Teradyne, Inc. (TER) Q2 2011 Earnings Report, Transcript and Summary

Good morning, my name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Andrew Blanchard, Vice President of Investor Relation.

Thank you, Kimberly. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our Chief Executive Officer, Mike Bradley; and our Chief Financial Officer, Greg Beecher. Following our opening remarks, we'll provide details of our performance for the second quarter of 2011 as well as our outlook for the third quarter. First, I’d like to address several administrative issues. The press release containing our most recent financial results was sent out via Business Wire last evening. Copies are available on our website or by calling Teradyne’s Corporate Relations office at (978) 370-2221. This call is being simultaneously webcast at teradyne.com. Note that during this call, we are providing slides on the website that may be helpful to you in following the discussion. To view them, simply access the Investor page of the site and click on the Live Webcast icon. In addition, replays of this call will be available via the same page about 24 hours after the call ends. The replays will be available, along with the slides, through the August 13. 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 will make reference to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure, where available on our website. To view them, go to the Investor page and click on the GAAP to Non-GAAP Reconciliation link. Also, we want you to know that between now and our next phone call, Teradyne will be participating in the Morgan Stanley Semi-Cap Equipment Corporate Access Day in Chicago on August 24, Piper Jaffray's Semiconductor Summit in Boston on August 31 and the Citi Technology Conference on September 8 in New York. Now let's get on with the rest of the agenda. First, our CEO, Mike Bradley, will review the state of the company and the industry in the second quarter and our outlook for the third quarter. Then, our CFO, Greg Beecher, will provide more details on our quarterly performance, along with our guidance for the third quarter. We will then answer your questions. For scheduling purposes, you should note that we intend to end this call after one hour. Mike?

Good morning, everyone. Thanks for joining us again today. While we posted very good results for the second quarter, we're experiencing a similar slowdown in semiconductor test orders that are affecting other semi-cap equipment sectors. As a result, our third quarter guidance ranges $320 million to $340 million down 17% to 22% from Q2, with a 15% to 17% operating profit rate and earnings per share of $0.22 to $0.26. Now I won't focus too much on the second quarter, as most of my comments today will be forward-looking given the market correction. But I do want to register that our model has performed exceptionally well now for 6 straight quarters and will continue to do so, number one. Number two, that we continue to grind out a number of important socket wins toward our market share objectives. And number three, that we're achieving some important product milestones this year, despite the softening demand picture. Equally important is the fact that as the market adjusts down, as it did in the fourth quarter of last year, our bottom line operates at about 10 points higher than in the past and is the strongest in the test sector, a sign of our continued discipline on growing costs, only when they contribute to sustainable top line growth. Greg will take you through a detailed breakdown of the Q2 and Q3 numbers, so I'll focus my remarks today on 3 things: First, is how we're reading this market correction; second, is what sectors we expect to be strongest over the cycle and how we're positioned in them; and third, how some of our new products had been faring, as they tackle emerging technical and economic challenges. What happened in our main SOC test market is that we've seen a downshift in demand of 28% from our combined IDM tablets and OSAT customers. Orders were down in all device segments, except for image sensor, where some new end products drove healthy growth. Mobile connectivity and power management applications though continue to lead the way in our bookings, while the biggest pullback was in automotive, coming off a near-record order level in the first quarter. By our estimates, this will reduce the overall SOC test market in Q3 to the $500 million to $550 million range, down from about $700 million in Q2. Now if you fold the $500 million fourth quarter into the equation, you'd end the year with a market between $2.3 billion and $2.4 billion or about 5% below the average of the last 5 years, and you'd have us exiting, that is, the market exiting the year at a $2 billion annualized level, which is 18% below that average run rate. You'll recall that we've worked our way up to a normalized market share of about 45% in this space from the low-30s, 5 or 6 years ago. And we set our fixed cost to deliver model profits at a $2 billion market size. So while these quarterly swings come with little notice, we've built in some decent shock absorbers to navigate over the rough spots. I don't think that there's any way to precisely time these inflections, but it wouldn't be unusual to have a few quarters below the trend line followed by the usual recovery cycle. But the important thing about this market is the segment shifts occurring within the overall test CapEx. A combination of end-market growth and device complexity is resulting in higher buy rates in the mobile connectivity, automotive and microcontroller segments and less in microprocessor and digitally dominant chip set applications, where structural tests and built-in-self test continue to compress test repurchases. Our engineering alignment to these growth segments, combined with the focus on winning critical new sockets are at the heart of our share growth over the last 5 or 6 years. On the SOC design end front, we continue to add new sockets each quarter. Our second quarter results were quite strong, actually, with 24 new competitive sockets added, with key wins in the power, analog and RF sectors. Now we don't win every battle, but the aggregate annual share numbers over the last few years continue to reflect steady progress for us. Some of these wins are tied to new high-end UltraFLEX options, which we introduced earlier this month at SEMICON West. In addition to higher frequency and higher density, the new generation of instruments allow much faster time to market for communications-rich devices used in smartphones, tablets and set-top boxes. In addition, our ETS-88 system from Eagle had a record quarter with a number of performance analog design ins, and it now has an installed base of over 100 systems. You may recall that the ETS-88 is a unique, entry-level offering in the Eagle line that allows simultaneous test of different device types and very efficient parallel test. As a result, it's proved to be very attractive to a variety of IDM and fabless companies in the analog sector. So in summary, we're seeing a natural digestion period in overall SOC test capital spending. The market trend line has centered around $2.3 billion to $2.5 billion per year. And we're entering a period, where as I said, it will be running at about $2 billion annualized, similar to many past cycles. More importantly, we're sized to navigate through this without any disruptions. And finally, our longer-term competitive position remains solid. Turning now to Memory Test. We've not yet seen a similar pullback to SOC, as our Q2 memory bookings were roughly flat to Q1. I will say that we could see some correction here going forward, given very recent caution and buying. But we are on track to achieve our highest market share ever this year at somewhere between 15% and 20%, based upon continued buying of Magnum and UltraFLEX products for FLASH, DRAM and graphics DRAM chips. The overall memory test market will come at the mid-$700 million level this year for the second year running. As you know, we've been shooting this year for revenues in the $120 million range and hope to come within striking distance of that, even if things soften somewhat in the second half. Our Systems Test business now was strong in the quarter with revenues, up 16% to $68 million and bookings over $75 million for the second quarter in a row. Hard Disk Drives led the way, as we posted record 6-month bookings totals due to our expansion into multiple HDD customers over the last 12 months, coupled with a broadening served market now, including both mobile and enterprise drives. Our HDD revenues through 3 quarters should break through the $120 million level, which as you remember was the high end of our $80 million to $120 million targeted range entering the year. So despite some caution in the overall HDD market, we have some very good product and customer momentum underway. In summary, we're guiding revenues down 17% to 22% from our Q2 level, as I said, as main line SOC customers digest their new capacity. But we will continue with stable or increased revenues in other areas including memory, defense, board test and hard disk drive, with standout growth in our ETS-88 and Neptune HDD systems. These last 2, good examples of our new market entry strategy. As we showed in the down cycle at the end of last year, we're in a very volatile short lead time market, where these swings will be the norm. Our strategy of extending our SOC core, extending into memory, innovating in the hard disk drive market and maintaining structural cost discipline will serve us well as we navigate these swings. Now let me turn it over to Greg for the broader financial perspective and the financial details.

Thanks, Mike, and good morning, everyone. Before I get into the details around Q2 and Q3, I want to address 3 important questions that I expect many of you are asking at this point in the cycle. First, is the current reduction in demand likely to be a major or minor reset in tester CapEx? In other words, how deep and long are we expecting this correction to be? Second, how will our model perform in scenarios of lower revenue or varied mix? And third, what measures are we taking short or long term to offset this lower demand? Let me take this one by one. First, regarding how long and deep do we expect this correction to be, well, let's first look back at recent cycles, where we had 3 normal market corrections, such as in the third quarters of 2006, 2007 and 2010. And the one major correction of 2008, 2009. Now from all that we've seen in terms of utilization rates, customer sentiment, SOC unit growth, end market demand for our segments, this decline in SOC orders looks much more like the '06, '07 and 2010 corrections than the '08, '09 major reset, where severe global economic stress outweighed any semiconductor industry-specific issues. These short corrections typically had 2 quarters of sequential SOC product order decline, ranging from about 30% to 50% peak to trough. We've shown this graphically in the slides on the website. Now regarding how the model performed and actions were taken, you'll recall we sized the company to achieve our 15% model profit rate, when the SOC test market is as low as $2 billion a year, despite its $2.5 billion average over the last 5 years. We've also outsourced manufacturing and variablize a significant portion of our compensation. This gives us a very strong shock absorber to do well in normal market corrections. We clearly demonstrate this in our last low point, the fourth quarter of 2010. In this period, we delivered a 20% profit rate with non-GAAP EPS of $0.35. This performance was actually better than our model due to some year-end true-ups in our fringe rate and taxes, so it is better to look at our model when thinking about this upcoming third quarter. Our Q3 guidance is tracking to our model with a very high mix of HDD revenue. The model is provided in the slide presentation on the website. We expect to deliver a 15% to 17% operating profit rate with non-GAAP EPS of $0.22 to $0.26 in the third quarter. As to the actions that we plan on taking, well, other than to reduce the inventory pipeline, the variable nature of our compensation naturally kicks in and lowers our operating expenses, consistent with our model. So we planned no headcount reductions or roadmap changes, as we set our model at a level that has proven to provide a very strong buffer against these market conditions. Now I'd like to cover some of the key highlights in developments at the halfway mark of the year before I talk about the SemiTest demand environment any further, the second quarter results and guidance for the second quarter of 2011. The key highlight of the second quarter was that we exceeded our sales and earnings guidance with a top line of $411 million and non-GAAP EPS of $0.50. The higher top line was primarily due to more Hard Disk Drive test acceptances than projected. This added volume, along with stronger performance, in SemiTest drove the better-than-forecasted EPS. As you can see from our earnings release, we achieved an operating profit rate of 27% in the second quarter. This marks the sixth quarter in a row of operating above our 15% model profit rate. I'm also pleased to highlight that our performance over the last 6 quarters matches up quite well against the leading semiconductor equipment suppliers. We've averaged a 27% operating profit rate over the last 6 quarters, along with free cash flow of 24% of sales. We've accomplished all of this by optimizing the company's model, keeping fixed costs in check, as well as steadily gaining market share. Shifting now to market share gains. The standout share gain story this year is Hard Disk Drive. We expect to have nearly half of the Hard Disk Drive test market this year, which should translate to sales somewhere over $120 million for the year, exceeding the top end of our earlier estimate. As to SOC test share, you'll recall that we gained about 9 points last year, which was from a combination of socket wins and temporary segment shifts. This year, we expect continued SOC socket wins at a pace consistent with the past but will likely be on the other side of the segment shifts, as strong PC test buying may temporarily depress our share. I'd like to add a quick thought about our longer-term growth prospects. With the industry consolidation phase now behind us, I personally believe the back end will begin to look more like the front end in the future, that is over time, one clear winner, who has both superior financial performance and leading market share. While we have accomplished the financial performance part of this today, by virtue of the recent combination of Advantest and Verigy, we're no longer the total ATE market share leader. So we see plenty of growth opportunities ahead of us in our core SemiTest markets. These opportunities are in addition to benefiting from a strong share we maintain in mobility applications, automotive and consumer digital, which should grow at a healthy rate. The other quick highlight of the quarter is cash and marketable securities. We accrued these balances by $91 million this quarter to a total of $1.2 billion. Our cash plans are unchanged from what we've outlined in the past, and we have an approved buyback of $200 million that have yet to buy back again. As a quick reminder, since the beginning of 2006, we've bought back $503 million worth of stock, at an average price of $13.80, and we acquired Nextest and Eagle for a total of $540 million in net cash. We'll continually look at what is the best use of our cash for shareholders against the current alternatives and our cost of capital of 15%. Moving to the demand side, SemiTest bookings declined 28% to $257 million. SOC test orders were $227 million and Memory Test orders were $30 million in the second quarter. Under the SOC covers, the bright spot was image sensor, with a strong sequential bookings increase tied to a share gain. On the other side of the SOC ledger, the segment with the sharpest drop off was automotive, after very strong ordering in the first quarter. Systems Test group came in at $76 million, with continued strength in HDD orders tied to share gains. In the second quarter, Semiconductor Test sales were 84% of the total and that Systems Test group was 16%. Our book-to-bill ratio for the second quarter was 0.81 for the overall company, 0.75 for Semiconductor Test and 1.12 for the Systems Test group. At the end of the quarter, our backlog stood at $467 million, of which 83% is scheduled to ship and be recognized as revenue within the next 6 months. The top line of $411 million was up $33 million or 9% sequentially from the first quarter. SemiTest was $343 million, up $24 million or 7% and Systems Test group was $68 million, up $9 million or 16%. SemiTest product shipments increased 7% from a quarter ago. Within the $411 million, service revenue was $69 million and up $8 million from Q1. System Test -- excuse me, SemiTest service revenue was $55 million. Total company product turns business was 29% versus 32% a quarter ago. SemiTest products turns business was 32% versus 35% a quarter ago. Memory revenue was $39 million in the quarter. Moving down to P&L. Gross margins increased from 51% in the first quarter to 52% in the second quarter due to higher volume. R&D expenses were $47 million or 12% of sales compared to $48 million or 13% of sales in the first quarter. SG&A expenses were $57 million or 14% of sales compared to $58 million or 15% of sales in the first quarter. Operating expenses of $105 million were down $1 million from the first quarter, driven by lower-than-anticipated R&D spending. Our net non-GAAP interest and other expense was $1 million. We recorded a tax provision of $8 million, at a tax rate of approximately 8%. We have a U.S. NOLs and credits that total about $275 million on a pretax basis, which will continue to benefit us well into 2013, as about 40% of our consolidated income ends up in the U.S. Cash from operations totaled $80 million after capital additions. Depreciation and amortization for the second quarter was $33 million. This includes $7 million of stock-based compensation, $7 million for acquired intangible asset amortization and $3 million for amortization of the GAAP computed debt discount. As noted in the press release, sales for the third quarter are expected to be between $320 million and $340 million, and the non-GAAP EPS range is $0.22 to $0.26 on 207 million diluted shares. I should add that the guidance excludes the amortization of acquired intangibles and the noncash computed interest on the convertible debt. Our GAAP EPS range is $0.15 to $0.18. The operating profit rate at the midpoint of our third guidance quarter is 16%. Now moving to the P&L percentages in the third quarter. We expect gross margin to be about 47%. R&D should be 15%, and SG&A should be between 16% and 17%. Non-GAAP net interest expense is expected to be about $1.6 million and the tax provision should be about 8%. In summary, we have a very resilient model. It’s got a very strong balance sheet. And we've got plenty of areas to further exploit for growth. Now I'll turn the call back over to Andy.

Thanks, Greg. Kimberly, we'd now like to take some questions.

[Operator Instructions] Your first question comes from the line of Stephen Chin of UBS.

This is Mahavir, standing in for Stephen Chin. Just one question on -- you mentioned about the downgrade of $2 billion exiting in 2011. So is it right to assume that sales would be down Q-over-Q in the fourth quarter?

Stephen (sic) [Mahavir], you're right. I was trying to give a scenario that said if the market took a couple of quarter downturn and leveled out at that level, then obviously, if our share was exactly the same as the prior quarters, everything would go down. We'd go down.

Got it. That's helpful. Second question, just wanted to get an idea about utilization rates, because it seems that they've been very cautious because in their order patterns in the recent few quarters. So any color on that?

Yes. The utilization rates, our numbers would show that the breakout between IDMs and OSATs would have the utilization on the OSATs breaking away here in the last couple of quarters, where the OSATs would be in the mid to high 70s, while the ODM -- while the IDMs would be still in the 80s.

Got it. I mean, do you think then they would come back in -- likely, in the first half of '12 now, or do you think maybe fourth quarter?

Well, I think, if everything is linked together, I think that the CapEx starts to move back if it got down to this $2 billion rate and started to move back up then the OSATs tend to swing harder in their CapEx, and therefore, the utilization would start to get loaded, and they'd move back up. So I think everything is kind of synchronized to this buying cycle.

One last question. Could you give some more color on what your market share is in the mobility test market? If you could maybe separate that? And also, what percentage of sales for Teradyne are from the mobility market?

No. This question's been asked in the past. We don't -- no one tracks the subsegments of test, with the resolution that would allow us to do it, so I'd have to speak in kind of relative terms. Our strongest segments would be in mobility, power management, microcontrollers. Our weakest segments would be in the processor -- PC processor. When I say mobility, mobile processors, obviously, are included in that. So with the 45% overall market share, you'd put us north of 50% in those, certainly significantly -- I mean, our market share in the PC processor space is very, very low.

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

What do you think is a reasonable assumption for sort of a normalized breakdown between Systems Test and SemiTest, as a couple years out, as you continue to see share gains in Hard Disk Drive, but also likely gains in other segments of SemiTest?

Jim, this is Greg. I think over time, the Hard Disk Drive will continue to grow, but we expect SemiTest to continue to grow as well. So I think, what we're really saying now is a very fast growth in Hard Disk Drive from a few years ago, where it's going to be north of 120% this year. But I think from this point forward, I think the percentages you get would be similar down the road, because we have attractive growth plans in SemiTest. And Hard Disk Drive is probably where most of our growth will be in the Systems Test group. I don't think it will be nearly as much in the other 2 groups.

So likely staying somewhere between that 80-20 and 75-25 breakdown?

Yes.

And then within Memory Test, what kinds of things have to happen whether it be in the market or with your products or with competitors, in order for you to gain additional share on top of what you already have in the Memory Test segment?

Two things. The first one is that the buying in FLASH has got to keep leaning more towards the higher speed FLASH -- DDR FLASH applications. That's where we're positioned. That's what our strategy is to intersect that. And secondly, for the DRAM buying to get some life to it, those 2 things have to happen. Obviously, we've got to win sockets in new customers.

Your next question comes from the line of Satya Kumar of Crédit Suisse. Satya Kumar - Crédit Suisse AG: Two questions. What do you think is the run rate for SOC CapEx in Q3?

The run rate for CapEx...

Do you mean bookings or... Satya Kumar - Crédit Suisse AG: No, the run rate for CapEx.

Yes. I think that market will absorb -- we think it's in the mid-5s. Somewhere between 500 and 550. That's all in, that's service and product, everything. Satya Kumar - Crédit Suisse AG: Okay. So essentially from -- the $2 billion run rate in Q4 is sort of modestly down maybe 5% to 10% lower than Q3?

Yes, that's what I was trying to do. You're exactly right. That's how I was thinking about it, just a little bit down. Obviously, it could go further, but I was trying to do some round numbers that would show you what the total market in 2011 would be and then what the run rate would be so. Satya Kumar - Crédit Suisse AG: Okay. Switching to PC segment, in light of the consolidation between Advantest and Verigy, it looks like they're going to come up with a new strategy, 90 days post the close of acquisition on what they want to do with the product roadmap. And it does look like ultimately, they probably will not go to customers with -- to the same customer with 2 different products. Now does that open up an opportunity for you to become a viable second source in some of the PC markets? And are you seeing any sort of traction or discussions that are perhaps in early stages right now moving in that direction?

Satya, I think the broad issue in the competitive landscape with this consolidation move is whether the roadmaps will, in fact, change. And I think there's a fork in the road. One branch is that the products will, in fact, get rationalized and customers will, in some sense, be forced to switch or open up evaluations. The other is that it's steady as she goes and the existing products, all will have roadmaps that extend out in time. So far, it's the latter. Obviously, if it becomes the former and I think, in some sense, for shareholders that has to become the former then opportunities would exist. I wouldn't just say it would be a PC opportunity, I think, across the board, there could be some opportunities that open up, because of the disruptions to that -- to the roadmaps. Satya Kumar - Crédit Suisse AG: And then lastly on the balance sheet, obviously, it's overcapitalized at this point. And in the past, you've talked about M&As versus buybacks. And you're talking about a 15% cost of capital. And if I assume that the SOC run rate goes to this $2 billion level, we're still looking at fairly good profitability for you even on the trough run rate basis. Related to your cost of capital function and the balance sheet, I'm just sort of struggling to see why you would not be a lot more aggressive on the buyback at current levels. I just want to hear your thoughts relative to that cost of capital versus where the stock is now versus the anomalous CapEx.

Yes. The first thing I'd say is it's probably not a good idea for us to say in any short-term environment what we intend to do over the next 90 days, whether it's buyback or acquisitions. So having said that, we're doing what we've always said we would do. We're going to buy back stock opportunistically, and if we can find acquisitions that are a good fit, and we could grow them faster, then Teradyne would do that. And we've been patient all along, so we're expecting what we said we'd do, and we'll report back to you next quarter, what activity might or might not take place in this next quarter.

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

Mike, if I look at your gross margin guidance, obviously, it's down, because of the mix of the HDD. Is it all due to SOC slowing down and HDD coming up? Or is there any -- in some of the analog power management team you've had for the last several quarters, is it actually slowing down now?

This is Greg. The vast majority -- overwhelming majority is the mix. In our guidance, the SemiTest business, if I go from Q2 to Q3, it's down $110 million, SemiTest. Hard Disk Drive is up $30 million. So that swing -- and Hard Disk Drive had some reasonable volume in the second quarter. So there's a very high mix of Hard Disk Drive in the third quarter guidance, higher than, I think, we have had for quite some time. So that's 95% of what's going on in the gross margin.

Got it. And then in the last 6 to 9 months, has there been any products where you've seen pricing actually increase?

Exclusive of mix, no. In other words, if we had price increases, the answer is no.

And then the final question, Mike. If you look at it longer term from like the newer technologies like [indiscernible]. How does it impact Teradyne when the industry moves [indiscernible]. I'm guessing, it's more in the wafer level test side. Please, can you help us give some thoughts around that? That would be helpful.

Yes. More moves -- performance at wafer level is what occurs, and that's not a new phenomenon. Obviously, the other thing is that you have system level test, very complex requirements with this new integrated devices, but it's one more generation of that. We're seeing in the tablet and mobility devices, increase in RF ports, multiple cores, just a whole series of things that affect both test development and production test. And this new introduction of UltraFLEX generation of equipment was targeting that, so we've already launched that set of capability into the market. And it's had very good acceptance already.

Y Our next question comes from the line of Wenge Yang of Citi.

Last night, the [indiscernible] mentioned that the inventory correction should be largely over by the end of Q3, and they are actually seeing utilization rate to start to bounce back in Q4. If that's the case, what do you think about the SOC buy rate in Q4? Is it still tracking to the turbulent level, or you think it can move up?

Well, I think -- to be honest with you, we don't lose a lot of sleep trying to call it, quite that precisely, but I will say that the characteristics in our market, in a very short lead-time environment, which is what the industry is capable of now, is that in the downturn, things tend to shut off quite hard. We saw that in the third quarter last year. We see that in this quarter, and it’s across the board, OSAT and IDM. So you just have absolutely a shift into engineering buying or new product ramp buying. And we don't have cancellations to speak of. We have some shuffling in the slot blend, but not a lot of pushing out, and so as a result, things turn on and off very quickly. We're in a phase where things have turned off. And I think everyone kind of squeezes down so far that the next move is that they say, well, we actually need some more. We don't know whether that will stay down, as I said, and have a lower Q4, or whether that can come back. Either scenario, I think, is possible. But in truth, we don't worry about it too much, because the supply line flexibility is very, very nimble for us.

This is Greg. One thing that I'm sure you guys track is the inventory levels. So if that does lead down at a rapid pace that's obviously good, everything else being equal. So that's something worth keeping your eye on. It's not something that we focus on, given how we can respond very quickly to customers, but given the roles you guys have, that might be a good thing to keep an eye on.

That's helpful. So I think, even with all the odd venues -- and I see unit growth is doing a mid-single digit. And if we assume 5% to 6% unit growth annually, what do you think is the required buy rate for SOC to support that kind of unit growth?

If I would have put a range around it, I'd put 1.3% to 1.5%. This year, if we take the numbers that I gave you earlier, if it downslope all the way through Q4, that ends up at an annual 1.1% for SOC. So the whole year would actually be a comparatively low year. But if you're modeling it, I think over time, a longer period of time, 1.3% to 1.5% would be a reasonable band.

That's very helpful. Last question, in terms of HDD, you mentioned about a full year revenue is tracking to the high end at $120 million. How much revenue have you shipped in the first half? And what's the number likely to be in Q3?

We shipped less than the $120 million, but what I'll say is this, because we don't break out HDD in total as a segment. By the time we get through third quarter, we expect to be at/or maybe slightly above our high-end target for the year. So whatever we get in the fourth quarter would push us above that.

Your next question comes from the line of Mehdi Hosseini of Susquehanna International.

A couple of things. Mike, could you elaborate on the number of customers you have in HDD? And what is the driver for such a sizable growth, when the end market appears to be soft? And on the DRAM side, could you also elaborate on the number of customers, and where do you see that number tracking into next year? And I have a follow-up.

Okay. That's a lot. Let's see, I'm going to be intentionally vague on exact number of customers, but we turned the corner within the last 12 months into multiple customers in HDD. And that was multiplied by the applications that we were targeting, the Neptune product app. So we were extending beyond the mobile market into the enterprise market into functional test. So we really expanded on 2 axis in Hard Disk Drive. Now as a result of that -- and you know we're on 2.5-inch disk drives. As a result, we really have kept very good momentum this year, as you can see with the revenues in the market, that in total is somewhere between the $250 million and $300 million a year as a run rate. So we've really been able to take a position now much broader than we've had in the past. So the growth is really in 2 axes. It's a multiple customers. It is the much wider variety of applications that the product now addresses. And in DRAM, we don't really get into many. I'm sorry, but delineation of the number of customers, I will say, that we've got products now over the last year, where we've got both DRAM wafer sort and final test and products and FLASH for wafer sort and final test, and we have customers in all of those segments. Obviously, our market share objective requires that we expand share inside our existing customers, but it's going to require that we get new customers going forward. I can't tell you that we will announce customers as they come in, but obviously, if we hit our market share goals, it means that we're getting new customers.

And maybe one other quick thing on the Hard Disk Drive, we're strong on 2.5-inch Hard Disk Drive, and there is -- there are more drives that are 3.5 that are being replaced by 2.5-inch Hard Disk Drives. So that's another thing that's favoring, where we're strong. The 2.5-inch Hard Drives have lower power and has good performance, so that's something else that's increasing our share of the market.

Great. And actually, Greg, I have 2 follow-up questions for you. A, what is the mix of product and services for SemiTest, and number two, last conference call you talked about looking into a couple of acquisition opportunities, and you walked away the last minute with -- valuation appears to be -- come down in the capital markets -- public market, are those acquisitions now looking better compared to 3 months ago?

Let me give you the semi -- this is Q2 semi-revenue. All right. The product revenue is $288 million, the service revenue was $55 million. Okay? On the valuation, I want to leave it at the level I left it earlier, that it's not constructive, I think, for investors or anybody to get any level of detail beyond what we have said earlier that we're going to look at all the alternatives, be very mindful of our cost of capital, be very mindful of where the stock's trading, be very mindful of what opportunities are attractive in front of us. So it all goes into our thinking. And we'll report back each quarter, what decisions we make.

Which got a higher priority, buyback or acquisition?

It depends upon the cost of capital return. It all depends. It depends if our stock goes lower, obviously, the buyback starts moving up. If -- and that depends what is the acquisition you're looking at. So there is no one answer. It all depends upon the exact circumstances at the time.

Your next question comes from the line of the C.J. Muse of Barclays Capital.

I guess, first question, when you think about this pause in overall SOC test and talking about around $2.3 billion for the year and how there's a heavier mix for PCs, should we be thinking about a lower market share for you guys, below the 46% level closer to the 44% 45%?

Yes, C.J. I think there's a band, obviously. I think that's fair. If you remember last year, when we hit 49%, we wanted to make sure all of our investors knew that we didn't think we gained 8 points of market share in one year. We thought -- and quite correctly, we explained that we were favored in share, in part, because of design ins, which were real and long term, and in part, because the segments that we were the strongest in we're moving up relatively more than other segments. So if you take the overall share, where our expectation is that 44%, 45% range would be, that would be a reasonable place to be.

Okay, that's helpful. And then on the HDD side, just to clarify, did you say you expect to revenue $120 million within the first 3 quarters of this year, or is that just shipments?

Revenue in the first 3 quarters of this year.

Okay. And then on Memory side, you talked about sustaining kind of 15% to 20% market share, but that things could be pausing here. Do we still look at an $800 million to $1 billion kind of market size, or should we trim that?

Our guesstimate at this point -- we'll trim that. We think $700 million to $800 million

Okay. And then last question for me. On the service side, you had a nice uptick on the SemiTest service. I think it was up about $6 million Q-on-Q. Is that sustainable into the second half of the year, or are there onetime items in there?

We think all is sustainable except for $1 million, which is tied to the Japan earthquake. Apart from that it should be sustainable.

Your next question comes from the line of Patrick Ho of Stifel, Nicolaus. Patrick Ho - Stifel, Nicolaus & Co., Inc.: Looking -- I understand the short lead times in the industry that you guys experience now, but how quickly do you think you can respond, given the fluid environment that's out there right now? I did notice that inventory did go up a little bit, but you've been maintaining a pretty good days inventory and inventory turns. How quickly can you respond, if you get late quarter orders?

We can respond very quickly, Patrick. I don't think we're -- we don't have constraints of any magnitude about being able to add slots and move the supply line up. Now the corner case is that you get some very, very specialized configurations that are heavy on a particular instrument. But even at that level, which we try to make sure that the pipeline is able to respond. And I think that the '10 quarterly ramp history gives you some sense of how much we can move in any quarter, both up and down. Patrick Ho - Stifel, Nicolaus & Co., Inc.: Great. That's helpful, Mike. I know you don't want to quantify, but in terms of market share gains, which segments you've been gaining share in the SOC market, you did mention that you're strong in microcontrollers and power management. Qualitatively, where are you guys winning the most new sockets and which market segments?

It's across the board. I think, the -- if you took the last couple of years and said what's been the biggest thing that shifted, I think, actually it's been combining our distribution organization with the Eagle product line. If you put the first bar on the Pareto though, that's -- that would be the first bar. And it's the ability to drive their product family into regions that they had not been before, number one. Number two, is the extension of their product down into the ETS-88 level, gets us access to much smaller customers, many of them Asia-based, new fabless companies or even companies at the IDM level, who are attracted by this double play that the product offers in terms of the variety of devices it can test and very, very effective parallel test. So that would be the first one. And that's going into a market where some of the products that have existed in the past are long in the tooth. The other segments have been -- as we, over the last couple of years, introduced new next-generation capability at the very high end on the UltraFLEX, we've been able -- there've been very big battles here, and we've been able to share of those. I'd say those would be the 2 top ones.

[Operator Instructions] Your next question is a follow-up from Krish Sankar of Bank of America Merrill Lynch.

Greg or Mike, if I assume your HDD market share remains static, is it fair to assume Q4 is seasonably slow for the business?

Our HDD market share, I'd say, if it stays static, which it is very healthy now. We have trouble trying to size the fourth quarter in HDD. So at the moment, looks like there could be some shipments there, but I would not be surprised if they pause and schedule those out. So we really don't have a good fix on the fourth quarter, what they might take. But seasonally, would it surprise me, if they took it in the fourth quarter? Not really, but if they're taking the late fourth quarter, that would surprise me. I think, it would have to be early in the fourth quarter for them to get productive use out of it.

Got you. And then, do you guys give a mix of IDMs versus OSATs in the Q2, or what do you think it will be in Q3?

Yes. The mix between what we call specifiers, so it's IDMs and then the fabless companies who buy from themselves, in Q2, on a bookings basis, that was 73% of the total and 27% for the OSATs. And just for reference, that was 76-24 last quarter. So actually the OSATs held up a little bit more. And the reason for that is OSAT, as you know, don't just -- they're not just the surplus capacity industry, a lot of the fabless companies use them. So new fabless products -- driven products held up, actually, relatively better than the IDM space did this quarter. But that's the breakdown.

Your next question comes from the line of Gus Richard of Piper.

First one, on the Hard Disk Drive business, long ago that had very low margins, you guys have been doing cost downs? Can you talk about how the product margins improved? And are there more margin improvements going forward? And how would those play out?

This is Greg. The biggest challenge for us after the first product which was designed to meet a deadline, to get the customer to accept it was that we designed it in the U.S. Since then, we've made the changes necessary to get to a very competitive cost structure. We're always still looking at some opportunities that might be small, but we're still looking at them. When you look at this year, 2011, we expect after 3 years of being below model to be at our model profit rate or a little bit better. So we actually like the position we're in right now -- the product position. But there's always still some fine tuning we need to do. The gross margins, as I think you know, are low 30%. Now if we ship a lot in one quarter, that, obviously, pulls it up to some higher number. But on average, it's about low 32%. But the SG&A and R&D are very low. So we get to 15%, and sometimes, more than 15% depending upon the volume.

We do have substantial volume to hit model profitability, that's the other piece of this equation.

Right. And then just with the mergers, Verigy and Advantest have occurred, how is the competitive dynamics of the marketplace changed? What are you kind of seeing? And what are your customers telling you?

Two things. One is, obviously, customers are voicing concern about uncertainty, and that relates to whether things will change. And their biggest concern would be, will the product development plans for the products that they're buying change. So that would be the number one thing. Number two, is I want to make sure -- these are both very capable competitors, and anytime there's a consolidation, as we had with our businesses, with Nextest and with Eagle, obviously, the first thing you do is you want to assure your customers that they're going to get continued support. So that, I call that as business as usual. The competitive landscape there is competition is making sure that they're stabilizing their customer base. But this issue about long-term uncertainty would be the main one. That's why over the last couple of quarters, we've reemphasized that when a consolidation takes place, customers don't run for the exits. They don't make changes immediately. That happens over time, and I wouldn't attribute any of the changes in market share that have occurred over the last year or any of the design ins, specifically to the effect of that consolidation. That will fold itself out or roll out over a longer period of time.

Your final question comes from the line of Atif Malik of Morgan Stanley.

I just want you to reconcile, Advantest reported pretty strong orders for the second quarter especially from Taiwan, and I believe those are for memory, with orders kind of flattening off in third quarter. So your comment that Memory Test market could be lower than $800 million estimate, I just want to reconcile, what are they seeing in the market that you guys aren't?

Atif, I think that their projections and the tone of their projections actually mirror ours, which is that while there was -- our business in memory was steady, theirs was strong, that the outlook going forward this year has a lot of uncertainty to it. So I think the tone of both are quite similar.

Great. Thanks everybody. This concludes today's call, and we look forward to talking to you through the quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.