At this time, I would like to welcome everyone to the Teradyne Fourth Quarter 2007 Earnings Conference Call. (Operator Instructions) Thank you. Mr. Newman, you may begin your conference.

Thank you, Kate. Good morning everyone, and welcome to our discussion of Teradyne's most recent financial results. I am joined this morning by our Chief Executive Officer, Mike Bradley; and our Chief Financial Officer, Greg Beecher. Following our opening remarks, we'll provide you with details of our performance for the fourth quarter of 2007 and for our 2007 fiscal year, as well as our outlook for the first quarter of 2008. First, however, I would like to address some administrative issues. The press release containing our most recent financial results was sent out by Business Wire yesterday evening. In addition, a joint press release from Teradyne and Nextest Systems Corporation was issued today before the market opened regarding the closure of Teradyne's tender offer for the shares of Nextest. Both press releases are 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 on our website that will summarize and reinforce some of the highlights. They may be helpful to you in following the discussion. To view them, simply access the Investor portion of our site and click on the "Live Webcast," followed by "Click Here for Webcast." In addition, replays of this call will be available starting around noon today Eastern Time. Our phone replay number in the US and Canada is 800-642-1687. Outside the US and Canada the number is 706-645-9291. The passcode for both numbers is 30479782. A web replay will also be available. You'll find it by going to www.teradyne.com and clicking on "Investors." The replays will be available along with the slides through the 7th of February. The matters that we discuss today may include forward-looking statements about events or future…

Thank you, Tom. Good morning, everyone. I would like to cover three things with you today. First, a summary of 2007, including a progress report on the important initiatives undertaken this past year. This will, of course, include results from this most recent quarter. Second, a preview of some new products that have begun shipping and what our expectations for those products are in 2008. And third, an outline of how the Nextest acquisition, when coupled with the final stage of our manufacturing transfers to Asia and other cost and productivity gains, will improve our overall financial structure this coming year. As I'm sure you've read this morning, we completed our tender offer for Nextest share at midnight last night, signifying that we had more than 90% ownership of the outstanding shares. I’d like to officially welcome any Nextest employees and customers to this morning's call. Our non-GAAP guidance, therefore, for the first quarter of 2008, which includes Nextest, is for sales to be between $285 million and $305 million, with diluted earnings per share between $0.09 and $0.13. I'm going to leave the specific Q4 and Q1 details to Greg. But despite an overall lackluster market in the fourth quarter with system orders down in both our semi test and system test businesses, we're raising the midpoint of our first quarter revenue guidance $10 million from our fourth quarter revenue level. That's before the addition of revenue from Nextest. Now, while it's only a modest increase, nonetheless it reflects some short-term SOC test demand patterns that warrant such a move. It's too early to say much more than that, but it's a favorable development from the intensive design and work we've been doing during this last six months, when capacity-driven demand has been soft. Now, our overall results in…

Thanks, Mike, and good morning, everyone. Before I provide an update on our financial results and outlook, I'd like to first join Mike in expressing how pleased we are with the results of the Nextest tender offer. As described in our release earlier this morning, we acquired over 90% of Nextest outstanding shares in the tender that closed last night. We'll promptly acquire the remaining shares using a short-form merger. The Nextest Magnum product will be a very important part of our growth plan. We expect the acquisition to be slightly dilutive in 2008 on a GAAP basis, and slightly accretive in 2008 on a non-GAAP basis; that is, after excluding the impacts from purchase accounting. Back to the financial highlights, our fourth quarter sales of $260.4 million were down 13% from the prior quarter. Earnings from continuing operations totaled $0.10 on a GAAP basis and $0.09 on a non-GAAP basis, both of which benefited about $0.02 from tax true-ups. For the full year, our sales totaled approximately $1.1 billion, and our earnings per share from continuing operations was $0.39 on a GAAP basis and $0.45 on a non-GAAP basis. For comparative purposes, our 2006 sales were approximately $1.4 billion, and our earnings per share from continuing operations was $1.06 on a GAAP basis and $0.90 on a non-GAAP basis. The single biggest factor to our 2007 results versus 2006 was the expected cyclical SOC test market falloff from $3.4 billion in 2006 to about $2.6 billion in 2007. As Mike commented, our SOC test business declined 19% in 2007, while the overall SOC test market declined 24%. So, our falloff was less than the overall market, and that was due to our 2007 SOC test share gains. Now, while our SOC test operating profit has improved by about 10…

Kate, we'd like to take questions now.

(Operator Instructions) Your first question comes from Chris Blansett from JP Morgan.

Hi, guys.

Good morning.

Mr. Blansett, your line is open. I'll move on to the next question, one moment please. Your next question is from David Egan from Lehman Brothers

Thanks for all the details today, and congratulations on getting that deal done so quickly. I guess the first question, I guess the one that I am working through based upon what you guided to in the talks about in terms of your model, and I just want to make sure that I understood this. So you are saying that your existing business right now, if I make this assumption that your average revenues were around $275 million over cycle, you add $25 million Nextest, $50 million to $60 million from the new products, that get you to, let's just say, $350 million revenues on average. Is that about right? Is that how we should be thinking about this?

That's very close. We use $340 million, but you are close enough.

Okay. And then given those numbers that OpEx then would be something like $120 million to $122.5 million, is that what you're targeting?

A little less, we will be targeting closer to about $118 million.

$118 million, okay. So you're thinking, I didn't do this then, but that your EPS is going to be something like, well, over $1, maybe $1.10 is what you think the normalized number is?

The normalized number would be $1 or just over a $1. So you got that right.

Okay. Now, getting into some of the new products, If you were to break it down and talk about the new products that you are looking at, how much is going to come from the microcontroller and the LCD driver, and how much of it's coming from the high density UltraFLEX in the Epsilon?

Dave, we are not breaking that down at this point. Obviously, the LCD product is brand new into a new market. The other is a complimentary in the spaces that we currently are. But we're estimating a lot of this depending on how big the overall market is. So our estimate is we can get, as I said, $150 million to $200 million in those. But we're not, at this point, going to break those down. As we go through the year and we get some resolution on that, we may start to give some disclosure around the velocity in each one of the products.

I guess the color that I was looking for is would it be fair to say that the UltraFLEX and the Epsilon is more towards the existing market in defending share, maybe trying to get a little bit what the other ones are, say, like the LCD driver is new virgin territory?

Right. I'd put a spectrum. And at one end of the spectrum would be total Greenfield, and you'll put the LCD driver at that end. At the other end of the spectrum actually I would put the image sensor product, because that product is where we have the highest market share. I'd put the others in the middle because they will, obviously a big piece on the wireless and on microcontrollers is holding what we have. But there's enough differentiation on new performance that we think there will be some offensive players with those product as well. The reason I put that all into one batch of saying we think about a third to that total amount will be market share shifts, was to try to give some estimate on what might move here on the new socket side.

Okay. And in terms of that market size, the $150 million to $200 million in the one-third, how of that depends upon the market being better in 2008 than it was in 2007?

All of this is a bit of a crystal ball at this point. The way we thought about this is to say that the market would be a little bit better next year, 5% to 10% better in total. Not that it would be exploding and that the new products aren't going to be depending that much on overall market rebound. So we're doing it in the context of, I'll say, a sub $3 billion market.

Okay. Very good. One last question and then I'll go away. The strength that you're seeing right now, it didn't show up in your orders for 4Q, so that's something you're seeing right now, is that correct? And is that primarily related to a couple of wireless customers or is that beyond that?

Well, it was a lackluster Q4 on the system side. It's just that the early demand as we enter the year has picked up. It's quite broad if you thought about segments. We're expecting some strength in RF and automotive and some other consumer applications, like hard disk drive. So it sprinkles. It's so broad; there is no single thing that's going to push it.

Thank you.

Yes.

Your next question is from Dave Duley from Merriman.

Yes, good morning. Could you talk a little bit about the new product front? What's going on with this new Epsilon product? Did you say that it was already out in beta? And is this the product that should be able to test or converge our FSOC products, that will show very rapid growth in the RF segment?

Right. Dave, this is a subsystem product. So this goes into existing installed systems as well as into new ones, including this high density system in the UltraFLEX line that we're also going to have this year. We've got the reason it's called Epsilon, it's a fifth generation product. So we've got a very solid share position now in the RF space. This is obviously to try to make sure that we keep that, and then expand the footprint going forward. Its real calling card, is that it's obviously got a much wider frequency range than our current products or some of the others that are in the market right now. But under the covers, there are some very interesting architectural elements to it. This is what we call the universal "can" capability. So it's everything is full performance on every pin of the option. So you don't have to make trade-offs and configure your system in order to get very high parallelism as well as to get high performance. I could wax on this for a while, but that's the bottomline. It's a much more powerful, frequency flexibility, and therefore, across the test product than we have and that we think others are offering at this point.

So if I heard that, then any pin can test RF or more traditional stuff at any time. So it's completely configurable pin-by-pin.

It's just that the different ports require different capabilities, and you don't have to make any kind of careful trade-offs as to how you configure the system. Think of it as universal pin RF capability.

Okay. And if sure there is a new segment in the RF market besides your traditional RF market that's very high end converged testing that this product line can address.

Yeah. We have been testing a lot of those parts already with our fourth generation. But this is a-step up in performance, and it will handle both more complex parts that have all of this variety of ports, but it will also configure in a way that does that with the maximum parallel. We think there's going to be a real difference in what people can do in multi device testing.

Okay. On your guidance statements, and you mentioned it earlier, but I just wanted you to maybe elaborate a little bit more, talk about what is the direction of the core business, and then what is kind of being added by Next in your guidance statements on revenue?

Okay. This is Greg. The core business, as Mike mentioned, before is up about $10 million this past quarter. We were at $260 in the fourth quarter. And the core business by itself has gotten us to the midpoint of our guidance, without Nextest, it would be $270. So there's $10 million there. Nextest were adding in $25 million, and that's from January 24 forward. Instantly, the Nextest business this quarter, if I could, the entire calendar quarter, which we cannot count because we didn't own, have controlled them prior to January 24, we were looking closer to about $30, maybe a little bit more than $30 million this quarter. So they're off to a strong start.

Okay. And when I look at that core business guidance of $10 million sequentially, and I think you mentioned your semi test bookings were down 11%, which is about the same number on the downside, is the confidence of increasing your core business guidance driven by the other test businesses or will you be shipping more from backlog in you semi test, or how should we look at that?

What's driving the very slide uptick here, is some very short-term demand that we're seeing in the SOC space. The other businesses are stable.

So it would be turns business in the quarter.

Okay. I guess the final thing from me is, does this appear to you that your, I guess it was just your December or your March, which is not that much difference in revenues for you as the size of your company, does this appear that this is a bottom or will we see a bottom in June?

It's too hard to tell, sorry. I'm not being evasive, but the caution in the world in our customer base is very tight. The utilization effort to keep utilization really, really tight has been obvious throughout 2007. And we've got behind us a whole what all of you know an overall consumer market. So it's a very uncertain environment.

Okay. I promise this will be my final one. With that kind of uncertainty out there, and the macroeconomic issues that everyone is chatting about, with the current environment getting a little bit worse, do the guiding statements reflect that kind of very cautiousness from your customers?

Right. It's all mixed into this. And really, I think the only thing you should take away from this is that as we enter 2008, is that we've got some indications that are very close end, and some indications that customers want a bit more than they've wanted over the last six months. We're responding to the demand timeframes rather than trying to manage anything in terms of curvature of shipments.

Okay. Thank you.

Your next question is from Patrick Ho from Stifel Nicolaus.

Thanks a lot. Mike, if you could follow-up a little in terms of your discussion in the semi test outlook. Do you believe this is a customer-specific market base or is it related to the share gains you mentioned during your official presentation?

You mean what's happening right now?

Yes.

Well, a month does not, a trend may. So, I think what we are seeing is this is more a function of some pretty hard designing work we've been doing over the last six to nine months. And I'm frankly having trouble reading anymore into it than that. Obviously, you always have some customer trends that your customers are moving, the others don't. That's why this issue of how share shifts really has to be looked at on a longer term. So I think it's much more specific around some sockets. And since we work on lots of sockets at the same time, there is enough going on there that's moving this up.

Great. In terms of the Nextest acquisition, you've been working on obviously, other memory applications within Teradyne itself before the acquisition. How does the Nextest acquisition, impact some of your other memory development work that you have done? Are you going to be integrating some of that or are you going to be, divesting yourself from that, given that now you have a solid memory, or at least on the flash memory side you have a solid tester on that front?

Well, the first thing we're doing is twofold. One is Nextest was very attractive to us because of the unique architecture of that product, both in performance and cost, and in the team that's behind it. It's a very interesting flexible architecture, and a very capable fast moving team. So that was what was interesting on that front. That made it possible for us to take our flash memory long-term investments, and shift that into their basket, not ours. Now what we do on other memory fronts, we still have other work and other investments going on there. And that's, frankly, one of the things we've got to carry with us as we move to model this year, is to be able to keep those investments going so we can expand even further in the memory space. That's not something you're going to see in the 2008, but it will be beyond that time. But I think we've got a pretty clean approach here with Nextest driving the flash memory side of equation for us.

Thank you. And a final question for Greg. In terms of your cash flow generation projection for the year post the Nextest acquisition, will this allow you to continue the buyback programs that you're being quite aggressive with, at least, in the past year or so?

The answer is generally, yes, but at a more modest level. After the Nextest acquisition, we'll have $443 million of cash. I have mentioned in the past that we can operate as low as $300 million. We've also $350 million; $400 million might be about the right place to be. So there is a little bit of room to buy more Teradyne stock back. Obviously, we'll generate cash throughout the year. So I think with the cash we generate we would be looking to buy Teradyne stock. And maybe some of the cash we have now, we also look to buy some Teradyne stock, obviously, dependent upon what the price is. But at the price it is today, it's very attractive to us.

Okay. Thanks a lot guys.

Your next question is from Steven Pelayo from HSBC.

Mike, could you just help me think about the organic growth, I guess, the core SOC market with more market share gains and new products coming in. What were you thinking when you sized it and then when you sized the flash test market opportunity in '08?

Steve, you're asking what's happening with the market itself, total market?

Correct.

Well, it's not a boom business here in SOC test. The market over the last three years has been fluctuated between the low point, which was this last year, about $2.5 billion to $2.6 billion and, let's say, $3.3 million or $3.4 million in '06, and '05 was a little bit in between those two. So, we've been modeling this around a market that's going to operate in the high 2s, not that's going to grow a tremendous amount out of that, except for what will be driven by unit growth and dollar growth in the semiconductor market. So, we've got pretty modest expectations about how that market is going to move on its own which is why we focus so much around the share gains. Our memory market has been much stronger, and it's got a higher buy rate, it's growing faster than the SOC test market. Obviously, two things going on there, bit growth especially in the flash memory market have been explosive, but on the other side, huge amounts of work to keep the cost of test down. But I think, overall, we'll see a bit more growth on that front, but it will be up and down over the next few years. But we have a relatively small footprint now with Nextest in that market. And so, there is a lot of upside for us to be able to expand in it. But again, we're not counting on the title uplift in the SOC market to make a huge difference in our plan. And our breakeven plan and our model profit plan this year is built around a market that is lower than 2006 and only slightly higher than 2007 is.

Okay. And that actually brings my next question. You guys have this goal of 15% PBIT by the end of the year which implies a revenue level we've been talking about. When you think about the linearity of the year, do you think that's a steady growth or are you're really making it more of a second half to get to that revenue number to drive that 15% bottomline goal?

This is Greg. The 15% goal is at the end of the year. If we are at our average revenues, it will be 15%. If we're above our average revenues, it will be above 15%. If we're below, then we'll be below the 15%. So it's based upon average revenues as how we set the 15% model, so that in any point of time we could be above or below the 15% just simply depending upon what the revenues are in that particular quarter.

Actually a goal for the model, not necessarily a goal for where you think the company is going to be at.

Yeah. We are not trying to intersect the point that says the revenue is at a peak and will hit 15% there. It's mid cycle revenue line. And therefore, this steady progress through the year on a breakeven time.

We're unable to call what the third or fourth quarter revenue levels would be. So instead, we model against average revenue levels. And our commitment would be that our profit rates in that fourth quarter would be at a rate that if we adjusted those revenues to average revenues, you would see we're at 15%.

Last question really to you, Greg. When I think about the incremental margins, you guys got, I think, the revenue growth coming, you have some cost controls, you've got full quarter of Nextest going to be happening as we look beyond the first quarter. When I think about kind of the incremental gross margins in the first half of the year, versus the second half of the year maybe, system revenues were flat. I assume you're going to get the margins improvement. Could you try to probably think about that a bit?

Right. If revenues were flat, we would probably get 1.5 of margin improvements again in 2008 from a set of initiatives that are not tied to new customer wins.

Okay. So this current quarter coming up here, you're talking about a 47% but that's not actually a full quarter of Nextest?

If Nextest was in for the full quarter, it would still be 47%.

Okay and so roughly about a 1.5 from there? Okay.

Yeah.

Thank you very much.

Sure.

Your next question is from Chris Blansett from JP Morgan.

Hi, guys. Can you hear me now?

Thanks, we can.

Yes.

I got a couple of housekeeping things here. What's your expected share count for the next quarter given the buybacks and how this is going to end up?

Well, the share count right now is $173 million. At end of next quarter, we're estimating $176 million. That does not include buyback. If we do buyback, then it's going to be adjusted.

All right. Now, I guess when you integrate Nextest into the business, how should we view this? You said before you're going to keep it as a separate entity, but would we expect some of the, I guess, more operational or common functions to start to be integrated into the two companies, or will it be held really as a separate entity the whole year?

The thing we're doing right out of the box, will be to integrate the customer-facing side of this. So we'll have very quickly, a sales distribution, applications engineering support. That will be the first thing that we do. Whether we do more, we're going to be much more careful on other steps. One thing our customers have voiced this, you know, just don't do anything that disrupts the lead times and availability. So if we do manufacturing transfers, that would be done very carefully in over a longer period of time. And on the engineering front, we're going to put a little bit more heavy hitting talent in were need if the Nextest team needs some additional engineering talent and that's probably in small numbers. We'd inject that into the play.

All right. Now, I guess determining how this is going to play out, do you have certain milestones to figure out when you make the decisions, is there certain revenue levels from Next? I'm trying to understand the long-term progression of how you expect the company to look in maybe two or three years?

Well, the thing we've done here, is to get some growth engines that are both inside the SOC space organically. That's what's behind the new products. That's what behind the close end adjacencies like LCD. So we expect some growth on that front, number one. Number two, we're expanding, this is really at a lower level, but it's a steady initiative around expanding some of our service offerings to customers to be able to provide them a more total solution in their socket solutions. And then, thirdly, the memory business and the growth behind the memory business, and we're going to try to accelerate that by putting some capability behind the product development that they've got.

All right. And then, lastly, when you think about levering up the balance sheet or, at least, the discussions that occurred in '07, how does the purchase of Nextest change this, maybe timing of this or delaying of this?

Well, we would at some point, look to investigate putting debt on the balance sheet and buying back stock, but we're not quite at that stage yet. The things that would move us faster there would be; one, being at our model profitability rate; two, having a tax rate that is higher than where it is now. Once those two things occur, then it's financially much more interesting for us to look at this alternative as it would help lower our cost of capital. So I think of something over the next, probably the end of the year, we'll be looking harder at other opportunities that make sense for us.

And then I got one real quick one, I've got to ask the quarterly utilization rate trends question.

Utilization moved down around November timeframe for us, and I think the market statistics on this so similar. So it nudged it down a little bit, still pretty tight, all in the 80s, high 80s. So it continues to be operated in our installed base at a very tight level, but it has moved down a bit during the course of the fourth quarter.

And any idea since we're kind of a good month end to it. You indicated you thought that some of your customers might want to buy more equipment but might be more cautious, are you seeing the utilization rates pick up a little bit?

I think that is too fine for us to be able to call. There is anticipation of new product and in the second quarter, I think, revenue. So I think they are anticipating tighter utilization at least in the products that we've got. But there is not a macro move here.

Okay. Thank you guys appreciate it.

Your next question is from Jim Covello from Goldman Sachs.

Hi. This is Kate Kotlarsky for Jim Covello. I have a couple of questions. My first question is to the extent that we do see a macro slowdown in 2008; I was curious whether you have more flexibility in your expense line to reduce expenses further than what you had alluded to originally?

Okay. This is Greg. I did mention we plan to lower our quarterly operating breakeven by $20 million or more. So there is a more there. But for now, the target we have is $20 million and it might be a little bit higher.

Okay. And just a follow-up question, obviously, you are very focused on maintaining profitability throughout the cycle. And I was curious here to the extent that you have certain share goals for 2008, if we do face a macro slowdown in your face with the decision of gaining unit shares, sacrificing your margin; I was curious where you would lean toward?

This is Greg again. Let me comment that. The new product wins we've achieved over the last two years have been very attractive standard margins because of the differentiation in our product. So, we have not been taking business at steep discounts. I know you may hear that, but that frankly is not what occurs. If you look at all the business, we've taken in the average margin it meets our model.

Okay. And just a final housekeeping question. Previously, I talked about your tax rate moving up post 2008 to about 26% to 28%. Is that still the target or is it a little bit higher post Nextest?

Correct. It's a little bit higher post Nextest, probably safer to say 28% to 30% now.

Okay. Thank you.

Your next question is from David Egan from Lehman Brothers.

Guys, I have one follow-up question about the demand environment. In terms of NAND, clearly Nextest saw some very good business in the fourth calendar quarter. In our checks we're hearing about squishiness across a number of the different on NAND chipmakers in their demand. Do you see any weakness ahead and do you have any concerns about that?

Well, beyond what is in the short-term, Dave, I obviously can't say that. The short-term demand in Nextest looks pretty good. But beyond that, I think it's all in the same category here that we're in a very, very uncertain and volatile market. I think the trend line overall in the product offering here, there will still be good demand for the Nextest product because I think it really offers very, very good economics of test. And in addition, it has a very flexible architecture to adapt to what changing test requirements are. So I think it will do pretty well. But obviously, it's going to ride whatever the cycle is here. But I can't predict what's going to happen beyond what we see in the short-term.

Okay. Thank you very much.

The next question is from Tom Diffely from Merrill Lynch.

Yeah. Good morning. Can you talk a little bit about the relative business trends or strength within the IDMs and the OSATs right now?

Yeah, Tom. Let me do that for you. Sorry, Tom, I've got a few papers in front of me. I'll give you the last couple of quarters because I think that gives you some indication of what's changing. We break it down by the way in terms of specifiers and OSATs. And I know it's done differently by different suppliers here, but we think about it as IDMs and fabless companies who specify into the OSAT. And over the last, let's say, three quarters, our business has gone, the specifiers have gone from 54% to 59% to 71%. So, obviously, what you see is a more much more of a slowdown in the OSATs as you break down that 100% of business.

Yeah

Now, if you go back far enough, you see that the OSATs have gone down as low as the low 20s for us. So they are in the high 20s right now. So it's not outside the trends that we've seen in the past. I think the other thing to open the time window a little bit wider,, in a down year, in '07, our overall bookings, as we said before the market went down X, we went down Y? Our overall bookings went down 11%. Our OSAT business in that same period went up 25%. So the OSATs resilience for us, the number of customers specifying into the OSATs for us has really kept that in a growth curve. So we've got a solid position in the OSATs, 75% of our business in Asia. So as they gain share and as we gain share with the specifiers, we are getting the flow through into the OSATs.

When you look at the recent uptick in business, has that trend changed at all? Is that 29% still look like a good number in the first quarter or is that starting to move back again?

I honestly haven't looked at what the breakdown is. We sort of look retrospectively at this rather than thinking that there is something happening with regard to OSAT versus specifiers.

Okay. And based on the potential volume discounts, is your margin structure changed at all between IDMs and OSATs?

No, there is no differentiation there. The IDM specify products into the OSATs, and the fabless companies specify. So it would be hard for us to have a different pricing structure when the decisions are driven by those companies. Obviously, high volume customers get leverage in size versus low volume customers.

Yes.

Beyond that there is no difference.

Okay. And then also with the slowdown in the fourth quarter, would you see your competitors get a little more aggressive on the pricing front with their tool?

Nothing out of the ordinary there. There are always some situational orders for that happening. Let me think. As some of the companies kind of reconfigure themselves, I'd say there's likely to be aggression to try to establish positions. The other thing I will say that we've seen, and I don't think this is out of the normal, is in the effort to establish some products that haven't been latching, that's where you see the most aggressive price moves competitively.

Okay. And then, finally, with the introduction of your CMOS image sensor program, does that mean you'll cancel the Nextest image sensor program?

That's a good question. Thanks for asking that. Nextest has got a modest SOC business. And that's the only place where there's a little bit overlap between what we do and they do. Image sensor is one space as they've been introducing an image sensor product to the market just as we combined with them. The message to their customer is we're not going to do disrupt those customers by abruptly doing anything. So, we're going to support the products that they've got. And if customers want those, we'll sell those. Obviously, we want overtime not to have redundancy in our R&D in spaces like that, but that will work itself out more gradually.

Okay. Thank you.

Your next question is from Mehdi Hosseini from FBR.

Yes, guys. Can you hear me?

We can hear you Mehdi.

Okay, great. I apologize. I jumped into the call late and got disconnected. Regarding your non-semi test, how would you see the Q1 momentum and then your overall impression or expectations for demand for 2008?

I'll take that one. The non-semi test business or system test group will start off the year at demand level similar to the fourth quarter, maybe up a slight amount. But we would expect as I go through the year, their volumes will increase as they are tied to various program buying at some accounts that they are the incumbents. So we would expect their lumpiness to continue, and that they will grow in the second half of the year.

Given the fact that in the semi-test maybe we are in a secular trend, utilization rates may not drop by much even if we see further slowdown. Do you expect the non-semi test to be even more volatile or to have even less visibility than semi test?

On the order front, the systems test business is choppier, believe it or not, choppier than the semi test business just because it's program-driven. You get designed-in and you have a slug. But in terms of revenue, I think the revenue profile would be steadier because those program orders convert to slower and steadier deployment.

Right. And the lead times for non-semi test are a lot shorter?

The system test group is met by three businesses. One business has very quick lead times, the in-circuit test. Then there is another that has very long because it's program buying. So it really is a mix. But you'd expect them to vary less than semi test. They may be 5%, 10%, but they're not going to vary the way semi test does.

And one final one from me. I'm not sure if you provided any comment on this, but can you elaborate on the cost of structure or rather margin profile between the semi and non-semi test?

The semi test has a higher gross margin than the system test group. It's generally a point or two higher.

Even with the new margin profile.

Yes.

Okay. And semi test, gross margins obviously is higher than the corporate average, correct?

Yes. And the system test group spends less than R&D. So that's how these models all work back down to 15%.

Thank you.

Kate, we'll take the last question now.

The final question is from Satya Kumar from Credit Suisse

Hi, this is [Vis Vellore] for Satya. I have two questions. The first one is Nextest is kind of focused on the memory final test, but some of the memory companies have shifted their focus to probe. So can you give a broader overview on your memory strategy?

You're right. Nextest has a strong position on the flash final test arena. Architecturally their system is capable of extending into probe test. And that's the aspiration of the Nextest organization and product is to move in that direction. So there is no wall between final test and probe with regard to system capability. And we'll see how that plays out overtime as we together target to expand.

Okay. And the other thing, one of your North American competitors mentioned their focus away from the MPU market. And so I want to find out what kind of opportunity does this create for Teradyne, and if you can kind of size, any opportunity, or any timeframe, that would be great?

Well, I think that will shake out gradually. The de-focusing of a competitor on a space, obviously, opens up the potential. But any conversion there I think would be somewhat gradual as different suppliers get qualified. It does open up a bit of space for us and for others. But I can't say more about how that might develop until we get further into it.

Kate, I think we're done. Thank everyone for their interest and participation, and we will talk to you next quarter. Thank you.

This concludes today's conference call and you may now disconnect. Thank you and have a great day.