泰瑞達 (TER) 2012 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Teradyne third-quarter 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)

I would now like to turn the call over to your host, Mr. Andrew Blanchard, VP of Investor Relations.

You may begin your conference, sir.

Thank you, Andrea.

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 will provide details of our performance for the third quarter of 2012, as well as our outlook for the fourth quarter.

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

The press release containing our third-quarter results was sent out via business wire last evening.

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

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

To view them simply access the investor page of the site and click on the live webcast icon.

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

The replay will be available along with the slides through November 11.

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

We encourage you to review the Safe Harbor statement contained to 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 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 Piper Jaffray, UBS and Credit Suisse.

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

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

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

We will then answer your questions.

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

Mike?

Good morning, everyone.

Thanks for being with us on the call this morning.

I'd like to cover three things with you today so that I address the range of short- and longer-term questions that I suspect are under on your mind.

The first is a brief recap of the last quarter which has a solid set of numbers, as you've seen.

Second is a comment on the sharp downturn in bookings that are linked to both seasonal and program buying trends.

And third is to give you a first look over the horizon into 2013.

Any time our industry has a slowdown, there are questions around what's temporary and what's permanent in nature.

So I want to give you our perspective on that.

And looking out into 2013 is the best way to see through the step down in the short-term environment.

So a quick recap of the third quarter starts with better top- and bottom-line performance in the high end of our guidance range.

Semi Test revenues were down 15% from Q2, in line with our expectations after a very strong first half.

LitePoint posted back-to-back revenue records in the last two quarters.

And our Systems Test business was steady in commercial board test and defense.

But dropped sharply in storage tests after a record first half and as worldwide HDD test utilization fell off.

Bookings in all sectors saw significant seasonal or program buying declines.

And Semi Test bookings fell 60% from second-quarter levels, a sharper reset them we usually have but actually not out of line with the cumulative numbers we saw in our peak to trough pattern last year.

You'll recall that Semi Test bookings dropped in Q3 last year to about $200 million following two quarters that averaged $310 million.

This year the drop to $154 million comes after two quarters that averaged $360 million.

So it's not surprising to go a little bit deeper after a higher sustained peak.

As you might expect, all SOC sectors saw sequential order declines.

But mobility-related products, from power management ICs to mobile processors, continued as our strongest segments.

Despite the third-quarter decline in this area, we've already booked $100 million more in mobility test configurations through three quarters in 2012 than we did in all of last year.

Microcontroller, automotive and linear applications are where we've seen both sequential and year-over-year declines.

As these areas have shown lower device growth and overall lower test utilization rates.

Memory test continues at very low buying levels.

And an important new design-in for us in Japan hasn't moved the needle much yet in what's now a market running at about $500 million in total.

Storage test orders have been subdued for the last couple of quarters and we expect that to continue until we get into 2013.

And our defense business, which continues to be healthy, will always be choppy on the new waterfront as program buying comes to us in chunks.

Now all of this leads us to a Q4 revenue plan that is down to just around breakeven in the fourth quarter.

We do expect this fourth quarter to be the trough, as the collective buying patterns in all of our businesses reflect consistently stronger first halves over second halves.

We expect LitePoint to follow this pattern now that we have a full year of their business under our belt.

So while the fourth quarter is the low point, it will cap off a very good year for us.

At the midpoint of our fourth-quarter guidance, annual revenues will be between $1.6 billion and $1.7 billion.

With operating profits north of 20%.

We continue to have an overall solid Semi Test operation despite the weakness in the memory market.

Our defense and commercial board test units are, of course, smaller than Semi Test but nevertheless steady contributors.

And LitePoint has added a very compelling growth engine.

This year LitePoint has been able to bring an array of new products to market that cover the latest wireless technologies with very competitive test economics.

And Teradyne has helped provide the necessary muscle to execute the very step production ramps essential to new consumer product launches.

So it's now obviously that LitePoint will far outstrip expectations for revenue growth in its first two years.

As you will recall, our original plan was for two years of 20% compound growth starting in 2012.

That would've given us $350 million in revenues in our first two years together.

Last quarter we upped that to $450 million based upon end market growth, rapidly changing and increasing test requirements, and market share gains.

We now believe that we can stretch that to $550 million to $650 million in the first two years, which means very strong back-to-back years.

I've asked Greg to further flesh out the latest from LitePoint in his comments.

So we expect 2013 to be good for us, albeit in a market that is likely to have more headwinds than tailwinds.

In semiconductor test, the market could see lower mobility buying early in the year as the industry digests the heavy 2012 equipment investments.

However, we still expect mobility to remain our strongest segment.

There could be some rebound in the automotive, microcontroller and linear sectors.

But these could also be slower to recover if economic conditions remain sluggish.

All of this means that our planning assumes only a $2.2 billion to $2.4 billion SOC test market in 2013, down from about $2.6 billion this year.

Memory will likely stay low but that doesn't swing the pendulum much for us, as you know.

We will have two major new product launches in SOC test and one in storage test in the coming year.

That, and some longer-term R&D investments are behind the increased engineering outlays that Greg will detail.

I can't go into our development plans at LitePoint, but wireless product test has a very fast evolutionary cycle.

So we will be fielding new products there on an ongoing basis.

All told, we are closing out another solid year.

Albeit on a quarterly down cycle that's expected in our business.

But the fundamentals remain strong.

And we look forward to a recovery trajectory as we enter the first half of 2013.

Now let me turn it over to Greg.

Thanks.

Mike, and good morning, everyone.

I'd like to first provide some perspective on 2012 before I update you on some model changes connected with our growth initiatives.

I'll then cover third-quarter highlights and fourth-quarter guidance, and close with some summary comments.

So first looking at 2012.

As Mike said, we are projecting our third consecutive year of very solid bottom-line performance, with a 23% operating profit, and free cash flow of about $300 million, 18% of sales.

Looking over the three-year period starting in 2010, our operating profit rate has averaged 24%, putting us alongside the top tier semi equipment suppliers.

This strong multi-year performance is a result of an efficient business model, coupled with very selective growth investments.

From a strategic point of view this solid multi-year financial health provides the necessary foundation to expand selectively into new markets and grow earnings.

Since 2008, as you know, we've entered four new markets with an aggregate market size of around $2 billion.

We're on track for these new market entries to account for over 40% of our 2012 profitability.

And we have further expansion plans in these newer businesses that we will update you on in 2013.

Now coming back to the current year recap.

We expect a top line of over $1.6 billion.

Operating profits of $373 million, or 23%, and non-GAAP EPS of $1.61.

This 2012 operating profit rate will be 17 points higher than prior to our remodeling at comparable SOC test market sizes.

We have both a very strong balance sheet, with gross cash and marketable securities of $1 billion, up from $755 million at the beginning of the year.

And an operating model that can weather whatever macro headwinds get thrown at us.

Rest assured, we will continue to focus on close to the core growth where we can leverage our technology or distribution strengths.

We have no intention of drifting away from what we know and where we have a strong competitive advantage.

In setting our financial model, we long ago accepted that model profitability or better is needed over normal business cycles, as there is no promise of relief from the next business cycle.

You can look at the steady test intensity trend line in Semi Test, showing increased ATE productivity.

While there are valid theories that support increasing capital intensity in the future, we plan our finances off the existing trend line.

If the theories prove to be correct, and intensity increases, so much the better, and we will see higher profitability.

We also recognize that Semi Test market share moves in small increments, as we compete at a device socket level versus a technology node.

So permanent share gain moves slowly.

Even though there may be temporary market shares gains resulting from the ebb and flow of segment shifts.

This is why we are continually reinforcing the importance of our operating model.

We understand it must bridge between the dynamics of the market and the necessity to deliver model or better results under normal business cycles.

Now let me move to 2013.

To fund that next round of growth, we plan to modestly increase our engineering and support spending.

This added growth investment means we will deliver 15% operating profit at quarterly sales of $375 million versus $350 million in the past.

We use 15% because that is what the industry generally needs to earn -- to achieve its cost of capital.

In fact, we have consistently exceeded this level, averaging 24% operating profit since the start of 2010.

Let me also answer a question we often get about how to model LitePoint in 2013.

First, for 2012, we expect sales of about $290 million.

Well over double LitePoint's prior sales of $130 million.

And well above our target of $160 million for 2012.

Two key factors were responsible for this.

The employment of our equipment within leading wireless device players who gained market share and had large capacity requirements.

And the 40%-plus growth of the smart device market in general.

A market that not only requires new test capacity due to volume increases but also due to the use of dual band Wi-Fi with its longer test requirements.

So after a truly extraordinary year 2012, we expect 2013 LitePoint revenues to be in the $260 million to $360 million range.

Independent of next year, we expect solid Wireless Test growth as far as the eye can see.

Wireless unit growth is expected to run in the mid teens.

A host of ongoing new wireless transmission technologies should continue to drive test buying up.

And, lastly, we expect to continue to gain market share.

On the other side of the ledger, the buying in any one year often contains program buying, which doesn't fit neatly on an annual trend line.

Additionally, we naturally expect greater productivity from next-generation testers.

Staying a bit longer on our Wireless Test business.

LitePoint was a standout performer again this quarter, with $119 million in revenue, a new quarterly record.

We've highlighted the favorable connectivity market trends from unit growth, the addition of a second Wi-Fi band, 802.11ac and MIMO.

So I won't go through these again.

We also continue to gain market share with our fast-to-market solutions approach and our production optimized testers.

Strategically, our LitePoint growth focus is to expand our very small cellular footprint into higher volumes.

In cellular there is a long design cycle that we are progressing through, and we expect to have a bigger cellular presence next year.

While the cellular test margins will be lower, the profit dollars should add nicely to EPS over the years to come, as the cellular test market is considerably larger than the connectivity test market.

I'll come back to third quarter highlights in a moment but first let me add a few comments on the sharp drop in total Company bookings.

Customers are clearly in a wait-and-see mode and this behavior fits with normal seasonality.

For us, this sharp drop doesn't have significant implications on our cost model, as the model naturally flexes variable costs down in periods of lower sales.

Of course, we put even more focus on all spending in times like these.

But the point is, our model is designed to handle wide swings in business level.

Now moving to the key highlights for the third quarter.

We had total Company bookings of $231 million, semi Test bookings were down to $154 million, SOC test orders were $148 million, and memory test orders were $6 million in the third quarter.

Semi Test service orders were $33 million, Systems Test group orders dropped to $25 million, with $7 million of service orders, Wireless Test orders were $52 million.

In the third quarter, semiconductor test sales were 67% of the total, Systems Test 7%, and Wireless Test 26%.

Our book-to-bill ratio for the third quarter was 0.5 for the overall company 0.5% for semiconductor test, 0.7 for the Systems Test group, and 0.4 for Wireless Test.

At the end of the quarter our backlog stood at $330 million, of which 73% is scheduled to ship and be recognized as revenue within the next six months.

The top line of $463 million was down $85 million, or 15% sequentially from the second quarter.

Semi Test was $310 million, down $55 million, or 15%.

And Systems Test group was $34 million, down $37 million or 53%.

Wireless Test was $119 million, up 6%.

We had two 10% customers in the quarter, and our top five customers accounted for 47% of our third-quarter sales.

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

Semi Test product shipments decreased 18% from a quarter ago.

Within the $463 million, service revenue was $70 million, a $2 million increase compared to the second quarter.

Semi Test service revenue was $55 million.

Total Company products turns business was 31% versus 45% a quarter ago.

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

Memory revenue was $24.5 million.

Moving down the P&L.

Non-GAAP gross margins decreased to 56% from 57% in the second quarter due to lower volume.

R&D expenses were $62 million, or 13% of sales, compared to $65 million or 12% of sales in the second quarter.

SG&A expenses were $69 million, or 15% of sales, compared to $73 million or 13% of sales in the second quarter.

Non-GAAP operating expenses of $131 million were down $6 million from the second quarter, driven primarily by lower variable compensation.

On the operating line, we posted a 28% profit.

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

We had a cash tax provision of $19 million, or 15% in the third quarter.

We now expect a full-year cash tax rate around 11%.

And looking at 2013 we also expect a cash tax rate of about 11%.

Cash from operations generate $260 million after capital additions.

We ended the quarter with gross cash of $1 billion.

DSO was 40 days, down from 57 in the second quarter due to the shipment profile being weighted towards the front end of the third quarter.

We expect to grow crash and marketable securities by about $20 million in the fourth quarter, and end with a gross cash balance just over $1 billion.

On a capital allocation front, you should expect a steady course from us with no sharp turns.

We have a balanced approach and are applying lessons learned from the past.

We remain opportunistic in our buyback program to ensure that long-term shareholders are rewarded.

We also believe there may be other good non-organic opportunities.

But there is no predicting whether we will be able to bring any of these to closure.

Consequently, we will continue to evaluate our capital allocation alternatives.

Also, I should add that as our Semi Test profitability has improved, and the geographic mix has shifted ultimately to Asia, we now have a larger portion of our cash, about $300 million, offshore and subject to US tax, if repatriated.

As noted in the press release, sales for the fourth quarter are expected to be between $235 million and $260 million.

And the non-GAAP EPS range is a loss of $0.04 to income of $0.05 on 192 million diluted shares.

The diluted shares are lower than normal because at this profit level, including interest and excluding the convert shares, is more dilutive.

I should add that the guidance excludes the (inaudible) of acquired intangibles, the non-cash imputed interest on the convertible debt.

And includes taxes on a cash basis.

Our GAAP EPS range is a loss of $0.12 to $0.05.

The operating profit rate at the midpoint of our fourth-quarter guidance is about 1%.

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

We expect non-GAAP gross margins to be 52% to 53%.

R&D should be 24% to 27%, and SG&A should be 25% to 28%.

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

We expect little or no cash tax provision in the quarter.

In summary, 2012 will go down as another very good year.

Our growth initiatives are delivering, and we have a time-tested model that can handle the normal seasonal swings.

We're also making some modest additional investments for our next leg of growth and some of these returns should show up late next year.

We will continue to stay focused on maintaining financial discipline, growing our core business and selectively investing to drive earnings growth.

Now I will turn the call back to Andy.

Thanks, Greg.

Andrea, we would now like to take some questions.

And as a reminder, please limit yourself to one question and a follow-up.

(Operator Instructions)

Weston Twigg with Pacific Crest Securities.

On the R&D line, you talked a little bit about it but can you give us a little bit more color in terms of how R&D might trend through the year with the new products you're releasing?

Yes, this is Greg.

On the R&D line we're upping our investment -- in OpEx in total, we're upping our quarterly investment on average about $12 million.

Much more of that is in R&D.

The substantial majority.

Half of that is in LitePoint.

As you know, LitePoint has grown quite remarkably.

And with that there is other opportunities for further growth.

Okay, good.

And then on the Semi Test business, I think you mentioned this earlier but can you give us an idea on the growth rate you're expecting for the next year in core Semi Test?

Did you say it was going to be down a little?

We expect the market to be down a little bit next year.

It's been averaging between $2.5 billion and $2.6 billion.

And our planning basis here says that that is more in the $2.2 billion to $2.4 billion.

There is not a build up segment by segment that gets you to that.

It's really an estimate of how strong the come back is in the first half.

Interestingly, last year, by January, we were expecting the full year to be $2.1 billion.

But there was such a strong first-quarter demand that resulted in both first and second quarter shipments that by the time we got to April that looked closer to $2.5 billion.

And we think it ends up at $2.6 billion.

So, the idea of having a little caution is integration of a lot of different things.

We do expect the third quarter bookings level to be the trough bookings for us.

Traditionally we've had an uptick in the fourth quarter.

We think we will this quarter.

And then it gets stronger in first and second.

But it's a little bit hard to call exactly when that would kick in next year.

So, we are being a little cautious and we are sizing that down 10% to 15%.

Got it.

Okay, that's very helpful.

But you do expect a bookings uptick in the Q1 timeframe, and you just are trying to wait and gauge the level of that uptick?

Yes, I think if you were a betting man and you looked at the patterns, you'd say that you would come up some in Q4.

And then it typically kicks in, in Q1 and Q2.

Calling it exactly, whether it's going to be as strong in Q1 this coming year as it was last year, that's a tough call.

All right, thanks very much.

Krish Sankar with Bank of America Merrill Lynch.

I have two of them.

One, either Greg or Mike.

When you look at LitePoint, especially the cellular test market, and you expect to gain some traction, how much revenue of that is baked into your $260 million to $360 million guidance for next year?

Krish, are you asking about cellular?

Yes, cellular test.

Yes.

Your line broke up, that's why we didn't hear it.

Go ahead.

Krish, this is Greg.

As you can imagine, there's a wide range of scenarios.

We gave you a tighter range as to what can happen.

But there is cellular revenue in that range.

So, we do expect to have more meaningful cellular revenue in 2013.

On the connectivity market it was very strong in 2012.

Our best guess is that market would be flat or down a little bit in 2013.

We think the cellular gains we get can give us in total a very good result.

Got it, that's helpful.

And then a question on your core Semi Test business.

It looks like SOC market as a whole would be down 12% next year from $62.3 billion.

How will the mobile market within that -- is it going to be down more than that or is it going to be in line with the decline?

Krish, mobile has been very strong and we think it's above the trend line.

So, we think there is some absorption on the mobile test sector.

I don't have the exact number but if you drew an arrow, that could be flat to down next year.

If it were up, that would be exceptional.

So we think it's a bit above the trend line.

The other sectors which had both the down quarter market and Teradyne, we think have some potential for recovery during the course of next year.

That, though, we think the overall totals are down in that 10% to 15% range.

Okay, thank you.

Jim Covello with Goldman Sachs.

First question is relative to the product portfolio.

You guys have done such a terrific job over the last whole bunch of years of being very jinaudible) to take away over time.

Obviously, we are in a cyclical downturn for a number of the businesses.

But the one segment that feels a little more secular is memory testing, in particular DRAM test.

Am I maybe getting carried away in a cycle downturn to think that's secular?

Or do you think there might be some secular elements in the DRAM side that you would think about and what kind of commitments you want to be making to that long term?

Jim, it's Mike.

Obviously the memory test market -- there used to $1 billion-plus.

Really, up at it's peak, to $1.5 billion.

We've now got three years where it's been between $500 million and $700 million.

From a total market, it's obviously disappointing to anybody supplying into that space.

Our position in it is a 15% to 20% share position.

So we haven't established the kind of position there that we have in SOC.

I think the way these design-ins go, and the amount of capital new product that's being brought, looks to us like this stays as a relatively subdued market.

And even though we're making some progress on account front and in coverage of the various segments in the market, it's going to be a smaller player for us.

Our commitment to it is going to be consistent.

We build the products for memory off of platforms that are both SOC and memory platforms.

So, it's a hybrid investment for us that gets amortized over both of those markets.

So, I think you'll see us still in this space, if that's the direct question you're asking.

Great.

Next question would be on the OSAT side of the market, ASE and SPIL are talking about better fourth quarters because of some pickup in mobility.

Now I know we're in a pretty deep hole, or starting in a pretty deep hole given the severity of the downturn.

How much do you think those kinds of customers need to pick up before you would see any meaningful improvement in their orders to you guys?

This cycle has been a stronger OSAT cycle.

And even with the downturn, the OSATs for us have not gone down to the trough that they were at last year.

And I think that's clearly because they are bigger players on the mobility supply for the fabless companies.

Our expectation is, for them, that the trough for that segment in bookings will also be in the third quarter.

And we think that comes gradually back.

I don't know how much they have to move, but we expect them to move a little bit back up here just in concert with the IDMs.

They should move back up in the fourth quarter.

Okay, helpful.

And then final question, if I might.

You guys have talked about, in the past.

a buyback at maybe a $12 level, I think is a stock price number that you have thrown out there.

When you think about the buyback, and you guys have been so thoughtful about not buying back stock either at the top of the cycle or at a very elevated price, and you've saved a lot of capital that way that you've used for smart acquisitions.

But when you think about a buyback, do you think about it now more in terms of a dollar price?

Or do you think about it more in terms of we're pretty clearly at or very near the bottom of the cycle, even if it could last a little while.

It may or may not.

But do you think more about it in terms of having an opportunity to buy stock back at the bottom of a cycle, even if that's at $14 or so?

Or do you still think something like a $12 price would still represent a better idea for us to think about when you could be more aggressive there?

Jim, there isn't an exact formula we use because there's so many factors that go into it.

Including what non-organic opportunities are out there, as well as what the price is at any one point in time.

So we do look at it carefully.

And we really want to be very patient, because in our past we bought back, like many others, at the wrong time, and it was a bad deal for long-term shareholders.

We would rather be on the side, in fact, even perhaps getting criticized, that you guys are going to slow.

And if that day comes when we buy aggressively, then hopefully our patience will be rewarding for long-term shareholders.

So, we continue to look at it and there is no exact formula.

Thanks very much and good luck, guys.

Stephen Chin with Barclays.

It's Stephen Chin actually from UBS.

Nice execution on LitePoint.

I'd just like to follow-up, Mike, on your early views on 2013.

It sounds like you think Semi Test CapEx is down next year, and LitePoint's up slightly in 2013.

So, that would imply Teradyne sales next year would be flat to down slightly.

So, I was just wondering if you could share with us some of the variables that you think could surprise on the upside.

Is a mostly wireless Semi Test?

Stephen, first of all, I wanted to declare we're mortal here in our estimating the market sizes.

Last year at this time, as I said, actually later in January, our view of the market at that point was that it would have a relatively normal recovery.

Fourth quarter, first quarter, second quarter recovery.

And we were looking at a market -- I'm talking about SOC test now -- that would be about $550 million a quarter.

It actually was over $700 million in the first quarter.

So, we are mortal in our ability or inability to read the tea leaves that our customers are telling us, even on that short a cycle.

For our own planning purposes we are saying you integrate a series of things.

It looks as if this could be a slightly more gradual recovery based upon inventories, utilization rates and so on.

So you do all that math.

And you're right.

You get a smaller market.

If our market share stays around where it is, then we end up with a smaller SOC business.

So, that's the SOC story.

On LitePoint, LitePoint is an even shorter lead time environment so the visibility on LitePoint is even tougher to call.

And that's evidenced by the fact that when we walked into the year, we had an ambition to get to $160 million.

And now we are going to do nearly twice that.

So, again, we are pretty mortal on that front.

What's different in LitePoint is that we're making some gradual progress on the design-ins that we've won this year in terms of fanning out to additional design-ins.

We've got a much bigger footprint in our Asia regions, both in Taiwan and China.

So there's a lot more business in play for us.

And that is why we are more optimistic on the LitePoint front.

And also why there is such a wide range on what could happen with LitePoint next year.

So, there are a lot of balls in the air.

But directionally we have got a more conservative view of SOC test.

We've got a similar view to what memory could be.

And LitePoint, we're optimistic about having another very good year.

But that will come from a lot of different pieces of business than we might have built in our 2012 view.

Okay.

Thanks for that, Mike.

Maybe just another follow-up question on LitePoint next year.

Do you have any early thoughts on the percentage of LitePoint sales next year that you think will be from connectivity versus LTE?

Since it seems like LTE could be a good opportunity for you to gain more share.

Connectivity will still be clearly more than half.

But it's possible cellular can be considerably larger than where it's been in the past.

Okay, thanks, Greg.

CJ Muse with Barclays.

First question, it looks like, based on your guide, you're going to gain about 100 bps a share in SOC test in calendar '12.

I'm just curious, as you look to calendar '13, I've got to think NPU spend is lower, graphic spend is lower, and that your share will move higher.

So, A, was the calculation correct in terms of '12?

And then, B, as you look to next year, what kind of share gains do you think you could take in terms of your greater share in mobility that will dominate the spend?

CJ, I think you're pretty close to right.

I think the market will end up growing about 5%, and will grow about 7%-ish percent in the market this year.

So, we are going to take a little bit more.

Now remember, the segments shift, so we can have an arithmetic variation in share year-to-year and actually be gaining ground.

Or losing ground in it.

But I think your short-term calculations are about right.

For us -- and this is a bit of an old record -- but we gain share based on very small increments around individual sockets.

We've got very good momentum on the socket front.

If you counted up the socket wars that take place, our net gains there have been positive the last few years.

But the ambition here, it's in single digits to be able to try to piece all of those together and get 1 point of share or 2 points of share, real share growth, each year.

So, it will move the needle very gradually in the coming years.

Okay, that's helpful.

And then gross margin.

If you look year-over-year, much lower revenue guide for Q4 but up 200, 300 bps.

Is that strictly mix related to LitePoint or are there other issues helping out there?

CJ, it's mix.

When you look at our gross margin quarter to quarter, invariably it's going to move around considerably simply based upon mix, whether it is high SOC LitePoint or high hard disk drive or some other mix.

So there's nothing other than mix going on.

Okay, great.

And then in HDD, can you comment on what your expectations are there?

I get that visibility is extremely low.

But curious whether you think that business can grow in calendar '13.

The sizing that we have is consistent with what we've said in the past.

And that is, we've got to get about $125 million a year to hit our model investment rate.

We will be below that this year.

We were above it on a two-year basis.

We're about on that rate.

But if there's any business that's had a first-half, second half dramatic difference it's HDD.

Virtually all of our revenue is in the first half of this past year.

So, you are right that it is a very hard one to call.

We do expect to bring some new products to market this coming year.

The idea there is to widen that PAM so that we can ensure that we get to this $125 million market, even if there is some compression in the total market.

So that is the game plan there.

We haven't sized up what the potential is.

If you looked at just history, you'd say the potential is in a good year for the market and a good market share position for us.

We've been above that $125 million.

But right now for planning purposes we are using $125 million.

Okay.

If I could just follow-up on that.

The new products you talked about, when will they be launched?

Are they focused strictly on the 2.5 inch?

And how should we think about the potential for ramping revenues off of that?

The new products are in the second half of the year, not the first half.

So, they would show up then.

And not to be too cute, we haven't disclosed what the target is for the new product development.

And we're holding off on that until we get some market penetration with it.

But we are opening up the PAM next year so that the idea of getting to the $125 million, and then getting above that is what is in our sites over the next couple of years.

As we get closer towards the end of the year, I think we're going to feel better about our position with the product coverage that we will have.

Okay.

Sounds good.

Thanks so much, guys.

Satya Kumar with Credit Suisse.

On the wireless SOC test side, perhaps there is a perception in the market that your market share is stronger than currently estimated IDM's versus perhaps a more even market share at the timing of OSATs.

If you're do end up seeing a significant shift in manufacturing from Korea over to Taiwan towards chips in general, is that a factor we should think about in terms of SOC market share for Teradyne for 2013?

Yes.

I don't think that that would affect our market share if there is such a shift.

And why is that?

Is it because your market share is similar?

It's because we've got a very solid IDM and OSAT installed base of the platform, the ultraflex platform that is used for those applications.

You generally want to stick with a tester that works well and is the leading tester.

So, you're not going to jump off the tester if you're moving.

Okay.

The question on longer-term outlook for testing, I think you briefly alluded to this that perhaps testing intensity will go up, but it's hard to say.

2012 has remained largely a year of testing leading edge 28 nanometer chips.

If I just looked at the SOC part, which is maturing pretty nicely.

We are starting to see 20 nanometer start to come in.

And there are some in the industry who claim that the failure of more of the mechanisms that you start to see with 20 nanometer are a lot higher than we see with 28.

How do you see?

Do you have any early sense of test intensity for 20 nanometer chips compared to 28 nanometer chips?

Satya, I think this is going to be the constant push-pull of failure modes, more testing, more integration on chips, more complexity, longer test times.

That is the push.

And then the pull is parallelism and pipelining of tests.

And so I don't think there is a step function change in it.

I think it's going to be that continuous tug-of-war between those two forces.

If you were saying who's going to win on that.

Will this be increasing tests?

I think that the market has found the need to invest in SOC around $2.5 billion a year.

And they're finding a way to do that.

And to get the coverage for these more advanced nodes and be able to keep the capital spend there.

That's the constraint that we see, is that the market isn't going to be growing dramatically in total.

So, we've got to keep being able to do more testing, more sophisticated testing, but doing it faster.

And that's been the formula for progress in the whole front.

Okay.

And lastly, on the balance sheet, I know there was a question earlier on the buybacks.

And I understand your point about wanting longer-term shareholders.

If I look at the stock over the last few years, it's been a very typical sort of stock that moves with just the seasonal patterns in the business, underlying business.

Because there isn't any other mechanisms, either buyback or the dividends, that return cash to shareholders.

Given that your business is likely to remain highly seasonal for the foreseeable future, how are you thinking about the situation around dividends to return some cash that you generate from cash as you go along in order to reward such long-term shareholders?

It's something we continually look at.

We have balanced out against LitePoint, Eagle and Nextest.

Those were cash acquisitions.

It's a lot easier to conduct a transaction with cash so the other Company doesn't have to do due diligence on your stock.

You can move faster.

So, the past use of cash we think has worked out quite well in the M&A front.

If you look at our stock buybacks over a long period of time, that really hasn't worked out as well.

So, that is one kind of bucket of information.

As you say, going forward, we certainly recognize, as cash continues to grow, we need to continue to look at what's the best use of our hard-earned capital.

And we've said that in many calls and many one-on-one investors.

So we constantly look at that.

We know the dividend tax rate may go up, so that's not something we would look to right away.

But even if that tax rate didn't go up, we would still look at what is the best use of our cash.

And it could be continue to hold it to look for non-organic acquisitions.

And at some point, if cash grows too large, then we would feel more pressure to do something returning capital.

But we are planning on taking a steady course.

Thank you.

Vishal Shah, Deutsche Bank.

I wanted to just follow-up on the bookings guidance for next quarter.

You said fourth quarter bookings would be up.

Are you assuming bookings recovery in just the high-end SOC segment?

Or you are also looking at recovery in the micro controller or linear segments, as well?

Vishal, I think it will be across the board.

Actually, we think it might be steady in the mobility sectors, with the recovery in the other sectors.

But it's a very dynamic forecast.

So that could change week to week.

But if you asked me right today, you would see that the sectors that have been quieter are the ones that we think in the very short term might see a comeback during this quarter.

But again, the step up in the fourth quarter that you've seen in the last two years, '10 and '11 -- I take '09 out because of the unusual nature of the overall markets then -- you'd say that that modest step up has been followed by a stronger step up in the following two quarters.

But the direct answer to your question is, it would tend to be in all the other sectors, with probably a steady level of business in the mobility sectors for us.

That's what's held up the best, obviously, through the year.

That's helpful, thank you.

And just on LitePoint, you mentioned 50% less revenues from the connectivity segment.

When do you think that percentage was this year?

In terms of the market share?

Mix of cellular versus connectivity.

Would it be 80-20 connectivity-cellular?

Or even more than that?

In 2012, connectivity was well over 90%.

Okay, great.

And then, as you think about that segment itself, I know you guys have gained some market share this year, but what is the competitive environment like?

Are you seeing increased pressure in pricing and margins in that segment next year?

And how should we think about margins for that segment next year?

Yes, we are seeing increased competition.

We do still see that we have the best products that have been optimized, and can do testing that the other parties can't quite do.

But there are some spots have some appealing products that they are pushing.

It is a little bit more competitive than the past.

I don't think there is any significant impact that you will see from that.

We think we can continue to maintain our north of 50% market share looking into the future.

On margins, what we would like to say on margins is we are confident that the LitePoint margins will stay above the Company model for margins.

But where they are at any particular point in time we don't want to get into that, because there are so many different factors that we would have to explain to you so you would understand why they could be a little bit higher or lower or sideways.

That's helpful.

Thank you.

Mehdi Hosseini with Susquehanna International.

Greg, going back to your comment about the 15% EBIT margin at $375 million revenue, how should we think about operating drop through as your revenues are scaled above and beyond $375 million?

Is there a metric or a range that you could offer us?

Yes, Mehdi.

We use 52% in our modeling.

There is a wide range, but if you average it out 52% is a pretty good number.

Again, sometimes it's going to be well above it, other times below it.

You could look to this past year.

The drop-through quarter to quarter has moved around considerably, depending upon the mix.

We've had drop through Q4 to Q1 only 36% at the PBIT line, Mehdi.

Then Q1 to Q2, it was 70%.

Then Q2 to Q3 it was 53%.

So, my point is, it's all over the place.

But if you average everything out and normalize everything, our estimate would be use 52%.

Got it.

And then going back to, as a follow-up to a prior question, you obviously put a lot of emphasis on longer-term return to shareholders.

But you also are facing seasonality in your business.

Is there any new thought that you discuss to help ease the volatility in the business as it relates to the stock?

Because, as much as you're focusing on long-term return to shareholders, you can't avoid the seasonality in the stock.

And I'm just curious if these conversations come up at the board meeting or there are new ideas that you are contemplating.

Yes, those discussions do come up, Mehdi.

And we have looked at companies that are serving semi equipment and in fact pay dividend.

And, in truth, we see they have the same, generally, peaks and troughs in stock price.

Normally you might think a dividend could give you less volatility.

I don't know if the data (inaudible) is convincing on that but we have looked at that.

And we continue to look at thoughts like that to figure out what's the best use of our hard-earned capital.

Got it.

And then just one question on the LitePoint.

On the business or the opportunities in LTE.

To what extent is that coming from gaining market share against the stronger incumbent versus consolidating market share among the smaller players?

It would be the former.

Got it.

Thank you.

Jagadish Iyer with Piper Jaffray.

Two questions.

First, how should we be thinking about LitePoint in terms of overall investor growth?

Can you talk about how your market share growth is versus industry growth for next year, please?

And I have a follow-up.

In Mike's comments and my comments we did give a range for LitePoint for next year.

I think it was $260 million to $360 million revenue.

That's a wide range.

And they were at $290 million this year.

And I think we also commented that connectivity market, LitePoint's major market, could be flat to down a bit next year.

And cellular is where we see the opportunity to get some meaningful business in 2013, which would put you to the upper side of that range.

When you step back, though, from what's going to happen next year, there are very favorable trends in both connectivity and cellular where you have products that have short lives, they got obsoleted quickly.

New technology has longer test times.

You have high unit growth so net new testers maybe buffer that.

So there's a number of very good factors going on for a period of time that we think, putting aside where next year falls, we feel good about the year after, and the year after.

So we think it's going to be a very good market for some number of years.

And you could just look around with some of the plans.

Wireless is going virtually everywhere, whether it's Internet things, machine to machine.

Those trends haven't really taken off.

It's really the smart devices, is driving the business today.

But there are some other things that will be coming.

Second one.

Mike, if you look at 2010 your Semi Test revenues versus what you are likely to end up this year, there is a drop from about $1.4 billion to about $1.1 billion.

Is it purely from how the market has shrunk?

And how should we be thinking about longer-term in terms of next two to three years in terms of how the associate market can potentially grow?

Is that going to be just capped between $2.2 billion to $2.7 billion?

Is that the range that we should be thinking about?

First question is, the answer is yes.

There were segments that were growing faster in 2010.

And the buy rates inside those segments are stronger so our revenue was higher.

Number two, for planning purposes we've actually thought about the market as being more compressed, to force us to make tighter decisions around our investment portfolio.

Three years ago we were looking at a market that we would size it between $2.0 billion and $2.2 billion.

It's actually delivered $2.5 billion to $2.6 billion the last few years.

So, we think that's more sustainable even though we've talked about this next year as being somewhat down from that.

So, in truth, the market has proven to be a stronger market than we had originally anticipated.

So, that's the bullish side.

Looking forward, we still don't think this is even a high single-digit natural growth in the market.

What we said in the past, and continue to believe, is that the segments will shift so that the buying that comes in these mobility products will be stronger and stronger, and that the PC-related SOC devices and the buy rates there and the ATE, capital there will redistribute into the other segments.

So there is growth inside some of the segments.

Those are the ones we're trying to get a stronger and stronger position, and have made real progress over the last three or four years.

But we're not counting on total growth in that market.

We're counting more on segment growth that we can capitalize on.

And just to add to Mike's point.

What that really has done for us over a number of years is, it's giving us a much better financial model with operating profit rates over three years north of 20%.

And when you have that level of financial strength, you can expand the business selectively.

And that's in part how LitePoint fit in.

And we can have these discussions as to what you do with the cash -- excess cash.

If we had not made these more conservative assumptions and put financial discipline in the Company, there is a whole set of other discussions you'd be having -- why can't you get to model profitability.

So, it's a good set of issues we have now.

What do we do with the growing cash and what's the best use of it.

So we spend much more time on that, not the model, because the model is in good shape.

Thank you.

Terence Whalen with Citibank.

Just one quick question.

You alluded earlier to margin differential in between cellular and connectivity test in the LitePoint business.

Can you help us understand what that differential is, just so we understand how to model that, as cellular picks up here as a portion of overall revenue for LitePoint?

Thank you.

I'm not going to get too specific because nothing is 100% settled right now.

But it would be measurably lower.

And this is often what's necessary to break into a market where there is entrenched competitors.

We think over time we can do better, but the first break-in, as has been in many of our other businesses, you tend to start lower, then you work your way back through new instruments, new clever engineering.

But I don't want to quantify because nothing is settled at this point.

That's helpful.

Thank you.

Okay, folks, thank you all for joining us today.

We look forward to talking to you in the weeks ahead.

This concludes our call.

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