Teradyne, Inc. (TER) Q3 2007 Earnings Report, Transcript and Summary

Good morning. My name is Anisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Third Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Newman, you may begin your conference.

Thank you, Anisa. Good morning everyone and welcome to our discussion of Teradyne's most recent financial results. I am joined this morning by our Chief Executive Officer, Mike Bradley; and our Chief Financial Officer, Greg Beecher. Following our opening remarks, we'll provide you with details of our performance for the third quarter 2007 and our outlook for the fourth quarter. First, however, I'd like to address some administrative issues. The press release containing our most recent financial result was sent out over Business Wire yesterday evening, it is available on our website or by calling Teradyne's corporate relations office at 978-370-2221. This call is being simultaneously webcast over our website at www.teradyne.com. Note that during this call, we are providing some slides on our website that will summarize and reinforce some of the highlights. They may be helpful to you in following the discussion. To view them simply access the Investor portion of our site and click on Live Webcast followed by Click Here for webcast. In addition replay to this call we will be available starting around noon today Eastern Time, these will be available along with the slides through the 1st of November. The matters that we discuss today may include forward-looking statements of our events or the future financial performance of the Company. Such statements involve risks and uncertainties. Actual results can differ materially from such forward-looking statements. Some of those risks and uncertainties are detailed in our press release and our filings with the SEC. Additionally, those forward-looking statements including guidance are made as of today and we do not take any obligation to update them. Investor should note that only Mike Bradley, Greg Beecher and I are authorized to provide company guidance. During today's call we will make reference to non-GAAP financial measures. We have posted a reconciliation of those measures to the most directly comparable GAAP financial measure on our website. To view them, go to the Investor portion of our website and click on the GAAP to non-GAAP Reconciliation link. Also you may want to note that between now and our conference call Teradyne will participate in the Credit Suisse Technology Conference in Phoenix on November 27th to 29th, the Lehman Brothers Global Technology Conference in San Francisco on December 5th to 7th, the San Green Securities Luncheon in Boston on December 10th and the San Green Securities Luncheon in New York on December 13th. Now, let's get down with the rest of the agenda. First, our CEO, Mike Bradley will review the status of the company and the industry in the third quarter of 2007 and will provide guidance for Q4. Then our Vice President and Chief Financial Officer, Greg Beecher will provide more detail on our financial performance for the third quarter and our guidance for Q4. We will then answer your questions. For scheduling purposes, you should note that we intend to end this call after one hour. Mike?

Thanks Tom. Good morning everybody; thanks for joining us today. I'd like to cover three topics with you today. The first is what's behind the slowdown in SOC test orders these last few months, and are these recent events signaling a fundamental change in test demand and CapEx of the future? Second, what are the implications for our revenue projections and market share and third what progress are we making on new products and on our financial goals for the future. As always my comments on new product momentum, in those comments I want to elaborate on any unannounced new products until they are in use at customers. On the surface to slowdown in orders in Q3 was somewhat unusual as the SOC market normally runs about a six quarter up cycle after a trough. In this case, the market is seeing a pull back after only two quarters of recovery. In fact, the industry has had somewhat similar digestion pauses in the past, but they've tended to be muted as they have occurred across quarterly boundaries. The more central issue is that this year, the main driver of our industry, semiconductor growth, will be off significantly from the growth rates it's seen in recent years. In fact, 2007 SOC semiconductor revenue and unit growth rates will be lower this year than any periods since 2002. Revenue growth is forecasted to be only 4%, that's far lower than the 7% to 19% annual growth rates of last four years. And unit increases will be at a six-year low at approximately 7%, far off the 10% to 18% growth rates over the last five years. Combining that with uncertainty entering 2008 and you have a backend environment that is sensitive to over expansion is pressing utilization very, very hard and is expecting and getting for the most part very fast deliveries. All of this combines for continued climate of very, very short-term visibility. But the important question that underlies all of this is does the current set of events signal a more fundamental shift in semiconductor test demand going forward? My view is no. It's not likely that we are seeing a step function change in the tester demand trend line. Having said that, we are in a low growth market and for us requires continued share shifts and new market expansion to satisfy our overall growth objectives. But let me comment on what I see as the forces underlying this question of the overall market trajectory in growth rates. On one side of the debate is what I call the productivity camp. Central themes here are parallel test, high throughput architecture, small footprints, multi-use flexible systems and high up time. All of these compress the market for testers. But there is another camp or set of countervailing forces that push in the opposite direction; device unit growth, relentless integration of devices, system-in-package architectures and subtle fault mechanisms are exerting strong upward pressure for more testing. Even parallel test has a price, as system configurations require added cost to expand site counts. My view is that this irresistible force of productivity in the immovable object of complexity in unit growth move very gradually. You can look back at the list of productivity disruptors like CMOS, designed for test, built in self test, per-pin tester resources and so on to see the last generations of productivity enablers. And to conclude that they helped control the rate of tester growth, but did not have a step function impact. Having said all this, the rate of growth in the SOC tester space is in low single-digits as we've discussed before, whether that's 3% or 4% or even zero, we know that it won't yield sufficient growth to meet our aspirations. Hence our three-pronged strategy of gaining share, internal productivity initiatives and investment into adjacent markets where we can leverage our core technology. Now moving back to the current climate, there is another important issue for our investors. That is what's happening in market share right now. Put bluntly, is our 16% sequential drop in orders in semi fab indicating a loss of market share? The answer is no. For us, the facts are as follows: First, last year in an up cycle, we grew revenue 34% while the overall market grew 22%, so we gained share. This data of course is publicly available. Second, in the first six months of this year, the market declined 18% from the prior six months and we declined 11%. So we gained some more ground in the down cycle. And third, in 2006, we added about a $100 million in new design wins and we followed that up with about $16 million more so far this year. So we are in good standing in the last 18 months, where market data is available and our internal score card of new business. I know on many of these conference calls or discussion about potentially large share shifting events, these come infrequently and most of this terrain is made up of small socket wins that blossom over time. Hence our focus on fanning out the FLEX and 750 products into more parts of our customers technology centers and winning new socket opportunities. Now, three areas of success for us have come this year in power management, digital TV and baseband applications. In all three, our instrumentation portfolio combined with high parallelism have been the key differentiators. Looking forward, as I've said the tester demand environment remains cloudy. Despite high sustained utilization and backend equipment, we are in a short notice environment for orders. On this call last quarter, I commented on this and others in our sector reinforced it. And it was consistently voiced by customers in my meetings with them in Asia last month. As such, we are projecting a revenue range of between $250 million and $275 million for the fourth quarter and EPS of $0.04 to $0.10. Greg will elaborate on those numbers shortly. Now on the new product front, our J750 EX has taken hold in the microcontroller, FPGA and image sensor space. We have installations in all of these applications. So we expect to expend our 2500 plus installed base as customers drive on higher frequencies and lighter parallel test applications. Despite the down tick in unit sales of FLEX systems from the second quarter record, we did add over a 100 more FLEXs to our customer base. The UltraFLEX hit a new quarterly record driven by applications as diverse as smartphone components, MP3 players and digital SLR camera processors. Over 30% of our more than 300 FLEX systems sold in the last six months have been RF configurations. And we've added over 40 more RF upgrades to the installed base in that same time. So the presence we have in the RF space has been a main stay in this cycle. Now, on our systems test businesses, our bookings were up 18% led by strength in our Mil/Aero sector offsetting weaker demand in commercial board test and automotive diagnostics. We are specially pleased by recent decision by the Department of Defense to standardize air force avionics testing. There is a program called VDATS which stands for Versatile Depot Automated Test System. This test system will be based on Teradyne Instrumentation from our Systems Test Group. In total, revenue now for our Systems Test Group will be essentially flat from Q3 to Q4. Our migration of manufacturing to Asia is on schedule with no business interruptions and we continue to make progress on our business model. Greg will elaborate on these subjects as well in just a couple of minutes. Most important for the long-term is our commitment to invest in new market, product development. We have a larger piece of our R&D dedicated to this in 2007, at the same time we intend to deliver better over the cycle performance while these investments are made. So the bottom line is; one, we are in a challenging market climate due to a four and five-year low in semiconductor dollar and unit growth respectively in the SOC space. Two, customers are likely to continue operating in a very tight utilization environment. Three, we are continuing to expand the FLEX and 750 footprint and are optimistic about the increasing preference especially in OSATs for flexible, multi-use systems. And four, we'll continue to make headway in our business model at the same time that we invest in long-term growth initiatives. Let me turn it over now to Greg for more of the financial picture. Greg?

Thanks Mike and good morning everyone. Our third quarter sales of $299 million were up 4% from the prior quarter, while our non-GAAP earnings per diluted share totaled $0.17. Our GAAP earnings per diluted share totaled $0.22 and included the gain from the sales the broadband test divisions and other smaller specials which are being detailed in our press release. Total bookings of $273 million were down 11% with semiconductor tests bookings down 16% and the System Test Group up 18%. Please note that going forward, we will report two segments; Semiconductor Test and our System Test Group. With the latter made up of Mil/Aero test, commercial board test and automotive test. Semi test buying in the quarter was broad-based with the top 10 customers making up 51% of our third quarter bookings versus 58% in the prior quarter. 59% of our semi test orders came from IDMs and fabless companies and 41% from OSATs, this is versus 54% and 46% respectively than in prior quarter. There was improved demand in micro controller test and in some consumer segments. However, this buying was overshadowed by decreases in RF and automotive, which had strong second quarter bookings. Utilization levels were flat at IDMs, were up a few points at OSAT customers and are in the high 80s low 90s percentages. Before I go through the third quarter results and provide comments on the fourth quarter outlook, I would like to revise some summary commentary on 2007 against our longer term growth plan. First, I expect that 2007 will be a key year for us and that we will obtain market share and SOC test with FLEX and with J750 for the second year in a row. Over the past 18 months, we have won many design in that have grown our market share and increased our gross margins several points. In many of these gains, we have had a 30% or better cost of test improvement over the incumbent. This 30% plus advantage is critical to shifting market share at attractive gross margins. This is primarily due to the FLEX architectural advantages that enabled much more efficient parallel test. FLEX also covers a very wide range of devices, which plays particularly well with OSATs, who are clearly pushing their customers more than ever to select test providers who can offer a flexible platform. The OSATs are also increasing their share of test as IDMs look to outsource more. We expect the share gains from SOC test to continue and that these gains along with the continued focus on gross margins will get us to our model profitability rate of 15% operating income. This assumes a normal market size. Currently, we operate at about a 10% to 11% operating income rate assuming a $3 billion annual SOC test market. Of the four to five operating income points, we need to get to our model P&L, about one-third comes from manufacturing savings and the other two thirds comes from SOC test share gains. The manufacturing savings comes from moving board assembly, electro mechanical integration and final configuration and test for FLEX to the same outsource site in China. The savings should come in evenly over the next five or so quarters. Our first FLEX shipment from this single site was on August 8th, and now two-thirds of our FLEX shipments come from the single site. This transition is on schedule and requires very significant planning and oversight to pull off. We are unique in having this broader capability of board assembly to final configuration test in one low cost site. In addition to the obvious benefits of low material costs, this one site allows for more efficient manufacturing, less inventory and lower shipping cost. The other major initiatives to get us to our model is continued SOC test share gains. We need about 2 to 3 points of further SOC tests share gains to achieve our model P&L. Our trajectory of share gains over the past two years would suggest that this could occur over the next year or two. Now for modeling purposes each point of SOC test share gain improves our operating income rate by about one percentage point. You should also note that while the SOC test market size has averaged about $3 billion a year, it is ranged between $2.6 billion and $3.4 billion over the last four years. With this annual volatility, our operating income rate would be expected to increase or decrease by about a percentage point for each $100 million annual swing in the market size. While, progress on the model is clearly important we also recognize that the steady SOC test share gains are not enough to provide the necessary growth given the underlying growth rate in SOC test. So 2007 will also be important and that we are continuing to make the long term investments to access closely adjacent markets with differentiated products. These investments are quite significant both in a level of spending currently and by the amount to which they increased our available market over each of the next three years. So we are investing aggressively for the mid term while steadily growing and improving our profitability near in. Now let me take you through some of the details of the third quarter then our guidance for the fourth quarter of 2007. Our third quarter gross margin percentage was 48.2% of sales, up from 47.5% in the prior quarter due primarily to lower manufacturing costs and slightly higher sales. The product mix remains favorable as well. R&D expenses were flat at $52.2 million or 17.4% of sales compared to $52.4 million or 18.2% of sales in the second quarter. SG&A expenses were also flat at $62.9 million or 21% of sales as compared to $62.8 million or 21.7% of sales in the second quarter. Our net interest income was $7.7 million, down from $9.2 million in the prior quarter, due primarily to re-positioned our investment portfolio to shorter maturities, which caused a $2 million accounting loss due to the increase in interest rates, and also a lower average cash balance. We had $4.7 million of income tax expense in the quarter. Our quarter ending headcount was 36,000 employees. In past calls I have talked about our longer-term tax rates of about 26% to 28% once we eliminate our valuation allowance against our net deferred tax assets. Well, this remains our best estimate longer term. For next year 2008, we would expect to continue with a lower tax rate of about 15%. In our third quarter, semiconductor sales were 81% of the total and the System Test Group was 19%. On a geographic basis, our third quarter sales in descending percentage order broke down as follows. U.S. 19.3%, South East Asia 17.2%, Singapore 15.3%, Europe 12.9%, Korea 11.6%, Japan 10.6%, Taiwan 10.6% and rest of the world 2.5%. Our book-to-bill ratios for the third quarter were 0.91 for the over all Company. 0.89 for semiconductor test, 1.0 for the System Test Group. At the end of the quarter our backlog stood at $317.5 million of which 80% is schedule to ship within the next sixth months. On a geographic basis, our bookings for the quarter again in the descending percentage of order were distributed as follows. U.S. 22.5%, South East Asia 19.1%, Taiwan 15.2%, Singapore 13.5%, Europe 10.5%, Japan 9.5%, Korea 9.2%, and rest of the world 0.5%. Now moving to the balance sheet, we ended the third quarter with cash and marketable securities of $748 million. We used a $176 million of cash in the quarter to repurchase approximately 11.4 million of our shares at an average price of $15.38. Subsequent to quarter-end, we have repurchased approximately 4.2 million of our shares at an average price of $13.91, which completes our authorized share buyback program. In total, we have repurchased 27.9 million shares at an average price of $14.31 totaling $400 million. This program lowered our outstanding shares by 14%, leaving us with a balance of a 173.6 million shares outstanding. As we have just completed the authorized buyback, we will comment on our cash plans in our next conference call. In the third quarter, capital additions net of sales of related capital equipment were $12.6 million; depreciation and amortization for the third quarter was $22 million, including $5.6 million of stock-based compensation, accounts receivable stood at $231.6 million with 71 days sales outstanding. This is nine days above our model of 62 days. In short, the nine day increase is largely due to extended payment terms connected with some recent SOC test share gains. These extended terms are backed by letters of credit. We ended the quarter with product inventory of $91.1 million, up $3.8 million from the last quarter. In the fourth quarter of 2007 as Mike mentioned, we expect sales to be between $250 million and $275 million with diluted earnings per share between $0.04 and $0.10. We expect gross margins to be between 45% and 46%, R&D and SG&A expenses should be flat in dollars, but up in percentages to be between 19% and 21% and between 23% and 25% respectively. We expect it to be down about $10 million in inventory dollars and accounts receivable to be down also about $10 million. In addition, we expect to spend $18 million or less on capital. In the fourth quarter, our depreciation and amortization should be around $22 million including $5 million of stock-based comp. Our tax rate is expected to be about 10% in the fourth quarter. Now I will turn the call over to Tom.

Thank you very much, Greg. Anisa, we'd now like to open the call for questions. Question And Answer

Thank you. [Operator Instructions]. Your first question is from Dave Duley with Merriman.

Yes, good morning. I was wondering if you could talk little about the PC in-market specifically the graphics area what you're seeing there? And where do you think you are gaining share in the SOC space?

Dave, it's Mike. The PC and graphics space for us is a small piece of our market share. So it doesn't move the needle for us significantly. We expect in the next quarter... this quarter for our business there to be up, but it's not big enough to be a standout. In terms of segments, where we are gaining share, it's a broad set of segments. Automotive and power applications is one that stands out, digital TV is another one that stands out and while we've got a large share position in RF, we have been able to expand that into adjoining spaces. Those would be the largest three.

Okay. One final thing from me is I think VERIGE has put out a new RF product, I think it's kind of geared at the higher end of that marketplace. What have you seen with that? And what competitive responses would you expect?

Well let me talk about what we are doing on that front and that will touch upon what's happening on the competitive front. We have a very significant position in the RF space. We are participating and do business with six of the top 11 leading SOC, RF companies in the world. So we've got a very, greater than 50% market share position. And the adoption of our products there and the new product that we have introduced over the last year of our fourth generation of RF instrumentation on the FLEX and UltraFLEX system, as you saw in the opening comments, that's been very substantial adoption. 100 systems out of the 300 we sold in the last six months plus another 40 plus upgrades. So we are in pretty solid shape with those customers. There are competitive offerings that are being offered, VERIGE and other companies are offering RF instrumentation as an add-on to their existing systems. So obliviously, that intensifies the battle there. And as you probably know, each generation has a new one following it. We're doing some new product development in that area, and most of our customers, if not all of our customers at this point are aware of our new generation of RF that they will be seeing in the future.

Thank you.

Your next question is from David Egan with Lehman Brothers.

Hi guys, thanks for the call. Just on a housekeeping note, the share count, where do you think the share count will be next quarter?

About $177 million will be the diluted shares for EPS purposes.

Okay perfect. And then I guess another housekeeping question, in terms of R&D hike, I guess we had expected it to pick up based upon your earlier comments in the year that R&D was going to be higher for some new product development. But where are we in terms of that and where should we be thinking... how should we be thinking about that going forward?

I think you'll see the R&D will be about flat and that extra spending is in the R&D numbers now for a in near in adjacency.

Okay. So that, we shouldn't be thinking that the number will pick up anymore from here?

No.

Okay perfect. And then the tax rate, could you repeat what you said, did you... because in prior conversations and in the conference call, I believe the... what you were saying in that, you said earlier that mid-year that the tax rate was going to tick up to 26% to 28%, but did you say today now we should expect 15% through the entire year?

Correct. 2008 will be 15%, the subsequent year, it more likely be 26% to 28% and we'll keep you posted as we get a clear view of that.

Okay and terrific. Then, lastly, on that Next Gen RF product, could you give a little more understanding about that. Is that more in terms of integrating RF on to UltraFLEX and what kind of time are you expecting for that?

Dave I we won't comment on timing, it's a 5th generation of RF capability. All of our customers are aware what we are doing on that front. And it's an expansion in parallelism and frequency.

Okay. Thanks so much guys.

Yes.

Your next question is from Chris Blansett with J P Morgan

Hi guys, thanks for taking the call. Since you guys have completed your current share buyback program, I noticed you have mentioned announcement of new one. What should we expect for that going forward?

As we just completed this buyback program this very month, we will comment in our next conference call as to our plans on cash. We are just not prepared at this point to do that.

Does that mean during the quarter we shouldn't expect any share buybacks?

That's correct.

Okay. And then based on your prior comments when you would think about restructuring the balance sheet in your comments just earlier about the tax rate staying low next year, does that mean that this restructuring exercise is likely pushed out till '09?

Yes, we would not look to be more aggressive on the balance sheet leverage until the tax rate was higher. But we would also consider other factors. For example, where we are against our model profitability, what is the volatility of the industry, how are other companies positioned with cash. But that will be one of many factors we'd look out.

And then kind of last question here, specifically you indicated that utilization rates at the sub-cons are relatively flat and IDMs crept up a little bit. Could you provide that data actually? And then, I mean what you kind of seeing now a month into the new quarter?

Its high 80s low 90s, there isn't a dramatic shift from the time from when we talked last quarter, it strengthened a little bit, but its just very, very high levels across the product line.

I guess what I am get out is at this time, are the... are your customers becoming much more active about utilizing the equipment more efficiently or it's just a matter of you haven't seen the unit growth flow through yet, as far as you can tell?

They're... quite frankly they are pressing their installed base for more and more as they try to keep a cap on their capital expenditures.

All right. And then one last question actually, on the LCD driver platform you guys have talked about before, could you give us a status update on that?

As I said last quarter, we are not going to comment about new products until they are introduced. We are working with customers on that product in trials now. That's as much as I can say at this point.

All right. Thanks a lot guys, I appreciate that.

Yes.

Your next question is from Nick Tishchenko with Global Crown Capital.

Hi good morning, thank you. Two very short questions; number one, what are the current lead times for FLEX and the 750? And the second question is what was historical high and low share of revenues in turns of business?

Okay.

Lead times are 6 to 8 weeks, let me just confirm.

That's correct.

They are pretty quick. 5 to 7... yes, put a band around 6 to 8 and you've captured all the product lines.

Yes. On your question on turns, in semiconductor the turns this quarter were 44%. If you look back over time, the range intends to be 40% to 46% in that neighborhood. Some of our other businesses have much higher turns business as well.

In the... what degree you are accounted for channels business, upside in the channels business in your guidance for December quarter?

We assumed a relatively consistent assumption based upon what we have seen in the average there. We did not put any extra increase in there or any decrease, assuming either higher or lower turns, we just assumed the average.

Thanks very much.

Our next question is from with Mehdi Hosseini with FBR.

Yes, thanks for taking my question. Couple of questions regarding your commentary on getting into new businesses and you brought up the parallel test, can you comment on what your strategy is exactly in giving to parallel test? And then where are we on your entry into memory?

Mehdi, no comment on the memory side. Obviously, a part of our future investment is in the memory space. But I can't give you any details on where that the magnitude of that or the timing.

Are we looking at the 2009-2010 or would it be sooner?

No, it's a multi-year program. So it's out in that time frame.

Should we expect to hear more in 2008?

I think you will only hear from us on the subject when we have products and customers on that front.

Okay.

But your question on parallel test, say a little more on that maybe I can --

When you talk about parallel test the first thing that comes to my mind is basically doing more test on the wafer which could essentially reduce your addressable market. So help us understand what exactly you mean by parallel test?

Well we mean heaving an architecture that is scaleable so that customers can get a multiple of what they are currently testing

Is that for the final test or is that on the wafer test?

Its both.

We do have on the wafer test what is the strategy for the probing?

What's the strategy for probing? The strategy for probing is similar to final test and that is, that if customers are currently at two architecture pin counts etcetera and the DSP architecture of the products allow customers to get a very high effective throughput by moving let's say to four parallel.

May give some quick numbers. If the customer brought a tester from us for a $1 million for a single site that they wanted to go to a dual site, that have to put extra instrumentation in this system, and that would probably saw for close to 17. So the customers certainly gets a benefit, but it's not two to one from us. But they get the benefit but then they also get the leverage their other equipment in the test cells. So their savings can add up to a customer as they don't need to buy multiple pieces of other equipment.

It doesn't mean that eventually you would be collaborating more with some of the top companies that are trying to give into the parallel test on the wafer?

I don't believe so. Not in the SOC test area.

Okay. And just... and one final of question, as the new realities of the lower growth rates for SEC becomes more of a consensus, any chance of consolidation? Is this going to be the final that brought quite some of you guys to consolidate?

Well if the growth rates that are being experienced in 2007 which are, five and six year lows in units and in devices that obviously puts pressure in the total market. And that presses consolidation is one of the potential outcomes because of that pressure. But in terms of consolidation, it come back... consolidation works in this market if you can get healthy players combining if this growth potential and if there is a high degree of complementarities versus conflict, so that you don't give the gains that you get through the combination. That been the hurdle in the industry, it remains the hurdle. So that will be the most challenging aspect if M&A is a result of the compression.

Your next question comes from Satya Kumar with Credit Suisse.

Yes, hi thanks for taking my question. I just want to understand the turns business expectation once again. When you... you said you were not assuming any changes in the average turns business, but it looks like looking at your customers business, and the like, they are actually strengthening somewhat into Q4. What's the possibility that you are perhaps being on the conservative side here in terms of your outlook for Q4?

Right, I guess that possibility could always exist, but let me give some quick numbers. Last quarter 44% of semiconductor test bookings were booked and shipped in the same quarter. If you go back over a handful of quarter, the range of that is 40 to 46. I haven't seen a range of 40 to 70 or 40 to 60. So there might a little bit upside or maybe there's some new indicator that you are seeing that we just haven't seen or factored in. But we have just picked a number that's in the middle of the range for our turns assumption.

Okay. What is sort of the last point in the quarter, I guess if we get an order that end in November, is that still shippable within the end of the quarter or?

Yes unless it has very unusual configuration, the answer is yes.

Okay. I have a sort of bigger picture question, I sort of share your belief that SOC business is growing slower this year than any years in the past. So again I guess I am not sure if I agree with the conclusion that if that's the only reason for the secular decline in test of CapEx because it seems like in past years when you have higher semi growth it did not actually result in higher test equipment growth. If there is a risk that we might be in a secularly declining test CapEx and the cycles are getting more muted and becoming maybe perhaps more seasonal than cyclical, why should Teradyne not be thinking also about the potential to lower the breakeven further and in that case, you sort of eliminate or offset the impact of secular and cyclical and can still have higher earnings growth?

We are constantly looking at ways to improve productivity lower breakeven and there are many initiatives that we have here that are tracked, executed against and some of them are the gross margin improvement plan that we've mentioned that will bring in a point, point and a half of improved gross margin that in turn lowers breakeven. So there are set of actions that are in place. The thing that we aren't willing to give up on the list, we have very significant investments, very significant in longer term growth adjacencies and we see the bigger issue is growth. And we could get to model profitability a lot faster or we could get there over some number of quarters and then have the upside of a much larger available market with the products that have differentiation. So we clearly are playing it that way.

What is your breakeven right now?

It ranges between... the way we calculate, it ranges between $240 million and $250 million. We do that at the operating income line, so we don't include interest income or taxes.

Okay. For modeling purpose, I should think that breakeven remains sustained through this or next year?

We'll talk more about that at the next call but seeing some of the changes we've talked about, I think you might expect it could go down a little. But we'll talk more about that I next call.

And one final question, what... can you update us on what you think is the appropriate level of cash at Teradyne to run the business?

It's a very wide range. I think $300 million to $700 million is a wide range but I think in that range, that's reasonable. You have to keep in mind that we're not at our model profitability and we're in a very volatile industry. Having said that, we could operate with less cash, if we chose to.

Thanks.

Welcome.

Your next question is from Jim Covello with Goldman Sachs. Jim Covello - Goldman, Sachs & Company: Hey guys, good morning. Thanks so much for taking my question. A lot of the stuff has already been covered, but I have a big picture question from the standpoint of... do you think there is anything else that you guys need to be dealing structurally to get to where your competitors are profitability-wise? So from a structural profitability perspective, do you think the initiative, the growth initiatives in the memory space or RF space and the restructuring initiatives on the manufacturing side are enough to eventually get you there or do you think you are going to have to take incremental steps given your profitability versus your most profitable competitors?

Jim except for what Greg just talked about, which is this continuation here of productivity and offshore manufacturing etcetera, that's going to give us some additional breakeven progress next year. The answer to your question is no, we don't think that we should be doing anything structurally. The bet we're making is the long-term bet to invest more heavily now in these outside the SOC, outside the core SOC space because the present value of that overwhelms any cuts we could make. But at the same time, we haven't said, we're going to give up on any progress. The progress we've made on the top line, on the share side, on the assumption that we are not going to get an uplift from the market there. That continues and the progress on cost and structure side of that also continues. So the two levers of cost and some incremental gain in share in the central space, get us to improve profitability. At the same time, we could get there faster but we are just not going to do that and not invest in these longer term place. Jim Covello - Goldman, Sachs & Company: I certainly understand and agree with the idea that it's better to grow than just to cut. That said, I think you guys have acknowledged that it's proving challenging to make real inroads into the memory market because the competitor there is a... competitors there are pretty well entrenched. Is there a point at which you guys would say, look this isn't working and we need to think about going in the other direction or what kind of signpost should we look at, I mean we are talking about 2009, 2010 as it is but is there a signpost along the way which you guys are going to be looking forward that tells you, yes, we can get there versus you know what, even though we know this is the better strategy its not going to work?

Yes, the signpost will be very visible to us and less visible to you for a while but the signpost would be, are we getting the depth of engagement with some lead customers in the development process. And if we see that flagging then we'd be looking for different plans to play in. That's going to be the leading indicator for us. Jim Covello - Goldman, Sachs & Company: That's helpful. And then final question relative to that, is your value add in the memory space going to be throughput, cost or both?

Well, high very high low, this performance issues in the memory space and there are multiple segments in the memory space. So we are intending to as we make investments there to look and work with closely with lead customers. Are the performance characteristics that we can build into and leverage off our existing FLEX architectures, that's the way we would come at it and the FLEX brings to the table you know cost to test, parallelism advantages in the SOC space, we tried to leverage those into memory if we find a space in there. Jim Covello - Goldman, Sachs & Company: Thank you very much.

Your next question is from Tom Diffely with Merrill Lynch.

Hey Good morning. Earlier you talked about the utilization rates being in the 80%, 90% range or low 90s, is there a practical limit that you see for utilization rates or is it possible to squeeze another 10% efficiencies there?

I don't think they can squeeze 10% more, I think the breaks it is that they see their forecast ticks up just a little bit and then they just need to start ordering. So I think they are about at the limit, could they go to 92, 93 may be, but they are close to the limit and if they see it tick up in unit growth, they'll be ordering.

So is this level today at historical peak then for utilization rates as you track them?

Yes, it's pretty very close to prior peaks. Yes.

Okay. And then just quickly, you talked about the interest income coming down a bit, was that just due to the lower cash balance or is there something else going on there?

Well we believe interest rates would be increasing. So we shortened our portfolio to take advantage of that and that has worked to our favor, but in doing that you've taken accounting loss, but then you can reinvest the money in higher interest rate securities. So there's really no economic consequence, it's just an accounting event.

Okay great. Thank you

Your next question is from Steve Balog with Cedar Creek Management.

On the program to move manufacturing to the China, could you expand on that a little bit more, specifically, what are you moving and from where? What risks are involved there, what are you doing to control that and are we left with excess capacity in the United States?

Okay. First, we moved FLEX and microFLEX starting as of August 8th and now as we sit here today two-thirds of all our FLEX shipments come from the single site. UltraFLEX will go early 2008, that's a more complex product. Some of the work that had been done in the U.S. was already at Selectron, a site in North Carolina. The work that happened in North Reading Teradyne's location was final configuration in test. So that area is at some point will be less of use, we will still have new product introduction as well as new products and new markets introduced here at Teradyne first. But the footprint we need at Teradyne is reduced. And that in fact will help us sell a building and squeeze into this campus so there is some facility statements as a result of that. But to get to the real thrust of your question, the way we manage this is our operating team very senior, very confident folks have taken people from Selectron brought them back, trained them here in our equipment, we have our people there on their site overseeing the work. Its constant and we make huge investments, we are probably spending $1 million a quarter extra costs to make sure that we have enough people flowing back and forth to train the Selectron folks on using this highly complex equipment. We also recruit the people as well, make sure that we are satisfied that they are hiring the right people so it's a huge effort and is done very well.

Steve, on the short hand though is we are not going to have excess space here we'll consolidate into a smaller footprint, number one. And number two, the actual headcount in manufacturing personnel inside Teradyne, that's domestic is going to be a very... it's under 50.

Okay, thanks.

Your next question is from Timothy Arcuri with Citi.

Couple of things; as I look at the world wide SOC data, so I graph it now, every month going back, I guess 15 years now, 16 years. There is a pretty clear secular decline. We have lower peaks and I guess the most obvious area was that in this most recent upturn, if you look at the SOC buyer rate, we only have regard to about 1.7% on the kind of a monthly basis and in '04, we got near 3% which was the kind of the same thing that we had done the prior cycle. So it seems like something, you are kind of tracking at the same level but you are peaking certainly in this recent kind of mini upturn much... at a much lower buyer rate than what happened in '03 or '06. So what particularly happened this time? Are the sub-cons acting that much differently because it just seems like a huge difference?

Well I think the big difference is in the, in our customers revenue and units. It's the growth rate there, the one standout issue is that the growth rate there is dramatically different in '07 than it's been in the last five years. And when they are faced with that, they are obviously just wheeling it in. The total buy rate, I agree with you that the buyer rate so far in this up cycle has still against historical measurements, its still got lot left to go, if its going to get back to that level. So it's only been as you said in the 1.3 to 1.6 level this year. And so, I agree that if that stayed, then you'd have a lower buyer rate, you'd have a lower market than the average of $3 billion which you have over the last four years?

Yes, I guess I am not sure Mike that is see that the unit growth rate of the industry slowed, I mean if you look at the unit at semiconductor unit sales as reported by the SIA there really hasn't been significant slowdown in that. Units have been pretty strong?

Are you looking at SOC only?

I am looking at semiconductor units, yes.

Yes, you should look... break it between memory and SOC and the difference here is that the memory unit growth has been strong and the comparison though to SOC for this year, in '07, they're dramatically off the trend line.

Yes, okay.

So I think the real question everyone is facing is, well, is that going to revert back to the normal unit growth rate. If it does, the buyer rates comes back and there is nothing that we hear from customers that says to us that there is a new level of unit growth in SOC, they all see that '07 was a off the trend line year, they are all talking about a whole bunch of new products. And they are bullish about the unit growth that they are going to see in '08. But if it stayed low, I think your point would be right that you have a different threshold here for CapEx in the SOC space.

Yes, I think what's probably happening there is that there is a mix shift to the lagging edge in the SOC space. But I guess my other question is why this quarter... why wouldn't you do a buyback, I mean I understand that you just finished the authorization, but is there something strategic, some potential acquisitions, some reviews, something that's preventing you from actually doing a buyback this quarter, billion if you look at your cash levels, there is only one company that at least I cover that has more cash as a percent of their market cap today. So I am wondering if there is some... something that you are not alluding to this preventing you from actually buying back stock.

We don't like you reading anything in at this point. We are just... we are going to come forward as we work with our Board what we do next?

Okay. And then I guess last thing Mike, it seems like the new products are kind of... it seems like every quarter they kind of push out a little bit in terms of the timing of them. I am wondering what's specifically the issue is with the new products? Is it that they are kind of ahead of their time or they are kind of a product waiting for the market to catch up to them? What's the issue?

Well, I mentioned that last quarter when we talked and so let me try to recap the score on that. The new products that we have introduced this year; the 750 EX for the microcontroller space digital applications and for image sensor, on schedule adopted by customers full speed ahead. We said we have an LCD product. A year ago, we had some work around resetting the performance feature set for the target customers on that because of unique requirements they had. So we did have a reset in that space about 9 to 12 months ago, since then we have been on schedule. And we are in the trail phase of that product now. So looking back you say yes, we did have a reset and that's about a year ago.

Your next question comes from Steven Pelayo with HSBC.

Mike, I am trying to think a little bit about next year Teradyne's growth opportunity, kind of the organic or inorganic. You are talking about a slower industry growth environment, zero growth environment, market size that's ranging from 26 to 34, what are you thinking for industry growth next year or buyer rate assumptions for next year. And then if you can talk a little bit about the inorganic that it sounds like you mentioned your on trajectory to gain a couple of points of market share over the next year or so, that $3 billion level that you are thinking about $60 million in organic market share gains next year?

In inorganic, okay. What we need to do to grow and to get to model profitability here is two to three more points of share over the next couple of years. That's on a $3 billion market and when we say $3 billion, we are just using the average market size over the last few years. If the market goes down obviously, we are going to get more than two or three points. But we are not building our plan around a growth rate assumption in the overall ATE, SOC market. So the way we work is we say we've got to get somewhere between $50 million and $100 million of new business that we win... straight out win in the course of a year. Now you would say, see that should be three points of share gain. No one has a undefeated season and we don't either. So when we think about it, we think we've got to get $2 of wins because there's compression and there's competitive things we don't win. So if we do that and continue on that pace over the next year and a half to two years, we'll be where we need to be in market share and the track record of the last two years supports that we should be able to that as fan out the FLEX and the J750 product. You asked about inorganic. And did you mean by inorganic, new market?

I mean the industry growth organic means pure industry growth, inorganic meaning market share gains including new market, any thing you are doing something different, if you will?

Well then --

Your industry growth will just kind of feel like whatever, may be you are actually coming out with individual design sockets and specific product and it sounds like you are talking about $100 million over the next couple of years?

Yes, and in your definition of inorganic, as we move... if you think about the new product set in the J750, we've got an image sensor product, a microcontroller product and an LCD product coming. The image sensor product we've got 70% plus share, so that would be principally a market share hold product, maybe a little upside. I'd say that as kind of a 90:10 meaning 90% to preserve 10% to expand. Microcontroller and digital side, that's more like 75%, 25% and the LCD space, which is about $250 million to $300 million market is a zero hold, 100% new opportunity. So that's where our inorganic growth will come from and contribute to this share gain requirement that we've got in the next year. So we can get 10% market penetration in that and that's $25 million to $30 million a year, if we can get 20, its double that excreta. So that would be one of our leverage that contributes.

Last question on the non-semi test side, you're running kind of a $40 million to $45 million reported revenue in the Systems Test for quite a long time. It looks like that you have stepped up into the mid 50s and you're talking about flat for the next quarter. Is it the new higher sustainable levels which we should figure out, $200 million plus in annually for the system business?

Yes, the 55 is more sustainable. We would expect to growth that into 2008, it may bounce back down for a quarter. But over time, you will see 55 will be a low base and would be moving that up over time.

Excellent. Thanks a lot.

Good.

Your next question is a follow-up question from the line of David Duley with Merriman.

Yes, one follow-up question from me is last quarter you described the outlook I think as murky and we ended up having order rates down to 11%, totaling down 16% in semi test. We use those same kind of descriptive words, I'm assuming that orders would be down again in December, I'm just wondering if you feel that December would be the bottom?

Well we don't... we can't look out beyond. All I give you is the climate from our customers. The tightness here says that that's clearly a short-term issue for them. They are very explicit on that, they are trying not to buy much, and so any upsurges not in the tone of their voices. Beyond that point, as they get through the fourth quarter bulge, they would... they are anticipating they get relief on unit and dollar volume in the first quarter. So you could see this level of business going out for couple of quarters is the way I would think about that.

So that would be more flattish orders then?

Yes, I think... that's the... that's the directional signal we are getting from them

Thank you.

Great. Operator, we will take one last call please.

Certainly. That last question will come from Mehdi Hosseini with FBR.

Thank you. Mike, want to go back to some of these new opportunities you're working on. Several years ago there were companies that were trying to promote the built-in-self test as a means to lower the total cost of test and recently I've been hearing more about it. What's your view on it? And whether this is an area where you can leverage some of the softer development into your favor or to advantage?

Well, I think of built-in-self test as one of the many things that test companies are working with our customers on and its... it is a one of the elements that contributes to the productivity increases and so as we work with our partners and with our customers on this, its one of the leverage Mehdi, but it's not the not the silver bullet. It's something that all customers are doing and we are developing with them.

But there hasn't been any resurgence or any change, is that what you are saying?

There is a steady amount of activity; I would not say that hasn't been any up tick or down tick that's been noticeable to me.

Great. Thank you.

Okay, thanks everyone. We will talk to you again next quarter.

Thank you very much.

Thank you. This concludes today's conference call. You may now disconnect.