Jan 24, 2008
Executives
Tom Newman - VP of Corporate Relations Mike Bradley - President and CEO Greg Beecher - VP, CFO and Treasurer
Analysts
Chris Blansett - JP Morgan David Egan - Lehman Brothers Dave Duley - Merriman Patrick Ho - Stifel Nicolaus Steven Pelayo - HSBC Kate Kotlarsky - Goldman Sachs Tom Diffely - Merrill Lynch Mehdi Hosseini - FBR Vis Vellore - Credit Suisse
Operator
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.
Tom Newman
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 performance of the company.
Such statements involve risks and uncertainties. Actual results may differ materially from such forward-looking statements.
Some of those risks and uncertainties are detailed in our press release and our filings with the SEC. Additionally, those forward-looking statements, including guidance, are made as of today, and we do not take any obligation to update them.
Investors should note that only Mike Bradley, Greg Beecher and I are authorized to provide company guidance. During today's call we will make some reference to non-GAAP financial measures.
We have posted additional information concerning these non-GAAP financial measures, including a reconciliation to the most directly comparable GAAP financial measure available on our website. To view them, go to the Investor portion of our website and click on the "GAAP to non-GAAP Reconciliation" link.
Also, you may want to note that between now and our next conference call, Teradyne will be participating in Oppenheimer-sponsored lunch in New York on January 30, the CIBC or Oppenheimer Tech Conference in Vail, Colorado on February 21 and 22, and the Goldman Sachs Tech Conference in Las Vegas, Nevada on February 26 and 28. Now, let's get on with the rest of the agenda.
First, our CEO, Mike Bradley, will review the state of the company and the industry in the fourth quarter 2007 and for our fiscal year 2007, and will provide guidance for Q1 of 2008. Then our Vice President, Treasurer and CFO, Greg Beecher, will provide more details of our financial performance for the fourth quarter, for our fiscal year, and on our guidance for Q1 of 2008.
We will then answer your questions. For scheduling purposes, you should note that we intend to end this call after one hour.
Mike?
Mike Bradley
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 2007 are better than we had in a similarly sized market two years ago.
But, our mid-cycle results still need to improve by 4 to 5 points. I'll talk more on how we're going to make significant progress on that front in a minute.
It's important to note then in that same two-year period our topline has outperformed the overall market. In 2006, the SOC market grew 22% and we grew revenues 34%.
And this past year, when the market declined 24%, our sales fell 19%. The net of all this is a share gain of almost 5 points over that two-year period, higher than anyone else in the space.
I know you hear from various sources every quarter about share shifts, and it's a subject that we obviously watch very carefully. But you have to have a broader reference than one quarter or one sale or one socket design, and to keep an objective view.
We're very pleased with this momentum despite intense competition in all of our markets. The share gains in 2007 came as we had a record year in FLEX system bookings with over 500 units sold.
We've made headway this past year in a variety of segments like baseband, automotive, digital TV and power management ICs. We've also got strong positions in wireless, image sensors and microcontrollers.
With over 1,600 FLEX systems and over 2,600 J750 systems sold, we've got a very solid installed base around the globe, with approximately 75% of our test systems in Asia. This brings me to my second point, what's happening in the new product front and how I expect that to factor into this coming year?
We have five major new products rolling out this year. Four of the five are installed with customers now, although only one has contributed to our revenue and share growth in 2007.
That one is the next-generation version of the J750 for microcontrollers. It's called the J750Ex.
The next product is a new image processing tester. The third one is a J750-based system for LCD driver test.
Fourth is a smaller, high-density version of the UltraFLEX. And fifth is a major new 12 gigahertz RF subsystem for the UltraFLEX, called Epsilon.
This last product represents an important differentiated capability for the high growth wireless market segment, where we have a strong position. And it will be sold with new systems as well as an add-on to our installed base of UltraFLEX systems.
As I said, we have installations at key customers with three other system level products, as well as with the Epsilon subsystem. And all five of these new products will ramp through this year.
As all these products ramp, we are estimating that they will contribute $150 million to $200 million in revenue this year. Now, some of these sales will strengthen existing positions in the market, but others will enable us to go after new sockets or entirely new customers.
I expect about a third of that dollar total to represent new share gain, and the rest to represent maintenance of our existing share positions. In total, 2008 will be a significant year for this pipeline of new offerings into the SOC market.
Finally, our acquisition of Nextest is significant in two ways. First is the obvious thrust into memory test, where we believe the Magnum product and the design team behind it offer a very flexible and low-cost approach for flash memory testing.
We plan to back their efforts with some design talent of our own, as well as to supplement the local applications engineering workforce close to their customers. Our bid is that by doing this we can accelerate the Magnum product growth over the next few years.
Secondly, during this year, we'll be able to reduce some of our own spending that's been earmarked for this space. When you couple those savings with the roll-off in R&D from the new product launches, our FLEX manufacturing transfers to China, plus a set of smaller moves, we expect to be able to make further substantial progress on our non-GAAP operating breakeven this year, hitting our model profit level by year-end.
Greg will take you through those numbers in a minute. So the starting chapter on 2008 is very good market share momentum in the last two years in SOC test, a broad set of new products to keep that momentum going, an innovative system for Nextest and flash memory test that can grow faster with our backing, and finally, steady gains in our financial model.
Now, let me turn things over to Greg for a more in-depth financial perspective.
Greg Beecher
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 points from two years ago when the market was of a similar size, we are about 5 points short of our 15% over the cycle operating model as we end 2007.
We intend to achieve operating profits of 15% by the end of 2008 through the following steps. First, we will lower our quarterly non-GAAP operating breakeven levels by about $20 million or more per quarter, by year-end.
I'll explain this in a minute. Second, we will be introducing a new set of products that Mike talked about in 2008 that should contribute $150 million to $200 million in sales, of which a third is targeted at new socket wins.
And third, we plan in growing the Magnum flash memory test sales from about $70 million to about $100 million per year. Some details on the breakeven reductions.
First, the planned 2008 operating breakeven reductions are quite significant and will affect all lines in our P&L. We have very detailed plans throughout the company to achieve these gains.
Let me start with gross margins. We'll complete our manufacturing transfers to China by the third quarter spot on schedule with what we described in the past.
This means that essentially all of our FLEX and J750 products will be produced in an integrated line at Flextronics, in Suzhou, China. The line starts with board assembly and ends at final configuration and test.
We will be unique in having this end-to-end capability in one low-cost outsource site. Our 2008 new product offerings will also improve gross margins.
In R&D, the improvements will come from a reduced run rate of new product investments, stemming from the five products that Mike outlined, and of course, from the synergies from the acquisition of Nextest. In SG&A, the improvements come from a lot of actions such as lower insurance costs, lower real estate costs, less IT spending, and others.
To summarize, between now and the end of the year, we expect to lower our non-GAAP operating breakeven level by $20 million or more per quarter from these initiatives. Of course, combining Nextest with Teradyne brings our breakeven level up by a similar amount.
So the very positive net effect is the formation and establishment of our flash memory test business into our P&L with no increases in our operating breakeven by year-end. So what does this all mean to our model?
Well, with Nextest, and excluding purchase accounting adjustments, our model would be for gross margins of 50%, operating expenses of 35%, and PBIT of 15%. As we've described previously, this PBIT figure includes stock-based compensation expenses.
This overall model is generally consistent with our long-term model that we've talked about in the past. The bottomline is we're planning on increasing our average profit rate of about 10% to about 15% by the end of 2008.
Now, let me take you through some of the details of the fourth quarter, and then our guidance for the first quarter of 2008, which will include Nextest from January 24 through the end of the quarter. Our fourth quarter gross margin percentage was 45.5% of sales, down from 48.2% in the prior quarter, due primarily to lower volume and less favorable product mix.
R&D expenses were $50.4 million or 19.4% of sales, compared to $52.2 million or 17.4% of sales in the third quarter, due primarily to lower variable compensation. SG&A expenses were $62.2 million or 23.9% of sales, as compared to $62.9 million or 21% of sales in the third quarter, also due to lower variable compensation.
Our net interest income was $8.7 million, up from $7.7 million in the prior quarter. We had $2.2 million of income tax benefits in the quarter, due primarily to foreign and state tax true-ups.
Our quarterly ending headcount was approximately 3,600 employees. In the fourth quarter, semiconductor sales were 80% of the total, and system test group was 20%.
On a geographic basis, our fourth quarter sales broke down as follows; US 24%; Europe 10%; Japan 13%; rest of Asia 48%; rest of the world 5%. Our book-to-bill ratios for the fourth quarter were 1.08 for the overall company, 1.06 for semiconductor test, and 1.18 for the system test group.
The semiconductor test product bookings of $164 million were down 11% from the prior quarter, while the semiconductor service bookings of 56% were up 76% from the prior quarter. At the end of the quarter, our backlog stood at $339 million of which 81% is scheduled to shift within the next six months.
On a geographic basis, our bookings for the quarter were distributed as follows; US 27%; Europe 15%; Japan 12%; rest of Asia 46%; and rest of the world 0%. Now, moving to balance sheet, we ended the fourth quarter with cash and marketable securities of $743 million.
During the quarter, we authorized another $400 million stock buyback program. Against this new authorization, we used $11 million of cash in the quarter to repurchase approximately 1 million shares at an average price of $11.66.
Our buying was stopped during the quarter due to the Nextest acquisition discussions. In the fourth quarter, capital additions net of sales of related capital equipment was $15 million.
Depreciation and amortization for the fourth quarter was $20 million. This includes $3.8 million of stock-based compensation.
Accounts receivable stood at $190 million or 66 days of sales outstanding, an improvement of 5 days over the prior quarter. We ended the quarter with product inventory of $80 million, down $12 million from the last quarter.
Our first quarter guidance includes Nextest results from today through the end of the quarter. In the first quarter of 2008, as Mike mentioned, we expect non-GAAP sales between $285 million and $305 million, with non-GAAP diluted earnings per share between $0.09 and $0.13.
Note that this non-GAAP guidance excludes the purchase accounting adjustments, such as the elimination of deferred revenue that would otherwise be recognizable in the first quarter, but for, the purchase accounting rules, the amortization of acquired identifiable intangibles, any inventory step-up or a possible in-process R&D charge. Lastly, it also excludes some modest restructuring charges.
Turning to the P&L details, we expect non-GAAP gross margins to be about 47%, plus or minus 0.5%. R&D and SG&A will be up slightly due to the Nextest acquisition and should run between 18% and 19% and between 21% and 23% respectively.
Our tax rate is expected to be about 17% in 2008, slightly higher than previously mentioned due to the impact of Nextest. Now, I'll turn the call back over to Tom.
Tom Newman
Kate, we'd like to take questions now.
Operator
(Operator Instructions) Your first question comes from Chris Blansett from JP Morgan.
Chris Blansett
Hi, guys.
Mike Bradley
Good morning.
Operator
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
David Egan
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?
Greg Beecher
That's very close. We use $340 million, but you are close enough.
David Egan
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?
Greg Beecher
A little less, we will be targeting closer to about $118 million.
David Egan
$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?
Greg Beecher
The normalized number would be $1 or just over a $1. So you got that right.
David Egan
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?
Mike Bradley
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.
David Egan
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?
Mike Bradley
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.
David Egan
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?
Greg Beecher
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.
David Egan
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?
Mike Bradley
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.
David Egan
Thank you.
Mike Bradley
Yes.
Operator
Your next question is from Dave Duley from Merriman.
Dave Duley
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?
Mike Bradley
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.
Dave Duley
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.
Mike Bradley
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.
Dave Duley
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.
Mike Bradley
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.
Dave Duley
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?
Greg Beecher
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.
Dave Duley
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?
Mike Bradley
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.
Greg Beecher
So it would be turns business in the quarter.
Dave Duley
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?
Mike Bradley
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.
Dave Duley
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?
Mike Bradley
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.
Dave Duley
Okay. Thank you.
Operator
Your next question is from Patrick Ho from Stifel Nicolaus.
Patrick Ho
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?
Mike Bradley
You mean what's happening right now?
Patrick Ho
Yes.
Mike Bradley
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.
Patrick Ho
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?
Mike Bradley
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.
Patrick Ho
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?
Greg Beecher
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.
Patrick Ho
Okay. Thanks a lot guys.
Operator
Your next question is from Steven Pelayo from HSBC.
Steven Pelayo
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?
Mike Bradley
Steve, you're asking what's happening with the market itself, total market?
Steven Pelayo
Correct.
Mike Bradley
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.
Steven Pelayo
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?
Greg Beecher
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.
Steven Pelayo
Actually a goal for the model, not necessarily a goal for where you think the company is going to be at.
Greg Beecher
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.
Mike Bradley
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%.
Steven Pelayo
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?
Greg Beecher
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.
Steven Pelayo
Okay. So this current quarter coming up here, you're talking about a 47% but that's not actually a full quarter of Nextest?
Greg Beecher
If Nextest was in for the full quarter, it would still be 47%.
Steven Pelayo
Okay and so roughly about a 1.5 from there? Okay.
Greg Beecher
Yeah.
Steven Pelayo
Thank you very much.
Greg Beecher
Sure.
Operator
Your next question is from Chris Blansett from JP Morgan.
Chris Blansett
Hi, guys. Can you hear me now?
Greg Beecher
Thanks, we can.
Mike Bradley
Yes.
Chris Blansett
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?
Mike Bradley
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.
Chris Blansett
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?
Mike Bradley
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.
Chris Blansett
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?
Mike Bradley
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.
Chris Blansett
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?
Greg Beecher
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.
Chris Blansett
And then I got one real quick one, I've got to ask the quarterly utilization rate trends question.
Greg Beecher
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.
Chris Blansett
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?
Mike Bradley
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.
Chris Blansett
Okay. Thank you guys appreciate it.
Operator
Your next question is from Jim Covello from Goldman Sachs.
Kate Kotlarsky
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?
Greg Beecher
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.
Kate Kotlarsky
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?
Greg Beecher
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.
Kate Kotlarsky
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?
Greg Beecher
Correct. It's a little bit higher post Nextest, probably safer to say 28% to 30% now.
Kate Kotlarsky
Okay. Thank you.
Operator
Your next question is from David Egan from Lehman Brothers.
David Egan
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?
Mike Bradley
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.
David Egan
Okay. Thank you very much.
Operator
The next question is from Tom Diffely from Merrill Lynch.
Tom Diffely
Yeah. Good morning.
Can you talk a little bit about the relative business trends or strength within the IDMs and the OSATs right now?
Mike Bradley
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.
Tom Diffely
Yeah
Mike Bradley
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.
Tom Diffely
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?
Mike Bradley
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.
Tom Diffely
Okay. And based on the potential volume discounts, is your margin structure changed at all between IDMs and OSATs?
Mike Bradley
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.
Tom Diffely
Yes.
Mike Bradley
Beyond that there is no difference.
Tom Diffely
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?
Mike Bradley
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.
Tom Diffely
Okay. And then, finally, with the introduction of your CMOS image sensor program, does that mean you'll cancel the Nextest image sensor program?
Mike Bradley
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.
Tom Diffely
Okay. Thank you.
Operator
Your next question is from Mehdi Hosseini from FBR.
Mehdi Hosseini
Yes, guys. Can you hear me?
Mike Bradley
We can hear you Mehdi.
Mehdi Hosseini
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?
Mike Bradley
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.
Mehdi Hosseini
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?
Greg Beecher
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.
Mehdi Hosseini
Right. And the lead times for non-semi test are a lot shorter?
Mike Bradley
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.
Mehdi Hosseini
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?
Greg Beecher
The semi test has a higher gross margin than the system test group. It's generally a point or two higher.
Mehdi Hosseini
Even with the new margin profile.
Greg Beecher
Yes.
Mehdi Hosseini
Okay. And semi test, gross margins obviously is higher than the corporate average, correct?
Greg Beecher
Yes. And the system test group spends less than R&D.
So that's how these models all work back down to 15%.
Mehdi Hosseini
Thank you.
Tom Newman
Kate, we'll take the last question now.
Operator
The final question is from Satya Kumar from Credit Suisse
Vis Vellore
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?
Mike Bradley
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.
Vis Vellore
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?
Mike Bradley
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.
Tom Newman
Kate, I think we're done. Thank everyone for their interest and participation, and we will talk to you next quarter.
Thank you.
Operator
This concludes today's conference call and you may now disconnect. Thank you and have a great day.