Zacks_Analysts' Blog : Teradyne Misses on Bottom Line - Analyst Blog

Teradyne Inc. (TER) reported disappointing first quarter results that missed the Zacks Consensus Estimate. Teradyne’s adjusted earnings per share missed by 3 cents, or 8.3%, on revenue that exceeded by 3.3%.

The weak first quarter results and disappointing guidance caused share prices to slump 4.81% in after-hours trading.

Revenue

Revenue of $377.2 million was up 21.6% sequentially and 14.4% from December 2010. Teradyne has seen very strong year-over-year growth in revenues in each of the last six quarters.

Around 88% of revenue in the last quarter came from semiconductor testing platforms, while the balance came from system testing. The company will host its conference call later today, so the drivers of the 21.8% sequential increase in the semiconductor business remain unclear as of now.

But judging from end market trends, we would say that memory likely remained strong in the last quarter. The 14.4% increase from the year-ago quarter was also commendable as that quarter was particularly strong. The System Testing segment declined 3.3% in the last quarter after three quarters of sequential increase. The business was up 46.6% from last year.

Orders

Teradyne saw very strong order growth in the last quarter, which took the book to bill ratio to 1.15. The semiconductor and systems test segments comprised 83% and 17% of quarterly bookings, respectively.

Semiconductor bookings were stronger, growing 25.9% sequentially although dropping 21.7% from the year-ago quarter, which resulted in a book to bill ratio of 1.13. The systems test business saw orders increasing 8.7% sequentially and 0.2% year over year taking the book to bill ratio to 1.29.

Margins

The pro forma gross margin was 51.4%, down 103 basis points (bps) sequentially and up 121 bps year over year. The gross margin change was mix-related, partially offset by stronger volumes.

Operating expenses of $106.2 million, were up 5.6% sequentially and 1.2% from a year ago. However, the operating margin expanded 322 bps sequentially and 246 bps year over year to 23.3%. This was possible because of the benefits of restructuring actions taken by management that resulted in significant declines in engineering & development and selling & administrative expenses as a percentage of sales.

Net Income

The pro forma net income was $77.4 million, resulting in a 20.5% net income margin compared to $63.7 million, or 20.6% net income margin in the December 2010 quarter and a net income of $58.7 million, or 17.8% net margin in the March quarter of 2010.

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 $94.9 million, or 41 cents a share compared to $60.1 million, or 27 cents a share in the previous quarter and $50.1 million, or 22 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 $855.8 million, which increased by $49.0 million in the last quarter. The net cash balance was $704.1 million ($3.80 a share).

Inventories at quarter-end were up 11.0% sequentially, with inventory turns increasing from 5.0X to 5.6X. DSOs went from 50 to 45.

Guidance

Management provided revenue and EPS guidance for the second quarter of fiscal 2010. Accordingly, revenue is expected to come in at around $375-$400 million (down 0.6% to up 6.1% sequentially). Teradyne expects non-GAAP earnings from continuing operations of 38-44 cents a share and GAAP EPS of 28-34 cents.

The Zacks Consensus Estimate when the company announced earnings were 44 cents a share, at the high end of the guided range.

Conclusion

We think the equipment sector was positioned to deliver better than expected results this year, but the Japan crisis has thrown the entire sector out of its rhythm. As a result, despite the underlying strength in demand, we are forced to take a more conservative view on the shares.

Teradyne shares currently carry a  Zacks #2 Rank, implying a Buy recommendation in the short term (1-3 months). This is similar to peer company Ametek Inc (AME), which also carries a Zacks #2 Rank, but better than Agilent Technologies Inc (A), which is currently rated Hold (Zacks #3 Rank).