Teradyne, Inc. (TER) Q2 2014 Earnings Report, Transcript and Summary

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 Q2 2014 Earnings Conference Call. [Operator Instructions] Andrew Blanchard, 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 CFO, 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. The press release containing our second quarter results was issued last evening. Copies are available at teradyne.com, where this call is also being simulcast. We're providing slides on the Investor page of the website that may be helpful to you in following the discussion. Those slides can be downloaded 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 have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures, were available on the Investor page. Also, between now and our next earnings call, Teradyne will be participating in investor conferences hosted by Pacific Crest, Citi and Deutsche Bank. Now let's get on with the rest of the agenda. First, Mark will comment on the second quarter and the general market environment as we enter the third quarter. Greg will then offer more details on our quarterly financial results, along with our guidance for the third quarter. We'll then answer your questions, and you should note that we intend to end this call after 1 hour. Mark?

Thanks, Andy, and good morning, everyone. The second quarter caps off a very good first half for Teradyne. Our core SOC market is on track to grow more than 20% for the full year. Our R&D engine is running very well, with 11 product introductions across the company year-to-date. The operating model has proven its ability to respond to rapid growth. And with the payment of our first quarterly dividend in June, we've begun a regular return of capital to shareholders. Our second quarter results highlight our strong position in mobility tests and the ability of our manufacturing model to respond to close-in surge of demand. Semiconductor Test and overall company orders came in at the highest level since the first quarter of 2000. Both sales and earnings were above the high end of our guidance as customers pulled in deliveries from 3Q into 2Q. The flexibility we've built into our manufacturing model is designed to respond to this type of in-quarter swing and gives us further competitive advantage in the dynamic world of mobility tests. In SOC tests, orders for testing applications processors, RF and power management ICs led the way. Increases in both unit volume and device complexity are driving tester demand. On the complexity front, the growth of specialty functions inside applications processors are resulting in increasing pin counts and test times. With LTE Advanced and the deployment of MIMO versions of 802.11ac, RF devices are increasing in the diversity of frequency bands and in total bandwidth. This also increases test intensity due to the need to verify more device ports and operating modes. Power management IC complexity is evolving most rapidly, with increased intelligence built in and more precision ports to better manage and extend battery life, even with the increasing silicon content in our phones. All these trends have contributed to the all-time record quarterly orders and unit shipments of our UltraFLEX tester in the second quarter. Since the platform's inception, we've been targeting our UltraFLEX R&D investments to anticipate and capitalize on these trends. Just this month, we have announced 3 new product enhancements to the UltraFLEX to further our advantages. One is a suite of software tools called Oasis that helps speed our customers' time to market for new silicon. This is an increasingly important criterion for mobility customers in selecting new test platforms. Our customers' short product cycles, steepening ramps and zero-defect requirements are placing new demands on their test development. Test program development is now a 24-hour operation at many mobility customers, with teams in multiple geographies working in parallel. Ensuring efficient integration of these teams by utilizing proven code libraries, change control audit tools and automated hazard identification is the value that Oasis brings. We also introduced our next-generation RF subsystem for the UltraFLEX, called the UltraFLEX UltraWave 24. Targeted at Carrier Aggregation, LTE Advanced, 802.11ac MIMO and multi-standard devices with higher port counts, this upgrade extends our leadership in the RF testing of silicon. Finally, we announced enhancements to our core UltraFLEX digital and power instruments to improve the accuracy and, thus, yields in today's and tomorrow's low-voltage processes. As I mentioned last call, microcontrollers are also showing strong test demand, as total microcontroller device shipments are expected to exceed 21 billion units in 2014. That's up over 11%, according to Gartner. Part of this growth comes from new applications in consumer mobility devices. Sensor management hubs and new device capabilities like embedded wireless communication provide new markets for microcontrollers. The increased complexity of these controllers also drives up the test intensity of the chip. Our J750 is well positioned for this growth, and we saw strong demand in the second quarter, with unit orders and shipments both up over 20% from the first quarter. And in memory test, we recently introduced our newest memory tester, the Magnum V. At over 20,000 pins and 1.6 gigabit operating speeds, this tester covers all current and emerging forms of Flash memory. The Magnum family, along with our UltraFLEX high-speed memory tester for DRAMs, drove memory bookings to a new record high in the quarter. This was driven by strength in both DRAM and Flash final test. I should note that Magnum testers are now used by 4 of the top Flash manufacturers and continues to earn design wins with its unique ability to test the high-speed interfaces found in Flash devices for SSD applications. At the halfway mark in 2014, we see the SOC ATE market towards the high end of our $2.1 billion to $2.4 billion range, likely about $2.3 billion, and the memory test market in the $450 million to $500 million range. After major share gains last year of about 7 points in SOC tests to 48% and 10 points in memory test to 26%, our goal in 2014 is to hold the SOC gains as the market expands and pick up a few more points of share in memory test. Turning to Wireless Test at LitePoint. We made solid progress in the LTE production design wins by adding 5 new customers in the quarter for IQ extreme cellular tester. As noted last quarter, the build-out of LTE handsets for the China market has progressed slowly in the first half of the year. While that has muted the market for capacity adds, it has given us the time to get qualified for cellular tests at several major accounts. We still expect the build-out of 4G handsets in China to pick up speed in late 2014, into early 2015. We still see the Wireless Test market in 2014 in the $700 million plus or minus $100 million range, and we are still on track to pick up a few points of share in this market as well. In Systems Test, we continue to add new customers for our Multi-Site Inline TestStation board tester, as 4 more manufacturers selected the product after initial wins in first quarter. On the defense and aerospace side, business was driven by upgrades for existing DOD programs and new subsystem orders. In storage test, while the hard disk drive market remains quiet, we have made progress in the SSD test market with 2 new design wins. This has resulted in our highest level of storage test bookings in 5 quarters and sets us up for a return to profitability in this segment for the second half of 2014. As we've noted in past calls, acquisitions and organic initiatives, combined with a disciplined financial model, have been the recipe for transforming Teradyne. While we've seen very nice earnings and revenue growth on the strength of market and share expansion so far this year, we also continue to work the M&A side of the equation. We have a healthy pipeline of opportunities to grow the company and see near-adjacency acquisitions as an important part of our overall growth strategy. At the same time, we will continue to assess our cash position and investment prospects to best optimize the long-term return to shareholders. So in summary, our product position in key growth segments continues to strengthen, and our share gains from 2013 are holding or trending upward. As is typical with the annual cycle in mobility, we expect the SemiTest market to soften in the second half of the year. On the other hand, as we saw in the second quarter, our manufacturing capability is positioned to respond to potential upside. Let me now turn it over to Greg to provide details on 2Q results, as well as guidance and perspectives on our current quarter. Greg?

Thanks, Mark, and good morning, everyone. I'll start with some brief comments on how the year is shaping up, our capital allocation principles, and then I'll cover the second quarter details and third quarter outlook. At the halfway point, we've logged about $1.1 billion of bookings, one of our best first half starts ever and over 20% greater than last year. We don't see any speculative buying with today's short lead times and stricter capital buying practices. On the sales front, first half sales of $847 million are up $137 million or 19% from last year's first half start. SOC test is driving this increase with sales of $604 million, up $153 million from last year's first half start. As Mark noted, mobility applications and broad microcontroller demands are driving much of the SOC test strength. This year, we expect the SOC test market to return to a more normalized level of about $2.3 billion. Regardless, though, of the market size in any one year, we expect to remain on our long-term share gain trend line. As we've noted in past calls, there are numerous factors pulling test intensity up, primarily related to device size and complexity. Balancing that upward pull are tester productivity improvements, most significantly parallel test economics. I note this because, for some device types, the drive to greater parallelism is abating as customers reach an economic sweet spot in site count versus cost of test per device. It's not a broad trend yet, but we continue to watch this closely, and we'll keep you updated. In SemiTest, we're also pleased to have been recognized as the top semiconductor supplier in the recent VLSI customer survey, scoring the highest test supplier grades in the survey's history. Shifting to Wireless Test. The natural question is, why aren't we seeing greater demand given what we're seeing in SOC test and some of the industry forecast for 4G cell phone growth in emerging markets? Let me tell you how we're thinking about this question. First, the ramp of 4G handsets in China is slower than earlier expected. Second, there is also some excess test capacity left over from last year's sizable buying that is being absorbed this year. And lastly, after 2 strong wireless buying years, the cost of tests and productivity gains have edged out the unit growth and device complexity drivers this year. These 2 parallel forces exist and constantly ebb and flow in test markets. Despite the favorable long-term wireless device trends, we expect the immaturity of the Wireless Test market will yield greater to greater year-to-year market size uncertainty for the next few years. As you've seen, our operating model is able to handle this volatility quite well. For us, though, the focus is to secure a series of key design wins in cellular tests, building off our successful penetration last year, and of course, to maintain our leadership position in connectivity. At the halfway mark, we're performing well on both fronts. I'll note that while we're building a strong foundation on cellular design wins, they are lengthy. And as a new player, we naturally start with a smaller share position in these new accounts. Our cellular test strategy remains to first get in the tent as the second supplier with our leading innovation and then, over time, expand share with our production-optimized focus. Shifting quickly to storage test. We're in a rebuilding mode in 2014. As you know, we've taken a series of actions including lowering the breakeven, introducing a 3.5-inch tester for cloud-based testing and working on SSD test solutions. So we've been very busy getting this business on a more solid footing and towards breakeven for the full year. We'd expect that at the end of the year, we'll be better positioned to determine, if, collectively, these actions are sufficient. In the defense and production board test portions of System Test, we continue to see demand for our new high-speed subsystem and growing traction for the recently introduced TestStation Multi-Site system. Overall, System Test orders were up over 50% in the second quarter, and we'll continue to look for ways to use clever technology to energize board tests. If you step back from the product and segment level details, you'll see that we continue to execute on a very deliberate product strategy. Let me clarify. We see 2 very large and well-noted megatrends taking place across the globe: mobile communications and ubiquitous sensing and computing, called by many names, perhaps most commonly the Internet of Things. These 2 trends drive lightweight, lower-power devices with always-on and connected operation and are rapidly embedding themselves in the fabric of consumer, commercial, medical and industrial markets. These device trends drive the familiar requirements we hear from our customers for low cost of test solutions and very fast programming environments for these complex products. These products can move from design to production of millions of units per month in just a few quarters, with near 0 defects across a globally dispersed supply chain. Mark provided some details about the new UltraFLEX products, but addressing these requirements and many others has also been the theme of our company-wide R&D efforts. So you've seen a steady flow of new product announcements from us in all of our business segments, in total, nearly a dozen in the last 6 months alone. The common thread in these products is this unwavering [ph] focus on the test needs of these high-growth mobile and IoT markets. Every part of Teradyne is delivering highly differentiated products to address these global trends. So back to the numbers. We're on track to have another good year. As you know, we long ago designed our cost structure to operate above the semi cap industry profit rate of 15% so that achieving a 27% operating profit rate this quarter is readily achievable even with less favorable product mix, namely some large apps processing buying and some of our businesses operating below their normalized revenue levels. As you can see from our third quarter guidance, we expect the familiar seasonal patterns to hold, driven principally by the timing of mobility product releases. So we've cautiously guided the third quarter sales to run under the second quarter levels despite the very strong second quarter book-to-bill. We put a slide in the package showing the historical pattern of SemiTest third quarter bookings, which have dropped anywhere from 24% to 57% from the second quarter level over the last 3 years. As noted earlier, we also had a substantial pull-in of revenue and related earnings from the third quarter to the second. Therefore, in addition to your normal analysis, I'd ask you to quickly look at the combined second and third quarter results and outlook. As a 6-month period taken together, you'll see that the combined results exceed the June consensus estimates. Moving to the second quarter P&L. Our sales were $526 million. The non-GAAP operating profit rate was 27%, and non-GAAP EPS was $0.54. The gross margin percentage was 55%, in line with our model. Moving now to capital allocation. We ended the quarter with gross cash and marketable securities of $1.1 billion and no debt. Our offshore cash totals $430 million, which will continue to grow. As a reminder, this year, we expect to add about $75 million for UltraFLEX leases, which is why our cap adds are up considerably from a year ago. As you know, in 2008, we spent over $500 million for Nextest and Eagle Test taken together, and in 2011, we also spent over $500 million for LitePoint. These M&A transactions are providing attractive returns, and future acquisitions remain a key part of our strategy. The timing of when we can close the next attractive transaction that meets our very strict criteria will remain uncertain. We also recognize that cash is often the preferred currency in M&A in order to avoid excess dilution from using equity. We believe that, in the midterm, there will be attractive M&A that we can close, which will provide our shareholders a better return than to simply buy back stock aggressively. However, we also recognize that with a growing war chest, we need to continuously consider all alternatives, including returning more capital, while maintaining flexibility for attractive M&A. Now moving to the key details of the second quarter. Of the total company bookings of $627 million, SemiTest bookings were $535 million, Wireless Test bookings were $52 million and System Test were $40 million. SOC test orders were $488 million, and Memory Test orders were $47 million. SemiTest service orders were $88 million. In the second quarter, semiconductor sales were 80% of the total; Wireless Test, 13%; and System Test, 7%. Our book-to-bill ratio for the second quarter was 1.2 for the overall company, 1.3 for Semiconductor Test, 0.8 for Wireless Test and 1.1 for System Test. The top line of $526 million was up $205 million or 64% sequentially from the first quarter. SemiTest was $422 million, up $160 million. Wireless Test was $69 million, up $47 million. And System Test group was $35 million, down $3 million. We had no customer that was more than 10% of company revenue in the quarter. Within the $526 million of second quarter revenue, service was $73 million, up $7 million compared to the first quarter. SemiTest service revenue was $54 million. Total company product turns business was 46% versus 55% a quarter ago. SemiTest product turns business was 45% versus 57% a quarter ago. Memory revenue was $51 million. Moving down the P&L. Non-GAAP gross margins increased to 55% from 52% in the first quarter due to higher volume. Non-GAAP operating expenses were $151 million compared to $138 million in the first quarter, led by higher variable compensation accruals due to higher profits. At the operating line, we posted a 27% profit. Our net interest and other income was $1 million. Tax expense for the quarter was $24 million, excluding discrete items. And our full year tax rate, excluding discrete items again, is expected to be 17% for 2014. Cash from operations generated $149 million after capital additions. We ended the quarter with a gross cash balance of $1.1 billion. DSO was 52 days, down from 60 days in the first quarter. We expect cash and marketable securities to increase by about $90 million in the third quarter. As noted in the press release, sales for the third quarter are expected to be between $440 million and $480 million and the non-GAAP EPS range is $0.34 to $0.43 on 217 million diluted shares. Q3 guidance excludes the amortization of acquired intangibles and the related tax impact. Our GAAP EPS range is $0.27 to $0.36. The operating profit rate at the midpoint of our third quarter guidance is about 22%. Now moving to the P&L percentages in the third quarter. We expect non-GAAP gross margins to be about 55%. R&D should be 16% to 17%, as we have several new product-related NREs in the third quarter, and G&A should be 16% to 17%. Net interest income is expected to be about $1 million. So to summarize, we had a very good second quarter. We continue to execute our product and market share strategies, and we remain very focused and disciplined on putting our capital to work for the benefit of long-term owners. With that, I'll turn the call back to Andy.

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

[Operator Instructions] Your first question comes from the line of Jim Covello from Goldman Sachs.

If I could ask about the SOC test business. We've had a couple of the analog companies in the last couple of days, namely Linear and NXPI, both increase their CapEx, citing back-end constraints a little bit. How much of that do you think is reflected in your June quarter results versus there's still some of that, that's going to have to work its way through the system in a positive way for you going forward? And when I think about your September quarter guidance, is -- are you assuming that what we saw from people like Linear and NXP and others -- and I know you don't want to comment on specific companies. But do you assume that, that's going to continue? Or do you assume in your guidance that, that drops off a little bit because that can be volatile?

Jim, thanks. Yes, I think the analog business is one of those pieces that is strengthening, and it tends to be less volatile overall than some of the digital businesses. So in the second quarter, I wouldn't say that it's peaked. We're still seeing strong demand for our Eagle and FLEX testers, which primarily serve that segment. I think for the rest of the year, it will continue to strengthen a bit. Some of the companies you mentioned, some are pure analog versus a mix of different types of parts. But overall, what we see is that analog will remain strong and probably strengthen a little bit in the second half.

That's helpful perspective. And then when I think about the short-term disruptions in the Wireless Test space versus the long-term opportunity, how do you guys frame that up in your mind? Obviously, you talked about the issues that are driving the market this year and in the back half of the year. What are you -- what in your mind has to be the long-term reward to live with the short-term volatility in that market?

Well, I think Wireless Test is going to be propelled by unit growth and complexity. And the period we're in, in the past, I would say, 2 years, last year and this year, is that the unit growth has slowed a bit for complex devices because of the sort of pushout of China LTE deployment. And people, in the meantime, in the traditional markets have been working on a lot of optimization and reuse of equipment. So what we do see is that the deployment of LTE in China will occur. It's hard to predict when the ramp starts to go vertical, but it will come. And with that will come a lot of complexity in those phones from an RF point of view and -- on the RF and from an applications processor and power management point of view. So for both the SemiTest business and the LitePoint business, we think that the China wave will be the next wave of benefit we see from the wireless space. And then what comes after that will be further enhancements with LTE Advanced and such that will continue to drive increased bandwidth and test complexity.

Your next question comes from the line of Timothy Arcuri from Cowen and Company.

Greg, can you help us with what the mix is going to look like for September from a revenue perspective? And the reason why I ask that is because it's pretty hard to fit the guidance, given where the bookings were. So I'm wondering maybe if you can help us with what the revenue mix is going to look like. And then I had a follow-up.

Okay. We don't typically do that, Tim. But I'll say the SemiTest, we expect to -- obviously, we have a larger segment. And basically, Semi and LitePoint are going to be down a bit from the prior quarter, but they'll both be down about the same amount [indiscernible] percent.

Okay. Down, you said what, 50%, you said?

As a percent, they'll look similar in their performance.

Okay, got it. Got it, got it. And then can you also talk -- wireless revenue was greater than the bookings. And that's not the typical pattern, given what you booked in Q1 and what you booked in Q2. Revenue was about $20 million higher than what you booked in Q2. Are there some deferrals in there, some lease-related arrangements similarly that's in the SemiTest side maybe that's inflating LitePoint revenue relative to what you're booking?

We don't have leases in -- at LitePoint. So no, that's not going on.

Okay. And then, I guess, just last thing for me. Can you break out the backlog, break out the $592 million worth of backlog?

I don't have it at my fingertips. But you could imagine SemiTest is the biggest piece by far.

Your next question comes from the line of Chad Dillard from Deutsche Bank.

Can you talk about how you're tracking on your memory share gain targets? I know before you were talking about 3% to 4%. Where are you right now in the year? And where do you expect to be at the end of the year?

Sure. Memory is a little bit of a bright spot in that the share gains, we're on track for the first half of the year with what we said, 3 to 4 points of share gain. We're seeing increasing demand in memory, actually. The -- both DRAM and the Flash speeds are going up dramatically. That is causing, I think, unplanned obsolescence at some of our customers. Whereas they had hoped they could reuse some legacy equipment, the mix shift toward higher-speed DRAMs and higher-speed Flash is driving a little bit more demand. And that's playing into our products' strength and driving our share north. So last year, we finished around 25%, 26% share of the memory market. Our goal this year is if we can stretch it to 30%, plus or minus a few, it would be great.

And then on the SSD side and SSD test, now that's a new market opportunity for you. Can you help us get a sense of how big that market size is what the penetration rate is and what sort of share should we expect you to achieve?

Yes. That market is very nascent and early, so I would not, at this point, be able to put a market size on it. We've gotten some initial design wins that are first applications of our product to that space. So we've really got to go through that initial deployment and see where it sorts out before we could start to think about this as a market and a sizing and such. So some good early indicators enough to make a big difference in the bottom line of that relatively small business, but it's too early to call the market.

Your next question comes from the line of John Pitzer from Crédit Suisse.

This is Farhan Ahmad asking a question on behalf of John. My first question is regarding your Wireless Test. If I think about the Wireless Test, you have very high exposure to 1 customer, and that particular customer is having very strong supply chain data points. So I was just wondering, like, what's led to, like, somewhat of weaker orders this quarter and if there is some share loss at the biggest customer in the Wireless Test.

I'll take that one. In my remarks, I believe I mentioned one of the factors affecting us was there was test capacity left over from the prior year that's being absorbed. So I think that's affecting us this year. And just to step back, in the last 2 years, there have been very high buying from LitePoint and Wireless Test. I think those last 2 years were above the trend line. I think we're below our trend line now, and this is not uncommon in tests, where there's some buying, it gets optimized, it gets better used with experience and know-how and then that pushes out future capital purchases. So that's what we believe is going on this year. And at some point, that capacity is absorbed and we're back delivering new testers. In terms of market share, we feel confident that -- overall, that we will gain market share yet again this year. It might be a couple of points. Now we accept market share is -- unlike SemiTest, where there's third-party reporting, it's more difficult. But the way we count noses, we think we have a good understanding of our position.

Got it. And in terms of your first half orders, they were $230 million higher than your revenues. So in regard -- just taking that into account, your September quarter guidance looks a bit light. And particularly, when I think about, like, the higher utilization rates at the foundries currently, I just want to understand, like, how much of conservatism is built into your guidance for third quarter. And could there be a significant upside to it?

Yes. I'll take that one, too. If you look at our history over time, and I think I also mentioned this, our bookings in the third quarter drop anywhere from 24% to 57%. So that's a very wide range that we have to model with. It can be a steep or a small drop. So could there be upside? Yes, there could be. But we tend to try to play it conservatively so that we earn your credibility. We weren't super cautious, but we were sort of normal cautious the way we normally set our guidance. So we feel good where we set it. And another key thing for us is, if you look at Q2 and Q3 together, taken together, it's similar to what the sell-side consensus was before this call. So I think you guys got it right. It's just some business came in a little bit earlier.

Your next question comes from the line of C.J. Muse from ISI Group.

I guess, first question on LitePoint. You reiterated the $700 million market size. I'm curious there. If cellular's really not buying because of excess existing capacity, but your share in connectivity is holding and you're doing roughly $140 million, give or take, in the first 3 quarters, it looks like the implied number for you guys is closer to $200 million for the year. And so I guess the question this, does that mean that we should see sustainable spending on tests within LitePoint into Q4? Or am I missing something there?

C.J., that's correct. We would expect a stronger Q4 than we traditionally had. So clearly, our plan is back-end loaded, and it's tied to, we think, the China 4G buying will starting to pick up, and we've gotten design wins. The trick for us though is, as we've gotten these very important design wins, it's also not quite clear how much we're going to get until the very, very end. We know we won, but are they going to give us 10%, 20%? What percent of the buy are we going to get? So even that's still in play now. So what we feel good about is we get those design wins and over time, similar to what we did in connectivity many years ago, you start as the low share guy, you work your way up over time. So we like where we are strategically, but we accept it's hard to call the short term.

Excellent. That's helpful. And then I guess, as my follow-up, this is a great year for SOC test, particularly when you think about Intel bringing in-house. Curious how you think about the moving parts for 2015. And I guess within that, would love to hear your thoughts around mobility, whether there's a pause as we shrink down to 16, 14 or whether you see re-up there. And then on the analog side, it sounds like that can continue. Would love to hear your thoughts there on sensors/microcontrollers, et cetera.

Well, I think -- so to start with analog, sensors and microcontrollers, I think there's a long-term systemic growth coming there that's both new applications driving an increase in unit volume growth for the devices. On top of that, there'll be increased test intensity because of some of the trends I cited in my remarks. So those 2 pieces I'm very optimistic about going into next year and beyond. Mobility is always volatile, and lots of things happen. Node -- you mentioned one, for example. Next year, there's likely to be a significant node shift. Now that in and of itself doesn't drive a lot of incremental test capacity, unless there's a yield issue, which did happen at the 28-nanometer node in 2012. So there's always this possibility that a node issue can create a temporary capacity surge. But it all averages out over time because once the yield issues are fixed, that capacity gets absorbed. That's what we saw in 2013. So as I look at where we are now and next year, I think looking at the balloons and anchors, it feels it's going to be about a similar kind of pattern with a systemic increase in test intensity perhaps buoying the market a little bit. So that's the color I can give you at this point.

Your next question comes from the line of Tom Diffely from D.A. Davidson. Thomas Diffely - D.A. Davidson & Co., Research Division: So I guess, first question is on the turns business. So were you surprised at the magnitude of turns in the quarter? And could you have even done more?

Yes. Surprised is a term of art because we always, in our manufacturing model, put in enough upside capacity to deal with some amount of surprise or pull-ins. And in this case, the customers were pulling hard to get a little bit ahead of some of the ramp of silicon for some product launches coming soon. And on the Semiconductor Test side, we actually exhausted not all but quite a significant portion of our upside. So it would have been hard for us to do much more in SemiTest than we did. On some of the other segments, we did still have some dry powder. We could have done more. We didn't need to. But that's a position we're in pretty much every quarter. When we're in a peak quarter like we are in the second quarter and third quarter months, we can have, depending -- if the mix hits right, anywhere from $50 million to $100 million of upside. And in a trough month or trough quarter, we might have $150 million of upside. But that's how we've been running the business now for 4 years, and it helped us really be responsive. And it's part of why I believe we've been able to move market share. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then, I guess, just to follow up here on the buy rate on some of your slides. You're saying the buy rate this year for SOC is only about 1%, which is significantly below where it was in '10, '11 and '12. Did something happen industry-wide? Or is it just dynamics of a single year?

Well, I think there's one factor that needs to be put in there. So yes, it's up this year from last year. It will be up 1%-plus. But the buy rate in the past had effect of some large microprocessor companies were buying significant commercial capacity. They tend, at this point, to move in-house. And so that was in the commercial market numbers in '10, '11, '12, and it's out of the commercial market numbers that you look at in '13, '14 and beyond. So if you -- and that could be on the order of several hundred million dollars of buying. So if you neutralize that effect of shifting from commercial to in-house, I think you would find it's back not quite to that 1.3% level, but it's getting back there. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. So would you consider the 1% buy rate kind of a normal rate going forward then?

I think -- well, I think it will -- my belief is it will slowly trend back up because of these test intensity issues we're seeing. And so if we're looking out -- in our planning, if we're looking a couple of years down the road, it's somewhere in the, let's say, 1% to 1.3% range is probably a planning number.

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

I want to go back to the LitePoint. I'm a little bit confused. If the end customer is building finished handset inventory today and into Q3 with the intention of selling those units in Q4, what gives you confidence that there's going to be a pickup in test equipment procurement late in the year?

Mehdi, we believe is as the year goes on, these design wins we're getting in Asia, for example, we think there is going to be the 4G handset build-out now that the towers are getting put in place and the infrastructure. So therefore, we'll get business from that end. In terms of existing customers that have excess capacity, there may be very little extra business we get from them.

Okay. Now so if the design wins help with better-than-seasonal trend in Q4, would it be fair to say -- to assume that there's also a probability that Q1 could turn out to be better than seasonal because of the design win?

Yes, that's possible. But I would still say there is strong seasonal patterns, like there is in SemiTest. So the design wins can help. But our design win, we believe we are going to start as the second source guys, so we're going to start at a lower share. So to us, they're very strategic. We can't say the names of these accounts, but they're very -- the accounts we'd want to be in. So we think, long term, we're in a very good path. It's just that the dollars probably will be smaller than the importance of these strategic wins long term.

Sure. And then on R&D, can you please explain again why the R&D mix is spiking in Q3?

In the third quarter, we have a set of NREs, fees paid to third parties, that coalesce in the third quarter, 3 -- about 3 NREs in different parts of the company, principally in SemiTest. So that's a bit of a bubble that we don't expect in the fourth quarter. And that's just timing. It happens now and then.

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

I have a couple of them. Number one, Greg or Mark, if you look at the last 3 years -- I know you guys don't give forecast beyond 1 quarter. But the last 3 years, your Q4 revenue was under $300 million. Now assuming it follows normal seasonal patterns, but Q4 seems to be weighted for LitePoint. So should we assume Q4 this year to be much better than $300 million versus the last 3 years?

As you said at the outset, we don't talk about fourth quarter guidance, so that's key. But all I could tell you is history should be a strong indicator for you. And yes, we think LitePoint could have some better news in the fourth quarter. But again, I also said that these are key wins that we start with small second source positions but important for the long term.

Got it. That's helpful. And then the second question is on the Wireless Test. If we look at the last few years, the market size has been compressing. Obviously, competition has been increasing, and there are probably 5 guys, including you guys, in the picture. So I'm just kind of curious what's got to give for the market to improve. Do you think there are like 2 or 3 competitors too many that need to get out of the business? Or do you think it is more about innovation, innovating to get the prices back up?

I think it's about innovation for the foreseeable future. That's what LitePoint was incredibly successful in the connectivity side. LitePoint's brought innovation to cellular test, but they were late to the market, so it's a different hand they had to play. I do think, with our production-focused optimized approach, that, over time, we'll win. And that includes everything from we tend to have a lower-cost product, the COGS of it. The throughput's better. It's easier to program. So it's exactly what is needed in a low-cost Asian fast-ramp manufacturing environment. Our competitors are all very capable. But they tend to come from an R&D or a general-purpose instrument and they try to bring that into the battlefield. That's not as strong an offering as we have because we optimize on the exact problem at hand. So I do think you're going to see that, over time, we'll continue to be very strong with production-optimized testing. Some of our competitors are better at general purpose or in the R&D lab.

Your next question comes from the line of Patrick Ho from Stifel. Patrick J. Ho - Stifel, Nicolaus & Company, Incorporated, Research Division: First question on Wireless Test. Given some of the reuse and upgradability that you've talked about in the past, how do you capitalize on the potential opportunity there in terms of, like, upgrades or providing additional services for those customers that are large for you right now that aren't doing a lot of that reuse and upgradability?

We generally have upgrade paths for our customers, where needed. If it makes sense, we'll do what's necessary to give the customer the roadmap that they need. So we do get business from upgrades, but we also -- there's also, in this industry, new products every year. I mean the product life cycle, the new products -- every 9 months to 12 months is a new product. So there is an element of upgrade. But I think that the greatest drive is the next product and the next product. And there's so much change happening. Unlike SemiTest where you have 2-, 3-year product design cycles, this is 9 months, so it's constantly changing.

And I would also say that it's an ebb and flow, where in any given year, some technologies don't offer an opportunity for a lot of equipment upgrades, but then there's new technologies coming into the phone. So what you'll see over time is that the portfolio of product offerings expands to cover more and more technologies. And sometimes, those waves get in sync, and sometimes, they're out of sync. But that's how we work with the established customers to increase our share of wallet.

The last maybe 12 months, thereabouts, customers are buying future-proof out of the box or buying testers with, example, 802.11ac even though they're not testing for that now. So customers have a choice. You can buy a future-proof tester or you can buy something lower cost for the problem at hand. So they have the choice. Patrick J. Ho - Stifel, Nicolaus & Company, Incorporated, Research Division: Great, great. That's really helpful. And in your commentary regarding the 4G China rollout in terms of being slower than expected. Just from your historical perspective to date, how long has it taken in terms of generation devices before you become a lead supplier to any new customer? Does it take 1 or 2 generations before you become the lead supplier? Or could it take more time than that?

Well, I think if you're referring to the cellular design wins we've talked about, in the LitePoint case, in the WiFi side of Lite, we very quickly moved to a dominant position. But we were moving in at a time when the market was also nascent and exploding, like LitePoint was. So we rode a wave and had a strong position. Here, we're coming into an established market. And because of the rapid product life cycles that Greg mentioned, it's actually possible to move into a high share position within 1- or 2-generation design cycle, which is a 1- or 2-year period. If the product life cycles were quite long, like SemiTest's 3 years, there's a much slower share-move strategy. But here, it can move more quickly.

Our next question comes from the line of Jairam Nathan from Sidoti. Jairam Nathan - Sidoti & Company, LLC: With regard to Wireless Test, have you mentioned what your breakeven level is on that business? And if -- and how has it changed over the last 2 years or so?

We haven't -- we're probably not -- we're not going to do that in this call and don't plan to. But LitePoint would expect to operate with good profits this year, as well as the prior 2 years. Obviously also, though, we've invested much were in the distribution and in the R&D in cellular tests. This -- we see this LTE as an opportunity. It's a discontinuity. Customers are looking for different solutions. They can't buy what they bought in the past. So there is this opportunity, whether it's a 1, 2-year window. So this is when we need our best engineers, best products engineers and best sales guys out in the field. And we've done that in the past year in the major Asian countries. So we've absolutely ramped up the LitePoint OpEx. And it is delivering with the early design wins, which, whether it's 2 years, 3 years, it will be some time period where we believe we can move from small share to a much more meaningful share. Jairam Nathan - Sidoti & Company, LLC: Okay. Just as a follow-up, like, what have you seen as a competitive response to -- with respect to you winning new business on LitePoint side?

What they tend to do is try to copy our product. We had 4 up testing, now everyone else has 4 up testing. But we have other things up our sleeve that they don't know about. So we're always, we believe, a turn ahead of them with some innovation. But they generally are fast followers. And the customers tell them, "Do what LitePoint did. Do what LitePoint did." But they're not starting with the best architecture to do that, so they have to make trade-offs. And often, they have higher COGS in their product. The other thing they're doing in the short term is they do what others do, they lower price. But we have much better throughput, so we tend -- that's usually not the best way for them to respond, but that's the only thing they can do in the short term.

There are no further questions at this time. I will turn the call back over to the presenters.

Great. Thank you, everyone, for joining us today. This concludes the call, and we look forward to talking to you in the days and weeks ahead.

Thank you.

Thank you.

This concludes today's conference call. You may now disconnect.