Teradyne Inc.’s (TER) third quarter earnings beat the Zacks Consensus by 7 cents. Revenue beat the Consensus by 2.4%. The quarter marked the company’s return to profitability on both GAAP and pro forma basis.

Earlier, Agilent Technologies (A), another test and measurement company, also reported above expectations.

Revenue

Revenue of $262.2 million was up 54.6% sequentially and down 11.8% year over year. The sequential increase was driven by a 68.0% increase in semiconductor test revenue and a 32.8% increase in systems test revenue. The strong double-digit increase in both segments is an indication of a broad-based recovery.

Orders

Total orders were up 26.7% sequentially and 45.4% over year-ago levels. Orders in the semiconductor test segment saw a strong sequential increase of 68.8%, while orders in systems test declined 38.2%. The book-to-bill ratio was 1.10.

Operating Results

The pro forma gross margin for the quarter was 45.3%, up 902 basis points (bps) from the previous quarter’s 36.3%. The higher gross margin was on account of significantly higher volumes.

Operating expenses of $84.6 million were lower than the previous quarter’s 85.7%. The operating margin was 13.0%, up 2,730 bps from -14.2% recorded in the previous quarter. Lower selling and administrative costs (as a percentage of sales) were the largest contributor to the higher operating margin, followed by lower cost of sales and then lower engineering and development.

Excluding the impact of inventory adjustments, restructuring charges, intangibles amortization charges, gain on sale of marketable securities and excluding amortization charges for imputed convertible debt discount, the pro forma net income was $33.9 million or 12.9% net income margin, compared to loss of $24.1 million or 14.2% in the previous quarter and net income of $36.9 million or net income margin of 12.4% in the year-ago quarter. Including the special items, the GAAP EPS was 4 cents compared to -39 cents in the July 2009 quarter and 1 cent in the September quarter of last year.

Balance Sheet

Inventories were down 11.6%, yielding inventory turns of 5.1. Days sales outstanding (DSOs) went up from 40 to around 46. The company ended with cash and short term investments of $412.5 million, up $78.4 million during the quarter.

Guidance

For the fourth quarter, management expects revenue of $255?270 million (down 3% to up 3% sequentially). The non GAAP EPS is expected to be 12 to 17 cents, while the GAAP EPS is expected to come in at 4 to 9 cents.

Zacks Investment Research
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