After a semiconductor chip maker makes its chips, they have to be tested before they can be shipped to buyers. A number of companies make the equipment that's used to test them, including Credence Systems (NASDAQ:CMOS), Advantest (NYSE:ATE), Nextest Systems (NASDAQ:NEXT), Verigy (NASDAQ:VRGY), and Teradyne (NYSE:TER). Teradyne, which reported first-quarter earnings last week, is our focus today.

The company reported $258 million in revenues, which is a lot less than the $363 million it achieved a year ago: This is a cyclical business in the midst of a downturn. Teradyne lost $7.6 million, or $0.04 per share, this quarter compared with last year's $44.9 million profit, or $0.23 per share. If not for a $16.7 million charge for in-process research and development related to its acquisition of some testing technology from MOSAID Technologies, it would have recorded a small profit this time around.

While one can be disappointed by the revenue decline over the past year, Teradyne appears to be managing the downturn well, as its gross margins during the quarter were 44.6%, compared with 46.8% last year. A decline in gross margins is expected in a business with high fixed costs, but this drop of two percentage points is pretty mild.

So, what's next? Management is cautiously optimistic that business is turning up, as are the folks at Verigy, and both say that semiconductor manufacturers are using as much or more of their capacity. An increase is reflected in next quarter's outlook for revenues -- ranging from $275 million to $300 million. This may not be too surprising, given that consumer spending accounts for more than half of semiconductor sales, and consumers tend to be more open to draining their wallets late in the year. The chips used in all those gadgets that we'll be buying for the holidays have to be manufactured well ahead of time.

Unfortunately, the share price has already risen quite a bit above its lows, so if the upturn does materialize, a big chunk of the stock's upside is already behind us. The market for semiconductor testers is not growing very quickly -- 3% to 4% per year was mentioned on the conference call -- so this is a business that I would try to buy only when a bleak outlook pulls the shares down, not after an upturn is in sight.

For more on the chip tester business:

Verigy is doing well, but Credence has been restructuring and is still having a hard time.

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Fool contributor Dan Bloom doesn't own shares in any company mentioned in this story. He welcomes your comments at blm_dn@yahoo.com.