Teradyne: Another Blow-Out Quarter – Analyst Blog


Teradyne (TER) reported second-quarter earnings that beat the Zacks Consensus Estimate by 13 cents, or 22.0%. Analysts were clearly expecting much weaker results, since there were no changes to estimates over the last 60 days.  This was in spite of the fact that the company has a very good surprise history, with the average positive surprise at 23.4% in the preceding four quarters. Management attributed the increase to solid revenue growth.
 
Revenue
 
Revenue of $454.8 million was also very strong, beating the Zacks Consensus by 11.7% and representing sequential and year-over-year increases of 38.0% and 168.2%, respectively. Revenues have been growing strongly over the past five quarters, with the triple-digit year-over-year growth the second in this cycle.
 
Around 88% of revenue in the last quarter came from semiconductor testing platforms, while the balance came from system testing. The 42.4% sequential increase in the semiconductor business was fueled by very strong demand in the system-on-a-chip (SoC) segment, where the company has been gaining share over the past few quarters. Management stated that the recovery in the memory segment lagged that of the SoCs, although the company was seeing growing demand in this segment as well. The System Testing segment experienced a turnaround in the last quarter, increasing 6.2% sequentially, following two quarters of double-digit decline.
 
Orders
 
Orders were a disappointment, declining 4.2% sequentially, although they were still up 125.6% from a year ago. Though the business is definitely much stronger this year than last, the company appears to be seeing slightly softer markets, as pent-up demand gets increasingly fulfilled. Particularly, the semiconductor test segment managed to hold its own, increasing 1.4% sequentially and 237.7% from the year-ago quarter. However, this was offset by the 38.5% and 48.3% sequential and year-over-year declines in the systems test segment. Net-net, the book-to-bill ratio dropped from 1.62 in the March 2010 quarter to 1.13 in the June 2010 quarter.
 
Margins
 
The pro forma gross margin was 57.0%, up 435 basis points (bps) sequentially and 2,071 bps year over year. The gross margin expansion is attributable to higher volumes.
 
The operating expenses were $108.7 million, up 3.6% sequentially. However, the operating margin expanded 1,277 bps sequentially and 4,734 bps year over year to 33.1%. 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 substantially in the last quarter.
 
Net Income
 
The pro forma net income was $136.1 million, resulting in a 29.9% net income margin compared with $58.7 million, or 17.8% net income margin in the March 2010 quarter and a net loss of $31.8 million, or 18.7% net loss margin in the June quarter of 2009. Our pro forma estimate excludes inventory adjustments, 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, the GAAP net income was $132.0 million, or $0.57 per share compared with income of $50.1 million, or $0.22 per share in the previous quarter and a loss of $66.8 million, or $0.39 per share in the year-ago quarter.
 
Balance Sheet
 
The company has a fairly strong balance sheet, with cash and short term investments of $408.0 million, which increased by $105.3 million in the last quarter. The net cash balance was $420.3 million ($2.33 a share).
 
Inventories at quarter end were flattish (down 0.4%) sequentially, with inventory turns jumping up from 7.4X to 9.3X. DSOs were flat at over 49 days, mostly due to the continued momentum in sales.
 
Guidance
 
Management provided revenue and EPS guidance for the third quarter of fiscal 2010. Accordingly, revenue is expected to come in at around $490–$520 million (up 7.7% to 14.3% sequentially). The company expects non-GAAP EPS of 75–83 cents and GAAP EPS of 60–67 cents. Teradyne reported GAAP EPS of just 4 cents in the third quarter of 2009. The Zacks Consensus Estimate is currently 44 cents, well below the guided range.
 
Reiterate Neutral
 
Although Teradyne reported another strong quarter, the decline in orders is something to look out for. The company appears to be seeing a slowdown in end demand, which will probably soften results next quarter. Moreover, management mentioned the fact that the memory test segment had dropped off somewhat, which further supports this theory.
 
Given these factors, we remain positive about the company’s overall business and the strong comeback after recession-hit 2009. We believe the longer-term outlook remains positive. Consequently, we are reiterating our Neutral/short-term Hold recommendation on Teradyne shares, as indicated by the Zacks #3 Rank.
 
TERADYNE INC (TER): Free Stock Analysis Report
 
Zacks Investment Research
July 29, 2010 | Filed Under Analyst Opinions 

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