Teradyne, Inc. (TER) Q4 2013 Earnings Report, Transcript and Summary

Good morning. My name is Toni, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Q4 2013 Earnings Conference Call. [Operator Instructions] Mr. Blanchard, you may begin your conference.

Thank you, Toni. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our soon to retire Chief Executive Officer, Mike Bradley; President and incoming CEO, Mark Jagiela; and our Chief Financial Officer, Greg Beecher. Following our opening remarks, we'll provide details of our performance for the fourth quarter as well as our outlook for the first quarter of this year. The press release containing our fourth quarter results was issued last evening, and copies are available at teradyne.com, where this call is also being simulcast. We're providing slides on the Investor page in the website that may be helpful to you on following the discussion. Those slides could be downloaded now or you can follow along live. If you don't see the download icon, simply refresh the page. In addition, replays of this call will be available via the same page about 24 hours after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release, as well as our most recent SEC filings for a complete description. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure. They are available on the Investor page of our website. Also between now and our next conference call, Teradyne will be participating in an Investor Conference that's hosted by Stifel Nicolaus, Goldman Sachs, Susquehanna and Bank of America. Now, as you know, the rest of the agenda. First, Mike Bradley will comment on 2013 and Teradyne's position as we enter the new year. Mark will then provide a deeper look at our performance in 2013 and an early view of 2014. Greg will then offer more details on our annual and quarterly financial results along with our guidance for the first quarter. We'll then answer your questions and you should note that we intend to end this call after 1 hour. Mike?

Good morning, everyone. I'm going to limit my remarks today to a short wrap up of 2013 plus a quick retrospective on how we've positioned the company for the future. As Mark will officially be taking over the reigns in about a week, I will leave the 2014 part of the story to him and to Greg, who will give you the financial perspective. 2013 is a good example of what we've done to make Teradyne more resilient in the volatile markets we serve. In a year of significantly reduced CapEx in our major markets, we've delivered a solid bottom line, improved our market share, launched a series of new products and improved our customer satisfaction levels. We exit the year at a higher trough than in last year's cycle and end at 2014 with expectations of a healthier climate, but still some uncertainty of how sharp a recovery we'll see. Our position across the mobility sector in SemiTest and LitePoint has been strengthened in the last year, buttressed by a very solid foundation in analog and consumer digital applications. As you know, this will be our fourth straight year of above model performance as we continue to outpace what last quarter I called the golden era of tests in the late '90s. This 4-year run has generated a 50% higher operating profit rate of that earlier period and over 3 times the cash flow. All with an average annual headcount at about 50% of the level of the late '90s. Of course, the more important comparisons are the current ones, relative to our industry peers. And I'm very pleased that we've made steady progress in market share, we've moved into the first tier of the broader semi cap equipment companies, and we've integrated some solid acquisitions in the portfolio. As important is the strategic reliance that our customers now place on us in a back end market that has sharply consolidated in the last 6 years or so. I hope that you see our leadership transition as a smooth handoff to a very capable industry veteran and a seasoned management team. Mark has been instrumental in getting us to the point we're at today, and I'm confident that we won't miss a beat in the next chapter. As this is my last earnings call, I do want to thank all of you who followed our progress. And I trust that you appreciate the continued power of our business model. We value the critical eyes you bring to our space and expect more of that in the future. I will say that we will continue to try and give you as straight a picture as we can, at times with a slight bias to caution, but I think that works and that you have us calibrated pretty well. So let me turn it over to Mark for his perspective on our recent results and how things will shape up as we enter 2014. And thanks to you all.

Thanks, Mike. I'm going to briefly review our key results from 2013 and paint a picture of how we are looking at 2014. Greg will then provide details on our Q4 results as well as guidance and perspectives on our current quarter. In 2013, we had a significant market share gain in SOC, Memory and Wireless Test, which help offset tougher than expected market conditions. In SOC test, the 2013 market fell to $1.9 billion, lower than the general market forecast of $2.3 billion at the beginning of the year. This was primarily due to a significant drop in CapEx for digital processor test. While 2013 illustrates the difficulty of predicting the market size this early in the year, we do believe that there will be a rebound in the digital segment and the market will likely be in the $2.1 billion to $2.4 billion range. In Teradyne's case, our 7-point SOC market share gain to about 47% helped offset much of the 2013 market decline. It also positions us well for the expected market uptick in 2014. Key design wins in microcontroller, automotive and processor test combined with the strong demand for linear RF testing, contributed to our gains in 2013. As an example, orders for our J750 microcontroller test were more than doubled over 2012 level. Furthermore, a new high-density version of the product introduced last summer ups the frequency and pin count to reach into new applications in the expanding digital test market in China. Our UltraFLEX tester continues to pick up new RF and digital baseband customers. In RF, the platform distinguishes itself with leading low noise performance to improve yields for our customers. In all applications, our unique IG-XL software provides program generation, anti-bug tools that speed the task of bringing increasingly complex, multifunction devices to market. These architectural advantages come from years of close collaboration with early customers which provides the insight to focus on areas with the biggest impact. In memory test, we had a breakout year in 2013, gaining 10 points of share to about 26% in a market that was down slightly to about $450 million. Sales growth was split almost evenly between our Magnum FLASH tester and UltraFLEX high-speed DRAM tester as we added new customers in both segments. Both testers were architected to push the envelope of high-frequency signaling, which is aligned very well with the increasing bandwidth of DRAMs and FLASH for SSD application. Looking forward, we see the memory test market in 2014 to be about flat. However, continued momentum in FLASH test combined with emerging applications in DRAM known good die testing should result in continued share gains in 2014. Turning to LitePoint and Wireless Test. As planned, we gained about 3 points of share in 2013, mainly from our cellular test design wins. However, while it's difficult to get an accurate fix on the Wireless Test market side, our internal estimates are that the overall market compressed from about $1.3 billion to around $1 billion in 2013. There are multiple reasons for this, but the bottom line is that Wireless Test is a relatively new market with volatile dynamic. In 2013, slower than expected adoption of 802.11ac and tester efficiency improvements led to the overall market decline. Looking forward, we see the continued adoption of 11ac with its MIMO and beamforming technologies as well as emerging markets like wearables that use Bluetooth, driving growth. In cellular, LTE and LTE Advanced are another growth engine that drives increasing test modes and calibration. While increasing test productivity will offset some of this growth, we remain bullish on the secular trends and our opportunities in Wireless Test. In Systems Test, the bright spot was an in-circuit board test where orders grew 5%. A new multi-site inline tests were introduced in the last quarter of 2013, is the 2014 story, as we target high-volume automated production line. Defense and aerospace orders were down year-over-year due to an abnormally high order pull-in, in the last quarter of 2012 in advance of the 2013 budget sequester. In HDD, the slowdown in the Q3 sharply reduced the investments in 2.5 inch drive capacity last year. And Greg will provide more color on the HDD business in his remarks. Finally, I'd like to say a few words on our capital allocation strategy. As you know, we've been working on growing the profitability, cash generation and revenue of the company over the past few years. Acquisitions and organic initiatives combined with a disciplined financial model, have been the recipe for transforming Teradyne. We still see plenty of opportunities to grow the company and see near adjacency acquisitions as a key element of increasing shareholder value. In the past, Greg has outlined the position of our cash portfolio and its utilization. While we continue to evaluate strategic investment opportunities, we do see that the strength of our business model, our cash position and optimism for the future allows for some incremental return of free cash flow to shareholders without jeopardizing our strategy. Hence, our initiation of a quarterly dividend as announced in the earnings release. As always, we will continue to assess our cash portfolio and investment process -- prospects to best optimize long-term returns to shareholders. Before turning things over to Greg, I just want to offer a note of thanks to Mike for his 35 years of service to Teradyne, and particularly, the last 10 years as CEO. Under his leadership, the company has been transformed and is now stronger than ever. Anyone looking at the change in landscape of the test business knows it was not a 3-inch putt to pull that off. Working with Mike has been a fantastic experience, and he leads Teradyne on a very strong footing, both financially and strategically. Thank you, Mike.

Thanks, Mark. And good morning, everyone. I'll start with a deeper dive into 2013 results and our multiyear performance then offer some perspective looking ahead. I'll then cover the fourth quarter details and first quarter outlook. Starting with 2013, we had revenue of $1.4 billion, non-GAAP EBIT of 80% and EPS of $1.06. Overall, this was solid performance considering CapEx spending for SOC test and wireless test equipment was down quite significantly on the prior year. Despite these strong headwinds, we close our fourth year in a row above the 15% target industry profit rate. The headline story of 2013 is twofold: strong, SemiTest and Wireless Test share gains, and a highly resilient operating model. In SemiTest, our sales were $1,023,000,000, down 9% from a year ago, against a combined SOC and memory market drop of 24%. The SOC test market was down about 27% and the memory test market was down 5%. We gained share in both SOC and memory, bringing our total ATE share to record levels at about 43%, up 6 points from the prior year. In SOC test, the share gains were about evenly split between competitive socket wins and segment shifts in the market. In memory test, the record 10 points of share gain Mark noted was largely in mobility applications such as FLASH and the low-power DRAM. Our other key SemiTest goals were to field new products in analog test, microcontroller tests and low-speed memory test. These goals were accomplished and this new suite of products are now on customer test floors, helping our customers get devices to market faster at the high quality levels demanded of today's consumer products. At LitePoint, we finished 2013 with revenue of $252 million. As Mark noted, LitePoint also gained market share in a down market. In the first full 2-year period in the fold, LitePoint has averaged about $270 million in yearly sales. More than double its 2011 run rate. Over the last 2 years, LitePoint sales have totaled $538 million, well above our original 2-year target of $350 million. This time last year, we outlined major LitePoint goals to grow our position in cellular, 802.11ac and MIMO test, and we accomplished those critically important goals as well. Now, point of system test. It was also not immune to the lower CapEx buying in 2013 and had a down year with sales of $153 million. This sequential drop of $90 million was due to the very steep decline in storage test as 2.5-inch hard disk drive testing demand was dormant. Our key system test goal is to field a 3.5-inch tester for data centers and that was accomplished as planned in the second half. Recall that System Test includes our minerals test and in-circuit test businesses, as well as HDD storage test. Our mineral business continues to operate above model, and our in-circuit test business tightened its cost structure and fielded a new higher throughput in-line product. At a company level, if we now look over a 3-year time period which smooth out the annual buying cycles, we've averaged annual sales of just over $1.5 billion in a non-GAAP operating profit rate of 21%. We're pleased that both our 2014 and multiyear performance continues to place us among the best performance semi cap suppliers. Now, looking into 2014, our playbook remains the same. We'll continue to focus on gaining market share through offering differentiated solutions that provide customers greater throughput and enable them to get their products to market faster. The latter is key as our customers continue to accelerate their product development plans. In SOC, we'll stay keenly focused on mobility, automotive and microcontroller testing as these segments all offer above industry growth. In memory, we expect to continue to gain share as device technology trends, especially higher speed and lower power consumption, favor our Magnum and UltraFLEX test families. At LitePoint, the focus remains on catching the 802.11ac and MIMO RAMs while continuing to expand our cellular test footprint. The global role of LTE continues to offer opportunities for our IQ extreme product line. Also at LitePoint, we're well along in the integration of ZTEC, the small innovative wireless instrument company we acquired early in the fourth quarter. A combination of ZTEC Instruments with LitePoint software allows us to offer LitePoint's ease of use earlier in our customers' design verification test process. This enables an even smoother and faster transition of customers' new mobility products from a lab to high volume manufacturer. This new offering will give customers the best of both worlds -- a flexible, wireless tester in design, and a production optimized tester for high-volume manufacturer. In System Test, storage test is now a recovery and get well plan, which should provide opportunities for better performance in 2014. I should note that the dynamics in this market are a bit in flux as on one side of the ledger, the demand is lower than we projected a year ago and in the other side of the ledger, our sole competitor is in the process of being acquired by a customer. We'll have a better sense of how all this shakes out later this year. Across the company, we'll maintain the steady financial discipline that has enabled our strong multiyear performance. We're coming off a 2013 that delivered very strong gross margins at 56% for the full year. A record. This was driven by a very favorable product mix. The mix of our business in 2014 is expected to be more normal which should bring our gross margin percentage closer to those seen in 2012, about 54% for the full year. I'll quickly add that we have not and do not see or anticipate any significant changes in the overall pricing environment. We also expect net capital additions to trend up, about 25% in 2014, from the 3-year average of $68 million due to expanded sales opportunities. Now, turning to capital allocation. As Mark noted, we announced the initiation of a quarterly dividend of $0.06 per share with the initial dividend payable on June 2, 2014 to shareholders of record as of the close of business on May 9, 2014. As you have all seen, our operating model has shown its cash generation strength across industry cycles, and this dividend reflects our confidence in the business, our operating model, our growth strategy. We will also continue to remain opportunistic with the funding of the stock buybacks and expect to continue to throw our dry powder so that we have sufficient U.S. cash for attractive M&A that meets our very strict criteria. Before I get to the fourth quarter highlights, I would like to explain that the convertible note is due on March 17, 2014. On that date, we'll pay the $190 million balance off with cash. We'll settle the $7.665 option element for 34.7 million shares over the 65-day trading period beginning on June 17. The mechanics are all part of the structure that was necessarily at the outset to receive favorable tax treatment. When included in the third quarter, we expect our share count exclusive of any buybacks between now and then to be about 260 million shares assuming an average share price over the period of $20. We've included a slide in the presentation on our website which describes this further. Now, moving to the key highlights for the fourth quarter. We had total company bookings of $290 million. SemiTest bookings were $225 million. SOC test orders were $193 million and memory test orders were $32 million in the fourth quarter. SemiTest service orders were $49 million. Wireless Test orders were $18 million. System test orders were $47 million with $26 million of service orders. In the fourth quarter, Semiconductor Test sales were 75% of the total, Wireless Test, 9%, and System Test, 16%. Our book-to-bill ratio for the fourth quarter was 1.0 for the overall company. 1.0 for Semiconductor Test, 0.7 for Wireless Test and 1.0 for System Test. At the end of the quarter, our backlog stood at $362 million, of which 75% is scheduled to ship to be recognized as revenue within the next 6 months. The top line of $285 million was down $148 million, or 34%, sequentially from the third quarter in line with seasonal patterns, and up 15% from fourth quarter of a year ago. SemiTest was $250 million, down $89 million. Wireless Test was $26 million, down $67 million, and Systems Test group was $44 million, up $8 million. We have 1 customer that was more than 10% of the company revenues in the quarter, and one for the full year as well. Within the $285 million of fourth quarter revenue, service was $74 million, up $6 million compared to the third quarter. SemiTest service revenue was $52 million. Total company product lines business was 41% versus 37% a quarter ago. SemiTest product turns business was 45% versus 42% a quarter ago. Memory revenue was $23 million. Moving down the P&L, non-GAAP gross margins decreased to 55% from 59% in the third quarter due to lower volume. Non-GAAP operating expenses were $140 million compared to $142 million in the third quarter as variable compensation flexes down on lower sales. At the operating line, we posted a 6% profit. Our non-GAAP net interest and other expense was $2 million, cash tax expense for the quarter was $2 million and our full year cash tax rate was 13% for 2013 and is expected to be 18% for 2014. Included in our GAAP results is a onetime gain from the sale of an equity investment of $34 million. Cash from operations generate $20 million after capital additions. We ended the quarter with gross cash balance of $1.2 billion. DSO was 50 days, up from 44 days in the third quarter. We expect cash and marketable securities to decrease by $260 million in first quarter as we will be repaying the $190 million face value of the convertible note, and we also paid out annual variable compensation and make tax payments. As noted in the press release, sales for the first quarter are expected to be between $300 million and $330 million and the non-GAAP EPS range is $0.02 to $0.09 on a 196 million diluted shares. The diluted shares are lower than normal because at this profit level, including interest and excluding the convert shares is more dilutive. Q1 guidance excludes the amortization of acquired intangibles, a CEO equity charge, the non-cash computed interest on the convertible debt and includes taxes on a cash basis. Our GAAP EPS range is a loss of $0.09 to a loss of $0.03. The operating profit rate at the midpoint of our first quarter guidance is about 5%. Now moving to the P&L percentages from the first quarter. We expect non-GAAP gross margins to be 49% to 50%. R&D should be 21% to 23%, and G&A should be 22% to 24%. Non-GAAP net interest expense is expected to be about $2 million. So 2013 will go down as a good year and a difficult market. It also positions us very well for 2014 with our strong market share momentum, new product offerings, a very resilient model and a capital allocation strategy that rewards shareholders and supports our growth strategy. I'll now turn the call over to Andy.

Thanks, Greg. Toni would now like to take some questions. And as a reminder, please limit yourself to 1 question and a follow-up.

[Operator Instructions] Your first question comes from the line of David Duley with Steelhead.

Just couple of questions from me. Why are you confident that the apps process of business is going to growth in 2014?

Yes, this is Mark. It's something that frankly is hard to predict with any precision, but we do see some advanced tooling being put in place for an anticipated uptick this year. Our visibility on this tends to be 8 to 12 weeks out, but the early indications we see are that the digital processor business in 2014 may have a very similar profile to what we saw back in 2012.

Then, I think in the press release, you mentioned that you think things are going to accelerate or I think, on the order front, could you just talk about which segment do you see doing that?

Yes, the most significant one is the one I just mentioned, which is around digital processor, whether that, digital modems or applications processors. But we do see continued strength as well in the microcontroller space and automotive. Those 3 segments. And last year actually, automotive and microcontrollers were strong all year long. That seems to be persisting here into the early part of 2014 and the adder has been the return of applications processors and modems.

Okay. Final thing from me is you talked about a mix shift in the business and that how -- that gross margins are going to shift down. Could you just talk about -- is that because the apps processor business is returning, or the customer concentration there? Just talk about why that is.

It's 100% due to mix. And our mix looks more like what you might have seen in other periods. I think we're starting off similar to Q1 2012 with a similar gross margin. But as we look later in the year, we see the mix improving, but it's just simply what piece of business in the first quarter versus other quarters. And I made some comments in my remarks to make sure that investors knew there's nothing going on differently in pricing, it's just simply mix.

Your next question comes from the line of Patrick Ho with Stifel Nicolaus. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: First question, in terms of the Wireless Test business. You mentioned last year that you saw some excess inventory from your customers in terms of the connectivity side. Can you give a little bit of color on how that situation has worked itself out and kind of just maybe a qualitative outlook on how you see that business or that side of the business entering 2014?

Yes. I think, first of all the Wireless Test business, as I said, is a very volatile dynamic area. So it's a bit difficult to project trends there. But on connectivity specifically, there's a clear movement in what we see coming in 2014 to increase the complexity of the consumer devices as it relates to connectivity. So we've talked a lot about, for example, the transition to 802.11ac, but even within that, there's multiple technology, like MIMO, multiple-in, multiple-out antennas, that allow shaping of the RF signals or beamforming. That's the complexity level that will be entering consumer products over the next couple of years that will drive incremental test need. So last year, what we saw was early adopters had 802.11ac. A lot of -- a half of our shipments were ac-capable, but there was some amount of digestion of prior year shipments and capacity and optimization that offset some of the growth. And the new technologies really start to roll in this year and beyond. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Great, and maybe a follow-up question on the SemiTest side on the SOC front. Obviously, you're right now looking at projected growth in the overall SOC test space driven by the digital application processors. Are you also anticipating some of your share gains that you talked about, I guess, hitting a volume ramp in 2014 as well that will allow you to outperform the overall marketplace?

; Yes. So we picked up significant market share in 2013, 7 points of share in SOC test. And as Greg mentioned, half of that we would consider real customer shifting buying to Teradyne and half is a bit due to customers that we don't currently have being abnormally low. So our goals for this year in SOC test were essentially to consolidate and hold the share we gained last year, keep the 7 point share gain at 47% share. That requires us adding some new customers. That's in sight, but as the market grows, we'll grow proportional to the market. In memory test, however, we do have some line of sight there that says the design wins we've achieved in 2013 should continue to propel our share north in 2014. So we are looking to pick up another 2 to 4 points of share in memory in 2014.

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

This is a pretty simple question, the higher level question around capital allocation. Can you help us or remind us how much of free cash flow is generated domestically versus internationally? And the more important part of the question is, as you sort of considered changing your capital allocation plan, how do you think about the potential for multiple expansion for the stock as you increase the percentage of free cash flow that's returned to investors? And then, how do you think about it between dividend buyback and M&A?

Okay. This is Greg. Our U.S. cash is 50% to 60%. So we have plenty of cash from our ongoing operations to fund the dividend. In terms of what happens to the multiple over time, I think you guys are more expert at that, but we would hope with a dividend, we would attract some new investors, and [indiscernible] nothing else [indiscernible] and a helpful yield to decide. But we'll see that unfolds but we do think it was the right time to do it, and at present, jeopardized our growth strategy. We still believe we can do another quality acquisition like another LitePoint or half a LitePoint but was the right time to do it.

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

Well, the M&A strategy hasn't changed. Our strategy has been further straightforward. We look for close adjacencies, businesses that will fit very nicely in Teradyne or we can help them grow faster than what they could do on their own. They are more likely going to be some type of electronics test measurement business, they may more likely be in production, high-volume production, but, yes, there could be some situations that are big connections but aren't exactly what I just said. But we look for businesses that have high differentiation and are in profit pools with good growth. And that basically describes LitePoint. And we find 1 or 2 of those companies a year and it's hard quite often to agree upon valuations. So we'll stay the course and if we find something that meets our strict criteria and it's a good fit that we can help grow faster and are across the capital or better, then we'll deploy the cash for M&A.

Your next question comes from the line of John Pitzer with Crédit Suisse. John W. Pitzer - Crédit Suisse AG, Research Division: I guess, my first question, I'm always hesitant to talk about normal seasonality because there's so much variance around normal, but when you look at the guidance for March, it is about half the sequential growth you guys have seen over the last, call it 3 or 4 years. And I'm just kind of curious to what extent is that a function of the industry still suffering through the excess capacity from last year as we were all too optimistic on high-end smartphones and to what extent of that just perhaps timing of projects this year? And I guess, specifically, what I'm thinking about is the 20-nanometer ramp on the apps processor side and if it's more the latter, what's the implication as we think about June?

Yes, I think it's really timing. There's nothing significant I think in the March, snapping along at the end of March and is that a signal of something significant happening. But the one thing you've mentioned, for example, process maturity in fabs can drive tooling sometimes, both in excess of normal levels and sometimes earlier. But not necessarily something we see this year. That was something that was a little more prevalent back in 2012. So if we really get back to this year, the timing of new product introductions for consumers and the ramp times of silicon can be a little bit closer to the ramp times of end products because the process maturity there is a little bit firmer, as I would say, this year than it may have been back in 2012. John W. Pitzer - Crédit Suisse AG, Research Division: That's helpful. Then just my follow-up, I'm just hoping to get a little bit of update about customer concentration within LitePoint. I think in 2012, the single largest customer was north of 50%. How did the diversification go in '13? And I'm just kind of curious, has the handset market overall starts to become more diversified, do you expect further customer diversification this year and what's the implications for margins if that happens?

It only gotten greater diversification and we expect it to continue on that path. We don't break out concentration within a segment but we do it as a total company. But yes, we do have concentration at LitePoint. And we've invested significantly in Asia to grow our penetration in Asian accounts, and we had a good year this year. There's much more we think we can do next year. So we're optimistic as to how we can pan out in Asia.

Your next question comes from the Jim Covello with Goldman Sachs.

This is Jack Sheng on behalf of Jim Covello. So my first question is that looking on your order, it looks like the 3-year seasonality for 4Q has been a bit, call it, about up 23% quarter-over-quarter. It looks like at this time you guys saw a pickup of up 7% in 4Q. Can you guys talk a little bit more about what's driving that more modest order growth at the back end of last year and then also does this imply in any way that 1Q can come in more modest relative to historical?

Yes, I think there is a couple of things you got to look at when you look quarter-over-quarter. One thing is that our third quarter of last year was actually a little bit stronger than some prior third quarter trough. So coming off of third quarter, as a relative reference, actually brings us to a higher baseline, than perhaps we were at in 2012. In SemiTest, that's an example, if you look at actual order dollars year-over-year, we're up significantly over 2012 in the fourth quarter and about where we were in 2011, as we were entering 2012. So I think the SemiTest story is, compared to 1 year ago, we're in a stronger position coming into '14, and compared to 2 years ago, about the same. One significant difference though is in storage test, because the storage test business has been very anemic and the orders there have been lumpy. And almost absent in fourth quarter of last year, on the storage test side, tends to make the company numbers look a bit weaker. But overall, I feel like the momentum we have coming into the year is much better than it was in a year ago. And I think the outlook, all signs right now are for a strong uptick. And what I mentioned earlier, the one thing that's hard to predict, is that going to be on an order basis, something that occurs through the March period or through the April period? Certainly by the time we are sitting here in May of this year, we'll have a very good line of sight as to how big the traditional summer peak will be for both the SemiTest business and the LitePoint business. It's just a bit hard to call the timing right now.

Great. And then, I guess, in terms of follow-up, how should we think about your penetration on the cellular side for LitePoint this year? I guess, what are the some of the milestones that you guys are targeting?

Yes. I think cellular testing is -- has multiple aspects to it. Cellular testing occurs in multiple stages as the phone is manufactured. There is what might be considered verifying that the cellular connectivity is working correctly. There's calibrating the cellular connectivity. There's testing at -- in an over-the-air mode to ensure that it's working in an end-user model. So last year, we made significant inroads in 1 out of those 3 types of testing. So our goals for 2014 are diversified into the other types of cellular testing, those from the technology base that I mentioned and then, also the customer base. Greg mentioned a lot of the effort we're putting into Asia. We expect that to yield dividends here in 2014. So it will be an incremental share gain in cellular is our plan, but the diversity of applications we'll be in -- and customers we'll be in will continue to grow.

Your next question comes from the line of Tom Diffely with D.A. Davidson. Thomas Diffely - D.A. Davidson & Co., Research Division: First question for Greg. On the taxes, you talked about how we're going from 13% last year to 18% this year and I think previously, you talked about maybe a mid-20s number for the out year. So first of all, I'm wondering what's driving that? Is it the using up of NOLs or mix shift? And second question on that is, is the mid-20s the long-term rate or is there more after that?

Yes. Mid-20s, as of now, is our long-term rate. We'll, obviously, look to do some tax planning, but right now, only that's [indiscernible] is the mid-20s. And at the rate it's going up because, you're right, we are using up some of our favorable tax attributes whether they're NOLs or credits acquired from many, many, many years ago. And those have been used against U.S. income. So our U.S. income in the tax rate is very low because we're using up credits and NOLs. And as those credits and NOLs expire, we will get limited as to how much we can use in 1 year then we move closer to a U.S. normal rate. And our rate offshore is lower, about 10% rate for UltraFLEX and J750 as you put some of that IP in Singapore, but when you blend it all together, it's -- as you said, it's using up these favorable tax attributes. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. Great. And then, Mark you talked about a little stronger momentum this year versus last year. Is that supported by utilization rates at a higher level than they were a year ago as well?

Well, when we look at utilization at the end of last year, we did see a significant uptick. So there is -- that's another indicator we'd look at. That's probably not the best indicator but it is positive trend there. So yes, I mean, into the year, the utilization has moved north and that adds to our bullish outlook.

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

Going back to the gross margin guide and some of the comparison to 2012, it implies to me that the LitePoint mix may go from 18% in '13 to 17% in 2014. Is that the right assumption? And if so, what -- that would suggest a decline in revenue. So if you could comment on that, and also, how do you see opportunities for LitePoint and tracking? And I have a follow-up.

This is Greg. LitePoint continues to perform above the company average of gross margin. So LitePoint's in fine shape. They do that because they have highly differentiated products and solutions. Yes, our margins, looking more like 54% for the year, would be very good performance. So we're not at all ashamed of that. That's outstanding. I think the [indiscernible] you compare it against other years. We had just record performance and sometimes it's because there was no hard disk drive revenue in that period or year. It's all a set of mixed issues. And I think 54% is very consistent with the model that we've put forth.

Let me rephrase the question. This time last year, you were looking at LitePoint with a TAM addressable market of $260 million to $360 million. Can you update us on that time projection?

We've discussed last quarter maybe 2 quarters ago, we weren't going to forecast LitePoint any longer because it's been in the company's portfolio for a couple of years now. But we did try to say in our prepared remarks that there's a number of very positive technology trends in the connectivity and the cellular side that increase test time and also obsolete the existing testers. So that should be good for LitePoint. I mean, other side of ledger, as you know, in any test industry, there's productivity and competition, parallel test and how that shakes out in any 1 year is anybody's guess. But we feel good over a multiyear period that LitePoint has good opportunities for growth.

Got it, and then my second question, it seems to me you have a good handle of revenue opportunities for the whole year. Is it just very difficult to guide on a quarterly basis given all the moving parts and we have gone through this for the past 2 years and towards -- to some extent, this is also impacting the stock. The stock has also become more like a cyclical. So to that extent, why not stop providing quarterly guide and just focus on opportunities for the whole year which better, in my opinion, captures your opportunity, and it helps us to get out of these quarterly trends?

Okay. Well Mehdi, we recently took your advice in the dividend, so let us think about that piece of advice, okay?

All right.

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

Couple of things. First on gross margin and second on just longer-term strategy around the business. So Greg, it seems to me that the margin guidance is more related -- margin guidance for March is more related to Systems Test. And if you're talking about comparing it back to -- I think, you said in Q1 2012 and that quarter, System Test is about $100 million, which is up a lot from where it is right now. So, I guess, the question is, a, is that really the issue, and b, is that the type of increase that we can expect to see in Systems Test for March? And then I had a follow on.

Yes, you definitely understand the numbers quite well. The story is a little bit different but the numbers work out the same. But in the first quarter, think of it as very little LitePoint. LitePoint tends to ramp in Q2 and Q3, and what we see is happening in the first quarter, there's some mix in SemiTest. And this is the digital business which tends to have lower margins but can have good volume and good dollars but starts at a lower percentage. So it's just the mix of the product portfolio.

Okay. But, I guess, just on systems then, Greg, do you see much change in the System Test revenue?

Systems -- I believe systems will have another difficult year, not as difficult as last year. Last year, the storage test revenue was under $25 million, which is hard to imagine, but it was that low after running an average of $125 million a year. So they will do better this year. But I don't think this is going to be the year they'd get back to model. I think we're going to get back to some stable footing this year and then, see a path to model maybe late in the year or early next year.

Okay. Thanks. And then, just sort of a longer-term question. The one seemingly sizeable market that you're not in that you could potentially be in is testing for enterprise SSD. Can you talk a little bit about maybe how large that market could be -- and I know that there's not a lot of standardization in that particular market and that might be what you're waiting for before you really enter that market -- but can you talk a little bit about that and whether that's an opportunity for you?

Yes, SSD testing is, obviously, something we've had our sights on here for a while. It is still a relatively small commercial market, something south of $30 million a year, in terms of business, but it's growing, and it's growing rapidly. And we've been working on a couple pilot programs to adapt our HDD storage tester for that market. I'd say it's too early to call that, in fact, we'll get in alignment there and sort of find a volume and a profit pool that makes sense, but that's one of the things that we'll sort out here in 2014.

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

Two quick questions. One is, can you guys give an update on the competitive situation in Wireless Test and for the 802.11ac opportunities is the same players or are you seeing any new entrants? And then I had a follow-up.

Yes, I think in Wireless Test, there is really no new entrants or a new competition there. The dynamics going on in Wireless Test, go back to what I said earlier, really center around some technological trends with multiple input, multiple output, beamforming on the one hand, and then customers trying to optimize their existing capacity and reuse it on the other. So there's this tug-of-war between technological growth and trying to reuse capacity as much as possible. That's the thing that was difficult to call last year. That will persist a bit this year, but nothing new. No new dynamics from a competitive front.

Got it. All right. And then as a follow-up, on the SemiTest side, if I look at the SOC test buy rates, in the -- over last several years, it's kind of ranged between like 0.9% to 1.5% but last year in this, it looks like it is more around the 1% range. I'm just trying to a sense of is the buy rate structurally changed that the range is tightened and is now more in the 0.9% to 1.2% range? And do you think this will potentially to go back to 1.4%, 1.5%?

Yes. I think those are some tea leaves that are pretty hard to read. But last year, I would say it's certainly, abnormally low and off the trend line. And something north -- in that 1.2% area. 1.1%, 1.2% is probably more reasonable but there will be lots of factors that cause that to remain volatile. So in a year, where new lithography nodes come in heavily into semiconductor production will tend to drive it north, the buy rate higher. And years that mature technologies tend to dominate will drive it south. But, I think, on average of around that 1% to 1.2 % range is how we think about the trend.

Your next question comes from the line of Vernon Essi with Needham & Co. Vernon P. Essi - Needham & Company, LLC, Research Division: Sort of bottom of the barrel in the Q&A here, but my first question, I think, is an old one and Mark, I think, you even sort of addressed it last quarter, but it's a subject of integrated Test Cell. Obviously, your competitor is making a lot of noise about that. And I'm just wondering if you are seeing any customer interest on this on the SOC side of things and sort of how you feel this may progress over the next couple of years.

Yes. I'll say a few words on this and elaborate a little bit, but the sure way to think about the Test Cell, testers always get married with either a prober at wafer test or handler -- automated handler at package test. And over the year, so if you think about the tester, the useful life of a semiconductor tester asset can be 7 to 10 years. And during that life, the customers' evolution of devices and package types require them to be able to modularly change in and out a handler to adapt to evolving mix of package types and to evolve to perhaps higher productivity handlers. So the integrated Test Cell has never, in the history of semiconductors, proven to be very interesting. That doesn't mean that in small niche areas where change may be low over many, many years, it couldn't find an application. But for the broad, broad market -- the experiment's been played out over a decade and it's just not applicable. And on the other side of the equation, if you look at -- well, rather than integrate the handler, what if you somehow maintained modularity. But one company could provide that complete package of a tester and handler. And again, as we looked at it, the problem with that is you can't pick a handler technology that is pervasive enough to serve the broad market. Customers need the flexibility of multiple solutions on the handler size. So we've always had that philosophy. We work to put our energy into making it the most adaptable, easy-to-dock tester to a wide variety of third-party handlers and have not tried to overly constrain the customer into a one solution. So I'm pessimistic about that, is an answer for the broad market and kind of our strategy will likely continue down that line. Vernon P. Essi - Needham & Company, LLC, Research Division: Okay. And then just wanted to dive into one comment that you keep making about seeing demand on the MCU front last year -- microcontroller front last year into this year. Can you give us a profile of sort of where that activity is happening and are there any changes between what was put into place last year versus what you see on the forefront in 2014 from a customer's perspective?

Yes. A little bit of color. Microcontrollers are pervasive in any consumer product in your home, in your automobile. And one of the things that is emerging as a growth driver -- 2 things. One is China. China is growing dramatically in their consumer product portfolio and microcontrollers proportionately to that growth. So the demand for indigenous capacity in China has been once part of the story. And then the other one, interestingly revolves around secure communication microprocessors and such. So when you look at smart cards for example, smart cards contain a small microprocessor and antenna to transmit secure information in a payment system. In Europe and other parts of the world, they've used chip and PIN cards forever. That technology is set to grow pretty dramatically, it looks like, over the next few years, as that remote secure payment technology finds its way into many more geographies and many more products. We saw a sharp uptick of capacity for that kind of device for the back end of the last year and expect that to continue. And operator, we have time for just one more question, please.

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

Just really quickly. First on 802.11ac, you said about half your shipments last year for the Wireless Test segment were 802.11ac-capable, how does that impact your opportunity for shipments this year? Does that dampen then your total market outlook in any way?

Well, I think it's not a significantly large factor. But this year, probably, 80% to 90% of our shipments will be ac-capable. So some of what has shipped historically will be able to roll forward into the ac world. There's still a significant amount of other capacity, however, that will be upgraded and replaced with ac machine. So it's kind of baked into the overall guidance we've given you. It's not significant, but this is probably going forward, you can think about the world's test capacity as all shipping as ac-compliant.

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

In terms of what's installed in the world, it may be, at this point, in capacity terms, 1/3 to half? In terms of what will ship going forward, it will all be ac pretty much.

And then, just another question on the Xyratex acquisition by Seagate. I know you have a new 3.5-inch tester, just -- can you give us a feel for how you believe this impacts the market? Does it reduce your opportunity by eliminating or potentially taking away one customer? Does it help strengthen the adoption rate perhaps with other players given that Seagate is tied up with the Xyratex and maybe speed up the adoption for your product?

This is Greg. We'll let you know maybe by the next call. If this is just happening, we need to speak to the customers and figure out what their plans and strategies are. But it's certainly a meaningful development that we need to figure out how to best play in this smaller market.

Great. Thank, everyone, and we look forward to talking to you in the days and weeks ahead.

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