Teradyne, Inc.

This call will be available via the same page after the call ends. The matter that we discuss today will include forward-looking statements that involve risks that could cause Teradyne's results to differ materially 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, 2024, on file with the SEC. Additionally, these forward-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, where available on the investor page of our website. Looking ahead between now and our next earnings call, Teradan expects to participate in technology or industrial-focused investor conferences hosted by Citi, Susquehanna, Morgan Stanley, and Cantor. Our quiet period will begin at the close of business on March 13, 2026. Following Greg and Michelle's comments this morning, we'll open up the call for questions. This call is scheduled for one hour. Greg?

Thanks, Amy, and thank you all for joining us today. I'll start off by summarizing our fourth quarter and full year 2025 results and provide some context for our initial view of 2026 and our new target earnings model. Teradyne had a strong fourth quarter, with 41% sequential revenue growth and more than 100% non-GAAP earnings growth. Both revenue and EPS were above our high guidance, as trends we noted previously continued through the end of the year. Semiconductor tests, product tests, and robotics all delivered double-digit sequential growth. A striking trend was the increase in AI-driven revenue in the second half of 2025. This is obvious in computing memory. However, the rapid build-out of cloud and edge AI is also driving demand for power management, SLT, HDD, ICT, and optical test. This aligns with the themes of AI, verticalization, and electrification that we have highlighted in prior calls. When you roll it up, AI demand drove 40% to 50% of our revenue in Q3. In Q4, AI drove more than 60% of our revenue. Looking forward to Q1 of 2026, we expect that upwards of 70% of our revenue will be driven by AI applications. Now, Michelle will go into a lot more detail about the quarterly results and trends. I'd like to give you a little full year color for each of Terranine's businesses. Starting first with the product test group. Overall, we grew revenue 8% in 2025, driven by strength in defense and aerospace. We have successfully integrated Quantified Photonics into this group, including training the sales team for Lightpoint and production board tests on the Quantified product line. We expect all of our business lines in this group to grow in 2026. Turning now to robotics. In 2025, we saw three consecutive quarters in growth starting in Q2. As we've discussed previously, we are optimistic about the value-creating opportunity in physical AI and advanced robotics, and our strategy has been to focus the organization on the segments, customers, and technologies with the highest growth potential. For all of 2025, the semiconductor test group delivered 19% year-on-year growth, SOC test revenue grew 23% year-over-year, driven mainly by networking and VIP compute. Memory test revenue was up slightly in a roughly flat memory test market on continued share games in HBM and DRAM final tests. With strong VIP revenue, we believe that we maintained about 50% market share in the VIP compute market in 2025. This entire segment remains very concentrated, with only a few players driving significant ATV purchases. This contributed to revenue lumpiness in 2025 and complicates forecasting VIP share in the future. Our full-year financial results reflect a successful pivot to AI-driven demand and high-performance computing. Back in 2020 and 2021, our business was dominated by mobile. We were highly exposed to mobile in SOC, memory, and wireless tests. Now, in 2025, compute is the largest component of our revenue and grew 90% year over year. This growth can be attributed to the decisions and investments we've made over the past few years that are now yielding. Our historically strong networking business has been growing because of high-density network connections in AI data centers and the increasing complexity of networking components. The work that we have done to align our product roadmap and customer-facing teams to VIP and merchant computing customers has enabled us to capture valuable new design wins. While we are gaming in computing memory, we believe that diverse revenue mix is Paradigm's long-term strength. Using round numbers, in 2023, only about 10% of our SOC product revenue was in compute. 50% was in auto and industrial, and 40% was in mobile. Now, in 2025, nearly 50% was in compute, and auto industrial and mobile were roughly balanced at a quarter each. This balance de-risks our target earnings model. The SOC TAM reached record levels in 2025, nearly 60% larger than 2024. Looking forward, we expect that TAM to grow robustly over the midterm, driven by continued data center build-out and the growth of Edge AI. Predicting this growth rate from year to year is going to be difficult because of the high concentration and less predictable product ramps. one big socket sliding across your boundaries could have a significant positive or negative effect on year-to-year growth although this uncertainty makes it challenging to predict the 2026 soc 10 we are expecting robust year-on-year tam growth at a segment level we expect compute to grow significantly from a very high base driven by ai We expect to see moderate recovery in auto industrial, but we are uncertain about the mobile TAN. Although we are expecting to see a significant jump in device complexity, there are questions about unit volume, product mix, and capital efficiency improvements. All in all, we believe that we are positioned to gain share in the single digits in SOC tests in a significantly larger market. Now, shifting gears to memory. In 2025, the overall memory TAM was down about 4% from 2024, and we were able to gain a little share. A bright spot in the memory test market was AI compute demand for both HBM and DRAM. Again, it is useful to take a longer-term look at the changes in memory test. Back in 2020 and 2021, the memory test market was split more or less evenly between Flash and DRAM. In 2025, DRAM and HBM comprise nearly 90% of the memory TAM, a trend we expect to continue into 2026. Overall, we expect a resurgent memory market in 2026 with low double-digit TAM growth over 2025 driven by continued strength in HBM and DRAM, and we expect to continue our incremental share gains. our IST business delivered over 50% growth from 2024 to 2025. Historically, IST has had very high segment and customer concentration. In 2024 and before, we served the HDD and mobile SLP markets, and our revenue was mostly driven by a large single customer in each segment. In 2025, this began to change. We won a new customer in mobile SLT in 2024, and that ramped strongly in 2025. Also in 2025, we entered compute SLT and won business from two customers in that segment. Finally, in late 2025, we received orders from a new customer in HDD, which will be ramping in 2026. All of this is setting us up for continued strong revenue growth from IST in 2026 and beyond. Michelle will be going over our target earnings model in some detail. I'd like to comment on the underlying drivers of that model. In looking at the future, we have to answer two questions. The first question is whether the markets we are in are poised for growth. In our mind, the answer to that is unequivocally true. Right now, the prime mover of the market is AI data center. Our product lines cover this market from beginning to end, from testing compute devices to complete server trays, all the way to robot-assisted operations in AI data centers. Looking beyond the AI data center, segments of the market where Teradyne has high share are poised for recovery. Auto industrial will have long-term growth tied to the transition to edge AI, EVs, and 800-volt data center power. Mobile is positioned for steep complexity increases as the compute power required to run inference on LLMs is crammed into phones. Physical AI is already expanding the applications of advanced robotics, and we believe that trend will continue to strengthen. The second question is whether we, Teradyne, are positioned to gain share in the markets where we play. Again, I think the evidence from 2025 is clear. We are. We have gained share in HBM and DRAM. We have maintained high share in networking. We have ramped significant new VIP sockets. We have a leadership position in silicon photonics device test, and we are in play for a share of merchant GPU. We have won new segments and customers in our IST group in both storage test and system level test of compute devices. But Teradyne's exposure to the growing AI data center market extends beyond device test. Our production board test business tests the server trays that devices go into. Our quantified photonics instruments test silicon photonics from device to rack. In alignment with our strategy to go from wafer to data center, last Thursday Teradyne announced an agreement with Multilane to form a joint venture. Multilane is a global leader in high-speed I.O. and data center interconnect test solutions. This joint venture will be called Multilane Test Products and is being formed to serve the growing AI data center demand. Upon the close of this transaction, which we expect in the first half of this year, we will be the majority owner of the JV, and Multilane will maintain a minority position. In robotics, we have built a world-class platform for physical AI applications that is being applied in multiple industry verticals, and we have embedded AI capabilities into our AMR products. Most importantly, we have begun to ramp an important worldwide AI-driven application in e-commerce. So, to sum up, Teradyne is positioned to deliver better-than-market growth in markets that are going to be growing robustly over the next few years. We foresee a future where the ATE TAM will be $12 to $14 billion, up from about $9 billion in 2025. In that market, our long-term model illustrates our expectation that Teradyne would deliver nearly two times 2025's revenue and two and a half times the earnings per share. With that, I'll turn the call over to Michelle Turner, our Chief Financial Officer, and welcome her to her very first Teradyne earnings call. Michelle, over to you.

Thank you, Greg, and good morning, everyone. I'm thrilled to have joined the Teradyne team and look forward to the value-creating opportunities ahead. Today, I will cover our fourth quarter and full year 2025 financial results Then I will share our Q1 2026 outlook. And then finally, I will discuss our new target earnings model. Now on to Q4. Fourth quarter sales were $1.83 billion with non-GAAP EPS of $1.80, both above the high end of our guidance range. Fourth quarter sales were the highest revenue quarter of 2025 and our second highest quarter in history. only $3 million below our record during the mobile boom of 2021. Semitest revenue was $883 million, fueled by AI compute and memory demand. Within Semitest, SOC revenue was $647 million, up 47% quarter-on-quarter. and memory revenue was $206 million, up 61% quarter-on-quarter, marking a record sales quarter for our memory business. The product test group at $110 million grew double digits sequentially and year-on-year, driven by strong defense and aerospace demand. Robotics revenue of $89 million grew for the third consecutive quarter and was up 19% from Q3. In Q4, greater than 5% of our robotics revenue was driven by a large e-commerce customer. Moving on to bottom line, non-GAAP gross margins were 57.2% aligned with our guidance range driven by semi-test AI demand strength, offset primarily by lower product test group margins and robotics mix and an inventory write-down on legacy products. Non-GAAP operating expenses were $306 million and the non-GAAP operating profit rate was 29% in the quarter. Non-GAAP operating profit dollars in the quarter roughly doubled to $314 million in comparison to both prior quarter and prior year. We generated $219 million in free cash flow and returned $204 million to our shareholders through share repurchases and dividends. quarter, excluding discrete items, was 10.6% and 10.3% on a non-GAAP and GAAP basis, respectively. Overall, fourth quarter results were strong across the portfolio. Now turning to full-year results. Our revenue was $3.2 billion, up 13% from prior year. At the beginning of the year, our SOC revenue was equally divided across our major end markets of compute, mobility, and auto and industrial. Exiting the year, fueled by strong AI-driven demand, compute is now the largest part of our SOC portfolio, eclipsing our historical stronghold of mobile. From an overall portfolio perspective, SimiTest now represents close to 80% of our enterprise sales, an increase from the low 70s over the last few years. From a customer perspective, I'd like to remind you about a characteristic of our business model. We typically have a specifying customer who chooses platforms and drives demand, and a purchasing customer who actually places the order and receives the equipment. In different cases, the specifying and purchasing customers have more influence in the purchase decision. In 2025, we had two greater than 10% specifying customers and one greater than 10% purchasing customer. Gross margin for the year was 58.3%, OpEx was $1.2 billion, and operating profit was 22%. Non-GAAP EPS was $3.96. We generated $450 million in free cash flow and returned $785 million, or 174% of free cash flow, to our shareholders through share repurchases and dividends. We ended 2025 with $448 million of cash and marketable securities. Our tax rate for the full year, excluding discrete items, was 12.8% and 12.6% on a non-GAAP and GAAP basis, respectively. now to our outlook for q1 since our october call we've continued to see demand across our group strengthen q1 sales are expected to be between 1.15 billion and 1.25 billion which would be a new quarterly record driven by all things ai the midpoint of this revenue range is 11 growth from an already strong q4 and 75 growth from the same period in 2025. Non-GAAP EPS is in the range of $1.89 to $2.25 on 158 million diluted shares. From a margin perspective, we expect first quarter gross margins to be in the range of 58.5 to 59.5, up 180 basis points at the midpoint of the guidance quarter over quarter. OpEx is expected to increase 6% from Q4 and run at approximately 26 to 28% of first quarter sales. The non-GAAP operating profit rate at the midpoint of our first quarter guidance is 32%. With the strong start to the year, I want to take a minute to talk about our historical sales patterns and how this is a classic example of history is not necessarily indicative of the future. Many of you who have been following us for a while know historically we've experienced what we call lumpy Q2 or Q3 revenue trends tied to mobile demand and product life cycles. From 2020 to 2024, we consistently delivered the majority of our sales in second and third quarter. 2025 broke this pattern. Q4 represented our largest quarter of the year. As our compute and memory portfolios continue to grow, our revenue will continue to be lumpy, yet follow a less predictable pattern. While 2025 sales were 40% in the first half and 60% in the second half, based on what we know today, we expect 2026 sales to be at the inverse. Before I walk through our new target earnings model, a few comments on our recently announced multi-lane joint venture. As Greg mentioned, we expect to close the joint venture in 2-2-26. For your modeling purposes, the results of this business will be consolidated into the results of our product test group, and our EPS will reflect our share of the results of this business. We will disclose the net income attributable to the non-controlling interest as a new line item on our income statement. We expect this deal to be accretive in 2026 with a de minimis impact to EPS. Now moving on to our new target earnings model. Rather than anchoring our earnings model to a specific future year, as we've done historically, this year we are framing it around what our P&L looks like at an ATE TAM of $12 to $14 billion, which we believe is achievable within this midterm. This approach better reflects the inherent lumpiness in both compute and memory demand, where program timing and customer buying patterns can shift revenue across supporter and year boundaries. So at an ATE TAM of $12 to $14 billion, our target model assumes roughly $6 billion of revenue. At this scale, we expect gross margins between 59% and 61%, a point higher at the high end versus our prior model. We anticipate OPEX of 27% to 29% of revenue, reflecting operating leverage in the benefits of scale. This results in an operating profit of 30% to 34% and non-GAAP EPS of $9.50 to $11. We expect this growth over the midterm to be proportional across each of our groups. From a semi-test group perspective, we expect to grow our revenue greater than the overall ATE market growth rate, reflecting our expectations of share gains. This growth is driven by continued strength in AI compute and memory, as well as anticipated recovery in auto and industrial and mobile. Our mobile assumptions reflect recovery, but not a return to the 2021 peak. We also expect growth in IST tied to wins in SLT for compute, as well as HDV. From a product test group perspective, we expect growth across the portfolio tied to compute, defense, photonics, high-speed Internet data, and data centers. From a robotics group perspective, we expect growth tied to physical AI, A strategic pivot towards large accounts along with a sharper focus on e-commerce, logistics, semiconductor, and electronics verticals is expected to further support growth. This new target earnings model is reflective of our conviction in the growth potential of the ATE TAM driven by all things AI, even at today's unprecedented levels. Moving from a date-driven earnings model to an evergreen one reflects this conviction while also recognizing a lack of precision in terms of which year this comes to fruition. Now turning to capital allocation. Our strategy remains consistent to maintain cash reserves that enable us to run the business and have dry powder for M&A. For reference, from 2015 to 2025, we returned over $5.4 billion to shareholders and dividends, which is roughly 100% of free cash flow. We will remain opportunistic around value-creating inorganic opportunities as well as share buybacks. So summing up, exiting 2025, we are encouraged by the strength of the business. Our overall company revenues grew 13% year-on-year, and our SOC and memory contributed 17% year-over-year, helping to achieve a 23% increase in our EPS to $3.96. We are making strategic investments to drive competitive advantages and gain market share in the semi-test and product test groups. We remain focused on large accounts and attractive verticals to drive sustainable growth in robotics. We enter 2026 feeling good about the year ahead. With that, I'll turn the call back to the operator for questions.