泰瑞達 (TER) 2014 Q1 法說會逐字稿

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

At this time, I would like to welcome everyone to the Teradyne Q1 2014 earnings conference call.

(Operator Instructions)

I will now turn the call over to Mr. Andrew Blanchard.

You may begin, sir.

Thank you, Natalia.

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

I'm joined this morning by our CEO, Mark Jagiela, and our Chief Financial Officer, Greg Beecher.

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

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

We're providing slides on the investor page of the website that you may find helpful.

And 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.

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 of 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've posted additional information concerning these non-GAAP financial measures including reconciliation to the most directly comparable GAAP financial measures where available on the investor page as well.

Also, between now and our next conference call, Teradyne will be participating in investor conferences hosted by Bank of America, Cowen, Credit Suisse, Davidson and Needham and Company.

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

First Mark will comment on the first quarter and general market environment as we enter the second quarter.

Greg will then offer more details on our quarterly financial results along with our guidance for the second quarter.

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

Mark?

Thanks, Andy, and good morning, everyone.

Our overall bookings in the first quarter were up 55% over the fourth quarter of last year and 12% higher than the first quarter of 2013.

This was due to a very strong opening quarter in our Semiconductor Test business where bookings were at their highest level since the rebound quarters of early 2010.

Strong demand for application processor, microcontroller and power management IC testing lead the way with orders for our UltraFLEX and J750 testers roughly doubling from the first quarter of 2013.

As noted last quarter, our plan for 2014 is to lock in the seven points of SOC share gain from 2013 and grow with the market expansion in 2014.

With our strong Q1 results, that plan is on track for the year.

The UltraFLEX continues to deliver on it's strong position in mobility.

And that's processor test, the power of the platforms parallel test capability and fast time to ramp IG-XL software continues to win share.

In RF, where chip scale packaging increasingly dominates, the UltraFLEX's unmatched accuracy of signal delivery at wafer test delivers higher yields for customers.

And while more quarters and components to manage in mobile electronics, the precision and complexity of power management ICs are advancing rapidly.

Here the UltraFLEX's DC architecture excels at the precise current sourcing and measuring required by these devices.

So all in all, our long-term UltraFLEX R&D strategy of creating the world's best platform for mobility device test is paying off.

Microcontroller test was another strong part of the Q1 story.

Our J750 bookings more than doubled from the first quarter of 2013.

Microcontrollers used as sensor management hubs in mobile devices embedded with RF and consumer products and general growth in industrial and automotive applications lead the surge.

To date, over 4,500 J750 platforms have been purchased worldwide with new customers being added particularly in Greater China every quarter.

I will also note that the strength in mobility and microcontroller did not extend to analog in Q1 and that segment has been relatively quiet for over a year.

However, in the current quarter we are seeing signs of improvement in this part of the market as well.

In memory test, although orders were relatively slow in Q1, we are seeing momentum build in 2Q.

Our new Magnum V flash tester is now in volume production and we added our third customer in the quarter.

We also received follow on UltraFLEX high-speed memory orders for GDDR5 testing and plan to ramp our new high pin count version for DDR4 testing in 2Q.

Again, increasing device interface speeds on both flash and DRAMs play into our product line strength.

So overall, we still see the 2014 SOC test market size and the $2.1 billion to $2.4 billion range up from $1.9 billion last year.

And the memory test market flat at about $450 million.

As is typical with the annual cycle in mobility, we expect the Semi Test bookings momentum to continue in a second quarter followed by a traditionally softer second half of year.

Our manufacturing capability is designed to respond to these surges and we are in good position with upside as we ramp capacity in 2Q.

In Wireless Test, first-quarter bookings were $57 million more than triple the orders of the seasonally slow fourth quarter but down from year ago.

As we've said before, short lead times and relatively opaque visibility into the ramp plans of customers makes the short-term market and order timing difficult to forecast.

However, we do see increased tester efficiency and reuse of installed test capacity particularly in cellular further compressing the overall market in 2014.

Longer term, the growth prospects for the market remain strong following this period of optimization.

As LTE begins its next phase of growth in China, and trends like MIMO and carrier aggregation gain momentum, the need for new test capability should grow.

In System Test we added two new customers for our recently introduced multi-site in-line test station for the commercial production board test market.

And in our defense electronic test unit, despite ongoing pressure on government spending, we expect to continue to operate at or above model.

On the other hand, our Storage Test business remains slow, the mainstream hard disk drive test market still has excess capacity to work through.

And while there's growing interest in SSD testing, it has relatively small potential volume in the near term.

In summary, calling the full year is as difficult as ever but we are off to a very solid start in 2014.

Our product position in key growth segments remained strong, and our share gains from 2013 are not only holding but trending upward.

Let me now turn it over to Greg to provide details on Q1 results as well as guidance and perspectives on the second quarter.

Thanks, Mark, and good morning, everyone.

I'll start with some brief comments on the start to the year, what we see looking ahead and then cover the first-quarter details and second-quarter outlook.

As Mark noted, first quarter bookings got off to a very strong start at $450 million.

As we remarked last quarter, we've been expecting an SOC snapback after a down year in 2013.

That's why we leaned into our inventory position late last year to keep first half 2014 lead times in check.

This planning has worked well as evidenced by our second-quarter guidance with sales expected to grow sequentially between 43% and 53%.

Two of the SOC segments driving the strong start are principally digital centric.

App processors used in mobile devices and microcontrollers used in ubiquitous applications including mobile, automotive, industrial and consumer products.

You recall that the apps processor demand was essentially zero last year after record buying in 2012.

As expected, it came back with a vengeance in the first quarter, bringing our UltraFLEX bookings to the highest point since the first quarter of 2012.

The combination of high throughput and award-winning software tools has helped fuel our multi-year share gains in the SCC mobility segment.

Customers increasingly rely on the UltraFLEX to achieve ever tighter quality standards, cost requirements and compressed time to market constraints.

As Mark described, another long-term trend we see is more chip scale packaging with wafer level devices mounted directly on circuit boards or combined with other die in a single package for space, cost and power savings.

This requires more robust testing at the wafer level so customers confirm they have known good die before the next level of assembly.

Outside of memory, these techniques are most often used for RF chips.

In testing these high-performance devices at the wafer level, the ability to source and receive complex high-frequency signals to and from the chip is essential.

The UltraFLEX with Ultra Wave RF excels at this task for two reasons.

First, the system is architected to have the lowest phase noise and tightest power accuracy in the industry equal to or better than some bench top instruments.

This capability provides headroom which directly translates to higher wafer yield in production test.

Second, we created an integration facility at Teradyne that replicates the production environment for wafer test.

Specifically to work with probe interface suppliers and customers to ensure the extraordinary performance of the tester is actually realized in day to day production.

This facility has allowed us to extend our lead in RF test and probe test in general by helping customers solve some of the most challenging mechanical, electrical and thermal issues facing semiconductor production testing today.

Turning now to the microcontroller strength.

The J750 continues to sell very well with over 100 systems ordered in the quarter.

In fact, it was the best consecutive four quarter run since 2010.

The J750 is the clear industry standard for microcontrollers, low-speed digital and image sensor testing.

With the recent introduction of low cost, LitePoint wireless capability, any of the thousands of systems sold to date can be easily upgraded to test controllers with RF connectivity as well as the new silicon used in the emerging class of devices for the Internet of things and wearables.

And recall that last year, we notched up the J750 operating speed, channel density and cost performance earning it is a 2014 Best in Test Award from Electronic Design News.

So the future looks very bright here as well both in end market trends and our product leadership.

Shifting to Wireless Test, the first quarter demand at $57 million was down from last year's first quarter record start.

Our Q1 demand this year was principally driven by new technology buys such as 11ac and connectivity.

While it's difficult to forecast Wireless demand, we're expecting a slower first half start with customers squeezing more out of their install base of testers.

I'll come back to LitePoint a little later to comment on the positive longer term picture.

Moving to the first quarter P&L.

Our sales were at $321 million, the non-GAAP operating profit rate was 9% and non-GAAP EPS was $0.11.

The gross margin percentage was 52%, 2 points above expectations due to more favorable product mix.

Our gross margin is most affected by mix and volume and over the last three years, it's ranged from 49% to 59% in any quarterly period.

We have not seen any meaningful changes to the overall pricing environment that would alter our traditional margin ranges.

Stepping back, you can see that we operate in seasonal annual cycles with the first and fourth quarters as the low points.

Our shipments have been peeking in a second and third quarters and we expect the cycle to continue.

Of course there are also other trends that impact us that are beyond the seasonal biorhythms.

Currently we remain in a severely depressed storage test market as PC demand is soft and the cloud build out hasn't absorbed the test capacity in place.

So in addition to the cost reduction actions taken last year, we're evaluating various options to minimize the financial impact to our P&L during this period of limited demand.

We will update you midyear on our plans in this area.

Shifting back to our Wireless Test.

LitePoint serves a market that is very difficult to predict and will have periods of strong buying with the ongoing growth in smart devices, the proliferation of new standards and a host of new wireless applications.

Volume buying will also be followed by the normal productivity squeezing and digestion periods.

We're in a squeezing out and digestion phase now after the last two years of sales of $538 million, well above our original two-year plan of $350 million.

Strategically at LitePoint, we are doing very well with new technology buying with our follow the chipset strategy and connectivity.

This proven formula gets our production optimized testers to market with full testing solutions well ahead of others with the right economics for production.

Namely we don't develop general purpose or R&D testers and then try to morph them into high-volume production systems.

We design for the exact problem at hand, the need for low cost, simple to use testers with solutions in place right out of the box.

In cellular, as you know we broke into the market last year in a very major way and look to further gain share albeit in smaller increments over a multi-year period.

So while the 2014 market size is tough to call and may very well be down from -- for the year, we remain very positive about the long-term prospects of Wireless Test.

Now back at the Company level.

Looking over the last three years, we've averaged annual sales of just over $1.5 billion and a non-GAAP operating profit rate of 21%.

Our first-quarter 2014 start with sales of $321 million and an operating profit rate of 9% fits with these prior-year starts.

You'll see that our multi-year performance continues to place us among the best-performing semi cap suppliers.

Now looking ahead, we'll continue to focus on selectively gaining market share through offering differentiated solutions that provide customers greater throughput and enable them to get their products to market faster with the best programming tools.

We accomplish this by carefully targeting R&D to where the hockey puck is going and ensuring that our solutions or as far as possible from a me too solution.

A quick example of this is in memory test where we have -- where we're greatly out spent by our largest competitor yet our solutions match what the customer needs now, higher frequency and throughput.

This is how we gain about 10 points of share in memory test last year alone and we expect to gain more share in 2014.

When profitably is hard earned as it is in ATE, we long ago learned that we need to be very judicious in how we invest both in R&D and in non-organic growth.

This mindset will continue to guide us as we evaluate growth opportunities.

Moving to capital allocation, our operating model has shown its cash generation strength across multiple industry cycles.

Since 2011, we have generated free cash flow of about $210 million a year.

This led to our announcement of an initial dividend last quarter.

We'll also remain opportunistic with the timing of stock buybacks and of course maintain sufficient dry powder for highly selective M&A.

While we may not find another LitePoint type asset, we will continue to revisit capital allocation.

As planned, we settled the convertible note with a face value of $190 million on March 17.

The option component will settle over the 65-day trading period beginning June 17 and ending September 17.

At $20 per share, this would amount to about 21 million shares, which we've included in our non-GAAP EPS guidance for the second quarter.

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

Now moving to the key details of the first quarter.

We had total Company bookings of $450 million, Semi Test bookings where $366 million, SOC test orders where $349 million and memory test orders where $17 million in the first quarter.

Semi Test service orders were $53 million, Wireless Test orders where $57 million.

System Test orders where $27 million with $12 million of service orders.

In the first quarter, Semiconductor Test sales were 81% of the total, Wireless Test 7% and System Test 12%.

Our book-to-bill ratio for the first quarter was 1.4 for the overall Company, 1.4 for Semiconductor Test, 2.7 for Wireless Test and 0.7 for System Test.

At the end of quarter, our backlog stood at $490 million, of which 84% is scheduled to ship and be recognized as revenue within the next six months.

The top line of $321 million was up $36 million, or 13% sequentially from the fourth quarter, in line with seasonal patterns.

Semi Test was $262 million, up $47 million.

Wireless Test was $21 million, down $5 million.

And System Test group was $38 million, down $6 million.

We had no customer that was more than 10% of Company revenues in the quarter.

Within the $321 million of the first quarter revenue, service was $66 million, down $8 million from Q4's record level.

Semi Test service revenue was $49 million.

Total Company product turns business was 55% versus 41% a quarter ago.

Semi Test product turns business was 57% versus 45% a quarter ago.

Memory revenue was $28 million.

Moving down the P&L, non-GAAP gross margins decreased to 52% from 55% in the fourth quarter due to product mix.

Non-GAAP operating expenses were $138 million compared to $140 million in the fourth quarter.

At the operating line, we posted a 9% profit.

Our non-GAAP net interest and other expense was $11 million -- was $1 million.

Non-GAAP tax expense for the quarter was $5 million.

And our full-year non-GAAP tax rate is expected to be 18% for 2014.

Cash from operations consumed $57 million after capital additions in the first quarter.

We entered the quarter with a cash balance and marketable securities of $967 million.

In the second quarter, we expect to generate about $75 million of cash after deploying about $55 million into fixed assets and paying about $12 million in dividends.

For the full year, we expect to deploy about $75 million of capital into UltraFLEX testers for leases bringing our gross total capital additions for the year to $145 million.

This is above our January estimate by about $20 million.

The higher projected fixed asset additions are attributed to greater than forecast demand for UltraFLEX system leases.

Our strong operating model and balance sheet gives us the flexibility to lease testers when it makes commercial sense.

Our first quarter DSO was 60 days, up from 50 days in the fourth quarter due to shipment patterns.

As noted in the press release, sales for the second quarter are expected to be between $460 million and $490 million.

And non-GAAP EPS range is $0.36 to $0.43 on 217 million diluted shares.

Q2 guidance excludes the amortization of acquired intangibles and the related tax impact.

Our GAAP EPS range is $0.29 to $0.36.

The operating profit rate at the mid point of our second-quarter guidance is about 22%.

Now moving to the P&L percentages in the second quarter.

We expect non-GAAP gross margins to be about 53% to 54%.

R&D should be 15% to 16% and G&A should be about 16%.

Non-GAAP net interest income is expected to be about $1 million.

As we have seen for the first quarter, we are well positioned in 2014 with our strong market share momentum, new product offerings and extremely 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.

Natalia, we'd now like to take some questions and as a reminder, please limit of yourself to one question and a follow up.

(Operator Instructions)

Jim Covello, Goldman Sachs.

You guys have talked a lot about the seasonality in your business and pretty well documented.

If I look at the third quarter over the last couple years in Q3 of 2012 it was down quarter-over-quarter, in Q3 of 2013 it was up quarter-over-quarter, can you talk about the pushes or pulls that would make this year look either more like 2012 or more like 2013?

Sure, Jim.

A lot of it gets tied to the product introductions of our customers and where they fall in the calendar year.

So in 2013 we saw a little bit more backend loaded surge.

This year might be a little bit similar to that, but the lead times we have tend to be four to eight weeks depending on the product line.

So we just try to position ourselves to run with the demand and we don't try to get overly fixated on the quarterly boundary too much.

But that's about as much color as I can give on it.

The other thing I'd quickly add Jim, is many customers are trying to release their products earlier and faster, so that tends to cause us to move our shipments in a little earlier in the year.

So I think you may see that occurring at times.

So it all depends what the exact date is for these launches and they tend to launch very vertical, very aggressively fast, so they need a lot of testers to stock the shelves.

That's helpful, thank you.

For my follow up, on the gross margin obviously mix, especially mix with Wireless which has traditionally had a little bit higher gross margin is a part of the equation, but what other puts and takes drive gross margin in Q2 to be a little bit lower than where it might have been at this revenue level historically?

Jim, this is very consistent with 2012.

2012 you'll recall we had a very high amount of digital centric buying for application processors.

The same thing is happening this year, that buying is happening early in the year and that part of our business carries a different margin profile.

The volumes tend to be very high, the percentages is a little bit lower.

And I think we said last call that we expect this year the gross margin -- for the year, to be about 54% starting off lower as the application processors work their way through in the earlier part of the year.

And so you still feel good about that 54% for the year?

I do.

Great, thanks so much.

I appreciate it.

Vernon Essi, Needham & Company.

You could discuss the Memory Test market a little more there?

It sounds like you're getting some share gains on some of these newer developments.

And could you remind us what your expectations are for share as we exit 2014?

Sure.

So Memory Test for us has been a success story mostly tied to increasing interface speeds on both flash devices and DRAMs.

So our products have been set up and architected to intercept that trend and it keeps coming our way.

So as we exited last year, we exited without about a 25% share of the Memory Test market, it was about a $450 million market.

This year we think it'll be roughly flat at $450 million and our goal is to pick up 3, 4 points of additional share this year.

It looks like we're on track for that at this point.

Okay.

And to switch gears, and you rarely talk about your other systems business outside of storage, but you did mention a new circuit.

And the only reason why I ask is I'm hearing that the demand in that area and the whole SMT side of life has actually picked up.

Are you seeing strong order patterns in that side of your business and is there anything that you think could materially move this year in that space even though it's small numbers?

Yes.

So it is small numbers and I wouldn't say we've seen a material movement yet.

But the new products we've introduced are targeted at these automated SMT lines that are high-volume applications.

It's a in-line multi-site tester.

We have had some design wins, we expect them to start to ramp for the rest of year and we're targeting some even higher volume applications, those design wins are not concluded yet so we don't know how they'll turn out.

But we see the same trend that you allude to and we've positioned ourselves with this new product.

But I'd add to that these shoot outs are very long shoot outs, they go on for nine months.

So we're at the early stages of some of these and we do believe we have a very good product with much greater throughput that the customer can buy far less fixtures and get meaningful savings.

So we're optimistic, but I think it's going to take a number of quarters before the numbers perhaps show some different trajectory.

And to qualify the answer though, you're saying as the activity picked up in the last couple of months in that space versus perhaps last year or even six months ago, in terms of the order engagement?

I think it's more the evaluations that --

Evaluation I mean.

Yes and so the actual orders, the decisions and the orders will flow as Greg said probably in the second half of the year.

But certainly the evaluations have picked up.

Okay, that's what I meant to ask.

Thank you.

Krish Sankar, Bank of America/Merrill Lynch.

Mentioned that you expect market share to stay flat for SoC but you expect to grow in the line with the market.

Curious how much do you think the APU market grows given the fact that some of the spending this year in SoC comes from NPUs and GPUs where you guys don't have any footprint?

I'm not sure exactly -- could you ask it again, I'm not sure what you're asking.

What do you think is the growth rate for the APU test market this year given that some of the other growth on the SoC market is coming from microprocessing and the GPUs?

Okay.

Yes, so last year GPUs, NPUs and APUs all where very low buying in the market.

This year APUs are going to -- are rebounding most dramatically of those three.

But there will be some return of buying for NPUs and the GPUs as well, but probably the growth rate on APUs will be two to three times higher than NPUs and the GPUs.

Got it, that's very helpful.

And then another question on the Wireless Test side, you commented how the growth was going to be muted or probably even down this year.

I'm curious is that the main reason for it, is it because of reuse or is it more because more tester sold last year that can do AC testing for this year or is it more pricing/productivity improvements in the whole tester supply chain?

Yes, it's a mix of things actually.

In connectivity testing, the market comparison over last year to this year is probably about flat as best we can tell, so there isn't a big compression going on in connectivity.

On the other hand in cellular, there is an effect where the testers that have been deployed starting last year tend to be more productive.

They tend to be able to do four devices in parallel versus prior to 2013 they were single devices in parallel.

So there's an efficiency of the new equipment that is higher.

The other thing that happened is that the roll out of LTE is in a little bit of a lull now.

There was a big rollout of LTE in the US and Korea that occurred a year ago, but it's getting somewhat saturated.

The next wave that's coming in China hasn't quite kicked in yet.

So we're in this in between zone on the cellular side, so that's another affect that we think will dampen that side of the market in 2014.

Got it.

Thanks, Mark and Greg.

Thanks.

C.J. Muse, ISI Group.

To the high end of your SoC test --

C.J., I'm sorry, we missed the first part of your question.

Could you --

Sorry about that.

Curious what it would take to reach the high end of your SoC market outlook?

Well I think based on where we see the trends in Q1 and Q2, it would probably take just a modest second half to reach that high end.

The analog business coming on here in second quarter that I referred to earlier is another positive sign that we could be trending toward the higher end of the market size.

So in Q1 as I mentioned, we didn't see very strong orders for analog or memory.

But we did see very strong orders for microcontrollers and Apps Processors.

That -- all of that continues in Q2 except now memory and analog seem to be kicking in.

So I would judge right now it's probably trending a bit toward the high end.

Excellent.

And in terms of Memory, can you walk through where you're seeing the gains DRAM versus NAND as well as the impact of Known Good Die test, full wafer test, et cetera, and whether strength there can continue?

Yes, so for us the gains have come in DRAM typically the higher speed end of the spectrum.

So graphics DRAMs have been very strong with the new gains that came out last year that helped.

New DDR4 high-speed interfaces for server DRAMs have also been something that has pulled share our way with our products.

Then on the flash side it's a similar story.

As the NAND interface speeds continue to rise to support higher bandwidth flash memories for SSD applications, that's fit right into our product.

So as that trend continues and it's not -- that's the real direction of the market.

That's why we're confident we can pick up a little more share this year.

Excellent.

Thank you.

Timothy Arcuri, Cowen and Company.

First question is on Wireless Test.

Did you -- you said that the market could be down year-over-year, does that imply that your Wireless revenues could actually be down this year?

That would be yes depending on where the market ends up.

It's very early in the year, difficult to call.

And we had a big win last year in cellular and this year we see cellular going through what connectivity went through last year.

So depending upon where the markets end up we could be down.

We think we'll do well in market share and we did very well in market share last few years.

So I think it's more of a market size and then we think beyond this year we think there's some positive items that should bring the market more to a healthier stage.

Okay.

I want to ask a follow up on that.

But first I want to ask on OpEx, it's up about $10 million according to the guidance and it's a good $10 million, $12 million, $13 million more than at similar revenue levels in late 2012.

Is this new norm going forward or is this a one-time bump due to maybe your desire to penetrate the new markets?

Right.

See the OpEx has only about $3 million that's a bubble finishing some projects that should go away next quarter.

The other portion of the increase is simply variable compensation.

So the model that we reset or communicated back in October we're on that model.

So if you go back further in time, you'll see our OpEx is up depending upon when you -- how far back you go.

But what we've done is we've invested more in some of the engineering and distribution, some in Semi Test and some in LitePoint.

And it's principally because we've gained good amounts of market share.

And to get that next couple points of market share, we need to make some more targeted investments.

And as you get more customers often you find there's more requirements.

So as you grow the top line, you end up having to put a bit more engineering.

Okay, thanks.

If I can sneak in one more on Wireless Test.

All of the customers are saying that they want to integrate a tester that can do both connectivity and cellular.

And this seems a little bit cannibalistic to grow gross margin and revenue, not just for you but for the entire industry, how do you respond to some concerns that maybe you can be entering a period where there could be a trade off between your share and margins in that area?

Yes, frankly we are not seeing a lot of customers ask for a tester that can do both.

There are certainly some, but I would characterize it as the minority.

The trade off of combining cellular and Wi-Fi in a single tester is usually idle capacity in the tester at some point in time, so it is not as efficient.

So if you're a high volume manufacturer, a focused Wi-Fi tester for example that can evolve with the Wi-Fi standards and be very efficient there combined with a separate box for cellular testing is what we're being asked for.

So I wouldn't call it a trend.

It's something that a few suppliers do desire.

We've -- we watch that.

If it becomes something that the larger suppliers want to pull on, certainly could create that product.

But it doesn't come for free, it comes with an added cost into the product that most of our customers aren't willing to pay for.

Thanks a lot.

John Pitzer, Credit Suisse.

Greg, a follow up on the gross margin line.

I know in you're prepared comments you mentioned no 10% customers in the March quarter, but I'm curious does customer concentration in addition to the mix towards Apps Processor Testing influence the gross margin guide for the June quarter or was it simply broad-based demand in Apps Processor Testing?

There's -- Apps Processor is the single item that probably, just given its volume, is the item that's moving our margins to where they were in 2012.

And that's the same thing that happened in 2012.

And Apps Processing buying by it's nature tends to be very compressed.

There's only one or two, a very small number of big players who buy in large volumes.

So it is compressed in terms of the end customer whether it's 2012 or 2014, it's a list of two or less.

Got it.

That's helpful, thank you.

And then Mark, the J750 business has been running at very high levels for a couple quarters now.

I'm curious as to your view on sustainability, to what extent is that being driven by the move from 8 to 16 to 32 bit on the microcontroller side.

Do test times go up?

And do you think you're at your benefiting yet, for more connectivity function on a microcontroller which should also drive test times up?

Help me understand how we should think about sustainability of the J750 business.

Yes, well I think it's quite sustainable.

What's driving it is a couple of things.

So embedded flash is one driver that I would say started last year and persists into this year.

The more embedded flash in a microcontroller, the longer the test time tends to be.

So that's a test time driver.

Another driver is more A-to-D converters and more precision on the A-to-D converters.

Unlike a digital microprocessor or a digital apps processor, microcontrollers have these A-to-Ds and D-to-As in them to communicate with sensors.

And more and more in mobile electronics since the sensor management is being off loaded onto these microcontrollers that may have three, four, six, seven analog ports to communicate to the sensors.

Testing those ports is also a very high precision and somewhat time-consuming test step.

So the more analog sensors get connected to microcontrollers, typically the test time tends to go up.

And then the third thing you mentioned, RF is still to come I would say.

There's been certainly some J750 with RF capability business that's been developing here in the past few quarters.

But most of that is tied to I would say a future world of microcontrollers used in machine-to-machine communication or wearables.

And that's a little further off.

Perfect, that's helpful.

Thank you.

Chad Dillard, Deutsche Bank.

First of all, could you quantify how much you expect Wireless Test market to decline this year?

And then also regarding your market share, how do you see that unfolding?

And maybe you could give a little bit of detail on whether you're expecting it to come more from mix improvement or from [actual] direct capturing from customers.

Well again I think the size of the Wireless Test market is really a hard one for us to triangulate on.

We've roughly, for historical reference, said that we think in 2012, which was a blowout year, the market surged to about $1.3 billion in total.

Last year we said that the market compressed to maybe $1 billion for the same connectivity in cellular testing -- production testing.

This year it's really hard for us to say but we're probably looking at a number around $700 million, plus or minus $100 million.

Most of that contraction coming as I said earlier in cellular.

Wi-Fi connectivity seems to be holding up.

And then regarding the LTE ramp in China, could you provide us with a little bit of detail on what the timing you expect and then also how much of an incremental opportunity there could be?

Okay.

Well right now on the Semiconductor Test side, we are seeing some demand for Semiconductor testers for the infrastructure chips that go into the base stations and such.

So it's really the leading indicator as the infrastructure gets built out in China throughout this year.

I think on the handset side, it seems that, that will follow more my estimate would be 2015.

So we're in infrastructure year and doesn't drive a lot of the Wireless Test demand from LitePoint perhaps next year as handsets start to ramp then we'll see that come back.

Great.

Thank you.

Mehdi Hosseini, SIG.

I have a follow-up question on the Wireless.

Even if your revenues were to be down consistent with the market down 30%, it would since suggest to me that maybe Q3 would be in line with Q4 and then you would see the seasonal downtick in Q4?

Is that a fair assessment on how quarterly trend is going to look like?

Mehdi, I think the quarterly trend will look similar to last year, that Q4 is certainly the trough.

And Q2 is -- Q2, Q3 tend to be the peak shipments.

So because lead times are so short, it's very difficult to be precise here, but I think the patterns of the past will repeat.

And we are really just speculating that it could be down 30%, we don't have any great insight.

I will add that cellular we gain market share last year.

Connectivity our market share was very strong.

So I do think we could hold up pretty well with our strong connectivity market share and this is an opportunity for us to -- if there isn't a whole lot of cellular buying, to demonstrate our products and get -- secure more designs in Asia.

And that's what we're off doing.

Sure.

And then Greg, one modeling question, what should we assume for a tax rate?

And the slides say 18% for the year, but did you mean that Q2 is going to see an uptick and then moderate in a second half?

Well the tax rate we think for 2014 I think we said it last quarter was 18%.

There was this discrete thing that shows up in our GAAP numbers that we take out for non-GAAP having to do -- it gets pretty complicated, but we don't put discrete things in our rate because those are one-time things that hit a quarter.

But on the annual rate 18% we believe is a good estimate and we've said -- I think we said last quarter as well that long term our tax rate's probably going to be mid 20%s and over time we'll get there.

We'll obviously look, are there other planning things we can do to get a better result.

But at least for this year you should use 18%.

Okay, so for -- on a pro forma basis it is 18% for Q2?

Yes.

Okay.

Thank you.

David Duley, Steelhead.

Yes, I had a clarification.

Did you say in your prepared remarks that you thought your SoC test orders would be up in the June quarter?

No, we didn't.

Okay.

And the -- I noticed in your slides the buy rate you're assuming for 2014 in SoC is about 1%.

And in previous peaks we've seen a much higher buy rate like 1.5%, I imagine if you go back longer it's even higher.

But versus the recent years, why do you think it'll be 1% versus 1.5%?

Well I think in the past couple of years it's been trending down.

It's not something that -- we tend to be modeling it conservatively.

We sized the business and sized our model revenue to assume a somewhat lower buy rate, in some years it does snap back.

So it's conservative set of financial sizing assumptions is what I would say and we can ride the upside.

And we always have the manufacturing capacity to ride the upside if it develops.

So you don't think there's a structural change in the amount of money that they're going to spend on test?

No, I don't think so.

But I do think that the capital intensity rate varies by segment.

And so as we discussed earlier, applications processors as a class of devices tends to have a lower average buy rate that let's say analog or even microcontroller.

So depending on the mix in any given year of what's surging in terms of tooling you can get aberrations in these average buy rate.

Okay.

Thank you very much.

Patrick Ho, Stifel Nicolaus.

Going back to the application processor side of things for a second.

A couple years ago you saw a really strong demand from that segment driven by the introduction of the 28-nanometer node devices.

This year we're seeing 20-nanometers.

Maybe looking forward longer term, as the industry continues to migrate to 16-nanometer and 14-nanometer FinFET, do you see new tester buys every node change for app processors or is there a level of reuse that can be implemented with the testers from 28-nanometer as well as 20-nanometer?

Yes, I think the main driver for tester capacity is unit growth more than the nodes.

The nodes might create a little bit of an aberration as yields need to get worked out, so there might be a little bit of extra capacity put in on an immature node.

But the testers definitely get reused across multiple nodes.

And I would expect that when FinFET 14-nanometer, 16-nanometer comes along, the main driver of extra capacity will be continued unit growth more so than the immaturity or something to do with the technology node.

That's helpful.

Going to the analog side you said things are picking up and it's been some time since you've seen a pickup in that segment.

Could you characterize what's driving whether it's the level of efficiency and reuse that's reached it's limit with analog testers or there's enough of a healthy demand in I guess unit growth that's driving these new capacity buys?

Yes, I think it's really unit growth.

It's been an anomaly now for about a year and I think that finally -- I don't have a good answer for you as to why, but it's now moving back into line with how we normally expect analog to perform with the rest of the market.

So I do think it's driven by units and it's now more correlated with what it has been historically prior to 2013.

Great.

Thank you.

(Operator Instructions)

Tom Diffely, D.A. Davidson.

I was intrigued by your comments about the leases earlier.

What -- or how big a program is that today?

How big do you think it gets?

And what is the ultimate impact on your profitability?

We think for this year we'll put about $75 million of capital to work into leases.

And that's much higher than we have ever done in any particular period.

But this particular arrangement made commercial sense based upon a whole set of circumstances.

I don't think if you look at next year or the year after, you'll see anything close to that.

I think it'd be more along the lines of $10 million a year which is a run rate we've had and it's noise level.

Is it just the smaller customers that need financial help?

No, no.

It's not a set of smaller customers.

There's no credit issues whatsoever.

It's a strategic decision by the customer, how they want to use their dollars.

But I don't want to get any more detail than that.

Okay.

And then what is the impact on you from a profitability point of view selling a system versus leasing a system over time?

Basically we recognize revenue and profits slower.

Instead of shipping a product and getting the sales and profits upfront, we -- we're going to recognize it over a longer time period.

So our surge or our revenue growth this year doesn't have the full value of those testers.

It only has maybe six months, nine months, three months.

It only has a partial period of that revenue in our P&L.

So in truth, it's actually a much stronger surge when you factor in $75 million, and this is again our book value, $75 million book value we're putting in of testers.

So it is a very strong start to the year.

Okay, so I assume this is on the Semi Test side?

Yes.

Great.

All right, thank you.

There are no further questions.

Great, operator, than we're going to conclude today's call and thank you all for joining.

If you have questions, please reach out and we'll get back to you.

Thanks so much.

Thank you.

This concludes today's conference call.

You may now disconnect.