Teradyne Q2 2021 Earnings Call Transcript

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Provided by Quartr
July 28, 2021

Key Takeaways

  • Teradyne reported Q2 2021 revenues of $1.086 billion, up 29% year-over-year, and non-GAAP EPS of $1.91, a 44% increase from Q2 2020.
  • In its semiconductor test business, SoC shipments rose 29% in Q2 (19% in H1), memory test shipments grew 9% in Q2 (18% in H1), system test was up 26% in H1, and LitePoint sales increased 12% year-over-year.
  • The Industrial Automation group delivered 57% sales growth in Q2 (22% vs. H1 2019), driven by recovering demand in North America and new applications such as automated welding and high-voltage line servicing.
  • Teradyne continues to navigate supply-chain constraints and extended lead times—now up to 20+ weeks for some products—but expects to manage these challenges through Q3 and Q4.
  • For Q3 2021, the company guides to $880 million–$960 million in sales, non-GAAP EPS of $1.29–$1.55, and gross margins around 59%–60%.
AI Generated. May Contain Errors.
Earnings Conference Call
Teradyne Q2 2021
00:00 / 00:00

Transcript Sections

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Operator

I would now like to turn the conference over to your host, Mr. Andy Blanchard.

Andy Blanchard
Andy Blanchard
VP of Corporate Relations at Teradyne

Thank you, Phyllis. Good morning, everyone. Welcome to our discussion of Teradyne's most recent financial results. I am joined this morning by our CEO, Mark Jagiela, and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2021's second quarter, along with our outlook for the third quarter of 2021. The press release containing our second quarter results was issued last week. We provide 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. 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.

Andy Blanchard
Andy Blanchard
VP of Corporate Relations at Teradyne

Those forward-looking statements are made as of today. 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 measures. We've posted additional information concerning those non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures where available on the Investor Relations 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 KeyBanc, Rosenblatt Securities, Deutsche Bank, and Citi. Let's get on with the agenda. First, Mark will comment on our recent results and the market conditions as we enter the new quarter. Sanjay will offer more details on our quarterly results, along with our guidance for the third quarter. We'll answer your questions. This call is scheduled for one hour. Mark?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Good morning, everyone, and thanks for joining us. Today, I'll summarize our results for the second quarter and first half of 2021, provide an update on current conditions in both Test and Industrial Automation, and comment on our view for the second half of the year. Sanjay will then provide the financial details on the quarter and our guidance for Q3. The strong demand we saw in Q1 accelerated in Q2 as both our Test and Industrial Automation groups grew substantially in the quarter. The long-term demand drivers we've discussed in the past continue to power demand for our products. In Test, it's device complexity and unit growth. In Automation, it's labor scarcity, the need for resiliency, and productivity improvement. Opening the books further, performance at the company level from 2016 through 2020 saw our sales and non-GAAP EPS grow at a compounded rate of 16% and 32%, respectively.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

For the first half of this year, sales are running ahead of that rate at 21%, and non-GAAP earnings per share grew at 29% compared with last year. This demonstrates both the vitality of the markets we serve and the efficiency of our operating model. Significantly, in Q2, we saw Industrial Automation demand recover in all major regions, with particular strength in North America. As a result, our production and logistics teams operated at a high pace in Q2, and that pace is increasing in Q3. For the year, our IA business is on track to grow about 30% from 2019 and about 40% from 2020. Looking more closely at the segment level, in Semi Test, SoC shipments grew 29% in Q2 from Q2 of 2020, with particular strength in both the compute and mobility end markets. For the first half, SoC sales grew 19%.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

For the first time in several years, smartphone unit shipments are helping growth in the mobility segment, whereas recent years have mostly relied on complexity growth. Mobility and compute are the two largest subsegments in SoC. Automotive, analog, and industrial demand continues to be strong. The auto-related Semi Test market is expected to exceed $500 million this year, the highest level since 2017. This is despite the fact that automobile unit production will be about 10% lower than 2017. A portion of this strength is catch-up spending. We're also seeing the impact of increased semi content and complexity per automobile driving the test market. Our memory test shipments also grew in Q2 from Q2 of 2020, up 9%, led by flash tester demand. For the 6-month period, overall shipments were up 18% from last year on solid demand for both flash wafer and die sort systems.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

This reflects significant growth in smartphone demand, the build-out of new memory capacity in China, and the growth of SSD demand. Looking at the full year, we are again revising up the SoC market for 2021 to now be in the range of $4.3 billion-$4.7 billion, with increasing strength in the x86, GPU, and display driver subsegments. Recall that we have lower customer exposure in those markets, with much of this incremental growth going to our competitors. We'll likely see our SoC share around 48% for the year. In memory, at the macro level, our market estimates are unchanged, with the test market this year expected to be about $1 billion and our share to be at about the 40% level. I will note that the expected ramp of DDR5 for server applications and the broader adoption of LPDDR5 is pushing out into 2022.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Shifting to our System Test group, sales were up 26% in the first half compared with 2020, with strong storage test demand and a recovery in our production board test unit driving the growth. For the full year, we see the System Test group grow in the 10%-20% range. At LitePoint, sales in Q2 were up 12% over 2Q 2020. 5G millimeter wave demand is lower than expected, the environment in wireless test is improving as we move through the year due to the continued Wi-Fi 6 growth and early Wi-Fi 7 investments. Ultra-wideband adoption is increasing, adding a new growth vector for LitePoint. For the full year, LitePoint will likely grow in the 10% range.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Moving on to Industrial Automation, the combination of expanding demand across our major markets and the increase in the range of tasks served by our Universal Robots and MiR units drove group sales up 57% in Q2 last year, 45% in the first half. Compared to pre-pandemic 2019, first half sales are up 22%. Supply chain issues have constrained growth a little bit, with lead times pushing out about one week. The demand environment for IA has recovered in most regions from last year's slowdown. America was the fastest-growing major region in Q2, with sales up over 90% from last year. We did see a slow in some countries in Asia, where COVID has spiked in recent months, the second half of the year outlook is quite strong in all our major regions.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Our long-term growth strategy in IA continues unchanged, and we expect long-term annual growth in the 20%-35% range. This year, we will likely see growth of about 40% from 2020, and we will continue to invest to enable this growth, target gross margins, and get a 5%-15% operating margin during these high-growth years. From an investment perspective, we are expanding our engineering programs to shorten deployment times, increase the served market, and improve the customer support experience. We are also growing our capacity to support distributors, integrators, and UR+ and MiR Go apps development partners as they engage customers. We are also expanding our sales to OEMs that integrate our robots into their products. Last quarter, we noted the expanding range of applications for UR robots, and a high voltage line application with hundreds of being deployed.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Today, I'd like to highlight the success of UR+ plug-and-play applications for industrial. There is a long-standing and chronic shortage of qualified worldwide, with an estimated 100,000 unfilled welding jobs in the U.S. alone. While automated solutions exist for large applications like auto manufacturing, customers with lower volume and higher mixed products are not well-served by traditional automation. The integration of a force torque sensor into e-Series cobots enabled the precision needed for this application, and with UR+ innovation with our partners, we began serving this market about three years ago. During this time, welding applications have grown to be about 6% of our global and our onto 1,000 cobots sold in 2021, more than tripling our 2020 pace. As we continue to extend the performance of our UR platform, we expect these high applications and new growth vectors to traditional industrial applications.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

We have similar market expanding initiatives in play on our MiR platform. I'll save those details for your call. To sum it all up, the first half of the year has been strong sales, strong gross margins, and earnings growth for. Longer term, the markets we serve are showing increasing demand for the future global economy. The importance, pervasiveness, and enabling capability of electronics in every our lives and industry is driving more fab investment, more complexity, and more test. Likewise, the broadening application and fast ROI collaborative robots in a world with labor shortages and productivity challenges is another growth trend.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Strategically, we've positioned ourselves in line with and plan to continue to make the test, and IA has our full potential while driving world-class. While the rate of change in our markets is accelerating, we are well-positioned to thrive as a company and to bring additional value to customers and shareholders. I'll now turn things over to Sanjay, additional color on the financial.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

Thank you, Mark. Good morning, everyone. Today, I'll details on our Q2 results, comment on current business conditions, and describe our Q3. To Q2. Second quarter sales were $1,086,000,000 with non-GAAP EPS of $1.91, up 29% and 44% respectively from Q2 2020. Non-GAAP gross margins were 59.6%, and our non-GAAP operating expenses were $250 million, but $5 million below the high guidance due to the timing of some non-recurring engineering expenses. Non-GAAP operating profit rate was 36.5%. Gross margin in the quarter was 59.6% compared with our plan of 58%. The increase was tied to favorable product mix in the quarter versus plan.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

For context, Q2 2020 gross margin was approximately 6%, and April earnings noted that this level of gross margin would continue in the near term, driven by the introduction of several key test systems in early 2020, which would take several quarters to come down the cost curve. These new product introductions, coupled with heightened costs driven by COVID shortages, were impacting our gross margins in 2020. One year later, we have now most of these test solutions at volume, and they have come down the cost curve as expected. The result contributed to higher margins in the second quarter, which we expect will continue in the second half of the year. A component of gross margin improvement over 2020 is higher revenue yielding leverage in the gross margin line. We had one 10% customer in the quarter, excluding discrete items for 14.5% on both GAAP and non-GAAP basis.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

Looking at the results from a business unit perspective, revenue of $834 million was up 27% from Q2 2020. SoC revenue was $742 million, up 29%, driven by strength in compute, mobility, industrial, and automotive. Memory revenue was $92 million, up 9% from prior year, driven by strength in flash test and flash wafer sort segments. System Test group had revenue of $105 million, which was up 46% year-over-year. This is driven by $58 million in storage test sales, including both HDD and SLT solutions. $47 million in defense and aerospace and production board test. Storage test, HDD, and SLT demand remains robust as drive densities continue to increase and the number of devices adopting SLT. At LitePoint, revenue of $55 million was up 12% from prior year due to continued strength of increases in and ultra-wideband test market segments. Now to industrial automation.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

As we did in April, I'll provide revenue metrics comparing Q2 2021 results with both Q2 2020 and Q2 2019, so you'll have the full context given the impact of a contracting market tied to COVID last year. Industrial revenue of $92 million was up 57% year-over-year and 23% over Q2 2019. Revenue expanded in all regions in Q2 last year, with North America delivering the highest absolute revenue growth. U.S. represented about 77% of IA revenue in the quarter, with China contributing about 14%. UR sales were $76 million in Q2, up 75% year-over-year and 8% over 2019. MiR sales were $16 million, up 41% from Q2 2020 and 51% from Q2 2019. Recall, MiR had an unusual Q2 2020, as its robots were widely deployed in automated COVID disinfectant applications. The longer-term outlook in our IA business continues to brighten.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

We expect continued labor shortages to drive new applications for both our fixed and mobile robots. Mark highlighted the shortage of welders and how that has opened up a new market for our UR cobots. That is just one of many job categories with acute short-term and long-term labor shortages. Our strategy is to provide an open platform that creative developers can leverage to solve industry-specific labor shortages. The numerous ultraviolet disinfecting solutions built on our UR+ last year is a shining example of the agility of our partner networks to solve problems. We're investing in engineering, support, and marketing resources to make our MiR platforms even easier to build upon, which will enable the continued proliferation of high-value automated solutions to solve challenging problems for an expanding range of customers. Significantly, these development partners and customers provide great feedback for R&D development plans.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

From a financial perspective, we expect IA will operate around the low end of our target profit range of 5%-15%. We do expect IA to operate above the Rule of 40 in 2021. That is the sum of operating profit and revenue growth over 40. Longer term, when growth moderates, we expect the IA group to have a similar operating profit rate as our test portfolio. Shifting to supply. We continue to manage through numerous supply constraints, along with increased material manufacturing logistics costs in both our test and IA businesses. For some products in both test and IA, the supply constraints have extended our and we're working closely with customers to minimize the impact of these delays. We've been able to offset these higher costs through operating leverage with higher volumes and other cost-saving measures, so the cost increase impact on the P&L has not been material.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

We do expect to be dealing with supply line-related issues in Q3 and Q4 this year, which are reflected in our forecasts. Shifting to the balance sheet and cash flow. Our cash and marketable securities at the end of the quarter totaled $1.42 billion, $172 million in flow in the quarter, and $151 million and $17 million on buybacks and dividends, respectively. Year to date, we've repurchased 1.6 million shares for $197 million at an average of $125.69 per share. Regarding our convertible debt, $15.6 million was paid in Q2 to convertible bondholders ahead of maturity. By the end of August 2022, bondholders will have early converted a total of $302 million, leaving a face value of $58 million outstanding. Looking at our operating model, I'd like to make three quick points. First, our performance over time.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

From 10 years ago, our gross margin percent has expanded from the low to mid to nearly 60% and our operating margin from the teens to low 20s to greater than 30% today. Second, our flexible business model shifts fixed costs to variable costs where appropriate through contract or outsourced manufacturing, variable compensation and other, which enables resiliency on the downside and is creative when business is strong. Third, the operating leverage in the model is evident in our Q2 results. Our test businesses are dropping through over $0.50 per revenue dollar through to the profit line in 2021. Thank you.

Andy Blanchard
Andy Blanchard
VP of Corporate Relations at Teradyne

Ladies and gentlemen, we're going to have a quick transition.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

I'll go back. Hi. Okay, it's Sanjay again. I'll go back to looking at our operating model. I'd like to make three quick points. First, our performance over time from 10 years ago. Our gross margin % has expanded from low to mid-50s to nearly 60% today. Our operating margin from the teens to low 20s to greater than 30% today. Second, our flexible business model shifts fixed costs to variable costs where appropriate through contract or outsourced manufacturing, variable compensation and other means, which enables resiliency on the downside and is accretive when business is strong. Third, the operating leverage in the model is evident in our Q2 results. Our test businesses are dropping through over $0.50 per revenue dollar through to the profit line in 2021, even while we continue to increase our R&D and support investments to strengthen our test business.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

This enables Teradyne to continue to invest in both our test and IA portfolios. For IA, we are building a deeper product, ecosystem, and distribution differentiation while achieving the Rule of 40 in our IA portfolio. To our outlook for Q3. As Mark noted, the demand environment across the business remains strong. Our guidance assumes no significant changes, positive or negative, in the availability of materials, and also assumes that we won't see additional pandemic-related issues. With that said, sales in Q3 are expected to be between $880 million-$960 million, with non-GAAP EPS in the range of $1.29-$1.55 on 176 million diluted shares. Third quarter guidance excludes the amortization of acquired intangibles and non-cash imputed interest on convertible debt. Third quarter gross margins are estimated to be between 59%-60%. OpEx is expected to run at 27%-29% of third quarter sales.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

The non-GAAP operating profit at the midpoint of our third quarter guidance is 32%. Regarding OpEx for the full year, while we spent a bit lower than planned in Q2, we expect the full year OpEx will be about in line with the plan we described in April. We expect total operating expenses for 2021 to be about $1 billion, or up approximately 19% from 2020. We recognize that we're on track to meet our 2024 earnings model this year. We'll update the model on our regular cadence in January after our detailed midterm planning is complete in Q4 this year. In summary, our businesses are performing extremely well, delivering strong revenue and earnings growth while funding the investments that will drive future success. Our first half sales grew 21%, and non-GAAP EPS grew 29% above the first half of 2020, which itself was a record.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

We expect to deliver the highest Q3 sales and profits in history. Our employees and production partners around the world have delivered a record number of systems under challenging conditions. Our support teams have done whatever was needed to make our customers successful, and our engineering teams have kept the new product pipeline moving on schedule. It's been an impressive display of teamwork, and I'm proud to be part of this powerful Teradyne team. With that, I'll turn things back to Andy.

Andy Blanchard
Andy Blanchard
VP of Corporate Relations at Teradyne

Thanks, Sanjay. Everybody, thanks for dealing with our small technical issue there. Phyllis, we'd now like to take some questions. As a reminder, please limit yourself to one question and a follow-up.

Operator

Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Brian Chin with Stifel.

Brian Chin
Brian Chin
Analyst at Stifel

Hi there. Good morning. Thanks for letting us ask a couple questions here. Maybe just to kick things off, I am just curious, to what degree, if any, are the extended lead times in ATE in this sort of the current strong semiconductor environment impacting your shipment outlook or pattern in second half? Obviously, Teradyne no longer discloses bookings, your competitor appears to be building backlog into the December quarter. I was wondering if you have better than typical backlog visibility beyond September.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

Yeah. Lead times have definitely been moving out. I'd say auto and industrial demand is still outstripping supply. Our lead times have pushed out, obviously, based on the very, very tight supply chain environment we're dealing with. What used to be, let's say, within a quarter, has pushed out to five, eight weeks incremental to where we were in the past to be, in some cases, in the 20s in weeks of lead time. With that, we have been seeing, I guess, improved bookings from our customers, and we're working with them to manage through it.

Brian Chin
Brian Chin
Analyst at Stifel

Okay. Got it. Thanks, Sanjay. Maybe for Mark, I think you touched on how, at least in the smartphone market, units are kind of a bigger tailwind this year, which hasn't always been the case in recent years. I think in 2022, what do you think, to what degree could increased packaging complexity across foundries and maybe some IDMs be a more meaningful driver of incremental test intensity next year?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Yeah, that's a good question. We bundle that into the complexity side of life, and there's already been advanced packaging technologies deployed for several years now in phones, but it's increasing. That trend of multi-chip, multi-die packaging incrementally adds test time above and beyond what you would get if you were putting all of that silicon on a single integrated die. There's not a good rule of thumb of how much of an adder it is. It is a trend that's going to continue to grow and drive tests.

Brian Chin
Brian Chin
Analyst at Stifel

Okay, great. Appreciate the color. Thanks.

Operator

Your next question comes from the line of Atif Malik with Citi.

Atif Malik
Atif Malik
Analyst at Citi

Hi, thank you for taking my questions. I have a similar question on the mobility side. Mark, it sounds like your mobility outlook has improved for the year versus 90 days ago, despite millimeter wave weakness. You talked about units helping. Can you talk about the confidence in test intensity staying elevated for both mobility and compute into next year? If you can also highlight the steps you're taking to improve your market share in the areas that you're not strong, like x86, GPU, and display drivers.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Yeah. I think the complexity trends looking even into next year are all very strong and positive. In the case of mobility, the newer lithographies that are coming online are being widely adopted by the manufacturers of silicon for phones, which portends more transistors, which portends more test time. That, looking into next year, all looks positive. We get, at this point in the year, early glimpses of what the silicon for next year might actually look like. On the compute side, similarly, we not only have the trend of lower lithography nodes, but the new interface standards related to LPDDR5 and DDR5, as I mentioned in my remarks, the early adoption of that has been pushed out a little bit as the processors that go with it have been delayed a bit.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

All of the complexity required to run at those higher bandwidths is coming in 2022. Those are two positive things I look at that gives me confidence that this driver of complexity growth is definitely going to be strong next year. In terms of share, what we said before is that penetrating the traditional x86 GPU stalwarts is going to be a long-term endeavor for us that's going to hinge on some kind of technological discontinuity, like the shift to DDR5 or like a shift to PAM4 interfaces to crack into them. That one is episodic and will play out over, let's say, three to five years.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

On the other front are the emerging hyperscalers and new people coming into the market of creating complex silicon. These are automobile manufacturers, hyperscalers that we've talked about in the past, the Googles, the Facebooks, the Microsofts, the Amazons. That's where we're focused on getting a position to grow with them as they launch their products into the market in the shorter term.

Atif Malik
Atif Malik
Analyst at Citi

Great. Very helpful. Sanjay, for you, the largest U.S. phone maker and your biggest indirect customer talked about supply constraints impacting smartphone sales in the September quarter yesterday. Have the materials and parts tightness gotten worse over the last 90 days for your business?

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

Well, first of all, I won't comment on any particular customer, but I will speak in general about the environment. Last year we were really working through demand increases, but we had fairly good, robust inventory strategies, and we were working through the impact of COVID. You have thousands of components that go into these testers, and we did a lot of resiliency improvements there. You fast-forward to today's environment, and the demand has really kept accelerating.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

The environment is tighter, I would say today, and frankly, we don't see it letting up until the second half of 2022. I think as the semiconductor industry goes through continued growth, you're seeing supply chains really getting tested. With the increase in the infection rates of COVID, especially, I'd say, in Southeast Asia, we're working through and managing the best we can. I believe the net summation is it's a tighter industry now than it was, say, three, six months ago.

Atif Malik
Atif Malik
Analyst at Citi

Thanks.

Operator

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

Mehdi Hosseini
Analyst at SIG

Yes. Thanks for taking my question. Two question, one on the Arm-based ASIC design. I'm trying to get a sense of how you see the TAM. You can either elaborate as a mix of SoC tests, or perhaps you can tell us how is the test time for an Arm-based ASIC chip compared to like a app processor maybe that way we could get a sense of how demand looks like. Either qualitatively or quantitatively, if you can elaborate on Arm-based SoC tests will be great. I have a follow-up.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

I guess the first thing I'd say is that a Arm-based high-end map processor, which is what's in most of our phones today, driving most of our phones, has a transistor count that's equivalent to any laptop x86 kind of product you might have in your computer. The test times comparatively between those twos are not that different. It's kind of proportional, the test count.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

The new Arm processors that are coming to market for compute applications, not smartphone applications, have perhaps anywhere from a 25%-60% add around transistor count above what's at the highest end of smartphones. The test time associated with them, I would say, is proportionately longer at this point. I think it's generally speaking, scaling with transistor count, and the transistor count on the Arm side is running a little bit at a faster clip than it is on the more traditional architecture side, if that helps.

Mehdi Hosseini
Analyst at SIG

Sure. The follow-up has to do with Arm-based. Actually, I want to just dig in a little bit more. Would you, at some point, break this out so we could better understand how kind of the Arm-based SOC tester is tracking or scaling versus the rest of the SOC market? Number two, is there anything you can give us to better understand the competitive landscape for this specific application?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Yeah. I guess I haven't thought about trying to find a way to break out Arm, because most of what mobility is Arm. There's, let's say, compute applications for Arm. There's some processors that are almost dual use in they go into either application. I think it's fair to say that any compute business that we have at Teradyne is Arm-based compute. Perhaps, Mehdi, in the future, we can look at some way to sort of characterize both the market and our associated revenue for that. I don't have a good number for you now on that. In terms of the applications coming to market, in the short term, we know about the phone applications. We know about some early adopters of Arm for compute. Those are all coming to market or are in the market now.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

The hyperscalers that we're working with are coming into market at various points next year with products that are quite interesting but highly speculative as to whether they'll latch in the market. Obviously, I'm not going to talk about those because they're pretty confidential. We'll see what latches. If one of these applications can become 100+ million unit application, which most of these design teams are targeting, then that's a significant adder to the market.

Mehdi Hosseini
Analyst at SIG

Great. Thanks for the detail.

Operator

Your next question comes from the line of Vivek Arya with Bank of America.

Vivek Arya
Vivek Arya
Analyst at Bank of America

Thank you for taking my question. I was curious, how's your kind of visibility for Q4 as you kind of stand today versus what it is usually? If you could give us some color by end market in terms of what is in your assumption for Q3 and the second half, that'll be very helpful.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

Sure. Q4, if I look back at my last two years here, we've been surprised mainly on the positive side. I'd say that given the tightness of supply and customers providing a little bit more in the way of backlog, it gives us a little bit more insight. However, obviously in the near term, we have much stronger visibility in Q3 than in Q4. We do have, I'd say, a little bit of incremental visibility. In color, in your question in regards to color for Q3, we see continued strength in semiconductor. Obviously, the different components within Semi Test are going to be a little volatile, but we do see a trend down.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

We believe it's very strong demand, but we see a trend down. We see in our IA portfolio, really a strength. Obviously with the COVID impact in 2020, industrials are really coming back. I'll cite some PMIs in the 60s of the U.S. and Europe, and we really see that, as Mark noted, in our growth, in the U.S. We're seeing that growth in China as well as in Europe and the U.S. Continued expected growth in IA, and then, from a test perspective, coming down a bit.

Vivek Arya
Vivek Arya
Analyst at Bank of America

Got it. On the UR side, Mark, I'm curious, what are the top three applications you're serving today, and how do you expect these applications to evolve? You are maintaining a very strong growth rate in that business. I'm curious, what is driving that? Is it more number of customers? Is it more applications within the same customer? What's giving you the confidence you can maintain this very strong growth rate in the UR business? On the gross margin side, is it accretive? I know on the operating margin side, you've given a range, but I imagine on the gross margin side, it might be accretive to your business.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Yeah. It's interesting because there's no silver bullet as to what's driving the growth at UR. For example, we're going to be up about 30% from revenue in 2019, 40% up from 2020. In the script, I mentioned this application for welding, which is a brand-new application that is now driving about 6% of our sales for the year. Last quarter, I talked about this service application for servicing high voltage power lines that's also running at around that 6% of sales applications that was essentially nonexistent two years ago. Already we have 12% of our growth attributable to new applications in new markets with new customers that we didn't have two years ago. It's a combination of expanding applications like those two examples, as well as established markets growing, that's driving this. Our top three applications tend to be the same.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

It's automotive supply chain, it's industrial machine tending, and it's electronic assembly tend to be the ones that are at the top of the pack. Frankly, they are shrinking as a percentage of sales as these new applications come online. What gives me confidence looking forward is that ecosystem of partners who are developing these application solutions on our platform, not our competitors', is just continuing to grow and prosper. They are not all going to be as successful as high voltage line tending or welding, but it only takes 10% of them to fuel the kind of growth numbers that we have been seeing.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

The activity there is very strong, and the technology is maturing to the point that more and more applications can economically be served. Over the horizon, when you look at what AI can bring as a whole new set of, let's say, features that will enable yet another expansion of the market, it's what gives us the confidence to talk about these kind of decade-long growth rates of 25%, 30%, 35%.

Vivek Arya
Vivek Arya
Analyst at Bank of America

Thank you.

Operator

Your next question comes from the line of John Pitzer with Credit Suisse.

John Pitzer
John Pitzer
Analyst at Credit Suisse

Yeah, good morning, guys. Thanks for letting me ask the question. Mark, maybe another way to ask the calendar fourth quarter question is, over the last three years, the business has run in such a way that the second half has been greater than the first half from a top-line perspective, which has broken kind of a trend where if you go back the prior seven years, it was first half stronger than second half. Do you have any commentary on sort of how you think the second half over the first half will look this year, just given how strong the market environment is and how tight test capacity is?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

You're right. Perfect student of the history. We have been, as Sanjay said, always a bit surprised in the recent years on how strong fourth quarter has come in, and driven second half to be a bit higher than first. If you asked us today, we'd say first half is a little bit stronger than second, but that's no different than kind of what we thought for the last couple of years, too. That just is a testament to the visibility in Q4, as the lack of visibility in Q4.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

As Sanjay said, though, it's a little bit more visibility now than before because lead times are a little longer. All the upside that could come in is obviously the piece that's not visible. We feel probably better now about Q4 than we felt in any prior two or three years. It's sort of what might happen between now and October that's invisible.

John Pitzer
John Pitzer
Analyst at Credit Suisse

That's helpful. Mark, as my follow-on, I apologize, the audio quality was a little poor during your prepared comments. I wanted to go back to some of the commentary you made around DDR5 adoption. I think the point you were making is perhaps it's a little bit slower than you thought. Is that correct? I guess more importantly, can you give us an update of how you think you're positioned for DDR5 when it does start to ramp relative to share in memory test?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Yes. Sorry about the audio quality, in fact, yes, DDR5 for server applications has pushed out a bit as the server chips themselves have been delayed. We've seen the impact of that in the demand for DDR5 testers. Similar things happened with LPDDR5 going into mobility applications. Despite all that, the share position for Teradyne, we think is unchanged from our earlier estimates at around 40% of the market, it's going to be a tailwind next year when the DDR5 and LPDDR5 ramp, as was originally thought, would happen toward the end of this year. We're well-positioned there. I think that's a tailwind for us next year.

John Pitzer
John Pitzer
Analyst at Credit Suisse

Perfect. Thanks, guys.

Operator

Your next question comes from the line of C.J. Muse with Evercore.

C.J. Muse
C.J. Muse
Analyst at Evercore

Yeah, good morning. Thank you for taking the question. I guess first question, Mark, you've taken the SoC test market size higher again. I guess curious, if we were to hit the high end of the range, what would be the driver there? Would your market share still be 48% or could you see greater contribution from what's driving potentially the market to the higher end of the range?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Yeah. Certainly, if the market goes up toward the high end of that range, our revenue would grow probably proportional to that. Would our share go much higher? I threw out a number of roughly 48% at the midpoint of our market size guide. I would expect our market share is probably going to stay around that number, plus or minus a half a point at this point in the year. It's hard to sort of prognosticate too much about where the share comes from. As you know, one customer's buying capacity can swing multiple points of share in any given year. One of our customers could come in and drive a demand that we don't see right now. We have the manufacturing capacity to serve it. Yeah, I guess we could be up at 50% share if that happened. It's just a little opaque at the moment.

C.J. Muse
C.J. Muse
Analyst at Evercore

Okay. That's helpful. I guess a follow-on question to a few of the questions that you got earlier. You spoke to DDR5 now being pushed to a tailwind next year. You've spoken to high-performance compute, particularly the non-x86 world, as a tailwind for you guys next year. I think the concern out there is that your one large customer could decline meaningfully, and that would cause SoC for you guys to be down next year. I guess as you sit here today and you're setting up your supply for customers and lead times have extended, how are you thinking about the world into 2022 for SoC for Teradyne?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Very bullish because I think the concern, let's see, I'm not going to speak too specifically around a customer, but what I would say is that the portfolio of devices that are being developed by our hyperscaler customers continues to expand. That's going to, in addition to the complexity growth of the existing portfolio, you add more chips on top of that, it portends a growing market, a growing customer. There's going to be ups and downs, but I think the cataclysmic or sort of the cliff concern, we're now a decade into this almost, and it just hasn't happened. The trend line, I think, is pretty clear, and I think that timeline will continue.

C.J. Muse
C.J. Muse
Analyst at Evercore

Great. Thank you.

Operator

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

Toshiya Hari
Toshiya Hari
Analyst at Goldman Sachs

Hi, good morning. Thanks so much for taking the question. I had two as well. Mark, I guess somewhat related to C.J.'s question, just curious in terms of the auto SoC test market. I think in your prepared remarks, you mentioned that you expect the market to exceed $500 million this year, and how that's the highest mark since 2017. How are you thinking about sustainability there into 2022? Near-term demand is clearly very strong, and when we speak with your customers, they're all kind of complaining about extending lead time.

Toshiya Hari
Toshiya Hari
Analyst at Goldman Sachs

I guess the bias is to the upside, but curious how you're thinking about that market. As a follow-up, a question on storage tests. It seems like both HDD and SLT are trending very nicely. I think the business was up more than 2x last year in 2020. Curious what you're thinking about the business full year 2021. If you can differentiate between SLT and HDD, that would be super helpful. Thank you.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

Hi, it's Sanjay here, so I'll take a cut at them. From an auto market perspective, it's true, this year we've seen tremendous growth and just about $500 million or plus or minus a bit from a market size. Yeah, it's the largest we've seen even back to 2017. Fundamentally, I think in the last call, there was commentary around the auto industry for years has lived on a just-in-time manufacturing. Fundamentally, in back half of 2019, sales weren't so high. Coming into 2020, obviously demand had really picked up. You're seeing just a significant replenishment of inventory back into the system. We're seeing that continue. We see, obviously, the lead times, and currently the demand is outstripping our supply. We see that with good visibility till the end of 2021.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

2022 will be interesting, because we'll have to take a look at what are the inventory levels and what is the market demand in 2022, in first half. So it's a little bit opaque, I'd say, in 2022, but it'll depend on what I believe to be the inventory level and obviously the end market demand. From a storage perspective, a little bit of color around 2020 and 2021. If I go back to 2020, HDD and our SLT business was kind of split relatively even. One was a little bigger than the other. From an HDD perspective, we've seen continued end market demand fueling that business.

Sanjay Mehta
Sanjay Mehta
CFO at Teradyne

When we look into 2021 from an SLT perspective, we're seeing a broadening of devices being adopted for SLT testing, which is providing a tailwind, which is enabling a larger growth in that segment of the storage business this year relative to the HDD business. The HDD business is still very strong, end market demand very strong, but the broadening of the SLT, or sorry, the ASICs being tested under SLT is increasing, which is really good news. It's going a little faster than the HDD shipments from a storage perspective.

Toshiya Hari
Toshiya Hari
Analyst at Goldman Sachs

Thank you for the color.

Operator

Your next question comes from the line of Timothy Arcuri with UBS.

Timothy Arcuri
Timothy Arcuri
Analyst at UBS

Thanks a lot. I had a question about your commentary, Mark, about your SoC share for the year and sort of what it implies for SoC in Q4 and more broadly, what it implies for total company revenue in Q4. You've sort of given us all the different pieces. You guided wireless for the year, you guided System Test for the year, you gave us the pieces on the test businesses.

Timothy Arcuri
Timothy Arcuri
Analyst at UBS

If I just look at what that implies for SoC in Q4, I mean, you're going to do about $575 roughly for SoC in Q3. That's not a big mystery. The Q4 number implies it goes down to like $425, somewhere in the low fours. That would be down year-over-year. I guess my first question is why would that be, given that you have all this visibility and obviously you're quite bullish about the market, why would Q4 be down so much? That's my first question in SoC.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Yeah, I don't know that it would be down so much or not. It's a portfolio of businesses, and all of those numbers have a margin of plus or minus, let's say, 1% around them. That creates a large Monte Carlo simulation, and if you go right down the middle, I think I'm sure you did the math right, that's probably what you come up with. That's typical, as I said earlier, of where we stand at this point in the year, looking into Q4, as in past years, where it's come in higher. There's a significant unknown around what we'll book between now and through October that can drive Q4 shipments. While we have backlog that extends in some product lines, as Sanjay mentioned, all the way through the end of the year, there's others that's more of a turns business.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

We've positioned ourselves to be very responsive on the SoC front in general to capitalize on these sort of short demand requests that come from our customers. That's why we've, in the past, been able to, in the quarter, exceed our guidance, and even in the fourth quarter in prior years, exceed what we thought when we were talking back then in July. It could very well turn out that the demand that we've seen the last couple of years in Q4 yet materializes again, and we end up, as C.J. was hinting at, having a second half larger than first. It's just that at this point in the year, given what customers are talking about, we just don't see that as the most likely outcome. It's episodic, too.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

What happens in Q4, a lot of it happens in the past couple of years in the December quarter, preparing for product launches that occur in February timeframe. New phones and things like that. Again, with a rash of phone introductions in February, although we don't see it now, we could see a demand for SoC testers to support that, driving December shipments.

Timothy Arcuri
Timothy Arcuri
Analyst at UBS

The total company revenue is implied to be below where people are expecting for Q4, that's why I was asking. Anyway, on your revised TAM for Semi Test, can you just update us on the segments? I think before you were thinking compute would be $1 billion, mobility would be $1.6 billion, auto, you just gave that number as $500 million, and industrial, I think before you were talking about $500 million. Is the revision mostly in the compute side? Can you update us on those numbers? Thanks.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Yeah. The numbers for compute are about the same. Mobility's probably up $200 million. Auto is up probably $50 million, Industrial up about $50 million.

Timothy Arcuri
Timothy Arcuri
Analyst at UBS

Okay. Awesome, Mark. Thank you.

Operator

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

Krish Sankar
Krish Sankar
Analyst at Cowen

Yeah. Hi, thanks for taking my question. Mark, thanks on the comment earlier on the Arm test opportunity. I just want to ask the question in a different way. When do you think the non-x86 compute TAM, or maybe the total test compute TAM, be similar or bigger than the mobility test market? I'm going to add a follow-up.

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Bigger than the mobility test. If your question is, when will the Arm compute test TAM be bigger than the Arm mobility test TAM?

Krish Sankar
Krish Sankar
Analyst at Cowen

No, mobility test TAM is about $1.6 billion or $1.7 billion, and you said compute is about $1 billion. When do you think the total compute TAM, or maybe just the non-x86 compute TAM, gets to be bigger than mobility?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

I don't think it's going to be in the next four or five years. I think much of what's being developed in the Arm space by the hyperscalers will more likely fall into the category of mobility. I don't see compute growing beyond mobility in the next four or five years.

Krish Sankar
Krish Sankar
Analyst at Cowen

Got it. Mark, on the auto test market, you said it's over $500 million. I'm guessing that includes auto microcontroller, linear, et cetera. If that is the case, is there any way of giving some more color within that, or you think it's too hard to segment it?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

Yes. It does include microcontrollers, and I would say that most of the growth is auto more than microcontrollers. Microcontrollers is growing, too, but it's mostly auto. Of course, there's microcontrollers in auto, so when I say auto, I mean microcontrollers for auto versus microcontrollers, let's say, for white goods and things like that.

Krish Sankar
Krish Sankar
Analyst at Cowen

Okay. Thanks, Mark.

Andy Blanchard
Andy Blanchard
VP of Corporate Relations at Teradyne

Operator, we have time for just one more call, please. One more question.

Operator

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

Joe Moore
Joe Moore
Analyst at Morgan Stanley

Great, thank you. I wanted to ask about the millimeter wave commentary. It seemed like the expectation, that was primarily one customer in one region. When you say that was short of your expectations, what are you referring to there?

Mark Jagiela
Mark Jagiela
CEO at Teradyne

It's not one customer, one region. Millimeter wave last year for us grew significantly. We probably had 90% share of the early buying for millimeter wave test in 2020, and I would say that was spread out across six or seven customers. Anybody who's making a chipset related to millimeter wave was pretty much using a Teradyne tester in 2020. The deployment of millimeter wave by the telecommunication companies has ground to a halt, and that has proportionally ground to a halt the need for incremental test in 2021.

Joe Moore
Joe Moore
Analyst at Morgan Stanley

Got it. Okay. Thank you.

Andy Blanchard
Andy Blanchard
VP of Corporate Relations at Teradyne

Okay, folks. Thanks so much for joining us today. That concludes the call. We apologize for the audio difficulties at the front end of it. We look forward to talking to you in the days and weeks ahead. Those in the queue, I'll get back with you directly here. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.

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