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Sejuti Banerjea

Teradyne Heading Up

TER

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Teradyne Inc’s (TER - Analyst Report) fourth quarter results were in line with the Zacks Consensus Estimate of 11 cents.

Revenue

Revenue of $297.0 million was down 13.8% sequentially and 4.2% from September 2011 and within management’s guidance of $270-$300 million. Revenue was in line with street expectations.

Around 75% of revenue in the last quarter came from semiconductor testing platforms, while the balance came from system testing. The segments were down 16.2% and 35.9%, respectively from the September 2011 quarter. Semiconductor test also fared badly in the year-over-year comparison, posting a decline of 22.9%. Systems testing remained strong, growing 10.0% from last year.

In the last quarter, Teradyne’s memory test business did particularly well, growing 11% from the year-ago quarter, as both its flash and DRAM test products gained traction. SOC test was slightly weaker.

While the HDD testing business continued to bear the impact of the Thailand floods, management stated that other opportunities were opening up. The systems test business gained from a stronger defense market, as well as improvement in storage and growth os the still-small commercial board testing products.

Orders

Total orders were up 18.9% sequentially, with the book to bill jumping to 1.40. The increase in the last quarter attributable to both the segments. Specifically, semiconductor test was up 18.9% sequentially and down 18.5% from a year ago.

Systems test grew 179.5% sequentially and 78.3% from last year. The book to bill ratios in semiconductor and systems test businesses were 1.15 and 1.86, respectively. The LitePoint acquisition has positioned Teradyne well to gain from the growing opportunities in wireless test and this business did not disappoint.

Margins

The pro forma gross margin was 49.3%, down 84 basis points (bps) sequentially and 314 bps year over year. The sequential decline was due to lower volumes offset by a lower mix of HDD revenue.

Operating expenses of $116.1 million were up 13.7% sequentially and 15.5% from a year ago. The operating margin shrunk 1,030 bps sequentially and 983 bps year over year due to the continued volume declines. As a result, all expenses were up sequentially and year-over-year (as a percentage of sales). SG&A increased the most, followed by R&D and then cost of sales.

Net Income

The pro forma net income was $25.1 million, resulting in an 8.5% net income margin compared to $65.9 million, or 19.1% net income margin in the  September 2011 quarter and a net income of $63.7 million, or 20.6% net margin in the December quarter of 2010.

Our pro forma estimate excludes inventory adjustments, restructuring charges, amortization of intangibles and tax adjustments in the last quarter. Our pro forma estimate may not match management’s presentation due to the inclusion/exclusion of some items not considered by management.

Including the special items, the GAAP net income was $125.1 million, or 56 cents a share compared to $54.7 million, or 25 cents a share in the previous quarter and $60.1 million, or 27 cents a share in the year-ago quarter.

Balance Sheet

The company has a fairly strong balance sheet, with cash and short term investments of $670.2 million, which declined by $521.5 million in the last quarter. The net cash balance was $507.7 million, down significantly during the quarter.

Inventories at quarter-end were up 20.0% sequentially, with inventory turns down from 5.1X to 3.8X. DSOs went from 38 to 40.

Guidance

Management provided guidance for the first quarter of fiscal 2012. Accordingly, revenue is expected to come in at around $360-$400 million (up 21-35% sequentially), with non GAAP gross margin of 48-49%, R&D 15-16%, SG&A 16-18%, interest expense of around $2 million.

Teradyne expects non-GAAP earnings from continuing operations of 22 to 33 cents a share (better than the Zacks Consensus of 23 cents) and GAAP earnings per share of 5 to 13 cents based on a diluted share count of 205 million.

Conclusion

Teradyne reported a good fourth quarter and announced a strong guidance. It appears that the company is seeing much higher demand across several markets. This has helped it grow both semiconductor and systems test businesses. The addition of LitePoint is also a positive, given the significant opportunities unfolding in the high-growth wireless market.

We remain optimistic about Teradyne in the longer term, given the popularity of its products, the LitePoint acquisition that further rounds out its portfolio and design win momentum that should continue. We therefore expect estimates to trend up, raising the Zacks Rank from the current #5, which translates to a Strong Sell rating over the next 1-3 months.

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