Teradyne, Inc.

Greetings and welcome to the Teradyne second quarter 2023 earnings call and web chat. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should 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, Vice President of Investor Relations. Thank you, Andy. You may begin.

Thank you, Operator, and 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 second quarter, along with our outlook for the third quarter. The press release containing our second 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 discussions. 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, 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, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by KeyBank, Jefferies, Deutsche Bank, Goldman Sachs, Citi, and Evercore ISI. Now, let's get on with the rest of the agenda. First, Greg will comment on our recent results and the market conditions as we enter the third 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. This call is scheduled for one hour. Greg?

Thanks, Andy, and good morning, everyone. Today, I will summarize our Q2 and first half results, comment on the current business conditions, and our view of the second half. Sanjay will provide the financial details on Q2, our outlook for Q3, and offer some financial guideposts for the rest of the year. Second quarter sales were at the top of our guidance range as supply constraints eased. Earnings were above our guide on higher gross margins. At the halfway point of the year, overall company performance has unfolded as expected, but at the segment level, test was incrementally stronger and robotics weaker. In semiconductor test, we are four quarters into a correction cycle driven by excess inventory, which has hit the mobility part of the market hardest. Automotive demand has remained strong, and in memory test, the growth of DDR5 and HBM devices for data center applications are driving retooling. In our wireless and system test businesses, demand remains muted, unchanged from our April view. Robotics demand has softened over the past three months with worsening PMIs and the short-term impacts of the transformation of the UR distribution channel. Looking forward to the rest of 2023, we estimate the 2023 SOC test market will be $3.7 to $4.1 billion, down 13 to 21% from 2022, but up from our outlook in April. The continued weakness in mobility has been offset by sustained strength in the automotive segment. Also since April, the accelerating build-out of AI-enabled cloud computing is driving test demand for compute and networking. In memory test, we expect the market will be at the low end of a $900 million to $1 billion range we described in April. In this market, the impact of AI is evident, especially in the HBM DRAM segment, where we see incrementally stronger test demand for Magnum products through the second half of 2023. Although HBM represents a small portion of the overall memory market, it is in a rapid growth phase, moving from under 5% of the test market last year to 10 to 15% of the market in 2023. And our HBM share is higher than our overall memory share. This technology-driven strength is offset by weaker capacity buys, especially in flash for mobile applications. Despite the current downturn, we remain confident about the future of the semiconductor test market. The primary growth driver is an insatiable demand for increasing device complexity. This can be seen in cloud and edge AI applications like ADAS systems, spatial computing, and privacy-focused consumer applications. These require enormous compute power, higher wireless data rates, and more sophisticated power management. We expect the automotive TAM will grow at a faster rate than the rest of the SOC market through this midterm, driven by the growth of EVs and hybrids, broader adoption of features such as ADAS, cabin lighting, and infotainment, and the high test intensity required to achieve automotive quality levels. The trend to vertically integrated producers, or VIPs, is a fundamental disruption to the computing segment and is beneficial to Teradyne. Companies that provide cloud computing, cloud AI, and edge AI are seeking to differentiate their solutions by taking control of chip design. Efforts that began a few years ago are now beginning to proliferate in data centers and vehicles, and this trend will accelerate. Over the midterm, we expect the VIP portion of the compute segment will grow faster than the overall compute segment, and our share will be higher than in traditional compute customers. The semiconductor industry has a process technology roadmap that supports these new, more complex devices. 3 nanometer is ramping now, and 2 nanometer and gate all around are coming soon. In advanced packaging, we see broader adoption of stack die for high bandwidth memory and chiplets for processors. These new technologies will drive longer test times and retooling to test new interface standards. Rolling that all up, our growth hypothesis for the semiconductor test market remains unchanged. A similar complexity roadmap drives our wireless and system test businesses. In wireless test, new standards like Wi-Fi 6E and 7 require new or upgraded test equipment. In system test, increased device complexity is broadening the adoption of SLT, and a very solid pipeline in defense and aerospace puts our system test group on a solid foundation for growth. Shifting to the robotics portfolio, I want to take a moment to highlight that Ujwal Kumar joined Teradyne earlier this month as the new president of our robotics group, which includes UR and Mir. Ujwal joins us from Honeywell, where he ran the process solutions business. His industrial automation and software background, combined with the deep experience in building businesses through organic and inorganic growth across multiple end markets, is a great addition for Teradyne, and we are delighted to have him join our leadership team. In the second quarter, robotics demand softened significantly. The trends that we noted in April have continued and intensified. Challenging economic conditions, particularly low PMIs in Europe and the U.S., have resulted in lower demand in our highest revenue regions. We have previously noted that channel transformation work at UR was having an impact on pipeline conversion. This trend has continued in Q2. Large account development and the build out of the OEM channel are progressing well, but not quickly enough to cover for the market softness in the quarter. With lead times under five weeks, change in end market demand, especially with our current high exposure to small and medium sized businesses, is felt quickly. However, there is no shortage in interest in our human scale automation products. We saw record lead generation from two major automation trade shows in the quarter, but there's a clear reluctance from customers to place orders in the short term. As a result, we are now projecting full year revenue for our robotics group to be flat to down 10% from last year. Despite the difficult macro environment, and the short-term impact of our distribution changes, we believe that we will emerge from 2023 in a stronger position in robotics. On the new product front, we began shipments in the quarter of our higher payload, longer-reach UR20. Customers serving welding and metal fabrication and palletizing across a number of industrial verticals have driven demand for the UR20 and a triple-digit unit backlog. We will see our first UR20 revenue in Q3 and ramp shipments through the second half. We also introduced MIR Insights, a cloud-based tool to enable MIR customers to monitor and optimize large fleets across multiple workflows and sites more effectively. We are transforming the UR distribution channel in 2023. Recall we are complementing our existing distribution channel with direct touch coverage at large customers and adding OEM partners that have high long-term growth potential. In the short term, it appears this shift is slowing sales from distributors that were dependent on a high level of UR sales support. Longer term, however, the change puts our focus on customers with the highest revenue potential. Although these changes will take several quarters to yield, we're confident that we're on the right path. We've added 28 new OEM partners so far this year and are working with our distribution partners to directly engage with over 200 large customers. At MIR, our focus on large accounts is yielding good results. This year, our installed base at large customers has grown three times the rate of our overall installed base. We view robotics as a long-term opportunity. The market drivers are clear. aging populations, rising wages, labor shortage, and the reshoring of production to reduce cost and cycle time. We have innovative, market-leading products serving a market that has the potential to grow to tens of billions of dollars per year. Our customers have already demonstrated the value of our products and ecosystem in their operations and they're partnering with us to extend our robots' performance to expand the range of tasks they are planning to automate. Teradyne brings the foundational expertise in engineering, operations, and customer support needed to enable UR and MIR to become premier providers of human-scale automation. We are putting the structure in place to support a billion dollars in profitable sales by the end of the midterm. This is a long-term project, but we are seeing the early signs of this work yielding. Wrapping it all up, our test businesses are performing better than planned through the first six months, and we expect that performance to continue through the second half. Automotive and memory are our strongest markets in tests this year, and a combination of inventory reductions and new products should enable the mobility market to recover next year. Our robotics business was below plan in the first half, And while we expect a stronger second half for the group, we expect to be below our growth and financial plan for the full year. Our plans to transform our distribution and expand our product line are on track. We are carefully managing our spending in this business while we execute these changes. With that, I'll turn things over to Sanjay for the financial details.