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spk01: Good morning, ladies and gentlemen, and welcome to the Q2 2021 Teradyne 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 touchtone telephone. As a reminder, this conference call is not... This conference call will resume. I would now like to turn the conference over to your host, Mr. Andy Blanchard.
spk09: Thank you, Phyllis. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Giglio, and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2021's second quarter, along with our outlook for the third quarter of 2021. The press release containing our second quarter results was issued last week. We're providing guides 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 statements that involve risk factors that could cause teradata 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 those non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures, where available on the integrity of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by KeyBank, Rosenblatt Securities, Deutsche Bank, and Citi. Now let's get on with the agenda. First, Mark will comment on our recent results and the market conditions as we enter the new quarter. 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?
spk13: Good morning, everyone, and thanks for joining us. Today, I'll summarize our results for the second quarter and first half of 2021, update on current conditions in both test and industrial automation, and comment on our view for the second half of the year. Sanjay will then provide the financial details on the quarter and our guidance for Q3. The strong demand we saw in Q1 accelerated in Q2 as both our test and industrial automation groups grew substantially in the quarter. The long-term demand drivers we've discussed in the past continue to power demand for our products. In test, it's device complexity and unit growth. In automation, it's labor scarcity, need for resiliency, and productivity improvement. Opening up further. Performance at the company level from 2016 through 2020 saw our sales and non-GAAP EPS grow at a compounded rate of 16% and 32% respectively. For the first half of this year, sales are running ahead of that rate at 21%, and non-GAAP earnings per share grew at 29% compared with last year. This demonstrates both the vitality of the markets we serve and the efficiency of our operating model. Significantly, in Q2, we saw industrial automation demand recover in all major regions, with particular in North America. As a result, our production and operations operated at a high pace in Q2, and that pace is increasing in Q3. For the year, our IE business is on track to grow about 30% from 2019 and about 40% from 2020. Mostly at the segment level, in semi-tests, SOC shipments grew 29% in Q2 from Q2 of 2020, with particular strength in both the compute and mobility end markets. For the first half, SOC sales grew 19%. For the first time in several years, smartphone unit shipments are helping growth in the mobility segment, whereas recent years have mostly relied on complexity growth. Mobility and compute are the two largest subsegments in SOC. Automotive, analog, and industrial demand continues to be strong. The auto-related semi-test market is expected to exceed $500 million this year, the highest level since 2017. This is despite the fact that automobile unit production will be about lower than 2017. A portion of this strength is catching up. We're also seeing the impact of increased semi-content and complexity per automobile driving the test market. Our memory test shipments also grew in Q2 from Q2 of 2020, up 9%, led by flash tester demand. For the six-month period, overall shipments were up 18% from last year on solid demand for both flash wafer and systems. This reflects significant growth in smartphone demand, the build-out of new memory capacity in China, and the growth of SSD demand. Looking at the full year, we are again revising up the SOC market for 2021 to now be in the range of $4.3 to $4.7 billion, with increasing strength in the x86 GPU and display driver segments. Recall that we have lower customer exposure in those markets, with much of this incremental growth going to our competitors, so we'll likely see our SOC share around 48% for the year. In memory, at the macro level, our market estimates are unchanged, with the test market this year expected to be about $1 billion and our share to be at about the 40% level. I will note that the expected ramp of DDR5 for server applications and the broader adoption of LPDDR5 is pushing out into 2022. Shifting to our system test group, Sales were up 26% in the first half compared with 2020, with strong storage test demand and a recovery in our production board test unit driving the growth. For the full year, we see the system test group grow in the 10% to 20% range. At Lightpoint, sales in Q2 were up 12% over 2Q 2020. While 5G millimeter wave demand is lower than expected, the environment and wireless test is improving. as we move through the year due to the continued Wi-Fi 6 growth and early Wi-Fi 7 investments. In addition, ultra-wideband adoption is increasing, adding a new growth vector for Lightpoint. For the full year, Lightpoint will likely grow in the 10% range. Moving on to industrial automation, the combination of expanding demand across our major markets and the increase in the range of tasks served by our universal robots and mirror units drove group sales up 57% in Q2 last year and 45% in the first half. Compared to pre-pandemic 2019, first-half sales are up 22%. Supply chain issues have constrained growth a little bit with lead times pushing out about one week. The demand environment for IA has recovered in most regions from last year's slowdown. America was the fastest-growing major region in Q2, with sales up over 90% from last year. Although we did see a slow in some countries in Asia where COVID has spiked in recent months, the second half of the year outlook is quite strong in all our major regions. Our long-term growth strategy in IA continues unchanged, and we expect long-term annual growth in the 20% to 35% range. This year, we will likely see growth of about 40% from 2020, And we will continue to invest to enable this growth, target 5% gross margins, and get a 5% to 15% operating margin during these high growth years. From an investment perspective, we are expanding our engineering programs to shorten employment times, increase the served market, and improve the customer support experience. We are also growing our capacity to support support distributors, integrators, and UR Plus and Mirgo apps development partners as they engage customers. We are also expanding our sales to OEMs that integrate our robots into their products. Last quarter, we noted the expanding range of applications for UR robots and a high-voltage line application with hundreds of being deployed. Today, I'd like to highlight the success of UR Plus plug-and-play applications for industrials There is a long-standing and chronic shortage of qualified welders worldwide with an estimated 100,000 unfilled welding jobs in the U.S. alone. While automated solutions exist for large applications like auto manufacturing, customers with lower volume and higher mix products are not well served by traditional automation. The integration of a force torque sensor into E-series cobots enabled the precision needed for this application and With UR Plus interviewing with our partners, we began serving this market about three years ago. During this time, welding applications have grown to be about 6% of our global sales and are on track to house 1,000 co-bots sold in 2021, more than tripling our 2020 pace. As we continue to extend the performance of our UR platform, we expect these high-end applications to add new growth vectors to our traditional industrial applications. We have similar market expanding initiatives in play on our , but I'll save those details for a future call. Summing it all up, the first half of the year has been a strong sales, strong gross margins, and earnings growth. Longer term, the markets we serve are shown future global economy. The importance, pervasiveness, and enabling capability of electronics in every part of our lives and industry is driving more FAB investment, more complexity, and more test. Likewise, the broadening application and fast RR lab of robots in a world with labor shortages and productivity challenges is another growth trend. Strategically, we've positioned ourselves in line with and plan to continue to make the test and IA as our full potential while driving world-class. While the rate of change in our markets is accelerating, We are well-positioned to thrive as a company and to bring additional value to customers and shareholders. I'll now turn things over to Sandy.
spk12: Thank you, Mark. Good morning, everyone. Today I'll talk about sales and our Q2 results, comment on current business conditions, and describe our Q3. Now to Q2. Second quarter sales were $1,086,000,000 with non-GAAP EPS of $1.91. up 29% and 44%, respectively, from Q2 of 2020. Non-GAAP gross margins were 59.6%, and our non-GAAP operating expenses were $250 million, but $5 million below the high guidance due to the timing of some non-recurring engineering expenses. Non-GAAP operating profit rate was 36.5%. Gross margin in the quarter was 59.6%, compared with our plan of 58%. The increase was tied to favorable product mix in the quarter versus plain. For context, the Q2 2020 gross margin was approximately 6%, and April 2020 earnings noted that this level of gross margin would continue in the near term, driven by the introduction of several key test systems in early 2020, which would take several quarters to come down the cost curve. These new product introductions, coupled with heightened costs driven by COVID shortages, were impacting our gross margins in 2020. One year later, we have now most of these test solutions at volume, and they have come down the cost curve as expected. The result contributed to higher margins in the second quarter, which we expect will continue in the second half of the year. Another component of gross margin improvement over 2020 is higher revenue yielding leverage in the gross margin line. We had one 10% customer in the quarter, excluding discrete items for 14.5% on both GAAP and non-GAAP basis. Looking at the results from a business unit perspective, revenue of $834 million was up 27% from Q2 2020. SOC revenue was $742 million, up 29%, driven by strength in compute, mobility, industrial, and automotive. Memory revenue was $92 million, up 9% from prior year, driven by strength in flash test and flash wafer sort segments. System test group had revenue of $105 million, which was up 46% year over year. This is driven by $58 million in storage test sales, including both AT&T and SLT solutions. $47 million in defense and aerospace and production board tests. In storage tests, HDD and SLT demand remains robust as drive densities continue to increase and the number of devices adopting SLT shows. At Lightpoint, revenue of $55 million was up 12% from prior year due to continued strength of supply, increases in 4G and ultra-wideband test market segments. Now to industrial automation. As we did in April, I'll provide revenue metrics comparing Q2-21 results with both Q2 20 and Q2 19, so you'll have the full context given the impact of a contracting market tied to COVID last year. Industrial revenue of $92 million was up 57% year-over-year and 23% over Q2 19. Revenue expanded in all regions in Q2 last year, with North America delivering the highest absolute revenue growth. U.S. represented about 77% of IA revenue in the quarter, with China contributing about 14%. UR sales were $76 million in Q2, up 75% year-over-year and 80% over 2019. MIR sales were $16 million, up 41% from Q2-20 and 51% from Q2-19. Recall, MIR had an unusual year on Q2-20, as its robots were widely deployed in automated COVID disinfectant applications. The longer-term outlook in our IA business continues to brighten. We expect continued labor shortages to drive new applications for both our fixed and mobile robots. Mark highlighted the shortage of welders and how that has opened up a new market for our UR co-bots, but that is just one of many job categories with acute short-term and long-term labor shortages. Our strategy is to provide an open platform that creative developers leverage to solve industry-specific labor shortages. The numerous ultraviolet solutions built on our platform last year is a shining example of the agility of our partner networks to solve problems. We're investing in engineering support and marketing resources to make our platforms even easier to build upon which will enable the continued proliferation of high-value automated solutions to solve challenging problems for an expanding range of customers. Significantly, these development partners and customers provide great feedback on the development plans. From a financial perspective, we expect IEA will operate around the low end of our target profit range of 5% and 15%. We do expect IEA to operate above the rule of 40 in 2021. That is, the sum of operating profit and revenue growth over 40. Longer term, when growth moderates, we expect the IA group to have a similar operating profit rate as our test portfolio. Shifting to supply. We continue to manage through numerous supply constraints along with increased material, manufacturing, and logistics costs in both our test and IA businesses. For some products in both test and IA, the supply constraints have extended our and we're working closely with customers to minimize the impact of these delays. We've been able to offset these higher costs through operating leverage with higher volumes and other cost-saving measures, so the cost increase impact on the P&L has not been material. We do expect to be dealing with supply line-related issues in Q3 and Q4 this year, which are reflected in our forecasts. Shifting to the balance sheet and cash flow. Our cash and marketable securities at the end of the quarter totaled $1.42 billion, $172 million in flow in the quarter, $151 million, and $17 million on buybacks and dividends, respectively. Year-to-date, we've repurchased 1.6 million shares for $197 million at an average of $125.69 per share. Regarding our convertible debt, $15.6 million was paid in Q2 to convertible bondholders ahead of maturity. By the end of August 2020, bondholders will have early converted a total of $302 million, leaving a face value of $58 million outstanding. Looking at our operating model, I'd like to make three quick points. First, our performance over time. From 10 years ago, our gross margin percent has expanded from the low to mid to nearly 60%, and our operating margin from the teens to low 20s to greater than 30% today. Second, our flexible business model shifts fixed costs to variable costs where appropriate through outsourced manufacturing, variable compensation, and others, which enables resiliency on the downside and is creative when business is strong. Third, the operating leverage in the model is evident in our Q2 results. Our test businesses are dropping through over 50 cents per revenue dollar through to the profit line in 2021. Thank you.
spk09: Ladies and gentlemen, we're going to have a quick transition.
spk12: I'll go back, I'll go back, I'll go back, I'll go back. Okay, it's Andrew again. I'll go back to looking at our operating model. I'd like to make three quick points. First, our performance over time from 10 years ago, our gross margin percent has expanded from low to mid 50s to nearly 60% today, and our operating margin from the teens to low 20s to greater than 30% today. Second, Our flexible business model shifts fixed costs to variable costs where appropriate through contract, through contract or outsourced manufacturing, variable compensation, and other means which enables resiliency on the downside and is accretive when business is strong. Third, the operating leverage in the model is evident in our Q2 results. Our test businesses are dropping through over 50 cents per revenue dollar through to the profit line in 2021. even while we continue to increase our R&D support and support investments to strengthen our test business. This enables Teradyne to continue to invest in both our test and IA portfolios. For IA, we are building a deeper product, ecosystem, and distribution differentiation while achieving the Rule of 40 in our IA portfolio. Now to our outlook for Q3. As Mark noted, the demand environment across the business remains strong. Our guidance assumes no significant changes, positive or negative, in the availability of materials and also assumes that we won't see additional pandemic-related issues. With that said, sales in Q3 are expected to be between $880 and $960 million, with non-GAAP EPS in the range of $1.29 to $1.55 and 176 million diluted shares. Third quarter guidance excludes the amortization of acquired intangibles and non-cash imputed interest on convertible debt. Third quarter gross margins are estimated to be between 59 and 60%. OpEx is expected to run at 27 to 29% of third quarter sales. The non-GAAP operating profit at the midpoint of our third quarter guidance is 32%. Regarding OpEx for the full year, while we spent a bit lower and plan in Q2. We expect the full-year OPEX will be about in line with the plan we described in April. We expect total operating expenses for 2021 to be about $1 billion, or up approximately 19% from 2020. We recognize that we're on track to meet our 2024 earnings model this year. We'll update the model on our regular cadence in January after our detailed midterm planning is complete in Q4 this year. In summary, our businesses are performing extremely well, delivering strong revenue and earnings growth while funding the investments that will drive future success. Our first half sales grew 21% and non-GAAP EPS grew 29% above the first half of 2020, which itself was a record. We expect to deliver the highest Q3 sales and profits in history. Our employees and production partners around the world have delivered a record number of systems under challenging conditions. Our support teams have done whatever was needed to make our customers successful, and our engineering teams have kept the new product pipeline moving on schedule. It's been an impressive display of teamwork, and I'm proud to be part of this powerful Teradyne team. With that, I'll turn things back to Andrew.
spk09: Thanks, Sanjay. And everybody, thanks for dealing with our small technical issue there. Phyllis, we'd now like to take some questions. And as a reminder, please limit yourself to one question and a follow-up.
spk01: Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Ryan Chin with Stifel.
spk02: Hi there. Good morning. Thanks for letting us ask a couple questions here. Maybe just to kick things off, I'm just curious, to what degree, if any, are the extended lead times in ATE in this sort of the current strong semiconductor environment impacting your shipment outlook today? or pattern in second half. Obviously, Tara and I no longer disclose bookings, but your competitor appears to be building backlog into the December quarter. So I was wondering if you have better than typical backlog visibility beyond September.
spk12: Yeah, so lead times have definitely been moving out. I'd say auto and industrial demand is still stripping supply. um but but our lead times uh have pushed out obviously based on the very very tight uh supply chain environment we're dealing with and so what used to be let's say within a quarter has pushed out to um you know five uh eight weeks incremental to uh where we were in the past to be in some cases um in the 20s in weeks of lead time so so with that um we have been seeing um I guess, improved bookings from our customers, and we're working with them to manage through it.
spk02: Got it. Thanks, Sanjay. And then maybe for Mark, I think you touched on how, at least in the smartphone market, units are kind of a bigger tailwind this year, which hasn't always been the case in recent years. But I think in the 2022, what do you think, to what degree could increase packaging complexity across foundries and maybe some IDMs be a more meaningful driver of incremental test intensity next year?
spk13: Yeah, that's a good question. We bundle that into the complexity side of life, and there's already been advanced packaging technologies deployed for several years now in phones, but it's increasing. So that trend of multi-chip, multi-die packaging incrementally adds test time above and beyond what you would get if you were putting all of that silicon on a single integrated die. And there's not a good rule of thumb of how much of an adder it is, but it is a trend that's going to continue to grow and drive tests.
spk02: Okay, great. Appreciate the comment. Thanks.
spk01: Your next question comes from the line of Atif Malik with Citi.
spk05: Hi, thank you for taking my questions. I have a similar question on the mobility side, Mark. It sounds like your mobility outlook has improved for the year versus 90 days ago despite millimeter wave weakness. You talked about units helping. Can you talk about the confidence in test intensity staying elevated for both mobility and compute into next year? And if you can also highlight the steps you're taking to improve your market share in the areas that you're not strong, like x86, GPU, and display drivers.
spk13: Yeah, so, you know, I think the complexity trends looking even into, you know, next year are all very strong and positive. In the case of mobility, The newer lithographies that are coming online are being widely adopted by the manufacturers of silicon for phones, which portends more transistors, which portends more test time. So that, looking into next year, all looks positive. And we get, at this point in the year, early glimpses of what the silicon for next year might actually look like. On the compute side, similarly, we not only have the trend of lower lithography nodes, but The new interface standards related to LPDDR5 and DDR5, as I mentioned in my remarks, the early adoption of that has been pushed out a little bit as the processors that go with it have been delayed a bit. But all of the complexity required to run at those higher bandwidths is coming in 2022. So those are two positive things I look at that gives me confidence that this driver of complexity growth is definitely going to be strong next year. In terms of share, you know, what we said before is that penetrating the traditional x86 GPU stalwarts is going to be a long-term endeavor for us that's going to hinge on some kind of technological discontinuity like the shift to DDR5 or like a shift to PAM4 interfaces to crack into them. So that one is episodic and will play out over, let's say, three to five years. On the other front are the emerging hyperscalers and new people coming into the market of creating complex silicon. These are automobile manufacturers, hyperscalers that we've talked about in the past, the Googles, the Facebooks, the Microsofts, the Amazons. That's where we're focused on getting a position to grow with them as they launch their products into the market in the shorter term.
spk05: Great, very helpful. And Sanjay, for you, the largest US phone maker and your biggest indirect customer talked about supply constraints impacting smartphone sales in the September quarter yesterday. Have the materials and parts tightness gotten worse over the last 90 days for your business?
spk12: Well, first of all, I won't comment on any particular customer, but I will speak in general about the environment. Last year, we were really working through demand increases, but we had fairly good, robust inventory strategies, and we were working through the impact of COVID. You have thousands of components that go into these testers, and we did a lot of resiliency improvements there. You fast forward to today's environment, and the demand has really kept accelerating. And the environment is tighter, I would say, today. And frankly, we don't see it letting up until the second half of 2022. So I think as the semiconductor industry goes through continued growth, you're seeing supply chains really getting tested. And then with the increase in the infection rates of COVID, especially I'd say in Southeast Asia, You know, we're working through and managing the best we can, but I believe the net summation is it's a tighter industry now than it was, say, three, six months ago.
spk05: Thanks.
spk01: Your next question comes from the line of Mehdi Hassani with SIG.
spk04: Yes, thanks for taking my question. two questions. One on an ARM-based ASIC design. I'm trying to get a sense of how you see the TAM. You can either elaborate as a mix of SOC tests, or perhaps you can tell us how is the test time for an ARM-based ASIC chip compared to like an app processor. Maybe that way we could get a sense of what the demand looks like. So either qualitatively or quantitatively, If you can elaborate on an ARM-based SoC test, it would be great, and I'll have a follow-up.
spk13: Yes, I guess the first thing I'd say is that an ARM-based high-end map processor, which is what's in most of our phones today, driving most of our phones, has a transistor count that's equivalent to any laptop x86 kind of product you might have in your computer. And the test times comparatively between those twos are not that different. You know, it's kind of proportional to test count. Now, the new ARM processors that are coming to market for compute applications, not smartphone applications, have perhaps anywhere from a 25% to 60% add-on transistor count above what's at the highest end of smartphones. And the test time associated with them, I would say, is proportionately longer at this point. And so I think it's, generally speaking, scaling with transistor count and the transistor count on the ARM side is running a little bit at a faster clip than it is on the more traditional architecture side, if that helps. Sure.
spk04: So the follow-up has to do with ARM-based. Actually, I want to just dig in a little bit more. Would you at some point break this out so we could better understand how kind of the ARM-based SoC tester is tracking or scaling versus the rest of the SoC market? And number two, is there anything you can give us to better understand the competitive landscape for these specific applications?
spk13: Yeah, I guess I haven't thought about trying to find a way to break out ARM, you know, because most of what mobility is is ARM. And then there's, let's say, compute applications for ARM. And then there's some processors that are almost dual use and they go into either application. So, you know, I think it's fair to say that any compute business that we have at Teradyne is ARM-based compute. And perhaps many in the future we can look at some way to sort of characterize both the market and our associated revenue for that. But I don't have a good number for you now on that. And in terms of the applications coming to market, in the short term, we know about the phone applications. We know about some early adopters of ARM for compute. Those are all coming to market or are in the market now. The hyperscalers that we're working with are coming into market at various points next year with products that are quite interesting but highly speculative as to whether they'll latch in the market. And obviously, I'm not going to talk about those because they're pretty confidential. But we'll see what latches. You know, if one of these applications can become a hundred plus million unit application, which most of these design teams are targeting, then that's a significant advantage. adder to the market.
spk04: Great. Thanks for the detail.
spk01: Your next question comes from the line of Vivek Gureya with Bank of America.
spk00: Thank you for taking my question. I was curious, how's your kind of visibility for Q4 as you kind of stand today versus what it is usually And if you could give us some color by end market in terms of what is in your assumption for Q3 and the second half, that would be very helpful.
spk12: Sure. So Q4, you know, if I look back at my last two years here, you know, we've been surprised mainly on the positive side. And I'd say that given the tightness of supply and customers providing a little bit more in the way of backlog, it gives us a little bit more insight. However, obviously in the near term, we have much stronger visibility in Q3 than in Q4. And so, but we do have, I'd say, a little bit of incremental visibility. In color, In your question in regards to color for Q3, we see continued strength in semiconductor. Obviously, the different components within Semitest are going to be a little volatile, but we do see a trend down. It still, we believe, is very strong demand, but we see a trend down. And we see in our IA portfolio really a strength. Obviously, with the COVID impact in 2020, industrials are really coming back. I'll cite some PMIs in the 60s in the U.S. and Europe. And we really see that in our, as Mark noted, in our growth in the U.S. But we're seeing that growth in China as well as in Europe and the U.S., So continued expected growth in IEA, and then from a test perspective, coming down a bit.
spk00: Got it. And then on the UR side, Mark, I'm curious, what are the top three applications you're serving today, and how do you expect these applications to evolve? You are maintaining a very strong growth rate in that business, and I'm curious, what is driving that? Is it more number of customers? Is it more applications within the same customer? So what's giving you the confidence you can maintain this very strong growth rate in the UR business? And on the gross margin side, is it accretive? I know on the operating margin side, you know, you've given a range, but I imagine on the gross margin side, it might be accretive to your business.
spk13: Yeah, you know, it's interesting because there's no, silver bullet as to what's driving the growth that you are. So for example, we're going to be up about 30% from revenue in 2019, 40% up from 2020. And in the script, I mentioned this application for welding, which is a brand new application that is now driving about 6% of our sales for the year. Last quarter, I talked about this service application for servicing high voltage power lines that's also running at around that 6% of sales applications that was non-existent, essentially non-existent two years ago. So already we have 12% of our growth attributed to new applications in new markets with new customers that we didn't have two years ago. So it's a combination of expanding applications like those two examples, as well as established markets growing that's driving this. And our top three applications tend to be the same. It's automotive supply chain, it's industrial machine tending, and it's electronic assembly tend to be the ones that are at the top of the pack. But frankly, they are shrinking as a percentage of sales as these new applications come online. So what gives me confidence looking forward is That ecosystem of partners who are developing these application solutions on our platform, not our competitors, is just continuing to grow and prosper. And they're not all going to be as successful as high-voltage line tending or welding, but it only takes 10% of them to fuel the kind of growth numbers that we've been seeing. And the activity there is very strong, and the technology is maturing to the point that more and more applications can economically be served. And over the horizon, when you look at what AI can bring, there's a whole new set of, let's say, features that will enable yet another expansion of the market. It's what gives us the confidence to talk about these kind of decade-long growth rates of 25%, 30%, 35%. Thank you.
spk01: Your next question comes from the line of John Pitzer with Credit Suisse.
spk10: Yeah, good morning, guys. Thanks for letting me ask the question. Mark, maybe another way to ask the calendar fourth quarter question is, you know, over the last three years, the business has run in such a way that the second half has been greater than the first half from a top line perspective, which has broken kind of a trend where if you go back, you know, the prior seven years, it was first half stronger than second half. Did you have any commentary on sort of how you think the second half over the first half will look this year, just given how strong the market environment is and how tight test capacity is?
spk13: You're right. Perfect student of the history. And we have been, as Sanjay said, always a bit surprised in the recent years on how strong the fourth quarter has come in. And driven second half to be a bit higher than first. So if you asked us today, uh, we'd say first half is a little bit stronger than second, but that's no different than kind of what we thought for the last couple of years too. And that just is a testament to the visibility in Q4 as you know, the lack of visibility in Q4 essentially said though, you know, it's a little bit more visibility now than before because lead times are a little longer. but all the upside that could come in is obviously the piece that's not visible. So we feel probably better now about Q4 than we felt in any prior two or three years. But it's sort of what might happen between now and October that's invisible.
spk10: That's helpful. And then, Marcus, my follow-on, I apologize. The audio quality was a little poor during your prepared comments. I wanted to go back to some of the commentary you made around DDR5 adoption and I think the point you were making is perhaps it's a little bit slower than you thought. Is that correct? And I guess more importantly, can you give us an update of how you think you're positioned for DDR5 when it does start to ramp relative to share in memory test?
spk13: Yes. Sorry about the audio quality, but in fact, yes, DDR5 for server applications has pushed out a bit as the server chips themselves have been delayed. We've seen the impact of that in the demand for DDR5 testers. And similar things happened with LPDDR5 going into mobility applications. So despite all that, despite all that, the share position for Teradyne, we think, is unchanged from our early estimates at around 40% of the market, and it's going to be a tailwind next year when the DDR5 and LPDDR5 ramp as was originally thought would happen toward the end of this year. So we're well positioned there, and, you know, I think that's a tailwind for us next year.
spk10: Perfect. Thanks, guys.
spk01: Your next question comes from the line of C.J. Muse with Evercore.
spk08: Yeah, good morning. Thank you for taking the question. I guess first question, Mark, you've taken SOC test – market size higher again. And I guess curious, if we were to hit the high end of the range, you know, what would be the driver there? And would your market share still be 48% or could you see greater contribution from what's driving potentially the market to the higher end of the range?
spk13: Yeah, certainly if the market goes up toward the high end of that range, Our revenue would grow probably proportional to that. Would our share go much higher? I threw out a number of roughly 48% at the midpoint of our market size guide. I would expect our market share is probably going to stay around that number, plus or minus, you know, a half a point at this point in the year. But, you know, it's hard to sort of prognosticate too much about where The share comes from, as you know, one customer's buying capacity can swing multiple points of share in any given year. And so, you know, one of our customers could come in and drive a demand that we don't see right now. We have the manufacturing capacity to serve it. And, yeah, I guess we could be up at 50% share if that happened. It's just a little opaque at the moment.
spk08: Okay, that's helpful. And I guess a follow-on question to a few of the questions that you got earlier. You spoke to DDR5 now being pushed to a tailwind next year. You've spoken to high-performance compute, particularly the non-X86 world, as a tailwind for you guys next year. I think the concern out there is that your one large customer could decline meaningfully, and that would cause SOC for you guys to be down next year. So I guess As you sit here today and you're setting up, you know, your supply for customers and lead times have extended, how are you thinking about the world into 2022 for SOC, for Teradyne?
spk13: Very bullish because, you know, I think the concern, let's see, I'm not going to speak too specifically around a customer, but what I would say is that the portfolio of devices that are being developed by customers our hyperscaler customers continues to expand. And that's going to, in addition to the complexity growth of the existing portfolio, you add more chips on top of that, it portends a growing market, a growing customer. So, you know, there's going to be ups and downs, but I think the cataclysmic or sort of the cliff concerns We're now a decade into this almost, and it just hasn't happened. So the trend line, I think, is pretty clear, and I think that trend line will continue. Great. Thank you.
spk01: Our next question comes from the line of Toshia Hari with Goldman Sachs.
spk11: Hi. Good morning. Thanks so much for taking the question. I had two as well. Mark, I guess somewhat related to – CJ's question. Just curious in terms of the auto SOC test market, I think in your prepared remarks, you mentioned that you expect the market to exceed $500 million this year and how that's the highest mark since 2017. How are you thinking about sustainability there into 2022? Your term demand is clearly very strong and when we speak with your customers, they're all kind of complaining about extending lead time. So I guess the bias is to the upside, but curious how you're thinking about that market. And then as a follow-up, a question on storage tests. It seems like both HDD and SLT are trending very nicely. I think the business was up more than 2x last year in 2020. Curious what you're thinking about the business full year 2021, if you can differentiate between SLT and HDD, that would be super helpful. Thank you.
spk12: Hi, it's Andrew here, so I'll take a cut at them. So from an auto market perspective, it's true, this year we've seen tremendous growth and just about 500 million or plus or minus a bit from a market size. And yeah, as far as we've seen even back to 2017. And fundamentally, I think in the last call, there was commentary around You know, the auto industry for years has lived on a just-in-time, you know, manufacturing. And fundamentally, you know, in back half of 2019, sales weren't so high. And coming into 20, obviously, demand had really picked up. And so you're seeing just a significant replenishment of inventory back into the system. And we're seeing that continue. We see, obviously, the lead times, and currently the demand is outstripping our supply. And we see that with good visibility until the end of 2021. 2022 will be interesting because, you know, we'll have to take a look at what are the inventory levels and what is the market demand in 2022 in the first half. And so, you know, it's a little bit opaque. I'd say in 2022, but it'll depend on what I believe to be the inventory level and obviously the end market demand. And from a storage perspective, you know, a little bit of color around 2020 and 2021. You know, if I go back to 2020, HDD and our SLT business was kind of split relatively even. One was a little bigger than the other. And from an HDD perspective, we've seen continued end market demand fueling that business. But when we look into 2021 from an SLT perspective, we're seeing a broadening of devices being adopted for SLT testing, which is providing a tailwind, which is enabling a larger growth in that segment of the storage business this year relative to the HDD business. So the HDD business is still very strong and market demand very strong, but the broadening of the ASICs being tested under SLT is increasing, which is really good news. So it's going a little faster than the HDD shipments from a storage perspective.
spk11: Thank you for the call.
spk01: Your next question comes from the line of Timothy Arcuri with UBS.
spk14: Thanks a lot. I had a question about your commentary, Mark, about your SOC share for the year and sort of what it implies for SOC in Q4 and more broadly what it implies for total company revenue in Q4. So you've sort of given us all the different pieces. You guided wireless for the year. You guided systems for the year. and you gave us the pieces on the, you know, test businesses. So if I just look at what that implies for SSC and Q4, I mean, you know, you're going to do about 575, you know, roughly for SSC and Q3. That's not a big mystery. But the Q4 number implies it goes down to like 425, somewhere in the low fours. That would be down year over year. So I guess my first question is, like, why would that be given that you have all this visibility and, you know, obviously you're quite bullish about the market. So why would Q4 be down so much? That's my first question in SOC.
spk13: Yeah, I don't know that it would be down so much or not. It's a portfolio of businesses and all of those numbers have, you know, a margin of plus or minus, let's say a percent around them. So that creates a large Monte Carlo simulation. And if you go right down the middle, I think you probably, I'm sure you did the math right. That's probably what you come up with, but that's, That's typical, as I said earlier, of where we stand at this point in the year looking into Q4, as in past years where it's come in higher. There's a significant unknown around what will book between now and through October that can drive Q4 shipments. And while we have backlog that extends in some product lines, as Sanjay mentioned, all the way through the end of the year, there's others that's more of a turns business. And we've positioned ourselves to be very responsive on the SOC front in general to capitalize on these sort of short demand requests that come from our customers. That's why we've in the past been able to, in the quarter, exceed our guidance and even in the fourth quarter and prior years, exceed what we thought when we were talking back then in July. So it could very well Turn out that the demand that we've seen the last couple of years in Q4 yet materializes again, and we end up, you know, as CJ was hinting at, having a second half larger than first. It's just that at this point in the year, given what customers are talking about, we just don't see that as the most likely outcome. And, you know, it's episodic, too. What happens in Q4, a lot of it happens in the past couple of years in the December quarter. preparing for product launches that occur in February timeframe, you know, new phones and things like that. And so, again, with a rash of phone introductions in February, although we don't see it now, we could see a demand for SSC testers to support that driving December shipments.
spk14: Yeah, no, it's, I mean, the, you know, total company revenue is sort of implied to be, you know, below what people are expecting for Q4, so that's kind of why I was asking. So, anyway... On your revised TAM for Semicast, so can you just update us on the segments? I think before you were thinking compute would be a billion, mobility would be 1.6, auto, you just gave that number as like 500, and industrial I think before you were talking about 500. So is the revision mostly in the compute side? Can you sort of update us on those numbers things?
spk13: Yeah, the numbers for computer are about the same. Mobility is probably up a couple hundred million. Auto is up probably 50 and industrial up about 50. Okay.
spk14: Awesome, Mark. Thank you.
spk01: Your next question comes from the line of Krish Sankar with Cowan.
spk03: Hi, thanks for taking my question. And Mark, thanks for the call earlier on the ARM test opportunity. I just want to ask the question in a different way. When do you think the non-X86 compute TAM or maybe the total test compute TAM be similar or bigger than the mobility test market? I'm going to add a follow-up.
spk13: Bigger than the mobility test. So your question is, when will the ARM compute test TAM be bigger than the ARM mobility test cam?
spk03: Mobility test cam is about 1.6 or 1.7 billion, and used to compute is about a billion. When do you think the total compute time, or maybe just the non-X86 compute time, gets to be bigger than mobility?
spk13: I don't think it's going to be in the next four or five years. I think much of what's being developed in the ARM space by the hyperscalers will more likely fall into the category of mobility. So I don't see compute growing beyond mobility in the next four or five years.
spk03: Got it. And then, Mark, you know, on the auto test market, you said it's over 500 million. I'm guessing that includes auto, microcontroller, linear, et cetera. If that is the case, Is there any way of giving some more color within that, or do you think it's too hard to segment it?
spk13: Yes, it does include microcontrollers, and I would say that auto is outstripped. Most of the growth is auto more than microcontrollers. Microcontrollers is growing too, but it's mostly auto. And of course, there's microcontrollers in auto, so when I say auto, I mean microcontrollers for auto versus microcontrollers, let's say, for white goods and things like that.
spk03: Thanks.
spk09: Operator, we have time for just one more call, please. One more question.
spk01: Your final question comes from the line of Joe Moore with Morgan Stanley.
spk07: Great. Thank you. I wanted to ask about the millimeter wave commentary question. it seemed like the expectation that was primarily one customer in one region. So when you say that was kind of short of your expectations, what are you referring to there?
spk13: So it's not one customer, one region. You know, millimeter wave last year for us grew significantly. We probably had 90% share of the early buying for millimeter wave test in 2020. And I would say that was spread out across six or seven customers. Anybody who's making a chipset, related to millimeter wave was pretty much using a teradyne tester in 2020. The deployment of millimeter wave by the telecommunication companies has ground to a halt, and that has proportionally ground to a halt the need for incremental tests in 2021. Got it.
spk07: Okay. Thank you.
spk09: Okay, folks, thanks so much for joining us today. That concludes the call. We apologize for the audio difficulties at the front end of it. We look forward to talking to you in the days and weeks ahead. And those in the queue, I'll get back with you directly here. Thank you.
spk01: Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.
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