Semiconductor tester Teradyne (NYSE:TER) reports its Q2 2006 earnings after close of market tomorrow afternoon. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Eighteen analysts follow Teradyne. Eight of them rate the stock a buy, seven a hold, and three a sell.
  • Revenues. Wall Street will be looking for 15% sales growth to about $352 million tomorrow.
  • Earnings. Meanwhile, analysts expect to see last year's loss turn into a $0.20 per-share gain.

What management says:
As investors wait to hear Teradyne's news tomorrow, they may (or may not) take comfort in CEO Mike Bradley's assertion last quarter that the business "is off to a strong start in 2006." The company's semiconductor testing business had posted its sixth-in-a-row quarter of higher order bookings, and Bradley was forecasting sales of $360 million to $380 million for the quarter. After four straight quarters of beating analyst estimates, an investor just might want to take Bradley's word over that of analysts, who are forecasting considerably lower sales for the firm.

What management does:
Or not. True, Teradyne has done well in exceeding expectations, but the story told by the chart below is one of a struggling business. Gross margins are falling. Rolling operating margins today are just a fraction of what the company achieved 18 months ago. And the superb rolling net margin you see in the April quarter below owes less to a business turnaround and more to the assistance of $134 million in profits from a one-time event that's now two-quarters old news.

Margins %

12/04

4/05

7/05

10/05

12/05

4/06

Gross

46.9

47.3

44.1

38.3

38.3

41.2

Op.

11.1

5.3

(5.8)

(13.7)

(6)

3

Net

11.7

6.1

(5.4)

(14.3)

8.4

15.3
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:
What most concerns me about Teradyne, though, is the fact that as sales skyrocket (up 21% in the last six months), it is slashing its R&D spending (down 19% in the same period.) On a quarterly basis (as opposed to trailing-12-months) those R&D cuts helped put Teradyne back in the black for operating profits in each of the last two quarters.

Now, I'm all for cutting operating costs when possible and when prudent. But in the fast-evolving tech field, cutting costs is not always possible, and cutting R&D costs in particular is rarely prudent. This Fool wonders whether, in seeking today's profits, the company hasn't mortgaged tomorrow's.

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

Competitors:

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

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Fool contributor Rich Smith does not own shares of any company named above.