Teradyne Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 15 speakers on the call.

Operator

Greetings, and welcome to the Teradyne First Quarter 2023 Earnings Call and Webcast. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Please press star 0 on your telephone keypad. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Andy Blanchard, VP, Corporate Communications. Thank you, sir. You may begin.

Speaker 1

Thank you, Latanya. Good morning, everyone, and welcome 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 Q1 along with our outlook for the Q2. The press release containing our Q1 results was issued last evening.

Speaker 1

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 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.

Speaker 1

We've posted additional information concerning these non GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure were 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 Q2, Sanjay will then offer more details on our quarterly results along with our guidance for the Q2. We'll then answer your questions and this call is scheduled for 1 hour.

Speaker 1

Greg?

Speaker 2

Thanks, Andy, and good morning, everyone. Today, I will summarize our Q1 results, comment on the current environment and outline how we see the market developing. Sanjay will then provide the financial details on Q1, our outlook for Q2 and some thoughts on full year planning. From a financial perspective, we delivered 1st quarter sales above the midpoint of our guidance range with earnings above the high guide on improved gross margins. In Q1, our flexible business model enabled us to convert improving component availability in semiconductor test into additional revenue and profit and our robotics businesses delivered on plan for the quarter.

Speaker 2

Stepping back from the Q1 results, I would like to outline our view of the current market conditions and how we expect the next few quarters to unfold. In semiconductor test, lower end market demand and high channel inventory is persisting and our measures of tester utilization in Q1 of 2023 are at their lowest level in over 10 years. The weakness is concentrated in compute and mobility SoC tests and reflects further erosion in end market demand in 2023. After a 20% decline in PC shipments in 2022, they are forecast to decline an additional 4% this year. Smartphones dropped 10% in 2022 And are forecasted to drop another 4% in 2023.

Speaker 2

We have clearly seen utilization weaken as well. Until inventory levels in these supply chains come into balance and the utilization levels improve, we expect test demand for these markets to remain at low levels. As a result, we don't expect any 10% customers in these end markets in 2023. Over the past 4 years, the compute and mobility segments have represented over 70% of the SOC market. So weakness in these segments has an outsized impact on the overall industry.

Speaker 2

There are however several factors beyond inventory alone that make forecasting in this cycle challenging. These factors are likely to impact both the depth of the cycle and the shape of the cycle recovery. The First is the strength in the other roughly 30% of the SOC test market, automotive and industrial test. The demand that we're seeing here is stronger and more persistent than we expected in January. Tester utilization at IDM customers that Drive this sector is substantially higher than at OSATs, which primarily serve the compute and mobility markets.

Speaker 2

In fact, high demand has pushed out our tester lead times for some configurations to be longer than our target. Wafer capacity expansion plans announced by many of our automotive and industrial customers bode well for sustained demand for us in these segments. Strength in these segments is being driven by a wide range of new and growing device applications such as EVs, autonomous driving and the digitization of industrial activity. We also see these customers working to replenish the inventory that has been depleted over the last 3 years. This strength suggests that the depth of the SOC test market decline of this cycle may not be as deep as past cycles.

Speaker 2

Another factor that makes this cycle very different is very strong tester demand from China based chipmakers. The current test buy rate is substantially greater in 2022 and higher than the broader market and may not be sustainable at these levels. In the vertically integrated producer category, we have seen no slowdown in R and D or design in activities. However, we expect low OSAT utilizations to significantly impact production capacity buys in 2023. When taken together, these three factors make it challenging to predict the timing and the strength of a recovery.

Speaker 2

Having said that, we do have better insight into the full year than we had 1 quarter ago. We estimate the SoC market in 2023 will be between 3.3 And $3,800,000,000 down about 20% to 30% from last year's roughly 4,700,000,000 we expect our share of the SoC market will increase 2 or 3 points from last year's 36%. I will note that we have increased our 2022 market size estimate by $100,000,000 since January. In the memory segment, while oversupply is limiting capacity expansion investments, the technology transitions we discussed in the past are continuing to drive test demand, especially for LPDDR5 and high speed flash. For the full year, we expect the market to be flat to down we expect to be 10% from last year's approximately $1,000,000,000 level.

Speaker 2

This is unchanged from our view in January. We expect our share to be in the high 30s also up a point or so from last year. We know that the global trends have driven over $300,000,000,000 of wafer front end investment over the past 4 years and that has not yet fully been converted into testament. When coupled with a forecast of an additional $160,000,000,000 of investment over the next 2 years, we think the fundamentals for midterm growth are strong. In our LitePoint wireless test segment, we see a more familiar correction cycle.

Speaker 2

We are also a year or so away from the next complexity leap in connectivity, the transition to Wi Fi 7. As a result, our early view has LitePoint sales down 20% to 25% from last year's level. In system test, the storage portion of the business is impacted both by reduced demand for HDDs and declining smartphone shipments. As a result, our system test group revenue will likely be down revenue in Q1 2023 is down 14% compared to Q1 of 2022. The Q1 of 2022 was the last strong quarter before the invasion of Ukraine and slowing industrial growth internal factors that are limiting the growth of our robotics businesses and addressing these challenges remains a high priority for our Universal Robots and MIR teams.

Speaker 2

At Universal Robots, we see a mixed picture. The external market conditions remain weak. Overall sales softened and were lower in Q1 than in the same period last year. However, shipments to Europe have returned to their highest level since then. And in the United States, demand slowed substantially in Q1 after a very strong Q4.

Speaker 2

Demand in Asia also softened in the quarter. In most years, we see a weaker Q1 as strong Q4 shipments are digested. But it is clear that the manufacturing the primary internal factor that is impacting our growth is the ongoing realignment of our distribution system. Recall we're shifting resources to put more focus on opportunities at large customers and OEM partners that have higher long term growth potential. We're seeing some short term headwinds from the shift in resources.

Speaker 2

An important positive for Universal Robots our strong pre orders for our new high payload UR20 cobot. We expect to have a backlog of over 6 months of volume shipments when we begin deliveries mid year. New York 2020 has already won numerous industry awards, including robots Business Review Innovation Award. At MiR, where we're coming off record Q4 shipments, we're seeing similar industry level headwinds along with seasonal slowdown in Q1 demand. However, our strategy to increase direct engagement with large accounts is latching with installed unit growth of over 40% in this sector from Q1 of 2022.

Speaker 2

With a persistent weak macro environment and with little evidence to suggest a near term change in these conditions, we've brought our full year revenue estimate for our Robotics Group downward to be 0% to 10% growth from last year's $403,000,000 I would like to emphasize that despite the current market conditions, our view of the long term growth potential for robotics remains unchanged. It is clear that there is a large and growing market for Collaborative Robotics driven by labor shortages and escalating labor costs. Our strategy is to address this market with an expanding range of applications for our robots and a focused distribution strategy that we expect to yield an average 20% to 30% annual growth over the midterm. The fundamental drivers of all of our served markets, test and robotics make them as attractive as ever. We are focused on continuing to operate efficiently with strong financial discipline as demand begins to recover.

Speaker 2

With our flexible business model, we will maintain the careful investments in our products and capabilities that are the fuel for our future profits. I'll turn things over to Sanjay for the financial details. Sanjay?

Speaker 3

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.

Speaker 3

1st quarter sales were $618,000,000 Which was $28,000,000 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 percent 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 $251,000,000 about flat with 4th 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.

Speaker 3

Semi Test revenue for the quarter was $415,000,000 with SoC revenue contributing $347,000,000 And memory, dollars 68,000,000 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 $75,000,000 with $34,000,000 in storage test and low SLT and HDD demand. Recall SLT has high exposure to smartphone market and as widely noted HDD markets are weak this year. In wireless test, revenue was $39,000,000 in Q1 on the impact of both low PC and smartphone volumes And a lull in complexity driven test investments ahead of the expected Wi Fi 7 rollout beginning in 2024.

Speaker 3

NADA Robotics. Revenue was $89,000,000 with UR contributing $72,000,000 and MiR $17,000,000 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 objective. Gross margins continue to be above the corporate average.

Speaker 3

Greg has noted reasons for growth in 2023 below expectations, 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. And you are, we have conviction in this very large market and believe it is still sub-five percent 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 omni channel, 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 we will be conducting an outsized rate before we see the full effect full benefit of our new channel strategy.

Speaker 3

From a profitability perspective, UR has operated atabove10% to 15% sorry, UR has operated atorabove 10% to 15% profit since 2017, with the exception of the initial COVID year in 2020. In 2023, we expect profitability you are 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 is earlier in its lifecycle 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.

Speaker 3

MiR is 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 and D investments needed to realize the opportunity.

Speaker 3

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 and cooperation with large customers, we expect it will be profitable in 2025. Gross margins in robotics are above the corporate average, and if we do not see significant growth opportunity in the market, we'll 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.

Speaker 3

At a company level, our free cash flow was an outflow of $22,000,000 in the quarter. We typically consume cash in the Q1 as we pay out our variable employee compensation. We repurchased $93,000,000 of shares in the quarter paid $17,000,000 in dividends and settled $15,000,000 of debt. Note, the share repurchase program began in late January, so it reflects we ended the quarter with $859,000,000 in cash and securities. Now to our outlook for Q2.

Speaker 3

Q2 sales are expected to be between $625,000,000 $685,000,000 with non GAAP EPS in the range of $0.55 to $0.74 on 164,000,000 diluted shares. The 2nd 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. 2nd quarter gross margins are estimated at 57% to 58%. OpEx is expected to run at 37% to 40% of 2nd quarter sales, roughly flat with Q1.

Speaker 3

Non GAAP operating profit rate at the midpoint of our 2nd quarter guidance is 19%. A few points to assist you in the modeling and 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.

Speaker 3

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.

Speaker 3

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 moved 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.

Speaker 3

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 2023 look incrementally stronger than we expected earlier this year with softer mobility and compute markets. Robotics demand is also incrementally softer.

Speaker 3

In this environment, we're making the investments to strengthen our global supply chain, while maintaining the R and 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 2023, which we'll deploy to maximize value for our shareholders through potential M and A, dividends and shareholder repurchases share repurchases. With that, I'll turn the call back to Andy. Andy?

Speaker 1

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

Operator

Thank you. We will now conduct a question and answer session. A confirmation tone will indicate your line is in the question our first question comes from Mehdi Hosseini with SIG. Please proceed.

Speaker 4

Yes. Thanks for taking my question. I have 2 follow ups. I want to go to your LitePoint. Can you please help me understand opportunities In the WiFi 6 area, it seems like that's already behind us.

Speaker 4

And when would you expect Contribution from WiFi 7 to materialize, is that late this year or do we have to wait till next year? And I do have a follow-up.

Speaker 2

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 WiFi investments in 2023, So there's a lot of R and D and development work going on, on WiFi 7 chipsets and equipment, that is probably going to ramp in 2024. So we're modeling that we'll have Some WiFi 6E investment through this year and then growing WiFi 7 investment in 2024. Does that help?

Speaker 4

Yes, absolutely. And then second question, the favorite topic, how 3 nanometer capacity ramp in 24 could Attribute and the fact that you don't have a top 10 customer this year, does that mean that next year is going to be a big SoC ramp for Teradyne, especially given the delay in 3 nanometer that would finally have 3 nanometer high volume manufacturing next year?

Speaker 2

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 2, 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.

Speaker 2

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.

Speaker 4

Thank you.

Operator

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

Speaker 5

Thanks a lot. So relative to your prior SOC TAM forecast, you were down like 20 at the midpoint off of a 4.6 number. Now I know that you took that to 4.7 last year. But so you've taken basically a few $100,000,000 out of the TAM this year. So, auto sounds like it's better.

Speaker 5

I know that you were thinking that auto would be down. It sounds like maybe it's flat at like 700,000,000. Can you kind of just sort of disaggregate that 3536 number at the midpoint that you now have for your new SOC TAM?

Speaker 3

Hi, 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 dollars 1,000,000,000 Mobility at $900,000,000 Auto, we believe, is flattish. And again, so auto and Microcontrollers at about $600,000,000 industrial at $400,000,000 and then service at roughly 700,000,000

Speaker 5

Got it. Got it, Sanjay. Thank you for that. So Greg, Maybe we can ask about the there was a question on 3 nanometer. And this year again is going to be typically you have a much More front end loaded year than you are this year.

Speaker 5

It's sort of fifty-fifty, it seems like. So I guess I'm just asking about, Is there something sort of structural going on? I know there's this debate, the sort of cyclical debate versus the structural debate with your largest customer. And I continue to believe that it has to be up a lot next year, but is there something under the surface going on? There's maybe more tester reuse, can you just sort of talk about what's going on under the surface that might kind of inform where The SSC TAM goes next year and where your share could go.

Speaker 2

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 It 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.

Speaker 2

So instead of putting a new processor in all of the phones, they use last year's processor in 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. Thank you very much.

Operator

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

Speaker 6

Yeah. Good morning. Thank you for taking the question. I guess a follow on question. Mobility at $900,000,000 worst level of spending in 5 years and 55% lower than peak.

Speaker 6

You talked about maybe not such a great year next year, but curious what's kind of a base case kind of recovery assumption if you were to make the view that handset units would be at least flat and given what you know content wise and increased test times, What might that kind of impute for Mobility?

Speaker 2

Yes. I think we don't have enough visibility into I think it will be stronger, but I can't really tell you how much.

Speaker 6

Okay. And you talked about Q4 revenues accelerated To some degree, I'm curious if you can kind of speak to DDR5 kind of ramp, When that starts and how that impacts Q4 and the same thing for UR20. Is that a meaningful driver given your backlog or is that something that might get pushed into 2024? Thanks so much.

Speaker 2

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 push out 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.

Speaker 2

And I would say that it's it will have a substantial impact on the growth that we're able to achieve than you are this year. It's going to have Meaningful single digit impact on growth.

Speaker 6

Thank you.

Operator

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

Speaker 7

Yes. Hi. Thanks for taking my questions. I guess if I can just start with the auto piece here, and I know you've called out the strength there, but if you can share your thoughts about how you think How sustainable that is, particularly as you're seeing, like, how do you think of the correlation there to production volumes, particularly in the China market, where we're seeing a lot of different players call out risk to production as well as demand in that market? And then I have a follow-up.

Speaker 7

Thank you.

Speaker 2

Sure. So, how sustainable?

Speaker 8

There's

Speaker 2

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.

Speaker 2

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 It's probably out a little ways in time.

Speaker 7

Okay. Okay. Got it. And for my follow-up, just on the memory side, there is obviously some, I guess, news or sort of just speculation in terms of China looking at sanctions on Micron and any thoughts of how that impacts dynamics with your in terms of your revenue mix in memory as well as with your customers in China in terms of their investment in memory? Thank you.

Speaker 2

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 2 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% or 5% of total Teradyne revenues. And the portion that goes to memory there is probably between a half and two thirds of that number.

Speaker 7

Okay, got it. Got it. Thank you. Thanks for taking the question.

Operator

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

Speaker 9

Hi, good morning. Thank you so much for taking the question. My first one is on component shortages. I just wanted to clarify. I think, Sanjay, you talked about shortage of analog and logic devices impacting semi test revenue in Q2 by 25%.

Speaker 9

So the interpretation there should be without the shortages, your Q2 revenue should be 25% higher. Am I understanding that correctly? And when do those headwinds have been

Speaker 3

in the prior year? No, sorry. I noted in my prepared remarks $25,000,000 which is outside of our range And it's roughly it's SOC and

Speaker 9

memory.

Speaker 3

$25,000,000 $25,000,000 Yes.

Speaker 9

Okay. Got it. And then my second question, just on your robotics business. So again, you're taking down your full year growth outlook for the year. Greg, you talked about the macro environment, you talked about the transition from distribution to direct and that having an impact.

Speaker 9

I'm curious if competition is having any impact here. It's always difficult to compare and contrast how you guys are doing relative to your competition because most of your competitors, they're either start ups or small businesses within bigger conglomerates. But curious, particularly in China, Is there anything going on the competition front? Thank you so much.

Speaker 2

Yes. So Toshiya, that'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.

Speaker 2

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.

Speaker 2

We've got between 35% 40% of a in 2023, it will probably be about $1,000,000,000 market. The our nearest competitor has probably less than a third, a quarter to a third of that share and that number 2 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.

Speaker 2

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 a pricing competitive threat from Chinese suppliers that we're really trying to deal with through differentiation.

Speaker 9

Very helpful. Thank you.

Operator

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

Speaker 10

Hi. Thanks for taking my question. I have 2 of them. First one, you guys are Sanjay, auto industry is pretty strong, maybe mobility rebounds next year. I understand you don't want to give color into calendar 24, but would that change the gross margin profile?

Speaker 10

Because it seems like Your auto industry has a much higher gross margin than mobility. And then I had a follow-up.

Speaker 3

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%.

Speaker 10

Got it. Thanks, Sanjay, for that. And You kind of gave some color on the SoC test breakdown with compute being $1,000,000,000 If I remember right, historically, the GPU You test market has been around $100,000,000 or so give or take and that has not been as test intensive. So I'm kind of curious As you get into all this AI stuff, do you think GPU test could grow? And what is your opportunity set there?

Speaker 10

Because historically, like Verigee Advantage has been the leader Thank you.

Speaker 2

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 chat, GPT, 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.

Speaker 2

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.

Speaker 2

And so as this market evolves and AI becomes a more important part of the vertically integrated Producers are hyperscalers. The overall value delivery, we our hope is that these internal devices we'll long term have a higher growth than traditional compute. So short term really strong for traditional, Longer term better for vertically integrated.

Speaker 10

And Greg, is it fair to and thanks very much for the color. Is it fair to assume GPU is probably a $100,000,000 in that $1,000,000,000 compute market?

Speaker 2

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

Speaker 10

Got it. Thank you very much, Greg. Really appreciate the color.

Operator

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

Speaker 11

Thanks for taking my question. I actually had a longer term one. It seems like you're keeping your long term sales and earnings model unchanged. But when I look at your largest end markets, Mostly on the consumer side, they seem to have matured quite a bit. So what's underpinning the confidence about reaccelerating to that double digit growth and let's say the new model is not for double digit growth, what will you need to change about your cost structure to realize better profitability?

Speaker 2

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 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 lull 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 gate all around technology that's coming as well.

Speaker 2

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.

Speaker 2

It's there, it's going to get turned on and when it is, it's going to require testers.

Speaker 11

Got it. And for my follow-up, Greg, seems like your SoC business Could we down half of 1 and half in the second half if I take that 39% share that you suggested of the Lower TAM. So just wanted to confirm on that. And would mobility also be down? And if it is down, is it that The 3 nanometer comment that you mentioned, is it not as big a node?

Speaker 11

So does that have implications on what we should be thinking about for calendar 2024 growth in your SoC test business also.

Speaker 2

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

Speaker 3

Yes. So second half, I think you asked about SoC revenue in the second half. And as I noted in my prepared remarks, we expect revenue to be a bit higher in the second half. And part of that increment is really tied to SOC. And while it does have auto and industrial as the main driver, so we

Speaker 2

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

Speaker 11

Of course. Yes. Yes. So what I specifically was trying to ask is, do you expect your mobility demand in the second half to be better than the first half? And if it isn't, then isn't that a surprise given that your large customer will get on the 3 nanometer cycle?

Speaker 11

So is 3 nanometer just not as big a node and does that have implications on how we think about your mobility demand for next year?

Speaker 2

Okay. Yes. So, it's a really good point and something that I think it's important to communicate clearly about. 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.

Speaker 2

So as unit volumes increase, we believe that we'll see the Full effect of that higher complexity.

Speaker 5

Thank you.

Operator

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

Speaker 8

Hi, good morning. Thanks for letting us ask a few questions. Maybe to start with, I think yours and advanced SOC TAM outlooks. I think they rarely align due to things like service, etcetera, That might be in or out of your forecast, but they seem especially far apart this year with sort of the high end of your range, worse than the low end of theirs.

Speaker 6

I'm just wondering, what do

Speaker 8

you think explains the kind of the discrepancy between each of your forecasts this year?

Speaker 2

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 Stronger 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 diverges.

Speaker 2

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. We basically, I'd like to say that we feel pretty comfortable with the range that we set, the 3.3 with the range that we set, the 3.3 to 3.8. And we'll see.

Speaker 2

If things Strengthened 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. Okay.

Speaker 8

Fair enough. So I guess your moles are better than theirs.

Speaker 2

No, 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 moles are better than their moles for sure.

Speaker 8

Okay. Yes, that was kind of a joke. Sorry. But the in terms of the omni channel strategy also, Greg, for automation, when do you think that will be Fairly, you may have sort of alluded towards the end of the year, I'm not sure, but when do you think that will be kind of somewhat well rooted or established? And it'll take probably more than a few quarters even potentially.

Speaker 8

But when do you think that'll be pretty well established? And then even when you think about it from like a scale or critical mass perspective, Would it not make a lot of sense for you to market even maybe a broader portfolio of automation than you do currently once you sort of have that, sort of revamped channel Strategies established.

Speaker 2

Yes. So that's it's like you're sitting in our strategy sessions. So The way to think about the omni channel is that we are doing this in steps. The first significant new channel that we've established for UR is the OEM channel. And from 2021 to 2022, the OEM channel grew 16% year on year.

Speaker 2

From 2022 to 2023, 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 are 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.

Speaker 2

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 midterm, 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. We will be looking to try to find ways to leverage that strength to find other growth engines.

Speaker 5

Okay.

Speaker 8

That's great color. Thanks, Greg.

Operator

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

Speaker 12

Great. Thank you. I wanted to understand a little bit more of the component constraints. And I guess if you could put that in the context of the last couple of quarters, I thought you guys weren't as constrained as AdvanTess was and I wasn't really thinking it was holding you back from revenue. Now it seems like the component constraints are easing, but there's still some negative impact this quarter.

Speaker 12

So you can just put that in context that what you've been seeing in the last few quarters and how does that affect you

Speaker 3

Yes, great. So last quarter, we had a little bit of market or component as well. We brought in roughly $10,000,000 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.

Speaker 3

I would say that there are a couple 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 and 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 25,000,000 as I noted, dollars 25,000,000 outside. Obviously, we're doing our best to service the customers. I see that hopefully going down into 2024. 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.

Speaker 3

We have a track record of execution. So Just think of it as tied to a couple of key components.

Operator

Okay, great. And are those

Speaker 12

I know you had constraints like a year ago. Is it the same components or is it there sort of just different areas like kind of moving hotspots of shortage that are moving around a little bit?

Speaker 3

Yes, I'd say going back to 'twenty one and kind of the first part of 'twenty two, I'd say there was a wide variety 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

Operator

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

Speaker 13

Thanks. Good morning. Greg, thinking about your prepared comments, How do you reconcile the strength in semi test for industrial digitization with the softer forecast for robotics? It seems like those should be correlated to some degree or is Some other aspect of digitization that's driving the test volume.

Speaker 2

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 still like if you think about cobots, they are $1,000,000,000 of about a $12,000,000,000 industrial robot market. The rest of the industrial robot market is running with 1 to 2 year lead times.

Speaker 2

And they are still very busy shipping product to help put together a whole bunch of EV Factories and Battery Factories. That's business that is not really core to the cobot space. And so I think that 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.

Speaker 13

That is a really great color. Thank you. And when you think about the longer term story for your robotics business, how is your thinking about the profit pools changed over the past year or 2? Is it a pure volume game that's driving the focus on large accounts? Or do you see the value in the ecosystem that you can provide and the hardware is how you Sell that or do you think that more value will be in the services and upgrades over time as the installed base grows?

Speaker 13

Like where is where do you think this goes to your benefit.

Speaker 2

Yes. So it's the I don't really think of it in terms of a volume play because that in 1st 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 That makes a big difference as does having an ecosystem of partners that it 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.

Speaker 2

So I see that as an efficiency gain. The comment that you made about hardware versus services, I think that that's an important of our future plans that we think that there are profit pools in retaining and 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.

Speaker 2

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.

Speaker 13

Would you get into more cobot as a service or robotics as a service over time based on that comment?

Speaker 2

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.

Speaker 2

Yes.

Speaker 13

Thank you. Appreciate the time.

Speaker 1

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

Operator

Sure. The next question is Vivani Chaudhry with Jefferies. Please proceed.

Speaker 14

Hi. Thanks for taking my question. I guess my First question is on the high bandwidth memory side. Do you think that kind of puts A positive angle on the test intensity on the DRAM side. Is that an angle?

Speaker 14

Just considering that these are advanced packages, does that increase your test intensity? Or how should we think about it?

Speaker 2

Yes. Hello, Vivendi. So, HiBean with memory is certainly one of the leading edge technologies that is driving some tester sales, some technology related tester sales even though overall capacity is down. But it's actually a really small part of the overall memory business. So it's a positive, But I don't think it's nearly as significant as the transition to LPDDR5 or the next generation of flash In terms of driving technology

Speaker 14

sales. Okay. Got it. And so for my follow-up, So on the auto industrial market, I have kind of a 2 part question for this. So the market Share has always been sort of fifty-fifty between Teradyne and Atlantis.

Speaker 14

Are there any pockets where you would see your market Share sort of being 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 restrictions. Has that impacted you in any sense? Like, do you expect some sort of clarifications in China restrictions drive your revenue sort of up better than what you expected.

Speaker 2

Yes. So In terms of within auto industrial, any parts where we're more dominant, I'd say that the segment where we probably have our leadership position is in power and discrete test that when it comes to gallium nitride, silicon carbide, IGBTs, things like that, our Eagle product line and the acquisition that we made of LEMSYS a few years ago Have allowed us to really establish a pretty good position in that space. It's not a huge part of that market, but it is So part of that market that we expect to grow over time. As for China restrictions, we don't know what's going to happen in the future. There is a lot of trailing edge Fab capacity coming online in China and we're getting a share of that.

Speaker 2

There are also something that we are on the lookout for is that, that is generally producing parts that you don't need a high performance tester to deal with. And there are some smaller test equipment makers locally there that are getting a share of that. So we're watching that and we're trying to make sure that we protect ourselves against competitive losses.

Speaker 14

That's helpful. Thank you.

Speaker 1

Okay, folks. We're out of time. So this concludes the call. Thank you all for your interest

Operator

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

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Earnings Conference Call
Teradyne Q1 2023
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