泰瑞達 (TER) 2013 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Teradyne Q4 2013 earnings conference call.

(Operator Instructions)

Thank you.

Mr. Blanchard, you may begin your conference.

Thank you, Toni.

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

I'm joined this morning by our soon-to-retire Chief Executive Officer, Mike Bradley; President and Incoming CEO, Mark Jagiela; and our Chief Financial Officer, Greg Beecher.

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

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

We're providing slides on the Investor page of the website that may be helpful to you in following the discussion.

Those slides can be downloaded now or you can follow along live.

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

I encourage you to review the Safe Harbor statement contained in the earnings release, as well 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 reference to non-GAAP financial measures.

We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure.

They are available on the Investor page of our website.

Also, between now and our next conference call, Teradyne will be participating in investor conferences hosted by Stifel Nicolaus, Goldman Sachs, Susquehanna, and Bank of America.

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

First, Mike Bradley will comment on 2013 and Teradyne's position as we enter the new year.

Mark will provide a deeper look at our performance in 2013 and an early view of 2014.

Greg will then offer more details on our annual and quarterly financial results, along with our guidance for the first quarter.

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

Mike?

Good morning, everyone.

I'm going to limit my remarks today to a short wrap-up of 2013, plus a quick retrospective on how we've positioned the Company for the future.

As Mark will officially be taking over the reigns in about a week, I'll leave the 2014 part of the story to him, and to Greg, who will give you the financial perspective.

2013 is a good example of what we've done to make Teradyne more resilient in the volatile markets we serve.

In a year of significantly reduced CapEx in our major markets, we've delivered a solid bottom line, improved our market share, launched a series of new products, and improved our customer satisfaction levels.

We exit the year at a higher trough than in last year's cycle and enter 2014 with expectations of a healthier climate, but still some uncertainty of how sharp a recovery we'll see.

Our position across the mobility sector in SemiTest and LitePoint has been strengthened in the last year, buttressed by a very solid foundation in analog and consumer digital applications.

As you know, this will be our fourth straight year of above-model performance, as we continue to outpace what last quarter I called the golden era of tests in late 1990's.

This four year run has generated a 50% higher operating profit rate of that earlier period, and over 3 times the free cash flow, all with an average annual headcount at about 50% of the level of the late 1990's.

Of course, the more important comparisons are the current ones, relative to our industry peers and I'm very pleased that we've made steady progress in market share.

We've moved into the first tier of the broader semi cap equipment companies, and we've integrated some solid acquisitions [in] the portfolio.

As important is the strategic reliance that our customers now place on us in a back end market that has sharply consolidated in the last half dozen years or so.

I hope that you see our leadership transition as a smooth hand-off to a very capable industry veteran and a seasoned Management team.

Mark has been instrumental in getting us to the point we're at today and I'm confident that we won't miss a beat in the next chapter.

As this is my last earnings call, I do want to thank all of you who followed our progress.

I trust that you appreciate the continued power of our business model.

We value the critical eyes you bring to our space and expect more of that in the future.

I will say that we will continue to try and give you as straight a picture as we can, at times with a slight bias to caution, but I think that works and that you have us calibrated pretty well.

So let me turn it over to Mark for his perspective on our recent results and how things will shape up as we enter 2014.

And thanks to you all.

Thanks, Mike.

I'm going to briefly review our key results from 2013 and paint a picture of how we are looking in 2014.

Greg will then provide details on our Q4 results, as well as guidance and perspectives on our current quarter.

In 2013, we had significant market share gain in SOC, memory, and Wireless Test, which helped offset tougher than expected market conditions.

In SOC tests, the 2013 market fell to $1.9 billion, lower than the general market forecast of $2.3 billion at the beginning of the year.

This was primarily due to a significant drop in CapEx for digital processor tests.

While 2013 illustrates the difficulty of predicting a market size this early in the year, we do believe that there will be a rebound in the digital segment and the market will likely be in the $2.1 billion to $2.4 billion range.

In Teradyne's case, our 7 point SOC market share gain to about 47% helped offset much of the 2013 market decline.

It also positions us well for the expected market uptick in 2014.

Key design wins in microcontroller, automotive, and processor tests, combined with the strong demand for linear RF testing, contributed to our gains in 2013.

As an example, orders for our J750 microcontroller tester more than doubled over 2012 level.

Furthermore, a new high-density version of the product introduced last summer ups the frequency and pin count to reach into new applications in the expanding digital test market in China.

Our UltraFLEX tester continues to pick up new RF and digital baseband customers.

In RF, the platform distinguishes itself with leading low-noise performance to improve yields for our customers.

In all applications, our unique IG-XL software provides program generation and debug tools that speed the task of bringing increasingly complex multi-function devices to market.

These architectural advantages come from years of close collaboration with our lead customers, which provide the insight to focus on areas with the biggest impact.

In memory test, we had a breakout year in 2013, gaining 10 points of share to about 26% in a market that was down slightly to about $450 million.

Sales growth was split almost evenly between our Magnum Flash tester and UltraFLEX high-speed DRAM tester, as we added new customers in both segments.

Both testers were architected to push the envelope of high-frequency signaling, which has aligned very well with the increasing bandwidth of DRAMs and Flash for SSD application.

Looking forward, we see the memory test market in 2014 to be about flat.

However, continued momentum in flash tests combined with emerging applications in DRAM Known-Good-Die testing should result in continued share gains in 2014.

Turning to LitePoint and Wireless Test, as planned, we gained about 3 points of share in 2013, mainly from our cellular test design win.

However, while it's difficult to get an accurate fix on the Wireless Test market side, our internal estimates are that the overall market compressed from about $1.3 billion to around $1 billion in 2013.

There are multiple reasons for this, but the bottom line is that wireless test is a relatively new market with volatile dynamic.

In 2013, slower than expected adoption of 802.11ac and tester efficiency improvements led to the overall market decline.

Looking forward, we see the continued adoption of 11ac with its MIMO and beamforming technologies, as well as emerging markets like wearables that use bluetooth, driving growth.

In cellular, LTE and LTE Advanced are another growth engine that drives increased test modes and calibration.

While increasing test productivity will offset some of this growth, we remain bullish on the secular trends and our opportunities in wireless tests.

In System Test, the bright spot was an in-circuit board test where orders grew 5%.

A new multi-site inline tester introduced in the last quarter of 2013 is the 2014 story, as we target high-volume automated production line.

Defense and aerospace orders were down year over year due to an abnormally high order pull-in in the last quarter of 2012, in advance of the 2013 budget sequester.

In HDD, the slowdown in [Key C] sharply reduced the investments in 2.5-inch drive capacity last year and Greg will provide more color on the HDD business in his remarks.

Finally, I would like to say a few words on our capital allocation strategy.

As you know, we've been working on growing the profitability, cash generation, and revenue of the Company over the past few years.

Acquisitions and organic initiative, combined with a disciplined financial model, have been the recipe for transforming Teradyne.

We still see plenty of opportunities to grow the Company and see near-adjacency acquisition as a key element of increasing shareholder value.

In the past, Greg has outlined the position of our cash portfolio and its utilization.

While we continue to evaluate strategic investment opportunities, we do see that the strength of our business model, our cash position, and optimism for the future allows for some incremental return of free cash flow to shareholders without jeopardizing our strategy.

Hence, our initiation of a quarterly dividend as announced in the earnings release.

As always, we will continue to assess our cash portfolio and investment prospects to best optimize long-term returns to shareholders.

Before turning things over to Greg, I just want to offer a note of thanks to Mike for his 35 years of service Teradyne, and particularly the last 10 as CEO.

Under his leadership, the Company has been transformed and is now stronger than ever.

Anyone looking at the changing landscape of the test business knows it was not a three-inch putt to pull that off.

Working with Mike has been a fantastic experience and he leaves Teradyne on a very strong footing, both financially and strategically.

Thank you, Mike.

Thanks, Mark, and good morning, everyone.

I'll start with a deeper dive into 2013 results and our multi-year performance, then offer some perspective looking ahead.

I'll then cover the fourth-quarter details and first-quarter outlook.

Starting with 2013, we had revenue of $1.4 billion, non-GAAP EBIT of 18%, and EPS of $1.06.

Overall, this was solid performance, considering CapEx spending for SOC tests and Wireless Test equipment was down quite significantly from the prior year.

Despite these strong headwinds, we close our fourth year in a row above the 15% target industry profit rate.

The headline story of 2013 is twofold -- strong SemiTest and Wireless Test share gains, and a highly resilient operating model.

In SemiTest, our sales were $1.23 billion, down 9% from a year ago, against a combined SOC and memory market drop of 24%.

The SOC test market was down about 27% and the memory test market was down 5%.

We gained share in both SOC and memory, bringing our total ATE share to record levels, at about 43%, up 6 points from the prior year.

In SOC tests, the share gains were about evenly split between competitive socket wins and segment shifts in the market.

In memory tests, the record 10 points of share gain Mark noted was largely in mobility applications, such as Flash and low-power DRAM.

Our other key SemiTest goals were to field new products in analog tests, microcontroller tests, and low speed memory tests.

These goals were accomplished and this new suite of products are now on customer test floors, helping our customers get devices to market faster, at the high-quality levels demanded of today's consumer products.

At LitePoint, we finished 2013 with revenue of $252 million.

As Mark noted, LitePoint also gained market share in a down market.

In the first full two-year period in the fold, LitePoint has averaged about $270 million in yearly sales, more than double its 2011 run rate.

Over the last two years, LitePoint sales have totaled $538 million, well above our original two-year target of $350 million.

This time last year, we outlined major LitePoint goals to grow our position in cellular, 802.11ac, and MIMO tests.

We accomplished those critically important goals, as well.

Now, turning to System Test.

It was also not immune to the lower CapEx buying in 2013 and had a down year, with sales of $153 million.

This sequential drop of $90 million was due to the very steep decline in storage tests, as 2.5-inch hard disk drive testing demand was dormant.

A key System Test goal was to field a 3.5-inch tester for data centers and that was accomplished as planned in the second half.

Recall that System Test includes our [mineral] test and in-circuit test businesses, as well as HDD storage test.

Our mineral business continues to operate above model and our in-circuit test business tightened its cost structure and fielded a new higher throughput inline product.

At a Company level, if we now look over a three-year time period, which smoothes out the annual buying cycles, we've averaged annual sales of just over $1.5 billion, and a non-GAAP operating profit rate of 21%.

We're pleased that both our 2013 and multi-year performance continues to place us among the best-performing semi cap suppliers.

Now, looking into 2014, our playbook remains the same.

We'll continue to focus on gaining market share through offering differentiated solutions that provide customers greater throughput and enable them to get their products to market faster.

The latter is key, as our customers continue to accelerate their product development plans.

In SOC, we'll stay keenly focused on mobility, automotive, and microcontroller testing, as these segments all offer above-industry growth.

In memory, we expect to continue to gain share as device technology trends, especially higher speed and lower power consumption, favor our Magnum and UltraFLEX test families.

At LitePoint, the focus remains on catching the 802.11ac and MIMO ramps while continuing to expand our [soil] test footprint.

The global rollout of LTE continues to offer opportunities for our IQ extreme product line.

Also at LitePoint, we're well along in integration of ZTEC, the small innovative wireless instrument company we acquired early in the fourth quarter.

The combination of ZTEC instruments with LitePoint software allows us to offer LitePoint's ease-of-use earlier in our customers' design verification test process.

This enables an even smoother and faster transition of customers' new mobility products from our lab to high-volume manufacturing.

This new offering will give customers the best of both worlds, a flexible wireless [tester and] design and a production-optimized [testing] for high-volume manufacturing.

In System Test, Storage Test is on a recovery and get well plan, which should provide opportunities for better performance in 2014.

I should note that the dynamics in this market are a bit in flux, as on one side of the ledger, the demand is lower than we projected a year ago, and on the other side of the ledger, our sole competitor is in the process of being acquired by a customer.

We'll have a better sense of how all this shakes out later this year.

Across the Company, we'll maintain the steady financial discipline that has enabled our strong multi-year performance.

We're coming off a 2013 that delivered very strong gross margins, at 56% for the full year, a record.

This was driven by very favorable product mix.

The mix of our business in 2014 is expected to be more normal, which should bring our gross margin percentage closer to those seen in 2012, about 54% for the full year.

I'll quickly add that we have not and do not see or anticipate any significant changes in the overall pricing environment.

We also expect net capital additions to trend up, [about] 25% in 2014 from the three-year average of $68 million due to expanded sales opportunities.

Now, turning to capital allocation.

As Mark noted, we announced the initiation of a quarterly dividend of $0.06 per share, with the initial dividend payable on June 2, 2014 to shareholders of record as of the close of business on May 9, 2014.

As you have all seen, our operating model has shown its cash generation strength across industry cycles and this dividend reflects our confidence in the Business, our operating model, our growth strategy.

We will also continue to remain opportunistic with the timing of the stock buybacks and expect to continue to [throw] our dry powder so that we have sufficient US cash for attractive M&A that meets our very strict criteria.

Before I get to the fourth-quarter highlights, I'd like to explain that the convertible note is due on March 17, 2014.

On that date, we will pay the $190 million balance off with cash.

We'll settle the $7.665 option element for 34.7 million shares over the 65-day trading period beginning on June 17.

The mechanics are all part of the structure that was necessary at the outset to receive favorable tax treatment.

When concluded in the third quarter, we expect our share count, exclusive of any buybacks between now and then, to be about 216 million shares, assuming an average share price over the period of $20.

We've included a slide in the presentation on our website, which describes this further.

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

We had total Company bookings of $290 million.

SemiTest bookings worth $225 million.

SOC test orders were $193 million.

And memory test orders were $32 million in the fourth quarter.

SemiTest service orders were $49 million.

Wireless Test orders were $18 million.

System Test orders were $47 million, with $26 million of service orders.

In the fourth quarter, semiconductor test sales were 75% of the total; Wireless Test, 9%; and System Test, 16%.

Our book-to-bill ratio for the fourth quarter was 1 for the overall Company, 1 for semiconductor tests, 0.7 for Wireless Test, and 1 for System Test.

At the end of the quarter, our backlog stood at $362 million, of which 75% is scheduled to ship and be recognized as revenue within the next six months.

The top line of $285 million was down $148 million, or 34%, sequentially from the third quarter, in line with seasonal patterns, and up 15% from fourth quarter of a year ago.

SemiTest was $215 million, down $89 million; Wireless Test was $26 million, down $67 million; and System Test Group was $44 million, up $8 million.

We had one customer that was more than 10% of Company revenues in the quarter and one for the full year as well.

Within the $285 million of fourth-quarter revenue, service was $74 million, up $6 million compared to the third quarter.

SemiTest service revenue was $52 million.

Total Company product turns business was 41% versus 37% a quarter ago.

SemiTest product turns business was 45% versus 42% a quarter ago.

Memory revenue was $23 million.

Moving down the P&L, non-GAAP gross margins decreased to 55% from 59% in the third quarter due to lower volume.

Non-GAAP operating expenses were $140 million compared to $142 million in the third quarter, as variable compensation flexes down from lower sales.

At the operating line, we posted a 6% profit.

Our non-GAAP net interest and other expense was $2 million; cash tax expense for the quarter was $2 million; and our full-year cash tax rate was 13% for 2013, and is expected to be 18% for 2014.

Included in our GAAP results is a one-time gain from a sale of an equity investment of $34 million.

Cash from operations generated $20 million after capital additions.

We ended the quarter with gross cash balance of $1.2 billion.

DSO was 50 days, up from 44 days in the third quarter.

We expect cash and marketable securities to decrease by $260 million in the first quarter, as we will be repaying the $190 million face value of the convertible note.

We also pay off annual variable compensation and make tax payments.

As noted in the press release, sales for the first quarter are expected to be between $300 million and $330 million, and the non-GAAP EPS range is $0.02 to $0.09 on 196 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.

Q1 guidance excludes the amortization of acquired intangibles, [a CEO] equity charge, the non-cash computed interest on the convertible debt, and includes taxes on a cash basis.

Our GAAP EPS range is a loss of $0.09 to a loss of $0.03.

The operating profit rate at the mid-point of our first-quarter guidance is about 5%.

Moving to the P&L percentages in the first quarter, we expect non-GAAP gross margins to be 49% to 50%.

R&D should be 21% to 23%; and G&A should be 22% to 24%.

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

So 2013 will go down as a good year in a difficult market that also positions us very well for 2014 with our strong market share momentum, new product offerings, a very resilient model, and a capital allocation strategy that rewards shareholders and supports our growth strategy.

I'll now turn the call over to Andy.

Thanks, Greg.

Toni, we would now like to take some questions.

Please limit yourself to one question and one followup.

(Operator Instructions)

Your first question comes from the line of David Duley with Steelhead.

Just a couple questions for me.

Why are you confident that the app processor business is going grow in 2014?

Yes, this is Mark.

It's something that frankly is hard to predict with any precision, but we do see some advanced tooling being put in place for anticipated uptick this year.

Our visibility on this tends to be 8 to 12 weeks out.

But the early indications we see are that the digital processor business in 2014 may have a very similar profile to what we saw back in 2012.

And in the press release you mentioned that you think things are going to accelerate on the order front.

Could you just talk about which segments you see doing that?

Yes, the most significant one is the one I just mentioned, which is around digital processor, whether that is digital modems or applications processors.

But we do see continued strength as well in the microcontroller space and automotive.

Those three segments.

Last year actually, automotive and microcontrollers were strong all year long.

That seems to be persisting here into the early part of 2014 and the adder has been the return of applications processors and modems.

Okay, final thing for me is you talked about a mix shift in the business and that how that gross margins were going to shift down.

Could you just talk about -- is that because the apps processor business is returning or the customer concentration there?

Just talk about why that is?

It's 100% due to mix.

Our mix looks more like what you might have seen in other periods.

We're starting off similar to Q1 2012 with a similar gross margin, where as you look later in the year, we see the mix improving.

But it's just simply what piece of business in the first quarter versus other quarters.

I made some comments in my remarks to make sure that investors knew there's nothing going on different in pricing.

It's just simply mix.

Okay.

Thank you.

Your next question comes from the line of Patrick Ho with Stifel Nicolaus.

Just wanted to extend my best wishes to Mike on your next endeavor.

Thanks again for a great job.

First question, in terms of the Wireless Test business, you mentioned last year that you saw some excess inventory from your customers in terms of the connectivity side.

Can you give a little bit of color on how that situation has worked itself out and just maybe a qualitative outlook on how you see that business, or that side of the business, entering 2014?

Yes, first of all, the Wireless Test business, as I said, is a very volatile, dynamic area.

So it's a bit difficult to project trends there.

But on connectivity specifically, there's a clear movement in what we see coming in 2014 to increase the complexity of the consumer devices as it relates to connectivity.

So we've talked a lot about, for example, the transition to 802.11ac, but even within that, there's multiple technologies, like MIMO -- multiple in, multiple out antennas -- that allow shaping of the RF signals or beamforming.

That's a complexity level that will be entering consumer products over the next couple years that will drive incremental test need.

So last year what we saw was early adopters had 802.11ac.

Half of our shipments were ac-capable, but there was some amount of digestion of prior-year shipments and capacity and optimization that offset some of the growth.

And the new technologies really start to roll in this year and beyond.

Great and maybe a follow-up question on the semi test side on the SOC front.

Obviously, you are right now looking at projected growth in the overall SOC test space, driven by the digital application processors.

Are you also anticipating some of your share gains that you've talked about hitting a volume ramp in 2014, as well, that will allow you to outperform the overall marketplace?

Thank you.

Yes, we picked up significant market share in 2013, 7 points of share in SOC Test.

As Greg mentioned, half of that, we would consider real customer shifting [buying] to Teradyne in half is a bit due to customers that we don't currently have being abnormally low.

Our goals for this year in SOC test are essentially to consolidate and hold the share we gained last year -- keep the 7-point share gain at 47% share.

That requires us adding some new customers [that's in flight], but as the market grows, we'll grow proportional to the market.

In memory test, however, we do have some line of sight there that the design-ins we achieved in 2013 should continue to propel our share north in 2014.

So we are looking to pick up another 2 to 4 points of share in memory in 2014.

Great.

Thank you.

Your next question comes from the line of Terence Whalen with Citi.

Hi, good morning.

Thanks for taking the question.

And best of luck to Mike and also to Mark.

This is a pretty simple question.

It's a higher-level question around capital allocation.

Can you help us -- remind us how much free cash flow is generated domestically versus internationally.

And the more important part of the question is, as you've considered changing your capital allocation plan, how do you think about the potential for multiple expansion for the stock, as you increase the percentage of free cash flow that's returned to investors?

And then how do you think about it between dividend buyback and M&A?

Thank you.

Okay, this is Greg.

Our US cash is 50% to 60% so we have plenty of cash from our ongoing operations to fund the dividend.

In terms of what happens to the multiple over time, you guys are more expert at that, but we would hope with a dividend that we would attract some new investors, and it provides, if nothing else, a [floor] and a helpful yield to the stock, but we'll see how that unfolds.

But we do think it was the right time to do it and it doesn't jeopardize our growth strategy.

We still believe we can do another quality acquisition, like another LitePoint or a half a LitePoint.

So we feel it's the right time to do it.

Terrific.

And then, perhaps, just a rough way to think about the allocation between the competing uses of dividend buyback and M&A, just in a broad, longer-term sense?

Thanks.

Well, the M&A strategy hasn't changed.

Our strategy has been fairly straightforward.

We look for close adjacencies, businesses that will fit very nicely in Teradyne where we can help them grow faster than what they could do on their own.

They are more likely going to be some type of electronics test measurement business, they may more likely be in production, high line production, but there could be some situations that have good connections but aren't exactly what I said.

But we look for businesses that have high differentiation and are in profit pools with good growth.

And that basically describes LitePoint.

We find one or two of those companies a year and it's hard, quite often, to agree upon valuation.

We'll stay the course and if we find something that meets our strict criteria and is a good fit that we can help grow faster and earn our cost of capital or better, then we'll deploy the cash for M&A.

Terrific.

Thanks, Greg.

Your next question comes from the line of John Pitzer with Credit Suisse.

Yes, good morning, guys.

Congratulations.

Thanks for letting me ask the question.

Guys, my first question, I'm always hesitant to talk about normal seasonality because there's so much variance around normal.

But when you look at the guidance for March, it's about half the sequential growth you guys have seen over the last, call it, three or four years.

I'm just curious, to what extent is that a function of the industry still suffering through the excess capacity from last year as we were all too optimistic on high-end smartphones, and to what extent is that just perhaps timing of projects this year?

Specifically, what I'm thinking about, is the 20-nanometer ramp on the apps processor side.

And if it's more the latter, what's the implication as we think about June?

Yes, it's really timing.

There's nothing significant in the March -- snapping the line at the end of March -- and is that a signal of something significant happening.

The one thing you mentioned, for example, process maturity in fabs can drive tooling sometimes both in excess of normal levels and sometimes earlier.

That's not necessarily something we see this year.

That was something that was a little more prevalent back in 2012.

So it really gets back to this year, the timing of new product introductions for consumers.

The ramp times of silicon can be a little bit closer to the ramp times of end products because the process maturity there is a little bit firmer [as some would say] this year than it may have been back in 2012.

That's helpful.

And guys, as my follow-up, I'm just hoping to get a little bit of an update of customer concentration within LitePoint.

In 2012, the single largest customer was north of 50%.

How did diversification go in 2013?

And I'm just curious, as the handset market starts to become more diversified, do you expect further customer diversification this year and what's the implications for margins if that happens?

[Pointly done] gotten greater diversification and we expect it to continue on that path.

We don't break out concentration within a segment, but we do it as a total Company.

But yes, we do have concentration at LitePoint.

We've invested significantly in Asia to grow our penetration in Asian accounts and we had a good year this year.

There's much more we think we can do next year, so we're optimistic as to how we can pan out in Asia.

Okay.

Thank you, guys.

Your next question comes from Jim Covello with Goldman Sachs.

Hi.

This is Jack Sheng on behalf of Jim Covello.

Thanks for letting me ask a question.

My first question is that, looking at your orders, it looks like the three-year seasonality for 4Q has been, call it about up 23% quarter-over-quarter.

It looks like this time you guys saw a pick up of up 7% in 4Q.

Can you guys talk a bit more about what's driving that more modest order growth at the back end of last year?

And then also, does this imply in any way that 1Q can come in more modest relative to historical?

Thank you.

There's a couple things you got to look at when you quarter over quarter.

One thing is that our third quarter of last year was actually a little bit stronger than some prior third quarter troughs.

So coming off of third quarter as a relative reference actually brings us to a higher base line than perhaps we were at in 2012.

In Semi Test, as an example, if you look at actual order dollars, year-over-year, were up significantly over 2012 in fourth quarter and about where we were in 2011, as we were entering 2012.

The Semi Test story is, compared to one year ago, we're in a stronger position coming into 2014 and compared to two years ago, about the same.

One significant difference, though, is in Storage Test, because the Storage Test business has been very anemic and the orders there have been lumpy.

And almost absent in fourth quarter of last year on the Storage Test side, tends to make the Company numbers look a bit weaker.

But overall, I feel like the momentum we have coming into the year is much better than it was a year ago and the outlook -- all signs right now are for a strong uptick.

What I mentioned earlier, the one thing that's hard to predict, is that going to be on an order basis, something that occurs through the March period or through the April period.

Certainly by the time we are sitting here in May of this year, we'll have a very good line of sight as to how big the traditional summer peak will be for both the Semi Test business and the LitePoint business.

It's just a bit hard to call the timing right now.

Great, that's very helpful.

And then in terms of follow-up, how should we think about your penetration on the cellular side for LitePoint this year?

What are some of the milestones that you guys are targeting?

Thanks.

Yes, cellular testing is -- has multiple aspects to it.

Cellular testing occurs in multiple stages as a phone is manufactured There's what might be considered verifying that the cellular connectivity is working correctly; there is calibrating the cellular connectivity; there's testing it in over-the-air mode to ensure that it's working in an end user model.

Last year we made significant inroads in one out of those three types of testing.

Our goals for 2013 are diversified into those other types of cellular testing, both from the technology base that I mentioned and also the customer base.

Greg mentioned a lot of the effort we're putting into Asia.

We expect that to yield dividends here in 2014.

So it will be an incremental share gain in cellular, is our plan, but the diversity of applications we will be in and customers we will be in, will continue to grow.

Great.

Thank you very much.

Your next question comes from the line of Tom Diffely with DA Davidson.

Yes, good morning.

First a question for Greg.

On the taxes, you talked about how we're going from 13% last year to 18% this year.

Previously, you talked about maybe a mid-20%s number for the out year.

So first, I'm wondering what's driving that?

Is it the using up of NOLs or mix shift?

And second question on that is, is the mid-20%s the long-term rate or is there more after that?

Yes, mid-20%s as of now is our long-term rate.

We'll obviously look to do some tax planning, but right now all we could commit to is the mid-20%s.

The rate is going up because, you're right, we are using up some of our favorable tax attributes, whether they are NOLs or credits acquired from many, many, many years ago.

Those have been used against US income, so our US income in the tax rate is very low because we're using up credits and NOLs.

As those credits and NOLs expire, we get limited as to how much we can use in one year, then we move closer to a US normal rate.

Our rate offshore is lower.

We have about a 10% rate for UltraFLEX and J750 as we put some of that IP in Singapore.

But when you blend it all together, it's -- as you said, it's using up these favorable tax attributes.

Okay, great.

And Mark, you talked about a little stronger momentum this year versus last year.

Is that supported by utilization rates at a higher level than they were a year ago, as well?

Well, when we look at utilization at the end of last year, we did see a significant uptick.

So there is -- that's another indicator we looked at.

That's probably not the best indicator, but it is a positive trend there.

So yes, coming into the year, the utilization has moved north and that adds to our bullish outlook.

All right.

Thank you.

And Mike, we look forward to hearing the stories about your single-digit handicap.

Well, you won't be hearing that for a long time.

Thank you.

Your next question comes from the line of Mehdi Hosseini with SIG.

Thanks for taking my question.

And Mike, best of luck, and I look forward to seeing you at conferences.

Going back to the gross margin guide and some of the comparison to 2012, it implies to me that the LitePoint mix may go from 18% in 2013 to 17% in 2014.

Is that the right assumption?

And if so, that would suggest a decline in revenue.

So if you could comment on that?

And also how do you see opportunities for LitePoint tracking?

And I have a follow-up.

Mehdi, this is Greg.

LitePoint continues to perform above the Company average of gross margin.

So LitePoint is in fine shape and they do that because they have very differentiated products and solutions.

Our margins looking more like 54% for the year would be very good performance.

So we're not at all ashamed of that.

That's outstanding.

The only thing that's [sticky] is when you compare it against other years we had just record performance and sometimes it's because there was no hard disk drive revenue in that period or year.

It's all a set of mix issues and 54% is very consistent with the model that we have put forth.

Let me rephrase the question.

This time last year, you were looking at LitePoint with a TAM addressable market of $260 million to $360 million.

Can you update us on that TAM projection?

We discussed last quarter -- maybe two quarters ago -- we weren't going to forecast LitePoint any longer because it's been in the Company's portfolio for a couple of years now.

But we did try to say in our prepared remarks that there's a number of very positive technology trends in the connectivity and the cellular side that increase test time and also obsolete the existing testers so that should be good for LitePoint.

On the other side of the ledger, as you know, in any test industry, there's productivity and competition, parallel tests and how that shakes out in any one year is anybody's guess, but we feel good over a multi-year period that LitePoint has good opportunities for growth.

Got it.

And then my second question, it seems to me you have a good handle of revenue opportunities for the whole year.

It is just very difficult to guide on a quarterly basis, given all the moving parts.

We have gone through this the past two years.

To some extent, this is also impacting the stock, as the stock has also become more like a cyclical.

So to that extent, why not stop providing quarterly guide and just focus on opportunities for the whole year, which better, in my opinion, captures your opportunity and it helps us to get out of these quarterly trends?

Okay.

Well, Mehdi, we recently took your advice on the dividend, so let us think about that piece of advice.

Okay?

All right.

Thank you.

Your next question comes from the line of Timothy Arcuri with Cowen Co.

Thanks.

Couple of things.

First, on gross margin, and second on just longer-term strategy around the Business.

So Greg, it seems to me that the margin guidance for March is more related to Systems Test.

And if you're talking about comparing it back to -- you cited Q1 2012, and in that quarter, Systems Test did about $100 million, which is up a lot from where it is right now.

The question is, A, is that really the issue?

And B, is that the type of increase that we can expect to see in Systems Test for March?

And then I had a follow-on.

Thanks.

Yes.

No, you definitely understand the numbers quite well.

The story is a little bit different but the numbers work out the same.

But in the first quarter, think of it as very little LitePoint.

LitePoint tends to ramp in Q2 and Q3.

What we see happening in the first quarter is some mix in Semi Test.

This is the digital business, which tends to have lower margins, but can have good volume and good dollars, but starts at a lower percentage.

So it's just a mix of the product portfolio.

Okay, but just on systems, then, Greg, do you see much change in the System Test revenue?

I believe Systems will have another difficult year.

Not as difficult as last year.

Last year the Storage Test revenue was under $25 million, which is hard to imagine, but it was that low after running an average of $125 million a year.

So they will do better this year, but I don't think this is going to be the year they get back to model.

I think we're going to get back to some stable footing this year and then see a path to model maybe late in the year or early next year.

Okay.

Thanks.

And then just a longer-term question.

One seemingly sizable that you're not in that you could potentially be in, is the testing for enterprise SSD.

Can you talk a little bit about maybe how large that market could be?

I know that there's not a lot of standardization in that particular market and that might be what you're waiting for before you really enter that market.

But can you talk a little bit about that and whether that's an opportunity for you?

Thanks.

Yes, SSD testing is obviously something we've had our sights on here for a while.

It is still a relatively small commercial market, something south of $30 million a year in terms of business, but it's growing and it's growing rapidly.

We've been working on a couple pilot programs to adapt our HDD storage tester for that market.

I would say it's too early to call, that in fact we'll get an alignment there and find a volume and a profit pool that makes sense.

But that's one of the things that we will sort out here in 2014.

Awesome, okay.

Thanks a lot.

Your next question comes from the line of Krish Sankar with Bank of America Merrill Lynch.

Hi.

Thanks for taking my question, and congrats to Mike.

Good to see the dividend initiation.

Two quick questions.

One is, can you give an update on the competitive situation in Wireless Test and for the 802.11ac opportunities -- is it the same players or are you seeing any new entrants?

And then I had a follow-up.

Yes, in Wireless Test, there's really no new entrants or new competition there.

The dynamics going on in Wireless Test go back to what I said earlier -- really center around some technological trends with multiple input, multiple outputs, beamforming, on the one hand, and then customers trying to optimize their existing capacity and reuse it on the other.

So there's this tug-of-war between technological growth and trying to reuse capacity as much as possible.

That's the thing that was difficult to call last year.

That will persist a bit this year.

But nothing new -- no new dynamics on the competitive front.

Got it, all right.

And then as a follow-up, on the Semi Test side, if I look at the SOC Test buy rates, over the last several years, it's ranged between 0.9% to 1.5%.

But last year and this year, looks like it's more around the 1% range.

I'm just trying to get a sense of -- is their buy rate structurally changed that the range has tightened and it's now more in the 0.9% to 1.2% range?

Or do you think there's opportunity to go back to 1.4%, 1.5%?

Yes, those are some tea leaves that are pretty hard to read, but last year, I would say, is certainly abnormally low and off the trend line.

And something north -- in that 1.2% area, 1.1%, 1.2%, is probably more reasonable, but there will be lots of factors that cause that to remain volatile.

So in a year where new lithography nodes come in heavily into semiconductor production, will tend to drive it north, the buy rate higher.

Years that mature technologies tend to dominate will drive it south.

But an average of around that 1% to 1.2% range is how we think about the trend.

Okay.

Thank you, guys.

Your next question comes from the line of Vernon Essi with Needham & Co.

Thank you.

Wanted to also echo my congrats to Mike on his retirement and the transition there for Mark.

And also just in keeping the same vein of humor, congrats on the dividend and I suspect no one is going to be happier than Andy because now he has an answer to that question with investors.

Bottom of the barrel on the Q&A here, but my first question is an old one, and Mark, you even addressed it last quarter, but it's the subject of the integrated test cell.

Obviously your competitor is making a lot of noise about that.

I'm just wondering if you are seeing any customer interest on this, on the SOC side of things, and how you feel this may progress over the next couple of years?

Yes, I'll say a few words on this and elaborate a little bit.

But the -- there's two ways to think about the test cell.

Testers always get married with either a prober at wafer test or a handler -- automated handler at package test.

Over the years, if you think about a tester, the useful life of a semiconductor tester asset can be 7 to 10 years.

During that life, the customer's evolution of devices and package types require them to be able to modularly change in and out a handler to adapt to evolving mix of package types and to evolve to perhaps higher productivity handlers.

So the integrated test cell has never, in the history of semiconductors, proven to be very interesting.

That doesn't mean that in some small niche areas where change may be low over many, many years, it couldn't find an application, but for the broad, broad market, the experiment has been played out over decades and it's just not applicable.

On the other side of the equation, if you look at, well, rather than integrate the handler, what if you somehow can maintain modularity, but one company could provide that complete package of a tester and a handler?

And again, as we've looked at it, the problem with that is you can't pick a handler technology that is pervasive enough to serve the broad market.

Customers need the flexibility of multiple solutions on the handler side, so we've always had that philosophy.

We work to put our energy into making the most adaptable, easy-to-dock tester to a wide variety of third-party handlers and have not tried to overly constrain the customer into a one solution.

So I'm pessimistic about that as an answer for the broad market and our strategy will likely continue down that line.

Okay.

Thanks for the broad answer there.

Then just wanted to dive into one comment that you keep making about seeing demand on the MCU front last year -- microcontroller front -- last year and into this year.

Can you give us a profile of where that activity is happening?

And are there any changes between what was put into place last year versus what you see on the forefront in 2014 from a customer's perspective?

Yes, a little bit of color.

Microcontrollers are pervasive in any consumer product in your home, in your automobile, and -- but one of the things that is emerging as a growth driver -- two things.

One is China.

China is growing dramatically in their consumer product portfolio and microcontrollers proportionally to that growth.

So the demand for indigenous capacity in China has been once part of the story.

And then the other one, interestingly, revolves around secure communication, microprocessors and such.

When you look at smart cards, for example, smart cards contain a small microprocessor and antenna to transmit secure information in a payment system.

In Europe and other parts of the world, they've used chip and pin cards forever.

That technology is set to grow pretty dramatically, it looks like, over the next few years, as that remote secure payment technology finds its way into many more geographies and many more products.

We saw a sharp uptick of capacity for that kind of device, for the back end of last year, and expect that to continue.

Okay.

That's great.

Thanks a lot, Mark.

And operator, we have time for just one more question, please.

Okay.

Your final question comes from the line of Weston Twigg with Pacific Crest Securities.

Thanks for taking my question.

Just real quickly, first on 802.11ac.

You said about half your shipments last year for the Wireless Test segment were 802.11ac capable.

How does that impact your opportunity for shipments this year?

Does that dampen then your total market outlook in any way?

Well, it's not a significantly large factor.

This year, probably 80% to 90% of our shipments will be ac-capable.

So some of what has shipped historically will be able to roll forward into the ac world.

There's still a significant amount of other capacity, however, that will need to be upgraded and replaced with ac machines.

So it's baked into the overall guidance we've given you.

It's not significant, but this is probably going forward, you can think about the world's test capacity as all shipping as ac-compliant.

So the shipped ac-capable tools are still a pretty small component of the total market?

In terms of what's installed in the world, it may be at this point.

In capacity terms, a third to half.

In terms of what we will ship going forward, it will all be ac, pretty much.

Got it.

And then just another question on the Xyratex acquisition by Seagate, I know you have the new 3.5-inch tester.

What -- just can you give us a feel for how you believe this impacts the market?

Does it reduce your opportunity by eliminating or potentially taking away one customer?

Or does it help strengthen the adoption rate, perhaps with other players, given that Seagate is tied up with Xyratex and maybe speed up the adoption for your product?

This is Greg.

We'll let you know maybe by the next call.

If this has just happening, we need to speak to the customers and figure out what their plans and strategies are.

But it's certainly a meaningful development that we need to figure out how to best play in this smaller market.

All right.

Fair enough.

Thank you.

Thank you.

Great.

Thank you, everyone.

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

This does conclude today's conference call.

You may now disconnect.