Andy Blanchard - VP, IR Mark Jagiela - CEO Greg Beecher - CFO.

C.J. Muse - Evercore ISI Krish Sankar - BofA Merrill Lynch Timothy Arcuri - Cowen and Company Farhan Ahmad - Credit Suisse Mehdi Hosseini - Susquehanna Financial Group Jagadish Iyer - Redstone Tech Research Tom Diffely - D.A. Davidson & Co.

Weston Twigg - Pacific Crest Securities Patrick Ho - Stifel Nicolaus Sidney Ho - Deutsche Bank Steven Chin - UBS Chelsea German - Goldman Sachs.

Good morning. My name is Brandi and I will be your conference operator for today. At this time, I would like to welcome everyone to the Teradyne Q2 2015 earnings conference call. [Operator Instructions] Thank you. Mr. Andy Blanchard, VP of Investor Relations, you may begin your conference..

Thank you, Brandi. 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 will provide details of our performance for the second quarter of 2015, our outlook for the third quarter and provide some general market comments. The press release containing our second-quarter was issued last evening.

We are providing slides on the investor page of the website that may be helpful to you 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.

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 will make reference to non-GAAP financial measures.

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

Also, between now and our next earnings call, Teradyne will be participating investor conferences hosted by Pacific Crest, Needham & Company, Citibank and Deutsche Bank. Now let's get on with the rest of the agenda. First, Mark will comment on our recent results and the market conditions 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 will then answer your questions. This call is scheduled for one hour.

Mark?.

Thanks, Andy, and good morning, everyone. In today's call, I'd like to focus on three topics, our first-half highlights, our outlook for the remainder of 2015, and our recent acquisition of Universal Robots.

The first half of 2015 has been very solid for Teradyne, with sales and operating profit running higher than expected following a cyclically strong 2014. Overall, first-half sales were about flat with 2014, while non-GAAP EPS was up 8%, due mainly to better mix.

When compared with the first half of 2013, the last down-cycle year, the results are even more striking, with revenue up 21% and non-GAAP EPS up over 30%. I'd also like to note that we are $156 million through our $500 million authorized stock buyback and we returned $26 million in dividends year to date.

Typically, over the past five years we've seen annual cycles in our semiconductor test business where even years have had more capital intensity than odd years. This is correlated with larger advancements in mobile device complexity in those even years and thus longer test times and larger instrument configurations in our testers.

Odd years have been a period of optimization and more incremental complexity advancement. While we expect this even/odd year trend to continue, we do see some moderation in 2015's swing, as device complexity is increasing at more than typical levels for a down-cycle odd year.

In 2015, we still expect the overall SoC semi test market to be moderately down from 2014's $2.35 billion level to the $2 billion to $2.25 billion range. However, we expect Teradyne's segments and customers to perform better than the overall market. Part of our uplift in 2015 is due to lead systems installed in 2014 converting to sales in 2015.

Greg will provide more details on this in a few minutes. However, we are also seeing other encouraging signs as having less exposure to PC related semiconductors and more exposure to apps processors, image sensors and analog has also lifted our performance.

Despite the ongoing slowing of Smartphone unit growth rates, we continue to see the positive impact on test demand stemming from unit volume growth. In addition, test intensity is being driven by the increasing complexity of applications processors, baseband processors, power management ICs and image sensors.

Image sensor test demand has been a particularly bright spot this year. This uptick comes from the increasing pixel resolution of imagers as well as growing unit volume from mobile and applications. On top of that, there's the broadening adoption of image sensors in automotive, security and industrial applications. Analog test is another bright spot.

Eagle Test had the best two-quarter stretch of orders since 2010. Automotive semiconductors, which have higher test intensity than other markets, was a major factor in this performance. The automotive market also supported microcontroller test demand, another strong segment in the quarter.

While the test demand for analog and microcontroller products can vary widely quarter to quarter, we expect automotive demand will be a very solid long-term balloon for the test market. Memory test orders of $90 million in the first half were the highest level in our history.

These results were powered primarily by the success of our Magnum V product, which was designed to deliver superior economics for both flash and wafer test of DRAM. This combination provides customers with the required cost performance benefits along with added flexibility for their test operations.

In wireless test, our LitePoint business is up slightly from 2014 for the first six months of the year. In second quarter, LitePoint recorded it strongest quarterly order level in two years, making up for light ordering in Q1. Strong connectivity and improving cellular test demand were responsible for the uptick.

Short-term market conditions remain difficult to forecast, but our outlook for the full year market is unchanged at the low end of the $450 million to $600 million range. In system test, orders were up 67% in the first half compared to last year on strength in storage test.

We continue to see strong storage test demand for 3.5 inch drive testing for enterprise applications. Also, our SSD test product is generating follow-on orders to last year's design wins.

At the same time, the continued slowdown in the PC space has reduced 2.5 inch drive demand and we recorded an inventory charge to reflect the weak outlook in this segment of the business.

So with a shallower than expected down year in SoC and stronger storage and memory test sales, we're slightly ahead of 2014's financial performance at the midpoint of the year. As we look forward to the second half of 2015, we expect the normal seasonal slowdown in orders as we've seen in prior years.

Finally, we've added a significant growth driver to Teradyne with the purchase of Universal Robots in June. As I noted when we announced our plan, collaborative robots are an entirely new class of automation. They are small, low-cost, easy to set up and program and can safely work side-by-side with people in a production setting.

Universal Robots provides Teradyne three clear benefits. First, it's serving an emerging market undergoing rapid expansion that should show growth for decades to come. Second, universal robots is the market leader and innovator in this space.

Third, there's a clear application of Universal Robots products to automate manufacturing steps at our system test and LitePoint customers. The cobot market is new and developing rapidly and has been growing at over a 50% annual rate to an estimated $100 million market size this year.

Estimates for the market size in 2020 range from $1 billion to over $3 billion, a very wide range but at either size, a rapidly growing market in the next few years. Universal Robots has led the way in developing collaborative robots and is the premier company in the field.

They are the clear leader, having sold more cobots than any other supplier and have been profitable for several years while funding revenue growth of 4X from 2011 through 2014. Their products are right in the sweet spot of what manufacturing customers need to get a quick return on investment.

Using a growing network of over 100 distributors worldwide, they've developed a broad set of applications in industries including automotive, food processing, machining, plastics and metallurgy, pharmaceuticals and countless more.

Tasks ranging from machine tending, assembly operations, packaging, polishing, quality inspection and others are enabled by UR's smart, simple cobots. So what's the fit with Teradyne? Greg will elaborate on this more in a few minutes, but let me give you the key points.

The overwhelming use of collaborative robots today is in a wide range of industries outside of electronics. Those industries have been driving UR's cobot market expansion to date, given the compelling economics that UR's products offer. We also expect those industries will continue to be the largest user of cobots in the future.

However, we see an under-exploited opportunity in the electronics manufacturing segment. The flexibility and adaptability of Universal Robots cobots allow for cost-effective automation in an environment that has traditionally been hampered by the need to handle nonstandard form factors and frequent product changeovers.

Initially, this will be assisting in the automation of testing at our system test and LitePoint customers where, unlike the semiconductor world, material handling for test is still a repetitive manual process.

Expanding beyond tests, there are many adjacent manufacturing operations at these customers that will also benefit from Universal Robots cobot advantage. We'll use Teradyne's customer relationships, scale, and global footprint to accelerate UR's growth in these attractive markets.

We are delighted to have the UR team and their bright future now a part of Teradyne. I will now turn things over to Greg for a review of the financial details.

Greg?.

Thanks, Mark, and good morning, everyone. I'll start with some brief comments on the year, update you on Universal Robots and its impact on our model and then cover the second-quarter results in more detail and the third-quarter outlook. On the demand front, 2015 is shaping up as a pretty good year with first-half sales of $855 million.

As Mark noted, you can see from our past annual sales that the odd years, 2011, 2013 have had lower sales and that the even years, 2012 and 2014 have had considerably higher sales. So with this as a backdrop, the first half of 2015 is well above the most recent off year of 2013.

The 2015 strength is due to several factors, including a significant majority of the lease testers we've discussed in past calls being converted to outright sales, the slowing of parallel tests and longer test times due to greater complexity and solid image sensor and analog test means. First, on the lease testers.

In the first quarter, we received orders from a third-party lessor for about a third of those leased systems. In the second quarter, most of the remaining systems purchased. A small portion of the systems were returned. We've recognized about two-thirds of the purchase system revenue to date and the remainder will be recognized in the third quarter.

These lease transactions had the effect of shifting some revenue into 2015 that otherwise would've been recognized in 2014 as the actual test capacity was put in place last year. Next, the slowing of parallel tests in some complex mobility applications is also giving us a lift. Let me quickly explain this.

Each time site counts are increased, the savings arise from amortizing the fixed costs of a tester over more and more sites. Hence, the greatest savings is from going from 1 to 2 devices and thereafter naturally diminishes as the fixed cost of a tester becomes a smaller and smaller component.

On top of this, the interfaces between the tester in the devices under test have become much more costly and complex to engineer for complex mobility parts, which can have over 1,000 pins. These two forces are at work and are helping our TAM this year.

Shifting next to the added complexity, apps processors now can have over 2 billion transistors, up nearly 100% from two years ago and the number of bands and modes in LTE transceivers are up 50% over the same period. Power management devices can now have 25 to 35 unique power supplies to manage, growing 10% to 20% a year.

This steady advancement of added performance means far more device complexity and associated test data volume, which ultimately drives up test times. The strength Mark noted in image sensor and analog is very beneficial for us, as we maintain strong share with our leading IP 750 and ETS product families.

This year, we expect image sensor tester demand to increase by a factor of threefold over last year. As Mark noted, analog is also strong this year, with automotive applications a key driver. I'll quickly shift to the recent soft patches cited by others in PC demand, OSAT buying and storage test.

And PCs, we have very little direct exposure, as we tied our wagon to mobility years ago, so apart from the excess hard disk drive inventory charge of $8 million in the second quarter related to 2.5 inch tester demand, we've not been affected by this decline.

The recent OSAT weakness referenced by many sell site analysts was dialed into our guidance when we outlined 2015 as a down year. And in storage test, we expect revenue in the range of $60 million to $80 million but not above it, which we thought might've been possible a quarter ago.

The other weakness widely reported has been in the Asia mobility market. And that has, in fact, moderated LitePoint's follow-on business this year after scoring several key design wins at leading Asia smart phone manufacturers last year.

Despite this headwind, LitePoint has had a good first half and continues to operate above the Company's 15% operating model with its strong market share, production optimized solutions and lean model. Turning to our seasonal demand patterns, recall that our third-quarter Company bookings typically fall 30% to over 60% from the second-quarter levels.

This drop off is due to the timing of annual mobility launches and the overall high consumer consumption connected with back-to-school and end of the year holiday buying. So with the first half behind us, we are pleased with first-half sales of $855 million and a non-GAAP operating profit rate of 23%.

Please note that while we operate a very tight model, it's not at the expense of customer satisfaction. For the third year running, we've won the prestigious VLSI Research semi cap equipment customer satisfaction survey. We also expect next year to be in on year with another step up in mobility performance, which we'll comment more later in the year.

Now shifting to Universal Robots, let me update you on UR's model and its impact to Teradyne. In the short-term, UR is expected to have sales of about $60 million for its full 2015 calendar year, with a 15% operating profit rate. We expect UR to grow 50% or more a year for the next few years and steadily move up to a 20% operating profit rate.

It's gross margins should run in the low 50%s. As a Danish company, it will have some currency risk, but this should largely be offset by a light level of revenue and cost, hence currency swings should largely be mitigated on the bottom line.

Given our planned 2015 revenue levels and geographic sales mix, we expect no meaningful impact on earnings from currency changes this year. This foreign exchange sensitivity in the updated model are shown in the slide deck for your reference.

Recall that our company model shows the sales level needed to achieve the industry profit rate of 15%, which would now be about $390 million a quarter versus the past $375 a quarter. We'll continue to target the 20% profit rate, which we've averaged over the last four years.

As a quick reminder, UR does not have any meaningful customer concentration and serves many diverse industries. We expect electronics will add 15% or more to UR's total available market. In 2015, about 45% of their sales are expected to be European-based, 35% North America and 20% Asia-based.

We used foreign cash for the purchase and at this point we'll keep UR's earnings offshore. I'll add a few quick comments on the fit, as Mark has covered the market growth, UR's sizable lead and differentiation. As you know, we long ago consolidated Semi Test and got the best assets, Eagle and Next Test.

We added a new test market with LitePoint and more recently small tuck-in acquisitions such as AIT and ZTEC. However, we haven't identified any attractive candidates of greater size in our core test ponds, so a few years back we set our sights slightly further out with two main criteria.

The first being long-term healthy secular growth and the second being strong customer or technology leverage. This led us to the collaborative robots space. I like to refer to this is a very close derivative to the A in automated test equipment.

We see many opportunities to cross sell or introduce UR cobots to our wireless tests, production board tests, and even storage test customers. We started a number of UR pilot engagements with some of our customers earlier this year to begin to prove out the fit.

Response has been very positive and there are several larger opportunities working their way through the buying funnel. We expect to accelerate UR's adoption and penetration into electronic assemblers while also providing them a strong platform to continue to grow in their existing markets.

From a reporting perspective, UR will be a separate operating segment. We expect they will add $0.02 to $0.03 of non-GAAP EPS this year and $0.05 to $0.07 next year. Now moving to the corporate level, we will continue with our balanced approach of returning significant capital while also searching for highly attractive and complementary M&A.

We'll constantly compare the very small number of M&A opportunities in our funnel against returning even more capital. On the buyback front, we've repurchased 7.9 million shares, totaling $156 million at an average price of $19.62 through yesterday. Against our $500 million authorization, we have a remaining balance of $344 million.

As a quick reminder, we plan on buying back at least $300 million in 2015 which, when combined with our quarterly dividend totaling about $50 million, for the year, we'll lower our US cash and marketable securities to a level much closer to our minimum US operating balance of about $400 million.

We closed the second quarter with total cash and marketable securities of $1.029 billion, down $242 million from the prior quarter due to UR purchase, which was a very good use of our offshore cash. Second quarter free cash flow was $131 million, due to strong profits and the benefit from the sale of leased assets.

As we have done in the past, we will update you in January on our 2016 capital return plan. Now moving to the details of the second quarter, our sales were $513 million, gross margins were 58.4%, the non-GAAP operating profit rate was 28.5%, and non-GAAP EPS was $0.53. We had one 10% customer in the quarter.

We had net inventory provisions of $12 million, or two points of margin. You'll see our non-GAAP operating expenses of $153 million were up about $10 million compared to the first quarter, due to higher variable compensation accruals, which increase with higher profitability.

Moving to our segment level details, semi test bookings were $395 million, driven principally by the seasonal patterns, SoC test orders were at $369 million and memory test orders were $26 million. Semi test service orders were $86 million of the total.

Shifting to wireless test, we booked $84 million, our highest bookings level since Q2 of 2013 and reported $63 million in sales for the second quarter. Moving to system test, orders were $45 million in the quarter and shipments were $46 million.

In industrial automation, for the very short partial period, UR had bookings of $5 million and sales of $4 million. Shifting now to the outlook for the third quarter, sales are expected to be between $450 million and $480 million and the non-GAAP EPS range is $0.35 to $0.41 on 212 million diluted shares.

Q3 guidance includes a full quarter of UR cost, which adds about $6 million our quarterly OpEx run rate and excludes the amortization of acquired intangibles and the related tax impact. The operating profit rate at the midpoint of our third-quarter guidance is about 22%.

Our 2015 tax rate outlook is now 23%, due principally to the sale of the lease testers. If the R&D tax credit is reinstated for 2015, that rate drops to 21%. So in summary, we are generating very strong returns from our core test businesses. Next year is expected to be in on, or up, year with another step change in mobility complexity.

We're returning significant capital to our shareholders and we're seeing some healthy long-term trends emerging in our SoC market size. On top of all of this, we've added UR, the clear cobot leader, to the Teradyne fold and expect to help them grow their business even faster inside Teradyne. With that, I'll turn the call back over to Andy..

Thanks Greg. Brandi, we'd now like to take some questions. As a reminder, please limit yourself to one question and a follow-up..

[Operator Instructions] And the first question is from C.J. Muse from Evercore..

Given the relatively better SoC backdrop here in 2015 and the reduced benefit of parallel testing, can you talk about how you think about SoC outlook for 2016, the puts and takes?.

Yes, C.J. We're certainly seeing some of those trends that we highlighted at the end of last year. The real key issue for 2016 will be the level of unit growth and complexity increase. I think on the complexity front, to us, from what we see now, that looks like it will have its normal step function improvement.

We'll have to get to closer to 2016 to really understand what the unit volume is going to look like.

Okay, that's helpful. And I guess as a follow-up, can you share with us what drove the uplift in LitePoint? That was particularly surprising and I think you talked mostly about connectivity. I'm curious the particular drivers were there. Thank you..

CJ, the LitePoint pickup in business is the seasonal demand we tend to get at this time of year.

We do expect LitePoint to be about the same sales level as last year, given the market size is about similar to last year, so we're very encouraged with this level of bookings but it doesn't significantly change what we expect for the full year and it's just simply the seasonal buying pattern.

I did comment in my prepared remarks that the Asia beachheads that they got last year that they broke in, there isn't a whole lot of buying going on there in the non-premium smart phones, so we're hopeful at some point that picks up a bit and we can follow on from those additional design wins..

I'd only add that the visibility and the lead times in that business segment have, compared to last year, shortened even more, so a lot of the surprise in terms of the robust orders came in, in June. And we've adapted our supply chain to be able to respond quickly, why we were able to ship off a lot of that.

It's truly almost in a handful of weeks of turns business..

Can we have the next question, please?.

Your next question comes from the line of Krish Sankar with BOA..

Hi, thanks for taking my question.

Couple of them – first one on the Universal Robot, at what point do you think the operating margin for them could expand more to the 20% range?.

I would expect over the next two to three years it would expand to the 20% range. So I would not say next year, but I think the year thereafter, thereabouts, we should be getting closer to 20% than we are 15%..

Got it, fair enough. On the memory test side, where is the key driver coming from? Looks like you guys are slowly targeting improving market share too. Can you just talk about is the coming from DDR4 or is it coming from flash? Any color would be helpful..

Yes. I'd say it's, in terms of device class, it's two classes of devices within memory that are driving our business. One would be the higher speed NAND flash devices. Across the board at multiple customers, that's been very healthy and robust. And then at DRAM wafer test, the LPDDR wafer test has been strong as well..

Got it, thanks Mark, thanks, Greg..

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

Thanks a lot, I had two. Greg, I'm just trying to get the impact of the leases to revenue and it sounds like maybe there was about $50 million in Q1, $50 million in Q2 and there will be kind of another $50 million coming through from a revenue perspective in Q3.

Is that correct?.

It's a little different than that, Tim. I would use, as a rounded number, $100 million. The reason I'd use that is there were a small number of leases that were returned and we also had in the plan rental payments that we will no longer get, so when you make those two adjustments you kind of round to about $100 million impact..

Okay. And then can you talk about those return testers? I was always thinking of this as a $150 million number, so it sounds like maybe a third of those got returned, and I'm sort of wondering, is that a demand commentary? [Multiple Speakers] Sorry, go ahead..

I'm rounding to $100 million, first of all. Two, there was rental income in our plan that we expected those testers to stay used for the entire year, so I have to take that number out of whatever the product sales is so I can give you a real apples-and-apples impact.

So that piece, it's going to be hard for you to figure out what that piece was, but that was a deduction. So if you start at $150,000 you have to deduct what you think by rental payments were. A small number of the testers came back. A small number, and they been redeployed..

Okay, great. Thanks a lot..

Sure..

Your next question comes from the line of Farhan Ahmad with Credit Suisse..

Thanks for taking my questions and congrats on the results. First, I just want to follow up on Tim's question.

Can you clarify whether the leases came in as the revenues or orders in Q1 and Q2? And do you expect some revenue from them in Q3 as well?.

Yes we got revenue -- the majority of the revenue was in the first half of the year. There'll be a modest amount in the third quarter. And again, we've rounded the numbers down a bit but the whole impact, we think, is about $100 million from all of this. And again, you have to take out the service revenue that we're not going to get in Q3, Q4.

That revenue we're not going to get that was otherwise in our plan..

The rental revenue..

Yes..

Got it.

And then just because you have these leases converting this year and you have this odd-year/even-year seasonality in the business, does it temper the growth expectations for next year just because you have $100 million incremental revenue this year?.

I think it has a couple of impacts, meaning, there was more capacity put in place ultimately in 2014 than what our numbers suggested. Because this equipment was put in place in 2014, we're just following the accounting, recognizing revenue this year because it was an outright sale.

So it shows you 2014 was a very strong year due to the even year that Mark talked about. So we generally are more optimistic as we go into an even year. Having said that, the more testers that are deployed in prior periods, prior quarters, that obviously can be a drag on incremental capacity.

But if you look at the past odd/even pattern, even years have been better for Teradyne, so we don't see anything here today why that would change..

Can I just add that as we entered the year, we were forecasting based on inputs from our customers that a reasonably significant portion of the lease testers would actually be returned.

In fact, not only were they not returned, they were converted to sales and additional capacity was put in place on top of -- beyond just the conversions of the leases.

So in the end, the test intensity, as I mentioned in my remarks, the complexity of the devices this year in the unit volume have run greater than forecast, and so that's what's driven the reversal of the plan to return more and incremental capacity on top. So as you think about next year, all that capacity sits there and is reutilized next year.

It will somewhat temper the peaking that we would see next year but it's not overly significant..

Got it, thank you. That's all I have..

Next question please..

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

Yes, thanks for taking my question. It seems like you have done a really good job of complementing your core semi test. The semi test and system test are viewed more like a stable market and the growth coming from wireless test and industrial. You also did a good job of better utilizing assets and managing margin.

In that context, could you share with us the kind of earning power that you are contemplating two, three years out? I ask you this because your slide did a good job of highlighting seasonality on a six-month or three-month trend.

And we're trying to understand what's the true earning power for your Company, given your execution and how your diversified revenues? And I have a follow-up..

Okay. Got it, Mehdi. When we look at what we call the midterm, which goes out four years, that's how we plan. And we get very detailed in terms of where we can win market share, at what margin, in what invest we make and we test that against what we've done in the past. We believe in the midterm we can get to a $2 EPS number in the later years.

That is what we're focused on. Historically, we've been trying to grow EPS 10%-plus a year. I know it's hard for you to see that, because there's different cycles and so forth. But we have our sights set on getting to $2 in the midterm..

Great, thanks for the concise answer. And then one follow-up question on wireless tests. You had a very nice pickup in booking.

Can you elaborate on the mix? Is it just the fruit company coming back or are you actually -- or finally seeing some traction in China?.

As I tried to say in my prepared remarks, Mehdi, that we had some very good wins last year in Asia but those accounts aren't buying much at this point in time, which I think a lot of the sales side folks have reported on that, that's been a soft patch. So where the buying has been has been in other places.

So but that's what we've gotten most of our business and as you know, historically we have had two-thirds of our LitePoint business has been one large customer, the customer you'd want to have. So that trend continues and we strategically are trying to get designed into more and more accounts to minimize some of the customer concentration risk..

But with that particular customer having a kind of a muted product refresh this year, I'm just kind of worried that if their booking this much in Q2 it could lead to a very dramatic decline in bookings in the subsequent quarters..

Well at it tends to be, at LitePoint the second of the year, they look more like semi test. They are tied to the same, whether it's electronics products for back-to-school or holiday buying, you need the test capacity in place Q2, Q3. You can't really be adding it in Q4.

So we would expect LitePoint second half to be softer than the first half, just like semi test so that would not be something surprising to us..

Got it. Thanks so much..

Your next question comes from the line of Jagadish Iyer with Redstone Tech Research..

Yes, thanks for taking my question, two questions. First, Mark, how should we think about LitePoint's growth longer term, given the competitive landscape and how you view the Smartphone growth say over the next two or three years? And then I have a follow-up..

Okay. I think that's -- it's a challenge to prognosticate that, but for connectivity and cellular test I think that over the next few years the market itself will be essentially flat. There are numerous competitors in the space.

We are convinced that we have the products in both connectivity and cellular that are winning products but it will be a tough market environment.

So for LitePoint, in addition to the expansion in Asia that we've been working on, we're also developing new products to expand our served market and these would be test products that are -- so it's test related, but it's testing aspects of the mobile devices that may not be RF or may be adjacent to test steps that we see around our current LitePoint products.

So that Tam expansion -- we will start rolling those products out this year into next year and that should expand our Tam by $200 million in the next couple years, and that should expand our Tam by $100 million in the next couple years. So the game plan at LitePoint is essentially twofold.

In this tough market environment, continue to exploit our product advantage to pick up share in Asia in a flat market environment and then roll out this new set of products and expand our Tam by one $200 million..

So longer-term, you think that maybe mid- to high-single digits or low-double digits will be your target for growth?.

Yes. I think that at this point, until we get some better proof on the new products, that's a reasonable assumption..

Okay. Fair enough. Then second, just a follow-up, you talked about the UR's trying to get into some of your core products.

When can we really see that impact right now, because there has been -- they pretty much gone into different segments and I just wanted to get a sense of when their interaction with your products would bear fruit for you guys?.

Good question. So as we bring -- in fact, right now we're in the midst of multiple evaluations of the Universal Robot products at our test customers for system test and LitePoint.

Those evaluations, like anything else with these large multinational companies, tend to take a longer period of time than the traditional universal robots customer that might have a sales cycle of less than a month. These will probably be more in the order of a six-month sales cycle.

So by the end of the year, we should be reporting on success in bringing the universal robots products into our electronic space..

And just to add to what Mark is saying, it will be a small number of cobots initially introduced, but the opportunities thereafter we would expect to be significant and for us, it's just getting them in and getting the customers using to them. It opens up many other opportunities, so job one is getting 3 to 5, not getting 30 or 50 in..

Fair enough. Thank you so much..

Your next question comes from the line of Tom Diffely with D.A. Davidson..

Yes, good morning. So first question on the semi test side, you talked about the slowing of the parallel test over time.

I'm curious, though, what percentage of the tester market is that impactful on?.

That's a good question, because what I've said in the past is it's not a homogenous market in semi test where everything is sort of peaking in terms of parallelism. So for complex RF complex processor devices, we're at the point where the inflection's occurring. That roughly, let's say, $700 million market Tam that's reached that point, I believe.

Other markets, such as automotive, other markets like analog and image sensor testing, micro controllers, still have a bit of a ways to go. But the point that Greg made is important to understand which is even though those other markets will continue to step up in parallelism, the anchor that it brings to our business diminishes with each step.

So in some markets, the $700 million I spoke about, perhaps we've reach the point where parallelism may not step at all going forward. The remaining markets, let's call it the other $1.45 billion SoC market, may continue to see more parallelism but the drag on our market size will be diminishing..

Okay, thanks. Looking at the Universal Robot model, we talked about higher margins, gross margins, but then higher operating expenses.

Is the higher operating expense side just a function of, early in the lifecycle, more R&D, or does it have something to do with the distribution channels?.

It's more tied to the distribution. In this business, where they are going through distributors and integrators, there's more spending as a percent of sales in that line. So compared to our traditional businesses, you'll see selling, marketing a bit higher than what you might otherwise expect for a Teradyne-type business..

When you look at the electronics market, does that go more to direct sales?.

While they don't sell to direct sales. We do at Teradyne. So they're going through channel partners and when you go through channel partners, there tends to be higher selling and marketing cost for various programs, incentives, initiatives, training.

It's a whole host of things because while they're doing the sale, you're also helping them sell it to bringing technical application resources to bear..

Okay. Thank you..

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

Hi, thanks for taking my question. First, I was wondering if you could maybe discuss the competition in the cobot space and your points of differentiation at Universal Robots. Particularly as it relates to your expectations around market share as the market expands..

Okay. In one sense, there's a series of products that either in the market or will be introduced over the next several years that are in what the competitors would describe as the collaborative robots space. So it's going to be a rich market for competition but the unique advantage that universal robots has is a couple of things.

One is their very intuitive and simple programming model. So a lot of the traditional robot manufacturers that are trying to move lower in the market are still applying a very complex lengthy programming model to these lower cost robots. That is a big inhibitor to a quick ROI and a quick redeployment in a factory for a robot.

So a UR product can go in and be utilized on a manufacturing line within a matter of days because of the swift programming and then three months later, six months later, be reprogrammed and redeployed for another task very quickly.

Many of the competitors would require an expert and a very complex programming language environment to re-purpose the robot. Most small to medium-size enterprises don't have that skill set whatsoever and even for larger enterprises, it's an anchor on a quick ROI. So that's the real key.

If you sit down and watch Universal Robot being programmed, it's actually almost being taught by a show. There's an operator showing the robot physically what to do, where to go, what to grab, and that model is very key. The other thing about the robot that's interesting is the safety aspect.

It is a very clever mechanism to ensure that if the robot were to bump into a human being in a production environment, it would sense that and stop and various competitors have different ways of dealing with that issue to make a robot safe.

But in the case of Universal Robots, the mechanism is quite effective, low-cost and it doesn't diminish the precision of the robot. Many of the methods you might use to make the robot safe also have consequences around diminishing accuracy and that's something that doesn't exist here. So it's a long story.

They have a website that's very rich in showing many of these advantages, if people are interested, but we're obviously excited about it..

So in a nutshell you think you can even hold a high market share position despite the more crowded marketplace that's developing..

Yes, we expect to hold a high market share position. Now today, is a developing industry. We're somewhere in the 60% to 70% share range, most likely. As this market takes off, do we think we can stay there? No, probably not, but can we stay close to 50% in that kind of neighborhood? We think so, over the next few years..

Okay. Good and one more real quick, just the cross-point memory technology that was announced by Micron and Intel. It seems fairly dense and fast. It sounds like it should be good for test but I was wondering if you could give us some color on that long-term opportunity for test demand..

Yes, I guess I don't want to comment specifically on that one, but in general -- I'll make a general point which is that as you've seen Teradyne's memory test business and market share grow over the past few years, it's come from applying our expertise in high-speed interface bus testing to the memory market.

This and other technologies that are coming to market are examples of pushing that even further. So that will benefit our product architecture, we believe. So I think anything that's bringing speed to the memory world is a good thing for us..

Very helpful. Thank you..

Your next question comes from the line of Patrick Ho with Stifel Nicholas..

Thank you very much.

Now as we look into second half of the year, and its 2016 for UR, can you give a little color on the type of seasonality that business has and as you penetrate some of these new electronic manufacturing marketplaces, will that change any of the seasonality?.

Patrick, UR has had some seasonality where their fourth quarter is their strongest quarter by quite a bit. So we expect that to continue. After a strong fourth quarter Q1 falls back a little bit and they build up momentum through the year, so I think a stronger fourth quarter would be welcome in Teradyne's soft fourth quarter.

The seasonality they've had has been going on for a long time period. Now, what the electronics thing does to it I don't -- I think it's not going to impact their seasonality.

The electronics orders are going to happen kind of when they happen when they get to the funnel, and it won't be tied to anything in the calendar year and those orders we expect to be small at the outset and then in future periods, much broader expansion..

Great. That's helpful and maybe go into the HDD test, or the storage test business.

Given the weakness out there in the PC marketplace, are you seeing the, I guess, the greater interest on the SSD side and that's why you're able to reiterate your $60 million to $80 million revenue target for calendar 2015?.

We're seeing demand on a 3.5 inch hard disk drive, which is used for enterprise or cloud-based storage. So that's where our business is coming from largely this year and a little bit of SSD.

Where we haven't gotten any business for years is 2.5, so we took a charge this quarter given that looked it even weakened further from what the PC guys were saying. But we're very well-positioned in 3.5 and SSD, so we think we're the leading vendor by far in terms of market share and product differentiation..

Great. Thank you..

Your next question comes from the line of Sidney Ho with Deutsche Bank..

Thanks for taking my question. I want to go back to Q2 and looking at the linearity of the orders, I know you have addressed some of the market concerns earlier in your remarks, but most of the semiconductor companies have talked about a sudden weakening of demand in the back half of the quarter.

Did you see similar dynamics in your business? And if so has that stabilized or improved in the first month of the quarter -- of this quarter?.

If anything, June was a bit of a frenzy. I mentioned earlier, LitePoint saw some very heavy pull in the month of June and our semi test business was similar. So no, we did not experience a slowdown in June.

In terms of what happened in -- the third quarter for us in semi test is always where we inflect and start to glide back down toward the end of the year. So will there be a softening in third quarter? Absolutely we expect that.

And if you look at prior years and how that's played out with our bookings, it's going to most likely be a very similar third quarter. So that has nothing, I would say, to do with the specific nature of this year. It's just the typical cycle we've been going through for many years now..

Okay. My follow-up question is -- it's just a housekeeping question here, but what percentage of your revenue comes from the subcontractors and what are you expecting those -- that CapEx in the second half versus the first half..

We're going to have to dig that number out here..

Maybe Andy can get that you off-line unless somehow you miraculously get it..

From an order perspective, it was about 50/50. Sub coms were a little -- 50%, 51%. IDMs and fabless were 49%..

And your expectation for second-half orders from OSAT gets us the -- some of the OSAT companies are cutting their CapEx. They announced the CapEx cuts. I'm just curious you think -- what you guys are see as well in that area..

We don't forecast at that level but we would expect OSATs to be lower as they have been in the second half traditionally..

Okay, great. Thank you..

Your next question comes from the line of Farhan Ahmad with Credit Suisse..

Thanks for squeezing back, and just one quick question on your LitePoint trend.

I wanted to know if that's driven -- if that strength in your LitePoint business was driven by more of unit growth or is it primarily driven by changes in testing standards for wireless forms going from one standard to the next standard?.

Yes, I'd say in the LitePoint business, it's not going to be a satisfying answer, but it's a little bit of both. Certainly test times have grown and then on top of that there has been, from our customers, I would say, a little more upside on unit volume growth than they might of expected. So both factors are happening.

Now, around that, if both are happening -- the market expansion, why isn't the market expansion happening overall. I think what Greg said earlier about Asia specifically being a bit off is one aspect, so that's not fueling growth there. And the efficiency of the testers is still something that's rolling into the market.

New testers that were introduced last year as they come in are more efficient than prior years, prior generations of products. So there's a bit of a offset going on. You know we talked about semi test getting to the point where parallelism is kind of reaching in many segments diminishing returns.

In LitePoint's business, there's still a bit to go there..

Thank you. That's all I have..

Your next question comes from the line of Steven Chin with UBS..

Hi, thanks. Just a follow-up question on UR, I know you're thinking the UR market size could be about $100 million this year.

If you are successful in maybe winning 3 to 5 of these electronics manufacturing customers, do you have any initial view of how big this market could be in 2016?.

We generally expect the market to grow 50% or more a year. And if there's been some third-party part reports, by the way, that Andy can reference you to that have market sizes further out in time that are actually bigger than some of the estimates we've come up with on our own.

On the electronics connection we have with Teradyne, we really believe we can get them into some number of accounts initially, but the deployments are going to be three robots, five robots.

That's where it's going to start and then after that's proven successful, which it will be, then we're going to presumably go to other spots in that line and it will be on test. That's going to take some time to play out so it will be a while before the electronics contribution becomes very meaningful. It's a couple year journey we're on.

But I would just, to put it in some -- again, this will play out over time, but if we, as we think about the future and as Universal Robots continues to grow in excess of 50% a year, as we get out two to three years from now maybe electronics is 10% of their overall business.

It's a nice adder and it could be in the 10% to 20% range, best case, but the bulk of that growth is going to be still in industries outside of electronics..

Okay thanks for sharing that Mark. Just a follow-up question on UR.

If the market does grow as fast as you're expecting, what you estimate the revenue, the served revenue that the current facilities can provide before Teradyne might have to spend CapEx to expand this business?.

Got it. We've taken an initial look at that and we know the facility can handle three to five years, depending on various scenarios, so we're going take another look at that when we go over there soon. But there's nothing in the next two years or three years we need to worry about..

Great. Thanks Greg..

And operator we have time for just one more question, please..

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

Hi, this is Chelsea German on behalf of Jim, thanks for taking the question.

Can you talk a little bit more about how you see capital intensity trending going forward? Is that going to be something that decreasing parallelism can drive higher capital intensity? Are there any other factors that you see as big drivers?.

No, I think capital intensity, related to longer test times and the diminishing effect of parallelism, will absolutely increase. The wild card really is, we still need unit volume growth and we've been modeling unit volume growth in kind of an 8% range over the rest of the decade. That's another significant factor in incremental test demand.

So those are the sort of two key things.

Historically, looking backwards, we've always had the unit volume growth but there's been this anchor of the parallel testing pack and as we discussed at the end of last year, we've seen signs of that diminishing and in some markets, like the $700 million market I referred to earlier, actually pausing or stopping.

So I think there's lots of interesting, encouraging signs on intensity and so what we really need to make sure is -- and look at it, is the unit volume going to be there?.

Great and as a quick follow-up. In terms of the first half versus second half seasonality, I think you mentioned that there should be about normal seasonal declines for 2H.

Should we be thinking about that from the first half base excluding the $100 million of revenue from lease conversions or including that?.

I think whether you included or exclude it, if you look at the past percentages of bookings declines from Q2 to Q3, or the sales declines over some number of years, I think you'll see where we are in our third-quarter guidance. We're within the range of where we've been in the past, so it doesn't really matter.

I say that because there's a fairly wide range of where we could end up in the third quarter, but what is clear is bookings are down in the third quarter..

Great. Thank you..

Great thank you everyone for joining us today and we look forward to talking with you in the days and weeks ahead..

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