barclays Capital.

Yeah, hi. Thank you. I guess a quick question on the OpEx side. Big variability in your guide, I guess given the range of revenues, bit looks like $82 million to $95 million. I guess I was expecting further cost downs looking into the second half of the year. Are there one-time charges in there, or I guess could you help me think about modeling the OpEx through the second half of the year?

Sure. The OpEx, let me give you just a little bit of history. You know, the OpEx in the fourth quarter with Eagle and Nextest was $111 million. In the first quarter, we took that down $9 million to $102 million.

Our second quarter guidance would suggest OpEx of about $88 million, so we're taking it down about $14 million. And I suggest 88 because if I took the percentages and applied them to the high and low range, I'd find that the high percentages against the low revenue number is 88, and the lower percentages against the high revenue number is 88. So I conclude that 88 is what we're signaling.

Yep.

And we said in my prepared comments that we would probably get to about mid 85, mid 80s once the cost reductions are in for a full quarter. Some of the reductions, a big chunk of them, took place early in this quarter so we didn't get the full benefit in the second quarter. The full benefit we should get in the third quarter. So we would expect the third quarter to be at about $85 million, as well as the fourth quarter.

I should also add that this $85 million of OpEx that we get to in Q3 and Q4, this is the level we're at when we're living on bread and water. So if business does come back, which we all hope it does, the OpEx will come up a bit because the variable compensation will kick in and/or some of the salary reductions, it's always possible we reverse those. Our OpEx model, when we get to healthy profits, is about $95 million. So you can think about it ranging from 85 to 95, and in theory could be higher than that if we're above model profitability.

Sounds good. And then just last question. How should we think about a tax rate for 2009?

I wouldn't think about a rate, because I don't think that will help you. I think what I would plan is when this loss is, we'll probably have a small benefit, say $2 million a quarter of credit, and I think when we turn into profitable times in the future, the tax rate's going to be very low because our NOLs are going to be quite large. I think for the foreseeable future it's either small credits or it's very low tax rate, and maybe the expense when we turn profitable is 10%, 15%, somewhere in that range.

Very helpful. Thank you.

Your next question is from Gus Richard with Piper Jaffray.

Yes, thanks for taking my question. Can you talk about, going forward, what you see in terms of incremental Tester requirements, beyond DDR3, and sort of the Sockets you're working on, what's the incremental driver to drive new demand?

You're talking about on the High Speed Memory space?

Yes, either High Speed Memory or SOC or DRAM. Where do you see the requirements in devices driving the need to upgrade the Tester base?

Well, in the SOC space, I think in the Memory space it's speed and density, in other words, parallelism and higher speeds for the DDR3, DDR4 generation of parts and the graphics DDR parts; those will all demand higher performance going forward on speed and on density. And I don't think that's a new theme. That's just a continuation of what the Memory market has been experiencing over the generations of parts.

In the SOC space, it's an integration story. There's two things going on, and that is higher integration so that the range of instrumentation required is wider and wider. At the same time, our customers are doing a tremendous amount of work on increasing parallelism for both simple and complex devices. So this discussion that we've been having over the last year that has been in the RF space and port count and parallelism is mirrored in all of the instrumentation that exists inside the systems. So we expect to see continuation on that axis.

At the same time, the lower end, lower cost products, the products that have smaller footprints and smaller capital costs, do have a place, and a significant place in the 750 in our product line, and the ETS product line from Eagle I think proves that. There's almost 5,000 of those testers in the world.

One of the things that is emerging at that low end, we've got an interesting offering in the ETS product space, which is called the ETS88 product, a very new product that Eagle has just brought out. First orders are now in. And think about it as a four in one, low end tester, in other words, there's really four racks, four testers can operate independently and test their different devices all at the same time.

So that's another innovation, but it carries on the theme of handling a variety and handling things in parallel, so I think that's the general theme you're going to see. The good news from our end is that we've got consolidation of platforms now, and we're able to provide more of our engineering in instrumentation going forward, versus platform investments.

Got it. And in your installed base that's out in the field, as demand improves, what do you think the mix is between upgrade versus new chassis? If you could just kind of help me, as we recover, is there an installed base of chassis that could just get new instrumentation and an upgrade cycle on the back end, or do you really need more new chassis? If you could talk about it across the various markets that would be helpful.

Well, there's definitely going to be additional system or chassis, as you call it, capacity growth. Right now, that is extremely (inaudible - microphone inaccessible). But as the unit device growth turns back up, there will be added capacity from a chassis standpoint, and the installed base will always be available for this upgrade. I don't think there's a ratio that you can put on that, but the installed base does capture (inaudible - microphone inaccessible). Greg, do you have a feel for what percentage that is?

I think upgrades are 15% but they can vary quite a bit depending on volume.

What the denominator is.

Okay. Thanks. And then just real quickly, is there going to be a restructuring charge in the second quarter, and how large might that be?

Yes, there is a restructuring charge in the second quarter. That charge is about $12 million, and then there's also a charge for inventory step-up that's purchase accounting, but the restructuring charge is $12 million.

Got it. Thanks so much.

And operator, we have time for just one more question, please.

Your next question will be from Mary Lee with Stifel Nicolaus.

Hi, this is Mary for Patrick. Do you have the stock option expense for the quarter?

Yes, we do.

Hang on Mary, just one sec.

Give us one second. We may have to give you and give you that offline. I'm not sure I have the exact number in front of me.

Sure. That's fine. Thank you.

Okay. Operator, thank you, and certainly if there are further questions you can call me; this is Andy Blanchard, directly at our office here in North Redding.

Thank you everyone. We'll talk to you next quarter. Thank you.

Thank you all for participating in today's Teradyne Q1 2009 quarter update conference call. You may now disconnect.