泰瑞達 (TER) 2014 Q3 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 Q3 2014 earnings conference call.

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

(Operator Instructions)

Thank you.

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 CFO, Greg Beecher.

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

The press release containing our third quarter results was issued last evening.

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

This expanded slide presentation contains some of the numerical data that in the past was included in the speaker remarks.

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

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

In addition to the replays of this call, will be available via the same page about 24 hours after this 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 our earnings release as well as our most recent SEC filings for a complete description.

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

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

We have posted additional information concerning these non-GAAP financial measures including reconciliations to the most directly comparable GAAP financial measures where available on the Investor Page of our website.

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

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

First, Mark will comment on our recent results and the general market environment as we enter the fourth quarter.

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

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

Mark?

Thanks, Andy and good morning, everyone.

Today I'd like to cover two topics with you.

First, our performance in 2014 and second, our outlook for the test market of the next several years.

Greg will then review the quarterly numbers in detail as well as update you on our capital plans.

First, our third quarter results keep the momentum going for a very good growth year in 2014.

At the midpoint of our fourth quarter guidance, we will deliver 15% growth in sales and 23% growth in non-GAAP operating income for the company compared to 2013.

Most of this gain comes from our strengthening Semiconductor Test business where sales and profits are likely to grow just over 25% and 50% respectively.

Seasonal swings in our semi test business have increased over the past few years, with this year's second-quarter product shipments more than double 2013's fourth quarter levels before settling back down again this Q4.

This is tied to the Semiconductor capacity ramp that occurs a few months in advance of launching new consumer handsets, tablets and other mobile products.

While additional test capacity shipments will reach a low point in Q4, all the capacity we've installed in 2Q and 3Q is running at maximum utilization churning out chips.

The good news is that our manufacturing model is designed to handle these sharp quarter-to-quarter swings with minimal impact to our gross margin and operating model.

The Semi Test story is built on steady, financially disciplined market share gains.

These gains come from a combination of targeting growth segments such as mobility and automotive, where we grow faster than the overall market and also by competitive design wins where our products outperform the competition.

This rifle-shot approach has led us to about 50% share of the SoC test market and we look to continue to grow share at about one point per year in this segment.

Our Memory Test story is equally compelling, where due to the more concentrated nature of this segment we target annual share gains on the order of 3 to 5 points per year.

Last year we picked up 10 points to move our share to about 26% and this year we will add another 3 to 5 points of share as our products' design focus on testing to higher bus speeds of new NAND flash and DRAMs is paying off.

This year our Wireless Test business has gained market share and scored significant design wins in cellular and NFC testing.

Despite this, revenue will be down year-over-year as market compression continues and the ramp of LTE handsets in China is slower than expected.

However, we are optimistic that 2015 will return to growth and we're well-positioned to benefit as we've continued to earn cellular design wins through the year.

We now count 8 of the top 10 smart manufacturers in cellular test as customers.

And we are just at the beginning of the NFC test growth curve as well.

While the cellular wins are important, they are all multi-source situations where volume is likely to be split among several suppliers.

On the other hand, our NFC radiated tester is a groundbreaking product with a leading position in this developing segment.

Our System Test business will see about a 6% growth this year in revenue and solid profitability.

This is due to strong customer pull for our newly introduced multi-site in-line board tester and an increase in our Storage Test business.

Storage Test is an encouraging story as we have swung from eight quarters of losses to a forecasted profit in the second half of 2014.

Adapting our product for 3.5-inch drive cloud storage applications and SSD testing has driven the turnaround.

As we enter 2015, we are optimistic that these two growth segments in Storage Test will drive further sequential revenue and profit growth.

I'd now like to shift to the topic of our growth over the next few years at Teradyne.

The two components of this are core market earnings growth and accretive M&A in adjacent markets.

In our core SoC business, we see favorable trends and capital intensity that should reverse the gradual market decline we've seen for the past decade.

As you know, over the past 10 years, the SoC test market has compressed from about a $3 billion annual run rate to about $2.2 billion today.

This negative 3% compound annual growth rate market shrink has been offset in Teradyne's case by market share gains and improvements in our financial model.

The encouraging news is that we now see signs of this market compression trend reversing in Semi Tests.

Let me break this down and explain this in terms of the market dynamics.

Over a ten-year period, the average annual increase in SoC device unit volume of about 8% combined with increasing device complexity and test time would normally drive test market sizes higher each year.

However, offsetting this trend has been increased tester efficiency.

Although there are many factors at play, this efficiency increase comes from two primary sources.

First, roughly every three to four years new instrumentation is introduced into the market using the latest semiconductor technology.

This Moore's Law effect alone produces about a 30% reduction in tester capital cost per device test insertion.

It doesn't happen all at once, as it takes many years for new instruments to filter into the market.

And they typically are used for new devices while legacy devices stay tooled on legacy testers, but the efficiency improvement is there.

In addition, on roughly the same thee to four year cadence, parallelism of the test cell has also doubled.

Thus, over the past 10 years, the combination of new instrument cost reduction and increased parallelism has more than offset the 8% unit growth CAGR and the increasing test complexity.

The net effect has been a 3% annual reduction in the SoC tester TAM cited earlier.

However, while the new instrument cost efficiency should continue at pace for the rest of the decade, the efficiency impact of increased parallelism from many devices is reaching the point of diminishing returns.

Each successive doubling of parallelism yields a smaller cost improvement and a diminishing impact on the tester market.

In our view, the net impact of this diminishing return, assuming device unit growth remains in the 8% range, turns the 3% historic annual SoC market shrink into about a 3% to 5% annual market growth.

What will this mean for Teradyne?

A 5% growth in a nominal $2.2 billion market today will add about $55 million of annual revenue and $0.10 of EPS per year.

Combine that with our target of 1% annual share gains, adding another $0.02 to $0.03, and we have an attractive earnings engine in Semi SoC Test.

Although we do not project the Memory Test market to grow, moving from our 30% share to 40% share over the next three to four years could add another $0.07 of EPS.

Of course, quarter-to-quarter and year-to-year growth will continue to vary based on short-term market dynamics.

Still, we consider the long-term market trends to be favorable towards growth in the SoC test segment.

Now let me turn to Wireless Test.

In this market, we've seen the rapid market expansion of 2011 and 2012 mirrored by a rapid market compression over the past two years.

Post the growth years of 2011 and 2012, test equipment makers shifted focus to efficiency and optimization by introducing lower-cost testers with higher throughput.

With tester product design cycles in this segment running under one year, these improvements have been rapidly engineered and brought to market to help customers offset the growth in unit cost, unit volume and test complexity.

At the same time, customers have optimized test flows based on yield learnings from the initial ramp in 2011 and 2012 resulting in additional efficiency.

Although the upswings and down strings have been dramatic, we see the market has stabilized as these improvements have been widely adopted at this point.

This segment has proven difficult to model, but we believe that compression has run its course and we expect modest market growth in 2015.

In addition to these core markets, we are committed to grow into adjacent markets through M&A.

Clearer EPS accretion is required for any acquisition and we remain patient for the right value proposition to materialize.

As we continue to generate cash, there will be ample opportunity in the coming years for both M&A and returning capital to our shareholders.

Let me now turn it over to Greg to give you more details on the numbers.

Thanks, Mark and good morning, everyone.

(technical difficulty) I'll start with the key highlights of 2014 to date and then cover the third quarter details and fourth quarter outlook.

I'll then describe how we're thinking about next year and close with a few comments on capital allocation.

This year's on track to be over $1.6 billion in revenue with a 19% operating profit rate and about $235 million of free cash flow which is after putting in place about $75 million of UltraFLEX leases and contributing $30 million to fully fund our US pension plan.

2014 is solidly on track to be the fifth consecutive year of operating above the industry target profit rate of 15%.

This consistent string of good financial performance stems not only from our optimized operating model, which we've outlined in prior calls, but also from seeing where the hockey puck is going.

This is both in targeting the segments that offer the greatest growth, such as mobility and IOT markets and carefully teasing out the future product features that our customers value the most.

This critical product planning capability comes from having our lights well out in front with the leading device players.

Moving to the details of the third quarter, our sales were $478 million.

The non-GAAP operating profit rate was 24% and non-GAAP EPS was $0.44.

We had no 10% customer in the quarter.

Non-GAAP gross margins were 55%.

You'll see our non-GAAP operating expenses were down $6 million to $145 million compared to the second quarter due to lower variable compensation accruals in certain one-time G&A credits.

Moving to the segment level detail, Semi Test orders were $203 million.

The sequential decline was in line with familiar consumer seasonal patterns and the strong first-half pull in.

Our SoC test product orders were $141 million and Memory Test product orders were $25 million.

Semi Test service orders were $37 million.

Semi Test revenue was $380 million, which included $290 million of SoC product, $58 million of service and $32 million of Memory product.

We expect to gain share in SoC tests again this year, led by very strong apps processor demand.

This will be a record year for UltraFLEX shipments.

Our operations team has already delivered more UltraFLEXs onto customer factory floors year-to-date than during any other full year period.

And this has all been done with compressed lead times.

This type of delivery performance is just one example of why, in 2014, we received the highest score ever awarded to an equipment provider in Vellai LSI's research's customer survey.

As Mark noted, the growth -- the story Memory Test is similar as we are growing in a flat market led by our strength in low-power DRAM and flash test.

Before leaving Semi Test, I'd like to say a few words about UltraFLEX leases as this has been an area of investor interest over the past few months.

First, to put in some perspective, in a normal year we invest about $10 million of our equipment into lease type arrangements with customers.

In 2014 however, we're on course to invest about $75 million, of which, one customer accounts for 95% of this.

All of these lease systems have been delivered.

After one year at this large customer, these leases can be canceled with two months notice.

We can't currently predict whether some or all of these leases will be continued post the initial period, bought out at fair value or canceled and returned.

It's important to note that these UltraFLEX configurations have a long life with broad market acceptance.

So we can redeploy these testers if needed.

If returned, we'd get a very good lift in cash flows when we redeploy the testers, as we've already invested the cash in this product.

Going forward we don't expect our leasing investments to grow, as financing terms from leasing companies are typically more favorable to customers as they have a lower cost of capital.

The leasing program with this large customer inflated our total capital additions in 2014 to $146 million to date.

In 2015 we expect our gross CapEx to fall back to be between $90 million and $100 million.

Shifting to Wireless Tests, we booked $42 million and shipped $55 million in the third quarter.

Our market share momentum continues as we add share in cellular and NFC to our solid connectivity base.

We continue to be the wireless innovator, whether the first one with one box testing, non-signal testing, multi-duct testing and now the first radiated NFC tester for manufacturing.

This innovative wireless D&A continues to gain us favor with leading customers both in initial design wins and market share.

Moving to System Tests, orders were $28 million in the quarter and shipments were $43 million.

In defense and aerospace, we're on the winning team for the recently announced next generation US Army test system.

And in Production Board Tests, we've secured multiple new wins with our in-line test station which is well suited for automotive, industrial and mobile product applications.

Shifting now to the fourth quarter, sales are expected to be between $305 million and $330 million and the non-GAAP EPS range is $0.08 to $0.14 on a 218 million diluted shares.

Q4 guidance excludes the pension mark to market charge, amortization of acquired intangibles and the related tax impact.

Our GAAP EPS range is a loss of $0.11 to $0.16 which includes a fourth quarter pension charge of about $50 million due to the adoption of new actuarial tables that contain revised mortality assumptions.

Of this $50 million, we will contribute $30 million to our US qualified plan in the fourth quarter which is off our balance sheet.

The remaining $20 million is for non-qualified and [foreign] plans and increases our long-term retirement liabilities on our balance sheet from about $90 million to about $110 million.

These payments will be funded with our long-term marketable securities.

The operating profit rate at the midpoint of our fourth quarter guidance is about 9% and we expect cash and marketable securities to increase by $50 million in the fourth quarter, leaving us with a year-end balance of $1.23 billion.

We provided some other details to assist you in your modeling in the slides which I won't cover in my remarks.

Now, regarding our 2015 market outlook, VLSI research currently forecasts next year's Semiconductor unit growth at a healthy 8%.

Balancing that, we expect lower spending in Applications Processor Tests after a very strong 2014.

So since it's too early to call the market size for next year, we'll keep our operations model primed to respond to whatever the market throws our way.

As Mark mentioned, we also expect to see a gradual slowing of parallel tests, as physical and economic constraints are reached on multiple fronts.

This will play out over a few years or more, but should lessen some of the productivity forces that have dampened the test market size.

Our operating model for 2015 is largely unchanged from 2014 other than a higher expected tax rate of about 25%.

This assumes the reinstatement of the R&D tax credit.

If it is not re-enacted, our tax rate will be a couple points higher.

Moving to capital allocation, we expect to end the year with gross cash and marketable securities of $1.23 billion.

This is up $30 million for the year after paying off the $190 million convert, adding $75 million of product leases, contributing $30 million to fully fund our US pension plan as noted earlier and distributing $38 million or 75% of expected dividend payments.

Of this total balance, about $500 million of our cash is offshore, an increase of $160 million from last year with a $130 million decrease in the US cash.

Given our sales mix this year, about 70% of our free cash flow was offshore, which is also why our tax rate is running at 18% for 2014.

Of our total expected US cash flow cash flow this year, our annualized dividend is tracking to about 40% of this amount.

This US cash flow includes our US free cash flow and cash received from our employee stock purchase plan.

So by this very short term measure, we have upped our capital returns significantly in 2014.

As we look increasingly at 2015, we'll continue to evaluate the best use for our cash and marketable securities, whether for highly selective M&A or returning more capital to shareholders.

2014 is shaping up as another year of solid financial performance, good market share momentum and also the year that we started our first ever dividend.

We look forward to next year and continuing to outperform the industry.

With that, I'll turn the call back to Andy.

Thanks, Greg.

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

(Operator Instructions)

John Pitzer, Credit Suisse.

This is Farhan, asking the question on behalf of John.

My first question is in regards to the circular market trend that you highlighted where you expect the test market to reverse from a decline to growth going forward.

My key question on that is that in regards to the test complexity that you mentioned that is an 8% increase per year and you said in your expectation that in order for the annual growth to -- for the test market to grow at 3% to 5%, but one of the keys I'm sure you had was the complexity continues to grow at the same rate.

However, we are seeing that the transistor costs are not declining anymore at the same rate and companies have been much more reluctant to add transistors and gross [complexities of silicon] in order to manage the costs.

So don't you think there is a structure in the increase of test complexity going forward as well?

Yes.

Thanks for the question.

I think test complexity -- transistor count isn't the only proxy for test complexity.

In a lot of devices, test complexity grows through functional complexity that doesn't scale directly with transistors.

So different modes, for example in an RF SoC device for lots of LTE bands would be one example of an increasing complexity; could be a tripling or a quadrupling of complexity in that device, but it doesn't necessarily mean a quadrupling or tripling of complexity of transistors.

So for a lot of mixed-signal and analog devices, I don't think there's a correlation.

On the digital front there's more of a correlation, but in fact, if you look at the proliferation of transistors and apps processors, it's been on a tremendous curve that's exceeded the rate of proliferation even in conventional MPUs in the past five years.

And I think that trend in terms of marketplace proliferation will continue for the rest of the decade.

What happens beyond the end of the decade with limitations in scaling down below 10 nanometers or 7 nanometers, I think is a reasonable question.

But in all likelihood in that case what will happen is stacked dies or multi-die packages will become the proxy for increasing transistor complexity and still drive test intensity.

Thank you.

And if you could provide some color on what you are expecting in terms of shipments by segment for the fourth quarter?

We don't typically guide shipments for the fourth quarter.

Semi test will clearly be the strongest segment.

So I'll leave it at that.

Timothy Arcuri, Cowen and Company.

Couple things; a follow-up on that last question.

Of the two factors that have been weighing on the size of -- or the rate at which the SoC test market could grow and actually shrink over time, is the factor that is lifting -- is that related to Moore's Law?

And is the parallelism factor still in effect?

Thanks.

Actually Tim, the Moore's Law effect I think will continue through the rest of the decade.

And that, as I mentioned, gives us about a 30% reduction in, let's say CapEx per test site every three to four years.

I don't think that will change for the rest of this decade.

The parallelism on the other hand is the area where there's diminishing returns.

A combination of the next step in parallelism having a smaller impact on our market and a bit of a slowing down of that effect is a thing that's ameliorating.

When you put the two together, by far the biggest impact of the two has been the Moore's Law effect, but the mere reduction in the parallelism the effect takes that 3% negative CAGR to something on the order of a 3% to 5% growth.

Okay.

Awesome.

Thank you for that.

Two more quick things.

First of all, certainly the size of SoC market this year was boosted by those leases that you've been talking about, but can you give us some idea of what you think that your SoC test sales will do next year?

It seems like they're going to be flat plus or minus, but I wanted your view there.

Lastly, I wanted your view on the competitive environment in wireless tests because given the size that the market is now, it's shrunk down to $600 million; it's a pretty small market to have five big companies, RODI and Keysight and you and everyone else chasing after.

What's going to change the highly competitive pricing environment in wireless test to get that market to again start to grow?

I'll take the first part and I'll give the wireless to you, Mark.

Tim, the leases themselves didn't really escalate the market size or our business because those are rentals.

It's monthly rentals.

They're operated leases.

So that didn't have a significant impact on our results.

We certainly benefited from total applications processor demand, which where there are many testers that were sold for that.

So I hope that clarifies what you're getting at.

Then on the wireless question, you're right.

I think certainly with a market in the $600 million, $700 million range, having five large suppliers is too much supply into that market.

So there will be a period of shake out and digestion here.

What we look for in that is, are we securing higher rates of adoption than our competitors so that when it does sort out, we emerge as the dominant supplier of whatever's left standing.

And that's the progress we've been making.

A year ago, in 2013, we ended the year with essentially our first major design-in for LTE cellular testing.

We sit here today going into the fourth quarter with 8 of the top 10 smartphone manufacturers having adopted the LitePoint cellular platforms.

So we're making progress.

It will be a couple years to sort out, there's no doubt in my mind.

But if we have the most innovative product and the demonstration of that is increasing market share, then we believe we'll emerge at the end of that as one of the major players.

Thanks a lot.

C.J. Muse, ISI Group.

First question, intrigued on your comments regarding the SoC test buy rate.

Would love to hear your thoughts on where you expect that inflection to happen first, what we should be looking at for evidence to point that will happen, and if you think about the implications over the next two, three, four years, what could that mean for what the size of the SoC test market could look like?

Sure.

That's a good point that various segments inside SoC test will reach this diminishing returns point in parallel test at different rates.

So certainly in the, what I would call complex analog SoC device case, those might be things like RF transceivers and power management.

Those kind of devices I think are at that point.

Applications processors, very high content digital, are also reaching that point.

On the other hand, if you look at things such as automotive power, electronics; I don't believe they've reached that point yet.

There's still probably several years to go before there's that diminishing return curve.

If you jump it way up, roughly I would say, 50% to 67% of the market is in a phase of diminishing returns.

What I said in the remarks is that if you then work that out for the rest of the decade, we see a 3% to 5% growth, so a negative 3% shrink move into a 3% to 5% growth.

On a $2.2 billion market, that's roughly an extra $100 million a year of market growth on average and if Teradyne is at 50% market share, that's about $50 million, $55 million of incremental revenue to us.

And given the drop through on that business, it translates to about $0.10 a share of earnings on an annual basis.

Now, of course, any given year, if you've been around the industry, you know the swings in the market size are quite dramatic.

So both on the compression side and from here on out, the growth side, these are trend lines that I think are averages.

What happens in one year versus the next, I bet will still be noisy.

That's very helpful.

As my follow-up, as you stand here today and look out to 2015, curious across your adjacent businesses, so LitePoint, HDD, SSD, other system tests, where do you see the best opportunity for growth?

Well for 2015, it's tough sitting here to day today to get a read on that, but I'll give you a little bit of color.

Certainly we think that the storage test area will be an opportunity for a turnaround in growth.

The repositioning we've done for solid state drive testing and cloud-based testing has both resulted in order volume in the second half of the year to get us back to profit.

We do see that momentum picking up in terms of orders as we get toward the end of the year and into next year.

So that's one area that will be incrementally positive.

I think production board test will be positive.

I think the LitePoint business will also be positive.

So the real thing that's hard to read right now is semi test.

Because what we said earlier is we had an abnormally large tooling year in 2014 around applications processors.

We don't expect, it's possible, but we don't expect, that in and of itself will repeat next year.

On the other hand, there are certain segments this year that were uncharacteristically weak that are strengthening.

An example of that might be the area of image sensor testing.

Image sensors show up of course in handsets, but they also show up in automotive and other applications.

We see that picking up dramatically next year.

We see automotive, which was strong all year continuing to build strength.

So it could very well be that emergence of those relatively quiet markets will offset what we expect to be a decline in apps processors.

The one thing that could turn on apps processors for us, that could make it a much larger year next year, would be if the market penetration of the premium smartphones in China is high.

If the places where our semi test business is strong around apps processors finds high penetration in China, that could be an upside.

Very helpful.

Thank you.

Jim Covello, Goldman Sachs.

Appreciate the strategic commentary around the business very much.

It was very helpful this quarter.

In terms of the comment from Mark about there was the record level of tester shift in the middle of the year, but the good news being that those testers all are all running at full utilization rates, I'm wondering if we could get a little bit more color on that comment?

In particular around, given the season seasonal elements of the business, what would those full utilization rates of those testers translate into in terms of orders timing-wise as we go through 2015?

Is that something we could expect reorders on in the early part of 2015 or just given the seasonality of the business, would that be a little later?

Yes.

I think one of the things that's a bit unique actually, just to extend that, is yes, they're highly utilized right now and uncharacteristically we will see some additional capacity bought here in our fourth quarter for that kind of segment, which traditionally in the fourth quarter we would not see.

So there's actually some momentum carrying forward here in the fourth.

I really have to believe that like prior years, the production ramp will slow down a bit in Q1.

There won't be additional capacity in Q1 as there hasn't been in past years and that the next phase, when it emerges, would be more toward the May, June time frame.

Very helpful there.

Then in terms of capital allocation commentary, that was very helpful as well.

If I could paraphrase, I just want to make sure I was understanding the message as clearly as possible.

It sounded like part of the message was, listen, there's a lot of cash there, but there is a lot of one off uses for that cash in 2014.

There may not be as many one-off uses of that cash in 2015.

Therefore, we could see more capital allocation going back to shareholders.

Is that a fair characterization of what you guys were trying to communicate?

I think that's close, Jim, but the capital return discussions continue each quarter.

And it's directly tied to what's in our M&A pipeline and we have a very good and active pipeline.

So it's looking at that, how executable do we think that is relative to we see some good opportunities to return capital.

We want to change it to we can do both versus it's an either or.

So that's what we're going to try to focus on in 2015.

That's great.

I really appreciate it.

Thanks very much for all the good commentary.

Tom Diffely, D.A. Davidson.

Another question on your mid to longer term view.

I'm kind of curious what the IOT, internet of things, impact is if we assume a lot of the growth comes from very low cost chips, what does that do to your competitive advantage and maybe the margin structure over the next couple years?

This is Greg.

On the IOT, this would help both semi and LitePoint.

We've got products that are designed for some of the sweet spots.

We have very good strength in microcontroller, which is the hub for some of these applications.

We are very strong in any of the wireless standards.

So we're approaching it both from the semi test and the wireless side.

At the wireless side we have some unique advantages: that our products are easier to use and in this segment, there'll be many more competitors who don't have a deep engineering capability.

So they need a very simple easy-to-use solution.

So I think LitePoint has some opportunities there as well.

It is hard, having said all that, what does it mean in numbers a couple years down the road?

We do believe we're well-positioned to benefit quite nicely from whoever grows there.

We're going to be the solution behind the scenes that helps that take off.

So you think from a competitive point of view your products are -- the competition's not closer to where you are in the low-cost chips?

Correct.

We are very strong with microcontroller and wireless.

I think we have a huge advantage the semi side there.

I'd say on the semi side for example, one of the lowest cost communication standards out there is Bluetooth.

And Bluetooth has been a sweet spot of our whole wireless test side of semi test.

It's certainly a less complex standard than something like an RF LTE or a Wi-Fi combo chip.

So the test intensity for what will emerge in the internet of things around Bluetooth will be lower.

On the other hand, when you look at things like machine to machine communication in industrial environments, which will more likely be over Wi-Fi or more smart utility applications that will be over LTE bands, that will fuel the same level of complexity and technology that you see in smartphones in those applications.

And that will be a benefit.

Okay.

That's good to hear.

Moving over to the wireless side, you said you had 8 of the top 10 as customers.

Do these customers typically dual-source or tri-source these sets or once you are in, do you expect a big slug of business?

They dual-source invariably.

They usually have three vendors and they'll pick two.

As we're the new guy and we tend to be the innovator, they choose us because they see we can deliver much more than they would otherwise get.

But they start off soft with the small amount of the purchase whether that's 10% or some number like that, so we get the low running product.

The incumbent gets the bigger running product, but we would expect over a number of couple years, we could move up our share so the key thing strategically for us this year at LitePoint was to get into these LTE Asian accounts.

We secured eight of them this year, so it was a very good year for us.

The business starts slow, but I think in a couple years or a year we should be in much better shape.

Okay.

Sounds good.

Thanks for your time.

Krish Sankar, Bank of America.

Two of them.

Just to clarify, Mark, did you say that the SoC market would grow 3% to 5% next year?

And then I had a follow-up.

I didn't try to project next year.

What I did say is if, I believe that you go off of a nominal market size of about $2.2 billion, that between now and the end of the decade when we're done, if you run a compound annual growth rate through there it will be in that 3% to 5% range.

So we are going to, overtime, see that sort of trend line.

Just like on the downside it hasn't been a year-over-year.

Some years are up and down dramatically, 20%, 25% year-over-year, but the trend line has been unfortunately negative.

I expect to see that reverse for the next five or six years.

Got it.

So just to follow-up on that, do you have a view for the SoC market for next year and then I had a follow-up on LitePoint.

I think we said in the prepared remarks that we aren't ready quite to do that.

We certainly will comment next quarter a little bit more about that.

Got it.

Then just to follow-up on the LitePoint side, I think people understand the competition and the productivity and pricing challenges.

I'm just kind of curious, is the fundamental issue for the market share shrink over the last two to three years a factor that LitePoint as a product is really not differentiated any more, there's not any unique IP to it that competition can catch up to it, or do you think that you still have some secret sauce out there that would help you re-drive growth in that market?

We're very confident that we have secret sauce.

That's a new application, NFC.

We do the radiated testing because we work with a key customer with their engineers and develop a solution that works for their needs.

I think I said last call, we have other tricks up our sleeve but we don't announce them publicly.

There's other things we can do that are on our road map that we see will help our customers.

What happens, unfortunately though as we do that, the customer says to the competitor as you know, do what LitePoint does so that they're constantly chasing us, but we tend to be six months, nine months ahead.

These are very fast product cycles, but we expect we'll continue to be ahead.

We are clearly the production optimized, easy to use out-of-the-box leader.

So I do think on the production side, not the R&D side, a lot of our competitors are much stronger on the R&D preproduction side, they're going to win over there.

We're not really chasing that, but on the production side I do believe that's where our DNA is and our innovation and we've got more we can unleash.

Thanks.

Chad Dillard, Deutsche Bank.

I wanted to dig a little bit further into the NFC product that you were talking about.

Is it a standalone application or is it integrated within the cellular test product?

And how big of a market opportunity is it and where do you see your share there?

So it's not integrated into a cellular product.

It's a standalone product, which in terms of again optimizing efficiency for that new test insertion, is the best economic way to go about testing NFC.

Right now, it's somewhat of an emerging communication connectivity standard in handsets.

As it becomes more mission-critical, we expect that the market for that will grow.

Today, this year being I would say -- we launched the product in January this year at Mobile World Congress and when we look at the tail of the tape at the end of the year, we'll probably end up in the 40% to 50% share of NFC test this year.

Moving to SoC test, what is your order of visibility right now?

How much of 4Q is booked so far and how does it compare to this time last year?

The fourth quarter looks very, very solid.

We have some, as Mark mentioned earlier, we have some business in the fourth quarter that we don't typically get this late in a consumer cycle.

So it's a good quarter.

Some customers are still pulling quite hard.

We have good visibility and we expect it to be one of our better fourth quarters.

Just in general, when we go into a quarter, as I mentioned, fourth quarter to second quarter can be a two to one swing in product shipments.

So it's quite volatile.

In any given quarter we go in, we're probably, roughly speaking, 50% to 67% booked and the rest is turns, even at those peak quarters.

That, going into fourth quarter, is not that different.

Great.

Thank you.

[David Dilley, First Energy Corporation]

A quick clarification: do you expect your SoC test business to show the normal seasonality that it has over the last years with I think, orders being up in December and then revenue being up in March?

It's hard to say that right now, but that's the normal seasonal pattern.

The only thing that may be a little bit different is fourth quarter is stronger for semi test now.

So does that have some impact on Q1?

We don't know.

Some of the business we're seeing in the fourth quarter is above what you'd normally expect.

We've see this year, some business pulled in and that can affect the subsequent quarter.

It's too hard to give you a definitive response on that.

We tend to find the seasonal history has a way of repeating itself at different levels, but it tends to repeat itself.

Okay.

I think you mentioned somewhere in your prepared comments that you might have seen a delay in the ramp-up of Chinese handsets.

Could you talk about what you are seeing there and a little bit more color around that commentary?

I guess I would have expected LitePoint business to show less seasonality in Q4 or maybe even grow given the rapid shipments of handsets from your biggest customer and then a bunch of the other Asian guys ramping up.

Yes.

I think at the beginning of the year there was a lot of optimism and some actual forecasts that perhaps China LTE shipments could be in excess of 100 million units for the year.

As the year's played out, it's certainly beginning to pick up now.

There's no doubt.

Maybe getting up to a run rate in excess of 10 million units a month.

But as Greg mentioned, the design-ins that we have secured have given us some participation in that ramp that's starting now.

But we are still the newcomer and getting the smaller portion of that ramp.

So as the tooling cycles go on, we believe what happens is we prove out the efficiency claims we've made for the ramps here in Q4 as a minority player and then build share and penetration throughout next year.

Okay.

And just one final clarification.

You've essentially talked about the buy rate in SoC going up.

What do you think the buy rate is in 2014?

And over this ten-year period, what do you think the buy rate goes to?

Let's see, I haven't done the math on the buy rate over the ten-year period looking forward.

In 2014, it's certainly up.

It may be up 0.1 points or so.

But I would expect that to slowly move up over time.

The thing we look at more carefully in buy rate is the correlation to unit volume growth.

The unit volume growth is what really drives our business.

The buy rate, as a function of semiconductor revenue, is less correlated it turns out, to our business.

Okay.

Thanks.

Patrick Ho, Stifel Nicolaus.

As it relates to the wireless test business, given the competitive nature that you've seen probably over the last two years, have you seen any changes to your operating model for that business segment and what the potential impacts going forward, particularly as we head into 2015?

We haven't seen a meaningful change to our operating model.

We're still doing quite well percentage-wise, but the dollars are far less.

So we have a competitive cost structure, very competitive COGS in our products because they're designed for the product at hand.

They're not a general-purpose tester or some tester that was started in R&D and then moved to manufacturing.

So at one level, the model looks good, but compared to what it could look like if we got some greater growth, then it would be outstanding.

So it's a healthy business now with good percentages.

We've expanded the footprint get into Asia so that's all built out.

We're not hiring there anymore and now it's about standing out these accounts that we've broken out which is a couple year process.

Right.

My follow-up question, again on the wireless test side of things, the China LTE ramp that you mentioned has been slower to ramp.

One, how do you see that shaping up in 2015?

And secondly, what other type of market drivers do you see overall as you head into next year?

I think it's hard for us to predict which supplier will benefit most from the ramp in China, which is why we've had a pretty broad initiative to get installed as broadly as possible.

So 8 out of 10 is really trying to get that footprint to be agnostic to who wins, but we're not indifferent.

Certain suppliers, if they ramp faster than others, would benefit us.

But again, that's something out of our control.

The other thing that's happening is the LTE standards in China are something that will roll into a couple hundred million unit annual volume next year, is our belief.

That's a benefit to the industry and to us.

Outside of China, the move to advanced carrier aggregation and LTE advanced standards is another balloon in terms of test complexity coming into the equation.

So earlier, when I commented that we think a lot of the optimization, which has been severe and very rapid, has run its course, it's sort of looking at those two trends: a big jump in China LTE and complex carrier aggregation LTE advanced standards proliferating in the US and elsewhere.

Great.

Thank you.

There are no further questions.

Great.

Well, let's wrap this up.

Thank you, everyone for joining us today and we look forward to talking to you in the days ahead.

Thank you.

Thanks.

This concludes today's conference call.

You may now disconnect.