HQ:Q2 CS'BB = 1.4:1
Date: 7/19/00O
Orders pulled back 19% from Q1, but outlook remains positive.
* Q2C00 bookings fell 19% to $826 million, from $1.024 billion in Q1C00 when
the company experienced explosive growth. The company-wide book-to-bill
retracted to a modest 1.1:1, following an eye-popping 1.58:1 from the prior
quarter. The reduction in bookings appears to be largely due to a shortfall
stemming from contract test houses that needed a digestion period.
* Q2C00 EPS was $0.76, beating our estimate of $0.71 and the street consensus
of $0.74. Likewise, Q2C00 revenues rose to $759 million, up 17% sequentially
and slightly ahead of our $750 million estimate.
* Management refuted recent rumors relating to market share losses at two
large customers, Motorola and Texas Instruments. Management claimed 13
competitive wins and no losses over the most recent quarter.
* Historically, the company has experienced large fluctuations in quarterly
bookings. Management believes that this quarter is no exception and they are
not sensing any major changes in the outlook. In particular, management stated
their confidence that Q3 bookings will most likely be sequentially up.
* Maintaining our current estimates and our BUY rating.
Significant bookings pullback. Bookings decreased 19% sequentially to
$826 million from $1.024 billion. This follows a Q1C00 quarter that reflected
a dramatic 50% increase in bookings over the prior quarter. As a result, we
estimate that backlog increased marginally to $1.42 billion or 5%, up from the
Q1C00 level of $1.35 billion. This equates to a modest overall company-wide
book-to-bill of 1.1:1.0. The semiconductor test segment witnessed a 1:1 book-
to-bill, whereas the non-semiconductor businesses (consisting of backplanes,
board test, and telecom test) revealed a healthy 1.4:1 ratio. The reduction in
semiconductor test bookings appears to be largely driven by a shortfall
stemming from contract test houses who needed a period of time to digest the
equipment they aggressively ordered in Q1C00. The company expects orders from
these customers to resume starting Q3C00. Furthermore, we believe that the
last few days of Q1C00 saw some exceptionally large orders that contributed to
last quarter's tremendous growth. Had these large orders been pushed into
Q2C00, the company would have reported consistent bookings growth.
Financial Highlights. Teradyne reported Q2C00 EPS of $0.76, beating our
EPS estimate of $0.71 and the street consensus of $0.74. Likewise, Q2C00
revenues rose to $759 million, up 17% sequentially from $648 million, slightly
ahead of our $750 million estimate. The main reasons for the upside on the
bottom line was an increase in gross margin and a decrease in R&D expense.
Gross margin expanded to 47% from 46.2% in Q1C00, versus our forecast of
46.5%. R&D as a percentage of sales decreased to 9.7% from 10.6% in Q1C00,
relative to our estimate of 10.4%. SG&A as a percentage of revenues remained
flat. Net margin was 18.1%, up from 16.8% in the March quarter and our 17.3%
forecast. Please see Exhibit 1 for a further comparison of our forecast to
the company's actual results.Exhibit1 Chase H&Q forecasts vs. actual results
Recent rumors appear unfounded. Management refuted recent rumors
relating to market share losses at two large customers, Motorola (MOT, $37 ½,
BUY) and Texas Instruments (TXN, $70 9/16, BUY). Management stated that
Teradyne shares some of the orders from these two customers with a competitor,
but Teradyne retains the lion's share. The company also claimed that it had 13
competitive wins and no losses over the reported quarter. Five of these wins
were reportedly won against Advantest, three against Agilent, four against
Credence, and the remaining against LTX.
History of bookings fluctuations. Looking back, large fluctuations in
the company's bookings are not unusual. Q4C98 saw a 52% sequential increase
in bookings, following three straight quarters of negative growth. This may
not seem surprising considering what happened in the industry during 1998, but
the fluctuations continued in 1999. C99 saw quarter over quarter bookings
growth of 19% and 29% in the first two quarters, respectively, only to be
followed by a third quarter decline of (14%). This was however, followed by
tremendous growth of 40% in Q4C99 and most recently 50% in Q1C00. Thus,
sequential bookings fluctuations seem to have a history at Teradyne. The
aforementioned test house loading up in Q1C00 and large orders in the last few
days of the quarter only helped to exaggerate these difficulties. As such, we
believe that the recent decline in bookings was a temporary event and is not
indicative of a reversal of the positive trend in the business environment.
Valuation and Recommendation. Shares of Teradyne are currently trading
at $68, or 17.7 times our forecasted C00 earnings. This represents a 25%
discount relative to the company's peer group. Given the weakness of orders,
we would not be surprised if the share price comes under further pressure in
the short term. On the other hand, we feel that any sharp declines in share
price should present good entry points for Teradyne's stock. First, we believe
that the negative bookings surprise was somewhat built into the stock price.
More importantly, we believe that the weak Q2 bookings number should set up an
easy comparison for the next couple of quarters, which we believe will show
healthy sequential growth. In conclusion, while near-term share price weakness
is expected, we would take any major sell-off as a buying opportunity. We are
thus maintaining our BUY rating. |
