Teradyne, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q4 and 2020 paradigm Inc earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question and answer session to ask a question during the session. You need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to Mr. Andy Blanchard, vice president of investor relations. Please go ahead, sir.

Thank you, Sharon. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined for our discussion this morning by Teradyne's CEO, Mark Jagala, and CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2020's fourth quarter and full year, along with our outlook for the first quarter of 2021. The press release content of our 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 discuss today will include forward-looking statements that involve risk factors that could cause Terra9'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 file. 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 our website. Looking ahead, between now and our next earnings call, Teradine will be participating in technology or industrial-focused investor conferences hosted by Goldman Sachs, Citi, and Susquehanna. Now let's get on with the rest of the agenda. First, Mark will comment on our recent results and the market conditions as we enter the new year. Sanjay will then offer more details on our results along with our guidance for the first quarter. We'll then answer your questions, and this call is scheduled for one hour.

Mark? Good morning, and thanks for joining us. In our call today, I'll summarize our Q4 and 2020 full-year highlights and provide some initial comments on our outlook for 2021. Sanjay will then provide the financial details, Q1 outlook, and review our updated earnings model and capital allocation plans. Fourth quarter capped off an amazing year for Teradyne, with sales up 16% from the fourth quarter of 2019 and non-GAAP earnings per share up 25%. That brought our full year sales to just over $3.1 billion, up 36%, and non-GAAP EPS to $4.62, up 62% versus 2019. These annual results, driven by strength in all of our test businesses, more than made up for a soft industrial automation market that was impacted by COVID. For the full year, our semi-test business was especially strong, driven by investments in smartphone-related test capacity, our expansion into the compute sector of SOC with our new Ultraflex Plus product, and the ramp of our Magnum Epic product for DRAM tests. In smartphones, Global unit shipments contracted in 2020, but the growth in chipset complexity continued, driving tester demand higher. Each subsystem on the phone, cellular, power management, connectivity, display, cameras, and application processing has its own cycle. And in 2020, both the processor and the cellular areas took big steps up in complexity. We use transistor count as a proxy for complexity, and the leading phone applications processors now exceed 10 billion transistors, growing double digits each generation. In 2020, we also saw the beginning of meaningful 5G silicon content, which necessitated a build out of new tester capacity. Together, these lifted the mobility test market in 2020 roughly $200 million to about 1.7 billion. This continuous refresh of smartphone silicon should be a tailwind for the semiconductor test business for the foreseeable future. In 2020, we also ramped our Ultraflex Plus product in the compute portion of the SOC market. Recall, this has historically been a $500 to $600 million market where we've had relatively low share. With the emergence of more players and applications in the processor market, including hyperscalers and AI, we expect this sector to outgrow the general market. The Plus brings a powerful value proposition in managing the unique complexity, power dynamics, yield learning, and time-to-market requirements of this segment. For 2020, we estimate the SOC market was in the range of $3.4 to $3.5 billion, up from about $3.3 billion in 2019. We estimate our SOC test market share moved up 15 points to about 54%. However, our internal view of share smooths out year-on-year swings due to the unique timing of investment cycles of both our and our competitors' customers. By that measure, we estimate our normalized 2020 SOC share at about 50%. Another notable growth segment of our semi-test business in 2020 was memory. In this call a year ago, we noted a significant design win for our Magnum Epic product in the LPDDR5 portion of the DRAM market. This new entry into DRAM test ramped through the year and, combined with healthy growth in our traditional NAND business, drove a 41% increase in memory sales from 2019. We estimate the market was about $900 million in 2020, up from $600 million in 2019, and our normalized 2020 memory share at about 42%. Beyond Semitest, Our system test group also had a great year, delivering 43% growth, with the storage test business more than doubling from 2019. This is the second consecutive year of hypergrowth in storage tests, driven by steady test intensity growth of terabyte HDD drives and similar growth in the system-level test of complex semiconductor devices. In our wireless test business at Lightpoint, sales grew 10% from 2019 with solid demand for both our connectivity and cellular end markets. Wi-Fi 6, ultra-wideband tests, and increased investments in 5G-related handset tests all contributed. The performance of our test businesses more than offset the weaker results in our industrial automation business, which contracted 6% for the year. The global slowdown in manufacturing activity led to a 12% decline in sales at our universal robots unit. MIR, on the other hand, grew 1% as makers of ultraviolet disinfecting products recognized the value of an easier-to-deploy, fully autonomous mobile robot. On a pro forma basis, AutoGuide also grew for the year. While the environment in IA was weaker than expected, the business troughed in the second quarter of 2020, and has improved dramatically in the second half, including record sales at UR in the fourth quarter. Collectively, the businesses returned to year-over-year growth in Q4, with UR growing 6% year-over-year and 41% sequential growth. With tests showing continued strength and industrial automation returning to growth, we are set up for another exciting year in 2021. Specifically, We are expecting a strong start to the year across all our businesses, with Q1 showing greater than 6% growth at the midpoint compared to Q1 of 20. As you know, full-year visibility is always a challenge, as evidenced by our missing the strength of the test market and the decline of the IE market in our forecast just one year ago. That said, let me describe how we see things today, and of course, we'll keep you updated in future calls. I will preface my remarks with a note that the well-publicized surge in the forecasted semiconductor capex in 2021 is a very bullish sign. However, the impact on test is likely to be felt in 2022 and beyond, as FAB capacity built this year will drive additional testers in future years aligned to FAB commissioning and ramping volumes and yields. In SOC test, the dynamics that made 2020 such a strong year continue into 2021. In addition, we have strengthening demand in the long-dormant automotive test market with orders for our Eagle test product line surging. Smartphone shipments are expected to grow in 2021 after contracting about 10% in 2020, and 5G content should increase. On the other hand, the SOC test market in China will likely be down in 2021 due to the expanded and full-year effects of trade restrictions that were widened in 2020. Also, as always, tester demand from our largest customer will remain opaque until sometime in Q2. Additionally, the global economic impact of COVID and its impact on electronics demand after a surge in 2020 is hard to forecast, with arguments for both positive and negative effects. Taking all of that into account, we have a bit wider range in our SOC market size estimate for 2021 at $3.3 to $3.8 billion, up slightly from 2020 at the midpoint. In memory tests, the transition to LPDDR5 and DDR5 should gain momentum in 2021 and beyond. After growing about 50% in 2020, we view the memory market to be in the $800 to $1 billion range in 2021, about even with 2020 at the midpoint. In storage tests, the underlying demand drivers of increased density and HDD and increased complexity in semidevices driving system-level tests remain in place. However, Visibility is limited, and annual shipments can be very lumpy. After more than tripling over the last three years, we expect 2021 sales to be in a band of plus or minus 20% from the 2020 level. For the rest of our test businesses, we expect growth in the 5% to 10% range in 2021. In industrial automation, 2021 is starting off on a strong footing. Barring any additional COVID-related manufacturing sector shutdowns, we expect to deliver the highest ever first quarter sales in each of our automation businesses, and we are well positioned to grow in excess of 30% for the year. 2020's results reflect well on Teradyne's strategy, execution, and efficiency. Our test businesses show the successful results of R&D bets made in years past and enable us to increase those bets for the future. Our industrial automation investments continue undeterred by short-term impacts of COVID, and we are well positioned to capitalize on a world emerging to invest even more in automation to improve resilience and productivity. Equally significant, 2020 showed the resilience of Teradyne employees, our global suppliers, and our operating model. In the face of unimaginable challenges across communities worldwide, the team dealt with health, safety, and operation obstacles daily, met R&D milestones, executed steep new product ramps, and delivered record shipments of SOC, memory, and storage text products to meet our customers' needs. We did all this while exercising the cost and schedule discipline expected at Teradyne. This is truly extraordinary, and I am very grateful to be part of such a powerful team. As we move into 2021, the outlook appears bright across all our markets. As Sanjay will detail, We are returning to our share repurchase program and have an active M&A pipeline. As 2020 taught us, no matter what comes our way in the short term, I am confident our global team and market strategy will deliver exciting long-term returns for our customers, investors, and employees. Sanjay will now take you through the financial and modeling details. Sanjay?