Teradyne (TER) reported first quarter earnings that beat the Zacks Consensus estimate by 8 cents. The company has a history of positive surprises, as evidenced by the net positive surprise of 12.75% in the four preceding quarters.


Revenue of $329.6 million beat the Zacks Consensus by 9.1%, growing 23.4% sequentially and 173.3% year over year. It was also well over the guided range of $290-310 million. Revenues have been growing strongly over the past four quarters, although the triple-digit year-over-year growth was the first in this cycle.

Around 88% of revenue in the last quarter came from semiconductor testing platforms, while the balance came from system testing. The 46.5% sequential increase in the semiconductor business was fueled by broad-based strength across memory manufacturers and foundries. This was partially offset by the 42.7% decline in System testing.

Revenues in the quarter were driven by strength in Asia, with Asia excluding Japan increasing 39.4% sequentially and Japan increasing 23.4% sequentially. The U.S. and Europe declined 11.1% and 4.0%, respectively.


Orders were up 76.5% sequentially and 291.9% year over year. The sequential increase was driven by both Semiconductor and System segments, which increased 74.5% and 90.1%, respectively. Consequently, the book-to-bill ratio jumped from 1.13 in the Dec 2009 quarter to 1.62 in the last quarter. The strength in system orders, despite the revenue decline, indicates that the segment is turning around.


The pro forma gross margin was 52.6%, up 435 basis points (bps) sequentially and 2,399 bps year over year. The gross margin expansion is attributable to higher volumes and stronger pricing.

The operating expenses were $104.9 million, up 13.5% sequentially. However, the operating margin expanded 712 bps sequentially and 7,721 bps year over year to 20.8%. This was possible because of the benefits of restructuring actions taken by management that resulted in significant declines in COGS, engineering & development and selling & administrative expenses as a percentage of sales. The leaner cost structure enabled significant margin expansion, as revenue increased in the last quarter.

Net Income

The pro forma net income was $58.7 million, or 17.8% net income margin, compared to $29.2 million, or 10.9% net income margin in the Dec 2009 quarter and a net loss of $68.2 million, or 56.5% net loss margin in the Mar quarter of 2009. Our pro forma estimate excludes inventory charges, restructuring charges and amortization of intangibles 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, GAAP net income was $50.1 million, or $0.22 per share, compared to income of $16.9 million, or $0.09 per share in the previous quarter and a loss of $90.7 million, or $0.53 per share, in the year-ago quarter.

Balance Sheet

The company has a fairly strong balance sheet, with cash and short-term investments of $460.5 million, which decreased by $3.2 million in the last quarter. The net cash balance was $318.0 million ($1.79 a share).

Inventories at quarter-end were down 7.3% sequentially, with inventory turns jumping up from 5.9X to 7.4X. DSOs were over 49 days, up from around 43 days, mostly due to the significantly higher revenues in the last quarter.


Management provided revenue and EPS guidance for the second quarter of fiscal 2010. Accordingly, revenue is expected to come in at around $390-$420 million (up 18.3% to 27.4% sequentially). The company expects non-GAAP EPS of $0.45-$0.52 and GAAP EPS of $0.33-$0.40. This would be a 62.6% increase in GAAP earnings in the first quarter. The Zacks Consensus Estimate is currently $0.23, well below the guided range.
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