泰瑞達 (TER) 2013 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Teradyne first quarter 2013 earnings conference call.

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

(Operator Instructions)

Thank you.

I will now turn today's conference over to Mr. Andrew Blanchard, Vice President of Investor Relations.

Thank you, Christie.

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, President, Mark Jagiela, and our Chief Financial Officer, Greg Beecher.

Following our opening remarks, we'll provide details of our performance for the first quarter, as well as our outlook for the second quarter of this year.

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

The press release containing our first quarter results was issued last evening, copies are available at Teradyne.com, where this call is also being simulcast.

We are providing slides on the investor page of the website that may be helpful to you in following the discussion.

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

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

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

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

To view them, go to the investor page and click on the GAAP to non-GAAP reconciliation link.

Also, between now and our next conference call, Teradyne will be participating in investor conferences hosted By Bank of America, Cowen and Company, 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 for the first quarter and provide our outlook for the second quarter of 2013.

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

The overall message today has two parts.

First, we are moving upward in the Semiconductor Test cycle in line with what we expected coming into the year.

And second, we are very much on track with the new market and new product initiatives that we outlined to you at this time last quarter.

You can see that our total bookings have taken a sharp step up, increasing nearly 50% over the prior quarter.

This is the net change of very strong Wireless Test demand, solid improvement in Semi Test order rates, and the usual lumpiness in our Systems Test bookings.

Most notable is that we've had a better start to the year at LitePoint than we did last year at this time with orders about 2.5 times the level of Q1 last year and over 4 times what we saw just one quarter ago.

Semi Test is rebounding nicely with over 40% sequential growth in orders as improved mobility demand has been coupled with strengthening patterns in microcontroller and automotive applications.

SOC test is up 35% while memory tests are a 130% plus increase over the relatively low order rate we had in Q4.

I would also add that in Semi Test our OSAT demand doubled in Q1, while IDMs and fabless moved up only 10% sequentially.

System Test is on a normal, albeit choppy, pattern with much lower defense spending in the quarter compared to the very high bookings picture we reported just three months ago.

So while the trend is positive on many fronts it doesn't have the record trajectory that we saw a year ago where SOC test bookings were so front-end loaded in the year, all of which led to a full year that had two-thirds of its demand in the first half and where customer new product cycles drove our shipment peaks in the Q2, Q3 period.

What is noteworthy about our start to this year, a very good hit rate on the strategic new markets we are entering and new products that we are bringing forth this year.

On that front we've made good headway at the quarter pull.

First of all, as I mentioned in our last call, we've set a course for two new market offenses this year, one in cellular test at LitePoint and one in the 3.5 inch hard disk space in our Storage Test unit.

I am pleased to report that we have received production orders in both new markets as of the end of March and are targeting volume ramps for each during the next two quarters.

Now, I can't go into specifics on these orders for obvious reasons but am pleased to say that our investments in these two important areas are beginning to bear fruit.

In our core SOC Test business, we are also launching two new platforms.

Successors to our J750 and Eagle Test mainframes.

These products are mainstays in the consumer digital and performance analog test markets and combined represent an installed base of nearly 7,000 units on our customers' test floors, two of the highest volume products in the industry.

We now have orders in place for both of these systems and will ramp their production levels throughout this year.

I will note that the new J750 and ETS family members are fully compatible with their predecessors and incorporate important features that deliver higher performance instrumentation, extremely productive parallel test economics, plus test program and time to market efficiencies.

Mark can elaborate on these if you have questions about these new platforms.

As I said at the opening, full year projections are hard to make given the nature of our markets combined with our short lead time capabilities.

I will say that the year in Semi Test is unfolding as expected.

The SOC market revenue ran at about a $2 billion annualized rate in Q1 and we expect it to move up to a $2.4 billion run rate in Q2.

Now, that is consistent with our projections for a $2.2 billion to $2.4 billion year in 2013.

So, no changes to our views on that front.

The same goes for memory tests, that looks to be $400 million to $500 million in market size for the year.

We are putting slightly more capacity in place for turns business in Semi Test this quarter as we are seeing some demand materialize with very little notice.

And of course we will be able to ratchet that in either direction as we enter the second half of the year.

Greg will talk a bit about how we are handling the capacity plan at LitePoint which of course, has even shorter lead times.

The full story as we enter the second quarter is Semi Test demand is growing as expected.

New products are on schedule, and most importantly, our new market entries in cellular and hard disk drive tests are seeing some early positive momentum.

Let me turn it over now to Greg for some further comments.

Thanks, Mike.

Good morning, everyone.

I would like to first offer some additional perspective on the start to the year and our key annual goals before I cover the first quarter highlights and second quarter guidance.

While first quarter orders are of $400 million are up 47% as Mike noted, the overall mobility demand in Semi Test is starting more slowly than in recent years.

This slower start is due to the later timing of some key smart device product launches along with a natural eeking out of greater tester productivity.

In contrast to the Semi Test start, Wireless Test is off to a stronger start.

This is due to the expansion into cellular test, a new market and 802.11ac demand.

So, while the short term demand picture is mixed, we have nonetheless been quite busy on a set of very important annual goals that should strengthen our longer term position.

Moving away from the short term bio rhythms of demand, recall that we are closely aligned to the mobility and Wireless Test markets.

Healthy growth in these end markets is expected over the coming years fueled by ongoing smart device growth, the growth of the internet of things, and new end applications, along with new more complex wireless standards.

Now let me move to our key 2013 goals.

Starting on the financial side, we, of course, plan to meet the financial model targets that we shared with you in October.

These are shown in the earning call slide deck on our website.

In line with the October plan for 2013, we will continue to hold spending tight across the Company while we very selectively up our R&D to fuel the next leg of growth.

Some of these growth initiatives will begin to contribute to our results later this year.

As a quick reminder, we publish a model that solves where the normalized quarterly sales needed to hit a 15% operating profit.

You can see that this quarterly revenue of $375 million is below the 2012 average quarterly revenue of $414 million.

And of course this historical revenue does not reflect the increased revenue we expect from our expansion into new markets this year.

So, as in the last three years, we are set up to deliver a greater than 15% model profitability.

Moving from the financial goals to market expansion plans.

First and foremost is breaking into wireless cellular product tests in a meaningful way.

We estimate the cellular test production market to be between $700 million and $900 million a year with solid growth from smart devices, the internet of things and other new applications.

It's a very important expansion.

I should quickly remind you that the cellular test margins are expected to operate closer to the Company average.

Cellular test is a system level test similar in many respects to our connectivity system level Wireless Test business.

Cellular test times are about double those in connectivity and new standards such as LTE are driving these test times up.

Our cellular test strategy has been to break in initially as a second source, earn our stripes as a reliable supplier, and then work more closely with leading customers in delivering innovative test solutions, much like what we have done in connectivity testing.

As we noted in the release, LitePoint recorded very significant cellular test orders in the first quarter.

While customer confidentiality of course limits what we can say, it's a very important break in for us in a competitive market that bodes well for LitePoint's future.

As to what this means to our earlier 2013 LitePoint sales range it's simply too early to provide you with any finer detail.

Another new market goal is to enter the 3.5 inch hard disk drive test market in the second half of this year.

The test market for 3.5 inch drives is expected to benefit from the ongoing cloud build out.

Our new product for this market is on schedule and similar to how we entered the 2.5 inch testing market several years back we have customer orders in hand.

We expect to see first revenues in the second half of this year.

Recall that about $125 million in annual sales we should hit our hard disk drive 15% model profit target.

Stay tuned for further updates on our progress in HDD.

Finally our other key market goals are centered on getting two new SOC Test products launched and onto customer test floors this year.

These products will strengthen our position in analog and consumer digital market segments.

Stay tuned for updates on this front as well.

So, collectively we have a pretty full plate of activity that will expand our served market by about $1 billion this year, while staying within our existing operating model.

This gives us the capacity to continue a steady rhythm of profitable growth in the future.

By design, we will remain tightly connected to mobility and wireless end markets.

Today mobility product launches from silicon tape-out to products in the hands of consumers are considerably shorter than in the past while the defect standards are becoming much tighter.

These trends make tests more important than ever.

In Semi Tests, we are the leader in the key mobility building blocks such as RF, power management, application processors, analog and microcontrollers.

In Storage Tests we are the leader in mobile hard disk drive tests for 2.5 and will enter the 3.5 inch cloud storage test market this year.

At LitePoint we are the leader in connectivity testing and have just now broken into cellular tests in a meaningful way.

Fortunately we can help our customers determine how to best deploy their test dollars, whether at the Semiconductor, Systems or Wireless device level.

Across that spectrum we have hardware and software solutions geared around getting mobility products to market faster at higher quality levels with the of course, the lowest cost of test.

So, in short, we are well positioned to ride the ongoing mobility and Wireless Test growth.

Now moving to the key highlights of the first quarter.

We had total Company bookings of $400 million.

Semi Test bookings were $259 million.

SOC Test orders were at $231 million, and Memory Tests orders were at $28 million in the first quarter.

Semi Test service orders were $48 million.

Systems Test group orders were $32 million with $13 million of service orders.

Wireless Test orders were $109 million.

In the first quarter, Semiconductor Test sales were 75% of the total, System Test group 13%, and Wireless Test 12%.

Our book to bill ratio for the first quarter was 1.4 for the overall Company, 1.2 for Semiconductor Tests, 0.9 for Systems Test group, and 3.3 for Wireless Tests.

At the end of the quarter, the backlog stood at $474 million, of which 80% is scheduled to ship and be recognized as revenue within the next six months.

The top line of $280 million was up $32 million or 13% sequentially from the fourth quarter.

Semi Test was $211 million, up $27 million or 15%.

And System Test group was $35 million, down $5 million or 11%.

Wireless Test was $34 million, up 37%.

We had one Semi Test customer that was more than 10% of Company revenue in the quarter and our top 5 customers accounted for 29% of our first quarter sales.

Semi Test product shipments increased 23% from a quarter ago.

From the $280 million, service revenue was $66 million, a $3 million decrease compared to the fourth quarter.

Semi Test service revenue was $50 million.

Total Company product turns business was 59% versus 40% a quarter ago.

Semi Test product turns business was 60% versus 40% a quarter ago.

And Memory revenue was $24 million, up $14 million from the fourth quarter.

Now moving down the P&L quickly, non-GAAP gross margins increased to 55% from 54% in the fourth quarter due to higher volume.

Non-GAAP operating expenses were $131 million compared to $122 million in the fourth quarter as our variable compensation flexes up on higher sales and we had some increased R&D spending consistent with our model.

At the operating line we posted an 8% profit.

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

Tax expense for the quarter was $3 million and our full year tax rate is expected to be 12%.

Cash from operations consumed $50 million after capital additions principally due to employee variable compensation payments tied to 2012 performance and normal working capital changes.

We ended the quarter with gross cash of $956 million, DSO was 53 days, down slightly from 56 days in the fourth quarter.

We expect cash and marketable securities to increase by about $60 million in the second quarter.

As a quick reminder, we have $300 million offshore and subject to US tax if re-patriated.

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

We have convertible debt with a face value of $190 million which matures in March of 2014.

Hence our available US cash is closer to $450 million.

As noted in the press release, sales for the second quarter are expected to be between $380 million and $420 million and a non-GAAP EPS range is $0.26 to $0.36 on 212 million diluted shares.

I should add that the non-GAAP EPS accounts for the dilution from the convertible debt net of the call overlay.

Q2 guidance excludes the amortization of acquired intangibles, the non-cash imputed interest on the convertible debt and includes taxes on a cash basis.

Our GAAP EPS range is $0.12 to $0.20.

The operating profit rate at the midpoint of our second quarter guidance is about 19%.

Now moving to the P&L percentages in the second quarter, we expect non-GAAP gross margins to be 54%, R&D should be 17% to 19%, and SG&A should be 17% to 19% as well.

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

So, we are off to a very solid start in 2013 with a 47% increase in Company orders, major design wins in Wireless and Storage Tests, and improving environment in Semi Tests, and an operating model that is delivering on plan.

While we can't control the size of the market we serve or the trajectory of growth within them quarter-tor-quarter, we are focused on implementing our goals to profitably grow the core business while very carefully evaluating new growth opportunities.

Now I will turn the call back to Andy.

Thanks, Greg.

Christie, we will now take some questions.

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

(Operator Instructions)

Vernon Essi, Needham and Company.

I'm wondering if I could go to one of my favorite topics, Greg, and that's the gross margin.

You guided a little lower than where you came and then on a go forward basis, obviously, keeping it in line with where you just came in, are we to assume most of that is due to just the new ramps on the HDD side?

Or are you leaving a little bit of gross margin upside on the table here?

Vern, the gross margin in the first quarter and the guidance is simply mix.

The mix is more favorable than what our model would suggest on a normalized basis.

We have very little HDD, virtually zero HDD business in the first half, under $5 million.

That helps the percentage, hurts us on the dollars, but helps on the percentage.

With our gross margin, invariably it can move several points just simply based upon mix.

Okay.

Then you mentioned briefly, not to be that guy that brings up the memory question, but you talked about some activity in memory but it seems like you are keeping your market sizing the same for the year.

Can you just discuss what you are seeing out there.

We're obviously seeing press that Samsung is looking to other vendors to boost their DRAM needs.

Any interesting new developments going on in that market from your perspective?

This is Mark.

I will take that one.

So, the memory market certainly has picked up in the first quarter compared to the dismal levels it was at in the fourth quarter of last year.

But as we look out across the year, we still see probably a $400 million to $500 million tester market for memory.

The key driver for capacity adds will be higher speed NAND devices that really obsoletes the installed base.

So if there's any upside it might be the rate with which high speed NAND devices come online that could propel a higher obsolescence, but in general we're looking $400 million to $500 million.

Okay, so this is all on the flash side, not DRAM driven from your perspective of course?

Yes I think DRAM, our view is will be about flat with last year.

Okay.

Thank you.

Satya Kumar, Credit Suisse.

First off, I was wondering if you could comment a bit about the composition of the LitePoint orders in Q1 between cellular and connectivity and give some thoughts on any additional cellular customer wins that you may have later this year?

Yes, this is Mark, again.

The good news in Q1 with LitePoint was that both on the connectivity side we saw orders that were strong, in fact stronger than they were a quarter -- the same quarter of last year.

On top of that, the break in for cellular was significant.

It was significant to the tune of multiple thousands of units of production capacity.

And we absolutely, having just tapped into this $700 million to $900 million market have other design ins in flight for the rest of the year.

Not going to be specific around any customers but this is a great validation on the product and we are going to keep pushing forward.

As we move forward --

And then I had a follow up on LitePoint as well, I think you guys have done a terrific job in terms of capturing the market share in the connectivity side and you're starting to do that on the cellular as well.

But your competitor is also starting to respond with their one box testers and what have you on the connectivity side.

Can you give a high level overview of the competitive environment on the connectivity side?

What do you see out there, what do you think that does to market size for connectivity, market share and your margins this year?

Satya, this is Greg.

As you may know, we've had a one box solution for some number of years.

We tend to be the innovator in connectivity and we hope to do the same in Wireless Test for cellular.

I do think there are some new products from our competitors but we are generations ahead, having the one box solution years ago and are continuing to optimist and improve our solutions.

There is certainly folks chasing after our space.

We think we will maintain very good market share as we've talked about in the past.

So, we feel good about our connectivity position.

Thank you.

Stephen Chin, UBS.

Thank you for taking my question.

This is Mahavir Sanghavi for Stephen Chin.

Greg, one question about the capacity expansion that you talked about.

Could you give us some color on what kind of annual or quarterly sales run rate you can now achieve with your added capacity and then maybe you can talk -- can you talk about the percentage of capacity that's being added for Semi Test versus LitePoint?

Maybe Mark will take the Semi Test and maybe I will try to take the LitePoint.

But you say the percentage of capacity --

New capacity, what percentage of new capacity is for LitePoint versus Semi Test.

Okay.

Let me do LitePoint first.

The demand in the first quarter for LitePoint for us, the growth over a year ago is two-pieces, one is cellular, which is a market expansion for us, that's all new expansion.

The other growth is 802.11ac.

That is why we are up conservatively from a year ago same quarter.

If those two things weren't there we would probably be about flat with the demand in the first quarter.

So, again, it's technological obsolescence with 802.11ac, drives new tester buys and cellular test is a new market.

I think we are early in some of the technology trends in the Wireless Test business, whether it's LTE, 802.11ac.

I think we're going to see more and more testers moving to 802.11ac this year for sure.

Let me pause there and see if Mark wants to add.

Just on Semi Test, the start to this year, the market for Semi Test in the first quarter is roughly $500 million, which is a $2 billion market run rate.

We still believe at the end of the year the market will be somewhere between $2.2 billion to $2.4 billion.

We layer into our capacity plan the ability to surge 30% to 40% above our nominal plan to account for an unforeseen spike in demand.

We expect that to come.

We can't time it.

That's why we model that into our capacity side.

That capacity is usually positioned 4 to 12 weeks, over a 4 to 12 week span in our future.

We don't try to call the term but whenever it comes we can surge about 30% to 40% north from where we are running at any given point in time.

Great.

Just to follow-up quickly, Greg, would that be the same kind of number you would shoot for on the LitePoint side as well?

Yes.

That would be similar.

It can in fact even be a little bit higher sometimes because LitePoint has more turns business.

But it's still in that neighborhood.

Understood.

One quick question on LitePoint, if you could talk about, without disclosing of course any confidential information about the breath of customers, how many customers did you, as design wins, how many new customers did you have on the cellular side and did you have any new design on the connectivity side?

This is Mike.

Let me maybe put this in the context of going forward.

Obviously this business has some large customers and then a large number of smaller customers.

It's not possible for us to get into customer by customer progress.

With regard to what's happened in this past quarter, all we wanted to make sure that our investors knew was that we had a production break in on the cellular side.

Going forward, we will likely talk about this as a total market because there is now a foothold for us in both of the markets and we will tend to describe what our position is and where our share is moving in that total market rather than breaking it down between connectivity and cellular tests.

Thank you, guys.

Jagadish Iyer, Piper Jaffray.

Jagadish, perhaps you are on mute?

Can we move on to the next call, please.

Jim Covello, Goldman Sachs.

Good morning, congratulations on the great results.

Mike, I love your reference to the quarter pull given the Derby is coming up next week.

I thought that was well done.

I'm glad you caught that.

A couple of questions.

First, this is going to be a tough one.

If you can project out to say 2014, some timeframe in the future, so it's not really official guidance, what do you think a likely split in LTE test will be between connectivity and device test or what do you think a reasonable or target goal would be for the split between the two?

This is Mark.

I'm not exactly sure what you are asking but in the LitePoint business, we see connectivity in the $200 million to $300 million range annually.

And at the same time we see cellular $700 million to $900 million.

So, that is unlikely to shift dramatically.

I guess I was asking your piece of the respective pies.

Well, you know, we have always had a strong north of 50% share in connectivity.

I think we see that continuing in the future.

On cellular, we just cracked that market.

So, it would be a little premature there to say what we think next year would look like.

We have got to play out this year, see how far we can move forward and then we will probably be in a better position to talk about it.

Okay.

That's helpful.

Then, if I could just ask as a follow-up, in terms of what the EPS could potentially look like, in a scenario where at some point you get back to the quarterly revenue levels that you saw at the best parts of last year, is the only difference in the EPS at those revenue levels going to be mix, or are there other things that would affect what you would be earning at a $575 million revenue level or something like that, is it mix or are there other factors.

Jim, this is Greg.

I think you would have to look at -- last year we had a model different than this year's model.

This year's model, we need $375 million a quarter to hit our 15%.

Last year it was $315 million.

So we're spending about $12 million more in OpEx.

Some of that goes to LitePoint and some of that goes to the core businesses.

Okay.

One change year-to-year, we've published that model in October and it's on our website as well.

Apart from that I think it's probably mix, and I think the mix changes will be similar to what you have seen in the past.

Really helpful, I appreciate it guys.

Thanks so much.

Good luck.

Timothy Arcuri, Cowen and Company.

I wanted to dive a little more into LitePoint.

I know that you don't want to disclose what the exact order split was between cellular and connectivity.

You said that the connectivity orders were up year-over-year.

If that is the case, then you probably did like 45 or 50 in connectivity because you did 42 last year.

If I take the remainder and assume that that's cellular, and then you said that that represents multiple thousand units, and I divide that, I get like an ASP in the $30,000 a system range which is quite a bit lower.

I always thought that these systems would sell for like $50,000.

Is that math not the right way to think about it?

Thanks.

This is Greg, yes, that math is not accurate.

I think the change from last year in bookings is 802.11ac, there was buying for that.

802.11ac was inconsequential last year on the connectivity side.

We're seeing much more demand for that now.

Then it was cellular test.

Those are the two-pieces above last year's demand.

We don't want to get into the price of the product at this point.

Okay.

Well, can you give, then Greg, can you just provide a split then between cellular and connectivity in that bookings number.

We don't want to do that at this time.

We are fearful it could be competitive information.

All we can say it was a very meaningful break in.

We wouldn't be talking about it if it was not significant.

Yes, okay.

Got it.

All right, second question, relative to your commentary about the Semi Test market size, the market's moving up in Q2 about to where you see the overall market for the year, which would imply not a lot of growth in Semi Test during the back half of the year.

I guess that's a little surprising particularly for you given that there is some capacity build out that I would have thought that has to be done in Taiwan for a big, there's a big consumer electronics company moving some production to Taiwan.

I thought that your testers would benefit from that.

So, I guess, is that the market size but then your share is going to go up during the back half of the year?

Is that the right way to think about it?

Thanks.

Tim, I think it's just a little more rough than that.

We are not folding in predictions at this point.

We are in the 40s in market share.

We hope to keep growing that.

The market is lagging last year at this time.

We notched it down.

I think we talked a little bit about this last quarter.

There is a bit more roughness in our calculations than there is precision around what orders go down when.

The other thing I would add, this is Greg speaking, if anything is directly tieable to a customer, we just can't comment on it.

It's very sensitive information.

I think what you are referring to could be directly tied to a customer.

We just can't comment.

Of course.

Okay, thanks a lot.

Medhi Hosseini, SIG.

Thanks for taking my question.

I'm not going to bother you with the math on the call but I want to go back to commentary from January when you guys guided to LitePoint revenue of $260 million to $360 million for this year.

I dialed in late.

Can you please update us on this?

And I have a follow-up.

Mehdi, this is Greg.

Yes, I did say in the prepared remarks that it's too early in the year to put any finer detail on that wide and rough range, $260 million to $360 million.

So, we have no update to that.

As you will see, we are starting off quite stronger in the first quarter due to breaking into cellular test and 802.11ac buy, so it's a good start, but there are so many questions as to what the second half of the year, how that will unfold.

But qualitatively and assuming that you have the got cellular, would it be fair to assume that you are at least on a run rate heading to the high end of previous guidance?

I wouldn't make that direct conclusion.

$260 million to $360 million is the range.

It's hard to say where it ends up.

I think we are going to know a lot more at the end of the second quarter because a lot of buying that is going to take place is pretty much known three months from now.

But we are strategically, the big news is we have broken into cellular in a meaningful way.

What the numbers end up this year to us frankly is less important.

The key is we are in a much bigger market, broke in, and if you go back not long ago, when we acquired LitePoint we had $160 million and $190 million as our targets.

The $160 million, we did $286 million, against the $190 million target, we have a range of $260 million to $360 million.

By any measure it has been a great start.

Where it ends up this year, we truly don't know, there is a lot of uncertainty with the ecosystem at the moment, even though it's a very strong start.

Got it.

One follow-up on the Semi Test.

If I were to look at a historical pattern, seems like this year has started on a slower slope but it seems like it is more sustainable.

Is that a fair way of assessing the current situation?

I'm focusing on booking, not revenues.

So I think the -- it's absolutely true that it's a slower start to the year.

I think the one factor in this particular year that is a bit unique is we believe a lot of the new mobility products, end products that drive capacity demands for testers tend to be more second half of the year than they were in the prior two years.

So, we do think that, as we get further into the year, we will see a bump of demand related to that effect.

Got it.

Thanks so much.

Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question.

Greg or Mike, it looks like you guys are doing a good job getting into cellular and on the connectivity side, you're gaining traction with 802.11ac.

Exiting this year, do you think LitePoint revenues will still be weighted towards connectivity or do you think they'll be evenly split between connectivity and cellular?

This is Greg.

That's a good question.

All we can tell you is our goal is to continue to break into cellular over time and we've gotten in as a second source.

The challenge for us is to show the customers that we have innovative solutions.

So, that requires them to change how they do their tests somewhat to fully get the benefit of what we can deliver.

If we are successful in doing that, then I do believe we can get good growth in cellular tests forward.

It also helps to have a meaningful break in, in cellular tests because once this has occurred, there's many accounts around the world that now we have much more credibility.

There is a major reference break in.

So, that also helps in cellular.

I would expect over time our position in cellular should certainly grow more than connectivity because connectivity we are already north of 50% market share.

So, our eyes are set on obviously maintaining connectivity and we did gain some share last year by the way, but maintaining that strong engine, we know people are chasing us aggressively.

You are going to hear a lot about that I'm sure.

But we are on offense in cellular test.

Over time we would think cellular tests would will have higher growth certainly than connectivity.

Where they intercept, hard to tell.

Got it, all right.

One other question, what do you think your SOC mobile market share is today, and where do you think it ends up being exiting 2013?

So just roughly when we talk about mobile market share, we think about all the variety of silicon in a mobile device, so that's applications processors, it's power management, it's image sensors, it's memory, it's all of that.

Roughly our share now is about 45% of those devices.

Exiting the year we plan to increase that somewhere in the 2 to 4 points.

This is the SOC, do you guys have a SOC application process for market share?

Yes.

Where is that today and where do you think it will be exiting this year?

In terms of market share of those types of devices?

Yes.

APU.

On application processors specifically, it's a swag but it's probably 45% to 50%, in that range.

It's probably closer to 50% on applications processors.

Got it.

Thank you.

Tom Diffely, D.A. Davidson.

Morning.

Maybe another question here on LitePoint.

Initially you have got a pretty nice margin increase from the business.

It sounds like now you are saying the margins are in line with the corporate average.

I'm curious, is it mix or competition?

What's changed on the margin front.

Hi, this is Greg.

The comment I made in the prepared remarks is consistent with what we have said in the past, is that the new market for us, cellular test, the margins are consistent with the Company average.

And we have said in the past that connectivity, the margins are a little bit better than the Company average.

We don't see any change to those two statements.

That goal should continue.

Okay, okay.

I guess I thought you said the combined LitePoint would be at average.

Sounds like the blended now, is it slightly above corporate average then?

Correct.

Okay.

Then second question, looking at the hard disk drive market, maybe a little bit more about how big the 3.5 inch market is compared to the 2.5 market that you currently play in?

Tom, they are -- they have shifted.

They have been moving up and down.

The way we are modeling it is, the total market for 2.5 and 3.5 looks to be $200 million to $300 million in total and that's shifted $100 million, $200 million, to $200 million, [$100 million].

Right now, we view that the 3.5 inch with the cloud build out is going to be the stronger of those two.

As you look at the mix -- as we project, and maybe it would be 60-40 or 70-30 in the current year.

That's what has motivated us to move more aggressively onto 3.5 inch side.

Okay, so bottom line, it more than doubles your market it sounds like.

Yes.

For very rough math we've said if you incorporate the last couple of years with the next couple of years, we've said it about doubles the served market.

Okay.

Thank you.

Vishal Shah, Deutsche Bank.

Thanks for taking my question.

I wanted to clarify the comments you had made last quarter, you said the connectivity market could potentially be down this year.

Are you guys still seeing that trend given the first quarter performance or do you think that there is some upside to that scenario.

This is Greg.

I think I said that.

The reason I said that was there was such a large tooling last year that what happens typically in any large tooling, customers optimize that tooling over a period of time, particularly when things slow down and sometimes even take out tasks or they have techniques to make the testing more productive and that's why I made that comment.

I think there will be lower capacity buys.

The thing that is going to help connectivity which we saw some of it this quarter is 802.11ac, that demand.

That is technological obsolescence.

They need a different tester to test 802.11ac.

So, again, I think it's still too early.

I believe the statements are correct that the existing testers will be, greater productivity will be gained from them, but more of the buying is going to be 802.11ac., so it depends how fast people want that new tester for 802.11ac.

That's great.

Thank you.

On the cellular test share gains, you mentioned that you've already received orders for multiple thousand units of testers.

My understanding was that the first year your opportunity in terms of share gains was in that 3,000 to 5,000 range.

So, are you seeing greater traction, at that one particular customer than you were previously expecting?

As you think about some of the other customers, you engaged with them for a couple of quarters now, what's the typical design cycle and when do you start seeing some more results from those other customers?

Thank you.

This is Greg.

It's a very long design in time.

The reason is, we are breaking into a market that has some good cellular test providers already.

And the reason that we are getting a shot at it is because we have done quite well in connectivity with innovative test solutions.

That is helping us get a crack at this market.

It takes a long time to get the correlation done and to get the customers willing to take some level of risk.

Typically when you start and you get the yes, they are going to start with a low running product.

So, it's a process that takes a long time.

Often at the outset you have to do the test just the way the other guy does it.

You can't fully use your productivity.

I think it will take us a year to two before we really are able to let the horses run that we have.

The key news is we needed a couple of meaningful break ins.

We have those.

Now there is much more activity at a whole set of other accounts.

Thank you.

[Dave Andooly], Sale Head Securities.

Real quickly, could you talk about the different segments of the SOC product line and where you are seeing strength on the order rates that were up 42% in the current quarter?

Sure.

So, we talked earlier about mobility.

That is certainly a big part of the order increase in Q1.

However, not as strong an increase as we saw a year ago in Q1.

The one area in addition to that that is running quite strong right now, in fact stronger than it has run for more than a year is microcontrollers.

The microcontroller market is on a rebound and our J750 product line where we have just introduced our next generation product there serves that market.

We have a very strong share and that is going to be, it looks like throughout the year, a strong market.

That is being driven by a couple of things, the traditional microcontroller segments like automotive are also hot.

But there is a lot more wireless going into microcontrollers.

Whether that is Wi-FI embedded, [Cigby] or NFC, near field communications.

That is also in these mobility applications as they move from high end smart phones to more pedestrian consumer products is helping this microcontroller side.

And I notice you are going to introduce a couple of new products and it seemed like when you talked about the increase of your TAM of your new products, that the SOC products weren't going to increase.

So, these are more of a protect the flank kind of introductions or maybe you could talk a little bit about that.

The J750 HD and the ETS 800, both of those products serve markets where we have a pretty high market share.

Somewhere in the 60% to 70% range.

Certainly they are designed to give our current customer base the next level of performance time to market advantage.

But we have been moving market share in that space as well over the years and we see the combination of some competitive inroads and customers that traditionally have used in-house equipment to test some of these parts are more and more moving to commercial equipment.

That is actually a place where we are picking up a lot of incremental business.

These two products play very well into those spaces.

Do you have, with these new products, do you have some sort of costs, lowering of the cost metric that you can share with us.

Obviously you are introducing a new product so that typically means the cost of ownership is going down.

Can you give us a guess of metrics about from one product to another what the cost savings are?

Yes, typically the way the customer benefits from cost reductions in a new product is increased parallel tests.

From generation to generation we typically enable doubling of parallelism from the prior generation product.

That's true for both the J750 HD and for the ETS 800.

That whole 2X benefit doesn't necessarily mean it sells at the same ASP.

The productivity gains for this customer are kind of in the, half of the gains go to the customer and half of it results in a higher priced tester, higher cost tester.

Thank you.

Terence Whalen, Citi.

Thanks for taking my question.

I wanted to come back to the subject of foundries and OSATs and wanted to get your perspective that as the market develops and changes, I wanted to get your perspective on how that will affect your business, thank you.

I think that the OSAT trend that we have seen emerge over the past decade is going to continue to be relentless.

The good news for us in that space is we have a suite of products to offer those customers.

The J750 that I just mentioned is a very strong pervasive product, over 4,000 of them deployed worldwide.

The OSATs utilize those not just for microcontrollers, but in the OSAT world, a lot of it is just Logic wafer tests, it's very well suited for that.

And then as more of these complex, a lot of the fabless companies that utilize OSATs are actually making some of the leading edge silicon products in the world.

They are not only very complex devices, they're moving into these 2.5D to 3D IC implementations as well.

The OSATs need a test platform that's very versatile in its instrumentation, can concurrently test a device that has embedded in it a PMIC, power management IC, an apps processor, an RF transceiver.

All of these things are how we have been architecting our UltraFLEX product line for years now.

We are very encouraged by the trend because we think that the flexibility and the time to market advantages in the UltraFLEX are a very attractive feature for the OSATs.

Great.

Then my follow-up question is actually related to that.

Specifically I wanted to understand that as potentially traditional front end foundries begin to internalize back end, I wanted to understand how dealing with those customers would be different than OSATs and how you see that developing and how that might affect perhaps pricing or margins given that the front end guys are more concentrated.

Thank you.

I think that's a trend that has been happening for some time.

The difference is that the front end and the foundries are much more technology driven in terms of utilizing testers, not just for capacity but also as process control.

So, they value performance.

They value maybe even more so sometimes than the OSATs.

And foundries have a stronger preference when it comes to selecting a piece of capital in that it has to both serve a capacity need and a technology need.

I think if anything, the trend toward foundries is a benefit in that the value proposition of validating process, insuring known good dye for these multi-dye assemblies is a much more valuable thing for a foundry who is trying to encourage more customers to technologically outsource.

I think it's actually a net positive compared to the concentration argument that says, boy, that is going to be a tough row to hoe.

Thanks, appreciate the insight.

Patrick Ho, Stifel Nicolaus.

Going back to the Semi Test side of things for a second, I think you've mentioned in the past that the customers given the big ramp that they experienced last year may have a little bit of excess capacity, especially heading into this year.

How do you see, I guess, that situation and whether, I guess, the pick up in demand that we are starting to see right now, whether that gets absorbed and that will drive the additional buys as the year progresses.

Patrick, it's Mike.

The numbers on it are that the utilization over the last three months has moved up on a mix of products from the md-70s into the low 80s.

So, that absorption from last year, all of that installed base that has been put in place is moving up.

I think if you segmented that and looked at our systems, you would see that the UltraFLEX was the product with the highest utilization in that range.

It's moving in the direction we expect it to.

But as Mark said earlier, it doesn't have the kind of surge that we had as the tooling took place in the first half of last year.

And of course, the obvious question is, well, will it have a back end surge?

No one knows that at this point.

But I think the short term numbers around capacity utilization indicate that it's steadily moving up.

Okay.

Great.

Maybe this is a longer term, maybe looking out into 2014, as we start seeing the next generation of leading edge devices, particularly at the 20-nanometer node, do you expect new tester buys for that or are the customers able to reuse or utilize or upgrade their current capacity for that next generation node?

What are your expectations there?

Yes, a lot of the existing capacity, at least the capacity that's been put in place in the past couple of years will be directly applicable to 20-nanometers.

Most of the buying will be incremental capacity driven, not obsolescence.

Great.

Thank you very much.

Operator we have time to perhaps squeeze in one more question, please.

Jagadish Iyer, Piper Jaffray.

Sorry about that last time.

Two questions, just two.

First on the, Mike you talked about $1 billion in SAM expansion, which is likely from the rollout of these new products and these new markets that you are targeting.

How should we be thinking about revenue grab that you might be able to have 12 months from now as you roll out all these new products and seek these new markets?

Then I have a follow-up.

Jagadish, the $1 billion is a combination of the growth in the hard disk drive, which is a smaller piece and then the cellular test for LitePoint.

I think the guidance we can give you here has really been discussed already.

That has been around our LitePoint expectations which are up from originally $350 million over the first two years, $350 million in revenues up into the $550 million to $650 million in total.

So, that's the best we can do at this point in terms of guidance.

As we move out of this year, I think we will have a better picture of what the trajectory that we expect and that will be tied to how much penetration we can get into the cellular space.

That will be the biggest piece of the equation.

At this point it's hard to know that.

Greg, just a question for you, when can we see some tangible actions on the use of cash now that you remain profitable through the cycle?

Can you give us your latest thinking on that?

Has anything changed from your prior view?

Thanks.

Good question.

Nothing has changed from what we have talked about over numerous quarters.

I did outline in my prepared remarks that of our cash there is $300 million plus offshore that we can't get back without paying taxes, rather high taxes.

And there's convertible debt of $190 million due early 2014.

So our real available cash is $450 million.

So, it's not as much as you might otherwise think just looking at our balance sheet.

If you look at Teradyne over a longer period of time, we've bought back a lot of stock.

We bought back, between 2006 and 2008, $0.5 billion worth of stock at just over $13.

More recently we've bought back a smaller amount, being much more patient.

So while we have a stock buy back program in place, obviously we are being very opportunistic.

If you look at how we deploy capital, whether it's LitePoint, Eagle, Nextest, put those three deals together, I think you would give us, most would give us good grades on how we deploy capital.

We are looking at other growth that could have an unfair advantage in Teradyne that we can grow our Company faster.

If we cannot find a company that meets a strict criteria we have, then we are back with what do we do with capital allocation.

We don't feel that is a decision we need to make immediately, but it is a constant discussion with our Board, every quarter we're talking about the topic.

But I would, for now I would just say, expect us to stay the course.

Thank you.

Okay, everyone.

Thank you so much for joining us this quarter.

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

Thank you.

This concludes today's conference call.

You may now disconnect.