Earnings Call: Q3 2015

Oct 28, 2015

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tarotyme Third Quarter 2015 Earnings Thank you. I would now like to turn the conference over to Mr. Andrew Blanchard. Please go ahead, sir. Thank you, Kelly. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Jagiela and our Chief Financial Officer, Greg Beecher. Following our opening remarks, we'll provide details of our performance for the Q3 of 2015 and our outlook for the Q4 and provide some general market comments. The press release containing our Q3 results was issued last evening. We're providing slides on the Investor page of the website that may be helpful to you in following the discussion and those slides can be downloaded now or you can follow along live. In addition, replays of this call will be available via the same page about 24 hours after the call ends. The matters that we discuss today will include forward looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in our earnings release as well as our most recent SEC filings. Additionally, those forward looking statements are made as of today and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make reference to non GAAP financial measures. We've posted additional information concerning those non GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure, where available on the Investor page of our website. Also between now and our next earnings call, Teradyne will be participating in investor conferences hosted by UBS and Credit Suisse. Now let's get on with the rest of the agenda. First, Mark will comment on our recent results and the market conditions as we enter the Q4. Greg will then offer more details on our quarterly results along with our guidance for the Q4. We'll then answer your questions and this call is scheduled for 1 hour. Mark? Thanks, Andy and good morning everyone. Today, I'll provide a brief summary of the highlights of our 2015 results to date and then focus on how we're looking at 2016 and beyond for long term growth at Teradyne. Greg will then provide the details for the Q3, the full year and our Q4 guidance. In Teradyne's core semi test business, the 2015 market is playing out about as we expected at the beginning of the year as the annual SoC test market size is trending to about $2,100,000,000 right in the $1,900,000,000 to $2,200,000,000 range we forecasted. The good news is that this is up from the previous down cycle odd year of 2013 where the market size was 1,900,000,000 dollars validating that increasing device complexity and the reduction in the impact of parallel test is starting to have a positive effect on the market. We are pleased with our performance in this market as we moved our market share from about 40% to 50% over the past 3 years. A combination of tailoring our products for high growth submarkets and cultivating higher growth customers has been and will continue to be our playbook for success. The memory test market is also performing as expected at about a $500,000,000 annual run rate. The technology story around test remains the increasing bus interface speeds that create demand for new testers. Our Magnum 5 continues to capture share in testing these higher speed non volatile devices. This trend will continue into 2016 as even higher speed UFS and PCIe versions of NAND will start to grow in the market. For Teradyne, the good news is that our same Magnum-five platform will be testing these higher speed devices as the architecture was set up from the beginning to track these trends. Our storage test business has seen a nice rebound in 2015 with sales more than doubling over 2014 resulting in a solid return to profitability. Buying for enterprise hard disk drive tests combined with new applications testing solid state drives has led to the doubling. Also, as packaging of semiconductors moves to increasingly dense and complex system modules, we are finding applications in system level tests where long application specific test suites can be run efficiently in our highly parallel environmentally controlled tester. In industrial automation, Universal Robots had record sales of $16,000,000 Our recently introduced UR3 robot arm saw strong demand in North America and China in particular. Early adopters of the new tabletop robot in the U. S. Market are the automotive, electronics assembly and high precision metal fabrication industries. Common applications are screw driving, glue dispensing, assembly and product testing. In China, we are experiencing demand from medium to large companies within the electronics industry where the UR3 is typically used for pick and place tasks, machine loading and light assembly. A good example that highlights the benefits of UR's collaborative robots in electronics assembly operations is Wistron. This Taiwanese manufacturer has quickly deployed over 60 UR robots to improve productivity in its laptop assembly operations. A video outlining experience can be found in the case story section of the UR website. Turning to the current environment. Over the past few months, we've had many investor questions related to our overall business conditions, given the worries about slowing emergent market growth. So far, we've seen little impact to our business. While we are in no way immune to swings in macroeconomic growth, the longer term trends in semiconductors and automation remains solidly positive. Our 3rd quarter unfolded much like those in the past. Semi Test orders declined 47% sequentially about in the middle of the 5 year historical range of Q3 bookings decline. That normal seasonal order slowdown is reflected in our Q4 guidance. While it is too early to put a number on the SoC market size next year, we do expect historical SoC test buying patterns to continue and 2016 to be an up year for the industry. The drivers of test demand, unit growth and increasing complexity remain intact. While smartphone unit growth is slowing, forecasters still expect over 100 and 40,000,000 incremental units in 2016, similar to the 2015 increment. And those units will have faster, more complex processors, more communication links, sharper displays, more storage and every device will be optimized to extend battery life, all made possible by the advanced semiconductor devices that we test. As customers strive for higher performance in smaller sizes with lower power consumption, advanced packaging technologies are becoming another area of differentiation for our customers. From a test perspective, we are well aligned both technically and commercially with this trend. Advanced packaging puts a premium on known good dye testing as repair inside these packages is prohibitively expensive. More extensive testing at probe requires the precise accuracy and signal delivery technology built into our Ultraflex. Longer term, we expect to see growth in semiconductor applications beyond just advanced smartphones. Continued unit and complexity growth in automotive, industrial and consumer products should keep the market on a solid footing for the foreseeable future. Two trends worth mentioning are 60 gigahertz applications and the continued proliferation of image sensors. A variety of applications are opening up around the 60 gigahertz and above frequency space. 802.11ad, automotive radar and cellular picocells are all developing new silicon technology to exploit this space. This in turn drives a new wave of test equipment for semiconductor test and Light Point. At Light Point, we've already fielded our first 60 gigahertz tester and early adopters carrier frequency and information bandwidth, the downstream chips that modulate, demodulate and process the information digitally also need much higher complexity, speed and processing power to manage the higher bandwidth. This in turn requires faster memories and bus speeds to keep up with the movement of information. All of this reinforces the complexity trend that drives the need for more test capability. Automotive radar is another emerging application in the 75 to 80 gigahertz spectrum, where enhanced driver safety and assistance packages will increasingly incorporate multiple transmitters and receivers per vehicle to monitor the surrounding environment. Our Ultraflex tester is positioned directly in line with these trends. In the case of image sensors, the diversity and unit volume forecast is exciting. At Teradyne, we have about a 70% share of the world's image sensor test business on our J750 platform. The trend to higher resolution sensors means more test seconds. Improved sensor performance in low light conditions means the low noise environment of the J750 is increasingly valued. Additionally, infrared, time of flight and other new sensor technologies will show up in phones, automobiles and security applications, which will continue to fuel unit growth and drive tester demand. At LitePoint, our core connectivity and cellular test markets remain test markets remain compressed, resulting in 2015 revenue coming in about flat with 2014. Looking forward, we see new markets like 802.11ad protocol markets over the next 2 years. 4 months into our acquisition of Universal Robots, things look very promising, a strong $16,000,000 quarter, a strong new product launch of the UR3 and numerous research reports validating the rapid development of this market are all positive. We expect to continue strong growth at 50% or more per year as the range of applications for UR's collaborative robots continues to expand and the attach rate for those applications increases. We are committed to maintaining our leadership in this rapidly developing cobot market and we'll continue to invest in enabling the growth of universal robots. Finally, a capital allocation plan including a balanced mix of dividends, buybacks and M and A will continue to be our strategy. The past 2 years are evidence of this commitment with the initiation of our first dividend, our largest buyback in over 10 years and the promising acquisition of Universal Robots. In our January call, we plan to update you on our capital return plan for 2016. Now here's Greg to review the financial details. Greg? Thanks, Mark, and good morning, everyone. I'll start with the key accomplishments of 2015 as we near the finish line, then I'll outline how we're positioning ourselves for earnings growth in 2016 and thereafter and wrap up with the Q3 details and the 4th quarter outlook. This year, we're tracking to just over 1.6 $1,000,000,000 in revenue with a 20% operating profit rate and will generate about $300,000,000 of free cash flow. As Mark noted, we're pleased with this performance considering the annual pattern of smaller steps in the year stands out for 3 key reasons. First, we're on track to have back to back years at just over 1.6 $1,000,000,000 in sales versus the typical odd year pattern seen in 2011 'thirteen where sales declined about 200,000,000 dollars 2nd, we have expanded into the fast growing cobot space with the addition of the market leader, Universal Robots And third, we're on track to return $350,000,000 in capital to shareholders. I'll quickly comment on each of these three important milestones. First, on the strong back to back years. We described last quarter that the Ultraflex leased tester buyout added just over $100,000,000 of revenue in 2015. We've also seen continued strength in image sensor tests, up about threefold from last year with the high growth safety and security driving demand. Analog has also seen strength led by automotive applications where semi content is growing for safety and entertainment. And finally, we've commented on the start of the shift in the buy rate line with the slowing of parallel test efficiencies and the increase in device complexities. These factors have held up Semi Test in an odd year and when combined with the strength in storage tests and universal robots have kept us about $200,000,000 above the recent down market years of 20 11 'thirteen. But if you look more strategically at 2015 or the 2 year 2014, 2015 period, it actually reflects a very careful and targeted market segment and account focus. This is how for many years we've been able to invest far less OpEx than our largest semi test competitor, while at the same time gaining share and achieving top BLSI research customer satisfaction ratings. In short, we're well aligned to the higher growth segments and accounts in mobility, analog, microcontrollers and image sensor with our fast time to market software, high accuracy specs and high test system throughput. We have equally avoided some closely adjacent semi test segments and offerings which have declining or razor thin profit pools. This includes microprocessor testing, commodity DRAM testing and a slew of test cell offerings such as probe cards, handlers and simple DIBs. Now moving to the 2nd important 2015 milestone, the acquisition of Universal Robots. UR has expanded the definition of a cobot beyond just a safe force limited robot that is one that doesn't need protective caging as it will stop when it feels any pressure in a handful of milliseconds to also being a robot that is smart and easy to train and redeploy. UR's unique programming model shatters the past model and enables UR cobots to be deployed by the very smallest of manufacturers. It is the ultimate equalizer for small and medium sized enterprises as you don't need skilled engineering resources on staff. This simple to train capability is one of the key reasons UR is a clear leader with SMEs. These customers are able to get a very fast payback, often about 6 months, and they also know they can easily redeploy their UR cobot when their demand invariably changes. Universal Robots is on track to achieve about $60,000,000 in sales in calendar 2015 and we expect 50% type growth next year. At this early stage, cobots have barely penetrated the available market and some third parties have pegged the TAM at over $3,000,000,000 by 2020. UR's product lead has attracted many of the top distributors and integrators and there is a growing army of 3rd parties developing solutions in many different verticals on Universal's platform, which should further extend our formidable market lead. So it won't solely be about having the best product, it will also be about having a developed and robust ecosystem, which will be increasingly hard for followers to replicate on their platform. Now shifting to the 3rd important milestone, we're on track to return $350,000,000 in capital this year. This sizable level of capital return signals the strong confidence we have in our future earnings power. We also stepped up the pace of buybacks the Q3 given the financial market weakness. With our steady performance of solid free cash flow averaging about $250,000,000 a year since 2011, we've had 2 fundamental strategic choices at the Extreme to immediately return all of our profits to shareholders or to use these profits to grow the top line through M and A. We've elected neither extreme, rather we use a very balanced approach where at any one time period we may favor highly selective M and A or higher levels of capital return simply depending on what is the best financial return at the time considering both our stock price and the small number of attractive opportunities in our M and A funnel. So now shifting to 2016 and beyond, as Mark described, we see favorable trends. These include rising complexity, the slowing of parallel tests and the need for tighter accuracy and higher quality testing. I'll take a quick moment to comment on the tighter performance specs required for some of the new packaging used for mobile products. In advanced packaging for mobility markets, high performance devices are being placed much closer than in the past and they have very stringent power requirements, which require more accurate tester instruments as found in the Ultraflex. You may recall the Ultraflex hit the market with the most efficient parallel test and then it became recognized for superior programming and debug tools critical for the vertical mobility ramps and now it's earning its stripes yet again with its performance for testing advanced packages. We're pipelining some inventory in the Q4 for 2016 demand to ensure we maintain attractive lead times. We did the same back in 2013, which positioned us well for the 2014 ramp. Shifting to the 3rd quarter results, we closed the quarter with total cash and marketable securities of $1,077,000,000 up $48,000,000 from the prior quarter after returning $111,000,000 through buybacks and dividends. 3rd quarter free cash flow of $159,000,000 was due strong profits and the sale of previously leased systems. On the buyback front, we've repurchased 13,400,000 shares totaling 254,000,000 dollars at an average price of $19.02 through yesterday. We stepped that buying up in the Q3 to take advantage of market volatility. Against our $500,000,000 authorization, we have a remaining balance of $246,000,000 As a quick reminder, we plan on buying back $300,000,000 in 2015, which when combined with our quarterly dividend totaling about $50,000,000 for the year, will lower our U. S. Cash and marketable securities to a level much closer to a minimum U. S. Cash operating balance of $400,000,000 As we've done in the past, we'll update you in January on our 2016 capital return plan. Now moving to the details of the Q3. Semi Test bookings were $211,000,000 driven principally by the seasonal patterns and revenue was $326,000,000 Recall that our 3rd quarter company bookings typically fall 30% to over 60% from the 2nd quarter levels. This drop off is due to the timing of annual mobility launches and the overall high consumer consumption connected with back to school and end of the year holiday buying. SoC test orders were $191,000,000 and memory test orders were $20,000,000 Semi test service orders were $34,000,000 of the total. Shifting to wireless test, we booked $40,000,000 and recorded $55,000,000 sales for the 3rd quarter. LitePoint is on track to be about flat with last year with solid margins above our 15% industry target and has funded a series of new products that should benefit us in the years ahead. The wildcard for LitePoint in the foreseeable future remains our large customers' buying patterns, which have declined considerably from 2012 to share gains with our production optimized solutions. Now moving to System Test. Orders were $47,000,000 in the quarter and shipments were 69,000,000 A substantial portion of those orders are annual service contracts and products with long lead times, which will convert to revenue over the next year. In storage tests, the 3.5 inches cloud demand should bring our annual sales to about $85,000,000 versus only about $40,000,000 last year. As drive capacity continues to grow, so does test time and we're well positioned to capitalize on this demand with our new Saturn tester, which has up to 13,000 asynchronous slots. In industrial automation, we have bookings and sales of $16,000,000 with strong demand across the product line. At the company level, our sales were $466,000,000 non GAAP gross margin was 56%, down from last quarter due to mix shift including increased storage test shipments. The non GAAP operating profit rate was 23% and non GAAP EPS was $0.40 We had 1 10% customer in the quarter. You'll see our non GAAP operating expenses of $152,000,000 were down about $1,000,000 compared to the 2nd quarter due to lower variable compensation expense. Shifting to our outlook for the Q4, sales are expected to be between $295,000,000 320 $1,000,000 and the non GAAP EPS range is $0.07 to $0.12 on a 208,000,000 diluted shares. Q4 guidance excludes the amortization of acquired intangibles and the related tax impact. The operating profit rate at the midpoint of our 4th quarter guidance is about 8%. Our 2015 tax rate remains at 23%. If the R and D tax credit is reinstated for 2015, that rate will drop to 21%. So in summary, 2015 will go down as our first back to back year with sales just over $1,600,000,000 versus the typical $200,000,000 fall off, we've added Universal Robots, the clear cobot market leader to the Teradyne fold, and we're returning significant capital, a strong signal of our confidence in our future earnings power ahead. And 2016 is an even year where mobility complexity is our friend once again as it along with device unit growth drives more incremental tester demand. With that, I'll turn the call back to Andy. Thanks, Greg. Kelly, we'd now like to take some questions. And a follow-up. Your first question will come from the line of Atif Malik with Citigroup. Hi, thanks for taking my question. Congratulations on a good quarter and decent guide. Question on integrated fan out packaging, a new type of packaging for mobile devices next year. Can you talk about the impact on the test equipment demand next year? And maybe you can compare the test times versus package on package type testing? Sure. I think there's general trends and there's specific applications. But overall, these packages require, as I mentioned in my remarks, much longer test times at probe in order to guarantee high yields coming out of a probe situation before they're mounted in that on that substrate. So what we expect to see is that probe test times will increase. Then for the integrated package itself, that vary depending on what's integrated into the package. But in general, if you look across probe and final insertion, the number of test seconds applied to the total part when it ships to, let's say, a phone manufacturer will be proportionally up as compared to the prior generation. So it may be up 10% or so. That's how we've modeled it at the moment and as it plays out next year, we'll get a better read on it. Okay. And then the second question on system test sales. I mean, your system test sales were up 50% in the reported quarter. How should we think about the long term revenue run rate? And if you can also comment on WDC Sandisk merger, I assume Sandisk is a big customer of yours on SSD side and WBC on the HDD side. So what impact the merger could have on the sales? So overall system test was strong this year because of storage test. And as we look forward, storage test is positioned reasonably well now with enterprise drive and SSD applications. The wildcard for us is what I described as the system level test, applications, which are less storage related and more long cycle time burn in applications. So, on a baseline, I'd say we'd look at, in applications. So at a baseline, I'd say we'd look at next year in that segment roughly flat with this year with the upside that the system level test could provide a kicker. The combination, it's really too early to tell if the combination between Western Digital and SanDisk will matter in any significant way to us. But that's how we're looking at the overall business. Thanks. Your next question will come from the line of Mehdi Hosseini with FIG. Yes. Thank you. Thanks for taking my question. I'm looking at the market and if I just were to go and look at your market share, it seems like the turning the lease into an outright purchase has actually been instrumental in helping you to maintain the market share, especially when I look at the market share trend over the past 4 years. As the lease program ends or turning the lease into an out of purchase end, how should we think about your ability to maintain and exceed market share? And market share, I'm referring to memory and SoC combined? And I have a follow-up. Mehdi, this is Greg. If you look at market share over a multiyear period, you can see that we've been steadily gaining quite considerably. And your point that the $100,000,000 or so this year really probably belonged last year. So our last year's SoC market share is actually higher last year, a little bit lower this year. But if you put this all on a trend line, you'd see the trend line is very clear that we consistently are gaining market share and it's from a couple of reasons. One is we're aligned to faster growing segments, the healthier segments that have growth and we've optimized our product solution set around the requirements that those growing segments have. And that's what's gotten us this steady market share trajectory growth. So can you increase the share from here assuming that there won't be any impact from the lease program? Yes. Or should we assume that the share remains unchanged? No, I think for a long time now, in fact, almost 7 or 8 years, we've had a model of about a point or so of market share gain per year in SOC. Now it never happens linearly and the market noise amplifies and shrinks that in any given year, but we still see the ability to move about a point of real market share a year, up to at least into that noise and commentary out there. But so noise and commentary out there. But so far, and I think inflow or the advanced packaging has talked about has been discussed for the past 15 years and I still see a limited application. Do we have any signs out there that the key fruit company has decided to adopt this technology? Because if they don't adopt it, I see its application limited. And especially with test, because you're going to be involved at a wafer level. Is it and so that in that context, the question is, are you seeing any signs that the system company is actually going to step up and adopt this? And if not, how do you see the existing infrastructure that has been added over the past year is going to be utilized over the next 1 or 2 years until the system company adopts this technology? 2 things. I'm not I can't comment at all on what any particular customer's plans might be. But in general, I'll say 2 things. 1st, Teradyne as it relates to test is reasonably indifferent in terms of the impact to our business whether the technology is adopted or not. It shifts more test seconds to probe, as I described earlier, but net net, it's not a big swing factor for us. We think our product, the Ultraflex, has some advantages in advanced packaging test, but not a big swing? And second, do I think even though it's been around for 10 years, are we at an inflection point or an adoption point in general in the industry? I think the answer to that is probably yes. The economics are improving quite dramatically it seems and the miniaturization of benefits are also compelling. So I would expect if we look over 2 to 3 years that you'll see a much faster adoption of advanced packaging than we've seen in the past 3 or 4. Got it. Thank you. Your next question will come from the line of Harnan Ahmad with Credit Suisse. Thanks for taking my question. And just a quick question on the odd year even year cyclicality. For last 10 years, obviously, there's been a trend where your revenues grow every even year and odd year, they decline. However, one thing that's been also going on for last 10 and even much longer has been that we have been on a 2 year cadence on Moore's Law, which seems to be taking a break this year and we are basically on 20 nanometers16 nanometer node instead of 2 years to 3 years and 10 nanometer most likely is not going to be introduced next year into most products. So I wanted to ask you if you think that could have an impact in any way for next year? And if the Moore's Law in any way had anything to do with the cyclicality of audio revenue that you saw in your business? So I think it's a reasonable point that usually when a new process node is introduced, there is a little bit extra buying of capacity for yield issues surrounding that new node. So next year, the absence of any dramatic step in lithography might dampen somewhat the peaking. But what happens when it peaks in the past is the following year, it gets amplified in terms of the absorption of that extra capacity as yields improve. So if it does dampen slightly the peak next year, it will serve to raise the following years buying. So long term trend the node issue doesn't inflate the long term market. It just amplifies the peaks and valleys. Got it. Thank you. And then one question on your storage business. Could you just give some clarity on into how much of your business is coming from hard drives versus SSDs? And also in terms of the SSD test market, how is your market share in that particular market and how big is the overall market? Because we are seeing pretty healthy growth in SSD and I wanted to understand if that could be a big driver for you going forward as you introduce new products and can increase market share in that area? Right. Okay, I'll take that one. Last year, a good part of our or most of our demand was SSD. This year, it's more magnetic or hard drive demand with some SSD demand. First on the hard drive side, as you probably know, we're the only freestanding merchant supplier. So, we have a very strong position with the 3 buyers that are out there of our tooling. The only other competitor is captive now in Seagate. In terms of SSD, we have multiple applications at a strategic account and we're speaking to other customers to see if their test times and their volumes make sense to use our solution. It's early in that process. We do believe that market is going to grow for us, but it needs some time to play out. And as again units and volumes grow and test times get longer, I think that moves them towards our solution. Thank you. That's all I have. Your next question will come from the line of Jagadish Iyer with Redstone. Hi. Thanks for taking my question. Two questions, Greg, Mark. First, on your on looking at how should we think about LitePoint look going forward in 2016 in the backdrop of your comments saying that slowing smartphone growth next year? And what are some things that you can do to buck the trend for LitePoint? Then I have a follow-up. Okay. I'll take the first part of that. LitePoint, I'll start with, is very healthy on the bottom line, profit rate wise and has been able to gain market share year after year as they have a very production optimized solution. The competitors tend to come at it from a different DNA, whether it's an R and D DNA or a other type solution and it's not optimized for the problem at hand. So I expect LifePoint will continue to do quite well in production testing, albeit that market's been compressed. So what has LifePoint done to try to improve their lot in life? A year ago, they got designed into a bunch of the Asian up and coming cellular players. Now unfortunately, a number of them have not done terribly well this year. So we have initial design ins, but there hasn't been much activity for anybody over there. So we'll continue to monitor that situation and hopefully improve our position when buying does eventually return. But we've also have introduced some new products. Some we'll talk to you more about in the future, but these new products will take some time to latch, and they will open up new markets and we expect the old LitePoint, high differentiation, production optimized DNA will show up in these new products that you'll hear more about as we get into next year. And so I do think, Justin, color that a little bit more. The $200,000,000 of new TAM we're talking about is really how we expect LitePoint to return to growth over the next couple of years. The traditional cellular and connectivity space, we expect the market size there will maintain its level. It's not expected to grow and it's expected to remain very competitive. The typical progression in Wi Fi and connectivity of old where you went from G to N to AC. This is a very different application and a different test insertion in mobile devices and other devices that will emerge. So that's one. And protocol testing is another area where LitePoint has not participated in and we're now moving products into that set of applications. So it's really TAM expansion with new products is the strategy at LitePoint. Okay. Fair enough. Then a big picture questions. Your shares have been somewhat range bound for a while. And given your cash position and what choices you might have in terms of potentially raising additional capital, what is management strategy in terms of crossing over the hurdle of your stock price? Would love to hear your thoughts, including your views on accelerated buyback. Well, this year as you know, we're returning significant capital, dollars 350,000,000 about that amount and we're lowering our available U. S. Cash to about $400,000,000 a little bit above that and that's what we want to maintain as a buffer for some possible severe downturn, which we don't see, but every 10 years you can have an event. In terms of how we get the shares out of this range bound, we have plans to grow each of our businesses quite considerably that could get us in the midterm to a $2 EPS stock price. So the organic plan is job 1 and that includes Universal Robots is going to be a big contributor. Semi Test is going to continue what they've been doing and that staying on that trend line of share gain with some of the improvements in the market based upon parallel test slowing down and intensity increasing, I think we'll give some help on the market size. And then we'll also return presumably over time we'll return a bit more capital and could take some shares out. So, we have a plan that we're looking to formalize in the Q4 that will tighten up how we think we can get to $2 4 years out and that very well could include another acquisition. It doesn't have to, but that certainly could be a part of the plan as well. Excellent. Thanks so much. Your next question will come from the line of Stephen Chen with UBS. Hi, thanks for taking the question. So you mentioned in the press release that you would be making some selective inventory investments in Q4. So just wanted to get some color on what that relates to, what the magnitude of the inventory build might be and then what gives you confidence that 2016 will see this big pickup in demand? The rough numbers are at the end of Q4, if you looked at our balance sheet carefully, you'd probably see $15,000,000 more of inventory. Some of it will be in inventory, some will be in a prepaid account depending on how the accounting works with our contract manufacturer. So about $50,000,000 of more inventory in the Q4. And we have high confidence with this demand based upon extensive very close discussions all along the way. We've been in a similar situation a couple of years ago too in the last odd year going into an even year. So we've been down this path before and we feel good about it and this is also inventory that can be used across a broad set of customers as well. So, this whole even odd year has played out for many years because there's a bigger step in some of these new phones that come out in the even year and that's much more test time, greater complexity. So, we see that continuing and that drives ultimate demand. Got it. And then, we've heard some commentary that Q4 might be seasonally weak for some of the OSAT customers. So, just curious to hear whether you're seeing that weakness and that speaks into your Q4 guidance and sort of whether you're expecting a pickup after Q4 into early 2016? We think we've factored everything in that's notable into the Q4 guidance. Some of the segments that remain strong are image sensor and mobility. So they're holding up and we think next year should start off healthy. So we're feeling good about the Q1 even though it's some time away. Yes, I think that if you look at there's a broad spectrum of utilization depending on the segments. So some segments are incredibly tight and capacity is being added and pulled on quite rapidly here in the Q4 and others are black as happens throughout the season. So all in all, to us, it doesn't seem to be that different from prior Q4s that we've seen. Great. Thank you. Your next question will come from the line of C. J. Muse with Evercore. Good morning. Thank you for taking my question. I guess first quick question is the $2,100,000,000 for SOC, does that include the $100,000,000 in leases? Yes, it does. Okay, great. And then given your confidence for next year, I think one of the concerns that the market has is that the A10 chip is not shrinking and therefore there will be less demand there. At the same time though you've talked about lower benefit of parallelism, you talked about a 10% uptick in terms of packaging and test times there. So would love if you could maybe dig a little bit deeper holistically for the whole year. What's driving the confidence and what's mitigating the lack of a shrink in the mobility side? And then also, are you expecting within that image sensors baseband RF, PMIC, etcetera, growing as well? Or are there certain pockets that's giving you the confidence that overall mobility and overall SoC can grow year on year? Well, again, without being specific around any particular part or customer, I think that what we see at this point in the year are early samples from our customers where test program developments occurring for parts that should ramp next year. And we get a little bit of visibility into the test times and the sort of intensity of those parts that becomes much clearer as we get into January. But as we look at it, when we look at those early signs, we see that the trends we've talked about are continuing. And therefore, we would expect to get an even year type impact from a broad set of devices, not just any one particular part, but even on the cellular side with RF transceivers and such, you see the proliferation of more frequency bands in phones. You see the adoption of more antennas in MIMO. All of those things contribute to incremental test intensity. That's very helpful. And if I could just follow-up, I guess, on the non mobility parts of SoC. I believe this year, linear was a great year, the catalog business, auto down. Curious, standing here today, what visibility you have there into next year? Yes, that's a harder one to read. Linear started out very strong. It's cooled off a bit here. It's very episodic is the history there and it doesn't follow a good pattern. So that piece of the markets I think standing here today is harder to prognosticate for next year. On automotive, I think what automotive is going to show that it's historically shown is a very steady, slow growth and the safety related enhancements to cars that will roll out over the next 3 to 5 years, whether it's autonomous driving or driver assistance, will really, I think, impact the test side of life a couple of years down the road. When we're in 2017, 2018, I think we'll really see the automotive market take off for test. Right now, the devices are somewhat in early development. So I'd expect automotive next year to be about the same and a kicker coming in 2017 2018. Great, very helpful. Thank you. Your next question will come from the line of Timothy Arcuri with Cowen and Company. Thanks. I had two questions. I guess the first question is on the 4th quarter. Usually, what you revenue in Q4 is somewhere between what you book in Q3 and what you book in Q4. And so for you to revenue midpoint of 308 roughly, it would imply that bookings have to be down. And that seems a little odd given that systems should be up because it's typically up seasonally in the Q4. So that would say that like semi test orders ought to be down. And yes, things are bad for sure. We know that. But semi test orders in the Q4 are almost never down. So I'm just sort of wondering if you can bridge the gap between your revenue guidance and maybe what you expect from a bookings perspective? Tim, the Q4 guidance is at this moment our best view of what will happen and as you know we tend to set the guidance somewhat cautiously given our history of lease meeting or beating. But that's what we see now and there are some customers that are going to likely get testers in early Q1, not late Q4 given lead times that we have now. Some of the orders seem to be coming in late this quarter, but we expect it to be a good quarter. So it's just how the slot plan all shakes out and maybe there's a tad of conservatism added to it. Okay. So I guess, Greg, just on that point. So that would argue, I mean, it would sort of seem to say that Q1 maybe sets up a little better than a typical Q1. I mean, Q1 is typically up, but it would seem like it might be up a little more this year than it typically is? Could be, Tim. Okay. Thanks. And then just last sort of big picture question. Have you guys gone through and of the $1,100,000,000 that you're getting from SSC, have you tried to parse this by end market and sort of focus in on how much of that's coming from the industrial and the automotive markets? We have, although we don't spend a lot of time trying to do that because some of it is hard to bucket if it's a wire if it's a LAN device, is it going into a PC application or some other application. But in general, as we look at our business, roughly half of our business and slightly more than half is related to mobility in some way, shape or form in semi test in the SoC side. So figure somewhere around 55%, 60% of our revenue comes from mobility related devices. But that includes image sensors are in there, power management is in there, baseband, apps processors. There's some linear in there, touchscreen controllers, microcontrollers. There's a lot of things in there, that roll up to that number. Automotive and linear are roughly about the same, it may be somewhere between 15% to 20% each. And we tend to be pretty low than in PCs. But those are kind of the 4 buckets we try to drop things in and watch. Awesome, Mark. Thanks so much. Next question will come from the line of Tom Diffely with Davidson. Yes, good morning. First, I want to dive into the comments you make about the decrease in efficiencies of parallel tests going forward. How does those trends vary between your memory and logic side of the business? I think that logic is more where we see the inflection points where the efficiency is starting to diminish. The memory side is really a harder area to characterize in any general way because, for example, as NAND flash devices go from Toggle NAND to the serial interfaces, the connection to the device during test will become perhaps lower pin count. Or pumping more data through a narrower pipe. So the tester resources diminish per device. So let's say CapEx per device may go down a bit. The capability per device goes up. But so I think the way you net it all out is in memory, what memory has been able to do is grow bit growth quite dramatically and have a market that's flat at $500,000,000 through a variety of test optimization techniques. And I expect that will continue. I do not expect the memory market will show some form of growth, whereas on the logic side, we do see these inflection points happening. Okay. Do you see a wall for some of these tricks a few years down the road? Or is it a situation where as far as you can see, it looks like efficiencies are going to continue to work in? Well, that's really hard to we're not planning on a wall. There's always for quite some time people have thought there might be a wall, but I think the memory devices the one thing that's somewhat encouraging in memory that I will put out there as a carrot, but I'm not then going to change my flat market is that the diversity of the types of DRAMs and the diversity of the types of nonvolatile memories is growing. And as that one of the things that has helped get efficiency in test is that, design for test optimization was possible because the proliferation of device types was relatively few and that design money and silicon area could be amortized over a lot of devices. As memories get a little more initially in custom, perhaps that will be less affordable and it may be more economical to do test versus do design. Okay. That's helpful. And then looking at your bookings, obviously the Asian bookings were down, normal seasonality there, but what drove the increase in Japan? As I mentioned, as we talked about, Japan has been very good market for us. 1 of the segments there that's strong is image sensors. So image sensors is a large part of that story. Great. Okay. Thank you. Your next question will come from the line of David Duley with Steelhead. Yes. Thanks for taking my question. Just a couple of clarifications. When you talk about the SoC market and the impact of this odd even cadence from the big apps processor customer. What generally is the delta in that segment of the market on an annual basis between the even in the odd years? Is it a $200,000,000 increase or less or could you give us some sort of idea what the swing factor here is? You could actually look at our financials and you could see we go from 1.4 to 1.6. We go back and forth. So it can be roughly in that neighborhood. Now this year, we didn't fall back for the reasons we outlined before, but if this was the historic pattern, we would have fallen back close to $200,000,000 You can also see in those even years the margin percent goes down, but the dollars go up. So that's the pattern we were largely referring to. And so if we would naturally apply that pattern to this upcoming year, so we might naturally think that the SoC test business for you would be up at least $200,000,000 It certainly could be up. You got to keep in mind, there was $100,000,000 of leased testers that hit this year that really were put in place last year. And that was more of a financing settlement this year, but the capacity was put in place last year. So you might want to just think about that as well. Okay. And then, I think when you bought the universal robot business, you talked about 50% kind of annual growth and that was without any contribute that was what was already in place with the backlog and the customers that the company already had. I think it was your plan to add some larger electronics customers. Could you talk about what you're seeing thus far on that initiative? And what kind of growth rate that science Distribution could add to that initial growth rate? Well, first of all, that initial growth rate wasn't predicated on any backlog. It's a high turns business and sustaining 50% over multiple years is really presumes penetration in a wide variety of markets. Now in electronics test area, one of the things we described there is that the sales cycle for our customers for these large deployments tends to be longer than the typical universal robot sales cycle OEMs, it could be 6 to 9 months, because OEMs, it could be 6 to 9 months because they're just looking at different scales and evaluated at different levels. So we're in the middle of several evaluations at our customers. Those started in the Q3 and we would expect to see results coming there sometime early next year. And at the same time, universal robots, as I mentioned the example of Wistron. Wistron is a large, ODM. They manufacture a variety of things, laptops being 1, laptop computers. They're in electronics assembly. They've put 60 robots in doing a variety of tasks around that piece. So universal robots on their own has been penetrating electronics assembly. And what we would expect to see is around test, some incremental business in early next year. So say it another way is, the growth rate should accelerate sometime mid next year based on you bringing more customers to the table? It very well may, but remember they'll be running next year we would expect them to be running at a 50% rate close to 90,000,000 dollars And so what we would add on to that is speculative next year, but it's probably in the 1st year in the order of a handful of $5,000,000 to $10,000,000 kind of number. Okay. Thank you. And operator, we have time for just one more question, please. You have a question from the line of Krish Sankar with BOA. Yes. Hi. Thanks for squeezing me in. Just a couple of quick questions. Not to beat a dead house, on this mobile SoC increase next year. Now I do remember a couple of years ago when the demand went up and you guys are fully sold out, lost some share to Adventus. I understand this way you're building up inventory. Are you getting any indications from your customers to do it? Or are you just being prudent in anticipation of a sharp ramp for next year? Yes, we don't want to talk about a specific customer, but all the signals we can read would suggest we should be well positioned. So we feel very good about this mobility complexity jump. We think it will happen. Every way we look at it, it looks very good to us, but I can't get any more specific than that. Got it. And then just as a follow-up, with universal robots, looks like you guys have raised the profile for cobots in general. And I'm wondering, have you seen any increase in competition, especially from the Japanese robotic makers in the last few months? Or do you think it's still early that there's enough room for everybody to have their lunch and not try to grab the other ones? Yes, I would say we've seen no impact or slowdown or anything related to what is and will continue to be a lot of players trying to participate in the market. But the market is growing rapidly. We're still a leading supplier, intend to stay there. Nothing from the competitors at this point has resulted in any impact we see. Got it. Okay. Thank you. Great. And thank you everyone for joining us this morning. And those in the queue, I'll get back to you immediately after this call. This concludes the call and we look forward to talking