Teradyne's CEO Discusses Q4 2011 Results - Earnings Call Transcript

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 |  About: Teradyne Inc. (TER)
by: SA Transcripts

Operator

Good morning, my name is Cody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Q4 2011 Earnings Conference Call. [Operator Instructions] Mr. Blanchard, you may begin.

Andrew J. Blanchard

Thank you, Cody. 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 fourth quarter and full year 2011, as well as our outlook for the first quarter of 2012.

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 at teradyne.com, where this call is also being simulcast.

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 February 11.

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 financial filings with the SEC 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 were available on our website. To view them, go to the Investor page and click on the GAAP to Non-GAAP Reconciliation link. Also, you may want to note that between now and our next conference call, Teradyne will be speaking in the Stifel, Nicolaus Technology and Telecom Conference on February 6 in Dana Point and Goldman Sachs Technology and Internet Conference on February 14 in San Francisco. Now let's get on with the rest of the agenda. First our CEO, Mike Bradley, will review the state of the company and industry of the fourth quarter full year 2011 and provide our outlook for the first quarter. Then our CFO, Greg Beecher, will provide more details on our quarterly and full-year performance, along with our guidance for the first quarter. We'll then answer your questions. For scheduling purposes, you should note that we intend to end this call after 1 hour.

Mike?

Michael A. Bradley

Good morning, everyone. Thanks for being with us again today. As you can see, we've raised our revenue guidance considerably from last quarter, so I want to explain what's behind that in just a few minutes from now. But first, I'd like to recap all of 2011, as we made some very good progress on our long-term strategy in the year just closed.

[Technical Difficulty]

From a numbers perspective, 2011 was solid despite a quite significant slowdown in the worldwide semiconductor test market in the second half of the year. We finished the year at over $1.4 billion in revenues and had another strong performance on the operating profit line. It's a especially satisfying to be able to go through significant down cycles and still be well in the black, something that has eluded most participants in this sector and in truth was a challenge for us until recent years. We generated nearly $200 million of free cash flow during the year, continuing a trend that we started back in 2006 when we began streamlining our product lines, shortening our manufacturing cycle time, revamping our fixed cost structure and steadily gaining market share. As you know, since 2006 we've generated over $1.2 billion in cash that has been put to good use in strengthening our core and expanding our serve markets, all through the acquisitions of Nextest, Eagle Test and now LitePoint. And of course we've kept some of those cash resources in reserve for similar strategic purposes into the future.

A few other notes on 2011 before I shift to the current quarter and upcoming year. Our Systems Test group had an exceptional year with record revenues and solid bottom line performance. Our defense business was back in very good shape after a turbulent 2010 where many military programs were reassessed or slowed. Our small but very competitive Commercial Board Test business had its best year in over 10 years. In the storage test business that had its first revenue less than 3 years ago, had an exceptional year of new products and new customers while logging a record year in systems shipped. On the semiconductor test side, we posted solid results in SOC test and Memory Test despite market contraction in both segments. While our SOC business declined as expected, our Memory Test business actually grew 11% year-over-year as our FLASH and DRAM test products gained further traction. Finally, our LitePoint business is off and running. With about 100 days under our belt, we're seeing almost exactly what we expected and then some. By that, I mean a dynamic company attacking a fast growing and fast-changing mobile electronic markets. And one like our storage test business that will ramp up and down through the coming quarters as major technology driven tool decisions are made at the same time that it delivers good annual earnings growth.

So let me turn now to the current quarter and the year ahead. Our fourth quarter bookings excluding LitePoint rose 49% sequentially to over $350 million. That's higher than either the second or quarter of 2011 and I'm pleased to say that we saw order increases in nearly every business. There were 2 major themes underlying these increases. First, semiconductor companies in the mobile sector are tooling up for new product launches this year. While segments like automotive and microcontroller have back-end overcapacity, the leading edge testers for Power Management, baseband processors, image sensors and wireless devices are in short supply. As a result, our high-performance FLEX products, especially those with our latest generation of UltraPin technology are in high demand. The second theme is in storage test, where customers are ramping capacity early so that they can be positioned for market share opportunities during this year. For us, I characterize this as new not-replacement capacity. In other words, we're not getting orders to replace any of our systems affected by the Thailand flooding. Our hard disk drive business is all new demand related. In light of these 2 themes, we're doing a couple of things in our Q1 capacity plan. First, we're ramping up the Neptune slot plan to respond to the healthy backlog we've built and second, we're opening up some additional capacity in SemiTest in the event that the mobility sector continues strong or if other sectors start to show life. So this upside strategy in SemiTest is what's behind our wide revenue range this quarter. I should add that LitePoint is likely to create some additional wider guidance ranges going forward, as they operate in an extremely short lead-time environment, shorter than any of our other businesses. So as we turn into this new year, I leave you with the following 3 points. First, short-term demand has turned up in SemiTest and we're in the sweet spot for that upward trend, most important being the new generation of mobile electronics. It's not a market wide recovery as a number of segments remain subdued, but it is a positive turn for leading edge mobile applications where we're very strong. Second, our Systems Test business, which you recall held us back in 2010, had a terrific year in 2011 and enters 2012 with record backlog and very good prospects in the storage, defense and board test sectors. And third, with LitePoint now in the fold, we have an exciting new growth engine that we expect will deliver at least 20% top line growth this year. We're backing LitePoint's expanded R&D and customer support plans and leveraging our footprint and worldwide resources to accelerate their growth. Finally, we're making prudent investments in the future but with a discipline that's allowed us to transform the company's financial performance over the last several years.

Now let me turn it over to Greg for his perspective on the business.

Gregory R. Beecher

Thanks, Mike, and good morning, everyone. I'd like to first recap the financial highlights of 2011 and provide a perspective over a 2-year period, capturing the results of the dramatic re-shaping of the company over the last several years. I'll then cover the fourth quarter highlights and the first quarter guidance and close with some brief summary remarks.

Looking first to 2011, we had one of our best years of the last 10 years with sales of $1.4 billion, a non-GAAP operating profit of 21% and non-GAAP EPS of $1.39. In fact, it was our second best year in that period, eclipsed only by last year's record results. Moreover, post our revamping of the company in 2009, our annual sales have averaged $1.5 billion a year, our non-GAAP operating profit rate has averaged 24% and our non-GAAP EPS has averaged about $1.80. We also delivered $677 million in free cash flow over this 2-year period, the ultimate validation of a successful model. One other interesting way to quickly illustrate the strength of our financial model is to average together the 2 fourth quarter costs of 2010 and 2011. When you do this, you'll get a 16% operating profit rate. This profitability rate exceeds our normalized operating performance of the prior 5 and 10-year periods before 2010 by more than 10 points. What might be less well known is that the non-GAAP EPS contribution from our nonorganic initiatives such as Eagle and Nextest and our organic hard disk drive and high-speed memory initiatives totaled 1/3 of our EPS over this 2-year period. So further expansion into closely adjacent markets where we can leverage our IT distribution or accelerate disruptive technologies has been a key part of our playbook. Let me expand on this just a bit, as it provides some insight into how we think about investing in future growth. First, on a nonorganic side, we were able to add Nextest and Eagle and make them highly successful for 3 key reasons. First, we have a very healthy core SemiTest business to build from. Second, we added healthy, complementary businesses with non-overlapping product portfolios. And third, we leveraged Teradyne capabilities where it directly led to hard savings or faster growth. And we decided this upfront; not quarters or years later. We know that if you don't have these 3 elements, it is very difficult to create shareholder value. The addition of LitePoint in wireless tests which expands our serve market by a $1 billion or more follows this same philosophy. On the organic front, we've been successful primarily because we've invested only after having a large rate customer work with us in the design phase to ensure we put into the product what mattered to them and equally important left out what wasn't valued. Then we fanned out to the broader market. On the capital allocation front, we've used our hard earned capital very carefully since the major revamping in 2009. In addition to LitePoint, we also bought back our stock at opportunistic prices. In 2011, we bought back 2.6 million shares at an average price of $11.84, totaling $31 million. We have $169 million remaining in our authorization, which we'll continue to use opportunistically. It should also be noted that in all of our businesses, each business achieved 15% or better operating performance in 2011, so there are no [indiscernible] in the group. On the competitive front, we don't intend to make any specific comment on the recent consolation moves in the SemiTest market other than to say we're well positioned against our larger combined competitor, whether they continue to operate with overlapping product lines or if they go in a different direction with some near-term financial objectives in mind. To shift to 2012 for a moment, we're starting the year off with healthy sales growth in both SemiTest and storage test. The more important story behind this new demand is that in SemiTest, we're shipping new UltraFLEX configurations to test next-generation smart phones and mobile devices. In storage test, wherever the 2.5-inch HDD buying takes place, we now have the products and customers to win this new buying. I should quickly point out that LitePoint's first quarter with Teradyne reflects what we expect is normal seasonality combined with their tight linkage to large new programs and technologies. Hence, we'll have natural sharp swings, and any one quarter shouldn't be extrapolated. We remain very confident with our top line revenue expectations of $160 million or more in 2012 for LitePoint.

Now moving to the key highlights of the fourth quarter. We met our sales and earnings guidance with a top line of $297 million and non-GAAP EPS of $0.16. Stepping back for a moment, on the market share and growth front, storage test was the key standout in 2011. Our annual sales were about 25% above our initial $120 million high-end estimate, with over 80% from either new customers or new applications all in the faster growing 2.5-inch disk drive space. On the SemiTest front, we're continuing with SOC socket wins at a pace consistent with the past. But as I mentioned last quarter, we'll be on the other side of the segment shifts as strong PC test buying will temporarily depress our 2011 numerical share. The second buying in 2011 favored our largest competitor, as PC driven buying was unusually high. We believe that our normalized share remains in the mid-40s in SOC test and we're very well positioned to ride the long-term mobility growth wave. You saw a glimpse of that trend in the Q4 orders. In a 2011 Memory Test market that was slightly smaller than 2010, we grew revenue 11% to $115 million, which puts our share in the high teens up from 14% in 2010.

With our strong FLASH and DRAM test portfolio, we expect to continue to add a few points of share per year going forward. On the balance sheet, we closed the year with gross cash and marketable securities just over $750 million. You'll no doubt note that we had a large GAAP credit for the reversal of our tax valuation allowance. This doesn't affect our non-GAAP earnings; it is simply bringing back onto our balance sheet our favorable tax attributes that we reserved a few years ago. As mentioned last quarter, our cash taxes should be 10% to 12%, which is what we'll use in our non-GAAP EPS.

Moving now to the demand side. SemiTest bookings grew to $233 million. Associate test orders were $215 million and Memory Test orders were $18 million in the fourth quarter. SemiTest service orders were $46 million, System Test service orders were $24 million and overall system test group orders came in at $123 million reflecting a sharp increase in HDD orders as new customers ramp production. As Mike noted in storage test, we didn't have any damaged equipment that required replacement, but we did see an acceleration of 2012 orders as customers position themselves for post-floor HDD demand. In SemiTest, while we can't directly quantify the amount, we did see some nominal ordering to replace equipment damaged in the Thailand floods.

In the fourth quarter, SemiTest sales were 68% of the total, Systems Test group was 22% and wireless Test or LitePoint was 10%. For the year just ended, LitePoint posted approximately $130 million in revenue. Our book-to-bill ratio for the fourth quarter was $1.3 million for the overall company, $1.2 million for SemiTest, $1.9 million for the Systems Test group and $0.7 million for Wireless Test. At the end of the quarter, our backlog stood at $455 million, of which 84% is scheduled to ship and be recognized as revenue within the next 6 months. The top line of $297 million was down $47 million or 14% sequentially from the third quarter. SemiTest was $202 million, down $39 million or 16%. And Systems Test group was $66 million, down $37 million or 36%. Wireless Test was $28 million after purchase accounting adjustments. SemiTest product shipments decreased 20% from a quarter ago. Within the $297 million, service revenue was $69 million, flat for the third quarter. SemiTest service revenue was $54 million. Total company product turns business was 38% versus 21% a quarter ago. SemiTest product turns business was 40% versus 30% a quarter ago. Memory revenue was $23 million.

Now moving down to P&L. Non-GAAP gross margins increased from 49% in the third quarter to 50% in the fourth quarter due to a lower mix of HDD revenue. R&D expenses were $53 million or 18% of sales compared to $47 million or 14% of sales in the third quarter. SG&A expenses were $63 million or 21% of sales, compared to $55 million or 16% of sales in the third quarter.

Operating expenses of $160 million were up $14 million from the third quarter, driven by the addition of LitePoint. Our net non-GAAP interest and other expense was $2 million. We had no cash tax provision in the fourth quarter, which reflects a reduction in our full-year cash tax rate from 6% to 5%. Cash from operations totaled $40 million after capital additions. As noted in the press release, sales for the fourth quarter are expected to be between $360 million and $400 million, and non-GAAP EPS range is $0.22 to $0.33 on 205 million diluted shares. When you look at our Q1 guidance, it includes a greater mix of lower margin, storage test and expenses added for growth investments which we previously discussed. I should add that the guidance excludes the amortization of acquired intangibles, the non-cash imputed interest on the convertible debt and estimated GAAP purchase accounting charges related to the acquisition of LitePoint. Our GAAP EPS range is $0.05 to $0.13. The operating profit rate at the midpoint of our fourth quarter guidance is above 16%.

Now moving to the P&L percentages in the first quarter. We expect non-GAAP gross margins to be 48% to 49%, R&D should be 16% to 15% and SG&A should be 18% to 16%. Non-GAAP net interest expense is expected to be about $2 million. The cash tax provision should be about $6 million. In summary, 2011 clearly was a solid year. The bottom out of orders in SemiTest appears to be behind us, albeit with macroeconomic conditions presenting uncertainty in the year ahead. Leading edge consumer mobility products are driving demand across a number of our businesses, including LitePoint. So [indiscernible], which is to stay very sharply focused on strengthening our core businesses, maintaining financial discipline while investing core growth.

Now I'll turn the call back over to Andy.

Andrew J. Blanchard

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Satya Kumar.

Satya Kumar - Crédit Suisse AG, Research Division

I was wondering approximately what part of the logic SemiTest orders that you saw in Q4 are for digital SOC versus analog mixing with other applications?

Gregory R. Beecher

I don't think we can break it down, Satya, for us right here. What I'll say is the strength from a product standpoint was in the high-performance end of the product line, the UltraFLEX end. We had quite an increase in that demand. But the low-end digital, the microcontroller types of applications were -- remained quite weak. On the linear analog side, those also were -- are also remain very subdued at this point.

Satya Kumar - Crédit Suisse AG, Research Division

Got it. Do you think that you're gaining market share on the high-end product segments? Obviously we're seeing some significant level of management departures at one of your big competitors. Could you talk a little about market share in the high-end? And also the diversifica -- how diversified are these orders? We are seeing some pretty concentrated orders from some large customers in the Korean geography. I was wondering if you could give some color on the geographical and customer breadth of these high-end orders.

Michael A. Bradley

Well, I'm going to take a little bit broader time perspective on it. We were in the low 30s percent a few years back, maybe 5 or 6 years back. We said last year as we had -- I shouldn't say last year, 2010 when we had a very strong surge in market share, part of that was driven by our position in the mobility segment. Last year PCs were stronger, so we dropped back. On average, as we said at the last call, we're in the mid-40s, 44% or 45%. And we do think we've gained share in that what you call high-end, what we would call the mobility product end of the business. We think our share movement has also had -- other components have been in other mobility related products like image sensors and in the microcontroller and truly digital low-end space where the J750 remains a very strong product with over 4,000 systems installed. Finally, in all of this has been the Eagle test product line, so on the performance analog side that has kicked in as well. So it isn't a one-horse kind of story here in terms of the share gains, but we do think on this high-performance mobility space, we certainly -- that would be the lead -- the lead product with the UltraFLEX in recent couple of quarters.

Satya Kumar - Crédit Suisse AG, Research Division

And the geographical distribution of orders?

Michael A. Bradley

Greg, you have got it a...

Gregory R. Beecher

The orders are strong in certainly in Asia, Korea is strong. We've had a strong mix -- some of this is on our web site, guys, if you want to look at what we've posted but you can see bookings in Asia. Fourth quarter to third quarter they were up 51% to 67%, so very strong pick up there. And it really is being driven by the mobility smartphone segment and that's the segment we have very, very strong share, so we think we can ride that wave and hopefully pick up some more share, but also we think we're in line with the guys who are winning in those segments.

Operator

Your next question comes from Krish Sankar.

Krish Sankar - BofA Merrill Lynch, Research Division

Greg, can you just tell us what do you think was the SOC in the memory market size in 2011? And what do you think it's going to be in 2012?

Michael A. Bradley

Okay, the market size?

Krish Sankar - BofA Merrill Lynch, Research Division

Yes.

Gregory R. Beecher

Let me do it, Mike. You said, was it memory that you're asking about or SOC?

Krish Sankar - BofA Merrill Lynch, Research Division

Both SOC and memory.

Gregory R. Beecher

Okay, SOC we think ends up at, hang on, 2.5 if -- we're still estimating the fourth quarter, but 2010 was 2.6 or -- between 2.6 and 2.7 for 2011 down slightly to 2.5. All of that back-end decline. And then memory, the total market for memory is 740 in 2010 and just over 600 in 2011. About 620, and we'll see how that shakes out as the fourth quarter finalizes.

Krish Sankar - BofA Merrill Lynch, Research Division

Anything in 2012?

Gregory R. Beecher

I'll give you a range. For planning purposes, we think that memory stays in that $700 million range, $600 million to $800 million but for planning purposes, I think $700 million wouldn't be a bad number to use. And it's a bit wider range in SOC; anywhere between $2.2 million and $2.6 million. If you had to pick a number, I'd pick $2.4 million.

Michael A. Bradley

Let me quickly add to that. The 2011 SOC market had a lot of PC buying, which we don't think will be anywhere near that level in the next year 2012. So it was not a good mix of business for our portfolio.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. Alright and then along those lines, in terms of your exposure to mobility, if I look at your end customers, is it safe to assume or characterize the fact that you guys are more exposed to kind of like, I guess the Apple ecosystem versus the Droid ecosystem? Is that a fair way to characterize it?

Michael A. Bradley

We prefer not to mention customer names, but we're certainly well tied into smart phones and tablets.

Krish Sankar - BofA Merrill Lynch, Research Division

Alright. And then a final question from my end. LitePoint, you guys did about $28 million in revenues. What was the -- was it profitable at $28 million?

Gregory R. Beecher

Yes, it was. The $28 million is under our watch. It was actually a little over $30 million; maybe $31 million to $32 million. It was a full quarter and we didn't have these GAAP purchase write-downs for service deferred revenue. But yes, it was profitable.

Operator

Your next question comes from Jim Covello.

James Covello - Goldman Sachs Group Inc., Research Division

First on the memory space, I understand what you said about the market size but it seems like as good as the results are this quarter, it didn't include any kind of big pickup from memory. So what do you think it would take drive maybe some sequential upticks in that segment, recognizing your comments about this fiscal [indiscernible] for the year?

Gregory R. Beecher

Jim, what will it take to drive the overall market to go up?

James Covello - Goldman Sachs Group Inc., Research Division

Yes, sequentially. So when or what [indiscernible] need to see a sequential uptick in the memory space?

Gregory R. Beecher

I think the one thing that will -- can push it in the coming year or 2 years, the lower power DDR devices. That's the one thing I'd call out.

James Covello - Goldman Sachs Group Inc., Research Division

Okay. And then just your free cash flow generation's terrific, $60 million in what was a tougher quarter in the fourth quarter, a couple hundred million for the year. What are the thoughts around incremental capital allocation? You've done a great job saving some for strategic acquisitions. Any thoughts of a dividend as we see more people doing that in the semiconductor space?

Gregory R. Beecher

Jim, we'll continue to pretty much stay the course we've been on, which is to keep some dry powder for possible, possible acquisitions that meet strict criteria that can leverage our distribution or technical capabilities. Those opportunities -- we found 2 in 2008 and 1 in 2011, so there's no set time when you can predict those opportunities are available. So we do think it's prudent to have a good buffer. We're constantly looking at capital allocation with our board, so it's an ongoing discussion. There's no imminent plan to do any different, other than what we've been doing. The close M&A has worked quite well for us, we like that, and buying back stock at opportunistic prices works well, too. But we'll continue to look at all other options as time goes on.

Operator

Your next question comes from Wayne Yang [ph].

Unknown Analyst

First question regarding the subcon. What's the percentage of revenue coming out of the subcon segments for your SemiTest?

Gregory R. Beecher

46% this quarter. Last quarter 28%. So that's where we've seen the big increase in demand. Subcon orders doubled from Q3 to Q4.

Michael A. Bradley

And again those are orders, not revenues.

Gregory R. Beecher

Alright, I said it in orders.

Michael A. Bradley

That's right, yes.

Unknown Analyst

So subcon actually started to pick up their order base as well? Right?

Gregory R. Beecher

Right. As the fabless companies who are participating in the mobile sector have driven these, the new tooling, the leading-edge tooling, the subcons are -- they're moving strongly at this point.

Unknown Analyst

Okay. Switch to LitePoint. You mentioned that orders could be very lumpy and there are also some feel-no factors, so we shouldn't read too much into the order run rate in Q4. What do you expect the LTE business to pan out in 2012? Is it more contributing to first half or second half?

Gregory R. Beecher

I think the contour, we need a few quarters to get under our belt here. But if you look at LitePoint business in the past, I think our prediction here is that the middle 2 quarters of the year will be stronger than the first and fourth quarters.

Unknown Analyst

Okay. And obviously LTE is a very new business opportunity for the LitePoint. Could you give some color on what's the business size and opportunity for the LTE side of the business in LitePoint? And how much LitePoint has LTE business today?

Gregory R. Beecher

This is Greg. LTE business is a very significant opportunity for LitePoint. The market for LTE or I'll say cellular, is probably 4x connectivity. And this business connectivity with LTE requires all new testers because of the increase in microhertz and different modulation schemes. So there is a big new tooling required. LitePoint has testers in the field now doing that type of testing. So we think it's a very, very good opportunity over 1, 2 year period that we're going to pursue very aggressively. And that's also behind some of the added investing -- investment we're putting into LitePoint this year.

Operator

Your next question comes from Mehdi Hosseini.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Coming back to hard disk drive, Mike, can you remind us how do you see the total addressable market changing from '11 into '12 given this replacement cycle coming, which is independent of the floods in Thailand? And I have a follow-up.

Michael A. Bradley

Mehdi, the sizing in that 2.5-inch space which is where we participate, we see that as a $200 million to $250 million -- somewhere between $200 million and $300 million a year market. And that includes commercial as well as in-house test platforms. And we think that size is about right. Last year and for the coming year, hard to judge growth rate inside that, but a $200 million to $300 million market is the way we size it for our own R&D and planning purposes. I think that migrates somewhat towards commercial going forward because the commercial equipment alternatives now, I think, are -- have the potential to outpace the in-house designs. But I think that will be a slow transition.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Is there any spending pattern in the hard disk drive? In other words, do you see this year a spending concentrate in the first half versus the second half given the run rate of booking in Q4?

Michael A. Bradley

Well, let's see. As we enter the year, it's unusual. It's very different compared to the last 2 years. And that is that the accelerated ordering, part of it caused by the Thailand flood and the positioning for market share moves in the year has put the order pattern very front loaded. At this point, we haven't adjusted our view of the total market size just because the first part of the year is looking stronger than prior years.

Unknown Analyst

Okay. And then if you could help me reconcile what you reported for SemiTest booking with what the semi-organization has reported. If I just look at the monthly numbers for back-end, bookings are down 17% in Q4 compared to Q3, and this is, again, this is for back-end test and equipment, but your bookings are up almost 20%. Does that -- how should I reconcile this? Does that mean that test is growing to the extent that it's offsetting decline in assembly? Or is that the system versus services? Any color you can add here will be great.

Michael A. Bradley

The color would not be some big mix change in systems and service. I think we're similar quarter-to-quarter on systems and service. The total market numbers tend to be, they come in the door a little bit later. So the trend lines that you see, and I think they're on our website of the market numbers, don't show any recovery yet. The story that we've got is that in the latter part of the fourth quarter, we have a very strong push for this leading-edge high-performance UltraFLEX based product for this next generation of product launches during the course of 2012. So that's very fresh news for us. It doesn't show up in the macro numbers at this point.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

And just to wrap up, I'm going to take a shot at booking directions for Q1. If I look at the slide that you have, it is obviously very lumpy. But since we have had 2 quarters of digestion and a strong Q4 booking especially SemiTest, should we expect continued improvement in terms of booking?

Michael A. Bradley

Well, Mehdi, I'm glad you took a shot at it because I'm not going to take too much of a shot at it but I will say that, and I'll just talk SemiTest SOC for a minute. The recovery, we typically see the 50% decline in the cycles. We've seen that, we think that profit is behind us, that would be point 1. The other thing I'd give you to flavor it a little bit is that while the long-term picture 2012 is uncertain, in the short-term, the way we're playing it, is to put a little extra capacity into the first quarter slot plan. And I would read that as the kind of signals that there could be some upside in the very short term that we're trying to respond to. I don't know whether to extrapolate that beyond the numbers I said for the total market but in the short term, we just want to be prepared if it continues to be a strong push, especially at the high-performance end, leading edge end of the product line. That's one of the reasons we have a wider revenue guidance in the quarter.

Operator

Your next question comes from C.J Muse.

Christopher J. Muse - Barclays Capital, Research Division

I guess, first question, given the disparity in margins with UltraFLEX and some of your AP customers, HDD and Eagle, curious how you see the trajectory for gross margins through 2012? Clearly utilization is very important and that's going to make it difficult to have true granularity there, but we'd really love to kind of get a view as to how should we think about through the year.

Gregory R. Beecher

Hi, C.J. This is Greg. On the model we put out a quarter or so ago, $250 million of revenue we had a 50% gross margin. I think throughout the year, we're going to be a point above/below, maybe 2 points above/below. I think you're going to find us on both sides of that as the year goes on, at the start of the year because of high storage test buying or on the other side of it. But when that buying comes down and if other buying picks up, whether it's analog or microcontroller, I think that moves it to the other side. So I think it's going to move up and down throughout the year and we've just started off a little bit on the other side of it right now.

Christopher J. Muse - Barclays Capital, Research Division

That's really helpful. And as my follow-up, in terms of LitePoint, clearly very well positioned in the move from dual-core to multi-core and fourth G, but curious in terms of building out from your more concentrated customer base to expanding that, particularly within China. I noticed you're building out your infrastructure there. We'd love to kind of get a feel for what kind of growth we could see above and beyond the existing customer base and when you think that would flow through the model.

Gregory R. Beecher

This is Greg again, C.J. I think some of that with the early signs we think can be showing up the latter part of this year. We hired a country manager who used to work at LitePoint before, incredibly capable guy, he's off and running. So we are building a team around him.

Michael A. Bradley

For Asia?

Gregory R. Beecher

Yes, for China particularly. So I do believe there will be signs of progress as the year unfolds. I think more of it will show up in 2013, but there should be some business in '12 that's directly a result of investing, the infrastructure, the people, the talent and our new leader in China.

Operator

Your next question comes from Stephen Chin.

Mahavir Sanghavi - UBS Investment Bank, Research Division

This is Mahavir Sanghavi for Stephen Chin. Wondering if you could share any color on the orders from foundries, some -- a large foundry customer's talked about integrating into the back-end testing as well. So wondering if you're seeing contributions from foundry customers already, or there's an upside from some foundry orders down the road.

Gregory R. Beecher

I don't think we break it out and I don't have it in front of me, but the profile of the customer mix, the one thing that has changed in the quarter-to-quarter picture has been this increase in the subcon end of it. I don't think there's a change of any note with regard to the mix, the components of foundry inside it.

Mahavir Sanghavi - UBS Investment Bank, Research Division

Great. And if I could ask about LTE opportunity. You talked about it being a 4x kind of opportunity compared to connectivity. I wonder if you could share with us when you see that opportunity going to materialize over the next 2 years.

Gregory R. Beecher

I think it's a 2-year, 2 to 3 year exercise of demonstrating the product, showing it has strong correlation. The cost, the simplicity, the throughput, that's easy to demonstrate that correlation takes some time. So we're out there now and making progress and these sales cycles, design cycles are long, so some have started. So I think there'll be some progress this year. And they'll be progress next year.

Mahavir Sanghavi - UBS Investment Bank, Research Division

I just wanted to confirm, in terms of how we understand it, you talked about the LitePoint addressable market was in the $1 million range? Does that also include LTEs or is LTE in addition to that?

Gregory R. Beecher

It includes LTE, but we also expect that market to grow over time, but LTE is in that market.

Operator

Your next question comes from Thomas Diffely.

Thomas Diffely - D.A. Davidson & Co., Research Division

Mike, you talked about some of the nice performance for the high-performance mobility space. I was curious, though, how do you view the health of some of your [indiscernible] segments, like the microcontroller and the analog. Either on the utilization basis or when do you expect that to recover?

Gregory R. Beecher

Tom, that's the quiet place. There's really been no movement. Automotive, microcontrollers, those are very, very -- they're not dead, but they're quite dormant. At this point, the capacity utilization for the market overall, testers is maybe a touch under 80%. So you've got an overall install base that's got some idle capacity and I think that would be centered on the microcontroller, automotive space. No projections at this point when that will pick up, so it's really hard to tell. But I think you correctly characterized it as a market that's got some cylinders that are hitting very hard and that are -- where capacity utilization is very high and the demand for extra capacity pushing. But there are these pockets, and the ones you pointed out are the softest ones.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And then you look at the memory space; with the slowdown in the DRAM market in general, how does that in your mind change the, kind of, the evolution towards the higher speeds that creates a bigger market for you going forward?

Gregory R. Beecher

Well, it's been slow. Frankly, the DRAM space-- we're very well positioned in FLASH, we're moving our Magnum product into the low speed DRAM test, so that's been some growth for us. That's one of the components of gaining share. And then we do have a pretty good position at the very high end of the DRAM test space. But really the CapEx in those spaces is very small. We continue to watch and hope that, that will move more quickly. This low-power DDR capacity need which we think starts in 2012 may be a place that can dislodge what's been a pretty dormant growth rate in that space.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Okay. And then just finally, if you see consolidation between the DRAM and the NAND market this year, does that materially impact your business in that space?

Gregory R. Beecher

I don't think so. Any consolidation always puts a pause into things as the inventory of testers gets rationalized. But I don't think it stops the work that we're doing on the design end because this is a place where we've got low share, therefore consolidation doesn't change too much the 80% or so of the market that we are not currently in.

Operator

Your next question comes from Vishal Shah.

Vishal Shah - Deutsche Bank AG, Research Division

Just wanted to understand your first quarter booking strength you mentioned. Is that sort of going to come from the subcon space? Or is that going to be more broad based?

Gregory R. Beecher

Are you asking going forward?

Vishal Shah - Deutsche Bank AG, Research Division

Yes. You mentioned -- yes.

Gregory R. Beecher

I don't have the forecast broken down here in front of me, but we'll still see a chunk of subcon. So I don't think we retreat back to the level we had in the third quarter. Whether we can -- whether it'll continue to the level of the $100 million flat level that we had in the fourth quarter is yet to be seen. But the subcons are the place where the growth in the Fabless mobility companies push, so that'll continue to be a decent purchase in the first quarter. But I honestly can't tell you whether it's going to go above we had in the fourth.

Vishal Shah - Deutsche Bank AG, Research Division

I guess I wanted to just also understand your expectation of revenues from the HDD segment. You mentioned the market size, but if you can maybe provide us some color on what you think you can do this year. I think you had mentioned something last year and just wondering if you have any idea of what that business is going to look like this year?

Gregory R. Beecher

Yes. Last year, if you remember or go back a year, we were projecting that we could operate in the $80 million to $120 million range. As we worked through the year, that was obviously -- was moved up for us because we were really very successful at breaking into some new customers and getting production buys in those customers and then expanding the applications with the Neptune was doing. So in fact, 80 plus% of our business last year came from new customers, new applications. As a result, we topped the $120 million mark and as we entered this year, we've said that our projection for the year is at the top end of last year's range. In other words, about $125 million would be what we expect to be able to deliver in the course of the year. Now we're only 26 days into the year, so we'll update you as we go along. The one thing I would say is that just because we've had this early demand, that hasn't changed our view of what the total market might be, but we certainly have a larger piece of that $125 million in house at this point in backlog. So we'll give you an update as we move through the year as to whether that moves up a bit.

Operator

Your next question comes from David Duley.

David Duley

Just had a couple of questions. Did you have any 10% customers during the quarter and who were they?

Gregory R. Beecher

No, we did not.

David Duley

Okay. And can we -- going forward, you had some pretty spectacular gross margins with LitePoint before you acquired them. Do you think those margins will continue at the current levels as you penetrate new customers?

Gregory R. Beecher

We think LitePoint's gross margins will be better than Teradyne's. Will they be as good as they were in the past? Not sure of that. It's possible, but certainly better than Teradyne's.

David Duley

Okay. And final thing from me is when you look at the segments of your business that were quite strong during the quarter, when you talk about mobility, does that generally referred to application processes or baseband processes that go into phones?

Gregory R. Beecher

Yes. And power management and RF.

David Duley

Okay, so you did also see the strength by the phones and the tablets that are shipping impact your analog and the other segments of your kind of mobile product line?

Gregory R. Beecher

Yes. Power Management, mobile processors, wireless, baseband, image sensors, those would be the top 3 sectors for us this quarter.

Operator

Your next question comes from Patrick Ho.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Just going back for a second on the high-end digital and some of the strength you saw with the UltraFLEX. Can you just comment a little bit on the concentration of customers? And following that, is that coming from existing customers that are expanding into new sockets, or are they new customers themselves?

Gregory R. Beecher

Well, the majority is existing customers. But it's new sockets of existing customers, so there's always a new component and certainly in this case, it would be new sockets of the last year that are driving this new business. Pat, you had a question as to what ...

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Was it kind of concentrated to a few key, I guess, key customers? Or was it kind of broader-based in terms of the demand strength that you saw last quarter that was, I guess, extending into the March quarter?

Gregory R. Beecher

It's pretty concentrated because the leaders in the space are pretty concentrated. So he said, the specifier list would be a small list. It fans out into the subcon. So it's a broader set of actual name customers with purchase orders, but it's driven by a concentrated market.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

That's helpful. And maybe just going back to Tom's question about the low-end IC market, what do you believe will be the catalyst that, I guess, spurs new tester demand for the microcontroller, analog market, given that we're still seeing pretty healthy demand in the smartphone and the tablet markets that do employ those type of devices as well?

Gregory R. Beecher

I think those are more general economic drivers rather than next big thing drivers. I think you just have to soak up the capacity as the IC growth continues, and that gradually happens during the course of a recovery. A wide range of usable electronics. So I think there's any one thing to look at there to spur a big uptick in the capacity utilization. But as it turns, it starts to -- and it starts to turn up, then you get the obvious -- the inventory buying.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great and final question for me in terms of the HDD test business segment and I want to make sure I was real clear on this, is you're suggesting that what you're seeing now is actually demand related and not replacement. How are you accounting for the potential replacement buys coming in through the year in terms of the current forecast that you just provided?

Gregory R. Beecher

Yes, the thing we wanted to be sure that people understood was that our business, in terms of replacement of Teradyne business, there's really been no replacement of Teradyne install base. Our systems, the customers were -- utilized our systems and those systems were kept, essentially kept above the flood level. So we don't have an insurance spike in our demand. Now, do we have -- was the install base of other testers affected? Obviously it was. So some of our demand, we think, it's a positioning where we're able to get some of that business. How much? I don't know exactly, but a piece of our business goes into -- is therefore flood related, but I wouldn't characterize it as directly Teradyne Neptune replacement business. It was none of that.

Operator

Your final question comes from Jagadish Iyer.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Two questions, big picture question, Mike. I was just wondering how should we think about the [indiscernible] SOC market 2 to 3 years from now? Is there -- are there some secular growth drivers which could take that up to probably the $3 billion level or we are probably going to be seeing hovering around the $2.4 billion, $2.5 billion? That's my first question and then I have a follow up.

Gregory R. Beecher

Yes. I think the past really gives you some idea of the projection for the future and that is, it's a low growth sector in total. But inside the market, there are segments that are clearly growing so as the market -- the path that -- the total market, we don't think, has more than low single-digit growth. But if you look at the sectors of wireless, mobile, even automotive, microcontrollers, pure logic and linear, that set of customers, if you take the 100% of the pie, we think that over the next few years, those sectors gain about 9 points of share of that pie, while the PC related sectors will be losing about half of that 9 points and then the shifting of 1 or 2 points in lots of other sectors. So we're not counting in our strategy for the overall market to grow. What we're counting on is the sectors that we're focused on to grow and that's been happening. And we are also counting on just this relentless socket design win strategy to be able to nip away and to take fractions of share points just through hard work. So that's fundamentally what we're looking relying on versus top -- total market growth.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

The second question. Now that you've had 100 days of LitePoint, what kind of synergies have you seen? And Greg, how should we think about the OpEx portion? You've done pretty well in the first half of '11 in terms of being under the model that you have prescribed, so how should we think about the OpEx as you progress through the year?

Gregory R. Beecher

Very good question, Iyer. The OpEx synergies will be insignificant. We're doing small things such as using they're going to use our HR system and we can help them hire people faster. Small things like that. We have some engineers speaking with their engineers sharing RF ideas, roadmaps. So there may be longer-term synergies that may help the customer. But in terms of cost synergies, I would say close to 0. It's more they avoid costs they would've incurred as a public company. They avoid those costs. And we're going to invest in LitePoint for growth, given their market share is 13% or so and they have disruptive products and there's these discontinuities which basically customers have to re-evaluate a whole new tooling decision. The past fleet cannot do the job. So we want to lean into LitePoint aggressively because there is so much, so much upside. So we look forward to speaking to you throughout the year in terms of how we're doing against that growth plan.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

So is it fair to then, say, model like 35% on the OpEx side going forward? Is that a right way to look at it?

Gregory R. Beecher

Yes. I think that's fair.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

And just one quick last follow-up Mike, maybe you can give us some color on that. Within the Systems Test, how should we think about the different components? I know you gave enough color on HDD side, but how about the other components on that? How do you think it's going to grow this year?

Michael A. Bradley

Let's see. The other components of the defense business and the Commercial Board Test business and in total, that's about $125 million of business. Those tend to be slower growth businesses. Commercial Board Test is not a growing market, but we've got a small and healthy business there. Defense, going forward, we think can grow to the tune of maybe 5% with a solid bottom line. So I don't think they'll be big engines of growth for us, but they'll be healthy players in the portfolio.

Andrew J. Blanchard

Operator that concludes today's call. Thank you for joining us. And we look forward to talking with you in the [indiscernible].

Operator

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

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