Teradyne, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Teradyne Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Andrew Blanchard. Thank you. Please go ahead, sir.

Thank you, Patrice. Good morning, everyone, and welcome to our discussion of Terra9's most recent financial results. I'm joined this morning by our CEO, Mark Jagaler, and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2021's third quarter, along with our outlook for the fourth quarter. The press release containing our third 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 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, where appropriate, on the investor page of the website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Baird, Credit Suisse, Davidson, and UBS. Now let's get on with the rest of the agenda. First, Mark will comment on our recent results, current market conditions, and thoughts on the rest of 2021 and 22. Sanjay will then offer more details on our quarterly results, along with our guidance for the fourth quarter. We'll then answer your questions, and this call is scheduled for one hour. Mark? Thanks, Andy.

Good morning, everyone, and thanks for joining us. Today I'll cover four topics, the highlights of our third quarter and the first nine months of the year, the changes we're observing in the SOC test market, our outlook for the industrial automation market, and how we're thinking about the test and automation markets as we close out this year and look into 2022 and beyond. Thank you. As our Q3 results demonstrate, demand remains strong across all of our businesses. At the company level, Q3 sales grew 16% from last year's record Q3, and non-GAAP EPS grew 35%. We did experience increased supply chain bottlenecks in our industrial automation business in the quarter and undershipped demand. Sanjay will describe this in more detail, but we expect these constraints to persist into Q4. Despite this, for the first nine months of 2021, Company-wide sales grew 19%, and non-GAAP EPS grew 31% from the year-ago level. In each of our businesses, we are riding long-term secular trends that we expect will drive revenue and earnings growth for years to come. In our test businesses, the unit growth and complexity drivers that power these markets continue unabated. For example, our semiconductor test business grew 18% through Q3, with SOC leading the charge, growing 22%. Sales continue to be dominated by our Ultraflex product line, which is well aligned to the performance requirements of the growing compute and mobility markets. Additionally, sales of our Eagle test systems more than doubled in the nine-month period, as automotive and industrial test markets have also rapidly expanded. Eagle's unique architecture hits the sweet spot of these markets by balancing high precision with the stress testing needed for these demanding applications. Within SOC, there's been a clear shift this year to higher demand from the compute, automotive, and industrial markets. While mobility is still the largest subsegment of SOC and growing, it has dropped from the high 50% range of the SOC test market in recent years to the high 40% range this year. Over the midterm, we expect mobility will remain the largest SOC submarket and continue to grow, but we also expect compute to grow at a faster rate, while automotive should remain at its current elevated levels. For the last decade or so, mobility has made rapid annual advances in semiconductor complexity that has enabled the advancement of smartphone sophistication. The refresh pace has been much faster than traditional PCs, graphics, automotive, and industrial end markets, leading to smartphone ICs rapidly progressing along the complexity scale. This is true in many areas of smartphone silicon, apps, processor, compute engines, graphics engines, AI engines, image sensors, power management, and more. Our leading position in testing these key technologies has driven our growth. At the same time, up until recently, the traditional compute testing market has been relatively flat with slower refresh rates and slower complexity growth. However, the groundwork laid by mobility designs, combined with advancing lithography nodes and design tools, has enabled new entrance into the chip design space for compute engines. The complexity of these chips, whether for laptop servers, autonomous driving, AI, or graphics, is incredible and advancing at an accelerated rate. For example, laptop CPUs are now crossing the 30 billion transistor level, which is a huge leap over previous legacy designs. As we've said in the past, increased transistor counts drives increased test time and increased tester demand. We've seen that this year, and there's more to come. We're targeting this expanding collection of new players and new designs, leaning heavily into our Ultraflex family's hardware performance and time-to-market advantages of our software. We've been adding new design wins every quarter, and while development pipelines can be long and these new designs can be speculative, we're confident we'll see growing production business from these wins in the future. It's also notable that the traditional chip suppliers in these markets aren't standing still. They are doubling down on their advanced designs, too, which is collectively driving WFE investments higher as applications expand and competition heats up. We expect this race to lead to higher test TAMs and, given the higher performance and faster design-to-market cycle times, more share gain opportunities for Teradyne over the midterm. Our system test segment year-to-date sales grew 11% from 2020, and storage tests continued its multi-year growth trajectory, expanding sales 12% in the same period. Higher capacity HDDs and more complex SOC devices, which require system-level tests, are driving this demand. Both trends are expected to continue into the foreseeable future. At light point, sales were up 24% through nine months compared with 2020, driven by Wi-Fi 6E production, Wi-Fi 7 R&D demand, as well as ultra-wideband. More connected devices demanding more bandwidth while managing growing congestion drive complexity increases in each new Wi-Fi standard and more tests. UWB, on the other hand, is a whole new wireless standard and application space. It's a new proximity detection wireless technology with a future of many promising security applications. We expect these trends to continue and to provide a long-term tailwind to our wireless test business. Shifting to industrial automation. Universal Robot's revenue grew 50% through the first nine months of the year, while MIR grew 40%, despite supply chain challenges. Each has a unique story. At UR, it's a combination of increasing sales for existing tasks and the expanding number of UR Plus offerings, making it easier for customers to deploy our cobots to do new applications. We highlighted welding in our last call, but other examples include screwdriving and palletizing. The UR Plus ecosystem is key to expanding these tasks and now totals over 360 products created by over 300 partners, both riding on and broadening the coattails of our UR platforms. This is a key advantage in the combination of our organic investments and our UR Plus and OEM partners' R&D dollars and creativity that's going into expanding the UR platform, and it's unmatched. At Muir, the story is about new products. The Muir 250, which was introduced just as COVID hit last March of last year, is now our largest seller by far. This year, we added the Muir Hook, to the 250 family to expand its applications into tugging. We've introduced higher payload products, such as the MIR 600 and 1350, to expand our footprint in the fast-growing logistics market. Unfortunately, with all this good news come supply chain issues that will limit IA growth in 2021 to be between 30% to 40% year-on-year, but demand is strong. The long-term outlook in IE remains very bright. Looking at the capabilities of UR Cobots today, we estimate the penetration rate is less than 2% of the servable market. UR's approximate 45% market share puts us clearly in the lead, and we continue to drive R&D and distribution investments to extend our competitive advantages, expand the servable market, and drive penetration higher. It's a similar story at MIR, where we estimate the autonomous mobile robot penetration is under 3%. The AMR market doesn't have a single dominant player like UR Cobots, and we estimate we're close to number two in the broadly defined market. And like at UR, we're making investments in both the distribution and product level to both reinforce our advantages and extend our product reach. In both IE businesses, the fact that our penetration of today's servable market is low single digits and that the servable market continues to expand each year with product enhancements sets up a fantastic future. So even with very high growth rates in our IE business, we expect the penetration rates to remain low for many years, sustaining our long-term annual growth forecast of 20 to 35%. In January, we will update you on the outlook for 2022 and our midterm earnings model. Between now and then, we'll be looking at the rate and timing of new semiconductor fab capacity coming online, especially at the more advanced lithography nodes, and we'll also be looking at the rate of adoption of DDR5 as key swing factors. In IA, we will be looking at the manufacturing output expansion, on-shoring trends, and PMIs in our principal geographies as tailwinds for continued robust growth. On the other hand, in both markets, supply chain bottlenecks could slow certain industries and become a headwind to growth demand. Short-term demand is influenced by many factors, but we manage our business aligned to the long-term trends. The trend of growing prevalence of increasingly complex semiconductors and a myriad of applications drives our semiconductor business and investments. The trend of new, increasingly smart, cost-effective automation in a world with labor scarcity, and on-shoring challenges drives our IE business and investment strategy. These systemic long-term trends pave an exciting future for Teradyne. With that, I'll turn it over to Sanjay.