Good morning. My name is Endrica, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Mr. Andrew Blanchard. Sir, you may go ahead.

Thank you, Endrica. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our Chief Executive Officer, Mike Bradley; Mark Jagiela, our President; and our Chief Financial Officer, Greg Beecher. Following our opening remarks, we'll provide details of our performance for the second quarter, as well as our outlook for the third quarter of this year. First, I'd like to address several administrative issues. Press release containing our second quarter results was issued last evening. Copies are also available at teradyne.com, where this call is also being simulcast. We're providing slides on the Investor page of this website that may be helpful to you on following the discussion. In addition, replays of this call will be available via the same page about 24 hours after the call ends and the replays will be available, along with the slides, through August 10. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release, as well as our most recent SEC filings for a complete description. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make references to non-GAAP financial measures. Additional information concerning these non-GAAP financial missions, including reconciliation to the most directly comparable GAAP financial measure, were available in our website. To view them, go to the Investor page and click on the GAAP to non-GAAP Reconciliation link. Also, between now and our next conference call, Teradyne will be participating investor conferences hosted by Piper Jaffray, Pacific Crest, Citibank and Deutsche Bank. Now let's get on with the rest of the agenda. First, our CEO, Mike Bradley, will review the state of the company and the industry of the second quarter and provide our outlook for the third quarter of 2013. Then our CFO, Greg Beecher, will provide more details on our quarterly performance, along with our guidance for the third quarter. We'll then answer your questions. You should note that we intend to end this call after 1 hour. Mike?

Good morning, everyone, and thanks for being with us again today. As you can see from our release last night, we posted solid results in the second quarter and we're guiding revenues and profits up slightly in the third quarter. The seasonal pattern in the Semiconductor Test cycle gets some of the credit for the uplift so far this year. But we've also had good market share momentum in SemiTest, both SOC and memory, as well as a strong first half showing from LitePoint. We're well above our operating profit model on the quarter and have also now exceeded that model for the first 6 months of the year, offsetting the naturally slower start to the year that we saw. On the longer arc, this is the 16th straight quarter within the black results for us and that's despite the roller coaster of demand that characterizes most of our markets. I should also note that, as outlined coming into the year, we're increasing our R&D investments for long-term growth, so these first half results show the continued resiliency of our model. I'd remind you that we're operating in a CapEx environment that is lower than last year due to less robust spending for mobility applications, which affects both our SemiTest and LitePoint business units. The SOC test market is running about $400 million below the first half numbers of last year, so we continue to expect a lower overall SOC test market for the full year, closer to the low end of the $2.2 billion to $2.4 billion we've outlined in our last 2 calls. Our momentum in SOC test is very good as we've registered back-to-back increases of nearly 40% in bookings through the first 2 quarters of the year. Wireless and power management continue as bright spots, coupled…

Thanks, Mike, and good morning, everyone. I'd like to start by providing some additional perspective on 2013 at the midway point before I cover the second quarter highlights and third quarter guidance. First, 2013 is shaping up to be another solid year for us. While it's running under some of the earlier year, full year analyst forecast, we're solidly on track to exceed our 15% industry target profit rate for the fourth year in a row. Since the start of 2010, we've averaged a 23% operating profit rate and generated $981 million of cumulative free cash flow. Our combination of an optimized business model designed for the industry realities and highly selective new growth investments, where we can use technology to differentiate, continues to work very well for us. In the short term, we expect the normal seasonal patterns to occur as much of our demand is tied to annual consumer cycles. As a quick reminder, in the last 3 years, after strong first halves, our third quarter SOC test bookings have declined from the second quarter levels between about 20% to 60%. That's why we're modeling the SOC test market this year to be about $2.2 billion. We provided a slide that illustrates the seasonal pattern in the earnings call presentation available at the Investors section of our website. Stepping back, Mobility remains our largest driver, albeit with demand down from the torrid pace a year ago. In the second quarter, we registered very solid demand in microcontroller and digital wafer sort testing, bringing our first half J750 bookings to over $110 million, our highest first half demand since 2010. Wireless Test also had another solid quarter, bringing its first half bookings to just under $200 million. And memory test is showing greater demand after a very low 2012,…

Thanks, Greg. Endrica, we'd now like to take some questions. [Operator Instructions]

[Operator Instructions] Your first question comes from Timothy Arcuri.

A couple of things. I guess, relative to your commentary about LitePoint being at the low end now. If I sort of back into the math, that suggests that the orders during the back half have to be like $50 million to $60 million at most for that business, which is just a bit odd given that your biggest customer or your new customer in that space is -- now finally has some clarity on when they're going to launch these phones. So I guess that's the first question. Then I'm wondering if you can give, Greg, a split of connectivity and cellular of the $87 million in LitePoint orders.

I'll start with the second and first, Tim. We're not going to break out connectivity and cellular. We much prefer, going forward, to talk about it as a total, but the cellular break-in was quite significant and we've commented on that before that it was quite meaningful. I'll let Mark take the first part -- first question.

Yes, I think on the order issue, the announcement of the end product is preceded by orders or CapEx. And typically, in the back half of the year, we do see a fall-off, that's the seasonal pattern. So whatever products are being introduced in the fall, typically we've already seen orders for that volume.

Well, just to kind of follow up on that. I always thought the lead times -- this time around, when you first broke into the business, lead times were a bit longer because they had to build a new test line. And I thought that this time around, lead times would be much shorter because they wouldn't have to build a new line. And so since you saw a big bookings quarter in Q1, I would have expected there would be sort of a follow-on business in advance of this ramp. Maybe that order wasn't related to the ramp and the ramp just got pushed out. So I guess maybe the question is around lead times, have they changed at all.

Tim, I'll take that. If it's follow-on business to an exiting line, lead times tend to be quite short. But if it's a new line, the lead times are much longer. So it all depends. And it all gets tied to new line, existing line and how much capacity. So it varies quite a bit.

The last thing I'd stress, it's very hard for us to forecast LitePoint wireless test. As I said in my prepared remarks, even at the midway point. We can get surprise on the positive or even on the negative. So stay tuned. The key thing for us is we focus on cellular test and we've got very good traction there.

Your next question comes from Krish Sankar.

It terms of LitePoint being at the low end of the guidance, last year at $286 million, it was all pretty much connectivity. This year, let's see, over the low end at $260 million, how would the split look between connectivity and cellular?

As we said, we don't want to give any information to competitors, so we're not going to break that split up. We had said that cellular order was meaningful, significant, it wasn't small. So it was an important order but we don't want to quantify it. And we have said some time ago, that we would not be surprised if the connectivity market was smaller, which it is this year. So everything is somewhat consistent from what we've thought. But yes, the connectivity market is a bit smaller than we -- what we might have thought 6 months ago.

All right. And just to follow up on the lead time question. If into the new product intro on cellular, let's say in September, when do the testers have to be installed by the OEM?

Typically, they have to be -- there's lots of qualification runs done leading up to mass production. But typically, the units get installed 4 weeks to 6 weeks before the big ramp.

Got it, okay. And then the final question, it looks like you're turning down your outlook on HDD. Is there any way to quantify how the HDD revenues would look this year relative to last and how much dollars it's going to be?

It will be down considerably. If you go back the last 2 years, '12 and '11, we've averaged just over $125 million a year. And that's the number we also need to hit our 50% model profit rate. This year, the demand will be down -- or shipments will be down quite considerably, under $50 million. And the key thing for us as we've talked about is getting into the cloud-based 3.5-inch testers and we expect to have some shipments of those in the second half of the year.

And the under $50 million includes the 3.5 inch drive?

It does.

Your next question comes from Mehdi Hosseini.

Going back to the prepared remarks that Q3's SOC test booking could follow seasonal pattern of down 20% to 60%. If I take the midpoint of that and then take in to consideration your commentary on LitePoint and System Test and your backlog, it does suggest to me that Q4 revenues could come in flat. Is that a reasonable assumption? And I'm not asking for guidance. I'm just taking your commentary, looking at the backlog, and making some projection on Q4. And I want to make sure that I'm not missing anything.

Mehdi, I'll take that. In putting a range of what's possible, if you look at the seasonal patterns, obviously Q4 is the low revenue period. But the seasonal patterns, what happens in the second half is also affected by how much buying happened in the first half. I think you tend to find the falloffs are sharper if the first half was stronger. But there's so many factors that get into these projections. It's we've learned a long time ago that we can't really forecast, so what we do is we forecast our supply line, how long it takes to get certain material and make sure we have capacity to ramp.

I think we're really knitting together all of the projections that we started the year with, which was we expected a down SOC market, we expected a roughly flat, maybe at this point now, very slightly, but not significantly of memory market. I think the -- so in the whole SOC and memory space, we're really confirming that our annual projections there of a lower than $2.5 million year in SOC makes sense to us, and a $400 million to $500 million market in memory also makes sense. And that all requires the kind of seasonal configuration that we've seen in prior years.

Sure. So let me rephrase my question. Would the midpoint of your SOC test booking commentary for Q3, which is down 40%, get us to the low-end of the overall SOC market or in other words, $2.2 billion, with the midpoint of SOC test booking?

I'll take that. I think the answer to that question. If, in fact, we saw a 40% drop quarter-on-quarter in bookings, the market would probably trend below the Q2.

Okay. So that reinforces my point and maybe as we come out of the seasonally weak Q3, Q4 revenue could flatten out.

Yes, I think anything is possible like that. We're not -- that's why we're not being explicit in trying to call Q4. So the hypothesis you have isn't unreasonable. It would be slightly different than patterns in prior years. That's all we're saying.

Your next question comes from Jim Covello.

This is Mark Delaney on behalf of Jim Covello. I have another LitePoint question. One of the big opportunities in connectivity test when you guys entered that business was the need to refresh the entire installed base for the 802.11ac WiFi refresh, where LitePoint had very strong share. With the strength in your shipments in connectivity test last year, is there still a large proportion of the installed base that is going to need to be refreshed, or is future growth in connectivity test going to be more driven by actual device unit growth?

Yes, let me take that one. So, yes, there's a large installed base of connectivity test equipment that is not AC capable. At the same time, the new devices that are introduced this year, actually, a very small percentage of the devices that need to be tested are AC capable. So the only point about obsolescence would be, in future years, that installed base will need to be refreshed. But the interesting trend this year is customers are installing equipment that is AC capable, even though the devices they're testing may not have AC in them. So the incremental capacity that's being installed in 2013 will not go obsolete, but all the prior-year stuff will.

Understood, that's helpful. Transitioning from my follow-up to the SemiTest business, I was hoping you could give us an update on the competitive dynamics in SOC test in terms of pricing in market share. Because as you know, the yen has been weaker and then also one of your smaller competitors has been introducing some new products. So how are pricing dynamics and market share trend in?

I think at pricing, nothing significant has changed there. We haven't seen any major impact from the yen in the sort of competitive environment or on pricing. The share picture for the year has been trending favorable to us. We're, on the SOC test side, up in the first half of the year, 5 or 6 points of share. And in memory, we're up about 10 points of share. A lot of that is because, in the memory side, it's mainly due to real customers shifting to Teradyne products for high-speed DRAM and high-speed FLASH testing. So it's a good, good story in memory, albeit a smaller market than SOC. In SOC, about half of that share gain is due to segments that Teradyne doesn't participate in coming down dramatically, like microprocessors. And the other half is due to real share gains that we've had, real customers shifting business.

Your next question comes from Satya Kumar.

This is Farhan Ahmad asking a question on behalf of Satya. I wanted to ask you about your LitePoint business. You had indicated at your last call that there were several deals in the works and you're expecting to see some outcome in July. And I was just hoping if you could provide some commentary on what kind of deals are still out there and if decisions have already been made.

Well, there's -- there are competitive situations and decisions being made every month. And following up on the large cellular design in that we had in the first quarter, we've certainly been continuing to try to build that momentum into other markets and customers. We've had some additional success there with cellular. But nothing out of the ordinary, the competitive situations play out constantly. Farhan, do you have a follow-up?

Your next question comes from Stephen Chin.

It's Mahavir. The first question, going back to LitePoint, I was wondering if you could help us with just sizing the market for 2013 and if we assume your market share was about 25% last year, how we should think about your market share this year? And going forward, how we should think about the order market size?

Okay, I'll take a shot at that. The market this year in Wireless Test is probably down on the order of 15% to 20%, would be our estimate, although it's a very difficult market to be precise in around share, but that's our estimate. Our overall share within that downmarket, we think, is up into -- from what was the low 20s to maybe the mid- to high-20s for the year. So that's the '13 tale of the tape. And as we think about '14, we did see in '13 a lot of digestion around the equipment that was put in place over the past sort of 12-month period, but the dynamics of what's happening in, whether it's handsets, tablets, the Internet of things, testing, is that the complexity of the test environment in Wireless Systems Test is increasing dramatically. So we expect the market to just go back to a growth scenario next year. Inclusion of AC will be more dominant next year. That will involve more extensive testing. MIMO technologies will find its way into more products, that's also more extensive testing. Not only the traditional sort of electrical testing that's done, but more and more over-the-air testing will be needed to optimize these end products for interference, multiple antennas trying to communicate simultaneously. So they see a lot of technological growth in the end products looking into '14 that will return this market to a growth picture.

Great. And then as a follow-up, one of your big customers cut CapEx as they noted in their 10-Q file last night. I'm wondering if that's impacting you guys at all. And I mean, not talking to the other customer, but just in general on the LitePoint side, if that has been hurt by CapEx cuts? And does the -- I mean, is it fair to think about 2013 as more of replacement buys and then capacity buys more happening in the 2014 timeframe?

No, I think, we're not going to comment on any specific customer. But in general, buying is driven by the need to test units. And so the macro budgeting of CapEx, something like a semiconductor fab, might be something that could be delayed in time as an investment. But if a certain number of units need to be shipped, then a certain amount of test capacity is needed to ship those units. And the bulk of what's been installed this year has truly been for incremental capacity, not so much for obsolescence.

Your next question comes from Vishal Shah.

This is Chad Dillard on the line for Vishal. Just one quick question on just the revenue linearity for 2013. How do you see first half versus second half trending?

This is Greg. We've given you obviously the first 2 quarters and you see our guidance for the third quarter and we tried to provide a slide that showed the bookings trend on our website for our largest business, SOC test, which generally shows that the third quarter bookings, because it's tied to the annual consumer patterns, those bookings are down between 20% or 60%. It can range quite a bit. And then therefore that means lower fourth quarter revenue. That's also difficult to be too precise at this point because there's other things that could have some impact on otherwise a normal seasonal pattern. But best we can say right now is we think that normal seasonal patterns will hold. And if there's greater demand, we'll be ready for it. We have stage inventory and parts to respond to any better news than something other than normal seasonal demand.

And then within Wireless Test, can you talk about margin dynamics and what you see in terms of where you need to be for pricing to gain a little bit of share?

I'll take that one. This is Greg. We have gained share this year, so we feel very good about the products that we have, how they're designed and the efficiencies and their throughput, they're production-optimized testers. We're probably unique in that having more of a solutions production-optimized tester with an emphasis added. And we expect LitePoint margins to stay above the company's average. So we think that's going to be intact for many years to come. So we feel good about margins and the product.

Your next question comes from Patrick Ho. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Maybe first on the SemiTest side of things. Given the, as you mentioned, slower pace of buying last year, as the industry transitions to 20- and eventually 14- and 16-nanometer devices, particularly, for the mobile side of things, do you see a potential step up in terms of new capacity buys? Or is there enough excess capacity or inventory out there from the tester side that those will be utilized first before any new capacity buys occur?

Yes. So the existing capacity that's out there certainly will be applicable to the 20-nanometer node and below. So it will be transitioned over. On the other hand, unit volume growth and complexity growth will drive incremental capacity. And there's a couple of trends that aren't directly related to the new nodes that affect test, that Greg highlighted a few of them. But one of them is devices start to be stacked more and more, the dyes are stacked, whether that's 2.5-D or 3D stacking, testing at probe becomes a more critical need to get good yield for the stack and not have to throw away a lot of value add. And so that's going to drive a new dynamic in test where probe testing will become a much higher performance test node and require a much more sophisticated system level- type testing strategy to weed out defects. That's kind of where we've been focusing our product development, is making that capability built into our UltraFLEX line of testers. So it's less the nodes themselves. The nodes, for example, 28 nanometers generated some yield issues that required a bit more test capacity that then gets optimized in follow-on periods as that yield gets improved. Similar things could happen, little bubbles like that for 20 and below, but the sustainable driver of demand will be unit growth and then complexity growth. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Great, that's helpful. Maybe second question for me, in terms of the memory test market. We see strength in both DRAM and an emerging NAND at least CapEx build out. Where are you seeing the buys for the memory size, both DRAM and NAND? Or is biased towards one of the 2?

Okay. It's both sides for us. I think on the DRAM side, it's the Mobility, healthy DDR buying. And on the NAND side, it's the high-performance or higher-speed NAND testing. So we're seen an uplift on both sides. That's what's given us a bit more in business in the first half of year than we had all of last year. So we're intersecting that pretty well.

Your next question comes from Jagadish Iyer.

So 2 questions. First, on the LitePoint side of the business, I just wanted to understand like while this year you're having a digestion period for connectivity and cellular test starts to improve. Longer term, how mutually exclusive are they? Will they be firing on the same time in, say, in the next 2 years. So we just wanted to understand the kind of the secular growth in the LitePoint part of the business and then I have a follow-up.

Like I was saying earlier, we think that in the next few years, the increasing number of antennas and the complexity of the wireless standards that will be embedded in mobile devices will drive growth -- unit growth and market growth in Wireless Test. And LitePoint is now positioned well in both -- all aspects of those RF standards. So it's really, if you looked at the phone technology in 2013 and tablets, there's been very slow migration to new standards in those products compared to the prior year. But if we look into '14 and '15, NFC will be pervasive, LTE and LTE Advance with carrier aggregation will come into play. We'll see MIMO technology in tablets and eventually some high-end phones. All of that's going to drive test quality and test coverage issues to ensure end-user experience is as expected.

And then, Greg, this is a question for you. Given that the LitePoint, you have kind of taken down your kind of estimates for the LitePoint at the lower end. I just wanted to find out how your gross margins are likely to trend for the second half of this year.

Sure. Our gross margins at LitePoint will be consistent with our model for LitePoint and above the company average. So LitePoint will do well and we don't want to get any more specific than that in terms of those percentages. But you can see some of the information in our footnote was segment in our 10-Q or 10-K, I think you'll see that LitePoint for the year will operate above the company model.

Your next question comes from David Duley.

Yes, just a couple of housekeeping questions for me. What's -- you've talked about the size of the SOC and the memory market this year. Could you give us a guess of what you think it's going to be in 2014?

Yes, so this year, it came down -- will be down, we believe, from last year's $2.5 billion, $2.6 billion level. And next year, we think it's going to bounce back probably into that $2.4 billion, $2.5 billion level. The only persistent dynamic change in consumption for SOC is we believe that the microprocessor testing segment in SOC will be very nominal for several years to come. So that piece of the market has systemically gone away, we believe. It's not a segment that affects us per se but it does affect the market to the tune of maybe a couple of hundred million dollars a year.

And the size of memory market?

Memory, well our view is even though memory has picked up a bit here, the trend line -- the first half is very weak in shipments and that the market will probably be in that $450 million to $500 million range next year as well.

Okay. And Wireless came in, I think, at $474 million, but your guidance on -- for revenue this quarter I guess is below that. Is there a specific reason? Do you have longer lead time orders or why is that?

We had a chunk of service business come in this quarter on an annual contract that gets renegotiated in the second quarter. And that's recognized over a 12-month period.

Okay. And when you talk about semiconductor orders being down, whatever the midpoint in your range was that you talked about seasonally, and I guess that's what you're expecting, how should we look at the segments inside your business? Is it all mobility driven, which is kind of why your orders were up I would imagine? But could just talk about the segments? And what would you expect the LitePoint orders to do in the third quarter?

On SemiTest, the thing that -- if you compare this year to last year, mobility is certainly strong again. RF testing for semiconductors is very strong here in the first half. The other thing that's new this year is the J750 for microcontrollers. Microcontrollers have turned on dramatically, and we've had almost a record level first half unit demand for the J750 product. Now as we look toward the back half of the year, what we've typically seen, certainly in Mobility, is the cyclical decline in third and fourth quarter. And we're not trying to prognosticate anything different than what we've seen historically. The J750's a bit of a wildcard. What happens there in the second half of the year, that one doesn't have the same sort of seasonal pattern that the other Mobility market does. So that one's a little bit more difficult for us to call. And then what we said earlier on LitePoint is LitePoint does have a seasonal pattern that's pretty clear over the year. The second half of the year typically is a slower period for new orders and we don't expect it to be any different. But as Greg mentioned, the dynamics of that market are beyond a few months, very difficult for us to forecast. And we are prepared to respond either way if demand picks up.

Okay. Final one for me is, have you seen any incremental improvement in some of the other SOC test segments perhaps tied to PCs or the other markets beside Mobility like analog or anything like that?

Yes. As I said before, microcontrollers are strong. Analogue is a bit weak relative to last year. So that is an area that's been a little bit weaker. And those are the major sort of segments: Analogue, microcontrollers and mobility. So mobility, strong. If anything, the absence in mobility this year that's more been on the digital applications processor capacity adds, have been down from last year. But the RF test had -- have been about on par with last year.

And at this time, there are no further questions.

Great. Well, thank you, operator, and thank you all for joining us today. This concludes the call, and we look forward to talking to you in the weeks ahead.

Thank you.

This does conclude today's conference call. You may now disconnect.