泰瑞達 (TER) 2010 Q2 法說會逐字稿

My name is Jasper, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q2 2010 earning release conference call.

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

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

(Operator Instructions)Thank you.

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

Andrew Blanchard.

Sir, you may begin.I am joining by our Chief Executive Officer, Mike Bradley, and Chief Financial Officer, Greg Beecher.

Thank you, Jasper.

Good morning everyone, and welcome to our discussion of Teradyne's most recent financial results.

I am joined this morning by our Chief Executive Office, Mike Bradley, and our Chief Financial Officer, Greg Beecher.

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

First, I'd like to address several administrative issues.

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

Copies are available on our website or by calling Teradyne'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 following the discussion.

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

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 August, the 14th.

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 -- (Inaudible).

Additionally, those forward-looking statements are made as of today, and we take no obligation to update them after this call.

During today's call, we'll 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 -- (Inaudible)GAAP financial measures 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 note that between now and our next conference call, Teradyne will be participating in the Oppenheimer Annual Technology, Media & Telecommunications Conference on August 11 in Boston.

And Morgan Stanley's Semiconductor & Semi Cap Equipment Conference on August 25 in Chicago.

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 second quarter, and will review our outlook for the third quarter.

Then, our CFO, Greg Beecher, will provide more details on our quarterly financial performance, along with our guidance for the third quarter.

We'll then answer your questions.

For scheduling purposes we intend to end this call after one hour.

Mike?

Good morning, everyone.

Thank you for joining us today.

We've continued to deliver some very good numbers this past quarter, and have registered a solid first half to 2010.

We're obviously operating at a very strong SOC test upturn, but we feel that our results this quarter and guidance for the third quarter reflect three important things.

Number one, significant share gains in our core business, number two, positive momentum in our new markets, and number three, a steady hand on costs.

Together these three elements are delivering record profitability, very strong cash flow, and solid base for future growth.

I'll have Greg go through the numbers in detail, including some discussion on our model, our cash strategy, and how our supply line is performing, but let me expand, for a few minutes, on those items that I think are especially important.

First of all, our SOC test business is very strong, continuing to grow faster than the market, as evidenced by the fact we're likely to account for about 50% of the total SOC market's revenues in the first half of this year.

On a longer timeframe, we've also shown steady gains.

Since the 2005, 2006 period, we've grown our SOC share from about 34% up to about 41% last year.

60% of that growth came our own FLEX and J750 products, and 40% from Eagle and Nextest growth.

And, we're on course to add three or four more sharepoints this year.

A very significant one-year move.

Our first half numbers would suggest an even larger share gain, but we believe some of this is due to the timing of segment buying patterns, which tend to be choppy, but which even out to their normalized levels over time.

Our SOC test bookings in Q2 were up 1%, topping the $430 million level for the second straight quarter.

So for the first half, we've taken in over $870 million in total SOC orders and shipped about $670 million to our customers.

In addition, memory tests, both flash memory and DRAM, delivered another $27 million in orders this past quarter, putting us over $50 million for the year.

So we're obviously operating in a strong SOT test market, and are seeing signs of a strengthening memory test environment.

But, three things stand out in our numbers outside overall market growth.

First, our strength in power management, microcontroller tests, and mobile wireless applications has meant that we're operating in three high-growth segments of the SOC market.

Second, our design end pace has continued with an additional 30 socket wins on top of the 32 we had in the first quarter.

Now, this is about double our historical rate, as the Eagle Test product line, including our newest product, the ETS88, is attacking the performance analog sector.

The J750 and J750 EX were advancing in the microcontroller and digital probe sectors, and the FLEX family is winning in the higher integration sectors.

And third, we've won additional DRAM test business, and now have systems purchased for engineering and production of the latest DDR3 and GDDR5 silicon.

Obviously, the memory numbers are small, relative to our SOC totals, but they're significant as they include strategic wins that should position us for revenue growth in coming quarters.

Now, our customers are bringing testers online very rapidly, but despite that, utilization remains well above the 90% level.

Our board repair data actually indicates that some systems previously decommissioned are back running in production.

We've seen no backlog pushouts and continue to be asked for delivery acceleration.

On that front, we continue to ramp production aggressively with our supply line partners.

Semi-test unit shipments will increase 40% this coming quarter, after a 35% increase in Q2.

So, we continue to press hard to meet customer demand.

Now on the systems test side of the ledger business is slower.

The combination of slower-paced defense spending.

And the expected lumpiness and hard disk drive ship schedules has the overall group break even for the first half.

But, the promising news on the HDD front is a Neptune design end of second customer, plus the expansion of our serve market through the addition of Enterprise Drive Test Capability to the platform.

While a second customer isn't likely to result in significant revenue in the short-term, it does establish the broadened market base, and combined with the Enterprise Drive market coverage, should increase the top and bottom line contribution of that group in 2011 and beyond.

In past calls, we've said that the hard disc drive test market could yield $40 million to $60 million annually at the top line.

With the addition of the Enterprise Test and expanded customer base, we're now shooting for double that revenue range over the next few years.

Now back to the semi-test side of the business, I should comment for a minute on the subject of the cycle, volatility, and so on.

My view comes from the input from a broad range of customers all of whom operate in a very short lead time world.

They remain quite bullish on the short-term picture, yet all have their eyes on the world economy and consumer spending.

So we're all schizophrenics to some degree in this regard.

But as you know, we've variablized our manufacturing expenses and kept our fixed costs in check, so we can be more focused on growing our market presence and winning key design ends for the future, independent of turns on the market.

In total then, we're on course to post some even stronger results in the third quarter, and we're quite proud of the earnings leverage in our model and are pleased to actually show how it can perform.

So, both the short and longer term pictures are promising.

We have our best product line-up in years, both organically and those added through our acquisitions.

All of these are delivering as we planned and hoped they would.

Our new memory offerings are, indeed, despite a slow recovery in that sector, and our position in the hard disc drive market is broadening, consistent with our goals.

All in all, I'm extremely proud of the extraordinary execution by our people this year inside our factory, at our design centers, at our customer sites, and also within our supplier's factories.

Our results reflect the success of those collaborative efforts.

Let me now turn it over to Greg for the financial perspective.

Thanks, Mike, and good morning everyone.

In addition to providing a detailed review of second quarter results and third quarter guidance, I'd also like to update you on our performance against model and on our cash plans.

Starting with the second quarter recap, we posted sales of $455 million, the non-GAAP operating profit rate of 32%, and EPS of $0.69.

The EPS was $0.17 over the top end of our guidance due to very good delivery performance by our manufacturing and supply line teams.

This was our highest quarterly EPS since the third quarter of 2000 and our highest non-GAAP operating profit rate in history.

These strong results driven by a very efficient model, a broad strengthening of SOC test market, and further share gains.

We also had another solid booking quarter with SOC product orders up 4% from a very strong first quarter.

So we are raising guidance again for this quarter.

In the third quarter, we expect revenue of $490 million to $520 million with non-GAAP EPS of $0.75 to $0.83.

This guidance has about 50% sequential quarterly growth in memory, off a low base of $21 million in sales, and essentially no hard disc drive revenue.

So, there should be more in the tank, further out, to fuel both of these growth engines.

Before I get into some detail on the second quarter and our guidance, I want to emphasize that our model is performing very well.

You'll recall that we sized the model to earn model 15% profits, when the SOC test market is about $2 billion a year.

While we believe the SOC test market will average above $2 billion a year, we size our cost structure at this level to ensure high leverage and a very efficient cost structure.

This sizing translates to about $275 million to $300 million in quarterly revenue to hit model profits given our SOC tests share and other businesses.

The shorthand math on how our model works above the $275 million in quarterly sales is fairly straightforward.

For every $25 million of additional sales over model sales, we add about a point of gross margin, up to $350 million in quarterly sales, and then the gross margin increases lessen.

OpEx generally moves up or down quarterly based upon the level of current profitability as well as changes in our annual variable compensation estimates.

If we smooth this all out we would generally add about $2 million of OpEx for variable compensation for each $25 million increase in sales over model.

And, these increases would also lessen past $450 million in quarterly sales.

The only other factor to bear in mind is if the added volume is heavily skewed to hard disc drive or memory tests, both the gross margin drop through and the operating expense impact will, of course, be smaller.

Against any lens, you can see that our second quarter results measure up quite well against the model.

We've posted slides on our website to show how our model is affected by volume and mix.

The only change of note from past illustrations is that mix will likely play a greater role, with increased contribution expected from hard disc drive, as we've expanded our serve market and broadened our customer-base.

We're clearing benefiting from the strengthening SOC test market.

The demand we're seeing is particularly strong in the high-growth mobile, smart power, and microcontroller segments, where we offer compelling products.

On top of this, we've also gained new sockets in the first half of 2010.

With about 60% of the share gains coming from FLEX and J750, and about 40% from Eagle and Nextest.

Our operations team did a great a job ramping the supply chain, which enabled to keep lead times stable at 10 to 12 weeks on average in the second quarter.

Of course, the actual lead time varies, more than the average, depending upon the amount of visibility our customers are able to provide us.

In that regard, we continue to work very closely with customers on forecasting future demand and we expect this will result in improved average lead times for forecast systems in the third quarter.

There are still a lot of material triage going on, but the list of critical parts is getting shorter.

We're quite pleased with our optimized manufacturing model and tight supply line collaboration which has enabled us to increase semi-test unit shipments 2.5 X over the last six months with some products increasing more than four-fold.

In the second quarter, systems test group lost money due to the anticipated decreases in hard disc drive (inaudible) demand.

That said, we expect better performance in the second half.

In addition, we expect some hard drive disc acceptances and revenue recognition to occur in the fourth quarter.

Even though we're planning on shipping a number of these systems in the third quarter.

On the balance sheet, we ended the second quarter with cash of about $661 million of which $90 million came from second quarter operations after capital additions.

After deducting the $190 million face amount of convertible debt due in 2014 is $471 million.

We expect to add over $100 million in the third quarter to our gross and net cash balances.

Our cash plans after the debts of 2009 are understandably more conservative.

In short, we plan to go through a full cycle and evaluate afterwards what plans, if any, make sense with our cash reserves.

With the volatility in our business, plus with our current valuation being quite low, relative to our earnings power, we need ample cash should we fine an attractive acquisition.

So for the foreseeable future, we'll be in an accumulation phase.

We also plan on paying off the $190 million principal amount of convertible debt with cash in 2014.

Our carry forward net operating losses total about $280 million and we have federal tax credits of about $55 million.

With a mix of income expected in 2010 by country, we expect our 2010 tax rate to be closer to 8% than our earlier 10% estimate.

For modeling in the future, we expect an 8 to 10% rate through at least 2011.

Now moving to the second quarter results, the top line of $455 million was up $125 million from the first quarter.

Semi-test was $413 million up $123 million and system test group was $42 million, up $2 million.

Semi-test product shipments increased 49% from a quarter ago and nine-fold from a drop in 2009.

Service revenue was $64 million, up $2 million from a quarter ago.

Semi-test service revenue was $48 million.

Total company product terms business was 28%, versus 37% a quarter ago, semi-test product turns business was 28%, versus 39% a quarter ago.

Memory revenue was $21 million in the quarter, up from $16 million sequentially.

Moving down the P&L.

Gross margins increased from 52.6% in the first quarter, to 55.9% in the second quarter, due to higher volumes.

We also had favorable mix overall.

R&D expenses were $54.4 million or 11.1% of sales, compared to $49.1 million or 14.9% of sales in the first quarter.

SG&A expenses were $58.3 million or 12.8% of sales compared to $55.9 million or 17% of sales in the first quarter.

Operating expenses in total of $108.7 million were up $3.8 million from the first quarter due to variable compensation.

On a year-over-year basis, operating expenses were up $23 million of which $18 million is variable compensation and $5 million is from the restoration of temporary pay cuts.

Revenues were up $285 million over the same period.

We've obviously kept a very firm hand on fixed costs.

Rest assured, we'll also keep a keen eye on long-term growth which may at some point require some added investments.

Our net non-GAAP interest and other expense was $2.3 million.

Taxes were $9.5 million in the quarter.

Headcount total about 2900.

In the second quarter, semiconductor sales were 91% of total.

System test group was 9%.

Book to Bill ratio for the second quarter was 1.13 for the overall company, 1.13 for semiconductor tests and 1.11 for the systems test group.

OSATS made up 36% of our semi-test bookings in both the first and second quarter.

In two to three pass cycles, OSATS got above the 50% quarterly booking mark for at least one quarter.

At the end of the quarter, our backlog stood at $634 million, of which, 92% is scheduled to ship within the next six months.

Cash flow from operations totaled approximately $90 million after deducting capital additions, depreciation and amortization for the second quarter, $32 million including $7 million of stock-based compensation, $7 million for acquired intangible asset amortization and $2.6 million for amortization of the GAAP imputed debt discount.

As noted in the press release, sales for the third quarter are expected to be between $490 million and $520 million and the non-GAAP EPS range is $0.75 to $0.83 on 200 million diluted shares.

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

GAAP EPS range is $0.60 to $0.67.

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

The operating profit rate at the mid point of our third quarter guidance should be about 33% which would be a new record, eclipsed in the second quarter.

We expect gross margins to be about 56%, R&D should be about 10%, and SG&A should be about 12% to 13%.

Non-GAAP, net interest expense is expected to be about $2.3 million and tax provision should be about $12 million.

In summary, our product offerings are in great demand.

Our supply chain is delivering and our people are executing very well.

And finally, while we are keeping a steady hand on fixed costs we are also keenly focused on our long term growth plan.

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

Thanks, Greg.

Jasper, we'd now like to take some calls.

(Operator Instructions) Your first question comes from the line of Jim Covello.

Thanks, guys.

Appreciate the opportunity for the questions.

Congratulations on the great results.

Couple things, first of all you mentioned one use of cash would be to buy back the debt.

Did you mean pay down the debt or actually buy it back?

What would be the timing on that?

Buy it back when it matures in 2014.

Not to try to buy it back early in the market.

Okay, I got it.

And then you mentioned, 33% or you know, 36% of overall semi-orders were OSAT.

People worry about a lot of negative things, there have been a lot of negative comments out of the OSATs.

Have you seen that translate into orders or outlook for the September quarter?

If not, you know, are you worried about that?

How much of that is reflected in the shipment commentary et cetera?

We haven't seen any of that, we're really a little biassed towards the pull in environment versus any kinds of flipouts.

I've read some of the same reports, but we haven't had any of that.

Okay, and then, you know, relative to the, you know, the traditional kind of analog cuts business, it seems like there remains tremendous shortages from a variety of different customers there.

You mention that you know, there's expedite or pull-in requests as the normal there.

How long do you think it's going to take for them to catch up?

It seems that every time they think they're caught up, they need to order more.

People are worried about the end market demand, ultimately inventory building up in those orders falling off.

What's your current expectations around that?

No one's able to predict that.

Everybody has been coming back to the table pretty regularly.

Just to give you a sense of the breadth of demand.

If you took our top 20 customers, I'm doing this from memory, in the fourth quarter, I think 11 of the 20 customers bought last year's fourth quarter.

That's gone up now so that it's been 14 to 16 the past couple quarters.

So it hasn't been 100%, but that group over the three-quarter period has typically been back to the table at least two of the three quarters.

It's quite broad and it's repeating.

Great, if I could just ask one final one, on memory, obviously we've seen a little bit of a pick-up on the memory side.

In order for a more broad-based meaningful pick-up to get orders very healthy again, do you think it's going to be more technology-driven where we just get up the memory speed requirements that drive new technology-driven memory orders?

Or more a function of, we bring on the front-end capacity that's just now being ordered and will come online later this year and early next year and we'll then we'll need more test capacity to test that or a combination of both?

I can't give you a break down.

It's a combination in our view.

You're starting to see signs of the technology push, the speeds are pushing up so the next generation of devices, next generation of test capability is getting pulled in.

That's very, very small and starting to break open a little bit.

I see the second bounce here as the new FABs come online and into the next few years.

That's going to push the volume side of the equation much harder

Your next question comes from C.J.

Muse.

First question, in terms of the strength you're seeing on the SOC side, both revenues and orders, can you talk a little bit about the SOC buy rate you see for this year?

Are you still holding to the $28, $29 billion or do you think that's moved higher?

I think we're on course, I'll give you a picture of where we think the market is in total so far this year and why last quarter, at the end of the first quarter, with were in the camp that this could be upwards of $3 billion in the -- for the full year in SOC.

There are a couple slides on the website.

Did we post these?

So that shows you some of the market trackers who are showing what the book and ship rates are.

But in a nutshell, first half of the year looks like it will ship somewhere around a $1.3 billion, maybe a tiny bit higher than that.

I don't think a $1.4 billion, but in the $1.3 billion level, so as we go into the second half of the year, at the levels of industry is shipping at right now, you can bring that, that can make the 2.8 to $3 billion level on the slide that we're showing that gives you, you know, it'll show a range there.

No one is accurately predicting the second half yet.

That shows a range of $2.6 billion to $3 billion.

The salient point here is that, that buy rate ends up in the 1.4, to 1.6 range, $2.6 billion to $3.0 billion.

So even on a single year basis, it's not outstripping the prior periods.

If you factor that in to correct the '09 downturn, you still have a pretty reasonable buy rate level that doesn't suggest wild overheating in the total year.

We're still in the -- that this can be upwards of $3 billion on the year.

That's helpful.

On the share fund, you talked about clearly tracking, 50% in the first half of the year, the view that three to four points coming from market share on your front, we should be thinking about you guys, the 45% market share for all of 2010, is that correct?

We think around that level.

There are two pieces, one is that some of the segments that we're very strong in are good segments to be in because they're growing.

The devices segments are growing faster than the other competing segments.

That's one piece.

The other one is that the rate of new design wins has been it's been quite good for us.

Just one last question, on the memory side, I guess you did about $35 million first half of the year.

Do you feel confident you can approach $100 million for the year if that's the case, I'm assuming the key driver will be on the Nan side as opposed to high speed memory.

We're still shooting for $100 million, trying to break that level this year.

It's a mix of high speed memory and Nan.

Okay, thank you.

Your next question comes from the line of Gary Hsueh.

Mike, I understand your answers about sort of near term weakness at some of the sub cons, but wanted to kind of look at this issue another way, with sub con exposure at roughly around 36% of semi-product revenue or SOC test revenue, it looks like you're still well below what the prior peak was for your sub con business, even at higher record revenues, compared to 2004, 2005, but if you look at front end, you know the front end arguably is you know, exceeding prior kind of peak CapEx spending levels in the foundry cycles, 2004, 2005.

I'm trying to reconcile that, why would you be seeing lower sub con exposure when arguably the waiver side, the foundry business is booming?

Well, I think it's a numerator and denominator, the percentages say one thing, the actual dollars are very healthy in sub cons for us.

When we say 36%, it's 36% of a $400 million plus.

So we booked in the $160 million level last two quarters.

I think it's quite healthy, strong.

The next question is, is it too strong?

I guess you say it's a little more (inaudible) than it was in 2004 and 2005 as well.

I think for the last three years it's been more tied to real business, versus put it in place and hope to get some business.

Okay, great, next question here.

A quick question here on two things, one is just hard disc drive, I understand that you, basically won a second customer and you're on the enterprise side.

Did you say that the $50 million or so, I think, in expected HDD revenue that you booked this year would come mostly in Q4 this year?

And you know, kind of a second question would just be the decline in your deferred revenue advance balance on the balance sheet.

That seemed like $30 million looked like it supplied a lot of the top line beat in terms of revenue in Q2.

Was that related to HDD or is that something else?

If you can help understand both components.

The HDD, we expect to have some revenue in the fourth quarter, that's based upon getting the acceptances completed.

That pushed out in the third quarter, we see that happening in the fourth quarter.

That revenue range will be consistent with the model we've told you guys in the past, between $40 million to $60 million.

It's all going to fall in one quarter.

In terms of the second customer we'd expect some small buying and that's going to be likely small.

Your other question was?

About deferred revenue.

It went down by roughly $30 million in the second quarter, roughly corresponding to the top line beat.

Wondering what drove that and what's your expectations for deferred revenue balance going into Q3?

Okay, that's simply a customer who's paid us in advance.

They needed shipments.

We shipped the systems, it was all part of a commercial deal to get paid up front.

We delivered shipments so that deferred revenue comes down and gets recognized in revenue.

And the expectation is to begin rebuilding that deferred revenue balance in Q3, Q4.

If that's possible.

We'll just need to see what makes the most sense with the customer.

Okay, great, thank you.

Your next question comes from the line of (inaudible).

Hi, this is Tim.

How are you?

I think you said before that you have not seen any slow down from the OSAT customers.

I'm just sort of wondering, what's the typical, if you look in the past, how long did it take for you to get notified of some sort of slow down in bookings when their business slowed down?

Does it usually happen intraweek or sort of as you look back?

What's that lag time, typically?

This is a real time environment we're in.

We're very connected with all our customers OSATs, as well as the IDMs.

One day it's something and the next day it changes.

I have to say you know, the slot planning is a dynamic thing.

I think you know that in the industry.

There's always a lot of churn as synchronization of testers to peripheral equipment and so on takes place.

In terms of changes in demand, that happens quite quickly.

Got it, thanks.

Just talk about bookings and Q3, if you sort of had to bet, do you think book to bill would be up or you know, over one or below one?

Because we don't guide, we don't, I think I probably said this the last many calls, but the picture that we're operating with here is we think the second half of the year is, still remains strong from a total revenue standpoint.

Because it doesn't provide an overheated or an overbought Capex environment.

How that will play out in bookings is totally uncertain.

It's just because of what you asked before, it comes very quickly.

There's been no impact on our slot plan, no impact on our backlog.

Right now things look very strong.

I'm hearing the same things you are.

That obviously as you watch and manage the slot plans carefully.

Right now we have 99% is pull versus push

Your next question comes from the line of David Duley.

Congratulations on a nice quarter.

I'm just wondering, were there any 10% customers on the revenues orders in this quarter?

Yes there would have been one customer.

On both?

On the revenue there was one customer.

I'd have to check the booking.

Can you talk a little bit about, I was just kind of curious if you could size the analog business for us, to talk about how rapidly growing it is.

I was just wondering if you could review how big that business is for you and what your market share is in that segment.

When you say analog business, what do you mean?

Our Eagle business?

Yes, Eagle business.

Let's see.

I'll tell you, in aggregate, I don't know how much we break out in these discussions, but Eagle has had -- I'll give you a couple pieces, Dave.

Eagle had a record quarter in both bookings and shipments.

The largest customer that we have in Eagle, the base of customers is broadening dramatically.

The largest customer we had was a non-US customer.

That's the first time, I think in Eagle's history that's been the case in an upturn period where there's been substantial buying.

And a third piece is of the 60 design-ins that we've had, 40% of those come from Eagle and next test.

The vast majority being Eagle.

We're seeing a different portfolio at the top end of the buying , the heavy buyers is broadening.

It's not always the same player.

The tail end, I'm afraid is getting much, much broader.

You know, 60 design ends about 25 of those were from Eagle.

Most of those design-ins come from

You've basically taken that panel and pushed that product in there across Asia.

That's all in the first half, right.

Do you have a status what you think the size of that market is?

What your share is in is he that is he that segment or-- We break the market a -- everybody breaks the market in different chunks.

We always talk about the total SOC, but eagle focuses on the combination of power, automotive devices as well as you know, smart power, discrete, and you know, in total, those markets, let me look here, I can probably give you something.

The biggest aggregate market is the complex SOC.

Which represents now about you know, in '08 about 60% of the market.

The markets that Eagle plays in, which I described, which you described as analog, I gave you the subsets, that's about 25% of the total market.

We think that goes to over 35%, over the next couple of years.

So you can do the math backwards on what the total market is to get those numbers.

Okay, thank you very much.

Congratulations on a nice quarter.

And to your earlier question, we had one customer booking greater than 10% this quarter.

Okay, thank you.

Okay, thank you.

Your next question comes from the line of Krish Sankar.

Thanks for taking my question.

Mike, if I look at your total SOC market, and it was a 50% run rate at this point in the market share, you end up at like mid- to upper 40s and $3 billion associated market.

Is it fair to assume there'll be a sharp drop-off in your Q4 revenues for SOC and is that more of a normal seasonality or is there something else going on there?

Krish, it's really more that you know, when you look at market share in a short period of time, you can be doing a victory lap or thinking you're losing tremendously, just because of temporary movement.

What we're trying to do here is to say you know, overtime, the market share moves come in one or two points.

That's what we've done over the last four or five years.

Right now we're ahead of the game.

And you know, at 50 you'd say something dramatic has changed.

We think what's changed is about half of that is in these segment shifts which benefit us because we're strong in those segments and half of that comes from design in momentum and growth of our prior design-ins.

We're really trying to tamp that down a little bit so we don't come back and say "Oh because the segment has recovered we've lost share." Maybe that's New England conservatism, but that's how we are trying to portray this.

You say for Q3 your memory business will grow 50%.

Is that mostly from the high speed memory sales?

It's a combination.

A big chunk from flash.

And then the final question, what's the linearity of bookings for your June quarter?

Thank you.

The June quarter looks a lot like the March quarter.

We typically book about 40% in the last four weeks of a quarter and that we were within let's say two or three percentage points if you compare the two quarters.

On bookings that were almost identical, slightly up, from a systems standpoint up about 4%, you could throw a blanket over it.

Almost a dead heat.

Your next question comes from the line of Satya Kumar Yes, congratulations on a strong quarter in margins.

I guess to follow-up to an earlier question.

Recent data points or shipments, I was wondering so far into the month of July for orders, wondering if you could make some color on how Q3 related to Q2 has started off magnitude to customers.

I don't think it'd be helpful to you.

We're not -- if you look at the beginning parts of quarters, it's absolutely all over the map.

What I said before, about the back end has been far more consistent than the front end.

So, it's just so different every quarter.

I think it would be, it wouldn't be helpful.

Okay, I think one of your subcontractor customers reported earlier this week and talked about disclosing of several testers over 150 testers, thought that was interesting.

Do you see any trends in the test market?

Older test capacity or more reallocation?

I think there's certainly much heavier reallocation environment because the demand is so high and the opportunities to gaining share at the OSATs.

There is shifting, but with watched the retirement data through our board repair rates and three months ago, we saw that coming out of the downturn, the recovery rate in repairs was significant below, for the legacy equipment, significantly below our, current generation equipment, but over the last three months, that has moved back up.

So that signals to us that the legacy equipment was really also being squeezed and put into service.

So, from our perspective, there is certainly a decommissioning that took place in the downturn, but I'll call it a recommissioning of some of it.

Not all of that equipment has been brought back online.

Lastly on necessity market shares, wondering if you have any additional color to add on the FPGA area.

One of your Japanese competitors claiming an increase in orders and I noticed the inventories were up as well, perhaps uh I was wondering if you could add color on competition in FPGA.

Well the 750 is the product that we have in that space and there are obviously a lot of skirmishes.

I think on a competitive front as you interact with your competitors, everyone will want to talk about the successful skirmishes.

We want to look at the overall movement and share and we feel very good about what's happening in that sector and others.

In particular, the 750 is, it's really on a move, not just in the last three months.

If you go back over three quarters, the last three quarters, on an upward trend, averaged 150, J750 system orders per quarter in the last three quarters.

Almost 500 units are being put into production into an install base that started at about 3,000.

So you know, if there's a work horse tester in the market, it's the 750.

Number one, zero footprint, low cost, high parallelism tester.

Number two, Regular refresh of capability.

Customers adopted at a 30 % rate and therefore have more customers to adopt.

Number three, upwards of 5,000 test engineers in the world who know that software.

It's very productive in the engineering front as well.

That's a short speech, but we're pretty comfortable about what the 750's doing in the market.

There are skirmishes that are pluses and minuses.

If I could squeeze one last thing in, 8 to 10% for next year, I was wondering what the assumption is, going to be going through very quickly.

I was wondering if you could provide parameters of revenue rates or something like that that, where (inaudible) valid.

Well we really don't go thorough the NOLs as you might expect.

20% of the income ends up in the US and these other things we do, for example, fund a pension plan and that is a target production.

Even this year, we've only tapered the NOL down about $20 million.

20, $30 million.

So this NOLs going to be here a long time.

Then there's credits.

So it's multiple years, and then offshore we have locations that have very low tax rates and Singapore is a 10% rate.

So our rate, our cash rate that we're going to pay is going to be low for three to four years.

That's great, thank you very much.

Your next question comes from the line of Patrick Ho.

Thanks a lot.

In terms of the SOC test share gains that you've been talking about, I understand how a part is coming from the market segments that are growing right now.

In the 40% you were talking about with eagle test and next test, can you describe where some of the design sockets, what some of the applications are that are on the socked winds?

Patrick, it's a pretty wide range, but it's you know, the performance analog sector, you know, power devised, automotive power applications, it tends to be big a small amount of digital in these.

It's a pretty wide range of device types.

The thing that's been compelling, Eagle gives us a lower platform price so it finds its way into these up and coming companies that you find in Asia.

Names of which people haven't heard of three months ago and are emerging fabulous companies.

The other thing is the ETS88, which is the new lower end model, this is the model that can test a variety of parts at the same time and also has a lower entry level CapEx.

I think we have 50-60 of those sold now.

We nearly doubled that in the second quarter, we doubled what we had before so now we've got about 60.

I think that's roughly right, the numbers.

That's just you know, the lower, penetration point on price.

And it's a completely compatible with the rest of the line.

It's an attractive price performance piece for the small players out there.

That's great, that's really helpful.

On the memory side of things, you mentioned 3Q you'll see a good chunk coming from flash.

Has that marketplace hit, I guess, a tipping point or inflection point where now we'll start seeing those type of capacity buys?

Or is the case with you guys, specific customers, that is now starting to ramp on their capacity buys?

The slide that shows the memory test three month moving average book to bill certainly doesn't depict a resurgence.

It's a situational market.

We've got an installed base of Magnum testers and we're targeting in the Nan space for those testers also to move.

Describe it as a little, sort of a half and half, the install base is starting to buy at a small rate, but the new design ends are what we're depending upon to get this $100 million level.

Final question on my end.

On the hard disk drive side of things, I know initially you had the lower margins, they were the initial rollouts with the first customer.

Now that you have the second customer coming up to ramp, can you discuss the margin profile of that segment whether, you guys are seeing the improvements you were looking for in terms of how that business is ramping?

This is Greg, uh, both customers should be around 30%, 32% gross margin.

That's just the nature of gross margin in hard disk drive.

So obviously the operating expenses are quite lean.

And with the volumes that we expect on a normal year, we could get from these customers, particularly once the second customer were further in their, integration, into their fab, we believe that the P&L will hit 15% operating profit at an level of say about (inaudible).

That's what we said before.

Before we said 40 to 60.

So once, both customers are in a buying mode, we think it's going to be 80 to 120 with a 15% profit.

That's probably sometime in 2011.

Great, thanks a lot.

Your next question comes from the line of Tom Diffely.

Good morning, another question eon the decommissioning of testers, can you give us any color on the relative trends you're seeing in SOC versus memory or low end SOC versus high end SOC?

For what's being decommissioned?

Tom, the comments that we're making were really around, the SOC side.

I don't, honestly, have a picture of the memory decommissioning.

My sense there is those are all pretty, that install base of the Magnum products is pretty robust and is still all out there operating.

I think that's a lot lower decommissioning.

I'm talking about, to give you an example, there was a power management version of the A500.

The A565, was it?

That's being decommissioned.

Some of the old logic testers, it was called J973.

It's kind of two generations ago.

You know, it's not current product, it's product that doesn't do parallel tests anywhere close to what the current generations are.

A little bit of that decommissioning in the catalyst generation, which would be the last generation product, not much, those are still all heavily, heavily used.

So it's really over the horizon.

It's sort of a two plus generation ago.

They're soaking up the capacity of the output of devices.

It has an affect on some of the new buying.

Is your sense once they can get the capacity in house, they will decommission them once again.

I think a portion of them are here stay.

This shock wave of '09 really squeezed out the unproductive asset compares to the new buy assets.

So we'll go back to a more normal decommissioning rate.

And that may be a little bit less than 10% per year.

On the high speed memory side, what is the sweet spot in terms of speed for your dram tester?

Very high performance for dram, DDR3 generation, expandable to DDR4, but then test all of the graphics DDR5, we are talking about 4gb, 6gb performance levels.

I was trying to figure out if we need to wait for DDR3 to get to a certain speed, kind of in the mainstream.

I think the 2gb is where we are hoping will loosen up and where the new buying will be.

Finally on the cost front, are there temporary costs you took out in terms of stock-based comp, salaries or bonuses or is that all back in the model at this point?

It's all back in the model.

Our costs are basically variable compensation which is tied to profitability and growth.

Your next question comes from the line of Gus Richard.

Yes, thanks for taking my question.

Just a couple quick questions on the memory market.

It seems to be recovering rather slowly.

Wondering where, the test buys are relative to prior peaks and what do you think it's going to take to move those buy rates back up to where they used to be?

Well, look at the thing on the website and you'll see we're way short of prior peaks.

This year, the recovery could have that market between $600 million and $800 million after $200 million level in 09.

But you know, the prior three years, $700 million, $1.8 billion 1.7.

I don't think anyone's projecting that this goes back into the $1.5 billion to $2 billion level.

The short-term expectation here, is this recovery year to get us between $500 million and a billion.

I think it probably operates at that level and then as these new fabs commons online it moves up as the output of those fabs drive it.

We're shooting to get about 20% of that market, so you know, we can run the numbers on different scenarios there that shows you what the contribution would be.

Got it.

And then just on the decommissioning, you know, some of the older testers are being resurrected from the dead, are these things going to be sticky?

Are they going to last, you know, another couple years or just in the interim until more efficient testers get purchased?

We're not sure is the honest answer.

I think it's a sign, and remember, we're deriving this based on failure rates as well as anecdotal evidence of bringing things back.

The net here is that the decommissioning has been substantial from '08 and '09 until now.

I want to make the point that our failure data would suggest there's some recovery in that.

Some of the overall worldwide capacity is being soaked up by those.

I think over time those get voted out.

From a productivity and cost to test standpoint, they don't match up with the economics of the new generation.

They'll keep it on more because the legacy product is there and they don't want to reprogram it.

Right, okay, great, thanks.

Great quarter, appreciate the time.

Okay, sir.

Your final question comes from the line of [inaudible]

Thanks for taking my question.

Most of my questions have been answered.

Greg, I thought the acquisition comments, given the cash situation were interesting relative to what the companies stand had been the past.

I was curious if that potential appetite is on the semi-side or the system test side and given your pure strategy has been around, you know, expanded at those markets.

Do you have any thoughts on how attractive the pro card markets are right now?

Understand.

Well we want reasonable cash reserves in the event we do find something that has attractive leverage and fits with our capabilities.

It's 1 plus 1 equals 3.

We're always looking.

We've been looking for, every since I've been at Teradyne.

It's very hard to find deals that work and make sense.

Obviously the Eagle test deal was a great deal for us.

Next test was a very good deal for us too.

The challenge is for us.

There isn't the next obvious deal, but we have to still keep on looking.

There isn't, you know, any list of capabilities, whether it's pro card or somewhere else that we're so saying we need to get it.

That's not it at all.

We need make sure we have the resources should the opportunity present itself.

Understand.

Great, thank you everybody and we look forward to talking you over the next few months.

And that concludes today's conference call.

You may now disconnect.