泰瑞達 (TER) 2010 Q1 法說會逐字稿

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

At this time I would like to welcome everyone to the Q1 2010 earnings release conference call.

(Operator instructions).

Thank you I would now like to turn the call over to our host, Andy Blanchard, Vice President of Investor Relations.

Mr.

Blanchard you may begin.

Thank you, Rebecca.

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 opening remarks we will provide details of our performance for the first quarter of 2010 as well as our outlook for the second quarter.

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 investors' page of Teradyne.com about 24 hours after the call ends.

The replays will be available along with the slides through May the 14th.

The matters that we discuss today will include foward-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 foward-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 the GAAP to non-GAAP reconciliation link.

Also you may want to know that between now and our next conference call Teradyne will be participating in the Credit Suisse Electronic Supply Chain conference on May 12th in Boston, Cowen's 38th Annual Technology, Media and Telecom Conference on June 2nd and 3rd in New York and UBS's Global Technology and Services conference on June 10th in New York.

And (inaudible) luncheon in New York and Boston on June third and 23rd respectively.

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

First our CEO Mike Bradley will review the state of the company and the industry in the first quarter and will review our outlook for the second quarter.

Then our CFO Greg Beecher will review more details on our quarterly financial performance along with our guidance for the second quarter.

We will then answer your questions.

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

Mike.

Thanks, Andy.

Good morning, everyone.

Thank you for joining us on the call this morning.

We are off to a strong start to 2010 with a very solid first quarter and increased revenue on profit guidance for the second quarter.

It's been an exceptional start to the year in three respects.

First, our SOC test product lineup is seeing increasing demand across a wide array of customers and technology segments.

Second, the business model we have shaped in the last two years is delivering markedly improved performance and third, this performance is being achieved without a strong rebound in the memory test market so far which means we should have another contributor once that market gets moving.

I'll ask Greg to focus on the financial model comparisons in his comments, but I'd like to expand on what's behind our bookings and sales numbers for the first half of the year.

As you saw in our press release, we logged $534 million in bookings in the first quarter up over $230 million from the Q4 total of $303 million.

Semi Test led the way, up about $200 million sequentially and totaling $460 million in the quarter, the highest Semi Test total in 10 years.

System Test group orders which include our defense, automotive, commercial board test and hard disk drive test units saw their own healthy order surge up about 85% from the fourth quarter driven mostly by hard disk drive and commercial board test.

Since many of these businesses in systems tests have longer lead time profiles you'll see much of that revenue flow through starting in the third quarter.

But back to semiconductor tests.

There are a number of things contributing to our strong showing.

First of all, utilization remains very high in our leading edge products.

Device unit volumes are increasing and the appetite for testers that offer high performance and high productivity is on the rise.

During the downturn, many older generation testers were permanently decommissioned and as the market has recovered, customers are buying new capability for the future rather than bringing old testers back into production.

We have seen evidence of this in our higher and UltraFLEX system sales where more than half of the testers ordered in the first quarter included new options that were introduced since mid-2008.

We had record demand for the J750 with over 150 units ordered, over a third of which were for the new J750 EX.

The EX improves through put and doubles the 750's operating frequency giving customers better economics and additional performance headroom for the micro controller and wafer sort applications.

The Eagle ETS88 introduced early last year targeting the very cost sensitive segment of the analog market also had record bookings in the quarter.

The lead technology segments driving the first quarter's strong demand were wireless, power management and a continued resurgence in micro controller tests which had started to pick up in the fourth quarter and continued to expand throughout this first quarter.

But in addition to these lead segments, there's been renewed customer demand in the wide variety of applications where we provide test solutions from net book components to network and server class processors to digital TV and mobile internet devices.

The only SOC segments that remain subdued are the image sensor and LCD driver segments but even without them we are seeing robust buying across all other markets.

As I mentioned earlier, the memory test market is not on the same recovery trajectory as SOC.

Nevertheless, we have seen our best results in the last two years, but in the context of a market that is only slowly starting to increase CapEx outlays.

Both our Magnum product for low speed memory test and our UltraFLEX M for high speed memory saw sequential order increases in the quarter.

But in comparison to SOC the memory market is still lagging.

I'd like to spend a couple of more minutes on the first quarter Semi Test numbers from a competitive perspective.

We had an outstanding quarter of design wins in Q1 logging over 30 contested socket wins across SOC and memory.

Half of these came from Nextest, Eagle and the high speed memory products and half from the SOC portfolio we had prior to our acquisitions.

So we are very pleased with the market breadth of our product offerings with the ability of our field organization to sell and support this broad portfolio into new applications.

In particular, the combination of Eagle's lower cost platform with our Asian distribution footprint making an impact in the market.

Finally, let me address the likely questions around sustainability.

Clearly this past quarter has been exceptional.

Both in the breadth of demand and in the leverage that we get in our P&L from the business model.

Part of the demand comes from the return of capital to the test sector after two years of very low buy rates, and part comes from the tooling for the future with next generation performance buying.

But even with the strong momentum across the market, the two and three-year buy rates remain historically low.

So rather than speculate on exactly where we are in the cycle, let me instead emphasize how much leverage exists in our model, how strong the drop-through on revenue growth is, how much we are committed to holding our fixed costs in check as we grow our market presence.

Now let me turn it over to Greg for some added depth on the numbers for the first half of this year.

Thanks, Mike and good morning, everyone.

In addition to providing a detailed review of first quarter results and second quarter guidance, I'd also like to expand on our earnings growth in the last cycle and the leverage in our business model going forward.

Starting with the first quarter recap, we delivered a 21% non-GAAP operating profit on sales of $330 million.

This resulted in non-GAAP EPS of $0.33 cents, $0.07 cents over the top end of our first quarter guidance.

Our first quarter non-GAAP EPS of $0.33 cents is already well above last cycle's second quarter 2008 peak earnings per share of $0.16 cents without significant contributions from our new market entries in memory and hard disk drive test.

Second quarter sales are projected to be $390 million to $420 million and non-GAAP earnings per share is expected to be $0.45 to $0.52 cents per share.

For the second quarter we expect a non-GAAP operating profit rate of 25% to 27% which would be the highest operating profit rate in 10 years.

This non-GAAP EPS guidance is also about three times higher than last cycle's quarterly peak earnings again with only modest contributions from the new market offerings.

On the top line, we are clearly benefiting from our broad SOC test product coverage.

The SOC unit recovery that started in the third quarter of 2009 has spread out to almost all device segments with power management, micro controller and wireless being the strongest.

The breadth of our SOC market coverage combined with our steady market share gains is driving our second quarter revenue guidance up approximately 25% over last cycle's peak quarterly revenue.

Our Semi Test business achieved a non-GAAP operating profit of approximately 26% in the first quarter on sales of $290 million despite only moderately increasing CapEx and memory tests.

SOC total of 95% of the revenue and memory was 5%.

In the first quarter our systems test group lost money due to anticipated lows in hard disk drive and (inaudible) demand.

That said, we expect a strong second half in 2010 for the System Test group.

Stepping back, though, for a moment, we recognize there are questions on exactly where we are in the CapEx cycle, but our focus is on maintaining the right fixed cost structure so we achieve our model profitability or better over the cycle.

You'll recall that we set our fixed cost structure so that when the annualized SOC test market is about $2 billion, we generate 15% or better operating profits.

Over the last four years ended in 2009, the SOC test market has averaged about $2.5 billion, so we feel the $2 billion is a prudent market size to plan for mid cycle profitability.

Equally important is that our earnings leverage, when the SOC market is above $2 billion, or if we gain a few additional points of SOC share is very attractive as about $0.50 cents or more of incremental sales drops to our operating profits.

While there are a host of other assumptions in the model, the major fact remains the size of the SOC test market given or greater than 40% and growing share.

The other important aspect of our model is that we have sized the company so that our new adjacencies, hard disk drive, and high speed memory are upside rather than base requirements to achieving model profitability.

So in this first half you're seeing the earnings leverage in our model during the SOC market upturn and we expect more contributions from a new market entries in the second half.

On the cost side of the ledger, we plan on keeping a tight rein on fixed costs and maintaining our head count at about 2900.

We are doing some selective hiring mostly in the distribution arena and are utilizing some contract talent in strategic product development areas.

Moving now to the supply side.

We have made good and steady progress in ramping all products.

Test product demand nearly doubled in two quarters with some models seeing more than tenfold growth, an astonishing reflex in the inherent volatility in the industry.

In spite of the surge we were able to keep our SOC test lead times in the first quarter to an average of about 10 weeks.

Overall, while we have done well in gathering components and expediting materials, we remain in a war room mentality until we are back down to single digit weekly times.

On the balance sheet, we ended the first quarter with gross cash of about $533 million of which $8.5 million came from operations after capital additions, we expect to end the second quarter with about a $610 million in cash and marketable securities.

Our carry forward and operating losses total about $295 million and we have federal tax credits about $55 million.

We expect our 2010 tax rate to be closer to 10% than the 15% estimate that we provided earlier.

We have posted some slides on our website that provide details and expected performance at different sales levels and mix and include some historical comparisons.

This is important as mix can have a significant impact.

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

Now moving to the first quarter results.

The top line of $330 million was up $63 million from the fourth quarter.

Semi Test was $290 million, up $92 million and System Test group was $40 million down $29 million.

System Test product shipments increased 55% from a quarter ago.

Within the $330 million, service revenue was $61 million, up $4 million from a quarter ago.

Semi Test service revenue was $44 million, total company product turns business was 37% versus 30% a quarter ago.

Semi Test product turns business was 39% versus 35% a quarter ago.

Memory revenue was $16 million in the quarter, down from $18 million sequentially.

Moving down the P&L, non-GAAP gross margins increased from 48.2% in the fourth quarter to 52.6% in the first quarter due to mix and higher volume.

R&D expenses were $49.1 million or 14.9% of sales compared to $40.9 million or 15.3% of sales in the fourth quarter.

SG&A expenses were $55.9 million or 17% of sales compared to $51.5 million or 19.3% of sales in the fourth quarter.

Operating expenses of $105 million were up $12.5 million from the fourth quarter primarily due to variable compensation and some added engineering spend for new products.

Our net non-GAAP interest and other expense was $2.5 million, taxes were $4.8 million in the quarter, our headcount total 2900.

In the first quarter semiconductor test sales were 88% of the total and the systems test group was 12%.

Our book-to-bill ratio for the first quarter was 1.62 for the overall company, 1.59 for semiconductor tests and 1.84 for the systems test group.

At the end of the quarter our backlog stood at $577 million of which 89% is scheduled to ship within the next six months.

Cash flow from operations totaled approximately $8.5 million after capital additions, depreciation and amortization for the first quarter was $34 million including $8 million of stock based compensation, $7 million for acquired intangible asset amortization and $2.5 million for amortization of the GAAP imputed debt discount.

As noted in the press release, sales for the second quarter are expected to be between $390 million and $420 million and a non-GAAP EPS range is $0.45 to $0.52 cents on 200 million diluted shares.

I should add that the guidance excludes the amortization of acquired intangibles and the noncash imputed interest on the convertible debt.

Our GAAP EPS range is $0.33 to $0.40 cents.

The operating profit rate at the midpoint of our second quarter guidance is about 26.5%.

I'd like to point out that the last time we were at this level of profitability our sales were $641 million or $236 million higher.

This was in the third quarter of 2000.

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

We expect gross margins to be about 53%, R&D should be about 13%, and SG&A should be about 14%.Non-GAAP net interest is expected to be about $2.2 million.

The tax provision should be about $10 million.

In summary our model is delivering and markets are improving.

Our designing momentum is very robust and the product portfolio is at its strongest in many years.

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

Thanks Greg.

Rebecca, we'd now like to take some questions.

Your first question will come from the line of Jim Covello.

Hi, good morning guys.

Thanks so much for taking the question and congratulations on the terrific results.

I guess the first question would be when you alluded to it a little bit but if you can go into it a little more detail, sort of the timing between the very significant order number, obviously your orders are much, much higher than your revenues, you know, the timing for how we think about that turning into shipments and revenues and again I know you alluded to it a little bit but if you can give it a little more granularity that would be great.

Thank you.

Jim, hi, this is Greg, thank you for the congratulations.

You can see in our guidance of about $400 million, thereabouts, there is some backlog that's being built, some of the backlog has to do with a new product that acceptance is required a significant amount and we are assuming that acceptance occurs in the third quarter, we will start shipping that product in the second quarter but some of it is just due to the timing of when you can recognize revenue with a new product.

The traditional SAB101 sort of requirements?

Yes, yes.

And so would we think that the -- is it fair to say, then, kind of the -- you think the Q3 revenue would be sort of, you know, clean, if you will, relative to what the backlog would look like and in other words we should expect -- you know, we should expect a pretty reasonable revenue quarter relative to the orders that we saw in this most recent quarter?

That's what we are assuming at this point.

I think that's a fair assumption.

Okay.

And then, you know, you have the slide up in the westbound which is very helpful relative to where we are in SOC, you know, test three months moving average bookings and we are obviously still well below the last cycle peak but up off the bottom but as you alluded to in memory test, we are still really nowhere.

You know, what do you think is going to be the kicker to get people moving in that segment, you know, now that pricing?

Do they have to add the capacity first on the front end which we are now starting to see and then they will make the tester orders or is it another dynamic?

Well, it's all tied to unit volume, Jim.

And I think that the major thing we have seen in this cycle has been the heavy reuse of the existing equipment.

As you know, the buy rate in memory has been -- traditionally been about 50% higher than it has been in SOC so in the downturn there's really been extra capacity there and that part of the industry is -- you know, it's just focused more and more on trying to reuse the existing equipment.

As that gets loaded here, as big growth in unit volumes go up, that will trigger some buying but as you can see from that chart, I think it's up off the bottom but if you annualize those numbers, it's still well below any of the last five years.

Sure.

And then maybe final question for me on that, obviously we are starting to finally thankfully see some capacity buying take place in the front end on the memory side.

Do you think really that has to get installed before, you know, we are going to get to the point where we are at a full utilization on the existing back end equipment or do you think we could even see some buying in the memory sector before we get that incremental capacity up and running?

I think you'll see some buying.

I don't think that this rate that the memory CapEx is reflecting now in that chart that we show there will stay flat.

We think it will go up.

It's very tough to call the slope, though.

Terrific.

Thanks so much.

Congratulations again.

Yeah.

Thank you.

One thing, Jim.

As the speeds go up in high speed memory, we think that will likely trigger some greater buying but that's more of a second half of the year story.

Thank you.

Your next question is from the line of Raj Seth.

Thank you.

A couple quick ones.

In HDD is your expectation of better HDD in the second half still largely driven, driven by that one customer?

Can you update us on where you are with other customers there and, Mike, you talked about gaining share on SOC, perhaps you can talk a little bit about where it is within SOC you think you're gaining share and sort of what the rate of share increase feels like to you at this point.

Okay.

Raj, first on the HDD side, that's a second half story from a revenue standpoint for us.

We are, as we talked about last quarter, have an effort underway to expand to more than one customer.

We are in the evaluation process to try to do that.

I would think about that as also obviously a second half story if we are successful on that.

So that's our objective and we hope to be able to deliver on something on that in the second half of this year.

On the share side, let me put it in perspective over the last few years.

In SOC, if you go back three or four years, we were mid-30s in share and moved that up in '08 to just over 40% and held our share position in 2009 at just over 40%, around 41% share in SOC.

Now, we think that -- and that's on a much smaller, obviously a much smaller test market of about $1.3 billion.

We are pretty optimistic that we are going to gain ground this year.

How much, I'm not sure.

But the hold at 41% last year was done without much real contribution from the microcontroller segment, from the image sensor segment, from the digital wafer probe segment, so holding last year was actually in retrospect a pretty good accomplishment.

We are hopeful we can get a couple of points of share this year but we won't know that until we have a few quarters under our belt.

And the share that you talk about this year, would it come from those areas that you just mentioned, micro controllers, image sensors, et cetera, is that primarily where you think the share gains are or is it elsewhere, do you see a meaningful movement?

I think we don't think about share gains from a market segment shift standpoint.

In other words, if image sensor comes back, that's just a -- you know, a recovery of a segment.

We think about it from a designing standpoint.

We are very pleased with the momentum we had this first quarter and we think that's what builds the real long-term market share story.

If you look at where that came, that was led in power management in terms of socket wins, some microcontroller wins, automotive it covers a lot of different segments but the ones I mentioned (inaudible).

Sure and just a quick follow-up.

In RF, what's the trend like in RF?

You've got a competitor that's talked about gaining share from implied they've been gaining share from you -- what's your view there?

From the outside world we are still north of 60% in share through 2009.

Obviously the quarterly battles and the socket battles go on, but we are in -- we think our momentum is quite good.

The Ultra Wave product is out between 150 and 200 units, I think close to 200 units from a booking standpoint.

So we feel like we are on pretty good ground on that front and from a socket standpoint, we do well.

Thank you.

Nice quarter.

Thank you.

Your next question is from the line of (Chris Sanchar).

Yeah, thanks for taking my question.

First question is on your gross margin guidance seems to be flat on such a strong revenue improvement.

Is it fair to assume that one of the business that seems to be slowing down is the analog business?

No, I wouldn't assume that.

What happened in the first quarter is we had favorable mix so we are a little bit higher than what we would normally expect.

And in the second quarter we are assuming a more normal mix and the other thing that is happening, it's just a simple math.

As the sales get higher, the incremental drop-through moves the percentages less as the numbers get bigger.

So it's those two things that are happening and to be at 53% at this level of sales is consistent with our model.

Okay.

And just to touch on the market shares for SOC, if I just take your 1Q and 2Q run rate for the business for a $2 billion year if you tried to extrapolate late it, you would end up at 50% market share unless there's slowdown in the second half.

You know, is that a fair enough way to look at it You go from 41% to a 45% still there's going to be some kind of a slowdown because I mean this run rate is probably a little too aggressive?

Chris, I think if you make the denominator that small, the only way you can translate is into very high share gain for us.

So we are not leading with that story.

We think there is share gain that will be embedded in our performance in 2010.

The way we think about it is that obviously the first quarter has been very strong, the first half of the year for us will be very strong and our short-term expectation here from a customer by customer standpoint is that, you know, there's still an appetite to continue to add.

If you took it at the other end of the spectrum and said, well, how much -- how large could the market be, if you put a $3 billion market in for SOC and you might be gulping as I say that because that sounds high historically but if you put a $3 billion market in, you still have a three-year cycle here that is lower than the prior two, three-year cycles, so the productivity and the buy rates continue to go down and if you don't mind me giving you the numbers, the buy rate on, you know, the first three years in the last nine would be 2.1% and then the middle three years 1.8% and then even if I embed a $3 billion market, which is not in my view out of the realm of possibility for this year because of the correction and because of all of the leading technology that's being developed by our customers, you still move that buy rate down to 1.4% so it really hasn't rocked the boat so much to have that kind of year, that kind of market performance.

If we do that, our market share moves up less than you described but it's still a good move on market share.

That was very helpful.

And just a final question, did you give the split of OSAT and IDM?

I don't think we did but we can.

The split is, and correct me if I'm --

Are you asking for bookings or sales?

Both.

Okay.

I'll give you on the booking side, the OSATs are 36%.

Thank you.

Last quarter 32.

Fourth quarter 32, last quarter 36.

Your next -- We will insert that answer in on the fly here as Greg digs it out.

Okay.

Go ahead.

Next question please.

Your next question is from the line of Satya Kumar.

Yes, Hi, thanks for taking my question.

I was wondering if I you could give some color on the order pattern in Q1.

What would be the linearity of the order intake.

Was it uniform or was there a rush to it at the end of the quarter.

Just trying to get a sense of the risk of double ordering going on.

Did you want to do the OSATs?

Satya, we will come right back to that.

I was going to answer that question but, go ahead.

The trajectory of orders was -- the thing that stood out in the first quarter was is that the trajectory of orders continued up in terms of a funnel forecast through the quarter.

But it was -- it did not have anything exceptional with back end rush.

If anything, it was steady all the way through, but all consistent up through the quarter.

The -- between the lines question or the thing you asked of is there double ordering, maybe I can answer it this way.

Of the top 20 flex customers just as an anecdote, the top 20 flex customers, about 80% of those customers bought in the first quarter and we see them coming back in about the same rate in the second quarter, so if there were double ordering, I don't think we would see that breadth of continued demand.

Are you saying that they are coming back at the same rate for orders or in terms of deliveries?

No.

I was just talking about the breadth of participation.

I can't make a call here as to whether they will order more or less.

Obviously, they ordered a lot in the first quarter, but the sign of a return for incremental ordering from a broad set of customers I think is one indication that there's not likely any double ordering and we are very careful as we work with customers as we are trying to populate a slot plan here that we don't have double ordering that you might see in OSATs.

Understood.

You mentioned that your lead time are 10 weeks on average for SOC.

Can you remind us what is normal and when do you expect to get back to normal?

This is Greg.

Normal for us would probably be six to eight weeks and it can obviously vary quite a bit depending upon how many systems and the configuration, but six to eight I would say is normal and last quarter, yes, we were at 10.

I think sometime during this quarter we are in we will probably work our way back to 10 or under 10 by the end of the quarter.

Okay.

And can you help me understand specifically on J760 how long are the lead times, there are some market participants who think it's five or six months.

How big is J7 (inaudible) part of the mix for you guys and is there an opportunity for competitors to take share in the J7 in that segment as far as the (inaudible) because of the lead times?

Satya, well, I think it's very common when there's a big drive on a product for competitors to say there's a window of opportunity that they can get in.

We haven't -- honestly, we haven't seen a lot of that.

We are expanding the capacity very dramatically to keep our lead times in check.

The 750 lead times are amongst the highest that we have got but they are now coming down and as we get through this quarter, we will see lead times in the third quarter that will be lower than they are in Q2 independent of volume because we are going to be in triple digits of shipments of that product.

And any sense of how much 750 is part of the Semi Test business.

What -- what percentage it is of our business?

Yeah.

You know, we don't have that.

From a unit standpoint it's obviously bigger than dollars but if we can dig that out as we talk here, we will insert that.

And lastly on memory, I agree that, you know, the buy rates probably need to go up and there is some equipment reuse happening and used equipment as well, I guess that's sort of getting used up.

I was wondering, though if you look at it from a little bit more of a longer term perspective is there a structural change that is happening in the way the chip companies are testing memories, whether it's more wafer level testing or using certain ECC or other features in nonflash for example to lower the amount of testing they do that they don't really need more testing?

Can you help me understand the way the productivity is working out for the chip companies?

All of those techniques are being applied because the memory customers are looking at the CapEx rate and memory relative to SOC and they are seeing that even with greater variety in SOC the SOC market has been -- has had a more productive test asset.

So they are driving a variety of techniques.

Many of the ones that you described are in place and then there's a brute force thing on making sure the utilization is just pushed and pushed.

I think the way that I would approach this is to say what if, you know, the market in -- in memory has been north of $1 billion in a number of years in the last five or six years so the way we model it is we say if it gets back -- and right now I think it's running at about -- annualized running at a about a $300 million dollars rate up from $200 million last year.

So if it's a $500 million market and we are trying to get a 20% share that's $100 million for us if it works its way incrementally back up to a billion our hope is that we could have 20% plus in that environment.

So rather than call exactly how big the market is, we are -- we have sized an investment and we have got two product lines that are attacking that that we hope to be able to deliver between $100 million and a $200 million business depending upon how that market does shape up.

Thank you so much and congratulations on the quarter.

Thank you.

Follow-up on your earlier question, the J750 in the first quarter was 13% Semi Test sales or 11% of total company sales in the first quarter.

Excellent.

Thanks much again.

Your next question is from the line of Gary Hsueh.

Hi, thanks for taking my question.

I was just wondering if you guys can talk a little bit about the end market.

You know, bookings hitting north of $500 million not to be too simplistic about this but the last time that happened was in 2004 and there's an inventory connection in the second half.

Now granted, you know, we are talking about buy rates that are considerably lower, but could you just give us than anecdotally how this year looks and feels and maybe how that looks and feel differently from 2004 and what the buy rate I guess just to kind of reset my expectation what the buy rate is in Q1 in SOC?

We have got the quarterly buy rates here.

I'll talk for a minute and then Andy if you can dig that number out.

Gary, the -- it's a little bit of a review of the numbers I was popping out just a minute ago.

I think you are asking, you know, comparitivley how does buy rate stack up and it's overheated that's the essence of where you're heading right?

Well actually I don't think its overheated , I agree, buy rates are still low but in terms of absolute dollar value we are getting to the $500 million kind of order kind of level.

Just wondering how does this year in terms of the first half look and feel differently from the first half of 2004.

More of a qualitative kind

Yeah.

Well, let's see qualitatively, the -- I'm having a little trouble remembering the beginning of 2004.

Ask me a 1984 question and I probably do.

What are the things that are happening now?

There's clearly a very broad and strong demand, heavy optimism in our customers about their projections for unit growth and new product introductions.

I think one of the big things that's different between '04 and now is that the OSATs don't buy the way they did in '04 now.

That was a build it and they will come environment.

It's far more thoughtful now and tied much more to commitments from their customers so you don't have the bubble, built in bubble from the OSAT side of the equation but you know when you're in an up market, everybody does feel good so we are very careful about whether things, whether there's any double ordering as we were asked a few minutes ago or whether there's some what was it exuberance in the market.

We are not seeing that, we are certainly seeing strength but we are not seeing the signs of double ordering.

The other thing I would comment on is there's really been quite a significant decommissioning in this cycle of older generation equipment and even though customers do want to squeeze out as much as they can out of fully depreciated assets they have really moth balled and decommissioned a number of systems and that can be as much as if I take a combination of complete decommissioning and low utilization, that could have eaten as much as 30% or 40% into the install base of cumulative installed base of legacy equipment.

So a bit of this buying here is offensive buying to get on with the new generation of product and it's filling in a little bit of that hole that existed -- that exists because of the heavy decommissioning in the cycle.

I think that's different from '04 as well.

Okay.

Great.

The other thing I would just point out is probably on an OSAT percentage of the bookings side of the house, I mean, that 36% or 32% last quarter, it's still a pretty tame percentage and your product portfolio is broader and stronger than it's been ever before certainly compared to 2004 I would guess.

2Q '08 it was 54% so you don't have to go back to '04 to find the percentage.

And Gary your point on product portfolio (inaudible) we have Eagle tests now and Eagle Test is performing very strong.

We also have Nextest which has a got SOC test business as well so some of the acquisitions have made a significant impact in terms of our bookings and sales.

Okay.

Great.

And kind of follow-up question for you, Greg.

You talked about how high speed memory tests and hard disk drive tests represent basically upside to the mid cycle model in terms of profitability, just wanted to kind of get reset in terms of, you know, what our expectation level should be in the second half for hard disk drive tests since the margins I have guessed over the last, you know, year have improved considerably.

I mean, you know, is this still a case where it's maybe dilutive on a gross margin basis but net neutral or maybe even slightly accretive on the operating margin line at the 20% operating margin level?

That would be correct.

Our gross margins will come down but the operating expenses are already in the P&L so while gross margins come down, we have higher revenue and it drops to the bottom line.

We have shown on our website some time ago that if the mix is heavy, hard disk drive, HSM, 80% mix of that business in a sales growth perspective and 20% SOC, the drop-through, playing around 35% versus, you know, 52%, that neighborhood.

But obviously it's upside to EPS, upside to income but it's going to throw off some of the percentages.

Okay, but that hasn't changed over the last three to six months?

That's been the same case?

It's the same case and we are much closer to having the HDD achieving its target margin profile.

We were behind as the new product came out, we think we are in much better shape to get that on its model, which is different than Semi Test model but it has its own model.

We think we can get it to that model in 2010.

Congratulations on the Q1 results.

Thanks.

Thank you.

Your next question is from the line of Daniel (Geltsup).

Just to follow-up on the previous -- on Gary's question.

With regard to, I guess the Eagle Test and the Nextest, is there any way to size what the contribution in terms of revenue is from those businesses or even just a rough cut so maybe we could have a comparison relative to mid cycle revenues for the base business?

We weren't planning on breaking that out but I can just tell you that it is very significant, the contribution.

You know, we would certainly be in the first quarter we would certainly would be below last Q2, 2008 peak by a significant amount if those businesses weren't with us.

So it's a very significant impact but we prefer not to break that out.

We prefer to keep that at the SOC and memory level.

Okay.

All right.

I appreciate it.

Thank you.

Congratulations on a great quarter.

Thank you.

Your next question is from the line of C.J.

Muse.

Hi, this is Olga Vincent calling in for CJ.

Thank you for taking my question.

In terms of your HDD outlook and given the, you know, significant portion of that in your current backlog, assuming you don't get a second customer, can you talk about the magnitude of revenues there, some range for the second half of the year?

This is Mike.

We mentioned in our last call and I'll reiterate that the range of buying from a sizable HDD customer in a 12 month period could range anywhere from $40 million to $60 million a year and that depends really on the timing of their tooling and so on, but if you thought about a CapEx rate, that would be a good shorthand to use.

So our hope would be that if we can bring another one into the fold that we would have the ability to get about that same amount from a second customer.

Okay.

And then if you do get the second customer, would that impact in any way the gross margin profile for that business or, you know, pretty common platform there would mean similar margins?

It would be similar margins.

It would help us cover the fixed costs so it would improve the bottom line but the gross margin percent would look the same.

Got it.

And then just for the new product that's currently included in your backlog which you'll begin to ship in the second quarter and really revenue in the third quarter, is there a magnitude that you can talk about that's currently in your backlog?

No, sorry, we can't.

Okay.

Thank you.

Your next question is from the line of Patrick Ho.

Thanks a lot and congratulations as well.

Couple questions first in terms of the customer mix on the SOC side of things, you did mention that you're still seeing the same type of buy rates from your existing customers.

Do you see in the second quarter any broadening of the customer base or is it going to be pretty much the same type of -- or the same customers just buying at the same rates or even possibly higher in the June quarter?

Patrick, it's Mike.

I was careful not to say that they are buying at the same rate because we don't know exactly what they are going to be buying in quantities this quarter.

I was trying to comment that the breadth of participation of the top 20 customers, you know, 16, 17 of those customers bought in the first quarter and I gave you a segment which was only flexes and I wasn't trying to disguise that.

It's just that we do that careful analysis flex line.

So you had 80% of the customers buying, 80% of them buying here in the second quarter.

Okay.

I apologize for that.

Secondly in terms of the disk drive test market I think you mentioned last quarter as you gave an outlook for 2010, given the strong buy rates in 2009 that there was a possibility that it would be a decline in 2010 because of that.

Has anything changed, you know, given that you saw some buys this quarter and potential changes in the second half of the year given with the disk drive market is heading?

Yeah, Patrick, the recap on this that we talked about last quarter was because of the acceptance process, the fab 101 process and the fact we had a totally brand new first generation product we described our '09 revenue as having more than an '09's worth of buying in it.

It was one and a half to two years' worth of buying as you saw in our 10K.

So if you do just numeric call comparison with one customer buying if one year has two years worth of buying then the next year would obviously be smaller and that was the signal we were trying to give last quarter.

I would say with the strength in that market, with the tooling that's going on, you know, each customer could buy in that range I described and hopefully it could be at the high end of that range given the expansion in the HDD market itself.

Great and final question from me and this is going back to the SOC side of things.

You know, I know your lead times are still a little bit extended so you're getting a little bit more visibility than you've gotten in the past.

Do you -- is there concerns of any capacity digestion period at this point of the game just because orders have ramped up, you know, now as we look into the June quarter for three consecutive quarters, what's your take about a potential capacity digestion kind of pause that could occur in the second half of the year?

Well, there's always that concern and I think that's why on the fixed cost side we -- we are not, you know, ramping the fixed cost structure up.

It's not because we are, you know, anticipating this digestion and dramatic fall-off.

It's because our business model doesn't require it, I do think we will have some digestion but if you look at the utilization rates, you know, the Q3, Q4 has been pretty strong ramp.

Q1 on top of it has been pretty strong and even with that amount of new capacity going in, customers are putting them online immediately and are getting very, very high utilization.

So it's really a function of will the unit volumes continue to grow and will their forecasts continue to strengthen that will have the impact as to whether there's any pause in digestion.

But again as I come back to this, I think there's a scenario here that is, you know, the probability of a sharp fall-off starting in the third quarter doesn't look to us that way based upon metrics like moving average of the buy rate as well as the appetite of a series of customers to bring additional capacity on in the third quarter.

Great that's been helpful.

Thank you.

Your next question is from the line of Gus Richard.

Yes, thanks for taking my question.

Could you just talk a little bit about supply constraints and you know are you able to get what you need to build your products, are those bottlenecks being (inaudible) for you.

Hi Gus, this is Greg.

Yes, they are.

The fact that we were at 10 weeks the first quarter despite the incredible ramp we had on average I think is very positive in terms of how our supply line guys were able to get the necessary parts.

There was extraordinary war room effort to pull that off.

As I think we have intimated, lead times are likely to move out a little now but we expect to pull them right back in similar to what we did last quarter when we started the quarter, we thought lead times could be a little beyond 10 but we ended up at 10.

And our normal is six to eight so we are not that far out the range right now.

So we are going to do everything we humanly can and our suppliers are making good progress so we see that we are making progress every day.

Occasionally a setback but we tend to recover very fast so we are feeling very good about where we are in the supply line and have more work to do but we are confident that we will meet our customers' expectations.

Okay.

And the constraints, are they, you know, electronics, loose logic, just any color there?

It's been all over the map.

There's no one thing.

What I will say is that typically in an upturn, you know, you would expect it to be the custom parts more than the commodity parts.

It's been both in this case.

The model we have got is that our manufacturing partner flex tronics handles the vast majority of the commodity parts we still have a supply line both in the US and based inside their plant that really goes after the custom parts and we work very much in a partnership to make sure that the supply line is responding.

But it's not -- you know, it's not any one thing.

It's been a mixture of components.

Got it.

And then I know this is hard to say but what would you consider in an upturn normal seasonality or is there such a thing?

In the last few years the seasonality has been stronger Q2 and Q3 buying and if you go back far enough, then it used to be more of a Q4 buying.

But I think the pattern of the last couple of cycles would -- everything else being equal, you know, no meltdowns in the world economies and so on, you would see highest demand in the second and third quarter.

I think this is exceptional in the first quarter because of the convergence of so many things, of the low, low, superlow buy rates that preceded it, the decommissioning of products and a return of some very strong optimism across the customer front.

Okay.

And then the last one for me and again this is a tough one to answer, you know, you've been talking to your customers here sort of engaged with them, you've got a pretty good idea of, you know, sort of what their ramp plans look like.

Would you be willing to hazard a guess as to what you thought the sequential unit growth in the IC business is going to be both X out (inaudible) to Q2, Q3?

Unit, IC unit growth?

Yes, just from talking to customers, kind of you know are we looking at five to 10% sequential, you know, do you have any thoughts there, just sort of how that aggregates.

We do it with a subset of customers.

Certainly greater than five and less than 15 so I think in the high single digits, mid to high single digits is what I would say.

That's very off the cuff.

You said it was a hard question and you're getting a lousy answer but --

Okay.

And that's for Q2 and Q3 from this -- at this juncture?

Yeah, you know, they are really not very good at being able to say what -- you know, beyond one quarter.

Got it.

So I wouldn't put a lot on it.

Got.

That was very helpful.

I appreciate T thank you and congratulations from going from near death to sprinting up heart break hill in the Boston marathon.

Thank you, Gus.

I don't like the near death.

Your next question --

This is going to be our last question, Rebecca.

Your final question is from the line of Atif Malik.

Hi.

Thanks for taking my questions.

Can you comment on the book to bill in the current quarter?

Do you expect it to be flat up or down?

Atif, we don't pay much attention to book to bill and that sounds like a curt answer to you but we are looking at our capacity plan and as Greg said trying to make sure we get our lead times back in a little bit and maybe that's just a way of asking us what we think our bookings are going to be in the second quarter and we don't forecast the bookings but I would say that from a tonal standpoint, you know, the customers still remain more optimistic than they are showing signs of caution.

Okay.

That's helpful and one more question and not to beat a dead horse on double ordering and indigestion kinds of lines of thinking but some testing houses like Ardentech have publicly commented about slow deliveries by test companies that could be hurting their revenue profile this year and if I go back to 2004, you know, phenomena that we saw there was that the OSATs ordered, you know, multiple testers for the same customer and any kind of tops you can give that can kind of lessen our concerns that something similar could be happening this time around where multiple OSATs are placing orders for the same customer?

Well, I'll keep alive the tradition that when you have longer lead times, you should blame your suppliers in that's -- I think that's what customers do and we tend to -- we have already said, you know, we had some supply constraints.

But I don't think that the -- you know, the OSAT double ordering that you saw in the '04 cycle, you did not see in the '08 cycle and we don't feel like we are seeing it now.

There is a very tightly connected world here where specifiers who are going to drive -- and we talked to the OSATs so there's a triangulation process that tends to identify things if they are on top of extra, you know, superbuying on top of what the real demand is.

We could get fooled but I think that we have a reasonably good handle on that.

That's very helpful.

I think the last point Mike made is different from the past when an OSAT is putting an order in we go back to the specifier to find out are you the guy driving that demand are you putting that demand anywhere else too so we get confidence that it is only going to that one OSAT and that specifier -- and the OSATs tend to buy it after they know they have the business.

They don't buy it in advance or -- so we check with the specifier to make sure it's a real firm commitment coming our way.

Okay.

Thanks.

Great.

Thank you everyone and we look forward to talking to you in weeks ahead.

Thank you.

This concludes today's conference call.

(Operator Instructions)