Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 Teradyne Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Operator Instructions. I would now like to hand the conference over to your speaker today, Andy Blanchard. Thank you, sir, you may begin.

Thank you, April. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Jagiela; and our CFO, Sanjay Mehta. Following our opening remarks, we will provide details of our performance for 2021's first quarter, along with our outlook for the second quarter of 2021. The press release containing our first quarter results was issued last evening. We are providing slides on the investor page of the website that may be helpful to you in following the discussions. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include Forward-Looking Statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release as well as our most recent SEC filings. Additionally, these forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today's call, we will make reference to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure, where available, on the Investor page of the website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Wolfe Research, ISI Evercore, Baird, Bank of America, Bernstein and Stifel. Now let's get on with the rest of the agenda. First, Mark will comment on our recent results and the market conditions as we enter the new quarter. Sanjay will then offer more details on our quarterly results along with our guidance for the second quarter, and we will then answer your questions. The call is scheduled for one hour. Mark.

Hello, everyone, and thanks for joining us today. In my remarks, I will summarize our Q1 results, review current market conditions and provide an update on how we are looking at Q2 and the full-year. Sanjay will then take you through the financial details of the quarter and our outlook for the second quarter. As you saw in our press release, our Q1 sales and profits grew double digits from Q1 of 2020's record level. Test sales grew 9% on broad-based demand with notable strength in automotive, industrial compute, memory and storage. Industrial Automation sales grew 33% in the quarter with strong demand at both UR and MiR. Notably, since our January call, the market demand in both Test and IA has been greater than we expected, as you can see from our Q2 guidance. In Semiconductor Test, customer orders are very strong as complexity continues to increase and chip units are expected to grow almost 15% this year, more than twice last year's rate. Regarding the sustainability of this demand, our visibility is limited to just a quarter or two but the growth in WFE from $50 billion in 2017 to $60 billion last year to over $75 billion this year should translate into a healthy tester market in the years ahead. Looking at SOC demand, the auto and industrial segment is especially robust, with our Q1 Eagle shipments up nearly 90% year-over-year, and deliveries expected to grow further in Q2. Test demand for mobility and compute devices is also running ahead of our January estimates as these end markets push the performance limits of advanced process nodes and drive the highest complexity growth. This higher complexity drives longer chip test times and often demands unique tester capabilities. Our UltraFLEX platforms are well aligned to these performance dynamics. As a result of this demand strength, we now expect the SOC test market to be in the $4 billion to $4.4 billion range, up about $700 million at the midpoint from our January estimate. This equates to about 16% growth from 2020, and we expect our share in SOC to be at about the 50% level. In memory test, we are seeing continued strength in both flash and DRAM. We now expect the full-year memory test market to be in the $900 million to $1.1 billion range, up about $100 million from our January estimate and up about 5% from 2020 levels. Our Magnum platform is in lockstep with the performance trends in both markets, and we expect another strong year in 2021. However, since most of the test market growth is expected to be wafer test applications, where we have less exposure, we are likely to see our share dip a few points into the upper 30s. In System Test, revenue grew 14% from Q1 2020, primarily on higher Storage Test shipments. As we have noted in past calls, Storage Test is linked to increasing density and complexity of data center hard disk drives and the expanding adoption of system-level test per chip test. Our full-year outlook for this business has improved from January as well on strength in both applications. The defense and aerospace and Board test units of STG are also performing well, and we expect the overall group will grow revenue 5% to 10% this year. Our LitePoint business is driven by the complexity of new wireless standards and the connectivity cellular and other wireless markets. In Q1, connectivity demand was the dominant revenue driver as WiFi 6E ramps in smartphones and access points. We expect LitePoint to grow in the 0% to 5% range in 2021. Shifting to Industrial Automation, we are on-track to grow 30-plus percent for the year. At the macro level, industrial economies are recovering with global PMIs above 50, indicating growing manufacturing investments. At the ground level, we are seeing increasing customer buying driven by economics, quality and lack of available shop floor labor. At UR, revenue grew 32% from Q1 2020 with a notable recovery in China where sales more than doubled in the quarter. Our China performance reflects the compelling value proposition UR offers, even in the face of low-cost competitors. We not only have the durability to operate in high-intensity production environments where downtime can't be tolerated, but we also offer a unique suite of organic and ecosystem provided software and peripherals to address a wide range of tasks with short deployment times. We are also seeing growth outside of the traditional manufacturing tasks. In the last several quarters, we have seen volume shipments of cobots to perform industrial service tasks, such as maintenance of high-power transmission lines while energized and robotic inspection of wind turbine blades. Together, these two applications account for over 500 installed cobots, and this should approximately double in 2021. Both examples highlight the flexibility of UR arms and value in performing dangerous service tasks. MiR also delivered strong results in the quarter, growing 55% year-on-year. A big part of that success has been the new MiR 250, which was introduced in March of last year and was our leading seller in Q1. We are also seeing a nice expansion of applications for MiR products. Initially, most applications were moving goods to and from. Last year, we saw a dramatic expansion in the use of MiR robots as a platform for mobile tasks such as disinfecting workspaces. And now we are seeing growing use in the conveyor market where our mobile platform replaces fixed conveyors. This provides owners greater flexibility than traditional fixed conveyor systems and allows them to reconfigure their factory on the fly as production requirements dictate. Although both UR and MiR have an expanding range of plug-and-play apps, now totaling over 430 in our UR+ and MiRGo ecosystem, these shorten the deployment time and increase the addressable market for cobots, adding additional growth factors for us. But we are not firing on all cylinders in IA yet. At AutoGuide, we have lowered our expectations for 2021. This year, we will focus on expanding existing customer deployments while we complete a series of engineering projects designed to scale and win new customers in the future. While this is surely a reset at our AutoGuide plan, we remain confident in the potential of the nascent market for high payload autonomous mobile robots and our ability to leverage AutoGuide's unique product architecture to deliver differentiated value to this growing market. Rolling it all up, the demand environment in our test businesses has strengthened dramatically since January and the wafer front-end equipment forecasts suggest that tester demand over the next few years will continue to grow. In Industrial Automation, UR and MiR are benefiting from their differentiated products and the improving global economy, which puts us on-track for a total IA group revenue growth of 30-plus percent for the year. Our employees are doing a great job, and our operating model is delivering strong financial profits and free cash flow. And finally, I would like to recognize and thank our Board chair, Roy Vallee, who will be retiring next month after 20 years on the Teradyne Board. Roy's leadership, integrity and wise counsel have been invaluable to me and the executive team, and we all wish him the best in his future pursuits. Sanjay will now take you through the financial details. Sanjay.

Thank you, Mark. Good morning, everyone. Today, I will provide details on our Q1 results, offer additional color on the operating environment, along with our plans to address a very strong demand environment and describe our Q2 outlook. During the appropriate sections, I will provide some full-year expectations. Now to Q1. First quarter sales were $782 million with non-GAAP EPS of $1.11. Non-GAAP gross margins were 59.1% and our non-GAAP operating expenses were $230 million, above our high guidance due to high variable compensation and G&A expenses. Non-GAAP operating profit rate was 29.6%. We had two 10% customers in the quarter. Tax rate, excluding discrete items for the quarter, was 14.75% on both a GAAP and non-GAAP basis. Looking at the results from a business unit perspective, semi test revenue was $528 million, up 9% from Q1 2020. SOC revenue was $420 million, up from prior year, driven by strength in compute, industrial and automotive markets, offset by a decline in our mobility shipments. Memory revenue was $108 million, up from prior year, driven by strength in the flash final test segment. System Test Group had revenue of $133 million which was up 14% year-over-year. This was driven by $95 million in storage test sales, including HDD and SLT solutions and $38 million in defense and aerospace and production board test. At LitePoint, revenue of $41 million was above plan, but down about 6% from prior year due to lower cellular test shipments. Looking at our test portfolio overall. We are very optimistic about the market and technology trends unfolding over the midterm. The growing attach rate of electronics across the economy, the increasing complexity of those devices and significantly, a faster refresh rate for many of these complex devices benefit all of our test businesses. Looking at a significant example, the increasing number of companies creating high-performance processors to serve a growing range of end applications, each with unique performance and design cycles, is driving an estimated doubling of the compute portion of the SOC test market this year compared with 2018. We have designed our UltraFLEXplus platform to serve this growing market and are having early success. This trend has complementary impacts on memory and SLT markets as well. Now to Industrial Automation. Given 2020 was a contraction year; I will provide revenue metrics comparing Q1 2021 results with Q1 2020 and Q1 2019. Industrial Automation revenue was $80 million, up 33% year-over-year and 21% over Q1 2019. Q1 2021 was a record for the seasonally soft first quarter of the year. U.S. and Europe represented over 70% of our IA revenue in the first quarter. As Mark noted, strength in China for UR, I will add that we saw the IA group revenue in China more than double year-over-year and grow greater than 50% over Q1 2019. UR sales were $66 million in Q1, up 32% year-over-year and 15% over Q1 2019. MiR sales were $14 million, up 55% from both Q1 2020 and Q1 2019. Sales increased in every region over Q1 2020. In addition to the success of MiR 250 that Mark noted, we also are starting to see a positive shipment trend towards higher payload MiR 500 and MiR 1000 models, which should improve our ASPs over time. Demand at both UR and MiR continues to improve as the global economy recovers and companies work to add production capacity. The opportunity of automation is growing. Our IA portfolio is solving problems for companies such as improving economics with a typical ROI of approximately one year, addressing labor shortages experienced by manufacturing and warehousing firms and adding supply chain resilience over the long-term. From a financial perspective in IA, we continue to lean into engineering, ecosystem and distribution investments to expand the range of applications our IA products address and extend our global distribution reach. Our goal in the short-term is to balance investments with sales growth in order to deliver an annual IA group operating profit of between 5% and 15%. However, given the reset Mark described at AutoGuide, we now expect AG revenues of less than $10 million in 2021, and AG will not be profitable in 2021. As a result, at the IA group level, we expect we will operate above breakeven in 2021, but below that target profit range. We do expect both UR and MiR each operate above the rule of 40 in 2021. That is the sum of the operating profit and revenue growth will be over 40. We continue to have confidence in our IA growth over the midterm, as articulated in our January earnings model update and expect the overall group to grow revenue over 30% in 2021. Shifting to supply. As Mark noted, the test market size has increased significantly across the board. From a supply perspective, we are dealing with increasing lead times and cost increases, predominantly in the semiconductor area. Given the significant demand increase in the challenging supply environment, we are experiencing some shipment delays. This is most acute in the automotive and industrial tester markets where demand is significantly outstripping supply. We are working with our customers on a daily basis to minimize the impact of these delays. We see this challenge accelerating into the third quarter with supplier lead times increasing. I appreciate the incredible pace of our operations team and partners around the world who have operated for over a year and continue to be impressive in their efforts to meet the needs of our customers. To sustain that pace and create a more resilient operation, we are continuing to invest in manufacturing capacity around the world. This includes qualifying redundant suppliers, production sites for critical components and redundant manufacturing capacity in new locations. Shifting to the balance sheet and cash flow. Our cash and marketable securities at the end of the quarter totaled $1.43 billion. We had $1 million in negative free cash flow in the quarter and spent $45 million and $17 million on buybacks and dividends, respectively. To-date, $67 million of the RTI convertible bondholders have elected to convert early. And in Q1, we paid $51 million of it to the bondholders. Regarding the buyback, we plan to increase our daily buying throughout the year and expect to purchase a minimum of $600 million in 2021, as noted in January. The relatively low volume of buybacks in Q1 was planned for three reasons. First, recall Q1 is a seasonally high use of cash, where we typically pay out our variable compensation and ramp up our prepayments to support increased Q2 test production. Second, we wanted to understand how much of our convertible debt would be redeemed in Q1. Third, we wanted to confirm the global recovery from the pandemic remained on-track. Now to Q2. As you have heard this morning, customer demand is strong and in nearly all parts of the business, our guidance assumes that we will continue to be successful dealing with the numerous material shortages we noted earlier and that we won't see additional pandemic related issues. With that said sales in Q2 are expected to be between $1.01 billion and $1.09 billion, with non-GAAP EPS in a range of $1.62 to $1.83 on 177 million diluted shares. The second quarter guidance excludes the amortization of acquired intangibles and the non-cash imputed interest on the convertible debt. Second quarter gross margins are estimated at 58%. OpEx is expected to run at 23% to 25% of second quarter sales. The non-GAAP operating profit at the midpoint of our second quarter guidance is 34%. Regarding OpEx for the full-year. We now expect OpEx will grow 17% to 19% over 2020. Note that this is up from our January plan for 2021, where we guided growth over 2020 at 8% to 10%. The increase from January in order of magnitude is in three general categories. One, higher revenue-driving higher estimated variable compensation and higher engineering costs related to mitigating supply constraints. Two, higher incremental spending to accelerate several engineering projects in test and IA. And three, higher-than-expected G&A spending related to legal, insurance and IT costs. As we noted in January and included in the estimate, we expect travel and marketing expenses to increase through the remainder of the year as pandemic restrictions ease. As outlined last quarter, we set our sight on reaching $5.25 to $6.75 in EPS by 2024 in our earnings model. In 2021, we expect our largest end market, semi test, to grow 14% and at the estimated midpoint above the estimate in our earnings model. Combined with industrial end markets recovering from the pandemic slump, these data points reinforce that our midterm earnings plan is on a solid foundation. We update our earnings model each January. In our next update, we will look closely at both the WFE forecast and test growth rates. To sum up, the demand environment across nearly all of our markets remain strong, and we are working closely with our suppliers and customers to expand shipments and minimize the impact of material shortages. We have had an outstanding start to the year, and we are on a path to healthy sales growth and profit growth for 2021. At the midpoint of our Q2 guidance, we will see sales grow 19% and non-GAAP EPS grow 21% above the first half of 2020, which itself was a record. We are well on our way to achieving our midterm revenue and earnings goals we set in our new earnings model. With that, I will turn things back to Andy.

Thanks, Sanjay. April would now like to take some questions. And as a reminder, please limit yourself to one question and a follow-up.

Operator Instructions. And your first question is from C.J. Muse with Evercore.

Thanks for taking the question. I guess first question, as it relates to the higher SOC test outlook, can you share with us what you are seeing in terms of ARM gaining momentum in both servers and PCs and how we should think about that impacting your SOC test revenue growth and market share?

Yes. I think it is a subtheme of what is happening in the compute area. The compute market for test this year will potentially double. ARM is eroding certain established share positions, and we are doing very well with ARM. But I think we are still in the early innings there. I don't think this is the end; it is the beginning. And the proliferation of other bespoke architectures that are high 10 billion-plus transistor count devices is proliferating, at least in design. They haven't started to ramp yet, but they are being worked on in design. So it looks to me like over the next few years that compute segment just is going to be very strong.

Very helpful. I guess as a follow-up, can you share with us your outlook for system-level test combined with HDD growth in 2021 and then thinking about the acceleration in nearline demand, how we should think about the growth CAGR there beyond 2021?

Yes. I think the system-level test and HDD markets are both still on a growth trajectory. We had a big year last year. We didn't expect that we might have a little digestion this year, but no, it is still heading north. And I think on the HDD front, that one looks like line of sight for several years ahead is positive. The exabyte growth in the 18-terabyte and above drive space just is very test intensive. And I don't see anything sort of blunting the transitions in the cloud storage to anything but those high-intensity drives. SLT is a little more of a, I think, a lumpy market at this point. It could continue to sequentially grow, but it is still limited to a very small subset of the market—manufacturers building very high complexity devices in high volumes. Now engineering work is going on to make SLT more meaningful to lower complexity devices. And I think as those products come to market over the next few years, you will start to see customer expansion in SLT and the market will grow. But I would sort of say, I wouldn't be surprised to see plus or minus 25% year-over-year swings as we try to get to a broader adoption of SLT.

Your next question is from Atif Malik with Citi.

Congratulations on another strong quarter and guide. Mark, can you compare or contrast the mobility and compute piece at your largest customer, which was 25% of sales last year versus the 2018, 2019 period where you saw correction? Obviously, the dynamics are quite different with 5G and now the compute piece this year.

Yes. Unfortunately, I'm not going to be able to break down anything related to any customer's mix. So I can't address your question specifically. I do think though that the lumpiness compared to prior years has smoothed a bit because of the bigger portfolio of devices that are at play here. And one of the big revisions, I would say, to our market size estimate as we move through the year—I have always talked about and our largest customer, the demand profile becomes clear in April. And up until April, there is a lot of variability. And it is starting to become clear, and it is stronger than we had expected. So that is part of the story of what is driving up the market and our revenue this year.

Great. And as a follow-up for Sanjay. Sanjay, if you can comment on the M&A strategy from here. On the last earnings call, you mentioned that even some areas in Semi Test are interesting to you guys. So just curious with the setback in the AutoGuide area, what are you thinking of M&A? Thanks.

Sure. Thanks. Yes. So as you know, M&A is part of our allocation strategy. And over the years, we have had a focus on industrial automation. We have an active business development organization that continues to look at different opportunities. And we will continue to do so. We are spending time as a management team reviewing them. When an opportunity makes sense both financially and has strategic product fit, we will act and we will advise at that time.

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

I think, Mark, you mentioned something interesting in your prepared remarks, which is that there could be some correlation between the rising front-end WFE investments and a pull-through effect on testers. I'm curious, what have been your impressions over this correlation from a historical perspective? Because this year will be kind of the second very strong year for WFE and there are expectations for almost 30% kind of growth this year. When do you see that impacting the demand for testers? Does it happen with a six month lag, does it happen with a one year lag? And should we be expecting a 30% growth in testers next year? Just curious what you think the correlation is.

Yes. So there is a correlation and a lag, as you alluded to. Front-end equipment usually goes into fabs, there is a period of time after that is installed where revenue gets recognized on behalf of those equipment makers and the fab gets tuned—the recipe, the yields and things—before the fab has put into commission for real customer shipments. So that can take anywhere from—the good suppliers these days maybe get through that phase in about three to four months. But then it is not a light switch that turns on. It is more like a knob on a faucet because you start to ramp wafer outs slowly and you proportionately start adding testers. So what you can expect to see is, let's say, maybe the beginning of tester orders lag four to five months, but they really get going kind of a year after the fab equipment goes in. So if you offset the tester market from the fab investments by about, let's say, a year plus or minus three months, you get a good indication of growth. Now if you go back for the past five years, you will see there has been pretty steady monotonic growth in WFE and there has been pretty steady monotonic growth in the tester market. I think the most recent step, though, from 60 to 70-plus is larger than we have seen historically. So if all of that happens and it is truly put into commission, I would expect it to be something that pulls up the growth rate a little bit higher than we have seen in the past. But the one caution I would add is that what drives test again is transistor count, which we sometimes call complexity, but it is transistor count. And the capital intensity to build transistors at three nanometers and such on a per-transistor basis is getting to be quite high. So it may turn out that it takes more CapEx per transistor at some of these nodes than it has historically. So that could mute a little bit the cause and effect. If you follow what I'm saying, but overall, the big picture is, you are right, it is correlated. Maybe it is a year plus or minus three months delay.

Got it. And for my follow-up, maybe one for Sanjay on the cost and the operating leverage perspective. So on the cost side are you seeing any rise in your input costs and what are you doing in response? Are you passing those along and will those be sticky over time? And then part B of that, you mentioned operating expenses could grow 17% to 19%. Do you think when you grow OpEx that much, there is still leverage left in the model if sales also grow in that neighborhood somewhere this year?

Sure. So first on the cost of sales, yes, we have seen certain cost increases: raw materials, semiconductor components, etc. Fundamentally, we have been able to manage through those. From a full-year perspective, we expect to be at our model gross margin of 58% to 59%. So we are managing through those cost increases. From an operating expense perspective, yes, we are seeing lower operating leverage in Q1, some OpEx increases, but throughout the year, you should expect to see us improve our operating leverage.

Your next question is from Mehdi Hosseini with SIG.

Mark, I just want to go back to your earlier comment regarding transistor counts. It is interesting in your press release last night, you also talked about smartphone unit growth as contributing to upside to SOC Test growth. In that context, can you help us understand how smartphone unit growth and transistor density are driving the SOC Test growth or which one do you think is going to be a bigger factor this year versus 2020? I have a follow-up as well.

Okay. Good question. Obviously, they are related and correlated. But for example, in 2020, we saw a dramatic increase in the tester market when cell phone units weren't growing. That was all driven by complexity growth. So you can see the power of complexity growth alone by examining 2020; it was big. Now in 2021, interestingly, we have a year where the complexity growth of the silicon going into phones is less than it was in 2020, but that has been more than offset by the fact that units are going to grow. So now we have units working for us in a year where complexity is going up, but not as dramatically as last year. So it's almost a multiplicative effect of the two. This year is really a story of both, but I would say without the unit growth, we would be looking at a smaller market than we are seeing.

Got it. And just moving on to system test, what is the mix between SLT and HDD and how are each one of these two pieces growing on a year-over-year basis? Thank you.

Yes. Mehdi, it is Sanjay here. It is roughly a 50/50 split, plus or minus a bit. As Mark indicated, from an HDD perspective, really strong end market growth and SLT, there is some investments going to expand that market. But we see growth in both.

Your next question is from Toshiya Hari with Goldman Sachs.

Hi, good morning, thanks for taking the questions. Mark, I wanted to ask about your market share traction in memory test. 2020 was a very strong year for you guys, particularly in DRAM package test. You talked about customer mix or spending mix this year, maybe driving a little bit of a decline year-over-year. But in terms of customer pull and your expectations through the cycle, what are you seeing in memory test right now?

Yes. Memory test is strengthening. At the midpoint of the new market estimate, it will actually grow compared to last year, which again was a good year. The sort of areas that are growing, some of them we participate in and some we don't. China is growing dramatically, and we are doing very well in China. So we are seeing good pickup there of the products in both flash and DRAM, and we are gaining market share. In other geographies where DRAM is growing, the piece of the DRAM market—final test for LPDDR5—that we targeted our new product for and have design wins is also looking very good and growing. But what is growing even faster is wafer test for DRAM, which is an area we really don't participate. It tends to be a low-technology tester product that serves that market; it is not a big profit pool. Because of that, I alluded to the fact that our share might drop from 40%–41% down to maybe 38%–39% for the year.

Got it. That is helpful. And then as a quick follow-up, I wanted to go back to the AutoGuide reset. What has changed in that business over the past three to six months and perhaps more importantly, does this change how you think about your growth strategy or M&A strategy within overall IA? Thank you.

Yes. It doesn't change anything about our thinking on M&A and growth strategy in IA. Over the course of many acquisitions we have done in the past 10 years, we have had various levels of success. The bigger acquisitions like Nextest, Eagle, UR and MiR have gone really well. Some of the smaller ones have taken longer to realize their potential than we expected. AutoGuide is a case where we are in that same situation. We started out last year deploying the product into multiple high-potential accounts, and we are lily-padding those initial deployments. As we reflected back on where we stood, we were getting overextended on new accounts where current accounts' potential could be jeopardized by not doing more to augment the product with the ability to dock into other factory automation systems that these customers are implementing. So we have decided to retrench around the five or six big accounts we have today, get them rock solid, develop linkages to warehouse automation and manufacturing systems, strengthen our linkage to our MiR product line for a more seamless connection, and grow within those accounts before scaling out more broadly. It is not what we planned a year ago when we acquired AutoGuide, but given the large opportunity, we think the better path is to address these issues now before expanding further.

Your next question is from John Pitzer with Crédit Suisse.

Good morning guys. Congratulations on the solid results. Sanjay, I just want to go back to your commentaries around supply constraints and duration. It sounds like from your prepared remarks that this is going to last at least into calendar Q3. Do things get worse from here? Is there any way to quantify the impact it is having on your revenue? Usually when customers can't get what they want, they tend to order more than they need. How are you safeguarding against inevitable double ordering and excess build-out?

Yes, great question. We are seeing shortages and through our inventory strategies and multiple suppliers we have been able to work through them. Fundamentally, with the rise of demand in 2020 and through COVID and into Q1 2021, we are seeing lead times increase from our suppliers across the board. We are booked out pretty much for the year. As I said in my prepared remarks, we are spending more engineering dollars and qualifying different suppliers. It is getting tighter as demand continues to increase throughout the year. We feel pretty good about Q2 being in the range. Of course, there are always things we are managing. But in Q3, we see it getting tighter and are working through some issues. Visibility into Q4 is naturally lower. On duplicate orders, I don't see a large set of duplication in the demand. We are working with our customers, understanding their specific needs and working to get them what they need.

That is helpful. And then, Mark, as my follow-up, clearly there is a lot of conversation coming out of Washington about trying to get more domestic front-end production inside the U.S. If the goal is to secure the supply chain, it seems inefficient to build wafers here and then ship them to Asia to test and package. From your perspective, are you seeing any drive toward regionalizing test capacity? What might that mean for your business in the future? And beyond semi test, are you seeing across other supply chains a redomiciling that might help your IA business?

Yes. There is a lot in what you said. A regional fab is somewhat meaningless without the associated infrastructure around it, including test, supply of chemistry and local suppliers to make the whole venture economical. As an alternative to doing everything in Taiwan, if you want to do it in the U.S., Japan or Europe, you need competitive infrastructure including test. I'm a bit skeptical whether all jurisdictions will have the long-term commitment to build that infrastructure, but in the U.S. case my read is probably yes—national security issues and other incentives suggest it is likely to happen. For test and robots as well, a fracturing of the supply chain to be more geographically dispersed may reduce utilization efficiency for equipment, but it's a tailwind for equipment suppliers since there will be more geographic demand. So I think both of our businesses could benefit from that trend even if it is less efficient economically.

Your next question is from Timothy Arcuri with UBS.

Hi, thanks. I guess a couple of things. Mark, I think you said that compute—so I guess my question is for you to break down what the Semi Test TAM is, if I take your $4.2 billion midpoint this year for SOC. I'm wondering if you can break that down. I think you had said last year, of the $3.45 billion, it was like $600 million compute and so I'm wondering, out of the $800 million that is going to grow this year from $3.45 billion up to $4.2 billion, can you break that down? It sounds like most of it is compute because you said compute is going to double from $600 million last year. Can you sort of reset the segments for us as well?

Yes. I'll give you rough numbers, but take it with a grain of salt. Our current view on compute would be about a $1 billion-ish market this year. So not quite doubling yet. Mobility compared to last year is probably flat to slightly down; it could be down a little compared to last year. One part of mobility we haven't discussed is millimeter wave test capability—last year there was a lot of tooling for millimeter wave as some phones were early adopters, but telco deployments globally have been limited so that suppresses demand this year for millimeter wave test equipment. That is a headwind for mobility. Call mobility flat to slightly down at about $1.6 billion or $1.65 billion. The automotive and MCU market is closer to $450 million for the year, up from about $225 million last year—big jump. The industrial segment is up to about $500 million from maybe $325–$340 million last year. That is how we segment it right now.

Awesome, thank you. And then I wanted to push back a little on the correlation between WFE and Test TAM. On the SOC side, your big customer is a significantly larger portion of the SOC Test TAM than they are of consumption in front-end non-memory WFE. So doesn't the SOC market depend a lot more on what the large customer is doing in the test world than WFE? The correlation in SOC could break down because of what the large customer is doing. Also they've never been good three years in a row; this is the second big year. How do you handicap the odds that next year is a big down year and that works against you in terms of share, even if the market doesn't come down that much?

A lot there. Your point about our large customer having uneven multi-year streaks has truth, but there's a difference: the portfolio now is broader. In 2013–2016 it was one device type driving demand; now there's a much broader portfolio which can smooth lumpiness. Customers have different test intensities, so part of noise in our revenue relates to large high test intensity customers and how much they buy. We intentionally participate in higher test intensity segments. If the market shifted away from high test intensity customers, you could see a disconnect between test and WFE. But it doesn't seem likely because the investments in the front end are aimed at building devices for the customers we are discussing. I don't see a disconnect unless fabs are idle. So correlation should largely hold unless fab utilization collapses.

Your next question is from Krish Sankar with Cowen.

Yes, thanks for taking my question. Mark thanks for the color on SOC Test. I wanted to focus on the compute test market. It looks like you said it is going from $600 million to $1 billion. Is the incremental growth all coming from custom silicon and if that is the case, can you tell us how much your market share in compute was last year and how much you think it will be this year? I have a follow-up.

Yes. Most of the growth is coming from the non-traditional suppliers of compute devices at a disproportionate rate, but other traditional players are also growing—AMD and NVIDIA, for example. As a proportion, newer players are growing the market faster. Historically our share in compute has been below our overall market share, maybe in the 30s. We are trending into a period where because of the change in who is building these devices our share is more likely to move up closer to our overall average share in the market. If our SOC average share is somewhere in the 50-ish range, it might take time, but that is where we are trending.

Got it, that is really helpful. And then a follow-up: you mentioned you are booked out for the rest of the year. Is that a Semi Test and Storage Test comment and if so, should we assume you would not see seasonality in the back half and that Q2 Semi Test revenue run rate is sustainable?

It was tied to supply perspective. We are working with contract manufacturers and direct suppliers to make sure we have orders on the books until the end of the year given supply constraints.

Your next question is from Brian Chin with Stifel.

Hi there, good morning and thanks for letting us ask a few questions. First, on Semi Test, I respect visibility limitations. But if I take the midpoint of your new expectations for the test markets, take your market share projection and assume the majority of Q2 growth will be Semi Test driven, I think I back into about a 10% or so sales decline in Semi Test in the second half of the year. Am I in the ballpark here and to what extent is backlog coverage supportive of this?

When you take a look at the numbers, overall we expect, given visibility and the reset of the market size and as we move throughout the year, that the second half of the year revenue will be slightly down, both for the enterprise and Semi Test.

Got it, thanks Sanjay. And then on IA, you noted China showing strong year-over-year growth, a lot of growth in MiR and a snapback in the UR business. Can you characterize Europe and North America—where are they in terms of snapping back relative to what you might expect this year?

From a U.S. perspective, we are seeing the snapback, whether you look at increases over Q1 of 2019, pre-COVID year, or Q1 of 2020; similar with Europe—very strong double-digit snapback over either year.

Your next question is from Joe Moore with Morgan Stanley.

Great, thank you. I wonder if you could talk about in the automotive and broader markets the degree to which test is one of the bottlenecks they are dealing with. We hear about shortages on wafers and packaging; is test a severe bottleneck? And given a 90% comparison in auto, it would seem like there is some catch-up—does that create sustainability risk next year?

I think the big issue is wafer capacity, not test. That doesn't mean we are completely aligned on deliveries for test equipment to chip suppliers who are trying to ramp shipments—we are misaligned by a few weeks here and there and everyone is pulling hard. The bigger issue is wafer capacity. Automotive will come out of this having learned lessons about being lean; they may build more slack which could create a temporary balloon in orders. Automotive always goes in fits and starts. I think this year we are at a near-peak level for automotive test investment close to the $500 million number, and that could sustain through the end of the year because of inventory catch-up. But into 2022 and beyond, I would expect it to oscillate between the $300 million to $500 million range.

Your next question is from Blake Gendron with Wolfe Research.

I want to come back to the ARM SOC commentary, not from a market share perspective, but rather the complexity discussion. As we have seen large customers accelerating ARM rollouts, it seems the architecture consolidates wafers for various compute functions and simplifies the circuit a bit. I'm wondering what the complexity in test intensity puts and takes are with this ARM trend specifically?

That is a little tricky. Most application processors in phones, which is a 1.5 billion unit market, are ARM-based. High-end phones, maybe 400–500 million units out of that, have transistor counts on par with any desktop or laptop—10 billion-plus transistors. When you look at test intensity there compared to a traditional microprocessor, it is a little more efficient but not by much—maybe 90% of the test time versus 100% for a traditional x86 microprocessor, so not a big difference. For ARM-based compute devices in non-phone applications, different cache requirements and IO technologies needed further complexify the implementation and bring test intensity back up to levels similar to x86. I don't see a big difference overall.

That is helpful. Then a follow-up on industrial automation: you noted peripheral services that demand additional software apps and hardware. We've seen many companies pursuing computer vision, ML and AI capabilities. What AI capabilities does Teradyne have in IA to keep up with these trends? Many peers are also entering the cobot space—could this be a focus of M&A?

It is certainly in our M&A funnel. Many startups in IA and machine learning enhance robots and do so on our platform as partners. If you go into our UR+ or MiRGo ecosystem, you'll see various ML and AI tools customized for our products. We benefit from them whether we own them or not. We have organic IA products on MiR already. Whether we need to own a capability or be the preferred platform they write apps for is a case-by-case decision.

We are just about at the limit, but we can sneak one quick question in. April, please.

Okay. And your last question is from Sidney Ho with Deutsche Bank.

Thanks for taking my question. Can you give us an update on your revenue opportunity related to 5G for both SOC Test and LitePoint? And maybe in the 5G infrastructure side, are you seeing a recovery of that market in any region right now?

I think infrastructure is not driving much tester demand generally. It did for us in 2019 when China was rolling out aggressively, but infrastructure 5G investments are likely to be sub-$100 million in tester demand—perhaps in the $60 million to $70 million range. The bigger driver is phones and terminals. In the U.S., spectrum auctions around sub-6 GHz are concluded and carriers will roll that out as their next step. That will suppress demand for millimeter wave, which is the most test intensive portion of 5G. In past calls I talked about LitePoint and Semi Test combined driving an incremental $400 million to $500 million in tester demand in the 5G era. I think we are currently in that $250 million to $300 million range of that potential, and it may go sideways for a while because millimeter wave investment this year will likely be less than last year. It could be a couple of years to reach full potential.

Great. Maybe lastly on system-level test, what is the size of that market today and how big could it be when those lower complexity devices you referenced start coming into the market? And a bit on competition—how do you sustain market share?

The market is relatively small; we don't have a firm public number. But between us and Advantest you can get a sense; the two of us probably have about 80% of the market. There are some bespoke custom products from other suppliers. SLT adoption could proliferate into other markets but two things matter: markets like automotive are high-quality but lower volume compared to phones, so for lower-volume devices to take advantage of SLT, we need different architectures we are developing to address high-mix, low-volume markets. Our position is sustainable—changeover costs are high and dislodging an incumbent requires a significantly better solution.

Okay. We are out of time. Thanks so much for joining us today, and we look forward to talking to you in the days and weeks ahead. Thanks again. Bye-bye.

This concludes the call.