泰瑞達 (TER) 2009 Q3 法說會逐字稿

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

At this time I would like to welcome everyone to the Q3 Teradyne earnings conference call.

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

After the speaker's remarks there will be a question and answer session.

(Operator Instructions).

Thank you.

Mr.

Blanchard, you may begin your conference.

Thank you, Molly.

Good morning, everyone.

Welcome to our discussion of Teradyne's most recent financial results.

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

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

First, I would 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 at our website or by calling our Teradyne's Corporate Relations office by 978-370-2221.

This call is being simultaneously web cast over our website at Teradyne.

com.

Note that during this call, we are providing slides on the website that may be helpful in following the discussion.

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

In addition, replays of the call will be available via our website starting 24 hours after the call ends.

You will find it by going to Teradyne.com and click on investors.

The replays will be available along with the slides through November 13th, 2009.

The matters we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statement contained in the earnings release as well as our most recent SEC filings for a complete description.

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.

During today's call we will make references 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 were available on our website.

To view them, go to 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 Teradyne will be participating in the Sidoti & Co.

New York emerging growth conference on November 20th.

Credit Suisse First Boston technology in Phoenix on December 2nd and 3rd.

Barclays global technology conference in San Francisco on December 9th.

And Eric May luncheons in Chicago, Boston and New York on November 11th, December 14th and 15th respectively.

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

First, our CEO, Mike Bradley, will review the state of the Company in the industry in the third quarter of 2009 and review the outlook for the fourth quarter.

Then our CFO, Greg Beecher, will provide more details on our financial performance in the third quarter and our guidance for the fourth quarter of 2009.

We will then answer your questions.

Scheduling purposes you should know we intend to end this call after one hour.

Mike?

Thank you.

Good morning, everyone.

Thank you for joining us today.

I want to focus my comes this morning in three areas.

First is a momentum we were seeing in our semiconductor test business, second is the important milestone we achieved in the high speed memory market and third, the increasing strength of our system test group which is contributed to the trajectory of our recovery from the trough of this cycle six months ago.

Later Greg will take you to the financials where you can see the positive effects of our cost controls and the balance sheet initiatives.

He will outline our financial model going forward including hard disk drive and high speed memory, which we added to the portfolio.

Let me start with the semi test side of the house.

Last quarter you will recall our overall semi test booking doubled from the level of Q1.

In this third quarter, we topped the Q2 total with bookings of just over $230 million or about a 70% growth over the second quarter.

Our IDM and fabless specifiers led the way with bookings double the level of Q2.

The OSAT business totalled about $50 million, equal to our second quarter order rate.

So both customer segments have more than tripled since the low levels of six months ago.

From a device segment perspective, we saw very strong growth in power management applications while our wireless business was still strong it was complimented by micro controller, storage and analog segments, which posted healthy growth from a second quarter.

Within these numbers, we are pleased with the upsurge of business from our eagle test product line, which recorded its strongest bookings quarter in a number of years.

New demand for automotive and image sensor systems remains below levels so we clearly have segments that will add to our totals as the recovery broadens.

As I mentioned last quarter, we were hitting on many but not all cylinders.

That remains true in the total memory market as flash and high speed memory test demand remains lower than in prior periods.

We seen our first new ordering in flash this quarter after virtually no business in the first half of the year.

So we are now more optimistic of albeit cautiously so the flash could start to participate more in the recovery, which brings me to high speed memory.

I'm very pleased to report that we met the important milestone of receiving multiple orders for our UltraFLEX AM system.

These systems are now installed in our customers in both engineering and production.

And we expect full acceptance and revenue recognition for them in the fourth quarter.

This is significant event as it represents a beach head and a potentially large new market for us one that is historically yielded largest concentrated buying power in the automatic test equipment industry.

I do want to say, however that we don't intend to delineate the specific applications or customers as we are obliged to protect all information of a strategic nature for our customers and ourselves, especially in this early phase of business.

I will say what we said publicly in the past and that is our UltraFLEX AM system combines test capability to handle the most advanced DDR3 and GDDR5 devices and architected for multigenerational device coverage.

We believe we have a very solid offering for these advanced technologies with the parallelism to provide very competitive test economics.

One last note of clarification, and that is that we are combining our HSM and flash memory numbers in Greg's summary without a specific breakout of each for the reasons I mentioned.

Now let me turn to our systems test business.

The outstanding news there is that we achieved record revenues and strong profitability from this group this quarter.

The systems test group is accounted for one-third of our orders this year and over $200 million in bookings.

The steady performance of our defense business is supplemented by our new hard disk drive venture and we continue to focus on improving our product cost structure in HDD so it can make a proportional contribution to the bottom line.

Like semi test we have businesses that haven't seen much recovery.

Our incircuit commercial board test and automotive diagnostic units remain at pretty low demand levels.

But they are not a drain on the bottom line given fixed cost structures.

Please note that we are not going to delineate any specific numbers relative to the individual businesses of defense, board test, automotive diagnostics or hard disk drive as this would expose some sensitive information about customer buying patterns in our concentrated customer segments.

We know you will understand this if we don't flesh out those particulars in the Q&A session as well.

Now turning to our revenue guidance for the fourth quarter, our semi test revenue will again grow sequentially while our systems test revenues decline due to the lumpy nature of some of their businesses.

In short, we will have system test shipping of the past Q2 level while semi test will have doubled over that same time frame.

I also want to mention that this rapid ramp in semi test business has in fact put strains into our supply chain.

The front part of the ramp was achieved through inventory drawdown throughout the supply chain.

With that inventory consumed, we were experiencing more part shortages which is moving our lead times out of a bit.

And Greg will comment more on that shortly.

As I mentioned earlier Greg will elaborate on the Company's financial model as we want to give you assistance in how that model move given the volatility of some the underlying components.

I do want to emphasize that we are keeping a tight rein on spending especially anything that is a fixed component to it.

That doesn't mean that we won't make some investments going forward just that we will continue to run things as tightly as possible so the drop through on top line growth is attractive.

Finally, the downturn of this last year is not yet a distant memory but instead a harsh reminder of the volatility of the space.

I'm extremely proud of our work force as adapted and how our customers have collaborated with us.

In under two years we added four new businesses, two acquisitions and two organic undertakings.

And we reshaped the Company for stronger over the cycle performance.

All while the world economy had its most severe meltdown.

We got a lot of work ahead.

But I'm pleased with our progress.

Greg?

Thanks, Mike.

Good morning, everyone.

In addition to providing our recap of third quarter results and details on the fourth quarter, I'll focus my remarks on our model, our balance sheet and responding to this latest increase in demand.

Let me first start with our third quarter results.

As you know, we generated a 9.6% non-GAAP operating profit on sales of $262 million.

Given our current cost structure and break even, this is seven points to eight points higher than we achieved at comparable sales levels during the last five years.

Much improved from prior periods, it is lower than our target model at $275 million as we head record hard disk drive sales in systems test this quarter, which is lower gross margins than the Company average.

So as I mentioned last quarter's call, I like to update you on the model that we were using to manage the business when the mix of business swings due to seasonality or the inherent lumpy buying that occurs in some of these businesses.

Before I update our model for the added variability from entering hard disk drive and high speed memory, I should first point out that the bottom line contribution from all of our businesses has the same 15% or better objective.

However, some businesses have higher gross margins and higher operating expenses than the Company average, while others have lower gross margins and lower operating expenses.

But they all need to get to the same 15% or better objective over a normalized cycle.

In the past, we included the full operating spending of hard disk drive and high speed memory but didn't update the model for the the combined lower gross margin percentage.

We wanted to first get a better picture of the relative contribution to the total.

As you might expect, the model will be affected in two dimensions.

First as a matter of revenue we will need to achieve our model 15% profitability will increase as we fold in these new businesses into our model as combined gross margins are lower than the Company average.

So we expect to be at our historical 15% model when sales are at $275 million and there are no hard disk drive or high speed memory sales.

Again, this is just a reiteration of our prior model.

An example of the mixed impact is, if sales of hard disk drive and high speed memory in a quarter are $35 million together we would need Company sales of $300 million to hit our 15% model.

Quick note that I should add is that the gross margins on hard disk drive are lower than high speed memory but for simplicity we combined them together in this example.

In addition, high speed memory margins should improve over time as performance requirements intercept our products capabilities.

And we broadened some exhibits on our website that show the variability we may experience.

We included a quarterly break even and margin drop through information for your models.

So the overall story is, attractive operating leverage with an expanded serve market that we are making good progress penetrating.

Moving next to the balance sheet, cash and marketable securities increased from $373 million to $468 million since last quarter.

The majority of this increase came from advanced customer payments to secure their position in our slot plan.

But we also maintained very competitive receivable day sales outstanding at 49 days which reflects strong customer satisfaction.

Overall our balance sheet continues to be strengthened.

Turning next to the continued surge in demand, product shipments increased 78% from a second quarter to the third.

And as we said a quarter ago we staged some finished goods inventory to respond to the anticipated demand increase.

This along with draining the existing inventory in the supply chain helped keep our third quarter lead times quite short.

However, as we move through the quarter, lead times extended on average to about 6 to 10 weeks.

We continue to work with our key suppliers to respond to this increased customer demand.

Overall, we were pleased with the responsiveness of the supply chain as it gets stoked up after quite a respite.

But the fact is that we are carefully monitoring the total supply chain along with our major contract manufacturer to ensure that the lead times remain in line with customer needs.

Before I redo the third quarter results in some detail, I should mention that we posted on our website an exhibit on the convertible debt delusion at different stock prices including both the economic delusion and the much more conservative accounting delusion calculation.

Now, moving to the third quarter results, the top line of $262 million was up $92.6 million or 55% from the second quarter.

Semi tests contributed $70 million of this increase for a total of $173 million and system tests contributed $22 million of the growth for a total of $89 million.

Within that $262 million, service revenue was $56.9 million up slightly from $54.4 million a quarter ago.

Semi test service revenue was $40.6 million up from $37.6 million a quarter ago.

Product turns business was 37% versus 40% a quarter ago.

In semi tests product turns business was 50% versus 62% a quarter ago.

Memory revenue was $7.9 million in the quarter, up from $2 million a quarter ago, which was all flash memory.

Moving down the P&L, non-GAAP gross margins increased from 29.5% in the second quarter to 42.5% in the third quarter due to higher volume.

Product margins were adversely affected by mix in system tests and a product obsolescence charge of $6.9 million.

R&D expenses were $38.3 million or 14 .6% of sells compared to $38.5 million or 22.7% of sales in the second quarter.

SG&A expenses were $46.3 million or 17.7% of sales compared to $47.3 million or 27.9% of sales in the second quarter.

Operating expenses of $84.6 million were down slightly from the second quarter and included the benefit of about $6 million from temporary seller related reductions.

Our net non-GAAP interest and other expense was $1.8 million, taxes were a benefit of $1.5 million in the quarter.

And our head count totaled about 2,900 people.

In the third quarter, semi test sales were 66% of the total and system test group was 34%.

Systems test sales were at record quarter levels.

Our book-to-bill ratio for the third quarter was 1.10 for the overall Company.

1.3 for semiconductor test and 0.62 for a system test.

At the end of the quarter our back log stood at $336 million, of which 83% is scheduled to ship within the next six months.

Cash flow from operations totaled approximately $94 million after capital additions of $9 million.

Again the majority of this increase was from advanced customer payments.

Depreciation and amortization for the third quarter was $34 million including $6 million of stock base compensation, $8 million for acquired intangible asset amortization and $2 million for amortization of the GAAP imputed debt discount.

As noted in the press release, sales for the fourth quarter are expected to be between $255 million and $270 million.

And non-GAAP EPS range is $0.12 to $0.17 on a 181 million diluted shares.

I should add that the guidance includes full reverse of a temporary pay cuts and a more normal product mix but also excludes the amortization of acquired intangibles, the purchase accounting step up charge and non-cash imputed interest on the convertible debt.

Our GAAP EPS range is $0.04 to $0.09.

Now moving to the P&L percentages expected in the fourth quarter.

We expect gross margins to be 47% or 48%.

R&D should be 15% or 16%.

And SG&A should be 19% or 20%.

Non-GAAP net interest expense is expected to be about $2.3 million and the tax provision should be about $2 million.

In summary, our model is performing quite well.

We are penetrating new marks and adding muscle to the balance sheet.

Our main focus short term is making sure our supply chain responds to demand in addition to maintaining very strong cost discipline.

Now I will turn the call back to Andy.

Thanks, Greg.

Molly, we would now like to take some questions.

(Operator Instructions).

Your first question comes from the line of CJ Muse with Barclays Capital.

Good morning and thank you for taking my question.

I guess first question on the high speed memory front in terms of the multiple orders there.

Can you comment does that mean you are named the second source vendor there?

Or are they still looking at three different vendors?

CJ, this is Mike.

What I can tell you is that I can't give you details on that and I don't think they have -- our customers have stated anything about first or second suppliers.

But I will say that our initial HSM evaluations have concluded in this past quarter and they are for both production and engineering applications.

So that sets the stage for growth in 2010.

Obviously it's our objective here was to get this milestone achieved this year and we have done that.

But in terms of first or second suppliers, none of those determinations have been made.

Okay.

And I guess as a follow on to that, just to confirm, I believe you said memory total was $7.9-mil?

Yes.

Can you expand on the trajectory from here I guess including high speed memory what the puts and takes are and what we can expect as we enter 2010 for that line item?

Our customers are putting their Cap Ex budgets together now.

And it's a pretty uncertain picture actually.

I think everyone assumes that 2010 will have production buying both on the DDR3 and on the GDDR5 front.

Hard to size that.

We made storm systems about the size of the market.

How big we think that will be?

And then obviously you can take calculations as to what our share might be.

I will say it's shaping up that the customers are talking about adding capacity in 2010 where they have been really at very, very low levels here in '09.

Okay, sounds good.

And last question for me and I will turn it over.

In terms of the non-GAAP pro forma, there is a line for profit sharing.

Is that stock base compensation?

No.

That line is as we make adjustments in non-GAAP such as removing the amortization of intangibles in theory that would create more of a profit sharing charge as we improve income.

We are just penalizing non-GAAP income for profit sharing had these other items we taken out not been in the P&L.

That's a tax effect?

No, no.

Some of the items we adjust for in non-GAAP increase our income.

So for increasing our any, our profit sharing calculation is basically 10% off what your pre-tax profits are.

So if we make adjustments and increase our pre-tax profits in non-GAAP land, we put a profit sharing charge on that just so it's consistent with how we would compensate people.

That charge -- that cost is never paid because we pay profit sharing based on GAAP results.

To give a clearer non-GAAP picture we thought it was fair to penalize ourselves for a profit sharing charge.

Thank you.

Your next question comes from Jim Covello with Goldman Sachs.

Thank you so much for taking the question.

I have a couple of them.

I guess first of all look at the orders you are able to recognize in the third quarter versus fourth quarter revenue guidance.

The fourth quarter revenue guidance is below third quarter orders, even though the last few quarters of revenue have been above the previous quarters worth of orders.

Can you help me understand that dynamic a little bit?

Jim, two things there.

One is that we have some advanced ordering that goes out beyond the quarter.

Some customers wanted to strategically get position what they view as a tight supply chain so they positioned themselves essentially not at the front of the queue but take an piece of capacity up front.

The other thing is that we are a little bit constrained on the supply chain and have some parts shortages.

So we are working through those but there is a little bit of caution in our tone here that as we not all of those things are resolved yet.

Those are the two components.

Okay.

And would that potentially give better visibility into the first half of 2010 with the extended orders and maybe orders that you couldn't be able to fulfill from a revenue perspective until the first quarter?

I think that's fair.

Of course, the orders that are there, the delivery schedule on those orders could still change.

I think it gives you a little bit more confidence that there -- those customers put an expectation that their businesses will grow.

We feel better about that.

Sure.

If I could ask two more.

One of the big packaging in textile customers that suggested that their 2010 Cap Ex would double this week.

Without commenting on that customer specifically, you know have you started to see orders or shipments to reflect that level of Cap Ex yet?

Or do you think that's in front of you still?

The OSEC segment came back pretty strong in the second quarter.

Tripled from Q1 to Q2 but stayed steady for us in Q3.

And it's nowhere close to the levels.

Two, almost two and a half times as high in the high point of the last cycle, the '08 part of the cycle.

From afar I say the energy still in that.

That's not an overheated segment for us.

Terrific.

Get at your point?

Very helpful.

On the high speed memory congratulations on getting the recognition there.

What do you think the timing could be for A, following orders from that customer, and then, B, potentially orders from a second customer who I believe might be engaged with now?

I will say we have gotten orders for more than one customer.

So those are in the house at this point.

I think your question is what's the potential for follow on orders for both of those customers or from expansion beyond that.

And that's a tough call because that's all wrapped up in their Cap Ex plans.

I think we vote along with what conventional wisdom is that that will start in the first half of next year and probably be heavier in the second half.

Obviously we are trying to make sure the engineering systems and the early production use of these system goes well so we can participate.

Very, very hard to size that.

Great.

Thank you so much.

I appreciate it.

Your next question comes from the line of Gary Hsueh, Oppenheimer.

A sense of normalized revenue and earnings.

Earnings on the margin front you were helpful there.

But in terms of normalized revenue what are you thinking in terms of buy rate for a number next year and off the back of Jim's question it sounds like the foundry and sub con world in Taiwan particularly in 2010 is feeling in close approximation for spending levels in 2004 and I know your sub con revenue number is far below what it was in '08 and '04.

Does that change your 1% test or buy rate sort of notion in terms of normalized numbers in 2010 and what kind of test or buy rate numbers are you expecting for next year?

It's Mike.

Buy rate in this downturn has been the less useful number to us.

I think everybody knows that sub 1% this year in total.

Both in memory and in SOC.

Here is how I'm think being it.

We are exiting the year this year in total Cap Ex is around a billion and a half.

Okay?

With 80 plus percent of that nonmemory.

And that's down from $3 billion which was down from $4 billion which was down to $5 billion.

We have been on this downward slide and the Cap Ex rate or buy rate has gone down.

We exit this year with if you annualize fourth quarter that gives you a little over $2 billion total market.

So if everything stays flat and there is different prognostications as to dip in the first half and recovery in the second half and so on everything stays flat.

You have a $2 billion market.

We think it goes up from that because we think that the buy rate is artificially low.

I don't know if that's 1.2 or 1.3.

It's not at 2% or 1 1/2% level.

So you know that would seem to argue to me that you are looking at basically a base case for semi test revenue on a normalized basis in 2010 somewhere around a $1 billion.

And consensus right now is at 1.1 and I think there is a lot of short term fear about how seasonally week Q1 could be.

In terms of the overall market you guys believe for sure that if semi cap ex is growing and semi test buy rates should grow.

That's right.

Okay.

Did you say a billion in SOC?

Yes.

Yes, so a billion on SOC makes the market has to be over $2 billion.

Do the math around $2 billion and 40 plus percent share.

800 to 900 is probably okay.

And just along these lines.

Last question.

Did you give a number in terms of a target revenue range for HDD test next year?

We don't give -- you mean in estimating for different models what you might put in?

Yes, for HDD test next year, was number given out.

No, but we have been using a windage number that could be $30 million, $50 million.

It could be $30 million to $50 million.

Perfect.

It could be higher than that because our penetration into the market has been at a higher rate than that.

The range is pretty wide and it's lumpy so it's hard to make a call on it.

Great.

Thank you.

Your next question comes from the line of Krish Sankar with Banc of America-Merrill Lynch.

Thank you for taking my question.

I have a couple questions.

Mike, you said about -- having record bookings in Q3.

Is it fair to assume that the -- business is running at traditional capacity which is about mid- to high $30 million run rate for revenue?

And maybe like a $40 million bookings run rate?

This is Greg.

Not currently.

It's below that.

The -- some of the bookings were securing capacity over the next couple of quarters.

So it's not quite at that level but working its way up to what mid-20s and attractive profits.

Got it.

And on the HDD side of the business, you guys said $30 million to $50 million and it could be higher.

Do you see any pull in this from 2010?

We don't think so.

We don't think there is pull.

But the equipment is being used.

High utilization.

So we don't think there is pull, but at having said that we would not be surprised if from a seasonal perspective Q1 and Q2 could be dry.

That's not uncommon for this business.

And just a final question, on the high speed memory not to be beat a dead horse, but in terms of DDR3 specifically, can you tell how many customers are you engaged with today?

That horse isn't dead.

We said multiple customers so that's where we will leave it, Krish.

If you remember, a couple of quarters ago we were in valuation at one and expanded that to two.

We were able to secure business here from multiple customers.

Got it.

Thank you very much.

Your next question comes from the line of Satya Kumar with Credit Suisse.

This is (inaudible) for Satya.

Actually can you share what the service revenues for semis and system tests for the September quarter?

Yes.

The semi service revenues are $41 million.

And the system test service revenues for the third quarter were $16 million.

Okay.

And then at these levels of $250 million to $270 million run rate how should we think about Op Ex coming back?

Op Ex will come back to around $92 million in the fourth quarter.

But as we approach our model 15% profit, we would expect Op Ex closer to $96 million, $97 million.

That maybe even $98 million that neighborhood, upper 90s as variable compensation that's tied to profitability kicks in.

Okay, thank you.

Next question comes from the line of David Duley with Steelhead Security.

Congratulations on a nice quarter.

Did you mention what the book-to-bill in the flash business was and was there more than one customer ordering there or was it just one?

David, it's multiples.

It's a group of customers.

There has been a reawakening in that space.

We don't break out the bookings between flash and HSM.

We bundle those together in the number we talked about.

Bundle them together bookings was 22 so revenue was eight so it's a book book-to-bill on a bundle bases.

That's great and great to see those customers back at the table.

Second leg to the story.

Did you have any 10% customers during the quarter?

In terms of revenue we did have one 10% customer during the quarter.

Okay.

And will you disclose the name of that in your filings?

We will disclose the name in the 10K.

We probably won't disclose the name this quarter.

I don't believe that's required.

But certainly in the 10K we will disclose it.

Great.

I was curious about two things.

Jim Covello was asking questions about the OSAT and what I have -- what we have been hearing is a lot of incremental Cap Ex these guys will be spending these guys will be on test.

I was wondering if you seen any of those big OSATs come in and give you advanced payments or are they starting to get nervous that your lead times are extended beyond a quarter?

Dave, I don't think -- we are so connected to them, it's hard to say if there is a lot of nervousness on it.

They say it's steady this quarter in demand.

But I think they know where we are.

And we don't see any anticipatory demand because our lead times have moved out a little if that's the essence of the question.

They aren't buying on the -- is what I would say to you.

They are holding their cards close and spend early next year, I guess.

And the advance payments I'm curious about that.

What exactly how does that work?

We had payments from customer and received a payment up front.

It gives them better position in our slop plan.

They get a slightly, slightly better discount but commercially it works for both parties.

So they are securing capacity and they see some greater test demand and want to get ahead of it.

And if for some reason they don't need the testers or something like that, the market to roll back over and didn't need the capacity, how do the deposits work then?

Well, I don't want to get into details of the contract in any great level but we would expect that they would take to capacity at some rate and if it takes little later I don't think there would be cash exchanging hands but we would have to work out the details and we would work closely with them to make sure it works for both parties.

Thank you very much.

Your next question comes from Patrick Ho with Stifel Nicolaus.

A couple of house keeping questions.

What was your stock options this quarter and what can I assume for tax rate in 2010?

The stock base compensation was $6.1 million this quarter.

And I'm sorry, the other question was?

Tax rate for 2010 now that you are back in profitability.

It would be 15% or less.

So it's 15% and probably do a little bit better.

Just some broader I guess market related questions now.

In terms of the SOC test business you mentioned that you are still waiting for the emergence of some sensor like image sensors and automotive, do you see that coming back in Q4 or do you see your current market segments being the same drivers in Q4?

Patrick, it will generally be the same drivers.

We are seeing a bit of life in the automotive space.

If something comes back that will come back of the laggards that will come back sooner.

Image sensor is actually image sensor has been up Q2 to Q3.

But it's not moving in the needle much.

Great.

Just going back to the flash memory business as a whole.

You now seem to pick up.

Is the trigger point for the pick up and spending on the flash memory side due to the transition to 3X node?

Or is it just overall demand trends that are requiring more capacity additional testers from your end?

Which is driving the pick up on the flash memory side of things.

It's more -- overall demand phenomena.

And final question, cash usage now that you are starting to generate positive cash flow you are active in buy backs in the previous cycles.

Is that something you will look into in 2010 once again?

Now we don't have any plans to buy back stock in the foreseeable future.

Thanks a lot, guys.

Yes.

(Operator Instructions).

Your next question comes from the line of Yagesh Jadhar with Arete Research.

Two questions is one of your competitors mostly recently earlier this week suggested that the memory market is going to be doubling in 2010 and progressively move into 2011.

I wanted to ask you what kind of position do you expect as exists in tout 10 in terms of memory market share for you guys?

Yagesh, I will tell you.

I think it's in the low teens market share.

But it's against the very low market.

Maybe the substantive point is we will probably be slightly up in share in 2000 -- did you say 2009?

No, 2010.

2010, oh, that has to be -- we have to speculate as to how much share we can get in high speed memory.

Obviously we are trying to get into some big players in high speed memory.

If we do that we can move our share position considerably because that's all upside for us.

We exit '09 in about -- I think it's expected to be about 12% total market share.

So we could see ourselves growing and we would like to get to 20% at the first hurdle here as we go into the next year.

The other question is we are moving to 300-millimeter analog.

Find out how well are you positioned to capture that portion of the business?

I missed the question.

Moving toward Texas Instruments moving toward 300-millimeter analog process starting up later this year and early next year.

I was wondering how well are you guys positioned to capture the test portion of the 300-millimeter analog business there?

There is no issue there.

TI is one of our major customers and are well positioned in a number of segments with their business.

I think we will be able to ride that transition.

Okay.

Thanks.

Your next question comes from the line of Krish Sankar with Banc of America-Merrill Lynch.

Thank you for the follow up.

Do you guys -- can you tell more on the seasonality of the HDD side of the business.

We don't have a long history in this business, but certainly from our understanding and speaking to the customer and how they bought in the past, it tends to have some seasonality element to it that it does tend to build or take capacity kind of Q2, Q3, Q4 and Q1 more of a quiet period for adding capacity.

So it might be macro-economic trends that change that.

But generally speaking I think it would be stronger in the mid-part of the year, maybe peak in the third quarter.

So we would expect that as a continuing trend and somewhat tied to holiday season and seasonal buyings in got it.

And then the IDM mix was is 79 in Q3?

79/21, we say we don't do IDMOSATs.

We said specifiers which includes IDMs and the fabless specifiers what they buy and then what the outsource of the test companies buy.

That's 79-21.

Last quarter 63-37.

Got it.

Thank you.

Your next question comes from the line of Robert Weaver with Forest Investments.

Hi.

A number of convertible bond issues from earlier this year have taken actions to get those bonds off your books.

Is that something you guys have looked at it all in terms of doing an equity flush out of those?

No we haven't looked that the at this point.

The bonds are trading at a high premium so it doesn't seem at this point that that would make a lot of sense.

You will continue to investigate all opportunities.

Our intent is in 2014 to pay the bonds back in cash and settle the option with net shares.

So we will likely stick with that path unless there is something be a normal that gives us a better deal for the company.

Okay.

Thank you.

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

Can you come on what you are seeing in the sort of low end J750 micro controlling test space?

I thought that when we last talked that was one of the businesses that was still off in your prepared commentary it sounded like micro controllers picked up.

Maybe you can remind me how big and normalized environment that segment of the market is relative to the total.

Thanks.

Yes, Raj, are you asking for how micro controllers fits into the total test market?

Not Teradyne, right?

Both I suppose.

If you can comment on what you have seen there or whether indeed it's coming back strongly and in a normalized environment for you what does that typically represent?

Let's see, total market, micro controller piece is somewhere around 9% or 10% of the total market.

Little bit higher for us because our share in that market has been pretty strong.

The level of business we had the last two quarters has been very low, under $5 million a quarter and has gone up by the factor of about 5 in this quarter.

It's a big jump in our third quarter demand off a pretty low base.

Is that normal.

We are not back at levels of J-750 that are close to -- we may be 40% of the way back to the levels of J-750 sales that we had.

When I say that, I'm wrapping in image sensor into it.

So don't need to make it complicated.

The run rate we got is sub 50% of the normal run rate for that product.

All right.

Thank you.

That's helpful.

Your next question comes from the line Atif Malik with Morgan Stanley.

Hi, thank you for taking my questions.

Advantis reported yesterday if I add their DDR3 test units and add a couple of units from you, we were still at handful of DDR3 units and if I look at the rate of DDR3 migration from DDR2, clearly the premium has gone away for DDR3, that migration rate is has been quite steep, our estimate probably on 30% to 40% DDR3 right now.

Has it surprised you on how few DDR3 testers have been bought and given the rate of DDR3 migration we have seen?

If you asked that question six or nine months ago the answer would have been yes because most people looking at the test market were assuming that tooling for DDR3 would have to take place in '09 at a heavier rate than is happening.

In the last three to six months everyone has recognized that the reuse and the stretching of the DDR2 product into the DDR3 low frequency range, lower speed grades has been heavily used by customers.

So there is a heavy reduction in Cap Ex as a result of that.

And that has been the major factor in depressing the DDR3 buys.

And then a question on your shortages, we have seen this movie before there is chatter of double ordering in the semi food chain.

Help us understand how much of your bookings strength is customers panicking given your shortages and how much is real?

We think the bookings strength is we believe it's real and look at it carefully.

Doesn't mean it might not be $1 million or $2 million or $3 million that gets canceled.

It's nothing like the past when we had very long lead times.

I think in truth customers are probably going to get systems a week later than they might otherwise and that's kind of on the worst case scenario this quarter.

I don't think there is anything they will get from us that would cause them to throw in a bunch of orders as a place holder.

We haven't seen it and wouldn't expect it.

And one last one, Amoco reported yesterday and they are saying that seasonality for 1Q could be single digit.

Want to get your thoughts on what kind of seasonality can we see in 1Q?

For revenue which is in demand in this quarter.

We think there is a digestion going on so that people will watch for the sell through in the holiday season.

So our expectations are that things are tonally demand is a bit down in this quarter going in so that the Q1 numbers could be lower.

Thanks.

There are no further questions at this time.

Great.

Thank you all for joining and we look forward to talking to you next quarter.

Thank you.

Thank you.

This does conclude today's conference call.

You may now disconnect.