Teradyne (NYSE:TER)

Added to the GeoSpecial list on May 5, 2010 @ $11.99

Catalyst: 2010 second quarter financials handily exceed analyst estimates.

Peak performance: Reached a high of  $11.96 on May 11, 2010.
Current road block: Lack of visibility; 2010 Fourth guidance is well below analyst estimates.
Current Price: $11.36

Removing TER from the GeoSpecial list @ $11.36.

The good news: TER reported stellar 2010 third quarter financial results last week:

The bad news:  TER issued fourth quarter guidance that was well below analyst EPS estimates of $0.38.

Guidance for the fourth quarter of 2010 is revenue of $300 million to $325 million, with non-GAAP net income per diluted share of $0.21 to $0.28 and GAAP net income per diluted share of $0.14 to $0.20.

“In the third quarter, we recorded the highest operating profit rate in Teradyne’s history driven by very strong System-on-Chip (SOC) test revenues,” said Mike Bradley, Teradyne president and CEO. “Our memory test business was stable and we saw order growth in all segments of our Systems Test Group, led by Hard Disk Drive. After five quarters of sequential growth, SOC orders fell sharply as our customers digest the investments made over the last year. Regardless of the duration of this downturn in SOC orders, we’re confident our growing market share, lean operating model and strict cost discipline will deliver strong financial performance across the cycle."

We think TER’s low P/E multiple has priced in a worst case scenario.  Still, even before this development, EPS was expected to trail off and turn negative in 2011, but this obstacle has arrived 6 months faster than investors had expected.  We are moving on to stronger stories such as GeoSpecial KEM.  We will revisit TER once visibility improves.

2010 second quarter results:

• Revenue of $455 million.
  
• On a non-GAAP basis, Teradyne’s net income in the second quarter was $133.7 million, or $0.69 vs. $0.33 for the prior sequential quarter and an analyst estimate of $0.47.
   
• GAAP net income for the second quarter was $122.1 million, or $0.55 per diluted share.

Guidance for the third quarter of 2010:

• Revenue of $490 million to $520 million.
  
• Non-GAAP net income per diluted share of $0.75 to $0.83 vs. $0.04 last year and an analyst estimate of $0.46. 

"We delivered our highest earnings in a decade in the second quarter driven by continued revenue and order growth in Semiconductor Test, and are poised to surpass that mark in the third quarter," said Mike Bradley, Teradyne president and CEO. “We’ve reached new order highs for all of our System-on-a-Chip (SOC) test products, continuing our market share gains of the last few years. While the memory test market is on a slower recovery path than SOC, we logged additional high speed memory production test orders and expect continued improvement in memory in the coming quarters.”

Source: Business Wire (July 28, 2010)

"We achieved another very healthy increase in orders for the first quarter led by our Semiconductor Test product line," said Mike Bradley, Teradyne president and CEO. "Our wireless, microcontroller, and power management segments continued to expand and we’re encouraged to see demand increasing in Memory and Hard Disk Drive test. With another quarter of strong top line growth, our business model in the second quarter is poised to deliver the highest profit rate in nearly ten years."

Guidance for the second quarter of 2010 is revenue of $390 million to $420 million, with non-GAAP net income per diluted share of $0.45 to $0.52 and GAAP net income per diluted share between $0.33 and $0.40. Non-GAAP guidance excludes acquired intangible asset amortization, non-cash convertible debt interest and restructuring and other charges.

TER reported 2009:

• Second quarter Non-GAAP EPS of -$0.21. 
• Second quarter revenues of $170 million. 
• Full year non-GAAP EPS of -$0.27

Analyst EPS estimates for the 2010:

• Second quarter EPS is $0.44
• Full year is $1.49