Teradyne, Inc.
Q3 2009 Earnings Call Transcript

Published: 30 Oct 2009

[Operator:]

Good morning. My name is Molly and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 Teradyne Earnings Call. (Operator Instructions). Thank you. Mr. Blanchard, you may begin your conference.

[Andy Blanchard:]

Thank you, Molly. Good morning, everyone and welcome to our discussion of Teradyne’s most recent financial results. I’m joined this morning by our Chief Executive Officer, Mike Bradley and our Chief Financial Officer, Greg Beecher. Following our opening remarks, we will provide details of our performance for the third quarter of 2009 as well as our outlook for the fourth quarter. First, I would like to address several administrative issues. The press release containing our most recent financial results was sent out via Business Wire last evening. Copies are available on our website or by calling our Teradyne’s Corporate Relations office by 978-370-2221. This call is being simultaneously webcast over our website 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 portion of our site and click on ‘Live Web Cast’ followed by ‘Click Here’ for webcast. In addition, replays of this call will be available via our website starting approximately 24 hours after the call ends. You will find it by going to teradyne.com and click on Investors. The replays will be available along with the slides through November 13, 2009. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne’s results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release as well as our most recent SEC filings for a complete description. Additionally, those forward-looking statements are made as of today and we do not take any obligation to update them as a result of developments occurring after this call. During today’s call, we will make references 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 that is available on our website. To view them, go to 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 next conference, Teradyne will be participating in the Sidoti & Co. New York Emerging Growth Conference on November 20, the Credit Suisse First Boston Technology Conference in Phoenix on December 2 and, the Barclays Global Technology Conference in San Francisco on December 9, and Eric May luncheons in Chicago, Boston and New York on November 11, December 14 and 15 respectively. 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 third quarter of 2009 and review the outlook for the fourth quarter. Then our CFO, Greg Beecher will provide more details on our financial performance in the third quarter and our guidance for the fourth quarter of 2009. We will then answer your questions. For scheduling purposes, you should know we intend to end this call after one hour. Mike?

[Mike Bradley:]

Thanks, Andy. Good morning, everyone. Thank you for joining us today. I want to focus my comments this morning in three areas. First is the momentum we were seeing in our semiconductor test business, second is the important milestone we’ve achieved in the high-speed memory market, and third is the increasing strength of our System Test Group, which is contributed to the trajectory of our recovery from the trough of this cycle just six months ago. Later, Greg will take you through the financials where you can see the positive affects of our cost controls and our balance sheet initiatives. He will also outline our financial model going forward including hard disk drive and high-speed memory, which we’ve added to the portfolio. Let me start with the semi test side of the house. Last quarter you will recall our overall semi test booking doubled from the level of Q1. In this third quarter, we topped the Q2 total with bookings of just over $230 million or about a 70% growth over the second quarter. Our IDM and fabless specifiers led the way with bookings more than double the level of Q2. The OSAT business totaled about $50 million, equal to our second quarter order rate. So, both customer segments have more than tripled since the low levels of six months ago. From a device segment perspective, we saw very strong growth in power management applications, while our wireless business was still strong it was complimented by micro controller, storage and analog segments, which posted healthy growth in the second quarter. Within these numbers, we are pleased with the upsurge in business from our Eagle Test product line, which recorded its strongest bookings quarter in a number of years. New demand for automotive and image sensor systems remains below our historical levels, so we’ve clearly got some segments that will add to our totals as the recovery broadens. As I mentioned last quarter, we are hitting on many but not all cylinders. That remains true in the total memory market as flash and high-speed memory test demand remains much lower than in prior periods. We’ve seen our first new ordering in flash this quarter, after virtually no business in the first half of the year. So, we are now more optimistic of albeit cautiously so the flash could start to participate more in the recovery, which brings me to high-speed memory. I’m very pleased to report that we’ve met the important milestone of receiving multiple orders for our [UltraFLEX M] system. These systems are now installed at our customers in both engineering and production and we expect full acceptance and revenue recognition for them in this the fourth quarter. This is significant event as it represents a beachhead in a potentially large new market for us, one that has historically yielded the largest concentrated buying power in the automatic test equipment industry. I do want to say, however that we don’t intend to delineate the specific applications of our customers as we are obliged to protect all information of a strategic nature, for our customers and ourselves, especially in this early phase of business. I will say what we said publicly in the past and that is our UltraFLEX M system combines test capability to handle the most advanced DDR3 and GDDR5 devices and is architected for multigenerational device coverage. We believe we have a very solid offering for these advanced technologies with the parallelism to provide very competitive test economics. One last note of clarification; and that is that, we are combining our HSM and flash memory numbers in Greg’s summary without a specific breakout of each for the reasons that I mentioned. Now, let me turn to our systems test business. The outstanding news there is that we’ve achieved record revenues and strong profitability from this group this quarter. The systems test group has accounted for one-third of our orders this year and over $200 million in bookings. The steady performance of our defense business has been supplemented by our new hard disk drive venture and we continue to focus on improving our product cost structure in HDD so that it can make a proportional contribution to the bottom line. Like semi test though we still have businesses that haven’t seen much recovery. Our in-circuit commercial board tests and automotive diagnostic units remain at pretty low demand levels. However, they are not a drain on the bottom line given their fixed cost structures. Please note that we are not going to delineate any specific numbers relative to the individual businesses of defense, board test, automotive diagnostics or hard disk drive, as this would expose some sensitive information about customer buying patterns in our concentrated customer segments. We know you will understand this if we don’t flesh out those particulars in the Q&A session as well. Now, turning to our revenue guidance for the fourth quarter, our semi test revenue will again grow sequentially while our systems test revenues decline due to the lumpy nature of some of their businesses. In short, we will have system test shipping at the past Q2 level while semi test will have doubled over that same time frame. I also want to mention that this rapid ramp in semi test business has in fact put strains into our supply chain. The front part of the ramp was achieved through some inventory drawdown throughout the supply chain. With that inventory consumed, we were experiencing more part shortages which is moving our lead times out of a bit. Greg, will comment more on that shortly. As I mentioned earlier, Greg’s also going to elaborate on the company’s financial model as we want to give you assistance in how that model can move given the volatility of some the underlying components. I do want to emphasize that we are keeping a tight rein on spending especially anything that has a fixed component to it. That doesn’t mean that we won’t make some investments going forward just that we will continue to run things as tightly as possible so the drop through on top line growth is attractive. Finally, the downturn of this last year is not yet a distant memory, but instead a harsh reminder of the volatility in the space. I’m extremely proud of how our workforce has adapted and how our customers have collaborated with us. In less than two years, we’ve added four new businesses, two acquisitions and two organic undertakings, and we’ve reshaped the company for stronger over-the-cycle performance, all while the world economy had its most severe meltdown. We’ve got a lot of work ahead, but I’m pleased with our progress. Greg?

[Greg Beecher:]

Thanks, Mike, and good morning everyone. In addition to providing a recap of third quarter results and details on the fourth quarter, I’ll focus my remarks on our model, our balance sheet and how we are responding to this latest increase in demand. Let me first start with our third quarter results. As you know, we generated a 9.6% non-GAAP operating profit on sales of $262 million. Given our current cost structure and breakeven, this is seven points to eight points higher than we achieved at comparable sales levels during the last five years. Though much improved from prior periods, it is lower than our target model at $275 million as we had record hard disk drive sales and systems test this quarter, which has lower gross margins than the company average. So, as I mentioned in last quarter’s call, I’d like to update you on the model that we were using to manage the business when the mix of business swings due to seasonality or the inherent lumpy buying that occurs in some of these businesses. Before I update our model for the added variability from entering hard disk drive and high-speed memory, I should first point out that the bottom line contribution from all of our businesses has the same 15% or better objective. However, some businesses have higher gross margins and higher operating expenses than the company average, while others have lower gross margins and lower operating expenses, but they all need to get to the same 15% or better objective over a normalized cycle. In the past, we’ve included the full operating spending of hard disk drive and high-speed memory, but we didn’t update the model for the combined lower gross margin percentage. We wanted to first get a better picture of the relative contribution to the total. As you might expect, the model will be affected in two dimensions. First is the amount of revenue that we will need to achieve our model 15% profitability, will increase as we fold-in these new businesses into our model as our combined gross margins are lower than the company average. So we’d expect to be at our historical 15% model when sales are at $275 million and there are no hard disk drive or high-speed memory sales. Again, this is just a reiteration of our prior model. An example of the mixed impact is, if sales of hard disk drive and high-speed memory in a quarter are $35 million together, then we would need company sales of about $300 million to hit our 15% model. A quick note that I should add is that the gross margins on hard disk drive are lower than high-speed memory but for simplicity we’ve combined them together in this example. In addition, high-speed memory margins should improve over time as performance requirements intercept our products capabilities. We’ve brought in some exhibits on our website that show the variability that we may experience. We also included a quarterly breakeven and margin drop through information for your models. So the overall story is, attractive operating leverage with an expanded serve market that we are making good progress penetrating. Moving next to the balance sheet. Cash and marketable securities increased from $373 million to $468 million since the last quarter. The majority of this increase came from advanced customer payments to secure their position in our slot plan. However, we’ve also maintained very competitive receivable, day sales outstanding at 49 days which reflects strong customer satisfaction. Overall, our balance sheet continues to be strengthened. Turning next to the continued surge in demand. Product shipments increased 78% from the second quarter to the third. As we said a quarter ago, we staged some finished goods inventory to respond to the anticipated demand increase. This along with draining the existing inventory in the supply chain helped keep our third quarter lead times quite short. However, as we move through the quarter lead times extended on average to about 6 to 10 weeks. We continue to work with our key suppliers to respond to this increased customer demand. Overall, we are very pleased with the responsiveness of the supply chain as it gets stoked up after quite a respite. However, the fact is that we are carefully monitoring the total supply chain along with our major contract manufacturer to ensure that the lead times remain in line with customer needs. Before I review the third quarter results in some detail, I should mention that we’ve also posted on our website an exhibit on the convertible debt delusion at different stock prices, including both the economic delusion and the much more conservative accounting delusion calculation. Now, moving to the third quarter results. The top line of $262 million was up $92.6 million or 55% from the second quarter. Semi tests contributed $70 million of this increase for a total of $173 million and system tests contributed $22 million of the growth for a total of $89 million. Within that $262 million, service revenue was $56.9 million, up slightly from $54 million a quarter ago. Semi test service revenue was $40.6 million, up from $37.6 million a quarter ago. Product turns business was 37% versus 40% a quarter ago. In semi tests, product turns business was 50% versus 62% a quarter ago. Memory revenue was $7.9 million in the quarter, up from $2 million a quarter ago, which was all flash memory. Moving down the P&L, non-GAAP gross margins increased from 29.5% in the second quarter to 42.5% in the third quarter due to higher volume. Product margins were adversely affected by mix in system tests and a product obsolescence charge of $6.9 million. R&D expenses were $38.3 million or [14.6%] of sales compared to $38.5 million or 22.7% of sales in the second quarter. SG&A expenses were $46.3 million or 17.7% of sales compared to $47.3 million or 27.9% of sales in the second quarter. Operating expenses of $84.6 million were down slightly from the second quarter and included the benefit of about $6 million from temporary seller related reductions. Our net non-GAAP interest and other expense was $1.8 million, taxes were a benefit of $1.5 million in the quarter, and our headcount totaled about 2,900 people. In the third quarter, semi test sales were 66% of the total and system test group was 34%. Systems test sales were at record quarter levels. Our book-to-bill ratio for the third quarter was 1.10 for the overall company, 1.3 for semiconductor test, and 0.62 for a system test. At the end of the quarter our backlog stood at $336 million, of which, 83% is scheduled to ship within the next six months. Cash flow from operations totaled approximately $94 million after capital additions of $9 million. Again, the majority of this increase was from advanced customer payments. Depreciation and amortization for the third quarter was $34 million, including $6 million of stock-based compensation, $8 million for acquired intangible asset amortization and $2 million for amortization of the GAAP imputed debt discount. As noted in the press release, sales for the fourth quarter are expected to be between $255 million and $270 million, and non-GAAP EPS range is $0.12 to $0.17 on a 181 million diluted shares. I should add that the guidance includes the full reversal of a temporary pay cuts and a more normal product mix, but also excludes the amortization of acquired intangibles, the purchase accounting inventory step-up charge, and the non-cash imputed interest on the convertible debt. Our GAAP EPS range is $0.04 to $0.09. Now, moving to the P&L percentages expected in the fourth quarter. We expect gross margins to be 47% or 48%, while R&D should be 15% or 16% and SG&A should be 19% or 20%. Non-GAAP net interest expense is expected to be about $2.3 million and the tax provision should be about $2 million. In summary, our model is performing quite well. We are penetrating new markets and we are adding muscle to the balance sheet. Our main focus short-term is making sure our supply chain responds to demand in addition to maintaining very strong cost discipline. Now, I will turn the call back to Andy.

[Andy Blanchard:]

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

[Operator:]

(Operator Instructions). Your first question comes from the line of C.J. Muse with Barclays Capital.

[CJ Muse:]

I guess the first question on the high-speed memory front, in terms of the multiple orders there. Can you comment, does that mean you were named the second source vendor there or are they still looking at three different vendors?

[Mike Bradley:]

CJ, this is Mike. What I can tell you is that I can’t give you details on that, and I don’t think the customers have stated anything about first or second suppliers. What I will say is, our initial HSM evaluations have concluded in this past quarter and they are for both production and engineering applications. So, that sets the stage for some growth in 2010. Obviously, our objective here was to get this milestone achieved this year and we’ve done that, but in terms of first or second suppliers, none of those determinations have been made.

[CJ Muse:]

Just to confirm, I believe you said memory, total revenues was $7.9-million?

[Mike Bradley:]

Yes.

[CJ Muse:]

Can you expand on the trajectory from here I guess including high-speed memory, what the puts and takes are and what we could expect as we enter 2010 for that line item?

[Mike Bradley:]

Our customers are putting their CapEx budgets together now, and it’s a pretty uncertain picture actually. I think everyone assumes that 2010 is going to have production buying both on the DDR3 and on the GDDR5 front. Very hard to size that. We’ve made some estimates about the size of the market. How big we think that will be? Then obviously, you can take calculations as to what our share might be. I will say it’s shaping up. The customers are talking about adding capacity in 2010 where they’ve been really at very, very low levels here in ‘09.

[CJ Muse:]

In terms of the non-GAAP pro forma, there is a line for profit sharing. Is that stock base compensation?

[Greg Beecher:]

No. As we make adjustments in non-GAAP such as removing the amortization of intangibles, in theory, that would create more of a profit sharing charge as we improve income. So, we are just penalizing non-GAAP income for profit sharing had these other items that we’ve taken out not been in the P&L.

[CJ Muse:]

Did you say that’s a tax effect?

[Greg Beecher:]

No, no. Some of the items we adjust for in non-GAAP increase our income. So for increasing our income, our profit sharing calculation is basically 10% of whatever your pre-tax profits are. So, if we make adjustments and increase our pre-tax profits in non-GAAP, we put a profit sharing charge on that just so it’s consistent with how we would compensate people. Now, that cost is never paid because we pay profit sharing based on GAAP results, but to give a clearer non-GAAP picture we thought it was fairer to penalize ourselves for a profit sharing charge.

[Operator:]

Your next question comes from Jim Covello with Goldman Sachs.

[Jim Covello -Goldman Sachs:]

I guess first of all, if I look at the orders that you were able to recognize in the third quarter versus the fourth quarter revenue guidance. The fourth quarter revenue guidance is below third quarter orders even though the last few quarters of revenue have been above the previous quarters’ worth of orders. Can you help me understand that dynamic a little bit?

[Mike Bradley:]

Jim, two things there. One is that we have some advanced ordering that goes out beyond the quarter. Some customers wanted to strategically get positioned against what they view as a tight supply chain, so they positioned themselves essentially not at the front of the queue but they’ve taken a piece of capacity up front. The other thing is, we are a little bit constrained on the supply chain and have some parts shortages. So we are working through those but there is a little bit of caution in our tone here as not all of those things are resolved yet. So, those are the two components.

[Jim Covello -Goldman Sachs:]

Would that potentially give better visibility into the first half of 2010 with the extended orders and maybe orders that you couldn’t be able to fulfill from a revenue perspective until the first quarter?

[Mike Bradley:]

I think that’s fair. Of course, the orders there and the delivery schedule on those orders could still change. I think it gives you a little bit more confidence that those customers put an expectation that their business is going to grow. So, we feel a little bit better about that.

[Jim Covello -Goldman Sachs:]

One of the big packaging in test side customers suggested that their 2010 CapEx would double this week. Without commenting on that customer specifically, have you started to see orders or shipments to reflect that level of CapEx yet? Or do you think that’s in front of you still?

[Mike Bradley:]

The OSEC segment came back pretty strong in the second quarter, tripled from Q1 to Two quarter, but stayed steady for us in Q3. It’s nowhere close to the levels; it’s almost two and a half times as high in the high point of the last cycle, the ‘08 part of the cycle. So, from afar I’d say there some energy still in that. That’s not an overheated segment for us.

[Jim Covello -Goldman Sachs:]

Very helpful. On the high-speed memory, congratulations on getting the recognition there, what do you think the timing could be for; A, following orders from that customer, and then; B, potentially orders from a second customer who I believe you might be engaged with now?

[Mike Bradley:]

I will say, we’ve gotten orders from more than one customer. So, those are in the house at this point. I think your question is what the potential for follow-on orders is for both of those customers or from expansion beyond that. That’s a tough call because that’s all wrapped up in their CapEx plans. I think we vote along with what conventional wisdom is that that will start in the first half of next year and probably be heavier in the second half. Obviously, we are trying to make sure these engineering systems and the early production use of this system goes well so that we can participate. It’s very, very hard to size that.

[Operator:]

Your next question comes from the line of Gary Hsueh with Oppenheimer.

[Gary Hsueh:]

I’m trying to get a sense of normalized revenue and earnings. I think on the earnings and the margin front you guys were helpful there, but in terms of normalized revenue, what are you guys thinking in terms of buy rate sort for a number next year. Just off the back of Jim’s questions, and it just sounds like the foundry and subcon world in Taiwan particularly in 2010 is feeling in close approximation to the spending levels in 2004, and I know your subcon revenue number is far below what it was in ‘08 and ‘04. Does that change your kind of 1% test or buy rate sort of notion in terms of the normalized numbers for 2010 and what kind of test or buy rate numbers are you expecting for next year?

[Mike Bradley:]

Buy rate in this downturn has been a less useful number to us. I think everybody knows that it’s sub 1% this year in total, in both in memory and in SOC. Here is how I’m thinking about it. We are exiting this year in total CapEx at around a $1.5 billion. Okay? With 80 plus percent of that non-memory, and that’s down from $3 billion which was down from $4 billion which was down to $5 billion. So, we’ve been on this downward slide here and the CapEx rate or the buy rate has gone down. If you annualize fourth, quarter that gives you about a little over $2 billion total market. So, if everything stays flat and I know there are different prognostications as to dip in the first half, recovery in the second half and so on, if everything stays flat, you’ve got a $2 billion market. We think it goes up some from that because we think that this buy rate is artificially low. I don’t know whether that’s 1.2 or 1.3, but it’s certainly not at the 2% or the 1.5% level.

[Gary Hsueh:]

So it would seem to argue to me that you are looking at basically a base case for semi test revenue on a normalized basis in 2010 somewhere around a $1 billion, and consensus right now is at 1.1, and I think there is a lot of short-term fear about how seasonally week Q1 could be. In terms of the overall market, you guys believe for sure that if semi CapEx is growing then you revenue should grow and semi test buy rates should grow?

[Mike Bradley:]

Did you say a billion in SOC?

[Gary Hsueh:]

Yes.

[Mike Bradley:]

Yes, so a billion on SOC, then the market has to be over $2 billion. Do the math around $2 billion and 40 plus percent share you get 800. So, 800 to 900 is probably okay.

[Gary Hsueh:]

Just along these lines, did you give a number in terms of a target revenue range for HDD test next year?

[Mike Bradley:]

You mean in estimating for different models what might you put in?

[Gary Hsueh:]

Yes, for HDD test next year, was number given out?

[Mike Bradley:]

No, but we’ve been using a windage number that says that could be $30 million, $50 million. It could be higher than that because our penetration into the market has been at a higher rate than that. So, the range is pretty wide and it’s lumpy, so it’s hard to make a call on it.

[Operator:]

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

[Krish Sankar:]

Mike, you said about Eagle Test having record bookings in Q3. I was just trying to understand, is it fair to assume the Eagle Test business is running at its traditional peak capacity which is about mid to high $30 million run rate for revenue and maybe like a $40 million bookings run rate?

[Greg Beecher:]

Not currently. It’s below that. Some of the bookings, we are securing capacity over the next couple of quarters. So, it’s not quite at that level but it’s working its way up to mid-20s in attractive profits.

[Krish Sankar:]

On the HDD side of the business, I know you guys said $30 million to $50 million and it could be higher. Did you see any pull-ins this year from 2010?

[Greg Beecher:]

We don’t think so. We don’t think there was pull-ins with the equipment are being used, very high utilization. So, we don’t think there are pull-ins, but having said that we would not be surprised if from a seasonal perspective Q1 and Q2 could be dry. That’s not uncommon for this business.

[Krish Sankar:]

Just a final question, on the high-speed memory not to be beat a dead horse, but in terms of DDR3 specifically, can you tell like how many customers are you actually engaged with today?

[Mike Bradley:]

That horse isn’t dead. We said multiple customers so that’s where we will leave it, Krish. If you remember, a couple of quarters ago, we ran a valuation of one, we expanded that to two. So, we’ve been able to secure business here from multiple customers.

[Operator:]

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

[Vis Vellore:]

This is Vis Vellore for Satya. Actually can you share what the service revenues were for semis and system tests for the September quarter?

[Greg Beecher:]

Yes. The semi service revenues were $41 million and the system test service revenues for the third quarter were $16 million.

[Vis Vellore:]

Okay. Then at these levels of $250 million to $270 million revenue run rate, how should we think about OpEx coming back?

[Greg Beecher:]

OpEx will come back to around $92 million in the fourth quarter, but as we approach our model of 15% profit, we would expect OpEx closer to $96 million, $97 million, maybe even $98 million, that neighborhood, upper 90s as variable compensation that’s tied to profitability kicks in.

[Operator:]

Next question comes from the line of David Duley with Steelhead Security.

[David Duley:]

Congratulations on a nice quarter. Did you mention what the book-to-bill in the flash business was and was there more than one customer ordering there or was it just one?

[Mike Bradley:]

David, it’s multiples. It’s a group of customers, so there has been a reawakening in that space. We don’t break out the bookings between flash and HSM. We bundled those together in the number we talked about.

[Greg Beecher:]

When you bundled those together, the bookings were 22, revenue was eight, so it’s a very high book-to-bill on a bundle basis.

[David Duley:]

That’s great, and great to see those customers finally back at the table. It’s kind of like a second leg to the story. Did you have any 10% customers during the quarter?

[Greg Beecher:]

In terms of revenue we did have one 10% customer during the quarter.

[David Duley:]

Will you disclose the name of that in your filings?

[Greg Beecher:]

We will disclose the name in the 10-K. We probably won’t disclose the name this quarter. I don’t believe that’s required, but certainly in the 10-K we’ll disclose it.

[David Duley:]

Great. I was a little curious about two things. Jim Covello asked some questions about the OSAT, and basically what we’ve been hearing is, a lot of the incremental CapEx these guys are going to be spending next year will be on test. I was wondering if you’ve seen any of those big OSATs come in and give you advanced payments yet or are they starting to get a little nervous that your lead times have extended beyond a quarter?

[Mike Bradley:]

Dave, we are so connected to them, it’s hard to say if there is a lot of nervousness on it. They’ve stayed this quarter in demand, but I think they know where we are and we don’t see any anticipatory demand because our lead times have moved out a little if that’s really the essence of the question. They are not buying on the come is what I would say to you.

[David Duley:]

They are holding their cards close. The advance payments, I’m just a little curious about that. Exactly how does that work?

[Greg Beecher:]

We had payments from a customer and received a payment upfront. It gives them better position in our slot plan. They get a slightly better discount, but commercially, it works for both parties. So, they are securing capacity and they see some greater test demand and then they want to get ahead of it.

[David Duley:]

If for some reason they don’t need the testers or something like that, the market were to rollback over and didn’t need the capacity, how does the deposits work then?

[Greg Beecher:]

I don’t want to get into the details of the contract in any great level, but we would expect that they would take the capacity at some rate and if they take it a little later, I don’t think there would be cash exchanging hands, but we would have to work out the details if their plans change and we would work closely with them to make sure it works for both parties.

[Operator:]

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

[Patrick Ho:]

A couple of house keeping questions first. What were your stock options this quarter and what can I assume for a tax rate in 2010?

[Greg Beecher:]

The stock-based compensation was $6.1 million this quarter. I’m sorry, the other question was?

[Patrick Ho:]

Tax rate for 2010 now that you are back in profitability?

[Greg Beecher:]

It would be 15% or less. So, let’ say it’s 15%, it will probably do a little bit better.

[Patrick Ho:]

Just some broader I guess market related questions now. In terms of the SOC test business, you mentioned that you are still waiting for the emergence of some sectors like CMOS, image sensors and automotive, do you see that coming back in Q4 or do you see your current market segments being the same drivers in Q4?

[Mike Bradley:]

Patrick, it will generally be the same drivers. We are seeing a bit of life in the automotive space. So, if something comes back, that would probably come back. Of the laggards, that will come back sooner. Actually, image sensor has been up Q2 to Q3, but it’s not moving the needle much.

[Patrick Ho:]

Just going back to the flash memory business as a whole, you’re now seeing the pick up, are the trigger point for the pick up and spending on the flash memory side due to the transition to the 3X node or is it just overall demand trends that are requiring additional testers from your end? Which is driving the pick up on the flash memory side of things?

[Mike Bradley:]

It’s an overall demand phenomenon.

[Patrick Ho:]

The final question is on cash usage. Now that you are starting to generate positive cash flow, you guys were active in buy backs in the previous cycles. Is that something that you are going to look into in 2010 once again?

[Greg Beecher:]

No, we don’t have any plans to buy back stock in the foreseeable future.

[Operator:]

(Operator Instructions). Your next question comes from the line of Jagadish Iyer with Arete Research.

[Jagadish Iyer:]

Two questions, one is that, one of your competitors earlier this week suggested that the memory market is basically going to be doubling in 2010 and again progressively move into 2011. I just wanted to ask you Mike, what kind of position do you expect as you exit 2010 in terms of memory market share for you guys?

[Mike Bradley:]

Jagadish, I will tell you. I think it’s in the low-teens market share, but it’s against a very low market. Maybe the substantive point is, we’ll probably be slightly up in share in 2000. You said 2009, right?

[Jagadish Iyer:]

No, 2010. As you exit 2010.

[Mike Bradley:]

As we are exiting 2010, okay. We have to speculate as to how much share we can get in high-speed memory. Obviously, we are trying to get into some big players in high-speed memory. If we do that, we can move our share position considerably because that’s all upside for us. We exit ‘09 at in about 12% total market share. So, we could see ourselves growing, and we’d like to get to 20% as the first hurdle here as we go into the next year.

[Jagadish Iyer:]

The other question is that with TI moving to 300-millimeter analog, I just wanted to find out how well are you positioned to capture that portion of the business?

[Mike Bradley:]

I missed the question.

[Jagadish Iyer:]

Texas Instruments moving towards 300-millimeter analog process starting up later this year and early next year. I just was wondering how well are you guys positioned to capture the test portion of the 300-millimeter analog business there?

[Mike Bradley:]

There is no issue there. TI is one of our major customers and we are well positioned in a number of segments with their business. So I think we will be able to ride that transition.

[Operator:]

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

[Krish Sankar:]

Can you guys tell little bit more on the seasonality of the HTD side of the business?

[Greg Beecher:]

We don’t have a long history in this business, but certainly from our understanding and speaking to the customer and how they have bought in the past, it tends to have some seasonality element to it that it does tend to build or take capacity kind of Q2, Q3, Q4 and Q1 is more of a quiet period for adding capacity. So there might be macroeconomic trends that change that, but generally speaking I think it would be stronger in the mid-part of the year, maybe peak in the third quarter. So we would expect that as a continuing trend and somewhat tied to holiday season and seasonal buying

[Krish Sankar:]

Then the IDM-OSAT mix was is it 79% and 29% in Q3?

[Mike Bradley:]

79/21, we say we don’t do IDM-OSATs, we’ve always said specifiers, which includes IDMs and the fabless specifiers what they buy and then what the outsource assembly and test companies buy, so that’s 79/21, last quarter 63/37.

[Operator:]

Your next question comes from the line of Robert Weaver with Forest Investments.

[Robert Weaver:]

A number of convertible bond issuers from earlier this year have taken actions to get those bonds off your books. Is that something you guys have looked at it all in terms of doing an equity flush out of those?

[Greg Beecher:]

No, we haven’t looked that the at this point. The bonds are trading at a very high premium, so it doesn’t seem at this point that that would make a lot of sense. You will continue to investigate all opportunities. Our intent is in 2014 to pay the bonds back in cash and settle the option with net shares. So we will likely stick with that path unless there is something normal that gives us a better deal for the company.

[Operator:]

Your next question comes from the line of Raj Seth from Cowen and Company.

[Raj Seth:]

Mike, could you comment a little bit more on what you are seeing in the sort of low end J750 microcontroller test space? I thought that when we last talked that was one of the businesses that was still off. In your prepared commentary it sounded like microcontrollers picked up. Maybe you can remind me how big in normalized environment that segment of the market is relative to the total?

[Mike Bradley:]

Yes, Raj, are you asking for how microcontrollers fits into the total test market not Teradyne, right?

[Raj Seth:]

Both I suppose. If you can comment on what you’ve seen there, whether indeed it’s coming back strongly and in a normalized environment for you what does that typically represent?

[Mike Bradley:]

Let’s see, total market for microcontroller piece is somewhere around 9% or 10% of the total market. Little bit higher for us, because our share in that market has been pretty strong. The level of business we’ve had the last two quarters has been very low, under $5 million a quarter, and it’s gone up by the factor of about five in this quarter. So, there’s been a big jump in our third quarter demand off a pretty low base. Is that normal? We are not back at levels of J750. We may be 40% of the way back to the levels of J-750 sales that we’ve had. When I say that, I’m wrapping in image sensor into it. So, don’t need to make it complicated. The run rate we got is sub 50% of the normal run rate for that product.

[Operator:]

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

[Atif Malik:]

Advantest reported yesterday and if I add their DDR3 test units and add a couple of units from you, we are still at handful of DDR3 units. If I look at the rate of DDR3 migration from DDR2, clearly the premium has gone away for DDR3. That migration rate has been quite steep. As per our estimate it’s probably around 30%, 40% DDR3 right now. Has it surprised you on how few DDR3 testers have been bought given the rate of DDR3 migration we have seen?

[Mike Bradley:]

Atif, if you’ve asked that question six or nine months ago, the answer would have been yes, because most people looking at the test market were assuming that tooling for DDR3 would have to take place in ‘09 at a much heavier rate than is happening. In the last three to six months, everyone has recognized that the reuse and the stretching of the DDR2 product into the DDR3 low frequency range, lower speed grades has been heavily used by customers. So, there’s been a heavy reduction in CapEx as a result of that and that has been the major factor in depressing the DDR3 buys.

[Atif Malik:]

I see. Then a question on your shortages, we have seen this movie before where there is chatter about double ordering in the semi food chain. So, help us understand how much of your bookings strength is customers’ panicking given the shortages and how much of it is real?

[Greg Beecher:]

We believe the bookings strength is real. We looked at it carefully. It doesn’t mean there might not be $1 million or $2 million or $3 million that gets canceled. It’s nothing like the past when we had very long lead times. I think in truth, customers are probably going to get systems a week later than they might otherwise, and that’s kind of on the worst case scenario this quarter. So, I don’t think there is anything that they are getting from us that would cause them to throw in a bunch of orders just as a place holder. We haven’t seen it and wouldn’t expect it.

[Atif Malik:]

One last one, AMCO reported yesterday and they are saying that seasonality for 1Q could be single digit. Just want to get your thoughts on what kinds of seasonality we can see in 1Q?

[Mike Bradley:]

For revenue, which is in demand in this quarter, we think there is a digestion going on so that people will watch for the sell through in the holiday season. So, our expectations are that things are tonally, demand is a bit down in this quarter so that the Q1 numbers could be lower.

[Operator:]

There are no further questions at this time.

[Andy Blanchard:]

Great. Thank you all for joining and we look forward to talking to you next quarter.

[Mike Bradley:]

Okay. Thank you.

[Operator:]

Thank you. This does conclude today’s conference call. You may now disconnect.