Teradyne, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Q2 2020 Taradani Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchstone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andy Blanchard, Vice President of Investor Relations. Please go ahead.

Thank you, Vincent. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Jagala, and CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2020 second quarter, along with our outlook for the third quarter of 2020. The press release containing our second 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 discuss today will include forward-looking statements that involve risk factors that could cause TerraDynes 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, including reconciliation to the most directly comparable GAAP financial measure, where available, on the investor page of the 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 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 KeyBank, Citibank, and Deutsche Bank. Now let's get on with the rest of the agenda. First, Mark will comment on our recent results in the market conditions, including comments on the COVID-19 pandemic and expanded trade regulations. Sanjay will then offer more details on our quarterly results, along with our guidance for the third quarter. We'll then answer your questions, and this call is scheduled for one hour.

Mark? Good morning, everyone. Today I'll summarize our results for the second quarter and the first half of 2020, comment on the impact of current environmental conditions, including new trade regulations, and then describe our view of the second half of the year. Sanjay will then provide the financial details on the quarter and our guidance for Q3. Despite the pandemic, trade issues, and shutdown-related headwinds in industrial automation, Teradyne is performing exceptionally well. Our second quarter results affirm the trend of growing test intensity and the efficiency of our business model. As you can see from our Q3 guidance, the market demand remains robust. While Q2 saw record SOC shipments, 3Q is being driven by growth in memory test and system level test. Industrial automation continues to pull out of the effects of global industrial shutdowns as we saw sequential monthly growth in sales throughout second quarter. We expect second quarter to be the bottom for IA and 3Q sales to be back close to 2019 levels. Superb execution by the global Paradigm team was on full display in second quarter as we managed to deliver new shipment records and tests. Supply line constraints were largely mitigated and remote technical collaboration with both within Teradyne and with our customers continues to show success. It takes dozens to hundreds of engineers working in concert to develop new test products. It takes similar numbers working with customers to launch test programs for new silicon. Flipping a switch to do this remotely without missing a beat is a fantastic accomplishment and I congratulate and thank all the employees at Teradyne for this achievement. On the trade front, New regulations related to both Huawei and China military end users were announced in the second quarter. We expect the China military end user restrictions to increase our compliance work and costs, but we currently do not expect any material impact on our sales into China. In the case of Huawei, while the new regulations do not impose any new restrictions on our business with Huawei directly, we expect it will likely impact our business with SubCon customers who test Huawei devices using our test equipment. However, we expect the macro global test demand to be minimally impacted as alternative sources of silicon supply grow to fill in whatever gap is created by these regulations. This alternative supply should absorb any idle test capacity as well as drive new demand in the future. Shifting to the highlights, As we reach the midpoint of the year, our January forecast for a $3.1 to $3.4 billion SOC test market is playing out about as planned, while our memory test market estimate has moved up to about $800 to $850 million. In SOC, our sales grew 60% in the first half and 82% compared to 2Q of 2019. as our participation in this year's mobility tooling cycle is significantly stronger than in the last two years. As expected, 5G infrastructure-related capacity remains weak after a strong 2019, while handset-related silicon is driving the bulk of the demand. While 5G-related silicon is beginning to add a small piece to the mobility handset market, the vast majority of the test demand is complexity growth in non-5G-related handset silicon. Whether related to high resolution still or video photography, artificial intelligence, augmented reality, gaming, location sensing, or advanced wireless connectivity, there is a rich set of features in addition to 5G that we expect will continue to drive mobility demand for the foreseeable future. Specific to 5G, we are still in the early innings of a multi-year rollout and expect it to be an incremental demand driver going forward. Additionally, Our new Ultraflex Plus platform will continue ramping in 3Q, providing new revenue sources in mobility and computing going forward. Beyond mobility, the automotive and industrial segments of the SOC test market remain weak, and we do not expect to see recovery until 2021. In memory, our 2Q sales were about flat with Q1, but up 45% from Q2 of 2019. Flash package test and DRAM wafer test, combined with ramping shipments of LPDDR5 package testers, drove Q2 results. DRAM test is growing faster than flash test in 2020 due to the LPDDR5 transition, and our design win in DRAM should allow us to hold our share position in the low 40s this year. In the system test group, sales were up 43% for the first half compared to 2019 due to strong storage test demand. We expect storage test shipments to grow sequentially and substantially in Q3, driven by both HDD demand and semiconductor system-level test shipments. System-level test is a great example of derivative products opening new markets for Teradyne. By combining silicon test instruments with our HDD test product, we've grown the combined sales from $60 million in 2017 to over $200 million this year. At Lightpoint, Sales were up 32% for the first half and 19% compared with 2Q of 19. Demand is being driven by Wi-Fi 6 and growing shipments of 5G test sets. Wi-Fi 6 has recently been allocated additional frequency spectrum in the 6 to 7 gigahertz range. Testing this expanded standard called Wi-Fi 6E will require new testers, which we expect will be a positive force in 2021 and beyond. Moving to industrial automation, the environment is mixed but improving. At UR, the biggest unit of our IE segment, sales in Q2 contracted 32% compared with the same period last year. Manufacturing shutdowns in Europe and North America had a significant impact on UR. MIR sales, on the other hand, grew 7% from last year's Q2 level as they benefited from exposure to healthcare and mobile disinfectant markets. AutoGuide, our newest IA business, saw sales more than double from the same 2Q period last year. Overall, IA sales for the first half were down 15% from 2019. We have seen positive indications of improvement as we move through second quarter. For example, all three businesses had sequential monthly sales growth across Q2 as customers began to reopen. While we expect IE demand will improve in the third quarter, we don't expect to return to year-on-year growth until Q4 or Q1. Our longer-term growth outlook for IE remains unchanged at 20% to 35%. Social distancing and the need for more resilient manufacturing flow should add additional drivers for our collaborative automation products. Our R&D and distribution investments in the IE business continue. as these macro-driven slowdowns provide opportunities to widen our competitive lead. We continue to add distributors in the second quarter, expanded our URplus stable of certified plug-and-play products to over 250 items. We also introduced URplus applications, moving to complete solutions for specific customer requirements like industrial bin picking and welding. Stepping back to look at the full year, At the company level, our latest estimates have revenue front half loaded at about 54% to 55%. This is similar to what we experienced in 2016 and 17 when we saw especially strong investments for smartphone test capacity. In summary, the first half of the year showed Teradyne strength in familiar test markets and demonstrated our ability to grow in new ones with differentiated products and exemplary execution. Our business model is efficient. and driving the plan drop-through on incremental sales. Our investments to broaden our competitive modes in IA amidst a global industrial downturn show the value of Teradyne's financial strength in these nascent industrial automation markets. While our short-term visibility remains limited, we are confident that our long-term strategy will continue to deliver outstanding results for our customers, employees, and investors. Now I'll turn things over to Sanjay for additional color and the financial details.