Teradyne, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Teradyne First Quarter 2020 Earnings Conference Call. At this time, all participant lines have been placed in a listen-only mode, and later we will open the floor for your questions. To ask a question at that time, simply press star, then the number 1 on your telephone keypad. Thank you. It is now my pleasure to turn the call over to Andrew Blanchard to begin. Please go ahead, sir.

Thank you, Maria, and good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Jagiel, and CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2020's first quarter, along with our outlook for the second quarter of 2020. The press release containing our first quarter results was issued last evening. We're providing slides on the investor page of the website that may be helpful to you in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discussed 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 filing. 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, including reconciliation to the most directly comparable GAAP financial measure, we're available on the investor page of our website. Also, please take special note of the Safe Harbor Statement in the press release and slide deck for risks related to the COVID-19 pandemic and potential changes to U.S. export regulations. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Wolf Research, R.W. Baird, Bank of America, Cowan, UBS, 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, including how we're responding to the COVID-19 pandemic. Sanjay will then offer some more details on our quarterly results, along with our guidance for the second quarter. We'll then answer your questions, and this call is scheduled for one hour. Mark?

Hello, everyone, and thanks for joining us. Today, I will describe how we're responding to the COVID-19 pandemic, including our high-level results for the first quarter. I'll then provide some context for how we're looking at the second quarter and the market conditions we're observing. Sanjay will then provide the financial details and more specifics on how we're managing in the current environment. COVID-19 has shaken the global economy and it's unclear how long the restrictions on daily life will continue or what the longer-term economic implications might be. However, as you read in our press release, demand for our test products remains very strong throughout the first quarter, and we were able to deliver revenue and earnings near and above the top end of our guidance respectively. As you might expect, the Teradyne team and our partners overcame numerous supply, production, and logistics obstacles during the quarter, and I could not be more proud of their work. Employee health and well-being has been our top priority at Teradyne. Globally, the majority of our employees are working from home. While some of our operations, supply line, and customer support teams must be on site, we are providing them with the necessary protective resources and procedures to minimize their exposure risk. Supply line challenges continue to come our way, and the unusually large revenue guidance range in Q2 reflects this challenge. Sanjay will give you more details on our supply line response. Application support projects are vital to the short-term and long-term success of both Teradyne and our customers. These projects are largely on track with employees assisting customers on site where necessary, but using enhanced safety protocols. R&D projects are moving full speed ahead and, with minor exceptions, are on schedule despite the rapid shift to significant number of engineers working remotely. While we are watching this closely to ensure we get ahead of any potential productivity loss from this remote work arrangement, so far things seem to be proceeding on plan. So in summary, despite the numerous challenges presented by the COVID-19 pandemic, the Teradyne team is executing and delivering one of the largest ramps of tester shipments in history. Moments like these really stand out in our careers and it feels great to be part of this team. Turning to the business, as of yet, demand for test equipment remains little impacted by the COVID-19 pandemic. While there is incremental softening in the automotive sector, That's being more than made up for by strengthening of mobility, 5G, and memory test demand. On the other hand, our industrial automation business saw a decline in Q1, which we expect will deepen in Q2 as Europe and North American manufacturing remains impacted by shutdowns. Now let's review how Q1 unfolded and how we're looking at Q2. Given the uncertainty in both supply and demand, we will not be making any full year projections in our comments today. At the total Teradyne level, our first quarter sales were up 43% from first quarter of 2019 and our non-GAAP earnings per share were up 85%. In semi-test, sales were up 42% from Q1 2019. Of that, SOC test was up 37%. As expected, 5G infrastructure test buying slowed in the quarter and handset related buying strengthened. This trend continues into 2Q as well. Part of our growth comes from the mobility design wins we highlighted last year, but the biggest driver is the same thing we've been describing for years. The increasing complexity of silicon in handsets drives up test time, which in turn drives demand for more testers, even in the face of flat to down handset unit volume. Increased complexity comes from more powerful apps processors, new technologies like Wi-Fi 6 and 5G, more cameras with higher pixel counts, and increasingly sophisticated sensors and displays. Tester demand for the specific 5G modem and RF components in handsets is growing in 2020, but remains modest. Much of the early 5G deployment will use low-band sub-6G technology, while millimeter wave will be a small percentage of 5G handset shipments this year. However, There is growing demand for millimeter-wave test capabilities, both in semi-test and at light point. The industry is building capacity for this technology from near zero, so much of this demand is to put initial capacity in place for early production. On the infrastructure side, the global build-out is still in the early innings, and we expect test demand to ebb and flow as the network build-out moves through various geographies. Memory test is another bright story. Revenues were up 76% from Q1 2019. The LPDDR5 ramp on our Magnum Epic test system was the highlight of the quarter, as DRAM final test is a new and promising segment for us. We expect that ramp to continue in second quarter. From a revenue perspective, though, Flash test shipments were the dominant contributor in the quarter. The latest protocol interface standards in Flash are pushing interface speeds higher, driving a refresh of package test systems. We expect this trend to also continue in the second quarter. Additionally, we saw healthy shipments for indigenous Chinese memory production in the first quarter. In the system test group, sales doubled from the first quarter of 2019, with storage tests standing out with sales of over $75 million in the quarter. This was more than three times the level of a year ago quarter, as demand for both HDD and system-level tests remained strong. Our defense and aerospace business grew over 30% in the quarter year-on-year, while production board tests softened on slower automotive electronics demand. In wireless tests, light point sales were up 50% year-on-year on increased demand for both connectivity and cellular-related test systems. Like semi-tests, light point shipments are building foundational capacity for 5G handset tests and benefiting from the Wi-Fi 6 transition. Shifting to industrial automation. Revenue in Q1 was down about 10% year-on-year as the improving outlook for universal robots in Asia, which we saw in Q4, was stopped dead in its tracks by the COVID-19 pandemic in Q1. In Europe and North America, UR also faced increasing headwinds as the quarter progressed. On the other hand, MIR's autonomous mobile robots delivered roughly flat sales in the quarter compared with the year-ago period. We believe the opportunities for automation will accelerate post-pandemic as businesses see the resilience benefit of a more automated workflow. There will also be the opportunity in the likely realignment of localized manufacturing of critical supplies and a heavier reliance on warehouse automation and logistics automation. To that end, our investment in new products, distribution, and organizational capability continues at full speed. In March, we introduced the MIR250 autonomous mobile robot and the AutoGuide MaxN10 pallet stacking autonomous forklift. In April, Universal Robots formally introduced the market's most capable industrial bin picking product, ActiNav. ActiNav is a URplus application that uses 3D vision and a proprietary path planning software in an easy-to-deploy plug-and-play solution. It provides the necessary hand-eye coordination to both precisely pick parts from bins and precisely place parts in a manufacturing flow. Finally, let's jump up and look at the big picture. Our 1Q demand was very strong, and we were nimble enough to fulfill that demand despite the COVID-19 challenges. Our Q2 demand looks even stronger, and the team is focused on knocking down supply bottlenecks to realize another great quarter. However, we recognize that we're not operating in a vacuum. The midterm impact of rolling economic shutdowns remains uncertain in many industries, including our own. Bear in mind that volatility is not new to us. We have an operating model that can flex up and down with extreme demand swings and still remain profitable. We have employees across the company that have weathered severe economic storms in the past, and in each case, we've emerged better positioned competitively. You will note that we have suspended our stock buyback as a prudent hedge until the future impact becomes a bit clearer. At the same time, we also anticipate an increased likelihood of M&A opportunities later in the year. Either way, our rock solid balance sheet will be an asset in the quarters to come. Longer term, we know technology relentlessly marches onward providing solutions to global challenges and enriching all of our lives. We remain confident in the long-term outlook for our test and automation markets and in our strategy to excel at serving them. Sanjay will now take you through the financial details. Sanjay?