泰瑞達 (TER) 2011 Q4 法說會逐字稿

Good morning.

My name is Cody, and I will be your conference operator today.

At this time I would like to welcome everyone to the Teradyne Q4 2011 earnings conference call.

All lines have been placed on mute to prevent any background noise.

(Operator Instructions) Thank you.

Mr.

Blanchard, you may begin.

Thank you, Cody.

Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results.

I'm joined this morning by our Chief Executive Officer, Mike Bradley, and our Chief Financial Officer, Greg Beecher.

Following our opening remarks, we'll provide details of our performance for the fourth quarter and full year 2011 as well as our outlook for the first quarter of 2012.

First, I'd like to address several administrative issues.

The press release containing our most recent financial results was sent out via business wire last evening, copies are available at Teradyne.com where this call is also being simulcast.

Note that during this call, we are providing slides on the website that may be helpful to you in following the discussion.

To view them, simply access the investor page of the site and click on the Live Webcast icon.

In addition, replays of this call will be available via the same page about 24 hours after the call ends.

The replays will be available along with the slides through February 11.

The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statement contained in the earnings release, as well as our most recent financial filings with the SEC for a complete description.

Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call.

During today's call, we will make reference to non-GAAP financial measures.

We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure where available on our website.

To view them, go to the investor page 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 the Stifel Nicolaus Technology and Telecom conference on February 6 at Dana Point and Goldman Sachs Technology and Internet conference on February 14 in San Francisco.

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, full year 2011 and provide our outlook for the first quarter.

Then our CFO, Greg Beecher will provide more details on our quarterly and full year performance along with our guidance for the first quarter.

We'll then answer your questions.

For scheduling purposes, you should note that we intend to end this call after one hour.

Mike?

Good morning, everyone.

Thanks for being with us again today.

As you can see, we've raised our revenue guidance considerably from last quarter, so I want to explain what's behind that in just a few minutes from now.

But first I'd like to recap all of 2011 as we made some very good progress on our long term strategy in the year just closed.

From a numbers perspective, 2011 was solid despite a quite significant slowdown in the worldwide semiconductor test market in the second half of the year.

We finished the year at over $1.4 billion in revenues and had another strong performance on the operating profit line.

It's especially satisfying to be able to go through significant down cycles and still be well in the black, something that has eluded most participants in this sector and in truth, was a challenge for us until recent years.

We generated nearly $200 million in free cash flow during the year, continuing a trend that we started back in 2006 when we began streamlining our product lines, shortening our manufacturing cycle time, revamping our fixed cost structure and steadily gaining market share.

As you know, since 2006, we've generated over $1.2 billion in cash that has been put to good use in strengthening our core and expanding our served markets, all through the acquisitions of Nextest, Eagle Test and now LitePoint.

And of course, we've kept some of those cash resources in reserve for similar strategic purposes into the future.

A few other notes on 2011 before I shift to the current quarter and upcoming year.

Our systems test group had an exceptional year with record revenues and solid bottom line performance.

Our defense business was back in very good shape after a turbulent 2010 where many military programs were reassessed or slowed.

Our small but very competitive commercial board test business had its best year in over 10 years, and the storage test business that had its first revenue less than three years ago had an exceptional year of new products and new customers while logging a record year in systems shipped.

On the semiconductor test side, we posted solid results in SOC test and memory test, despite market contraction in both segments.

While our SOC business declined as expected, our memory test business actually grew 11% year over year as our flash and DRAM test products gained further traction.

Finally, our LitePoint business is off and running.

With about 100 days under our belt, we're seeing almost exactly what we expected and then some.

By that, I mean a dynamic company attacking a fast growing and fast changing mobile electronics market, and one like our storage test business that will ramp up and down through the coming quarters as major technology driven tooling decisions are made at the same time that it delivers good annual earnings growth.

So, let me turn now to the current quarter and the year ahead.

Our fourth quarter bookings, excluding LitePoint, rose 49% sequentially to over $350 million.

That's higher than either the second or third quarter of 2011, and I'm pleased to say that we saw order increases in nearly every business.

There were two major themes underlying these increases.

First, semiconductor companies in the mobile sector are tooling up for new product launches this year.

While segments like automotive and microcontrollers have back end over capacity, the leading edge testers for power management, baseband processors, image sensors and wireless devises are in short supply.

As a result, our high performance flex products, especially those with our latest generation of ultra pin technology, are in high demand.

The second theme is in storage test where customers are ramping capacity early so that they can be positioned for market share opportunities during this year.

For us, I'd characterize this as new, not replacement capacity.

In other words, we're not getting orders to replace any of our systems affected by the Thailand flooding.

Our hard disk drive business is all new demand related.

In light of these two themes we're doing a couple things in our Q1 capacity plan.

First, we're ramping up the Neptune slot plan to respond to the healthy backlog we've built, and second, we're opening up some additional capacity in semi tests in the event that the mobility sector continues strong or if other sectors start to show life.

So, this upside strategy in semi test is what's behind our wide revenue range this quarter.

I should add that LitePoint is likely to create some additional wider guidance ranges going forward as they operate in an extremely short lead time environment, shorter than any of our other businesses.

So, as we turn into this new year, I'd leave you with the following three points.

First, short-term demand has turned up in semi tests and we're in the sweet spots of that upward trend, most important being the new generation of mobile electronics.

It's not a market wide recovery as a number of segments remain subdued, but it is a positive turn for leading edge mobile applications where we're very strong.

Second, our systems test business which you'll recall held us back in 2010 had a terrific year in 2011 and enters 2012 with record backlog and very good prospects in the storage, defense and board test sectors.

And third, with LitePoint now in the fold, we have an exciting new growth engine that we expect will deliver at least 20% top line growth this year.

We're backing LitePoint's expanded R&D and customer support plans and leveraging our footprint and worldwide resources to accelerate their growth.

Finally, we're making prudent investments in the future, but with the discipline that's allowed us to transform the Company's financial performance over the last several years.

Now, let me turn it over to Greg for his perspective on the business.

Thanks, Mike, and good morning, everyone.

I'd like to first recap the financial highlights of 2011 and provide a perspective over a two year period, capturing the results of the dramatic reshaping of the Company over the last several years.

I'll then cover the fourth quarter highlights and the first quarter guidance and close with some brief summary remarks.

Looking first at 2011.

We had one of our best years of the last 10 years with sales of $1.4 billion, a non-GAAP operating profit rate of 21% and non-GAAP EPS of $1.39.

In fact, it was our second best year in that period, eclipsed only by last year's record results.

Moreover, post our revamping of the Company in 2009, our annual sales have averaged $1.5 billion a year, our non-GAAP operating profit rate has averaged 24%, and our non-GAAP EPS has averaged about $1.80.

We also delivered $677 million in free cash flow over this two year period, the ultimate validation of a successful model.

One other interesting way to quickly illustrate the strength of our financial model is to average together the two fourth quarter troughs of 2010 and '11.

When you do this, you'll get a 16% operating profit rate.

This trough profitability rate exceeds our normalized operating performance of the prior 5 and 10 year periods before 2010 by more than 10 points.

What might be less well known is that the non-GAAP EPS contribution from our non-organic initiatives such as Eagle and Nextest and our organic high disk drive and high speed memory initiatives total a third of our EPS over this two year period, so (inaudible) expansion into closely adjacent markets where we can leverage our IT, distribution, or accelerate disruptive technologies has been a key part of our play book.

Let me expand on this just a bit as it provides some insight into how we think about investing in future growth.

First, on the non-organic side, we are able to add Nextest and Eagle and make them highly successful for three key reasons.

First, we have a very healthy core semi test business to build from.

Second, we added healthy complimentary businesses with non-overlapping product portfolios, and third, we leveraged Teradyne capabilities where it directly lead to hard savings or faster growth, and we decided this up front, not quarters or years later.

We know that if you don't have these three elements, it is very difficult to create shareholder value.

The addition of LitePoint and Wireless Test which expands our served market by $1 billion or more follows the same philosophy.

On the organic front, we've been successful, primarily because we've invested only after having a large league customer work with us in the design phase to insure we put into the product what mattered to them, and equally important, left out what wasn't valued.

Then we fanned out to the broader market.

On the capital allocation front, we've used our hard earned capital very carefully since the major revamping in 2009.

In addition to LitePoint, we also bought back our stock at opportunistic prices.

In 2011, we bought back 2.6 million shares at an average price of $11.84, totaling $31 million.

We have $169 million remaining in our authorization which we'll continue to use opportunistically.

It should also be noted that in all of our businesses, each business achieved 15% or better operating performance in 2011, so there are no laggers in the group.

On the competitive front, we don't intend to make any specific comments on the recent consolidation moves in the semi test market other than to say we're well positioned against our larger combined competitor whether they continue to operate with overlapping product lines or if they go in a different direction with some near term financial objectives in mind.

To shift to 2012 for a moment, we're starting the year off with healthy sales growth in both semi tests and storage tests.

The more important story behind this new demand is that in semi test, we're shipping new ultraplex configurations to test next generation smartphones and mobile devices.

In storage tests, wherever the 2.5-inch HDD buying takes place, we now have the products and customers to win this new buying.

I should quickly point out that LitePoint's first quarter with Teradyne reflects what we expect as normal seasonality combined with our tight linkage to large new programs and technologies.

Hence, we'll have natural sharp swings, and any one quarter shouldn't be extrapolated.

We remain very confident with our top line revenue expectation of $160 million or more in 2012 for LitePoint.

Now moving to the key highlights of the fourth quarter.

We met our sales and earnings guidance with a top line of $297 million and non-GAAP EPS of $0.16.

Stepping back for a moment, on the market share and growth front, storage test was the key stand out in 2011.

Our annual sales were about 25% above our initial $120 million high end estimate with over 80% from either new customers or new applications all in the faster growing 2.5-inch disk drive space.

On the semi test front, we're continuing with SOC socket wins at a pace consistent with the past.

But as I mentioned last quarter, we'll be on the other side of the segment shifts as strong PC test buying will temporarily depress our 2011 numerical share.

The segment buying in 2011 favored our largest competitor as DC driven buying was unusually high.

We believe that our normalized share remains in the mid [$40 millions] in SOC tests, and we're very well positioned to ride the long term mobility growth wave.

You saw a glimpse of that trend in the Q4 orders.

In a 2011 memory test market that was slightly smaller than 2010, we grew revenue 11% to $115 million which puts our share in the high teens, up from 14% in 2010.

With our strong flash and DRAM test portfolio, we expect to continue to add a few points of share per year going forward.

On the balance sheet, we closed the year with gross cash and marketable securities just over $750 million.

You'll no doubt note that we had a large GAAP credit for the reversal of our tax valuation allowance.

This doesn't affect our non-GAAP earnings.

It is simply bringing back on to our balance sheet our favorable tax attributes that we reserved a few years ago.

As mentioned last quarter, our cash taxes should be 10% to 12%, which is what we'll use in our non-GAAP EPS.

Moving now to the demand side.

Semi test bookings grew to $233 million.

SOC test orders were $215 million, and memory test orders were $18 million in the fourth quarter.

Semi test service orders were $46 million.

System test service orders were $24 million, and overall system test group orders came in at $123 million, reflecting a sharp increase in HDD orders as new customers ramp production.

As Mike noted in storage tests, we didn't have any damaged equipment that required replacement, but we did see an acceleration of 2012 orders as customers position themselves for post-flood HDD demand.

In semi tests, while we can't directly quantify the amount, we did see some nominal ordering to replace equipment damaged in the Thailand floods.

In the fourth quarter, semi test sales were 68% of the total.

Systems tests group was 22% and wireless tests for LitePoint was 10%.

For the year just ended, LitePoint posted approximately $130 million in revenue.

Our book-to-bill ratio in the fourth quarter was 1.3 for the overall Company, 1.2 for semi test, 1.9 for the systems test group, and 0.7 for wireless tests.

At the end of the quarter, our backlog stood at $455 million, of which 84% is scheduled to shift and be recognized as revenue within the next six months.

The top line of $297 million was down $47 million, or 14% sequentially from the third quarter.

Semi test was $202 million, down $39 million, or 16%, and system test group was $66 million, down $37 million, or 36%.

Wireless test was $28 million after purchase accounting adjustments.

Semi test product shipments decreased 20% from a quarter ago.

Within the $297 million service, revenue was $69 million, flat with the third quarter, and semi test service revenue was $54 million, total Company product turns business was 38% versus 21% a quarter ago.

Semi test product turns business was 40% versus 30% a quarter ago.

Memory revenue was $23 million.

Now, moving down the P & L.

Non-GAAP gross margins increased from 49% in the third quarter to 50% in the fourth quarter due to a lower mix of HDD revenue.

R & D expenses were $53 million, or 18% of sales compared to $47 million, or 14% of sales in the third quarter.

SG&A expenses were $63 million, or 21% of sales compared to $55 million, or 16% of sales in the third quarter.

Operating expenses of $160 million were up $14 million from the third quarter, driven by the addition of LitePoint.

Our net non-GAAP interest and other expense was $2 million.

We had no cash tax provision in the fourth quarter which reflects a reduction in our full year cash tax rate from 6% to 5%.

Cash from operations totaled $40 million after capital additions.

As noted in the press release, sales for the fourth quarter are expected to be between $360 million and $400 million and non-GAAP EPS range is $0.22 to $0.33 on 205 million diluted shares.

When you look at our Q1 guidance, it includes a greater mix of lower margin, storage test and expenses added for growth investments, which we previously discussed.

I should add that the guidance excludes the amortization of acquired intangibles, the non-cash imputed interest on the convertible debt and estimated GAAP purchase accounting charges related to the acquisition of LitePoint.

Our GAAP EPS range is $0.05 to $0.13.

The operating profit rate at the mid point of our fourth quarter guidance is about 16%.

Now moving to the P & L percentages in the first quarter.

We expect non-GAAP gross margins to be 48% to 49%, R & D should be 16% to 15%, and SG&A should be 18% to 16%.

Non-GAAP net interest expense is expected to be about $2 million.

The cash tax provision should be about $6 million.

In summary, 2011 clearly was a solid year.

The bottom out of orders in semi test appears to be behind us, albeit with macroeconomic conditions presenting uncertainty in the year ahead.

Leading edge consumer mobility products are driving demand across a number of our businesses including LitePoint, so we firmly plan to stay on course, which is to stay very sharply focused on strengthening our core businesses, maintaining financial discipline while investing for growth.

Now, I'll turn the call back over to Andy.

Thanks, Greg.

Cody, we would now like to take some questions.

(Operator Instructions) Satya Kumar.

Thanks, and congrats on a good quarter, guys.

I was wondering approximately what part of the Logic Semi Test orders that you saw in Q4 are for digital SOC versus analog mix signal and other applications?

I don't think we can break it down, Satya, for us right here.

What I'll say is the strength from a product standpoint was in the high performance end of the product line, the UltraFLEX end.

We had quite an increase in that demand, but the low end digital, the microcontroller types of applications remained quite weak.

On the linear analog side, those also are streaming [very] subdued at this point.

Got it.

Do you think that you're gaining market share on the high end product segments?

Obviously, we're seeing some significant level of management departures at one of your big competitors.

Could you talk a little bit about market share in the high end?

Also, the diversific -- how diversified are these orders?

We're seeing some pretty concentrated orders from some large customers in the Korean geography.

I was wondering if you could give some color on the geographical and customer breadth of these high end orders.

Well let's see.

I've got to take a little bit broader time perspective on it.

We were in the low 30%s, a few years back -- maybe five or six years back.

We said last year as we had -- I shouldn't say last year -- 2010 when we had a very strong surge in market share, part of that was driven by our position in the mobility segment.

Last year PCs were stronger, so we dropped back.

So, on average, as we said at the last call, we're in the mid 40s, 44% or 45%.

We do think we've gained share in that, what you called high end, what we would call the mobility end product end of the business.

We think our share movement has also had -- other components have been in other mobility related products like image sensors, and in the microcontroller, and truly digital low end space where the J750 remains a very strong product with over 4,000 systems installed.

Finally in all of this, you know, has been the Eagle Test product line.

So, in the performance analog side, that has chipped in as well.

So, it isn't a one horse kind of story here, in terms of the share gains.

We do think on this high performance mobility space, we certainly -- that would be the lead product with the UltraFLEX in recent couple of quarters.

And the geographical distribution of orders?

Greg, you have got it.

The orders have been strong, certainly on Asia, Korea has been strong.

We've had a strong mix, some of this is on our website guys, if you want to look that at what we posted.

But you can see bookings in Asia, fourth quarter to third quarter they went up 51% to 67%, so very strong pickup there.

It really is being driven by the mobility-smartphone segment, and that's a segment we have very, very strong share.

So, we think we can ride that wave and hope we pick up some more share but also we think we are in line with the guys that are winning in those segments.

Got it.

Thank you.

Krish Sankar.

Greg, can you just tell us what you think was the SOC in the memory market size in 2011, and what do you think it's going to be in 2012?

Okay, the market size?

Yes, let me do it.

This is Mike.

You said, was it memory you were asking about or SOC?

Both SOC and memory.

Okay.

SOC, we think ends up at -- hang on, $2.5 billion.

We're still estimating the fourth quarter, but 2010 was $2.6 billion -- or between $2.6 billion and $2.7 billion.

For 2011, down slightly to $2.5 billion, all of that back end decline.

Then memory, the total market for memory is $740 million in 2010, and just over $600 million in 2011 -- about $620 million.

We'll see how that shakes out as the fourth quarter finalizes.

Anything happen in 2012?

We'll give you a range.

For planning purposes, we think that memory stays in the $700 million range, $600 million to $800 million, but for planning purposes, I think $700 million wouldn't be a bad number to use.

It's a bit wider range in SOC, anywhere between $2.2 billion and $2.6 billion if you had to pick a number, I'd pick $2.4 billion.

The only thing I'd quickly add to that, the 2011 SOC market had a lot of PC buying which we don't think will be anywhere near that level in the next year, 2012.

So, it was not a good mix of business for our portfolio.

Got it.

All right, and then along those lines in terms of your exposure to mobility.

If I look at your end customers, is it fair to assume or characterize the fact that you guys are more exposed to, I guess the Apple ecosystem versus a DROID ecosystem?

Is that a fair way to characterize it?

We prefer not to mention customer names, but we're certainly well tied into smartphones and tablets.

All right, and then a final question from my end.

LitePoint, you guys did about $28 million in revenues.

What was the -- was it profitable at $28 million?

Yes, it was.

The $28 million is -- under our watch, it was actually a little over $30, maybe $31 million, $32 million.

It was a full quarter, and we didn't have these GAAP purchase write downs for service deferred revenue, but yes, it was profitable.

Thank you.

Jim Covello.

Congratulations on the great results.

First, on the memory space, if I understand what you said about the market size, but it seems like as good as the results are this quarter, it didn't include any kind of big pickup from memory.

So, what do you think it would take to drive maybe some sequential upticks in that segment, recognizing your comments about (technical difficulties) would be for the year?

Jim, what would it take to drive the overall market to go up?

Yes, sequentially.

So, when or what do need to see a sequential uptick in the memory space?

Yes, I think the one thing that can push it in the coming year, and two years, are the low power DDR devices.

That's the one thing I'd call out.

Okay, and then, just your free cash flow generation is terrific, $60 million in what was a tougher quarter in the fourth quarter, $200 million for the year -- $100 million for the year.

What are the thoughts around incremental capital allocation?

You've done a great job saving some for strategic acquisitions, any thoughts of a dividend if we see more people doing that in the semiconductor space?

Thanks so much.

Okay, Jim, we'll continue to pretty much stay the course we've been on, which is to keep some dry powder for possible, possible acquisitions that meet strict criteria that can leverage our distribution or technical capabilities.

Those opportunities, we found two in 2008 and one in 2011.

So, there's no set time when you can predict those opportunities are available.

So, we do think it's prudent to have a good buffer.

We're constantly looking at capital allocation with our board.

So, it's an ongoing discussion.

So, there's no imminent plans to do any different other than what we've been doing.

The close M & A has worked quite well for us, we like that.

Buying back stock at opportunistic prices works well too, but we'll continue to look at all other options as time goes on.

Thanks so much, congratulations again.

Thank you.

Wenge Yang.

First question regarding the subcons, what's the percentage of revenue coming out of the subcon segment for your Semi Test?

46% this quarter, last quarter 28%, so that's where we've seen the big increase in demand.

Subcon orders doubled from Q3 to Q4.

Again, those are orders, not revenues.

Oh, right.

I said it in orders.

That's correct.

Okay, so subcon actually started to pick up the order pace as well, right?

Right, as the fabless companies who are participating in the mobile sector have driven these know that, the new tooling, the leading edge tooling, the subcons are -- they're moving strongly at this point.

Okay, switching to LitePoint, you mentioned that orders could be very lumpy and there is also some seasonal factors, so we shouldn't read too much into the order run rate in Q4.

What do you expect the LTE business to pan out in 2012?

Is it more concentrating first half or second half?

I think the -- we need a few quarters to get under our belt here, but if you looked at LitePoint's business in the past, I think our prediction here is that the middle two quarters of the year will be stronger than the first and fourth quarters.

Okay, and obviously, LTE is definitely a new business opportunity for the LitePoint.

Could you give some color on what's the business size and opportunity for the LTE side of the business in LitePoint?

How much LitePoint has LTE business at curr -- today?

This is Greg.

LTE business is a very significant opportunity for LitePoint.

The market for LTE, or I'll say cellular, is probably four times connectivity.

There is this discontinuity with LTE, it requires all new testers because of the increase in megahertz and different modulation schemes.

So, there is a big new tooling required.

LitePoint has testers in the field now doing that type of testing.

So, we think it's a very, very good opportunity over one, two year period that we're going to pursue very aggressively, and that's also behind some of the added investment we're putting into LitePoint this year.

That's helpful, thank you.

Mehdi Hosseini.

Going back to hard disk drive, Mike, can you remind us how do you see the total addressable market changing from '11 into '12 given these replacement cycle coming which is independent of the floods in Thailand, and I have a follow-up.

Medhi, the sizing in the 2.5-inch space, which is where we participate, we see that as a $200 million, $250 million, somewhere between $200 million and $300 million a year market, and that includes commercial as well as in house test platforms.

We think that size is about right last year and to the coming year.

Hard to judge growth rate inside that.

But a $200 million to $300 million market is the way we size it for our own R & D and planning purposes.

I think that migrates somewhat towards commercial going forward because the commercial equipment alternatives now, I think, are -- have the potential to outpace the in house designs.

But I think that will be a slow transition.

Is there any spending pattern in the hard disk drive?

In other words, do you see this year spending concentrating the first half versus the second half, given the run rate of booking in Q4?

Well, let's see.

As we enter the year, it's unusual.

It's very different compared to the last two years and that is that the accelerated ordering -- part of it caused by the Thailand flood and the positioning for market share moves in the year, has put the order pattern very front loaded.

At this point, we haven't adjusted our view of the total market size just because the first part of the year is looking stronger than prior years.

Okay, and then if you could help me reconcile what you reported for Semi Test booking with what the Semi organization has reported.

If I just look at their monthly numbers for back end, bookings were down 17% in Q4 compared to Q3.

And this is, again, this is for back end test and equipment, but your bookings were up almost 20%.

Does that -- how should I reconcile this?

Does that mean that the test is growing to the extent that it is offsetting decline in assembly, or is that a system versus services?

Any color you can add here would be great.

Yes, the color would not be some big mix change in systems and service.

I think we're similar quarter-to-quarter on systems and service.

And the total market numbers tend to be -- they come in the door a little bit later.

So, the trend lines that you see, and I think they are on our website, of the market numbers don't show any recovery yet.

The story that we've got is that in the latter part of the fourth quarter, we've had a very strong push for this leading edge, high performance, UltraFLEX based product for this next generation of product launches during the course of 2012.

So, that's very fresh news for us.

It doesn't show up in the macro numbers at this point.

Sure, and just to wrap up, I'm going to take a shot at booking directions for Q1.

If I look at this ledger, you have -- it is obviously, very lumpy.

But since we have had two quarters of digestion and a strong Q4 booking, especially Semi Test, should we expect continued improvement in terms of booking?

Well, Medhi, I'm glad you took a shot at it, because I'm not going to take too much of a shot at it.

But I will say that -- and I'll just talk Semi Test SOC for a minute.

The recovery, we typically see these 50% declines in the cycles.

We've seen that.

We think that trough is behind us, that would be point one.

The other thing I'd give you to flavor it a little bit is, while the long term picture in 2012 is uncertain, in the short-term, the way we're playing it is to put a little extra capacity into the first quarter slot plan.

I would read that as the signals that there could be some upside in the very short-term that we're trying to respond to.

I don't know whether to extrapolate that beyond the numbers I said for the total market.

In the short-term, we just want to be prepared if there continues to be a strong push, especially at the high performance and leading edge end of the product line.

Great.

That's one of the reasons we have a wider revenue guidance in the quarter.

I see.

Thanks.

CJ Muse.

Thank you for taking my question.

I guess first question, given the disparity in margins with UltraFLEX and some of your AP customers, HDD and Eagle, curious how you see the trajectory for gross margins through 2012.

Clearly, utilization is very important, and that's going to make it difficult to have true granularity there, but would really love to kind of get a view as to how we should think about that through the year.

This is Greg.

The model we put out a quarter or so ago, turned to $50 million of revenue, we had a 50% gross margin.

I think throughout the year, we're going to be 1 point above, below, maybe 2 points above, below.

I think you'll find us on both sides of that as the year goes on.

At the start of the year, because of high storage test buying, we're on the other side of it, but when that buying comes down and if other buying picks up, whether it's analog or microcontroller, I think that moves it to the other side.

So, I think it's going to move up and down throughout the year, and we've just started off a little bit on the other side of it right now.

That's very helpful.

As my follow-up, in terms of LitePoint, clearly very well positioned in the move from dual core to multi core and 4G, but curious in terms of building out from your more concentrated customer base to expanding that, particularly within China.

I notice, you're building out your infrastructure there.

Would love to get a feel for what growth we could see above and beyond the existing customer base and when you'd think that would flow through the model.

This is Greg again, CJ.

I think some of that, with the early signs we think can be showing up the latter part of this year.

We hired a country manager, used to work at LitePoint before, incredibly capable guy.

He's off and running, and we're building a team around him.

For Asia.

Yes, for China particularly.

So, I do believe there will be signs of progress as the year unfolds.

I think more of it will show up in 2013, but there should be some business in '12 that's directly a result of investing the infrastructure, the people, the talent and our new leader in China.

Great.

Thank you.

Stephen Thin.

Yes, thanks for taking my question.

This is Mahavir Sanghavi for Stephen Chin.

Wondering if you could share any color on the orders from foundries?

Some -- a large foundry customer has talked about integrating into the back end testing as well.

So, wondering if you're seeing contribution from foundry customers already, or there's an upside from some foundry orders down the road.

I don't think we'd break it out, and I don't have it in front of me.

But the profile of the customer mix, the one thing that has changed in the quarter-to-quarter picture has been this increase in the subcon end of it.

I don't think that there's a change of any note with regard to the mix, the components of foundry inside it.

Great, thanks, and if I could ask about LTE opportunity, you talked about it being a 4X opportunity compared to connectivity.

I wonder if you could share with us when you see that opportunity materialize over the next two years.

I think it's a two year, two to three year exercise of demonstrating the products showing -- It has a strong correlation.

The cost, the simplicity, the throughput, that's easy to demonstrate, the correlation takes some time.

So, we're out there now and making progress.

These sales cycles, design cycles are long, so some have started.

So, I think there will be some progress this year and there will be some progress next year.

Great, so I just wanted to -- in terms of how we understand it, you talked about the LitePoint addressable market was in the $1 billion range.

Does that also include LTE, or is LTE in addition to that?

It includes LTE, but we also expect that market to grow over time, but LTE is in that market.

Thank you.

Tom Diffley.

Yes, good morning.

So Mike, you talked about some of the nice performance for the high performance mobility space.

I was curious though, how do you view the health of some of your wide end segments like the microcontroller and the analog?

Either on the utilization basis or when do you expect that to recover?

Tom, that's the quiet place.

There's really been no movement.

Automotive microcontrollers, those are very, very -- they're not dead, but they are quite dormant.

At this point, the capacity utilization for the market overall, testers is maybe a touch under 80%.

So, you've got an overall install base that's got some idle capacity, and I think that would be centered on the microcontroller automotive space.

No projections at this point when that will pick up.

So, it's really hard to tell.

But I think you correctly characterized it as a market that's got some cylinders that are hitting very hard and that are -- where capacity utilization is very high and the demand for extra capacity is pushing.

But there are these pockets, and the ones you pointed out are the softest ones.

Okay, and then you look at the memory space, with the slowdown in the DRAM market in general.

How does that, in your mind, change the evolution towards the higher speeds that creates a bigger market for you going forward?

Well that's been slow.

Frankly, the DRAM space, we're very well positioned in Flash, we're moving our Magnum product into the low speed DRAM test, so that's been some growth for us.

That's one of the components of gaining share.

Then, we do have a pretty good position at the very high end of the DRAM test space, but really, the CapEx in those spaces is very small.

We continue to watch and hope that, that will move more quickly.

This low powered DDR capacity need which, we think starts in 2012, may be a place that can dislodge what's been a pretty dormant growth rate in that space.

Okay, and then just finally, if you see consolidation, either the DRAM or the NAND market this year, does that materially impact your business in that space?

I don't think so.

Any consolidation always puts a pause into things as the inventory of testers gets rationalized.

But I don't think it stops the work that we're doing on the design end, because it's a place where we've got low share, therefore, consolidation doesn't change too much the 80% or so of the market we're not currently in.

Okay, thanks for your time.

Vishal Shah.

Thanks for taking my question.

Just wanted to understand your first quarter bookings trends you mentioned.

Is that still going to come from the subcon space or is it going to be more broad based?

Are you asking forward?

Yes.

You mentioned -- yes.

I don't have the forecast broken down here in front of me, but we'll still see a chunk of subcon.

So, I don't think we retreat back to the level that we had in the third quarter.

Whether we can -- whether it will continue to the level of the $100 million plus level that we had in the fourth quarter is yet to be seen but the subcons are the place where the growth in the fabless mobility companies push.

So, that will continue to be a decent participant in the first quarter, but I honestly can't tell you whether it's going to go above what we had in the fourth.

Great, thanks.

And I guess, I wanted to just also understand your expectations of revenues from the HDD segment.

You mentioned market size, but if you can maybe provide us some color on what you think you can do this year.

I think you had mentioned something last year, and just wondering if you have any idea of what that business is going to look like this year.

Yes, last year, if you remember, go back a year.

We were projecting that we could operate in the $80 million to $120 million range.

As we worked through the year, that was obviously -- was moved up for us because we were really, very successful at breaking into some new customers and getting production buys in those customers.

Then, expanding the applications that the Neptune was doing.

So, in fact, 80% plus of our business last year came from new customers and new applications.

As a result, we topped the $120 million mark.

As we entered this year, we've said that our projection for the year is at the top end of last year's range.

In other words, about $125 million would be what we expect to be able to deliver in the course of the year.

Now, we're only 26 days into the year.

So, we'll update you as we go along.

One thing I would say is that just because we've had this early demand, that hasn't changed our view of what the total market might be.

We certainly have a larger piece of that $125 million in house at this point in backlog.

So, we'll give you an update as we move through the year as to whether that moves up a bit.

Great.

Thank you very much.

David Duley.

Yes, congratulations on an excellent quarter, and I just had a couple of questions.

Did you have any 10% customers during the quarter, and who were they?

No, we did not.

Okay, and can we -- going forward, you had some pretty spectacular gross margins with LitePoint before you acquired them.

Do you think those margins will continue at the current levels as you penetrate new customers?

We think LitePoint's gross margins will be better than Teradyne's.

Will they be as good as they were in the past?

Not sure of that.

It's possible, but certainly better than Teradyne's.

Okay, and final thing from me is, when you look at the segments of your business that were quite strong during the quarter.

When you talk about mobility, does that generally refer to application processes or baseband processes that go into phones?

Yes, and power management and RF.

Okay, so you did start -- you did also see the strength by the phones and the tablets, that are shipping, impact your analog and the other segments of your mobile product line.

Yes, power management, mobile processors, wireless baseband image sensor -- those would be the top three sectors for us this quarter.

Okay, thank you very much.

Patrick Ho.

Just going back for a second on the high end digital and some of the strength you saw with the UltraFLEX.

Can you just comment a little bit on the concentration of customers and following that, is that coming from existing customers that are expanding into new sockets or are they new customers themselves?

Well, the majority is existing customers, but it's new sockets at exist in customers.

So, there's always a new component.

Certainly in this case, it would be new sockets of the last year that are driving this new business.

Patrick, you had a question as to what --?

Was it concentrated to a few, I guess key customers?

Or was it broader base in terms of the demand strength that you saw last quarter that, I guess, is extending into the March quarter?

It's pretty concentrated because the leaders in this space are pretty concentrated.

So, if you said the specifier list would be a small list, it fans out into the subcon.

So, it's a broader set of actual name customers with the purchase orders, but it's driven by a concentrated market.

Okay, no, that's helpful.

Maybe just going back to Tom's question about the low end IC market.

What do you believe will be the catalyst that I guess spurs new test or demand for the microcontroller analog market, given that we're still seeing pretty healthy demand in the smartphone and tablet markets that do employ those type of devises as well?

I think those are more general economic drivers rather than next big thing drivers.

I think you have to soak up the capacity as the IC growth continues, and that gradually happens during the course of a recovery, the wide range of use of electronics.

So, I don't think there is any one good thing to look at there to spur a big uptick in the capacity utilization, but as it turns, it starts to -- and it starts to turn off then you get the, obviously, anticipatory buying.

Okay, great, and final question for me, in terms of the HDD test business segment.

I want to make sure I was clear on this is, you're suggesting that what you're seeing now is actually demand related and not replacement.

How are you accounting for the potential of replacement buys coming in through the year, in terms of the current forecast that you just provided?

Yes, the thing we wanted to be sure that people understood was that our business, in terms of replacement of Teradyne business, there's really been no replacement of Teradyne install base.

Our systems, the customers were -- utilized our system and those systems were kept -- essentially kept above the flood level.

So, we don't have an insurance spike in our demand.

Now, do we have -- was the install base of other testers affected?

Obviously it was, so some of our demand we think is a positioning where we're able to get some of that business.

How much, I don't know exactly, but a piece of our business goes into -- is therefore flood related, but I wouldn't characterize it as directly Teradyne Neptune replacement business.

There was none of that.

Great.

Thanks a lot.

Operator, we have time for one more call please.

Jagadish Iyer.

Yes, thanks for taking my question.

Two questions.

Big picture question, Mike.

I was just wondering how should we think about the overall SOC market, two to three years from now.

Are there some secular growth drivers which could take that up to probably the $3 billion level, or we are probably going to be seeing hovering around the $2.4 billion, $2.5 billion, that's my first question.

Then I have a follow-up.

I think the past really gives you some idea of the projection for the future, and that is it's a low growth sector in total.

But inside the market, there are segments that are clearly growing, so as the market -- the total market we don't think has more than low single digit growth.

But if you looked at the sectors of wireless, mobile, even automotive, microcontrollers, pure logic and linear, that set of customers.

If you take the 100% of the pie, we think that over the next few years those sectors gain about 9 points of share of that pie while the PC related sectors will be losing about half of that 9 points.

Then, the shifting of 1 point or 2 points and lots of other sectors.

So, we're not counting in our strategy for the overall market to grow.

What we're counting on is the sectors that we're focused on to grow, and that's been happening.

We're, also, counting on just this relentless socket design win strategy to be able to nip away and to take fractions of share points just through hard work.

So, that's fundamentally what we're relying on versus top -- total market growth.

Okay, the second question, now that you've had 100 days of LitePoint, what kind of synergies have you seen?

And Greg, how should we think about the OpEx portion?

You've done pretty well in the first half of '11 in terms of being under the model that you have prescribed.

So, how should we think about the OpEx as you progress through the year?

Very good question.

The OpEx synergies will be insignificant.

We're doing small things such as, they are going to use our HR system, and we can help them hire people faster, small things like that.

We have some engineers, speaking with their engineers, sharing RF ideas, road maps, so there may be longer term synergies that may help a customer.

But in terms of cost synergies, I would say close to zero.

It's more they avoid costs they would have incurred as a public company.

They avoid those costs.

We're going to invest in LitePoint for growth given their market share is 13% or so, and they have disruptive products, and there's these discontinuities which basically customers have to re-evaluate a whole new tooling decision.

The past fleet cannot do the job.

So, we want to lean into LitePoint aggressively because there's so much, so much upside.

So, we look forward to speaking to you throughout the year in terms of how we're doing against that growth plan.

So, is it fair to then say model like 35% on the OpEx side, going forward?

Is that a right way to look at it?

Yes, I think that's fair.

That's fair.

Just one quick last follow-up.

Mike, maybe you can give us some color on that.

Within the System Test, how should we think about the different components?

I know you gave enough color on the HDD side, but how about the other components on that?

How do you think it's going to grow this year?

Thanks.

Let's see.

The other components are the defense business and the commercial board test business, and in total, that's about $125 million of business.

Those tend to be slower growth businesses.

Commercial board test is not a growing market, but we've got a small and healthy business there.

Defense going forward we think can grow to the tune of maybe 5% with a solid bottom line.

So, I don't think there will be big engines of growth for us, but there will be healthy players in the portfolio.

Great.

Operator, that concludes today's call.

Thank you, everyone, for joining us, and we look forward to talking with you in the weeks ahead.