泰瑞達 (TER) 2012 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Q1 2012 earnings conference call.

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Andrew Blanchard, you may begin your conference.

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

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

Following our opening remarks, we will provide details of our performance for the first quarter of 2012, as well as our outlook for the second quarter.

First, I would 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, and 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 May 12.

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 statements contained in the earnings release, as well as our most recent SEC filings 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 Bank of America Merrill Lynch Conference on May 9 in San Francisco, Craig-Hallum Investor Conference on May 30 in Minneapolis, Callum & Company's annual TMT Conference on May 31 in New York, and SEMICON West in San Francisco in July.

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 first quarter and provide our outlook for the second-quarter.

Then, our CFO Greg Beecher will provide more details on our quarterly performance, along with our guidance for the second 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 are off to a very strong start in 2012 with nearly $400 million in first-quarter revenues and a projection for $100 million or more in revenue growth in Q2.

This will be the second quarter in a row of adding about $100 million for the top line and represents just over 70% growth off the Q4 2011 trough.

And with it, we'll post our best first-half totals in nearly a decade.

Obviously, the piece of this momentum comes from the SOC sector, which is rebounding from last year's second-half pull back.

This market recovery will lift all boats to some degree.

But I want to emphasize that two or three main stories behind these growth numbers that we are seeing, which are unique to us.

First, our focus on the complex SOC chips within the wave of new mobility products is producing unprecedented demand for our UltraFLEX system.

The chip coverage we have in the latest smartphones and tablets has fueled a sharp increase in demand for testers that cover baseband processors, wireless connectivity chips and power management ICs.

Just about 90% of our SOC bookings increase in Q1 was accounted for by this upsurge in UltraFLEX demand.

Second, our Storage Test product line will post first-half revenue numbers nearly equal to the second half of last year, which was itself a half-year record.

So the market acceptance of our 2.5 inch drive test product remains broad and strong.

And third, we will have very good growth from LitePoint as they outpace the market in end-product wireless test.

In addition, we will continue to get steady top- and bottom-line performance from our defense, our board test and our memory test units.

Obviously, back-to-back quarters like we're seeing will stir questions about both the near- and long-term sustainability of what we are seeing.

For the near term, you can see that we are leaning into things, ramping our revenues a bit faster than our trailing bookings would warrant.

We are doing this both because we see some short-term strength, but also because we are getting a more versus less tone from our customers as we plan near [incapacity].

Over the horizon, things understandably get less clear.

On the downside, our global concerns about economic growth, and on the upside, our continued strong signals in the mobility sector coupled with the possibility of second-half recoveries in other segments like automotive and microcontrollers.

So let me comment on some of the broader market issues, then step back for some thoughts on our longer-term strategy and how the business portfolio is coming together.

As you know, the SOC total market run rate in the fourth quarter of last year was at $2.1 billion, down from about a $2.7 billion run rate in the middle of last year.

PC-based buying was holding up, but all other sectors like wireless, automotive, microcontrollers and precision analog were all well off their 2010 and 2011 peaks.

OSAT buying hit its trough in Q3 of last year, and that was quickly followed by IDMs in Q4, which posted a 10-quarter low as the year closed.

Now as we close out the first quarter, the market run rate is up to $2.6 billion or $2.7 billion, and for us, IDMs are up over 80% from their lows, and OSATs are up almost 2.5 times the 2011 trough, and 25% sequentially up.

With this strong first half in 2012, we could see a total SOC market in the $2.4 billion to $2.7 billion range, even if the market pulls back some in the second half.

Memory has not seen the same inflection as the last two quarters continue to reflect about a $600 million run rate.

While memory demand for us was up sequentially due to some successful [designing] work, we are expecting an overall memory market in the $600 million to $700 million range this year.

Of course, the second half is a wild card, but the surge in SOC is not currently mirrored in the memory space.

In Storage Test, we have come off a strong year, and our backlog position has a very good first half dialed in.

As I've mentioned the past calls, all of our demand is in the 2.5 inch hard disk drive space, where we have broadened our product offerings and our customer base in the last 18 months.

With a solid first half, we expect to meet our plan for at least $125 million in Storage Test sales this year.

Which brings me to LitePoint, which has been running at about a $30 million in quarterly revenue level since we combined in October of last year.

We are expecting our revenues to ramp substantially this quarter, putting us on path for at least a $160 million revenue year, and that is a 20% or more increase over 2011.

Since LitePoint lead times are very short, we won't be surprised by significant swings in this business.

I will say that robust wireless unit growth will be the principal driver of the test market this year.

So as we launch into 2012, the results out of the gate are very promising.

Our two new businesses are on track for strong first halves, our Semi Test business has record demand for next-generation smart phone and tablet driven components.

And some dormant sectors offer the promise to turn on as we progress through the year.

Nextest and Eagle Test are fully integrated and performing well.

Storage Test has built a $100 million to $150 million [per e] business from scratch in under four years.

And LitePoint is expanding its footprint, its solutions and its revenue base across the globe.

We do intend to increase some investments both in engineering and customer support to ensure that our momentum continues in the years ahead.

Now these have all been covered in prior discussions about our model P&L.

And of course we remain alert to make other prudent investments with our hard-earned capital as opportunities present themselves.

Let me turn it over to Greg for the financial perspective as well as for some expanded comments on the LitePoint progress.

Thanks, Mike.

Good morning, everyone.

I would like to first offer some perspective on our strong start to the year, including some comments on our model.

Then I will cover the more detailed first quarter highlights and second quarter guidance and close with some summary comments.

Looking at the strong start to the year, we are on course to have first-half sales ranging from $890 million to $930 million.

Recall that our sales to over the last two years have averaged $1.5 billion a year.

It was not too long ago in 2007 and '08 when using similar SOC test market sizes we averaged annual sales closer to $1.1 billion.

As you know, Eagle and Nextest played key roles in this earlier growth along with our expansion into hard disk drive testing.

Most recently, we've added LitePoint into the fold in late 2011.

LitePoint's contribution is expected to kick into a higher gear in the second quarter along with a strong SOC test mobility demand on the UltraFLEX.

So as Mike talked about, mobility is the key driver, which brings along wireless, power management, baseband and flash memory.

We estimate that we have over 60% of the SOC test mobility buying and expect to gain additional mobility share with our UltraFLEX platform, as some of our recent mobility design wins had a considerable lag before they hit production.

UltraFLEX, which is now coming back into the spotlight with a strong growth in mobility, was designed from the ground up to enable complex devices to get to market faster with easier to program software and deliver the highest throughput for these devices.

We also have strong share in segments that are well below their average buying of the last two years, such as microcontroller, performance analog and automotive.

So there is other semi-test demand that has not kicked in yet, but we expect will pick up as year unfolds.

On the model front, recall in our October call, we update the model to include some additional engineering investment and distribution coverage in order to drive the next round of share growth.

We said that at $350 million of quarterly sales, we'd expect a 15% non-GAAP EBIT and a healthy drop through beyond that level.

We continue to operate on that model, and depending upon revenue level and product mix, the drop through can vary significantly.

So the key takeaway is that while we are maintaining strict financial discipline, the model does support our investments for additional growth, particularly in LitePoint.

As a quick reminder, the primary swing factor in any one period against the model is the mix of business given we have both large program buying and a wide range of products with different margins.

In Q1 for example, the mix was heavy with Storage Test shipments, which weighed on gross margins.

As you would expect, there is a direct connection with the level of operating expenses that the different margin businesses consume; namely the lower margin businesses consume less in operating expenses.

As you will recall, the stand out growth business last year was Storage Test, delivering revenues of over $150 million.

Before that, Semi Test share gains via Eagle and Nextest products, with our distribution muscle, were the main show.

While Storage Test and Semi continue to deliver quite nicely, we expect LitePoint to take some of the center stage.

LitePoint gained about four points of share last year in a $1 billion test market that is growing about 10% a year.

We expect LitePoint to continue to grow share this year from their current level in the low teens.

LitePoint offers production optimized solutions that enable brands and [chip site] companies to get their products to volume faster.

In addition to gaining share, the longer-term outlook is driven by two important trends.

First, the number of wireless devices continues to grow at a mid-teens or higher rate.

These devices range from the familiar smart phones, tablets and PC networks to the perhaps less familiar networks connecting industrial equipment, household appliances and smart grids.

Second, expanding demand for more information across the many different forms of devices like tablets, smart phones, laptops, eReaders to name a few is driving the need for new standards to deliver this growing data volume.

In wi-fi, it's 802.11ac, where their first wave of adoption will be in products that have higher powers such as PCs.

In cellular, it is LTE.

Both of these new standards cannot be tested on installed base testers.

The higher performance requires new testers, and the volume of data will also drive test times higher.

So we have the combination of unit growth and technology refresh that extends over a few years, coupled with LitePoint's unique product line up driving this business forward.

Last year, LitePoint had sales of $130 million, and inside of Teradyne, its sales were [$28 million] as we acquired them in the fourth quarter.

This year, we're on track to meet our LitePoint sales target of $160 million or more.

Now, moving to the key highlights of the first quarter.

We met our sales and earnings guidance with a top line of $397 million and non-GAAP EPS of $0.30.

Storage Test had a very strong start to the year with its second-highest quarterly revenue in history.

Moving to the demand side, Semi Test bookings grew $130 million or 55% to $363 million.

SOC test orders were $335 million, and memory test orders were $28 million in the first quarter.

Semi Test service orders were $62 million.

System Test service orders were $14 million.

And over all, System Test group orders came in at $53 million.

Wireless test orders were $42 million in the quarter.

In the first quarter, Semi Test sales were 67% of the total.

System Test group was 25%, and Wireless Test was 8%.

Our book-to-bill ratio for the first quarter was 1.2 for the overall company, 1.4 for Semi Test, 0.5 for the System Test group, and1.3 for Wireless Test.

At the end of the quarter, our backlog stood at $519 million, of which 85% is scheduled to ship and be recognized as revenue within the next six months.

The top line of $397 million was up $100 million, or 34% sequentially from the fourth quarter, Semi Test was $268 million, up $65 million or 32%, and System Test group was $98 million, up $32 million or 48%.

Wireless test was $31 million, up 10%.

We had two 10% customers in the quarter, and our top five customers accounted for 42% of our first-quarter sales.

This level of concentration is unusual for us and reflects the strength in the mobility area.

In the fourth quarter, for example, we had no 10% customers and the top five were 30% of our sales.

Looking over a broader time period, in the last eight quarters, we had 28 different customers among our top ten.

So you can see, we don't encounter the dense concentration that [semi permanent] markets see.

Semi Test product shipments increased 46% from a quarter ago.

Within that $397 million, service revenue was $66 million, a $3 million decrease compared to the fourth quarter due to a reduction in application demand.

Semi Test service revenue was $51 million.

Total company product turns business was 33% versus 38% a quarter ago.

Semi Test product turns business was 37% versus 40% a quarter ago.

Memory revenue was $22 million.

Before I take you through some of the P&L details, I should quickly add that we have made a change in our accounting to mark our pension gains and losses to market versus spreading them into future periods.

This has the impact of changing some of our historical results and over all will lower our quarterly cost about $2 million a quarter.

In the fourth quarter, on the GAAP, there will also be an annual mark to market adjustment that will show up in the GAAP results only.

We have entered a reconciliation table to our website, and more footnote disclosure in our release on the impact of this change.

The fourth quarter comparison numbers that follow reflect this change, and we have excluded the annual mark to market adjustment in our non-GAAP results for better comparability.

Now moving down the P&L.

Non-GAAP gross margins decreased from 50% in the fourth quarter to 49% in the first quarter due primarily to mix.

The primary mix shift was a much greater percentage of hard disk drive sales as customers accelerated purchases in part as a result of the Thailand flooding.

R&D expenses were $60 million or 15% of sales compared to $53 million or 18% of sales in the fourth quarter.

SG&A expenses were $68 million or 17% of sales compared to $62 million or 21% of sales in the fourth quarter.

Operating expenses in total of $128 million were up $13 million from the fourth quarter, non-GAAP numbers, driven by higher variable compensation and primarily LitePoint growth investments.

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

We had a cash tax provision of $6 million or 9% in the first quarter.

We expect a full-year cash tax rate closer to 9%, down from our earlier estimate of 10% to 12%.

Cash from operations used $16 million after capital additions.

Recall that in the first quarter we paid out the majority of the employee variable compensation, and we had very low DSO at year-end of 40 days.

On the capital allocation front, we have $169 million remaining under our authorized buyback, and we will remain opportunistic in [the timing of] buybacks to ensure that long-term shareholders are rewarded.

We will also continue to re-look at our capital strategy to ensure we provide the best possible returns.

On the M&A front, I want to first say that we very much like the portfolio businesses that we have.

There is nothing that is missing from a strategic perspective or any hole that we need to fill.

You'll also recall that each business contributed model or better profits in 2011.

So on the M&A front, apart from telling you we will maintain our strict and disciplined criteria when evaluating opportunities, there's simply no predicting whether we find another good fit over the next few years.

We expect to grow cash and marketable securities by about $90 million in the second quarter and end with a gross balance of $833 million.

As noted in the press release, sales for the second quarter are expected to be between $490 million and $530 million, and the non-GAAP EPS range is $0.53 to $0.62 on 210 million diluted shares.

I should point out that this guidance excludes the amortization of acquired intangibles, the non-cash imputed interest on the convertible debt, and the inventory step up charge related to the acquisition of LitePoint.

Our GAAP EPS range is $0.31 to $0.37.

The operating profit rate at the midpoint of our second-quarter guidance is about 26%.

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

We expect non-GAAP gross margins to be 54%.

R&D should be 14% to 13%, and SG&A should be 15% to 14%.

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

The cash tax provision should be $10 million to $12 million.

In summary, 2012 is off to a great start with our second-highest [HDD] revenue in history for a quarter, a very strong mobility market driving our SOC and LitePoint orders and the potential for other market segments to pick up as the year unfolds.

In this environment, will stay focused on gaining share and maintaining financial discipline while also very selectively investing to drive our above-industry rate of growth.

Now I will turn the call back over to Andy.

Thanks, Greg.

Katie, we would now like to take some questions.

Katie, we are ready for some questions, please.

(Operator Instructions)

Jim Covello, Goldman Sachs.

Thank you, good morning.

Congratulations on the terrific results.

I guess the first thing I wanted to ask was about was just -- really speaks to the diversification of your model that a couple of your segments or customers that had been big customers in the past aren't really very active right now, and still you have terrific results.

You listen to the Texas Instruments call the other day, and they talk about near record low CapEx, and obviously the memory segment is very weak right now and still you're able to produce terrific results.

If I look forward, is it really -- you mentioned microcontrollers.

Is it really that microcontroller kind of core analog business and then the memory segment that could drive even higher incremental growth in the back half of the year.

Those are the two main segments we should be looking at?

Jim, this is Mike.

Yes, it would be microcontrollers, automotive, linear, precision analog in the semi space, in the SOC space, and memory obviously.

Those are the ones that are -- that haven't seen the pickup.

Is it just simply a function of utilization rates, or are there some technology transitions, particularly in the microcontroller side that could drive the pickup?

And then in memory, is it just pricing that we should be watching there?

It's utilization on the analog and the microcontroller side.

An in memory, the forces that have kept the market low continue, which are reuse of existing equipment, reduction of test times, increase in parallelism.

And I think you have to add in, as we've come into the market, especially in the flash space, the test capital cost per site.

All those things have had an impact on the market.

Terrific.

If I could just ask one other quick follow-up.

You mentioned on the buyback, the $169 million I think you said remaining, and you talked about being opportunistic.

How do you guys define good value at this point with your stock relative to an improving financial model, but also a decently improving stock price.

Is it a price to earnings metric or is it just more mechanical than that in terms of how you think about being opportunistic to buy the stock?

Thank you so much.

That's a great question, Jim.

What we do is we look at the intrinsic value of the Company.

We do a DCF analysis with different assumptions, so we come up to a range of the stock.

And then what we do after that as is we discount it twice, which then becomes somewhat conservative discounts, just to ensure that the number we buy back at has high confidence that it is a good deal for long-term shareholders.

If I go back a few years, we did not discount it as much and we bought back at prices that we wish we had not, so we are very conservative in the price we pick given the history of many tech companies' mistimed buybacks.

They buy them back when they are healthy and they have a lot of cash.

So we want to be more opportunistic.

Really helpful.

Thanks so much and congratulations.

Wenge Yang, Citi.

Thank you for taking my questions.

Two things.

First of all, when I -- you mentioned about the 60% share in the mobility market past and also gains in recent design wins.

Can you comment a little bit more which segments you actually are gaining shares and also what's the reason behind share gains?

We said in the opening comments that we think we've got a roughly 60% share in the mobility market.

That is a little bit hard to pin down because there's so many devices, so many customers, but we do think we are well above the 50% level.

If you look inside tablets and smartphones, the devices that comprise those systems are made up of a variety of different devices, we are very strong really across the board.

If you said -- where are we the weakest?

We are the weakest in memory obviously because we've got the lowest share in memory, but we're the strongest in the wireless transceiver space, power management and so on.

Now, winning is a matter of gaining a socket here and a socket there over time.

So we've got the portfolio of instrumentation to go after everything that is in those mobility products.

And as we win a socket and a generation of socket, that is how we win the overall share.

There isn't a particular sub segment of the technology in those devices that we would say we've got 90% share or another place where we've got 10% share.

We really got pretty good coverage from an instrumentation and economics of test standpoint to cover them all.

That's helpful.

A quick follow-up for Greg.

In terms of gross margin assumptions, if I use UltraFLEX or the core SOC test as the corporate average, is it safe to assume that HDD is about 5% to 10% lower in terms of gross margin and LitePoint is 5% to 10% higher in terms of gross margin?

I would assume Storage Test is closer to a little more than 10% -- about 10% below.

So Storage Test will be below, 10% below, and LitePoint would expect to be a little bit above the Semi Test.

If you look at the margin guidance for the second quarter, 54%, that is generally consistent with the model.

I should point out that there's still some healthy Storage Test business in those numbers still higher than an average quarterly run rate.

Obviously as the numbers get higher, the impact of Storage Test gets watered down a bit because you've got a big denominator.

So I think overall the margins are tracking to model, and I think we really see the variations if sales get low and there's a heavy skew of either higher or lower margin business.

That's where it really shows up.

Great.

Thank you.

Krish Sankar, Bank of America.

Great, thanks for taking my questions.

I have a couple of them.

Michael, Greg, can you tell us what is the SOC available market for mobility testing this year?

In SOC test?

Yes.

The mobility portion of it.

Try to field that one?

Krish, there's no good number.

Let me do it from our numbers out rather than being able to say what the total market is because all of the suppliers in this space group their bookings in different ways.

Our bookings have trended such that the mobility sectors -- if you add up RF, mobile processors, baseband, power management, image sensor, all of those together have tended to be more than 50% of the total market.

So as a rule of thumb, that is the way we think about it.

It's more than 50% of the total, but it ranges from very general purpose, high-performance, UltraFLEX type systems to more dedicated systems like we find in the image sensor space or in power management.

So the testers are a wide range of testers, but I think when you put it all together, you're in the 50% plus of the SOC market is connected in some way to mobility.

All right.

Okay that's been helpful.

And then, two other questions.

In terms of your top ten -- the two 10% plus customers, which segments were they?

Were they like HDD, IDM, OSAT -- can you helps us understand that?

The two top 10 were IDMs.

They both were IDMs, got it.

The final question, let's say the back half of the memory recovers -- some point into next year, the memory test business does recover, which one do you expect to recover first, the DRAM or the NAN testing?

We think that NAN would recover more than DRAM.

Thank you very much.

Mehdi Hosseini, Susquehanna.

Thank you.

I have a question on LitePoint.

You guys keep talking about a minimum of $160 million of revenues this year, but at the same time, you are gaining share.

This is a fast growth market.

Is there any way you can give us [a wrench] so that we can better evaluate dollars of opportunities?

Mehdi, at this point, we really can't.

It is such a lumpy business for 3.5, almost 4 months into the year.

I think for another quarter or so, what we will say is we believe we've got $160 million plus.

We are very confident of being able to meet or exceed that $160 million level.

We may be able as we get into the middle part of the year to give better resolution on that.

But I would say three months ago we were saying from a tone standpoint, that's our objective.

Right now, I'm pretty confident that we will beat that number, but I really can't give you a range as to how much we might beat it by, but I am confident that we can meet and exceed that number.

Mike, I appreciate the color you provided earlier about how you see the Semi Test market.

Maybe I want to go back to cyclicality nature of the Semi Test, and outside of memory, in the core SOC, what gives confidence that Q2 is not the peak of the current spending cycle?

Is there anything else that you see out there that you can share with us?

You said what gives me confidence that Q2 is not the peak.

I don't think I said it was the peak or was not the peak.

What I said is that we've had strong bookings leading into Q2, and because of the short-term signals from customers, we are leaning a little bit harder into Q2 capacity planning.

Because we think that it's warranted by the demand and certainly warranted by the experience of the last four months.

Calling the peak, we are not doing that.

I think we when you get into that, we step back and say how big do we think the market will be this year?

We have increased our view of that by $100 million to $200 million from the last call to this call.

I don't think we let the short-term overcook the view of what the market and total might be.

So as we march through the year and we get the numbers per quarter behind us, we will be able to say -- are we above or below the midpoint of the market?

Right now it's certainly very strong, and I would not be the one to want to call a peak at this point.

Got it.

Thank you.

CJ Muse, Barclays.

Good morning, thank you for taking my question.

I guess first question, I was hoping to probe a little bit deeper on the mobility SOC side and if you could talk a little bit about sustainability, the strength you are seeing here, what kind of lead times and whether they've stretched out on the UltraFLEX side?

The visibility there for the remainder of the year?

CJ, beyond two or three months of visibility is quite cloudy.

You've got new products that are coming out in the end market that are being tooled for, and then you've got uncertainties around demand, volumes and so on.

So not to be short, to have a short horizon here, but that really is the only visibility that our customers have in their markets and that they pass on to us.

Your second question?

Lead times have typically run six to eight weeks.

They were running that in the quarter, but towards the end of the quarter, they got extended closer to maybe 8 to 10 in the complex UltraFLEX segments.

So the lead times are pushed out a bit there, but they are not as far pushed out as they have been in some other periods.

But we have done incredible scrambling to respond to this demand.

The UltraFLEX demand, we have gotten orders in the first quarter that equals an entire year's level of orders in one quarter.

So it really has been a very sharp ordering period.

And earlier in the quarter, there was a lot of work going on scrambling with suppliers to meet that demand.

So we think we've captured the vast majority of the orders that were able to be captured in this quarter.

That's great.

If I could move to LitePoint, can you talk about -- on the connectivity side, what kind of uplift you're seeing in terms of the revenue opportunity with the move to fifth-generation wi-fi ac.

And then secondly, as part of LitePoint, can you talk about progress on the baseband side with the move to LTE, any sort of update you can provide on your ability to garner share in that new market for LitePoint?

Sure, CJ.

First on the connectivity before I get to the new standard, the business is very strong, just simply the unit growth.

It is very healthy, in terms of the demand we are hearing from our customers.

So I think that's very healthy.

And then before -- then we moved to this 802.11ac.

That is sort of in the early innings.

We've booked some demand for that.

We will be shipping some in this second quarter.

I do think that plays out over a couple year period.

The first products are plugged into a wall will likely use that because we need more power.

But over maybe two or three years, that will be a bigger deal, but it's a bigger deal in part for test because customers want to make sure that the product they buy either has a roadmap or can connect to the new requirements.

So we are well-positioned there.

We feel good about our spot there, and we have very good share in that whole connectivity segment.

And in LTE, we are -- we can't say customer names, but we are -- we did win a key design and we are testing in LTE.

So we have our product out there.

Truth be told, we are very small in this large market, and that is another part of the upside, a small player trying to replicate what was done in a connectivity side into cellular -- again, break-ins, a key break in and has occurred, but we need to continue that trajectory, and that is probably a two or three-year timeframe, so stay tuned.

Very helpful.

Thank you.

Satya Kumar, Credit Suisse.

Hi, thanks for taking my question.

Just a quick clarification, did you give a percentage order breakdown for Semi Test, [IDMs] and [sub core] in Q1?

I gave some numbers, but -- let me refresh that, I have it here.

Hold on.

The breakdown was for IDMs and the specifiers in the [fabless] companies was about 63% and 37% in the OSATS.

Last quarter, that was 54%, 46%.

Okay.

Some of your OSAT customers have talked about fairly substantial ramps and additional test capacity.

At least one has talked about tripling the new test capacity.

I guess are you seeing that sort of pickup come through yet, or is it still opportunity ahead of you?

No, that is a big piece of this upsurge that we got in the bookings plan, and then this very intense slot plan alignment that we've got in Q2 and going into Q3.

As Greg said, we've had in one product family here -- subset of our total product line in the UltraFLEX.

We've had almost the equivalent of the peak year between 2010 and 2011.

We came within, I don't know, 5% to 10% of hitting a full year's demand in one quarter booking.

So that's clearly -- that fire is stoked.

And the OSATs are pulling on it.

Having said that, the OSATs haven't hit the peak of the last cycle in the 2010 growth cycle.

So considerable growth from two quarters ago, almost three times the size in our OSAT business, so they've clearly turned on, and in the short-term, we think they're going to continue to pull pretty hard.

That is the signal from our slot plan work that we are doing with them.

And then a question on SOC, could you talk a little bit about general market transfer pricing and market share trends within the apps processor segment versus these image processors, especially large IDMs?

This is Greg.

The pricing environment is unchanged.

I recall some number of quarters ago, I did mention it was getting a bit more aggressive, there's been no real change to that.

We think it is sort of a new norm.

It hasn't in any stretch deteriorated.

It's just a new normal.

Our gross margins as you can see are holding up pretty well.

And what was the second part of the question?

No, on the device side, on the apps processors, different processors in the -- I think -- quite frankly, the demand for us has been so high.

I think the question -- let me turn the question around.

Have we got 100% of the potential demand, or has that -- have customers had to find other avenues to get the spike satisfied?

And over the last three or four years, I would say we were awfully close to getting 100% of that business.

Frankly, on this last two to three months, we have probably in the 90% plus, we are not at the 100% level.

We are really more in the 90% plus.

So the good news is, we are riding the segment in the segment growth, which is the hottest segment around the edges.

We didn't get 100% of that.

And we just could not respond to every piece of demand.

The results of that is obviously we have been working very hard with the supply line, and as I speak now, I would say that customers coming in the door -- certainly the ones who are tightly connected to us and have been planning capacity, were able to meet those demands.

But two months ago, we were not at the 100% level.

We're much closer to that at this point.

That's good to know.

One last clarification question again.

That CapEx SOC market outlet that you gave, $2.4 billion to $2.7 billion, could you give a breakdown of that between complex SOC and the other segments?

I just want to get a sense of how you are thinking of the mix between complex SOC and the other segments and how that might have changed over the last three months.

And that is my last, thanks.

Because we don't change our product strategy and our capacity planning based upon the shift -- we look more at that as a macro picture of where the segments are going to go long-term.

But as I said before, a complex SOC, if mobility is more than half, then if you put all of complex SOC, it's clearly, obviously higher than that.

The thing I would say to you on the SOC segments over time is that if you took the whole pie of buying and split it into these categories of, you know, the PC-based and then the mobility-based and then microcontrollers and automotive and linear and so on, the PC sector, microprocessors, chipsets, graphics, right now are a bit under 20% of the market.

Maybe around 17% or 18%.

Over the next two or three years, that drops probably by something between three and five percentage points of that pie.

And at the same time, if you take mobility products, which is the full range of the things we've just talked about, that goes up by about five to seven points.

So it's give and take in some of the other segments.

So that is what I would say to you about what's going to happen with the complex SOC.

It is going to gradually take a larger and larger portion of that pie, and that is how we've aligned our strategy.

Raj Seth, Cowen and Company.

Thanks for taking the question.

Mike, I had a quick follow-up on Jim's first question.

The areas of the business that haven't yet picked up, microcontroller, precision analog, I'd assume LCD drivers, a couple of other things.

Is there any way to characterize -- that you can characterize the business levels you're seeing today and sort of a dollar sense relative to what, if there is such a thing, normalized business levels are in those segments?

How much potential exists in those market segments?

Raj, hang on one second.

It's a tough question to ask because inside these sub-segments, things are obviously lumpy.

Microcontroller is at a low point of probably six quarters as we speak.

And the linear precision analog is a little bit higher against its range, but you are trying to get at how many dollars are there where the powder is dry.

And I would be winging it a little bit right now, so I've got to step back from answering that directly.

Not because I wouldn't try to answer it for you, but this probably -- I'd that they're at, in total, collectively, they are at a third of what the buying level would be if they got back to their prior peaks.

I'm not going to give you the denominator and the calculation because then -- but there's clearly less than 50% of the total where it has not kicked in, and that business could double or triple.

Great.

And you say less than 50%.

Is 25% kind of the right way of to think about it?

Or do you not want to get more precise?

Certainly closer to 25% than it is to 50%, but let me stop at that point because of --.

Quick follow-up for Greg.

Greg, how should we think moving into this?

What happens to inventory here in the context of your capacity planning, et cetera, and lead time discussion.

And in Q2, what would you expect turns to be -- what's the assumption on turns in the guided quarter?

Thanks.

Inventory's a little tricky for us because a portion of inventory is off the balance sheet.

So you guys don't even see it.

Because we've outsourced to a contract manufacturer in Asia, but then some of our other products, LitePoint, Nextest and Eagle Test, there is a final touch inside of our companies.

So it's a mixed bag.

But generally speaking, you should see inventory likely increasing into the second quarter on the balance sheet.

In terms of turns, we think turns can be very high in the LitePoint business.

I think in the non LitePoint businesses, they're going to be consistent with where they've been in the past.

Okay.

Thank you.

David Duley, Steelhead.

Congratulations on a nice quarter.

A couple of questions from me.

Do you -- is there a refresh of the UltraFLEX coming, or have you kind of just added instruments as you go?

I'm kind of curious as to -- seems like you have picked up share in this high end, mobility, baseband processor side of the marketplace.

I'm wondering what the reason for that is and if you've got more legs to that share gains story coming?

David, this is Mike.

There is an ongoing refresh that is just a steady flow of new instrumentation.

Any instrument may take a couple of years to design and get into the field, and then there's different segments of the system.

So there's always a constant flow.

There's actually been a bit of a refresh by us and by other players in the market that's underway right now on the digital side of this system.

And that typically is increasing frequencies and increasing density.

So we're in the process of that.

We've got a very good RF instrumentation in the system.

As an ongoing evolution of the product, we continue to do that.

I think the important point in this is that the platform of the UltraFLEX is the base for that refresh strategy.

So we are not into a change the platform, or the platform has run out of gas.

So those are very -- I think that is a fundamental strategy point of getting leverage out of the single platform that we now have at the high-end.

Okay.

I am a little curious, when you talk about all this strength and mobility.

Analog parts and microcontroller parts go into all these mobile parts, these devices that you're talking about.

So I'm a little curious as to why the high-end can turn on and why some of these other sectors that really serve the same markets haven't turned on.

I would just like your perspective there.

That's a great question.

That is a question mark I think in the bubble above a lot of people's heads.

Why wouldn't memory be turning on as much?

Or microcontrollers and so on?

And I think it's just a matter of there's lumpiness in the buying that exists in the market place.

It's pretty dramatic.

The swings in annual buying and certainly quarterly buying are quite dramatic.

So the tooling and therefore the utilization swings are significant.

Compounding that is the ongoing productivity, so that as you increase parallelism, that increases or decreases the utilization.

So I think it's more a function of how the tooling pattern has gone in the past and what is available.

And then there are some new devices that sparked the growth, that spark a new round of buying because of instrumentation in the testers.

But it's always had this patchwork kind of characteristic to it that not every front moves at the same time.

Right.

Okay and final question for me is -- could you just talk about where -- you mentioned where your share at LitePoint is.

Could you just review that again and how you're going to gain share and grow faster than the market is, are we going -- are the customers you currently have growing faster than the market?

I imagine that is one driver, but perhaps tells us about what looms with the new customer wins?

Yes.

There's three waves that are going to help LitePoint achieve this 20% or plus growth.

The first is simply the unit growth is very healthy in their core business, which tends to be connectivity.

They are also into cellular, but the connectivity unit growth rate is very high.

You probably heard [any number of] things.

Many things are going to get connected to one another, and LitePoint is very high share and works very closely with the chipset companies in that space, and they tend to be the de facto company that is used in that test solution.

So units first.

Second is as 802.11ac makes its way, obsoleting the [installed] base, that does open up the market a bit for new testers.

So there's an opportunity and a threat for LitePoint, because once a new tester needs to come in and you can't upgrade a tester by the exact next version, so we are well ahead in that front.

We are shipping this quarter.

We have worked with the key chipset guy, and we think we have a product that clearly can hold the market share.

So that is going to drive a big buying.

But that is not this year.

Maybe some this year, but it's not going to be a big part of the story this year.

The design-ins will be, I think that's more volume next year and some revenue later in the year.

The next is the longer-term growth, which is all upside in the cellular.

and the quick story there is basically taking the non-signal testing that LitePoint pioneered (inaudible) four dots at the same time, production optimized tests with software that helps customers get their products to market faster.

But they're going into a new market, and that's not easy to do, so there's a longer selling cycle.

And I have gotten designs in, but it's getting the next design in, and the next design in, and the next design in.

That is where a lot of the energy is going in, while also making sure the very strong core business that is growing very healthy is well attended to.

Thank you.

Operator, we have time for just one more quick question.

Charles Schulz, Deutsche Bank.

Thank you for taking my question.

Just wanted to follow up on LitePoint.

Just understand the $160 million plus guidance this year, does it assume any contribution from the cellular market?

And also, what do you think your share in the connectivity segment goes this year?

The $160 million, we already have some set of revenue in the numbers as I speak here today.

But the $160 million doesn't necessarily need that, but we have it.

So we're confident with $160 million plus.

I hope I answered that question, What was the second part of your question?

The market share trend in the connectivity segment, you said you gained 4% share last year.

The 4% share we did in the total market, connectivity and cellular.

If we just broke off connectivity, the share gains would have been much more dramatic.

But we look at the markets together, they are both testing phones, tablets, same customers, so they are really to us the same market with different technologies but doing similar things.

So the four-points was a very good growth -- much of it was in conductivity.

Again, that is part of the total market.

You expect that kind of trend to continue this year, you think?

I think we are very confident with $160 million and plus revenue.

This year, I think mid year we could be more explicit what that means.

And $160 million plus, off of $130 million, that's pretty good.

Great.

Thank you.

Thank you, everyone for joining us today.

This concludes the call, and we look forward to talking with you in the weeks ahead.

Thank you.

This concludes today's conference call.

You may now disconnect.