泰瑞達 (TER) 2013 Q2 法說會逐字稿

Good morning, my name is Endrika, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Teradyne Second Quarter 2013 Earnings Conference Call.

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

(Operator Instructions)

Thank you.

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

Sir, you may go ahead.

Thank you, Endrika.

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

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

First, I would like to address several administrative issues.

Press release containing our second-quarter results was issued last evening.

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

We're providing slides on the Investor page of the web site 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.

The replays will be available, along with the slides, through August 10.

The matters 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 you review the Safe Harbor statement contained in the earnings release, as well as our most recent SEC filings for a complete description.

Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call.

During today's call, we'll make references to non-GAAP financial measures.

Additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure, were available on our web site.

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 Piper Jaffray, Pacific Crest, Citi Bank, and Deutsche Bank.

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 second quarter, and provide our outlook for the third quarter of 2013.

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

We'll then answer 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.

As you can see from our release last night, we posted some solid results in the second quarter, and we're guiding revenues and profits up slightly in the third quarter.

The seasonal pattern in the semiconductor test cycle gets some of the credit for the uplift so far this year.

But we've also had good market share momentum in semi test -- both SoC and memory -- as well as a strong first-half showing from LitePoint.

We're well above our operating profit model in the quarter, and have also now exceeded that model for the first six months of the year, offsetting the naturally slower start to the year that we saw.

On a longer arc, this is the 16th straight quarter with in-the-black results for us, and that's despite the roller coaster of demand that characterizes most of our markets.

I should also note that as outlined coming into the year, we're increasing our R&D investments for long-term growth, so these first-half results show the continued resiliency of our model.

I'd remind you that we're operating in a CapEx environment that is lower than last year due to less robust spending for mobility applications, which affects both our semi test and LitePoint business units.

The SoC test market is running about $400 million below the first-half numbers of last year, so we continue to expect a lower overall SoC test market for the full year, closer to the low end of the $2.2 billion to $2.4 billion we've outlined in our last two calls.

Our momentum in SoC test is very good, as we've registered back-to-back increases of nearly 40% in bookings for the first two quarters of the year.

Wireless and power management continue as the bright spots, coupled with a very strong surge in microcontroller and digital probe applications.

You'll recall that we've introduced a new model of our J750 test system, with higher frequency and pin count this year.

That new model is off and running, and helped us post our best J750 order rate in three years, and our second-highest quarterly total in over eight years.

Memory test has been another bright spot, with our six-month order total exceeding the 2012 yearly total.

As performance requirements in NAND and DRAM increase, we're well positioned with the Magnum and UltraFLEX-M systems.

Note that we're expecting the total memory test market to again be in the $400 million to $500 million ball park -- the bottom line being that we should out-grow the market by a good bit this year.

At this point, I'd add that in semi test, our customer report card hit a notable milestone, as we were awarded first place in the VLSI Research Supplier Survey.

While we've been a top performer in the test sector in the past, this year we topped the ranks of all semi cap suppliers, so a good acknowledgement of our semi test organization from field to factory on this achievement.

Turning to LitePoint, orders for the first half were just under $200 million, which is down from the $230 million we saw last year.

Greg will go into some detail on our LitePoint business, but the lower book level makes sense to us, given the aggressive tooling last year, the digestion of those capital additions, and the more muted product ramps in the consumer mobility space.

We're very pleased to have broken into the larger cellular test segment already this year, as that gives us an expanded addressable market going forward.

Now our defense business remains steady through the first half despite the downward pressure of the sequester.

There, we expect single-digit percentage growth in that business this year, with a solid business model underlying it.

The only soft spot in the portfolio is in storage test, where tooling for both 2.5-inch and 3.5-inch drives is very slow.

While we've achieved production buys this year in the 3.5-inch space with a new platform, the capacity at Horizon is pretty cloudy.

We've gotten more pessimistic about revenue levels in that sector as the year has progressed.

In summary, the trajectory of our top line is good, albeit against some headwinds in market size, and the performance on the bottom line continues to stand out.

The new product roll-outs are tracking to plan, our R&D pipeline has been strengthened, and our market share position should stand up well through year end.

On balance, a good set of results at the halfway pole.

Now let me turn it back to Greg.

Thanks, Mike, and good morning, everyone.

I'd like to start by providing some additional perspective on 2013 at the midway point before I cover the second-quarter highlights and third-quarter guidance.

First, 2013 is shaping up to be another solid year for us.

While it's running under some of the earlier year full-year analyst forecasts, we're solidly on track to exceed our 15% industry target profit rate for the fourth year in a row.

Since the start of 2010, we've averaged a 23% operating profit rate, and generated $981 million of cumulative free cash flow.

Our combination of an optimized business model designed for the industry realities and highly selective new-growth investments, where we can use technology to differentiate, continues to work very well for us.

In the short term we expect the normal seasonal patterns to occur, as much of our demand is tied to annual consumer cycles.

As a quick reminder, in the last three years, after strong first halves, our third-quarter SoC test bookings have declined from the second quarter levels between about 20% to 60%.

That's why we're modeling the SoC test market this year to be about $2.2 billion.

We've provided a slide that illustrates the seasonal pattern in the earnings call presentation available at the Investor section of our web site.

Stepping back, mobility remains our largest driver, albeit with demand down from the torrid pace a year ago.

In the second quarter, we registered very solid demand in microcontroller and digital wafer sort testing, bringing our first-half J750 bookings to over $110 million, our highest first-half demand since 2010.

Wireless test already had another solid quarter, bringing its first-half bookings to just under $200 million.

Memory test is showing greater demand after a very low 2012, with first-half bookings over $70 million.

On the other side of the ledger, hard disk drive demand remains essentially dormant, and isn't expected to bounce back this year.

Our focus in this business is getting our new tester for 3.5-inch cloud-based storage completed and accepted.

Recall in semi test most of our demand is tied to IC unit growth, which is forecast to increase at a compounded rate of about 8% per year over the next three years.

New semiconductor device technology such as FinFETs, 3D NAND and EUV by themselves do not obsolete our installed base or drive increased engineering investments on our part.

However, we do expect to see some benefit from these technologies as advanced processes are naturally less stable, and test is critical to wean out new defects.

Test seconds also tend to rise with these denser, more complex devices.

Offsetting these factors, of course, are tester efficiencies such as parallel test, which to date has kept the annual SoC tester market at an average of about $2.5 billion over the last three years.

Looking ahead, some analyst models have growing SoC test capital intensity, and hence, SoC test market size in the coming years, after being flat for the last three.

While we're not sizing the Company's fixed costs assuming a larger market size, we're very well positioned to take advantage of this growth should it happen.

Elsewhere in semi test, there are some technology-driven buys in RF tests, due to new standards that require more complex modulation and increased computing horsepower.

In memory test, we're seeing similar technology buys due to increasing frequencies in both Flash and mobile and graphics DRAM.

These buys often open up market-share opportunities, and we're capitalizing on them.

In microcontroller and imager test, we've refreshed the industry-standard J750, with 4,400 sold to date.

We've taken the system pin count up to over 2,000, doubled the operating frequency, and added more features to shorten the time it takes customers to bring new chips to volume production.

These new instruments and software features can be plugged into existing J750s so customers get the maximum leverage from their installed base.

As Mike noted, the J750 had its best bookings quarter in three years, and we have broad adoption of the new J750 in the market.

While we have majority share in the microcontroller market today, we expect to grow that further going forward.

Now shifting to LitePoint.

I know there continues to be keen interest after a spectacular 2012.

So let me get to the key points.

First, with our short lead times, it is very difficult to estimate full-year results, even at the midway point of the year.

That said, despite a very strong start, we expect LitePoint to come in at the low end of our full-year range of $260 million to $360 million in sales.

Keeping 2013 in perspective, recall that LitePoint sales were $130 million in 2011, and more than twice that level in 2012, at $286 million, driven by record connectivity buying.

When LitePoint joined Teradyne in late 2011, we set targets of $160 million for 2012, and $190 million for 2013.

We remain well ahead of those plans.

The lower end of the range for LitePoint's 2013 revenue is primarily the result of a smaller connectivity market than last year.

It's not too surprising that we're seeing less demand in connectivity after the record year in 2012, as the market naturally digests those large-capacity adds.

Shifting to cellular test, our first half design-in momentum provides a very important beach head to grow upon.

This market entry should help open up doors elsewhere, as we're now a proven supplier in high-volume production tests.

We do recognize the design cycle can be long, and often the initial break-in has a second source.

But we expect cellular test to be a multi-year growth story for us.

Stepping back just a bit, let me describe how we think about the wireless test market.

Within the market, we see very familiar forces at work, increasing product complexity, driving test times up, new standards obsoleting the installed base, and unit growth driving tester demand.

Balancing those balloons, so to speak, are the increasing productivity of new testers, and more efficient test operations at our customers acting as anchors the tester demands.

In any given year, one set of forces can have more or less influence on the market size.

In 2012, the heavy investments for dual-band Wi-Fi drove the market higher.

This year, digestion of last year's spending and improving efficiencies have reduced the market size.

When we look ahead to next year and beyond, we expect the market to grow, as 802.11ac, MIMO, LTE, and future standards are more widely deployed, and wireless unit growth continues.

Overall, we feel very confident that LitePoint, with its production-optimized test solutions, will be a long-term winner in the growing wireless test market.

LitePoint has been the long-standing innovator, focusing on production test exclusions rather than shoe-horning a general-purpose tester into focused wireless production test applications.

LitePoint was the first to offer a one-box connectivity tester, the first with non-signaling, and the first with four-device testing.

LitePoint's DNA is to lead by working very closely with the leading chip set companies and brands, offering a solutions-of-level approach for high-volume production tests.

We'll continue driving that innovation very hard going forward.

Now before I get into the financial details of the quarter, I'd like to note that we will not be commenting on the various reports from Asia and elsewhere about specific strategic competitions in semi tests.

As you know, we can't speak about any particular customer, or what any order may signal.

We can, however, simply say that we are well positioned in mobility, whether high-end smartphones, low-end smartphones, tablets, or the Internet of Things.

Now moving to the key highlights of the second quarter.

We had total Company bookings of $474 million.

Semi test bookings were up over $100 million to $362 million.

SoC test orders were $319 million, and memory test orders were $43 million in the second quarter.

Semi test service orders were $76 million.

Wireless test orders were $87 million.

Semi test orders -- systems test orders, excuse me -- decreased to $25 million with $8 million of service orders.

In the second quarter, semiconductor test sales were at 68% of the total; wireless test 23%; and systems test 9%.

Our book-to-bill ratio for the second quarter was 1.1 for the overall Company, 1.2 for semiconductor test; 0.9 for wireless test; and 0.7 for systems test.

At the end of the quarter, our backlog stood at $519 million, of which about 80% is scheduled to ship and be recognized as revenue within the next six months.

The top line of $429 million was up over 50% sequentially from the first quarter.

Semi test was $293 million, up $81 million, or 38%.

Wireless test was $99 million, up $66 million, or almost three-fold; and systems test was $37 million.

We had one customer that was more than 10% of Company revenues in the quarter, and our top five customers accounted for 43% of our second-quarter sales.

Semi-test product shipments increased 50% from a quarter ago.

Within the $429 million, service revenue was $66 million, or flat compared to Q1.

Semi test service revenue was $50 million.

Total Company products turns business was 38% versus 59% a quarter ago.

Semi test product turns business was 48%, versus 60% a quarter ago.

Memory revenue was $27 million.

Now moving down the P&L, non-GAAP gross margins increased to 56% from 55% in the first quarter, due to higher volume.

Non-GAAP operating expenses were $138 million, compared to $131 million in the first quarter, as our variable compensation flux is up on higher sales; and we had increased R&D spending as planned.

At the operating line, we posted a 24% profit.

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

Cash tax expense for the quarter was $12 million, and our full-year cash tax rate is expected to be 12%.

Cash from operations generated $77 million after capital additions.

We ended the quarter with gross cash balance just over a billion.

DSO was 48 days, down from 53 days in the first quarter.

We expect cash and marketable securities to increase by about $100 million in the third quarter.

As a reminder, we have about $330 million offshore and subject to US tax if repatriated.

This will likely grow to about $400 million by year end.

We also have convertible debt with a face value of $190 million, which matures in March, 2014; hence, our available US cash is closer to $500 million.

We'll continue to evaluate non-organic opportunities that offer entry into a closely related business which has a growing market and sustainable product differentiation.

This is why we keep more dry powder than needed to run our existing businesses, and as you might imagine, cash is by far the preferred currency in any M&A transaction.

Having said this, we also recognize that we might not find a new business that meets our strict criteria, so we'll continue to evaluate all of our capital allocation alternatives, with a bias to benefiting long-term shareholders.

As noted in the press release, sales for the third quarter are expected to be between $425 million and $465 million, and the non-GAAP EPS range is $0.39 to $0.49 on 213 million diluted shares.

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

Q3 guidance excludes the [imposation] of acquired intangibles, the non-cash imputed interest on the convertible debt, and includes tax on a cash basis.

Our GAAP EPS range is $0.23 to $0.31.

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

Now moving to the P&L percentages in the third quarter, we expect gross margins to be 56% to 57%; R&D should be 16% to 17%; and SG&A should be 16% to 17%, as well.

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

2013 looks to be another year of above-model profitability despite more modest demand in some of our key segments.

As you know, we started the year with a major design win in cellular test, which should help pave the way for a multi-year expansion plan.

In SoC test, we've refreshed the highly successful J750 product, and have multiple installations already.

In memory test, our products are gaining greater traction.

We remain keenly focused on implementing selective growth through technology differentiation while maintaining financial discipline.

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

Thanks, Greg.

Endrika, we'd now like to take some questions.

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

(Operator Instructions)

Your first question comes from Timothy [Arcuri].

Close enough.

Hi, guys.

A couple things.

I guess, relative to your commentary about LitePoint being at the low end now, if I sort of back into the math, that suggests that the orders during the back half have to be like $50 million to $60 million at most for that business, which is a bit odd, given that your biggest customer -- or your new customer in that space is now finally we have some clarity on when they're going to launch these phones.

I guess that's the first question.

Then, I'm wondering if you can give, Greg, a split of connectivity and cellular of the $87 million in LitePoint orders?

I'll start with the second one first, Tim.

We're not going to break out connectivity and cellular.

We much prefer, going forward, to talk about it as a total.

But the cellular break-in was quite significant, and we've commented on that before that it was quite meaningful.

I'll let Mark take the first part -- first question.

On the order issue, the announcement of the end products is preceded by orders for CapEx.

And typically, in the back half of the year, we do see a fall-off.

That's the seasonal pattern.

Whatever products are being introduced in the Fall, typically we've already seen orders for that volume.

Just to kind of follow up on that, I always thought that lead times -- this time around -- when you first broke into the business, lead times were a bit longer because they had to build a new test line.

And I thought that this time around, lead times would be much shorter because they wouldn't have to build a new line.

Since you saw a big bookings quarter in Q1, I would have expected there to be a follow-on business in advance of this ramp.

Maybe that order was related to the ramp, and the ramp just got pushed out.

I guess maybe the question is around lead times -- have they changed at all?

Tim, I'll take that.

If it's follow-on business to an existing line, lead times tend to be quite short.

But if it's a new line, the lead times are much longer.

It all depends.

And it all gets tied to new line, existing line, and how much capacity.

So it varies quite a bit.

All right, guys, thanks.

The last thing I'd stress -- it's very hard for us to forecast LitePoint wireless test.

As I said in my prepared remarks, even at the midway point, we can get surprise on the positive or even on the negative.

So stay tuned.

The key thing for us is we've broken cellular test, and we've got very good traction there.

Your next question comes from Krish Sankar.

Hi, thanks for taking my question.

I have a few of them.

In terms of LitePoint being at the low end of the guidance, last year at $286 million, it was all pretty much connectivity.

This year, let's say you're at the low end at $260 million, how would the split look between connectivity and cellular?

As we said, we don't want to give any information to competitors, so we're not going to break that split out.

We have said that cellular order was meaningful, significant.

It wasn't small.

So it was an important order, but we don't want to quantify it.

And we have said some time ago that we would not be surprised if the connectivity market was smaller, which it is this year.

Everything is somewhat consistent from what we thought, but yes, the connectivity market is a bit smaller than what we might have thought six months ago.

All right.

Just to follow up on the lead time question, if there's a new product intro on cellular -- let's say in September -- when do the testers have to be installed by at the OEM?

Typically, there's lots of qualification runs done leading up to mass production, but typically the units get installed four weeks to six weeks before the big ramp.

Got it, okay.

The final question -- it looks like you're toning down your outlook on HDD.

Is there any way to qualify how the HDD revenues would look this year relative to last year?

How much down is it going to be?

It will be down considerably.

If you go back the last two years, '12 and '11, we've averaged just over $125 million a year.

That's the number we also need to hit our 15% model profit rate.

This year, the demand will be down -- or shipments will be down quite considerably, under $50 million.

The key thing for us, as we've talked about, is getting into the cloud-based 3.5-inch testers, and we expect to have some shipments of those in the second half of the year.

The under $50 million includes the 3.5-inch drive?

It does.

Got it.

Thank you, guys.

Your next question comes from Mehdi Hosseini.

Thanks for taking my question.

Going back to the prepared remark that Q3 SOC test booking could follow a seasonal pattern of down 20% to 60%, if I take the midpoint of that, and then take into consideration your commentary on LitePoint and system test and your backlog, it does suggest to me that Q4 revenues could come in flat.

Is that a reasonable assumption?

I'm not asking for guidance.

I'm just taking your commentary, looking at the backlog, and making some projection on Q4.

I want to make sure that I'm not missing anything.

Mehdi, I'll take that.

It's within the range of what's possible.

If you look at the seasonal patterns, obviously Q4 is the low revenue period.

But the seasonal patterns -- what happens in the second half is also affected by how much buying happened in the fist half.

I think you tend to find the fall-offs are sharper if the first half was stronger.

But there's so many factors that get into these projections.

We learned a long time ago that we can't really forecast.

What we do is we forecast our supply line -- how long it takes to get certain material, and make sure we have capacity to ramp.

I think [that's true].

(multiple speakers) We're really knitting together all of the projections that we started the year with, which was -- we expected a down SOC market.

We expected a roughly flat -- maybe at this point now, very slightly, but not significantly up memory market.

I think the -- in the whole SOC and memory space, we're really confirming that our annual projections there of a lower than $2.5-million year in SOC makes sense to us, and a $400 million to $500 million market in memory also makes sense.

That all requires the kind of seasonal configuration that we've seen in prior years.

Let me rephrase my question.

Would the midpoint of your SOC test booking commentary for Q3, which is down 40%, get us to the low end of the overall SOC market -- or in other words, $2.2 billion?

Would the midpoint of SOC test booking -- okay, so that's the worst-case scenario, right?

(multiple speakers)

I think the answer to that question --

If in fact we saw a 40% drop quarter on quarter in bookings, the market would probably trend below the $2.2 billion.

Okay, so that reinforces my point.

Maybe as we come out of the seasonally weak Q3, Q4 revenue could flatten out.

Yes, I think anything is possible like that.

We're not -- that's why we're not being explicit in trying to call Q4.

So the hypothesis you have isn't unreasonable.

It would be slightly different than patterns in prior years -- that's all we're saying.

Okay.

All right, thanks much.

Your next question comes from Jim Covello.

This is Mark Delaney on behalf of Jim Covello.

I had another LitePoint question.

One of the big opportunities in connectivity test when you guys entered that business was the need to refresh the entire installed base for the 802.11ac Wi-Fi refresh, where LitePoint had very strong share.

With the strength in your shipment in connectivity test last year, is there still a large proportion of the installed base that is going to need to be refreshed, or is future growth in connectivity test going to be more driven by actual device unit growth?

Yes, let me take that one.

Yes, there's a large installed base of connectivity test equipment that is not AC capable.

At the same time, the new devices that are introduced this year -- actually a very small percentage of the devices that need to be tested are AC capable.

The only point about obsolescence would be -- in future years, that installed base will need to be refreshed.

But the interesting trend this year is -- customers are installing equipment that is AC capable, even though the devices they're testing may not have AC in them.

So the incremental capacity that's being installed in 2013 will not go obsolete, but all of the prior-year stuff will.

Understood, that's helpful.

Transitioning for my follow-up to the semi test business.

I was hoping you could give us an update on competitive dynamics in SOC test, in terms of both pricing and market share?

Because, as you know, the yen has been weaker, and then also one of your smaller competitors has been introducing some new products.

How are pricing dynamics and market share trending?

I think in pricing, nothing significant has changed there.

We haven't seen any major impact from the yen in the sort of competitive environment around pricing.

The share picture for the year has been trending favorable to us.

We're, on the SOC test side, up in the first half of the year 5 or 6 points of share.

In memory, we're up about 10 points a share.

A lot of that is because -- on the memory side, it's mainly due to real customers shifting to Teradyne products for high-speed DRAM and high-speed Flash testing.

It's a good, good story in memory, albeit a smaller market than SOC.

In SOC, about 50% of that share gain is due to segments that Teradyne doesn't participate in coming down dramatically, like microprocessors.

The other 50% is due to real share gains that we've had -- real customer-shifting business.

Thank you very much.

Your next question comes from Satya Kumar.

Hi, this is [Farha Namodas] taking a question on behalf of Satya.

I wanted to ask you about your LitePoint business.

You had indicated at your last call that there were several deals in the works, and you expected to see some outcome in July.

I was just hoping if you could provide some commentary on what kind of deals are still out there, and if decisions have already been made?

Well, there are competitive situations and decisions being made every month.

Following up on the large cellular design-in that we had in the first quarter, we've certainly been continuing to try to build that momentum into other markets and customers.

We've had some additional success there with cellular, but nothing out of the ordinary.

The competitive situations play out constantly.

Do you have a follow-up?

No, that's all I had, thank you.

Next question, please.

Your next question comes from Stephen Chin.

Hi, it's Mahavir.

Thanks for taking my question.

The first question, going back to LitePoint, I was wondering if you could help us with just sizing the market for 2013?

And if we assume your market share was about 25% last year, how we should think of your market share this year?

And going forward, how we should think about the overall market size?

Okay, I'll take a shot at that.

The market this year in wireless test is probably down on the order of 15% to 20%, would be our estimate, although it's a very difficult market to be precise in around share.

But that's our estimate.

Our overall share within that down market, we think, is up into -- from what was the low-20%s to maybe the mid- to high-20%s for the year.

That's the '13 tale of the tape.

And as we think about '14, we did see in '13 a lot of digestion around the equipment that was put in place over the past sort of 12-month period.

But the dynamics of what's happening in -- whether it's handsets, tablets, the Internet of Things, testing is -- the complexity of the test environment in wireless systems test is increasing dramatically.

We expect the market to go back to a growth scenario next year.

The inclusion of AC will be more dominant next year.

That will involve more extensive testing.

MIMO technologies will find its way into more products.

That's also more extensive testing.

Not only the traditional sort of electrical testing that's done, but more and more over-the-air testing will be needed to optimize these end products for interference, multiple antennas trying to communicate simultaneously.

So we see a lot of technological growth in the end products looking into '14 that will return this market to a growth picture.

Right, thanks for that color.

As a follow-up, one of your big customers cut CapEx, as they noted in their 10-Q filed last night.

I'm wondering if that's impacting you guys at all -- not particularly the customer, but just in general on the LitePoint side, if that's been hurt by CapEx cuts.

Is it fair to think about 2013 as more of a replacement buy, then a capacity buy is more happening in the 2014 time frame?

No, I think -- well, we're not going to comment on any specific customer, but in general, the buying is driven by the need to test units.

The macro budgeting of CapEx -- something like a semiconductor fab might be something that could be delayed in time as an investment, but if a certain number of units need to be shipped, then a certain amount of test capacity is needed to ship those units.

And the bulk of what's been installed this year has truly been for incremental capacity, not so much for obsolescence.

Thank you.

Your next question comes from Vishal Shah.

Hi, this is (inaudible) for Vishal.

One quick question on just your revenue linearity for 2013.

How do you see first half versus second half trending?

This is Greg.

We've given you -- obviously you had the first two quarters, and you see our guidance for the third quarter.

We tried to provide a slide that showed the bookings trend on our website for our largest business, SOC test, which generally shows that the third-quarter bookings -- because it's tied to the annual consumer patterns -- those bookings are down between 20% or 60%.

It could range quite a bit.

Therefore, that means lower fourth-quarter revenue.

But it's also difficult to be too precise at this point because there's other things that could have some impact on otherwise a normal seasonal pattern.

Best we can say right now is we think the normal seasonal patterns will hold, and if there's greater demand, we'll be ready for it.

We have stage inventory and parts to respond to any better news than something other than normal seasonal demand.

Within wireless test, can you talk about margin dynamics, and what you see in terms of where you need to be for pricing to gain a little bit of share?

I'll take that one, this is Greg.

We have gained share this year, so we feel very good about the products that we have, how they're designed, and the efficiencies, and their throughput.

Their production-optimized testers -- we're probably unique in that, having more of a solutions-production-optimized tester, with an emphasis added.

We expect LitePoint's margins to stay above the Company's average, so we think that's going to be intact for many years to come.

We feel good about margins and the product.

Okay, we're ready for the next question, please.

Your next question is from Patrick Ho.

Maybe first on the semi test side of things.

Given the, as you mentioned, torrid pace of buying last year, as the industry transitions to 20- and eventually 14- and 16-nanometer devices, particularly for the mobile side of things, do you see a potential step-up in terms of new capacity buys?

Or is there enough excess capacity or inventory out there from the tester side that those will be utilized first before any new capacity buys occur?

Yes, the existing capacity that's out there certainly will be applicable to the 20-nanometer node and below.

So it will be transitioned over.

On the other hand, unit-volume growth and complexity growth will drive incremental capacity, and -- there's a couple trends that aren't directly related to the new nodes that affect test.

Greg highlighted a few of them.

One of them is -- devices start to be stacked more and more.

The dies are stacked -- whether that's 2.5D or 3D stacking.

Testing at probe becomes a more critical need to get good yield for the stack, and not have to throw away a lot of value add.

That's going to drive a new dynamic in test, where probe testing will become a much higher performance test node, and require a much more sophisticated system-level type testing strategy to weed out defects.

That's kind of where we've been focusing our product development is making that capability built into our UltraFLEX line of testers.

It's less the nodes themselves.

The nodes -- for example, 28 nanometers generated some yield issues that required a bit more test capacity that then gets optimized in follow-on periods as that yield gets improved.

Similar things could happen or little bubbles like that at 20 and below, but the sustainable driver of demand will be unit growth and then complexity growth.

That's helpful.

Maybe a second question for me in terms of the memory test market.

We see strength in both DRAM and on emerging NaN, at least CapEx build-out.

Where are you seeing the buys for the memory side?

Is it both DRAM and NaN, or is it biased towards one of the two?

Thank you.

It's both sides for us.

I think on the DRAM side it's the mobility LT DDR buying, and on the NaN side it's the high-performance or higher-speed NaN testing.

We're seeing an uplift on both sides.

That's what's given us a bit more in business in the first half of the year than we had all of last year.

We're intersecting that pretty well.

Next question, please.

Your next question comes from Jagadish Iyer.

Thanks, Mike.

Thanks, Greg.

Two questions.

First, on the LitePoint side of the business, I just wanted to understand, like, while this year you're having a digestion period for connectivity, and cellular test starts to improve, longer term how mutually exclusive are they?

Or could they be firing on the same time in -- say, in the next two years?

We just wanted to understand the circular growth in the LitePoint part of the business?

Then I have a follow-up.

Like I was saying earlier, we think that in the next few years, the increasing number of antennas, and the complexity of the wireless standards that will be embedded in mobile devices will drive growth -- unit growth and market growth -- in wireless test.

LitePoint is now positioned well in both -- all aspects of those RF standards.

It's really -- if you looked at the phone technology in 2013 and tablets, there's been very slow migration to new standards in those products compared to the prior year.

But if we look into '14 and '15, NFC will be pervasive, LTE and LTE Advanced with carrier aggregation will come into play.

You'll see MIMO technology in tablets, and eventually some high-end phones.

All of that's going to drive test-quality and test-coverage issues to ensure end-user experience is as expected.

Greg, this is a question for you.

Given that the LitePoint -- you've kind of taken down your estimates for the LitePoint at the lower end, I just wanted to find out how your gross margins are likely to trend for the second half of this year?

Thank you.

Sure.

Our gross margins at LitePoint will be consistent with our model for LitePoint, and above the Company average.

So LitePoint will do well.

We don't want to get any more specific than that in terms of those percentages.

But you can see some of the information in our footnote to our segment in our 10-Q or 10-K, and I think you'll see that LitePoint for the year will operate above the Company model.

Thank you.

Your next question comes from David Duley.

Just a couple of housekeeping questions from me.

You've talked about the size of the SOC and the memory market this year.

Could you give us a guess at what you think it's going to be in 2014?

Yes, this year it came down.

We'll be down, we believe, from last year's $2.5 billion, $2.6 billion level.

Next year, we think it's going to bounce back, probably into that $2.4 billion, $2.5 billion level.

The only persistent dynamic change in consumption for SOC is we believe that the microprocessor testing segment in SOC will be very nominal for several years to come.

That piece of the market has systemically gone away, we believe.

It's not a segment that affects us, per se, but it does affect the market to the tune of maybe $200 million a year.

And the size of the memory market?

Memory -- well, our view is, even though memory has picked up a bit here, the trend line -- the first half was very weak in shipments, and that the market will probably be in that $450-million to $500-million range next year as well.

Okay.

Your orders came in, I think, at $474 million, but your guidance for revenue this quarter is below that.

Is there a specific reason?

Do you have longer lead-time orders, or why is that?

We had a chunk of service business come in this quarter on an annual contract that gets renegotiated in the second quarter.

That's recognized over a 12-month period.

Okay.

When you talk about semiconductor orders being down, whatever the midpoint of your range was that you talked about seasonally, and I guess that's what you're expecting.

How should we look at the segments inside your business?

Is it all mobility driven, which is kind of why your orders were up, I would imagine?

But could you just talk about the segments, and what would you expect the LitePoint orders to do in the third quarter?

In semi test, the thing that -- if you compare this year to last year, mobility is certainly strong again.

RF testing for semiconductors is very strong here in the first half.

The other thing that's new this year is the J750 for microcontrollers.

Microcontrollers have turned on dramatically.

We've had almost a record-level first-half unit demand for the J750 product.

Now, as we look toward the back half of the year, what we've typically seen, certainly in mobility, is the cyclical decline in third and fourth quarter.

We're not trying to prognosticate anything different than what we've seen historically.

The J750 is a bit of a wild card.

What happens there in the second half of the year -- that one doesn't have the same sort of seasonal pattern that the other mobility market does.

That one's a little more difficult for us to call.

What we said earlier on LitePoint is that LitePoint does have a seasonal pattern that's pretty clear over the years.

The second half of the year typically is a slower period for new orders.

We don't expect it to be any different, but as Greg mentioned, the dynamics of that market are beyond a few months.

Very difficult for us to forecast.

We are prepared to respond either way if demand picks up.

Final one from me is -- have you seen any incremental improvement in some of the other SOC test segments perhaps tied to PCs or the other markets besides mobility, like analog or anything like that?

As I said before, microcontrollers are strong.

Analog is a bit weak relative to last year.

That is an area that's been a little bit weaker.

Those are the major segments -- analog, microcontrollers and mobility.

Mobility -- strong.

If anything, the absence in mobility this year has more been on the digital applications processor capacity adds have been down from last year.

But the RF test adds have been about on par with last year.

Thanks for the color.

At this time, there are no further questions.

Great.

Thank you, operator, and thank you all for joining us today.

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

Thank you.

This does conclude today's conference call.

You may now disconnect.