ML:CS(23% of orders) BB=1.6,orders grew 70%. Assembly test grew 65% Q/Q. DSL testing grew 140% Q/Q
10/17/00 Excerpts of ML.
Book Value/Share (Sep-2000): $9.50
Investment Highlights:
• Teradyne reported 3Q operating results of
$0.84 vs. $0.76 last quarter and $0.35 last year.
The results were above our $0.83 estimate and
in-line with consensus. Revenues and gross
margins were light compared to our model but
offset by strong operating expense control.
• Orders were sequentially down for the second
quarter in a row at $819 million. Over
capacity in test and assembly appears to be a
multi-quarter phenomenon.
• We are cutting our estimates from $3.10 to
$2.86 on 2000 and $4.00 to $2.80 on 2001
respectively. 12-18 mo. price objective stays at
$65.
• We are reducing our int. and long-term rating
to Accumulate based on the uncertainly about
when excess back-end semiconductor test
capacity will be absorbed, providing a return
to order growth.
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.
• Teradyne is also a leading Electronics
Contract Manufacturer.
Teradyne Reports Inline on Tight
Expense Control – Outlook Cloudy
Teradyne reported third fiscal quarter (September)
operating EPS of $0.84 versus $0.35 a year ago and $0.76
last quarter. This was above our estimate and the Street
consensus of $0.83. The $0.01 upside came from tight
expense control and a slightly lower share count.
Revenues and new orders were in-line with our estimates.
The company gave an outlook for declining revenue in the
fourth quarter and slower growth going in 2001.
Table 1: TER Variance Table
$M (except EPS)
3Q00A 3Q99A
%
Change 3Q00 E
Variance vs.
Estimate
Sales $848.0 $497.0 70.6% $850.0 -0.2%
Gross Margin 45.7% 43.4% 5.3% 47.0% -2.8%
Operating Income $213.2 $84.9 151.1% $212.5 0.3%
Pre-tax Income $219.2 $89.5 144.9% $218.0 0.6%
Net Income $153.5 $62.7 144.8% $152.6 0.6%
EPS $0.84 $0.35 140.0% $0.83 1.2%
Shares (mm) 181.9 179.0 1.6% 183.0 -0.6%
Source: Company Reports and Merrill Lynch Estimates
Orders slow due to overcapacity in semiconductor test
The company booked $819 million in overall orders versus
$826 million last quarter. The overall book-to-bill was
0.97, but semiconductor test division was a low 0.7. The
bright spot in semiconductor test was memory test. New
wins at both DRAM and FLASH memory makers drove up
memory test orders Q/Q. Logic and mixed-signal testers
both declined from record levels in the previous quarter.
Semiconductor test was 68% of sales.
Non-Semiconductor test booming
Connection Systems’ (23% of orders) book-to-bill was 1.6,
and orders grew 70% indicating business continues to be
robust in that segment. Assembly test & inspection orders
grew 65% Q/Q. Broadband DSL line testing grew 140%
Q/Q. These lines benefited from new products and
represented 9% of orders.
Reducing estimates on lower semi-test revenues
The company expects a revenue decline of 2-4% for the
fourth quarter. The decline is due to softer semiconductor
test orders, as the other segments of the company are
showing solid growth. The company believes that semi
test business can decline 10-15% in the fourth quarter. The
other segments carry lower margin than semi test, reducing
our blend gross margin assumptions from 47% to 41-42%
over the next several quarters.
Accordingly, we are adjusting our estimates as follows:
Table 2: Estimate Changes
Revised Estimates
Current
EPS
Previous
EPS
Current
Revenue
Previous
Revenue
4QE December $ 0.66 $ 0.90 $815 MM $920 MM
2000E $ 2.86 $ 3.11 $3,070 MM $3,177 MM
2001E $ 2.90 $ 4.00 $3,477 MM $3,478 MM
Source: Company Reports, Merrill Lynch Estimates.
Teradyne not losing share in semiconductor test
We believe the root issue at Teradyne is not a loss of share,
but instead a decline in overall semiconductor test business
due to over capacity at subcontract test and assembly
houses. The company has introduced a number of new
products over the last year and has a number of additional
products in the pipeline. Category killer products such as
Tiger, the Silicon Germanium based high-end mixed-signal
test system will start shipping in volume early next
year. The company has started to ship its Flash 750 tester,
winning a major customer recently. DRAM tester wins in
Korea and Taiwan have provided growth in this tester
segment for Teradyne even in the current quarter.
Connection systems business continues to surge
The company’s connections systems business continues to
be a shining star. The business has customers such as
Cisco Systems, Nortel Networks, Lucent, EMC and others.
Teradyne gets better margins than competitors based on
the proprietary nature of its technology and products.
Balance sheet supports future growth
The company has $325 million in cash and a book value
per share of $9.50. Days sales outstanding and inventory
turns were flat at 57 days and 3.9x. The company spent
$14 million during the quarter buying back shares.
Investment Opinion
Reducing rating to Accumulate from BUY
We are reducing our rating from Buy to Accumulate based
on the uncertainty surrounding semiconductor test orders
over the coming quarters. Order momentum has always
been the key catalyst for the stock and the group. Over the
longer term, we view Teradyne as the premiere
semiconductor test company. It has gained market share
this cycle and we believe this trend can continue. The
company’s connections systems business is surging and
can not add capacity fast enough. Thus, although a near
term catalyst is lacking, we believe investors with a
longer-term horizon will gravitate toward this premier
company. |
