Andrew J. Blanchard - Vice President of Corporate Relations Mark E. Jagiela - Chief Executive Officer and President Gregory R. Beecher - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer.

James V. Covello - Goldman Sachs Group Inc., Research Division Vernon P. Essi - Needham & Company, LLC, Research Division Krish Sankar - BofA Merrill Lynch, Research Division Christopher J. Muse - ISI Group Inc., Research Division Timothy M.

Arcuri - Cowen and Company, LLC, Research Division John William Pitzer - Crédit Suisse AG, Research Division Chad Dillard - Deutsche Bank AG, Research Division Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division David Duley Patrick J. Ho - Stifel, Nicolaus & Company, Incorporated, Research Division Thomas Diffely - D.A.

Davidson & Co., Research Division.

Good morning. My name is Natalia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Q1 2014 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Mr. Andrew Blanchard. You may begin, sir..

Thank you, Natalia. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Jagiela; and our Chief Financial Officer, Greg Beecher.

Following our opening remarks, we'll provide details of our performance for the first quarter, as well as our outlook for the second quarter of this year. The press release containing our first 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 of the website that you may find helpful in following the discussion. Those slides can 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 measures. They are available on the Investor page as well.

Also between now and our next conference call, Teradyne will be participating in investor conferences hosted by Bank of America, Hallum, Crédit Suisse, Davidson and Needham & Company. Now let's go down to the rest of the agenda. First, Mark will comment on the first quarter and general market environment as we enter the second quarter.

Greg will then offer more details on our quarterly financial results, along with our guidance for the second 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. Our overall bookings in the first quarter were up 55% over the fourth quarter of last year and 12% higher than the first quarter of 2013. This was due to a very strong opening quarter in our Semiconductor Test business, where bookings were at their highest level since the rebound quarters of early 2010.

Strong demand for application processor, microcontroller, and power management IC testing led the way, with orders for our UltraFLEX and J750 testers roughly doubling from the fourth quarter of 2013. As noted last quarter, our plan for 2014 is to lock in the 7 points of SOC share gain from 2013, and grow with the market expansion in 2014.

With our strong Q1 result, that plan is on track for the year. The UltraFLEX continues to deliver on a strong position and mobility. In Apps Processor Test, the power of the platform's parallel test capability and fast time to ramp IG-XL software continues to win share.

In RF, where chip scale packaging increasingly dominates, the UltraFLEX's unmatched accuracy of signal delivery at wafer test delivers higher yields for customers. And while more cores and components to manage in mobile electronics, the precision and complexity of power management ICs are advancing rapidly.

Here, the UltraFLEX's DC architecture excels at the precise, current sourcing and measuring required by these devices. So all in all, our long-term UltraFLEX R&D strategy of creating the world's best platform for mobility device test is paying off. Microcontroller Test was another strong part of the Q1 story.

Our J750 bookings more than doubled from the first quarter of 2013. Microcontroller is used as sensor management hubs in mobile devices, embedded with RF and consumer products, and general growth in industrial and automotive applications led the surge.

To date, over 4,500 J750 platforms have been purchased worldwide, with new customers being added, particularly in Greater China, every quarter. I will also note that the strength in mobility and microcontroller did not extend to analog in Q1, and that segment has been relatively quiet for over a year.

However, in the current quarter, we are seeing signs of improvement in this part of the market as well. In Memory Test, although orders were relatively slow in Q1, we are seeing momentum build in 2Q. Our new Magnum 5 FLASH tester is now in volume production, and we added a third customer in the quarter.

We also received follow-on UltraFLEX high-speed memory orders for GDDR5 testing, and plan to ramp our new High Pin Count version for DDR4 testing in 2Q. Again, increasing device interface speeds on both FLASH and DRAMs play into our product line strength.

So overall, we still see the 2014 SOC test market size in the $2.1 billion to $2.4 billion range, up from $1.9 billion last year, and the Memory Test market flat at about $450 million.

As is typical with the annual cycle in mobility, we expect the SemiTest bookings momentum to continue in the second quarter, followed by a traditionally softer second half of the year. Our manufacturing capability is designed to respond to these surges, and we are in good position with upside as we ramp capacity in 2Q.

In Wireless Test, first quarter bookings were $57 million, more than triple the orders of the seasonally slow fourth quarter, but down from a year ago. As we have said before, short lead times and relatively opaque visibility into the ramp plans of customers makes the short-term market and order timing difficult to forecast.

However, we do see increased tester efficiency and reuse of installed test capacity, particularly in cellular, further compressing the overall market in 2014. Longer term, the growth prospects for the market remain strong following this period of optimization.

As LTE begins its next phase of growth in China, and trends like MIMO and Carrier Aggregation gain momentum, the need for new test capabilities should grow. In System Test, we added 2 new customers for our recently introduced Multi-Site Inline TestStation for the commercial production board test market.

And in our defense electronic test unit, despite ongoing pressure on government spending, we expect to continue to operate at or above model. On the other hand, our Storage Test business remains slow.

The mainstream Hard Disk Drive test market still has excess capacity to work through, and while there's growing interest in SSD testing, it has relatively small potential volume in the near term. In summary, calling the full year is as difficult as ever, but we are off to a very solid start in 2014.

Our product position in key growth segments remain strong and our share gains from 2013 are not only holding, but trending upward. Let me now turn it over to Greg to provide details on Q1 results, as well as guidance and perspectives on the second quarter..

first, the system is architected to have the lowest phase noise and tightest power accuracy in the industry, equal to or better than some benchtop instruments. This capability provides headroom, which directly translates to higher wafer yield in production test.

Second, we created an integration facility at Teradyne that replicates the production environment for wafer tests. Specifically, to work with probe interface suppliers and customers to ensure the extraordinary performance of the tester is actually realized in day-to-day production.

This facility has allowed us to extend our lead in RF test and probe tests in general by helping customers solve some of the most challenging, mechanical, electrical and thermal issues facing semiconductor production testing today. Turning now to the microcontroller strength.

The J750 continues to sell very well, with over 100 systems ordered in the quarter. In fact, it was the best consecutive fourth quarter run since 2010. The J750 is the clear industry standard for microcontrollers, mostly digital and image sensor testing.

With the recent introduction of low-cost, LitePoint wireless capability, any of the thousands of systems sold to date can be easily upgraded to test [ph] controllers with RF connectivity, as well as a new silicon used in the emerging class of devices for the Internet of Things and wearables.

And recall that last year, we notched up the J750 operating speed, channel density and cost performance, earning it a 2014 Best In Test award from Electronic Design News. So the future looks very bright here as well, both in end market trends and our product leadership.

Shifting to Wireless Test, the first quarter demand of $57 million was down from last year's first quarter record start. Our Q1 demand this year was principally driven by new technology buys, such as 11ac and connectivity.

While it is difficult to forecast wireless demand, we are expecting a slower first half start with customers squeezing more out of their installed base of testers. I will come back to LitePoint a little later to comment on the positive longer-term picture. Moving to the first quarter P&L.

Our sales were $321 million, the non-GAAP operating profit rate was 9% and non-GAAP EPS was $0.11. The gross margin percentage was 52%, 2 points above expectations due to more favorable product mix. Our gross margin is most affected by mix and volume, and over the last 3 years, it's ranged from 49% to 59% in any quarterly period.

We have not seen any meaningful changes to the overall pricing environment that would alter our traditional margin ranges. Stepping back, you can see that we operate in seasonal, annual cycles, with the first and fourth quarters as the low points. Our shipments have been peaking in the second and third quarters, and we expect this cycle to continue.

Of course, there are also other trends that impact us that are beyond the seasonal biorhythms. Currently, we remain in a severely depressed storage test market, as PC demand is soft and the cloud build-out hasn't absorbed the test capacity in place.

So in addition to the cost reduction actions taken last year, we are evaluating various options to minimize the financial impact to our P&L during this period of limited demand. We will update you mid year on our plans in this area. Shifting back to Wireless Test.

LitePoint serves a market that is very difficult to predict, and will have periods of strong buying with the ongoing growth in smart devices, the proliferation of new standards and a host of new wireless applications. Volume buying will also be followed by the normal productivity squeezing and digestion periods.

We're in the squeezing out and digestion phase now, after the last 2 years of sales of $538 million, well above our original 2-year plan of $350 million. Strategically, at LitePoint, we are doing very well with new technology buying, with our [indiscernible] chipset strategy and connectivity.

This proven formula gets off production, optimizes testers to market with full test solutions well ahead of others with the right economics for production. Namely, we don't develop general purpose or R&D testers and then try to morph them into high-volume production systems.

We design for the exact problem at hand, the need for low-cost, simple to use testers, with solutions in place, right out-of-the-box. In cellular, as you know, we broke into the market last year in a very major way and look to further gain share, albeit in smaller increments over a multiyear period.

So while the 2014 market size is tough to call and may very well be down from -- for the year, we remain very positive about the long-term prospects of Wireless Test. Now back at the company level. Looking over the last 3 years, we've averaged annual sales of just over $1.5 billion and a non-GAAP operating profit rate of 21%.

Our first quarter 2014 start with sales of $321 million and an operating profit rate of 9% fits with these prior year starts. You will see that our multiyear performance continues to place us among the best-performing semi-cap suppliers.

Now looking ahead, we'll continue to focus on selectively gaining market share through offering differentiated solutions to the right customers, greater throughput and enable them to get their products to market faster with the best programming tools.

We accomplish this by carefully targeting R&D to where the hockey puck is going and ensuring that our solutions are as far as possible from a need to solution. A quick example of this is in Memory Test, where we are greatly outspent by our largest competitor, yet our solutions matched with the customer needs now, higher frequency and throughput.

This is how we gained about 10 points of share in Memory Test last year alone, and we expect to gain more share in 2014. When profitability is hard earned as it is in ATE, we long ago learned that we need to be very judicious in how we invest, both in R&D and in nonorganic growth.

This mindset will continue to guide us as we evaluate growth opportunities. Moving to capital allocation. Our operating model has shown us cash generation strength across multiple industry cycles. Since 2011, we've generated free cash flow of about $210 million a year. This led to our announcement of an initial dividend last quarter.

We will also remain opportunistic with the timing of stock buybacks, and of course, maintain sufficient dry powder for highly selective M&A. While we may not find another LitePoint-type asset, we will continue to revisit capital allocation. As planned, we settled the convertible note with a face value of $190 million on March 17.

The option component will settle over the 65-day trading period, beginning June 17 and ending September 17. At $20 per share, this would amount to about 21 million shares, which we've included in our non-GAAP EPS guidance for the second quarter. We've once again included a slide in the presentation on our website, which describes this further.

Now moving to the key details of the first quarter. We had total company bookings of $450 million, SemiTest bookings were $366 million. SOC test orders were $349 million and Memory Test orders were $17 million in the first quarter. SemiTest service orders were $53 million. Wireless Test orders were $57 million.

System Test orders were $27 million, with $12 million of service orders. In the first quarter, semiconductor test sales were 81% of the total, Wireless Test 7% and System Test 12%. Our book-to-bill ratio for the first quarter was 1.4 for the overall company, 1.4 for Semiconductor Test, 2.7 for Wireless Test and 0.7 for System Test.

At the end of the quarter, our backlog stood at $490 million, of which 84% is scheduled to ship and be recognized as revenue within the next 6 months. The top line of $321 million is up $36 million or 13% sequentially from the fourth quarter, in line with seasonal patterns. SemiTest was $262 million, up $47 million.

Wireless Test was $21 million, down $5 million. And System Test group was $38 million, down $6 million. We had no customer that was more than 10% of company revenues in the quarter. Within the $321 million of the first quarter revenue, service was $66 million, down $8 million from Q4's record level, SemiTest service revenue was $49 million.

Total company product turns business was 55% versus 41% a quarter ago. SemiTest product turns business was 57% versus 45% a quarter ago. Memory revenue was $28 million. Moving down the P&L, non-GAAP gross margins decreased to 52% from 55% in the fourth quarter due to product mix.

Non-GAAP operating expenses were $138 million, compared to $140 million in the fourth quarter. At the operating line, we posted a 9% profit. Our non-GAAP net interest and other expense was $11 million -- was $1 million. Non-GAAP tax expense for the quarter was $5 million and our full year non-GAAP tax rate is expected to be 18% for 2014.

Cash from operations consumed $57 million after capital additions in the first quarter. We ended the quarter with a cash balance and marketable securities of $967 million. In the second quarter, we expect to generate about $75 million of cash after deploying about $55 million into fixed assets and paying about $12 million in dividends.

For the full year, we expect to deploy about $75 million of capital into UltraFLEX testers for leases, bringing our gross total capital additions for the year to $145 million. This is above our January estimate by about $20 million. The higher projected fixed asset additions are attributed to greater than forecast demand for UltraFLEX system leases.

Our strong operating model and balance sheet gives us the flexibility to lease testers when it makes commercial sense. Our first quarter DSO was 60 days, up from 50 days in the fourth quarter, due to shipment patterns.

As noted in the press release, sales for the second quarter are expected to be between $460 million and $490 million and non-GAAP EPS range is $0.36 to $0.43, on 217 million diluted shares. Q2 guidance excludes the amortization of acquired intangibles and the related tax impact. Our GAAP EPS range is $0.29 to $0.36.

The operating profit rate at the midpoint of our second quarter guidance is about 22%. Now moving to the P&L percentages in the second quarter. We expect non-GAAP gross margins to be about 53% to 54%, R&D should be 15% to 16%, and G&A should be about 16%. Non-GAAP net interest income is expected to be about $1 million.

As we have seen for the first quarter, we are well-positioned in 2014, with our strong market share momentum, new product offerings and extremely resilient model and an capital allocation strategy that rewards shareholders and supports our growth strategy. I'll now turn the call over to Andy..

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

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

You guys have talked a lot about the seasonality in your business and pretty well documented. If I look at the third quarter, over the last couple of years, in Q3 of '12, it was down quarter-over-quarter and Q3 of '13, it was up quarter-over-quarter.

Can you talk about the pushes or pulls that would make this year look either more like '12 or more like '13?.

Sure, Jim. A lot of it gets tied to the product introductions of our customers and where they fall in the calendar year. So in 2013, we saw a little bit more back-end loaded surge. This year might be a little bit similar to that. But the lead times we have tend to be 4 to 8 weeks, depending on the product line.

So we just try to position ourselves to run with the demand and we don't try to get overly fixated on the quarterly boundary too much. But that is about as much color as I could give on it..

The only thing I'd quickly add, Jim, is many customers are trying to release their products earlier and faster. So that tends to cause us to move our shipments in a little earlier in the year. So I think you may see that occurring at times.

So it all depends what the exact date is for these launches, and they tend to launch very vertical, very aggressively fast, so they need a lot of testers to stock the shelves..

That's helpful. For my follow-up, on the gross margin, obviously, mix, especially mix with wireless, which has traditionally had a little bit higher gross margin, is a part of the equation.

But what other puts and takes drive those margin in Q2 to be a little bit lower than what it might have been at this revenue level historically?.

Jim, this is very consistent with 2012. 2012, you recall, we had very high amount of digital-centric buying for application processors. The same thing is happening this year. That buying is happening early in the year and that part of our business carries a different margin profile. The volumes tend to be very high. The percentage is a little bit lower.

And I think we said last call that we expect this year, the gross margin to be -- for the year, to be about 54%, starting off lower as the application processors work their way through the earlier part of the year..

And so you still feel good about that 54% for the year?.

I do..

Your next question is from the line of Vernon Essi with Needham & Company..

You had discussed the Memory Test market a little more there, it sounds like you're getting some share gains on some of these newer developments.

Could you remind us what your expectations are for share as we exit 2014?.

Sure, so Memory Test for us has been a success story, mostly tied to increasing interface speeds on both FLASH devices and DRAMs. So our products have been set up and architected to intercept that trend and it keeps coming our way. So as we exited last year, we exited with about a 25% share of the Memory Test market. It was about a $450 million market.

This year, we think it will be roughly flat at $450 million and our goal is to pick up 3, 4 points of additional share this year. It looks like we are on track for that at this point..

Okay. And then just to switch gears, you rarely talk about your other systems business outside of storage, but you did mention a new circuit, and the only reason I ask is, I'm hearing that the demand in that area and sort of the whole SMT side of life has actually picked up.

Are you seeing strong order patterns in that side of your business? And is there anything that you think could materially, has actually picked up? Are you seeing the numbers?.

Yes, it's small numbers. I wouldn't say we've seen a material movement yet. But the new products we've introduced are targeted at these automated SMT lines, they are high-volume applications. It's a inline multi-site tester. We have had some design wins.

We expect them to start to ramp for the rest of the year, and we are targeting some even higher volume applications. Those design wins are not concluded yet, so we don't know how they will turn out. But we see the same trend that you allude to and we positioned ourselves with this new product.

But after that, these are -- shootouts are very long, shootouts, they go on for 9 months. So we are at the early stages of some of these and we do believe we have a very good product, with much greater throughput, that the customer can buy far less fixtures and get meaningful savings.

So we are optimistic, but I think it's going to take a number of quarters before the numbers, perhaps, show some different trajectory..

And just to clarify, I guess, the answer that -- you're saying the activity picked up in the last couple of months in that space versus perhaps last year or even 6 months ago in terms of the order engagement?.

I think it's more of the evaluations [indiscernible]. And so, the actual orders, the decisions and the orders would flow, as Greg said, probably in the second half of the year. But certainly the evaluations have picked up..

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

You mentioned that you expect market share to stay flat for SOC, but you expect to grow in line with the market.

Kind of curious, how much do you think the APU market grew, given the fact that some of the spending this year in SOC comes from MPUs and GPUs, where you guys don't have any footprint?.

I'm not sure exactly, can you ask it again? I'm not sure what you're asking..

What you think is the growth rate for the APU test market this year, given that some of the other growth in the SOC market is coming from micro power and GPU..

Okay. So last year, GPUs, MPUs and APUs, all were very low buying in the market. This year, APUs are going to -- are rebounding most dramatically of those 3, but there will be some return of buying for MPUs and GPUs as well, but probably the growth rate on APUs will be 2x to 3x higher than MPUs and GPUs..

Got it, that's really helpful.

And then another question on the Wireless Test side, you commented how the growth is going to be muted or probably even down this year, I'm just kind of curious, is that the main reason for that, is that -- is it because of reuse? Or is it more because there were more testers from last year that can do AC testing for this year? Or is it more pricing/productivity improvement in the whole tester supply chain?.

Yes, it's a mix of things. Actually, in connectivity testing, the market comparison over last year to this year is probably about flat, as best we can tell. So there isn't a big compression going on in connectivity.

On the other hand, in cellular, there is an effect where the testers that have been deployed starting last year tend to be more productive. They tend to be able to do 4 devices in parallel versus prior to 2013, there were single devices in parallel. So there is an efficiency of the new equipment that is higher.

The other thing that's happened is that the rollout of LTE is in a little bit of a lull now. There was a big rollout of LTE in the U.S. and Korea that occurred a year ago, but it's getting somewhat saturated. The next wave that's coming in China hasn't quite kicked in yet. So we're in this in-between zone on the cellular side.

So that's another effect that we think will dampen that side of the market in 2014..

Your next question is from the line of CJ Muse with ISI Group..

To the high end of your SOC test?.

CJ, I'm sorry, we missed the first part of your question, could you....

Oh, sorry about that.

Curious what it would take to reach the high end of your SOC market outlook?.

Well, I think based on where we see the trends in Q1 and Q2, it would probably take just a modest second half to reach that high end. The analog business coming on here in second quarter that I referred to earlier is another positive sign that we could be trending towards the higher end of the market size.

So in Q1, as I mentioned, we didn't see very strong orders for analog or memory. But we did see very strong orders for microcontrollers and apps processors. That -- all of that continues in Q2, except now, memory and analog seem to be kicking in. So I would judge right now, it's probably trending a bit towards the high end..

Excellent.

And in terms of memory, can you walk through, I guess, where you are seeing the gains, DRAM versus NAND, as well as the impact of known good die test, full wafer test, et cetera? And whether strength there can continue?.

Yes, so for us, the gains have come in DRAM, typically the higher speed end of the spectrum. So graphics DRAMs have been very strong, with the new games that came out last year, that helped. New DDR4 high-speed interfaces for server DRAMs, have also been something that has pulled share our way, with our products.

Then on the FLASH side, it's a similar story. As the NAND interface speeds continue to rise to support higher bandwidth FLASH memories for SSD applications, that's fit right into our products. So as that trend continues, and it's not -- that's the real direction of the market, that's why we're confident we can pick up a little more share this year..

The next question is from the line of Timothy Arcuri with Cowen and Company..

First question is on Wireless Test, did you -- you said that the market could be down year-over-year.

Does that imply that your Wireless revenues could actually be down this year?.

That would be yes, depending where the market ends up. It's very early in the year and difficult to call. And we had a big win last year in cellular. And this year we see cellular going through what connectivity has been through last year. So depending on where the markets end up, we could be down.

We think we'll do well in market share, and we did lap [ph] very well in market share the last few years. So I think it's more of a market size. And then we think beyond this year, we think there is some positive items that should bring the market more to a healthier stage..

Okay. I wanted to ask a follow-up on that. But first I want to ask on OpEx.

Is that about $10 million according to the guidance? And is it good like $10 million, $12 million, $13 million more at similar revenue levels in late 2012? Is sort of, is this is the new norm going forward? Or is this sort of a onetime bump due to maybe your desire to penetrate some new markets?.

The OpEx has only about $3 million, that's a [indiscernible], finishing some projects that should go away next quarter. The other portion of the increase is simply variable compensation. So the model that we reset or communicated back in October, we're on that model.

So if you go back further in time, you'll see our OpEx is up depending upon when you -- how far back you go. But what we've done is, we've invested more in some of the engineering and distribution, some in SemiTest and some in LitePoint.

And it is principally because we've gained good amounts of market share and to get that next couple of points of market share, we need to make some more targeted investments. And as you get more customers, often we find there's more requirements. So as you grow the top line, you end up having to put a bit more engineering..

Okay, if I could just sneak in one more, just on Wireless Test. All of the customers are saying that they want an integrated tester that can do both connectivity and cellular. And this seems a little bit cannibalistic to both gross margin and revenue, not just for you, but for the entire industry.

How do you respond to sort of some concerns that maybe you could be entering a period where there could be a trade-off between your share and margins in that area?.

Yes, frankly, we have not seen a lot of customers ask for a tester that can do both. There are certainly some, but I would characterize it as the minority. The trade-off of combining cellular and Wi-Fi in a single tester is usually idle capacity in the tester at some point in time. So it's not as efficient.

So if you're a high-volume manufacturer, a focused Wi-Fi tester, for example, that can evolve with the Wi-Fi standards and be very efficient there, combined with a separate box for cellular testing, is what we're being asked for. So I wouldn't call it a trend. It's something that a few suppliers do desire.

We watch that, if it becomes something that the larger suppliers want to pull on, we certainly could create that product. But it doesn't come for free, it comes with a added cost into the product that most of our customers aren't willing to pay for..

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

Greg, just a follow-up on the gross margin line.

I know that in your prepared comments, you mentioned no 10% customers in the March quarter, but I'm kind of curious, does customer concentration, in addition to the mix towards apps processor testing, influence the gross margin guide for the June quarter? Or is it just simply broad-based demand in apps processor testing?.

There is -- apps processor is the single item that probably, just given its volume, is the item that's moving our margins to where they were in 2012. And that's the same thing that happened in 2012. And apps processing volume, by its nature, tends to be very compressed.

There is only 1 or 2, a very small number of big players who are buying large volumes. So it is compressed in terms of the end customer, whether it's '12 or '14, it's a list of 2 or less..

That's helpful. And then Mark, the J750 business has been running at very high levels for a couple of quarters now. I'm kind of curious as to your view on sustainability. To what extent is that being driven by the move from 8 to 16 to 32-bit on the microcontroller side.

Do test times goes up? And do you think that you're actually benefiting yet from more connectivity functions on a microcontroller, which should also drive test times up.

Just help me understand how we should think about sustainability of the J750 business?.

Well, I think it's quite sustainable. What's driving it is a couple of things. So embedded FLASH is one driver that, I would say, started last year and persists into this year. The more embedded FLASH in a microcontroller, the long the test time tends to be. So that's a test time driver.

Another driver is more A-to-D converters and more precision on the A-to-D converters. Unlike a digital microprocessor or a digital apps processor, microcontrollers have these A-to-Ds and D-to-As and then to communicate with sensors.

And more and more, in mobile electronics, the sensor management is being offloaded onto these microcontrollers that may have 3, 4, 6, 7 analog ports to communicate to the sensors. Testing those ports is also a very high-precision and somewhat time-consuming test step.

So the more analog sensors is connected to microcontrollers, typically the test time tends to go up. And then the third thing you mentioned, RF, is still to come, I would say.

There's been certainly some J750 with RF capability business that's been developing here in the past few quarters, but most of that is tied to, I would say, a future world of microcontrollers used in machine-to-machine communication or wearables. And that's a little further off..

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

First of all, could you quantify how much do you expect Wireless Test market to decline this year? And then, also regarding your market share, how do you see that unfolding and maybe you could give a little bit of detail on whether you're expecting it to come more from mix improvement or from actual direct capturing from customers?.

Well, again, I think the size of the Wireless Test market is really a hard one for us to triangulate on. We have roughly, for historical reference, said that we think in 2012, which was a blowout year, the market surged for that $1.3 billion in total. Last year, we said that the market compressed to maybe $1 billion.

For the same connectivity and cellular testing, production testing. This year, it's really hard for us to say, but we're probably looking at a number around $700 million, plus or minus $100 million. Most of that contraction coming, as I said earlier, in cellular. Wi-Fi and connectivity seems to be holding up..

And then, just regarding the LTE ramp in China, could you provide us a little bit of detail on what the timing you expect? And then also, how much of an incremental opportunity there could be?.

Okay. Well right now, on the Semiconductor Test side, we are seeing some demand for semiconductor testers for the infrastructure chips that go into the base stations and such, so it's really a leading indicator, as the infrastructure gets built out in China throughout this year.

I think on the handset side, it seems that, that will follow more -- my estimate would be 2015. So we're in a infrastructure year, it doesn't drive a lot of the Wireless Test demand from LitePoint, perhaps, next year as handsets start to ramp, then we'll see that come back..

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

It's actually Mehdi Hosseini. I have a follow-up question on the Wireless.

Even if your revenues were to be down, consistent with the market, down 30%, it would -- it seems to suggest to me that maybe Q3 will be in line with Q4 and then you would see the seasonal downtick in Q4? Is that a fair assessment on how quarterly trend is going to look like?.

Mehdi, I think the quarterly trend will look similar to last year. The Q4 is certainly the trough. And Q2, Q3 tend to be the peak shipments. So -- because lead times are so short, it's very difficult to be precise here, but I think the patterns of the past will repeat. And we are really just speculating that it could be down 30%.

We don't have any great insight. I will add that, in cellular, we gained market share last year. Connectivity, our market share was very strong.

So I think that we feel that we can hold up pretty well with our strong connectivity market share and this is an opportunity for us to -- if there isn't a whole lot of cellular buying, to demonstrate our products and secure more design wins in Asia, and that's what we're out doing..

And then Greg, one question, what should we assume for tax rate? The slides say 18% for the year, but did you mean that Q2 is going to see an uptick and then moderate in the second half?.

Well, the tax rate, we think for '14, I think we said it last quarter, was 18%. There was this discrete thing that shows up in our GAAP numbers, that we take off for non-GAAP, having to do -- it gets very complicated, but we don't put discrete things in our rate, because those are kind of one-time things that hit a quarter.

But on the annual rate, 18%, we believe, is a good estimate. And we said as well that our tax rate is probably going to be mid-20s. And over time, we will get there. We will obviously look, are there other planning things we can do to get a better result. But at least for this year, you should use 18%..

Okay.

So on a pro forma basis, it is 18% for Q2?.

Yes..

Your next question is from the line of David Duley with Steelhead..

Yes, I just had a clarification.

Did you say in your prepared remarks that you thought your SOC test orders will be up in the June quarter?.

No, we didn't..

Okay, and then I noticed in your slides, the buy rate you are assuming for 2014 in SOC is about 1%. And at previous peaks, we have seen a much higher buy rate, like 1.5%. I imagine if you go back longer, it's even higher.

But versus the recent years, why do you think it will be 1% versus 1.5%?.

Well, I think in the past couple of years it has been trending down. It is not something that -- we tend to be modeling it conservatively. We sized the business and sized our model revenue to assume a somewhat lower buy rate. In some years, it does snap back. So it's a conservative set of financial sizing assumptions, is what I would say.

And we can ride the upside and we always have the manufacturing capacity to ride the upside if it developments..

So you don't think there's a structural change in the amount of money that they're going to spend on test?.

No, I don't think so, but I do think that the capital intensity rate varies by segment. And so, as we discussed earlier, applications processors as a class of devices tends to have a lower average buy rate, than let's say, analog or even microcontroller.

So depending on the mix in any given year of what's surging in terms of tooling, you can get aberrations in these sort of average buy rates..

Your next question is from the line of Patrick Ho with Stifel, Nicolaus..

Maybe just going back to the application processor side of things for a second. A couple of years ago, you saw really strong demand from that segment, driven by the introduction of the 28 nanometer node devices. This year we're seeing 20 nanometers.

Maybe just looking for longer term, as the industry continues to migrate to like 16 and 14 finFET, do you see new tester buys at every node change for app processors? Or is there a level of reuse that can be implemented with the testers from, I guess, 28 as well as 20?.

Yes, I think the main driver for tester capacity is unit growth more than the nodes. The nodes might create a little bit of an aberration, as yields need to get worked out.

So there may be a little bit of extra capacity put in on an immature node, but the testers definitely get reused across multiple nodes, and I would expect that when finFET 14, 16 comes along, the main driver of extra capacity will be continued unit growth, more so than the immaturity or something to do with the technology node..

That's helpful. Going to the analog side, you said that things are picking up and it has been some time since you have seen a pickup in that segment.

Could you characterize what's driving it, whether it's the level of efficiency and reuse that's kind of reached its limit with analog testers? Or there is enough of a healthy demand, and I guess unit growth, that's driving these new capacity buys?.

Yes, I think it's really unit growth. It's been an anomaly now for about a year. And I think that, finally -- I don't have a good answer for you as to why, but it's now moving back into line with how we normally expect analog to perform with the rest of the market.

So I do think it's driven by units and it's now more correlated with what it has been historically prior to 2013..

[Operator Instructions] Your next question is from the line of Tom Diffely with D.A. Davidson..

I was intrigued by your comments about the leases earlier.

What -- how big of a program is that today? How big do you think it gets? And what is the ultimate impact on your profitability?.

We think for this year, we'll put about $75 million of capital work into leases. And that's much higher than we have ever done in any particular period. But this particular range had made commercial sense based upon a whole set of circumstances. I don't think, if you look at next year or the year after, you'll see anything close to that.

I think it will be more along the lines of $10 million a year, which is sort of the run rate we've had in its kind of lowest level..

Is it just the smaller customers that need financial help?.

No, it's not a set of smaller customers. There is no credit issues, whatsoever. It's a strategic decision by the customer, how they want to use their capital dollars. But I don't want to get into more detail than that..

Okay, and what is the impact on you from the profitability point of view, selling a system versus leasing a system over time?.

Basically we recognize revenue and profits slower. Instead of shipping a product and getting the sales and profits upfront, we're going to recognize it over a longer time period. So our surge or our revenue growth this year doesn't have the full value of those testers. It only has maybe 6 months, 9 months, 3 months.

It only has a partial period of that revenue in our P&L. So in truth, it's actually a much stronger surge when you factor in $75 million, this is, again, our book value, $75 million book value we are putting in on testers. So it is a fairly strong start to the year..

So I assume this is on the SemiTest side?.

Yes..

There are no further questions..

Great. Operator, then we are going to conclude today's call. And thank you all for joining. If you have questions, please reach out and we'll get back to you. Thanks so much..

Thank you..

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