Teradyne, Inc.

Greetings and welcome to the Teradyne first quarter 2023 earnings call and webcast. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone to require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Blanchard, VP Corporate Communications. Thank you, sir. You may begin.

Thank you, LaTanya. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith, and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2023's first quarter, along with our outlook for the second quarter. The press release containing our first 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 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, including reconciliation to the most directly comparable GAAP financial measure, where applicable, on the investor page 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 J.P. Morgan, KeyBank, Cowan, Stiefel, and Bank of America. Now, let's get on with the rest of the agenda. First, Greg will comment on our results and the market conditions as we enter the second quarter. Sanjay will then offer more details on our quarterly results, along with our guidance for the second quarter. We'll then answer your questions, and this call is scheduled for one hour. Greg?

Thanks, Andy, and good morning, everyone. Today, I will summarize our Q1 results, comment on the current environment, and outline how we see the market developing. Sanjay will then provide the financial details on Q1, our outlook for Q2, and some thoughts on full year planning. From a financial perspective, we delivered first quarter sales above the midpoint of our guidance range, with earnings above the high guide on improved gross margins. In Q1, our flexible business model enabled us to convert improving component availability and semiconductor test into additional revenue and profit, and our robotics businesses delivered on plan for the quarter. Stepping back from the Q1 results, I would like to outline our view of the current market conditions and how we expect the next few quarters to unfold. In semiconductor tests, lower end market demand and high channel inventory is persistent. And our measures of tester utilization in Q1 of 2023 are at their lowest level in over 10 years. The weakness is concentrated in compute and mobility SOC tests. and reflects further erosion in end market demand in 2023. After a 20% decline in PC shipments in 2022, they are forecast to decline an additional 4% this year. Smartphones dropped 10% in 2022 and are forecasted to drop another 4% in 2023. We have clearly seen utilization weaken as well. Until inventory levels in these supply chains come into balance, and the utilization levels improve, we expect test demand for these markets to remain at low levels. As a result, we don't expect any 10% customers in these end markets in 2023. Over the past four years, the compute and mobility segments have represented over 70% of the SOC market, so weakness in these segments has an outsized impact on the overall industry. There are, however, several factors beyond inventory alone that make forecasting in this cycle challenging. These factors are likely to impact both the depth of the cycle and the shape of the cycle recovery. The first is the strength in the other roughly 30% of the SOC test market, automotive and industrial test. The demand that we're seeing here is stronger and more persistent than we expected in January. Tester utilization at IDM customers that drive this sector is substantially higher than at OSATs, which primarily serve the compute and mobility markets. In fact, high demand has pushed out our tester lead times for some configurations to be longer than our target. Wafer capacity expansion plans announced by many of our automotive and industrial customers bode well for sustained demand for us in these segments. Strength in these segments is being driven by a wide range of new and growing device applications, such as EVs, autonomous driving, and the digitization of industrial activity. We also see these customers working to replenish the inventory that has been depleted over the last three years. This strength suggests that the depth of the SOC test market decline of this cycle may not be as deep as past cycles. Another factor that makes this cycle very different is very strong tester demand from China-based chip makers. The current test buy rate is substantially greater in 2022 and higher than the broader market and may not be sustainable at these levels. In the vertically integrated producer category, we have seen no slowdown in R&D or design in activities. However, we expect low OSAT utilizations to significantly impact production capacity buys in 2023. When taken together, these three factors make it challenging to predict the timing and the strength of a recovery. Having said that, we do have better insight into the full year than we had one quarter ago. We estimate the SOC market in 2023 will be between $3.3 and $3.8 billion. down about 20 to 30% from last year's roughly 4.7 billion. We expect our share of the SOC market will increase two or three points from last year's 36%. I will note that we have increased our 2022 market size estimate by $100 million since January. In the memory segment, while oversupply is limiting capacity expansion investments, the technology transitions we discussed in the past are continuing to drive test demand, especially for LPDDR5 and high speed flash. For the full year, we expect the market to be flat to down 10% from last year's approximately $1 billion level. This is unchanged from our view in January. We expect our share to be in the high 30s, also up a point or so from last year. We know that the global trends have driven over $300 billion of wafer front end investment over the past four years, and that has not yet fully been converted into test demand. When coupled with a forecast of an additional $160 billion of investment over the next few years, we think the fundamentals for midterm growth are strong. In our light point wireless test segment, we see a more familiar correction cycle. We are also a year or so away from the next big complexity leap in connectivity, the transition to Wi-Fi 7. As a result, our early view has light point sales down 20 to 25% from last year's level. In system test, the storage portion of the business is impacted both by reduced demand for HDDs and declining smartphone shipments. As a result, our system test group revenue will likely be down 20 to 25% for the year. Now, turning to the robotics businesses. Robotics revenue in Q1 2023 is down 14% compared to Q1 of 2022. The first quarter of 2022 was the last strong quarter before the invasion of Ukraine and slowing industrial growth began to significantly impact our results. As we've discussed in prior calls, there are both external and internal factors that are limiting the growth of our robotics businesses. And addressing these challenges remains a high priority for our Universal Robots and MIR teams. At Universal Robots, we see a mixed picture. The external market conditions remain weak. Overall sales softened and were lower in Q1 than in the same period last year. However, shipments to Europe have returned to their highest level since then. And in the United States, demand slowed substantially in Q1 after a very strong Q4. Demand in Asia also softened in the quarter. In most years, we see a weaker Q1 as strong Q4 shipments are digested. But it is clear that the manufacturing economy is also slowing, as indicated by weakening manufacturing PMIs in Q1 for almost all regions. The primary internal factor that is impacting our growth is the ongoing realignment of our distribution system. Recall, we're shifting resources to put more focus on opportunities at large customers and OEM partners that have higher long-term growth potential. We're seeing some short-term headwinds from the shift in resources. An important positive for Universal Robots are strong pre-orders for our new high-payload UR20 cobot. We expect to have a backlog of over six months of volume shipments when we begin deliveries mid-year. The UR20 has already won numerous industry awards, including a recent robots business review innovation award. At MIR, where we're coming off record Q4 shipments, we're seeing similar industry level headwinds along with seasonal slowdown in Q1 demand. However, our strategy to increase direct engagement with large accounts is latching with installed unit growth of over 40% in this sector from Q1 of 2022. With a persistent weak macro environment and with little evidence to suggest a near-term change in these conditions, we've brought our full-year revenue estimate for our robotics group downward to be 0% to 10% growth from last year's $403 million. I would like to emphasize that despite the current market conditions, our view of the long-term growth potential for robotics remains unchanged. It is clear that there is a large and growing market for collaborative robotics driven by labor shortages and escalating labor costs. Our strategy is to address this market with an expanding range of applications for our robots and a focused distribution strategy that we expect to yield an average 20% to 30% annual growth over the midterm. The fundamental drivers of all of our served markets, test and robotics, make them as attractive as ever. We are focused on continuing to operate efficiently with strong financial discipline as demand begins to recover. With our flexible business model, we will maintain the careful investments in our products and capabilities that are the fuel for our future profits. I'll turn things over to Sanjay for the financial details. Sanjay?