泰瑞達 (TER) 2012 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Teradyne fourth quarter 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)

I will now turn the call over to Mr. Andrew Blanchard, Vice President of Investor Relations.

Mr. Blanchard, please go ahead, sir.

Thank you, Sally.

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; our Chief Financial Officer, Greg Beecher; and I'd like to welcome our new President, Mark Jagiela.

Mark stepped up from his role as leader of the Semiconductor Test group on January 1. Following our opening remarks, we will provide details of our performance for the fourth quarter and full year 2012, as well as our outlook for the first quarter of this year.

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

The press release containing our fourth quarter and full year results was sent out via Business Wire last evening.

Copies are available at www.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 in the Live Webcast icon.

In addition, replays of this call will be available via the same page about 24 hours after the call, and the replays will be available along with the slides through February 9.

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

We encourage you to review the Safe Harbor Statement contained in the earnings release as well as our most recent 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 posted additional information concerning these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measure where available on our website.

To view them, go to the Investor Page and click on the GAAP to Non-GAAP link.

Also, between now and our next earnings call, Teradyne will be participating in investor conferences hosted by Stifel Nicolaus, Goldman Sachs, Piper Jaffray and Susquehanna.

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

First, our CEO, Mike Bradley will review the state of the Company in the industry for the fourth quarter and full year 2012 and provide our outlook for the first quarter of 2013.

Then our CFO Greg Beecher will provide more details on our quarterly performance along with our guidance for the first 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 today.

I will start today with a brief recap of 2012 and give you both a view of how the start to this year is shaping up, plus an outline of what we think would make for a successful 2013 when we're talking with you 12 months from now.

As usual, Greg will give you the financial perspective, not just for the near term, but more importantly, an overview of how our market and financial strategies will continue to be prosecuted going forward.

As Andy mentioned, Mark Jagiela will join in on the Q&A portion of the discussion today.

Let me start with a quick recap of the year just finished.

The overall numbers continued to be very good.

We grew revenues and total profit rate to $1.66 billion and 23% respectively.

I recently noted to our employees that we eclipsed our records from what many consider the golden era of the semi cap industry.

That was the 1998 to 2000 dot-com boom.

The shorthand is that while our cumulative top line revenues were 26% lower in the last three years than they were in that explosive era, our profit rate was 8 percentage points higher and our cash generation $500 million higher this time around.

We accomplished this was an average annual workforce that was 55% lower than that of the 1998 to 2000 period.

Now, all of this is to say that the resilience of our business model has been proving itself out now over multiple cycles at the same time that we have latched into some new markets and new growth engines.

Greg will spend some time on how the strategy that produced these results will be employed going forward.

Back now to 2012.

While the total picture was strong, the component pieces were mixed with an extraordinary performance by LitePoint, a solid showing in our SOC test and defense businesses, a very choppy year for storage test, and disappointing results in memory test.

We remained in the 40% plus level in SOC test market share despite a smaller than normal market in analog and lower-end digital applications, as the microcontroller and automotive markets were subdued all year.

As you know, our SOC test products for mobility applications hit new records in the year, as we've previously reported.

But memory and storage test lagged, for six months in the case of hard disk drive test, and really for the full year in memory test.

So the very good annual results came from some standouts combined with some slow movers.

It's pretty clear that the trough in our businesses in the rear view mirror.

But the market's rebound off the bottom is short of what we saw last year.

You will recall that December of 2011 was a sharp turning point led by smartphone and tablet-driven SOC test bookings.

So, this means a more gradual recovery in the first quarter and far less of a capacity scramble we were into last year at this time.

Now, this doesn't change our view of the total SOC test market, which we've projected at $2.3 billion, or our view of what needs to happen for us this year with regard to new markets and new products.

As I mentioned last quarter, we have two important product launches in SOC test in the [EJ750] and Eagle Test sectors.

These are both on plan to contribute this year in markets where we have very strong market share.

We are progressing rapidly with the new offering in the hard disk drive space for 3.5-inch drives, a new market for us.

And we've secured customer commitments already, even though revenues will be loaded into the second half of this year.

Our efforts to expand LitePoint into cellular testing remain very promising, but we will of course hold our cards close for competitive reasons.

We do believe we will make headway in the cellular front this year, opening up a whole new sector for LitePoint.

I should note that we are not expecting much of a rebound in memory, so that's more of a wait-and-see arena, but our defense and commercial board test units should make their usual contributions.

So, despite a slower start to the year than we saw last year, we've got more irons in the fire and are optimistic about how the full year should play out.

Now, let me turn it back to Greg.

Thanks, Mike.

Good morning, everyone.

I'd like to first offer some perspective on the year just ended and our multi-year performance before I update you on 2013.

I will then cover the fourth quarter highlights and first quarter guidance and close with some summary comments.

So, first looking at 2012, we recorded our third consecutive year of very solid financial performance with sales of $1.657 billion, a 23% operating profit rate, and free cash flow of $285 million.

Clearly, LitePoint was a standout performer, having more than doubled its annual sales to $286 million, far exceeding our original $160 million target.

I will come back to LitePoint shortly, but first let me give you a quick multi-year picture.

Over the last three years, we've averaged an operating profit rate of 24%, and annual non-GAAP EPS of $1.76.

We've also generated $963 million of free cash flow.

This strong, multi-year performance is attributable to our optimized business model and several selective growth investments.

On the business model front, we consistently maintain financial discipline throughout the Company.

We require each business unit to be sized to earn model profits or better over a cycle.

And, we require that our core businesses steadily grow their market share by targeting attractive segments in which we can deliver clear product differentiation.

We also have some hard SOC advantages over our peers that contribute to our strong performance.

For example, we are able to be much more efficient in Semi Test applications engineering as our software is much easier to program.

So, while our customers get their silicon to market much faster, we spend far less in application support engineering.

We are also able to be much more efficient in Semi Test engineering, as we don't have major overlapping platforms covering the same requirements, so we get more engineering leverage.

We take full advantage of our scale and the value of low-cost regions, whether in back-office functions such as accounting and IT, applications, engineering or sourcing.

Our strong core business and steady financial discipline provide a solid platform to grow into adjacent markets.

This platform provides the dry powder and allows for the necessary management bandwidth to allow us to expand into new, higher growth markets.

This platform also is attractive to smaller, faster growing test companies that are potential acquisition opportunities.

As I said in our last call, over 40% of our 2012 bottom line resulted from entering new markets since 2008.

So, for us, a strong core and selective new growth opportunities go together, and it's what distinguishes Teradyne.

I can now spend a few moments providing some insight into how we execute new growth.

Remember, first, there is no predicting the timing of any new growth opportunity, but nonetheless, I think it's useful if we give you a sense of how we look at this area.

First, for opportunities that meet our growth and profitability targets, which we can address organically, we have a straightforward process.

We work closely with a lead customer to confirm and tease out the new product's requirements and differentiation.

We then secure the lead customer's engagement with a firm order.

Then, we execute against a set of milestones.

An example of this type of development is in storage test, where we've built a solid business over the last four years.

Now, for growth through acquisitions, we first look at growing markets with meaningful profit pools and closely related businesses.

Teradyne's strengths revolve around developing complex test systems requiring tight integration of hardware and software, so naturally our M&A efforts tend to focus on companies and end markets that demand similar skills.

We have strict criteria around sustainable competitive differentiation.

We look for opportunities to build on that differentiation by leveraging our existing IT, our global distribution network, our financial strength, or some combination of all three.

Eagle, Nextest and LitePoint are good examples of this approach.

On the financial front for organic or M&A opportunities, of course we need to at least earn our cost of capital at a hurdle rate we set at 15%.

As we pursue growth opportunities, we will continue to maintain financial discipline so we can generate cash and self-fund new growth opportunities or return capital to our stock buyback program if that's more beneficial for long-term shareholders.

We have about $169 million remaining on our buyback authorization.

I go through this to remind investors that while we operate in a very dynamic environment, the foundation of our strategy remains steady -- a tight business model, generating strong free cash flow coupled with a very disciplined growth strategy.

I'd like to now turn to LitePoint, which is at the epicenter of the ever-faster and steeper ramps of smart devices.

LitePoint grew its sales from about $130 million in 2011 to $286 million in 2012.

As you recall, LitePoint testers are at the module and assembled product ends, and they do both calibration and testing of the wireless capabilities.

LitePoint set records in new product launches and ramp manufacturing fourfold from the prior-year peak, and being inside of Teradyne certainly helps LitePoint customers face even more business with them as well as expand their Asia footprint.

LitePoint was also first to market with an 802.11ac production test solution, which is clearly winning in the market.

These wins bode well for the future as 802.11ac based products ramp.

In 2012, LitePoint benefit from a growing connectivity market due to smart device growth, some large probe in buying and the addition of the 5-gigahertz Wi-Fi band driving up test time.

We also gained market share with their production optimized solutions and followed the chipset strategy, which helps customers get their products to market faster.

Longer-term, the wireless trends remain very positive with ongoing smart device growth, with faster and steeper ramps, the growth of the internet of things that is connecting appliances, security, medical devices, climate control and lighting to your hand-held device.

Finally, increasing cellular data requirements from the growth and media sharing across multiple devices, anywhere, anytime.

Now coming back to this year.

As we said last quarter, we expect 2013 LitePoint revenues to be in the $260 million to $360 million range or $550 million to $650 million in its first two years as part of Teradyne.

Similar to 2012, the first quarter and fourth quarters should be the low points.

As you know, we have our sights set on breaking into cellular in 2013 in a more substantial way, so stay tuned for further updates.

Our expectation is that connectivity buying will be less than last year, given the very large 2012 program buying.

Company-wide, 2013 is expected to start off more slowly than last year, and as a reminder, in any one year, either our second or third quarter can be the peak.

Mobility will remain the main driver.

Some of our other segments that we're very strong in, such as performance analog, microcontroller, automotive, should pick up as we get further into 2013.

Our new growth investments that we talked about last quarter will continue to ramp in the first quarter, and we expect to be on the model we shared with you last quarter.

Some of our investments will bring new offerings to market later this year, so stay tuned.

Now moving to the key highlights of the fourth quarter.

We had total Company bookings of $273 million.

Semi Test bookings were up to $183 million, SOC test orders were $171 million, and memory test orders were $12 million in the fourth quarter.

Semi Test service orders were $51 million.

Systems Test group orders increased to $64 million with $35 million of service orders.

Wireless Test orders were $26 million.

In the fourth quarter, Semiconductor Test sales were 74% of the total, System Tests grew 16% and Wireless Test 10%.

Our book to bill ratio for the fourth quarter was 1.1 for the overall Company, 1.0 for Semiconductor Test, 1.6 for the Systems Test group, and 1.1 for Wireless Test.

At the end of the quarter, our backlog stood at $354 million, of which 68% is scheduled to ship and be recognized as revenue within the next six months.

The top line of $248 million was down [$215] million or 46% sequentially from the third quarter.

Semi Test was $184 million, down $127 million or 41%, and Systems Test group was $40 million, up $6 million or 18%.

Wireless Test was $24 million, down 79%.

We had one 10% customer in the quarter, and our top five customers accounted for 28% of our fourth-quarter sales.

For the full year, we had one 10% customer.

Semi Test product shipments decreased 49% from a quarter ago.

Within the $248 million, service revenue was $69 million, a $1 million decrease compared to the third quarter.

Semi Test service revenue was $52 million.

Total Company product turns business was 40% versus 31% a quarter ago.

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

Memory revenue was $10 million.

Moving down the P&L.

Non-GAAP gross margins decreased to 54% from 56% in the third quarter due to lower volume.

Non-GAAP operating expenses were $122 million, compared to $131 million in the third quarter, as our variable compensation flexes down on lower sales.

At the operating line, we posted a 5% profit, marking the third consecutive year that we stayed in the black on the trough fourth quarter.

Our non-GAAP net interest and other expense was $2 million, taxes where a benefit of $3 million in the quarter as we adjusted the full-year tax rate down to 10%.

Looking to 2013, we expect a cash tax rate of about 11%.

Cash from operations generated $14 million after capital acquisitions.

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

DSO was 56 days up from 40 in the third quarter.

We expect cash and marketable securities to decrease by about $40 million in the first quarter as we pay out annual variable compensation and make tax payments.

As reminder, we have about $300 million of cash offshore and subject to US tax if repatriated.

This will likely grow by about $100 million a year.

As noted in the press release, sales for the first quarter are expected to be between $260 million and $280 million, and the non-GAAP EPS range is a loss of $0.01 to income of $0.05 on 195 million diluted shares.

Diluted shares are lower than normal because at this profit level, including interest, and excluding the convertible shares, it's more dilutive.

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

Our GAAP EPS range is a loss of $0.06 to $0.01.

The operating profit rate at the midpoint of our first-quarter guidance is about 2%.

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

We expect non-GAAP gross margins to be 52%, R&D should be 24% to 26%, and SG&A should also be 24% to 26%.

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

So, in summary, 2012 was our third consecutive year with 20% plus operating profitability.

We will continue to stay focused on maintaining financial discipline while selectively investing to drive further earnings growth.

Now, I will turn the call back to Andy.

Thanks, Greg.

Sally, we would now like to take some questions.

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

(Operator Instructions)

Vernon Essi, Needham & Company.

I was wondering, Mike, if you could look into the first half of this year and give us an understanding of where you are seeing activity most on the device front.

I've heard over the last couple of weeks some of your sub-assembly type folks in the industry were seeing some activity.

Of course, your guys don't necessarily indicate that there is a lot of activity in the ATE front.

I'm just wondering if things changed after the turn of the year with some of the customers and where there might be some activity.

Yes, Vern, as we come back off the bottom, the drivers for us are power management.

I'm talking here on the SOC space.

Sure.

Power management and the mobility ICs.

So, that continues to be the strongest segment for us.

I think that that's what we will see as the leading segments going forward over the next couple of quarters.

We saw a little bit of growth in the fourth quarter here in automotive for us, which has been quiet.

But, I think as this moves back up, the thing that will click back in much more strongly, here, will be the mobility products.

And just to sort of follow-on that, was there any -- I guess, since the turn of the year, have you seen any increasing activity on the order front?

Or, has it been pretty consistent from where was at the end of 2012?

Well, we've only got a few days into it, here.

So, in the last 15 minutes, it's picked up.

There is nothing that is dramatic at this point.

I think the thing that we would refer you to is that when we come up -- when the industry comes off the bottom, it usually doesn't go back down.

So, we're expecting it to continue to go northward.

It's really the slope of it that is hard to call at this point.

But, clearly there's more activity now than there was a month ago.

So, we are expecting things to continue to turn up.

But the exact call here on which month it's going to start to move, you remember last year -- the move was earlier.

It was very, very strong.

We'd expect that when it moves, it tends to move in a herd.

So it will move stronger.

At this point, we are on the trajectory of recovery off the bottom.

But it's very hard to call the slope, right now.

Okay.

Thank you.

Jim Covello, Goldman Sachs.

It's Mark Delaney calling on behalf of Jim Covello.

Mike, I was hoping you could talk a little bit more about your views on the slope of the recovery into the first half of 2013.

I know that the absolute level of where your Semi Test orders are is different in 4Q this year as opposed to 4Q last year.

But if I just look at your numbers last year, your Semi Test orders were up 19% sequentially.

It was the same growth rate of your Semi Test orders this year.

So, can you compare and contrast what it was that enabled the Semi Test revenues in each of the first two quarters to be up over 30% sequentially?

Contrast that with what you are seeing, today, for the first half?

Mark, do you want to talk a little bit about that?

Mark, this is Mark Jagiela.

In the Business in the last few years, it's all mobility that drives the volatility, and buying for mobility.

So, if you compare last year to this year, essentially we are seeing very similar trends where the mobility buys drop-off in late third, early fourth quarter and start to pick up in first, and we are seeing some signs of that.

The difference is, that I think the tooling last year for mobility capacity was tooled for a peak ramp forecast of new devices that probably came in slightly under that.

So, there is a little bit of utilization to soak up here in the first quarter.

As we look at the new products that will be introduced in second and third from our customers, the first step is to absorb a little bit of that capacity and that rocket will take off again.

That's around all the parts you would normally expect in these devices.

There's Wi-Fi, we are seeing a little bit of sign there of that pick up, applications processors, those kind of devices.

Thank you for that color.

That's helpful.

As a follow-up question, I was hoping to talk on wireless device test business and, Greg, I appreciate the color you gave on the full-year targets and what drove that for 2012.

Could you give us your view on what inning the 5G Wi-Fi refresh is in?

What inning?

Mark, was that the question?

I know you guys have strong share on the Wi-Fi side of that.

I understand that drove some of the strength in 2012.

Just as you look into 2013, or 2014, what your view is of how far along a refresh of the installed base is.

Okay.

The biggest area for a refresh is with 802.11ac.

We are in the very, very early innings of that.

That was a small amount of our sales this year.

We captured very, very high market share.

So, I think 802.11ac is a significant Wi-Fi standard change that will affect our senses probably 2014 a lot more than '13.

But it's going to continue to grow over time.

The thing that's happened with Wi-Fi this past year, and is still occurring, is the 5G band has been added.

That drives up test time.

I believe in China, the Chinese government is authorizing or releasing that 5G band.

So, that's good news as well for LitePoint.

Thank you.

Good luck.

Vishal Shah, Deutsche Bank.

Just wanted to understand in the cellular test business, revenues from your LitePoint business last year, what percentage of revenues came from that segment?

You said, in the hard disk drive segment, you expect some of the customer governance to show up in revenues in the second half.

I mean, could you maybe talk about what kind of traction you see in there, in that segment?

Thank you.

Sure.

This is Greg, again.

Cellular revenues last year were less than 5% of our total sales.

So, very small.

They were important design ins, though.

This year, we have plans to break into Sailor in a much more meaningful way, and we look at our guidance of $260 million to $360 million, that's really cellular.

If we have good year in cellular, we are up at $360 million.

If we don't, we're down at $260 million.

We see good opportunities.

What I did say last quarter was that the margins will be lower in cellular.

It's very competitive, and the new guy has to be very aggressive to get in.

We've got some key product advantages, but some of these advantages can't be fully unleashed based upon how we have to fit into the test environment.

So, we feel good about our prospects.

It is a long designing cycle, and we are not going to know probably until early Q1 if we break in, which we have our sights set on doing that, we'll probably shift Q2, Q3.

Vishal, on the hard disk drive side, last year was first-half story.

I think we had probably 85% to 90% of our revenues in the first half of the year.

It won't be fully inverted, but it will be very heavily weighted to the second half.

That's the capacity utilization story on the 2.5 side.

But, we will complement the product line with a 3.5-inch product in the second half.

So, that will give us another engine.

It will nearly double the market of the TAM that we are going after.

There will be a quarter or two here, we think, that will still be pretty quiet on the hard disk drive side, and then in the second half should pick up substantially, because we have got a second product going.

That's very helpful.

Thank you.

Stephen Chin, UBS.

It's Mahavir for Stephen Chin.

Two questions on LitePoint.

First question about -- you're guiding flat for the year.

Just trying to get a sense, in terms of -- you talk about internal things, is that an upside opportunity or is that a 2014 opportunity in terms a the build-out for internal things?

That's the first question.

The second one is, can you give some color about your exposure to top two players on the wireless mobility side?

Are you exposed to one of the two, or is the exposure kind of even?

I will take the second one, which is, we can't comment on the exposure.

Sorry, but that's a very -- that's a sensitive arena.

Greg, the first one?

The first one, I'm very sorry, I didn't get the full question -- oh, the internal stuff?

Where is that?

Is that a '15 or '14 --?

It's very early.

You see some applications now, but we are in the early innings.

That's going to run for the next at least five, seven years.

It's going to help the semi test business, too, as well as LitePoint.

I think the more you look around, you see applications showing up, but it certainly is nowhere -- I'd say it's inning one or two, right now.

We know it's not season monitor.

That's fine.

And then just a quick follow-up.

You had a great year for LitePoint in 2012.

Have you seen any big changes in the competitive landscape of new competition or new product introductions or accelerated product introductions from your competitors?

Anything you can talk about that?

It's obviously an attractive market, and I think we are a bit of a target.

So, yes, it is very competitive.

But we believe we can continue to execute and stay ahead.

I think in this business, LitePoint is also going to be quite volatile like our other businesses.

So, 2012 was a -- many new records.

We gave wide ranges.

If you look at the range inside the Company, it could be even wider.

It's a business that is very difficult to forecast.

Strategically, we feel very good about our product portfolio and our position with customers, and we gained market share last year.

It's very hard to call exactly where we might end up at any point in time.

Thanks.

Mehdi Hosseini, Susquehanna International.

Couple of follow-ups.

Can you maybe elaborate on the LT opportunity by kind of walking us -- where are you in the qualification stage, or are you already qualified and just simply waiting for the customer ramp?

Then, Greg, I'm going to go back to the issue of -- topic of cash.

You have effectively doubled net cash per share.

Any update there?

I know that you don't want to use to buy back or give dividend, but anything you can share with us, in terms of where you are in M&A would be really greatly appreciated, because you keep building out the cash and it's going to continue to grow.

We don't know how you guys are going to employ this cash.

Okay.

Both good questions.

On the first question, so, we are in a good position.

We are qualified, but I cannot tell you that doesn't mean -- yes, I win.

There's a whole bunch of other things that have to get sorted out.

But, we are qualified and our tester can test the devices quite competitively.

So, we are in a good spot, but stay tuned.

A lot can happen between getting qualified and getting the order.

Okay?

The second one, on the cash, we do try to, in each call, update you on cash and our strategies.

But, in truth, it really is a steady course.

If you think about what we've done over the last three years, we've built a strong core that generates strong cash.

We've used that cash to buy LitePoint, Eagle, and invest in some other businesses.

That has given us 40% of our earnings growth.

We like that.

We very much like that strategy.

But, what I've also said is that at some point, the cash grows and it gets, perhaps, much larger than where it is now.

Then, there's more pressure on us to think about the subject harder.

What do we do?

Stepping back from that, each quarter we review the topic with our board.

Stock buyback, dividend -- but we continue to stay the same course to be very patient on stock buyback for long-term shareholders, wait till the stock is severely undervalued, and hold the hard-earned capital, because we believe there are some attractive test companies, not exactly another LitePoint, but there may be other businesses that have some similarities to LitePoint that we could get a much greater return inside of Teradyne in our platform than buying back stock.

If we can't find those enterprises, then fair enough, the pressure's back on us to look harder at returning capital.

Granted.

If I may just squeeze one follow-up.

Given the recovery and -- actually, the cyclical nature of the semi test and where you are with bookings, if you look at historical trends, it suggests that yes, bookings are going to continue to improve into Q1, and is that a fair assessment?

You are going to continue improving it -- bookings are going to help improve backlog.

Yes, I think that the issue is just the slope is hard to call.

If you look back, maybe on the website, we've got those back a few years.

You can see it's a very rare occurrence that after the bottom is hit, that you go up and then quickly come back down.

We do expect things to firm up.

But, what Mark said about where capacity is and the introductions of our customers' new products really has suggested to us a quarter ago that 2013, in total, we had shaved our estimates for the total market in SOC down by about 10%.

I think about half of that 10% is likely to be absorbed in the first quarter of this year.

So, we do expect things to continue to strengthen.

Very tough to call, though, given the steepness of the ramps that our customers are going through and the lead time compression that we've got.

Very tough to call exactly when that kicks into overdrive.

But, it's definitely on the up-slope.

Thanks so much.

Krish Sankar, Bank of America.

Greg or Mike, if I look at the Q1 guidance, is the SOC revenue in Q1 at the same run rate as in Q4?

Hang on, Krish.

Is that a question?

Yes, he said is the SOC revenue the same as the one in Q4.

No.

Is that higher or lower?

It's higher.

It's higher than Q1.

Okay.

Fair enough.

And calendar '13, when I look at the HDD sales, do you think it would be higher or lower than calendar '12 baking in your new 3.5 inch product?

I think it will be higher, Krish.

Just a quick reminder, this past year, HDD was about $100 million all front-end.

The year before was $155 million, $160 million.

So over two years, it's averaged $125 million.

But we all know that that area's kind of weakening, because of the tablets.

But we do believe getting into 3.5 can help us with the cloud computing to get back up to $125 million, which is the amount of revenue we need to hit our 15% model profit.

We think we can get to about $125 million.

Having said that, Krish, the place we are standing on hard disk drive now is very different from last year at this time.

We just have -- we had a first-half year backlog in hand as we entered the year last year.

This year, it's just the opposite.

So, we are really making a forecast here based upon what we think the overall market will do, and we will buttress this year a bit because we do have a new product.

If we are able to get that latched, that will help us.

That's why we think we can, on an annual average basis, get to our $125 million level.

But it will be a second half story.

The risks have gone on too long on this.

This is what we talked about earlier in the prepared remarks that we secured two lead customers to work with us on the design of this product.

One thing you want to do when you are designing new, complex test equipment is have the buyers working with you, so you get the all subtleties right.

We have market share agreements.

So, they are bought into it.

It's up to us to execute -- a lot of risk in execution.

The good news is we have got some customers pulling us.

Got it.

And then, finally, you guys said that it looks like your SOC market share last year was roughly static in the lower 40%s.

What is your mobile SOC market share you think it was calendar '12?

Exiting calendar '12?

This is Mark, again.

In mobility devices, we are probably right around the 50% point if you look at a tablet or a cell phone and break it down.

So, that pulls up our average.

So, if you look at the whole market, the place that pulls the average down would be PCs where we really have low exposure.

But, roughly 50% mobility.

That's very helpful.

Thank you, guys.

Satya Kumar, Credit Suisse.

Just to continue on the market share question.

Do you expect the mobility share to be similar this year, or are there any major shifts happening in the supply chain that might play to your benefit or against you?

How should we think about share, this year?

Yes.

Mark, again.

So, our whole product strategy for a couple of years now, and go to market strategy has been focused on mobility.

So, when we talk about gaining a point or two of share per year, most of that is targeted at mobility devices.

We would expect that share to go up in 2013.

That's our plan.

The product that we have for that area, it really focuses on two features to enable that.

One is just the breadth of instrumentation.

If you look at a phone, compared to any other consumer or industrial product, the breadth of sensors, digital processing, analog processing, RF capability is vast.

You need a product that can do all that.

That's what we've got.

The second characteristic is the ramp and the time-to-market for new silicon.

It's unbelievable.

Three years ago, it might have been six months between a validated piece of silicon and a ramp.

That's compressed last year to down to three months, and I bet you this year, it will be down to less than two.

So, the ability of the test system to debug silicon and get the yields north quickly is the other feature that we've leveraged into this.

So, we expect our share to go up.

That's where we are focused and will continue to focus.

That's helpful.

Mark, again, perhaps you can address this.

You mentioned there was some amount of excess capacity that was created in last year by your shipments.

Was that specifically for SOC or LitePoint, or both?

Is there a way you can qualify the amount by which you over-shipped the market demand last year for these segments?

I'm just speaking of SOC in that case.

What typically happens is, when a new mobile device comes to market, it has a vertical ramp.

There is a bit of a pre-build of inventory that goes on, but frankly, not as much as you would think.

So, a lot of capacity needs to be put into keep up with that ramp.

The ramp is a forecast.

There's a range of how fast is this new thing going to ramp.

Our customers don't want to be caught short on the upside.

So, they tend to buy toward the high side of the forecast for the ramp.

But, what happened I think in 2012, is that the ramps for the new devices were very strong, better than average, but not at the peak forecast that people bought to.

So, how much of an overhang was there?

It's hard to calibrate.

I don't think there's a lot.

The utilization right now is quite high.

So, I think as we get into the next product announcements, you will start to see the ramps kick in.

But, I think as people think about capacity, they don't want to be caught short, and if the world comes in a little bit below the top end of the forecast, there will be a little bit of an overhang.

That's what we saw.

Okay.

Lastly on LitePoint.

802.11ac, is that going to be a meaningful -- it sounds like it is contributing to something?

Is there a way to for us to think about the magnitude of that contribution to LitePoint this year?

How far away from 50%, for example, will we be for 802.11ac this year, for you guys?

I think 802.11ac will be well under 50% of the connectivity sales this year, maybe it's 20% -- that neighborhood, maybe 25%.

Perfect, thank you.

Sorry, go ahead.

That's it.

Next question, please?

C.J. Muse, Barclays.

I guess, first question, I was hoping to dig a little bit deeper into the SOC side.

Can you share with us what you think the size of the market was in 2012, and what your view is for 2013?

And, if you could talk about your expectations for share, not only on the mobility side, also including the two new products you alluded to from Eagle and the J750.

I'll give you the market, C.J., and then Mark will talk about the segments.

Dropping back a little bit, for three years it's been -- the market's been around $2.5 billion to $2.6 billion.

The last two years, just under $2.5 billion in '11 and just over $2.5 billion in '12.

What we've projected, and again, it's all connected to this issue of utilization, the ramp, the buying levels and the various segments of what's strong and what's not strong.

We said, for ball park estimates, we're around $2.3 billion.

If you look at the recovery in the overall market, we think the first quarter soaks up a fair amount of that drop of $300 million, maybe about half of it.

Then, on the product front, the new Eagle and J750 products that we will be introducing this year are really going after segments in linear power, automotive and microcontroller, low-cost consumer where we are currently very strong in share.

We see the ability to extend that with these product introductions.

But, the markets themselves, with those two products are in are essentially slow growth markets.

So, what we can pick up additional share in those markets and we are very strong there, a lot of the share gain we are looking at in 2013 is back-end mobility, which is the UltraFLEX product that we introduced a major refresh on last year.

So, as we look at our share position in 2012, as I mentioned before, in aggregate, it was in the low 40%s.

In 2013, our target is to move that north into the mid 40%s.

If I could just follow-up on that theme.

In terms of the share gain, is that entirely mix related?

Or, actually winning sockets?

It always comes about from both.

Socket wins probably are about half of that.

Then, the mix shift that we are forecasting is the rest of it.

Great.

And then if I could ask a follow-up question regarding LitePoint.

I guess, two questions to that.

First, in terms of what you are seeing today in AC demand, is that more access point related or, handset?

Then, on the cellular side, it sounds like carriers want LTE-ready handsets regardless of whether the technology will actually be available.

So, curious -- what that means for your expected ramp for that business over the next two quarters.

CJ, this is Greg.

On the connectivity side, the growth is handsets.

It's not the access point.

There are some of that, but handsets is going to drive it, at least for the next year or two, and tablets will be next in terms of the drivers.

On the cellular side, LTE generally needs more test time, has many more bands and its complex, different modulations.

Test times go up, and it's a good opportunity because LitePoint has a production optimized tester.

So, it plays well to their strengths.

Great.

Thank you.

Patrick Ho, Stifel Nicolaus.

I guess first on the SOC test side of things.

You mentioned the 28-nanometer device build-out that you saw last year that spurred some of the activity you saw in 2012.

As we move out to 20 nanometers, are you expecting another similar surge or the possibility that they will try to you reuse some of the equipment they bought last year for that node, as well?

I think, Patrick, the equipment is always reused.

Usually, the lifetime of a piece of equipment in this space is at least 7 to 10 years.

That's always been true.

I don't see that changing.

The thing that changes when you go from 28 to 20 and so on, is the yield learning curve on the parts, is one issue.

So, typically, the 20-nanometer node will come in at a lower yield than the 28-nanometer node.

That is another thing that early on spurs more capacity early in the lifecycle of a node.

So, when we moved to 20, we will definitely be a surge of buying early in that node that will ameliorate until we get to the next node step, over time.

Those kind of come in two to three-year increments.

You will see a very strong year.

Then, you will see a mature process technology maybe in the second year.

Then, by the third year, you're back into it again.

Great, that's really helpful.

And maybe just moving to LitePoint for a second, in terms of your activities or entering the cellular market on a more active basis.

Is there a different, I guess, qualification of the design stage where you will see different seasonality versus what you are seeing in connectivity where it is primarily concentrated in 2Q and 3Q?

Is there anything different with that, or are you expecting that to also be kind of in the middle of the year?

No difference.

It should the following the same pattern.

I think, for the connectivity, we are going to see Q2 and Q3, generally speaking, as peak the shipment quarters.

Great.

Thank you very much.

Jagadish Iyer, Piper Jaffray.

Mike, quick question on -- two questions on -- first on -- we had talked about it a while ago about NAND testing being more customized.

As we see more and more SSD adoption in both ultrabooks and tablets and other hybrid devices, I was just wondering what is your plan, right now, to target that market given it could be a huge market going forward.

So I was just wondering if you have any updates for me on that front.

I will comment overall on memory, and Mark can talk about the NAND space.

I think, the memory space both DRAM and NAND has been a compressed market here for the last three years.

We are projecting that it's going to stay that way.

There is heavy reuse in that space, and the productivity effects in memory test have been much more significant than they have been in SOC despite the fact that SOC has had a big increase in parallelism.

But there are technology advances that are underway in both DRAM and in NAND that we think we can intersect here with our product offerings.

You want to comment on that?

Yes, so, I agree with what Mike was saying.

The market is going to be pretty anemic as a total market.

Maybe $400 million to $500 million of equipment, and our share right now is in the mid-teens.

What we do see happening technologically, on the DRAM side as we go to known good die as bare die DRAM get popped onto applications processors and mobile electronics the test requirements at probe are getting increasingly important to get good yields at these integrated packages.

Our high-speed memory tester in that regard has some advantages that we hope to exploit here in the next year or two.

On flash, the only real technological driver in flash related to test that could cause a break out there is, as we move into SSD type applications, or even tablets, the need for flash to run at much higher speeds, bandwidths, is resulting in the interface speeds of NAND flash going up through toggle technologies.

That obsoletes a lot of the install base test equipment, which has been sub kind of 100 megabit per second rates.

That's the other area we hope to exploit.

As that shifts to 800 megabits and above, our Magnum product line is sort of fitting right in that sweet spot but, in aggregate, the dynamics of buying I think will be as an aggregate market pretty flat for the next few years.

As a share shift those are the two things where looking at to move north of the mid-teens up into the 20s.

Just a quick follow-up on the OSAT utilization.

Mike, can you give us some thoughts in terms of how we're just tracking from fourth quarter into first quarter and what you are seeing going forward for the remainder of the year.

Thanks.

The -- I don't have it right in front of me, but we are between 70% and 80% utilizations with the mix of products, with the UltraFLEX at the high end being certainly at the high-end or above that top number where the 750 would be at the lower end of the utilization levels.

I think OSATs have typically been, the OSAT buying this past quarter was 47% of our total, down from 51% in the prior quarter.

Obviously, that correlates to the utilization being a little bit lower on the OSAT side.

But if you look at it on the product basis, you would find UltraFLEX at the high end of the utilization spectrum in all of the customer environments.

And do you see that continuing to improve the utilization after the soak-up in the first quarter?

Yes, I mean, the industry numbers on this say that the utilization levels that we have right now are actually a little bit higher than the last trough.

I feels close to us.

But, it may in fact be just a hair -- it's not lower -- it's around the same level.

I think it's more tied to what Mark was talking about, and that is the product launches that really drive the spike in buying, that's the difference in the scenario, this year versus last year.

Whereas, I think utilization is kind of a mirror image in the two years.

Thanks so much.

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

Certainly.

Terrence Whalen, Citi.

Just one quick question.

I'm not sure if you addressed this.

What's the anticipation of competitively on pricing from Japanese yen devaluation?

This is Greg.

We are not expecting a significant impact.

The yen has moved around over a period of time.

We just haven't seen that affect our major competitor.

I think they price based upon the competitive dynamics and what's necessary in that situation, as opposed to other pricing impacted by the yen.

But stay tuned.

Terrific.

And then the follow-up question that I had is just very broad regional question.

As you look into the first half, do you expect better demand acceleration from some of your Japanese customers or Korean customers?

Thanks.

Mark?

I don't know if we've got a break down -- our visibility on forecast doesn't go out very far.

What do you think the breakdown is between Taiwan and Korea?

Yes, that is a tough one to call.

I wouldn't -- actually, I don't think we should even try to speculate, there.

It might devolve some of our major customers' buying plans.

Terrence, the countries don't really mask the Company.

That's why we are holding back.

Fair enough.

I thought it was worth a try.

Thank you.

Great.

Thanks everyone for joining us today.

This concludes our call.

Thanks for your interest, and we look forward to talking with you in the coming weeks.

Thank you.

This concludes today's conference call.

You may now disconnect.