泰瑞達 (TER) 2011 Q2 法說會逐字稿

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

At this time I would like to welcome everyone to the Q2 2011 earnings conference call.

(Operator Instructions).

Thank you.

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

Andy Blanchard, Vice President of Investor Relations.

Thank you Kimberly.

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, Mick Bradley and our Chief Financial Officer, Greg Beecher.

Following our opening remarks we'll provide details of our performance for second quarter of 2011 as well as our outlook for the third quarter.

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

To view them, simply access the investor page of the site and click on 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 August 13th.

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

We encourage you to review the Safe Harbor statement contained in the earnings releases 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 non-GAAP financial measures.

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

To view them go to our investor page and click on the non-GAAP to GAAP reconciliation link.

Also, you may want to note, that between now and our next conference call Teradyne will be participating in the Morgan Stanley Semi Cap Equipment Corporate Access Day in Chicago on August 24th.

Piper Jaffery's Semi Conductor Summit in Boston on August 31st.

And the Citi Technology Conference on September 8th in New York.

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

First, our CEO Mick Bradley will review the state of the company and the industry in the second quarter and our outlook for the third quarter.

Then our CFO Greg Beecher will provide more details on our quarterly performance along with our guidance for the third 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, thank you for joining us again today.

While we posted very good results for the second quarter.

We're experiencing a similar slowdown for the Semi Conductor Test orders that are effecting other Semi Cap Equipment sectors.

As a result our third quarter guidancerange $320 million to $340 million, down 17% to 22% from Q2.

With a 15% to 17% operating profit rate an earnings per share rate of $0.22 to $0.26.

Now I won't focus too much on the second quarter as most of my comments today will be forward looking given the market correction.

But I do want to register that our model has performed exceptionally well now for six straight quarters and will continue to do so.

Number one.

Number two, that we continue to grind out socket wins in our market share objectives and number three that we're achieving important product milestones this year despite the softening demand picture.

Equally important is the fact that as the market is adjusts down as it did in the fourth quarter of last year, our bottom line operates about 10 points higher than in the past and is strongest in the test sector.

A sign of disciplined ongoing costs only sustainable when they contribute to top line growth.

Greg will take you through a detailed break down on the Q2 and Q3 numbers so I will focus my remarks today on three things.

First how we're reading this market correction.

Second, what sectors we expect to be strongest over the cycle and how we're positioned in them, and third, how some of our new products have been faring as they tackle technical and economic challenges.

What's happened in our main SOC Test market is that we've seen a down shift in demand of 28% from our combined IDM, fabless, and OSAT customers.

Orders were down in all device segments except for image sensors where some new end products drove healthy growth.

Mobile connectivity and power management applications continue to lead the way in our bookings while the biggest pullback was in automotive coming off a near record order level in the first quarter.

By our estimates this will reduce the overall SOC test market in Q3 from the $500 million to $550 million range down from about $700 million in Q2.

Now if you fold the $500 million fourth quarter into the equation you end the year with the market between $2.3 billion, and $2.4 billion, or about 5% below the average of the last five years.

And you'd have us exiting, that is the market exiting the year at a $2 billion annualized level which is 18% below that average run rate.

You recall that we've worked our way up to a normalized market share of about 45% in this space from the low 30s five or six years ago.

And we set our fixed costs to deliver model profits at $2 billion market size.

So while these quarterly swings come with little notice we built in decent shock absorbers to navigate over the rough spots.

I don't think there is anyway to precisely time these inflections, but it wouldn't be unusual to have a few quarters below the trend line followed by the usual recovery cycle.

The important thing about this market is the segment shifts occurring within the overall test cut backs.

A combination of end market growth and device complexity is resulting in higher buy rates in the mobile connectivity, automotive and micro controller segments and less in micro processor and digitally dominant chip set applications where structural tests and built-in tests continue to compress tester purchases.

Our engineering alignment with these growth segments, combined with a focus on winning critical new sockets are at the heart of our share growth over the last five or six years.

On the SOC design in front we continue to add new sockets each quarter.

Our second quarter results were quite strong with 24 new competitive sockets added with key wins in the power, analog and RF sectors.

We don't win every battle, but the aggregate annual share numbers over the last few years continue to reflect steady progress for us.

Some of these wins are tied to new high end UltraFLEX options that we introduced earlier this month at Semi Con West.

In addition to higher frequency and higher density, the new generation of instruments allow much faster time to market for communication rich devices used in smart phones, tablets and set top boxes.

In addition, our ETS 88 system from Eagle had a record quarter with a number of analog design ins and it now has an install base of over 100 systems.

You may recall that the ETS 88 is an unique entry level offering in the Eagle line that allows simultaneous test of different device types and very efficient parallel tests.

As a result it's proved to be very attractive to a variety of IDM and fabless companies in the analog sector.

In summary we're seeing a natural digestion period, an overall SOC Test capital spending, the market trendline has centered around $2.3 billion to $2.5 billion a year.

And we're entering a period where, as I said, we're running at $2 billion annualized similar to many past cycles.

More importantly we're sized to navigate through this without any disruptions.

And, finally, our longer term competitive position remains solid.

Turning now to memory test we have not seen a similar pull back as SOC as our Q2 memory bookings were roughly flat to Q1.

I will say that we could see some correction here going forward given very recent caution in buying.

But we are on track to achieve our highest market share ever this year at somewhere between 15% and 20% based upon continued buying of Magnum and UltraFLEX for flash, DRAM, and graphics DRAM chips.

The overall memory test market could come in at the mid $700 million level this year for the second year running.

As you know we've been shooting this year for revenues in the $120 million range and hope to come within striking distance of that even if things soften somewhat in the second half.

Our systems test business now was strong in the quarter with revenues up 16% to $68 million and bookings over $75 million for the second quarter in a row.

Hard disk drive led the way, as we posted record six-month bookings totals due to our expansion into multiple HDD customers over the last 12 months coupled with a broadening market including both mobile and enterprise drives.

Our HDD revenues through three-quarters should break through the $120 million which was the high end of our $80 million to $120 million targeted range entering the year.

So despite some caution in the overall HDD market we have some very good product and customer momentum underway.

In summary, we're guiding revenues down 17% to 22% from our Q2 level as main line SOC customers digest their new capacity.

We'll continue with stable or increased revenues in other areas including memory, defense, board tests, and hard disk drive with stand out growth in our ETS 88 and Neptune HDD systems.

These last two are good examples of our new market entry strategy.

As we showed in the down cycle at the end of last year, we're in a very volatile short lead time market where these swings will be the norm.

Our strategy of expanding our SOC core, extending into memory, innovating in the hard disk drive market, and maintaining structural cost discipline will serve us well as we navigate these swings.

Now let me turn it over to Greg for the broader financial perspective and the financial details.

Thanks Mike.

Good morning everyone.

Before I get into the details around Q2 and Q3 I want to address three important questions that I expect many of you are asking at this point in the cycle.

First is the current reduction in demand likely to be a major or minor reset in test or cap backs.

In other words, how deep and long are we expecting this correction to be.

Second, how will our model perform in scenarios of lower revenue or varied mix.

And, third, what measures are we taking, short and long term, to offset this lower demand.

Let me take this one by one.

First, regarding how long and deep do we expect this correction to be?

Let's first look at past recent cycles where we had three normal market corrections.

Such as the third quarters of 2006, 2007, 2010, and the one major correction of 2008, 2009.

Now from all that we've seen in terms of utilization rates, customer sentiment, SOC unit growth, market demand for our segments, this decline in SOC orders looks much like the 2006, 2007, and 2010 corrections than the 2008, 2009 major reset where severe global economic stress outweigh any semi conductor specific issues.

These short corrections typically had two quarters of sequential SOC product order decline ranging 30% to 50% peak to trough.

We've shown this graphically in the slides on the website.

Now regarding how the model performed and actions were taking, you'll recall we sought as a company to achieve our 15% model profit rate when the SOC test market is as low as $2 billion a year despite it's $2.5 billion average over the last five years.

We've also outsourced manufacturing and variabalized a significant portion of our compensation.

This gives us a very strong shock absorber to do well in normal market corrections.

We clearly demonstrate this in our last low point, the fourth quarter of 2010.

In this period we delivered a 20% profit rate with non-GAAP EPS of $0.3535.

This performance was actually better than our model due to some year-end true ups in our fringe rate and taxes, so it's better to look at our model when thinking about this upcoming third quarter.

Our Q3 guidance is tracking to our model with a very high mix of HDD revenue.

The models provided in the slide presentation on the website, we expect to deliver a 15% to 17% operating profit rate with non-GAAP EPS of $0.22 to $0.26 in the third quarter.

Add to the other actions we plan on taking, well, other than to reduce the inventory pipeline, the variable nature of our compensation naturally kicks in and lowers our operating expenses consistent with our model.

So we plan no head count reductions or road map changes as we set our model at a level that is proven to provide a very strong buffer against these market conditions.

Now, I would like to cover some of the key highlights and developments at the halfway mark of the year before I talk about the Semi Tests demand environment any further, the second quarter results and guidance for third quarter of 2011.

The key highlight of the second quarter was that we exceeded our sales and earnings guidance with a top line of $411 million and non-GAAP EPS of $0.50.

The higher top line was merely due to more hard disk drive test acceptances than projected.

This added volume along with stronger financial performance and Semi Test drove better than forecasted EPS.

As you can see from our earnings release we achieved an operating profit rate of 27% in the second quarter.

This marks the sixth quarter in a row of operating above our model 15% profit rate.

I'm also pleased to highlight our performance over the last six quarters matches up quite well against the leading semi conductor equipment suppliers.

We've averaged a 27% operating profit rate over the last six quarters along with free cash flow of 24% of sales.

We've accomplished all this by optimizing the company's model, keeping fixed costs in check, as well as steadily gaining market share.

Shifting now to market share gains the stand out share gain story this year is hard disk drive.

We expect to have nearly half of the hard disk drive test market this year, which should translate to sales somewhere over $120 million for the year, exceeding the top end of our earlier estimate.

As to SOC test shares you'll recall we gained nine points last year which was from a combination of socket wins and temporary segment shifts.

This year we expect to continue SOC socket wins at a pace consistent with the past but will likely be on the other side of segment shifts as strong PC test buying may temporarily depress our share.

I would like to add a quick thought about our longer term growth prospects.

With the industry consolidation phase now behind us I personally believe the back end will begin to look more like the front end in the future.

That is over time one clear winner who has both superior financial performance and leading market share.

While we've accomplished the financial performance part of this today by virtue of the recent combination of Advantest merging, we are no longer the total ATE market share leader.

So we see plenty of growth opportunities ahead of us in our core Semi Test markets.

These opportunities, that in addition to benefiting from the strong share we maintain in mobility applications, automotive, and consumer digital which should grow at a healthy rate.

The other quick highlight of the quarter is cash and marketable securities.

We improved these balances by $91 million this quarter to a total of $1.2 billion.

Our cash plans are unchanged from what we've outlined in the past.

And we have an approved buy back of $200 million that we've yet to buy back against.

As a quick reminder, since the beginning of 2006 we've bought back $503 million worth of stock at an average price of $13.80 and we acquired Nextest and Eagle for a total of $540 million in net cash.

We'll continually look at what is the best use of our cash for shareholders against the current alternatives and our cost of capital of 15%..

Moving now to demand side.

Semi Test bookings declined 20% to $257 million.

SOC Test Orders were $257 million and Memory Test orders were $30 million in the second quarter.

Under the SOC covers the bright spot was image sensor with a strong sequential bookings increase tied to a share gain.

On the other side of the SOC ledger, the segment with the sharpest drop off was automotive after very strong ordering in the first quarter.

Systems Test group came in at $76 million with continued strength in HDD orders tied to share gains.

In the second quarter Semi Conductor Test sales were 80% of the total the systems test group was 16% and our book to bill ratio for the second quarter was 0.81 for the over all company 0.75 for Semi Conductor Test and 1.12 for the Systems Test group.

At the end of the quarter our backlog stood at $467 million of which 83% is ready to be ship and be recognized as revenue within the next six months.

The top final (inaudible) of up $33 million or 9% sequentially from the first quarter.

Semi Test was $343 million, up $24 million or 7%.

And Systems Test group was $68 million up $9 million or 16%.

Semi Test product shipments increased 7% from a quarter ago within the $411 million.

Service revenue was $69 million and up $8 million from Q1.

Semi Tests service revenuewas $55 million.

Photo Copy products turns business was 29% versus 32% a quarter ago.

Semi Tests products turns business was 32% versus 35% a quarter ago.

Memory revenue was $39 million in the quarter.

Moving down to PL, gross margins increased from 51% in the first quarter to 52% in the second quarter due to higher volume.

R&D expenses were $47 million or 12% of sales compared to $40 million or 13% of sales in the first quarter.

SGA expenses were $57 million or 14% of sales compared to $58 million or 15% of sales in the first quarter.

Operating expenses of $105 million were down $1 million from the first quarter driven by lower than anticipated R&D spending.

Our net non-GAAP interest and other expenses was $9 million.

We recorded a tax revision of $8 million at a tax rate of approximately 8%.

We have US NOL credits that total $275 million on a pre-tax basis which will continue to benefit us well into 2013 as about 40% of our consolidated income ends up in the US.

Cash from operations totalled $80 million.

After capital additions, depreciation, and amortization was $33 million and this includes $7 million of stock based compensation, $7 million for acquired intangible asset amortization, and $3 million for the GAAP imputed debt discount.

As noted in the press, release sales for the third quarter are expected to be $320 million and $340 million in the non-GAAP EPS range is $0.22 to $0.26 on 207 million diluted shares.

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

Our GAAP EPS range is $0.15 to $0.18.

The operating profit rate of the mid-point our third guidance quarter is 16%.

Now moving to the P&L percentages for the third quarter, we expect gross margin to be about 47%, R&D should be 15%, and SGA should be between 16% and 17%.

Non-GAAP interest and expense is expected to be about $1.6 million.

And the tax provision should be about 8%.

In summary we have a resilient model.

We've got a strong balance sheet and we've got plenty of areas to further exploit for growth.

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

Thanks, Greg.

Kimberly, we would now like to take some questions.

(Operator Instructions).

Your first question comes from the line of Stephen Chin of UBS.

Thank you for taking my question.

Just one question, you mentioned a down grade of $2 billion exiting in 2011.

Is it right to assume that sales would be down Q over Q in the fourth quarter?

You're right.

I was trying to give a scenario that said if the market took a couple of quarter down turn and leveled out at that level and then obviously if our share was exactly the same as the prior quarters.

If everything went down, then we would go down.

That's helpful.

Second question, just wanted to get an idea about utilization rates, it seems that there has been cautious in the order patterns in the recent few quarters.

Any color on that.

Yes, the utilization rates our numbers would show the breakout between IDMs and OSATs would have the utilization on the OSATs breaking away here in the last couple of quarters where the OSATs would be in the mid to high 70s while the IDMs would be still in the 80s.

Got it.

I mean, do you think they would come back likely in the first of 2012 or maybe the fourth quarter.

I think if everything is linked together right, the CapX starts to move back if it got down to this $2 billion rate and started to move back up, then the OSATs tend to swing harder than CapX and then they start to get loaded and they'd move back up.

I think everything is synchronized to this buying cycle.

One last question, could you give more color on what your market share is in the mobility test market, and if you could maybe separate that and also what percentage of sales for Teradyne are for the mobility market.

This question has been asked in the past.

We don't--no one tracks the sub segments of test with the resolution that would allow us to do it.

I have to speak in kind of relative terms.

Our strongest segments would be in mobility, power management, micro controllers, our weakest segments would be in the processor, PC processor.

When I say mobility, mobile processors are obviously included in that.

With the 45% overall market share, you know, you put us north of 50%, and those certainly significantly--our market share in the PC processor space is very, very low.

Okay, thank you.

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

Good morning, guys, thank you for taking my question.

What do you think is a reasonable assumption for a normalized breakdown between Systems Tests and Semi Tests a couple of years out.

As you continue to see share gain in hard disk drive and other likely gains in other segments of Semi Test.

Jim this, is Greg.

I think over time the hard disk drive will continue to grow, but we expect Semi Tests to continue to grow as well.

What I think we're really seeing now is a very fast growth in hard disk drive from a few years ago where it will be north of 120 this year.

But this point forward, I think the percentages you get would be similar down the road because we have attractive growth plans in Semi Tests.

And hard disk drive is probably where most of our growth will be in the Systems Test group.

I don't think it will be nearly as much in the other two groups.

Staying somewhere in that 80/20, and 75/25 breakdown.

Yes.

In memory test what kinds of things have to happen in the market or with your products and with your competitor in order for you to gain additional shares than what you already have in the memory test segment.

Two things.

The first one in buying in flash has got to keep leaning towards the higher speed flash DDR flash applications.

That's where we're positioned.

That's what our strategy is to intersect that.

Secondly for the DRAM, you know, buying to get some life to it.

Those two things have to happen.

Obviously we have to win sockets and new customers.

Great.

I really appreciate it.

Thank you so much.

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

What do you think is the run rate for SOC CapX in Q3.

The run rate for CapX.

Do you mean bookings.

No, the run rate for CapX.

Yeah, I think the market will absorb--we think it's in the mid five's.

Somewhere between $500 million and $550 million.

That's all in.

That's service and product, everything.

So essentially from the $2 billion run rate in Q4 is down 5% to 10% lower than Q3.

I was trying to do--you're exactly right.

That's how I was thinking about it, just a little bit down.

Obviously it could go further, but I was trying to do round numbers that would show you what the total market in 2011 would be, and what the run rate would be, so.

Okay, switching to PC segment, you know, in light of the consolidation between Avantest and (inaudible)it looks like they're going to come up with a new strategy, 90 days post of acquisition, on what they want to do with the products road map and it does look like ultimately they probably will not go to the same customer with two different products.

Does that open up an opportunity to become a viable second source in the PC markets and are you seeing any traction or discussions perhaps in the early stages moving in that direction.

Satya, I think the broad issue in the competitive landscape with this consolidation move is whether the road maps will, in fact, change.

And I think there is a fork in the road.

One branch is that the products will, in fact, get rationalized and customers will, in some sense, be forced to switch or open up evaluations.

The other is that steady as she goes and the existing products all will have road maps that extend out in time.

So far it's the latter.

Obviously if it becomes the former, and I think in some sense for shareholders it has to become the former, then opportunities would exist.

I wouldn't just say it would be a PC opportunity.

I think across the board there could be some opportunities that open up because of the disruptions to that.

You know, to the road maps.

Lastly on the balance sheet, obviously it's over capitalized at this point, and in the past you've talked about M&As versus buybacks and you're talking about a 15% cost of capital.

If I assume that this goes to this $2 billion level we're still looking at fairly good profitability for you even on a run basis.

Led to your cost of capital function and balance sheet and settling to see why we would not be a lot more aggressive on the buy back at current levels.

I just want to hear your thoughts relative to the cost of capital where the talk is now.

The first thing I would say is it's probably not a good idea for us to say in any short-term environment what we intend to do over the next 90 days, whether it's buy back or acquisitions.

So having said that, you know, we're doing what we always said we would do.

We're going to buy back stock opportunistically, and if we can find acquisitions that are a good fit and we can grow them faster then Teradyne will do that and we've been patient all along.

We're sticking with what we said we would do, and we'll report back next quarter what activity might or might not take place in this next quarter.

All right, fair enough.

Thanks.

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

As I look at your gross margin guidance, obviously it is strong because of the mix of HDD, is it all due to SOC slowing down and HDD coming up.

Or is some of the analog power management team over the last several quarters it actually slowing down now?

This is Greg.

The vast majority, overwhelming majority, is the mix.

In our guidance.

The Semi Test business, if I go from Q2 to Q3, it is down $110 million Semi Test, Hard Disk Drive is up $30 million.

So that swing and hard disk drive had some reasonable volume in the second quarter, so there is a very high mix of Hard Disk Drive in the third quarter guidance, higher than we've had for quite some time.

So that's 95% of what is going on in the gross margin.

And then in the last six to nine months has there been any product where you've seen pricing actually increase?

Exclusive of mix, no, in other words, if we had price increases, the answer is no.

Okay, and then the final question, Mike, if you look at longer term from the newer technologies, like (inaudible) how does it impact Teradyne, can you give us thoughts.

More moves performance at wafer level is what occurs and that is not a new phenomenon.

Obviously, the other things, you have system level tests, very complex requirements with these new integrated devices, but it's one more generation of that.

What we're seeing in the tablet and mobility devices, you know, increase in RF ports, multiple cores, just the whole series of things that effect both test development and production tests.

This new introduction of UltraFlex generation of equipment was targeting that, so we've already launched that set of capability into the market, and it has had very good acceptance already.

Thanks, Mike.

Your next question comes from the line Wenge Yang of Citi.

Thank you for taking my question.

Last night it (inaudible) mentioned inventory correction should be largely over by the end of Q3, and they're actually seeing utilization rate to start to bounce back in Q4.

If that's the case, what do you think of the SOC buy rate in Q4.

Is it still tracking to the turbulent level or do you think it can move up.

You know, to be honest with you, we don't lose a lot of sleep trying to call it quite that precisely.

But I will say that the characteristics in our market in a very short lead time environment, which is what the industry is capable of now, is that in the downturns things tend to shut off quite hard.

We saw that in the third quarter last year.

We see that in this quarter, and it's across the board.

OSATs and IDMs.

You have absolutely a shift into engineering buying or new product ramp buying.

And you know, we don't have cancellations to speak of.

We have shuffling, but not a lot of pushing out.

As a result things turn on and off very quickly.

We're in a phase where things have turned off, and I think everyone kind of squeezes down so far that the next move is that they say, well, we actually need some more.

We don't know whether that will stay down, as I said, and have a lower Q4 or whether that will come back.

Either scenario I think is possible.

But in truth we don't worry about it too much because the supply line flexibility is very, very nimble for us.

This is Greg.

One thing that I'm sure you guys track is the inventory level.

So if that does lead down at a rapid pace that's good everything else being equal.

That's something worth keeping your eye on.

It's not something that we focus on given how we can respond very quickly to customers but given the roles you guys have might be a good thing to keep an eye on.

That's helpful.

I think even with all the avenues and unit growth, you're still in the single digits, and if it were assume 5% to 6% unit growth annually, what do you think is the required buy rate for SOC to support that kind of unit growth.

If I were to put a range around it I would put 1.3% to 1.5%.

This year if we take the numbers that I gave you earlier, you know, with the down slope all the way through Q4 that ends up at an annual 1.1% for SOC.

The whole year would be a comparatively low year.

But if you're modeling it, I think over a longer period of time, 1.3%to 1.5%would be a reasonable band.

That's very helpful.

The last question in terms of HDD, you mentioned about a four-year revenue tracking to the high end.

How much revenue have you shipped in the first half?And what's the number likely to be in Q3?

We shipped less than that, than the 120, but what I'll say is this, because we don't break out HDD in total as a segment.

By the time we get through third quarter we expect to be at or maybe slightly above our high-end target for the year.

Whatever we get in the fourth quarter would push us above that.

Great, thank you.

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

Thanks for taking my question.

A couple of things.

Mike, could you elaborate on the number of customers you have in HDD and what is the driver for such a sizeable growth when the market appears to be soft.

And on the DRAM side can you elaborate in the number of customers, and where do you see that number tracking into next year, and then I have a follow up.

Okay, that's a lot.

Let's see, I'm going to be intentionally vague on exact number of customers, but we turn the corner within the last 12 months into multiple customers in HDD.

That was multiplied by the applications that we were targeting, the Neptune product app.

We were extending beyond, you know, the mobile market into the enterprise market into functional test.

So we really expanded on two axis in hard disk drive.

Now, as a result of that, and you know we're in 2.2 and a half inch disk drive.

As a result we've kept very good momentum this year, as you can see, with the revenues.

The market in total is between $250 million and $300 million as a run rate, so we've really been able to take a position now much broader than we have in the past.

So the growth is really on two axis.

It's on multiple.

customers: It's on much wider application that the product now addresses.

And in DRAM we don't get into the delineation of the number of customers.

I will say that we have got products now over the last year where we got both DRAM wafer soft and final test and products and flash wafer sort and final test and we have customers in all of those segments.

Obviously our market share objective requires that we expand share inside our existing customers, but it will require that we get new customers going forward.

I can't tell that you we will announce customers as they come in, but, obviously , if we hit our market share goals it means that we're getting new

Great, and then one of the quick things on the hard disk drive, we're strong in two and a half inch hard disk drive, and there are more drives that are three and a half that are being replaced by two and a half inch hard disk drives, so that's another thing that is favoring where we're strong.

The two and a half inch hard drive has lower power and good performance and that's something that is increasing our share of market.

Great.

I have two follow-up questions for you.

A, what is the mix of product and service for Semi Test, and then last conference call you looked at a couple of acquisition opportunities and you walked away at the last minute.

With valuation appeared to be calmed down in a capital public market, are those acquisitions now looking better than compared to three months ago.

Let me give you the Semi, this is Q2 Semi revenue service.

This is product revenue is $288 million.

The service revenue is $55 million, okay.

And then--

on the valuation, I want to leave it at the level I left it earlier.

It's not constructer for investors or anybody to get any level of detail beyond what we've said earlier that we're going to look at all the alternatives, be mindful of our cost to capital, be mindful of where the stock is trading, and be mindful of what opportunities are attractive in front of us.

It all goes into our thinking, and we'll report back each quarter to what decisions we make.

What has got a higher priority, buy back or acquisition.

It depends on the cost of capital return.

It all depends.

It depends if our stock goes lower than obviously the buy back starts moving up.

And that depends what is the acquisition you're looking at.

There is no one answer.

It all depends on the exact circumstances at the time.

Thank you.

Sure.

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

Muse of Barclays Capital.

Thank you for taking my question.

The first question, when you think about this pause in overall SOC test and talking about around $2.3 billion for the yearand now there's a heavier mix for PCs, should we be looking at a lower market share, below the 46% level closer to 44%, 45%.

Yes, C.J.

I think there is a band, obviously.

I think that's fair.

If you remember last year when we hit 49% we wanted to make sure all of our investors knew that we didn't think we gained eight points of market share in one year.

We thought, and quite correctly, we explained that we were favored in share in part because of design ends which were reel and real and long term, and in part the segments we were strongest in moved up relatively more than other segments.

If you take the overall share, our expectation is that 44% to 45% range that, would be a reasonable place to be.

Okay, that's helpful.

And then on the HDD side, just to clarify, did you say you expect to revenue $120 million within the first three-quarters of this year or is that just shipments.

Revenue in the first three-quarters of this year.

Okay, and then on memory side you talked about sustaining kind of 15% to 20% market share, but that things could be pausing here.

Do we still look at an $800 million to $1 billion mark size or should we trim that.

Our guesstimates at this point would trim that.

We think $700 million to $800 million .

Okay, and then last question for me on the service side you had a nice up take on the Semi Test service up about $6 million Q on Q.

Is that sustainable on the second half of the year or are there one-time items in there.

We think all are sustainable except for $1 million which is tied to the Japan earthquake.

All over is sustainable.

Your question comes from Patrick Ho of Stifel Nicolaus.

I understand the short lead times in the industry that you guys experience now.

How quickly do you think you can respond given the fluid environment that's out there right now.

I noticed that inventory did go up a little bit, you've been maintaining a good days inventory and inventory turns, how quickly can you respond if you get late quarter orders?

We can respond very quickly, Patrick.

I don't think we're--we don't have constraints of any magnitude of being able to add slots and move the supply line up.

The corner case is that you get some very, very specialized configurations that are heavy on a particular instrument, but even at that level we try to make sure that the pipeline is able to respond.

I think the 2010 quarterly ramp history gives you some sense of how much we can move in one quarter both up and down.

That's helpful, Mike.

I know you don't want to quantify, but in terms of market share gains, which segments have you been gaining share in the SOC market.

You did mention you're strong in micro controllers and power management.

Qualitatively where are you winning the most new sockets and which market segments.

It's across the board.

I think the--you know, if you took the last couple of years and said what's been the biggest thing that shifted, I think, actually, it's been combining our distribution organization with the Eagle product line.

If you put the first bar of the parade on, that's the first bar.

It's the ability to drive their product family into regions that they had not been before, number one.

Number two is the extension of their product family down into the CTS 88 level, gets us access to much smaller customers, many are Asia based, new fabless companies and many companies at the IDM level that are attracted to the double play that the product offers in terms of the variety of devices it can test and very, very effective parallel test.

That would be the first one.

That's going into a market where some of the products that have existed in the past are long in the tooth.

The other segments have been, as we have left a couple of years introduced new next generation capability at the very high end, on the UltraFLEX, there have been very big battles there, and we've been able to win our share of those.

I would say those are the two top ones.

Thanks a lot, guys.

(Operator Instructions).

Your next question is a follow up from Krish Sankar of Bank of America Merrill Lynch.

Greg or Mike, as your HDD share remains static, is it fair for Q4 to be seasonably slow for the business?

Our HDD market share stays static, it is very healthy now.

We have trouble trying to size the fourth quarter in HDD so, at the moment it looks like there could be some shipments there, but I would not be surprise if they paused and scheduled those out.

We really don't have a good fix on the fourth quarter of what they might take.

But, seasonally, would it surprise me if they took it early in the fourth quarter, not really.

If they take it late in the fourth quarter that would surprise me.

It would have to be early in the fourth quarter for them to get productive use out of it.

Could you give us a mix of IDM and OSAT for Q2 or what you think it will be Q3.

The mix between what we call specifiers, IDMs and then the fabless companies who will buy for themselves.

In Q2 on the booking space that was 73% of the total and 27% for the OSATs.

And just for reference that was 76.24% last quarter.

So actually the OSATs held up a little bit more.

The reason for that is OSATs as you know, they're not just the surplus capacity industry.

A lot of the fabless companies use them.

So new fabless driven products held up relatively well than IDMs this quarter.

That's the breakdown.

Thank you.

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

Thank you for taking my question.

I've got a couple of them.

First on the hard disk drive business, long ago that had very low margins, and you guys had been doing cost downs.

Can you talk about how the margin has improved, and are there more improvements going toward and how would those play out.

Hi, Gus, this is Greg.

The biggest challenge for us after the first product, which was designed to meet a deadline to get the customer to accept it is that we designed it in the US.

Since then we've made the changes necessary to get a very competitive cost structure.

We're always still looking at opportunities that might be small, but we're still looking at them.

When you look at this year, 2011, we expect after three years of being below model to be at our model profit rate or a little bit better.

So we actually like the position we're in right now.

The product position.

But there's always still some fine tuning we need to do.

The gross margins are low 30%.

Now if we ship our lot in one quarter that pulls it up to the higher number, but on average it's a low 32%.

We get to 15% and sometimes more than 15% depending on the volume.

We do add substantial volume to the hit model profitability.

That's the answer to this equation.

And just with the merger of Verity and Avantest that have occurred how is the competitive dynamics of the market place marketplace changed?

What are you seeing?

What are your customers telling you?

Two things, one is obviously customers are, you know, are voicing concern about uncertainty, and that relates to whether things will change, and their biggest concern would be will the product development plans for the products that they're buying change.

That would be the number one thing.

Number two is, you know, I want to make sure, these are both very capable competitors, and any time there is a consolidation as we had with our businesses with Nextest and with Eagle, obviously, the first thing you want to do is ensure your customers that they'll get continued support.

That's what I call business as usual, the competitive landscape there is, you know, competition is making sure that they are stabilizing their customer base.

This issue about long-term uncertainty would be the main one.

That's why over the last couple of quarters we've reemphasized that when a consolidation takes place, customers don't run for the exits.

They don't make changes immediately.

That happens over time.

And I wouldn't attribute any of the changes in market share that have occurred over the last year or any of the design ends specifically to the effect of that consolidation.

That will fold itself out or roll out over a longer period of time.

Thanks so much.

Operator, we have time for one more question please.

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

Thank you for taking my question.

I just want you to reconcile, Avantest is reporting strong orders in the second quarter especially from Taiwan and I believe for memories with records flattening off in the third quarter.

So your comments that the memory test market could be lower than $800 million estimate.

I want to reconcile what are they seeing in the market that you guys aren't?

Atif.

I think their projections and the tone of their projections mirror ours.

That is while our business in memory was steady.

Theirs was strong.

That the outlook this year has a lot of uncertainty to it.

I think the tone to both are quite similar.

Good, thanks.

Great, thanks everybody.

This concludes today's call, and we look forward to talking to you through the quarter.

Thank you.

Ladies and gentlemen this concludes today's conference.

You may now disconnect.