Good morning. My name is Cara and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2007 Earnings Conference Call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Newman you may begin your conference.

Thank you operator, and good morning everyone. We like to apologize for the slightly late start here and get right to business. First, welcome to our discussion of Teradyne's most recent financial results. I am Tom Newman; I'm joined this morning by our Chief Executive Officer, Mike Bradley; our Chief Financial Officer, Greg Beecher. Following our opening remarks, we will provide you with details of our performance for the second quarter of 2007 and for our outlook for the third quarter. First, however, I would like to address some administrative issues. Teradyne's press release concerning... containing our most recent financial results was sent out via Business Wire yesterday evening and is available on our website or by calling Teradyne's Corporate Relations office at 978-370-2221. This call is being simultaneously webcast over our website at www.teradyne.com. Note that during this call, we are providing some slides at our website that will summarize and reinforce some of the highlights. They may be helpful to use in following the discussion. To access them, simply dial into the investor portion of our site, click on Live Webcast followed by 'click here for webcast.' In addition, a replay of this call will be provided on our website starting around noon today Eastern Time. If it's more convenient, you can also access to replay of the call by dialing 1-800- 642-1687 in the US and Canada or 1-706-645-9291 outside of the US and Canada, and providing the passcode 6348562. Replays from both sources as well as the slides, I mentioned earlier, will be available through the 2nd of August. Investors should accept the contents of this call as the official guidance from the Company for the third quarter of 2007 and beyond. If at any time we communicate any material changes to this guidance, it's our…

Thanks Tom. Good morning everyone. Thanks for joining us today. I would like to focus on two subjects with you this morning. The first is to describe what's behind our momentum in Semiconductor Test with a focus on where we're making headway independent of the overall market recovery. This will give you a feel for why we expect to increase our market share this year. And second, I will describe how we are positioning shipments for the third quarter, so you have a sense of the current business climate. I will also give you some flavor the issues we are seeing on the competitive front, without disclosing any specific customer names, of course. As always, I don't intent to comment on other markets we may enter in the future or to elaborate on new products until they are in use at initial customers. Now, as far as the numbers go for the second quarter, we posted revenue of $289 million and earnings of $0.14 per share. At $307 million, orders for the Company were up 25% subsequently. In Semiconductor Test, orders were up 28% from the first quarter with product orders up 38%. In our System Test group, orders were up 9%. So it was a solid show, of course, in the Semiconductor Test sector, with strong demand across a wide range of end markets. We saw particular strength in markets, as diverse as cell phones, bluetooth, automotive, broadband, power management, digital TV, baseband and optical disc drive devices. Our FLEX products hit an all time high in orders with nearly 200 systems added to the books putting our total unit sales now over 1,400 systems. Our IBM and fabless customers accounted for 54% of that demand with outsource, assembly, and test companies at 46% of the total; that's up…

Thanks Mike, and good morning everyone. Our second quarter sales of $289 million, were up 14% from the prior quarter or diluted earnings per share of $0.14 exceeded our second quarter guidance of $0.08 to $0.13 per share. This bottom-line improvement from our guidance was primarily due to improved Semi Test gross margins. Total bookings of 27 million were up 25% from the prior quarter, led by 28% growth in Semi Test. FLEX bookings set a new record in the quarter with broad customer penetration and wide device coverage, with particular strength in RF, automotive, and power management. Before I go to the second quarter results and provide commentary on the third quarter outlook, I'd like to comment on two things. First, you should be aware that the financial results I'll cover today are expressed excluding our Broadband Test division results, as BTD is treated as a discontinued operation for all periods presented. Second, I'd like to take a step back in putting context where we are against our longer term growth plans. Strategically, first and foremost, we have been focused on building a strong core business in the roughly $3 billion per year system-on-a-chip test sector. This is meant, first, divesting businesses or product lines that are not core or expected to provide attractive returns inside of Teradyne; second, establishing a solid financial model that will deliver improved over-the-cycle profits and strong cash flow; third, fully exploiting our leading SOC test capabilities to gain share with high parallelism and platform extendibility; and lastly, leveraging our financial strength and existing platforms in SOC test to expand into closely adjacent markets. So, where are we in these four strategic initiatives? On the first, we have made good progress in refining the portfolio of businesses that are more closely aligned to our…

Thanks Greg. Operator, we now like to open the discussions for questions.

[Operator Instructions]. Your first question comes from the line or Gary Hsueh.

Yes. Hi. Can you hear me?

Yes.

Hey, thanks for taking my question. I'm just going to ask the most obvious question with OSAT at 46% of total bookings. In your commentary, I think, last quarter about how it's roughly in eight months cycle between inventory correction period. Where exactly are we and how can we get comfortable about OSAT comprising 46% of total orders? What sort of the downside risk here is that number going down?

Gary, it's Mike. As I said you are correct, this is an OSAT led upturn for us. In the past they were as low as 20%, low-20% level and this is a high for the OSAT surge. Now part of that percent is, obviously, what IDMs have done, and the IDMs have been more in the sidelines so far in this recovery. The OSATs have ... are a little bit above ... about 15% percent above their last peak. So, obviously they have done their part but the main drivers for us which have always been over 15% of our booking's and the IDMs have been slower here in this upsurge. If your question is should we be concerned about overheating, I think you have to look at the total market, and the total market is gradually growing. So, I don't think we have got an overheated situation is the short answer.

Mike, if I could just ask the question in a different way. I don't think I asked it correctly. I was just wondering if you could kind of handicap what that 46% OSAT content would have been year at last year's market share position. I know that's something to do, but obviously you have been gaining share at the OSATs and the OSATs as you said are consolidating their tester fleet. I was wondering if you could handicap that 46% to a kind of historical terms?

Well I'm not sure what you are getting at, when we think about market share, Gary, we don't think about OSAT market share, because that's a complex mix of who is outsourcing. We look at market share on the Specifier basis.

Got it. Okay. I was just wondering about your market share at OSAT?

We don't ... I don't mean to be slow on the uptake here but we don't look at it as an OSAT market share calculation.

Okay. All right, no problem. Thank you.

Sorry, if we're not getting at your ... maybe at the end if there is little more time come back and ask it and we will be --

Thank you.

Your next question comes from the line of Chris Blansett.

Hi guys thanks. A couple of things, how is your order linearity throughout the quarter. You get any rush orders and in general how are your utilization rates for your equipment in the field and kind of along the lines of what Gary asked. What are the utilization rates at Subcons versus IDMs, maybe that's part of the difference?

Okay. On linearity ... this was ... Q2 was a bit more back loaded. So, we were anticipating that there would be some very short demand which is why we leaned into the capacity and the guidance in the second quarter and we saw just that. But it was heavily back loaded. And number two, on utilization, utilization, if you recall in our last call, we said that utilization was had turned in the February timeframe, and it has been moving back up steadily all the way through this month. And that looks ... the projections by external prognosticators on this say that that's continuing up. We continue to see a difference between utilization at the IDM and at the OSATs that spread has closed, and while the IDMs maybe in the 90% level; the OSATs are trailing but are increasing. Now as they take on a large chunk of capacity here the obvious thing to watch for is dose anything move on the OSAT utilization rate, but they've trending up since about February.

Then one quick last question on share repurchases. You guys maybe repurchased some stock during the quarter but at your current quarterly cash generation rate. I mean the way the share repurchase have been going, you never really going to catch-up. I mean at some point in time should we expect a large onetime share repurchase out there?

Well we are about half way through the program and we have bought back 165, that's against 400, so we're a little bit behind, I guess, $35 million behind where you might expect us to be precisely. So, we are going to continue the program for the duration of the next year, and we would expect to buyback at a higher rate than we did this past quarter.

All right. Thanks a lot guys. I appreciate it.

Your next question comes from the line of Satya Kumar.

Yes. Hi. Thanks for taking my question. Just wanted to follow up on the couple of previous questions. It seems like you had a pretty good backend loaded quarter. It seem like you, sort of, we're sounding cautious ... what has changed in the market in this three weeks into this quarter that you feel that Q3 might end up being more backend loaded quarter. Could you point to any specific area in the end markets or maybe across IDMs or OSATs that has gone softer that you, you sound a bit conservative on your September outlook?

Satya the thing that's different is really only that we expect this to be equally back-loaded and so as we size this quarter up. We're going to respond to the demand that is visible to us plus some uncertain demand that we think is coming because utilization rates are so high. But this is ... that the uncertainty in the market is up a tick from where it was three months ago, but I don't think we're playing this conservatively; we are setup so that we can move up to respond to that and we have increased our shipments accordingly.

Where is that uncertainty coming from, which end markets or customer segment do you see a bit more uncertain right now?

It's not market specific is much; if you talk to the customers the OSATs have put a lot of capacity in, they're going to push that and load that, and everybody is playing it ... continues to play it very tight. As I look at this and look at the utilizations continuing to go up, I think the forecast would suggest that this can keep moving up. The other piece is that the overall size of the market ... we haven't come to the midpoint in the average size of the market per quarter. We've had three quarters now that have been below the average over the cycle size of the market. So, all of those things argue for continued strength. But we are in the summer, the summer usually is a very quite period and I think that these ... the increase that we might see in Q3 would be satisfied in our shipments in Q4.

Great. I mean, when you look at this pick up that you are seeing at the OSATs and IDMs in Q2, and this sort of outlook for Q3, is what you are seeing more seasonal than cyclical; you see this in Q2 and Q3 every year and maybe sort of back in Q4 and beyond?

Actually there isn't the kind of seasonality that it feels as if there is, what I mean by that is all of us sense that and we tend to see strong Q2s in order to do the build for the end of the year. In truth, in the last three cycles the peak quarters for us have been either Q1 they have been Q4 and they have been Q2, in the last three cycles. So, I would think more ... less of this as a seasonality issue and more where the industry is in the cycle and we are on an upturn gradual increase in the cycle and that tends to overwhelm issues around seasonality.

Okay. And my last question, I might have missed this, your gross margins came in at 150 basis points above your midpoint. Could you walk through what was the variance driving that was it both FLEX and the product mix that helped you, or what happened there?

We had lower manufacturing cost this quarter. We have been driving down our indirect and our manufacturing cost over long period of time. We've also been lowering our material costs and some of that has started to show up in this quarter's gross margin.

Great. Thanks so much.

Your next question comes from the line of Dave Duley.

Yes, good afternoon, congratulations; or good morning and congratulations on a nice quarter. I was wondering if you could talk about what's, where FLEX lead times are now and how they have changed over the last quarter? And then also what would be your cash flow generation target for this upcoming quarter?

Dave, it's Mike. We have been working very hard to make sure that we keep our FLEX lead times in single-digits. Six to eight week lead times are what we are shooting for. As you know we've got a much more efficient manufacturing cycle and we have worked very heavily with our main suppliers so that we can flex the capacity up or down very quickly. So, in spite of the fact that we had a record quarter in FLEX bookings, we are keeping those lead times in check.

On the second question, the free cash flow, I would expect that to be over $25 million so, say, $27 million in that neighborhood in the third quarter?

Okay. And then one final thing from me is obviously your products bookings in Semi Test were up, nicely ... up I think for 38% number that you highlighted, and you gave all the geographic regions but I don't have the comparison numbers to compare. Could you talk about which regions were the big drivers of that sequential growth on product and maybe, can you give a little bit more information or more specific information about a couple of device types that might be driving that; I am assuming that some of your big customers Broadcoms and the Qualcoms of the world. But maybe you could talk a little bit more about it?

Well from a regional standpoint it maps pretty closely to where the OSATs are located. So, we have very good bookings strength in Taiwan and South Asia, relatively weaker in terms of the percentage of bookings in the US and Singapore; Korea also strong for us this quarter. Going forward we see Europe and the Taiwan, China segments likely to be down this coming quarter with the US and Japan rebounding. Now, in terms of segments very, very strong growth for us in our RF segment, as we said before automotive, baseband, optical disc drive devices; those were all very strong sectors for us. We expect to continue to see very strong RF Business and we probably ... at this point, as we look out, the places that have been softer for us with microcontrollers, we expect that to get stronger in the second half of the year and likelihood that image sensor may get stronger perhaps in the fourth quarter versus the third quarter. So, those will become some of the segment stories.

Thank you.

Your next question comes from the line of Timothy Arcuri.

Hi guys. Two things, number one, we had heard some chatter that the new LCD driver tester had pushed out a little bit. Pushed out may be six months, nine months in terms of shipments and that maybe that tester might not derive meaningful revenue until the end of next year. What's your current update on that product and what the kind of push and pulls are there?

Well, let see. Update on the product is that we are not talking in any detail about the product, the thing I have mentioned on the last call was that this year we have 750 based product expansion, we've introduced the 750EX microcontroller version of that product, so that is how that's at customers and we will introduce products going forward when we have got penetration into lead customers. I had also mentioned that as you know that we intended to use that platform base of the 750 for next generation product and image sensor and for an entry into the LCD market. So that's the extent of disclosure on those two other segments. Schedules, products, development schedules we're not disclosing, obviously, I'll say the work we are doing in those segments with customers continues unabated, so we are continuing forward in both of those segments, but you'll hear more about those later when we are into customers.

Okay, I guess, let me ask it maybe just in a different way, so it seems like maybe coming of the last call, it seemed like some of the new products could drive something like $80 million a year in kind of incremental sales, something in that range. Is that ... and it seems that maybe while that number has pushed out a little bit, is that still the right overall number?

The ... let's see, I'm not sure how got the 80 but maybe I can help by reinforcing that two of those segments of those three we're already in. So it'll be a little bit hard to discriminate between how much the new product gets in share and how much the existing J750 product gets. So, obviously the first two segments of microcontroller and image sensor will be holding in and expanding inside existing customers mostly. The LCD market, we size at around 10% of the total market about $300 million and we've got a overall market share of little bit north of 30%. So, obviously if you get to that level you can hit the kind of numbers that you are talking about.

Okay. And I guess last thing, what do you think is the tax rate going to be next year, it seems like you have kind of chewed through the NOL. So it seems like the tax rate is probably going to go up to the corporate maybe 26% to 28% next year and if that's the case what quarter do you think that that it would go up? Thanks.

Okay. First of all the tax rates for the balance of this year is about 16%. What would likely happen at some point, and it could be as early as the fourth quarter of this year or it could be later say Q2 of next year, we would likely put back on our books that deferred tax assets that we wrote off and we have over $250 million of NOLs that are still available that we could use this to reduce the taxes we would otherwise pay, but on our accounting we would have to put these on our books at some point. And once we do that we go to a more natural rate and I think we said in past calls that's 26%, 28%. Over a longer period of time, we would expect to take that down a little bit, but I think as guidance for the next couple of years, I think 26% to 28% is probably good and while we are able to not book this deferred tax asset, a tax rate guidance of 16% is probably okay. I will be very surprised if we are in 2009 and we were not at 26% to 28%. I think, sometime in 2008 we would likely put this valuation allowance and be at the 26%, 28%.

Okay. So just to clarify, so the write-back that you will have to the balance sheet will be some where in that $350 million?

Yes.

Okay. Thanks.

Your next question comes from the line of Mehdi Hosseini.

Yes, a couple of questions. First, Greg what was ... what would be the tax rate without the options and then a couple of questions for Mike. First, I see your non-Semi bookings were up single-digit and historically as you move from Q1 to Q2 seasonality kicks in and it's been up a lot more, does that mean that some of that bookings may trickle into Q3 and that would balance any weakness from OSAT CapEx. And then the last and final question, you mentioned that Japan is going to come back in Q3 and microcontroller is going to be driving that, does that cause any ASP difference for your Semi Test on a blended basis versus the strength in FLEX that was in the Q2, in other words to what extend the ASP from microcontroller would impact the bookings?

Okay, Mehdi, why don't I go first, your question was whether tax impact be with excluded [ph] options? Is that right?

Yes.

Okay.Well the options ... are you talking about option in prior years or going forward?

No, no, just option expense, I am just trying to calculate earnings without the impact of options?

Okay, maybe, I should do that for you offline, I think can tell you about the cost is our option expense is very low right now.

Okay.

It's very low. So, I think the impact would be negligible, but we have restricted stock unit there would be tax consequences on that. So, maybe offline I can help you with the other schedule.

Got it. Okay. Thank you.

Mehdi and your other two questions. The non-Semi Test ... the Systems Test businesses are far less seasonal story than they are program based story. So, the changes that you see quarter-over-quarter there really are typically tied. Aside from the In-Circuit Test business which is lots of units of In-Circuit Test; the other businesses Mil Aero and Diagnostic Solutions in the automotive space tend to be program based. If you think back over the last year or so, big deployment in Automotive and in our VMM business, Vehicle Measurement Module business, that created a surge in '06 for that business. As we mentioned last quarter, we have gotten into the commercial airlines tests business in the Mil Aero space, and that will be another bump in future business for us. So, I don't think about the Systems Test business as a orderly or seasonal phenomenon as much as I do in a program based cases. On the ASP side, certainly if the 750 becomes a larger piece of our mix, that's a much lower cost platform, small footprint, lower cost platform. So, to the extent that we get a resurgence in those spaces, partly driven by the extents of installed base and partly driven by the new products. Yes you'll see ... arithmetically you'll see a decline in ASPs. But, that's the nature of the beast; as you get a different mix with a focused tester versus a general purpose tester. But I wouldn't take much ... with regard to that.

Sure. There is so much of focus on the Semi Test. But give me some idea how you see the demand on the non-Semi Test in the second half of this year?

Well let's see, the way we think about it is we are trying to built the healthy portfolio of businesses their, that operate for the next year or so in the ... between ... around $60 million to $70 million a quarter, which sometimes In-Circuit being the leader and other times in Mil Aero space and Diagnostic Solutions changing the order of contribution to that $60 million to $70 million. That's the modeling I would do with it, the other piece is we continue to push those divisions northward in profit contribution. In the past, they were a drag on the company and now we are just insisting that those businesses are structured in a way that they contribute more heavily to the bottom line, but I think that sizing would be what I use in the model going forward with some lumpiness, obviously, factored in.

Got you. Thank you.

Your next question comes from the line of David Egan.

Hi guys. Thanks for taking the question. I was wondering about the ... your comment about CapEx pressure from the memory market, what is that reference in particular?

Well it's ... that was more intended to be kind of tone-off what I mean by that is there is a general broad hesitation out there about CapEx across the board, a lot of that comes from the memory space, but SOC is not immune from those kinds of pressures. Now obviously a company that is a pure play in memory, there is no affect in the SOC segment but on the combination companies that have both memory and SOC, there is ... we feel the concern and it trickles through in the form approval for CapEx and so on.

So we might see that like in the image sensors and things like that?

No, I think those are more specific to the end markets and to the transitions and technology of the devices in there. I was just trying to pass along that we are not immune from what's going on in the memory space and it does have some, what I'll call, atmospheric affect. I don't think that the indicators, in terms of SOC unit growth with the buy rate or the where the recovery is at this point in time, any of those ... none of those argue in favor of a softening on the SOC side. But the summer phenomenon, the backend loading we saw just last quarter and the overall CapEx concern puts a litter flavor of ... higher flavors of uncertainty in the very, very short term. Longer term I don't ... I wouldn't put as much stock in that.

Okay, no problem. This is a question for Greg, I didn't, I don't think we got all the information that you are talking about with the breakeven. And then also the ... what was the gross margin, first of all, the gross margin guidance for this quarter?

Okay. The guidance was 46% plus or minus a half a point.

I am sorry, for September?

For the second quarter?

No, for the third quarter ... I am sorry ... the guidance?

I am sorry, the third quarter, okay. 48% plus or minus a half a point.

Okay. And then when you are looking at the SG&A it looks like it is going to be up quarter-to-quarter. What is the ... I guess this is about the same percentage... but what is that driving the increase in the SG&A is it just basically variable comp?

The variable comp is a single most significant piece, there is also a new order entry system that's getting implemented but it's really variable comp.

Okay, fine. And then back to the question I was asking before about the breakeven, should ... where should we expect ... as the breakeven comes down, what should we think about the gross margin; how should we start modeling that?

If we get to what we expect to get to our 50% profit rate which takes some amount of SOC test share gain, we would expect to be at 49% gross margin, on average, over cycle; sometimes above, sometimes below but that would be the target that we set ... we are tracking to it. What we do need to do is get some modest growth as we've made a number of investments in engineering that gets us access to new markets. So with that playing out we should be able to get to the 49%. And the SOC test share gains will also get us there. So, I think 49% is looking better than it did a year or two ago when we said this. It looks very much line-of-sight target.

Okay. And the ... on the prior call you had mentioned that you thought that the R&D would pick up in the second half of the year, is that still on track for what we should be should be expecting?

Correct, it's picked up and it's to enter the new adjacency within existing platform.

So, that's an opportunity that we see is very attractive and we are very far along with some customers on that. I don't see that as a necessarily a permanent up-tick; that should come down later.

And then finally, from the last call I think we remember the way we were thinking about the tax rate was that you'd be doing buybacks also and then maybe that was going to offset some of the higher tax rate. Do you think you have said in terms of you EPS. Do you think that would be something we should consider?

Well we are going to do buyback simply because, we have ... we think Teradyne stock is a good buy and we have excess cash. The tax situation itself is somewhat tied to how you capitalize the balance sheet. Meaning, if five years down the road we wanted to have far less cash and more debt on the balance sheet then from a weighted average cost of capital perspective it makes more sense to have debt on the balance sheet. I don't know how I should get that but [ph] what I am trying to say is the tax and the balance sheet capitalization do connect to one another. The only other way I'll try to say quickly is, if we had a leveraged balance sheet now we wouldn't get much of an advantage from a weighted average cost of capital because our tax rate is so low.

I remember that you had mentioned this last quarter, and I guess a takeaway was if possible that you are going to re-level the balance sheet later in the year or next year and that would help lower the tax rate?

I think we do that over a longer period of time and that would lower the weighted average cost of capital; not the tax rate itself. The tax rate we're lowering independent and at some point we are getting the tax rate that is a sustainable rate given our mix of businesses and where the work is done. But the opportunity for us, like many other technology companies, is can you lower the weighted average cost of capital ... maybe this is too theoretical, but there is models out there that would suggest if you could lower the amount of capital in the business. The investor can get a better return.

Right, now that makes sense, do you have a target where you would like to get the long-term tax rate?

The long term tax rate, the target would be about 25% to 27%.

Okay.

And that's in part because we have non-Semi Test business; Semi Test itself would much lower, yet other non-Semi Test businesses would be at a higher tax rate, still profitable, still making the contribution.

Thank you, guys.

Operator we'll take the last question.

Your next question comes from the line of Tim Diffely.

Hey. Good morning. I was hoping, you can give us a feel for which members FLEX family were doing the best at this point?

Tim the RF-based systems have been really the leading the charge here in the last quarter and we expect them to be pretty strong through this coming quarter, that's the standout product ... obviously we've got, Tom, I mean, not Tim. Tom, we've got a family here of FLEX, micro-FLEX and ultra-FLEX. This last quarter it was more the mid-range performance product, the FLEX product led, but the real significant element is that it's been RF-based which has led the charge.

Okay. And on average ... in general, do you think your business in the RF world has improved or decreased over the last couple of quarters on a competitive front?

We've had some wins in that space. We think we are very strong and in it. And while there is a lot of competition in that space, there are two things in my view that go on there. One is the integration of technology including RF elements on SOC devices, means that is not just a pure RF instrumentation story. So costumers are valuing the extendibility of the product and the ability to add a variety of instrumentation to their systems. And then it's a cost of test battle and throughput and the parallelism on the FLEX has proven to be important in that respect.

Okay. And if the market moves back towards the IDMs over the next couple of quarters, that change the profile of which systems you might be shipping out?

Not discernibly, I think we give a pretty consistent mix, and the reason I say that is that all of our customers now are, kind of, converted to FLEX and J750. The one addition I would make is, if, as I said before, if microcontrollers and image sensors come back stronger, which we expect, that they will, then obviously that changes the mix to a heavier J750 element.

Okay. Thank you.

Operator we are completed.

Okay. Do you have any closing remark, sir?

No, thanks everyone for joining us. We'll talk to you next quarter. Thank you very much.

This concludes the second quarter 2007 earnings conference calls. You may now disconnect.