泰瑞達 (TER) 2014 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Teradyne Q4 2014 earnings conference call.

(Operator Instructions)

Thank you.

Andrew Blanchard, Vice President of Investor Relations, you may begin your conference.

Thank you, Kevin.

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 fourth quarter and full year 2014, as well as our outlook for the first quarter of this year.

The press release containing our fourth-quarter results was issued last night.

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

And 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, 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, including with respect to our dividend and share repurchase programs, which may be discontinued depending on general economic and market conditions and other considerations.

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've posted additional information concerning those non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measure, where available, on the investor page of the website.

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

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 first quarter.

Greg will then offer more details on our 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.

Mark?

Thanks, Andy.

And good morning, everyone.

Today I'd like to cover three topics with you -- first, our performance in 2014; second, the outlook for our markets in 2015; and, third, our capital allocation plans for 2015.

Greg will then review the numbers and our capital plans in detail.

2014 was a very good year for Teradyne, with sales up about 15% and non-GAAP operating profit up over 25%.

Most of this gain came from our semiconductor test business where sales and profits grew 27% and 50%, respectively.

A strong SOC test market in 2014 of about $2.35 billion, combined with our 2 point share gain to 50% in this segment, led to most of our year-over-year increase.

Mobility devices such as applications processors, wireless transceivers and power management ICs all posted above average demand in the year, as the combination of new nodes, higher than average complexity advances and a wider proliferation of new product introductions drove demand.

Our strong share position in these device segments was responsible for much of our year-over-year revenue increase.

During the year our R&D pipeline introduced new RF, digital and collaborative software products in this segment.

The software, called Oasis, is particularly appealing as it allows widely dispersed teams of tens of development engineers to collaborate on increasingly complex test program development.

This yields time-to-market advantages that are key in the fast-moving mobility space, where complexity grows dramatically every year and volume ramps get even steeper.

The memory market was about flat year over year at around $500 million.

And here we picked up about 1 point of share to 27%.

2014 marked our highest level of memory test revenue since the year 2000.

Our new Magnum V memory tester won numerous design wins and began to ramp in 2014.

The product is now well-positioned at four of the top five flash manufacturers.

Additionally, at the end of 2014, we secured two design wins for our new high-speed DRAM tester for known good die.

Known good die is a developing trend as more bare die get tested at speed to allow for more die-on-died mounting in future mobile devices.

Looking forward, we see the 2015 SOC test market in the $1.9 billion to $2.2 billion range.

Coming off an above average year for mobile device test tooling in 2014, we expect to see the same pattern we've seen over the past five years, where this year's capacity [adds] will fall below the average as mobile device test editions from 2014 are digested and optimized.

We then expect another surge in 2016 as more aggressive technology node migration and more complex functional content combine to drive test intensity.

Other SOC segments like linear, mixed-signal automotive and MCU should be flat to up 3% year over year.

Stepping back to a broader perspective, as I mentioned last call, we still see a nominal $2.2 billion SOC market growing 3% to 5% over the mid term, assuming an 8% unit growth rate in semiconductors.

At the same time, we expect this pattern of year-to-year and seasonal swings to remain a part of the SOC test market over the next few years.

In memory test, we see the market in 2015 as essentially flat at $500 million.

Higher-speed interfaces in both flash and DRAM continue to grow and swing more of the market to the sweet spot of our product offerings.

And our plan is to pick up 2 to 3 points of share in 2015.

Turning to wireless test, last year our LitePoint business gained market share and scored significant design wins in cellular and NFC testing.

We are now qualified and positioned in 8 of the top 10 handset manufacturers.

Despite this, revenue was down year over year as the market compressed even more than our earlier forecasts due to the continued tester productivity and pricing pressures.

We estimate the wireless test production market was in the $500 million range in 2014.

Looking forward, we expect modest market growth in this segment over the next few years as handset growth rates, while still high, continue to slow.

We expect this market to be in the $450 million to $600 million range in 2015, with LitePoint gaining a few points of share, building off our design wins in 2014.

LTE, LTE Advanced and 802.11ac adoption will continue at a fast pace.

And this, combined with new standards like NFC testing, are the opportunity for LitePoint.

Further, the proliferation of reliable high-bandwidth connections in vehicles over the next five years will be another driver of test intensity, as quality and reliability of these connections will be paramount.

Our system test business saw about a 6% year-on-year increase in revenue and solid profitability.

This was 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 continues its recovery as revenue more than doubled year on year, and the group returned to profitability in the fourth quarter.

Steady progress in SSD testing has led much of the recovery.

And the traditional hard disk drive test business is also showing signs of recovery.

As we look to 2015, we see a return to buying in the enterprise and cloud-based storage drive market, as well as continued demand in the SSD space.

We expect double-digit revenue growth and the group to be back at model profit for the year.

Our production board test business grew over 15% in 2014 due to the success of our new in-line test product.

It's also notable that bookings in Asia grew 47% year over year.

After many years of decline, 2014 was a turning point to growth in this business, which we expect to continue in 2015.

Our defense and aerospace business saw a revenue decline in 2014 due to the anticipated wind down of some legacy programs in the DoD.

Despite this, the group still delivered above model profits and enhanced its product portfolio with the acquisition of AIT in the fourth quarter.

AIT brings advanced test instrumentation to the testing of high-speed communications interfaces increasingly found in all forms of military hardware, from aircraft to drones to ground vehicles to smart munitions.

As legacy weapons systems get retrofitted and new systems come online, this product will play an increasingly important role in our defense and aerospace test business.

We expect the combination of new DoD programs ramping and AIT to put us back on a growth trajectory in 2015 and beyond.

Finally, let me turn to capital allocation.

2014 was a strong year for cash generation at Teradyne with over $300 million of free cash flow.

During the year, we paid off our convertible debt and initiated our first quarterly dividend.

We've also been very active on the business development front working, on select, attractive M&A candidates to enhance our strategic position for the long term.

Technology businesses evolve quickly, and capitalizing on turning points both in organic R&D and M&A is vital for long-term success.

A balanced approach of capital return and investing in the business is our recipe for long-term success for the Company and the shareholders.

As we enter 2015 and look at the total portfolio of opportunities ahead of us, we've decided to increase our stock buyback authorization to $500 million, while maintaining our quarterly dividend at its current level.

We plan to execute $300 million of this total authorization in 2015.

As we move through the year, we will continue to assess our M&A pipeline and core business cash generation to determine if a buyback above the $300 million level in 2015 is warranted.

Let me now turn it over to Greg.

Thanks, Mark.

And good morning, everyone.

I'll start with the key highlights of 2014 and then I'll detail our 2015 capital allocation plans and how those plans reconcile to our cash requirements, our M&A prospects and longer-term plans.

I'll then cover the fourth-quarter results and first-quarter outlook and close with some perspective on 2015.

On the financial highlight front, 2014 goes into the annals of Teradyne as our fifth consecutive year of exceeding the ATE industry model profit rate.

In 2014, we achieved a non-GAAP operating profit rate of 19%, 4 points above the model rate of 15%.

Over the last five-year period, our non-GAAP operating profit rate has ranged from 18% to 28% and averaged out at a 22% annual rate.

This solid 2014 and multi-year performance places us right alongside the best-run semi equipment suppliers.

In 2014, we achieved sales of $1.648 billion, up 15% from the prior year, and non-GAAP operating income of $321 million, up 26% from the prior year.

We also generated $323 million in free cash flow after investing about $75 million in leased testers, and contributing $30 million to fully fund our US pension plan.

Over the last five years our annual free cash flow has averaged about $290 million or 19% of sales.

The Teradyne of today is a far less volatile performer than in the past, with our lean OpEx and variable manufacturing model.

This optimized model has allowed us to stay in the black even in the seasonal fourth-quarter troughs where sales are often down about 40% from the peak quarter.

SOC test buying cycles have ebbed and flowed year to year between on and off mobility test buying rather than sizable over-buying, followed by prolonged corrections.

Mobility buying was very strong in 2012 and 2014, and we averaged a 21% non-GAAP operating profit rate in these on years.

In the off buying years of 2011 and 2013, despite sales being down about $200 million Company-wide, we nonetheless earned above the 15% industry model profit rate.

While I've previously described the market and product strategy behind our strong financial performance, I'll quickly summarize it again now, as it's how we plan on growing earnings looking ahead.

First, we are highly selective and target the most attractive markets.

And we likewise avoid the hard to differentiate segments.

After selecting the most attractive segments to target, we work closely with the leading and most demanding players to tease out their future test challenges.

We then design new products with lower cost of test through higher device throughput, while also reducing their time-to-volume production with faster programming and debugging tools.

We often also deliver greater accuracy and therefore better device yield as there is less guard banding needed.

This combination of a very efficient and optimized model with lean OpEx and variable manufacturing, coupled with identifying submarkets and customers that are attractive, both in growth rate and the ability to differentiate, continues to set us apart.

By executing this strategy, we set another semi test share record in 2014, reaching 46% share in the combined SOC and memory market, up 2 points from last year's record.

You may recall from prior calls that about half of our market share gains come from being in healthier markets, which capture a growing share of the total test wallet, and the other half are net share wins from head-to-head battles.

In 2014, we also benefited from higher-than-normal application processing buying.

So we'd expect 2015 segment shifts to be less favorable for us and expect to hold share about flat for the year.

Our largest semi test competitor has about 41% share, so the two largest players have a combined 87% share of the market.

However, this market remains as competitive as ever.

This has had a direct impact on our operating expenses.

After aggressive reductions in 2008 and 2009, our semi test OpEx has trended back up due to that competitive environment.

These investments have been fundamental to our 10 points of share gain over the last four years, and our product and support lineup is stronger than ever.

Still, we continue to look for opportunities to scale this OpEx investment back, and expect our 2015 spend in both semi test and at the Company level to be equal to or lower than 2014.

Turning now to a quick summary of the strategic highlights of 2014, we fielded over 10 new innovative products and enhancements across the Company.

Mark noted a few key products in semi test that have driven our share forward.

At LitePoint, we introduced and shipped in volume a new product for NFC radiated test and extended our conductivity share position with the leading 802.11ac MIMO and beamforming test solution.

In system test, we have successfully entered the 3.5 and SSD storage markets, expanded our reach in defense and aerospace with the AIT purchase, and established a profitable growth path for the production for our test business.

Now, moving to our 2015 capital allocation plans, the $500 million buyback approved by our Board is based upon our strong business model and confidence in Teradyne's future.

We plan on buying back $300 million in 2015, either through an ASR, open market purchases, or a combination of the two.

I should point out that we also have a healthy pipeline of attractive M&A opportunities which require that we preserve some balance sheet flexibility.

Of course, we'll continually review the returns we can achieve from our M&A pipeline and get an even greater capital return.

We've also included a schedule that shows our total cash and marketable securities balances along with our minimum cash needs.

You'll note that, similar to some other peer companies, we did about a year's worth of OpEx, or roughly $500 million as our minimum cash, of which $400 million is needed in the US.

Hence the planned 2015 buyback of $300 million is quite significant against our beginning US balance of $683 million.

The $300 million is, of course, in addition to about $50 million that we expect to spend on dividends in 2015.

You can also see that we have $616 million offshore, well above our $100 million minimum foreign balance.

This is a result of a lower offshore tax rate that we have enjoyed over many years for a portion of our foreign sales.

We may find a foreign acquisition that meets our strict acquisition criteria where this excess cash can be efficiently deployed.

Barring this, we look to bring this foreign cash back when and if there is a repatriation holiday.

Longer term, absent a cataclysmic environment, we plan to generate additional US and foreign cash each year.

We plan to update you each January on our current-year capital return plans rather than setting a rigid long-term formula now.

Moving to the details of the fourth quarter, our sales were $323 million, the non-GAAP operating profit rate was 11%, and non-GAAP EPS was $0.14.

We had two 10% customers in the quarter.

Non-GAAP gross margins were 53%.

You'll see our non-GAAP operating expenses were down $9 million to $136 million compared to the third quarter, due to lower variable compensation accruals.

Moving to our segment level details, semi test bookings were $226 million, in line with the familiar consumer seasonal patterns and the strong first-half pulling.

SOC test orders were $201 million and memory test orders were $25 million.

Semi test service orders were $61 million of the total.

Before leaving semi test, I'd like to quickly update you on the UltraFLEX leases which have a one-year initial term.

In 2014 we invested approximately $75 million in lease testers.

Currently, we expect about 20% of these testers to be bought out in the first quarter.

In 2015, we expect our gross CapEx to fall back to about $90 million to $100 million.

Shifting now to wireless test, we booked $39 million and shipped $40 million in the fourth quarter, the highest fourth-quarter revenue in history.

I'd like to now quickly cover the LitePoint goodwill charge.

As you can see from our release, we recorded a non-cash goodwill impairment charge of $99 million.

This was triggered primarily by the reduction in the wireless market size in 2014, which in turn tempers our longer-term view of the wireless test market size.

There was a large step-function change in the market size due to aggressive pricing, parallel test efficiencies and customers optimizing their existing equipment.

As Mark noted, the wireless test market, which came in at about $500 million in 2014, still offers growth opportunities looking ahead with LTE proliferation, test time expansion and unit growth.

However, this lower starting point of the wireless test market drives the goodwill impairment charge.

Now moving to system test, orders were $67 million in the quarter and shipments were $46 million.

Defense and aerospace orders more than doubled from Q3 on the strength of DoD system orders and annual service renewals.

And in production board test, though Q4 orders softened after a strong Q3, we finished 2014 with the highest full-year bookings in three years.

Sales for the first quarter are expected to be between $320 million and $345 million.

And the non-GAAP EPS range is $0.09 to $0.14 on 220 million diluted shares.

Q1 guidance excludes the amortization of acquired intangibles, a gain on the sale of an equity investment and the related tax impact.

The operating profit rate at the mid-point of our first-quarter guidance is about 11%.

Our 2015 tax rate is expected to be about 27%.

If the R&D tax credit is reinstated for 2015, that rate will drop to about 25%.

Post 2015, we expect our long-term tax rate to be in the high-20%s, assuming no R&D tax credit.

Before we completely close the book on 2014, it's worth highlighting one last time some of the key milestones achieved in 2014.

We notched our fifth consecutive year of operating above the industry model profit rate.

We achieved our highest-ever ATE market share position.

We scored the highest-ever VLSI score for customer satisfaction for any semi equipment provider.

And we initiated our first-ever quarterly dividend.

We now enter 2015 demonstrating our long-term confidence in our business and future earnings growth, with our planned $300 million buyback in 2015 against the announced $500 million authorized repurchase program.

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

Thanks, Greg.

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

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

(Operator Instructions)

Timothy Arcuri, Cowen and Company.

The first question, Greg, is just on the buyback.

This has been discussed for some time.

Obviously, you've been getting a lot of pressure on that.

And you're certainly buying back more than your cash flow this year.

And you always said you wanted to keep cash on hand for deals.

But what changed and why now?

This could've been done last quarter or the quarter before.

Is it that the asset prices of the stuff you want to buy are not coming down the way you thought?

So, the question is, why now?

I think last quarter on the call I did indicate that it's not an either/or.

We do intend to pursue highly strategic, very good fits into Teradyne and M&A, we can grow companies faster and return capital.

So, we can do both.

We also want to get a good look at the mid-term plan which we pull together about this time of year.

And we want to spend enough time with our Board to go through all the alternatives, tradeoffs, or M&A pipeline.

What we tried to signal to you guys last time is that we can do both.

Okay.

Thanks.

And then a question on wireless test.

It seems like a really terrible market.

We're hearing pricing is down 70%, 80% the last 12 to 18 months.

It just sounds really bad.

What's going to change the competitive issues there?

There's still five large companies trying to compete in a market that is really not big anymore at all.

So, what's going to catapult you back into the technology lead?

Do you have to make another M&A deal there?

And what's your assessment, broadly, of what the competitive issues are?

And, importantly, what's going to make it better?

I'll take that one, Jim.

You're right in terms of the fact that the market has contracted dramatically.

I wouldn't say pricing is down as much as you suggested but it has been down.

The thing that's going to play out, as I mentioned in my remarks, over the next few years, I think, it will be a continued tough market.

There's some technical innovations in how handsets and such get tested that we believe will break out over the next two to three years, and allow Teradyne, we plan, to emerge from that.

As long as the market stays in its current algorithm around how it's testing the handsets, it will be a tough slow-growth market.

But we do see some things coming with the proliferation of more bands and phones and the premium on, how does that phone switch bands, hand off voice to Wi-Fi, get voiceover LTE going?

All of that complexity probably requires a rethink on how phones get tested, and we've got some work going on in that direction.

Okay.

And maybe last thing, Greg, can you give us just a sense of what you think gross margin's going to be for March?

Thanks so much.

Gross margins, we think gross margins for the year will be about flat with last year.

Did you ask just for the first quarter?

Yes.

First quarter, 52% to 53%, similar (inaudible).

Jim Covello, Goldman Sachs.

First question for Greg.

Greg, the chart on your US cash versus your foreign cash is really helpful.

Thank you for that.

Could you give us some sense of what dictates where the difference in where the cash is generated year to year?

There's some pretty dramatic changes as you laid out the FY12, FY13 and FY14 in terms of where the cash flow is generated and therefore domiciled.

If you could give us some sense on that, that would be great.

Sure, Jim.

What drives the foreign cash high as a percent in some years is UltraFLEX and J750.

Those are both very successful, high-runner products, huge install bases.

Those profits for foreign customers end up in Singapore.

So, that's the foreign cash that gets trapped.

Our other businesses, whether it's LitePoint, Eagle, Nextest, mil-aero, production board test, that would be US cash flow.

And it's the mix of how those businesses perform year to year affects the cash flows in one location versus the other.

That's incredibly helpful.

Thank you.

And if I could, just for my follow-up, congratulations on announcing the buyback.

It's a great buyback buying back 7.5% of the Company this year.

It looks like you are matching the current year buyback with the previous year's cash flow.

Is that an intentional issue or is that just more coincidence?

Because I remember you did something relatively similar with the dividend that you announced last year, the outlay was consistent with the previous year's cash flow.

Is that how we should think about maybe the capital allocation incrementally going forward?

Thanks.

I wouldn't think of it that way per se, Jim.

After this $350 million, the buyback and the dividend, if you model Teradyne -- it's hard to model US versus foreign cash flow, but no matter how you do it you're going to see that there isn't really any excess cash in the US at the end of this buyback.

So that's how we thought about it.

We have a foreign cash trap problem which is the result of a lower tax rate.

So, it's more about bringing our US cash closer to the minimum balance.

That's terrific.

I really appreciate the color.

Thanks a lot and good luck.

CJ Muse, Evercore ISI.

The first question, your system test orders reached a roughly three-year peak here.

In your prepared remarks you talked about HDD and SSD.

I'm curious if you could expand on that.

And is that what's driving the strength in the order book?

And how should we think about the businesses in 2015 and beyond on the hard drive and solid state drive side?

Most of the growth in the systems test business did come from storage test.

And in 2014, we endeavored to get a good position in SSD testing.

That worked in our favor.

We ended up with over $20 million of test business in SSD testing in the year.

So, that was a significant part of the growth and the other part was the production board test side.

If we think about this year, the good news in storage test is it looks like, on top of the SSD business, we will see a return to buying at some level for hard disk drives for enterprise and cloud.

So, there's a trend there that looks good.

Mil-aero should also growth this year.

So I think, after many years of that section of the business being weak to down, we are back and going to see sequential years of growth.

Okay.

That's helpful.

And then as my follow-up, on the SOC test side, can you walk me through what gives you the confidence that we'll see a nice recovery in 2016?

I'm assuming there you're talking about the two-year cadence on AP.

And as part of that, can you weave in your thoughts again on the buy rate bottoming and potentially moving higher, as you discussed last call, as well as what you're seeing in terms of the weakening yen versus the dollar and how that might be impacting or not impacting the competitive landscape?

Okay.

A lot of topics there.

Let me start with the yen and dollar issue.

Our competitor being a yen- and euro-dominated currency in terms of their OpEx certainly we'll see a benefit from the exchange rates over time since the tester market world-wide is predominantly a dollar-based transaction.

We haven't seen any pricing changes as a result of that.

And as they've indicated, hopefully they'll take all of that to profit and we'll have a healthy ecosystem.

So, on that front, nothing new, so we just watch and see what will happen.

In terms of the year-to-year swings in the SOC market, and around mobility, it's really more than just applications processors.

It's a whole series of parts that includes the baseband, the RF, and the PMIC, and a variety of other things that have coincidentally been on this even year/odd year cadence.

For example, in 2014 what drove it above average, I would say, was a series of things happened in that year.

The diversity of new product introductions in the year was quite larger than normal.

We had more flavors of new handset products coming to market than would be typical.

And inside those handsets, there was more innovative capabilities in silicon than in a typical year of, say, the prior year 2013.

So those two things combined to drive test demand.

The other thing that happened in 2014 is there was, I would say, pent-up demand to refresh handsets in the consumer base.

And, so, the level of ramp around those new product introductions to meet the surge of demand for the handsets was quite high.

And if you look through the year the level of shipments isn't flat for handsets.

It peaked, perhaps, in the fourth quarter.

And so I think people have to tool to that peak.

In a year where the introductions may not be as, let's say, a lot of change in technology or diversity, a lot of that capacity can be smoothed out and reabsorbed.

So, I would say the fourth-quarter peak last year in handsets was probably higher than normal.

That explains why last year was high.

This year we think will be more like a 2013 market where there certainly will be change but not at that level.

When we look forward to 2016 why are we confident that 2016 will be another surge year?

It really gets into what we see are the underlying new designs and the technologies and the complexity of the new designs that are currently in a test chip mode that won't show up for another year and a half.

And when we look at that, and just from that extrapolate, we say, 2016 should be another big year of a more complex introduction of more diverse products, and that should drive our market.

So, a long-winded answer but that's how we look at it.

Very helpful.

Thank you.

Krish Sankar, Bank of America.

Mark, if I look at the LitePoint business, I think we all know the challenges that you're seeing in the competition.

It looks like you guys had a layoff in that division.

My question is, was it a profitable operating level in Q4, the wireless business?

And then I have a follow-up.

First of all, on the wireless, yes -- good questions.

In the wireless business last year we didn't really have any significant layoffs.

We made a few adjustments, less than a couple percent of the total workforce.

But the profit rate, it was profitable in the fourth quarter, and for the year it was profitable above the ATE industry model rate target of 15%.

It was above that.

So, while the market has been compressed, LitePoint as I think we've said in the past, has manufacturing production optimized testers, which generally means lower cost of goods sold and better throughput and easier to use in production, because they don't use a general-purpose tester or an R&D tester and try to convert it.

So, the gross margins and the operating profits are still good, but they're down from the record levels.

Prior to this year we were averaging much higher operating profit rates.

But, again, we're still north of the 15%.

Got it.

That's very helpful, Greg.

And then as a follow-up, with all the focus on IOT and things like that, I was wondering, if you look at the analog mixed-signal test market, are you actually seeing any of the traditional rack-and-stack guys or some of the software coming into the market and trying to, for lack of a better term, pull the LitePoint competitive situation in that segment?

Rack-and-stack equipment has always played a role at the simple device end of test for semiconductors.

And, so, for things like power amplifiers or discrete semiconductors, that's always been a situation that they've persisted in.

I think there is a trend for them trying to move further up the food chain.

So, that's happening.

But the complexity of these devices -- in other words, in order to get really innovative products at a low cost that a consumer would crave, requires some functionality that typically can't be produced in a simple device.

So, producing an advanced, let's say, Bluetooth or Wi-Fi-embedded microcontroller with a bunch of sensors and converters to do something significant for a consumer, is a complex chip.

It's not an expensive chip per se but it's complex.

And the ability for the rack-and-stack guys to move in and test those, I think is limited.

Got it.

Thanks, Mark.

Very helpful.

[Saran Seems], Credit Suisse.

This is Farhan from Credit Suisse.

My first question is regarding the capital allocation.

Can you just talk about the choice of buyback over dividend?

Wouldn't it be better if you had raised the dividend and maybe added buyback in addition to that?

So, just wanted to hear your thoughts on why not do some dividend plus buyback rather than just allocating everything to buyback.

We look at the total capital return first in total, and then we see you could increase the dividend and/or buy back the stock.

But we thought a very meaningful stock buyback, really depleting our US cash to the middle level, would be the strongest signal we can send to our long-term investors to really show the confidence that we have sitting here.

So we thought that was a stronger move.

And we also said each January we will update you on our next year's capital allocation plan.

So, stay tuned.

Next January we'll update you what the plan is then.

Got it.

Thank you.

And then my second question is for Mark.

The test market has consolidated from what used to be five to seven players down to primarily two large companies.

Mark, you mentioned the competitive dynamics continue to remain strong in the industry.

My question to you is, if it's a two-player market, how much of the competitive dynamics in the market is affected by your own actions?

And would the market be less competitive if you were a little less OpEx and maybe try to optimize the Company for margins rather than market share?

We have optimized the Company for margin so it's a question of how much.

And as Greg mentioned in his remarks, we scaled back significantly in 2009 and 2010 on OpEx.

And what we found is that our competitor didn't.

And in that situation, over the long course of time, we've been increasing our R&D and a few other places in the Company as a result.

Now, that's all proven successful.

We've been able to have a large profit headroom over the competitive even with that increase in OpEx.

But since this is a long-term battle, we have to make sure that our product portfolio and our customer-facing support is competitive.

Got it.

Thank you.

That's all I had.

David Dooley, Steelhead.

A question on the SOC test market projections that you just made, I think.

It looks like you're calling for the overall market to be down about $250 million next year.

Is the vast majority of that the application processor piece?

I know there's ancillary parts that go along with those that could also in unison be down, but just trying to figure out is the big piece that's down the application processor piece?

And outside of that what would you expect the rest of the market to do?

I would say the vast majority of it, or the majority of it, is application processors.

But I would say the associated mobile chips that go with that are also, we're thinking, going to be down.

Those would be the wireless, whether it's Wi-Fi or whether it's the LTE RF transceivers, and baseband shifts to also be down compared to last year.

On the end markets, the devices themselves will grow.

They just won't grow as much as last year and therefore the test needs will be down a bit.

Outside of wireless and mobility, areas like analog and automotive, and even image sensor, which is actually a mobile product, will grow this year.

Those are all going to grow.

It's just that the relative magnitude of the swing in the mobile devices is quite large, and that underlying growth of these other device segments really cushion a little bit but not the whole swing.

I'm trying to interpret what your SOC revenue will be next year based on your market commentary.

It sounds this segment's going to be down $250 million or so, right?

You have the vast majority of market share there.

Does the rest of the market make up for this and you end up somewhat, let's say, flat to down 5% in SOC?

I think that's hard to predict that mix.

But I think one way to think about it is our overall market share is about 50%.

And if the market's going to come down $200 million, $300 million, you could reasonably assume that we're not overly highly concentrated in those mobility segments.

I would say that if our 50% share on average is spread around, we have higher share in analog and microcontroller and such.

And in mobility it's probably a little bit below 50%.

But rough math, you might say, if the market comes down $200 million, maybe $100 million of that comes out of us.

Does the rest of the market make up for it, do you think?

Some of it.

Some of it will be made up but not all of it.

Okay.

Then just as my follow-on, could you help us understand who your 10% customers were, segments they were, what the ultimate percentages were.

Any other information that you can give us would be helpful.

Other than the customers who are in the mobility space there's really nothing else we can say.

Both SOC test customers or --?

A LitePoint and an SOC.

Okay.

Thank you very much.

Patrick Ho, Stifel Nicolaus.

Mark, maybe just gong on the wireless test market for a second, you provided a pretty wide variability of the overall market outlook.

One of the key drivers for both the low end and high end of the range, is it driven more by the cellular test market and seeing growth there that can either get you to the high end, or if you experience more pressures there, that gets you to the low end?

Good question.

In wireless test, the volatility in the market is much higher on the cellular side of test than it is on the Wi-Fi side of test.

One of the factors there will be in Asia, and primarily in China, how will the year play out with incremental volume.

And who and which supplier of handsets in China will capture that incremental volume.

There's a wide variation in terms of test intensity among different suppliers of handsets, so that's something that's hard to call.

That is part of the reason the range is a bit wide.

And, as I mentioned, we're positioned pretty well across a large number of those, but what each might invest in terms of test and quality assurance is different.

Great.

That's helpful.

Maybe going to the SOC test market, I know you gave a broad outlook of 2016 with the hopes that the next-generation devices will create the demand once again for an uptick in the SOC test market.

Big picture, how much can your customers reuse the capacity that they bought in 2014 for the next-generation devices?

And what gives you confidence that you'll see another buying wave for the 14-nanometer FinFET devices that are likely to come out later this year and into 2016?

First on the reuse, in semi test, the platforms that we sell, tend to be utilized for 10 years or so.

There is some obsolescence that occurs along the way, and the systems get refreshed with new instruments.

And as the devices increase in complexity, that typically means there's more power supplies and more digital pins needed in the tester to test the parts, so they're upgraded.

That's not new.

That's been going on forever.

And we expect that to be the case in 2016.

So, the parts that we've installed in 2014 and will in 2015 will certainly be utilized and upgraded for use in 2016, in addition to new systems.

So if the world is adding, let's say, 250 million new smartphones a year, that gets serviced by predominantly new testers.

And then the current testers get upgraded.

The other thing that happens with each new complex device is the test time goes up.

That tends to require additional capacity, as well.

So, it's not just the incremental 250 that needs to be serviced but the other 1 billion units of devices that are being produced need more capacity, as well.

That's the flywheel effect that keeps going.

And the real wild card, I'd say, under all of that is, what's the level of incremental jump in complexity coming in 2016 versus 2015 versus 2014?

And we triangulate on that by just looking at the standards, the chips that are running in a test chip environment that are maybe nine months to a year from production, and try to extrapolate off of that.

Great.

Thank you.

Tom Diffely, D.A. Davidson.

Maybe just a quick follow-up on Patrick's question there.

When you look at 2016 on the SOC side, does your demand require the move to FinFET?

Or would you see that demand if you stayed, at, say, the 20-nanometer node and just had increases in the number of [FinFET] activity?

I think there's an assumption in that that it will be FinFET in 2016, I would say.

All right.

And then looking over at the memory side, if we saw actual DRAM wafer starts increasing this year, not just upgrades to the existing wafer starts, would that change your view for the size of the test market for memory?

Yes, a bit.

But memory test has been in a pretty tight control band for a while now.

I'd say there's more upside in memory than in prior years because, with the move to LPDDR4 for mobile devices, that's a frequency jump again that's a challenge, and it limits the reuse of existing testers.

So, to the extent the shift toward LPDDR4 tends to be harder, that will move the market up.

And then the SSD side on flash, that's another potential upside balloon, that if that shift occurs a little bit faster, it can drive upside there.

So I think it's a good point.

The memory side this year probably has a bit more upside than normal.

Okay.

Is most of that upside on the wafer test side or the final test side?

Probably on the DRAM question, I would say it's evenly split.

Although known good die is starting to get some traction.

I think it will be on both, wafer and package.

And then on the flash test side, packaged test probably is a little more upside because that's the spot where the frequency validation and certification occurs.

Okay.

Thank you very much.

Sidney Ho, Deutsche Bank.

Understanding the SOC market will be down roughly 10% at $250 million this year, are you still expecting your overall revenue to grow this year?

And can you remind us your aspiration of share gains by each segment?

Okay.

Just to go back and refresh, the SOC test market in 2014 was $2.35 billion.

And this year what we said in the remarks here was that we expect it to be somewhere between $2.2 billion down to $1.95 billion.

So, we expect it to come down for the reasons I mentioned earlier.

And then inside that, we every year have a goal of trying to gain 1 to 2 points of share in SOC.

We've been on that trend line now for quite some time and being successful, although it's lumpy year to year.

So 1 to 2 points of share on SOC and then in memory this year we're looking at around 3 points of share to pick up.

So, those are our goals.

Those are the goals we've had for several years running now.

But how should we think about the other businesses, the memory as well as the system business?

Would that be able to make up the difference for the decline in the semi test, call it?

If you think about memory, if memory's a $500 million market and we pick up 3 points of share, that means $15 million of additional revenue out of the memory business.

If memory has a very strong year of $600 million, it would actually be quite a bit more.

But it's not going to make up for the fall off in the overall SOC business where we have 50% share of $2.2 billion market.

Okay.

Maybe switching to wireless for a second, I know you guys talk about the taking a charge of that.

But in terms of profitability, I think this business, the gross margin actually is above average gross margin.

How should we think about operating margins for this business on a go forward basis?

And at what level will it get to the corporate average run rate?

This year, in this down year, it operated above the 15%, ATT industry model profit rates.

So, it's above that.

The prior two years it was considerably above that.

I think the model for LitePoint probably is about, long term, is probably a 20% EBIT business.

So, that's where I expect them to operate, plus or minus a few points.

And it will be lumpy.

Okay.

Great.

Thank you.

CJ Muse, Evercore ISI.

To follow up, two quick questions.

The first one is, how should we think about share count given the $300 million buyback plan for the next 12 months?

And within that, how should we think about share grant and dilution from their offset by that?

And then, secondly, on the tax side, if you look at TI, they have a 28% tax rate and they have access to almost 100% of their cash.

You guys are at 25% including the R&D tax credit.

Curious if there are tax strategies that you are pursuing to enable you to repatriate more cash and sustain the similar tax rate where you are today.

Thank you.

CJ, I'll start with the second question first.

You're right, our tax rate's gone up in 2015 but we're going to have more US cash flows that goes hand in hand.

But if you go back to the prior few years, our tax rate was 18%.

It was also lower than that, it was 13%.

So, it's fluctuated in the teens, and that's when a lot of cash got offshore.

Which is a good problem to have.

But if you look at the snapshot of 2015, yes, it's looking more like a TI type rate.

But at this rate of 27%, that's a high rate for us given our mix of businesses.

We are constantly looking at tax planning.

The only got-you with tax planning is the more profits you put offshore the less cash that's available to increase the dividend or to buy back stock.

So, we have to navigate how much we want offshore for a lower tax rate versus how much we want to return to our shareholders.

And the former question was -- I lost track.

Share count.

The authorization is about 7% of our share count.

I would expect by the end of the year, we'll take those shares out, whether it's 16 million shares, thereabouts.

And then the normal dilution should occur that's happened the last couple years.

Great.

Thank you.

This concludes our call for today.

Thank you all for your interest in Teradyne.

And we look forward to speaking with you in the days and weeks ahead.

Take care.

Thank you.

This concludes today's conference call.

You may now disconnect.