ML:inits BUY,tgt $110, 43 wins so far, order increases in 2H
Investment Highlights:
• Teradyne reported 2Q results of $0.76 vs.
$0.60 Q/Q and $0.20 Y/Y. The results were
above our $0.75 estimate and $0.74 consensus.
Revenues were in-line, gross margins were
slightly better than our estimate.
• Orders were the second highest in the
company’s history at $826 million. Orders
declined from the blow-out levels in the
previous quarter. Importantly, the outlook is
for Order growth in the coming quarter on all
product lines.
• We are raising our estimates from $3.05 to
$3.10 on 2000 and $3.95 to $4.00 on 2001
respectively. Our price target is $110.
Fundamental Highlights:
• Teradyne is the leading manufacturer of
automatic test equipment (ATE) serving the
electronics industry. The main product lines
include semiconductor, circuit board, and
telecom infrastructure test equipment, and
software testing.
• Teradyne is also a leading Electronics
Contract Manufacturer with a highly
differentiated, high margin business platform.
Strong quarter and stronger
outlook
Teradyne reported second quarter results of $0.76 versus
$0.60 last quarter and $0.20 a year ago. Results were
above our estimate of $0.75 on higher gross margins of
47% versus our 46.3% estimate. Revenues were in-line at
$759 million.
Don’t be followed by the drop in orders
The $826 million in orders overall dropped from $1024 the
previous quarter. The drop was attributable to the Catalyst
system on a chip tester line which had $125 million in
orders in the last three days of the first quarter that were
essentially pulled in from the second quarter. Catalyst is
poised to snap back toward Q4/Q1 levels of orders based
on customer forecasts in the third and fourth quarters.
Otherwise orders would have been $900 and $950 million
for the first and second quarters.
In fact, Teradyne achieved record orders in 4 of 8 product
lines in the second quarter. High end J973 logic testers,
J750 low cost testers, software test, connectors and
backplanes had record orders. Memory testers also had the
highest level of orders in 2.5 year.
Teradyne has visibility for order growth above the
second quarter level in the third quarter with a positive
fourth quarter outlook as well.
Raising Estimates
Although we just recently initiated coverage with fresh
estimates and Teradyne came in only slightly above our
forecast for the quarter, margins and revenues both appear
to be trending higher than our model. Thus, we are raising
estimates modestly from $3.05 to $3.10 for 2000 and from
$2.95 to $4.00 for 2001. It is a calendar fiscal year. We
believe these estimates could prove conservative over time
as both more margin leverage and revenue upside occurs.
Major design wins propelling Semi-Test share gains.
In 1999, Teradyne saw design wins – basically
competitions against other tester companies for the orders
for testers for new semiconductor devices – jump from 22
to 77 wins. In 2000, Teradyne has already had 43 wins.
Memory test demand is finally picking up for Teradyne
after 2.5 years. The company had a major competitive win
in the quarter and is beginning to see traditional memory
test customers order again – a sure sign demand is strong.
Non-Semi test businesses also picking up steam.
Software test nearly doubled year over year and is now
achieving an annual revenue run rate of over $80 million.
The company has a large presence in telephone line testing
for voice and data applications but orders have been weak.
DSL related testing should provide order growth in the
third quarter as worldwide service providers increasingly
focus on improving access to high bandwidth capability.
Connectors and backplanes, which includes contract
manufacturing was particularly strong growing 24% Q/Q
and is now approaching a $1 billion run rate.
Strong balance sheet supports growth opportunities
The company generated over $50 million in cash to reach
$297 million. Inventory turns were stable at about 4.0x.
DSOs dropped dramatically to 58 from 70 days.
Investment Opinion
Reiterate BUY and price target of $110.
We believe that the order decline reflects the normal
lumpiness associated with the large orders regularly placed
in testers and that the 4 quarter moving average has always
been a better way to track Teradyne’s progress. This
average has increased steadily over the last 6 quarters and
should continue in the second half. We believe the stock
should regain a valuation in-line with Applied Materials
and KLA-Tencor as the leader in their respective segments
at 25-30x 2001 EPS estimates. We are initiating our price
target at $110, based on our 2001 estimate of $4.00. |
