It's been a good two years since semiconductor tester Teradyne (NYSE:TER) last disappointed investors with an earnings report. When the company arrives on Wall Street with its Q4 and full-year 2006 results after close of market Wednesday, will the firm continue its streak of trumping expectations?

What analysts say:

  • Buy, sell or waffle? Sixteen analysts now follow Teradyne. Four of them still rate the stock a buy, 11 more a hold, and one a sell.
  • Revenues. On average, the analysts expect to see a 21% sales decline to $271.4 million.
  • Earnings. They predict profits will nearly evaporate, down 92% to just $0.02 per share.

What management says:
After nearly two years of exceeding expectations, it seems Teradyne is ready to take a breather, and it's busy preparing itself for a slowdown. In last quarter's earnings release, CEO Mike Bradley first praised the third quarter's "strong gross margins and record cash flow," before warning: "After almost two years of expansion, our customers have pulled back as expected."

Fortunately, if things do indeed turn south as expected, Teradyne will be in a stronger position to weather the storm. Two weeks into the fourth quarter, the firm paid off the remaining $261 million of its long-term debt. (So when you see some data providers, for example, putting total debt at $261 million, don't believe it. Teradyne is currently debt-free.)

What management does:
Teradyne hasn't just been succeeding in a relative sense by exceeding expectations; it's been succeeding objectively as well. Each of the past three quarters has seen the firm increase its rolling gross, operating, and net margins substantially.

Margins %

7/05

10/05

12/05

4/06

7/06

10/06

Gross

47.2

44.2

38.3

41.2

44.1

48.1

Op.

(7.4)

(19.8)

(6.0)

3.0

10.6

15.8

Net

(6.0)

(17.9)

8.4

15.3

22.7

28.2
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Reviewing the firm's last couple of income statements, it looks like most of the success is owed to sales rising modestly, while cost of goods sold (COGS) fell dramatically -- yielding expanding gross margins that trickled all the way down to the bottom line. Sales were up 6% versus this time last year for the last six months; COGS declined 24%; and selling, general, and administrative expenses helped boost the net results by rising less quickly than sales (at 4%).

On the income statement, the only thing I really find troubling (still) is the fact that Teradyne's R&D spending isn't keeping pace with sales growth -- declining 12% year over year even as sales grew. Although that certainly contributes to the strong margins, for a tech company, it seems an unwise strategy for the long term.

Competitors:

  • Advantest (NYSE:ATE)
  • Credence Systems (NASDAQ:CMOS)
  • CTS (NYSE:CTS)
  • Data I/O (NYSE:DAIO)
  • LTX (NASDAQ:LTXX)

Where does Teradyne fit into the semiconductor production cycle? Find out in Stephen Simpson's "Does Teradyne Pass the Test?"

Give your opinion on Teradyne, its competitors, and thousands of other stocks by joining Motley Fool CAPS. It's free, and you get a little virtual jester hat that changes colors.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.