泰瑞達 (TER) 2009 Q4 法說會逐字稿

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

At this time I would like to welcome everyone to the Q4 2009 earnings conference call with Teradyne.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) Thank you.

I would now like to turn the call over to Mr.

Andrew Blanchard, Vice President of Investor Relations.

Mr.

Blanchard, you may begin.

Thank you Carrie.

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 will provide details of our performance for the fourth quarter and year-end 2009, as well as our outlook for the first quarter of 2010.

First I'd like to address several administrative issues.

The press release containing our most recent financial results was sent out via the business wire 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 at teradyne.com.

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

To view them simply access the investor page of the site and click on live webcast.

In addition, replays of this call will be available via the investor's page of teradyne.com about 24 hours after the call ends.

The replays will be available along with the slides through February the 12th.

The matters that 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 take no obligation to update them as a result of developments occurring after this call.

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 page 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 Oppenheimer Semiconductor Summit on February 18th in New York, the Goldman Sachs Technology and Internet Conference in San Francisco on February 24th and 25th and Morgan Stanley's Media Technology and Telecom Conference in San Francisco on March 3rd and 4th.

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

First, our CEO, Mike Bradley, will review the state of the Company and industry in the fourth quarter and at year-end 2009 and will review our outlook for the first quarter of 2010.

Then our CFO Greg Beecher will provide more details on our year-end and quarterly financial performance along with our guidance for the first quarter.

We will then answer your questions.

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

Mike?

Good morning, everyone.

Thanks for joining us today.

I'm pleased to report that we continue to see a strengthening across many of our product lines and with the business rebounding, we are getting very good earnings leverage as we keep our fixed cost structure in check.

The lead story in the fourth quarter was a broadening of orders in our SemiTest business.

Bookings in that sector were up 13% to over $260 million, led by increases in wireless and microcontroller segments.

This is on top of a nearly 70% uptick in the third quarter.

Predictions of an industry pause in bookings as we entered the fourth quarter did not materialize.

On the contrary, we have seen continued strong buying from both our IDM and OSAT customers.

So as we exit 2009, we have had a solid recovery in SemiTest from the $65 million trough order rate in the first quarter to nearly $265 million in the fourth quarter.

Our System Test bookings were down 28% sequentially totaling $40 million in the quarter.

This kind of swing was not surprising, nor will it be going forward, as the lumpy buying patterns within that group are expected to continue.

I will say that our automotive diagnostics and commercial board test units have not seen the rebound during the year that has occurred in other lines, so when they do start clicking, they will give us a small boost to our overall results.

I should also mention that the System Test group remained profitable throughout 2009 anchored by steady performance in our defense business which held up the best through this downturn.

So the overall picture for the quarter completed is that total Company bookings increased 5% to just over $300 million and that's the basis for our increased revenue guidance of $290 million to $310 million for this first quarter.

I'd like to spend several minutes on a few other topics which I think will be of interest to you and then I'll turn it over to Greg for a recap on the numbers, especially focusing on how the business model is performing now and should perform going forward.

There are three things I'll touch on.

First is the health of the product portfolio in SemiTest, second is the status of our memory initiative, and third is a temperature check on demand going forward.

We also want to keep you abreast of lead times and supply line issues, so I've asked Greg to expand on that subject for you as our product line demand profile has had some very sharp swings resulting in some lead time stretch outs in the short term.

On the product portfolio, we are now very well positioned in every market segment across semiconductor test with Magnum and the low speed memory sector, Eagle's ETS family and performance analog, J750 for consumer digital and the flex for the high performance memory and SOC segments.

Every platform in our SemiTest catalog has had at least one new instrument introduction during the past year and every one of those products has been bought, shipped and installed during this last 12 months.

So we are entering 2010 with the broadest and most refreshed portfolio that we have had in recent years and we can ramp these products into this upsurge.

On the individual product front, we have just had two very strong quarters for Eagle products with an all time bookings record in Q3 and only 10% less in Q4.

In addition, this last quarter we had a major surge in J750 orders as the microcontroller market turned up smartly, driven by a long awaited rekindling of automotive demand.

In fact you have to go back over three years to find a quarter where J750 orders were higher.

This is one of the major areas where lead times are stretching out so I've asked Greg to comment further on that shortly and on what we are doing to meet the demand.

But the upturn hasn't touched every end market or geographic segment.

Image sensor and flash memory demand remains low, consumer audio/video and gaming driven orders are off from their third quarter levels, and Japan and Europe based capacity orders remain subdued.

While we have gained memory share through the year, the memory order rate remains low.

We have had follow-on orders in high speed memory but major capacity orders from our customers haven't occurred yet and the flash sector continues to be a spot buying environment despite high utilization rates in the install base.

In anticipation of your questions on the order outlook, I'll say the following - we have clearly seen a broadening of demand.

More customers are participating each quarter.

The tone of customer interactions is more optimistic and more urgent so the short-term outlook remains strong.

Now, from an end user standpoint, OSAT has accounted for 32% of total SemiTest orders and with a major driver of the Q4 bookings increase having grown by over 70% sequentially.

But the OSAT order level still remains well below the top two quarters of the last cycle.

Overall semiconductor test buy rates for 2009 will be under 1% at about 0.8% for the year and if 2010 runs at the Q4 '09 rate we would see that buy rate notch up to maybe 1% -- still quite low against any historical level.

While we are not making forecasts about 2010 or even about the next quarter's bookings, I want you to know that the short-term demand outlook remains strong as we work our production slot plans.

In summary, we are on a solid recovery path.

We are hitting on a lot of cylinders but not all.

Our new product offerings are all in production of customers and the operating model delivers about ten points of higher operating profit at like sales levels of the past.

It's been a very challenging 18 months but our employees and our supply line partners have shown great adaptability and innovation in gearing us for the future.

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

Thanks, Mike and good morning, everyone.

In addition to providing a recap of fourth quarter results and details on the first quarter, I'd like to step back and highlight some of the key accomplishments this past year that should contribute to our future earnings power.

First, though, as a quick way to illustrate the degree of renovation in our cost structure, I should point out that we generated a 13% operating profit on sales of $267 million in the fourth quarter.

This is about 10 points higher than we achieved at comparable sales levels in the past five years.

The renovation of our cost structure has touched every part of our Company and enabled us to earn a 10% operating profit rate in the third quarter and 13% in the fourth quarter.

Without detailing the litany of changes over the past few years, let me highlight just a few of them.

We have one major outsource flex manufacturing site in China that does order assembly all the way through final configuration and test.

We now source about 70% of our material in low cost locations.

Our board repair is consolidated in low cost locations and in engineering we have established technology building blocks that are reused in our products.

In SG&A, we have consolidated work and sales and HR, while in finance and IT we have used low cost locations or providers for transactional support and processing.

Rest assured, we will keep a firm grip on fixed costs as our model can scale without adding significant permanent headcount.

Looking ahead the majority of our cost changes should be variable compensation in nature based on the level of profitability.

So apart from a much lower operating breakeven level and a model that can scale, what else was accomplished in 2009 that increases our earnings power?

One, we brought into two leading high speed memory accounts with our product's frequency, throughput and flexibility advantages.

While there is much more to be done to exploit the advantages we bring, we are in the tent now and we have got a compelling product.

Buying and high speed memory has been very low compared to historical measures as the prior generation has been stretched further.

Yet as time marches on, the likelihood of a refresh is ever increasing as memory speeds and units both increase.

Two, we successfully entered the hard disk drive market and captured significant market share in the latest generation of drive products.

Units in this segment are forecasted to grow more than 20% per year over the next several years which bodes well for tests.

Lastly, we reached an agreement with Xyratex to dismiss all of the pending litigation between one another.

Although the settlement agreement is confidential it will not have any financial impact on Teradyne.

Third we successfully integrated Eagle Test into the Teradyne family.

Eagle itself has been expanding its TAM and matched with our distribution muscle was able to break into multiple new accounts in 2009.

Eagle on a stand alone basis has historically delivered very strong financial performance with their highly differentiated offerings and that performance should continue.

So in 2009 we significantly expanded our TAM into high speed memory, hard disk drive and low cost analog testing, while also renovating our cost structure.

I should also note that our core SOC test business finished strong in the fourth quarter with the highest bookings since the first half of 2008.

As Mike noted, the J750 product was the standout topping 100 units ordered.

This was the highest quarterly order level since mid 2006 for the J750 which is valued for his low cost, high parallel capabilities in the micro-controller and wafer probe markets.

In addition our System Test group was profitable for the full year at 7%, led by our Mil/Aero business which is the de facto standard for a family of test instruments with the Department of Defense.

On the balance sheet side, we ended the year with gross cash of about $519 million, up from $374 million at the end of 2008.

$80 million of that came from operations after deducting capital additions.

Our cash plans for the foreseeable future are to accumulate cash.

We have no plans to buy back stock.

And we ended the year with net operating losses of about $300 million along with other favorable tax attributes.

We expect to have a 15% tax rate for the foreseeable future.

So we are very pleased with our product lineup, our lean cost structure and our financial muscle.

And the start of 2010 is about as different as it could be from a year ago.

First quarter sales are expected to be about 2.5 times higher than first quarter 2009 and operating profit will swing about $108 million.

While 2010 has plenty of promise as outlined in several recent analysts reports, we will focus our forecasting brain power on the supply chain lead times and closing part shortages.

On that front, we have made good progress in the quarter but with very strong orders, lead times from order receipt have stretched out to eight to ten weeks and in some cases to over ten weeks versus our normal model of six to eight weeks.

We are working very hard with our suppliers as they scramble to catch up with demand.

As to our model, it's delivering as outlined in prior calls.

We have included on the website information on the convertible debt dilution which again we plan to pay the principal off in cash in 2014 and fill the option element with net shares.

So the overall story is we have emerged much healthier, the short-term outlook is improving and we have made very good progress in expanding our serve markets.

So now moving to the fourth quarter results.

The top line of $267 million was up $5 million it from the third quarter.

SemiTest was $198 million, up $25 million and System Test group was $69 million down $20 million.

SemiTest product shipments were ramped 20% from a quarter ago.

Within the $267 million, service revenue was $57 million, flat with a quarter ago, SemiTest service revenue was $39 million.

Product turns business was 30% versus 37% a quarter ago.

SemiTest product turns business was 35% versus 50% a quarter ago.

Memory revenue was $18 million in the quarter, up from $8 million a quarter ago.

Moving down the P&L, non-GAAP gross margins increased from 42.5% in the third quarter to 48.2% in the fourth quarter due to mix and a lower obsolescence provision.

R&D expenses were $40.9 million or 15.3% of sales compared to $38.3 million or 14.6% of sales in the third quarter.

SG&A expenses were $51.5 million or 19.3% of sales compared to $46.3 million or 17.7% of sales in the third quarter.

Our operating expenses in total of $92.4 million were up $7.8 million from the third quarter primarily due to the removal of the temporary seller-related reductions.

Our net non-GAAP interest and other expense was $2 million, taxes were $2.7 million in the quarter and our headcount totaled about 2900 people.

In the fourth quarter semiconductor sales were 74% of the total and the System Test group was 26%.

Our book-to-bill ratio for the fourth quarter was 1.13 for the overall Company, 1.33 for Semiconductor Tests and 0.58 for System Test group.

At the end of the quarter our backlog stood at $372 million of which 84% is scheduled to ship within the next six months.

Fourth quarter cash flow from operations totaled approximately $50 million after capital additions of $15 million.

Depreciation and amortization for the fourth quarter was $33 million including $6.3 million of stock based compensation, $7.6 million for acquired intangible asset amortization and $2 million for the amortization of the GAAP imputed debt discount.

As noted in the press release, sales for the first quarter are expected to be between $290 million and $310 million and the non-GAAP EPS range is $0.20 to $0.26 on 182 million diluted shares.

I should add that the guidance excludes the amortization of acquired intangibles and a non-cash imputed interest on the convertible debt.

Our GAAP EPS range is $0.14 to $0.19.

The operating profit rate at the midpoint of our first quarter guidance is about 17%.

I'd like to point out that the last time we were at this level of profitability our sales were about $390 million or $90 million higher and this was in the second quarter of 2006.

I should also add that our operating expenses will be approximately $100 million due to higher variable compensation with the above model performance and some added engineering spend due to the timing of NREs.

Now moving to the P&L percentages in the first quarter.

We expect gross margins to be 50% to 51%, R&D should be 17% to 16% and SG&A should be 18% to 17%.

Non-GAAP net interest expense is expected to be about $2.1 million.

The tax provision should be about $6.5 million.

In summary, our model is delivering, end markets are improving and we are successfully penetrating new markets.

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

Thanks, Greg.

Carrie, we are now ready to take some questions.

(Operator instructions).

Your first question comes from the line of C.J.

Muse of Barclays Capital.

Good morning, thank you for taking my question.

First question I was hoping to discuss SemiTest -- 74% of your revenues in December.

Can you outline what your thoughts are mix wise in the March and potentially June quarters and then within that how you see core SOC as the positive/negative drivers in the first half of the year.

This is Greg.

In the early part of the year we would expect SemiTest to be stronger than our System Test group.

In the System Test group there is very lumpy buying and it tends to be lower in the early part of the year and pick up in the mid, latter part of the year, so we would expect SemiTest to be a bigger contributor in the first half of the year.

C.J., you asked also about the -- what are the segment drivers in the core SOC.

Yes.

It will be a continuation of what we have been seeing the last two quarters.

It will be -- probably be led by the wireless and the power management segments.

We have had a comeback here on the microcontroller side so that is going to be more of a participant in the first half of this year compared to the second half of 2009.

Add onto that, automotive is picking up so I think those will be the drivers in the SOC segment space.

Okay.

That's very helpful and then last question, can you provide some color on what the contribution was for memory for both Nextest and high speed memory in terms of revenues for 4Q and how you see that trajectory throughout 2010.

Do it combined.

I'll start with memory.

We have put memory together -- we don't intend to break out HSM or Flash but basically memory in the fourth quarter we had $18 million of sales which was the highest quarterly sales amount for the year by quite a large amount.

I think the second part of the question was what we thought going forward?

Your outlook for 2010.

That's the big wild card.

We really -- the memory market coming out of '09 is sub $300 million, $200 million, $225 million, $250 million market, we think is what it's going to head up to.

So, we are hoping that we can get a position.

We have got about a 13% share in that market now, up from 8%, 8% or 9% in '08.

We are hoping to push that up towards the -- above 15%, towards the 20% level, but the denominator is the big question as to how big that market is going to be and we just have to watch and see that play out.

Thank you.

Your next question comes from the line of Jim Covello of Goldman Sachs.

Good morning, thanks so much for taking the question.

I'd like to continue on the memory theme if we could.

Is memory really the biggest opportunity for upside in 2010?

And then, I just heard what you said about not breaking out DRAM and NAND.

But is DRAM or NAND going to be the bigger opportunity in that qualitatively if not quantitatively?

Memory is the biggest -- I think you would have to put memory and the hard disk drive business, if we can expand our footprint in that, we hope be able to that to have that a big contributor -- 2010, 2011.

The split between NAND and high speed memory, honestly, it's hard to call.

Obviously we have got a bigger position in NAND, so we are ahead of the -- we are ahead of the curve there.

Jim, I don't know which would be bigger for us.

Obviously, if the higher speeds on the high speed memory side accelerate, that might be -- I think the rate of growth there will be higher than it will be in NAND for us but we really don't have a breakout on what the percentage breakdown between the two would be by the end of 2010, so sorry I can't flush that out further.

Thanks.

And maybe final one, any -- what would it take for you to start to buy back stock?

I heard what you said about that's not what you're going to be doing -- but what threshold would we have to see for you guys start to be more comfortable with the buy back given the significant cash flow generation.

I think we need to see cash closer to $1 billion and then at that level we would consider it but until we get there, we wouldn't be interested in considering it.

Your next question comes from the line of Mehdi Hosseini of FBR.

Yes, thanks for taking my question.

As a follow-up to Jim's question, I want to revisit the DRAM topic.

Maybe another way of asking the same question is can you help us understand the breadth of the customers that you have in DRAM and I have a follow-up.

Mehdi, we have a couple of customers on the DRAM side.

That's what we had indicated last -- at the last call, and that's the footprint we have now.

We have had follow-on business in the fourth quarter, but, obviously, given the size of the market, nothing has exploded on that front yet, but we introduction, we are in production.

Maybe the best way to get at your point is, I think we will get depth before we will get breadth on the high speed memory side.

Is that going to be dependent on when those DRAM customers, especially in Korea, are going to be done with front end capacity addition or are we still dealing with evaluation or competitive eval that is going on?

No, there's still a lot of competitive activity, but the thing that's holding it back is that they haven't moved to large CapEx on test capacity by just stretching the install base of what they have there, they are working their test times down.

So they are doing everything they can and that's been the theme through 2009, to hold back on CapEx.

And, obviously, from our end, the hope is that that bubble breaks as the demand for the devices moves up.

Because we are ready for -- we are in production and we are ready for a ramp in production, but I won't say that the evaluation period is over.

That continues.

Okay.

And in terms of evaluation, what is your biggest competitive advantage?

Is that just speed or above, something more?

It's different against each competitor, but the compelling argument that we have been putting forth to our customers is that the frequency range on the system allows them to use the same system for testing the very, very super high speed graphics DRAMs as well as the DDR3 products.

Secondly that the product as a platform extends and they can see the product capability and road map, it therefore extends into DDR4 and then finally against -- on the normal access of productivity, it's a high productivity system from the standpoint of parallelism.

I see.

And then I promise just one more question.

Regarding the Q1, the mix between semi and non-semi, should we expect any meaningful improvement in system non semi including HDD or is that more towards the Q2, Q3 time frame?

It's more towards the Q2, Q3 time frame, Mehti.

In the early part of the year System Test will be relatively lower than what you saw in -- certainly in the second half of 2009 -- but we expect it to be very lumpy and it to contribute in the second part of the year in 2010.

Okay.

Great.

Thank you.

Yes.

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

Thanks for taking my question.

A quick question here in terms of the J750 business.

You said that basically you're hitting record unit shipment levels but lead times are stretching out.

Can you help me out in understanding what you're doing in terms of reigning in execution and managing that ramp and whether or not at the fringes -- because lead times are stretching -- at the fringes are there any opportunities for competitors to really come in here and gain a foothold and build a tent in the microcontroller business?

I've got a follow-up too.

Okay.

We are working very close with our suppliers.

The issue is not our labor or our talent and configuration of tests.

It has to do with getting parts.

There's part shortages throughout the entire supply chain.

I don't think we are unique with this.

A number of our suppliers -- their lead times have doubled.

Some have gone much more than doubled in terms of the normal lead times.

So we are working very hard with suppliers.

We think we are getting our fair share of parts.

We are obviously using any demonstration equipment we have or any other means we can get equipment on the J750.

I do not believe we are at risk of losing market share at such a large installed base -- very strong workhorse.

It takes a lot of effort to move from one platform to the other so we don't see that as an issue and we believe competitively in terms of our responsiveness, because our demand is higher now, we might be off a week or so in terms of what others might be able to deliver but we are going to close that gap shortly.

Okay.

In fairness, I that I competitively our competitors will go into our customers and say our lead times are moving out but we are in very close contact.

We are doing a lot of other things besides working the production line and that is -- the demo systems we have got internally -- we are putting as much into this to make sure that we cover the short-term needs, the revenue needs that our customers have.

So, we are very hopeful that we don't leave something opening here -- leave an opening here for competitors -- and in general we think that we are going to be okay on that front, but we are asking our customers to bear with us here as we get through the end of this quarter.

We think we will be able to solve this as we get into the second quarter.

Okay.

Great.

And you talked about some cylinders still not firing -- we talked a lot about memory here.

Any commentary on the LCD Driver IC business, particularly since I think that's off the J750 platform as well.

It seems like that build on the LCD Driver IC side with potential customers is tightening.

Any visibility on that cylinder firing in 2010?

Yes, turns out the other two 750 based cylinders here -- both image sensor and LCD driver have not been participating in the upsurge.

And in one sense that's been helpful to us because the microcontroller segment has been pushing us so much, so, in an odd way we are grateful that that's been a little bit slower.

That may emerge.

We don't see in this coming quarter a big uptick in either of those two segments, so, that's one of those areas that's just been more depressed.

But as you said, as things tighten, we may get some demand in that -- on that front.

If I were wishing, I would hope that would come later, at the end of this quarter rather than at the beginning.

But right now our short-term indicators are not that we are going to see anything -- any spike in those two segments of the J750 in the short term.

Great.

Thank you.

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

Thanks for taking my question.

My first question was if you look at your HDD sales and if you assume you get no new customers, what do you think HDD sales would be in 2010 with respect to 2009?

Do you think it would be greater, lower, flat?

Well, 2009 was an unusual year for us because since we were launching the product, we had shipped in in '08 but our '08 shipments weren't recognized for revenue until 2009.

So, if we kept the same customer base, it would be hard to hit 2009 numbers in 2010 because you've almost got a two-year revenue recognition in 2009.

Got it.

Okay.

And in terms of the analog business, you guys mentioned that the record high bookings.

How do we think of that business going forward in 2010 and clearly that benefits your margin profile quite dramatically.

But if you just look at it from a first half 2010 versus second half 2010 do you think that business will slow down because the biggest customer is ordering right now?

Well, let's see.

Two things have happened.

We have had a lot of very strong IDM demand for the analog products -- the Eagle products -- in the mid to second half of '09.

And then that IDM space as it comes in in big chunks like that, that would be great if that repeated but I think a betting man might say that that would come down a little.

But the offset on the Eagle product is that the Eagle product with our distribution is actually having some very good momentum in fanning out, especially in Asia as we attack the low end of the market with the ETS -- current ETS line -- and then the ETS-88, the scaled-down version of the product.

So I think what we will see is you'll have -- if we have a reduction in the lump buying, we are going to get more customers -- we have already gotten more in in the second half of this past year, so we are going to fan out more and that will help to fill the -- any hole that's created by a reduction in the IDM side.

I don't know if it will totally fill it but it's a favorable trend for us.

Great.

And my final question -- for Q4 '09, do have any greater than 10% customers and if so, what segment were they from?

For the -- we speak about that in terms of the full year.

For the full year we will have one customer that's more than 10% and we will disclose that in our 10-K.

Thank you.

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

Hi.

Just a quick question.

Did you mention what the utilization rates were for test and install base were?

Satya, we did not.

They have continued to trend up -- many of the tester models are in the 90s now.

I think the sweet spot is in the 80% to 90% range.

We do have some that are still down in the 70% levels as we talked about segments before, some of the more focused testers.

But this is an 80% to 90% game at this point.

And is there much of a difference between OSAT and IDM's on utilizations?

I don't have it in front of me but they used to be -- now in the trough it goes to about 10% and it closes as it moves up so I think there is not -- if anything, it's less than 5%.

Andy, what is it?

It's less than 5%.

Would you talk a little bit about the lumpiness of orders on the IDM side of things?

Is there a risk that as we move through the first half, we get a nonlinear change down on IDM orders as we look at Q1 or Q2?

We think that -- IDM is -- maybe I'm drawing a picture of lumpiness and we have so -- we have got a good, broad base of customers -- so as one goes up and another one comes down, individually, they are lumpy, but we have had pretty steady IDM business.

I'm going to look at the breakout here.

Our expectation, maybe the short way of answering this -- is the expectation is that the IDM and the OSAT split we think continues through the first quarter the way it was in the fourth quarter, and with that would be is about a two-thirds/one-third split.

I say IDMs.

I should say specifiers -- so IDM and Fabless and then the OSATs - IDM and Specifiers is two-thirds and the OSAT is one-third and it looks like that continues through this quarter.

Beyond that, I don't know.

Okay.

And lastly, on high speed memory, I think a quarter ago, I think you might have mentioned you had two engagements with customers.

What is the status of the customer engagements over the last quarter?

Still true and we have had some follow-on business so we are enlarging our install base in the two customers.

Okay.

Thank you.

Your next question comes from the line of Peter Karazeris of Citi.

Hi, thanks for taking my question.

If you look through this year orders have grown pretty well, as you look out into Q1 and maybe through first half, do you think that your book to bill could remain relatively close to one through that time?

Peter, the thing I'll say about it, because we -- the reason we don't forecast -- give a forecast on bookings is the -- believe it or not, these bookings churn very heavily inside a quarter -- systems configurations change, demand changes, OSATs, the IDMs change.

But the very short-term indicators which I would call the slot plan management would indicate to us that as we go through this quarter, we feel reasonably comfortable that demand is holding up because there's a tonal urgency -- not emergency -- a tonal urgency to the slot management.

Beyond Q1, very hard to tell.

We will have to get to ten more weeks from now and take a look at that.

All right.

That's actually helpful.

And then as you think about that, one of the things that strikes me as you've had -- let's say hard drive test roll off, you've had some other things come up, do you feel like there's -- is there any specific end market that's really carrying through the demand through first half, is it really SOC and maybe potentially OSATs come back.

Or is there some other thing that you could point to that would keep the order rate at an absolute level running fairly steady?

Well, I think the good thing we have got is we have this portfolio and when one thing is -- in this last quarter we have had the lumpiness of hard disk drive as Greg was talking about isn't a big participant in our revenue plans in the first quarter -- maybe in the first half -- but we have got a very strong SOC business.

Memory is depressed.

That could come back.

So, if everything hit, we would really be -- we would be able to have a very significant revenue growth.

The thematic component that runs through almost everything we are doing is mobile -- the wireless business, the embedding of wireless into all of the consumer devices, these tablet devices that are coming out, everything is pushing the wireless side and that is a sweet spot for us, so we are -- if you looked at end products, you would say that's what's helping us.

Thank you.

And could I ask one more?

Sure.

Just as you think of your -- you're at 13% share roughly in memory that target is -- hope goal is 15% to 20% -- as you think about that range, what would put you towards the lower end of it versus the higher end of it?

Would it be DRAM versus Flash?

Is it customer expansion that you would need or is it really just based on how memory test CapEx progresses?

And that's it for me.

Thanks.

Yes.

Peter, the move in share on memory would be NAND -- Flash on the low speed memory would be a more gradual contributor to that growth and high speed memory would spike it.

So there's more weight to a high speed memory penetration than there is for us in NAND.

But we are expecting some of that growth to come from low speed memory, multi-chip modules, flash memory tests.

That's helpful.

Thank you.

Your next question comes from the line of David Duley of Steelhead Securities.

Congratulations on a nice quarter.

I was wondering if you might be able to -- could you give us the geographical breakout of orders?

Yes.

We will grab them here.

And then while you're looking at that is could you talk about which parts are actually stretching the lead times, where are the shortages located at at this point?

Yes.

Greg is looking at that.

There's no simple short list on the shortages.

I'd like to say it's one or two components.

Obviously we have got thousands of components.

Semiconductors obviously is the category that you would say if we could solve anything, that would be it, so -- but it's -- without being an alarmist here, it's scores of parts that we are expediting, so it's -- there's not one silver bullet where we are pressing one supplier.

It's many, many suppliers.

That's why it's quite a task for us.

Okay.

On the geographic distribution, it's on our website the --

I can look at there.

Details --

And then one final up question for me is just clarifying is last quarter and the third quarter you had a really big order from an IDM customer I think in the analog space.

And you were still able to grow your order sequentially here in Q4.

And I think what I heard you say -- I'm just trying to clarify -- it is that was really driven from further analog orders from other IDMs and the J750 ramp-up?

Is that why you were able to annualize that big order last quarter?

It's because the other cylinders were participating.

We had very good growth in our wireless business.

Power management, which was this driver in the third quarter, even though it went down slightly, it was still very, very strong.

We had the microcontroller logic segment and the automotive piece of that going up, so those were the things that -- there were more cylinders essentially hitting in the fourth quarter than in the third quarter, so that's what took up the slack.

Okay.

Thank you.

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

Thank you for taking my questions.

First question, have your internal expectations or estimates on the size of the high speed DDR3 DRAM market in your opportunity change from one quarter ago and if it did, can you tell us what has been that change?

Not from a quarter ago, no.

There hasn't been any change in our expectations on that front in the short term.

Over a year, over the last year, I think everybody whose had had product or has been trying to penetrate that market has been -- has been disappointed with the buy rate that's occurred there and that's -- connects back to the earlier point that so much of the existing equipment has been stretched for the low speed.

I'll say the low speed/high speed memory parts and I think that's been the reset that over the last 12 to 15 months has occurred in that space.

But no changes in the short term.

Okay.

And then can you tell me when was the last time you saw ten weeks long lead times and then it sounds like the upside in March is being driven by wireless and given one of the major wireless chip maker -- Qualcomm -- disappointed on the results and you and Verigy are exposed there.

What's the confidence level risk in the guidance?

Yes, ten week lead times have -- you have to go back at least a year and a half, maybe two and a half -- two plus years.

Now, I say that sometimes in a subsegment of product we have had the -- and it's been under the radar, but it's a bigger issue right now, but I think it's one and a half to two-year phenomenon.

Yes.

I think you're right, Mike.

And in terms of the rest of the guidance, we don't think that's significant.

We could ship more if we could gather all the parts so we set the guidance based upon what we felt reasonably confident that we could ship.

I thought you were asking whether we were causing our customers to miss their guidance.

Was that your question?

No.

I was talking about your own guidance.

Okay.

Sorry.

I missed it.

Okay.

Thanks.

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

Thanks a lot.

Just a couple of questions.

First in terms of the pickup you're seeing in the microcontroller business, obviously, that's a positive for you guys.

Can you just comment in terms of the competitive environment with one of your peers entering that market, can you just describe what you're seeing in the marketplace as that market segment picks up?

What we are seeing competitively?

That's your question?

Yes.

No, there is a lot of competitive activity in the focus platform, both on the digital and on the analog side.

We feel quite good about the status of the 750 and I'm saying that not because we had a good quarter of bookings, but if you look back over the last year and a half and then look forward, what our customers see is they see that there's been a product capability refresh on the 750.

So an increase in frequency that gives them more headroom and more coverage in the microcontroller space.

As they go forward and look at the road map they will see the same thing over the next couple of years as a continuation of that product -- new instrumentation, new capability for even higher throughput.

So as a product, it's a pretty solid product with 3000 systems and no indications that it mismatches against the technical requirements or the economic requirements in its face.

Now, in the overall Semi market, everyone wants to cover as much space as they can so there are competitors coming in, but it's not an arena that is easy to get in in a big way.

You can find a place where you can get one system in or two systems in.

But moving into triple digits in that space in unit bookings is quite a challenge.

That's true over on the analog side as well.

In the Eagle product there is -- actually, that's the offensive play in the low end as we move against some of the legacy products that are being discontinued there.

So it's a tough space but we feel pretty comfortable about the arsenal we have got down at that end.

Great.

In terms of the turns business you see quarter over quarter, obviously it leveled off a little bit in the December quarter.

Two part question.

One, do you see those turns businesses being in that 30% to 35% range in March.

And do you believe some of the supply restraints that are probably keeping it there, will that be resolved -- what time period do you see that being resolved?

I think the turns business will actually be lower in the first quarter.

The first quarter is essentially all booked out, so it will be below the numbers you just mentioned and it's tough to say when the supply chain catches up.

It's a little bit of a guess but I think it's sometime late second quarter.

Okay.

Final question for me in terms of the disk drive business, obviously, you're in one customer, you're getting share there.

If you look at 2010 as a hole in terms of your revenues, on a qualitative basis, do you see that coming from your existing customer more so or do you see a new customer coming on board being a bigger percentage of 2010's revenue?

Patrick, we are still in the one customer situation right now.

We are pursuing additional customers.

At this point I would be getting ahead of myself to say that 2010 revenue would have more than a -- would have a broadening of our customer base.

That's too early to say right now?

Too early, yes.

Thanks a lot, guys.

Your next question comes from the line of Gus Richard of Piper Jaffray.

First one you mentioned you had new instruments across your platforms and I was wondering if you could talk a little bit about the new instruments and how that expands your TAM.

Gus, the new instrumentation in some cases just continues the coverage in the TAM and so it's defensive.

But others are offensive.

There's -- against -- let me do a few segments to give you a flavor of it.

The Eagle Test product has a new family member, the ETS-88.

That gives us a low cost configuration multiple device type testing in -- off the same platform -- in parallel, so that's an expansion of TAM at the low end of the analog space.

On the flex, we have got high density, high voltage DC instrumentation that has been introduced so in the mid-range, mixed signal space, that gives us more capability for more sockets.

On UltraFLEX, we have got high speed expansion of our high speed digital capability.

That's been important in some networking applications.

What else?

Well, UltraFLEX M obviously gives us a greater TAM expander.

So it's a mixture of instruments that keep fleshing out the product.

Remember, we are 40+% share in the SOC space so most of what we add, actually, is -- it's to get additional sockets in our current install base.

But those are some of the examples.

Got it.

And then any help on this question would be appreciated.

There's clearly a bull whip effect at the retail level in the economy, at the OEM level of the economy, at the semiconductor level of the economy and finally the semiconductor test level of the economy.

All these things have their own periodicity, frequency, peaks and troughs.

Do you have any thoughts as to whether we are in a period where these are constructively interfering, partially coming together to make a bigger peak?

I know the business is lumpy.

I was just hoping you could give some sense as to how you think these lumps are playing.

Are we on the high end of a lump or the low end of a lump or any thoughts would be really helpful helpful.

There's a logical side of it that argues that there has to be some inventory replenishment in here so it's not consumer demand that's a concern.

That's offset by -- the levels of CapEx here still remain very, very low compared to any prior period and I'm not talking about comparing to prior peaks --I mean any prior period of buy rates, be sub 1%.

That's just been unheard of.

In your -- in our stomach, of course, we always say is there some double buying?

Is there any excess capacity being added?

The indicator on sub cons not overheating is a more positive indicate for for us that they are not stretching here to try to get ahead of the curve.

At the same time, we set the Company up so that even if things turn off sharply, we don't start to disassemble the Company because of it.

So we do have a healthy concern on those issues.

The short-term indicators are not telling us that things are overheated but obviously we got the same kind of feel that you have, which is -- the world economy isn't snapping back here, so you have to be -- we can't size the Company up for something that is only going to be temporary, but right now the short-term outlook looks like it's steady as she goes for us.

Great.

Thank you.

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

Hi.

Thanks.

A couple quick ones.

Mike, back to the HDD market just real quickly, are you actually in qualification with non-western customers now?

Are you in a qualification loop?

And if so, how long does that generally take or are you just beginning discussions with customers other than your primary customer in that segment?

Raj, it's in the conversations -- I don't want to get into what -- where the flags are on the customers.

But the qualification discussions have been going on and preliminary work has been going on for a few quarters -- a couple of quarters.

But we are still in the phase of trying to get into a serious qualification that you could see a glide path into additional business.

So from a distance it's still -- we would call it still early.

Okay.

And Greg, quickly, can you comment a little bit on how we might think about the OpEx trend as we move beyond Q1?

I know to some degree there's some variability in there depending on how revenues, et cetera, come in, but generally how should we think of that?

Flattish from here or how should we think about it?

I would think flattish from here if sales go up and profit rate goes up, then we would be adding some more variable compensation so it really depends upon the profit rate of the Company.

As a very quick rule of thumb for every $25 million or so of extra sales, once we are around model profitability, there's probably another maybe $2 million that gets added to operating expenses for variable compensation.

Okay.

Thanks.

And, Mike, one last one, if I might.

Yes.

Can you comment on how you think you did across '09 from a share perspective, at least in SOC.

Memory, the order rates are so slow and you've made commentary there but in SOC what do you think you did from a share perspective and what do you think the vector in 2010 looks like at least what's the slope?

Raj, the -- without all the numbers in, obviously it's a little speculative, but we expect that we are pretty close to -- we will end up pretty close to where we were in 2008 by the end of 2009.

And that's in the low 40s SOC share.

The trajectory, though is up for us.

If you looked at the halfway point in 2009, I think the speculation was that we were going to take a step back so we don't believe we have and that means the second half for us has been very strong relative to our competitors.

And which sub segments if you can provide any more detail do you think are the areas where you will show the biggest gain?

I think if it's -- if we end up about where we were, I think there will be more -- it will be more in the denominator, meaning that some share -- some segment shifts would cause share to look like it's going up.

We think we have held very strong in the RF segment.

We are certain that we are still well over 50% share in that space.

We have held up against this issue that new competitors have come in in the microcontroller space.

So it's -- if we are flat, I don't think there's anything that has moved dramatically up or down in the portfolio that we have got.

Okay.

And any big chunks available on the relative near term that can move those share numbers around or it's still socket to socket?

It's still socket to socket.

I think you'll see, the big socket battles that occur, many of those don't mature into volume business for a year plus, so the battles that we are in now and have been in '09 won't yield until we are back end of 2010 and 2011.

And we feel pretty good about how we have done on that front.

Great, thanks.

Operator we are about out of time so I'm going to draw this to a close now.

I want to thank you all for your interest in Teradyne and we look forward to talking to you in the weeks ahead.

Thanks everybody.

This concludes today's conference.

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