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Teradyne Inc. (TER - Analyst Report) reported third-quarter 2013 earnings of 46 cents per share, beating the Zacks Consensus Estimate of 44 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

Revenues of $433.4 million were up 1.0% sequentially but down 6.5% year over year and just beat the lower end of management’s guided range of $425.0 million–$465.0 million.

Around 70.2% of revenues in the quarter came from semiconductor testing platforms, 8.3% from system testing and the remaining 21.5% from wireless testing business.

Bookings

Total bookings in the quarter amounted to $271.0 million, of which $207.0 million were in Semiconductor Test, $40.0 million in Wireless Test and $24.0 million in the Systems Test Group.

Total orders were down 42.8% sequentially, consistent with seasonal patterns.

Margins

Reported gross margin for the quarter was 58.7%, up 250 basis points (bps) sequentially as well as year over year due to favorable mix.

Operating expenses of $160.8 million were up 5.7% from $152.1 million in the year-ago quarter. The reported operating margin was 21.6%, down 170 bps from 23.3% in the year-ago quarter. Both engineering and development (E&D) expenses and selling and administrative (S&A) expenses increased as a percentage of sales.

The quarter’s GAAP net income was $69.5 million or earnings of 29 cents per share, down from $88.6 million or 39 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $95.0 million or 46 cents per share compared with $108.4 million or 53 cents a share in the year-ago quarter.

Balance Sheet

The company ended the third quarter with cash and cash equivalents, and marketable securities balance of $957.2 million, up from $728.7 million in the prior quarter. Trade receivables were $209.4 million, down from $228.2 million in the prior quarter.

Cash flow from operations was $154.5 million versus $249.0 million in the year-ago quarter. Capex was $32.1 million versus $33.3 million in the year-ago quarter.

Guidance

Management provided guidance for the fourth quarter of 2013. Revenues are expected to be in the range of $260 million–$285 million, down 37.1% sequentially at the mid-point. Non-GAAP earnings from continuing operations are expected to be in the range of 0 to 7 cents a share and GAAP earnings are expected to be 4 cents to 8 cents per share.

Conclusion

Teradyne’s third-quarter earnings exceeded the Zacks Consensus Estimate on lower-than-expected operating expenses.

The company reported weak orders and also provided conservative fourth-quarter revenue guidance, indicating low visibility and weak demand for Teradyne products in the future. Though Teradyne’s new products related to mobile phones fared well in the quarter, storage test lines were impacted by weak PC demand.

Management believes the addition of LitePoint to be a positive, going ahead, and expects the wireless device test market which it serves to grow 25%–30%. However, the SoC tester market is expected to be down 25% while the memory market remains flat. These factors are not indicative of much growth this year.

In the near term, we expect the shares to remain under pressure due to weakness in key end markets. Currently, Teradyne has a Zacks Rank #4 (Sell).

Other Stocks to Consider

Other stocks that have been performing well and are worth a look include Melco Crown Entertainment Limited (MPEL - Snapshot Report), Kemper Corporation (KMPR - Snapshot Report) and Fiserv, Inc. (FISV - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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