泰瑞達 (TER) 2011 Q3 法說會逐字稿

(Operator Instructions).

Welcome to the Q3 2011 earnings conference call.

I would now like to turn the call over to today's host, Mr.

Andrew Blanchard, Vice President of Investor Relations.

Sir, you may begin your conference.

Thank you.

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 for the third quarter of 2011, as well as the outlook for the fourth quarter.

First, I would like to address several administrative issues.

The press release containing our results was sent out via Business Wire last evening and copies are available on our web site or by calling Teradyne's Corporate relations office at 978-370-2221.

This call is being simultaneously webcast at Teradyne.com.

During this call we are providing slides on the web site that may be helpful 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 November 13th .

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

We encourage you to review the Safe Harbor statement contained in the earnings release as well 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 will make reference to non-GAAP financial measures and we have posted additional information concerning these non-GAAP financial measure including reconciliation to the most directly comparable GAAP financial measure are available on our website.

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

You may want to note between now and our next conference call, Teradyne will be participating in the Piper Jaffray TMT conference on November 8th, and UBS's technology and service conference on November 17th , both in New York.

Credit Suisse 2011 technology conference in Phoenix on November 30th, and Barclays global technology conference on December 8th in San Francisco.

Now let's get on with the rest agenda.

First our CEO Mike Bradley will review the state of the Company and the industry in the third quarter and the outlook for the fourth quarter.

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

We will then answer your questions.

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

Good morning, everyone.

Thanks for being with us again today.

I would like to divide my comments today into three areas.

First, is to recap both our quarterly results and the short-term outlook.

Second, is to step back and look at how 2011 will close out with an emphasis on both our core business and on how our expanded product portfolio is performing, and third, is to frame how our acquisition of LitePoint fits into our overall strategy.

As always, Greg will give you the financial details and outlook, but he will also add some insights into our model going forward, as well as our operating flexibility and cash strategy after the LitePoint acquisition.

So let me go over how we are doing in the current market environment.

Our third and fourth quarter numbers are straight forward.

We exceeded the top end of the Q3 range and had another solid bottom line performance, but the fourth quarter continues to track down as we step through the continued pull back and semi test demand and see the normal choppiness in the HDD shipments.

We moved our Q4 guidance down in line with this order trend to $270 million to $300 million range with a 6% to 11% operating profit level.

Now, this does include LitePoint revenue but not a full quarter.

So you can see that our ongoing business has down shifted considerably since mid-year.

Greg will break the numbers out in a bit more detail in his comments.

What's happened in our main associate test mark is a sequential order drop of about 22%.

Power management and image sensors with a strong sectors at or close to their highest levels during the last year or so, followed by wireless and mobile processors.

But demand for precision analog, microcontrollers and automotive were all off their Q2 levels.

Now, I don't think there's any special significance here other than the higher caution customers have during pullbacks and most of these are, of course, tied to macro economic themes.

I mentioned last quarter that the overall market size expectation in SOC for Q4 could be about $500 million, but I would amend that at this point and put it more in the $450 million to $500 million range.

That means a sub $2 billion total market run rate as we exit the year, and that includes some reasonably hefty tooling in the PC test segment.

We will see pretty tight times in SOC for the short term.

Now, the pattern and memory test was similar in Q3 with books down 37% from the second quarter, although we saw incremental business in both Flash and high-speed memory test, the overall market is now running at a quarterly rate between $100 million, $150 million, so a sub $600 million annualized market size.

Total OSAT bookings were $55 million for the quarter which is very close to the most recent trough quarter, Q3 2010.

IDM buying in Q3 this year was actually below the level of that Q3 2010 trough.

You can see we are in a very cautionary environment.

That said, we haven't seen anything significant in the way of cancellations.

So what's on the books is truly needed for new product introductions and ramps.

In our service business provided an additional floor of support averaging about $240 million annually over the last two years.

Now, outside of semi test our defense and in circuit test businesses units are holding up quite well with increased order rates in the third quarter and they are delivering model bottom line performance due to the ongoing cost discipline.

The defense sector uncertainties of the past year are stabilizing and we expect that business to be more steady going forward, while the in circuit business will more likely follow the cycle of the overall economy.

On the spending front, we are making some selective investments in engineering and distribution that Greg talked about last quarter.

We see these as prudent and disciplined moves that are aligned with our continued drive for market share.

So let me now move to how this year will shape up in total.

Assuming the midpoint of our fourth quarter range will end the year with revenues of just over $1.4 billion and above model profits for the second year in a row.

Systems test will have its best year ever with solid results in defense and end circuit test.

Storage test will exceed the top end of our expectations and revenues as the group has successfully penetrated new customers and expanded its range of test solutions in two and a half inch hard drives.

Eagle test has performed exceptionally well and been a major component of our market share thrust in performance analog and mix signal applications.

Despite a subdued market, Nextest has made market share progress in both wafer and final test applications for DRAM and flash memory testing.

Our semi test strategy has been focused on sectors like wireless, power management, image sensors, and anything mobile, as well as on steady growth sectors like automotive and microcontroller rich consumer end products and virtually every arena across semi test and systems test, we have new products in the field or in the pipeline for 2012 introductions, which brings me finally to the most recent move in our long-term growth strategy, the acquisition of LitePoint.

As we have discussed, LitePoint gives us an extension into the fast growing wireless test market for products like SmartPhones , tablets, and the array of wireless products connected to the Internet.

What is compelling about LitePoint is how they have married a unique ATE type tester architecture to a production solution that integrates the needs of the product brand, the chip set designer, and the contract manufacturer.

LitePoint's close enough to our core to get leverage from our technology and scale, but separate enough to open up a new high growth market.

So we can concentrate on expanding their business, not being mired down by the challenges of overlapping products and markets.

We believe that it's close to a bull's eye in the potential for growth and leverage and thus a great use of our capital.

In summary, the short-term picture is one mostly of caution.

As such, we will stay disciplined but not frozen in the investments we make.

But the longer term course, I believe, holds a great deal of promise for our core test businesses and the strategic additions that we have made.

Now, let me turn it over to

Thanks, Mike and good morning, everyone.

Before I get into the details around Q3 and Q4, I will first address the three questions that I expect many of you have.

First, how does LitePoint affect our model?

Second, given the LitePoint acquisition, what is our thinking around our cash strategy and future M&A.

And, third, what are the plans if we enter a deep or prolonged downturn.

Taking these in order.

First how does LitePoint affect our model.

LitePoint is expected to add about $160 million or more in revenue next year, though its quarterly sales will be volatile as revenue is both tied to new programs and somewhat seasonal.

The model sales necessary to achieve our 15% operating profit will move from about $305 million a quarter to about $350 million with the addition of LitePoint's fixed costs and some other changes in semi test, which I will get to in a moment.

While LitePoint's fixed costs will increase the revenue required to earn our 15% model profit rate, the lean cost structure will improve gross margins of the entire Company by about two points, at that $350 million quarterly sales level.

The semi test changes include an increase of about $3 million a quarter from our earlier model, beginning in the first quarter, as we increase engineering spend on product development to drive future market share gains.

We also expect semi margins will decline about 1% over the next year, based upon our best estimate of the pricing environment.

Recall this level of model operating revenue of $350 million simply describes our gross margin and OpEx at that revenue point that delivers 15% operating profit for the Company.

It shouldn't be viewed as a cross cycle midpoint.

In fact, as you can see in the slide in the earnings call package on the web, pro forma sales over the eight quarters ending in 2011 with the pro forma addition of $40 million per quarter of LitePoint revenue is over $400 million, well above that $350 million level.

LitePoint is off to a good start for our first partial period with sales in the low $30 million range, projected in the fourth quarter.

For the full year 2011, we expect about $130 million in LitePoint sales.

Now, LitePoint will also move our cash tax rate to about 10% to 12% in 2012, up from 6% in 2011.

I will talk more about cash taxes a bit later.

The second question is, given the LitePoint acquisition, what is our thinking around our cash strategy and future M&A?

The short answer is there are cash plans remain unchanged.

We will continue to be patient and opportunistic in our buyback program so that it provides value to our long-term shareholders.

The purpose of the program remains to offset dilution from employee equity instruments.

So far, we have bought back $2.6 million shares at an average price of $11.83.

Over the period of the buyback authorization last Friday, our stock has averaged $14.63.

We have $169 million left under the buyback.

As the use of cash for future M&A will also continue with our strict criteria of earning our 15% cost of capital, and any candidate that we consider must be a very close fit with either our technology or distribution capabilities.

Clearly our overriding focus will be on our core test businesses and fully ensuring that LitePoint is a success.

And the third question, what are our plans if we enter a deep or prolonged downturn.

If this were to happen, as we said before, we would not plan to take acts to reduce head count or change our product road map or support levels.

This is because our model was designed for full cycles, including sharp downturns.

Our operating break even is set so that in a normal downturn, we'll stay profitable.

Our lean model keeps our entire organization fully focused on growth and customer support through downturns, versus having to turn our attention inward every few years to rework the cost structure.

At the extreme, a 2008/2009 or even worse scenario could actually play to our competitive advantage as we're significantly better prepared than our competitors from a cost structure or balance sheet perspective.

Now, moving to the key highlights of the third quarter.

We exceeded our sales and earnings guidance with a top line of $344 million and non-GAAP EPS of $0.34.

The higher top line was primarily due to more hard disk drive test system revenue than projected as product acceptances were achieved ahead of schedule.

The third quarter marks the seventh quarter in a row operating above our model 15% profit rate.

Our financial health matches up well against the leading front end companies, as we expect to average a 24% operating profit rate along with free cash flow of 23% of sales over the two-year period ending this calendar year.

On the market share and growth front, the key stand out this year is in hard disk drive.

This quarter our hard disk drive sales exceeded its first half of volume and brought the year-to-date hard disk drive sales past the high end of our original target of $80 million to $120 million.

This was accomplished by expanding into multiple new customers and new applications in the two and a half inch space.

This year will also set new records for our systems test group.

It's on course to achieve our highest sales and profitable levels ever.

On a semi test front, we're continuing with SOC socket wins at a pace consistent with the past.

As I mentioned last quarter, we will be on the other side of the segment shifts as strong PC test buying will temporarily depress our 2011 market share.

You will recall that last year we said that about half of our 9 point SOC gains were temporarily segment shifts favoring us and the other half were permanent.

This year the segment buying has favored our largest competitor as PC driven buying is usually high.

We believe that our normalized share basis were in the mid-40s in SOC tests.

In memory, we expect to gain a few points in the strong Flash and DRAM test portfolio.

On the balance sheet we grew cash to $1.2 billion.

Subsequent to the close we spent $514 million, including transaction costs to acquire LitePoint, net of cash and tax benefits acquired.

At year end, we expect our gross cash and marketable security balances to total about $750 million.

As a mentioned before, our cash tax rate in 2012 is moving up to 10% to 12% from about 6% in 2011.

Let me explain this.

With the addition of LitePoint our US 2012 taxable income is significantly increased.

This is because we eat through our unlimited favorable tax attributes much sooner and start to encounter the tax attributes that have annual limits on their usage.

The bottom line to all of this, though, is our favorable tax attributes will be spread over a longer time period.

We have added to our web site some additional information on taxes to help you fine tune your models.

Moving now to the demand side, semi test bookings declined 24% to $196 million.

SOC test orders were $177 million, and memory test orders were $19 million in the third quarter.

Systems test group came in at $44 million, reflecting a decline in HDD orders after very strong shipments in the third quarter.

In the third quarter, semiconductor sales were 70% of the total and the systems test group was 30%.

Our book-to-bill ratio for the third quarter was 0.7 for the overall Company, 0.81 for semiconductor tests and 0.42 for the systems test group.

At the end of the quarter, our backlog stood at $362 million of which 81% is scheduled to be shipped and recognized as revenue within the next six months.

The top line of $344 million was down $66 million or 16% sequentially from the second quarter, semi test was $241 million, down $102 million or 30%, and systems test group was $103 million, up $36 million or 53%.

Semi test product shipments decreased 36% from a quarter ago.

Within the $344 million, service revenue was $69 million, flat with the second quarter.

Semi test service revenue was $56 million.

Total Company product turns business was 21% versus 29% a quarter ago.

Semi test product turns business was 30% versus 32% a quarter ago.

Memory revenue was $26 million.

Moving down the P&L, gross margins decreased from 52% in the second quarter to 49% in the third quarter due to lower volume and a much higher mix of hard disk drive revenue.

R&D expenses were flat at $47 million or 14% of sales compares to 12% of sales in the second quarter.

SG&A expenses were $55 million or 16% of sales compared to $57 million or 14% of sales in the second quarter.

Our operating expenses in total of $102 million were down $3 million from the second quarter, driven by lower variable compensation.

Our net non-GAAP interest and other expense was zero due to gains in our marketable securities sold to fund the LitePoint acquisition recorded tax revision of $2 million and a tax rate of approximately 3% which reflects a reduction in our estimated full year cash tax rate from 7% to 6%.

The lower tax rate and gains on marketable securities that were sold contributed $0.02 to our third quarter EPS.

Cash flow from operations totaled $71 million after capital additions.

As noted in the press release, sales for the fourth quarter are expected to be between $270 million and $300 million and the non-GAAP EPS range is $0.08 to $0.16 on 202 million diluted shares.

I should add that the guidance excludes at (Inaudible), of acquired intangibles, the non cash imputed interest on the convertible debt and estimated GAAP purchase accounting charges related to the acquisition of LitePoint.

Our GAAP EPS range is a loss of $0.10 to $0.02.

The operating profit point at the mid point of our fourth quarter guidance is about 9%.

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

We expect gross margins to be 50%, R&D should be 21% to 19% and SG&A should be 22% to 20%.

Now non-GAAP net interest expense is expected to be about $2 million.

The cash tax provisions should be about $1 million.

In summary, if I step back from the short term for a moment, over the last few years our strategy has been to exercise strong financial discipline while at the same time strengthen each of our core businesses this strategy has resulted in strong cash flow and market share gains.

We have used that cash flow for a very close to the core growth, such as the Eagle and next test acquisitions and for the organic expansions into hard disk drive and high-speed memory.

We were also patiently returning capital to shareholders with our buyback program.

The four growth initiatives I just mentioned have contributed about one-third of our EPS since the beginning of 2010.

We have now added LitePoint into the fold, which has both a higher growth rate, and better margins than Teradyne with its highly differentiated product and solution set and lean cost structure.

We plan to stay on course which is to stay sharply focused on strengthening our core businesses, maintaining financial discipline, and deploying our excess cash for the highest possible returns.

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

Thanks, Greg.

We would now like to take some questions.

(Operator Instructions).

And your first question comes from the line of Stephen Chin with UBS.

Hi, thanks for taking my question.

Just first question about just short term highland flooding.

I was wondering if you could share about -- if you could see another wave of strong HDD opportunity from this disaster, perhaps.

Steven, it's Mike.

I think it's too early to tell.

I wouldn't -- you may be asking an HDD question, but we have hundreds and hundreds of systems.

We have many more semiconductor test systems in Thailand than we have storage test systems.

So if you like, I can broaden my comments to that.

Yeah, sure.

Go ahead.

Well, let's see.

Let me say just a couple of things.

One, it's too early to tell definitively what the impact will be.

Our priority is to be side by side with customers trying to assess the damage and quickly mobilize so that if they need anything, we are there both with technical support and with material.

We do, of course we are in the process of assessing where every system is and we've got some take on the status of systems.

I have think it would not be appropriate for me to break down how many systems are affected and so on, but there's a direct effect that we are looking at, systems that have been directly damaged and then any environmental effects that may reveal themselves over time.

Right now everything we know is factored in.

So the guidance has got some amount of additional short-term equipment in it to try to plug any holes for folks.

So in the short -- your question was in the short term, is there an impact?

Everything you see in our revenue plan is broken down there.

We obviously don't want to get into describing either product types or customers and how they are affected.

I think we'll leave that to those customers to delineate that.

Thanks for that, Mike.

Just to expand on, that do you think there may be perhaps a second wave of opportunity in the HDD space once the M&A is sorted out?

Well, let's see, for us, I don't know if that's a market question or -- for us -- I will do it with regard to us.

This last year, we have been able to get into penetrate a number of new accounts with a number of new applications.

So, you know, consolidations will typically -- they can have two effects.

One can be some compression in buying because there's some utilization of equipment and the other one is if there are new opportunities, you can pursue those new opportunities.

I think we are tied to the total market and how it will go now.

If you asked me that a year ago, I think the consolidation might have had a different effect, I think we were trying to design in at that point and maybe that gets slowed down by a consolidation.

I don't think there's kind of a double effect here.

We'll track, I think, more the market now than we would any specific business combination.

Got it.

That's helpful.

And just if I could switch to SOC, on the SOC side, two questions.

Are you seeing an impact from accelerated depreciation in the December quarter as what Novellus mentioned yesterday.

And second, how should we think about 2012 buy rates given the weakness at the analog customers?

And that would be --

Yeah.

Steve, this is Greg.

I will take first one on accelerated depreciation.

No, we have not heard that from our customers as a catalyst that might cause them to pull orders.

So that hasn't hit our radar screen yet.

Steven, on the buy rate, you he no, we are exiting the year at a pretty depressed rate.

If you annualize SOC, it's operating at a sub $2 billion level and in memory, it's in the low $500s million.

So in these cycles, if you are buying into -- that we are connected here at some mid cycle level, we obviously have a recovery ahead of us.

What's the magnitude of the recovery?

Well, this will be the second lowest buy rate year for those two sectors in more than ten years, and the only lower buy rate was in the downturn in 2009.

The timing of that, no one can call.

I think you see there's a chart on the web that talks about what the typical drops have been and we're close to that 50% sequential quarterly drop, which is where some of the cycled have trough but the duration on it, whenever you are here, customers are very, very conservative and that's what we are hearing.

I think it has to come back, the $2 billion to $2.5 billion SOC market I think is probably too north and memory is a little harder to call, but $600 million, $700 million in total market, I think would not be unreasonable to get back.

When is obviously everybody's question.

And your market share would be around 45% roughly?

In SOC, our market share would be -- I think that's a good number.

You remember last year we were higher than that because we had some of our sectors grow faster.

Great.

Okay.

But around 45%.

Thank you.

That's the normalized market.

We call it the normalized market share for us.

Okay.

Can we have the next question, please?

Your next question comes from the line of Wenge Yang with Citigroup.

Hi, thank you for taking my questions.

You showed a pretty good slide showing that in the last four to five cycles, the downturn lasted two to three quarter, never longer than that, even in the 2009.

So for this time, we already see two quarters of auto decline.

Do you see this downturn to behave similar to the past four or do you see it differently?

It feels to us more like the normal cycle than it does.

2009 is an outlier and I think it will remain an outlier.

If you do comparables, you look at the other 50% cycles.

Now could it go for an extra quarter?

Sure it can.

Okay.

That's helpful.

Switch to the LitePoint.

So can you discuss a little bit more about the growth opportunities of that business, and you mentioned about the $1 billion market size.

What's the growth rate in the next couple of years?

And what's the market share of LitePoint and what's the target market share coming up in the next couple of years?

Okay.

Let me give you quickly.

The LitePoint business this year will be in the $130 million roughly in that level.

So if the market is around $1 billion, $ 900 million to $1 billion, that means it's in the mid-teens, let's say 13% to 15%, 16% share.

As we have looked at this market, the end market growth is higher than the semiconductor device unit end market growth and the tester market growth is higher.

We think the tester market could grow 8% to 10% compound for the next few years.

That's the TAM we are looking for, and as Greg outlined, we think we can be in the 20% plus growth rate compounded over the next few years.

So you can go the math and see that our market share can move up here as it will grow faster than the 8% to -- we hope it will grow about twice the rate of the tester market.

Great.

That's helpful.

Thank you.

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

Hi, good morning.

Thanks so much for taking the question.

I guess a couple of questions.

First, on a competitive environment, now that we have seen a little bit of time go by with one of your old stand alone competitors integrated into a bigger Company what kind of things are you seeing that you might have not expected relative to the competitive environment relative to that?

Jim, this is Greg.

I will take that one.

You know, at this point, it still feels more as if it's the same.

We haven't seen any significant changes in either's approach and we certainly haven't seen any significant cost synergies.

So it feels a little bit more that it's the battle that we have been fighting for many years.

I suppose at some point there may be some synergies or some rationalization, but that doesn't appear to be in the foreseeable future.

Jim, I think the surprise from our end is not -- it's not a big surprise, because it looks like the same product staff and the same road maps we have been competing with and will be competing with.

I think from the analyst standpoint, the surprise is that there isn't more product rationalization in the short term, but that's the battle we are in and as we said in the past, this won't shift things quickly.

It more shifts it on the basis of the normal Socket war that transpires.

Okay.

That's helpful.

If I could ask a follow-up on the analog side.

It's pretty clear that the analog customers are under shipping their demand as they go through a little bit of an inventory draw down, which is healthy he it end of the day for your customers.

How much do you think analog shipments would need to increase before those customers could start to think about ordering again?

Any idea on kind of percentage increase that your customers would need to see there?

On their device shipments?

Correct.

No.

I don't have a picture on that.

Okay.

Maybe if I could then get a different follow-up since we couldn't fairly address that one.

On the NAND side, NAND has been very, very healthy and NAND test has been okay but I guess I might have expected more on the NAND test side in light of the health of the NAND market this year.

What are your thoughts around that?

Well, NAND has clearly been better than DRAM in the total market and for us.

You were saying that you would expect more from us or more from --

No, more from that -- I guess I would expected the NAND industry to order even more test equipment given what's been a pretty darn good year on the NAND side.

It's good for you, but I'm surprised it hasn't been even better, your customers haven't had more activity there.

Well , I don't disagree with you.

I think what happened as the device units and the bit counts go up, the testers don't go up anywhere close to that, so the productivity side of the equation is still pretty effective in how customers are using the equipment, but I think you are right to characterize that the NAND side of the equation is certainly better in the market and it's certainly been better for us, the Magnum product has been doing pretty well there.

So if you take total memory market we will gain a little bit of ground this year in share points but that's in a smaller rather than bigger

Okay.

Great.

Thanks so much again.

Your next question comes from the line of Mehdi Hosseini from SIG.

Thanks for taking my question.

Going back to the Q4 guidance I understand on the top line LitePoint will contribute somewhere in the $30 million to $35 million, can you provide more color on the margin side?

I see in your material that the non-GAAP gross margin is about 50% for Q4.

So should we assume LitePoint is at those levels?

Mehdi, this is Greg.

We are not going to break out LitePoint's gross margin.

We won't do that.

There's a lot going on when you go from any one quarter to the next.

For example, there's a lot less hard disk drive shipments in the fourth quarter.

There are other ins and outs.

So you are not going to have a trail that you can quantify LitePoint.

What I did say earlier, though, if we had a normalized mix of business, everything was normalize at the $350 million.

LitePoint would have an impact of about 2 points, versus it not being in there.

So LitePoint will obviously improve our gross margins.

Then what about on the OpEx side?

LitePoint has higher OpEx.

So the higher gross margins gets diluted a bit with their higher OpEx but the operating margins still healthier than Teradyne on average.

Then did you say for Q4, the non-GAAP operating margin guidance is 6% to 8%?

The operating profit would be 6% to 11%.

6 % to 11%?

Yes.

And 9% is sort of the midpoint.

Okay.

And then if I may just one more.

When we -- and this goes back to LitePoint again.

Sure.

There could be hundred -- I lost my notes.

There could be well over $130 million of revenue opportunity next year, there also a comment on the seasonality of that segment.

How we think about Q1 of next year, versus Q2 or Q3?

Mehdi the number was $160 million plus.

The $130 million was this year.

Sure.

Right.

Mehdi I think it would likely build and have stronger quarters in Q3, Q2 could be strong.

I think it would build through the year.

So I wouldn't look for Q1 to be a blowout quarter at all.

There's new programs that they are going after and making great progress.

I think some of those things will take off mid-year.

So it is going to be quite volatile, its level of sales.

I think it is easier to think about it as $40 million on average a quarter or better.

But it can be quite higher in any one quarter.

Similar to what we have done in describing the volatility that you see in storage test.

Then one final one.

How should we think about kind of a booking direction in Q4?

We already almost a month into the quarter, and I do understand you do have more than half of your business in the latter part of the quarter, but given the current business trends, should we assume there's another double digit decline in booking or is it less?

Mehdi Hosseini, we don't guide for the reasons you just described.

I think if you go back to that chart that shows, the prior troughs, as we said, you could see continuation at or around that level.

I don't think we actually have more visibility than that.

Thank you.

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

Yes, thanks for taking my question.

I had two of them.

Number one, Greg, you mentioned that semi business might see a 1% decline in margins because of pricing pressure.

In your comments in Q2, I think you said you saw some pricing pressure.

My question is, has the pricing gotten incrementally worse or has it stabilized that you think just a spill over in margins?

I think it stayed on that same trajectory that we talked about earlier, that the pricing environment for the last six months or there abouts has been a little bit sharper than in the past, but we have gone through these ebbs and flows many, many times and what normally happens is when you introduce your new product down the road, do you better because it has a different cost structure, but in the near term, you know, maybe we are conservative but in the near term we want to reflect on the models some of what we are sensing or seeing in some particular situations.

All right.

And then on the LitePoint side, for my understanding this is more of a focused position, that I really shot lifetime.

The lifetime is 12 to 18 months for these products, if I'm right and so along that, should we assume that LitePoint really doesn't have a service business and the mix of total revenues is going to go down next year?

That's a great question.

LitePoint service business is very small.

You are right.

So it will be different than other parts.

It will not get up to 18%, 20% being serviced.

It will be dramatically lower.

So, yes, you can model that, and the life is certainly shorter.

It's not as short as you mentioned.

I would think of it more as three years.

But it is a high rate of technological change, which obviously is good for us, because there's always new testers needed every couple of years.

For the incremental revenue from LitePoint, it wouldn't carry the same 18% to 20% level that the other business does.

That's very helpful and then just the final question.

Your break even with that LitePoint was somewhere in the 220 million run rate for the operating break even.

Yes.

What is it with LitePoint?

With LitePoint, it's about 250.

250.

All right.

Thanks very much.

Sure.

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

Yes, a couple of questions from me.

The growth that you expect from LitePoint, do you think that will come more from current customers or from new customer wins?

I think a big chunk will come from current customers in the near term, as time goes on.

More will come from new customers.

They have very strong penetration into some existing customers and we expect their new product to gain market share at existing customersfirst, but it's also being shown to some new customers but I think the traction at the existing customers is much stronger.

Okay and as far as the semi test business, do you think not asking for guidance, but do you think the business is bottomed and -- I guess I will ask that part first, and then I have a follow-up.

From the order rate, I think we are in the ballpark, plus or minus some amount, but we are in the ballpark and I think, you know, unless it's something very different going on, which we don't think there is because if we look at the segments or if you look at OSATs and ODMs, I think all these things triangulate to this level likely being around the bottom level.

So your subset at the bottom is not being driven by looking at the last five or six cycles and looking at the duration of the cycles, it's based on what your customers are telling you and where their levels of spending are?

It is a combination of all of those.

Okay.

Did you mention what the hard disk drive revenue was in the third quarter and what should we expect for that business in the fourth quarter?

We didn't mention that, other than to say that it was more in that one quarter than the entire first half of the year, and that with the third quarter revenue we're above the top end of our earlier range, which was 120.

So we are over $120 million right now and there's a fourth quarter to go.

Third quarter was a big quarter.

Fourth quarter we expect to be quite a bit less, but obviously it is a very strong year for hard disk drive based upon new customers and new applications.

Now, I should also say, we set hard disk drive up to hit model profitability of 15% when they are at $125 million of sales.

So we are obviously pleased that they are above that this year.

And we'll close out this year with a record year for hard disk drive and we'll look forward to next year in terms of any other expansions we can get.

Okay.

Final question from me is you mentioned what cash should end up the year at.

Can you just give us an idea of what the cash flow from operations is kind of in this, I guess, perhaps trough quarter?

In the trough quarter, from ops, about $60 million or so.

One thing that has a little bit of an impact on us is we still have decent amount of deferred revenue customer advances.

I know that's coming down but that balance does tend to reduce what otherwise would be our cash inflows but $60 million.

And you incorporated the reduction in the customer deposits in that $60 million?

Yes.

Okay.

Thank you.

Sure.

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

Thanks a lot.

Two-part question on LitePoint.

You mentioned the seasonality aspect what's the normal seasonality for LitePoint and the second question on LitePoint, what are the average lead or cycle times.

How quickly do you turn those products around for those customers?

So far, I think it's going to be hard to say normal, but we think it's going to have the characteristics of being more of a mid-year .

If you tried to pick the peak quarter, it's probably going to be Q2 to Q3 rather than the beginning or end of your quarters.

What was the second

Just on like the lead and the cycle times in terms of that business relative to your other businesses.

Oh, right.

This is Greg.

That's much quicker.

It's two to four weeks and those boxes have less variations of configurations.

So it's much quicker.

Okay.

So that could just increase your overall turns business for the whole Company?

It does and the turns in some of their quarters can be 90%.

Wow.

So they will be a little more difficult to forecast with their volatility, high turns business, very little service business.

So we might continue to have a little bit wider range to compensate for that.

That's very helpful.

Going to the hard disk drive business, in terms of some of the recent events that have occurred, have you made any adjustments in terms of your lead times, your inventory management to potentially respond to any, I guess, sudden changes or requests from customers because typically I believe and you can correct me if I'm wrong, it's typically over three months in terms of the lead times.

Have you made any adjustments based on potential customer requests?

Patrick, we have.

We are trying to position some material in the first quarter to be able to respond to the uncertainty.

Okay.

Great.

And final question from me in terms of the overall SOC test market if we are approaching a bottom, as you have suggested, how do you look at the overall industry SOC test market in 2012 at this point of the game?

Well, let's see.

We do two things.

We speculate only to the level of, you know, saying that we think this is a 1% plus buy rate business in a $200 billion device market.

So we have been sizing our operations here around, you know, a $2 billion level, which has certainly been the floor in the last four or five years, below the floor of the market, which has been in the $2.3 billion to $2.5 billion range.

So in a recovery year like you had in 2010, it's strong, and I think this year's numbers are actually going to end up on $2.3 billion or $2.4 billion.

But we exit the year at a $1.9 billion rate.

So we always try to size the business conservatively, meaning sizing the expense level, but we expect that market to be still in that I will call it $2.3 billion, to $2.5 billion dollars range.

I will add one thing to what Mike just said.

We sized our cost structure for $2 billion, but our inventory pipeline is often deliver revenue $2.3 billionto $2.5 billion that neighborhood.

We have sort of two plans a revenue plan based upon where the market has been and what we had some belief that it's reasonable, but we size it -- the cost structure at $2 billion to ensure healthy profitability.

Great.

Thank you.

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

Muse with Barclays Capital.

Thank you for taking my questions, it's Olga calling in for C.J.

Just following up on an earlier question regarding the pricing declines in semi test, can you talk about which areas or markets and specifically where you see the most pressure, and what that equates to on a blended basis in terms of year-over-year declines in pricing for your testers?

Olga, there's no particular segment or customer.

It's really the competitive environment that in some cases there are offensive moves and we are the aggressor and in other cases, it's defensive moves where we are moving price to protect the sector.

But if you looked at the last 10, you wouldn't see a pattern, either in customer or market segment or product.

Got it.

And then I guess on the LitePoint targeted model, and the revised model that you offered incorporating LitePoint does that include just existing OpEx structure or does that also incorporate your potential cost cutting efforts as you go through 2012.

It incorporated existing and actually added investment of LitePoint.

They need to hire some more people in Asia and other locations to achieve a higher plan than the $160 million.

So they are ramping up for more ambitious plan.

It's not significant hiring, but some hiring.

And LitePoint is doing quite well financially now.

So we would certainly be on the side of investing more in LitePoint.

Now, that's all factored into the model.

We have put that in into the model.

In truth, we might start off a little favorable to the model because all of that spending may not be in right away in the first quarter of 2012.

Got it.

And then just a clarification question on the share buybacks, you said that you had $169 million left and so far you are really targeted just offsetting the dilution.

Are you targeting a specific timing in terms of deploying the cash or is this more of an opportunistic type of monitoring the stock price?

It's the latter.

It's opportunistic.

We want to be very patient.

In prior buybacks whether it was Teradyne or others, you know, companies tend to buy back once they have a lot of cash and authorization and that often did not work with hindsight and so we would rather be very patient, very patient, you know have a conservative grid and, you pick up larger amounts as the stock goes lower and lower.

We may not target in a one year or two year period but we think over a longer term period it will be a better deal for the shareholders.

Thank you.

Thank you.

You are in next question comes from the line of Satya Kumar with Credit Suisse.

Did you give the utilization rate for your testers (Inaudible).

subcontractors?

Satya, we didn't but I can for you.

Let me put it in context from last quarter to this quarter.

I think last quarter we were describing a total utilization rate.

I think we broke it down actually we said the OSAT were in the mid to high 70s and the IDMs were in the 80s.

That's notched down lightly.

The IDMs are now in the low 80s.

They were probably in the mid-80s a quarter ago.

The sub cons are in the mid-70s at this point.

So combined, I would put us around 80 with a slight bias towards the under.

So high 70s at this point.

So it is a pretty low level.

Just the macro level, when you look at the packaging and test tree as industry as an aggregate, some of sub customers will actually raise their CapEx and they seem to be shifting a lot more of their spending to packaging, where the utilization rates seem to be a lot higher.

Do you see the mix shift happening, back in the universe where the mix is going more for packaging and the tester productivity or pricing pressure is making the testing market gross lower?

I don't think that the money is being allocated and what's left over is going to test.

I think that the test productivity has been very strong over the last few years which has allowed unit volumes to go up, and the tester capital to stay at a steady rate.

So, you know, the allocation is based upon technology changes, and what the test industry has been doing a very good job at is improving productivity and improving the useful life of systems.

Now, that doesn't work great for the size of the market, but, you know, that's why our focus has been on share gains.

Yep.

A couple of quick questions on LitePoint.

You mentioned it doesn't include a full quarter worth of sales.

I was wondering if you could say how many weeks of sales are included in LitePoint.

Is it everything after October 5th .

I will make it easier for you, we are missing about $4 million of revenue if it was a full quarter.

Okay.

And then related to LitePoint's higher growth rate, versus the market growth rate for 2012, my understanding is LitePoint's very strong in the short range wireless test market and the cellular market is obviously much bigger and with the LTE deployment, and it could be a big growth opportunity as well.

Is that part of the big area that you expect the LitePoint will get a lot stronger and if that's the case what specifically can Teradyne bring to the table that might accelerate the option rate for LitePoint in the cellular market.

Maybe you can put in context the Qualcomm licensing that you announced as well.

Satya, you are correct that the opportunity up side in the larger cellular market is one of the places that we think LitePoint has great growth potential.

What Teradyne brings to the table, frankly, we are trying to make sure that the engineering programs and the customer support, ambition at LitePoint is met and I think the bigger challenge is expanding the field organization.

So that's where we are trying to directly help.

Longer term, there's obviously some opportunity for us to cross pollinate on technology because we are in the device testing end and they are in the product testing end.

So over a longer horizon, we intend to figure out ways that we can exploit the combination or the full range of tests from semiconductor all the way to end product.

The focus right now is for us to accelerate to our larger worldwide footprint, the staffing that they need to do to get this market penetration during this next year.

All right.

Excellent, guys.

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

Your final question comes from the line of Jagadish Iyer with Piper Jaffray.

Thanks for taking my question.

Mike, you talked about mobility a lot.

So I just want to understand.

How should we think about unit growth for your testers in 2012 versus 2011 given your share position there please?

Unit growth for the --

For Teradyne testers in the mobility segment.

So you are talking about semiconductor test?

Yes.

Yes, yes.

Let's see, I'm pausing because I guess we're not looking at it in units.

We look more in terms of what's going to happen in the market segments and I can give you a picture of that if you hold just one second.

I don't do this terms of 2012, Jagadish, if that is all right we don't think, well, next year we are going to have 12% more unit volume, because then you get into well, which testers at which level of price performance, but I think the important thing was if you carved the semiconductor test SOC market into its segments, the mobility segment is a little bit under 20%.

It's about 17% of the market, and I want to go back to a baseline of 2008 because I think that's a pre downturn or a precurser.

We think that the market the projections that we have and the market is projecting is that moves up to be about 20% of the market.

So overall, that goes up to 17% over the next, you know, from 2008 to 2013.

So it has a larger piece of the pie.

I Would add automotive and microcontroller to that which is growing a bit more from that, from 9% or 13% is our projections.

What is being offset, the PC, the ship set, graphics segments are declining.

So when you factor those all in, those are the numbers we are thinking about in terms of market growth and then you layer on top of that, we think we have a very competitive position in mobility, automotive and microcontroller.

That's what together gives us the projection that we are trying to gain 1 to 2 points of market share each year in the total market.

Two quick questions.

Thank you.

Two quick questions on as a followup.

On the LitePoint acquisition, if you think the LitePoint revenues are going to increase year-over-year, not the quarter over quarter fluctuations in 2012.

Can you draw some meaningful conclusions on the (Inaudible).

revenue projector for 2012 I'm not worried about quarter to quarter, but overall for the year, please?

Well, I think it is what I had said before in terms of the tester market, we think the sizing that you should use that we would use would be in the $2.3 billion to $2.5 billion market size.

I also think it's tricky to correlate LitePoint to SOC tests because LitePoint has some set of technological discontinuities where new standards are being introduced, requiring a different tester and that opens up buying.

There's less of that in semi test.

Okay.

And one last question is that one of your customers NAND customers really talked about growth in the SDD space.

I just want to find out if there's any offering in the SDD space in the horizon, and how do you think the tester market is going to shape up for the SSD?

Thank you.

We are keeping our eye on the SSD module test area, we don't have products in this space, but we certainly have technology in the NAND tests and in the storage test area that we're watching that market to see if it grows to a substantial size that would justify the kinds of platforms that we could develop or combine to address it.

So nothing in the shore short term but obviously one that we are watching closely and we think we have a different portfolio of IP at this point to address it.

Thanks, Mike.

Thank you.

Everyone this concludes today's call.

Thank you for your interest in Teradyne and we look forward to talking with you down the road.

Thank you very much.

Thanks, everybody.

This concludes today's conference call.

You may now disconnect.