泰瑞達 (TER) 2012 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Teradyne Q2 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, VP, Investor Relations, you may begin your conference.

Thank you, Sharon.

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 provided details of our performance for the second quarter of 2012, as well as our outlook for the third quarter.

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

The press release containing our second quarter results was sent via Business Wire out last evening.

Copies are available at teradyne.com, where this call is also being simulcast.

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

To view them, simply access the investor page on 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 August 11.

The matters will discuss today will include forward-looking statements and involve risk factors that can 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 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'll make reference to the non-GAAP financial measures.

We've posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures, were 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 investor conferences hosted by Barclays, Pacific Trust, Morgan Stanley, and Piper Jaffray in August, and Citibank and Deutsche Bank in September.

Now, let's get on with the rest of the agenda.

First, our CEO Michael Bradley will review the state of the Company and the industry in the second quarter, and provide our outlook for the third quarter.

Then, our CFO Gregory Beecher will provide more details on our quarterly performance, along with our detailed guidance for the third quarter.

We'll then answer your questions.

We should note that we intend to end this call after one hour.

Mike?

Good morning everyone, and thanks for joining our call today.

As can you see, we have posted some exceptional results in the second quarter and have registered a very solid first half.

I want to spend some of my time breaking out what's behind those numbers.

After I do that, I'd like to recap the growth projectory we're on and the strategy behind it.

Greg will go into some additional detail on LitePoint, on our model and cash strategy, and on what we expect to see in the second half of the year.

Of course, he'll also run down the details on the second quarter results.

The bottom line at the halfway mark this year is continued strength in SOC Test, driven by mobility applications, plus an additional boost from the Microcontroller and Analog Sectors.

On top of that, a new product ramp in LitePoint has delivered record first half revenues that put LitePoint on course to exceed our original projections for revenues and profits this year.

The SOC story is an extension of what we saw last quarter, that is very strong demand in mobility applications, resulting in a record in UltraFLEX shipments and a near record in bookings.

On top of that, we've had an uptick in the Microcontroller Sector with our best J750 order rate in two years.

That brings our J750 install base to over 4000 systems.

Our Performance Analog Business at Eagle had a strong showing with over 100 systems ordered in the quarter, including a number of new socket wins for linear, automotive, and power management applications.

These milestones for the J750 and the ETS line are noteworthy, as they're the workhorse products for high productivity digital and analog testing, respectively.

They compliment the versatility of the UltraFLEX with focused, cost-effective architectures that have stood the test of time, are constantly refreshed with new instrumentation, and continue to log new design wins.

Now, the only dim spot in Semi Test was in memory, which continued to be subdued, despite some good design in these first six months.

In Semi Tests, IDM and specifier orders were up 4%, while o-sets declined by about 10%.

So we had a two-third / one-third 3 split between the two end markets.

In Systems Test, we've logged a very good first half in hard disk drive, and our defense business has continued to strengthen through the year.

While the Defense Sector will show continued strong revenue in the second half, we expect that HDD demand will slow, as capacity put in place the last six months is likely to carry customers through the next six months or so.

In fact, aside from our defense business, we have a natural seasonality to our businesses that generally will be reflected in strong first half bookings, corresponding strong middle quarter shipments, and a natural absorption period in the fourth and first quarters.

This is evident in SOC test where industry revenues will be close to a $3 billion annualized run rate for the first half.

So we're due for a normal digestion period in the second half.

This seasonality won't be exactly the same each year, but that pattern has been developing in our industry, as you all know, and we'll ride that same cycle in our new business units as we do in the established core sectors.

That's what you see now as we move our guidance down in the third quarter into the $420 million to $460 million range, with the midpoint being the fourth highest quarter of the last eight years.

As Greg will note, we'll have very solid operating results at that level.

Now, the stand-out story so far this year is obviously LitePoint, which broke all of its prior quarterly and six-month records, surging past the $100 million level in revenues, about three times higher than its previous record.

That was achieved through three things.

First, we launched a set of new products which were aligned to the next round of smartphones and tablets.

Second, we executed an ambitious production ramp that met some very demanding customer requirements.

Third, we hit our product acceptance milestones early, which translated into those record revenues.

We're very fortunate to have a powerful team at LitePoint that's growing its customer base, introducing leading edge technology, and investing in extended R&D and customer support.

That team combined with Teradyne's worldwide organization has been able to achieve these more aggressive growth objectives.

So in our customers' eyes, we've moved up in weight class as a supplier to the wireless industry.

I'd lay out the broader landscape as follows.

Four or five years ago, we were focused on the core Semi Test market with SOC as our main bet.

We made our major R&D investments in the mobility, wireless, and power management areas, everything tied to smartphones and tablets.

We doubled down with Nextest and Eagle acquisitions, as each of them extended our SOC footprint and market share, and launched us into memory test at the same time.

Those additions have given us just over a $0.25 billion of profitable growth each year, based upon a solid R&D pipeline.

We then built a Storage Test business on the bet that the DNA of our core could be leveraged into the massively parallel architectures required in disk drive test.

That has delivered about $400 million in cumulative revenues, now with $100 million to $150 million in revenue each year, and leadership in the 2.5-inch drive arena, the largest HDD test segment.

Finally, we made a bet that LitePoint could outgrow the wireless test market, arguably the fastest growing test sector of all.

That combined strategy has moved us to an average of $1.5 billion in annual revenues over the last two years, and puts us on course to move well above that this year and beyond.

So we continue to unfold a strategy that first focuses on our core Semi Test business, which is sized to deliver strong market share and solid over-the-cycle financial performance.

We don't hold back on the R&D spend in the core, but we're realistic about market growth rates.

So we make measured but aggressive investments in the technology and end product sectors with the most growth potential, like mobile communications.

Second, we try to identify markets where a homegrown or acquired system architecture can be differentiated by offering time to market and cost of ownership advantages.

Third, we've exited markets where we didn't have critical mass or a technology and distribution leverage.

You've seen a few of those over the last few years.

Finally, we reinforced the habits of financial discipline in everything we do.

So a quick recap on the current state of affairs as we enter the second half.

As I said earlier, a strong first half in SOC Test driven by our focus on mobility, an expected seasonal slowdown but with solid averages, a very good first half in Storage Test with an upcoming absorption period, and exceptional results from LitePoint with a longer-term growth trajectory that's shaping up well.

Now let me turn it back to Greg.

Thanks Mike, and good morning everyone.

I'd like to first provide some color on our very strong quarter, and also comment on our model.

Then I'll cover the more detailed second quarter highlights and third quarter guidance, and close with some summary comments.

In the second quarter, we had sales of $548 million and non-GAAP EPS of $0.77.

LitePoint, our Wireless Test Segment was a stand-out performer with $112 million in revenue and $189 million in bookings in the second quarter.

On the product front, LitePoint successfully introduced two new wireless calibration and test products in the IQ family, which were aggressively ramped in the quarter and met customer acceptance tests ahead of schedule.

These new products further extend our lead in providing wireless test solutions that enabled brand and chipset companies to get their new products to market fast, while also meeting their aggressive cost targets for high volume production testing.

I'll come back to LitePoint later, but first I'd like to provide some overall comments on the year as we pass the halfway mark.

Our first half non-GAAP EPS of $1.07 gives us our best first half start in the last 10 years.

Looking around the corner, we'd expect, as Mike said, normal second half seasonality to come into play.

This generally causes our revenue to peak in the second or third quarter and trough in the fourth quarter.

For us, apart from adjusting our supply line, our model anticipates and flexes variable costs down in periods of lower sales, allowing us to deliver very solid earnings through the trough and across the cycle.

Let me take a moment now to give you a sense of how we think about our normalized sales and earnings.

I'm doing this now to remind you of the high level structure, as there have been a fair number of moving pieces over the last year.

You will recall the our model is set so that at $350 million in quarterly sales, we've delivered a 15% non-GAAP operating profit.

Now, if I take our average quarterly sales over the last 10 quarters, and insert LitePoint at $50 million a quarter, our average quarterly pro forma sales would total $430 million a quarter.

So while we only need about $350 million a quarter to generate a 15% operating profit, our pro forma run rate is about $80 million north of this level.

Operating with this lean financial model drives our above-industry profitability and strong free cash flow.

Looking at this over a slightly longer time period, and on an annual basis, reveals that we've grown the company from an average top line of $1.1 billion in 2007, 2008, average, to $1.5 billion in 2010, 2011, average, and we're on track to step that up to a new level in 2012.

Looking at it from a free cash flow perspective, over the last 2.5 years, our free cash flow as a percent of sales has averaged 18.5%.

One other quick way to get a sense of the changes we've made is that in 2007 our quarterly break-even was about where it is now, and we didn't have LitePoint, Nextest, Eagle, or Storage Test businesses at that time.

This growth, combined with steady financial discipline, allows us to be on offense and exploiting new growth, whether geared towards expanding LitePoint more aggressively, funding new investments in our other test businesses, or adding new inorganic growth engines.

We fully expect our core and past growth investments to continue to generate very solid earnings, providing the necessary cash to, in turn, fund other new close-to-the-core growth, continuing the cycle of increasing our earnings power and cash flow generation in an otherwise cyclical semi test market.

This is in part why we have cautious in buying stock back, as we believe there may be other good opportunities where we can put our hard-earned cash to very good use.

Please note, though, there is no predicting whether hat we will find other suitable M&A candidates, and as such we continue to evaluate our capital allocation alternatives.

In 2012, we expect nearly 50% of our earnings to come from new markets we've entered in the last five years.

This includes performance analog, memory test, hard disk drive, and most recently, wireless product test.

So in short, at the halfway mark to the year, we're averaging quarterly sales of $47.2 million with a 26% operating profit rate, which tracks quite well against our $350 million, 15% operating profit model.

As can you see from our guidance, using the midpoint, we also expect to operate very favorably to our 15% PBIT model in the third quarter at $440 million in sales and at 24% operating profit.

Turning now back to LitePoint.

We expect to continue to grow and to gain share.

The overall serve market is growing, led by healthy trends and mobile computing, particularly the growth of smartphones and tablets, the emerging internet of things that connect everyday household appliances to the internet, and a bevy of other new wireless applications for familiar device, such as set-top boxes and TVs.

So in addition to the healthy unit growth, we're benefiting from an increase in the amount of testing.

Smartphones are moving to dual WiFi bands, which increase the number of channels by fivefold, and they are adding multiple antennas, which increases coverage and support faster data rates, both of which increase test times.

The new standards such as 802.11ac and LTB obsolete the existing install base of testers, as these new standards require more bandwidth, more computing power, and more complex modulation.

We have a combination of strong unit growth, test time growth, and an equipment refresh that extends over a few years.

So the future looks quite promising, even before factoring in for the share gains.

To put some guideposts on the LitePoint revenue range going forward, when we announced the purchase in September of last year, we planned for a 20% revenue growth per year for several years.

That plan had revenues of approximately $160 million in 2012 and $190 million in 2013, totaling $350 million for that two-year period.

Driven by the strong 2012 to date and current outlook, our updated view shows revenue over this two-year period will likely be closer to $450 million.

That's $100 million greater than our initial plan.

Keep in mind, though, that LitePoint's quarterly volatility will remain very high with its very short lead times.

Moving to Semi Test.

Mobility remains the key driver for us.

Microcontroller and analog related to power management did see solid improvement in the quarter.

Now to the key highlights of the second quarter.

We had total company bookings of $502 million (sic - see press release "$292 million") and LitePoint bookings of $189 million.

Semi Test bookings were essentially flat at $358 million, SOC Test orders were $337 million, and Memory Test orders were $21 million in the second quarter.

Semi Test service orders were $67 million, System Test service orders were $9 million, and overall System Test Group orders came in at $45 million.

In the second quarter, Semi Test sales were 67% of the total, Systems Test Group was 13% and wireless test was 20%.

Our book-to-bill ratio for the second quarter was 1.1 for the overall company, just shy of 1 for Semiconductor Test, 0.6 for the Systems Test Group, and 1.7 for Wireless Test.

At the end of the quarter, our backlog stood at $562 million, of which 81% is scheduled to ship and be recognized as revenue within the next six months.

The top line of $548 million was up $152 million or 38% sequentially from the first quarter.

Semi Tests was $365 million, up $97 million or 36%, and Systems Test Group was $71 million, down $26 million or 27%.

Wireless Test was $112 million, up 257%.

We had one 10% customer in the quarter, and our top five customers accounted for 36% of our second quarter sales.

This level of concentration continues to reflect a strength in the mobility area.

Semi Test product shipments increased 45% from a quarter ago.

Within the $548 million, service revenue was $68 million, a $2 million increase compared to Q1.

Semi Test service was $52 million.

Total company product turns business was 45% versus 33% a quarter ago.

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

The increase in product turns business reflects the nature of our Wireless Segment, which as described for you in the past, has shorter lead times and visibility.

Memory revenue was $16 million in the quarter.

Now moving down the P&L.

Non-GAAP gross margins increase from 49% in the first quarter to 57% in the second quarter due to volume and mix.

R&D expenses were $65 million or 12% of sales, compared to $16 million or 15% of sales in the first quarter.

SG&A expenses were $73 million or 13% of sales, compared to $68 million or 17% of sales in the first quarter.

Non-GAAP operating expenses of $138 million were up $10 million from the quarter, driven primarily by higher variable compensation.

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

We had a cash tax provision of $15.5 million, or 9% in the second quarter.

We continue to expect a full-year cash tax rate around 9%.

Cash flow from operations generates $71 million after capital additions.

We ended the quarter with gross cash of $829 million.

DSO was 57 days, up from 51 in the first quarter, due to the shipment profile being weighed toward the latter part of the second quarter.

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

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

We expect to grow cash and marketable securities by about $120 million in the third quarter, and end with a gross cash balance of $950 million.

As noted in the press release, sales for the third quarter are expected to be between $420 million and $460 million, and the non-GAAP EPS range is $0.41 to $0.51 on 208 million diluted shares.

I should add that the guidance excludes the amortization of acquired intangibles, the non-cash imputed interest on the convertible debt, and includes taxes on a cash basis.

Our GAAP EPS range is $0.22 to $0.29.

The operating profit rate at the midpoint of our third quarter guidance is about 24%.

Now moving to the P&L percentage in the third quarter.

We expect non-GAAP gross margins to be 55%, R&D should be 16% to 15%, and SG&A should be 17% to 16%.

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

The cash tax provision should be $8 million to $10 million.

So in summary, 2012 is off to a great start.

Our growth initiatives have delivered another step-up in revenue.

Our first half earnings are the best in 10 years.

We're very well aligned to the secular growth in mobility devices, and we have a very resilient model that can handle the normal seasonal swings in orders and revenue, while still delivering strong earnings through normal troughs and across the cycle.

In the current environment, we'll stay focused on maintaining financial discipline, investing to support growth in our existing businesses, and very selectively investing to drive our above-industry average growth.

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

Thanks, Greg.

Sharon, we'd now like to take some questions, and as a reminder, please limit yourself to one question and a followup.

(Operator Instructions)

Jim Covello, Goldman Sachs.

First, I'm just trying to understand kind of the go-forward dynamics of the LitePoint business.

It seems like you turned a lot of those orders into revenue in the current quarter.

Do you think that's going to be the dynamic of that LitePoint business, that's going to be more of a turns business with orders as opposed to some of the longer-dated orders-to-revenue dynamics you've seen in some of the other new segments that you've rolled out?

Jim, it's Mike.

It will be a faster turn business for us, the granularity of the units is smaller, but that piece of the business is just a faster rep rate.

We can't say what the lead times will be.

We'll have to watch for a few quarters and be able to give you some sense of that as we go forward, but it's clearly going to be inside our larger system structures.

[Real quick], and then if I can ask my follow-up on LitePoint as well.

It's such a terrific acquisition, great growth and terrific margins.

How do you see the margins playing out in that business?

Do you think it's going to continue to stay at above-corporate average gross margins, or would you expect some moderation as the business, as the growth rate sort of stabilizes there a little bit?

Thanks.

Jim, this is Greg.

We would expect for the foreseeable future there, the margins should stay above the Company average.

LitePoint is quite a bit ahead in some of the technology areas that give customers a much better advantage in getting the products to market fast with low cost production test.

So I do think it's a unique value proposition that can continue to return good margins.

I really appreciate it.

Thanks very much, and congratulations.

Satya Kumar, Credit.

Congratulations once again on the outstanding results in LitePoint.

You mentioned earlier on that you've had some new products you had introduced in wireless, that Wireless Test and LitePoint that helped you.

Can you provide a little bit more color on whether it was pertaining to, perhaps, the WiFi side or are you starting to make some penetration in the LTE side as well?

We're not going to get specific on those products, but I will say that it's the WiFi side.

So that those products were WiFi and they were very successful right from engineering, and they were ramped in record time.

Okay.

Are these products tied to any particularly strong product cycle that might be happening downstream of you, whether it's in smartphones or tablets, and what -- so, I mean honestly, at the time you guided Q2, you didn't expect this level of performance at LitePoint.

At what point did you find getting this visibility and how quickly did that business end up happening?

Satya, we can't connect to specific end products.

But on your second question, if you remember in our call last quarter, the guidance we gave in revenue included the low end of the range for LitePoint, and because it's such a turns business, because we had new products ramping, and the question was whether those acceptances would be second quarter versus third quarter, it took us well through the middle part of the quarter and into the third month of the quarter to see how that was going to shape up.

Quite frankly, acceptances turned out to be very good for us, and that emerged, really, in the last few weeks of the quarter.

One last question.

You're obviously having a pretty steady revenue pattern over the last two or three years, as you, yourself, noted, and it seems like revenues has stepped up to higher level, it's a bit more diversified as well.

I think you mentioned a couple of times that you're re-looking at your capital strategy.

I understand your position on being opportunistic on buybacks.

What are your thoughts specifically, if at all, on initiating a dividend, however small it might be?

How serious is that thought?

Have you considered that at the Board level?

That, among other possibilities, are explored with our Board on an ongoing basis.

I think we have consistently said is, don't expect any sharp turns from what we have been doing.

If you look at what we've done historically, we've been more recently very opportunistic on buybacks, and the returns we've gotten from LitePoint, and what we expect to get from LitePoint as well as Eagle and Nextest, we think are quite significant.

So we think that's better use of hard-earned capital.

We acknowledge we may not find another good fit.

So it all depends, are there these other good fits out there?

When you're looking at something like LitePoint, it's very hard to use your own stock.

The other part is a different industry, so that complicates the deal.

So we need enough good dry powder so that if there are these good opportunities, that we can move.

I think last year, I think at this time, we had $1.2 billion of gross cash.

So we grew the cash to a reasonable level, which gave us a good war chest to do a sizeable deal.

So, in summary, I think, expect what we've been doing in the past, but we continue to look at it.

Thank you very much.

Mehdi Hosseini, Susquehanna International.

Two follow-on, one on the Semi Test.

Mike, would it be fair to say that, given the changes going on at end customer, there are new applications for Controller IC, and in that segment of the test, there are changes going on that is creating new opportunities?

Opportunities for a Semi Test, and I have a follow-up.

Mehdi, I think it's an ongoing, every segment has got new applications, and that's why the design end work we do to get new sockets on an ongoing basis is really the essential strategy of the business, but you may want to refine that question.

Sure, actually let me refine it.

If you think about what, if you look at the end market, there is increased conversions and more functionalities added to the silicon.

So, one could argue that your SOC Test business in the long-term could actually see fewer opportunities because there will be fewer chips.

But on the Controller side, there is increased application, there is increased focus on embedding Controller into the complete solution, or more of a system in the package solution.

So, with that as a background, I see increase wafer-level test for Controller to be included into the SIP, and that could drive new demand for Controller.

So am I right with my thought process, or are you seeing something different?

No, I think you're right.

If you remember, last quarter when we talked, maybe the last couple of quarters, that that's why our focus has been on the more highly integrated devices and in this mobility sector because we think the test dollar shifts continually in that direction.

I gave some numbers last quarter how that segment of the market would take, we think, at least 4% more of the pie over the next couple of years.

It turns out it's even more than that this year.

So I agree with you on that front.

And I think the other thing is that if you look back at our history, really, over a 20-year period, we've been focusing some major part of our R&D at a strategy that would exploit that higher integration, and the higher buy rates that exist, and the more buying of capital that exists in that sector.

Got it.

And then on LitePoint, I appreciate the update on the turn, but the problem I have is the second quarter was so strong.

So to get to that $450 million revenue opportunity for '12 and '13, then I need to model a significant decline from first half of '12 into second half of '12.

Are you being just conservative, or is that very difficult to assess the size of the market?

Mehdi, LitePoint should operate like our other businesses, in terms of strong Q2, Q3, trough in Q4, Q1 low, maybe picking up a bit.

So it's kind of the same pattern, that the bulk of the buy is in Q2 and Q3.

What we did say is $100 million more than what we described to you guys a quarter ago over a two-year period.

So I think that's just remarkable growth compared to, we said 20%-plus.

So the math is, it's much higher than a 20%-plus growth rate for the first two years.

Could it be somewhat higher?

Of course.

Could it be somewhat lower?

Of course.

Thank you.

Stephen Chin, UBS.

This is Mahavia Sangvi for Stephen Chin.

Congrats on the LitePoint results again.

A quick question on LitePoint about share gains.

I mean, you talked about three reasons that led to LitePoint's strong results.

I was wondering if share gains is another opportunity down the road, or if you can share with us what the share was in the first half?

Previously you have talked about making share in the LitePoint business.

So wondering if you could share some light -- throw some light on that, and also, the second question about HDD.

It looks like your HDD customers had a -- one of your customers reported last night, had a really great results.

So I was wondering if you could talk about, if you can perhaps start to see some HDD pick-up likely in the first half '13, after some digestion in the second half '12?

Thank you.

I'll take the first LitePoint one and then Mike will take the second.

On the LitePoint, the bulk of the growth is a very healthy market for the reasons I mentioned in my prepared remarks.

Apart from that, there have been share gains.

We have doubled the number of customers that are over $0.5 million from a year ago.

So we do have many more customers in the fold.

We've gained a little bit of share in a new market as a foothold, and hope to expand from there.

If you step back and say where is LitePoint in the total market, our share would be up this year.

It's up this year in part because the market we're in, connectivity, I believe is healthier this year based upon some of the trends I mentioned and is buying more compared to what the cellular test market would otherwise buy.

In addition, there have been some number of share gains where we've broken in and gotten a little bit more connectivity business, and we've gotten a little bit of cellular business.

Stephen, on the HDD side, the trajectory we're on and the market's on, has been, as we've said, it's been a strong capacity add period here in the first half, and we do expect that to slow down.

There's more capacity in the market -- test capacity right now, than there is demand.

So we see the next quarter or perhaps two to be slower.

As that gets absorbed, you could see it pick up in the timeframes that you talked about, but the signal we wanted to give to you was that we can't just multiply the first part of this year and say that's what the size of the market's going to be.

We do expect it to be slower an absorption period in the second half of this year.

As you know, we're focused on 2.5-inch.

That's where our -- all of our businesses is.

We fanned out to a number of customers now, broader set of applications.

So we've got a very good position on that front, and that market's, as you know, that's the biggest piece of the HDD CapEx.

Greg, one quick followup.

You had one customer greater than 10%.

Was that a LitePoint customer?

We're not going to speak to that level of detail.

We simply have one -- we do have the company-level customer.

One customer at the company level that's more than 10%.

I think we have one in Q1, one in Q2, and then for the six-month period, we have one customer at 10%, spot-on.

All right.

Thanks.

Jagadish Iyer, Piper Jaffray.

Two questions, and I just have a quick housekeeping question.

But first on the question, if you look at, Mike, the second half Semi Test revenues in comparison with first half, and compared to similar periods in 2011, where you compare first half '11 versus second half '11, clearly there was a 30% decline in Semi Test revenues in '11.

How different is it this time, given the backdrop of commentary from companies like TI recently that things are softening?

So can you please elaborate, which associate segments will be stronger in second half, and which one will be weaker in the second half?

Then I have a followup.

Yes.

Jagadish, so let me come at that two ways.

One is, you're right.

That's the signal we're giving, the second half would be softer.

The numbers behind that, if you recall, the industry in SOC was running at an annualized $2 billion rate as we exited 2011.

The first half of this year, it's just a nudge under $3 billion.

So the ramp-up has been dramatic.

You know that $3 billion would be about $400 million higher than the market size the last couple of years, and the buy rate would be higher than the regular run rate.

So we do expect a correction in the second half.

The slide that we've shown in our package that's available to you says that we think we end up between $2.5 million and $2.8 million.

So take the midpoint of that, $2.6 million, between $2.6 million, $2.7 million, and that means that you have a correction, a likely correction in the second half of this year.

That's what we would expect.

The segment information, let me tell you, I think this is a little bit of a repeat of what we've said in the past because the pattern is very similar, and that is mobility has been the driver -- that's RF, mobile processors, base band.

We've had, and I think the market likely has had, three quarters of growth -- sequential growth.

Power management has been strong the last three quarters, grown so much that actually it was down a little bit for us this quarter, and then places like microcontroller and linear were up after, finally, a few quarters were down.

Those were both up.

So our expectation is that everything recedes as we go into the second half of the year, but the order of buying, in other words, the Pareto will still probably stack up with the mobility sector first, power management, microcontrollers, linear, in that order.

Okay.

And just a quick followup.

How should we think about LitePoint in the context of broader market growth for the older LitePoint's market, and how does LitePoint grow in '12 versus '13?

How should we think about that in terms of the broader market?

Is it outgrowing, I mean, any color on that?

We would expect LitePoint to outgrow the wireless market for the next several years.

I think we'll, as we log a few more quarters and a couple of more years, we'll hopefully have a better picture.

This market doesn't get tabulated the way the Semi Test markets have been for the last 5, or even 10, years.

Our estimates were that the test market was going to grow at about 10%.

We were shooting for a 20% growth.

We're clearly well above that.

So the kind of accuracy of measurements, we can't give you the same in the LitePoint end test market, but I think it's pretty clear with the level of growth that we've got, if we can sustain that on an annual basis, then we're clearly moving faster than the market is.

One, just a quick housekeeping.

Greg, I just wanted to find out your accounts receivable kind of increased in the second quarter.

Any color on that?

Thank you.

That's simply shipments were skewed towards the end of the quarter, and therefore the payment wasn't due from the customer.

Thank you.

Krish Sankar, Bank of America.

Two quick ones.

Greg or Mike, when I look at your LitePoint booking, which has been phenomenal in Q2, can you tell me how many customers are in it?

Of course.

Yes.

I don't have that handy but there's too many to -- I don't know if it's 30 or 40, but we'd have to go back and count.

It's a -- if you put the Paretos next to Semi Test, it's actually a wider Pareto than Semi Test.

But because the unit value of the systems is smaller, at the end of the Pareto, the numbers are very, very small.

But it's a very, very broad and distributed -- geographically distributed market.

Obviously, the big guys are the big guys, and they take up a large chunk of the business.

But it's a very wide terrain.

Then I had a question on the competition, both on your core SOC and the wireless side.

On the core SOC, I mean, there seem to have been some movement in Q1, especially in the mobility side, with one of your Japanese coms taking some market share because of you guys being capacity constrained.

I want to find out what is the situation in Q2?

Has it resolved itself because you expanded in manufacturing?

And, along the same lines for wireless, do you have any thoughts on Agilent picking up the test assets of AT full systems, not the certification, but seems like they picked up some of the test business.

How do you think of that looking ahead on the LT side?

Thank you.

Let's see.

First question, the bottlenecks we had in the first quarter are behind us.

Those were caused by us having, really, a year's worth of demand in our high system UltraFLEX coming in one quarter.

Unusual for us not to get every piece of business that comes in the door, but that is behind us at this point.

We've ramped that product very, very aggressively and we're positioned to be able to not be capacity constrained at this point.

The second question on wireless, say again?

It was on the Agilent's acquisition of the test assets of AT full systems, which competes with the LT side with you guys.

Yes, this is Greg.

We haven't seen that particular transaction.

If I can step back, what we're doing in this market is we're working with the lead accounts where we've helped them on connectivity and we have deep relationships and credibility, and we're demonstrating our product, which can do four ducts at the same time.

The competitors can't do that.

They're trying to.

So it's simply a design end cycle that takes a period of time, and if you are successful, you tend to get in as a second source for some piece of business.

So we're on that path, we feel good.

How we're doing?

It takes time.

It can be a year process, and we're tracking it very carefully where we are.

Got it.

Thanks, guys.

These are very impressive results.

Patrick Ho, Stifel Nicolaus.

Mike, in terms of the SOC Test seasonal aspects, do you believe that there's been any change this year relative to past years, given some of the current market sentiment, and maybe some of the caution that's emerging?

Could this year have come a little bit earlier in terms of that seasonal pause?

But measured, Patrick, in months.

The first quarter demand, certainly from a unit standpoint, would be one of the top first quarters that we've seen in the past.

And first quarter of 2010, with the 2009 correction, was big, obviously.

I'm not sure.

Are you getting at whether --

I guess what I'm trying to get at is sometimes you do see September still being a relatively healthy SOC Test quarter.

I'm just wondering if it's because the market sentiment has obviously changed, whether you've seen that kind of pulled into the June quarter, and that's why you're seeing the pause now versus, say, in Q4?

I think definitely there's a sentiment -- the big question mark on world economies, and consumer demand, and transition of mobility products, and all of that stuff is putting a pause in.

So I'd mildly agree with you that things are uncertain.

The reason we've said that Q3 is down is three reasons.

One is, the vibrations from the customers are suggesting that they've put a lot in place and they will probably put less in place in the third quarter -- number one.

Number two, history tells us -- on the exhibit we've included on the website, history tells us that third and fourth quarter are usually down, so I wouldn't say this would be unusual, they're usually down.

And number three, with the run rate in SOC at $3 billion, we think it has to back off a little bit despite the dollar growth in the Semi Test device market, the SOC -- I'm sorry, the SOC device market that comes down to.

So you put all those three together and the betting man says that the third quarter and, certainly, the fourth quarter are likely down.

Okay, no, that's helpful.

Going to LitePoint for a second, you mentioned that you guys did really well going from the engineering side to the product ramp for some of the new products.

Did you add capacity, I guess, earlier this year or last year for that ramp, or is it something that you've been able to just leverage with your existing capacity?

And what's the outlook going forward, given the strength in the June quarter?

We grow that capacity, as we do in Semi Tests, with a manufacturing partner -- set of partners, but main partner, and we've been able to ramp the capacity on these products with that same infrastructure.

So, but obviously inside that factory, it was a very ambitious and aggressive ramp program, not just in unit volume, but in the introduction of the new products that Greg talked about.

Great.

Thank you very much.

(Operator Instructions)

Vishal Shah, Deutsche Bank.

Greg, I wanted to just understand the increase in LitePoint revenues, $100 million.

Is that going to be all from WiFi side, or are you also embedding in the increase some share gains in the cellular side as well?

Yes, I'd rather speak to not any one quarter, but if I could speak for the year.

Yes, I'm talking about your $350 million to $450 million guidance for the two years.

Okay, and let's just do 2012 at the moment, okay?

Yes.

So 2012, we would have, certainly have cellular test business.

That would be a small piece of our business.

We would have some 802.11ac -- you didn't ask about that, but that's another new product.

So we had a small amount of that business, which will ramp much more in the future.

But, yes, there is cellular business in, there's some good chunks in there, but it's not significant in the grand scheme of things, and we expect it to grow in the subsequent years.

Okay, great.

Then, as you sort of think about the higher revenue run rate, is your outlook on the operating margins for the segment changed?

You talked about slightly better margins, more than 15% in the target model.

Should we now sort of think about a few hundred basis points higher margins?

No, I don't think the margins are going to go up.

I think as the more successful we are with some large volume deals, there's -- our best guess is they'll stay similar where they are.

We do spend a fair amount on the OpEx, too, in this business.

To give an example, the OpEx was running at about $12 million a quarter in 2011.

In 2012, we're going to close at $23 million a quarter.

So we're about doubling it.

So we're investing a lot.

So while the gross margins are great, there are a fair amount of costs that are below gross margins as well.

Thank you very much.

CJ Muse, Barclays.

I guess first question on LitePoint.

If you look at the order run rate versus revenues, and over the last three quarters, it looks like your backlogs run $80 million.

So, curious, is that calculation correct, and is that the kind of number we should think about in terms of revenues there in the September quarter?

In that number there is some extended warranty, too, that is deferred revenue.

I think it's recognized over a period of time.

So 10% of it, you'd almost want to haircut, CJ, because that's service revenue over a period of time.

Then the bulk of it would be product revenue.

The number's a little higher than what you put forth, but you're close enough with your guess.

Yes, so that's in part in our guidance, but keep in mind with two-week lead times, it's also possible those orders could get canceled, pushed out.

Therefore, it is a little trickier forecasting LitePoint than our existing businesses.

Okay, that's fair.

I guess, though, if you think about that kind of number, and if you assume nothing in December, you're still around a $225 million run rate.

So, curious on the $450 million guide for two years combined.

Is that just conservatism, or should we be thinking about a higher number, given how you talked about seeing faster-than-mobility growth year on year in '13?

Well, I think time will tell is it conservative or not.

There's so many different things we have to look at and evaluate.

Dual bands, for example, this year are the WiFi, that's driven much more buying.

That's in the base now.

So the next round of testers aren't going to quad bands.

There isn't that extra jump.

So we sort of, because of that, where we see that might be a little bit of an anchor, but then we see balloons in terms of cellular as well as unit growth.

So there's so many things in the stew that we look at that it could be up, could be flat.

We just thought at this point, this is what we feel quite confident with, and we don't want to put numbers forth that we're not quite confident with.

CJ, I think, to be fair, I think I'd second your proposition there, and that is what we wanted to do was to indicate that this is a very strong picture, and, yes, maybe we are being conservative.

But, honestly, it's not a bottoms' up forecast that gives us the $450 million number.

It's more of a top down thing that says if we sustain this level, we could see some backing off in 2013, because we can't build it all up from the bottom, but even if we do, there's an extra $100 million on the table.

So, legitimately, if we could keep on this trajectory, then obviously we've got more than $100 million-plus in that picture.

It's a top down calculation.

From a, I guess, revenue per handset perspective, how do you think about kind of current WiFi purchases versus AC and cellular, particularly as we move to LTE?

Revenue per handset, in terms of?

Well, just trying to understand the rising impact time for LTE, AC, and so what that means in terms of incremental testers required vis-a-vis what you're seeing on the WiFi side.

Right.

I think the trend will be positive there because I would say it's a new standard, and the existing testers don't support that.

So you need to buy a new tester, and often you find test times are longer.

Any time you can get more through, I'll call it a pipe, there's more to test, whether it's more channels, more signals.

So test times are likely to go up, and you need new testers.

So I do think that's a very favorable trend, and that's going to play out over quite a few years, the LTE.

That's not going at a rapid pace right now.

Got you, that's helpful.

Then one last question from me.

On the SOC Test side, it looks like you've widened the band there by about $100 million to the downside and $100 million to the upside versus kind of prior conversations.

So curious on that front.

What would drive to the high end, and what would get us to the low end?

What are your thoughts there?

I think the main thing that would push to the high end is if this new product launches and the growth in the mobility sector stay for another quarter, then you get to the high end.

I think it only takes another quarter of that to happen.

So that's why we've got the range there.

There's nothing magical about having one more quarter and having one year that's a little high, because we saw in 2010 an accumulation of held-off buying from 2009 period.

So you could get to the top end, since we're halfway through the year, and honestly it takes only an extra quarter of the push.

Our expectation, though, both in short-term information from customers and in the macro calculations, are that the absorption period starts here over the course of this next quarter.

We could be wrong.

Okay, very helpful.

Thank you.

(Operator Instructions)

Okay.

Operator, I think we have an empty queue, so we'll conclude today's call.

Thank you for your interest in Teradyne and we look forward to talking with you down the road.

Thanks, guys.

This concludes today's conference call.

You may now disconnect.