泰瑞達 (TER) 2010 Q4 法說會逐字稿

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

At this time I would like to welcome everyone to Teradyne's Q4 2010 earnings conference call.

(Operator Instructions)Thank you, I would now like to turn the conference call over to the Vice President of Investor Relations Mr.

Andrew Blanchard.

Sir, you may begin your conference.

Thank you Jamie.

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

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

Following our opening remarks, we'll provide details of performance for the fourth quarter and full year 2010 as well as our outlook for the first 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 www.teradyne.com.

Note that during this call we're 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 the live webcast icon.

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

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

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

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

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

During today's call, we'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 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 note that between now and our next conference call, Teradyne will be participating in the Stifel Nicolaus Technology conference on February 9, and Goldman Sach's Technology conference on February 15, both in San Francisco.

Oppenheimer's Semi-Conductors Summit in New York on February 17, and Morgan Stanley's Technology Media and Telecom conference on March 1, in San Francisco.

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 first quarter.

Then our CFO Greg Beecher provide more details on our quarterly and full year financial results along with our guidance for the first quarter.

We will then answer your questions.

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

Mike?

Good morning, everyone.

Thanks for being with us again today.

You can see that we're guiding revenues up in the first quarter, so I want to describe what's driving that as well as the general tone of business as we enter 2011.

But I'd like to spend some time first recapping 2010 as it reflects very solid progress on our long term strategy.

As you know, we closed out the year with annual revenues of $1.6 billion and non-GAAP earnings of $2.20 per share.

That was the fourth highest revenue level in our history and the number one year in terms of profit rate and cash generation.

Obviously, these results were due in part to a strong recovery in the semi-conductor test market, particularly in SOC Test.

The worldwide SOC test portion doubled from $1.3 billion in 2009 to $2.6 billion in 2010.

And we captured nearly 60% of that growth as our SOC shipments grew from $500 million to just over $1.3 billion.

Our customers ordered over 1700 systems in the year propelling our SOC market share to about 50%, up from 41% last year.

Now, we've benefited from some strong segment buying which can ebb and flow each year.

So, we believe a conservative base line market share would be somewhat lower, but still significantly up from 2009 with half of our share gain coming from new design wins and half from the steady mix shift in the market to mobile, consumer and smart power devices.

We're very pleased that our customers voted so strongly in favor of the FLEX, the 750, Eagle, and Nextest SOC products for the new silicon releases and for their aggressive product ramps this past year.

Our FLEX and J750 installed base now sits at well over 6000 systems and record years for Eagle and Nextest have broadened our total installed base to the point where we'll cross the 10,000 system mark sometime this year.

On the memory side of things, we had a very good year with record bookings and revenues for our memory business unit both topping $100 million.

While the memory test market recovered to a $700 million CapEx level for the year, we grew our shipments every quarter through the year, ending the year at just under our $40 million per quarter run rate.

The annual scorecard memory now has us in second place in market share, up from third place last year and fourth place in 2008.

But, at about a 15% share we obviously have a long way to go.

The Magnum and UltraFLEX products are well positioned for growth in 2011.

In Systems test, slow downs in our defense and hard disk drive businesses in the second half, left us in the red for the year.

But we've moved back to profitability in the fourth quarter and expect to continue increasing profits as we grow our shipments in the first quarter.

Strategically, we've made good progress in expanding our HDV serve market both through it's customer expansion as well as broadened test applications, and we expect between $80 million and $120 million in business this year as we've said in prior calls.

So, Greg will go through the Companywide numbers in detail.

But I want to reinforce that we're committed to tight cost discipline going forward.

That doesn't mean that we won't make strategic investments.

It does mean, that we'll keep a grip on any expense creep whether the market is going up or down.

Now, those of you who followed our industry for a while know that the prior industry wide pattern has been to give back all the profits in of an upturn in the subsequent downturn then to repeat that pattern over and over again.

Our model ensures that won't be the case for Teradyne.

And I think you can now see how we perform even when there's a sharp downturn like that from the third to the fourth quarter.

The bottom line is fixed cost discipline, a strong balance sheet, market share growth in our core markets, and expansion into new markets where we have leverage in technology, distribution, and costs.

Now, the subject of new market expansion deserves some comment as our cash resources do give us more M&A flexibility going forward.

On this subject, I'd like to make a few clarifying points.

First, our acquisitions of Eagle Text and Nextest were critical additions to our core market coverage in performance analog and memory test respectively.

We saw these as must haves with respect to strengthening our SOC presence and expanding it to memory.

We don't have any market coverage gaps that warrant M&A moves of that magnitude going forward.

Second, expansion in and around the test cell would be pursued only when we could get an integration advantage.

By that, I mean acquiring and integrating a peripheral product to achieve a performance level that's impossible to achieve through a modular stand alone approach.

And third, we would not pursue M&A targets so far afield that they don't have significant technology or customer leverage.

So, this multiplier effect of technology and customers is an essential component of anything we consider outside our immediate markets.

So these three principles, along with the requirement that any acquisition be healthy and growth oriented guides all of the work we do in considering non home grown initiatives.

Now, let me turn to our fourth quarter and our trajectory into the first quarter of 2011.

Our fourth quarter bookings of $355 million were up 1% from Q3, with Semi Test up 10% and our system test group down 24%.

The system test drop isn't surprising as we generally see lumpy buying patterns in the defense and hard disk drive sectors.

In this quarter, HDD was down, while defense, commercial board test, and automotive diagnostics were all up.

In Semi Test, memory was the big story, as we had record orders in the quarter.

As I mentioned last quarter, we now have installations in Flash, in DRAM probe, and in DRAM final test markets.

This quarter, we continued to generate business in all three sectors.

I will say that the flash momentum is building, while high speed memory test remains at a steady but low level.

So we're pleased with the trajectory in memory, but understand we have a lot of share growth yet to be realized.

In SOC test, system orders were about flat to Q3 while end of year service orders were up.

We continue to see the benefit of being well positioned in the smart power, microcontroller, and wireless segments where we capture a very high share of end product test segments.

As I mentioned in a prior call, the consumer migration to smart phones and tablets and away from PCs favors our product portfolio.

In total, IDM and fibrous company direct orders for SOC and memory combined, were flat while OSAT demand increased 58% sequentially to $74 million in the quarter.

This is a promising sign as usually subcon demand remains muted for a few quarters in a down cycle.

So, in the first quarter, we're moving our revenue plan up over 10% at the midpoint of our guidance as virtually all business units will grow sequentially.

In summary, it's been a rewarding year.

We've executed some very aggressive production ramps for our customers.

We've cracked into some important new customers which give us real upside going forward.

We've kept a tight hand on the cost structure.

And we've now tested out our model in both a sharp up and down cycle, assuring us that we can outperform the market and our past history in over-the-cycle results.

Now, let me turn it over to Greg for the full financial perspective.

Thanks, Mike, and good morning everyone.

I'd like to start by highlighting some of the key 2010 accomplishments before closing the chapter on the year.

Then I'll talk about our cash strategy and wrap up with a recap of fourth quarter results and guidance on the first quarter of 2011.

On an annual basis, our sales doubled from the last year's $819 million to $1.6 billion in 2010.

Our full year non-GAAP EPS totalled, $2.20 versus a loss of $0.27 in 2009.

We set new records in units shipped, ramp rate, and annual share gain.

Certainly though, two of the headline financial accomplishments are a new annual record for free cash flow of $491 million, about $150 million more than our prior record of $343 million and our full year non-GAAP operating profit rate of 28% surpassing our prior record of 23% set in 2000.

Perhaps more important than ramping products at record levels or exceeding these two past high water marks is that we expect to retain these profits with our new model versus giving a large portion of them back in a trough period.

As a very quick reference, following our second highest EPS year in 2000, we gave all of those profits back and more in the subsequent downturn.

Now though, despite sales dropping $180 million or 36% from the third quarter, we operated 6 points above our model 15% profit rate in the fourth quarter and expect even better results in the first quarter of 2011.

The model changes from our past peak earnings in 2000 are too many to detail, but I'll quickly note that our fixed costs are well more than a third lower with about two-thirds fewer permanent employees.

On the employee front, we're very pleased that our people earned the highest full year, profit sharing payouts in our history for 2010 as they executed exceptionally well in meeting the needs of our customers.

Across the Company, we've taken full advantage of low cost regents and outsourcing.

We've fully leveraged technology building blocks and platforms to reduce both cycle time and cost and we've consolidated numerous facilities, functions, and activities.

But, perhaps more than anything else on the model front, we've instilled financial discipline and optimized business models throughout the Company.

Our models are conservative and based upon smaller market sizes than we expect.

This is perhaps most evident in SOC tests where we've talked about our model being built off a $2 billion SOC test market, despite the $2.5 billion, five year average market size.

This obviously provides for far greater full cycle earnings.

The model though, is just one part of the story.

There's actually a bigger story which is share growth and expansion into multiple new markets.

In 2010 our very strong market share and the higher growth Semi Test segments, such as power management, wireless and micro controller shined brightly.

The combination of being in faster growing segments and taking share on a socket by socket basis enabled us to grow our SOC test share from about 41% in 2009 to about 50% in 2010.

Looking ahead, we also expect to benefit from the multiple technology waves underway in smart phones, mobile computing and Internet connectivity.

On the market expansion front, starting with our non organic moves, we are very pleased to report that Eagle and Nextest both significantly eclipse their past sales and earnings records in 2010.

A portion of our 2010 share gains came from growing Eagle and Nextest, best in class product sales faster than they could do on their own with our broader distribution and support.

Organically, we've also significantly expanded our addressable markets with our entry into hard disk drive and high speed memory.

While, neither made the contribution in 2010 that they are capable of, we're encouraged about their prospects in 2011 and beyond.

In summary, our market share, product momentum and operating model position us better than at any time in our past, no matter what the market conditions.

Now, moving to the fourth quarter recap, we posted sales of $322 million with a non-GAAP operating profit rate of 21% and EPS of $0.37.

This was our fourth consecutive quarter operating above our model 15% profit rate which is another record.

Similar to last quarter, we've shown the combined 2009, 2010 periods and contrasted that to prior two year periods and you can see that our operating profit rate is about 10 points higher now than in the past.

Moving to a demand side, Semi Test bookings increased 10% to $286 million with strengthening in low speed memory and service bookings.

On the other side of the bookings ledger, Systems Test Group came in at $69 million with strong bookings in Mill Arrow.

Moving to cash, we ended the year with $1.55 billion in gross cash and $855 million in net cash after deducting the face amount of the convert and our Japan debt.

We recently announced a $200 million buy back program.

The program is intended to offset dilution from employee equity compensation.

So far, we have not bought back any stock.

Let me explain how we're thinking about cash.

While not cast in stone, we have two basic choices.

Return capital to shareholders or retain it for M&A.

As you know, our track record in M&A with Eagle and Nextest has been very positive.

Furthermore, we believe that there will be other attractive opportunities where we can grow businesses faster inside Teradyne than on their own as well as benefit from cost synergies.

We'll retain our very strict criteria, including the need to earn at least our cost of capital of 15% and of course, the business need to be healthy with a differentiated product and road map.

That is why we're holding significantly more cash than necessary to operate our existing businesses.

We also recognize that the timing of when an acquisition fits our strict criteria and can be brought to closure is very unpredictable.

Again, as to our stock buyback, we intend to offset the dilution from employee equity transactions which is about 4 million to 5 million shares a year.

We also plan to be opportunistic in our purchases.

To summarize, our intent is not to just accumulate cash.

We continuously look at our capital structure.

But, at this time, we feel there are attractive opportunities to grow both revenue and earnings with current use of this cash through M&A.

Now to the financial details.

The fourth quarter top line of $322 million was down $180 million or 36% from the third quarter.

Semi Test was $262 million, down $186 million or 41% and Systems Test Group was $60 million, up $6 million.

Semi Test product shipments decreased 47% from a quarter ago within the $322 million service revenue was $69 million, up $3 million from a quarter ago.

Semi Test service revenue was $49 million.

Total Company product turns business was 30% versus 18% a quarter ago.

Semi Test product turns business was 33% versus 18% a quarter ago.

Memory revenue was $38 million in the quarter up from $29 million sequentially.

At the end of the fourth quarter, our US forward net operating losses total about $170 million and we have federal tax credits of about $50 million.

Expect to end Q1 at about the same cash level as we ended the year as we have variable compensation, payouts, and year end tax payments in the quarter.

Moving down the P&L, gross margin decreased from 54.9% in the third quarter to 52.5% in the fourth quarter due to volume.

We also had favorable mix, somewhat tempering the impact of the sharp volume decline.

R&D expenses were $47.5 million, or 15% of sales compared to $50.1 million or 10% of sales in the third quarter.

SG&A expenses were $54.8 million or 17% of sales compared to $61.1 million or 12% of sales in the third quarter.

Operating expenses of $102 million were down $9 million for the third quarter due to lower variable compensation.

Our net non-GAAP interest and other expense was $2.2 million.

Taxes were a benefit of $6.3 million in the quarter as we adjusted the full year rate down to 4%.

In the fourth quarter, Semi Test sales were 81% of the total and the Systems Test Group was 19%.

Our book to bill ratio for the fourth quarter was 1.1 for the overall Company, 1.09 for semiconductor test and 1.16 for the Systems Test Group.

At the end of the quarter, our backlog stood at $514 million of which 82% is scheduled to ship and be recognized as revenue within the next six months.

Cash flow from operations totaled $155 million after capital additions.

Depreciation and amortization in the fourth quarter was $32 million including $7 million of stock based compensation, $7 million for acquired intentional asset amortization and $2.8 million for amortization of a GAAP imputed debt discount.

As noted in the press release, sales for the first quarter of 2011 are expected to be between $350 million and $375 million and the non-GAAP EPS range is $0.33 to $0.39 on 206 million diluted shares.

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

Our GAAP EPS range is $0.26 to $0.31.

The operating profit rate at the midpoint of our first quarter guidance is about 22%.

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

We expect gross margins to be 51% to 52%.

R&D should be 13% to 14%.

And SG&A should be 15% to 16%.

Non-GAAP net interest expense is expected to be about $2.3 million, and the tax provision should be about $5 million.

In summary, we have the best product lineup in the industry, a model that is delivering and we're well positioned to benefit from the technology buying waves underway.

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

Thanks, Greg.

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

(Operator Instructions)Your first question is from the line of Chris Shankar with Bank of America.

Yes, thanks for taking my question.

I have a couple of them.

Number one, Greg or Mike, in your guidance, can you split it between Semis and the System Test?

Cause, I remember last quarter you said there would be about $30 million of System Test business in Q1.

This is Greg.

The System Test business will be similar to the fourth quarter but maybe up about $5 million.

Got it.

Okay.

And the second thing was what are the splits between IDM and OSATs?

I've got it.

The OSAT business was 26% this quarter.

And that was up from 18% in the third quarter.

That's where it bottomed.

Got it.

And then in terms of M&A strategy I'm just trying to understand, are your customers pushing you to have a more integrated test solution?

Or do you think as the test Company you don't need to really go out, get more footprint in a test cell and look at M&A outside the test cell?

They are consistently focused, Chris on best of breed, so they wouldn't take components of a test cell that were lower in performance just because they were integrated.

So, the short answer is they are not looking for integration for integration's sake.

They are looking for integration only if it has a functional or economic advantage that can't be achieved through a modular approach.

All right.

Thank you.

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

Great.

Good morning, guys.

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

A couple questions.

I guess, I'd like to follow-up, on Chris', a little bit relative to your message on M&A is very loud and clear.

Would you expect at least some of that M&A activity to come outside of your traditional test base consistent with other market expansions you've done over the last couple of years, so that's the first question.

And the second question, is any color you could offer us relative to what market impact you think the M&A that's happening outside of Teradyne in the test space is going to have on the business really focusing on kind of incremental opportunities you may be able to take advantage of while there's disruption with competitors?

Thank you so much and congratulations again.

Jim, with regard to our strategy, the thing we wanted to be clear about is that in one sense our focus in the past has been very tightly around the core with the additions of Nextest and Eagle.

But, that doesn't mean we're limiting it to the test cell as we scan the market.

The issue for us is what are the core capabilities of the Company?

And can we find ways to leverage that more inside the core as well as in what I would call close adjacencies?

The thing we want to do is avoid looking so far afield that we dilute any of the technology leverage or any of the customer leverage we could get.

So that's the -- I don't to say it's exclusively inside the test arena.

Having said that, I think we would be unlikely to venture so far away that you would look in and say this is a Holding Company.

On the front of what's happening in the rest of the test space and consolidation, obviously, the consolidation moves that are underway now will have some effect short term and long term.

The thing I'd emphasize is that the design in cycles that our customers go through are many months in duration.

So there's really nothing immediate that's happening.

Certainly, customers are asking questions and trying to figure out the implications of that.

But, the trajectory and the progress we've made doesn't really incorporate anything that's, could be an outgrowth of that consolidation activity that's taking place.

I think in the future as if product road maps change as a result of it if products are discontinued, and so on, I think that will have an impact.

But at this point, I wouldn't put any register of anything into the numbers that we have that's resulted from that.

Thank you so much.

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

Hi, thanks for taking my questions and a nice bounce in numbers.

I have a question on your prepared remarks, you said your market share will be down this year but up from 2009 levels and I'm just guessing, should we take the midpoint of 41% of 2009 and 50% last year as an average market per share?

And what test buy rate assumption we should use on average for this year?

And then I have a follow up.

Atif, because the share shifts come from two places for us, one is from specific device design ins, and it also comes from the shifting sub segments of the markets, which are gradually moving more and more in favor of the mobile applications and power management and automotive and micro controllers and so on.

It's a little bit hard to put your finger on how much is permanent and how much is transitional.

The way we've been doing it, the rule of thumb we've been using is that we think there is some of this segment shifting and bumpiness in the buying pattern.

So we didn't want to peg our market share at the numerical high at 49%, 50% level, which I think it will come out to when all the numbers are in.

So, the short answer is mid-40%s is the way we're roughly modeling it for this year.

I think I would add to that, Atif, is that we've modeled the Company to hit our model profit rate at a 41% market share.

So, if the market share ends up at somewhere north of 41% which we believe it will, likely short of 50%, obviously, that profit rate is above 15% is what we should be delivering.

Atif, what was your second question?

Test buy rate.

What is your assumption for the test buy rate this year?

Let me just do a quick recap.

The 2010 buy rates we think will settle in for SOC around 1.4% and for memory around 1%.

Let's do some quick math.

Now, what we've modeled the business at as you know in SOC is we build the model around 2 billion.

If it comes in at 2 billion, that actually would be a decline buy rate to about 1.1.

So, I think at this point in time, we've got a range of possibility for the market between 2 billion and as much as 2.6 billion which is what we think it settles in at for 2010.

At this point, we'd be betting over, in other words, above 2 billion in the 2.2 billion and above range because of some of the early, the starting quarter here looks pretty good for the industry.

So I think you have to deal with it as a range.

At 1.1 you get a $2 billion market and then you push your way up to 1.4 where you get to the higher end of that range in SOC.

Memory was about a $700 million market that's a 1% buy rate.

We think that range is anywhere from 1%, possibly 1.3% for this coming year for memory.

And then, you didn't buy any shares last quarter, but the EPS guide for Q1, does it include any share buy back?

The guidance does not include share buy backs at this point.

Thanks.

Your next question comes from the line of Mehdi Hosseini with Susquehanna.

Thanks for taking my question.

Back to the system segment of your business or your revenue, how should we think about the additional market you have been talking about incremental share gain in that segment.

And here we are in 2011 and therefore I was just wondering if you could update us on the overall addressable market and how you see your penetration.

And I have a follow-up.

In system test in total?

Yes, yes.

The system test and specifically hard disk drive.

Mehdi, the update I guess comes in a couple of pieces.

As you know, we focused on the 2.5 inch drive sector.

And over the last couple of years have gotten a footprint in that segment that's all up side to us.

We've done two things to give us a foundation for expanding that share.

And that has been to expand the applications from the mobile market to the enterprise market.

And into functional testing of disk drives.

So, that broadens our market base in one way.

And then we've also added a second customer design in to the equation.

So, both of those things we think give us the ability to grow going forward.

Now, I will say that the uncertainties in that market segment have pushed out revenues in 2010, so actually, we were at the low end of our expectations this past year.

But we think with the expansion of the market and expansion of customers we're positioned to do what we've described in the past which is to move this business on a normal year into a range of $80 million to $120 million annually.

That's our aspiration.

Sure, and then back to Semi services, how should we think or model for the overall trend in 2011?

Should we just take the Q4 and normalize it or should we expect it to increase?

This is Greg, I would expect it to increase a little bit.

A little bit each quarter as some of the systems come off warranty that we provide and then they go into a service contract which turns into revenue, so, it will build slowly, particularly as you get to the latter part of the year, it should increase a little bit more, so you might want to add 1%, 2%.

1% to 2% year-over-year growth?

Yes.

Okay, and then just one more item.

What would you say categorize effective tax rate for 2011?

We're planning on 8% tax rate for 2011.

Okay.

Thank you.

Thank you.

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

We have no further questions, thank you.

The next question comes from the line of David Duley with Steelhead.

Congratulations on a nice quarter.

Could you just recap again exactly why you're guiding your revenue up in the current quarter?

And I also noticed the gross margin guidance was down sequentially on an up revenue.

Could you talk about that?

Okay, this is Greg.

I'll start with the gross margin.

In the fourth quarter, we had very favorable mix of margin within semiconductor test and even in system test group which is all consistent with I'll say, our model in terms of the variation you can get.

And if you look at Q1 it's actually going the other way on us.

So, if I put the two quarters together, you would have a more normalized margin.

But, there is variation simply based upon product mix.

In the first quarter, we are shifting a greater amount of or recognizing revenue on more hard drive systems.

So, it's simply next.

And why are we increasing revenue?

We've had some strength in bookings and the outlook we have looks positive and it's what we believe customers need.

Yes, the short term indicators, Dave, are picking up.

In a short lead time environment, it's pretty hard to call long term.

But the close-in activity has picked up a bit.

So we're positioning for that.

Could your just talk about segments or products or geographically, things that are showing the strength.

I was trying to dig in a little bit more into the guidance.

The, maybe the best way, I think geographic is not as interesting as the segments.

I'm going to talk about the SOC part because that's the interesting part I think for you.

Let's see.

If I looked over the last, let's say three or four quarters, the strength that we've had continues to be in the microcontroller and logic test segment in the wireless or mobile segment and in power management.

Maybe in fourth place, you would find automotive applications.

So that has consistently been the case, even in the last quarter.

Those are the leaders.

Now, obviously, they're down from the peaks in the first and second quarter.

Those will continue to be in the short term they look to be the leaders for us and we're expecting a little improvement in most of those segments.

They kind of change position first, second, third, and fourth.

But that's the cluster of the strongest applications.

Now, if I put that into a long term context, that really is what we've been anticipating is that those segments over time will capture more of the test market, because we think that the growth in the test segments will favor the mobile RF and the micro controller and automotive spaces at the expense of declining test market size in the micro processor or chip set spaces.

So I think the short term picture that we've got sort of fits into the long term picture, but those are the three or four segments that have been driving things and continue to drive them through this fourth quarter and we believe into the first.

One final thing from me, did you have any 10% customers during the quarter?

And do you think your cash generation in 2011 can match 2010?

Thank you and nice quarter again.

I'll answer the last question first.

No, I don't think we can match the performance in 2010.

2010 did have a higher amount of customer advance payments so that certainly helped us.

And we're not assuming a market size of $2.6 billion SOC test.

So our plan to be more conservative.

Can it happen?

The answer is yes.

I would plan on that it would be less than that number.

That was a very strong number and again, customer advances helped us a bit too.

In terms of 10% customer for the year we don't have a 10% customer.

For the quarter, let me take a look and get back to you.

Thank you.

Your next question comes from the line of Steven Chin with UBS.

This is (inaudible) for Steven Chin.

Congratulations Mike and Greg on executing on your model.

I have two questions and the first question is even though a DRAM CapEx will be down in 2011, can Teradyne grow DRAM sales in 2011 from new customer wins?

Well, we hope so.

I think we've got a little bit of head wind, just as you described, which is things are shifting to the flat side versus the DRAM side.

But, our design in position is at this point, gives us the launching pad to grow if that segment and the CapEx in that segment grows.

So, I think it's more tied to the CapEx rate that's going to move in that space.

Obviously, we're trying to get additional design in, and if we do that, we've got a little bit of upside potential in that space.

I think, for us, this year, the trend towards Flash is helpful to us both in a volume and a share sense since our design in position with the Magnum product from Nextest is actually -- it's been in that market for some years and it's increasing its position in that space, so if the CapEx shifts to Flash which we think it will, we think that works in our direction.

All right.

Thanks.

And the second question is you've got a boost from improved outlook from OSAT.

How sustainable are these sales to OSAT and do you think that they will steadily improve in the first half of '11 after sort of bottoming out in Q3?

It's a rear view mirror here, that the OSATs went down substantially if you remember in the third quarter.

And the favorable news is that they moved up a bit.

They are nowhere close to their peak buying levels, but a move up by the OSATs we took as a positive signal because they are really the canary in the mine shaft in terms of where the overall market is moving.

So, we took that as a favorable move.

Again, their trigger is such a short one that they could move up or down.

But, in terms of the tone of the discussions, we feel like the bottom on the OSATs is behind us.

How much it could go up, we're not sure at this point.

Thank you guys and congratulations again.

Thank you.

Your next question comes from the line of Timothy Arcuri with Citigroup.

Hi guys.

Several questions.

Greg, I'm just trying to clarify something you just said.

Did you just say that you were planning that the SOC test market would be down in 2011?

Is that correct?

For our planning purposes, we assume a conservative market.

That's how we structured the Company.

I think the question was asked to Mike earlier, what do we think the SOC test market size could be?

And I think we answered that, it could be as high as 2.6 or it could be as low as 2.2.

Somewhere in that range would be our judgment at this point.

Okay, just on that, I guess I'm sort of trying to fit that with what we've already heard from the big OSAT .

One big OSAT came out and was pretty clear that CapEx was going to be up 15%.

And cash CapEx should be up at least that much, so talking to the other OSATs, that seems like a pretty consistent theme.

So, the OSATs seem to be spending definitely up on test.

And if you look at your OSAT business it peaked out at almost triple where it is today on a quarterly run rate.

So, it would seem like there's a lot of whip in that business headed into the back half of the year, if in fact these companies all spend up like they say they are going to, so I'm wondering why you are being so conservative when they are saying they are going to

I absolutely take your point.

I think sometimes we talk about our planning process so that you understand the discipline side of our investment and our expense side of the equation.

I think the reason we don't speculate about the topside or the possibility of it being higher is that frankly, we really can ramp up to whatever level is necessary in that space.

We may be as you said we may be under promoting the up side in our discussions.

But we only do that because we want to keep the discipline on the cost side.

I would accept the point that if the OSATs recover to the level that they were at 2010, considerable upside, that was a $400 million to $500 million chunk of business for us.

And you are right, we're far, far short of that rate at this point.

Okay.

Got that.

Second question, just on the trying to sort of back into what the Semi test order, sort of the trajectory of that?

I know that you don't want to talk about bookings, but the if I just plug in sort of $75 million in system revenues in Q1, it would sort of suggest that Semi test are about flattish.

Maybe they are up a smidge in Q1.

Is that the right way to think about it?

And then I had a last follow-up.

Thanks.

Well, I won't do all the prelims about not forecasting.

I think the thing I wanted to do in my comments and in response to your question here is that, I do think that we see a short term strengthening scenario.

Where that ends up, obviously, we're not sure.

We're still inside, we're 27 days into the quarter.

But, I think the short term indicators are a reasonable positive for us.

And we signaled the reflection of that in this capacity and slot plan that we have.

Great.

And the just last question, just on M&A, your last two deals were $300 million in size.

Are your sort of comfortable with that sort of a size?

There's been a lot of questions asked about what vertical you might buy in.

In terms of size of deal.

Should we expect a bigger deal than what you've done in the past?

Or are you going to try to stick to the same sort of small to medium sized deals that you've done in the past?

Thanks.

This is Greg.

That's a difficult question to answer directly, because a lot of it depends upon what is the best fit, what would be most accretive inside Teradyne?

Having said that, generally speaking, the larger the deal, the less likely because there's less likely further help Teradyne can provide a company that's already grown to a certain level.

So, I think they would tend to be companies a little bit on the smaller size where we really could help them in Asia and supply line.

Once a company gets to a certain size, they often build some of those capabilities themselves.

Got it.

Thanks a lot.

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

Muse with Barclays Capital.

Good morning.

Thank you for taking my question.

I guess first question on memory.

Can you share what your memory orders were in Q4, what your expectations are for memory revenues in terms of a range for '11, and then how do you see the mix between flash and high speed memory?

Memory bookings in the fourth quarter were $42 million.

Size of our business this coming year we have to put some bands around it.

I think if the market is the size of this year, this past year, the $700 million market, our view is this memory market doesn't go back to the levels it has been in the past because of productivity elements that have been exercised over the past couple of years.

So, if you put a band of $700 million to $900 million or $1 billion and we're sitting at about a 15% shares as we exit 2010.

Our appetite here is to gradually grow that.

We hope that with the shift towards flash this year and with the design ins we've had over the last couple of years, we could move that northward towards 20.

So if you put those numbers together.

You can get a revenue range in that.

Anything inside that sizing, we're fully capable of shipping.

Okay.

That's helpful.

And then on the HDD side, it looks like you had some of that business push from Q4 and I'm assuming into '11.

Can you provide some color there, and in terms of the revenue guide or the range you provided for '11, can you tell us what the expected linearity is?

You're right CJ, some of the hard disk drive while it shipped in the fourth quarter, it will be recognized in revenue in the first quarter.

And hard disk drive if there is a buying pattern, they tend to put orders in the second quarter, third quarter.

But it's very hard to forecast that.

It's the least linear of our businesses.

And it's the shortest history of any product that we've got.

But our expectation is it's going to be very lumpy.

Okay.

That's helpful.

And on the SOC side, you talked about, some uncertainty in terms of which end markets are necessarily going to grow, and what the share will be, but, I guess curious on what you see in terms of product mix and what the implications are for your margins on the SOC test side excluding memory.

Any help there?

I think the mix will be somewhat similar to some prior quarters.

And we set our guidance, we tend to try to be a little conservative on the mix.

There's nothing happening in the pricing environment that should change our model at least in the short term.

That's for sure.

And we had very good mix in the fourth quarter.

Very good.

So first quarter we're assuming is not as strong.

And we also have greater hard disk drive business.

I don't think there's anything unusual about the Q4 to Q1 mix if you could see the products underneath it.

They are delivering at their normal standard margins, it's just the mix that's in the quarter.

I was actually thinking beyond Q1 for all of '11.

I know that's out a bit further, but we were wondering if you have any thoughts there.

I think the only thing significantly different.

There's two things that could be different was the more hard disk drive business.

So that's going to give us more dollars on the bottom line but lower the gross margin percent.

And lower our R&D and SG&A percent.

But more dollars on the bottom line.

The other thing on, inside SOC, there's really not a -- we don't project much of a difference in mix.

I guess the only thing in the short term that has moved of interest is that the image sensor market which has been quite subdued actually had a decent up tick here in the fourth quarter.

Any of these moves and mix actually don't have much impact to us in terms of either production capability and as Greg had talked about the margin mix.

It moves gradually.

But the margins are fairly consistent.

That's helpful.

Last question for me.

On the M&A side, you talked about acquisitions.

I'm curious whether you would consider JV partnerships as well?

Hard to say never, but it's hard for me to conceptualize how that might serve our interests.

It would have to be some unique set of circumstances that that might make sense.

Over the years, we have not seen one that made sense for Teradyne.

We consider everything, but many things get thrown off the table pretty quickly.

Thank you.

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

Thanks a lot and congrats on the great quarter.

Two questions, one, Mike, you mentioned some of the design wins that you guys have generated.

Are those new design wins coming in some of the same areas that are strong right now like power management, wireless, and micro controllers or are they in other market segments?

No, they cover the waterfront, Patrick.

Maybe one way to think about it is from a product standpoint.

If you accumulate all of the design wins that we've had this year that would total between $40 million and $50 million of identifiable sockets.

About half of those design wins come from the FLEX family.

About I think a little bit under 40% of those come from the Eagle family and a bit more than 10% have come from the 750.

That can change a little bit but that gives you some flavor from a product standpoint how things have moved.

I think the thing that's interesting in that profile is that over the two years here that we've had Eagle Test in the portfolio, this is all SOC by the way.

While we've had Eagle Test in the portfolio, we've really been gaining some steam as we have combined our sales and applications teams, especially in Asia to go after a series of accounts that Eagle didn't have the reach into with their distribution organization, so that's really starting to kick in here, and that's why the Eagle piece is as high as 35% to 40%.

Great, that's really helpful.

And one clarification on the HDD test business, I think Greg, you just said that you expected to recognize revenues in Q1.

Is there a different I guess revenue recognition policy with HDD tests from your normal semiconductor test business?

Or are these kind of the eval units that have a little bit of a longer period before revenue in that condition?

Can your just give a little color on that?

It's the latter.

There is no difference but because it's a new product, a new version of the product, we wait for acceptance.

No different than what we do with a Semi Test product.

Great.

Thanks a lot, guys.

Operator we have time for just one more question, please.

Thank you.

You have a question from the line of Tom Diffely with D.A.

Davidson.

Good morning.

Quickly, I was hoping you could give us a feel for what the utilization rates are of your tools in the field and how it's trended over the last couple of months?

Tom, it's Mike.

Things have moved down a little through the third and fourth quarter.

And by a little, I mean into the 80%s.

80% levels, 80% to 90%.

If you looked at it industry wide, and I think with the share we have, we're a fair indicator of the industry.

The bottoms of the last few cycles have been low 80%s.

This is a little bit higher than that, I put it around the mid-80%s at this point.

The buying has stabilized here and the utilization has stabilized at a slightly higher level.

Now, all these comments don't embrace the 2009 downturn.

I always talk about that separately.

That was in the 50%s obviously.

Right, yes.

Okay.

And then you talked about how you've had a nice little jump here in some OSAT business.

What about the IDMs, are they starting to ramp up as well, just on a lower level?

The IDM buying rate, everything came down in the third quarter.

But that has stabilized.

Would you expect that to improve in the first quarter?

Or OSAT driven upturn in the near term?

I think it's not distinguished OSAT to IDMs.

I think the general sense that we have is that the customer base is mobilizing here to move a little bit into a more strong position.

So I wouldn't say it's one place or the other.

Okay, and then finally in the past , you've talked about how the hard disk drive business had lower margins.

I was just kind of curious.

Is that a volume driven issue or is it more of a

It's a structural issue.

It's more based upon the level of differentiation the product has while it's significant.

We're not able to get the same margins as we are in semiconductor test, and it's the model.

And it's far lower engineering and selling costs.

So it can have the same operating profit line.

But it has less engineering.

With less engineering you generally get less of a gross margin.

Okay, that makes sense.

Thank you.

Thank you everyone for joining us, we look forward to talking to you in the coming weeks.

Take care.

This concludes the Teradyne Q4 2010 earnings conference call.

You may now disconnect.