泰瑞達 (TER) 2011 Q1 法說會逐字稿

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

At this time I would like to welcome everyone to the Q1 2011 Earnings 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)

I would now like to hand the program over to Mr.

Andrew Blanchard.

Please go ahead.

Thank you, Christy.

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

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

Following our opening remarks, we will provide details of our performance for the first quarter of 2011, as well as our outlook for the second quarter.

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

The press release containing our most recent financial results was sent out via 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 for 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 same page about 24 hours after the call ends.

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

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 the result of developments occurring after this call.

During today's call we will make reference to non-GAAP financial measures.

We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure, where available, on our website.

To view them, go to the Investor page and click on the GAAP to non-GAAP Reconciliation link.

Also, you may want to note that between now and our next conference call, Teradyne will be participating in the Credit Suisse First Boston Semicap Equipment Conference in Boston on May 11; the Bank of America/Merrill Lynch Technology Conference on June 1; and the Cowen and Company TMT conference on June 2, both in New York.

Also please note that we've removed Diagnostic Solutions from the various lines in our P&L, as this business unit was sold to SPX for $41 million in the first quarter.

Consequently, we've reported as revenue and expenses on that in one line as a discontinued operation, and our comments and comparisons hereafter will exclude these results.

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

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

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

We will then answer your questions.

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

Thanks, Andy.

Good morning everyone, and thanks for joining us today.

When we were together last quarter we had wrapped up a very good year, and were seeing strengthening demand in our Semi Test bookings after a one-quarter correction.

That momentum has continued, as we posted a $100 million increase in bookings in this quarter, with roughly $75 million from Semi Test, and about $25 million from our Systems Test Group.

I will get into some details behind those increases in a minute, but the summary is, that despite some macroeconomic headwinds, and despite the tragedy and disruption in Japan, our customers are adding capacity across virtually all of our product lines.

Now, most of what we'll talk about today with sound familiar to you, reflecting a steady course of our strategy these last couple of years.

That includes a focus on testing the silicon in high-growth consumer products, a steady hand on fixed costs, and an emphasis on new products and new markets, like hard disk drive test.

I should also note up front that despite the terrible human toll in Japan, our operations there were not severely impacted, so the 200 or so people we have there have been fully engaged with our customers through this very difficult period.

Of the 109 customer test facilities that we serve in Japan, with about 1,700 testers installed, essentially all have returned to full operating status.

Now, obviously we don't know whether any secondary effects will impact our customers in Japan, or others outside the region, but we are not altering our shipment plans in anticipation of any additional interruptions.

Greg will talk about what we have also done on the supply line side of the house to ensure that our own material flow and manufacturing schedule remains intact.

Now, getting back to the first-quarter numbers and our guidance for the second quarter, we had a solid up-tick of orders in SOC test, led principally by our IBM customers.

Mobile processors, power management, and automotive were the strongest segments of demand.

As a result, our FLEX, Magnum and Eagle SOC products led the way; while J750 products posted unit bookings just off their fourth-quarter levels.

In particular, the FLEX family had its fifth-best quarter ever, with 3 of the highest-demand quarters being posted since the beginning of 2010.

So, we continue to see 3 things in customer buying patterns.

First, the UltraFLEX is being adopted for next-generation mobile computing products, due to its instrument performance and density.

Second, the Eagle family is reaching into a wider range of emerging Asian Fabless companies; and third, the J750 often remains the market's choice in digital wafer probe and microcontroller test applications.

In each of these products, our customers can look out over a 2- or 3-year horizon and see how our instrumentation road maps align to their product plans.

This is obviously important for IBM and Fabless specifiers, but even more critical in OSAT environments, where product life expectancy is so crucial.

In memory tests, our bookings were the second-highest since combining with Nextest, and were driven principally by flat memory capacity adds.

We are not seeing much on the DRAM side right now, so the booking strength is really coming from the lower-speed test applications.

And in Systems Test, we've turned the corner with an expanded hard disk drive customer base, now placing production buys for 2.5-inch drives.

You will recall that our Neptune product is a massively parallel system, targeting mobile and enterprise drives, that will ride both PC and cloud computing growth trends.

Now, all of this brings me to our guidance for the second quarter.

Our revenue guidance will be up about $25 million in the second quarter to a $375 million to $400 million range.

That's in line with our average bookings these past 2 quarters, and with an adjustment for our sale of the automotive diagnostic units.

And it also reflects the (inaudible) recognition for new HDD customer installations will show up more heavily in the second half of the year.

Greg can break the numbers down between Semi Test and Systems Test for you in his comments.

The bottom line on Q2, though, is a sequential step up in revenues and profitability, and our sixth straight quarter operating above our model.

And, of course, our balance sheet remains strong and flexible.

As always, are demand visibility is connected to our customers' forecasts, which as you know, look out weeks, but not months.

So we can't really say much with certainty about new demand late this quarter or into Q3.

What I can tell you, though, is that the first quarter has been healthy, but well below the peak quarters of 2010.

We've started the year in SOC test without any big upsurge in OSAT buying; and while there is great uncertainty about worldwide GDP growth, unemployment, and political unrest, we see no wavering in customer new-product launches.

So whatever we see in demand this quarter and next, we feel very equipped to respond to, because we have a lot of elasticity in the supply channels and our manufacturing capacity.

And finally, I'm sure there are continuing questions about the pending consolidation in the test market, and the impact on us.

So let me say this.

First, obviously we are very pleased with the Nextest and Eagle moves we made in 2008; truly complementary products for us with solid financial performance.

Second, the effects of consolidations in our industry play off gradually, due to the execution time required to make platform transitions.

And third, but most importantly, our support strategies and our product road maps remain intact, and are very visible to our customers and prospective customers.

So we're ready to step forward at a minute's notice if customers need us, in these uncertain times.

Let me now turn it back over to Greg.

Thanks Mike, and good morning, everyone.

I'd like to first make a few comments about our financial model, and then I will recap the first-quarter results and provide guidance for the second quarter of 2011.

I am pleased to report that in the first quarter of 2011, we achieved an operating profit rate of 23%, marking the fifth quarter in a row of operating above our model 15% profit rate.

We've detailed in the past the many cost structure changes and new products that have contributed to our above-model financial performance, so I won't go into these details again.

Instead, though, I will summarize the three key drivers to give you some context before I get into further details.

First, we have optimized the Company and all functions, and maintained steady, fixed cost discipline.

Second, we are well-positioned with leading accounts that are supplying fast-growing segments, such as mobile computing, automotive, and digital consumer.

And third, we have grown market share both with Eagle and Nextest products, as well as with our FLEX, J750, and Neptune HDD test product lines.

In HDD test, I am pleased to report that we have received volume orders from multiple customers in the first quarter.

This further increases our confidence of doubling our annual HDD revenue, to between $80 million to $120 million.

We will update you more on our progress as the year unfolds.

I want to now update our model that has been in place since early 2009.

We plan to increase our engineering spending by about $2 million to $3 million a quarter, starting in the second quarter of 2011, to fuel the next wave of growth.

As a quick reference, we have averaged quarterly sales of $388 million over the last 5 quarters, and an operating profit rate of 27%.

So this is a very modest adjustment to our overall model, which you can find on our website.

There is 1 other item I would like to highlight that will likely affect us this year.

We are looking at moving our pension accounting to marked-to-market accounting, versus the past practice of smoothing losses and gains over a multi-year period.

You may have read of a few large companies that have recently done this, and there are many more looking at this now.

As you might expect, it is generally preferable for investors if the current year pension losses and gains are recorded in the current year P&L, versus smoothing them over many future periods; as it provides a better picture of the current-year performance.

If we make this change, there would be a large, one-time, non-cash accounting charge as early as next quarter, and we'd have lower quarterly operating costs of about $2 million thereafter.

This, of course, would have no impact on cash, and is not reflected in our updated model.

I should add that we fully funded our US frozen pension plan through a $45 million contribution in 2010, and we also reallocated the assets much more heavily to fixed income.

Hence, we do not expect to be making any significant further cash outlays to this US pension plan.

Shifting now for a moment to the tragic Japan natural disasters -- we have carefully looked and re-looked for impacts from this crisis.

From what we know now, we believe we have reacted where prudent, which was to place about $5 million of buffer inventory for certain components that are sourced in Japan.

We also offered additional support to our Japanese customers.

So far, we have not seen any other actions that may be needed on our part.

We will continue to monitor the situation very carefully as we learn more.

Moving now to the first quarter.

[Wiat] sales are up $377 million, and non-GAAP EPS up $0.39.

Our operating profit rate was 23%.

Again, the first quarter marks the fifth quarter in a row where we have operated above our 15% model profit rate.

Moving now to the demand side -- Semi Test bookings increased 26% to $316 million, with strengthening in mobile processing, power management and automotive devices.

Memory test orders were $31 million in the first quarter.

On the other side of the bookings ledger, Systems Test Group came in at $75 million, driven by volume HDD orders.

Moving to cash, we entered the quarter with $1.1 billion in gross cash, and $900 million in net cash, after deducting the face amount of the convert in our Japanese debt.

So far, we have not bought back any stock under our $200 million buyback program.

Let me remind you how we are thinking about cash.

We believe there will be attractive M&A opportunities where we can exploit customer or technology leverage to accelerate the growth and profitability of the acquired business.

Said more simply, the acquisition candidates would be better optimized in our hands, where we retain our strict criteria and discipline over valuation, fit, and the need to at least earn our cost of capital of 15%.

As to the approved buyback, we will continue to be opportunistic.

Now, back to the first-quarter results.

The top line of $377 million was up $67 million, or 22% sequentially from the fourth quarter.

Semi Test was $319 million, up $57 million, or 22%; and Systems Test Group was $58 million, up $10 million.

Semi Test product shipments increased 27% from a quarter ago.

Within the $377 million, service revenue was $61 million and flat with the fourth quarter.

Semi Test service revenue was $49 million.

Total Company product turns business was 32%, versus 30% a quarter ago.

Semi Test product turns business was 35%, versus 33% a quarter ago.

Memory revenue was $28.8 million in the quarter.

Moving down the P&L, gross margins decreased from 52.7% in the fourth quarter to 51% in the first quarter, primarily due to product mix.

R&D expenses were $48 million, or 13% of sales, compared to $47 million or 15% of sales in the fourth quarter.

SG&A expenses were $58 million, or 15% of sales, compared to $54 million, or 17% of sales in the fourth quarter.

Operating expenses of $106 million were up $6 million from the fourth quarter, primarily due to higher variable compensation; and the fourth quarter benefited from some true ups at the end of the year, some credits.

Our net non-GAAP interest and other expense was $2 million.

We recorded a tax provision of $5.5 million, or a tax rate of approximately 8%.

We have US NOLs and credit that total about $315 million on a pre-tax basis, which will continue to benefit us well into 2012, as about 40% of our consolidated income is in the US.

In the first quarter, Semiconductor Test sales were 85% of the total, and Systems Test Group was 15%.

Our book-to-bill ratio for the first quarter was 1.15 for the overall Company, 1.13 for Semiconductor Test, and 1.30 for Systems Test Group.

At the end of the quarter, our backlog stood at $554 million, of which 85% is scheduled to ship and be recognized as revenue within the next 6 months.

Cash used for operations totaled $3 million after capital additions.

Depreciation, amortization for the first quarter was $33 million, including $7 million of stock-based comp, $7 million for acquired intangible assets amortization, and $3 million for amortization of the GAAP-imputed debt discount.

As noted in the press release, sales for the second quarter are expected to be between $375 million and $400 million, and the non-GAAP EPS range is $0.38 to $0.44 on 209 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 $0.28 to $0.34.

The operating profit rate at the midpoint of our second quarter guidance is about 24%.

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

-- we expect gross margins to be 51% to 52%, R&D should be about 13%, and SG&A should be about 15%.

Non-GAAP net interest expense is expected to be about $2 million, and the tax provision should be about 8%.

In summary, our operating model and products are well-positioned for continued healthy financial performance, and we are strategically investing where we see greater growth.

Now, I will turn the call back over to Andy .

Thanks, Greg.

Christy, we would now like to take some questions.

(Operator Instructions)

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

Hi, thanks.

Just a bookkeeping question first.

Were there any cancellations in the backlog in the quarter?

Satya, none to speak of.

Very small, nothing different from what we've had in the past.

Got it.

In terms of the mobile processor segment, I was wondering if you were able to quantify how big that is for you now?

The strength that you are seeing in the FLEX product line -- I was wondering if you could comment if that's more unit-driven, or also you're seeing some improvement in the test times?

Recently, there has been some concern with perhaps some weakness in the mobile segments for some of the and customers.

I was wondering how you see that particular segment tracking into the second quarter?

A lot of questions there.

Let me see if I get them.

Obviously, I think in the past we have said that a chunk of our business does come from the smart phone space.

If I took tablets and added that to smart phones, the test or configurations tend to be very similar.

So, both of those are big drivers for us on a segment basis, That was the strongest segment for us in this past quarter, the wireless, mobile processor, base-band segment.

So, your question was, could you give me the test time question again?

The question was approximately could you quantify how big that segment is for you -- the wireless, base-band processor segments?

And is the improvement you are seeing more unit-driven, or also test time driven, and how do you see that outlook into the second quarter?

Breaking it down -- I'm pausing because there are many, many segments, and a lot of our testers are kind of hybrid testers that will bought to cross over different segments.

If I looked at the total market, we think that the mobile base-band part of the market is probably about 20% of the total.

And for us, if I look at it here, we have got a very good position in that market share.

So, we're well north of that.

But as a percentage of our total this quarter, it was the number one segment for us.

I can't give you the exact numbers.

We don't group them exactly the way you're describing, because of the hybrid nature of the configurations.

Okay.

(multiple speakers)

I'm sorry, Satya, go ahead again.

We were talking.

I was asking, the strength that you're seeing there, is that units or test time driven as well, and what do you see into Q2?

I think it's more unit driven than it is test time driven, number 1.

Number 2, in Q2 the short-term forecast we have would say that will be the strongest segment in the second quarter for us as well.

It will be close.

In the past, we've always had 3 to 4 driver segments for us, with the wireless/ mobile processor segment, power management and then an automotive segment, and if I added micro-controllers into that, those have tended to be the 4 driver segments for us.

But the standout in maybe 4 of the last 5, or 3 of the last 5, have certainly been in this mobile processor tablet segment, so I think that will be the case going forward, into this next quarter, short-term.

Thank you.

Yes.

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

Hi guys.

Most of the front-end companies have, in the last couple of days, talked about some push-outs, mainly from Korea and Taiwan, that have occurred anywhere from the past month to the last week or so.

Have you seen, particularly with your OSAT customers, have you seen say in the last week or 2, any sort of a weaker bookings profiles from them, or any push-outs from them, or any signs that you could see push-outs?

Thanks.

Tim, nothing in the very short-term.

Obviously we see all the same reports that you are talking about.

The back end side of this is, obviously the bookings are up so the demand is up, and I think you'd be looking for -- is there a flinch here in a quick pull-back from the increase in demand.

We haven't seen that.

So, there's nothing I'd say that is a signal of that.

Now, on the OSAT side, the OSATs this quarter for us remained pretty steady to what they were in the prior quarter.

I think we said that -- I don't know if we reported -- but the percentages this quarter were 75/25, meaning -- or, 24 for the OSATs -- and in the prior quarter they were 26, so roughly the same level.

On increased bookings, they were up a little bit, but they are really not anywhere close to what they were in the last cycle.

I think how to read that is, 1 reading is, they are certainly not over-driving; therefore, a pull-back at this moment by them would be a pull-back from a relatively base level of business, and we haven't seen that.

Got it, okay.

And then, question on cash.

Obviously you guys have been very, very straightforward about saying that are going to keep cash on hand, because there are several targets that you are sort of looking at.

And you're still not buying back stock.

What's the impediment right now to getting these deals done?

Is it a price issue?

Is it a timing issue?

Because I think the street and many investors want to see something done with that cash.

Thanks.

Yes, this is Greg.

We look at a lot of opportunities and we tend to narrow it down to 1 - 2, which is over perhaps a 12-month period, and the 1 - 2 that we think would be a good fit and could do very well inside Teradyne on [inaudible] stock based upon valuation.

Generally, we believe that those situations may come back alive, as the other parties get more information as to what a reasonable valuation is.

So, It's a valuation hurdle has been the thing that has not enabled us to bring a transaction to closure yet.

Perfect.

Thanks a lot.

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

I had a couple of questions.

Can you tell me the Q2 guidance, directionally, your SOC memory HDD sales?

Sure.

This is Greg.

We can do SOC and memory and we put HDD in with our systems test business, so we can break it down that way, Krish.

Okay.

Okay, let me do Semi Test first.

Semi Test is certainly up from the first and second quarter.

They were up $30 million, in that neighborhood.

And Systems Test Group was closer to being flat after a healthy first quarter.

Well, we broke the bookings down.

Was this bookings or sales?

(multiple speakers) sales.

Yes.

Okay.

All right.

How big do you think is the SOC market this year?

I'm just trying to do a quick backup on calculation.

Looking at your first-half SOC run rate it seems like a 50% market share associated under slowdown in the second half of this year?

Yes.

We put on the website this run chart that shows you that the monthly moving average monthly booked-to-bill in each of the segments.

I think it's in one of the early pages, on it.

The projections for the market that we get from the outside are anywhere between $2.4 billion and $2.8 billion, so that would be in the same ballpark that 2010 was.

The size of the market in the first quarter is a little bit north of $600 million, we think.

So, it's at a run rate, it's at the low end of that $6.4 billion, maybe a little bit above -- I said $6.4 billion -- $2.4 billion mark.

The other thing is, you said 50% market share, that's a little bit generous to us.

Last year, I know we came out to about 49%.

I think we said in the last call, we certainly have said to investor discussions over the last 6 months, we think our running rate market share is in the mid-40s.

It was the low 40s in 2009 and 2010.

We think that's checked up to maybe the mid-40, 44%, 45% level.

Why is there a difference?

Because we had very strong segment-buying patterns that favored us last year, but we think sustainably in the 45% level.

So, when we put all that math together, we think the first quarter is running slightly above $2.4 billion range, but not at the $2.8 billion rate.

That will give you a buy rate, by the way, of anywhere between 1.2% and 1.4%, compared to 1.4% in all of 2010.

That is very helpful.

And then a final question, with 2 of your large analog customers merging, can you just help us understand what it means to Teradyne and what it means for the opportunity down the road?

Thank you.

We don't think it has a big impact.

Obviously, in the medium-term, you would say there could be an opportunity there for them to optimize the utilization of their installed base, so, I think anyone supplying for them would have, in the medium term, some impact.

We tend to have a footprint in many, many, other customers because of the market share position we have.

So, we don't think there's a likelihood of a big shift one way or the other, either towards or away from us.

We think the equipment we have is a broad install base in those customers.

So.

I guess the only significant thing would be, naturally, when companies combine, they really reassess their equipment, so there could be a pause in the short-term, then a rationalization in the mid-term, which is measured in quarters, and then they're back on the running rate that they have been in the past.

Thank you.

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

Good morning.

Thanks so much for taking the question.

First, another one on the buy-back.

Can you not do a buy-back before you do the M&A deal?

Is there some sort of legal issue there that if you are engaged in a certain level of M&A discussion, you can't be buying back your own stock, or is it more just you want to see the size of the deal, and what kind of cash you need before you'll put the $200 million to work?

Jim, this is Greg.

It's the latter.

We would only have a problem doing a buy-back if we got far enough along with the party that the deal is deemed to be probable, and that's generally when you have a signed agreement of some sort, and you're deep into diligence.

So, the no buy-back this quarter on the authorization was simply a function then of--

We want to be opportunistic, and we think it's just not a good time for us to buy, and we see some attractive opportunities, and I don't believe they've been fully brought to closure.

I do think when we are in this terrain there is often discussions that we get close, then they break down.

Three months later we get back together, we get closer, they break down, and it might be the third time we get back together we can pull it off.

So, there is still lingering discussions going on behind the scenes, so I want to see how those opportunities pan out.

Okay.

Again, just thinking about the order number versus the sales guidance.

I understand that some of the orders were for longer-dated hard disk drive orders that will ship later in 2011, but if I just look at the Semi Test orders they were up significantly.

And again, I understand your averaging the Semi Test orders over the last two-quarter period to get sort of a baseline of what you think the semi test sales are going to be.

But is that how it works in actuality?

Aren't the shipments -- haven't we really shipped most of the orders for Semi Test, the lower orders that we saw a couple quarters ago now?

Or are some of those Semi Test orders taking longer to ship her some reason?

It's also a chunk of service that gets booked, Jim, in fourth quarter/first quarter, and that service tends to get recognized over a four-quarter period.

So, is that the driving force?

I think it would be the 1 single thing that would help reconcile what you just highlighted.

Okay, great.

I appreciate it.

Thank you.

Your next question comes from the line of Stephen Chen with UBS.

Hello, thanks for taking my question this is Mahavia Sangri for Stephen Chen.

First question on OSATs.

Greg, you mentioned that OSAT bookings and orders were in the same range as 1Q.

I was wondering if you could give some color on utilization rates at your OSATs?

Also, what do you think the OSAT CapEx will be, it will be more first half loaded, or second half, given you're seeing not increased level of orders in the second quarter as you might have expected?

Stephen, the utilization rates, I don't have it OSAT versus IDMs.

In total, the total utilization rates now are -- the industry tracks now around the 90% level.

I think the interesting thing on the utilization is that the bottom point that this cycle had was above 85%, and normally the bottoming point is closer to 80%, sometimes below 80%.

So, utilizations have trended up since the third and fourth quarter, they are now in the 90% plus level for us.

I believe that's true across the board.

We don't see a big differential across OSATs versus IDM's.

The CapEx for the OSATs -- revenue forecasts are going up for the OSATs, so one would expect that their utilization will go up and their CapEx will increase.

But, of anything, they are the shortest fuse, the shortest leadtime customers we have.

So, it's pretty hard to predict what they will do.

I will say to you that in the short-term, meaning between Q1 and Q2, the very short-term visibility there doesn't say that we are going to see a big difference in the OSAT demand.

You put all of that together and say that if there's going to be a CapEx increase, then I guess you put it into the second half of the year.

But, so far through the first 6 months we think they'll be pretty stable, around the level that they were in the first quarter.

That's helpful, thanks.

Second question is on hard disk drives.

I just wanted to get an idea about, do you still think the hard disk drive opportunity is as big as you originally expected, given the recent 2 big acquisitions in this space?

Thank you.

Actually, we're -- the picture is brightening, from our perspective.

Why?

Number 1, the unit volumes on the 2.5 inch hard disk drives have continued to increase, and the test times have continued to increase as densities increase on the drives.

So, unit volumes of 2.5-inch last year exceeded the 3.5-inch volumes.

Number 2, growth will continue.

The forecasts that we have and that we see from our customers say that those will continue as 3.5-inch now has turned over and start to decline.

So, the sweet spot has now moved into the 2.5-inch space.

So, that's a plus.

Number 2, the expansion of our position with multiple customers now, is a plus.

As you know, in the last 2 years we have been -- we have had a very narrow customer base.

That has opened up now.

Last year we talked about some engineering system installations.

We've now moved into production buying from multiple customers.

Same kind of question.

What will consolidation do there?

In the short-term, consolidation is not having an impact, but, obviously, as companies consolidate, they assess what they are installed base is.

In the short-term, that hasn't changed any of the trajectory of the adoption of the Neptune product for us.

But, obviously, it will have some effect as the customers who consolidate.

But we will come out of that with multiple customers, so, that is a good picture for us.

So, actually, we feel better and more optimistic about that space.

Having said that, I guess I should reaffirm the guidance we gave in this business.

We said we thought we would be between $80 million and $120 million this year, and I think we feel very good about that projection.

Just to follow.

Can we assume that you have a higher share at 2.5-inch?

Our share in higher -- we only supply 2.5-inch, so relative to our total prefer, it's all 2.5-inch.

We believe that we're gaining share in the 2.5-inch space because of the growth that -- if we hit this $80 million-$120 million plan, which we feel very good about at this point based on the backlog, we're quite sure that we'll gain share this year.

Thank you.

And your next question comes from the line of C.J.

Muse with Barclays Capital.

Thank you for taking my question.

First question on the HDD side, you alluded to in your prepared remarks shipments in Q2 that wouldn't be recognized until Q3/Q4.

Can you share what the amount of that is?

Let me just step back.

The HDD revenue in the first half of the year is in the mid-$20 millions per quarter.

In the third quarter, we'd expect it to be higher.

I don't want to quantify that now, because there's a bunch of details in terms of what gets accepted when, but it would be higher than the run rate of about $25 million that we're seeing in the first and second quarter.

Okay, that's helpful.

On the memory front, I believe that you have been on record thinking about $150 million - $200 million range.

Has that changed?

And if you could talk on both the NAND and the DRAM side, particularly given the strength you're saying in the NAND side.

C.J., the market size this year, if you look at that run rate chart, it only shows 3 months of 2011.

You get a little depressed, because it's gone down, and it's starting to pick itself up, but again it's a very, very low monthly level.

The projections from the outside say that could be anywhere in total from $700 million - $900 million this year, obviously well south of the $1.5 billion - $1.8 billion that it was four years ago.

Our objective this year is to get ourselves into a position where we have got -- we are shooting to get to about a 20% market share.

That's an ambition that would take us up from about the 15% level that we're at right now.

You do all the math, and that's says we could be anywhere from -- let's say $100 million-- if we hit that, that's $120 million to $180 million.

So that would be a good accomplishment for us.

Obviously the disappointing thing here is that the size of the market isn't where it has been in the past, and that really is the biggest headwind we're winning into.

You had a question between, about NAND and DRAM, was that?

Yes, it sounds like NAND is working very well for you guys, and I know that's a plus given the higher margins there.

So, I'm curious if there is any color you can offer there, and then on the DRAM side, when you think the high speed memory will come into vogue, and you'll see a pickup in that business?

Yes, the NAND side is really what's driving our business.

We've got the Magnum product for Flash and for low-speed Wafer Pro for DRAM.

Over the last 6 months, we've had business in both of those sectors, but the current emphasis is on Flash.

Virtually all of the business in that space for us has been on that side.

That's a plus from the standpoint of what our share is in that sector.

On the DRAM side, and I'm a bit of a broken record, it has been very, very slow.

The final test high-speed testing capacity expansion has been pretty anemic.

We are positioned to get some of that when it does turn on.

At some point I'm going to not sound very credible if I say it's coming.

Our hope is that contributes some in the second half of the year.

We think it will do some.

I honestly can't say how much.

But if you wrap it all together, it would be a piece of this hundred, what I would say, if the market is $700 million - $900 million, the $140 million, or 20% level.

Thanks, that makes sense.

Two last questions for me.

The first one, your service for systems test came in at about $12 million, about anywhere from $6 million - $8 million below what you did run rate-wise in 2010.

How should we think about that in June and beyond?

Let me make sure I have that one again.

Say that again, C.J.?

I thought you said your overall service revenues of $61 million, and that you did $49 million for Semi Test, so $12 million Systems Testing versus $20 million in the prior quarter.

Okay the $20 million had DS in it.

Our Diagnostic Solutions business is basically a service business.

So, we've stripped them out.

But it's also, there's not a smooth, on a bookings side for service.

Annual contracts, I think, are more heavily distributed in Q4 typically, than in Q1.

So, I think that's the other part of the explanation.

Are you talking about revenue or bookings?

No sir, I'm talking about revenues.

The important question is on system test service, how should we model that prospectively?

Yes, got it.

It should be $12 million a quarter, and in truth, about $10 million is taken out from what used to be there, because we've sold our Diagnostic Solutions business, which was largely a service-based business.

Okay, great, and then final question.

You talked about higher R&D, and I guess the question there, is that over just a period of time, or is that a permanent change to your business model?

We are going to update our model once a year.

I would assume that will be in our model for the full year of 2011.

At the end of 2011, we will re-evaluate our model to see what makes sense then.

But we do see good opportunities for the growth, some in hard disk drive, by the way.

We've had good success there.

Some other areas that are very close to our core, we can get very good leverage.

Okay.

Thank you.

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

Just a couple of clarification questions.

Did you mention what your service bookings were?

If you could break out Semi Test in both product and service, that would be great.

Okay.

So, first quarter bookings -- and you want service, correct?

Yes.

Okay.

Semi Test was $71 million, Systems Test Group was $8.3 million, and again, it excludes the automotive diagnostics business, so it's much lower than it would be otherwise.

In total, our bookings were $79.2 million.

Okay.

Just going forward, you mentioned an area of strength is the mobile processor area.

Could you talk about, in the past you had 4 drivers.

Which ones will be the areas of strength, besides the mobile processor, going forward?

I think, the pattern will be pretty consistent with what it has been.

It would be -- that first, mobile processors, wireless -- Power Management has been and will be second strongest, typically second or third.

Then, it's a bit of a horse race.

Micro controllers and other logic, like Wafer Pro Logic, where the 750 is strong, tends to be in the next tier.

And then, it kind of a flattens out into precision analog, linear, image sensor, automotive, those things that in that third tier.

But the 3 top ones would be the mobile processors, the wireless applications, Power Management, and Microcontroller.

Okay.

And on the hard disk drive area , you talked multiple customers.

I guess I'm just trying to figure out, does that mean you've gone from 1 customer to 2 customers, or is there more than 2 customers at this

There's more than 2 customers.

Okay, that's it for me.

Thanks a lot

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

Thanks for taking my question.

I have a couple of follow-up.

Mike, your Semi Test system booking was up 20% on a sequential basis to $289 million off of rather low levels in the second half of last year, it peaked at $411million Q2 of last year.

So, given the kind of correction that happened in the Semi Test in the second half of last year, do you think that going forward you could hit the $400-plus million per quarter Semi Test booking?

Mehdi, we certainly could.

I hope we will.

I am being a little bit flip with you.

We base this -- quarterly trends are really a function of this overall CapEx rate.

I think the way I've always start on this is to say, how are you sizing the Company?

And in our core business and SOC test , if you remember over the last couple of years, we were on the conservative side of sizing the market, and sizing our R&D around a $2 billion rate.

In 2009 and 2010, that was the average size of the market.

In 2010 and 2011, it looks as if the average size of the market is closer to the $2.5 billion level.

So, really, that's the place to start.

Is true north that the market run rate going forward is going to be $2.2 million, $2.3 million, $2.4 million or $2.5 million, or north of that?

So, the $400 million is a function of that size and then our market share.

I think it's fair in your models to put us in market share around 45%, and then you have to take whatever you think and whatever the market is telling us about the overall CapEx rate.

And right now, I think that this range of $2.4 million - $2.8 million is not a bad place to be positioning it .

And therefore the math all falls out from that.

If it slows down significantly, then it has to pick back up, and the peaks -- the $400 million peaks -- come in those peak quarters when you're getting back on the trend line of the overall

Okay.

The math is not complicated, right?

It's just a matter of drawing the curves as to when the peaks and valleys are, but really it's driven by what the total market is and what our share is.

Sure.

And given those kind of assumptions for the Semi Test system, what about the services component?

Should we also assume that's going to be about a $200 million business per year?

The service business for Semi Test, that probably would be a little bit bigger.

Our service business in total is about $60 million, so for semi, it's about $50 million.

So, yes, I guess $200 million is probably about right.

That's correct.

And then moving on to the topic of the cash, which I think given the cash from operations for the Q1, which is what, about 5% operating cash margin compared to last year that it came out about 30% for the year.

The level of disappointment has started down 10% - 15% some of the front-end equipment companies may be out there buying back shares, but you are approaching the cash situation differently.

You want to go out and secure future growth.

So, if you could provide more color as to how we should think about, the way you think about acquisitions.

There is a dilution factor coming in.

It may be more prudent to go and use the cash for acquisition, but there could be some near-term impact to the bottom line.

Are these concerns valid?

Help us better understand how we should think about it.

Okay, I will start where you started.

The first quarter low cash generation is simply due to the nature of variable compensation and profit sharing, and some of our foreign taxes all get paid in the first quarter.

So, first quarter is always our lowest cash generation period.

There's nothing to be read into that.

That's just the way the first quarter has always worked.

In terms of how we are thinking about cash, I think we have been quite consistent that there are some good opportunities that we have identified.

We simply can't get to the right valuation.

Maybe we can in the next 3, 6, or 9 months, and if we are able to do that, I think that would be a much better deal for our investors than buying shares back.

We bought $0.5 billion in shares back several years ago, and I don't think that improved the Company in any meaningful way.

Obviously, if the stock for some unknown reason became more attractive, we would obviously make an opportunistic buy-back.

We do have an authorization for $200 million to offset dilution from employee equity instruments.

And our cash strategy is not cast in concrete forever.

This is just how we want to approach it now -- offset dilution, be opportunistic.

So, I have a bias for buying companies that could fit and be optimized in Teradyne better than on their on.

But we can't overpay, and that's what slows down what otherwise could be some more exciting news.

One quick follow-up regarding the model.

Early on, you said you update the model once a year.

Does that mean that what you highlighted last year is going to hold through Q4 of this year?

And no change?

I would expect so.

Okay, thank you.

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

Thanks a lot.

You gave a little bit of color on the HDD test revenues and the trends over this year, but in general what is the typical turnaround time between when you receive the order, and revenue recognition for those systems?

Let's put some more passive qualification period, because otherwise it could be a nine-month period.

But once we get past qualification and we get an order, there is still another evaluation, so net-net it's probably 6 months.

Okay, so it's obviously a little bit longer than the core Semi Test --

Correct

-- turnaround time.

Right.

But then once we are through the first acceptances with a new product, new customer, then it goes back to a normal recognition and it will look like our other businesses.

Okay, got you.

That's really helpful.

And maybe just on an apples-to-apples basis, and it doesn't have to be an exact number, but could give what the automotive diagnostics business could have contributed to revenues in the June quarter, just so we have a clear apples-to-apples at least between March and June?

Okay, the June quarter?

In 2011?

Yes, 2011, Yes.

Yes, I'll give you June of last year, because I don't have their books any more.

Okay.

June of last year was $9.5 million in revenue, and the PBIT was break even.

All right.

Finally, Mike, maybe just to go back to the memory test side of things for a second.

How sustainable do you believe the current NAND Flash test buying trends are.

Obviously we see that the overall environment seems to be still relatively healthy based on some of the consumer electronic devices that continue to consume NAND.

What's your take on the test buy rates and the sustainability for you guys, and then maybe the whole segment as a whole?

I think for this year, the trend will be much heavier Flash component than a DRAM component in that total market, whether the market ends up at $600 million or $900 million.

I think that trend for the short-term is certainly what we are expecting.

Beyond that, I think there are a variety of forecasts on it.

But our position with the Magnum, actually -- it's favorable for us because we have a bigger footprint on the Flash side of the business than we do on the DRAM side of the business.

And maybe just a final follow-up off of that comment.

Do you believe some of your growth with Magnum is due not only to market conditions, but also potential share gains?

Yes.

Maybe it was 1 or 2 quarters we talked about extending the Magnum into the DRAM wafer probe segment.

So, the position in Flash has been growing gradually over the years, even before Nextest was part of us.

And the expansion into the low-speed DRAM probe sector is what gives us some additional growth.

Obviously that has to be resuscitated and be a little bit stronger than it has been for us to get meaningful share.

But when you wrap all of that together, that's what's driving us hopefully from the teens in market share up to the 20% level this year.

Great, thanks a lot guys.

And operator, we have time for just one more call please.

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

We are not hearing Atif.

Perhaps his line is on mute?

Okay.

Atif, are you there?

Apparently not.

His line is open.

Hi, can you hear me?

Yes, now we're fine.

My question is, I am a bit surprised at the test utilization number of 90% that you are talking about.

You've still guided to 70% test utilization for second quarter, and 1Q at 75%.

Is it something you are starting to see with test utilization that's starting to come down, and maybe you can explain the discrepancy between what [Bill] is saying and what you are seeing?

Well, it's a mixed bag in difference sub-prompts, and it can shift pretty dramatically based upon the orders that they get.

If you look at the outside measurements of utilization, it's clearly in the 80% up to the 90% level and it's trended up from this trough, which was around 85%.

So, it was a high trough, and it has been moving up over the last couple of months.

Now, I think the thing that supports overall reasonably high utilization in our overall installed base is that the bookings growth has been strong.

So, there is capacity being added at a pretty healthy rate.

The run rate in the business we think at $600 million plus in the first quarter in shipments would suggest the $2.4 billion, $2.5 billion market level.

So, I think all of that says that across the world, the install base utilization is high.

Having said that, the fact that our OSAT bookings have remained stable at 25% - 24%, would suggest that in the OSAT sector that could be lower .

Got it.

And then another OSAT, Power Tech, they are actually raising the CapEx this year for DRAM DDR3 testing.

Not by a lot, but at least they are raising it.

I am curious to know, is you status still a dual source kind of status for DRAM testing, and why aren't you seeing it in your DRAM testing bookings?

Well, we are not into the entire market, and the customers that we have in DRAM final test have been using, as we talked before, have been really been able to get productivity and adapted the systems so they can test the current speed grades of the DRAM products, essentially with a lot of their existing install base.

So, we're not seeing as much business there as you would get if we were populated across the entire market.

But, that's why it's an opportunity that's in the future for us, rather than baked into the numbers that we have reported.

Okay.

Operator, thank you, and everyone, I appreciate you joining.

Please call a few questions.

We look forward to talking you in the next couple of months.

Thank you.

This concludes today's conference call.

You may now disconnect.