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

Thank you, Patrice. 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'll provide details of our performance for 2021's Third Quarter along with our outlooks for the Fourth Quarter. The press release containing our third quarter results was issued last evening. We are providing slides on the Investor page of the website that may be helpful to you in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discussed then will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor Statement contained in the earnings release, as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures. They are 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 Baird, Credit Suisse, Davidson, and UBS. Now let's get over to the rest of the agenda. First, Mark will comment on our recent result, current market conditions, and thoughts on the rest of 2021 and 2022. Sanjay will then offer more details on our quarterly results along with our guidance for the fourth quarter. We'll then answer your questions and this call is scheduled for one hour. Mark?

Thanks, Andy. Good morning, everyone and thanks for joining us. Today I will cover 4 topics, the highlights of our third quarter and the first 9 months of the year, the changes we're observing in the SOC test market, our outlook for the industrial automation market, and how we're thinking about the test and automation markets as we close out this year and look into 2022 and beyond. As our Q3 results demonstrate, demand remains strong across all of our businesses. At the Company level, Q3 sales grew 16% from last year's record Q3 and non-GAAP EPS grew 35%. We did experience increased supply chain bottlenecks in our Industrial Automation business in the quarter and under-shipped demand. Sanjay will describe this in more detail, but we expect these constraints to persist into Q4. Despite this, for the first 9 months of 2021, Company-wide sales grew 19% and non-GAAP EPS grew 31% from the year-ago level. In each of our businesses, we are riding long-term secular trends that we expect will drive revenue and earnings growth for years to come and our test businesses, the unit growth, and complexity drivers to power these markets continue unabated. For example, our Semiconductor test business grew 18% through Q3, with SOC leading the charge, growing 22%. Sales continued to be dominated by our UltraFLEX product line, which is well aligned to the performance requirements of the growing compute and mobility markets. Additionally, sales of our Eagle Test Systems more than doubled in the 9-month period as automotive and industrial test markets have also rapidly expanded. Eagle's unique architecture hits the sweet spot in these markets by balancing high precision with the stress testing needed for these demanding applications. Within SOC, there has been a clear shift this year to higher demand from the compute, automotive and industrial markets. While mobility is still the largest subsegment of SOC and growing, it has dropped from the high 50% range of the SOC test market in recent years to the high 40% range this year. Over the mid-term, we expect mobility will remain the largest SOC submarket and continue to grow. But we also expect compute to grow at a faster rate while automotive should remain at its current elevated levels. For the last decade or so, mobility has made rapid annual advances in semiconductor complexity that has enabled the advancement of smartphone sophistication. The refresh pace has been much faster than traditional PCs, graphics, automotive, and industrial end markets, leading to smartphone silicon and SoCs rapidly progressing along the complexity scale. This is true in many areas of smartphone silicon: apps processor compute engines, graphics engines, AI engines, image sensors, power management, and more. Our leading position in testing these key technologies has driven our growth. At the same time, up until recently, the traditional compute testing market has been relatively flat, with slower refresh rates and slower complexity growth. However, the groundwork laid by mobility designs, combined with advancing lithography nodes and design tools, has enabled new entrants into the chip design space for compute engines. The complexity of these chips, whether for laptops, servers, autonomous driving, AI, or graphics is incredible and advancing at an accelerated rate. For example, laptop CPUs are now crossing the 3 billion transistor level, which is a huge increase over previous legacy designs. As we've said in the past, increased transistor counts drives increased test time and increased tester demand. We've seen that this year and there's more to come. We're targeting this expanding collection of new players and new designs leaning heavily into our UltraFLEX family's hardware performance and time-to-market advantages of our software. We've been adding new design wins every quarter, and while development pipelines can be long and these new designs can be speculative, we're confident we'll see growing production business from these wins in the future. It's also notable that the traditional chip suppliers in these markets aren't standing still. They are doubling down on their advanced designs too, which collectively is driving WFE investments higher as applications expand and competition heats up. We expect this race to lead to higher test times. And given the higher performance and faster design-to-market cycle times, more share gain opportunities for Teradyne over the mid-term. Our System Test segment year-to-date sales grew 11% from 2020 and storage continued its multi-year growth trajectory expanding sales 12% in the same period. Higher capacity HDDs and more complex SOC devices, which require system level test, are driving this demand. Both trends are expected to continue into the foreseeable future. At LitePoint, sales were up 24% through 9 months compared with 2020 driven by WiFi 6E production, WiFi 7 R&D demand, as well as ultra-wideband. More connected devices demanding more bandwidth while managing growing congestion drive complexity increases in each new WiFi standard and more tests. UWB on the other hand has a whole new wireless standard and application space. It's a new proximity detection wireless technology with a future of many promising security applications. We expect these trends to continue and to provide a long-term tailwind to our Wireless Test business. Shifting to Industrial Automation, Universal Robots revenue grew 50% through the first 9 months of the year, while MiR grew 40% despite supply chain challenges. Each has a unique story. At UR, it's a combination of increasing sales for existing tasks and the expanding number of UR+ offerings, making it easier for customers to deploy our robots to do new applications. We highlighted welding in our last call, but other examples include screw driving and palletizing. The UR+ ecosystem is key to expanding these tasks and now totals over 360 products created by over 300 partners, both riding on and broadening the contours of our UR platform. This is a key advantage and the combination of our organic investments and our UR+ and OEM partners are increasing the dollars and creativity going into expanding the UR platform and it's unmatched. At MiR, the story is about new products. The MiR250 which was introduced just as COVID hit last March of last year, is now our largest seller by far. This year, we added the MiR Hook to the MiR250 family to expand applications into tugging. We've introduced higher payload products such as the MiR600 and MiR1315 to expand our footprint in the fast-growing logistics market. Unfortunately, with all this good news come supply chain issues that will limit IA growth in 2021 to be between 30% to 40% year-on-year but demand is strong. The long-term outlook in IA remains very bright. Looking at the capabilities of UR robots, today, we estimate the penetration rate is less than 2% of the serviceable market. UR's approximate 45% market share puts us clearly in the lead and we continue to drive R&D and distribution investments to extend our competitive advantages, expand the serviceable market, and drive penetration higher. It's a similar story at MiR, where we estimate the autonomous mobile robot penetration is under 3%. The AMR market doesn't have a single dominant player like UR robots and we estimate we're close to number 2 in the broadly defined market. And like at UR, we're making investments in both the distribution and product level to both reinforce our advantages and extend our product reach. In both IA businesses, the fact that our penetration of today's serviceable market is low single-digits and that the serviceable market continues to expand each year with product enhancements, sets up a fantastic future. Even with very high growth rates in our IA business, we expect the penetration rates to remain low for many years sustaining our long-term annual growth forecast of 20% to 35%. In January, we will update you on the outlook for 2022 and our mid-term earnings model. Between now and then, we'll be looking at the rate and timing of new semiconductor fab capacity coming online, especially at the more advanced lithography nodes. And we'll also be looking at the rate of adoption of DDR5 as key swing factors. In IA, we will be looking at the manufacturing output expansion, onshoring trends, and PMIs in our principal geographies as tailwinds for continued robust growth. On the other hand, in both markets, supply chain bottlenecks could slow certain industries and become a headwind to growth demand. Short-term demand is influenced by many factors, but we manage our business aligned to the long-term trends. The trend of growing prevalence of increasingly complex semiconductors and a myriad of applications drives our semiconductor business and investments. The trend of new, increasingly smart, cost effective automation in a world with labor scarcity and on-shoring challenges drives our IA business and investment strategy. These systemic long-term trends paint an exciting future for Teradyne. With that, I will turn it over to Sanjay.

Thanks, Mark and hello, everyone. In my remarks, I will review our Q3 financial results, discuss our supply strategy in this challenging environment, provide Q4 guidance, and comment on our full-year financial outlook at the midpoint of our Q4 guidance. To the financial headlines for Q3. Our third quarter sales were $951 million, near the high end of guidance driven by strength in semi test and wireless test. Gross margin in the quarter was approximately 60%. Our non-GAAP operating expenses were $242 million or 25.5% of revenue. The favorability in OpEx drove a non-GAAP operating margin of approximately 35% and non-GAAP EPS of $1.59. A few more components of third quarter data. Our tax rate excluding certain items was 14.8% on both a GAAP and non-GAAP basis. Non-GAAP diluted share count was approximately 176 million. We had two 10% customers. Looking at the results from a business unit perspective, Semi Test revenue of $688 million was up 16% from Q3 '20. SOC revenue was $575 million, up 28% driven by strength in applications processors, RF, industrial, and automotive applications. Automotive and industrial doubled revenue year-over-year. Memory revenue was the second highest in history at $113 million, but down 21% from Q3 of last year's record. Flash final test demand was the strongest segment on handset and SSD end market demand. System Test group had revenue of $103 million, which was down 13% year-over-year. Recall storage is the largest business in this segment and has lumpy shipments. While storage test will still grow more than 15% for the year, sales including HDD and SLT declined to $56 million on the timing of shipments in Q3. Defense and aerospace and production board test combined grew 10% year-on-year to $47 million. At LitePoint, revenue of $69 million was up 70% from prior year due to early success of our new WiFi 7 product, continued strength in 4G cellular and UWB. Now to Industrial Automation. As in July, given COVID shutdowns that impaired the UR business in 2020, I will provide revenue metrics comparing Q3 '21 results with both Q3 '20 and Q3 '19. Industrial Automation revenue of $91 million was up 32% from both Q3 '19 and Q3 '20. North America delivered the highest revenue growth from last year, but all regions expanded year-on-year. As Mark noted, supply issues, primarily semiconductors, reduced our IA shipments in the quarter. UR sales were $78 million in Q3, up 46% year-over-year, and 31% over Q3 '19. MiR sales were $13 million up 27% from Q3 '20 and 35% from Q3 '19. IA was about breakeven in the quarter and for the full-year, we expect low single-digit profitability. As we've noted before, we continue our strategy of investing during this high growth era while maintaining gross margins to enable mid-20s operating profit in the future. Shifting to supply. We continue to deal with numerous supply constraints across the Company. While semiconductor shortages are well reported, we're also seeing delays in mechanical parts and logistics, all exacerbated by rolling COVID-related shutdowns or labor shortages. We expect these issues will continue through the first half of 2022. Despite these issues, we've been able to deliver record shipments and a big part of that performance is a result of the supply chain management, operations teams, and engineering teams working with our supply chain and contract manufacturing partners. We view our operational business model and execution against it as a core competence. Our gross margin performance over the last 10 years displays the financial value of this model. In our Test portfolio, our execution has kept most of our test lead times within the range that meet customers' needs to expand their production capacity in this dynamic environment. The significance of this lead time performance is that customer orders more closely reflect true Test demand. So while a bit counterintuitive, we feel that maintaining short lead times are a more accurate indicator of Test demand with lower risk than holding orders with lead times far beyond ship manufacturing cycle times. Of course, our supply chain and operations model isn't static. We began adding resiliency through both geographic and supplier diversity prior to COVID. Those efforts have accelerated over the last 20 months. This work is paying dividends in the current environment and we'll continue to invest to harden our supply chain further. Our lead time performance is an example of our resilience and execution. Another example is the ability to scale to significantly increased demand. Auto and industrial sales have more than doubled year-over-year. While we're not perfectly aligned to all customer requested delivery dates, we are managing through delivery issues in a reasonable manner. The value of these efforts can also be seen in the operating leverage and our gross margin line. In IA, we've seen lead times extend from our normal 1 to 2 weeks to 4 to 6 weeks for some products. While this is challenging with the business growing so quickly and ongoing industry supply issues, we've already seen the positive impact of our work in material sourcing and manufacturing cycle times. We expect to bring lead times back to model over the next 2 to 3 quarters. Shifting to the balance sheet and cash flow. Our cash and marketable securities at the end of the quarter totaled $1.45 billion. We had $493 million in free cash flow in the quarter and through 9 months, we've spent $103 million on capex, and we expect we'll spend $148 million for the full year. We spent $210 million and $16 million on buybacks and dividends respectively. Year-to-date, we've repurchased 3.3 million shares for $406 million at an average price of $123.53. In 2021, we expect to return over 80% of our free cash flow to shareholders and from 2015 when we began repurchasing shares, we've returned 85% of our free cash flow to owners. Regarding our convertible debt, $302 million of principal was paid in the first 9 months to the convertible bondholders ahead of maturity. By mid-December, bondholders will have converted approximately $343 million, leaving a face value of $117 million. Now, to our outlook for Q4. Sales in Q4 are expected to be between $820 and $900 million with non-GAAP EPS in a range of $1.14 to $1.40 on a 174 million diluted shares. Fourth quarter guidance excludes the amortization of acquired intangibles and non-cash imputed interest on the convertible debt. Our guidance assumes no significant changes, positive or negative, in the availability of materials and assumes that we won't see additional pandemic-related issues. Fourth quarter gross margins are estimated at 59% to 60%, OpEx is expected to run at 28% to 31% of fourth quarter sales. The non-GAAP operating profit at the midpoint of our third quarter guidance is 30%. Regarding OpEx for the full year. We spent a bit lower than planned in Q3 and we expect the full-year OpEx will be about $980 million, up 17% from 2020. At the midpoint of our guidance, 2021 will be another year of growth in both revenue and EPS, with sales growing 18% to $3.7 billion and non-GAAP EPS growing to $5.88, up 27%. Gross margin for the full year should be approximately 59.5% up from 57.2% in 2020, reflecting the ramp of new products, product mix and operating leverage, offsetting component and logistics cost increases. Our 2021 non-GAAP operating profit rate is expected to be about 33%, up from last year's 30%. Our full-year tax rate is expected to be 14.8%. These results put us comfortably in the range of our 2024 earnings model this year. We'll update the model on our regular cadence in January. The breadth of our customer buying in 2021 is also broader than last year. In 2020, we had one customer that drove 25% of sales. In 2021, we do not expect to have any customer larger than 20% of our yearly revenue. This reflects the trend Mark noted about 2021's higher growth in compute, auto and industrial demand compared with mobility demand in semi-test. IA growth of over 30% year-over-year continues to diversify our revenue. This growth is expected to continue over the midterm and become a larger portion of our revenue. In summary, we expect to end the year with another quarter of strong year-on-year revenue and EPS growth. On a full-year basis, we'll exceed our mid-term targets on stronger-than-expected demand in our test businesses, continued high-growth in IA, and excellent execution across the Company. While we don't have a clear picture of 2022 yet, we're confident the long-term industry trends powering our test and IA businesses remain firmly in place. With that, I'll turn the call back to Andy.

Thanks, Sanjay. Patrice would now like to take some questions and as a reminder, please limit yourself to 1 question and a follow-up.

Operator Instructions: Please stand by while we compile the Q&A roster. Your first question comes from Atif Malik with Citi.

Hi, thanks for taking my questions and good job in the tough supply environment. Mark, if I look at some of the recent ARM-based notebook processors, the transistor count is growing 2 to 4 times versus prior-generation. You commented mobility to grow and compute, auto and industrial to grow faster than mobility in the mid-term. I understand you guys will talk about next year outlook in January, how confident do you feel about your SOC growth next year?

I think at this point, pretty confident. We look at the trends that I just cited and see that there's very little standing in the way of this increased growth, but the caveat I would mention is there's a lot of supply chain bottlenecks in the system. When end products get bottlenecked, that can slow down the unit volume demand for new semiconductors. And then the other thing we're looking at is when do these new nodes really come online in terms of capacity. All that $90 billion of WFE that was put in place this year hasn't yet had a single impact on test. That's all to come. But it depends on when those additional 5 and 3 nanometer fabs come online. That is a kind of a big swing factor in the calendar year 2022 as to how our growth will chunk out and that's why we wait till January because we don't get good enough visibility on that right now.

Additional 5 and 3 nanometer fabs coming online is a big swing factor for calendar year 2022, and that's why we wait until January when we have better visibility.

Great. And Sanjay, as a follow-up, can you talk about concentration within mobility and compute customers and the impact on long-term gross margins? There have been talks about price discounts with equipment suppliers by Tier 1 foundries.

As I stated in my prepared remarks, we won't have any customer above 20%, so it's a broader breadth of customers. Regarding gross margins, throughout the year, we've improved gross margins. As I said in earlier calls, this has been driven by a couple of key test systems coming online and we're shipping in volume that have come down the cost curve. We've seen some benefits to product mix shift, as well as our operating leverage offsetting component cost and logistics cost increases. From a look-forward sustainability perspective, we will give an update to our earnings model in January. But I view the second half of our gross margin performance as carrying into the first half of 2022.

Your next question comes from Mehdi Hosseini with FIG.

Yes, sir. Thanks for taking my question. The first one has to do with your largest customer given your commentary in terms of revenue mix. It seems to me that that particular customer is going to be down 5% to 6%. And in that context, should we assume a return to growth in '22? This is a trend that has happened over the past several years. Should that happen again in '22? I have a follow-up.

We, of course, can't talk about any individual customer and what they might do or not do in the future, so I have to leave that aside. But I will point out that yes, our largest customer is dropping below 20% in a growing revenue year. The amount that you might think they're falling has to be taken against our numerator of higher revenue.

Got it. Thank you. And then I wanted to follow up to the question that came up 3 months ago when we were looking into your market share in compute. Can you update us where you are with that market share in 2021? As hyperscalers ramp their own ARM-based CPUs, how will your market share change over the next 1 or 2 years? Thank you.

Like the total SOC market, year-to-year market share is very volatile. It depends on which customers are buying what in any given year. Our market share in any given year can swing significantly; in a submarket like compute it can swing 20 points year-to-year depending on who's buying. For this year, it's been a very good compute year for us. Our compute market share is up, I would say, close to what our average share is in SOC this year. But I would say that it's not steady—it will be pretty volatile year-to-year as it has been in the past and likely will be going forward.

I know we're supposed to ask only 2 questions, but just a quick follow up. I think what I'm trying to understand is on the GPU side, it's pretty clear that your competitor has dominated and assuming that that were to remain unchanged, I think the incremental change to the compute market were all driven by ARM-based designs. I was just trying to understand how you look at your competitive position as these new chips come into the market addressing the compute market.

We're very pleased and confident with our progress in ARM-based compute and design-ins in that realm. But I would say that it's not exclusive. The tester market for compute is also driven by more traditional x86 demand as well. There are a couple of suppliers there that are not standing still, and they are advancing along the complexity growth curve. So there will certainly be a lot of growth there as well.

Your next question comes from Toshiya Hari with Goldman Sachs.

Hi, good morning. Thank you for taking the question and congrats on the strong execution. I had two questions. First on the supply constraints for Mark and Sanjay: how significant were the headwinds for IA in Q3 and what's embedded in your Q4 guidance? If you can share that, that would be helpful. And just wanted to confirm that there was little to no impact on your Semi Test business. Then on gross margins, you came in at the high end of your guided range, but was there any impact on profitability in the quarter from supply chain shortages? Thank you.

I'll take those. For Industrial Automation, year-to-date we've grown 40% in IA and Q4 demand is high. If we can't supply at all, that's why IA growth will be between 30% to 40% year-on-year. Predominantly, it's a semiconductor parts issue and we expect to be out of the supply chain crunch with better visibility in Q2 or Q3 of 2022 for IA. On the Test side, we've seen supply chain tightening quarter-over-quarter and we don't think it will abate until the end of Q2 of 2022, again mainly semiconductor parts. From a gross margin perspective, we've been managing through component and logistics cost increases. We've had favorable product mix and coming down the cost curve of our new products introduced late last year. We're gaining operating leverage and managing through those cost pressures.

Got it. That's super helpful. And then as my follow-up, Mark, I wanted to ask about your Eagle Test business. In your prepared remarks, you noted that the business is up more than 2x year-to-date. Historically, Eagle Test has been quite cyclical. You would be up for a year, year-and-a-half, then down as customers digest capacity. Based on what you said, it seems like you're expecting 2022 to be another strong year. What's different this time? As you think about Eagle Test into '22, I realize there's complexity growth, but you could argue that's been ongoing for a long time. So just curious how different this cycle could be relative to past cycles.

Good question. In addition, automobile unit volume isn't near its historical peak either, so how could this keep going beyond the normal 6-quarter surge in automotive? I think what's happening and makes us believe this will persist at least through 2022 is there's a lot of silicon refresh going on in the automotive space—new generations of lithography nodes and silicon for automotive designs. Legacy fabs are constrained, and chip suppliers are encouraging customers to move to more advanced nodes. That transition brings complexity and yield issues which require more test than you might expect. I think that's what's giving us a different view this time.

Your next question comes from John Pitzer with Credit Suisse.

Good morning, guys. Thanks for taking my question and congratulations on the solid results. Mark, I want to go back to increasing test times in the Semi-test business. You've done a good job helping us understand complexity and transistor count. I'm curious as we move from a world of general-purpose compute to one of more optimized silicon, you're going to move from testing huge volumes in one device to smaller volumes across multiple devices. What does that do for test efficiency at your customers and enhance test times as that trend takes hold?

Building, let's say, one 100 billion-transistor chip versus four smaller chips isn't equivalent from a test standpoint. The multi-chip approach is likely to be more test intensive, perhaps 25% more, because there is a premium on known-good-die testing when you put those together in advanced packages. The advanced package itself also has more potential failure modes that need testing. Another major factor is the move from FinFET to Gate-All-Around transistor architectures at 3 nanometer and beyond. When the world moved from planar to FinFET a decade ago, it drove incremental test intensity and complexity. We're headed for another one of those shifts with Gate-All-Around. There will be new defect modes and additional test intensity because of the new architecture. These two trends—multi-chip packaging and Gate-All-Around—will increase test intensity. Gate-All-Around is probably more of a 2023-and-beyond story given current timelines, but it is coming.

That's helpful and this is my second question, Mark. Just going back to your largest customer, can you help me better understand the diversity of business with that customer? Clearly it's been mobility-led for the last several years and now you've got them doing more in compute. Are you seeing meaningful diversification of demand drivers at that customer? And how fungible is your test capacity across those different product families?

I can't talk in detail about any individual customer, but in general terms, testers are pretty fungible across compute engines used in phones, laptops, desktops and other devices. RF and power management products have somewhat different architectures and their testers can be more unique. People have observed that if cell phone unit growth plateaus, complexity can still rise and customers may diversify into more silicon both inside and outside the phone into compute. Emerging hyperscalers are building silicon for cloud computing and new consumer products. Design teams today can form and build 10-billion-plus transistor chips, and while only a fraction may become hits, they still represent new opportunities for UltraFLEX and UltraFLEX Plus family devices.

Your next question comes from C.J. Muse of Evercore.

Good morning. Thank you for taking the question. Mark, another technology question. You taught us to think about transistor count and test times for mobility and compute. As we go to more high-performance compute where there are thermal issues and perhaps more complex software algorithms, how should we think about test times in that transition?

Test times are driven more by technology than by application. The application only fundamentally changes test times in automotive due to qualification requirements. For the rest, 3 nanometer and the shift to Gate-All-Around will be more impactful to test times across phones, computers, servers and graphics than individual end market applications.

Okay, that's helpful. And Sanjay, a question for you. Clearly you're making investments, particularly in IA. As you look to 2022, can you speak to your outlook for operating leverage? How should we think about OpEx relative to topline growth?

We're in the early innings of planning for 2022 and we'll provide an update in January. OpEx is growing in a couple of areas tied to higher volume—variable compensation and engineering expense to qualify new suppliers, etc. We continue to invest in go-to-market and engineering across the Test portfolio and we're leaning into IA investments to drive growth. The growth rate of OpEx next year will not be as large percentage-wise as this year, but we'll provide more detail in January.

Your next question comes from Timothy Arcuri with UBS.

Thanks a lot. Mark, can you update us on the SOC TAM? You had previously talked about the segments: compute, mobility, autos, industrial. Can you update those numbers?

Fundamentally, it's in the same range as we discussed previously. It's probably trending more toward the higher end of that range, and compute is driving us a little higher within that range at this point in time. Memory is still about a $1 billion TAM as well.

Okay, great. I also wanted to ask about profitability in IA. Last year we thought IA might be 10% to 15% operating margin, it got cut to 10 and then to 5, now it's low single-digits. I get that penetration is low, but what's the catalyst for you to potentially optimize OpEx investments? How do you think about long-term profitability target for IA?

Our range for IA operating margin targets has been roughly 5% to 15%, and currently we expect low single-digit for this year. We manage IA with a Rule of 40 mindset, combining growth and operating profit. Given the low penetration and strong secular tailwinds—automation opportunity and labor scarcity—we're focused on engineering and go-to-market investments. Where we see strong and accelerating revenue growth, we'll lean into investment. When growth moderates, we'll moderate OpEx to drive improved operating profit. We're conscious of gross margin improvements in the portfolio and will manage investments accordingly.

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

Thanks for taking my questions. Mark, this move to 3 nanometer: is that a benefit for Teradyne in '22 or '23? I thought it would be '22, but I wanted to confirm. Following on that, what are the top one or two end markets you're most excited about for growth next year?

We're watching 3 nanometer timelines closely. We've seen some push-outs by a few months so whether it has meaningful impact in 2022 is a swing factor. The bulk of 3 nanometer impact is likely to be in 2023 and beyond, although some early ramping could occur in 2022. Regarding markets for next year, the emergent hyperscalers developing new applications and complex silicon for those applications are particularly exciting. Those customers could introduce new product categories that drive significant semiconductor and test demand. We're close to several such opportunities that could breakout in 2022.

Some of those hyperscaler-driven products could latch in the market with new product introductions and drive a whole new demand stream for semiconductors and the associated testers. That's something we're focused on and optimistic about for 2022.

Is there a way to contrast the additional complexity in a hyperscaler application versus a mobility application? Conceptually, what does the mix shift from mobility-heavy to more compute/hyperscaler mean for Teradyne in terms of growth prospects and seasonality?

The range of devices from hyperscalers is broad. Some are simpler than a classic smartphone app processor, others leverage AI and machine learning and can be equal to or greater complexity. On average, hyperscaler devices may bring smartphone-like complexity to market—probably more in the 10 billion transistor range on average and then iterate higher year-over-year. Seasonality could change slightly since mobility has historically been seasonal, but many hyperscaler-driven products may be less seasonal. Overall, a shift toward compute and hyperscaler applications is favorable for Teradyne and should support higher growth and possibly smoother seasonality over time.

Your next question comes from Krish Sankar with Cowen and Company.

Hi, thanks for taking my question. I have two. First, on 3 nanometer: you spoke about how test investments have to catch up to front-end WFE spending. During the 3D NAND cycle, WFE grew in 2016 and 2017 while Memory Test spending came in 2018. How should we think about the timeline effect of test to front-end foundry logic WFE this time around?

All of the WFE investment is recognized before single tester purchases associated with that investment. A practical rule of thumb: when you see silicon coming off a new node, assume the testers were installed about 3 months prior. So when a 3 nanometer fab comes online and you start to see product in reasonable volume, assume tester installations occurred roughly 3 months earlier. Also note memory and SOC differ—the relationship of transistor count to test time is different. Memory tends to be a bit more efficient; doubling transistors in memory doesn't increase test time as much as doubling transistors in SOC.

Got it. That's very helpful. My follow-up on gross margins: despite the constrained environment, gross margins have stepped up about 200+ basis points over the last 4 quarters to a 59%–60% range. Is this the new baseline at these revenue run rates?

We're conducting strategic planning in Q4 and will update our earnings model in January. You should expect the gross margin profile to be similar in the first half of next year as it was in the second half of 2021. There are many variables—component and logistics costs, product mix, cost curves on new products and operating leverage. As revenue diversifies, there are puts and takes, but we will provide more guidance on this in January.

Your next question comes from Brian Chin with Stifel.

Hi there. Good morning. Nice results and thanks for letting us ask a few questions. First, to clarify: if you had more chips, you would be able to ship to an appreciably higher level of revenue in both the Semi Test and Industrial Automation businesses in Q4, did I hear that correctly?

In Industrial Automation, percentage-wise we'd be able to ship more if we had more components. In the Test portfolio, we believe we're going to manage through the majority of the supply issues at this point.

Okay. Great. And then interesting discussion here on 3 nanometer and it being a fulcrum event for test intensity again. A couple of follow-ups: what is it about 3 nanometer or Gate-All-Around? Is it yield, die sizes, advanced packaging, or types of devices and roadmaps? Also, larger picture: if HPC is secularly growing faster than average market growth—if average market growth is around 4%–8%—how much of a premium do you think we're looking at for HPC TAM over the next several years?

There are multiple drivers. 3 nanometer enables denser transistor counts, which is a big driver. Separate from that is mixed-node chips and multi-chip packages which increase test intensity due to known-good-die testing and additional package failure modes. The unique factor at 3 nanometer is the transistor architecture transition from FinFET to Gate-All-Around. These architectural shifts, like the earlier move to FinFET, typically introduce additional failure modes and require more verification, which increases average test time per transistor. Early in the architecture's life, that premium is higher, then it comes down as the architecture matures. Regarding HPC, we expect compute to grow at the higher end of our submarket mix over the mid-term—if you take an average market growth rate and pick a baseline, compute should lead that by a couple of points.

Okay. Great. That's helpful. Thanks for all the color on that.

And Operator, we have time for one more question, please.

Thank you. Your final question comes from Sidney Ho with Deutsche Bank.

Thanks for taking my question. I have two quick ones. First, you talked about supply constraint impacts in your IA business. Your gross margin has been pretty good overall. To the extent that your input costs for logistics and freight increase in both your Test and IA businesses, are you able to pass along some of those costs to customers?

At this point, we've been managing through these cost increases and materially, no, we haven't been broadly passing them on to customers.

Okay. Maybe my follow-up: there's a lot of discussion on 3 nanometer today, but it's really an opportunity in 2023 and beyond. If you look at next year, I know you'll update us in January. How does it impact your tester business if a customer chooses to move from going to 3 nanometer to instead staying at 5 nanometer? What is the tester reuse rate comparing those two nodes?

Testers are reusable across nodes. Customers will reuse 5-nanometer generation testers in the 3-nanometer era; new testers are not required simply because of a node change. Testers tend to have a useful life of a decade or more and can span usability across many nodes and device generations. There's nothing about 3 nanometer that requires a new tester. While 3 nanometer is primarily a 2023-and-beyond story, even absent it we have an optimistic view of 2022 driven by continued complexity growth at 5 and 5+ nodes. We'll start the year similar to past years with modest growth in Q1 and then see how refresh cycles play out over the summer. Okay, everybody, we are out of time. Thanks so much for joining us today and those in the queue, I'll get back to you later today, and again, thanks, everyone, for joining.

Bye bye.

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