Teradyne, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 Teradyne earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Andy Blanchard, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Josh. 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 our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2020's third quarter, along with our outlook for the fourth quarter of 2020. 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. The 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 may involve risk factors that could cause paradigm results that 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 will make reference to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including the reconciliation to the most directly comparable GAAP financial measure, where 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 changes to the 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 Baird, Wolf Research, Credit Suisse, and UBS. Now let's get on with the rest of the agenda. First, Mark will comment on our recent results, current market conditions, trade regulations, and our future outlook. Sanjay will then offer more details on our quarterly results along with our guidance for the fourth quarter. We will then answer your questions, and this call is scheduled for one hour. Mark?

Thanks, Andy. Good morning, everyone, and thanks for joining us. My prepared remarks today will cover three topics. First, the highlights of our third quarter and first nine months of the year. Second, the impacts of the latest trade regulations on Teradyne. And third, I'll share with you how we're thinking about the test and automation markets as we close out 2020 and look into the next year and beyond. Our third quarter results were above guidance and reflect the continued strength of our test businesses. Additionally, our industrial automation businesses grew 17% from the Q2 trough, and we are now operating at 2019 quarterly levels as manufacturing activities in Europe and North America improve. At the company level, sales in Q3 were 41% above Q3 19, and non-GAAP EPS grew 53% from the year-ago level. Throughout 2020, we have seen increased short-term upside demand across our semi-test and markets. The impact of this is clear in both our above-guidance results in Q3 and in our Q4 guidance, which at the midpoint is substantially higher than we forecast in July. Throughout 2020, the semiconductor ecosystem has seen somewhat cautious initial forecasts, which were replaced with better-than-expected actual demand, and test has been no exception. We continue to run a manufacturing pipeline that allows us to respond to this upside. Stepping back and looking at our performance through the first nine months of the year, the results show the success of our new products and related design and efforts and the resilience of our employees, supply line partners, and operating model. Teradyne sales through nine months are up 44%, and our non-GAAP earnings per share are up 79%. Our test businesses collectively grew 52% year-to-date, while industrial automation revenue, on an as-reported basis, contracted 10%, reflecting the pandemic impact. In semi-tests, we estimate the SOC market will be about 3.3 billion, roughly flat with 2019's level, as automotive, industrial, and linear markets remain depressed. However, our SOC test business is up 53% year-to-date, due to strong investments in mobility test and the shipment of our new Ultraflex Plus platform, which is ramping significant design wins. The principal driver of mobility test demand continues to be increases in complexity of cell phone silicon. This is especially notable in 2020 when smartphone unit shipments are expected to decline about 10% to $1.2 billion, yet the collective test intensity of each unit continues to grow at a rate in excess of this unit decline. Within smartphones, the mid- to high-tier is the place to be in test, and that's where Teradyne is solidly positioned. These phones are seeing disproportionate growth in complexity related to multiple high-density camera arrays and the associated processing power and storage to manage this data. Another complexity driver is 5G, and these high-tier phones are early adopters of the extra silicon needed to enable these features. Less than 250 million phones are expected to be 5G enabled in 2020, and only a fraction of those will support millimeter wave communication. So despite the bump in 2020, we are still in the very early stages of 5G adoption. Memory test is another bright spot. The market is likely to be up about 50% from $600 million in 2019 to about $900 million in 2020. The shipment ramp of our Magnum Epic Products LPDDR5 win last year, combined with continuous strength and flash demand, has driven our year-to-date memory revenues up 70% from 2019. In system tests, revenues are up nearly 50% through nine months on growth in storage test and defense-related investments. Recall, storage test serves HDD and system-level test markets, and we expect sales to more than double in 2020 to over $200 million. And at Lightpoint, sales are up 18% year-to-date due to increasing adoption of advanced connectivity standards like Wi-Fi 6E and our growing share in 5G production tests. As noted earlier, in industrial automation, we saw a significant uptick in demand in Q3 with growth of 17% off the second quarter trough. UR grew 23% as demand in Europe, North America, and China showed steady gains. AutoGuide continues to win new accounts and we expect over 50% growth in 2020 on a pro forma basis. Regarding trade, as we noted last quarter, the China military end-user restrictions require increased compliance work and costs, but we do not expect any material impact on our sales into China. In the case of Huawei restrictions, the fleet of testers previously installed at OSATS to support their device test are already being reabsorbed into the market to test the alternative sources of silicon supply that's growing to fill in the gap created by these regulations at Huawei. For example, In the third quarter, we have seen an increase in upgrade orders at these OSATS customers to reconfigure installed testers to meet the unique needs of new customers. This upgrading and repurposing continues in fourth quarter. Shifting to the future. It's difficult to make the call on how 2021 will shape up, as it's been difficult to predict 2020 even on a quarterly basis. Customers will likely continue to forecast conservatively and respond close into demand. However, semiconductor complexity growth has proven itself resilient to COVID and is the fundamental driver of our test business. With that in mind, I'll comment on a few of the key indicators that we are watching. In SOC tests, we will be watching the smartphone market for complexity increases to support higher performance video and still photography, the adoption rate of 5G and millimeter wave, AI integration, and handset unit growth. We'll also be watching the automotive and analog markets for signs of a sustainable recovery and test demand. Longer term, the increase in edge AI devices should drive billions of additional complex chip units into the market by 2025, so early design wins in that area are key. In memory, the transition to higher performance DDR5 standards is just underway and should accelerate in 2021, along with newer high-speed UFS and NVMe flash interfaces. The roadmaps for both flash and DRAM show continued growth in interface speeds, which is another driver of test intensity beyond the traditional bit growth and should drive healthy memory test demand over the midterm. At Lightpoint, the continued growth of Wi-Fi 6, 6E, and ultra-wideband connectivity standards along with 5G, will be drivers for continued growth. A bit further out, we expect the next generation Wi-Fi 7 standard will require another refresh of the entire existing connectivity install base of testers. In system test, storage test is the interesting wild card. After torrid growth in 2020, the underlying demand drivers remain in place. In HDD, both increasing complexity and 30% percent plus annual exabyte growth, and in system-level tests, increasing device complexity and higher quality requirements are driving the additional test intensity. However, both are narrow markets and prone to swings in investment levels at individual customers. Our industrial automation businesses are well aligned to long-term economic and technical trends in manufacturing and material handling, so we are confident in their ability to return to high growth. The only question is how quickly the manufacturing economy returns to health. We continue to scale our distribution capability and invest in R&D to widen our leading position. Among other things, AutoGuide adoption by key logistics, e-commerce, retail, and automotive customers in 2021 will set the stage for multiple years of double-digit growth. Despite these comments, as I've noted in the past, We do not spend too much time trying to predict the various short-term demand drivers as they generally don't affect our investment plans. We do spend a lot of time trying to predict the underlying long-term growth drivers. We want to be positioned with the right products at the right customers at the right time. We believe the use of semiconductors across the global economy will continue to expand and chip complexity will grow along with that expansion. Similarly, in industrial automation, the cost performance of the sensor software and mechanical building blocks of advanced automation continues to improve, making our products economically attractive to an expanding universe of customers. We have built our strategy on these fundamental beliefs and built our operating model with the flexibility to deal efficiently with the inevitable ups and downs of economic cycles. So, while we can't predict what lies ahead in 2021, We finished 2020 on an optimistic note. Across the company, our employees delivered remarkable results under very difficult circumstances. Our new test and IA products are seeing strong market acceptance, and our R&D pipelines are well-stocked with future products to drive future growth. With that, I'll turn things over to Sanjay for the financial details.