泰瑞達 (TER) 2013 Q3 法說會逐字稿

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

At this time, I would like to welcome everyone to the Teradyne Q3 2013 earnings conference call.

(Operator Instructions)

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

Sir, you may begin your conference

Thank you, Angel.

Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results.

I am 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 will provide details of our performance for the third quarter as well as our outlook for the fourth quarter of this year.

First, I would like to address several administrative issues.

The press release containing our third-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.

Those slides can also be downloaded, or you can follow along live.

If you don't see the download icon, just simply refresh your page.

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

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 have posted additional information concerning those non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure, where available, on Investor page of the website.

Also, between now and our next conference call, Teradyne will be participating in investor conferences hosted by UBS and Credit Suisse.

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

First, our CEO, Mike Bradley, will review the state of the Company and industry for the third quarter and provide our outlook for the fourth quarter of 2013.

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

Mark Jagiela will then provide a short overview of some of the technology trends impacting the Business.

We will then answer your questions, and you should note that we intend to end this call after one hour.

Mike?

Good morning, everyone.

Thanks for being with us, again, today.

Let me start with what's been challenging about this year, then I will give you the rundown on how we're navigating in this climate, and how I expect we'll do through the full 12 months of the year.

By challenging, I mean that the SOC test market will be down about 25% this year, the memory market will be roughly flat, and the wireless device test market that LitePoint serves will be off 25% to 30%.

Add to that, a dramatic CapEx reduction in the hard disk drive market for the last six quarters, and you get as tight a capital spending environment as we have seen in quite some time.

The semiconductor test markets, which are tracked closely, prove this point.

The SOC test market will bottom at under $400 million in revenues in Q4, and close the year at just under $2 billion in total.

The memory test market will drop slightly in Q4, at an annualized run rate of just under $500 million.

While our prior projections for the full year in these markets have called for reduced capital spend rates, the actuals will come in around the low end of our projections.

So, that's been the challenge.

Despite this environment, we'll post some very good results in three respects.

First, we expect to, again, deliver above model performance for the full year, despite annual revenues that will be down about 15%.

The hallmark of our performance over numerous cycles is our ability to deliver good results over the cycle, independent of the ongoing market volatility.

Second, we'll post sales at the trough that are slightly better than last year, even though the market trough is deeper this time.

And third, we'll have proved our market share position in our three major served markets over the last year.

Obviously, this third element is a key to having very good results in what's been a tight capital spending environment.

Now, our product portfolio in Semi Test is rolling out as planned, with new products this year in our J750 and Eagle Test lines for SOC, and with a new Magnum product in memory test.

Coupled with our UltraFLEX refresh last year, we're offering new product extensions across our core Semi Test business, where our install base now tops over 12,000 active systems.

As you know, we've cracked into the cellular test space in LitePoint, as well, this year.

The new product momentum for everything that touches mobile consumer products and the Internet of things is doing well.

Now, admittedly our storage test lines have been impacted by the continued softening in PCs, and as a result, we scaled back in the area to navigate in this smaller demand environment.

But, the total package of Company performance will, again, be quite solid.

At this time, each year, as the market troughs and as full-year market numbers becomes solidified, the discussion turns to our outlook for next year.

Now, we'll have a better estimate on the level of recovery we expect when we talk next quarter.

But, we do expect a rebound, as that has been the pattern over the last 10 to 15 years after an individual year of tighter CapEx.

Mark will go into some of the key technology trends in each area -- SOC, memory, and wireless test in a minute, so you have some added perspective on the drivers in each of these markets and how we're positioned.

I will end with a reminder that we continue to scan the market for sensible acquisition candidates.

Greg will update you on how we want to remain financially capable of investing in assets that will strengthen our core businesses going forward.

Let me turn it over to Greg, and then to Mark for their comments today.

Thanks, Mike; and good morning, everyone.

Before diving into the details of the third-quarter and our outlook for the fourth quarter, I'll take a few moments to recap the broader picture behind our strategy and finances.

Our overall strategy has two main elements.

First, continue to grow share profitably in our core test markets by developing great products, while still maintaining strict financial discipline.

And second, to use these hard-earned profits for the best possible return for our shareholders.

Let me begin with the first component.

We decided about five years ago that we needed to have financially healthy test businesses, based upon the industry realities.

It became clear that the secular growth rates, and the ability to move market share, had both moderated with the maturing and consolidation of the ATE industry.

These industry realities required a very different model, with each business unit and function knowing their part of the larger financial picture.

For example, each unit knows they must self fund annual raises with productivity gains.

It also requires very careful selection of the test segments that we focus on.

Only those segments where we can use clever design to differentiate from our competitors, and where the end-market trends are favorable, thus our focus on mobility, in both IC and consumer device end products, and our deselection of some of the PC-centric markets.

That's why this year, despite lower customer buying in our major markets, we're on track to deliver our fourth-consecutive year of greater than the industry model operating profit rate of 15%.

Looking over a longer time period, since 2010, we have averaged a 24% operating profit rate and generated $1.1 billion in free cash flow.

Even with the 2010 recovery excluded, since 2011, our average operating profit rate is 22%, and we have had free cash flow of $618 million.

An obvious concern with pressing hard on a financial model is a potential adverse impact on new products or customers support.

Well, by that scorecard, we're doing just fine.

In 2013, based upon strong share gains in SOC and memory test, we're on track to deliver our highest semiconductor ATE market share position in our history.

And, to top this off, we received first place in VLSI Technology's Customer Satisfaction Survey, based on several responses from Semi Test customers around the world.

So, customers are voting in favor of both our products and service support with their wallets, and also, at the ballot box.

As Mike mentioned, our R&D pipeline has delivered a new round of products in Semiconductor and Wireless Test, that have strengthened our position at existing customers and earned us new ones in 2013.

Despite a projected 25% decline in the SOC test market this year, our SOC test revenue is tracking to be down only about 15%, far less than industry decline.

And again, we should exceed the industry target profit rate.

A significant portion of this industry decline is in segments where we don't have a presence, such as in PC microprocessor testing.

But, some of the decline in 2013 was also in the application processor segment, where we do have a strong presence; however, we expect this segment to recover in 2014.

Moreover, we are well positioned in those segments that offer higher long-term growth potential, such as mobility, automotive and microcontroller, to name a few.

I have talked about LitePoint extensively in the last few calls, so I'll quickly summarize 2013 and our outlook for 2014.

First, we met our key goal of breaking into cellular test and have expanded our customer base.

We are encouraged by the long-term trends and our prospects to gain additional share next year.

We don't plan to guide 2014 LitePoint revenue, as it now has been part of Teradyne for two years, but you should expect it to perform strongly inside of Teradyne.

After a digesting year in 2013, the long-term market drivers of unit growth, new standards, and increasing device complexity remain in place.

Now, coming back to the model, I should point out that it is not static.

When opportunities exist to grow, we up our investment.

A good example is at LitePoint, where we significantly expanded our Asian distribution and cellular test engineering capabilities, in line with our plans described to you in October of last year.

But equally important, when markets change unfavorably, such as in HDD test, we resize are fixed-cost structure to reflect those changes.

We completed that resizing a few months back.

Turning, now, to the second component of our strategy, using the hard-earned profits for the best possible shareholder return.

As you know, we actively look for closely related businesses that offer a rate of return in excess of our cost of capital.

Let me reference LitePoint as the most recent example.

Recall LitePoint more than doubled its sales, inside of Teradyne, in its first year.

If you take 2012 and 2013 together, we are on track to deliver about $550 million of additional revenue versus our original two-year target of $350 million.

To acquire LitePoint, we needed sizable US cash reserves, otherwise, we faced unnecessary shareholder dilution, as sellers significantly discount any buyer's stock.

Going forward, we believe having sizable dry powder in the US ultimately avoids diluting shareholders.

And, while we've grown cash and marketable securities quite significantly since the acquisition of LitePoint, ending the quarter with a total gross balance of slightly under $1.2 billion, our actual total US cash is about $600 million.

This is net of the $360 million in offshore cash and the $190 million convertible debt principal due in March of 2014.

So, we're actually operating with a conservatively lower level of fully flexible US cash than we have had since before the LitePoint acquisition.

We also accept that we may be too opportunistic with our stock buyback program.

But, for now, we would rather be opportunistic and cautious in share buybacks so we have the latitude to invest in growth opportunities without trading off dilution.

Of course, there is no predicting if we can find another attractive, non-organic addition of size that requires US cash, so we will continue to evaluate and consider all other options, too.

To recap, our playbook is to operate an optimized business model designed for the industry realities.

And then, to use these hard-earned profits for the best possible shareholder benefit.

In our third-quarter call with you each year, we like to update our model for the following year.

You'll recall that we need about $375 million in quarterly sales to achieve a 15% operating profit, assuming normal product mix.

We are not planning any changes to that model this year.

However, given our rising profit outlook, our cash tax rate will increase from about 13% in 2013, to upwards of 18% in 2014.

Post-2014, we expect this rate to be in the mid-20%s.

We have included our model in the accompanying slide deck for your reference.

Now, moving to the key highlights of the third quarter.

We had total company bookings of $271 million, down from the second quarter, consistent with seasonal patterns.

The top line of $433 million was essentially flat with the second quarter.

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 total third-quarter sales.

Total company product turns business was 37%, versus 38% a quarter ago.

Semi Test product turns business was 42%, versus 48% a quarter ago.

Memory revenue was $39 million.

Moving down the P&L, non-GAAP gross margins increased to 59%, from 56% in the second quarter, due to very favorable product mix.

Non-GAAP operating expenses were $142 million, compared to $138 million in the second quarter.

The delta was driven by LitePoint sales expense and one-time corporate items.

At the operating line, we posted a 26% profit.

Our non-GAAP net interest expense and other expense was $2 million, cash tax expense for the quarter was $16 million, and our full-year cash tax rate is expected to be 13%.

Cash from operations generated $122 million after capital additions.

We ended the quarter with a gross cash balance of $1.159 million.

DSO was 44 days, down from 48 days in the second quarter.

We expect cash and marketable securities to be flat in the fourth quarter, as we are staging long lead-time inventory for 2014 surge demand.

As noted in the press release, sales for the fourth quarter are expected to be between $260 million and $285 million, and the non-GAAP EPS range is $0 to $0.07 on 194 million diluted shares.

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

Q4 guidance excludes the amortization of acquired intangibles, the non-cash imputed interest on the convertible debt, and includes taxes on a cash basis.

It also excludes an expected pre-tax gain of $33 million from the sale of an equity position in a private company.

Our GAAP EPS range is $0.04 to $0.08.

The operating profit rate at the midpoint of our fourth-quarter guidance is about 4%.

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

We expect non-GAAP gross margins to be about 55%.

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

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

As 2013 gets closer to entering the record books, it's shaping up to be a good year for us, despite a down test equipment market.

We have a fresh product lineup and expect to post solid market-share gains in SOC, memory and wireless test.

Across the Company, we have a rich engineering pipeline to drive future growth.

We are well positioned competitively, entering 2014, and expect higher capital equipment spending for test than in 2013.

And, our operating model is generating the necessary cash to offer us a broad range of options to grow shareholder value.

Now, I'll turn the call over to Mark for a few comments on some of the technology trends impacting our business.

Thanks, Greg.

I'd like to spend a few minutes outlining our strategy in mobility, as it represents about two-thirds of our revenue since the start of 2012.

It's no secret that the growth of semiconductors for mobile devices has been a bright spot.

From a semiconductor test perspective, it drives about 50% of the market today, up from about 40% four years ago.

Low-power DRAMs, NAND flash, image sensors, applications processors, cellular modems, WiFi, GPS, and battery management are just a few examples.

Right around the corner are enhanced security devices, more sensors, and an increasingly diverse set of wireless protocols.

In both Semiconductor Test and LitePoint, the majority of our R&D investments have been aligned to these trends.

It's not just the unit growth that's attractive, but also the leading-edge complexity, technical innovation in this space that gives us the opportunity to develop unique test solutions that provide high differentiation for both us and our customers.

One example of this is in wireless standards, where complex modulation schemes, like 802 11ac and LTE Advanced, are emerging.

Combining the technology with shortened time to market, almost vertical production ramps, and a near-zero defect quality target, puts extreme demands a tester.

Our UltraFLEX provides the total package and leads the market in these applications.

It's combination of low-noise signaling, hardware acceleration, and an intuitive, almost addictive, environment that tames this complexity is what has earned us over 50% share of this growing market.

That philosophy is the same at LitePoint, and is behind both our leading position in WiFi test and our breakthrough this year in cellular testing.

Open up a LitePoint product and you will see the same innovation apply to making complexity simple in the hands of our customers.

By working far upstream with chipset providers, LitePoint harnesses this insight into an architecture of optimized signal generation and measurement modules, coupled with performance-tuned software algorithms.

Whether it's enabling MIMO, AC, or LTE, LitePoint leads.

While the LTE and 802 11ac wave is just starting, right behind it are two more mobility trends where we are focusing our R&D.

One is the emerging market for flash with high-speed interfaces, driven by multimedia applications in smart devices and SSDs.

Our Magnum test system is winning share because it's architected to meet the needs of flash interface speeds, reaching up to 800 megabits and beyond, without sacrificing any economic.

The second trend is advanced-packaging for mobile devices, where multiple chips are combined in a single package.

In memory, we're same growth in low-power DRAMs which require rigorous at-speed testing at probe before being assembled into these advanced packages.

That plays right into the design target of our UltraFLEX tester, which has the speed, accuracy, and signal delivery to yield these devices in production environments.

All of this is adding up to share gains that will pay dividends in future years.

Over the last few years, our SOC share is up about 5 points, memory share is up about 10 points, and LitePoint share is up as well.

So, as Greg noted, we look very carefully at which markets to invest our R&D dollars.

The focus on mobility and Semi Test and LitePoint has been very beneficial, as we're well aligned to this growing market.

We will continue to use the same rigor that drove that alignment as we look at future investments to attack new market opportunities.

Now, back to Andy.

Thanks, Mark.

Angel, we would now like to take a few questions.

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

(Operator Instructions)

John Pitzer.

I guess my first question is, given how difficult a year this has been for the overall market -- just a little history lesson, is most of the difficulty this year just a function of coming into the year there was expectations for high-end handsets to show a lot more growth than they actually did?

And, I guess, the basis of my question is I'm trying to get a better understanding of how mix in mobility impacts the overall test market for you guys?

First half of that John is, yes, we ended the year at a run rate that was lower than prior year coming in, and we had a very strong tooling year in mobility in 2012.

If you remember back three quarters from now, we were projecting a down market.

It actually came in at the low end, slightly lower than the low end of our range at that point.

And then, relative to how I think about the test TAM, if all the growth in mobility is going to start to come at the lower end of the market, how does that impact the size of the market, in your guys' opinion?

I don't think the growth of low-end smart phones really has a big, positive or negative impact on the test TAM.

This was a year to digest a tremendous amount of capacity that was put in place in 2011, so as that has all worked its way out and the cell phone market and mobility keeps growing, we think that, next year, we'll get back to a bit of a more normal market environment

Helpful.

Then, guys, as my follow up, can you just talk a little bit about sizing the AC opportunity on the connectivity side?

How big do you think that test opportunity is?

And, as we think about the quarterly patterns for next year around AC, when do you actually start to see some more significant ramps there for you?

That's all tied -- a lot of it is tied to product introductions that incorporate AC, high-volume product introductions, so it's hard to prognosticate which particular quarter that might affect.

But, one other thing to keep in mind is, in 2013, this year, although few mobile devices have AC embedded in them, about half of the testers that we ship will be AC capable.

So, there is already some amount of tooling going on for future proofing testers to enable them to test AC in the out years.

There's still an install base that will need to be upgraded, but it's not 100% turnover when the world moves to AC.

Perfect.

Thanks, guys, appreciate it.

Timothy Arcuri.

First question, can you give, Greg, of the $207 million in Semi Test orders, can you break them out by SOC and memory?

Yes, the SOC, $172 million; the memory, $34 million.

Okay, great.

Then, can you talk, also, about what happened in Q4 to the SOC market?

It seems like it's about half of what you thought it would be when you guided three or so months ago.

Can you talk a little bit about what specifically happened in Q4 that caused it to be so low, and why that's going to change going into Q1?

Because, typically, Q1, as you know, it's up like 40% in the last four years' average, from a bookings perspective.

And, I'm wondering, could what happened in Q4 change that dynamic headed into Q1?

Thanks.

Tim, I don't think it was a Q4 phenomenon.

But, you're correct that the market is at a lower run rate in the fourth quarter -- I'm talking about SOC now -- run rate than it's been since the fourth quarter of '08.

So, a chunk of it was fourth-quarter decline, but certainly, at least half of it was a lower rate as we came into the year.

I think it's just the digestion period, here, just continued on through the year.

Now, yes, the market's lower than we would have had if we had come in the full year at about a $2.2 billion rate.

I think the other side of that coin is, our trough position is higher than it was a year ago, and our second half incoming order rate is higher than -- will be higher than it was a year ago.

So, lower market, better performance, and as we come out of the trough, we're in a better position than we were last year at this time

I'll add one thing, quickly, the part of the market that impacted us the most was the application processor segment, where there was very large buying in 2012, and that was the digestion that took place in 2013.

We believe, in 2014, that market will come back, and we'll have a good amount of business in application processor segment.

Greg, I guess just on the question I asked, so do think it's reasonable to expect that bookings would come back in March to the same degree that they have seasonally the last four years, up [40%] or up [50%], something like that?

I mean it's hard to say, but I'm just wondering the range

We have no reason to think seasonal patterns won't hold.

We have no greater insight, other than just looking at past seasonal patterns, and they seem to play out year after year.

The one thing I'll add to the though is, it kind of correlates seasonally, but the real driver are new product introductions of our customers.

If there were early year announcements of new products, that tends to drive Q1 bookings sharper, versus later in the year announcements would push that out a bit.

That's the key thing

Got it Thanks much.

Jim Covello.

First on LitePoint, understanding, Greg, you don't want to guide specifically to that segment revenue anymore.

How much -- but just qualitatively, of the growth you're going to expect into next year, how much growth do you think is going to come in connectivity versus handset test?

Jim, most of our growth would come from cellular test.

We have very high share in connectivity test.

Of course, we can get some more, but we have a very strong position there in connectivity.

So, the opportunities for us will remain cellular test for the next several years.

And, you don't see the connectivity market growing so much that, that would be the bigger opportunity?

It is more the share gain on the handset test?

Well, we focus much more on what we can control.

We know the market may be -- who knows where it's going to be next year, we really don't know.

We know AC, at some point, will drive some buying, but we don't know when, as Mark mentioned.

And, MIMO is going to drive some buying, so there's some favorable trends.

What we set our sights on are cellular test because that's greenfield for us where we have some big break ins.

But, there's some other opportunities that are very significant, and we have a very strong offering, so that's what we're doing.

We will see what the connectivity market does next year, but again, we have very strong share and a good position in that market.

And then, as a follow up, if I could just ask on memory, and I've asked this before, but just maybe get an update, relative to some of the new capacity that's now being added on the front end within memory.

Do you think your orders in memory are going to be driven by testing some of the new capacity?

Or, is it going to be more technology transition based in 2014?

Well, I think that -- we expect to be able to continue to increase our share, based on the technology trends I talked about, which are high-speed interfaces and known good die for DRAMs.

But, overall, I don't expect the market for memory test to grow very much, even though there's a lot of fab capacity being added.

So, kind of a flat $500 million market.

We picked up 10 points of share, we think we can pick up additional share next year based on the technology trends.

That's helpful.

Thanks so much.

Good luck.

Jagadish Iyer.

Two questions of Greg -- first, if I look at your Semi Test revenues and if I look at the last two years, we have seen third quarter starter to be weaker after a peak in second quarter, but this year, this seems to be a little bit different.

Is there anything that we can glean into this some place?

And then, I have a follow up.

I'm going to pass that one off to Mark Do you want to take that one, Mark?

Yes.

I think the only thing -- Greg alluded to this earlier, but what's unique about 2013, compared to last year, for example, or the year before was the applications processor tooling that occurred in the second and third quarter of the prior two years was really absent this year.

And, that's what sort of skewed the numbers, this year, compared to the last two.

Fair enough.

And secondly, when you bought LitePoint, we were all under the impression that there was going to be some kind of a secular growth.

Can you remind us, now, having seen how the connectivity has shaped up, in terms of your long-term growth rates for this particular segment?

I know you don't want to go specific in terms of guiding for LitePoint, but how should we be thinking about it, given the dynamics between your share gains in cellular test, as well as how the connectivity market is shaping up, in terms of longer-term growth rates that one should be thinking about?

Thanks.

Okay, I'll take that one.

The overall cellular and connectivity test business that LitePoint participate in has been dramatically growing for the past several years.

This year was sort of the first year that, in recent years, there's been kind of an optimization and digestion year of all of the capacity.

Long term, for both unit-growth point of view and technology-evolution point of view, it's a growing business; it's a growing TAM.

But any given year, it's so tumultuous around how customers may be focused on optimization versus technology [buy], that it's hard to call any given year.

But long term, we see the trends all positive.

Thanks.

Mehdi Hosseini.

Yes, thanks for taking my question.

I want to go back to the LitePoint, it seems to me that maybe some of the challenges that has prohibited you from provide any forecast is maybe lack of diversification in customers, especially on the cellular side?

Can you help me -- or can you elaborate on it?

And, I have a follow-up.

Hi, Mehdi.

We don't have that many cellular customers, but we have multiple.

That's not what is causing us not to give guidance.

We just think it's a mistake to give guidance for LitePoint after it's been in our fold for a couple of years.

It's had spectacular growth.

It's way ahead of any plan.

And, in any one year, depending upon what wins the day, whether it's productivity digestion or the positive trends, that can move the market, in any one year, quite a bit.

What we are confident on is that we can continue to grow market share for the next some-number of years.

We don't see anything in our way that would stop us.

So, we're much more focused on market share.

We don't truly spend time trying to figure out what's the market size going to be next year because it doesn't really change what we do.

We focus on what accounts we're going after with what products and what teams are supporting those accounts

Got it.

I was surprised to hear that memory spend or memory market could be flat next year because I was under the impression that DDR4 and low-power DDR3 would require an upgrade or refresh cycle.

What is it I'm missing?

Well, it's the -- for years and years, the memory market has seen both unit and bit growth, but not tester TAM growth.

The two trends you talk about, this year, for example, we have seen reasonable tooling for DDR4 already occurring.

And despite that, the market's going to come in at about $500 million.

For the low-power DRAMs, the real shift that's occurring isn't the fact that low-power DRAMs are going into mobility, but they're moving more and more from package-on-package type applications to bare die.

That's a technology buy that shifts final-test testers to wafer probe.

And so, it's again, it's a shift of the emphasis of where the testing occurs and not so much a growth in the total tester market.

Got it.

If I could ask one quick question for Greg.

Of the Semiconductor Test equipment booking, what was the services portion?

Okay, of the Semi services bookings -- almost there, give me one second.

I'll get back to you, Mehdi, I don't have --

No worries, I will follow up later.

Okay.

Thank you.

Krish Sankar.

Thanks for taking my question, I have a couple of them.

Number one, either Greg or Mark, can you talk about the competition in the wireless LitePoint space, especially with relatively new entrants, like National Instruments, seem to making some [end roads]?

I don't want to get into any one specific competitor, but it's certainly a very robust competitive space.

With the market going through both technological change and digestion of capacity, it provides opportunities and challenges for everybody to find the growing spaces.

Now, LitePoint has had a unique approach to the market compared to just about any other competitor by having these purpose-built, production-focused products for the market.

They don't come from a heritage of building lab equipment and then trying to optimize them for production.

They go right of the heart of production test, so that's been the unique position we have had in the market.

But, the competition is tremendous and will not -- because it's a growing market and because it's attractive, it's not going to change.

Got it, all right.

And then, in 2014, if cellular testing is going to grow for you guys, is it coming from the side because you are going to get more customers for cellular test?

Or, is it going to come from the side that is going to be increasing test times in the cellular test.

Or, is it going to be a function of both?

We would be more focused on getting increased customers, that's where our sites are targeted.

Almost every other factor is a variable that can go in our favor or go against our favor.

So, if you were sitting in our shoes, I think you would be focused on the incremental customers that you are well aligned to with your solution set, going after them.

And, that's exactly what we're doing.

Thanks, guys.

Patrick Ho.

Thank you very much.

Maybe just as follow-up to the last question about the cellular side on the Wireless Test business.

And, I know you mentioned that a lot of it is dependent on your customers' timing, but how do you see 2014 in terms of, quote, increasing share and gaining new customers as a contribution to revenues, versus the AC adoption in the industry?

Yes, I think as Greg said, most of our growth will come from capturing new, cellular business.

There's certainly an underlying balloon in the connectivity space around AC.

And by the way, AC, when you talk about a standard like AC, there is an initial introduction of AC that tends be fairly straightforward in its implementation, and that's what you're finding today in some cell phones.

But, the standard is immensely complex and has an evolution that drives additional test requirements over its adoption over 10 years.

So, the AC chips you see, today, will be very different than the ones you see in 2 to 3 years and require much sophisticated testing.

So, that balloon is there, but I would say the emphasis, in terms of growth, comes more from picking up share in the cellular space.

Great, that's helpful.

And, maybe going to the SOC side of things, for the December quarter, what are you looking for in terms of your outlook for revenues on just the SOC side of the test business?

Patrick, we don't get that specific in terms of forecasted for Semi, but you have our total range for the fourth quarter

Okay, fair enough.

Thank you.

Vishal Shah.

Hi, this is Chad Dillard on the line for Vishal.

Thanks for taking my question.

Just wanted to get a little more insight into your outlook for HDD test?

Should we think about the $125 million run rate as being the same, or should it be lower, given some of the difficulties in the overall end market?

Yes, it should be lower, and it is lower.

A couple months ago, we resized that business, and now, it's about $90 million we would need a year to hit a 15% profit target rate.

So, we did take some meaningful fixed-cost actions to get the business in a position that it should be able to hit its 15% target.

Got it.

And, I know you don't provide full-on end-market guidance, but for the next quarter, how should we think about the puts and takes, and where do you see the greatest downside?

What market?

It could be any.

Where's the greatest downside?

Yes, I mean it were talking about the next -- this quarter, fourth-quarter, there's not a lot of disruption that can occur or we see occurring on the downside.

I don't think we see much of anything on that, and it's reasonably contained at this point

Chad, the contour we think will mirror what we saw last year, with Q3 as the low point, and new orders coming in at a slightly higher rate.

We don't know at this point exactly how much difference there is, but the turning point looks similar, number one.

And, number two, for us, it's off a higher base.

Thanks.

David Duley.

Thanks for taking my question.

Just a couple of clarifications -- could you mention -- you mentioned how much your market share was up.

Could you give us what your market share is in each market -- SOC, memory, and in LitePoint?

I'll give you some rough numbers because market share isn't super precise, but roughly speaking, in SOC test, our share is about 45% of that market, in total.

In memory test, it's about 25%, in total.

And, LitePoint is the most difficult one because there really isn't a clear picture of the total market.

There's no developed infrastructure around that.

But, our internal view of that is we're somewhere between 25% and 28% of the wireless test market.

Dave, back on SOC, which is the biggest semi test market, the market share position, at any point in time, is a function of segments shifting and from gains or losses in new accounts.

So, at any point where we say our market share is X, there's a plus or minus in there because a piece of that is segment related.

Overall, the segment shifts toward mobility are helping us, number one.

But number two, there's this gradual account-by-account, socket-by-socket work that we've been doing over the last few years, and that's the other piece.

Roughly, that's half to half.

If you went from one year to the next and you just had segment shifts, you could see some movement up or down in our market share.

The point here is the biggest part of the market, which is mobility, we have gained ground in that, and mobility has become a bigger piece of it.

So, overall, we're getting two things that go into the market share gain.

Okay, and as far as the SOC test market goes next year, it sounds like you guys are qualitatively talking about all your major markets being up next year and that you plan on gaining share.

So maybe give us -- do you think the SOC test market reverts back to the mean, which would indicate probably 15% growth on an annual basis?

Or, can you give us some sort of idea what you think the size of the market's going to be next year?

I think 15% is definitely a possibility because what 15% represents is, at a slightly below $2 billion market, that gets you to 2.3, so that's very much a possibility.

Just a recap of the numbers for the last six or seven years, you go 2.6, 2.4 -- 2009 is 1.3, a big correction year, but then it's back to 2.7, 2.5, 2.6, and this year, just under 2. So, 15% is definitely in the cards.

It could be higher than that if it goes back to the sort of the 2.6 high point that we've had in the last three or four years.

Just a final clarification question from me, you mentioned you had a 10% customer -- was that on the LitePoint side or was it in the SOC test side?

We're not going to specify that, but in our annual 10-K, you can see who that customer is if it holds up being 10% for the full year.

So, same customer as it was last year then?

I'm not going to get into that.

All right, thank you.

Stephen Chin.

It's Mahavir Sanghavi.

Thanks for taking my question.

Just a clarification question about the bookings, SOC bookings, in the third quarter -- what was the split between IDMs and OSAT?

Hang on, we've got that.

63%, 37%, we call it specifiers and OSAT.

Got it.

So, 63% IDMs.

Just a follow-on question to that, I'm wondering if you could talk about 2014 -- you talked about application processor driven bookings I mean booking and [end] sales to come back?

Wondering if you could give us some color on how we should think about, in terms of some new process RAMs around 20-nanometer or 20, 16-nanometer going on in 2014 time frame?

Time frame in terms of how one or two quarters before we should see production of 20-nanometer or so?

And just a question on the LitePoint, on the cellular test business, is it easier for us to model that business out as a function of the LTE unit growth?

Thank you.

Well, first of all, on applications processors, certainly in 2014, it's likely that there will be migration to 20-nanometer.

That doesn't, in and of itself, drive much of a change in the test capacity demand.

The only issue there is, if there are yield issues, like there was with 28-nanometer a year ago, it can drive a little bit of over-capacity buying to accommodate the lower yield.

But then, that corrects itself in the following year, and on average, it doesn't really change, so it's kind of a blip, if anything.

So the return to applications processor, yes, it will be 20-nanometer, but it's more driven by unit growth and complexity.

On the LitePoint side, LTE is the opportunity that opens up customers to reevaluate their suppliers for cellular test.

So, as LTE becomes a larger and larger portion of the cell phone market, those are the entry points for LitePoint to get in and demonstrate the superior capability of their product.

It's not so much there's something unique about LTE, but it really is the technology change that gives us the entree.

Could we have the next question, please, Angel?

Jairam Nathan.

Just to follow up on the systems test business, so you have talked about the systems test been $125 million on the industrial side and $125 million on HDD.

Do you have a straightforward way to go in the current year, and how should we think about that in '14?

I'll take the beginning of that.

The system test business includes three businesses, of which, one is the hard disk drive, there's also a Mil/Aero business, and a commercial board test business.

So, earlier, and I think in response to a question, we mentioned that the hard disk drive business of $125 million a year is what you needed for 15% profit rate.

We resized that down to $90 million -- lowered that fixed-cost structure.

I think your other question was really a view as to what we think 2014 looks like for hard disk drive or system test in total?

Yes, the non-HDD businesses have been running, if you put them together, they been running $130 million, $140 million in top line for the last couple of years, that would not be a bad number to use.

Okay.

And, my other question was on two of your competitors have a handler business now with [LTE] kind of going in there.

How do you think about that?

Do you see a competitive advantage with that?

Yes, we've looked at the handler business, as you might expect, for quite some time.

The fact of the matter is, in handling, there's a very wide diversity of handler types that customers needs to accommodate the wide diversity of package types.

And so, no one or two or three handlers serves a very large part of the market.

We've taken a philosophy that we need to adapt our product to a wide variety of handlers and be best in class at that, as opposed to trying to narrow it down to a sub subset of the market and focus there.

The other thing about handling is, it's a pretty low barrier-to-entry business.

When you look at it as a business, you see emergent players in far regions of the world, like Korea.

The profit pools are low, and it's very hard to make a profit in that business.

And then, the experiment that's been run for a couple of decades, now, at Advantest, where they've had handlers as part of their portfolio, really hasn't changed anything strategically in the market.

Again, I don't see that as something in the short term -- never say never, but it's not something that we see as an attractive place to differentiate.

Okay, thank you.

That's all I had.

Tom Diffely.

Good morning.

Earlier you talked about the rising use of wafer level testing, so I was curious if you're seeing that on both the memory and the SOC side?

And, from a tester point of view, how the tester for the more advanced wafer level testing now compares to the final testers?

Yes, it is a trend for both SOCs and memory.

From a tester point of view, essentially you're right, a lot of the capability that existed at final test -- wafer test traditionally was a somewhat cursory, straightforward screen, and then all of the performance characteristics were tested at final.

And, there was a diversity there for the test equipment at each node.

A lot of that capability is being pulled back now into probe test.

And, it's not just -- you can't just take a final test tester and now redeploy to probe, you need to have the signal delivery capability to get the same fidelity down to a device through a probe interface that you were able to do the package level.

So, it is migrating back to an earlier node is the fundamental shift.

Okay, but in general, are you seeing the times for final test go down because there's more extensive wafer level testing?

Well, it's a complex equation.

So what happens is, let's take -- when people do known good die testing it's because they're going to assemble those die into some kind of multi-chip package.

So, at wafer test, the test time and the test criteria goes up.

At final test, that assembled package, that might have two, three, or four bare die in it, also gives tested for performance.

And, that test time and that complexity is quite large as well.

So, it's really a close to a zero-sum gain, possibly a little bit of an adder, because you need to do performance tests, now, at both package and probe.

Okay.

And then, finally, where do you think we are in the migration to wafer level testing, and where we're going to the next couple years?

It's quite early.

A lot of WiFi chips are tested right now, wafer level package, at a known good die level.

Memory is just starting and SOC as well.

The real thing that will unleash that is either the substrate or the TSV stacked die economics becomes superior to the sort of traditional packaging we have today.

Once that economic equation can be solved, it will take off rapidly.

Okay, thank you

There are no further questions at this time, sir.

Great.

Everyone, thank you for joining us today.

This concludes the call.

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

Thank you for your participation.

This does conclude today's conference call.

You may now disconnect.