Good day ladies and gentlemen and welcome to the Q3 2024 Teradyne Incorporated Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, Traci Tsuchiguchi. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith, and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for the third quarter of 2024 and our outlook for the fourth quarter of 2024. The press release containing our third quarter results was issued last evening. We have provided slides as well as a copy of this earnings script on the Investor page of the Teradyne website that may be helpful in following the discussion. Replays of this call will be available via the same page after the call ends. The matters 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 caution listeners not to place undue reliance on any forward-looking statements included in this presentation. We encourage you to review the Safe Harbor Statement contained in slides accompanying this presentation as well as the risk factors described in our Annual Report on Form 10-K filed with the SEC. Additionally, these forward-looking statements are made only as of today. During today's call, we will refer to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures including reconciliation to the most directly comparable GAAP financial measures where available on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or investor-focused conferences hosted by R.W. Baird and UBS. Additionally, please note that we are planning to host a financial analyst meeting at our headquarters in North Reading, Massachusetts, in the afternoon of March 11, 2025. Following Greg and Sanjay’s comments this morning, we will open up the call for questions. This call is scheduled for one hour. Greg.

Thanks, Traci. Good morning, everyone, and thanks for joining us. Today, I will summarize our third quarter results and discuss the trends we are seeing in the semiconductor and advanced robotics industry. Sanjay will then provide more color on our third quarter results and forward-looking guidance. Generally, the market dynamics that we identified in our July earnings call have continued through the third quarter. The ongoing strength of Cloud AI is driving demand in both the SoC and Memory Test markets, and our Semi Test business is performing above our expectations. Within Semi Test, the memory business delivered record high revenue in the third quarter on strong HBM demand. Our SoC business was driven by networking and by vertically integrated producers, or VIPs, who are designing silicon for their own use in Cloud and Edge AI applications. Beyond Compute and Memory, we are beginning to see stabilization and in some cases modest levels of improvement in our other Semi Test segments. We are seeing utilization rates continue to tick higher as test was initially purchased for Mobile increasingly being upgraded to test Cloud AI Compute devices. By the beginning of 2024, our lead times have returned to normal, and while our customers are not generally providing forecasts beyond a quarter or two, which limits our visibility, we do expect a broader market recovery as we progress through 2025. Robotics, powered by transformation and SAM expansion, continues to outpace its peer group as it operates beneath a difficult macro industrial environment that has now persisted for more than two years. Focusing in on Q3, we delivered third quarter financial results at the high end of our revenue guidance range and above the high end of our gross margin and earnings guidance ranges. Memory and SoC came in above our plan, driven mainly by AI applications. In Q3, Cloud AI drove Compute Revenue with notable strength in networking devices. As we have discussed, AI-enabled data centers require much denser networks, and our incumbent leadership position in networking, combined with shipments to support VIPs, has resulted in a considerable shift in our revenue mix. This year we expect our revenue from Compute to be four times what it was in 2023. We are increasing our SoC SAM forecast for the Compute market segment by $200 million from $1.6 billion to $1.8 billion in 2024. This compares to $1.4 billion in 2023, approximately 30% year-over-year TAM growth. The VIP portion of the Compute TAM is growing fast, and our current estimate of this market for 2024 is approximately $300 million, of which we have roughly 50% share. In Memory, AI-driven HBM DRAM demand remains very strong, and AI servers are driving demand for enterprise SSD NAND flash. Our memory business is at record levels, driven by volume shipments for DRAM wafer sort and HBM stack die test. We are revising our estimated Memory TAM expectation for the year to approximately $1.4 billion, above our prior estimate range of $1.2 billion to $1.3 billion. The Memory Test for TAM in 2024 is now expected to be over 35% higher than the last peak in 2021. We note that the 2024 Memory TAM includes a large amount of initial tooling for HBM at multiple memory suppliers. It's likely that the HBM TAM will flatten or reduce in 2025. Moving on to Q4, Cloud AI demand is expected to continue into the fourth quarter. However, given the surge of memory shipments in the third quarter, we expect that our memory revenue will moderate in the fourth. While Semi Test has consistently outperformed our expectations this year, our other test businesses have continued to see softer demand. Our wireless business, in particular, has been impacted by the slower than expected ramp of Wi-Fi 7 in access points, PCs, and laptops. Our HD business continues to wait for our primary customer to work through capacity, and our Production Board Test business continues to be weak mainly due to lower demand from Tier One Automotive OEMs. Now turning to Robotics, despite roughly flat quarter-on-quarter revenue, our Robotics business has delivered 8% year-to-date growth despite a worsening industrial macro backdrop. We see our industrial automation peers with year-over-year declines averaging more than 10%. While the basic demand drivers for advanced Robotics remain, low penetration rate, the demographics of an aging population, fewer young workers willing to do factory work, and the compellingly short ROI, the industrial market that we serve is inherently cyclical, and our customers have significantly cut back on capital investment plans. We believe a more appropriate short-term indicator of progress is to consider performance relative to the peer group rather than an absolute growth metric for this business. To consider absolute growth, one needs to look over a complete business cycle. Even in the adverse business environment, the Robotics team is seeing good progress in executing its growth strategy. Our highest priority in Robotics go-to-market transformation is the development of an OEM solutions channel for UR. This channel is highly valuable because customers purchasing cobot-based solutions from these partners get into production more quickly and have fewer problems than customers that develop custom solutions. In the first three quarters of the year, OEM revenue at UR is up over 50% compared to 2023. Innovation-driven SAM expansion is central to outgrowing the market. The new heavy payload UR robots that began shipping late last year have lasted well in the market and represent 16% of UR units shipped year-to-date. The OEM growth and new product revenue essentially account for Teradyne Robotics outperforming our peer group in budget-constrained market conditions. We expect innovation-driven growth to continue in Q4. The MiR1200 Pallet Jack is a breakthrough product that brings NVIDIA-powered AI to solve a tough problem in the physical industrial world. Our beta customer trials have completed successfully, and we expect commercial shipments to begin late this quarter. Earlier this week, UR launched its AI accelerator, which is a ready-to-use hardware and software toolkit that will reduce time to market for AI-based work cell robotic solutions for UR's partners. To sum up, based on year-to-date outperformance of our Semi Test business, partially offset by the softer environment outside of Semi Test, we expect total company revenue growth of approximately 5%, up from our prior expectation of low single-digit revenue growth from 2023. As a reminder, excluding the impact of the sale of DIS to Technoprobe, our 2024 revenue growth would be a couple of percentage points higher. Our third quarter results have reinforced our belief that AI is a transformational secular growth driver across Teradyne's businesses, both in test and in robotics. It is powering demand in Semi Test and powering innovative products in robotics. We expect that this will only accelerate in the years ahead. With that, I'll turn the call over to Sanjay. Sanjay?

Thank you, Greg. Good morning, everyone. Today, I'll cover the financial summary of Q3, provide our Q4 outlook, and provide some color around 2025. Now to Q3. Third quarter sales were $737 million, which was at the high end of our guidance with non-GAAP EPS of $0.90, which was above our high-end guide of $0.86. Non-GAAP gross margins were 59.7%, which was above our high guidance primarily due to product mix. Non-GAAP operating expenses were $275 million, up sequentially and year-over-year, consistent with our guidance as we invest in targeted opportunities to drive long-term growth. Non-GAAP operating profit was approximately 22%. Turning to our revenue breakdown in Q3. Semi Test revenue for the quarter was $543 million, with SoC contributing $393 million and Memory $150 million. Strength in SoC was driven by Compute, while Mobile and Industrial continued to ship at a consistent level with Q2. Memory Test revenue was driven by HBM DRAM shipments, flash tooling for new UFS 4.0 standard in Mobility and DRAM wafer sort. In Memory, we continue to expect DRAM to dominate the Memory mix at over 80% of the Memory TAM in 2024. In System Test group, Q3 revenue was $73 million with continued weakness across the businesses. Production Board Test business decline was driven by weakness in the automotive end market. Storage Test weakness in SLT was tied to the mobile end market. While the HDD end market is recovering, the demand is being satisfied with underutilized test capacity. In wireless test, revenue was $33 million in Q3, lower sequentially and year-over-year on a slower-than-expected ramp of Wi-Fi 7 and continued weakness in the PC end market. Now to Robotics. Revenue was approximately $89 million, flattish sequentially and up 3% year over year. In the quarter, UR contributed $73 million and MiR contributed $15 million. As noted, although the overall market is down, we are experiencing year-over-year growth tied to our SAM expansion and channel strategies. Some other financial information in Q3. Our equity investment in Technoprobe is reflected below the line in the income statement, where we recognized 10% of TPI's profit one quarter in arrears. Clearly, as the transaction closed at the end of May, our third quarter results reflect the impact of one month of the TPI investment. We had three 10% customers in the quarter. The tax rate, excluding discrete items for the quarter was 13.6% on a GAAP basis and 13.8% on a non-GAAP basis. The full-year rate is expected to be 14% on a GAAP basis, 14.5% on a non-GAAP basis. Shifting to some cash metrics, at a company level, our free cash flow was $114 million, primarily driven by earnings and net working capital improvements in the quarter. We repurchased $25 million of shares in the quarter and paid $20 million in dividends. We ended the quarter with $678 million in cash and marketable securities. Now to our outlook for Q4. Q4 sales are expected to be between $710 million and $760 million. Gross margins are estimated at 59.5% to 60.5%. Recall in January, we had a plan to improve gross margins back to model in the second half of 2024. The first half of 2024 had subscale revenues tied to a seasonally low Q1 and operational resiliency spend. In the second half of 2024, we are back to our model gross margins of 59% to 60%. A little more color on gross margin seasonality. In Q1 2025, we anticipate revenue to be roughly 5% to 10% down quarter-over-quarter. With this lower volume, our gross margin is expected to be slightly below our target model. Back to Q4, OPEX is expected to run at 36.5% to 38.5% of fourth quarter sales. The non-GAAP operating profit rate at the midpoint of our fourth quarter guidance is 23% with non-GAAP EPS expected to be in the range of $0.80 to $0.97 on 164 million diluted shares. GAAP EPS is expected to be in the range of $0.73 to $0.91. A few comments on the semiconductor test market. We are revising up our total semiconductor ATE TAM estimates for 2024. We have provided a slide in the appendix of our earnings deck with this information. Recall, our SoC TAM range has been $3.6 billion to $4.2 billion with a midpoint of $3.9 billion. We now expect the SoC TAM to be at the high end of this range around $4.2 billion. This is comprised of Compute, which we now estimate to be $1.8 billion, up $200 million from our prior midpoint estimate, and industrial to be around $400 million, up $100 million from our prior estimate. We continue to estimate mobile to be around $800 million, Auto MCU to be around $500 million, and Services at $700 million. We are also raising our Memory TAM estimate to $1.4 billion, up from an estimated range of $1.2 billion to $1.3 billion. Within our 2024 expectations, as Greg noted, we are calibrating our expectations of growth in Robotics around the relative growth of the peer group. We are targeting growth in our Robotics business to be 15% to 20% above the industrial automation peer group, which contemplates macroeconomic factors that are outside of our control. We are confident in the long-term growth of this business and will continue to have a disciplined approach to spending. Given the weak end market, we now expect Robotics growth in 2024 to be between 5% and 10%. With regard to capital allocation, we will continue to target our share buybacks in 2024 to have an amount necessary to offset dilution from equity compensation and our employee share purchase program. Looking ahead to 2025, with an uptick in utilization and an expectation of end market improvement, we will be making investments that will increase our operating expenses. However, we expect to have a plan with operating leverage. We expect revenue growth to accelerate from 2024 levels across all businesses. That said, demand for most of our end markets outside of AI related to Compute and Memory is improving, but remains muted, and the timing and magnitude of a broader-based recovery is not known. Our variable business model is scalable and resilient with outsourced manufacturing and our operating expenses having a variable component. During a cyclical downturn, we shed OPEX, enabling greater profitability and free cash flow generation. During an upturn in the market, we expect in 2025, we will see an accelerated OPEX increase tied to our variable OPEX model. In 2025, given our expected top line growth, we are planning a low teens increase in year-over-year OPEX, mainly to fund our Semi Test growth initiatives, primarily in engineering and go-to-market. Also, approximately 30% of the growth is due to our variable compensation model. Q1 OPEX is expected to grow 15% to 20% year-over-year. Summing up, we delivered strong sales and earnings in the third quarter as Memory and Compute revenue helped us drive to the high end of the range. Our Robotics team delivered year-over-year growth despite a difficult auto and industrial end market as the business continues to execute its new product development and go-to-market strategy. Overall, our midterm fundamentals remain strong, and we are investing to accelerate our long-term growth trajectory. With that, I'll turn the call back to the operator to open the line up for questions.

Thank you. Our first question comes from Mehdi Hosseini of SIG. Please go ahead.

Yes, thanks for taking my question. The first one has to do with just the overall system-level test. You have highlighted opportunities in Compute. I think of System-Level Test as an extension of Compute impacting both your Semi Test and System Level. So remind me, where do you see the TAM in 2024 and your projection for 2025 and what are the opportunities that Teradyne could benefit from? And for context, SLT was mostly opportunities in the smartphone. I'm under the impression that the end market diversified, and I want to hear how Teradyne is positioned and I have a follow-up?

Hi Mehdi. So unlike the semiconductor ATE market, there aren't as accurate measures of TAM in the SLT space because there are a lot of fuzzy edges between SLT and burn-in and different methodologies. So we look more at this from a major customer perspective and a segment perspective. So you're right, the thing that's happened over the past few years, maybe the last five years or so is SLT becoming an important part of the test strategy for the processors that go into smartphones, and that has been the primary driver for us. Over in 2024, we have added Compute customers to that mix. And we're really going to hit more, like I think that's only going to be a meaningful contributor to SLT revenue once we get to 2025. There's a little bit in 2024, there will be more in 2025. We also, while this mobile downturn has been going on, have been adding an additional customer in the mobile space. So when the mobile market hopefully recovers to an extent in 2025, we expect that to grow a little bit more robustly because we have an additional customer there. So I don't have a firm answer to give you, but we certainly believe that we're looking at a significantly stronger 2025 than 2024 in SLT.

Sure, thank you. And just as a follow-up, when I asked your customers, it seems like the overall test time for the next generation of AI Blackwell increases by more than 30% versus the prior generation. And I'm just wondering given the fact that you've had limited exposure to accelerate part of the AI market, would the escalating test time open the door for Teradyne to come in and reduce the test time, and this is where SLT could potentially become an enabler?

The trend of increasing test times is closely linked to the complexity of the device. The Blackwell has a large die, and its test time is well optimized for that complexity. I see SLT mainly as a means to manage growth. If test times increased in line with transistor complexity, they would rise by more than 30%. SLT acts as a limit on that growth, and while we have significant opportunities in AI accelerators, I don’t see a major chance for us to capture market share in specific areas like Blackwell. Our future is more closely connected to vertically integrated producers. As hyperscalers begin to deploy more computing power on their own silicon, that will drive our improved results in the compute space. Additionally, as device complexity increases, the networking required for AI model training is growing at a faster rate than the number of nodes. Within a single company, both AI accelerators and networking devices require increasing test seconds, with networking devices requiring at least as many, if not more, due to the greater number of links. This expansion of test time presents a broad opportunity for the ATE industry, leading to larger total addressable markets and more testers, with our main prospect lying in the growth of vertically integrated producers and networking.

Thank you.

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

Thank you for taking my question. I'm not sure how the TAM is being taken up several hundred million dollars, but your Q4 and Q1 sales are going to be below Q3 sales. And as we look forward, Greg, do you think that this 20%, 25% sales growth, which is kind of in line with your midterm model CAGR, that's a realistic target for 2025?

Let me address this in two parts. Regarding the expansion of the total addressable market, we see two key factors at play. First, as we analyze our performance and that of our competitors, we're noticing significantly stronger business in AI Compute and related areas like HBM Memory. Second, as the year progresses, we're gaining better insights into the total addressable market in China and the successes of local Chinese testing firms serving that market. There is demand from Chinese companies being met by other local companies. It's not that this demand is increasing dramatically, but we're gaining a clearer understanding of its scope. Given Teradyne's relatively low exposure in China, this is not a major factor impacting our growth share. However, it is contributing to a more accelerated estimate for the total addressable market in 2024. As for your second question about our growth model suggesting an increase of 20% to 25% in 2025, we will provide a complete overview of our estimates for that year during our January call. However, I believe we have the necessary elements to align with our 2026 plan.

And from a follow-up, if I do a five-year look back for your automation or your Robotics business, the 29% to 24% if my model is right, it shows a 5% CAGR. So what explains that software growth, how does that long-term trend compare against the industry, and what needs to happen for Teradyne to grow at this 20%, 30% forecast for the next handful of years?

That's a great question and something we've reflected on extensively. In our analysis, we identified several factors. Looking back over five years, 2020 was a particularly challenging year for industrial automation, although the semiconductor sector recovered swiftly as it was crucial during the COVID pandemic, yielding strong results. However, industrial automation, including our own, faced significant hurdles in growing sales. We saw a strong recovery in 2021, but by 2022, our growth plateaued, and we experienced negative growth in 2023. Since 2023, we’ve observed a weak end market, with the industrial PMI remaining at or below 50%, indicating contraction for the past two years, which is the longest such period in the last four decades. This aligns with the broader post-COVID contraction and rising interest rates that have made financing for industrial growth more challenging. We've been proactive during this time, assessing our own performance and challenges. One key issue we identified was that our distribution was insufficient for our growth targets, highlighting the need to expand our offerings in both hardware and software to tap into a significantly underserved market. Despite difficult market conditions, we've introduced high payload robots to our UR line and are set to launch a product for MiR that will significantly expand our market reach. Additionally, we've developed a successful OEM solutions channel for UR, which is now contributing materially to sales and growing at 50% year-over-year, even in a sluggish market. While we need improved market conditions to achieve 20% to 30% growth, we believe, as Sanjay mentioned, that we can outpace traditional robotics and industrial automation suppliers by 15 to 20 percentage points annually. This sector typically grows slightly faster than GDP, around 5%, which would place us in the 20% to 25% growth range in a normal market. We are confident that we've laid the groundwork for future growth and are continuously monitoring and adjusting our strategies.

Thank you, Greg.

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

Thanks a lot. Sanjay, you guided OPEX next year up low teens, and you talked about how that's going to be focused in Semi Test, but you also said you want to show leverage next year. So implicit in that statement, you think you're going to grow revenue something higher than that. The Street right now has it up low 20s. So is that a reasonable number since you're growing the OPEX up low teens, is the Street projection of up low 20s, is that a reasonable number or do you think you can grow even faster than that?

Yes, hi, Tim. I believe this indicates a couple of things. First, we are confident that, as I mentioned in my prepared remarks, we expect to see improvement across the business. However, we are currently experiencing a downturn or weak demand in the mobility, automotive, and industrial sectors. The timing of when this will change is uncertain but will play a significant role in our outlook for 2025. We will share our perspective on 2025 during our January call. Additionally, we want to convey that this is a dynamic environment. We are currently engaging in our strategic planning process, which will culminate in a meeting with our Board, followed by an update to our earnings model in January, as we typically do. We are still in the midst of this process, but one of the key principles we are focusing on is how to achieve operating leverage. We wanted to emphasize that. Tactically, as we observe significant changes in the market—similar to the strong mobility seen back in 2008—we recognize a shift towards Compute. Several years ago, we pivoted to a VIP or hyperscaler strategy that we believe is proving successful in the short term. We are making the appropriate engineering and market decisions. Therefore, while our goal remains to drive operating leverage, we are carefully evaluating these investments. This sets our expectations regarding our investment profile and reinforces our commitment to operating leverage.

I would like to add a comment regarding our 2026 earnings model. As we worked on it, we aimed to provide as much relevant information as possible, even without complete plans for 2025. Our primary concern was the possibility that our trajectory in operating expenses for 2025 might be misunderstood. We were less worried about how our 2026 earnings model might affect perceptions of our revenue growth in 2025.

Okay, great, thanks for that. As you all know, I don’t often express positive views about the industrial automation business. So, I’ll ask a question that could be seen as encouraging. If you look at this white paper, it appears that Amazon, which has Kiva for automated guided robots, is exploring a niche with cobots for warehouse and fulfillment operations. Does this signify a potential growth opportunity that could help stimulate that business, even though AI has not seen significant growth?

We don't provide comments on specific customer engagements, but I have seen the same white paper you mentioned, and it showcases some exciting technology. What excites me is the application of AI to enable cobots to manage the vast number of SKUs they deal with daily. Other customers in logistics are also leveraging AI and cobots similarly, such as in cube storage systems for online grocery picking. We see potential in how AI can expand the capabilities of cobots across a wider range of products and challenges than before. I believe online retailing presents significant opportunities for growth in this area.

Thank you, Greg.

Our next question comes from Samik Chatterjee of J.P. Morgan. Please go ahead.

Hey, thanks for taking the questions. So for the first one, I'm just trying to go back to your comments on the prepared remarks about growth being significantly higher in 2025 compared to 2024 and just trying to think about it in terms of the TAM by segments that you outlined. And I remember previously, you've outlined that the complete TAM probably is really not where you see a lot of upside into 2025, but more in the cyclical parts of the TAM that you outlined like Mobility and others. I mean, more curious if that's still your view as you look forward to 2025, because you just outlined today as well that the memory or the HBM TAM might be sort of flattening out as well. So is it still very much when we start to think about next year significant growth, is it really driven by the cyclical parts of the TAM or is your view changing on Compute or Memory in aggregate in relation to that? And I have a quick follow-up.

Yes. I will provide more details about our outlook for 2025 in January. However, since we discussed this last quarter, I'll update you on our recent observations that impact that outlook. Last quarter, I mentioned that Compute is performing exceptionally well, and I now believe it might actually get even better. We expect some growth from its current state. We are certainly anticipating a recovery from the lower levels expected in 2024 for the automotive and industrial sectors, as there is significant demand in those end markets. The transition from internal combustion engines to electric vehicles may be delayed, but it's evident that the semiconductor content in every new car model is increasing. Therefore, we see long-term growth drivers in both the automotive and industrial sectors. In the Memory segment, while we expect HBM to stabilize, the other memory sectors remain quite weak. The DRAM market currently makes up about 80% of our total addressable market, which is typically more balanced. Thus, we believe there is potential for stronger performance in the flash segment of the Memory market. To address your question about whether AI will be the sole growth driver next year, the key takeaway is that the rest of the market is likely to see incremental improvements alongside a robust AI market.

Got it. Good. That's helpful. And for my second one, just on Sanjay, you mentioned the seasonality into Q1. If I sort of look at your business as AI versus sort of the more cyclical part, are the AI pieces also going to go through a seasonality typical to the rest of the business or are you seeing those sort of stand out in seasonality and it's more driven by the cyclical aspects that you sort of take that step down into Q1? Thank you.

Yes. I think if you look at our history, what you'll see is the seasonality come down in Q1. And we're seeing that in Robotics specifically. Historically, we've seen strong Q4 and then come down in Q1. And then from a test perspective, the AI strength right now, it will be interesting to see because one thing I want to tie back to is that our lead times have come down significantly from where they were several years ago. And one of the drivers of our strength in Q3 was really tied to customers pulling in future forecast to meet current wafer routes and test requirements. And we're seeing that more and more, and we're positioned well to service that. There have been some unforecasted demand. So I would say that the visibility is starting to get a little bit lower looking out into kind of Q1 from a tactical execution perspective. Now we are positioned well that if customers come in and we can service it. But even in test, we are seeing historically a little bit of seasonality, but a large part is driven by Robotics and a little bit in Test.

Great, thank you. Thanks for taking my questions.

Our next question comes from Brian Chin of Stifel. Please go ahead.

Hi there, sorry about that. Thanks for letting us ask a few questions, and good morning. Maybe just first question, can you discuss why the industrial test TAM was revised higher for this year? Is there a connection to China there, or would you explain that in another way?

Yes. So you hit the nail on the head. This isn't a case of the industrial TAM lengthening from quarter-to-quarter. It's a case of us getting better visibility into the size of the TAM that existed in China that's being served by indigenous suppliers.

Okay, that's very clear and helpful. Greg, can you help to quantify roughly what percentage of the mobile installed tester base has been reduced, rationalized, or repurposed for other chips and markets such as AI accelerator GPUs and ASICs?

Yes, so right now, like as of today, based on the upgrade shipments that we've done, over 100 testers have been repurposed, and by the end of the year, we expect that over 200 testers will have been repurposed into other markets. Most of that isn't to Compute, but not all of it. And the other thing that we look at is to see directionally what's happening with utilization. We don't trust the absolute numbers, but since we keep our measurement methodology consistent, you can get a better idea of whether capacity is getting tighter or looser, and we've seen a meaningful uptick in utilization as these testers have been converted and put to use. So we definitely believe that there's less idle capacity now than there was a quarter ago, and there will be even less when we get to the end of the year.

That's helpful. You understand kind of the supply side of that, and the demand is what you are kind of floating at the moment for next year. Maybe one last quick question. And I understand maybe the reluctance to give a number for 2025 of that VIP Compute TAM. But you revised it higher again for this year. Maybe it will ultimately push higher in terms of what your 2026 view has been. But maybe can you at least talk about the key considerations that may drive the size of that opportunity next year and are constraints for things like cobot capacity or HBM supply one of those considerations?

In terms of the VIPs, we previously indicated that we believe the total addressable market (TAM) for VIP Compute will be around $500 million by 2026. This year, we expect the TAM to be approximately $300 million, which is a positive surprise regarding market size for 2024. Consequently, we are reassessing whether that $500 million forecast for 2026 is accurate and will provide an update in January about any potential upward revisions. I feel confident there is upward pressure on this number. Additionally, it’s important to note that the VIP TAM is quite variable due to the limited number of producers and part types, resulting in a lumpy market. If a successful product is identified, large orders might come in quickly, but then capacity is utilized and the market doesn't currently exhibit a mature, consistent growth pattern. The overall trend is definitely improving. Regarding constraints, we are hearing from VIP customers that they face limitations in accessing HBM Memory and advanced packaging necessary for assembling these components. These are likely the two most significant constraints. Moreover, another critical factor is the functionality of the part itself; these are complex dies that can face surprises related to reticle constraints, and customers are incorporating redundancy to ensure sufficient yields. However, it is not guaranteed that these parts will function correctly on the first attempt, leading to variability in demand for the testers. This makes the market difficult to predict, but the overall trend is advancing more quickly than we originally anticipated.

Yes, that's super helpful color. Thanks, Greg.

Our next question comes from C.J. Muse of Cantor Fitzgerald. Please go ahead.

Yeah, good morning. Thank you for taking the question. I guess first question, I realize you want to save the thunder for your Analyst Day in March. But everything that I'm hearing in this call is telling me that 2025 is a transition year. Your OPEX in Q1 is at new highs, while your revenues are 37% below the prior peak. So can you give us a little bit of help here to understand that there's actually real leverage in the model in 2025?

Yes, hi C.J. As Greg mentioned, we are currently in our strategic planning process. We are engaging with customers and learning about their plans. We’ve completed our initial market size assessments, and as Greg noted, we are planning for incremental growth in mobility, automotive, and industrial sectors. This growth is starting from a low base, which means the percentage increase will be more significant, and Compute is performing very well. Given the information we have right now, we are confident in expecting to see operating leverage as we anticipate low teens growth in operating expenses. However, a lot can change in 90 days, and we need to finalize our planning process, after which we will provide an update. For now, we anticipate seeing operating leverage in our business by 2025.

Yes. I just want to add a bit more to that. When we reached our previous peak, the market environment perfectly aligned with Teradyne's strengths, especially in mobile, where we experienced a significant surge in demand. We operated at peak efficiency without needing to increase operating expenses to support that level of revenue. Moving forward, it's evident from our earnings model that we anticipate solid growth in total addressable market over the next few years. However, this growth does not directly correspond with Teradyne's traditional strengths, prompting us to adapt and invest to capture the market changes. We made substantial investments to align with the high bandwidth memory market and have made notable progress in testing performance stacked die. Additionally, we've invested significantly in engineering and sales to better position ourselves in VIP, where our market share in Compute VIPs has increased to 50% this year, compared to much lower figures in traditional Compute. It’s important to note that we couldn't control the market shifts, but we can respond effectively. Balancing moderate investment increases while preserving strong operating margins is essential for us to maintain our leadership in the industry.

That's very helpful, thank you. As my follow-up, a near-term question on Robotics, it looks like you're guiding that business to grow 50% sequentially in December. Can you kind of walk through the drivers there and how to think of what the business will look like after that? I believe that's driven primarily by MiR product cycle, but would love to hear more color there. Thank you.

Yes. So the Robotics business has historically had a very, very large Q4. There's a lot of seasonality in that business, and this year is no exception. We expect sort of the normal seasonality pattern. We also expect that the growth that we're seeing in the OEM channel and with heavy payload is going to continue to contribute. I also note, like it's a lesser factor, but now there's a more meaningful amount of service revenue that's coming into those businesses. So the near story is much more of a 2025 story than a 2024 story. We need to get our new Pallet Jack into the hands of customers. That is going to happen at the end of this quarter, but it's not going to be a material contributor to Q4 growth. So it's really more a view of the pipeline that we have, like our lead pipeline for Q4, how strong we expect that business to be from what we have going now than any contribution from like a new product.

Thank you.

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

Hi, good morning. I had two questions as well. First, on the mobile SoC Test TAM. I know you're not giving guidance for 2025, but Greg, I'm curious how you're thinking about the opportunity set medium to long term. I think the market peaked around $2 billion a couple of years ago; you're at $800 million today. How do you think about sort of the through cycle? I know there is no steady state, but how do you think about sort of the through cycle opportunity for mobile? You talked about utilization rates coming up per year market intel. But medium to long term, are you thinking $1.2 billion, $1.3 billion for Mobile Test and some of the reasons behind that, that would be super helpful?

Once we reach a stable phase, which I anticipate will occur in 2025 as we utilize the excess capacity, I expect the mobile market floor to be closer to $1 billion rather than the current $800 million. The increase from that point will largely depend on the emergence of AI-enabled smartphones and whether they provide significant value to customers, as this is crucial for market growth. If a phone is released with a more advanced processor, it will demand additional testing time, necessitating more testers. If these phones offer desirable features, it could shorten the refresh cycle. Currently, smartphones are older on average than ever before, and people are keeping their devices longer because there hasn't been a compelling new feature to motivate upgrades. Therefore, I believe that the potential for mobile to reach the $1 billion mark relies on an increase in phone refresh rates and overall unit sales.

Got it, thank you. And then as my follow-up, just a question on how you're thinking about the overall business portfolio. It's been, I think, something like eight years since you guys acquired UR, and I know that it predates you becoming CEO of the company. But since then, I think at the time, I think the growth expectation around Semi Test was lower perhaps than how you're thinking about the business today. And I think the market sort of perceived the acquisition as a diversification play. When you think about the opportunity set today, I think you've got a lot going on in Semi Test, and you touched on quite a few of those things, whether it be HBM or the VIP opportunity set. I guess to ask the question bluntly, do you feel like you're still the right owner of the Robotics business? Do you feel like you're getting fair value for running this business, and do you guys ever internally debate separating the two businesses?

Yes, that's a direct question, and it's a valid one. When we acquired UR in 2015, we realized we were emerging from a decade of declining total addressable markets in the semiconductor test market. During that same period, Paradigm increased our market share in the semiconductor test sector. In that situation, we managed to enhance our profitability and effectively double our market share, but we didn't see that as a sustainable long-term growth plan. Owning a diminishing market isn't particularly gratifying. Thus, we were actively seeking ways to ensure the long-term growth of the company, which was our initial goal. Since acquiring the Robotics companies, we've found that Paradigm offers a unique value proposition in advanced robotics. Competitors in industrial automation, particularly those from traditional industrial robotics backgrounds, often struggle to deliver high-tech products that meet stringent reliability demands. The level of reliability and complexity we achieve with our testers is remarkable. Bringing that expertise and reputation to our robotics businesses positions us competitively against traditional industrial automation companies transitioning into advanced robotics, as well as against smaller advanced robotics firms that are typically underfunded and lack international distribution or spare parts networks. We believe we are well-positioned to scale advanced robotics in the industrial sector. There may come a time when separating these two businesses could unlock shareholder value, but currently, we believe that associating Teradyne with the advanced robotics brand is a key differentiator that will enable us to lead in that market.

Thanks so much, Greg.

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

Yeah, hi, thanks for taking my question. Greg, I had two of them. First one, I just want to come back to this OPEX thing either for Greg or Sanjay. I thought the strategy on the Semi Test side was with VIPs to engage earlier and on the GPU customer side was to get into the networking test side. With this Semi Test OPEX increase, are you trying to build new platforms to compete? I am basically trying to understand if this is a structurally new OPEX level for the Semi Test business or is it just cyclical trying to get market share?

So, I would consider it more to be cyclical. It is not and for sure we are always trying to get more market share, right. So, that is kind of a given. But the thing that we are seeing is that these VIP customers they are building extremely complex devices and they amount of applications and technical support required to help them get to market is hefty and it is worth it. If you invest that money with that team then you end up with a part that drives a significant amount of business. So the ROI is there to make those investments, but those investments right now we are definitely in the phase where we are making more investments than we are reaping the results of them. So, I think it is a cyclical effect, long-term I would expect that we would be able to... like I think we will grow revenue into the OPEX that we are taking on. Not reduce OPEX against normal revenue. So, that’s sort of the view that we have that by treading in place of these VIP and networking spaces that we are going to be able to hold and grow without proportionally increasing OPEX the whole way.

Got it, got it. It is very helpful Greg. And then a quick follow-up on HBM. Can you give a little bit of bulk year opportunity in the market share that in the post stack dye cast?

We were not able to participate in the post stack dye cast market until we got qualified by a major supplier in the middle of this year. This has led to significant traction in the second half of the year with one of the major HBM suppliers. We are currently engaged in discussions with another HBM supplier, which we anticipate could generate revenue in 2025, depending on their success in gaining market share. Regarding wafer sort, it aligns more closely with the traditional market share distribution in the wafer storage sector. There are a few key players in memory, and we have a strong share of DRAM wafer sort from one major supplier, although we have limited share with the largest player. However, we are performing well with memory manufacturers in China, and as they expand, we expect to benefit as well. Thus, while we predict our wafer sort share to remain stable, we do anticipate gaining additional share.

Thanks a lot, Greg. Very helpful.

Our final question comes from Gus Richard of Northland Capital. Please go ahead.

Yeah, thanks for taking my question. I just want to ask about your expectations for complexity growth and mobile processors in the next generation next year, including more AI capability, perhaps integration of modems. Do you have any thoughts or any thoughts on what that might look like in 2025?

Yeah, it is an interesting take. The devices that are going to ramp next year is at the Test Chip phase now, and we expect modest complexity increases, and a lot of that complexity increase is associated with AI. Modems is a different story. We don’t see a trend towards additional modem integration. But we do see the opportunity for changes in the supply chain to begin to get modems from different sources than they get now. So that is at play both in the iOS and the Android space. So we don’t see modem integration but we do see shifts in terms of who is providing the modems.

Great, that is super helpful. And then just touching on capacity utilization. You indicated it will rub sequentially and at this point if you could quantify that a bit more what was it in Q3, what you are thinking Q2, Q3, and Q4 how is that supposed to be utilization trended, can you quantify that?

I wish I could provide more details, but I can't. What I can say is that we have the numbers, and while we use them internally, we don't believe they are sufficiently audited for external use in this context. The only information I can share is that there has been a notable increase quarter-on-quarter, approximately in the mid- to high single digits. However, I prefer not to provide specific figures due to auditing challenges. Regarding the fourth quarter, I expect to see significant continued increases in utilization, driven by normal seasonal trends as well as the number of testers that we have available for upgrades between markets. Typically, upgrades will occur on underutilized testers rather than fully utilized ones. Therefore, I anticipate further improvement in utilization for Q4, but I cannot provide a definitive number.

Got it, thanks so much. Appreciate it.

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

Thanks so much for joining us this morning. We look forward to speaking with many of you through the course of this quarter. Thanks again.

Thank you.