Traci Tsuchiguchi:

Thank you. Good morning, everyone and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for the second quarter of 2024 and our outlook for the third quarter of 2024. The press release containing our second quarter results was issued last evening. We are providing slides as well as the copy of this earnings script on the Investor page of the Teradyne website that may be helpful in following the discussion. Replays of this call will be available via the same page after the call ends. The matters 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 caution listeners not to place undue reliance on any forward-looking statements included in this presentation. We encourage you to review the Safe Harbor statement contained in slides accompanying this presentation as well as the risk factors described in our annual report on form 10-K filed with the SEC. Additionally, these forward-looking statements are made only as of today. During today's call, we will refer 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 measures where available on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology and investor-focused investor conferences, hosted by KeyBanc, Evercore, Jefferies, Citigroup and Goldman Sachs. Following Greg and Sanjay's comments this morning, we'll open up the call for questions. This call is scheduled for one hour. Greg?

MiR1200 Pallet Jack:

Our highest priority in our Robotics go-to-market transformation is the development of an OEM solutions channel for UR. We have seen that customers purchasing cobot-based solutions from these partners get into production more quickly and have fewer problems than customers that build their own solutions or rely upon an integration partner. There are two aspects to the OEM Channel strategy. The first is signing up new OEM solution partners. In the first half of 2024, we have increased the total number of OEM solutions partners by 8%. Second, we work with these partners to get them to scale, which we define as having an annual revenue run rate above $1 million. Midway through the year we have nearly as many OEM solution partners that have reached that revenue level as we had in all of 2023. One of our largest revenue OEM partners in the first half of 2024 uses our cobots in an AI based logistics solution. Overall, the OEM solutions channel has shown over 70% growth from the first half of 2023 to the first half of 2024. In the second quarter, the OEM channel represented over 30% of UR's revenue. Finally, because of the criticality of the processes that our Robotics are being used to automate, we saw an opportunity to build a strong service business. In the first half of 2024 we launched managed service offerings at UR and MiR and are beginning to see customer uptake. On balance, the positive effect of these growth vectors and the challenging demand environment, we are expecting growth towards the low end of this year's target 10% to 20% range. Last quarter, I shared the idea that AI would be a transformational, secular growth driver across Teradyne's businesses. In the first half of 2024, we saw the considerable AI driven growth in memory, networking and ramps of vertically integrated producers. But we think that this is just the beginning. We believe that a larger opportunity lies ahead as inference applications and edge AI begins to permeate the mobile and industrial end markets, markets where Teradyne is traditionally strong. We are also already seeing the impact of AI on our Robotics business, with AI powered OEM solutions for UR and a strong backlog for our AI enabled pallet jack. We believe that we are well positioned as a leading platform for the development of AI based solutions for manufacturing and logistics. We are seeing AI driven growth now and we expect AI to be an overarching growth driver for years to come in test and in Robotics. With that, I'll turn the call over to Sanjay. Sanjay?

Operator:

Thank you, sir. [Operator Instructions] Our first question comes from C.J. Muse of Cantor Fitzgerald. Please go ahead.

Greg Smith:

Hey CJ, this is Greg. Basically, we are pretty bullish on 2025. The Semi Test market in 2024, we're seeing strength in computing and we're also seeing fair amount of upgrade business where people are converting testers that were underutilized in mobile to use for compute and VIP applications, so that's soaking up some of the excess in that market. We expect that to really sort of accelerate business. As mobile returns in 2025, it won't have that capacity to grow into. On HBM, I think we continue to expect that we are going to make progress in two directions on HBM. One is that our share has primarily been in the pre-stack wafer test of HBM, and we believe that we're going to be gaining share in performance tests of the HBM memory after it's been stacked. And so we're hoping that we can expand both our market share within the account where we are participating in HBM and then also break into additional accounts for HBM and that would be more of a 2025 thing. So I think overall, our outlook for 2025 and into 2026 is in line with what we talked about in January.

Greg Smith:

Sure. So we, I think the way that we're looking at VIP is right now, because that growth has been happening at a time when there is a fair amount of capacity in OSATs to soak up. We're actually trying to keep track of the number of testers that are being used for these VIP customers. And right now it's hundreds of testers. There are currently hundreds of testers that are being used for VIP and we expect that to end. We have, I guess we should probably call it multiple VIP customers that are loading significant numbers of testers. We have additional VIPs where they've made plan of record decisions to put their parts on our testers and those parts are going to be released later in this year and into 2025. So we think that we'll probably exit this year with twice as many testers being used for these vertically integrated producers than we have right now.

Operator:

Our next question comes from Tim Arcuri of UBS. Please go ahead.

Sanjay Mehta:

Yes. If I go back to 2023, it was about $100 million business. And $20 million to $25 million is roughly the number. And this quarter, with the sale occurring kind of end of the second month on May 27, it was $16 million. So I think that estimate you have is reasonable. And as I noted my prepared remarks, we expect growth year-over-year to be in the low single digits, but without DIS, you'd expect it, or that's a shortfall of roughly 3 points. So you would increase that by 3 points if there was no DIS in 2023 and 2024 from a growth perspective.

Greg Smith:

Sure, yes. So we tend to think of the process nodes not as, from our Business perspective, not as a driver, but as an enabler. So the 2 nanometer or Gate-All-Around, they're going to be enablers for higher device complexity. But the thing that really drives our Business is whether the end market is pulling for that complexity. And we're really optimistic that between cloud AI and especially for edge AI like in mobile, that that is going to be a major driver for companies to get into N2 even at a faster rate than they got into N3. So we think that it's a good thing that the capacity is being put in place for N2 because we think that it's going to be needed. In addition, the deployment of edge AI, it's really going to increase complexity of the application processors. It's also going to be pulling harder on the mobile part of the memory market. So we think that there's sort of a virtuous circle in terms of the capacity being put in place, the end market demand that's going to use that capacity, and then the pull effect on other parts of the market enabled by the features that are going into these products. So we think basically this is going to be a good demand driver really through the rest of this midterm, 2025, 2026, 2027.

Operator:

The next question comes from Mehdi Hosseini of SIG. Please go ahead.

Greg Smith:

So that's a good question, Mehdi, because there's a little bit of subtlety to this. So you're right that one of the reasons that our mobile revenue and our compute revenue are going to be comparable in 2024 is because the mobile market is weak. But the other reason is, and I talked about this in my prepared remarks, that our compute revenue for the first half is bigger than all of our compute revenue for 2023 and we see good strength for compute in the second half of this year as well. So, like, things are going great in compute. Next year, we think that compute is going to remain strong, but the TAM sizes for compute are likely to be in the same range, maybe a little bit stronger than where they were. The mobile market really should come back pretty strongly, and so our mobile revenue will come back with that. So we anticipate that we'll have good revenue growth in compute, but it's very possible that mobile will outweigh it next year because of the strength of that recovery.

Sanjay Mehta:

Sure. So, in 2024, we started the year with thinking that we'd be just a little bit above breakeven, low single digits. As we look to the year, and we see the range of 10% to 20% this year of growth, and we see that coming in more to the lower end of the range, we think that number is about breakeven. And in our earnings model, we had 20% to 30% growth. So with that incremental scale, we did build in a level of profitability in the outer years, and we still believe that that trajectory is going to occur as we move into the future.

Operator:

The next question comes from Vivek Arya of Bank of America. Please go ahead.

Greg Smith:

So let me take the second part of your question first, and then, actually, I'm going to tag team the first part with Sanjay because I want to work on sort of a history lesson perspective of the mobile TAM to try and bracket what we would see in 2025. But in terms of the modem supplier, for the our historically largest customer, a thing to remember is that whoever is supplying that modem is also likely supplying all of the ancillary devices associated with that modem. So there's a modem, there's power management, there's RF, and if that was to change, there's a lot of pluses and minuses. The thing that I will tell you is that they're all relatively small relative to the magnitude of the overall AP business. So if that was to change, I would expect it to be a slight positive for us, but I don't think it's a game changer kind of a thing. And so, on the mobile TAM, so Sanjay, could you just give us sort of the history of the mobile TAM, like over the past few years?

Greg Smith:

Okay, so take what I'm going to say with a grain of salt, because we are entering into our strategic planning process and haven't completed sort of an updated view of 2025. But the thing that I will tell you is that the mobile TAMs are unlikely to go as high as we saw during the COVID peak, but they're likely to be significantly stronger than what we're seeing in 2023 and 2024. So going in the middle of that range might not be a bad idea, but it's a pretty big range. Vivek, does that help at all?

Greg Smith:

That's a great question. So I think you are -- in terms of your hypothesis, you're hitting the nail on the head, that part of it is scale, part of it is channel. The thing that we are really -- we're actually really optimistic about our Robotics business right now, that the macro environment is really weak. Our automation peers are struggling with declining sales. We posted an 11% gain over the first half. And the thing that is encouraging to us is that that 11% gain is on the back of specific aspects of the strategy that we're executing. We were trying to expand our SAM [ph] by adding a high payload, high payload options for universal robots. And those robots are accounting for 20% of our sales in the quarter. We are trying to build additional channels, and our OEM channel grew by 70% year-on-year for the first half. We have additional irons in the fire to drive additional growth that have not yet paid off. And there are primarily other aspects of market expansion. So our Pallet Jack for the AMR business, additional products that are coming to market for UR as well. We have additional channels that we are building. We've been working for the last year and a half on building out a large accounts channel and we have significant pipeline for that, but we don't have significant revenue growth to see from it yet. And then finally, we think that there's a very significant revenue opportunity in service and recurring software. Right now, that's a vanishingly small part of our revenue in Robotics. But every business that has machinery in critical processes definitely needs to have a way to keep that stuff running. And we have an example in our semiconductor business, where service represents a significant portion of our overall revenue and we are trying to apply that same model of managed service plans in Robotics. And we're actually seeing good customer uptake, but not a lot of revenue yet. So we think that those three engines are going to be kicking in, in 2025, on top of growth that we're going to still get from the things that we've done in 2023 and 2024. So we're pretty optimistic that the end market is terrible, but we're actually doing what we said we were going to do in terms of the strategy.

Operator:

Our next question comes from Krish Sankar - TD Cowen. Please go ahead.

Sanjay Mehta:

Hi Chris, it's Sanjay. At a top level, you're right, we did guide the full year consistently with the first half a little bit stronger than we anticipated. And what's happening under the covers is Semi Test is up, but our other test businesses are down a little bit in the way of in storage it's tied to the global market and SLT and the HDD. As that market returns, there is still underutilized capacity. In our Defense and Aerospace business, we had some projects push out and our production board business we had, it's tied to the automotive slowdown. And so overall Semi Test is stronger and the other test is lower. And then we did move to the lower end of our Robotics range. So at a top level we're calling the same year, but Semi Test stronger, other tests a little weaker, and Robotics is at the low end of the range.

Greg Smith:

I'm really, really glad you asked that question. So there are a couple of things going on in the compute space around this topic of cloud AI and building large capabilities to do training of large language models. So the first is obviously huge demand for GPU's. That's why people have seen Nvidia run up as much. They are providing an incredibly valuable engine for all of this. But if you look at an AI enabled server, there is a much larger number of high speed data links within a server rack than there is for a traditional server. And so in more traditional accelerated computing, we were seeing a ratio of, within a specific account, it might be 90% GPUs, 10% networking, that's trending more towards 20% or even higher. So there's definitely a tailwind there that is beneficial. The other is, as these models become more sophisticated and the players in this space are trying to differentiate between these large language models, they're each trying to gain an advantage through architecture and that's driving this VIP design trend that we're seeing. So we think that there's enough end market demand to drive growth for both sort of traditional GPU based AI models and also drive even faster growth for the VIP or homegrown silicon that is being built into these large server firms.

Operator:

Our next question comes from Toshiya Hari of Goldman Sachs. Please go ahead.

Greg Smith:

So, to answer the last part of your question first, I think we're very close to the point where the balance is going to tip back away from soaking up capacity to driving new system sales. The trends that we're seeing, third party data around test utilization are showing a good uptick, a little bit above sort of typical seasonality. Our own data is showing mixed utilization right now. We don't see a clear trend there, but we do have a fair amount of both systems that have already been converted and also upgrades that would be used as conversion kits. And so that is going to essentially occupy hundreds of testers that are underutilized now. So we are expecting utilization to tick up pretty strongly in the second half of this year, and for that to tip over to the point where it turns into real system demand. When you get to the IDM customers, especially in auto and industrial, there's an interesting, many of those customers are down significantly year-over-year from 2023 to 2024, but a lot of them are persisting in relatively aggressive capacity expansion plants. They see the same thing that we've been talking about in the automotive space, that there are going to be short-term fluctuations, but the crossover to EVs and hybrids is something that it's a question of like when, not if, that is going to happen and the amount of compute power in cars and other electronics in cars is going to continue to increase the attach rate of more chips per car shipped. So they have long-term plans to drive capacity and they have long-term plans for purchasing our equipment that we think is going to be important. So we are cautious about the current downturn that we're seeing in automotive, but we're really confident about the long-term potential in that space, especially parts of it where we have a ton of good share and great customer relationships like battery management, discrete in power and more and more importantly ADAS stuff. So right now I think the utilization in auto and industrial is down, but what the signals that we're hearing from those customers is that they expect that to be relatively short lived.

Greg Smith:

Okay, so there's a lot to unpack there, so let's get down to it. So the story for MiR is pretty simple, that take a robot, add AI capability, and suddenly you have a robot that works better. That's our basic hypothesis behind the pallet jack, is that we're going to be able to have a higher success rate picking pallets than competing solutions. And so far, the customer reception is that they think that those claims have some merit. So we have a pretty strong backlog for a product that we're going to start shipping in Q4 of this year. So that's pretty simple. For UR, the story is a lot more complex because what we're really doing is creating a platform for our solution providers to build AI based solutions on. And there's actually like four chunks of an AI based solution on UR. At the bottom, you have our robot and the software that controls our robot. And then on top of that, there's AI toolkits that can come from Nvidia or can come from other providers that really give the primitives that allow people to use AI capabilities to solve problems. Then on top of that, there's usually a solution builder. And so what that solution builder will do is they'll take our robot and that toolkit and they will build a solution to do something like heterogeneous bin picking or vision based inspection or welding, and then they will take that solution and they will market it to their end customers. So the key thing that differentiates the UR platform from other robots is its features as a platform. So the APIs that people can use, the features that they need in order to build these solutions for, and that's what makes us sticky, is that once a solution provider builds a solution around a specific toolkit in our robot, it's tough for them to move off. The thing about that model for UR is that it's a slower burnt. That it's an indirect AI drives our business indirectly because we're not building the AI solution, our solution providers are. So I'll tell you that we have AI based solutions in the market. Right now, our estimate is that high single digits of UR sales are going into AI based applications that are in the market right now. So that's sort of our baseline and we intend to grow from there. These solution providers, it can take a while from when they begin building their solution to when they see a commercial inflection and that's often in excess of a year. So we have a great pipeline of partners that are using AI right now to try and build solutions and we would expect that to deliver material revenue in 2025, but not in 2024. So sorry for going deep, but you kind of hit a nerve.

Operator:

The next question comes from Joe Moore of Morgan Stanley. Please go ahead.

Greg Smith:

Okay. So on HBM, the primary difference from a test perspective, as you go from HBM3 to HBM3E to HBM4, is the data rates that are required in the performance test of the final HBM product and the capacity that's in place right now for HBM3, most of it, essentially all of it, is incapable of testing at the data rates required for HBM3E and HBM4. So the people that are building HBM3E are seeking additional capacity. They're essentially retooling to be able to test the HBM3E. Now, this is one of the areas where we believe we have an advantage that will allow us to gain share in HBM performance test, that we have a tester that is going to be effective for both HBM3E and HBM4. And so that essentially will give customers that adopt that solution longer asset life than if they were to adopt a competing solution. So we are pretty hopeful about our opportunity to gain share in HBM performance test and we're working on essentially benchmark competitions in multiple customers to try to prove that.

Operator:

The next question comes from Samik Chatterjee of JPMorgan Chase & Co. Please go ahead.

Greg Smith:

So I think it'd probably be a good idea to do our TAM history lesson in compute as well, so really strong this year. Why don't we go back a couple of years and set that as context, and then we'll bracket kind of what we think we'll do in 2025. So, Sanjay, could you do that?

Greg Smith:

So as you look into 2025, we don't think that we would see mammoth increases to the compute TAM. It is between 2x and 3x larger than it was in 2019 at this point in time. And for sure, people are trying to add capacity all through the production chain, but it's coming off of a really high base. So looking forward into next year, I would probably be looking at where we are this year, plus or minus something, versus a much -- a lot of increase in the compute space. Now, you asked about VIPs. Right now, VIPs are towards the low end of a $100 million to $200 million range. It could trend towards the high end of that by the end of this year. We think that by the time we get out to 2026, VIPs will be about $500 million of the overall compute spend. So I think that's a pretty exciting chunk. That could be a quarter to a third of the compute TAM could be driven by VIPs.

Greg Smith:

So I guess the best thing to say is that at the point in time, there are two things that are going on since we set our plan. One is that the amount of underutilized capacity was larger than we thought at the point that we built our plan. The other thing that's happened since we built our plan is that even in 2024, compute has strengthened by a couple $100 million that the sort of the underlying demand drivers in the market are stronger than we were forecasting. So when you balance the deeper hole of utilization and the stronger end market demand then I think our hypothesis for 2026 holds.

Samik Chatterjee:

Yep. Thank you. Thanks for taking the questions.

Brian Chin:

Hi there. Good morning. Thanks for letting us ask a few quick questions. Greg, may be just curious, in Q2, in compute and memory, which obviously drove a lot of that sequential strength, was there any shipment pull in from second half or 3Q?

Sanjay Mehta:

Yes, Brian, we did see acceleration from Q3 into Q2. Customers were pulling. And that's in my view we have a full year view and Semi Test is a little bit stronger, as I noted earlier. Customers are pulling and the demand is there. And we see a fairly strong backlog going into Q3 with kind of low turns. So we're in a, I think from a compute and memory perspective, yes we did see some acceleration.

Sanjay Mehta:

Yes, so, rough numbers here, but we have on the order of 80,000 UR cobots out in the field, and probably on the order of 10,000 or more AMRs. The useful life of them is, we have cobots that were delivered before Teradyne bought Universal Robots that are still being used, but most of our customers will depreciate the asset over about a five-year period. So, I think if you're trying to model sort of installed base decay, it's not a bad idea to look at maybe a five to seven-year life. So, I think, and you're going at this exactly the same way that we're thinking about, that we look at the entire installed base, not just new equipment sales as our total available market service agreements. And we're also doing this service agreement build in alignment with the build out of our large account channel. So large accounts are the ones that are most likely to have large fleets and are most likely to see advantage from a managed service plan and that's another sort of aspect to the strategy that we're building out.

Operator:

The next question comes from Atif Malik of Citi. Please go ahead.

Greg Smith:

The mobility weakness is really both Android and iOS. If you look across the major suppliers for silicon for all of those ecosystems, it's generally pretty weak. Now, if you peel it back a little bit under the covers, there are some areas of the mobile space that have done better during this downturn than others. So one aspect of it is in image sensor, that the transition to, like 48 megapixel image sensors really put some pressure on the suppliers in that space, and they've added capacity both in iOS and Android land. The other is the improvements in wireless charging and other charging aspects that even now, when we've seen significant weakness in power and linear, we're still seeing some incremental demand as people always want their phones to charge faster. They want them to charge faster on wireless charging. So, we're seeing increased silicon content there. So it's been a little bit of a bright spot within that market. So, I think we've seen broad-based weakness in 2023 and continuing into 2024, and we expect to see relatively broad-based recovery in 2025.

Sanjay Mehta:

Yes, so we're happy with this year's gross margin performance kind of playing out as we expected. A little bit better though, in the first half, but 58% to 59% with continuous improvement. And I would say that, regarding next year, obviously, we'll provide a little bit more color in January. But the way I'd think about it is, we do expect revenues to grow, so we'll have a bit of a tailwind tied to volume. And it really depends in those segments you referred to as what specifically the customer is ordering. It depends on the configurations of the instruments. And so, I think, in my view, I think that we're exiting the year at our model. That's what we expect and look forward to giving you more of an update in January for 2025. But I would leave you with a higher volume level, it should help as tailwind.

Operator:

Our next question comes from Steve Barger of KeyBanc Capital Markets. Please go ahead.

Greg Smith:

So, I will tell you that our OpEx acceleration is in both R&D and in our sales and marketing expenses. So you can infer from that that means that we're working on new products and we're working on building relationships with new customers and trying to capture. The key thing in semiconductors is that once customers make a platform decision, then it becomes very, very difficult to change their direction. And so we see a fleeting opportunity with all of the new VIPs to get in the door and influence that initial platform decision. So we're going to take those opportunities and we're going to make the investments to try to capture them while that share is available versus trying to move it after the cement sets. The one thing I will say is that the focus of our acceleration is really in our test business that we see that we have. We're confident in our strategy in Robotics, and we're confident for the OpEx plan that we put together. We saw no need to pour on more OpEx in our Robotics business. We're going to execute the plan that we set. But in the test business, especially in our semiconductor test business and in the system level test business, we saw an opportunity by accelerating our spend that we would be able to drive a better outcome long-term. So that's where that money's going.

Greg Smith:

So it is mainly because the rollout of those programs. We're trying to make sure that we can walk before we run when it comes to these service programs. So we have essentially piloted the programs in a relatively small region and we're seeing good results in that region, but we have not deployed the program worldwide because we have to build out the infrastructure to support it. So that's why I say that we haven't seen material uptake is just because it isn't globally deployed at this point.

Greg Smith:

Oh, definitely 2025. So in the back half of this year, we're going to be -- and also the sales cycle time for the service business is it's not terribly long, but it's probably a couple of quarters because you have to establish the value for the managed service plan. So we have a lot of interest. We are talking to a lot of customers, but we haven't closed the deals yet, because I think some of it is that it needs to be incorporated into their 2025 budgets. So, I'm very hopeful that we'll see an inflection in service revenue in 2025. I don't think we'll see much in terms of revenue in 2024.

Operator:

The next question comes from Gus Richard of Northland Capital. Please come ahead.

Greg Smith:

So our win rate on sockets, when we started describing our plans in VIPs, we said that we were trying to make sure that we got at least sort of an even split of sockets. And right now in 2024, that's kind of how it's playing out, that we're getting our fair share of wins. The other way that we're looking at this is in terms of testers loaded. So we're not looking at it in terms of tester purchases because of the underutilization, but we are trying to count noses in terms of how many testers are being loaded by our customers versus testers being loaded by our competition's customers. And right now I would say that we are kind of 60/40 in favor of Teradyne in terms of testers loaded for VIP customers.

Greg Smith:

So right now it's not having a significant effect. The key thing that we are trying to do in the joint development projects that we have with Technoprobe is to take on relatively hard problems that required collaboration between us and Technoprobe that unless we had a firm partnership, we'd be unwilling to take that risk on speculation. We have initiated those projects, but they do require technology development on both sides. So right now, what we said at the point in time when we announced the deal is that we thought this would have a low-single-digit, long-term effect on market share in the Semi Test space. We still think that that's true and we think that we're on track to achieve those gains.

Greg Smith:

So we haven't publicly announced sort of what segments of the market we are doing these joint development projects, because we think that we need to keep that relatively proprietary until we have demonstrated the success. But I will say that the key things that we believe are enabled by the projects that we're working on with Technoprobe are around devices that have very high power requirements and also devices that have very high parallelism. So the TPI probe technology is unlocking sort of the high end scalability of our test platforms in both SoC and memory. And we think that that's going to result in share gain by sort of opening up a place where both TPI and Teradyne are differentiated from their competition.

Operator:

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now hand over to Traci Tsuchiguchi for closing remarks. Thank you.

Operator:

Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending and you may now disconnect your lines.

Gregory Smith:

Thanks, Traci. Hello, everyone, and thanks for joining us this morning. Today, I will summarize our first quarter results and discuss some of the trends in the semiconductor industry and robotics that we believe position Teradyne for long-term growth. It is useful to comprehend these longer-term growth drivers because the industries in which we operate are inherently cyclical. Sanjay will then provide greater financial detail on our first quarter results, our current outlook and additional financial information.

Sanjay Mehta:

Thank you, Greg. Good morning, everyone. Today, I'll cover the financial summary of Q1, provide our Q2 outlook and full year planning assumptions. Now to Q1. First quarter sales were $600 million, which was $10 million above the high end of our guidance with non-GAAP EPS of $0.51, which was above the high end of our guidance of $0.38. Non-GAAP gross margins were 56.6%, above our guidance due to favorable product mix, higher volumes and improved operational efficiencies. Non-GAAP operating expenses were $251 million, both flat year-over-year and up slightly compared to our fourth quarter. Non-GAAP operating profit was approximately 15%.

Operator:

[Operator Instructions] The first question comes from the line of Mehdi Hosseini with SIG.

Sanjay Mehta:

Yes, it would, Mehdi.

Operator:

Next question comes from the line of Vivek Arya with Bank of America Securities.

Gregory Smith:

Interesting question. Thinking about the TAM, that is the overall size of the market, so what we would get, what our competitor would get. And the size of the accelerator market has gone up a lot this year. Most of the testers to support this year's revenue in accelerators was put in place last year. So if the TAM that was supported last year supporting that sort of big growth that we've seen in the end market this year, what's going to happen this year, the $1.5 billion that we talked about is going to support a significant increase again next year.

Vivek Arya:

And just a quick follow-up. A number of your WFE peers have started to see the benefits of 2-nanometer and gate-all-around. I'm wondering what does that mean for Teradyne? When will you start to see those benefits? And what does that mean for tester intensity? I assume that's more '25 or '26. Any color around that would be very useful.

Toshiya Hari:

I had one question on memory and another one on your VIP business. On the memory side, you guys talked about a $1.25 billion TAM for '24. I was hoping you could provide a rough split between DRAM and NAND, how you're viewing the market, what the contribution could be from HBM, and if you can speak to your competitive position, your market share position within HBM, that would be helpful.

Gregory Smith:

So in terms of competitive position, the share patterns that have existed for a few years are persisting. We have very high share in flash final test, we have strong share position in DRAM final test and we have a lower share position in both flat wafer sort and DRAM wafer sort. So what's happening in the memory market? Like last year, there was a lot of technology-driven buys that were pushing final test purchases. This year, the spark is coming back to the memory market, and that is driving the need for more capacity, and that is driving wafer sort purchases.

Gregory Smith:

Well, from a vertically integrated producer perspective, it really kind of started back in like 2022, 2023. In 2024, like right now, there are hundreds of testers that are being used to test VIP source parts for us. And probably a similar number from our competitor. So it has happened. The thing that hasn't happened because of the -- the low utilization driven by the mobile slowdown, that hasn't translated into as much new tester purchases as we would have expected in a stronger market.

Operator:

Next question comes from the line of C.J. Muse with Cantor Fitzgerald.

Gregory Smith:

So we have limited visibility, so just bear in mind that I'm going into the realm of speculation here. The things that could drive a higher second half is the leading edge of some sort of a recovery in mobile. Right now, we have a pretty low baseline baked into our plan. So essentially any capacity shortfalls would immediately turn into business.

Gregory Smith:

Yes. So that's a great question. We've been having very rich discussions internally about this to try and figure out when you consider a smartphone to be AI-enabled. And we're thinking about it in terms of the complexity of the processor that goes into the phone. There have been neural processing units and AI features in phones for years. But now, the AI opportunity, the edge AI opportunity is driving things towards pushing the amount of silicon area used for AI up towards like 50% or 1/3 of the silicon area going into that.

Operator:

Next question comes from the line of Samik Chatterjee with JPMorgan Chase.

Gregory Smith:

I hope I caught all of your question. If I didn't, then please correct me. We don't comment about specific customers. I will share that we don't expect that our historically largest customer will be a 10% customer this year. I'll also share that we think that there is more of -- that we've gotten sort of the bottom dialed into our plan, that there's definitely more upside to downside in terms of the plan associated with mobile in general.

Gregory Smith:

So I'll start off with sort of a qualitative answer in terms of the drivers, but then I'll pass it off to Sanjay to give you more of the precise split first half, second half and the profitability. So what's going on right now is we have a plan for the year that's going to be essentially sequentially growing quarter by quarter. And the reason that the plan is laid out that way is because there are new growth drivers that are coming online throughout the year. There are drivers that are in place from last year in Q1, that's specifically the UR20 and UR30, the heavy payload cobots.

Sanjay Mehta:

So roughly the first half of the year -- well, first, as Greg noted, we expect to grow sequentially in Q2, and we expect to grow throughout the year for the reasons Greg just noted. But in the first half, we have 42%-ish plus or minus, and then 58% in the back half of the year. We do expect to be profitable this year. I would say, over the year, and I would say that, that would be single-digit profitability. I will comment, I think you asked about Q1. We were not profitable just given the seasonality of the quarter. That should give you the context, I think that you asked.

Sreekrishnan Sankarnarayanan:

I had a couple of them. First one, on the memory side, how much of your memory revenues were from HBM in the March quarter. And I think Sanjay, you mentioned HBM revenues could grow 5x this year. I'm kind of curious, are you over-indexed to 1 customer, because my understanding is of the 3 HBM customers, 1 of them in sources, and within other 2, can you just talk a little bit about your share position there? Then I have a follow-up.

Gregory Smith:

Yes. So Krish, one quick comment. The 5x comment about HBM was referring to the market size for HBM memory. So last year was about $100 million of TAM for HBM. This year, we think it's about $500 million worth of TAM for HBM. Our revenue is not going to go up by a factor of 5. It's going to go up. It's going to go up significantly. But we're not going to be able to hold sort of the 50-ish percent share of HBM that we had last year.

Sanjay Mehta:

Yes. Interesting question. I'd say that I remember several years back when we talked about we were going into a downturn and that downturn was 4 to 6 quarters, and the downturn has gone a lot longer in the way of mobility. And as Greg noted, we believe that our forecast considers mobility at a point where we feel comfortable that it's going to be achieved. And so I think as things pick back up, the historical seasonality, I put it in the context of some segments are going to be recovering and we have some new segments that are -- or some segments that are growing fairly well. So I think the seasonality comment with regards to the test perspective, or test portfolio of businesses we have. It's a little bit off this year.

Operator:

Next question comes from the line of Joe Moore with Morgan Stanley.

Gregory Smith:

Well, I think we certainly have optimism that it can get better. And that's basically because we've dialed in the bottom. And the way we do this is we typically will look at tester utilization numbers. And frankly, those numbers are all over the map. Some indicators show that capacity is tightening. Other indicators are showing that it's relatively -- utilization is tightening. Others show that it's relatively flat. Our qualitative checks, when we are talking to people in the ecosystem, they are telling us that capacity -- that utilization is getting tighter and it's forecast to go up from there.

Operator:

Thank you. Next question comes from the line of Brian Chin with Stifel.

Sanjay Mehta:

Yes, I'll take the kind of the Q3 to Q2. It was, I'd say, mainly in compute and some ADAS that was accelerated and -- just looking up something.

Brian Chin:

Okay. That's helpful. And then switching gears to robotics. It seems like your omnichannel and new product focus is driving a lot of this improved momentum in that business. But can you also just touch on the broader environment you're seeing in robotics, and where, if any, you see sort of macro like headwinds or tailwinds? And last part of that, what vertical or application was that customer that placed the record MiR order? And did that include any of the MiR1200s?

Operator:

Next question comes from the line of Gus Richard with Northland Capital.

Gregory Smith:

Yes. So for sure, the great thing about AI, there are two primary benefits to AI. One is that it's far easier to design a solution that is able to deal with variation, whether it's part variation or location variation or other uncertainties that exist in normal manufacturing environments, the solutions end up being far more resilient. So that means that more people would be willing to adopt them.

Auguste Richard:

Got it. And then on the semi test side, you've got sort of -- it's going to be a while before we get to 2 nanometers, yields at 3. I don't think we're that great. And the AI accelerators are reticle limited. How are you seeing the expansion of use of chiplets sort of beyond AI accelerators and servers and FPGAs. Is that beginning to broaden out?

Steve Barger:

I'll be quick. Greg, you said share gain opportunities in HBM are good. Is that primarily due to you having capacity to support a fast-growing addressable market, or is there something unique in your current or future testers that will make you a supplier of choice for some variations of HBM?

Steve Barger:

Understood. And for the large account channel in robotics, you said there's a gestation time before revenue. Was this largest ever MiR order a function of work prior done to the pivot? Or did it come after? And then to your point about being more immune to cycles, is that just because large accounts are more likely to invest through cycles and are less swayed by near-term conditions?

Steve Barger:

And then just about being more immune to cycles, is that because large accounts will invest through cycles? And so that pivot will make you less cyclical yourself?

Traci Tsuchiguchi:

Great. Thank you all for joining us this morning for our first quarter earnings call. We look forward to being in touch with you all through the course of the quarter. Thank you. Good day.

Andy Blanchard:

Good morning, everyone and welcome to our discussion of Teradyne’s most recent financial results. I am joined this morning by our CEO, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we will provide details of our performance for 2023’s fourth quarter and full year, along with our outlook for the first quarter of 2024. The press release containing our fourth quarter results was issued last evening. We are providing slides on the Investor page of the website that maybe helpful to you in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne’s results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release as well as our most recent SEC filings. And 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 measures, where available on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Wolfe Research, Citi, Susquehanna and Morgan Stanley. Now, let’s get on with the rest of the agenda. First, Greg will comment on our recent results and the market conditions as we enter the new year. Sanjay will then offer more details on our quarterly results, along with our guidance for the first quarter. We’ll then answer your questions and this call is scheduled for 1 hour. Greg?

Sanjay Mehta:

Thank you, Greg. Good morning, everyone. Today, I’ll cover the financial summary of Q4, the full year 2023, provide our Q1 outlook, some planning guidance for full year 2024, review our updated earnings model and outline our capital allocation plan. Now to Q4. Fourth quarter sales were $671 million, with non-GAAP EPS of $0.79, both in line with our guidance. Semi Test revenue of $431 million at SOC revenue of $327 million, with high memory shipments of $104 million, as Greg noted in his highlights. System Test group had revenue of $86 million, down 14% from Q4 ‘22. Growth in Defense and Aerospace was offset by weakness in storage test and production board test. LifePoint revenue of $25 million was weaker year-over-year due to continued weakness in cellular, PC markets. Robotics revenue of $129 million was up 17% from the fourth quarter of last year and up 50% sequentially on seasonally high demand and the impact of UR20 and UR30 new product shipments. Non-GAAP gross margin was 56.6% in the middle of our guidance range and non-GAAP operating expenses were $245 million in Q4, up $2 million from Q3 ‘23. Non-GAAP operating profit rate was 20.1%. Some other financial facts. We had one 10% customer in the quarter. Tax rate, excluding discrete items for the quarter was 12.6% on a non-GAAP basis and lower than planned because of geographic mix. GAAP tax rate was 14% in Q4, excluding discrete items. We repurchased $51 million of shares in the quarter. Turning to the full year results. We had revenue of $2.676 billion. Texas Instruments was the only customer greater 10% of our revenue for the year. Gross margin for the year was 57.4%. OpEx was $990 million and operating profit was 20.4%. Non-GAAP EPS was $2.93. We generated $426 million in free cash flow in 2023. We returned $468 million or 110% of free cash flow to our shareholders through share repurchases and dividends. We ended the year with $937 million of cash and marketable securities. Our tax rate for the full year, excluding discrete items, was 15.5% on a non-GAAP basis and 15.25% on a GAAP basis. Semi Test revenue for the year was approximately $1.8 billion, with SOC revenue contributing $1.43 billion and Memory $386 million. Our SOC sales contracted 16% in 2023, in line with the continued mobility market weakness, partially offset by strength in auto and industrial. In Memory, our sales grew about 4%, driven by new technologies like UFS4 and Flash and LPDDR5 and HBM and DRAM. System Test group had revenue of $338 million in 2023. Combined Defense and Aerospace and production board test sales were both flat, while HDD and system-level test in our storage business were down in total nearly 50% from 2022. In Wireless Test, revenue of $144 million in 2023 was lower year-on-year, given the decline in handset units and continued weakness in the networking and PC markets. Now to Robotics. Robotics revenue in 2023 was $375 million, with UR contributing $304 million and MiR $71 million. The group had mid-teens profitability in Q4 ‘23, but for the full year, had an 8% non-GAAP operating loss. While UR was profitable in 2023, we continue to lean into R&D and channel enhancement investments in MiR. Now to our outlook for Q1. Since our October call, SOC test demand has softened, which impacts our Q1 outlook. Q1 sales are expected to be between $540 million and $590 million, with non-GAAP EPS in a range of $0.22 to $0.38 on 162 million diluted shares. The first quarter guidance excludes the amortization of acquired intangibles. First quarter gross margins are expected to be the low point for the year and are estimated at 53.5% to 54.5%, due to lower volume and unfavorable product mix. OpEx is expected to be roughly flat with Q4 ‘23 and run at 42% to 46% of first quarter sales. Non-GAAP operating profit rate at the midpoint of our first quarter guidance is 10%. A few points to assist you in modeling 2024. First, the gross margin profile. In 2024, we expect gross margins to increase through the year. Gross margins are forecasted to improve to 58% to 59% for the full year driven by improved product mix, including the sale of the Device Interface Solutions or DIS business, lower business resiliency spending and operational improvements. Moving to the strategic partnership we announced with Technoprobe in November 2023. The agreement has several key components as follows

Operator:

Thank you. [Operator Instructions] Our first question will be coming from the line of Mehdi Hosseini with SIG. Please proceed with your questions.

Greg Smith:

Hi, Mehdi, this is Greg. So the composition of the TAM in the mid-term model, if you compare this year to last year, I think the biggest change is that we think that the that the compute part of the market is going to be at a higher level, than we did last year. And we think that the mobile portion of the market is going to be up from where it is now but will not be at the level that we were modeling last year. So we believe that the pace of transistor density is proceeding basically at the same rate that we thought it was proceeding last year. The real difference is that the end market sort of end unit market predictions going out through the mid-term are a bit softer in this model than they were last time. And certainly, the impact of cloud and Edge AI in the market is a relatively new factor and is strengthening the compute part of it.

Greg Smith:

So there are sort of two comments in my prepared remarks. One talked about socket wins for VIPs. And those socket wins are in both cloud compute and in EDGE devices. And the right way to model that is perhaps a little bit starting towards the end of 2024, but definitely hitting much more seriously in 2025. The other reference that I made was for an SLT win for a compute customer, and that’s definitely something that’s going to take until 2025 to build to material volume.

Greg Smith:

That’s – sorry. We – because most of the – there are a number of players that are designing their own silicon. And typically, a big portion of those are the hyperscalers, but there are – there are players in that space that don’t fit the traditional hyperscaler model. So like a large integrated automaker or people that are doing custom silicon development for their own handsets or customer devices. So we prefer the term vertically integrated producer, but you can read that as hyperscale.

Operator:

Our next question is from the line of Timothy Arcuri with UBS. Please proceed with your question.

Sanjay Mehta:

Sure. Hi, Tim, it’s Sanjay. So we estimate the SOC TAM in 2023, you were going down the correct numbers that haven’t really changed. But just for specifics. We view the Compute market at $1.3 billion, Mobility at $900 million, Auto at $600 million, Industrial at $400 million and Service at $700 million. That’s how you get to the $3.9 billion. And then the midpoint of 2024, Compute is $1.4 billion, Mobility at $0.9 billion. Auto and MCU at $0.5 billion, Industrial of $0.4 billion and Service – SSC service at $0.7 billion to get to the $3.9 billion at our midpoint.

Greg Smith:

So, hi, this is Greg. Our historically largest customer, we’ve said that like in 2023, they are going to come in at under 10%. Looking forward into 2024, our base case, again, has them at less than 10% of total revenue. Right now, our visibility into their second half demand is quite limited. And we usually have a better picture of that in the April time frame. So if we get any better information about it, we will share it at that time. But the thing that you should think about is that there isn’t there isn’t much downside to our base case around anything that happens with our historically largest customer.

Operator:

Our next question is from the line of C.J. Muse with Cantor Fitzgerald. Please proceed with your question.

Greg Smith:

Sure. So the leading indicator that we tend to look at most is really around utilization rates. And right now, those utilization rates are low, but we did start to see OSAT utilization start to tick up. So they are still below normal seasonality, but they are definitely improving. And we believe that they could reach sort of the point – the levels that would trigger buying by the third quarter of this year, if the trend that we’re seeing continues. The key end market trends that we’re looking for is unit growth in smartphones and PCs. PCs have been in a real pit. And so just from a refresh cycle, we’re expecting to see that recovering a bit and that would be a tailwind for us. The thing that we also saw in the fourth quarter was that utilization came down a bit in IDMs. And so they are primarily the – that’s where most of our business is concentrated for Industrial and Automotive. So we saw the Industrial part of that start to weaken in the second half of 2023. And then late in 2023 – late in Q4 of 2023, we also started to see Automotive begin to weaken. The – our model right now has that that’s a relatively short lull in demand. And we think that that’s mainly driven by the fact that new model year introductions, every year for the automakers has a significantly higher attach rate for electronics and that’s driving a pretty good CAGR in the Automotive Semiconductor market. So we think the fundamentals are good to drive growth in Automotive. So we think that this demand lull is going to be relatively short.

Greg Smith:

So the – in the prepared remarks, I was referring to system-level test wins for Mobility and for Compute. And if you put that into context, the customer that we won for Mobility is not as large as our primary SLT customer, but they have the potential to drive significant volume. In Compute, that’s something that’s going to take a while to take off. The device plans basically for SLT, it was a hyperscaler customer in Compute and the volumes for those devices is going to start at a relatively small level and then increase over time. So I don’t think that any of those in isolation would rise to the level of our historically largest customer, but it’s more additional incremental tailwinds for us.

Operator:

Our next questions are from the line of Vivek Arya with Bank of America Securities. Please proceed with your questions.

Greg Smith:

Hi, Vivek, this is Greg. So first of all, let me talk a little bit about client versus data center. As far as we can tell in 2023, most of the Test capacity adds in Compute, were really in support of data center. That the client market has been very, very quiet. Looking forward into the future, we think that the capacity adds required for cloud are going to moderate a bit. They have added a ton of productive capacity in 2023, and that is going to be felt in higher-end volumes in 2024, so they are at sort of a new high watermark in terms of that part of the market. The client side, there are two things that I think are going to accelerate things. The first is that the unit volume in PCs is at a very low point right now. There is really nowhere to go but up. And the other is that we’ve been seeing the push in large language models in AI, primarily on the training side right now. And looking at the roadmaps for our customers, they are putting a huge push on custom silicon for Edge AI inference versus the training part. So, I think we are going to see a shift over the next 3 years, to a much more balanced market, whereas 2023 was dominated by data center, as we get out through this mid-term, it’s going to be much more balanced between data center and client. Now, in terms of the modest size, the thing that I want to just – I want to try and provide a little bit of context, that if you look back to the high watermark for the total SOC TAM, back in 2021, it was about a $4.9 billion market. And in that $4.9 billion market, less than $1.2 billion of it was in compute. Now, fast forwarding to this year, the overall TAM is down to $3.9 billion, and compute is representing of $1.3 billion of that total. Now, as you look into 2024, that’s a very high level that it’s at right now. And that level supports significantly increased production for these devices. The last thing that I will point out is these devices are big and complex, and they have a high test intensity. But the unit volumes are relatively small, and the margin, the margin in the end market for these devices is very high. So, the revenue that compute makers are getting on these devices is pretty great. But it means that the number of testers required to fulfill that revenue demand is a little bit lower than it would be in the mobile space.

Greg Smith:

Yes. So, first, just a quick comment on China. The news report is really nothing new. We have had a multiyear effort going on to increase the resilience of our supply chain. And that involved moving production locations for some of our products. We still have an extensive supply chain that is in China. We have over 600 people in China. We are competing for business and winning in China. And I think that it’s a good headline, but there is nothing new in that story or in our commitment to that region, as a place where we expect to grow. So, on the mid-term model, if you look at the – if you look with a longer lens than you are talking about, we have been in this market for 60 years. And we have seen the dynamics of the market as it comes out of downturns. So, in coming out of 2001, coming out of 2009, and then, again, the COVID-related demand increase in 2020. It’s not that unprecedented to see significant growth in the years following a downturn. And looking at the state of the end market for mobile phones, and the end market for PCs, we really expect to see a pretty good snapback. The other X factor that I think we are becoming increasingly confident in is how generative AI is going to impact complexity of devices. So, we were really kind of wondering what was going to be the next thing that drove complexity at the in handsets, in cars, at the edge. And it appears that the technology is incorporated in these large language models and the amount of compute that they need to execute is something that is a very positive tailwind both in the mobile and the compute part of the market. One final reminder is, as you look at this, when you think about Edge AI, a lot of that is going to accrue to growth in the mobile part of the market and the automotive part of the market, not in the compute part of the market.

Operator:

Thank you. Our next question is from the line of Krish Sankar with TD Cowen. Please proceed with your question.

Greg Smith:

Sure. So, I think it’s really fundamentally two things in Q1. One is much lower volume, but then really product mix. Say, product mix is a little bit of a bigger driver, nothing more than that. It’s product mix and volumes.

Greg Smith:

So, I think the – there is no real change in our strategic priorities. And so our strategic priorities has always been to look for accretive investments and opportunities to put free cash flow to work for our investors in the most effective way. We didn’t take our eye off the ball on test, when we were talking about our industrial automation business. And as a matter of fact, over the period of time that you are talking about the industrial automation business was accretive that we were making money, and that IA business had a rough year in 2023, mainly because of end market conditions. So, we haven’t changed our strategy. The thing that’s different and the thing that really motivated the investment in Technoprobebe is that there is a trend in the test market that is drawing the tester and the interface closer together. And that’s really driven by the complexity and performance in the end market. So, if you look at the data rates that are required for SOC and memory devices, if you look at the bandwidths required for RF devices, if you look at the number of devices that customers want to test in parallel, all of those are driving a tighter integration between tester and interface. And by establishing a partnership with TPI, we believe that we were going to be able to achieve an advantage in terms of unlocking value for our customers that exists in the technology that Technoprobe has in those interfaces and our testers have in their architecture. So, I wouldn’t say that the – like the Technoprobe investment reflects a change in strategy, more it reflects the fact that we have been monitoring the trends in the test market, and we discerned an opportunity for us to do something great for our customers and our investors.

Operator:

Our next question is from the line of Brian Chin with Stifel. Please proceed with your question.

Greg Smith:

So, I think I will end up phoning a friend with Andy here in terms of what we have said in terms of projected TAM for that market.

Greg Smith:

Right. And we have said that has – there is modest growth in the overall Compute segment over that period of time. So, both, we are going to see a slight decline in sort of the traditional compute part of the market and this $400 million to $600 million of new hyperscaler VIP. The way that you can think about this is we are always putting up a good fight to try and win share in the traditional compute space. But we really think that our opportunity is to gain share in that $400 million to $600 million chunk. And what we have seen is, we are like – say, we are at below 20% share in the traditional market. In terms of socket wins, the sockets that we see in the market, and we are competing for, we are definitely winning more than our fair share. So, we are winning the majority of sockets that we are targeting. And so we are very hopeful that we will end up with a pretty good split inside of that $400 million to $600 million.

Greg Smith:

I think it could represent upside to our view. But the thing that I will remind you is that if you look at the memory test market, we typically break it up into four chunks. So, two types of memory DRAM and NAND Flash and then the wafer sort and then the final test. Our highest share is in the final test for both DRAM and for Flash memory. What we have seen in 2023 is technology-related buying in those spaces, and that has been a great tailwind to our share in that market. What we don’t have clear visibility into or real forecast from our customers is how much capacity they are going to need to add at wafer sort. So, that’s not a technology-driven retooling space. That’s something where they can use the same testers for new generations of parts. And they need to have production volumes that drive additional acquisitions. It’s entirely possible that our competitor has a better view into the long-term needs in the wafer sort for some of those customers than we do. So – and it’s also possible that we have not seen the benefit in that part of the market. So, I am pretty confident in our – in that we have a good view of our memory business for 2024. I think there is an upside potential depending on how much capacity add is required as the memory inventories come down.

Operator:

Our next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Greg Smith:

Hi Samik. So, in terms of the long-term model, our goals remain kind of consistent for our robotics group that our target performance is 20% to 30% growth and our target profit is 5% to 15%. What we have said previously and what we are still operating to is, as we are watching the growth develop in that market, if it appears that incremental investment is not yielding higher growth rates, then we will feather those back to try to increase the profit range. But as long as we believe that we are at this low penetration and there are fruitful investments that we can make, we would prefer to make those investments and continue to drive growth. The key thing that we are doing in operating that group is we are really focusing on maintaining high gross margins. So, we are in excess of 60% gross margins for the group now and we are intent on keeping those gross margins at that level so that we have the option to sort of dial the profit that is appropriate to the growth rate we are achieving.

Sanjay Mehta:

Yes. So, you are right. I think some of the quarters, we do anticipate to be higher than our model, really coming back with a stronger product mix. In various quarters, we have obviously higher volume. And then some of our higher product lines or some of our higher margin product lines do come back. So, it’s volume in the quarters, but mainly product mix and product line mix that are driving the improvement. I should add that there is also operational efficiencies that we are working on that we anticipate that will help margins as well in the back half.

Operator:

The next questions are from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.

Greg Smith:

Okay. So, you packed a lot of parts into that question. So, let me start unpacking it. So, first, in terms of competitive position, right now, we are roughly splitting the HBM test market with our competitors. So, if you look at overall share, that’s a positive to our share that there are multiple competitors in the overall memory space. But the HBM part of the market is pretty much a clean split between us and our competitor. In Q4, we think HBM represented more than 50% of our memory shipments. So, it was a huge factor in that quarter. And in terms of growth, we think that there is the potential for growth that there are new HBM competitors that are coming on the scene. So, there is both a unit volume growth. I think that a lot of that – the capacity for a lot of that is in place now. But there are also standards changes, HBM3E and HBM4 that are coming, and those are driving retooling for performance tests. And we think that, that is going to be a potential driver for us in the back half of the year in memory.

Greg Smith:

Well, I think, the key thing that is limiting our optimism is that even though we had a really great Q4, we had a really great Q4 because we introduced basically a blockbuster product. 24% or so of our revenue in Q4 came from that product. Underlying that, there is still some fundamental weakness in the industrial end market. And there are predictions that, that is going to ease, that the demand is going to come back relatively strongly. But we are entering Q1 of 2024 with PMIs at a relatively low level and a fair amount of some regions that are quite quiet. So, we have optimism for continued growth through the year, both quarter-on-quarter through the year and each quarter in comparison to the year prior. But we are coming in with a relatively low Q1. So, we wanted to be careful in terms of where we set the bar for growth for the full year.

Andy Blanchard:

Okay. And operator, we are out of time. So, folks that are still in the queue, I will get back to you later this morning. But thanks everyone for joining and we look forward to talking to you in the days and weeks ahead. Bye.

Andy Blanchard:

Thank you, and good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith, and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2023's third quarter along with our outlook for the fourth quarter. The press release containing our third quarter results was issued last evening. We are providing slides on the Investor page of the website that may be helpful to you in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly-comparable GAAP financial measures were available on the Investor page of our website. Looking ahead, between now at our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Baird, UBS and Wolfe Research. Now, let's get on with the rest of the agenda. First, Greg will comment on our recent results and the market conditions as we enter the fourth quarter. Sanjay will then offer more details on our quarterly results, along with our guidance for the fourth quarter. We'll then answer your questions. And this call is scheduled for one hour. Greg?

Sanjay Mehta:

Thank you, Greg. Good morning, everyone. Today, I'll cover the financial summary of Q3, provide our Q4 outlook and update you on our supply chain and resiliency progress. Now to Q3, third quarter sales were $704 million with non-GAAP EPS of $0.80, both at the high-end of our guidance as Robotics delivered above plan and some supply constraints eased in Test. Non-GAAP gross margins were 56.6%, in line with our guidance. Non-GAAP operating expenses were $243 million, down about 3% from the second quarter on spending controls and lower variable compensation. Non-GAAP operating profit rate was 22%. We had two 10% customers in the quarter. The tax rate excluding discrete items for the quarter was 14.5% on a GAAP basis and 15.7% on a non-GAAP basis. Semi test revenue for the quarter was $498 million, with SOC revenue contributing $404 million and memory $94 million. As noted earlier, we continue to see strength in SOC concentrated in auto end-market and image sensor parts of our business in the quarter. Memory sales continue to be weighted towards technology retooling for higher-speed protocol flash for smartphones, DDR5 and HBM DRAM for server applications. System Test Group revenue was $83 million, with $38 million in storage test, as SLT in HDD production demand remains muted. In wireless test, revenue was $37 million in Q3, with low demand from both PC and smartphone end-markets. We expect this market trend to continue over the next several quarters. Now to Robotics, revenue in Q3 was $86 million with UR contributing $71 million and MiR $15 million, which was above plan, as Greg noted. Shifting back to the company-level financials. Our free-cash flow was $140 million in the quarter and we returned 97% to shareholders. We repurchased $119 million of shares in the quarter, paid $17 million in dividends and settled $9 million of debt. We have the final $24 million of convertible debt, which will be repaid in the fourth quarter. We ended the quarter with $820 million in cash and marketable securities. Now, to our outlook for Q4. Q4 sales are expected to be between $640 million and $700 million, with non-GAAP EPS in a range of $0.61 to $0.81 on a 162 million diluted shares. Fourth quarter guidance excludes the amortization of acquired intangibles, restructuring and other charges. This outlook is in line with our July view at the company level for the second half. Our revenue guide for Q4 has no material supply constraints. As supply has become more in line with demand, we are now back to including normal supply issues in the revenue range. As a result of supply and demand coming into balance, our lead times continue to improve. This enables customers to place orders more in line with our incremental production requirements. In Q4, there is a component of this behavior, but we expect to see more book-ship variability in Q1, as lead times continue to be reduced. Fourth quarter gross margins are estimated at 56% to 57%. OpEx is expected to run at 35% to 38% of fourth quarter sales, in line with Q3. Non-GAAP operating profit rate at the midpoint of our fourth quarter guidance is 20%. A little more color on gross margins and OpEx profile for the second half. Recall, our long-term model has gross margins at 59% to 60%. In 2021 and 2022, we were in our model range, with margins of 59.6% and 59.2% respectively. In our July call, we noted the gross margin profile by quarter, which show lower gross margins in Q3 and Q4 due to the timing of spending to strengthen our supply chain but that we expected our full-year 2023 gross margins in the 57% to 58% range. That outlook is unchanged. Turning to resiliency spending, in our operations, manufacturing spend will continue in Q4 but the spend associated with enabling our new factories to be qualified and producing testers is behind us. Packing up inventory and some capital equipment from old locations is what is left to do for our manufacturing in Q4. In short, we have successfully completed our objectives of moving many product lines to new locations. I would like to thank our internal teams and our partners for their tireless effort in de-risking our supply chain. Some component qualification will continue in 2024, but the majority of the test operational resiliency spending is behind us. Regarding OpEx, as noted, our full-year spend will be flat to slightly down versus 2022 spend levels. This is due to both spending controls and lower variable compensation. Recall our operating model has a variable component for operating expenses where the model flexes compensation expense with revenue and profits. As both are lower than 2022 levels, we're spending less than 2023. As revenues are expected to grow in 2024 and future years, that variable compensation component will also grow. For the full-year 2023, at the midpoint of our guidance, revenue will be slightly below $2.7 billion with non-GAAP EPS of $2.85 and operating profit of 20%. Gross margin for the full year should be about 57.5%. Our GAAP and non-GAAP tax rates are forecasted to be 15.75% and 16.5% respectively in 2023. Looking at 2024 business levels. Greg noted we expected revenue growth in 2024. How much growth is tough to call at this point. Starting the year with Q1 2024 revenues, similar to Q1 2023 levels, Q1 is expected to have unfavorable product mix yielding lower gross margins than Q4 2023. For the full-year 2024, we expect gross margins to be better than ‘23 on higher volume and lower resiliency spending. Summing up, our second half is playing out as expected with the highlight being strong execution by our UR team, as they ramp UR20 to meet high customer demand. For the full-year, while the end markets have softened in 2023, our company operating model has flex cost down to support profitability while enabling our R&D and go-to-market investments to support our long-term growth objectives. We've transformed our supply chain to reduce geographic risk and strengthened our operations capacity. From a shareholder return perspective, year-to-date, we've returned 181% of our free cash flow to owners. Our cash position and strength in our balance sheet enables us to continue to invest in strategic organic initiatives and has the firepower to support a wide range of M&A options for inorganic growth in the future. With that, I'll turn the call back to Andy. Andy?

Operator:

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tim Arcuri with UBS. Please proceed with your question.

Greg Smith:

Yeah. That's -- thanks, Tim. So the -- right now, our -- I'm hesitant to give you exact numbers because our measurements of utilization are indirect. So we tend to look more at the changes from quarter-to-quarter than the absolute level. But they are significantly lower than what we've seen for people to want to buy. So -- and there's also a big difference between our IDM customers and our OSAT customers. So our IDM customer utilization by our measurements are up in the low 80s, and that's usually at a high enough level that trigger buys. Our OSAT customers are like 20 points lower, there's usually a few points of inflection, like an increase in utilization from Q2 to Q3, we saw very little in our data this time. And so it's still on the order of 20 points lower than what we're seeing inside of IDMs. So I think there's a pretty big hill to climb in terms of utilization before that would trigger buys from OSATs to support the mobile space.

Greg Smith:

Sure. So yeah, I'm -- I think we're both sort of working off of the same source data when it comes to like reading the tea leaves about this large customer. We don't really know what their product plans are. The things that we are watching for are how quickly 3-nanometer goes into their high-performance computing process -- products that the more of that product line that's on 3-nanometer, the more complexity there will be, and that's a tailwind towards loading. The next is what's the relationship between -- like how do they use the next-generation 3-nanometer process? Do they use that to try to decrease dye size and attack cost? Or do they use that to add features to sort of keep dye size the same, add a lot of complexity. So we're watching very closely to see how that plays out. And then the last is, if there's any change to the strategy of using the N-1 processor in the lower-end phone product line. If that changes, that compresses the period of time that they have to build the -- up chips, and that helps to drive peak loading. So we don't have information about that. We are -- so we're being pretty cautious in terms of how we model that going into the future. But there are -- like as you point out, there are a number of things that could drive some upside.

Operator:

And our next question comes from the line of Krish Sankar with TD Cowen. Please proceed with your question.

Greg Smith:

So I think that they actually followed a familiar pattern this year. But what ended up happening in April, May was that they ended up meeting not a lot of additional capacity. So I think we've pointed out in prior calls that we expect that major customer to be less than 10% customer in 2023. But we haven't seen any significant change in the timing. The thing that we said in the prior call about this was we didn't see -- like, we didn't have demand confirmed in that April, May timeframe, but there was still some uncertainty about what their peak loading might be and whether they need additional capacity. And that played out the way it played out. So I think they're still on basically the same schedule.

Greg Smith:

No. So I think that what we're seeing in automotive is most of the players in that space, they're large IDMs and they all have significant capacity expansion projects in process. And they've -- and with the lead times that they have for front-end equipment and where our lead times were running, say, even six months ago, they needed to place orders way in advance. And as they're building out that capacity, they need to phase their deliveries so that it lines up with their commissioning. And -- so we've seen some rescheduling, but we haven't seen anything that we would consider to be a significant signal of demand change.

Operator:

Our next question comes from the line of Mehdi Hosseini with SIG. Please proceed with your question.

Greg Smith:

Okay. So right now, the computing market, if you -- like, just to sort of break it down, there are a couple of components of the compute market. There's end equipment PCs. That part is significantly weak and continues to be. Then there's cloud computing, and the thing that's driving cloud computing is really AI acceleration. The beneficiaries of that are GPUs and then hyperscalers doing their own silicon. There's definitely increase in the amount of bespoke silicon that's going in, but it's still dwarfed by sort of traditional GPU-driven accelerators at this point. The TAM, sort of the amount of testers that are being sold to support the hyperscalers is very -- it's not very consistent at this point. We had a big hit last year, from a revenue perspective, it's quieter this year, but we think that this is something that's going to play out over probably the next three or four years. So we're really looking at it in terms of socket wins. And right now, I can tell you that we are on track with socket wins. We have low share in traditional compute. We were aiming to try and win half and half, like half the battles we get into on hyperscalers, and that's about what we're doing this year, that we're winning half of the sockets that we are fighting for and the other guys winning the other half.

Sanjay Mehta:

Hi, Mehdi, it's Sanjay. Yeah. So the seasonality decline is really coming through, I would say, in robotics. Obviously, seasonality comes down. And then we're ramping UR20 Q3 and really Q4 that goes down to run rate. The other component of the decline in Q -- or the forecasted decline in Q1 is tied to storage, really the mobility of the end market and SLT. And from an SOC perspective, we're seeing that as roughly flattish at this point, Q4 to Q1. So those are really the drivers of what we see now. And as I said in my prepared remarks, I'll just remind you that we're seeing, as lead times come down, a lot more kind of book-ship and customers coming to us with incremental orders within lead time. So we're expecting to see kind of more bookings kind of at the tail end of Q4 for Q1 shipments. So there's a little bit more volatility there.

Operator:

Our next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your questions.

Greg Smith:

Yeah. So right now, the noted characteristic of it is volatility year-on-year. Our model of it, though, is by the time you get out to sort of the 2026, 2027 timeframe, we expect that these vertically integrated producers are going to represent about $400 million to $500 million of the compute test TAM. And for reference, that's probably going to be on the order of 1/4 to 1/3 of the total compute TAM out in that timeframe.

Sanjay Mehta:

Yeah. I think that -- it's Sanjay. I think that Greg really outlined kind of the potential headwinds and tailwinds in 2024. So right now, the first half and given the limited visibility, especially in mobility, it still continues to look a little dampened or weaker. But from a model perspective, where we see '24 tailwinds are in compute, mobility and Robotics for 2024. And so that's where we do see the tailwinds. The question is, to what degree. And we've provided some transparency of what we know about in Q1. And we think that, that is the low point. We think we'll grow from there. It's tough to call right now how it appears to be for the rest of the year. And we'll provide an update in January with what we know.

Operator:

Our next question comes from the line of Vivek Arya with Bank of America. Please proceed with your questions.

Sanjay Mehta:

Yeah. Good question. So it's a similar story to what I noted in July, Vivek. Fundamentally, it's product mix in the second half, and we deferred resiliency spending in operations really from first half to second half. And in the first half, we were focused on chasing and meeting customer demand. So some of our projects were deferred into the second half. So it's mainly mix as well as deferred resiliency spending from kind of first half to second half.

Sanjay Mehta:

Sorry. Thank you. In 2024, really, I think if -- as we've noted in our prepared remarks, incremental volume. Incremental volume, product mix -- is a main driver of product mix. And then there's a bunch of other puts and takes. And as I've noted in my prepared remarks, we expect to see much of the operational resiliency costs behind us in '24.

Greg Smith:

So I think the answer to your question is not very. The business that we're in with UR and MiR tends to be -- it's a short lead time business. We tend to run with about four weeks of lead time and customers will use our stuff for smaller projects. Much of the rest of the industrial segment that TI and Infineon and ST are serving is towards much longer lead time projects. Some of our industrial robot competitors are working off of year-long backlogs and for process control equipment, it can be even longer than that. So what we tend to see is that the cycles of investment for advanced automation lag we do are actually a little bit out of phase with the cycles of investment for, say, factory building. And right now, we're seeing that there is significant weakness in orders for our peers in industrial automation compared to where they were a year ago. And we're actually stabilizing relative to them. And that kind of makes sense. They will build a factory, they'll start running in the factory, and then they will look at different tasks in the factory that could be automated using AMRs and cobots and then they'll make a subsequent investment to do that. So I think the answer to your question is that you can't really infer what's going to happen with our Robotics business based on the industrial semi trends.

Operator:

Our next question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.

Greg Smith:

So I'll take the lead time, and then I'll pass it off for the percent of turns to Sanjay. The lead times, if you go back about a year, our lead times were running out past 26 weeks out to 39 weeks, we were way oversubscribed. And right now, we've managed to be able to tighten up the supply chain and get us to the point where our lead times are running in the 16-week timeframe, and we're aiming in the short term to get those down to something that's closer to 13 weeks. That's probably where we're going to be sitting. But again, that's sort of an average lead time. We will be maintaining some -- an ability to work within lead time for particular high-priority orders. And so going into a quarter, we will probably have a very good idea about the majority of our revenue but we will have some ability to do book-ship. And I don't know, we're scrambling through the papers to make sure we give you a good answer for the turns question here. It's actually kind of fun to watch. So have you gotten to the right page yet?

Toshiya Hari:

That makes sense. Thank you. And then as my follow-up, a question on China. Your peers in WFE on the front-end side of things, they're seeing 40% to 50% of their revenue come from customers in China. I think your business peaked at about 20% China a couple of years ago, and I think the most recent quarter, you were in the low teens. With new customers and existing customers expanding capacity, is China a potentially a growth area for you guys with the time lag over the next, call it, 24 months? Or is there a reason to believe that your exposure there could stay low in given competition or what have you? Thank you.

Greg Smith:

And so I'll talk a little bit about the growth trends. If you decompose the business that we have in China right now, probably the part of the segment that's heaviest investment for us is really in memory. And we expect that to continue to grow. There's significant capital investment, WFE investment going into memory in China, and we have very good exposure to that. And there's also a significant growth in analog and power for automotive and industrial in China, and we serve that segment very well with our Eagle Test platform. The biggest headwind that we have in China is we are unable to sell test equipment into Huawei. That's by US regulations. And frankly, that takes the biggest single chunk of the test TAM in China out of our -- off of the table for us. So we're in there. We have a great team in China. We're competing for all the business that we can go after. And so we're hoping to kind of hold and potentially grow from where we are.

Operator:

Our next question comes from the line of Brian Chin with Stifel. Please proceed with your question.

Greg Smith:

So right now, when we roll it up, we think that our overall ATE share is probably going to be flat to slightly up next year. No dramatic shifts from where we are. And I think there may be a bit of a tailwind because if the -- and that will depend on sort of the strength of the mobility recovery. So that's probably the biggest x-factor in terms of where share goes. Now in terms of IC unit growth, I don't have the data at my fingertips in terms of what our current expectations are. I think it's typically -- I'm almost there. Yeah. So we're looking at -- probably -- yeah. So unit growth was actually down this year, and it's coming back slightly, but it will still be below the units back in 2022 by our best guess. So the thing that's really going on is even though the units will be sort of at or below the peak that they had in 2022, the complexity growth that's happened since 2022 will drive test capacity requirements.

Greg Smith:

I'm sorry, could you repeat that?

Greg Smith:

Yeah. So the biggest lever there is the degree to which advanced processors move to 3-nanometer technology. So it's really in the digital space. There are some tailwinds as more of the compute segment moves towards chiplet-based design. That's about a 10% to 20% tailwind on the amount of test that's required. And another area that is -- that complexity really helps is the more complex devices that are going into an automotive environment, it has a much higher test threshold than other markets. So high-performance processors for ADAS applications, those have very high test intensity for the same number of transistors is the same thing going into a phone. So that's where we're really looking for some sort of a complexity tailwind, I guess.

Sanjay Mehta:

Yeah. Great question. Every year, we go through a process where we go through a strategic planning process in Q4. It culminates with a review with our Board in January. And then we share an update to our earnings model. And we're just starting to go through that process now. So I think the first quick answer is, sit tight. We’ll share that with you in January. But let me provide a little bit of color to your question. We still have conviction in the overall key drivers and fundamentals of the model in test and in Robotics. I think Greg talked a little bit about them, we've narrated them. So in the -- over the mid and long term, we have conviction. Obviously, in the short term, the visibility is very muted and very cautious. And so we're going through that now. We're looking for key indicators of when the inflections will occur. But fundamentally, we believe, over the mid and long term, we're going to get to those goals. The timing, we're going to work through and provide an update in January.

Operator:

Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.

Greg Smith:

Hi, this is Greg. Hey, Joe. How are you doing? The -- so we definitely are seeing that the market is being driven this year by technology-driven retool. So HBM, DDR5, LPDDR5 and next-generation protocols. The fundamentals in the memory market are getting better. So inventory levels are coming down a bit and production rates are going up. Right now, we haven't seen that reach a trigger to drive a large amount of capacity buys. But that is one of the tailwinds that we're expecting to help a little bit in 2024, that we don't expect it to be a dramatic increase, and we would expect it to be somewhat back-end loaded because there is a fair amount of capacity that needs to be loaded before they trigger more buys, but it's definitely a tailwind.

Greg Smith:

Well, we would love to. The thing that I can tell you is that our share in memory is highest in final test and we also tend to be a first mover that we have the capability to test next-generation standards and protocols, and that allows us to sort of capture more share in that part of the market. In the wafer sort part of the market that's driven really by capacity needs, there's less differentiation, less profit and more competitors. So what we tend to see is when we're in a technology-driven retooling cycle, our share tends to be high. And when we're in a much broader capacity add that our share would tend to go down a little bit. But we're always fighting and we do have share in the wafer sort space. It's just not as high as our share in the final test space.

Operator:

And our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Greg Smith:

Hi, Steve. So, thanks for your question. Definitely, large customers are a very different sales process and application process than small customers and robotics. So in small customers, the sales cycle can be quite short but the level of repeat purchases tends to be low. What we're seeing is we increase our direct coverage of large accounts from robotics is that they work against annual planning cycles and they come up with sort of multi project plans that they will put you into or not. And so since we started assigning more salespeople into this space in 2023, we now have a pretty rich opportunity funnel but it takes longer to get through that funnel than it does with smaller customers. So we expect to see a much greater impact from large customers in '24 than we do in '23. At the same time, there's also a lag time associated with the build-out of our OEM channel. So just to remind you, when I say OEM, what I'm talking about is we'll sell a robot to someone who has developed a repeatable solution, whether it's for adhesive application or welding or palletizing, they basically have a product that has our robot inside of it. And then they have their own sales and marketing and service to take care of distribution and customer service. So we signed up 48 new partners in 2023. Those partners have to go through that development process and build out their own distribution. So what we see is that, not all of the OEMs succeed. There's a certain percentage that do, and they tend to have an inflection about 18 to 24 months after the initial sign-up. So we'll -- we have sign-ups that have come from 2021 and 2022 that have inflected and are about to inflect. The ones that we signed up in 2023 are going to become a factor towards the end of '24 and into '25.

Greg Smith:

It's fair. There's still cyclicality because big companies have lean times and investment times as well. So they sort of follow these PMI cycles a bit, but they work on longer lead times. The thing that I think we're looking at long term as a key way to reduce revenue volatility is to try to increase the amount of software and service revenue as part of our robotics business. So we're working to try and make sure that we can develop some recurring revenue streams in that space. And we think that, that will have a good effect. Not immediately, but by the end of this -- by sort of the '26, '27 timeframe.

Greg Smith:

So we're always thinking about M&A. So the -- just to remind you, our capital allocation strategy is that accretive M&A is the highest priority identified use for capital. When we do not find suitable M&A targets, we return that cash flow to our investors, primarily through buybacks. And of course, we have the dividend as well. We always have a pipeline running. We're always looking at things, and we don't comment on what's in our pipeline.

Andy Blanchard:

All right, operator, we're about out of time. So I'd like to just thank everybody for joining. And if you have questions, please reach out directly to me, Andy Blanchard. Take care and look forward to talking to you over the weeks ahead. Bye-bye.

Andy Blanchard:

Thank you, operator. And good morning, everyone, and welcome to our discussion of Teradyne’s most recent financial results. I’m joined this morning by our CEO, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we’ll provide details of our performance for 2023’s second quarter, along with our outlook for the third quarter. Press release containing our second quarter 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. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne’s results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release, as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today’s call, we’ll make reference to non-GAAP financial measures. We’ve posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure were available on the Investor page of the website. Looking ahead, between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by KeyBanc, Jefferies, Deutsche Bank, Goldman Sachs, Citi and Evercore ISI. Now let's get on with the rest of the agenda. First, Greg will comment on our recent results and the market conditions as we enter the third quarter. Sanjay will then offer more details on our quarterly results along with our guidance for the third quarter. We'll then answer your questions. This call is scheduled for one hour. Greg?

Sanjay Mehta:

Thank you, Greg. Good morning, everyone. Today I'll cover the financial summary of Q2, provide our Q3 outlook and full year planning assumptions. I will also update you on our supply chain and resiliency progress. Now to Q2. Second quarter sales were $684 million, which was at the high end of our guide with non-GAAP EPS $0.79, which was above our high guide of $0.74. Non- GAAP gross margins were 58.8%. Above our guidance due to deferred resiliency costs until later in the year and improved product mix. Non-GAAP operating expenses were $251 million flat with the first quarter. Non-GAAP operating profit was 22%. We had one 10% customer in the quarter. The tax rate excluding discrete items for the quarter was 16.5% on a GAAP basis and 17.2% on a non-GAAP basis. Semi test revenue for the quarter was $475 million with SOC revenue contributing $355 million and memory $120 million. As Greg noted, we continue to see SOC strength concentrated in the auto end market. Memory sales were weighted towards technology driven buys as the industry ramps new, higher speed devices like protocol Flash for smartphones, DDR5 and HBM DRAM for server applications. System test group Q2 revenue was $94 million with $38 million in storage test, which has been down all year on continued low SLT and HDD production demand. In Wireless Test, revenue was $44 million in Q2 with ongoing low demand from both PC and smartphone end markets. Now to robotics. Revenue in Q2 was $72 million with UR contributing $58 million and MiR $14 million, which was below plan as Greg noted. FX did not have a material impact on our top or bottom line results. Shifting back to the company level financials, our free cash flow was $104 million in the quarter. We repurchased $135 million of shares in the quarter, paid $17 million in dividends and settled $2 million of debt. We have $33 million of convertible debt remaining. We ended the quarter with $813 million in cash and marketable securities. Now to our outlook for Q3. Q3 sales are expected to be between $650 million and $710 million, with non-GAAP EPS in a range of $0.61 to $0.81on 163 million diluted shares. The third quarter guidance excludes the amortization of acquired intangibles, and restructuring and other charges. This outlook is above our April view at the company level. But under the covers test is incrementally stronger, and robotics softer. Third quarter gross margins are estimated at 56% to 57%. OpEx is expected to run at 35% to 38% of third quarter sales down slightly from Q2. Non- GAAP operating profit rate at the midpoint of our third quarter guidance is 20%. A little more color on our revenue and gross margin profile for the second half. Our revenue guidance excludes approximately $35 million of test demand tied to supply constraints in Q3, which we expect to resolve in Q4. As a result, we expect Q4 revenue to be similar to the Q3 level. If we clear some of the supply constraints earlier. Some Q4 revenue and resulting profits will shift into Q3. That will put second half revenue at roughly 51% of the full year. Shifting to gross margins. Our long-term model has gross margins at 59% to 60%. In 2021 and 2022, we were in our model range with margins of 59.6% and 59.2% respectively. In April, we noted that we expected full year 2023 gross margins to be at 57% to 58% due in part to transitory costs of adding new manufacturing sites for our test products. Geographically multi sourcing components and sub-assemblies to reduce supply line risks. We're also developing multi country capability of some of our design services work. In past calls, we know that expected margins to be lowest in Q1 and improved through the year. However, the timing of these resiliency costs shifted to later in the year, which was a driver of outperformance on gross margin in Q1 and Q2. Since that spending will now happen in the second half, our margins in Q3 and Q4 will drop to reflect these costs. Net-net, we continue to expect 57% to 58% gross margins for the full year. However, some of these transitory resiliency costs have been deferred until the second half of the year. Regarding OpEx for the full year, no change from our prior guide as we expect full year 2023 OpEx to be roughly flat compared with 2022. Now to profitability for robotics for the full year. As Greg mentioned, we expect lower robotic sales for the year. Even at these reduced revenue levels. Robotics gross margins are above the corporate average. And while we expect UR to be profitable, the robotics group overall is now expected to have an operating loss for the year. Our GAAP and non-GAAP tax rates are forecasted to be 16.5% and 17% respectively, in 2023. Summing up, our stronger test businesses in Q2 more than balanced weaker robotic shipments, leading to sales at the high end of guidance with gross margin improvements yielding profits above our high guidance. We're executing our plan to improve the resiliency of our supply chain and engineering services. We're modeling full year gross margins in the 57% to 58% range in line with our April outlook and are on track to hold our full year OpEx flat with last year. We have a strong balance sheet to support organic and inorganic growth, while we continue returning excess cash to shareholders through share repurchases and dividends. With that I'll turn the call back over to Andy. Andy?

Operator:

[Operator Instructions] Our first question is from Tim Arcuri with UBS.

Sanjay Mehta:

Sure. Roughly at the midpoint, last time, we got to the SOC Tam, at the midpoint about 3.6. Now, obviously, it's Greg noted 3.7 to 4.1. So roughly a $300 million increase. And that's really tied to the compute market as a key driver. And there's we're rounding to hundreds of millions. So it's, but it's mainly in compute. And I would say, from a share perspective, our view on the full years that were roughly flat may tick a bit.

Greg Smith :

So this is Greg. Yes, we think that storage is sort of running along at a minimal ship rate, we're going to expect to continue at that rate. And there might be a recovery in 2024. But I don't think it would be a first half thing. I think that there's still a fair amount of softness in the end market for HDD, a fair amount of oversupply. So it's really only when we're going to see significant capacity inflection when hammer comes online, and demand increases, that will drive higher test times and ultimately drive additional capacity purchases. But that's probably further out in time than the first half of next year.

Mehdi Hosseini:

Yes. Thanks for taking my question. Just going back to SOC Tam, want to get an update how you see the transistor density growth evolving into 2024. I remind you a couple of years ago, the SOC test was benefiting handsomely. And then we hit the pause. And I'm just trying to get an understanding of how the growth rate is evolving into next year. And I have a follow up.

Mehdi Hosseini:

Does that imply that the growth rate would accelerate in ‘24 or would remain the same?

Operator:

Our next question is from Vivek Arya with Bank of America.

Greg Smith :

Good morning, Vivek. Thanks for the question. So the good news is that utilization hasn't gotten any worse. So tam it's up a bit so in the 2% to 5% increase in terms of utilization of Teradyne equipment. So our view is really of our own fleet, the thing that I will tell you is that there is a significant disparity in utilization between IDM and subcons. So, utilization inside of IDM is in the upper 80s. And that's well into the range where our customers are actively adding capacity. And that's really the strength that we see in automotive. In subcons, the utilization is nearly 20 points lower, but it is heading in the right direction. So I think it's a really good question in terms of how much that idle capacity will impact the size of business in 2024. So we are. that's sort of factored into our plans, we think 2024 would be stronger, but we really don't have a great idea about how much stronger it will be.

Greg Smith :

So it's a good question. The first thing that I'll point out is that the group has consistently underperformed our profit targets, it hasn't consistently lost money. So this is, I think this is really the first year where we're projecting a loss for that group. But you're right, we are in robotics for growth, and we're not delivering the growth that we expect it to from this from this business. And what we're really discovering is that there's a, f I'm going to sort of sum it up, we misunderstood how large the potential end market is, and how much the early years of those business was driven by very sophisticated early adopters, people that were like, robot enthusiast. And what we found is that as we satisfied those early enthusiasts and started moving into a larger market, where people were more focused on just buying a solution, that they didn't have the skills that they needed to put these robots into operation. So that's the logic behind our transformation in the channel at UR that by shifting more emphasis towards solution providers like OEMs, we're going to be able to provide solutions that are at the level of the capability of our customers. And by directly connecting to larger customers. Those are customers that have the heft to be able to maintain and implement the robots within their organizations. So I think that the thing that's that we're discovering is that the challenge in robotics isn't as much around technology as it is a go-to-market and a product market fit challenge. And we have a lot of evidence that our products do deliver value, we just are working out the best way to get them into the hands of our customers in a way that they're going to be able to easily adopt them.

Greg Smith :

Oh, yes. So thanks for the cue, Andy. So in terms of the competitive environment, the UR is a clear leader in its space, it has more than 3x the market share of our nearest competitor. And our shares in the mid-30s. We are, we see two kinds of competitors, industrial robot makers that are pivoting into Cobots. And sort of pure play cobot companies, mostly from China, we have not lost any significant share to the industrial robot players that have entered the cobot market in the past couple of years. But we have lost a few points of share to the Chinese pure play entrance. And almost all of that share losses specifically in China. So I said that our share was like mid-30s. worldwide, if you exclude China, our share worldwide is over 50% or around 50%. And it's much- much lower in China. And to be really frank, we are struggling with coming up with the best solution to gain share in China because a lot of that market is being served at prices that aren't profitable for us. And we're not really interested in growth at the expense of overall profitability. In AMRs, it's the Wild-Wild West, we have about the total AMR market is about $2 billion per year, and our share is probably in the range of about 3%. And we're in a crowd of a whole bunch of other companies that are in that 1% to 6% range. The thing there is that it's very fragmented, there's no clear leader and we are really working on trying to establish strategic relationships with global customers, because they're the ones that have the ability to adopt large fleets. So I think we see competition, but we believe that it's fragmented and will be able to outperform.

C.J. Muse:

Yes. Good morning. Thank you for taking the question. I guess first question, I was hoping you could speak in more detail around the $35 million shortage? Is that specific to auto? And I guess what would enable those revenues to come in earlier in Q3?

C.J. Muse:

Makes sense. I guess for mobility for ‘24. You gave some great detail earlier, but was hoping perhaps you could kind of rank order three nanometer complexity unit growth, potential for edge AI demand and any other kind of drivers we should be thinking about to support growth for that business next year.

C.J. Muse:

Yes.

Operator:

Our next question is from Samik Chatterjee with JPMorgan.

Greg Smith :

So cloud AI driving HBM and DDR5 is something that we expect to continue, it's still a minority of the DRAM shipments. And so there's significant room for it to grow. And there's also less oversupply in those parts than there is in the general DRAM market. The application of AI in mobile is going to drive the adoption of next generation flash protocols. And that will also drive performance of tester sales into that segment. And then when you look in the SOC space, there's significant business, of course, for traditional compute suppliers. But it is the primary driver for vertically integrated producers to be developing their chips. And so where we're looking for growth in those VIPs in 2024, for both especially for cloud AI, hyper scalar type stuff, but also in terms of AI capabilities and vehicles, we expect that that's going to be a driver of business from those nontraditional compute players.

Greg Smith :

Sure. So let me take that backwards. So in terms of how long does it take, we expect that we're going to see significant improvement in Q4 of this year, related both to the release of the UR20. And also, that will have given us kind of 12 months of direct account coverage in some large accounts, which is on par with what our normal sales cycle is. So we're hoping to see some improvement in Q4 results over where we are now. In terms of the scale for profitability, I think it's probably best to talk about that in terms of where we are now and where we're heading to. So our target going into 2023 was that this group was going to yield 5% to 15% profit. And we've capitulated against that because we're not achieving the growth. That is our baseline in terms of our planning for next year is to return to that range. And by the time we are at the end of this midterm in the ’22 to ’26 timeframe, we expect that profitability range to eke up a couple of points from there. But the answer to when the profits that we make from robotics is in the same range as our sort of mature semi test business. That really depends on the growth rate that we're seeing as we exit this midterm. So if we're on track, and that business is growing 20% to 30% per year, then we're going to continue to drive it in that 10% to 20% profit range, because we see a tremendous, a larger future value by doing that, if we're seeing that we've misunderstood the scale of this $500 billion potential end market, then we will be changing gears and trying to reduce our OpEx in those groups to try and get into the same range as the rest of the company. The rule of thumb that we are, that are we're planning to is we want that group to operate at a rule of 40. And I would be delighted to have it, delivering 30% growth and 10% profit exiting the midterm, because that means that we'd be on track for having that unit at multiple billions of dollars over the long term.

Toshiya Hari:

Hi, good morning. Thank you for taking the question. Greg, question on the auto and industrial semiconductor test businesses. I guess the level set I was hoping you could share what roughly what percentage of SOC tests revenue in calendar ‘23 will likely come from auto and industrial? And I guess more importantly, how are you thinking about sustainability into ‘24? I think this has been one of the most extended upturns for your customers. And for you guys as well. I think collectively, we appreciate the long-term secular drivers and you spoke to some of them in your script. But how are you thinking about the cycle into ‘24?

Toshiya Hari:

That's super helpful. And then, Sanjay, any color on how, yes, thank you.

Toshiya Hari:

That's very helpful. Thank you. And then as my follow up, curious, Greg, how you're thinking about the memory test tam into ‘24? I think the markets been very consistent over the past several years, somewhere in the $900 million to $1 billion range, this year is I guess, no exception. But given what you're seeing in HBM, given what we hope to be a recovery in ‘24, across DRAM and NAND. Is there a possibility the market kind of breaks out? And it's closer to $1.5 billion? Is that realistic? And I guess, importantly how should we be thinking about your market share? I mean, you spoke about your presence in HBM being higher than your average in DRAM. But if you can kind of provide a little more context, that will be helpful. Thank you.

Operator:

Our next question is from Brian Chin with Stifel.

Greg Smith :

Yes, so I think the way I would model it is normal seasonal Q4 plus the additional shipments of UR20. So we were expecting, our Q4 is always our strongest quarter of the year. And we have -- we've been taking orders for the UR20 for nearly a year at this point. And we have a significant backlog that will support sort of a new layer or basically represents additional SAM that we're serving that we were unable to serve before.

Greg Smith :

No. So we began shipments of the robot at the end of the second quarter, we will recognize that revenue plus continue shipments in the third quarter, but the volume per week is increasing as we go through Q4. So the bulk of the revenue is going to be in Q4.

Greg Smith :

So, it's interesting, we had a conversation about this yesterday. And we expect a pretty robust recovery in mobile over time. But at this, like while this has been going on, the amount of semiconductors in cars and the complexity of semiconductors in cars, is really accelerating. And the investments around cloud computing, and especially AI accelerated cloud computing are proceeding at a pretty good clip. So when you look back in time are sort of a large portion of the whole SOC tam was mobile and there were years for us where it was over 50% of our SOC sales went into that space. What we see looking forward is we think the whole market is going to grow at kind of 8% to 13% CAGR. That mobile will come back, but the rest of the market will have grown so that it's less concentrated in that area. So it's not like mobile's dead. But we think that there's a greater level of diversity across segments looking forward.

Sidney Ho:

Great, thanks. I just want to follow up with that Brian's question. If you look at Q4 guidance of being flat, quarter-over-quarter, you talk about the robotics business up quite a bit in Q4, but what gets you to flat revenue, in terms of what are the businesses are down taking any particular segment you would call out that may be below normal seasonality?

Sidney Ho:

Okay, that's fair. If I maybe switch over to talk about the compute SOC, Tam, sounds like that is definitely stronger, you raise it, the overall Tam. But maybe within a computer, it's now $1.3 billion instead of $1 billion that you talked about quarter ago. Within that number, how should we think about the vertically integrated producers today? And how that can look like next year? And maybe what kind of market share are you expecting within the VIP group that you mentioned?

Operator:

Our next question is from Krish Sankar with TD Cowen.

Greg Smith :

So the fun thing about HBM is that it, it doesn't go into a package. So it's essentially all way for test, there are two phases of that wafer tests. So there's a test of the memory itself. And then there is an interface performance test, which is done at the wafer level. And so once all of that test takes place, and the HBM has been built up, then it gets shipped off to be incorporated into a chiplet base design for the final product. The tam that we're talking about for HBM test is probably roughly split about half and half between the core testing and the performance testing.

Greg Smith :

No, it's much, much more diverse. So last year, like what you could probably think about is that the broad diversity of customers from last year to this year is actually increasing. But last year, on top of that broad base, a single customer did pop for a lot of capacity. So I think that's, so I guess the answer to your question is yes and no.

Atif Malik:

Hi. Thank you for taking my question. Greg, I have a question on your robotics business. You spoke about two challenges. Teradyne not able to build OEM channels fast enough. And then macro environment. And I'm just trying to understand how much of this is on you guys? And how much of it is on macro? Is it more like 60% on you guys for not building the channel? Also these higher weight robots and 40% macro, if you can help have a thought on that kind of split.

A - Andy Blanchard:

Okay, and operator, we are out of time. So everyone, thank you for joining us today and those in the queue I will follow up shortly after this call. And we look forward to talking with you in the days and weeks ahead. Bye-bye,

Andrew Blanchard:

Thank you, Latonya. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2023 first quarter, along with our outlook for the second quarter. The press release containing our first quarter 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. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure where applicable on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by JPMorgan, KeyBanc, Cowen, Stifel and Bank of America. Now let's get on with the rest of the agenda. First, Greg will comment on our results and the market conditions as we enter the second quarter. Sanjay will then offer more details on our quarterly results, along with our guidance for the second quarter. We'll then answer your questions, and this call is scheduled for one hour. Greg?

Sanjay Mehta:

Thank you, Greg. Good morning, everyone. Today, I'll cover the financial summary of Q1, provide our Q2 outlook and the full-year planning assumptions. I will also provide some financial color around our robotics companies and update you on our supply chain and resiliency progress. Now to Q1. First quarter sales were $618 million, which was $28 million above our mid-guide with non-GAAP EPS of $0.55, which was above our high guide of $0.52. Non-GAAP gross margins were 57.7% above our guidance due to favorable product mix, operational efficiencies and some resiliency costs deferred until later in the year. Non-GAAP operating expenses were $251 million, about flat with fourth quarter OpEx. Non-GAAP operating profit rate was 17%. We had no 10% customer in the quarter. The tax rate, excluding discrete items for the quarter was 16.5% on a GAAP basis and 16.75% on a non-GAAP basis. Semi Test revenue for the quarter was $415 million, with SoC revenue contributing $347 million and memory of $68 million. As Greg noted, SoC strength was concentrated in auto and industrial end markets. In memory, our sales were strongest in flash final test followed by DRAM final test as the industry ramps new, higher-speed devices from smartphone and server applications. System Test Group Q1 revenue was $75 million with $34 million in storage test and low SLT and HDD demand. Recall, SLT has high exposure to the smartphone market and as widely noted, HDD markets are weak this year. In Wireless Test, revenue was $39 million in Q1 on the impact of both low PC and smartphone volumes and a low in complexity driven test investments ahead of the expected Wi-Fi 7 rollout beginning in 2024. Now to robotics. Revenue was $89 million with UR contributing $72 million and MiR $17 million. FX did not have a material impact on our top or bottom lines. Profitability was negative in the quarter on weaker revenue growth. We are trending toward a breakeven profit this year, below our intended 5% to 15% operating profit objectives. Gross margins continue to be above the corporate average. Greg has noted reasons for growth in 2023 below expectations, which is preventing us from achieving our profit goal this year. I would like to share some thoughts to enable an appreciation of where we are with each business. In UR, we have conviction in this very large market and believe it is still sub-5% penetrated coupled with our products and ecosystem leadership. One of our challenges is our distribution approach, which we believe has limited our longer-term growth. We are executing a solid plan to move to an omnichannel, which we believe will significantly enhance our growth potential. In the slower market we're seeing this year, our traditional channels are being impacted by an outsized rate before we see a full effect -- full benefit of our new channel strategy. From a profitability perspective, UR has operated above 10% to 15% -- sorry, UR has operated at or above 10% to 15% profit since 2017 with the exception of the initial COVID year in 2020. In 2023, we expect profitability of UR to be in that 10% to 15% range. In short, we are profitable while we continue to invest in transforming our channel, introducing new products, which increase our served markets and growing our industry-leading ecosystem. Turning to MiR. MiR's earlier in its life cycle and serves a more fragmented AMR market where there is no clear leader and the top players have less than 10% share of the market. MiR's in the Top 5 participants with mid-single-digit share. We're not yet profitable at MiR, we expect to be in 2025, which is aligned with our strategy to establish a leadership position in a market with long-term upside potential. This market is also less than 5% penetrated today. Given the strong pull from our large customers, we're making substantial R&D investments needed to realize the opportunity. An attractive feature of this market is the relatively concentrated customer base, which enables a focused distribution with heavy direct involvement in sales, service and product requirements. In summary, UR is profitable with a leading market position, and we're evolving our go-to-market approach. MiR is in the heavy engineering investment phase, creating solutions in cooperation with large customers, and we expect it will be profitable in 2025. Gross margins and robotics are above the corporate average and if we do not see significant growth opportunity in the market will reduce growth in OpEx and enable this portfolio to have greater than 20% operating profits similar to our test businesses. Shifting back to the financials. At a company level, our free cash flow was an outflow of $22 million in the quarter. We typically consume cash in the first quarter as we pay out our variable employee compensation. We repurchased $93 million of shares in the quarter, paid $17 million in dividends and settled $15 million of debt. Note, the share repurchase program began in late January, so it reflects approximately two months of purchases. We ended the quarter with $859 million in cash and securities. Now to our outlook for Q2. Q2 sales are expected to be between $625 million and $685 million, with non-GAAP EPS in the range of $0.55 to $0.74 on 164 million diluted shares. The second quarter guidance excludes the amortization of acquired intangibles. This outlook is slightly ahead of our January view as automotive and industrial semiconductor test demand continues to outpace our earlier forecast. Second quarter gross margins are estimated at 57% to 58%. OpEx is expected to run at 37% to 40% of second quarter sales roughly flat with Q1. Non-GAAP operating profit rate at the midpoint of our second quarter guidance is 19%. A few points to assist you in the modeling in the rest of the year given the unusual environment Greg has described. First, the expected revenue profile. We expect Q3 sales to be similar to Q2 and Q4 to improve a bit from there. As a result, you should expect the second half will be a bit better than the first. Now to gross margins. We've improved gross margins in the first half of the year, driven by accelerated operating efficiencies and deferral of manufacturing resiliency spending to the second half of the year. Full-year gross margins will likely be 57% to 58% range. Regarding OpEx for the full-year. As noted in January, we expect the full-year 2023 OpEx to be roughly flat compared with 2022. Our GAAP and non-GAAP tax rates are forecasted to be 17% in 2023. A quick update on our supply chain. While supply -- sorry, while supply and demand is coming back into balance for most of our supply chain, we continue to see shortages in some analog and logic devices. This is impacting about 25% of Tester revenue in Q2 and is outside of our guidance range. On the supply chain resiliency front, while some spend moves from first half to second half, strengthening of our supply chain is progressing largely according to plan. For our tester product manufacturing, that work will be substantially complete in Q3, though there will be component qualifications continuing for several quarters after Q3. The changes in our supply chain for our hardware services business will continue through the year. The costs related to strengthening our supply chain are included in the gross margin estimates. Summing up, we delivered sales above the midpoint of our guidance range with earnings above the high guide on improved gross margins. The auto and industrial Semi Test markets in '23 look incrementally stronger than we expected earlier this year with softer Mobility and Compute markets. Robotics demand is also incrementally softer. In this environment, we're making the investments to strengthen our global supply chain, while maintaining the R&D and go-to-market focus to support our long-term growth strategies in test and robotics. We're doing this while maintaining roughly flat OpEx since 2021. As a result, we expect to generate solid free cash flow in '23, which will deploy to maximize value for our shareholders through potential M&A, dividends and shareholder repurchases -- share repurchases. With that, I'll turn the call back to Andy. Andy?

Operator:

Thank you. We will now conduct the question-and-answer session. [Operator Instructions]. Our first question comes from Mehdi Hosseini with SIG. Please proceed.

Greg Smith:

Hi, Mehdi, so at LitePoint, there's sort of multiple phases of Wi-Fi 6. So Wi-Fi 6 is -- the tooling for that is largely in place. But there is a transition to Wi-Fi 6E, which is probably the primary driver of Wi-Fi investments in 2023. So there's a lot of R&D and development work going on, on Wi-Fi 7 chipsets and equipment that is probably going to ramp in 2024. So we're modeling that we'll have some Wi-Fi 6E investment through this year and then growing Wi-Fi 7 investment in '24. Does that help?

Greg Smith:

That's a great question. So first, in terms of like technology transition to 3-nanometer, we've seen no real substantial changes from any of our customers in terms of the pace at which they are trying to move to 3-nanometer to support more complex designs. So that drumbeat is continuing. The thing that we are seeing is that the declines in unit volume in PCs and smartphones has created a fair amount of idle capacity that needs to get filled up before tester demand is going to return. So the -- so we think that, that is likely to be significantly stronger in 2024. At this point in time, we don't know whether 2024 is going to be good or great. The other things that are going on is like I talked about the demand in China that might be sustainable, the automotive and industrial markets have been going really, really well, and we think they have great long-term potential, but there are often temporary supply/demand imbalances. So they might get incrementally softer. So there are some things that could mute the up that you see in 2024 that I think all of us expect with sort of a return in unit demand.

Operator:

Our next question comes from Timothy Arcuri with UBS. Please proceed.

Sanjay Mehta:

Sure. It's Sanjay. So disaggregating it, we think roughly the Compute market this year is -- and I'm going to give you the rounded numbers roughly at the midpoint, Compute at roughly billion dollars, Mobility at $900 million. Auto, we believe is flattish. And again, Auto and Microcontrollers at about $600 million, Industrial at $400 million and then Service at roughly $700 million.

Greg Smith:

I can give you a little bit of color. So there's no significant change in the amount of reuse. The tester capacity that we've put in place is largely fungible across all of the technology nodes that are here now or coming. So we're really talking about what's the incremental demand, how much more capacity needs to be put in place. The one structural change is that we haven't really seen a peak in demand since leading producers of mobile phones have started to reuse silicon in lower parts of their product line. So instead of putting a new processor in all of the phones, they use last year's processor and a portion of the volume. So at this point, we haven't seen a significantly strong year since that decision has happened. We believe that long-term, that kind of thing will come out in the wash, but it may make the demand less peaky.

Operator:

Our next question comes from C.J. Muse with Evercore. Please proceed.

Greg Smith:

Yes. I think we don't have enough visibility into the way 2024 is going to shape up to really call a market size for next year? Directionally, I think it will be stronger, but I can't really tell you how much.

Greg Smith:

Yes, so the DDR5 ramp we're kind of running against the same schedules that we've had for a while. So we haven't seen any significant pushout of the technology shift. So I think we've got a pretty steady demand for the capacity to support the new technology DRAM testers. For UR20, we're going to be starting substantial shipments of that in the second half of this year. And I would say that it will have a substantial impact on the growth that we're able to achieve in UR this year. It's going to have a meaningful single-digit impact on growth.

Operator:

Our next question comes from Samik Chatterjee with JPMorgan. Please proceed.

Greg Smith:

Sure. So how sustainable. There's a fairly large capacity increase that has come online in terms of ability to produce vehicles and the supply chain has reacted to that. We are starting to see that the lead times for many of the parts, the sort of electronics that go into cars are starting to come down but there are a lot of linear devices that still have extremely low inventory levels and extremely long lead times. And so that appears to be where capacity is being added to support reducing those lead times. So if they catch up, if vehicle sales drop remarkably or if they bring that more into balance, then I would expect that to soften. But the thing I'll remind you is that the current situation for us and our competitors in this space is we're running with tester lead times that are in excess of 26 weeks. So we have a pretty good idea of what these customers are going to need over the next few quarters. And so I would say that the likelihood that we're going to see a lot of softening in that space is probably out a little ways in time.

Greg Smith:

Yes. So I really don't think I can speculate on what's going to happen in terms of those regulations. I will say that we are a supplier to the two major memories producers in China. And if there are regulations that impact that, it will have an impact on our sales there. To sort of size that, our sales to indigenous memory in China, like all indigenous in China is about 4%, 5% of total Teradyne revenues and the portion that goes to memory there is probably between a half and two-thirds of that number.

Operator:

Our next question comes from Toshiya Hari with Goldman Sachs. Please proceed.

Sanjay Mehta:

I noted on my prepared remarks, $25 million, which is outside of our range and it's roughly its SoC in memory.

Sanjay Mehta:

$25 million.

Greg Smith:

Yes. Toshiya, it's a great question. In terms of robotics growth, the first, just a quick correction. The change to distribution isn't like distribution-to-direct. It's really establishing an omnichannel strategy that we're continuing to invest in our traditional distributors. We're adding additional channels through OEMs and, in some cases, direct business. So it's not like a complete flip, but it does -- it is sort of moving resources around. In terms of market share, I agree with you. It's really hard to get market statistics about the COBOT market. The best data that we have is that from 2021 to 2022, share was relatively stable. We've got between 35% and 40% of a -- in 2023, it will probably be about a $1 billion market. Our nearest competitor has probably less than a third, a quarter to a third of that share and that number two player has shifted from year-to-year. The trend that you noted about China competitors is certainly true that the Chinese competitors are coming up, and they are doing very, very well in the Chinese market. The price points in that market are significantly lower than the rest of the world. And their understanding and knowledge of that market is better than our or other foreign competitors. So what's happening in China is that our products are tending to migrate towards sort of a premium tier, both international customers and customers that really value the ecosystem that we have. In either specialized software or specialized adapters that they can get with our products that they can't get with a local supplier. So we are -- we think we can hold the share that we have in China in that particular segment, but there's definitely a competitive threat -- pricing competitive threat from Chinese suppliers that we're really trying to deal with through differentiation.

Operator:

Our next question comes from Krish Sankar with TD Cowen. Please proceed.

Sanjay Mehta:

Sure. Thanks for the question. This year, as I noted in my prepared remarks, we're going to be at 57% to 58%, and it's really tied to both product mix as well as we've got these, what I would call, transitory costs tied to manufacturing resilience. I think when that's materially behind us, I see no reason why we don't get back to our model gross margin of 59% to 60%.

Greg Smith:

Yes. No, that's -- it's certainly a question we've been talking a lot about internally. So here's the way that we see it. The rise of generative AI, things like ChatGPT is a significant driver for additional cloud Compute capacity, especially accelerated capacity. Right now, the primary way that that acceleration is delivered is through traditional GPUs. So I would expect that, that's going to be a tailwind for our competitor who has much higher share with traditional Compute. At the same time, the same companies that are making these really aggressive moves to try and capture market share in the AI market are also the same vertically integrated producers that are developing their own ways to accelerate that type of Compute. And that's where we are investing our energy primarily is to capture those customers as they bring that kind of technology to market. I don't want to give you the impression that we're -- that like we have VIPs locked up, but it's a different situation than the traditional Compute suppliers, because these new players don't have a long history of working with any particular vendor. So we are in shootouts in most of these places, and we're winning more than our fair share. And so as this market evolves and AI becomes a more important part of the vertically integrated producers or hyperscalers, the overall value delivery. Our hope is that these internal devices will long-term have a higher growth than traditional Compute. So short-term, really strong for traditional. Longer-term, better for vertically integrated.

Greg Smith:

In 2023, I would -- my guess would be that it's bigger, but I don't know an exact number.

Operator:

Our next question comes from Vivek Arya with Bank of America. Please proceed.

Greg Smith:

So Vivek, the things that we are looking at is we don't see a fundamental change, like you said in terms of a maturing of our consumer markets. We see the primary driver of the growth in semiconductor test to really be the pace at which leading chipmakers adopt new process technology. And there's a -- the thing that has happened is that the transition from 5-nanometer to 3-nanometer has taken longer than people expected. And I think that, that has contributed to some of the wall in the growth that we've seen in this market. But if you look, there is this -- there's a number of steadily increasing capability 3-nanometer nodes that are coming from both of the major foundries and behind that, there's a gate all around technology that's coming as well. And so as we talked about, the Compute and Mobility is 70% of the SoC test market. And the complexity in the Compute and the Mobility space is also the primary driver for advanced memory technologies and memory density improvements. So as long as that fundamental pace around nodes and node technology continues, then we think that the fundamentals for the growth are strong. I also noted that there is a significant amount of wafer front-end capacity that has gone in, but has not been turned on yet. And we think that that is a long-term driver for demand in the test space, because it's essentially the test equipment of dark fiber. It's there. It's going to get turned on and when it is, it's going to require testers.

Greg Smith:

Yes. I haven't really looked at second half, there.

Greg Smith:

So and to the other part of your question, so -- actually, I'm sorry, could you repeat the second half of your question?

Greg Smith:

Okay. Yes. So it's a really good point and something that I think it's important to communicate clearly. We believe that the complexity increase enabled by 3-nanometer is on track to what we've modeled before. The reason that we are not seeing significant demand increase in 2023 is because the amount of capacity that is available driven by lower unit volumes is sufficient to absorb that complexity increase. So as unit volumes increase, we believe that we'll see the full effect of that higher complexity.

Operator:

Our next question comes from Brian Chin with Stifel. Please proceed.

Greg Smith:

Yes. So I -- Brian, it's a great question. Every year, this is sort of how the year starts that depending on the view from our perspective, the view from their perspective, you end up with a different view. And I think the challenging thing for us is predicting how strong or weak their business will be. And the same thing is true for them, is trying to predict how strong or weak our business will be. And so right now, you see that divergence. By the way, the same thing basically existed last year. And quarter-by-quarter, those numbers tend to converge. And you can take a look -- basically, I'd like to say that we feel pretty comfortable with the range that we set, the 3.3% to 3.8%. And we'll see if things strengthen through the year, we'll adjust that range quarter-by-quarter. But I don't -- I guess I don't see it as unusual as you do to see that kind of a spread.

Greg Smith:

Actually, I don't want you to walk away thinking that. I think we ended up having a more accurate prediction last year than they did at the similar time, but if you look at it this year, I don't know that our molds are better than their molds for sure.

Greg Smith:

Yes. So that's -- it's like you're sitting in our strategy sessions. So the way to think about the omnichannel is that we are doing this in steps. The first significant new channel that we're -- that we've established for you are is the OEM channel. And that from '21 to '22 the OEM channel grew 16% year-on-year. From '22 to '23, we expect that same channel to deliver like 20% growth, even though, overall, the UR growth is going to be significantly lower. In this year, we're taking steps to try and establish more effective coverage of large accounts, and we expect that to start delivering towards the end of this year and to significantly impact growth in 2024. After that, we have other channel additions that we'll be making. So the idea is each one of these channels, we think, is capable of delivering kind of 20% to 30% growth. And as we add new ones, they're going to have a multiplicative effect. So we have each channel growing at that rate and then adding a new channel which adds a new growth source. So that's definitely the reason why we have some confidence about the 20% to 30% growth per year over the mid-term, even though we're starting at a much lower rate. Now the second question that you have in terms of a broader portfolio, yes, once we build this omnichannel, it is going to be a very powerful advantage for us in our Robotics business. And we will be looking to try to find ways to leverage that strength to find other growth engines.

Operator:

Our next question comes from Joe Moore with Morgan Stanley. Please proceed.

Sanjay Mehta:

Yes. Great. So last quarter, we had a little bit of market -- or component constraint as well. We brought in roughly $10 million of that constraint into revenue into Q1. And I'd say that overall, supply and demand is kind of coming in more into balance, really with the fall off of demand. And fundamentally, we see things normalizing. I would say that there are a couple of suppliers with still very long lead time for some unique components that we source, and really that's driven by demand that has just started to spring up where obviously, we have supply chain programs. We have available slots. But when several customers in specific industries or end market segments are coming in that really ends up outstripping our availability to supply. So think about it as a couple of key component suppliers in a couple of the markets that we're seeing an uptick in that's higher than our expectation, which is great. I expect that this quarter will be $25 million -- as I noted, $25 million outside. Obviously, we're doing our best to service the customers. I see that hopefully going down into '24. But with this uptick, the good news is we have the opportunity to solve these problems, and we're working very hard to do it. We have a track record of execution. So just think of it as tied to a couple of key components.

Sanjay Mehta:

Yes. I'd say going back to '21 and kind of the first part of '22, I'd say there was a wide variety of component supply chain issues that occurred. And think about it, the band is narrowing considerably. While there's a couple that are still out there, that we're working through and working very closely with our suppliers that are showing continuous improvement.

Operator:

Our next question comes from Steve Barger with KeyBanc. Please proceed.

Greg Smith:

Hi, Steve. So it's a pretty insightful question. So the thing that is going on. And if you look at us versus other industrial like robotics companies, you'll see that our results are significantly more volatile. And the biggest difference between us and them. And still, like if you think about cobots, they are $1 billion of about a $12 billion industrial robot market. The rest of the industrial robot market is running with one to two year lead times. And they are still very busy shipping product to help put together a whole bunch of EV factories and battery factories. That's a business that is not really core to the cobot space. And so I think that the -- one of the things that's going on is there's significant consumption of electronics into the other parts of the Robotics business, but our business tracks like PMIs and other broader indices a little bit more closely than that longer lead stuff.

Greg Smith:

Yes, so it's -- the -- I don't really think of it in terms of a volume play, because that infers sort of commoditization, and we don't really see that happening. This is a high-tech space where technology differentiation actually matters. Having a better robot, having better software, easier-to-use capabilities, that makes a big difference as does having an ecosystem of partners that can help people build solutions quite quickly. The focus on large accounts, I think of that primarily in terms of our cost of sales, that by concentrating on a smaller number of larger accounts, we can sell more robots per account, and that allows us to grow with -- like that our sales growth will outpace our sales cost growth over time. So I see that as an efficiency game. The comment that you made about hardware versus services, I think that that's an important aspect of our future plans that we think that there are profit pools in retaining an engagement with customers that have bought our product, both in terms of providing service, but more importantly, in terms of providing new types of software, new components that will allow them to get more out of the product in the future. At the end of the day, our robots are really reliable. They don't break that much. So like a break-fix business, I would not expect to be a huge volume generator, but as robots get into more and more critical processes, these customers are going to want to pay for uptime and that's a more lucrative service model.

Greg Smith:

Well, we might want to get a beer to have that conversation. I think that like in a nutshell, we believe in service as a service, right that the models where people are trying to offer hardware that depreciates as a service is largely around who carries the depreciation, and I think it's an interesting model at the low levels of penetration that we have right now in robotics because customers are reluctant. They're worried about making investments that won't pay off. And robots as a service allow them to walk away more easily. We're far more focused on solving those problems so that customers are willing to make those investments, because they're smart enough to figure out if they get a better deal by carrying the depreciation versus paying rent for the robot. And that's basically what you're talking about.

Andrew Blanchard:

Hey operator, we're going to try to sneak in just one more question, please, if you would.

Vedvati Shrotre:

Hi. Thanks for taking my question. I guess my first question is on the high bandwidth memory side. Do you think that kind of put a positive angle on the test intensity on the DRAM side. Is that an angle of just considering that these are advanced packages? Does that increase your test intensity or how should we think about it?

Vedvati Shrotre:

Okay. Got it. And sir, for my follow-up, on the auto industrial markets, I have kind of a two part question for this. So the market share has always been sort of 50-50 between Teradyne and Advantest. Are there any pockets where you would see your market share sort of be more dominant? And then as a follow-up to that, some of the front-end equipment players have been talking about China restrictions or getting clarifications on China restriction. Has that impacted you in any sense? Like do you expect some sort of clarifications and China restrictions drive your revenue sort of up better than what you expected?

Vedvati Shrotre:

That's helpful. Thank you.

Operator:

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

Andrew Blanchard :

Thank you, Daryl. 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; President, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2022's fourth quarter and full year, along with our outlook for the first quarter of 2023. The press release containing our fourth quarter 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. Replays of this call will be available via the same page 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 language contained in the earnings release as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of events occurring after this call. During today's call, we'll make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial as it were available on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Citi, Susquehanna, Luke Capital and Morgan Stanley. Now let's get on with the rest of the agenda. First, Mark and Greg will comment on our recent results and the market conditions as we enter the new year. Sanjay will then offer more details on our quarterly results, along with our guidance for the first quarter. We'll then answer your questions, and this call is scheduled for 1 hour. Mark?

Greg Smith:

Thanks, Mark, and good morning, everyone. Today, I will summarize the full year of 2022 and then comment on our early view of 2023. For the full year, we delivered sales of $3.155 billion and non-GAAP earnings of $4.25 per share. 2022 was the second-highest revenue in company history but down 15% from 2021's record level due mainly to reduced demand in SOC test, specifically in mobility and compute. This offset was -- this was offset somewhat by strength in the automotive end market, including substantial demand for ADAS processor test. Overall for 2022, we estimate the SOC test market was about $4.6 billion, down 6% from '21, and the memory market was down a similar amount for the year. Industrial Automation grew about 7% in dollar terms. Foreign exchange was a major headwind in that business. Our growth was 15% in constant currency. I'll divide my comments on market conditions into an early view of 2023, followed by our outlook for the midterm. In July of last year, we noted the Semi Test equipment market was entering a downturn, with demand declining in end markets such as smartphones. This began to create chip supply/demand and inventory imbalances. We noted these types of corrections typically have a 4- to 6-quarter duration. Now we're a bit more than 2 quarters in, and as the downturn continues, our customers continue to rebalance their production and inventory with end market demand. Much of the imbalance is in test-intensive end markets like smartphones, compute and networking, where we see lower utilization. At this point in time, with limited visibility into the second half, we estimate a market size for SOC tests to be 10% to 30% below 2022's $4.6 billion level. Major SOC producers are expected to start the transition to 3-nanometer later in 2023, and this could mitigate the headwinds a bit. Our historically largest end customer is expected to lead this transition, and revenue driven by this customer is expected to grow in 2023, moving from less than 10% of our revenue in 2022 to low double-digit percents of revenue for this year. Demand won't be finalized until Q2 and will be weighted towards the second half of the year. In general, our models factor in 2 key demand drivers, unit volume and device complexity. We've read the same press reports that you have, that smartphone volumes are likely to be down in 2023. The complexity growth associated with the 3-nanometer transition is likely to offset the test demand impact of the unit decrease, and the net effect is the increase in revenue that I've described. Our assumption that this transition is going to be gradual is likely to mute the peaks, but it will also fill in the troughs as the full portfolio migrates to 3-nanometer. Overall, averaging across the entire life of a process node, like 5-nanometer or 3-nanometer, we expect that each new node will drive continued higher test investment in total than the prior node. On top of that, increased unit growth and the addition of new part types to the portfolio will drive further increases in test investment. In the memory test market, technology transitions continue to drive demand. Faster interface speeds in DRAM with DDR5 and in flash with UFS 4.0 cannot be tested on existing testers and are driving purchases of next-generation ATE. Offsetting this technology-driven replacement demand is a difficult end market for our memory customers, which is likely to reduce capacity buying for this year. We are seeing some impact of that in the first quarter. On balance, we expect the memory test market size to be flat to slightly down from 2022. We expect Storage Test will be weak in 2023 due to excess capacity in the HDD end market. And Wireless Test demand will be soft on lower smartphone shipments and a demand lull in advance of the transition to WiFi 7 beginning in 2024. Shifting to Industrial Automation. As we expected, the macro-outlook in industrial markets is cautious, with weak industrial PMIs. We expect this will be a growth headwind in the first half of the year. Rolling up these headwinds and offsetting factors over the first half of the year, our current judgment for the total company has our second quarter about flat with Q1. However, in Industrial Automation for the full year, we have 3 notable factors that should help offset these headwinds later in the year. First, we do not expect the currency exchange impacts we experienced in 2022. Second, growth initiatives that began in 2022, including a channel transformation at UR, will gain traction. One component of the channel transformation is supplementing our traditional distributor channel with a focused OEM channel. That effort delivered 26% growth in 2022, and we expect this to continue in 2023 as our existing OEM partners continue to grow and we add additional OEMs and targeted verticals. The third factor driving IA growth is expanding the served market through new products. Most notably, in 2023, shipments of the new long-reach, heavy-payload cobot at Universal Robots, the UR20, which will ramp in the second half of the year. Barring a significant deterioration in the macro economy and reasonably stable currencies, we expect channel expansion, combined with new products, to drive greater than 20% growth for IA in 2023, weighted to the second half of the year. Now shifting to the midterm outlook. The short-term changes in customer buying patterns in semi cap equipment can be abrupt. We built our flexible operating model to accommodate those cycles. Our midterm plans track the long-term historical trends and the future demand drivers in each of our businesses rather than the short-term cycles. In any given year, we will land above or below trend, but that trend line has provided a reliable baseline for planning. Sanjay will be going through a quantitative view of our 2026 earnings model. To set up that discussion, I'd like to make a few qualitative comments to provide some context. Our 2026 earnings model shows significant revenue and EPS growth, and it's reasonable to ask why we assume midterm growth when the short-term environment is so weak. There are several factors that give us confidence in our midterm outlook. End markets, like AI and cloud computing, mobile processing and automotive, including ADAS and EV, are driving increased semiconductor content and increasing chip complexity. The deployment of advanced wireless standards will support ever higher data volumes and the pervasive deployment of edge AI. This end market demand will drive the timeline for new semi fab nodes and packaging technologies, like 3-nanometer, chiplets and gate all around. We have seen these technology transitions drive demand for test as the new nodes enable more complex chips and multichip packaging technologies like chiplets drive higher quality level requirements. Both of these factors drive longer test times and higher ATE TAMs. But the landscape is changing. These complex chips are increasingly developed by a new class of vertically integrated producers, or VIPs, including hyperscalers and automakers. We've had good design-in success to date with this emerging customer type, and these VIPs provide Teradyne with an opportunity to grow share in a space long dominated by legacy x86 architectures, where our share has historically been lower. These large, complex devices are used in uptime-critical applications and will require exceptionally low defect levels. To achieve this quality level, our customers will increasingly adopt an additional test step, system-level tests or SLT. We have a strong footprint in this growing market, and our design-in success with new customers is expected to be a growth driver over the midterm. Over the midterm, we expect to see WiFi 7 ramp and the rapid expansion of UWB-enabled devices for both precision location tracking and security. These new standards obsolete existing test instrumentation, and this replacement cycle will be a growth engine over the midterm for both SOC test and Wireless Test. Turning to IA. Global labor shortages and converging regional wages will continue to be unrelenting demand drivers. Market penetration for collaborative robots, including AMRs, is under 5%, providing enormous opportunities for long-term growth. The steady application of new technologies in our products will continue to expand our served market, and the transformation of our channel will enable us to serve a broader range of customers and drive revenue to the $1 billion level in 2026. Summing it up. Over the midterm, our strong core test businesses will support share gain and trend line growth, while IA will grow to be about 20% of company sales and become a meaningful contributor to earnings. In 2022, we have planted the seeds for future growth. We expanded our design-in footprint in the vertically integrated producer space and recognized substantial revenues from this emerging market. We expanded our customer base in SLT. We grew our IA sales in challenging business conditions and set the foundation for higher long-term growth at both Universal Robots and [Newark]. We're in a cyclical downturn in the semiconductor capital industry, and visibility in downturns is always a challenge. We expect sales and earnings to be below our midterm trend line in 2023. While we don't have line of sight to an inflection in demand, that's typical in these cycles. The market will recover, and we expect to return to historical growth rates driving strong earnings over our midterm planning horizon, as Sanjay will describe. Before turning it over to Sanjay, I would like to thank Mark for his more than 40 years of service to Teradyne and his 9 years as CEO. He has steered the company through an extraordinary period in the semiconductor industry and helped to assure our future growth through our investments in robotics. More personally, it's been an honor to work for Mark during that period. His candor and insight has made me and all of us at Teradyne better. Although we're facing a cyclical downturn, we're facing it as a company with tremendous financial strength, a great team and a clear strategic vision, thanks to Mark. Now Sanjay?

Andrew Blanchard :

Thanks, Sanjay. Daryl, we would now like to take some questions. [Operator Instructions].

Mehdi Hosseini :

The first one has to do with the Semi Test cycle. You did mention in your prepared remarks that perhaps we are in the second quarter of a typical downturn that would last 4 to 6 quarters. But wouldn't that be fair to say that the situation with Teradyne Semi Test is different? If I just look at your guide for Q1, it would suggest that Semi Test is already down by more than 50% since the peak some time in early '21, and perhaps Teradyne is well into the semi cycle correction. I would appreciate if you could help me reconcile, and then I have a follow-up.

Q - Mehdi Hosseini :

Got it. As my second as a follow-up and as a follow-up to your comment, would it be fair to say that you have pushed out your targeted model by 2 years because you just -- we don't know the rate of recovery into '24, and yet you have a new target 2026. We may go through another downturn before we get to that target. But the main valuable here is the rate of recovery into '24, and we just don't know. And I also want to thank Mark for all the calls that he has hosted and wish him the best of luck in his next endeavor.

Mark Jagiela:

And maybe, Mehdi, thank you for those kind comments. I'll just make one quick comment on your first point, which is every downturn cycle, as we try to measure, it's different. But if you classify it around when does the imbalance between semiconductor supply and demand start to inflect and cause an industry-wide downturn, from that point of view, we see it as something that started last summer. So that's how -- why we mark it back to that date.

Timothy Arcuri :

So the SOC TAM in 2022, it came in at the high end of what your range was. So what segment drove that in 2022? And then, can you also segment for us, in 2023, how you see the mix? I mean, I think this year, you'd been -- you sort of gave us some numbers for each of the markets. Can you sort of tell us -- if you just take the midpoint of that down 20%, can you tell us sort of what the mix will be, and how the different markets will change?

Timothy Arcuri :

Okay. Okay. Got it. And then I guess, Greg, since you're taking over for the company, I know you've been running IA. And I guess the indictment I would have over the past 5 -- well, really more like 7 years in IA, the growth expectations sort of have consistently been downticking since 2017 or 2018. And I get there's been a ton of macro headwinds. But can you just sort of take a step back and sort of assess maybe the competitive element in the market? Do you think some of it is competition? I know you'd like to maybe do some M&A, it sounds like in IA. So I think some -- I mean I just get a lot of questions from folks that just question whether there really is as much growth in IA as you think there is because the model does keep on pushing out.

Operator:

Our next question has come from the line of C.J. Muse with Evercore.

Greg Smith:

Sure. No, it's a good question. We're very cautious about making predictions about 2023. We have a reasonable line of sight, but a lot of uncertainty around even just the first half. In the second half, there are some things that could break our way and could drive both the market larger and our share higher. And there has also been -- in 2022, there's been quite strong buying in compute with traditional customers that has tended to push our share down. So I can't really give you sort of a target number for share in 2023, but we believe that we're going to see some share recovery.

Greg Smith:

Yes. So I think you hit many of them. So I think that we are more bullish about 2024 than we are about 2023, certainly. There's -- it's a cloudy crystal ball to try and figure out what's going on. But the positive drivers, I think you hit an important one, that 3-nanometer is going to have much broader adoption across the industry, and 3-nanometer enables a significant increase in device complexity. That's always been a really good driver for ATE TAM. The hyperscalers and automakers, we think that, that is going to be a -- we tend to think of it more as a share gain opportunity than a real TAM driver. So if you think about -- the end market has a demand for a certain number of semiconductors, those semiconductors are going to come from traditional suppliers or these vertically integrated producers. We think that we have an opportunity to do well with that class of customers and potentially shift some share. Overall, I think I hit kind of the high points around AI, cloud computing, a recovery in mobile and especially increasing semiconductor content in automotive. The one thing that could happen in 2024 is we're seeing unit declines in smartphones in 2023. And typically, if people take time off, if they slow down their refresh cycle for their phones, the following year tends to have a little bit more positive task to it. So that may also help with the rebound.

Samik Chatterjee :

I guess for the first one, I know you're sort of seeing the test market, particularly on the SOC side, being down, particularly in the first half. But -- I mean, you called this sort of the early part of a down cycle as well. But when you sort of rely on your experience going through prior down cycles, how would you sort of think about the recovery path between the different pieces here? Like should we expect memory test to sort of rebound sooner? Or are there certain pieces of SOC that you would expect to sort of rebound a bit faster than the others? How should we think about sort of the recovery path? And then I have a follow-up.

Samik Chatterjee :

Okay. And for a follow-up, and I apologize if you've discussed this already on the call, I jumped a bit late. But in terms of sort of your expectations for what sounds like a bit better sort of second half versus first half, I mean, is -- how much of that is driven by sort of one of the primary customers moving to 3-nanometer? And have you -- are you able to provide a split of how you're thinking about sort of first half versus second half in terms of revenue?

Greg Smith:

Yes. But we're not able to sort of predict a 2023 in full, so we really can't give you an exact percentage, this percent first half, this percent second half. We're cautiously optimistic that it will be bigger.

Brian Chin:

Again, best of luck, Mark. And Greg, congratulations and look forward to working more with you. Maybe first question, just to clarify on the complexity. You outlined again that you expect your largest customer to grow year-over-year and expect -- I believe that complexity-driven revenue will occur mostly in the second half of the year. And so while the sizing sounds fairly similar, is this later than you anticipated maybe 3 months ago from a timing perspective? And just how would you describe why that those shipments could occur later towards the second half versus sort of maybe in 2Q, but where I might normally expect it to be concentrated?

Brian Chin:

Got it. And I mean this is probably just geared up to a plan at the moment, which obviously is subject to change or revision. But do you have sort of a -- or could you give us a sense of where test cell utilization is broadly across our device end markets? Maybe where you think it gets to by midyear and where it could end the year, based on your current planning?

Brian Chin:

Got it. I appreciate the comment. Maybe if I could just sneak one thing on Automation. Greg, you provide a growth rate for the OEM business through UR, 26% last year. Can you give us a sense of how large that is, the significance relative to UR sales? And also, is that margin profile similar or different relative to traditional channels?

Operator:

Our next questions come from the line of Toshiya Hari with Goldman Sachs.

Greg Smith:

Yes. We're -- I think it's safe to say that we're baking in conservatism into the 2023 plan for Automotive and Industrial. It's been a very, very strong year for that in 2022, and it sustained very well through the whole year and into the first quarter. But we've definitely modeled declines in that market as well.

Greg Smith:

Yes. So it's an interesting question because I helped to bake this cake. The strategy that we have in terms of a capital allocation strategy that prioritizes M&A, share buybacks, dividends, nothing is going to change in terms of that strategy. The thing that's happened is we've been on the sidelines since 2019 in terms of M&A, mainly because when we did our analysis of the valuations, it didn't seem like we would be able to do something that was beneficial to our shareholders by using our capital in that way. It's a different market now. And we assume that valuations are going to become more reasonable. And so you may see different outcomes across the next few years than you've seen in the past few years. That's not a reflection of a change in strategy, it's more of a change in the business conditions.

Vivek Arya :

Congratulations and best wishes to both Mark and Greg. For my first one, from what you have described about the different segments, it seems like full-year sales are in the ballpark of being down 10% to 15% year-on-year. I just wanted to make sure I'm in the ballpark. And if yes, I wanted to check how you expect your mobility sales to do this year versus last year.

Vivek Arya :

Got it. And for my follow-up, I'm curious, for the 3-nanometer transition, do I absolutely need new testers? Or is it possible to just reuse existing tester capacity?

Vivek Arya :

Got it. So there is a scenario where, if 3-nanometer volumes are low enough, that they don't really need to buy new testers in the back half, right?

Operator:

Our next questions come from the line of Krish Sankar with Cowen.

Sanjay Mehta:

Sure. Thanks for the question. So I think a couple of things are included in our plan. The first thing is we expect to gain some operational efficiencies, some tied to specific programs, I would say, mainly in our IA portfolio. There are also some price increases baked into our -- that are rolling through in the second half, and some volume that is anticipated in the second half.

Greg Smith:

Yes. So that's -- it's a good question because most of the business that's going through Chinese OSATs, it comes from 2 places. There are local Chinese fabless specifiers that are driving volume through that value chain. And then there's also companies that are from other places that are utilizing those facilities. What we expect is that, if there are issues in terms of producing chips in China because of any sort of restrictions, the non-Chinese specifiers will move their supply chains. They still need to build their chips. They will move to other parts of the world, other facilities to do that. The indigenous Chinese sales, that could be affected by the new trade regulations that are in place. But I'd like to point out that, that's not the majority of our revenue in China, and it's not the majority of the business that -- of the TAM in China. So our exposure there is limited to probably less than 5% of our total revenues.

Vedvati Shrotre:

So I just wanted to dig in a little bit on the compute SOC side of things. So you mentioned that you're seeing a lot of digestion that's going on in the traditional x86 markets, where you have lower share. So does that, in a way, put you in a better position? Are you seeing things -- are things different on the hyperscalers versus the traditional x86 architectures?

Vedvati Shrotre:

That's great. And then for my follow-up. On the automotive side, there's, I think, portion of your revenues are tied to legacy parts and some would be more on the ADAS side of things. Could you help me understand like what that split is, essentially? Is it a 50-50 split? Or is it more levered to traditional and less towards ADAS or other way around?

Andrew Blanchard :

And operator, can we sneak in just one last question, please? Operator Our final questions come from the line of Sidney Ho with Deutsche Bank.

Greg Smith:

Yes. So I don't think I want to comment on the specific numbers. But directionally, I think you're not wrong. And your comment about smoothing out the troughs, that's our belief as well. As to what the sort of steady state average is, I think we're going to have to wait and see. We're pretty -- we have some optimism that, that average is going to be strong because of both new parts coming into the portfolio and the transition of the portfolio of all processors going to 3-nanometer and continuing to march in that way. So that's -- I think that's kind of our view, that we have some optimism that the peaks are going to be lower, the overall is going to be stronger.

Operator:

Thank you. This does conclude today's teleconference. We appreciate your participation.

Andy Blanchard:

Thank you, Andrew. 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; President, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we’ll provide details of our performance for 2022’s third quarter along with our outlook for the fourth quarter of 2022. The press release containing our third quarter 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. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne’s results to differ materially from management’s current expectations. We encourage you to review the safe harbor statement contained in the earnings release as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today’s call, we’ll make reference to non-GAAP financial measures. We’ve posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure were available on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Baird, Credit Suisse and UBS. Now let’s get on with the rest of the agenda. First, Mark and Greg will comment on our recent results and the market conditions as we enter the new quarter. Sanjay will then offer more details on our quarterly results along with our guidance for the fourth quarter. We’ll then answer your questions and this call is scheduled for one hour. Mark?

Greg Smith:

Thanks, Mark, and good morning, everyone. Teradyne’s third quarter sales and profits were above the midpoint of our guidance in revenue and profit with sales of $827 million and $1.15 in non-GAAP earnings per share. At the company level, the quarter unfolded generally as planned, but at the operating level, we cleared some supply bottlenecks, which allowed us to ship more semiconductor test products than planned in the quarter. On the other hand, industrial automation was weaker than we forecast in July. Putting the third quarter into context. When we spoke in July, we noted that slowing SOC and wireless tester demand in the second half were related to declines in the end market shipments of smartphones, compute products and associated infrastructure. With that backdrop, we reduced our estimate for the SOC market size and reduced our second half shipment plan approximately $300 million. About one-third of that amount was already confirmed in June and about two-thirds, $200 million was our judgment on how the second half would unfold. In the subsequent three months, about $110 million of the $200 million additional decline was realized and about $90 million was not as overall test demand held up better than we expected in July. This incremental strength and test has been partially offset by weaker IA demand as reflected in the Q4 guidance. The highlight in Semi Test is the continued strength in automotive test demand. This year, we’re seeing a step increase in our shipments for ADAS processors, silicon carbide drive and charging ICs and battery management devices. Our UltraFLEX platform is well aligned to the unique requirements of multibillion transistor ADAS processors and our Eagle platform is well suited for the thousands of volts and hundreds of amps often required for silicon carbide devices. It’s notable that these three device types collectively will add over $100 million of incremental SOC TAM in 2022 and they were insignificant five years ago. Shifting now to industrial automation. Because only about 30% of our sales are transacted in dollars and there have been significant changes in exchange rates in 2022, will describe results in both constant currency and dollar terms. In constant currency, Automation Group Q3 revenue grew 7% from last year’s Q3 and is up 19% for the first nine months of the year. In dollar terms, however, revenue contracted 2% in the quarter compared with Q3 2021 and growth is 11% for the first nine months. Looking at the full year, we expect IA growth from 2021 will be about 6% in dollar terms at the midpoint of our Q4 guidance. In constant currency terms, IA growth will come in at about 14%. Even using constant currency terms, this is below our 2022 plan to grow in the mid-30s, from the 2021 level and reflects two additional factors. First, slowing industrial activity, especially in Europe, where PMIs dropped below 50 in July and have remained in that contraction zone since. Europe is our largest end market for automation and this is a 10-point headwind to growth. Second, labor scarcity continues in our distribution channel, which we expect to reduce growth by about five points. While 2022 growth is below our plan, we have a number of bright spots in IA, and I will highlight just a few. At Universal Robots, customer demand for our higher payload, longer-reach UR20 has been stronger than expected since its introduction mid-year, and we expect it to be a meaningful contributor to results when it begins shipping in 2023. The UR20 expands our capability in the palletizing, welding and machine tending end markets. Also, we’ve continued to grow our OEM channel at UR including supporting partner expansion from national to international sales coverage. The OEM channel is a powerful growth driver for us. For example, our welding channel grew over 80% in the first nine months compared with last year. And for this year, we expect to ship well over 1,200 robots in that vertical. At MiR, our sales to large customers continue to expand with more than 30 customers having fleet sizes greater than 20 robots. The number of customers with these large fleets has increased 30% in 2022. This is significant as our fleet management software is an increasingly important differentiator as fleet sizes grow. On a related note, at the end of Q3 we merged AutoGuide into MiR as we prepare to offer customers a broad payload range from hundreds to thousands of kilograms sold by the same team using the same fleet management software backed by the same global distribution – same global network of distributors, all while increasing our engineering, marketing and back-office leverage. Finally, MiR service and spares revenue has more than doubled to about 5% of revenue through the first nine months compared with 2021 as we begin to expand our customer support offering. Across Industrial Automation, the investments we’re continuing to make are giving us the foundation to support high growth with differentiated products to global customers through multiple distribution channels. While we are not satisfied with 2022’s growth rate and have taken actions to improve, we remain confident of our long-term strategy in these growing markets. With that, I’ll now pass it back to Mark.

Sanjay Mehta:

Thank you, Mark. Good morning, everyone. Today, I’ll provide details on our Q3 results, update you on the impact of the new trade regulations and describe our Q4 outlook. Now to Q3. Third quarter sales were $827 million, with non-GAAP EPS of $1.15. Non-GAAP gross margins were 58.7% and our non-GAAP operating expenses were $247 million. About flat with second quarter OpEx due to implemented spending controls. Non-GAAP operating profit was 28.8%. We had one, 10% customer in the quarter. The tax rate, excluding discrete items, for the quarter was 18.7% on a non-GAAP basis. Please note, you should now use 17.25% for the full year non-GAAP tax rate. Looking at the results from a business unit perspective. Semi Test revenue was $576 million with SOC revenue contributing $451 million and memory of $125 million. We cleared some supply constraints, which enabled the highest level of memory shipments in the past two years. In memory, the transitions to new memory standards in both flash and DRAM, along with strong demand from indigenous China customers drove the results. In SOC, the increasing semi content for EVs, autonomous driving and infotainment and autos, along with continued strength in analog industrial contributed to the demand. System Test group had revenue of $116 million with Storage Test delivering $70 million in Defense and aerospace and production board test $46 million. In Wireless Test at LitePoint, revenue was $46 million in the quarter, down 33% year-over-year, primarily because of lower WiFi revenue tied to declining PC and smartphone end markets. Now to Industrial Automation. IA revenue was $89 million with UR contributing $73 million and MiR $16 million. MiR results include auto guidance. As Greg noted, a large portion of IA sales are outside the U.S. For the first nine months, 41% of IA sales were in Europe, 29% in the U.S. and 11% in China and the remainder in the rest of the world. From a financial perspective in IA, the group was slightly above breakeven on a non-GAAP operating basis in the third quarter. And for the full year, we expect to be about breakeven. Below the 5% to 15% profit range planned for the group. As growth has slowed this year, we’ve also slowed the growth in OpEx. Shifting to supply. Looking at Q4, we continue to face supply issues, but the supply trend continues to improve relative to three months ago. These supply bottlenecks noted at the beginning of each quarter have moved from $50 million in Q3 to about $15 million in the fourth quarter. These amounts are outside the high end of our guidance range. Switching to a strategic issue. We manufacture certain products and deliver certain engineering services in China for our global customers. While recent U.S. government actions have no immediate impact to these operations, due to concerns about potential future impacts, we are accelerating our strategy to expand our manufacturing and engineering service capabilities in other countries. In manufacturing, this work has been underway for several years and we’re accelerating the work to complete our expansion strategy in the next several quarters. In Engineering Services, the transition will likely take most of 2023 to achieve. Shifting to the balance sheet and cash flow. [Technical Difficulty]

Andy Blanchard:

Did John say where we lost it?

Andy Blanchard:

Hey, Andrew.

Andy Blanchard:

All right. We’re ready to go.

Andy Blanchard:

Back to you Sanjay.

Andy Blanchard:

Thanks, Sanjay. Andrew, we’d now like to take some questions. And as a reminder, please limit yourself to one question and one follow-up.

Krish Sankar:

Hi. Can you hear me?

Krish Sankar:

Yes. Hey thanks for that – thanks for taking my question. I had two of them. First one, Mark, I’m just kind of curious, you’ve seen – industrial automation flow, you’ve seen mobile compute flow, and then I understand the demand drivers for ADAS and auto. Do you worry that auto and industrial tests is the next shoe to draw? Or do you think that it could be resilient into 2023?

Krish Sankar:

Got it. Got it. That’s very helpful. And then the quick follow-up, I think you mentioned that the China impact was probably $75 million to $100 million headwind in 2023. I’m kind of curious, you mentioned a lot of the exposure was through memory. What about the China OSATs? I thought you had pretty high exposure over there too, or is that part of this $70 million to $100 million headwind?

Krish Sankar:

Got it. Got it. Thank you very much.

CJ Muse:

Yes, good afternoon or good morning. Thank you for taking the question. I guess, was hoping to get a little bit more detail on gross margins. I think you talked about manufacturing, engineering, resiliency and kind of investments outside of China negatively impacting margins into Q1. And I guess, can you give a little bit more color on the plans there and how we should think about the impact to overall calendar 2023?

CJ Muse:

Very helpful. As my follow up, you talked a bit about 2023 outlook and highlighted your top customer accelerating higher, but not getting back to prior peak. I guess, any color there in terms of kind of the diversification of the business and/or when you’ll have clear visibility to what kind of the magnitude of the growth might look like?

CJ Muse:

Thanks so much.

Timothy Arcuri:

Hi. Thanks. So I’m wondering if Mark, maybe you can help bridge the gap between Q4 is better because things aren’t as bad as you thought when you guided particularly on this Semi Test side, mostly sounds like because of supply, but then Q1 being worse. So to get Q1 down 10%, you have to assume a pretty significantly worse than normal Q1, which I assume would mostly come from Semi Test. So can you sort of help us bridge that gap? Thanks.

Timothy Arcuri:

Got it. Okay. And then can you also talk about, I know that you – it’s a bit early to kind of talk about what the outlook is for the full year next year. But can you talk about any sense of directionality for the SOC TAM? I assume that the memory TAM will be down clearly, you have front end WFE down 40% plus next year for memory. So I assume that the memory test TAM would be down. But front end foundry and logic WFE TAM is not down that much next year it’s down probably 5%, maybe 10%. So do you have any sense in terms of where the SOC TAM could go next year, at least from a directional perspective? Thanks.

Timothy Arcuri:

Great, awesome. Thank you so much.

Samik Chatterjee:

Hi. Good morning, thanks for taking my question. For the first one, if I could start on gross margin, you gave us some color for 1Q. I was just thinking if you can give us a bit more color on the trajectory for the year, particularly the implications of the drivers of growth that you’re outlining, which is – seems to have a lot of the growth will come from your primary customer next year and some from IA. But there’s obviously demand slowdown across the board as well as the memory headwinds that you outlined. And there’s also – I guess, supply improvement. So as we sort of look at the puts and takes, how should we think about the trajectory of gross margin given the growth drivers? And I have a follow-up.

Samik Chatterjee:

For my follow-up, I think I heard you say for the industrial automation slowdown that you’re seeing, some level of that slowdown come through because of labor shortages. I’m not sure if I heard you correctly there. But I’m just curious if what you’re hearing from your customers is more of a pullback in terms of capital investment plans that’s driving the slowdown that you’re seeing right now? Or is that sort of more of a next step right now, it’s more about labor shortages that you sort of outlined? Thank you.

Samik Chatterjee:

Thank you for the clarification. Thank you.

Mehdi Hosseini:

Yes, thanks for taking my question. The first one for Sanjay. In this scenario and I’m not asking for a guide, in a scenario where your 2023 revenues would be flattish. Would you expect OpEx flat, up or down? And I have a follow-up.

Mehdi Hosseini:

Okay. Let me come back to the question differently. You guys have been very proactive in helping us better help investors – you were the first one, nine, 12 months ago to talk about 3-nanometer pushed out and this morning, again, your recent expectation with 3-nanometer nine months ago, you were referring to significant strengthen capacity being added for MCUs analog. And now I’m looking forward and some of those front-end equipment being added and may not be fully utilized. So why not take opportunity and be more conservative. Now I understand you’re helping us by giving an overview of Q1 but why not just be more aggressive in being conservative?

Mehdi Hosseini:

I’m not asking for a speculating, but if I go back to nine months ago, [Technical Difficulty] we are thinking of, yes, considerable amount of front-end investments being added. But now we’re finally looking at the inventory situation that is problematic. 25 really high and your customers have to come back on production. So even if they have added investment for front end, those equipment are not going to be fully utilized. So wouldn’t none compute SOC be weak into midyear as your customers become more aggressive in working down inventories?

Mehdi Hosseini:

Got it, thank you.

Vivek Arya:

Thank you for taking my question. First one on smartphone test. I’m curious how much of the existing capacity that’s for 5-nanometer can be repurposed for 3-nanometer tested? Is there a large reuse element that we should be aware of? And kind of related to that, I thought that one of the incremental growth areas for next year was the possibility that if your large customer would in-source their 5G modems, that would provide you incremental opportunity, but that seems to be pushed out as well. So just wanted to get your insights on the reuse aspect and the large customer retaining the 5G modem, what impact does that have on how you’re thinking about next year?

Vivek Arya:

No, no, very helpful. Thanks, Mark for that. My follow-up question is, it’s interesting that you are keeping your calendar 2024 earnings model of $8, which is roughly a doubling from the 2022 level even though 2023 seems to be facing some of these macro headwinds. Mark, what’s your gut on what is kind of the bottom of the cycle for you, right? Is it Q1, Q2 next year? Like when do you start making the recovery to your 2024 plan? Or is the 2024 plan looking ambitious at this point?

Vivek Arya:

Thank you.

Joe Moore:

Great. Thank you. Why do you talk about memory test from the perspective of the DRAM and NAND vendors are building a lot of inventory right now. Is that untested and is that – like as their volume picks up, do you see a recovery in test volume that maybe helps you next year? And then on the flip side of that, I think you talked a little bit about what the deceleration in WFE might mean, but do you have any kind of sense of what memory supply does next year above and beyond the DDR5. Thank you.

Joe Moore:

Okay. But on those large inventory builds on the producer balance sheets, is that Die Bank that has yet to be tested? Or is there already some test that you think has occurred on that inventory?

Joe Moore:

Great. Thank you very much.

Unidentified Analyst:

Hi. Can you hear me okay?

Unidentified Analyst:

Okay. Great. So I had one clarification and one question. In terms of my clarification, just on the China export control. You talked about the headwind in 2023 being $75 million to $100 million. Just curious how significant China memory test was in Q3? And I assume that number should be zero in Q4. Am I thinking about that correctly? And can you speak to the profitability of some of these China memory customers?

Unidentified Analyst:

Okay. Mark, just a quick follow-up. So I meant local China memory. That should be near zero or zero going forward, correct? The multinationals you’ll serve.

Unidentified Analyst:

Okay. Okay. Got it. And then my question is on the IA side, maybe one for Greg. I realize it’s hard to predict what 2023 could look like, but hoping to get your preliminary views there. You talked about labor scarcity outside of Europe being a 5 percentage point headwind. You talked a little bit about some of the idiosyncratic stuff that you’re working on in terms of the new product, the higher payload, longer-reach product, you talked about the OEM channel. Could those be sort of impactful enough for your growth to accelerate in 2023? Or is it a little premature to talk about those things? Thank you.

Unidentified Analyst:

Thank you.

Atif Malik:

Hi. Thank you for taking my question. Mark, your comments on next year’s end markets, they all make sense, memory stable on DDR5, industrial coming down, mobile improving on the large customer. The only one that I struggled is on the auto side, auto TAM around $700 million this year from historically $350 million. Now $100 million of that, like you said, is coming from new opportunities in ADAS, silicon carbide power management. What about the opportunities outside those areas like won’t that see a correction next year if there’s a recession?

Atif Malik:

Got it. And then, Sanjay, can you talk about what are the other geographies you’re looking at in improving your supply chain resiliency moving out of China?

Atif Malik:

Thank you.

Operator:

Certainly. Our next question comes from the line of Steve Barger with KeyBanc. Pardon me, Steve, please check your mute button. Pardon me, Steve, please check your mute button. Okay. I will now turn the call back over to Vice President of Investor Relations, Andy Blanchard for any closing remarks.

Operator:

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, and you may now disconnect.

Andy Blanchard:

Thank you, Latif. 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; President, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we’ll provide details of our performance for 2022’s second quarter, along with our outlook for the third quarter of 2022. Press release containing our second quarter 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. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne’s results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release, as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today’s call, we’ll make reference to non-GAAP financial measures. We’ve posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure were available on the Investor page of the website. Looking ahead, between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by KeyBanc, Davidson, Jefferies, Deutsche Bank, Citi, Evercore, Piper Sandler and Goldman Sachs. Now let's get on with the rest of the agenda. First, Mark and Greg will comment on our recent results and the market conditions as we enter the new quarter. Sanjay will then offer more details on our quarterly results along with our guidance for the third quarter. We'll then answer your questions, and this call is scheduled for one hour. Mark?

Greg Smith:

Thanks, Mark, and good morning, everyone. Teradyne's second quarter sales and profits were above the midpoint of our guidance in revenue and profit with sales of $841 million and $1.21 in non-GAAP earnings per share. From a market perspective, we're seeing mixed signals. While the pressure to improve lead times in some test markets is as strong as ever, and we continue to work through supply issues, we have seen some softening in mobility demand, our largest test market. Also, it now looks like IA growth in the second half will be similar to first half growth. In today's call, we'll try to provide some context on how we're navigating this complex environment. Diving into the details of the second quarter, semiconductor test revenues were in line with our plan as were profits. The automotive and industrial end markets served by our Eagle platform were notably strong in the quarter. In memory, flash final test and DRAM wafer sort was the strongest markets. From a strategic perspective, Semi Test had a strong quarter of competitive design wins for both R&D applications and for devices that we expect to ramp in volume production over the next year or so. The design wins were in a wide range of end markets. There were Ultra Flex family design wins in mobility, where the systems architecture supports higher throughput for large complex devices especially when time to market is an important factor. Eagle Test had a significant design win in a battery management application where the system's highly accurate voltage measurement capability enables customers to get to market faster with better device specifications, delivering higher value. In Systems test, sales were on plan in the quarter with solid year-on-year growth for storage test and production board test. At LitePoint, strong wireless test demand for Wi-Fi 6C, Wi-Fi 7 R&D and ultra wideband test products drove double-digit year-on-year growth. Notably, we're seeing strong interest in Wi-Fi 7 development test where we are qualified at all major chipset vendors and to date, we have won 20 of 21 design-in opportunities with end product design teams. This sets us up to expand our already high share of Wi-Fi production test as these products ramp. In Industrial Automation, revenues grew 10% from last year's Q2 and 19% for the first half. This lower than planned growth in the first half is attributed to two primary factors and warrants a few comments. The first factor was foreign exchange. The majority of IA revenue is linked to the euro. For example, within Europe, at UR, we saw a robust 34% unit growth in the first half of 2022 but the decline of the euro with respect to the dollar has muted UR revenue growth in that region to 20%. The dollars appreciation was a revenue headwind in the first half and Sanjay will comment further on the full year foreign exchange outlook. The second factor is lower regional demand that can be traced to a variety of region-specific causes, including COVID lockdowns in China and distribution partner staff shortages in North America where end demand remains quite strong. Staff shortages for integration partners is an ongoing challenge. In the past, we've noted that our distribution partners struggle to grow staff at the same rate as IA demand growth. Our strategy to overcome this is to use software technology and plug-and-play applications from UR+ and MiRGo partners to shorten the deployment time to make these critical staff more productive. But an equally important part of the strategy is to build a robust OEM channel. For example, at Universal Robots, our OEM channel, which includes verticals like welding, power grid maintenance and order fulfillment is doing very well, growing 39% in the first half of 2022. The OEM channel is an important complement to our distributor-based channel because these OEM partners deliver a mostly complete solution to their customers that can be put in operation almost immediately. In many cases, these OEMs have an existing distribution network that can reach customers beyond our traditional channel. These partners can scale much more efficiently than distributors that add staff in proportion to revenue growth for customer support. We are actively adding new OEM partners to serve these and new market verticals. Now I'll hand it back to Mark more on the market, the second half outlook and the demand drivers for next year.

Sanjay Mehta:

Thank you, Mark. Good morning, everyone. Today, I'll provide details on our Q2 results, offer additional color on how we're addressing the slowdown in some markets and supply shortages and others and describe our Q3 outlook. Now to Q2. Second quarter sales were $841 million with non-GAAP EPS of $1.21, non-GAAP gross margins were 60.2% and our non-GAAP operating expenses were $251 million, $14 million below mid guidance. The main driver -- sorry -- the main driver of the lower than planned OpEx was an Industrial Automation Group or IAG due to lower variable compensation tied to lower revenue projections and slower than planned hiring. Non-GAAP operating profit rate was 30.3% we had two 10% customers in the quarter. The tax rate, excluding discrete items for the quarter was 16.9% on a non-GAAP basis. Please note, you should now use 16.5% for the full year non-GAAP tax rate. Looking at the results from a business unit perspective. Semi Test revenue was $541 million. SOC revenue was $461 million, driven by strength in automotive and industrial markets. Memory revenue was $81 million, led by flash final test and DRAM wafer sort. System Test group had revenue of $135 million, which was up 29% year-over-year. Storage Test sales, including both HDD and system-level test solutions were $86 million in the quarter, up 49% from Q2 2021. Defense and aerospace and production board test combined grew 4% year-on-year. At LitePoint, revenue of $64 million was up 16% from prior year due primarily to strong shipments in Wi-Fi 6C and Wi-Fi 7 and UWB test systems. Now to Industrial Automation. Industrial Automation revenue of $101 million in Q2 was up 10% year-over-year. This was lower than expected, as Greg noted. Despite the lower growth, we still expect IA revenue to follow the historical pattern and grow as we move through the year. UR sales were $83 million in Q2, up 8% year-over-year with the highest growth in Northern Europe. MiR sales were $17 million, up 9% from Q2 2021 in the quarter. From a financial perspective, in IA the group was slightly under breakeven on a non-GAAP operating basis in the second quarter. And for the full year, we expect to be towards the low end of the 5% to 15% profit range we discussed in past calls. We view the roughly 20% growth rate in IA as a short-term situation, as Greg noted. Like the company model, the IAG Group operating model naturally flex spending down based on profitability, and we're tightening discretionary spending where appropriate. But our long-term IA growth strategy and related investment plans remain unchanged. Shifting to supply. Our Q2 guidance excluded approximately $50 million of revenue tied to our inability to supply customer demand. In Q3, we're excluding a similar $50 million of revenue from our guidance range, primarily in our test businesses. The shortage of semiconductors ranging from FPGAs to industrial analog continues to impact our production. As I've noted in prior calls, we're taking numerous actions to harden our supply chain but even with these actions, we expect supply line constraints to remain challenging. I will note these actions and other factors improved our supply situation in Q2, mainly in test, which enabled higher shipments. Shifting to the balance sheet and cash flow. Our cash and marketable securities at the end of the quarter totaled approximately $900 million, down from $1.2 billion at the end of Q1. We had $70 million in free cash flow in the quarter, reflecting the timing of shipments and supplier prepayments. Over 80% of our shipments occurred in May and June saw our DSO expanded to 74 days, which we expect will decline in the second half of the year. Other uses of cash in the quarter included share buybacks of $331 million, dividend payments of $18 million and debt retirement of $22 million. At the end of Q2, we're more than two-thirds of the way through our $750 million share repurchase plan for 2022 with $217 million remaining. In October -- sorry, in our October call, we'll note any updates to our share buyback plan. Regarding debt. To date, $386 million of convertible bonds have early converted. I'd also like to note several points regarding the strong US dollar and its impact on our results. In our Test portfolio, the majority of revenue and expense are in dollars, so there's not a material foreign exchange impact. In IA businesses, on the other hand, have a large amount of euro-linked expenses and about 50% of their revenue is tied to the euro. The result as the strong dollar reduces IA's revenue and gross margin in dollars. In the first half, the FX impact reduced our IA growth rate approximately four points. Assuming exchange rates remain consistent with July's exchange rate, we expect six points of growth headwind for the full year compared to our January projection. For IA, the strengthening dollar has a marginal benefit on the OpEx side. IA revenue and margin degradation is offset by the OpEx gain, yielding a neutral effect on our operating profit for that segment. Now to our outlook for Q3. A combination of slowing demand and test, extending lead times due to material shortages and reduced automation demand in Europe and China results in a lower Q3 outlook than we expected three months ago. As noted, the guidance excludes approximately $50 million of shipments due to material shortages primarily in test. Also, the guidance assumes we won't see any extended shutdowns of production facilities due to COVID, and we won't see any new trade restrictions. With that said, sales in Q3 are expected to be between $760 million and $840 million, with non-GAAP EPS in a range of $0.90 to $1.16 on 166 million diluted shares. The third quarter guidance excludes the amortization of acquired intangibles. Third quarter gross margins are estimated at 58% to 59%, down from Q2 due to product mix, 2022 investment supply chain resiliency and wage inflation. Some of these effects are transitory, and we expect our mid-term earnings model gross margin range of 59% to 60% to remain intact. OpEx is expected to run at 31% to 34% of third quarter sales. The non-GAAP operating profit rate at the midpoint of our third quarter guidance is 26%. As Mark noted, we expect second half revenue to be below the first half, approximately 48% of full year sales. Given the reduced revenue outlook for the second half of the year, our operating expenses are now planned to grow just 4% to 6% annually versus 11% to 13% planned in our prior guidance. The OpEx reduction from prior guide is driven by two factors. First, our variable compensation model is approximately half of the decline tied to reduced revenue. Second, we have delayed some expenditures in both test and IA, which we believe will not impact our long-run competitiveness. Spending savings are roughly evenly split between engineering and go-to-market. Summing it all up, we're expecting revenue and profit in Q3 and the second half of the year to be lower than we projected three months ago, but our operating model is resilient to varying revenue levels. With the reduced revenue level, our model reduces variable compensation expense, and we're taking other steps as appropriate. A downturn is always challenging, but we're confident we have the operating model, strategy and experience to lead us through whatever lies ahead, while keeping our focus on the needs of our customers and the long-term opportunities in the test and industrial automation markets. With that, I'll turn things over to Andy.

Operator:

[Operator Instructions] Our first question comes from the line of Vivek Arya of Bank of America. Vivek Arya, please go ahead.

Mark Jagiela:

Yeah. Roughly speaking, those are about right. And I think, as I mentioned in my prepared remarks, maybe we probably reduced our second half revenue targets somewhere between $300 million to $350 million. About one-third of that is known customer weakening where the demand has been communicated to us to have soften. Two-thirds of it is just a projection of more to come of that vein based on conversations that are just beginning with customers. So there's not a clear -- and all of this is mostly related to test. So there's not sort of a clear identified two-thirds of that decline portion, but it's just the experience we've seen in prior cycles and the test industry suggest that there's more to come. If you go back to 2013, for example, when the market went through a significant 30% year-over-year correction, this was the beginning of that kind of trend. Now here, we're talking about a market correcting about 9% off of the peak of last year. So a much more modest correction -- but that's -- this is kind of how the market turns and we're using history to guide us in how we're projecting these yet to be identified digestion phases.

Mark Jagiela:

Yeah. I think our exposure to Android smartphones is a little bit higher this year than it's been in past years. We've picked up a little bit of market share in that segment. Obviously, that segment is down significantly this year in unit volume. So that's having the -- that's principally the reason for the declines we're forecasting here in the second half. Now when we look at 2023, it's hard to tell what's going to happen with the Android phones, part of what's happened in 2022 in terms of the declines related to China -- and part of this is predicting how China will rebound in 2023 as consumer demand hopefully recovers. But we don't have a strong forecast for the Android sub-segment of smartphones yet for 2023. So I can't really give you a lot of color on that.

Operator:

Thank you. Our next question comes from the line of Toshiya Hari of Goldman Sachs. Toshiya Hari, your line is open.

Mark Jagiela:

Yeah. I think -- so there's two pieces of Semi Test Memory and SOC Memory, it's going to be 40-ish percent market share, consistent with last year. On SOC, it really depends on what happens on the compute side in terms of how much decline happens in the market on compute, which is more of our competitors, strong soup. So we've baked in a significant decline in mobility. We believe a decline in compute is imminent -- but that's something that I think over the next few weeks, as we hear from our competitor, we'll know more about. All that being said, I think our statistical share is in the upper -- mid- to upper 30% range in SOC Test this year. But that's based on, again, strong compute market, weak mobility market versus customer switching suppliers and that moves around quite a bit year-to-year.

Greg Smith:

Hi, this is Greg. Let me try and take that. So we believe that the fundamentals are still very strong in the IA market. The effects of China lockdowns and staff shortages should both eased to some extent through the rest of the year. We believe that the FX headwind is going to be consistent through the rest of this year. We don't see a significant appreciation of the euro. So that translation into dollars is going to continue to take a couple of points off the top in terms of our growth for revenue that's denominated in euros. To your second question, our OEM channel right now, it represents about 16% of overall UR revenue lower for the entirety of the Industrial Automation Group. And it's growing -- for the first half, it grew at 39% and we expect to be able to maintain that kind of a growth rate.

Greg Smith:

So our pricing in the OEM channel is a little bit favorable to pricing through our normal distribution channel. So we don't expect to see any negative impact to profitability as that channel grows.

Operator:

Thank you. Our next question comes from the line of Samik Chatterjee of JPMorgan. Your line is open.

Mark Jagiela:

No, not really. Most of the weakness we're baking in, again, in the fourth quarter that we've yet to really get confirmation on is in more in mobility and compute and infrastructure. But we think industrial and auto will remain strong through the end of the year.

Sanjay Mehta:

It's Sanjay. So just a couple of comments on our business model as it relates to cost structure. So as you know, the majority of our test portfolio has contract manufacturing. So it really provides great scalability up and down with our outsourced partners fixed assets. So that helps on the margin line. But then from an operating expense perspective, we have a key portion of our wages in a flexible or variable compensation plan that is that as revenue and profit goes up, that is passed along part of it to the employees. But as it goes down, which is one of -- it's about half of the driver of the growth reduction from a midpoint of 12% expected this year to a midpoint of 5%, as I noted in my prepared remarks, about half of that growth reduction is driven by the variable compensation. So we believe as time moves on and let's say, the market goes lower, we'll have the ability to reduce our operating expenses on a variable basis while keeping our workforce intact and investing for the long-term. And, obviously, as the market rebounds or increases, our revenue goes up, then that will increase our operating expenses on a variable basis.

Operator:

Thank you. Our next question comes from the line of C.J. Muse of Evercore ISI. Your line is open.