泰瑞達 (TER) 2009 Q2 法說會逐字稿

Good morning.

At this time I would like to welcome everyone to Teradyne Inc.

quarter two earnings release 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).

At this time I will turn the conference over to Mr.

Andy Blanchard.

Sir, you may begin.

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 Financial Officer, Greg Beecher.

Following our opening remarks we will provide details on our performance for the second quarter of 2009 as well as our outlook for the third quarter.

First, I would like to address several administrative issues.

The press release containing our most recent financial results was sent out via Businesswire last evening.

Copies are available on our website or by calling Teradyne's corporate relations office at 978-370-2221.

This call is being simultaneously webcast over our website at 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 our site and click on live webcast.

In addition, replays of this call will be available starting approximately 24 hours after the call ends.

The phone replay number in the US and Canada is 800-642-1687.

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

The passcode for both numbers as 20503616.

A web replay will also be available in the same time frame.

You will find it by going to teradyne.com and clicking on investors.

The replays will be available along with the slides through August 13.

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 management's estimates of our future results or other forward-looking statements will be achieved.

Actual results could vary materially from such forward-looking statements.

Important factors that could 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 and expenses related to the implementation of (inaudible - microphone inaccessible) 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 31, 2008, and our quarterly report on Form 10-Q for the period ended April 5, 2009.

Additionally, those forward-looking statements are made as of today, and we do not undertake 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've 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 our website and click on the GAAP to non-GAAP reconciliation link.

Also you may want to note that between now and our next conference call Teradyne will be participating in the Oppenheimer Technology Conference in Boston on August 12, the Piper Jaffray Chicago Semiconductor Summit on August 25, the Morgan Stanley Midwest Semiconductor Investor Day in Chicago on August 26 and the Citigroup annual Tech Conference on September 9 and 10 in New York City.

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 second quarter of 2009 and review our outlook for the third quarter.

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

Thank you, Andy, good morning, everyone.

My comments this morning are centered on three points.

First, we are starting to fire on a number of cylinders that have been very depressed through this downturn, plus we are adding some momentum in our Hard Disk Drive test business.

Second, we still have a way to until we get all product lines engaged.

And third, we are aggressively pulling on the supply chain and the product sectors that are ramping at the same time that we hold our internal costs in check.

Greg will walk you through the Q2 results and Q3 guidance in a few minutes, but the high-level view is that we are seeing the first recovery stage in Semiconductor Test at the same time that our new Hard Disk Drive business is gathering momentum.

Of course, the most important news is that we've seen a good rebound in SOC test off the very depressed Q1 levels.

Total orders, more than doubled in SOC system orders, were over $100 million, up more than fourfold from the first quarter.

This resurgence was driven by strong wireless and power management demand.

Excluding Hard Disk Drive, our Systems Test Group saw a small increase in orders as a strong Mil/Aero buying offset continued softness in the automotive and commercial board test arenas.

And in Hard Disk Drive, we were able to receive customer acceptance on most of the systems shipped in the first round of business we announced last quarter, and we secured a second round of orders that will ship through the latter half of this year.

Overall, this gave us about a 70% sequential increase in total Company orders in the quarter.

So we are moving our revenue guidance to the $190 million to $205 million range for the third quarter, as we noted in our press release yesterday.

Despite this sharp increase since Q1, it's obvious that the engine isn't hitting on all cylinders.

In SOC test there are still a number of segments with excess capacity like image sensors, microcontrollers and automotive applications, and Flash memory test demand remains very weak.

You can see this in the latest market data that shows memory CapEx still at record lows with a total market outlay of well under $100 million through midyear.

Outside of Semi Test, the commercial in-circuit test market has had only spot buying, and automotive service day tooling is quite depressed.

So there are a lot of sectors that have to turn back on for us to be running at anything close to full-tilt.

From an OpEx standpoint, we are holding our spending and headcount levels in check.

Headcount cutbacks are behind us, and our workforce total is now at about 2900 with about 1000 of those based in Asia.

We continue to have temporary salary cuts in place but have relaxed furloughs in areas where business activity has rebounded.

All of those numbers are baked into the projections that Greg will go through shortly.

I have been asked about the potential for a pause or a pullback in the fourth quarter.

Now, that's beyond our visibility to comment on with any accuracy.

What I will say is that we intend to maintain a dual personality in this environment.

By that, I mean staying very aggressive on design-ins and new product ramps, but very conservative on adding fixed costs.

So we expect to be able to respond to whichever way the market moves without adding any risk.

Now, on the new product front, we are obviously pleased that the Neptune hard disk drive tester has passed its production qualification phase and that we've secured a substantial second round of business.

As we mentioned last quarter, we're focusing on improved margins from moving a supply chain for that product and manufacturing into Asia.

There has been good progress on that front.

In high-speed memory, our UltraFLEX qualification work continues on schedule.

As noted in our last call, we expect initial orders and revenue in the second half of this year.

With memory CapEx so low as a result of extensive efforts to use existing equipment it's difficult to project production buys at this time, but initial installations will position us well to participate when capacity buying does start.

Finally, there's an emerging story in the Eagle Test product line as we've launched a new low-end analog test product called the ETS 88.

This system gives customers a CapEx entry point about 25% below the previous low end of the ETS line but, more importantly, offers the ability to test a variety of IC types simultaneously.

So it's an attractive product, especially in Asia.

We have secured five customers and nearly 10 system sales to date and expect it to access additional customers who have previously been off our radar.

So the bottom line of all this is a good rebound in our core business, growing momentum in the new business arenas and very tight cost controls.

Staying on this course will give us good earnings leverage as the broader markets recover.

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

Thanks, Mike, and good morning, everyone.

In addition to providing a recap of second-quarter results and details on the third quarter, I'll focus my remarks today on cost control, on our cash and on the dilution from our recent convertible debt issuance.

Obviously, on cost control, it's essential to keep a firm grip on the fixed costs, as that will give us the operating leverage to earn model profitability at quarterly sales levels of $275 million.

This $275 million model compares favorably to our historical quarterly sales average of $329 million over the last four calendar years, that is, after adjusting for the pro forma inclusion of Eagle and Nextest.

As previously described, this $275 million model excludes Hard Disk Drive business, as its model gross margins of 30% are lower, yet it should have the same 15% model bottom line as the rest of our business.

While the vast majority of our cost reductions were permanent in nature, we still maintain a series of temporary actions such as pay cuts and furloughs that total about $7 million a quarter.

We intend to proceed quite carefully in releasing temporary pay cuts and furloughs, as we don't want to reverse course if the upturn is not sustained.

In some areas, though, such as at our repair site in the Philippines, the furloughs have been relaxed as board repair activity has picked up.

We've seen system utilization in board repair trending upwards since about March, so we've made this furlough policy change there.

Now moving to our balance sheet, cash and marketable securities increased from $321 million to $373 million since last quarter.

$44 million of this increase came from the convert and other non-operating transactions, but $8 million came from operations net of capital additions.

Looking ahead, we expect to end the quarter with about $345 million in cash.

We improved working capital in the second quarter with record accounts receivable DSO of 40 days and product inventory reductions of about $25 million before write-downs.

Turning to the convertible debt of $190 million that was secured at the beginning of the second quarter, our intent is to settle the principal in cash in 2014, thereby minimizing future dilution.

I have posted an exhibit on our website on the convertible debt dilution at different stock prices, but let me summarize, as I often get questions in this regard.

If we settled the principal in cash as planned and settle the option element in net shares, given effect to the related convertible note hedge transactions, the share dilution using today's outstanding shares would be about 5% if our stock price was $10 and 10% if our stock price was $15.

The GAAP dilution would be greater, though, as it assumes conversion and gives no benefit of our right to buy back our shares at the convert strike price.

And we've also shown this accounting calculation.

Now turning to the third-quarter guidance.

As you can see in our earnings release, we are increasing our third-quarter revenue guidance to $190 million to $205 million.

The non-GAAP EPS range is for a third-quarter loss of $0.02 to income of $0.02, which includes $2.2 million for non-GAAP net interest expense and $1 million for taxes.

The sales growth is being driven by much improved Semi Test demand after the worst back-to-back quarters on file.

The Systems Test Group is expected to be down from the second-quarter sales levels simply due to the timing of customer acceptances of hard disk drive testers.

Hard Disk Drive should contribute between $10 million and $15 million of revenue in the third quarter.

This amount also includes the last $6 million from the first round of zero gross margin business.

Systems Test Group without Hard Disk Drive has been profitable with very strong performance from the Mil/Aero business.

And with new Hard Disk Drive orders on the books, coupled with our lower HED product costs, we expect positive contribution from the Systems Test Group looking ahead.

We are certainly pleased that momentum has returned but very mindful that cost discipline must remain high, as there's a long way to go before we see normal spending patterns from our customers.

Now turning back to the second-quarter results, the top line was much stronger than the earlier guidance due to the early acceptance of $26 million worth of Hard Disk Drive business and greater SOC test demand in segments tied to mobile applications and analog.

On the other side of the ledger, non-GAAP gross margins were pulled down from 41.4% to 29.5% by the zero gross margins on the first round of Hard Disk Drive business, due to the overriding focus on schedule and also by product provisions that totaled $11.5 million in the quarter, which was well above our $2 million model estimate.

R&D expenses were $38.5 million or 22.7% of sales compared to $47.2 million or 39.1% of sales in the first quarter.

SG&A expenses were $47.3 million or 27.9% of sales compared to $55.4 million or 45.9% of sales in the first quarter.

In total, operating expenses of $85.7 million were down $16.9 million or 16% from the first quarter.

Operating expenses in the second quarter include the benefit of about $6 million in temporary salary related reductions.

Our net non-GAAP interest and other expense was $2.1 million.

Taxes were a benefit of $2.2 million in the quarter, and our headcount totaled about 2900 people.

In the second quarter, Semiconductor sales were 61% of the total, and the Systems Test group was 39%.

Our book-to-bill ratio for the second quarter was 1.34 for the overall Company as well as for Semiconductor Test and the Systems Test Group.

At the end of the quarter our backlog stood at $310 million, of which 78% is scheduled to ship within the next six months.

Cash flow from operations totaled approximately $19 million before deducting gross capital additions of $11 million.

Depreciation and amortization for the second quarter was $32 million including $6 million of stock-based compensation, $8 million for acquired intangible asset amortization and $2 million for amortization of the GAAP imputed debt discount.

Accounts receivable stud at $74 million or 40 days sales outstanding, which benefited about seven days due to the timing of recognizing Hard Disk Drive revenue after we had collected the cash.

We ended the quarter with product inventory of $127 million, down from $165 million a quarter ago.

Of this decrease, $25 million is from the net decrease in product inventory, and the balance is from inventory provisions and the amortization of the Eagle Test inventory step-up.

As noted earlier, sales for the third quarter are expected to be between $190 million and $205 million, and the corresponding non-GAAP EPS range is for a third-quarter loss of $0.02 to income of $0.02, which excludes amortization of acquired intangibles and the non-cash imputed interest on the convertible debt.

Now turning to P&L details, for the third quarter we expect gross margins to be about 44%, plus or minus 0.5 points.

R&D should be between 18% and 20%, and SG&A should run between 22% and 24%.

The tax provision should be about $1 million.

In summary, we intend to hold a firm grip on costs and balance sheet management.

We expect to relax temporary measures gradually and as warranted by the business.

Making sure that our supply chain can respond to demand increases is our main focus in addition to cost discipline.

We are hitting on some but not all cylinders, as Mike said, and we see very good earnings leverage as the recovery broadens.

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

Thanks, Greg.

We are now ready to take some questions.

Satya Kumar, Credit Suisse.

Some pretty good gross margin guidance out there for Q3.

I was wondering if you could quantify what the margins would have been if there was no Hard Drive revenue in there?

Okay, yes.

The Hard Disk Drive revenues accounted for about five points; it pulled us down.

Did you say how much new orders you booked for Hard Drives in Q2 and what's the order outlook intake for the second half on the Hard Drive business?

We did not disclose that and aren't intending to break that level of detail out, but we did disclose that we expect $10 million to $15 million of Hard Disk Drive revenue, of which $6 million was from the first round of orders.

And there's a new round of orders; we are just not breaking that out.

Did you say it was a new customer or an existing customer?

Existing customer.

Okay.

And lastly, on the DDR3 front, can you give us a little bit more color on how the evals are progressing and what's happening on that front competitively with your Japanese competitors?

Satya, last quarter we talked about having one evaluation unit underway, and we were having discussions with other customers.

We've now got two evaluation units, two different customers.

So the evaluations continue as we speak.

Gary Hsueh, Oppenheimer & Co.

I'm looking at the gross margin number, and at the midpoint of our guidance, let's say around $200 million in the September quarter, ex-HDD you're saying basically you're going to be hitting in your core organic business 49% gross margin.

So I'm assuming that's ex any kind of inventory write-downs.

That's a pretty clean number.

If I compare that to 2008 at roughly the same revenue level, you're at substantially lower gross margin, I think.

I might be cherry-picking numbers, but looking at the December quarter, can you just walk me through basically what the margin improvement stems from in your core organic business?

The five points for HDD was the impact to the second quarter, not the third quarter.

Oh, I'm sorry.

If you look at the third-quarter gross margin guidance, if you strip out HDD, what would have the gross margin guidance been for your core business, then?

We pick up a point; we'd be at 45, instead of the 44.

We pick up one point.

Okay.

So basically, then, it actually looks like your gross margin level is kind of leveling out around the mid-40s in your core business?

Because, if I do my math right, ex the inventory write-down and ex-HDD, you are running about 44% or 45% in Q2?

That -- about right.

And we've said in the past that at our model of $275 million quarterly revenue, we are certainly a ways away from that, but we would expect to be at 50%.

And that excludes Hard Disk Drive because I can throw off the numbers, depending upon when it hits in what quarter.

So as we work our way over time at $275 million, we'd expect to get up to 50%.

So you can see the math, that that's a little over a point for each $25 million of sales we would get.

Okay.

And, just to further get a sense of where gross margin is headed, can you give me a flavor of the Eagle Test trajectory here, particularly as a percentage of the mix?

Eagle Test and Nextest, at least to date, have not been a significant piece.

If I put them together, they have been about 10% of our sales the last quarter or two.

Okay.

Final question here -- on your non-GAAP EPS guidance, what's the non-GAAP share count?

And, does that deviate significantly from your GAAP share count assumption for Q3?

The non-GAAP share count would be probably about 180 million shares, and we haven't fully done the GAAP share count.

The GAAP share count under certain circumstances can be a lot higher.

But that requires us to get to a higher EPS number.

But I think for both, it would be about 180 million.

C.J.

Muse, Barclays Capital.

First question, on the HDD front, can you share with us what percentage of backlog that is, exiting the June quarter?

We don't think it's appropriate at this time to disclose the order or give you other information that you could get the order.

But it is a second round of buying from our lead account, and we are very pleased to get this business.

And it's at commercial terms that are better for us because we've done a lot of work to lower our costs.

So we talked to you guys some time back about, we needed to improve our costs.

We've done a big chunk of that; and this business, we believe, is going to be at our 30% standard margin.

So we're pleased with the cost progress and securing this customer.

So I guess, are you saying that you expect to hit that 30% gross margin in those revenues of 10 to 15 in September, or is that the on September?

I would say beyond September because, in the 10 to 15, we still have that $6 million from the first buy, where there was zero gross margin.

So if I could take that out, and then say what's left is -- let's say it's nine, to get to 15.

Then we'd hit the 30% for the nine.

Okay, so that's done there.

And then I guess thereafter, beyond into December, do you see any reason why that can go higher, or is that the steady state-level we should be thinking about?

Hard to predict.

We talked last quarter, and I think would reaffirm that it's such a lumpy business.

It's very hard to project a flat line -- an average level and whether that average would stay.

Our expectation is, this would be lumpy going forward.

If you are trying to eyeball how much business there could be, it's a fairly wide range.

Given where we are in the market penetration at this point, maybe we could get $25 million, maybe we could get up to $50 million a year in that business if we hold just our current position and our current share.

But (multiple speakers) that's a pretty wide range.

That's assuming just one customer?

Yes.

And then I guess, in terms of your 3Q guide, GAAP versus non-GAAP, can you, I guess, help me understand the impact of the convert on the guidance there?

Are you including a non-GAAP -- the non-cash imputed interest?

We are not, in the non-GAAP, no.

What, on a GAAP basis, would your earnings outlook look like?

Well, we have provided the guidance of the EPS range.

Well, that's non-GAAP, though; right?

We've given GAAP and non-GAAP in our release.

Oh, I'm sorry.

Okay, I can look in the press release for that.

And we've also -- just may help a bunch of you guys, because this is very confusing, is we've posted some exhibits to our website under the investor tab that shows both how the convert works from an economic dilution, and that's more tied to how we intend to do our non-GAAP EPS.

And then we've shown the convert from a GAAP calculation, which is an accounting calculation which is quite conservative because we can't take benefit for the option we have to buy back our shares at the strike price.

But nonetheless, both calculations are on our website.

And it is a very confusing topic, so we gave some examples of different stock prices to try to make it clearer for you guys.

I guess final question, in terms of the revenue mix for June, $103 million Semi Test revenues -- can you share with us what Semi Test service revenues were?

Yes.

Okay, Semi Test service was $38 million.

And then in terms of I guess the Semi Test product, I guess it's fair to say memory fairly weak, Eagle Test up some and core SOC the primary beneficiary, or should we be modeling slightly higher Eagle Test?

We think of SOC and Eagle as one and the same because both products attack similar customers, albeit Eagle does open a new TAM.

So we tend not to break those out; we put those together.

But SOC and Eagle are both moving up in a more -- at least in Q3, in a healthy fashion.

And then I guess, on the System Test side, can you share what the System Test service was?

Yes.

System Test service was $17 million.

Jim Covello, Goldman Sachs.

Hi, this is Kate Kotlarsky for Jim Covello.

I have a couple of questions; first, kind of a follow-up on the DRAM business.

You talked about the revenues in the second half.

I was just curious if there are any revenues for the DRAM business implied in your Q3 guidance, or whether it's more in the Q4 time frame that we should anticipate that.

No, it's not in the guidance.

The other question I had was on the competitive landscape.

One of your competitors recently introduced a new low-cost analog tester.

Just curious if you are seeing them in your engagements with customers and whether that's having any impact on you guys?

Kate, we expect to see them.

Obviously, they are bringing the product out now, so we don't see them across the board.

This is the space where we have a very good position with the 750 line microcontrollers and other applications.

So it's a solid position that we've got, both on performance and cost of test, because of parallelism of the product.

So we do expect to see them into the future.

Their product doesn't address all of the areas that the 750 does, so we'll see them in a subset of that market space, and we expect to compete vigorously with them.

And then just a final question on the Hard Disk business.

I know you obviously have a lead customer in that business.

Could you share with us how much the lead customer now represents, whether -- I don't know -- you want to size it order-wise or revenue-wise, just kind of curious what the distribution is between your lead customers in Hard Disk Drive and maybe some other customers that you have that are smaller.

We are concentrated with one customer at this (technical difficulty).

As we go forward, I think we'll probably, as we get into multiple customers, we won't be delineating how many customers.

But at this point we've entered the market with a lead customer.

That's one of the reasons we can't be as forthcoming with units and total revenues and so on; we do have to protect the information around that lead customer.

Okay, that makes a lot of sense; maybe just one other final question.

If you could comment on the mix between IDMs and subcons this quarter, it would be great.

I'll give it to you in terms of demand, because that's the leading indicator.

We break it down between specifiers and OSATs, so the specifiers, which are IDM's and fabless, represented about high 50s -- I'm sorry -- 62 -- 62%, 63%; so the subcons, 37%.

Krish Sankar, Banc of America.

Mike or Greg, if you look at the DDR3 market, let's say in 2010 or in a normalized cycle, what do you think is the actual market size?

And what do you think is the realistic market share potential for Teradyne?

That's a good question and a tough question.

Maybe the best way to think about that or to answer that, address that question, because I think it's not going to be very satisfying to say how much it is because it's very uncertain, given the heavy reuse that's going on.

But if you just give me a minute, I'll try to organize some thoughts around that we are viewing that market.

And then I think you can speculate on what the penetration might be.

But very quickly, the volume on DDR 3's are increasing.

Device volumes are -- expectations going from 20% of total to 40% or 50% by year end.

The issue that exists out there, I think you know, is that the current-generation testers are being modified -- are being used for the 1.0-, 1.3-gig speed grades.

There's just very, very heavy pressure to reuse that and avoid CapEx by customers.

So that's the big headwind, and that's what makes the market hard to predict.

Now, there's been a very slight uptick in June from the [sems] data you can see, so there's a little bit of buying going on.

So the issue has been, when will additional capacity be needed?

There are a lot of predictions out there.

Most point to 2010, with maybe a little in 2009.

That looks right to us.

So the issue that we see is, when the capacity is fully utilized, what performance will customers buy?

Our proposition to our customers, potential customers, is that we've got a product that's architected for two generations, DDR3 and DDR4.

In other words, it's really got headroom for higher and higher speed grades.

And the question is, and what we are hoping is customers will buy at the top end of performance as they need future capability from multi-generation.

Second is, the system is configurable to handle a variety of performance DRAMs, the graphics DDR chips as well.

That's because it's got the headroom on speed, so it covers a broader TAM.

We hope to be able to access that.

It's got very good accuracy specs, which translate to yield, and it's very competitive on parallelism.

So when we put all that together, that's the picture that we are proposing.

Now, how much and when that capacity runs out -- since we don't have an installed base in these customers, that's not something we can probe easily.

But the issue is, will customers be interested in that value proposition?

And obviously, the hope is that the position of the UltraFLEX there will be received well.

So the eval that you have at a big customer -- is that on the 1.3-1.6-gig, or is it the 800-1066-meg where they are evaluating you versus competition?

They are really evaluating it for a broad TAM of current generation, the parts that they have, the highest speed grades that they have, as well as the specialty graphics chips.

So, as I said, our hope is that they see it as a headroom tester for the future, not a spot solution.

And we think that, if they do see it that way, that will change the economics as they look at the CapEx that they've made in the past for each node.

I just had a couple other questions.

One is, how much do you think would the turns business be in September?

How much do we think it will be?

The turns business, how much book/ship?

In the next quarter, in Q3.

In Q3?

Somewhere in the 20s.

Just 20% is going to be turns business?

20% to 30%, that neighborhood.

And how do you think of the incremental gross margin, once we go beyond the $200 million revenue level, assuming no [STD]?

Well, we get to 50% at $275 million.

So you can model it from where it is, without HDD, up to that amount.

Obviously it assumes there aren't inventory surprises.

And then thereafter, once you get above $275 million, it starts rounding closer to a half a point, each $25 million of incremental revenue.

Raj Seth, Cowen and Company.

Most of mine have been answered, but I have a couple little ones.

Mike, the DDR3 tester, the target margins there -- and I understand you've yet to revenue any of these -- but is that the above or below corporate margins, now that we think about margins in this product when it eventually starts to take hold?

The margins in that product -- the way we're looking at it now, it will probably be close to the model margins.

It could be a little lower.

We wouldn't expect them to be higher.

There's also a mix of products.

There is the graphic chipsets, and then there's the DDR3.

But when you put them all together, it likely will be a little bit lower than the corporate standard.

Great, that's helpful.

Can you comment on utilization you see in your installed base?

And perhaps you can talk about how to think about what working capital does as we start moving into a ramp.

You have been working inventory down, etc., etc.

But what happens here?

How does the balance sheet look as we start to ramp?

Equipment utilization at customers, Raj?

Is that what you're asking?

Yes.

The utilization has moved up about 10 points from last quarter to this quarter.

I think the interest -- so it was in, let's say, around 60%, now around 70%.

The interesting thing that's happened is that, by our data and our installed base, the OSAT utilization has actually gone up about twice in that time frame what the utilization has -- increase has been on the IDMs.

So that's why we had a 3X growth in our OSAT bookings.

Even though it's coming off a low number, it was -- the real big piece of growth on bookings was from that front.

And that's correlated back to this growth in utilization.

Is that 70% for the OSATs that you're talking about, or is it 70% now across the board?

They are kind of close now, so you could use around 70% for both.

[David Dooley], [Steelhead Securities].

Congratulations on potentially achieving profitability in this upcoming quarter here.

It looks like you're the first [backing] company to do that.

A couple questions from me.

Could you talk about the increment in revenue you look like you're going to see in your core business?

I guess, if my math is right, you are going to go from $130 million to like $188 million, is the midpoint of your guidance.

And is that all the SOC business, or is there any contribution from the Flash guys?

And given Flash utilization rates and NAND are pretty good, would we expect to see some ordering there?

It's essentially all SOC test.

Flash is still expected to be very low in the third quarter, so it's essentially all SOC test.

Dave, if you look at industry demand, not just ours, but industry demand in memory in total, it's still very anemic.

Yes; I would suspect that there might be some sort of snap-back in that segment at some time or another, and I was just wondering, are there any early indications are that?

Are the consumables levels going up, service contracts, anything that you might look at a leading indicator and say that they might actually spend some money again in Flash?

Utilization is pretty high.

It has been and continues to be, so the equipment is being squeezed pretty hard.

Our repair statistics, you know, the board cycle failure rates, have moved up since the March time frame.

So a lot of those leading indicators are trending towards the healthy side, but there's this huge back pressure on CapEx.

So I think the notice will be short, and that will tend to be turns business rather than sitting in backlog for very long.

Okay.

And I was wondering, you had an inventory write-down; I think it was like $11 million.

Could you talk about exactly what was written down, and why?

Okay, yes.

The single largest piece was a part from a supplier connected to a new product at Nextest, and the supplier is reimbursing us for some part of it.

We have to go off and repair some boards at customer sites.

And so that was an inventory provision to rework those boards.

Each of these items contributing to the charge, each have their own unique story.

So there are a couple of items; that was the most significant.

And then the other one was just largely trying to be a little more conservative, given the demand.

Okay.

And final question from me is, you mentioned like with each $25 million of incremental revenue, your gross margin should expand by roughly 1 percentage point.

Is that math just solely driven by volume, or is there something else that we should be thinking about regarding the mix or anything else like that?

No, it's purely volume.

Timothy Arcuri, Citigroup.

I understand that $26 million of the $66 million of the systems revenues in June were HDD.

How much of the $89 million in bookings was HDD?

Tim, you missed our reluctance to disclose that.

Because we're so concentrated on the customer side, we're holding that information.

I think you understand why.

Sure.

I guess, Mike, I'm just trying to understand -- you guys told us what the initial bookings were.

You told us that you took $26 million of that in June, and there's $5 million or $6 million left over for September, and then there's another, what, like, I guess, $10 million that's going to -- revenue from this booking.

So I guess maybe, if you can't give us what the actual bookings number was, is the sort of lead time the same?

So whatever you're going to revenue in September had to be booked in June?

Yes, that is correct.

Okay, so the follow-on would be -- that extra $10 million or so, something like that?

There's -- you can't derive it, is the short answer, because it doesn't all go out in the September quarter.

Okay, okay, so then there is some that spills over into December?

Right.

Okay, go you.

Second thing -- do you think that book to bill is going to be greater than 1 in Q3?

Tough question.

Very hard to tell.

What I'll say is, we always keep the elastic in this is so we can move either way.

So our science around forecasting, quite honestly, is not a highly-invested science.

And with lead times and so low, we honestly don't do much predicting there.

We manage a slot plan, we manage the supply chain.

What I will say is that the demand that we saw in the first quarter activated -- about 40% of our customers were active in that process.

So, if the market overall becomes more healthy, you would expect we would be above 40%, so things could go up.

At the same time, it's a very cautious market, so some of those customers who bought will pause, hopefully be replaced by others.

So it's a tough one to call, and we are just managing this based upon the short-term demand that we've got and the flexibility we want to keep in the system.

So, sorry I can't answer it as directly as you'd like.

Understand, sure.

So, of the $103 million that was revenued in Semi Test in June, like a couple million of that was memory?

Is that sort of the right way to think about it; like $2 million, $3 million, $4 million?

Yes.

Okay.

And then, relative to your DDR3 tester, have you been qualified at that customer yet, or is it still in qual?

It's still in qual.

And then, just last thing, just so I'm clear -- so, at the midpoint of your September quarter revenue guidance, you're expecting between $10 million and $15 million of that to be HDD; is that right?

Correct.

(inaudible), Morgan Stanley.

Hi, thanks for taking my questions, and nice quarter.

On the HDD shipments in second half of '09, can you clarify, is this going to be the redesigned product?

And, what gross margins are you targeting for this product?

For the Hard Disk Drive?

For the second half, he's saying, the mix.

Okay, yes.

Once we get through the first $6 million of zero gross margin, the business thereafter, on average, should have a gross margin of 30%.

Some will be a little bit lower, some will be a little bit higher.

But on average, it will be 30%.

And can you talk about seasonality in the HDD market?

Is there anything like that?

Because [in the center] market there is some seasonality in Q4, but in the HDD market, is there anything like that?

Not enough data points for us to be able to conclude that.

I think that would be a thought, once we were able to expand in the customer base.

What we know now is it's very, very lumpy and we work very closely with our current customer to respond to the demand.

So honestly, I couldn't tell you if this time next year it's going to be similar to what we've seen right now.

Okay.

And then, on the high-speed DDR3 memory, I'm a bit puzzled.

Advantest yesterday -- their orders are growing quite nicely, and they've got DDR3 orders from the second-biggest Korean memory maker.

And I'm just wondering, when should we see a pickup in your new volume, business in DDR3?

Because you will have been evaluated for a long time now.

Well, it's a very extensive evaluation, as you might expect, given the fact that we haven't been a supplier to them.

And you are right; Adventest is in that business, has an installed base and therefore gets some business flow-through, even though the overall market is very low.

All we can tell you is that we are still -- we believe that we'll still execute here in the qualification phase so that we'll have installation in the second half.

And when we have that, I think then we are at the table to be able to vie for production business.

Okay, and one last one.

Did you disclose your Flash revenue in 2Q?

And, can you talk about the reuse in NAND from DRAM equipment that's being idled from (inaudible) and tier 2 [time] these guys, and also the impact on the NAND market from the NOR equipment that's coming from Spansion?

So is the reuse from DRAM and NOR equipment impacting the NAND market?

I'm sure it is.

I can't lay out for you what the bits and pieces of that are, but that's one of the components, in addition to aggressive attempts to optimize test flow and so on.

So they are all pieces.

And that -- I would say that in this cycle, that's obviously a much bigger piece of the headwind that we are running into, but it's hard to quantify.

And then your Flash revenues in 2Q?

$2 million.

Mark Kurland, New Castle Funds.

I had one question that I just wanted to ask you.

When you went through the R&D and the SG&A expenses for the quarter coming up, would that be the percentage we should look going forward?

Or, would the absolute dollar amount be the numbers we should be looking at going forward?

Both the percentage and dollar is what we expect for the third quarter.

But, the percentages will vary in any one quarter, depending upon the sales level.

The other vertical that could throw you off is the operating expenses next quarter.

If you do the math, you'd see that we're forecasting around $84 million, $85 million, in that neighborhood.

Those operating expenses we intend to hold at about that level with temporary pay cuts.

At some point, hopefully not too far in the future, business improves and we can relax some of these pay cuts.

So at some point the $84 million would go back up.

And then, once it goes back up because pay cuts are restored, and if we are making model profits and we are much healthier, then we would expect to have more variable compensation.

So $84 million-$85 million is the low point for our SG&A.

It could go as high -- if we're making attractive profits, it could go into the upper $90 million's.

Patrick Ho, Stifel Nicolaus.

You mentioned that wireless and power management drove your 2Q SOC test orders.

What segments are you hoping to see kick up in 3Q, in addition to those two marketplaces?

The expectation is that we'll see the same kind of distribution.

I think RF will lead the way, power management will be strong.

We're going to see a little resuscitation in sectors like image sensors.

So it's going to be a little bit broader than it was, I think, in the second quarter.

But I think the Pareto would look similar in terms of market segments.

So let me follow up on that.

So you are still in implying that, until a lot of these market segment [hits] there's still a lot of upside, potentially, in your Semi Test business because those marketplaces or the other marketplaces haven't really hit full force yet?

Yes.

I think that's exactly -- if you look at it either a customer or from a segment standpoint, it's great to have an increase in business.

But there's such a long way to go to get anywhere close to where we've been.

I think there's obviously some room there.

But we are all facing the same thing, which is a tough world economy and all the question marks around that.

(multiple speakers) on a comparative basis, there's a ways to move.

If I could add one point to what Mike said, just to link it back to the model, one slide that we've shown shows that, if you look back the last four years and pick those quarters, that our sales averaged $329 million.

And that's without HSM, obviously, or Hard Disk Drive, our existing businesses.

We've obviously grow market share over that period.

But not adjusting for that, just using the actual sales, putting in Nextest and Eagle Test, we have sized the business 20% lower than historical sales.

So I think the key thing that it's helpful to understand is HSM, HED, we see as upside, not something that is a must-have for our model.

We think the existing businesses can get us to model profitability.

And I can take you through the math of that, if you're interested, at some point.

But (multiple speakers)

That would be great, at some point.

Just following up on some of the NAND Flash related questions, what would you say would be the biggest trigger point for (inaudible) in NAND Flash test spending?

Is it the transition to the 3X node?

Would that spur on testing as demand for some of the higher-capacity NAND Flash devices take hold?

Yes; I think it's unit volumes.

I think it's if the big squeeze on the capital and the trade-offs that are being made in testing start to affect yield, and what you said.

I think all of those things can cause it to break out.

But to this point, we haven't -- as you can see from the numbers, we just haven't seen much there at all.

Final question from me, in terms of the HDD test business.

Are you still primarily focusing on the 2.5 mobile form factor, or is there the potential for you to expand into the more traditional desktop side?

No, the focus is around the mobile applications in the 2.5-inch form factor.

Gus Richard, Piper Jaffray.

Thanks for taking my question, but pretty much they've all been answered.

Thanks.

And, Tia, I think we have time for probably just one more question.

Krish Sankar, Banc of America.

Thanks for taking it again, just a quick question.

I know you guys don't disclose the Eagle Test sales.

Can you tell how much percentage they are expected to grow from June to September?

What percent we expect Eagle to grow from June to September?

Yes.

Maybe I'll give you that one, and that will be it.

Okay?

21%.

21%.

And the ETS-88, the low-cost analog product -- is it expected to have a similar Eagle Test gross margins, or like is it going to 60%, 65% range?

Or is it going to be lower than that?

Similar to Eagle Test, attractive, just high gross margins.

There are no further questions.

Great.

That concludes our calls.

Please, if you have questions, feel free to give me a ring here in North Reading.

Thanks, everybody.

Take care.

Ladies and gentlemen, thank you for participating in today's Teradyne, Inc.

quarter two earnings release conference.

You may now disconnect.