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 %




























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.


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

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