Teradyne, Inc. (TER) Q1 2011 Earnings Report, Transcript and Summary

Good morning, my name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2011 Earnings Conference Call. [Operator Instructions] I would now like to hand the podium over to Mr. Andrew Blanchard. Please go ahead.

Thank you, Christy. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our Chief Executive Officer, Mike Bradley; and our Chief Financial Officer, Greg Beecher. Following our opening remarks, we'll provide details of our performance for the first quarter of 2011 as well as our outlook for the second quarter. First, I'd like to address several administrative issues. The press release containing our most recent financial results was sent out via Business Wire last evening. Copies are available on our website or by calling Teradyne's corporate relations office at (978) 370-2221. This call is being simultaneously webcast at teradyne.com. Note that during this call, we are providing slides on the website that may be helpful to you in following the discussion. To view them, simply access the Investor page of the site and click on the Live Webcast icon. In addition, replays of this call will be available via the same page about 24 hours after the call ends. The replays will be available, along with the slides, through May 14. The matters that we discuss today will include forward-looking statements that involve risks factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release as well as our most recent SEC filings for a complete description. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today's call, we will make reference to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure where available on our website. To view them, go to the Investor page and click on the GAAP to non-GAAP reconciliations link. Also you may want to note that between now and our next conference call, Teradyne will be participating in the Credit Suisse First Boston Semicap Equipment Conference in Boston on May 11; the Bank of America Merrill Lynch Technology Conference on June 1; and the Cowen and Company TMT Conference on June 2, both in New York. Also please note that we've removed Diagnostic Solutions from the various lines in our P&L as this business unit was sold to SBX for $41 million in the first quarter. Consequently, we've reported its revenue and expenses, all net, in one line as a discontinued operation, and our comments and comparisons hereafter will exclude its results. Now let's get on with the rest of the agenda. First, our CEO, Mike Bradley, will review the state of the company in the industry in the first quarter and will review our outlook for the second quarter. Then, our CFO, Greg Beecher, will provide more detail on our quarterly performance, along with our guidance for the second quarter. We will then answer your questions. For scheduling purposes, you should note that we intend to end this call after one hour. Mike?

Thanks, Andy. Good morning, everyone, and thanks for joining us today. When we were together last quarter, we had wrapped up a very good year, and we're seeing strengthening demand in our SemiTest bookings after a one-quarter correction. That momentum has continued as we posted a $100 million increase in bookings in this first quarter with roughly $75 million from SemiTest and about $25 million from our System Test group. I'll get into some details behind those increases in a minute. But the summary is that despite some macroeconomic headwinds and despite the tragedy and disruption in Japan, our customers are adding capacity across virtually all of our product lines. Now most of what we'll talk about today will sound familiar to you, reflecting the steady course of our strategy these last couple of years. That includes the focus on testing the silicon in high-growth consumer products, a steady hand on fixed costs and an emphasis on new products and new markets like Hard Disk Drive test. I should also note upfront that despite the terrible human toll in Japan, our operations there were not severely impacted. So the 200 or so people we have there have been fully engaged with our customers through this very difficult period. Of the 109 customer test facilities that we serve in Japan with about 1,700 testers installed, essentially all have returned to full operating status. Now obviously, we don't know whether any secondary effects will impact our customers in Japan or others outside the region, but we're not altering our shipment plans in anticipation of any additional interruptions. Greg will talk about what we've also done on the supply line side of the house to ensure that our own material flow and manufacturing schedule remains intact. Now getting back to the first quarter numbers and our guidance for the second quarter. We had solid uptick in orders in the SOC Test, led principally by our IDM customers. Mobile processors, power management and Automotive were the strongest segments of demand. As a result, our FLEX, Magnum and Eagle SOC products led the way while J750 products posted unit bookings just off their fourth quarter levels. In particular, the FLEX family had its fifth best quarter ever with 3 of the highest demand quarters being posted since the beginning of 2010. So we continue to see 3 things in customer-buying patterns. First, the UltraFLEX is being adopted for next-generation mobile computing products due to its instrument performance and density. Second, the Eagle family is reaching into a wider range of emerging Asian Fabless companies. And third, the J750 often remains the market's choice in digital wafer probe and Microcontroller Test applications. In each of these products, our customers can look out over a 2- or 3-year horizon and see how our instrumentation roadmaps aligned to their product lines. This is obviously important for IDM and Fabless specifiers, but even more critical in OSAT environments where product life expectancy is so crucial. In Memory Test, our bookings were the second highest since combining with Nextest and were driven principally by FLASH Memory capacity adds. We're not seeing much in the DRAM side right now, so the booking strength is really coming from the lower-speed test applications. And in Systems Test, we've turned the corner with an expanded Hard Disk Drive customer base now placing production buys for 2.5-inch drives. You'll recall that our Neptune product is a massively parallel system targeting mobile and enterprise drives that will ride both PC and cloud computing growth trends. Now all of this brings me to our guidance for the second quarter. Our revenue guidance will be up about $25 million in the second quarter to a $375 million to $400 million range. That's in line with our average bookings these past 2 quarters and with an adjustment for our sale of the automotive diagnostic units, and it also reflects that revenue recognition for new HDD customer installations will show up more heavily in the second half of the year. Greg can break the numbers down between SemiTest and Systems Test for you in his comments. The bottom line on Q2, though, is a sequential step-up in revenues and profitability and our sixth straight quarter operating above our model. And of course, our balance sheet remains strong and flexible. As always, our demand visibility is connected to our customers' forecast, which as you know, look out weeks, but not months. So we can't really say much with certainty about new demand late this quarter or into Q3. What I can tell you though is that the first quarter has been healthy, but well below the peak quarters of 2010. We started the year in SOC test without any big upsurge in OSAT buying and while there's great uncertainty about worldwide GDP growth, unemployment and political unrest, we see no wavering in customer new product launches. So whatever we see in demand this quarter or next, we feel very equipped to respond to as we have a lot of elasticity in the supply channels and our manufacturing capacity. And finally, I'm sure there are continuing questions about the pending consolidation in the test market and the impact on us. So let me tell you this. First, obviously we're very pleased with the Nextest and Eagle moves we made in 2008, truly complementary products for us with solid financial performance. Second, the effects of consolidations in our industry play out gradually due to the execution time required to make platform transitions. And third but most importantly, our support strategies and our product roadmaps remain intact and are very visible to our customers and prospective customers. So we're ready to step forward at a minute's notice if customers need us in these uncertain times. Let me now turn it back over to Greg.

Thanks, Mike, and good morning, everyone. I'd like to first make a few comments about our financial model, and then I'll recap the first quarter results and provide guidance for the second quarter of 2011. I'm pleased to report that in the first quarter of 2011, we achieved an operating profit rate of 23%, marking the fifth quarter in a row of operating above our model 15% profit rate. We've detailed in the past the many cost structure changes and new products that have contributed to our above-model financial performance. So I won't go into these details again. Instead, though, I'll summarize the 3 key drivers to give you some context before I get into further details. First, we've optimized the company and all functions and maintained steady fixed cost discipline. Second, we're well positioned with leading accounts that are supplying fast-growing segments, such as mobile computing, automotive and digital consumer. And third, we've grown market share both with Eagle and Nextest products as well as with our FLEX, J750 and Neptune HDD test product lines. In HDD test, I'm pleased to report that we've received volume orders from multiple customers in the first quarter. This further increases our confidence of doubling our annual HDD revenue to between $80 million to $120 million. We'll update you more on our progress as the year unfolds. I want to now update our model that has been in place since early 2009. We plan to increase our engineering spending by about $2 million to $3 million a quarter, starting in the second quarter of 2011 to fuel the next wave of growth. As a quick reference, we've averaged quarterly sales of $388 million over the last 5 quarters and an operating profit rate of 27%. So this is a very modest adjustment to our overall model, which you can find on our website. There's one other item I'd like to highlight that will likely affect us this year. We're looking at moving our pension accounting to mark-to-market accounting versus the past practice of smoothing losses and gains over a multiyear period. You may have read it by a few large companies that have recently done this, and there are many more looking at this now. As you might expect, it is generally preferable for investors that current-year pension losses and gains be recorded in the current year P&L versus smoothing them over many future periods as it provides a better picture of the current-year performance. If we make this change, there'd be a large onetime noncash accounting charge as early as next quarter, and we'll have a lower quarterly operating costs of about a $2 million thereafter. This, of course, would have no impact on cash and is not reflected in our updated model. I should add that we fully funded our U.S. flows and pension plan through a $45 million contribution in 2010, and we also reallocated the assets much more heavily to fixed income. Hence, we do not expect to be making any significant further cash outlays to this U.S. pension plan. Shifting now for a moment to the tragic Japan natural disasters. We've carefully looked and relooked for impacts from this crisis. From what we know now, we believe we've reacted where prudent, which was to place about $5 million of buffer inventory for certain components that are sourced in Japan. We also offer additional support to our Japanese customers. So far, we haven't seen any other action that may be needed on our part. We'll continue to monitor the situation very carefully as we learn more. Moving now to the first quarter. We had sales of $377 million and non-GAAP EPS of $0.39. Our operating profit rate was 23%. Again the first quarter marks the fifth quarter in a row where we've operated above our 15% model profit rate. Moving now to the demand side. SemiTest bookings increased 26% to $316 million with strengthening in mobile processing, power management and automotive devices. Memory Test orders were $31 million in the first quarter. On the other side of the bookings ledger, Systems Test group came in at $75 million, driven by volume HDD orders. Moving to cash. We ended the quarter with $1.1 billion in gross cash and $900 million in net cash after deducting the base amount of the convert in our Japanese debt. So far, we have not bought back any stock on our $200 million buyback program. Let me remind you how we're thinking about cash. We believe there will be attractive M&A opportunities where we can exploit customer or technology leverage to accelerate the growth and profitability of the acquired business. Said more simply, the acquisition candidates will be better optimized in our hands. We'll retain our strict criteria and discipline of evaluation, fit and the need to at least earn our cost of capital of 15%. As to the approved buybacks, we'll continue to be opportunistic. Now back to the first quarter results. The top line of $377 million was up $67 million or 22% sequentially from the fourth quarter. SemiTest was $319 million, up $57 million or 22% and Systems Test group was $58 million, up $10 million. SemiTest product shipments increased 27% from a quarter ago. Within the $377 million, service revenue was $61 million and flat with the fourth quarter. SemiTest service revenue was $49 million. Total company product turns business was 32% versus 30% a quarter ago. SemiTest product turns business was 35% versus 33% a quarter ago. Memory revenue was $28 million in the quarter. Moving down the P&L. Gross margins decreased from 52.7% in the fourth quarter to 51% in the first quarter, primarily due to product mix. R&D expenses were $48 million or 13% of sales compared to $47 million or 15% of sales in the fourth quarter. SG&A expenses were $58 million or 15% of sales compared to $54 million or 17% of sales in the fourth quarter. Operating expenses of $106 million were up $6 million from the fourth quarter, primarily due to higher variable compensation, and the fourth quarter benefited from some true-ups at the end of the year with some credits. Our net non-GAAP interest and other expense was $2 million. We recorded a tax provision of $5.5 million or a tax rate of approximately 8%. We have U.S. NOLs and credits that totaled about $315 million on a pretax basis, which will continue to benefit us well into 2012 as about 40% of our consolidated income is in the U.S. In the first quarter, Semiconductor Test sales were 85% of the total and Systems Test group was 15%. Our book-to-bill ratio for the first quarter was 1.15% for the overall company, 1.13% for Semiconductor Test and 1.30% for Systems Test group. At the end of the quarter, our backlog stood at $554 million, of which 85% is scheduled to ship and be recognized as revenue into the next 6 months. Cash used for operations totaled $3 million after capital additions. Depreciation and amortization for the first quarter was $33 million, including $7 million of stock-based comp, $7 million for acquired intangible asset amortization and $3 million for amortization of the GAAP-imputed debt discount. As noted in the press release, sales for the second quarter are expected to be between $375 million and $400 million, and the non-GAAP EPS range is $0.38 to $0.44 on 209 million diluted shares. I should add that the guidance excludes the amortization of acquired intangibles and the noncash imputed interest on the convertible debt. Our GAAP EPS range is $0.28 to $0.34. The operating profit rate at the midpoint of our second quarter guidance is about 24%. Now moving to the P&L percentages in the second quarter. We expect gross margins to be 51% to 52%. R&D should be about 13%, and SG&A should be about 15%. Non-GAAP net interest expense is expected to be about $2 million and the tax provision should be about 8%. In summary, our operating model and products are well positioned for continued healthy financial performance and we are strategically investing where we see greater growth. Now I'll turn the call back over to Andy.

Thanks, Greg. Christy we would now like to take some questions.

[Operator Instructions] Your first question comes from the line of Satya Kumar with Credit Suisse Satya Kumar - Crédit Suisse AG: Just a bookkeeping question first. Was there any cancellation from the backlog in the quarter?

Satya, none to speak of. Very small. Nothing different from what we've had in the past. Satya Kumar - Crédit Suisse AG: Got it. In terms of the Mobile Processor segment, I was wondering if you're able to quantify how big that is for you now. The strength that you're seeing in the FLEX product line, I was wondering if you could comment if that's more unit driven or also you're seeing some improvement in the test times. And recently, there's been some concern with perhaps some weakness in the Mobile segment for some of the end customers. I was wondering how you see that particular segment tracking into the second quarter.

A lot of questions there. Let me see if I get some. Obviously, I think in the past, we've said that a chunk of our business does come from the smartphone space. If I took tablets and added that to smartphones, the tester configurations tend to be similar, so both of those are big drivers for us on a segment basis. That was the strongest segment for us in this past quarter, the Wireless Mobile Processor Baseband on segment. So your question was -- could you give me the test question again? Satya Kumar - Crédit Suisse AG: The question was, approximately, could you quantify how big that segment is for you now, the Wireless Baseband Processing segment? And is the improvement you're seeing more unit driven or output test time driven, and how do you feel your outlook into the second quarter?

I'm breaking it down. I'm pausing because there are many, many segments and a lot of our testers are kind of hybrid testers that will be brought to cross over different segments. If I look at the total market, we think that the Mobile baseband part of the market is probably about 20% of the total. And for us, if I look at it here, we've got a very good position in that market share. So we're well north of that. But as a percentage of our total this quarter, it was the number one segment for us. I can't give you the exact numbers. We don't group them exactly the way you're describing because of the hybrid nature of the configurations. Satya Kumar - Crédit Suisse AG: I was asking the strength that you're seeing, is that units or test time driven as well? And what do you see into Q2?

I think it's more unit driven than it is test time driven, number one. Number two, in Q2, the short-term forecast we have would say that, that will be the strongest segment in the second quarter for us as well. It'll be close. In the past, we've always had 3 to 4 driver segments for us with the Wireless Mobile Processor segment, Power Management and then an Automotive segment and if I added Microcontrollers into that, those are tended to be the 4 driver segments for us. But the standout in maybe, let's say, 4 of the last 5 or 3 of the last 5 has certainly been in this Mobile Processor Tablet segment. So I think that'll be the case going forward into the next quarter, in short term.

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

Most of the [indiscernible] companies had, in the last couple of days, talked about some pushouts mainly from Korea and Taiwan that have occurred anywhere from the past month to the last week or so. Have you seen, particularly with your OSAT customers, have you seen, say, in the last week or 2 any sort of weaker bookings profiles from them or any pushout from them or any signs that you could see pushouts?

Tim, nothing in the very short term. Obviously, we see all the same reports that you're talking about. The back end side of this is -- obviously, the bookings are up, so the demand is up. And I think you'd be looking for -- is there a flinch here in a quick pullback from the increase in demand. We haven't seen that. So there's nothing I'd say that is a signal of that. Now on the OSAT side, the OSAT this quarter, for us, remains pretty steady to what they were in the prior quarter. I think we said that -- I don't know if we reported, but the percentages this quarter were 75-25 meaning -- or 24 for the OSATs. In the prior quarter, they were 26. So roughly the same level. And on increased bookings, they were up a little bit. But then really not anywhere close to where they were in the last cycle. And I think how to read that is -- one reading is they're certainly not overdriving. Therefore, a pullback at this moment, by them, would be a pullback from a relatively base level of business, and we haven't seen that.

Got it. Okay. And then question on cash. Obviously, you guys have been very, very straightforward about saying that you're going to keep cash on hand because there are several targets that you're sort of looking at and you're still not buying back stocks. So what's the sort of impediment right now to sort of getting these deals done. Is it a price issue? Is it a timing issue? Because I think the Street and many investors want to see something done with that cash.

Yes. This is Greg. We look at a lot of opportunities, and we tend to narrow it down to one or 2. This is over perhaps a 12-month period and the one or 2 that we think would be a good fit and could do very well inside Teradyne already got stock based upon valuation. And generally we believe that those situations may come back alive as the other parties get more information as to what a reasonable valuation is. So it's a valuation not a hurdle that has been the thing that has not enabled us to bring a transaction to closure yet.

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

I have a couple of questions. Can you tell your Q2 guidance directionally with your SOC, Memory HDD sales?

Sure. This is Greg. We can do SOC and Memory and we put HDD in with our Systems Test business, so we can break it down that way, Krish.

Okay.

Okay. Let me just Semi Test first. Semi Test is certainly up from the first to the second quarter. They were up $30 million, in that neighborhood. And the Systems Test group is closer to being flat after a healthy first quarter.

We broke the bookings down.

All right. And then how big do you think is the SOC market this year? I mean I'm just trying to do a quick backup running in calculation and looking at your first half SOC run rate, it seems like it's 50% market share. SOC market hasn't slowed down in the second half of this year.

Yes. We've put on the website this run chart that shows you the monthly -- moving average of the monthly book-to-bill in each of the segments. I think it's in one of the early pages on it. But the projections for the market that we get from the outside are anywhere between $2.4 billion and $2.8 billion. So that would be kind of in the same ballpark that 2010 was. The size of the market in the first quarter is a little bit north of 600, we think. So at a run rate, it's at the low end of that $6.4 billion, maybe a little bit above -- actually, it's not $6.4, $2.4 billion mark. Now -- so the other thing is, you said the 50% market share, that's a little bit generous to us. Last year, I know numerically we came up to about 49%. I think we said on the last call, we certainly said to investor discussions over the last 6 months. And we think our running rate market share is in the mid-40s. It was below 40s in '09 and '10. We think that's ticked up to maybe in the mid-40%, 44% 45% level. Why is there a difference? Because we had very strong segment-buying patterns that favored us last year, but we're staying sustainably in the 45% level. So when we put all of that math together, we think the first quarter is running at slightly above the $2.4 billion rate, but not at the $2.8 billion rate. That would give you a buy rate, by the way, of anywhere between 1.2% to 1.4% compared to 1.4% in all of 2010.

That is very helpful. And then a final question. The 2 of your large [indiscernible] customers merging, can you just help us understand what it means to Teradyne, and what it means for opportunity down the road?

Yes, we don't think it has a big impact. Obviously, in the medium term, you'd say there could be an opportunity there for them to optimize the utilization of their installed base. So I think anyone supplying for them would have in the medium term some impact. We tend to have a footprint in many, many, many of the customers because of the market share position we have. So we don't think there's the likelihood of a big shift one way or the other, either towards or away from us. We think the equipment we have is a broad installed base in those customers. So I guess, the only significant thing would be naturally when companies combine, they really reassess their equipment so there could be a pause in the short term then a rationalization in the midterm, which is measured in quarters. And then they're back on the running rate that they've been in the past.

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

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

Jim, this is Greg. It's the latter. We'd only have a problem doing a buyback if we got far enough along with the party that the deal is deemed to be probable and that's generally when you have a signed agreement of some sort and you're deep into diligence.

Okay. And then -- so the no buyback this quarter on the authorization was simply a function then of?

We want to be opportunistic and we think it's just not a good time for us to buy and we see some attractive opportunities, and I don't believe that they're fully brought to closure. I do think we're in this terrain, there's often discussions that we get close and they break down. Three months later, we get back together. We get closer. They break down. And it might be the third time we get back together, we can pull it off. So there's still lingering discussions going on behind the scenes. So I want to see how those opportunities run, pan out.

Okay. And then again just thinking about the order number versus the sales guidance. I understand that some of the orders were for longer dated Hard Disk Drives orders that will ship later in 2011, but if I just look at the SemiTest orders, they were up significantly. And again I understand you're averaging the SemiTest orders over the last 2-quarter period to get sort of a baseline of what you think the SemiTest sales are going to be. But is that how it works in actuality? I mean aren't the shipments -- haven't we really shipped most of the orders for SemiTest, the load orders that we saw a couple of quarters ago now? Or were some of those SemiTest orders taking longer to ship for some reason?

Well, it's also a chunk of service that gets booked in, in fourth quarter, first quarter. And then service tends to get recognized over the fourth quarter period.

So is that sort of the driving force?

I think it would be that one single thing that will help reconcile what you just highlighted.

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

This is Mahavir Sanghavi for Stephen Chin. First question on OSAT. Greg, you mentioned that OSAT bookings and orders were in the same range as 1Q. I was wondering if you could give some color on utilization rates at your OSATs and also what do you think the OSAT CapEx will be? Will it be first half loaded or second half, given you're seeing not increased level of orders in the second quarter as you might have expected?

Stephen, the utilization rates, I don't have OSAT versus IDMs. In total, the utilization rates now are -- the industry tracks now around 90% level. I think the interesting thing on the utilization is that the bottom point that this cycle had was above 85%. And normally, that bottoming point is closer to 80%, sometimes below 80%. So utilization have trended up since the third and fourth quarter. They're now in the 90%-plus level for us. I believe that's true across the board. We don't see a big differential across OSATs versus IDMs. The CapEx for the OSATs -- revenue forecasts are going up for the OSATs, so one would expect that their utilization will go up and their CapEx will increase. But if anything, they're the shortest lead time customers we have. So it's pretty hard to predict what they will do. I will say to you that in the short term, meaning between Q1 and Q2, the very short-term visibility there doesn't say that we're going to see a big difference in the OSAT demand. You put all that together and say that if there's going to be a CapEx increase, then I guess you'd put it into the second half of the year. But so far through the first 6 months, we think they'll be pretty stable around the level that they were in the first quarter.

That's helpful. And second question is on Hard Disk Drives. Just wanted to get an idea about do you still think the Hard Disk Drive opportunity is as big as you originally expected given the recent 2 big acquisitions in this space?

Well, actually, the picture is brightening from our perspective. Why? Number one, the unit volumes on the 2.5-inch Hard Disk Drives have continued to increase and test times have continued to increase as densities increased on the drives. And so unit volumes of 2.5 inch last year exceeded the 3.5-inch volumes. Number two, growth will continue the forecast that we have and that we see from our customers say that those will continue as 3.5 inches now have turned over and start to decline. So the sweet spot has now moved into the 2.5-inch space. So that's a plus. Number two, the expansion of our position with multiple customers now is a plus. As you know in the last 2 years, we've been -- we've had a very narrow customer base. That has opened up now. Last year, we talked about some engineering system installations. We've now moved into production volume from multiple customers. Now the same kind of question, what will consolidation do there? In the short term with consolidation is not having an impact, but obviously as companies consolidate, they assess what their installed base is. But in the short term, that hasn't changed any of the trajectory of the adoption of the Neptune product for us. But obviously, it will have some effect as the customers who consolidate. They will come out of that with multiple customers, so that's a good picture for us. So we're actually -- we actually feel better and more optimistic about that space. Having said that, I guess I should reaffirm the guidance we gave in this business, we said we thought we would be between $80 million and $120 million this year. And I think we feel very good about that projection.

Just a follow-up. Can we assume that you have a higher share at 2.5 inch?

Our share in higher -- we only supply 2.5 inch. So relative to our total portfolio, it's all 2.5 inch. And we believe that we're gaining share in the 2.5 inch space because of the growth that -- if we hit this $80 million to $120 million plan, which we feel very good about at this point based on the backlog, we're quite sure that we'll gain share this year.

And your next question comes from the line of CJ Muse with Barclays Capital.

I guess first question, on the HDD side, you alluded to in your prepared remarks, shipments in Q2 that wouldn't be recognized until Q3, Q4. Can you share what the amount of that is?

Let me just step back. The HDD revenue in the first half of the year is in the mid-20s per quarter. In the third quarter, we'd expect it to be higher. I don't want to quantify that now because there's a bunch of details in terms of what gets accepted when. But it'll be higher than the run rate of about $25 million that we're seeing in the first and second quarter.

That's helpful. And I guess on the Memory front, I believe that you've been on record thinking about $150 million to $200 million range. I guess, has that changed and if you could kind of talk on both demand in the DRAM side, particularly given your strength you're seeing on the RAM side.

CJ, the market size this year, if you look at that run rate chart, it only shows 3 months of 2011. You get a little depressed because it's gone down and it's starting to pick itself up. But again it's a very, very low month level. The projections from the outside say that could be anywhere in total from $700 million to $900 million this year. Obviously, well south of the $1.5 billion to $1.8 billion that it was 4 years ago. And our objective this year is to get ourselves into a position where we've got -- shooting to get to about a 20% market share. That's an ambition that would take us up from about the 15% level that we are at right now. You do all the math, and that says we could be anywhere from let's say $100 million. If we hit that, that's $120 million to $180 million. So that would be a good accomplishment for us. Obviously, the disappointing thing here is that the size of the market isn't where it has been in the past and that really is the biggest headwind we're running into. Now you had a question between about NAND and DRAM. What's that?

Yes. I mean it sounds like NAND is working very well for you guys, and I know that's a plus given higher margins there. So curious if there is any color you can offer there. And then on the DRAM side, when you think high-speed Memory will come into vogue and you'll see a pick-up in that business?

Yes. The NAND side is really what's driving our business. We've got the Magnum product for FLASH and for low-speed wafer probe for DRAM. So over the last 6 months, we've had business in both of those sectors, but the current emphasis is on FLASH. And so virtually all the business in that space for us has been on that side. That's a plus from the standpoint of what our share is in that sector. On the DRAM side, I know I'm bit of a broken record is it's been very, very slow. The final test, high-speed testing capacity expansion has been pretty anemic. We're positioned to get some of that when it does turn on. At some point, I'm going to sound not very credible if I say it's coming. Our hope is that, that contributes some in the second half of the year. We think it will do some. I honestly can't say how much. But if you wrap it all together, it would be a piece of this 100, but I'd say if the market's $700 million to $900 million, the $140 million or 20% level.

That makes sense. Two last questions for me. I guess, the first one your service persistence test came in at about $12 million, about anywhere from $6 million to $8 million below what you did run rate wise in '10. How should we think about that in June and beyond?

I want to make sure I have that again. Say that again, CJ?

I thought you said your overall service revenue was $61 million and that you did $49 million for SemiTest. So $12 million Systems Test versus $20 million in the prior quarter?

Okay. The $20 million had DS in it, the our Diagnostics solutions business. It's basically a service business. So we've stripped them out. But it's also -- there's not a smooth on the bookings side for service annual contracts. I think they're distributed more heavily in Q4, typically then in Q1. So I think that's the other part of the explanation.

Are you talking about revenue or bookings?

No, sir. I'm talking about revenues. And the important question is on System Test service. How should we model that prospectively?

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

Okay. Great. And then final question, you talked about higher R&D and I guess the questions there is, is that over just a period of time? Or is that a permanent change to your business model?

We are going to update our model once a year. I would assume that, that will be in our model for the full year 2011. At the end of 2011, we'll reevaluate our model to see what makes sense then. But we do see good opportunities of further growth, some in Hard Disk Drive, by the way. We've had good success there. And in some other areas that are very close to our core where, we can get very good leverage.

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

Just a couple of clarification questions. Did you mention what your service bookings were? If you could break out SemiTest in both product and service, that would be great.

Okay. So first quarter bookings and you want service, correct?

Yes.

SemiTest was $71 million. Systems Test group was $8.3 million and again exclude the Automotive Diagnostics business, so it's much lower than it would be otherwise. In total, our bookings were $79.2 million.

And then just going forward, you mentioned an area of strength as the Mobile Processor area. Could you talk about -- in the past, you've had 4 drivers. Which ones would be the areas of strength besides the Mobile Processor going forward?

Well, I think as a pattern, we'll be pretty consistent with what it's been. It would be that first mobile processors, wireless. Power management has been and will be second strongest, typically second or third. Then it's bit of a horserace. Microcontrollers and other logic like wafer probe Logic where the 750 [J750] is strong tends to be in the next tier. And then it kind of flattens out into precision analog, linear image sensor, automotive. Those things are in that third tier. But the 3 top ones would be the mobile processors, the wireless applications, power management and Microcontroller.

Okay. And on the Hard Disk Drive area, you talked multiple customers. I guess I'm just trying to figure out does that mean you count one customer or 2 customers, or is there more than 2 customers at this point?

There's more than 2 customers.

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

A couple of follow-up. Mike, your system -- I'm sorry, your SemiTest system booking was up 20% on sequential [indiscernible] to 289 off of rather low levels in the second half of last year. A peak of 411 Q2 of last year, so given the kind of correction that happened in the second half of last year, do you think that going forward you can take the 400-plus million to quarter's SemiTest booking?

Mehdi, we certainly could. I hope we will. I'm being a little bit flip with you. We based this -- quarterly trends are really a function of this overall CapEx rate. So I think the way I always start on this way is to say how are you sizing the company? And in our core business in SOC Test, if you remember, over the last couple of years, we were on the conservative side of sizing the market and sizing our R&D around the $2 billion rate. In '09 and '10, that was the average size of the market. In '10 and '11 it looks as if the average size of the market is closer to the $2.5 billion level. So really that's the place to start. It's true north that the market run rate going forward is going to be $2.2 billion, $2.3 billion, $2.4 billion, $2.5 billion or north of that. So the $400 million is a function of that size and then our market share. I think it's fair in your models to put us in market share around 45% and then you have to take whatever you think and whatever the market is telling us about the overall CapEx rate. And right now, I think this range of $2.4 billion to $2.8 billion is not a bad place to be positioning it. And therefore the math all falls out from that. If it slows down significantly, then you have to pick back up and the peaks, the $400 million peaks, come in those peak quarters when if you're getting back on the trend line of the overall market size. And the math isn't complicated, right. It's just a matter of drawing the curves as to where the peaks and valleys are, but really it's driven by what the total market is and what our share is.

Sure. And given those kind of assumptions for the SemiTest system, what about the services component? Should we also assume that, that's going to be about a $200 million business for you?

The service business for SemiTest, that probably would be a little bit bigger. Our Services business in total is about $60 million. So for Semi, it's about $50 million, so I guess $200 million is probably about right. That's fair.

And then moving on to the topic of the cash, which I think, given the cash from operation for the Q1, which is about 5% operating cash flow margin compared to last year that it came out about 30% for the year. I think the level of disappointment started down at 10% to 15%, some of the front-end equipment companies maybe out there buying back shares but you're approaching the cash situation differently. You want to go out there and secure future growth. So if you could provide more color as to how we should think about -- the way you think about acquisitions. Because there's a dilution factor coming in. It may be more prudent to go and use the cash for acquisition, but there could be some near-term impact to the bottom line. Are these concerns valid or help us better understand how we should think about it.

Okay. I'll start where you started. The first quarter low cash generation is simply due to the nature of variable compensation and profit sharing and some of our foreign taxes all get paid in the first quarter. So first quarter is always our lowest cash generation period. So there's nothing to be read into that. That's just the way the first quarter has always worked. In terms of how we're thinking about cash, I think we've been quite consistent there are some good opportunities that we have identified. We simply can't get to the right valuation. Maybe we can in the next 3, 6 or 9 months and if we were able to do that, I'd think that would be a much better deal for our investors than buying shares back. We bought $0.5 billion of shares back several years ago, and I don't think that improved the company in a meaningful way. Obviously, if the stock for some unknown reason became more attractive, we'd obviously make an opportunistic buyback. And we do have an authorization for $200 million to offset dilution from employee equity instruments. And our cash strategy is not cast in concrete forever. This is just how we want to approach it now to offset dilution, be opportunistic. We have a bias for buying companies that could fit and be optimized in Teradyne better than on their own, but we can't overpay and that's what slows down what otherwise could be some more exciting news.

Got it. And one quick follow-up regarding the model. Early on, you said that you update the model once a year. Does that mean that what you highlighted last year is going to hold through Q4 of this year and no change?

I would expect so.

Your next question comes from line of Patrick Ho with Stifel, Nicolaus. Patrick Ho - Stifel, Nicolaus & Co., Inc.: You gave a little bit of color on the HDD test revenues and the trends over this year. But in general, what is the typical turnaround time between when you see the order and revenue recognition for those systems?

If they passed the qualification period because otherwise it could be a 9-month period. But once we get past qualification and we get an order, there's still another evaluation. So net-net, it's probably 6 months. Patrick Ho - Stifel, Nicolaus & Co., Inc.: Okay. So it's obviously a little bit longer than the core SemiTest turnaround time?

Right. But then once we're through the first acceptance is with a new product, new customer, then it goes back to a normal recognition and it'll look like our other businesses. Patrick Ho - Stifel, Nicolaus & Co., Inc.: Okay. Got you. That's really helpful. And maybe just on an apples-to-apples basis and it doesn't have to be an exact number. Could you give what the Automotive Diagnostics business could have contributed to revenues in the June quarter just so we have, I guess, a clear apples-to-apples at least between March and June?

The June quarter in the June of 2011? Patrick Ho - Stifel, Nicolaus & Co., Inc.: Yes, '11, yes.

Well, I'll give you June of last year because I don't have the books anymore. June of last year was $9.5 million of revenue and the EBIT was breakeven. Patrick Ho - Stifel, Nicolaus & Co., Inc.: Great. And finally, Mike, maybe just to go back to the Memory Test side of things for a second. How sustainable do you believe the current NAND FLASH test-buying trends are? Obviously, we see that the overall environment seems to be still relatively healthy based on some of the consumer electronic devices that continue to consume NAND. What's your take on the test buy rate and the sustainability for you guys and then maybe the whole segment as a whole?

Well, I think for this year, the trend will be a much heavier FLASH component than a DRAM component in that total market, whether that market ends up at $600 million or $900 million. And I think that trend for the short term is certainly what we're expecting. Beyond that, I think, there are a variety of forecast on it, but our position with the Magnum actually it's favorable for us because we have a bigger footprint on the FLASH side of the business than we do on the DRAM side of the business. Patrick Ho - Stifel, Nicolaus & Co., Inc.: And maybe just a final follow-up off of that comment, do you believe some of your growth with Magnum is due not only to market conditions, but also potential share gains?

Yes. I mean, maybe with one or 2 quarters ago, we talked about extending the Magnum into a DRAM wafer probe segment. So the position in FLASH has been growing gradually over the years, even before Nextest was part of us. And the expansion into the low-speed DRAM probe sector is what gives us some additional growth. Obviously, that has to be resuscitated and be a little bit stronger than it's been for us to get meaningful share. But when you wrap all of that together, that's what's driving us hopefully from the teens in market share up to the 20% level this year.

Your next question comes from the line of Atif Malik with Morgan Stanley. [Technical Difficulty]

My question is I'm a bit surprised at the test utilization number of 90% that you guys are talking about. You still guided to 70% test utilization for second quarter, but 1Q at 75%. So is it something that you're going to see or starting to see with test utilization have to tried to come down and maybe you can explain the discrepancy with what's being seen and what you're seeing?

Well, it's a mixed bag and different [indiscernible] and it shifts -- it can shift pretty dramatically based upon the orders that they get. If you look at the outside measurements of utilization, it's clearly in the 80% to -- up to the 90% level and has trended up from this trough, which was around 85%. So it was a high trough and it's been moving up over the last couple of months. Now I think the thing that supports overall reasonably high utilization in our overall installed base is that the bookings relatively has been strong. So those capacity being added at a pretty healthy rate. The run rate in the business, we think, at $600 million plus in the first quarter and shipments would suggest the $2.4, billion, $2.5 billion market level. So I think all of that says, across the world the installed base utilization is high. Having said that, the fact that our OSAT bookings have remained stable at 25%, 24% would suggest that in the OSAT sector, that could be lower.

Got it. And then another OSAT, PowerTech, they are actually raising the CapEx for this year for DRAM DDR3 testing, not by a lot, but at least they're raising it. And I'm curious to know is your status still dual sourced kind of a status for DRAM testing and what aren't you seeing in your DRAM testing bookings?

Well, we're not into the entire market and the customers that we have in DRAM final test have been using, as we've talked before, have really been able to get productivity and adapted the system so they can test the current speed rates of the DRAM products, essentially, with a lot of their existing installed base. So we're not seeing as much business there as you would get if we were populated across the entire market. But that's why it's an opportunity that's in the future for us rather than baked into the numbers that we've reported.

Operator, thank you. And everyone, appreciate you joining, and please call if you have questions. We look forward to talking to you in the next couple of months. Thank you.

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