Teradyne, Inc.

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, our CFO, Sanjay Mehta, and following our opening remarks, we'll provide details of our performance for the fourth quarter and full year of 2024 and our outlook for the first quarter of 2025. The press release containing our fourth quarter results was issued last evening. We are providing slides as well as a copy of this earnings script on the investor page of the Teradyne website. That may be helpful 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 risks that could cause Teradyne's results to materially differ from management's current expectations. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation. We encourage you to review the Safe Harbor Statement contained in the slides accompanying this presentation, as well as the risk factors described in our annual report on Form 10-K for the fiscal year ended December 31st, 2023, on file with the SEC. Additionally, these four looking statements are made only as of today. During today's call, we will refer to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures were available on the investor page of our website. We hope that you plan to join us for our financial analyst meeting, which will be webcast beginning at 1 p.m. Eastern time on March 11th, 2025. Following Greg and Sanjay's comments this morning, we'll open up the call for questions. This call is scheduled for one hour. Greg?

Thanks, Tracy, and thank you all for joining us today. I'll start off by summarizing our fourth quarter and full year 2024 results and provide some context for our initial view of 2025. Then I'll provide context around our updated midterm earnings model. I'll describe the trends we expect to We expect to drive the markets and Teradyne's strategy to drive highly leveraged earnings growth through the midterm. Sanjay will then go into greater detail on all of these topics. Our fourth quarter came at the high end of our guidance range as trends we noted previously continued through the end of the year. Cloud AI has been the dominant driver of our semiconductor test business, and we have seen some short-term improvement in the mobile space driven by supply chain shifts in our customer base. In industrial and automotive, our fourth quarter benefited from customer-specific equipment for purchases. Strength in our test business more than offset the continuing weakness in the industrial automation market, which impacted our robotics business. In 2024, after two years of semiconductor test market declines, our SOC and memory test revenue grew 17% year-over-year, excluding DIS. AI was the dominant driver of our growth, specifically AI accelerator ASICs, networking, and HBM DRAM. We have previously described a class of customers called VIPs, or vertically integrated producers. We use this term because these customers develop custom silicon to provide differentiation in their end products, whether they are phones, cars, or cloud AI computing. In the first half of 2024, we saw VIP strength for edge AI in automotive. In the second half, strength was driven by cloud AI compute VIP customers. Our goal in 2024 was to achieve 50% market share in computing VIPs, and we believe that we achieved that goal. This is particularly notable because much of the VIP test demand in 2024 came in the form of upgrades to systems left underutilized by the weak mobile market. If this demand had come in the form of system sales, our 2024 VIP revenue would have been more than double what we recognized in the year. At the company level, we grew 5% in 2024. If one excludes the divestiture of the DIS business, our total revenue growth was 8%. We grew earnings per share by 10% year over year and generated over $470 million in free cash flow. Our full year financial results reflect an inflection in our business. both in terms of semiconductor test cyclical recovery, but more importantly, a successful pivot to diversify our customer base and reduce customer concentration. In 2020 and 2021 timeframe, our business was dominated by mobile with high customer concentration in that market. Back then, we were highly exposed to mobile in SOC, memory, and wireless tests. Now in 2024, The compute end market was a larger component of our revenue than mobile as our SOC business in the compute market grew more than three and a half times the prior year. We have been investing to capitalize on the secular shift towards VIP ASICs and that yielded roughly 50% share in what we believe was around a $300 million TAM in 2024. We have seen growth driven by our historical strength in the networking space. And we see opportunities in system level tests for AI compute. The pivot we have executed in SOC over the past couple of years is remarkable. In 2023, 11% of our SOC product revenue was in computing and 51% was in auto and industrial. In 2024, 34% was in compute and 34% was in auto and industrial, a balance that underpins our longer term model. Recent advancements in AI inference, which appear to reduce the cost and time to develop AI applications, may be a catalyst to accelerate edge AI development. We think this could directly benefit the markets where we have historical strength, mobile and automotive. It's early days, but we believe that lower cost, lower power, and faster time to market AI solutions can drive complexity growth and increased unit demand at the edge. which are key inputs for improving demand for test equipment. Looking forward to 2025, we expect the SOC TAM to continue to grow roughly 7% year over year. While some of this growth is driven by AI compute, we expect a modest recovery in mobile, automotive, and industrial in the back half of the year. We believe that we are positioned to gain share in the low single digits in SOC test. Now, Shifting gears to memory. In 2024, our memory business grew to over 500 million, up 30% year over year. Strength in the market and our growth was fueled by AI compute demand for HBM DRAM. In the second half of 2024, we were qualified for HBM performance test at a major memory supplier. Our higher throughput and forward compatibility created competitive differentiation, enabling us to capture significant share of the HBM performance test market in the second half of 2024. We expect the HBM device end market to be strong through 2025. However, from a test equipment perspective, we are expecting the market to soften as customers absorb capacity with higher productivity tools. We expect the HBM TAM to recover in 2026. As a result, we expect the entire memory test market to be flattish in 2025, although we do expect to gain share in the low single-digit range. Beyond AI compute, we believe that there are other segments in the semiconductor test market that offer the opportunity for accelerating long-term growth. One of these areas is power semiconductors. These devices will continue to grow long-term with the crossover to EVs and the demand for more efficient power generation, storage, and distribution. We are announcing a strategic partnership with Infineon, the market leader in power semiconductors, to acquire their internal tester development team in Regensburg, Germany. This group will enable us to accelerate our roadmap in power semiconductor space specifically in areas like silicon carbide and gallium nitride at the scale needed to serve the automotive and renewables market. While the semi-test business was strong in 2024, Paradigm's other product test businesses, which include our system test and wireless test operating segments, continued to be impacted by weak end market conditions. Within our product test businesses, we saw some programs push out from 2024 into 2025, but scored key program wins that we expect to drive healthy growth in 2025. We expect our wireless test business to return to growth in 2025 after securing 74 out of 80 tracked Wi-Fi 7 design win opportunities in 2024. Turning to robotics, the industrial automation market continued to be weak in Q4. We typically see strong fourth quarter seasonality as customers place quick turn orders in the back half of the quarter. Visibility is inherently low in this high turns business. In Q4 of 2024, this seasonality was far more muted than in prior years, and we ended the year down slightly for UR and roughly flat for MIR. This underperformed our expectations, but outperformed our industrial automation peer group. Despite the headwinds, there were highlights for robotics. The UR channel transformation continues to progress with the OEM channel delivering 20% growth and the MIR large accounts also delivering 24% growth year over year in 2024. In the fourth quarter, as part of our multifaceted partnership with NVIDIA, UR launched its AI accelerator. Late in the fourth quarter, MIR's new flagship product, the AI-enabled MIR 1200 Pallet Jack, began shipping to customers. And most recently, Teradyne Robotics announced a strategic partnership with Analog Devices to develop and deploy robots, AI, and software to support ADI's automation initiative. In 2024, we combined UR and MIR operations into a unified robotics operations group. Now, in Q1 of 2025, we are consolidating our go-to-market functions at the robotics level to enable our best partners to sell the full UR and MIR product line and to serve our customers better with a single customer service organization. This restructuring increases our efficiency and reduces our robotics break-even revenue from $440 million in 2024 to $365 million in 2025. Looking ahead to the next four years, we are very optimistic. A year ago, there were questions as to whether VIPs would matter, and if they did, could we win their business? At that time, we thought the compute VIP market would be $100 million to $200 million opportunity in 2024, growing to $400 to $600 million in the 2026 timeframe. Our latest estimate is that the compute VIP market was $300 million in 2024, and the compute VIP market will be centered around $600 million in 2026 and could approach $800 million in 2028. We believe that cloud AI will continue to drive share gains for us in SOC and memory. By the later years of this midterm, as AI moves to the edge for mobile, enabled by process technology like 2 nanometer and gate all around, we expect robust growth of the mobile TAM. With the remarkable complexity of AI computing systems and the need for highly reliable performance in the training and use of AI models, we expect growing demand for additional test steps. The addition of system level test insertions for AI compute, both in the cloud and at the edge, creates an additional growth vector for Teradyne. This was a primary consideration in our decision to align the integrated system test unit within Semitest. Going forward, we believe that AI will have an outsized impact on the longer term growth of edge devices, specifically in mobile and automotive applications. Also, the trends towards electrification, whether pure EV or hybrid, provide considerable growth potential with increasing silicon content per vehicle. Our investments in this space, including our strategic partnership with Infineon, will help us drive share gains in this highly complex, test-intensive segment of the market. Based on these long-term trends, we expect to see healthy TAM growth in the automotive and mobile segments of the market over the midterms. Our strong market position in these segments will help fuel our revenue growth. These positive trends underpin our 2028 earnings model. At the midpoint of our model, we expect to grow from $2.8 billion of revenue in 2024 to $5 billion in 2028. We expect EPS to grow from $3.22 per share to $8.25 per share over the same period. implying a 12% to 18% revenue CAGR and a 21% to 31% EPS CAGR over that period, demonstrating considerable operating leverage in our business model. To sum up, 2024 was a very good year. We have repositioned the company and are seeing the success from our investments in AI in compute and in memory. We expect that 2025 will be another good year, We are setting our robotics business up on a sustainable path for long-term growth, and our test business will grow driven by continued strength in share gains and VIPs, tightening capacity utilization, and the return of higher demand in mobile, industrial, and automotive. With that, I'll turn the call over to Sanjay. Sanjay?

Thank you, Greg. Good morning, everyone. Today I'll cover our Q4 and full year 2024 financial summary, provide our Q1 outlook, some planning guidance for the full year 2025, and discuss our updated earnings model and capital allocation plan. Now to Q4. Fourth quarter sales were $753 million, but non-GAAP EPS of 95 cents, both at the high end of our guidance range. Semi-test revenue, which now includes our integrated system test business, or IST, comprised of product lines for system-level tests and HDD tests, was $561 million. Within semi-test, SOC revenue was $429 million, with memory shipments of $112 million and IST shipments $19 million. The other product test businesses comprised of defense and aerospace, production board test, and wireless test contributed $94 million. Robotics revenue was $98 million, was up 11% sequentially with muted seasonality due to ongoing weak industrial spending. As Greg noted, we had softer than expected performance in the robotics business tied to typical turns business that did not materialize. Non-GAAP gross margin was 59.4%, just below our guidance range due to robotics. Non-GAAP operating expenses were $284 million in Q4, higher than our guide. A majority of the increase was tied to accelerated engineering spend and semi-test. Non-GAAP operating profit rate was 22%. Some other financial facts. The tax rate excluding discrete items for the quarter was 7.6% on a non-GAAP basis and lower than planned because of product mix shift to semi-test. GAAP tax rate was 8.7% in Q4, excluding discrete items. We repurchased $144 million of shares in the quarter as we opportunistically accelerated our share buybacks. Dividends were $19 million and we had one 10% customer in the quarter. Turning to the full year results, our revenue was $2.82 billion. Samsung was the only customer greater than 10% of our revenue for the year. Gross margin for the year was 58.6%. OPEX was $1.08 billion, and operating profit was 20.4%. Non-GAAP EPS was $3.22. We generated $474 million in free cash flow in 2024. We returned $275 million or 58% of free cash flow to our shareholders through share repurchases and dividends. We ended the year with $724 million of cash in marketable securities. Our tax rate for the full year excluding discrete items was 12.6% on a non-GAAP basis and 12.5% on a GAAP basis. Business unit revenues for 2024 were as follows. Semi-test revenue for the year, including IST, was $2.124 billion, with SOC revenue contributing $1.537 billion, memory $502 million, and IST $85 million. Excluding the impact of our DIS divestiture, our SOC and memory revenue was 17% year-over-year. SOC growth in the year was driven by AI compute, specifically custom ASICs for VIPs and networking. Our memory sales were up 30% year-over-year, driven primarily by AI compute demand for HBM DRAM. IST revenue declined 39% year-over-year, primarily due to underutilized test capacity in HDD. Turning to our other product test businesses, the system test group, which has combined defense and aerospace and production board tests, had revenue of $201 million in 2024, flattish in 2023. Wireless test revenue was $130 million, down from 2023 due to slower ramp of Wi-Fi 7. The combined revenue of the two operating segments in 2024 was $331 million, down 4% year over year. Now to robotics. Robotics revenue in 2024 was $365 million, with UR contributing $293 million. Here, $72 million. Considerably lower than expected volumes in the fourth quarter drove profitability well below our expectations. The group had 13% non-GAAP operating loss in both Q4 and the full year. As Greg mentioned, we are restructuring the robotics business to create a single point of contact for customers and partners across UR and MIR sales, marketing, and service organizations to improve customer experience. The results of these actions will help drive top-line growth in 2025 and improve our efficiency. These actions will enable our robotics business to continue to outperform others in the industrial automation market. Now to our outlook for Q1. Since our October call, our semi-test outlook has remained strong. However, robotics forecasts remain seasonably soft. Q1 sales are expected to be between $660 and $700 million, with non-GAAP EPS in the range of $0.58 to $0.68 on 163 million diluted shares. The first quarter guidance excludes the amortization of acquired intangibles and restructuring charges. First quarter gross margins are expected to be in the range of 58.5 to 59.5%. OpEx is expected to be roughly flat with Q4 and run at approximately 41.5 to 42.5% of first quarter sales. The non-GAAP operating profit rate at the midpoint of our first quarter guidance is 17%. As Greg noted, we believe the semiconductor SOC test TAM will see healthy growth in 2025. driven by a second half broad-based recovery. We expect the SOC TAM to be between $4.7 and $5.1 billion, or $4.9 billion at the midpoint. For a more detailed view of our end market expectations for SOC, please refer to the table in our earnings deck. We are forecasting the memory TAM to be between $1.3 and $1.5 billion, Recall that within this, HBM has grown from around $100 million in 2023 to over $500 million in 2024. Our memory TAM forecast for 2025 is roughly flat year over year, with the HBM tester market going through a period of digestion. In both the SOC and memory semi-test markets, we expect to gain low-digit share in 2025. In robotics, we are currently operating in a difficult, low visibility industrial spending environment. The business is still driven by turns. When we look at our plans for 2025, we see SAM expansion and channel growth initiatives expected to yield approximately 10% revenue growth in current market conditions. Of course, there is a wide range around this growth expectation. A few points to assist you in the modeling 2025 for the enterprise. In Q2, we expect 5% to 10% sequential growth from Q1's midpoint. We expect first-half revenue to be approximately 43% to 44% of full-year revenue. Now to gross margins. We expect full-year gross margins to be 59% to 60%. We expect second-half gross margins to slightly improve from current levels tied to higher revenue expected in the second half of the year. Regarding OPEX for the full year, We expect full-year 2025 OPEX to increase 8% to 10% year-over-year, which is a reduction from our low-teens view in October. The key changes we're restructuring to capture synergies between UR and Premier and robotics and the acceleration of semi-test projects in Q4. Interest and other line is forecasted at $1 million of income per quarter, but we have cash driving the yield. We also have items like FX gains and losses included in this line in our P&L. Our GAAP tax rate is forecasted to be 15.25% and 15% non-GAAP in 2025, excluding discrete items. Turning to capital allocation. Our strategy remains consistent as we take a balanced approach to maintain cash reserves that enable us to run the business and have dry powder for M&A. For reference, from 2015 to 2024, we've returned over $4.6 billion to shareholders through share repurchases and dividends, which is 93% free cash flow. 2025, we plan on executing up to $400 million of share buybacks along with our current level of dividends. Moving to our midterm earnings model. As we do each January, we've updated our model. We share this model with investors to provide insight into how we look at the markets we serve, our competitive positioning, and ultimately, the growth and earnings power of the company. A few points for context. We're rolling forward our midterm model to 2028, which replaces our prior 2026 midterm model. That said, we believe we are tracking with our prior 2026 model in terms of ranges of revenue and earnings. Over the midterm, we expect test revenue to grow at a 12% to 17% CAGR off of our 2024 results, driven by continued strength in AI compute-related demand and recovery with long-term growth in broader end markets, including auto-industrial and mobile. Our mobile assumption is for recovery, but we're not assuming a return to the prior peak in 2021. In robotics, we're expecting the industrial markets to begin to recover with AI expanding the SAM and persistent labor shortages. We expect these dynamics to drive a top line of 18 to 24% CAGR off of 2024 with modest growth in 2025, which we expect to accelerate over the midterm. Going forward, the robotics operating model will deliver increasing operating leverage through the midterm, ending towards the high end of our target 5 to 15% operating profit range for this business. Our updated midterm model is expected to drive 2028 revenue to $4.5 to $5.5 billion and non-GAAP EPS between $7 and $9.50. As Greg mentioned, this implies a 15% CAGR from 2024 to 2028 and a 27% EPS CAGR at the midpoint, demonstrating the operating leverage of our test and robotics businesses. Gross margin is expected to be between 59% and 60%. OpEx is a percentage of sales between 28% to 31%, yielding a non-GAAP operating margin of 28% to 32%. Coming up, 2024 was a good year overall, driven by strength and semi-test. Excluding the DIS divestiture, our overall company revenues grew 8% year over year, and our SOC and memory combined grew 17% year over year, helping to achieve a 10% increase in our EPS to $3.22. We are making strategic investments to drive competitive advantage in the semi-test business, and we are leveraging logical synergies between UR and MIR to drive long-term sustainable growth in robotics. We enter 2025 feeling good about the year and our line of sight to our midterm model.