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Edited Transcript of TER earnings conference call or presentation 23-Jan-20 3:00pm GMT

Q4 2019 Teradyne Inc Earnings Call

NORTH READING Jan 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Teradyne Inc earnings conference call or presentation Thursday, January 23, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Blanchard

Teradyne, Inc. - VP of Corporate Relations

* Mark E. Jagiela

Teradyne, Inc. - President, CEO & Director

* Sanjay Mehta

Teradyne, Inc. - CFO, VP & Treasurer

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Conference Call Participants

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* Atif Malik

Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst

* Christopher James Muse

Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst

* John William Pitzer

Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head

* Krish Sankar

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Mehdi Hosseini

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Richard Charles Eastman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Sidney Ho

Deutsche Bank AG, Research Division - Director & Senior Analyst

* Thomas Robert Diffely

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Timothy Michael Arcuri

UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment

* Toshiya Hari

Goldman Sachs Group Inc., Research Division - MD

* Vivek Arya

BofA Merrill Lynch, Research Division - Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Teradyne Q4 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker, Mr. Andrew Blanchard. Please go ahead, sir.

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Andrew J. Blanchard, Teradyne, Inc. - VP of Corporate Relations [2]

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Thank you, Sherry. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Jagiela; and CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2019's fourth quarter and full year, along with our outlook for the first quarter of 2020. The press release containing our fourth 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. Replay 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 statements 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 the website]. Also, please take special note of the safe (technical difficulty) press release and slide deck for risks associated to potential changes in U.S. export regulations.

Looking ahead, between now and our next earnings call, Teradyne will be participating in technology- or industrial-focused investor conferences hosted by Goldman Sachs, Citi, Barclays and Susquehanna.

Now let's get on with the rest of the agenda. First, Mark will comment on our recent results and the market conditions as we enter the new year. Sanjay will then offer more details on our quarterly results, along with our guidance for the first quarter. We'll then answer your questions, and this call is scheduled for 1 hour.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [3]

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Thanks, Andy, and hello, everyone. In today's call, I'll note our Q4 and 2019 full year highlights and comment on our outlook for 2020. Sanjay will then provide the financial details. (technical difficulty) and as we do each January, update you on our earnings model and capital allocation plans.

We ended the year on a very strong (technical difficulty), with sales up 26% from the fourth quarter of 2018 and non-GAAP earnings per share up 40%. That brought our full year sales to about $2.3 billion, up 9%, and non-GAAP EPS to $2.86, up 21% versus 2018.

Looking back at 2019, our test businesses performed well above our plan. Industrial Automation showed solid growth but came in below plan on manufacturing sector headwinds in the U.S. and Europe. In Semi Test, the above-plan results came primarily from 3 areas: first, 5G infrastructure buildout in China; second, significant smartphone complexity growth; and third, memory test share gains.

We estimate the 5G infrastructure buildout contributed about $200 million to the $3.3 billion SOC TAM in 2019, and we captured a sizable portion of that spending. As stated in prior calls, this buildout has, for the moment, been mostly concentrated in China.

In smartphones, complexity growth was very strong, driving up test intensity and, therefore, tester demand. The growth is largely unrelated to 5G as 5G handset volume was insignificant in 2019. Rather, the steady increase of features like multiple (technical difficulty) cameras, enhanced photo and video processing and new connectivity features drove test demand. In particular, image sensor test demand was very strong as there was broad adoption of 3 to 4 backside cameras in a wide variety.

The third driver was memory. While the memory market declined as expected by about 35% from 2018, our sales were down about 3% as NAND test spending was buoyed by (technical difficulty) higher-speed devices and by investments from emerging suppliers in memory. Less significant in 2019 revenue but a significant impact going forward was our successful break into the DRAM (technical difficulty) testing, our new Magnum Epic LPDDR5 DRAM tester. This expands Teradyne's TAM, now serve all 4 segments of the test market with our Magnum platform.

Our System Test and LitePoint test businesses also delivered above-plan results. In System Test, defense and aerospace, production board test and storage test all delivered strong growth for the full year. Storage test performance is especially noteworthy (technical difficulty) 70% coming from the increased test intensity of terabyte HDD drives and a growing business in the system-level test of complex semiconductor devices. While at LitePoint, new connectivity standards, along with early buy-in for the 5G handset test market, are the principal drivers of 19% growth for the full year.

While our test businesses operated above plan, our IA business performance was solid but below plan for the year, growing 12% on a pro forma basis. Individually, UR grew 6% and MiR grew 43% on a pro forma basis. As we've discussed, at UR, we've had high exposure to the global automotive supply chain and general European manufacturing sector, both of which faced strong economic headwinds throughout the year. On the other hand, MiR's mobile robots serve a more diverse range of end markets and showed solid growth in the year.

2019 was also a big year for Teradyne on the new product front. These new products both strengthen our core positions and set us up to profitably grow in the future. In Semi Test, we introduced the UltraFLEXplus platform, targeting the AI and big data markets, the Magnum Epic platform for LPDDR5 DRAM final test and the MX44 instrument for 5G millimeter wave device test. At LitePoint, we introduced new members of our IQgig and IQxel families of production testers for 5G handsets and [semi] (technical difficulty) WiFi, respectively.

In System Test, we ramped production of the spectrum high-speed tester for complex defense electronic systems. In Industrial Automation, we introduced the UR16e cobot for higher payload and began delivery of our bin picking solution to multiple beta site customers in Q4.

In mobile robots, we introduced the MiR1000 for increased payloads and the MiR AI camera system that utilizes AI to improve robot traffic flow in busy industrial settings. And our engineering pipeline is full of future products across all groups.

Rounding out 2019, our balanced approach to capital allocation resulted in the strategic acquisition of AutoGuide, serving the nascent autonomous mobile forklift market. We also continued our capital return program with $500 million in share buybacks and $61 million in dividends.

Looking forward to 2020, we see continued strong momentum in our test businesses and an improvement in our IA growth. Early returns on our new products are positive with the UltraFLEXplus winning a significant competitive design-in during Q4 in the mobility space and the Magnum Epic tester winning in LPDDR final test at a major memory maker. These early wins in Semi Test contribute to our strong outlook for the first quarter.

I'd like to give you some context on how we're looking into 2020. First, we expect our smartphone test demand to be strong and back to levels similar to what we saw in 2016 and 2017. As then, we expect our 2020 revenue will be first half weighted in the year. Second, we expect storage test to be especially strong in the first half for both HDD and system-level test applications. For the year, it's expected to grow about 40% from 2019. Third, the design wins for the Magnum Epic and the UltraFLEXplus will begin to ramp in Q1, and this represents new customers and new segments that we expect to contribute revenue growth over the midterm.

Balancing this strength, we are seeing the expected pause in the 5G infrastructure test buying to power our 2019 sales. At a high level, we're seeing the 5G demand evolve from infrastructure to smartphones, as we outlined in past calls. The global 5G infrastructure build-out is still in the early innings, and we expect test demand will cycle at various geographies build -- as various geographies build out their networks.

5G smartphone-related test demand will begin in 2020, but it will be somewhat modest as it's mostly low-band or sub-6G technology rolling out. Millimeter wave investments are still to come over the midterm.

Additionally, we do not expect to see any significant recovery in the automotive or analog markets in 2020. As Sanjay will describe, we will be increasing our 2020 OpEx in Test to expand these design wins, accelerate some new products and take advantage of what we now expect to be a faster-growing test market over the midterm.

Taken altogether, our outlook for the 2020 SOC Test market is in the $3.1 billion to $3.4 billion range, and Memory Test is in the $650 million to $750 million range. Of course, this assumes no change in the current global trade regulatory environment. We'll update you on this outlook as we move through the year. For reference, this compares to about a $3.3 billion SOC and about a $600 million memory test market in 2019.

Turning to Industrial Automation. Recall, our strategy is to use the power of advanced technology to democratize automation and make industrial warehouse applications more productive and safer. We remain confident of the growth opportunity as we execute this strategy, and the addition of AutoGuide gives us access to an even broader set of opportunities. While we expect the automotive and general manufacturing markets in Europe and the U.S. to remain weak, we do think this headwind has dissipated. This, combined with our expansion into the electronics manufacturing sector, other consumer goods manufacturing, bin picking and the industrial forklift automation market, gives us confidence that a higher IA growth profile in 2020 is likely.

Additionally, the UR+ ecosystem continues to grow, and we ended the year with 206 certified plug-and-play solutions available, up from about 130 at the start of 2019. A similar program for our mobile autonomous robots, MiRGo, launched in 2019 and will expand in 2020. Overall, we expect our 14% IA growth in 2019 to increase to above 20% in 2020.

In summary, we enter 2020 very optimistic. While uncertainties remain in trade policies and global economies, the overall technological and economic trends that fuel our business are strong. Our new products are opening new markets and gaining new customers. Test market growth is strong, and we are still in the early innings of 5G. IA growth is solid in the environment of a U.S. and European manufacturing slowdown, and we expect that this headwind is dissipating. This, plus a strong M&A pipeline and a commitment to capital returns, remains our strategy.

Sanjay will now take you through the financial and modeling details. Sanjay?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [4]

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Thank you, Mark. Good morning, everyone. Today, I'll cover the financial highlights of Q4 and review the financial details of 2019. Looking forward, I'll provide an update to our midterm-level Q1 outlook and color around 2020, which will include our capital allocation plans.

Now to Q4. Revenues were $655 million, which were $25 million above the high end of our guidance range. Semi Test revenue of $439 million led the quarter-over-quarter growth driven by memory and SOC test demand, enabling 5G infrastructure and higher speed flash and DRAM devices. System Test group had revenue of $83 million, which grew quarter-over-quarter driven by our storage test solutions, enabling system-level test for SOCs. Industrial Automation, or IA, revenue of $88 million had a seasonal increase in revenue over Q3 and grew year-over-year in an environment where significant auto industry headwinds exist. LitePoint revenue of $45 million grew quarter-over-quarter and year-over-year with new connectivity standard, WiFi 6, and cellular 5G driving revenue.

Non-GAAP gross margins were 58.5%, a bit above our plan and slightly down quarter-over-quarter due to product mix. You'll see our non-GAAP operating expenses were up $19 million to $204 million for the third -- from the third quarter due to a higher variable compensation on higher profit, increased test spending to support design wins and ongoing IA investments.

Non-GAAP operating profit was 27%, and non-GAAP EPS was $0.88. The tax rate excluding discrete items for the quarter and the year was 15.5% on a GAAP basis and 16.5% on a non-GAAP basis. We bought back 2.1 million shares for $131 million at an average price of $62.44 in the quarter. For the full year, we bought back 10.9 million shares at an average price of $45.89. Since the start of 2015, we have spent $1.97 billion to repurchase 60.8 million shares with an average price of $32.38, which delivered significant shareholder returns over the 5-year period. We ended the year with cash and marketable security balances of approximately $1 billion.

Turning to the full year results of 2019. Teradyne revenues of $2.295 billion grew $194 million or 9%. $157 million of the growth was from our test portfolio and $37 million from IA. We had 2 customers with 10% or greater revenues in 2019, who will be disclosed in our 10-K filing. Gross margins were 58% and operating profit was 25%, which is consistent with 2018. EPS was $2.86 or 21% growth year-over-year.

Breaking down the components of 2019 revenues. As Mark outlined, the SOC test revenues grew $67 million or 6% on strength in 5G sub-6 infrastructure, increased complexity in mobile devices and millimeter wave development demand. In memory, revenues were $266 million, down 3% in the down market. Demand for higher-speed NAND testers from existing customers and new entrants, combined with DRAM wafer test demand, highlighted the year. Late in the year, we also received initial revenue for our Magnum Epic LPDDR5 DRAM package test system.

In System Test, sales grew for the third year in a row. Revenue of $287 million grew $71 million or 33% year-over-year primarily on growth in storage test for both system-level test and HDD test, which had sales of $115 million, up from $67 million in 2018. We also saw annual growth in our defense and aerospace and production board test components of STG.

At LitePoint, sales grew for a third year in a row as well. Revenue was $157 million, 19% above 2018 level. New connectivity standards were the biggest driver of demand, but we also saw surge in 5G cellular demand in Q4.

IA revenue of $298 million grew 14% from 2018 on an as-reported basis or 12% on a pro forma basis. Universal Robots revenue of $248 million or 6% year-over-year growth was below our original plan. As discussed by Mark, UR's demand has 40% plus exposure to manufacturing in Europe and the automotive industry, both of which faced significant market headwinds in 2019. Recent eurozone PMI data suggests a moderating trend but no indication of improvement in the near term. The auto outlook is similar.

MiR revenues of $44 million grew 43% on a pro forma basis or 84% on an as-reported basis. Recall, we acquired MiR in April of 2018. IA in total had a non-GAAP operating profit of 10% for the full year, a rate that we're modeling for 2020 as well.

Shifting to our midterm earnings model. Factoring in both recent history and our latest outlook, we've updated the high end of our $3.50 to $4 earnings target to $4.25 of non-GAAP EPS in 2022. We have growing confidence in the semi test end market drivers such as greater product complexity for performance, 5G sub-6 millimeter wave driving capacity needs in infrastructure, phones and IoT devices. We also expect a continuation of the growing performance trends in memory devices. This, along with some specific mobility and memory share gains and device unit growth, give us confidence to raise the Semi Test revenue growth rates from 3% to 5%, to 4% to 8% from our baseline 2019 revenue. At the same time, to reflect near-term industry conditions, IA's model growth rate has been reduced to a range of 20% to 35% off of our 2019 baseline revenue, as Mark noted. We expect above 20% growth in 2020.

In 2019, we experienced a significant slowdown in sales growth tied to macro conditions noted earlier. However, our long-term outlook remains positive, and we'll continue to invest in scaling the business, specifically increasing our distributor capacity, sharpening our focus on marketing efforts for lead generation and closure, investing to expand our reach to major accounts and continuing to invest in software solutions needed to scale our portfolio. The net result of these updated growth assumptions is a greater revenue contribution in 2022 from our test portfolio versus the prior model.

Our gross margin target has increased roughly 1%, which drops down to operating profit, increasing that to 26% to 28% at the top end of our EPS range and increasing the top end of our EPS range to $4.25.

Now to our outlook for Q1. Sales are expected to be between $670 million and $710 million, non-GAAP EPS range of $0.86 to $0.96 on 174 million diluted shares. The first quarter guidance exclude the amortization of acquired intangibles and noncash imputed interest on the convertible debt. First quarter gross margins are estimated to be between 57% and 58%, down slightly from the fourth quarter due to mix.

The first quarter OpEx, running at 30% to 31% of first quarter sales, is up about $6 million from the fourth quarter due to further IA distribution and product development investments, including the addition of AutoGuide, along with incremental test investments I'll discuss shortly. The non-GAAP operating profit at the midpoint of the first quarter guidance is 27%.

Now turning to some color around the full year outlook to help your model. As Mark noted, we expect a strong first half similar to 2016 and 2017 when the first half revenues were 55% and 54% of the full year sales, respectively. Key drivers of the first half revenue include handset test demand, system-level testers being sold to enable key product ramp in our storage test segment and early ramping of LPDDR5 DRAM memory test capacity. Unlike 2016 and '17, based on our very early estimates, we expect roughly similar sales levels in Q2 as in Q1.

Regarding our OpEx plans for 2020. We expect our OpEx to grow 10% to 12% from 2019's $758 million. This is driven by investments across the business. In IA, we'll continue to invest to reinforce our competitive position across the sector, as noted earlier. In our test portfolio, we plan to increase our spending in engineering, sales and marketing, primarily in Semi Test. The engineering efforts will include memory and SOC investments to maintain our leadership position as well as invest in areas of the market where we believe there's opportunity for us to grow. Increased sales and marketing investments are driven by share gains, which require effort to convert and ramp customers on Teradyne's products and then provide ongoing support. Beyond 2020, we model test OpEx to have flat to GDP growth.

Capital expenditures in 2020 will increase above our normal run rate. In 2019, our CapEx was $135 million, used primarily for customer demonstration equipment, operations and engineering. In 2020, we've earmarked an incremental $40 million or so for real estate investments in locations where we plan to grow significantly over the next several years. We are buying land and developing it to eliminate lease costs and enable more cost-efficient spend profile over the mid- to long term. The projects will take 2 years to complete, with the majority of the spending this year. Our GAAP and non-GAAP tax rate for 2020 is estimated at 16%.

Shifting to capital allocation. We'll continue to balance strong cash position to support our operating investments and potential M&A with direct shareholder returns through dividends and share repurchases. Recall, we have a $460 million face value convertible bond that matures in 2023.

Regarding direct returns. We will be increasing our dividend by 11% to $0.10 per quarter, which reflects our confidence in our operating level and growing markets we serve.

With regards to share repurchases. We canceled the unused portion of the prior program and replaced it with a $1 billion share repurchase program. We plan a minimum of $250 million of share repurchase in 2020. The program does not have a fixed end date and as in the past, there's a programmatic and opportunistic component. Recall, in 2018 and 2019, we spent approximately $1.3 billion in share buybacks driven by 2017 tax reform, which enabled offshore cash to be repatriated efficiently. Our 2020 target represents our getting back to a more normal level of share repurchases.

In summary, we closed out 2019 very strong and entered 2020 with good momentum powered by our strong test portfolio. Our updated capital allocation plan and earnings model reflects our confidence in Test and Industrial Automation while acknowledging the short-term impacts of the global slowdown in industrial spending. We'll continue to invest in R&D, distribution and internal capabilities to improve our competitive position and drive profitable growth across the business. While we can't predict what lies ahead for the full year, we have the products, the team and a proven flexible business model that can efficiently scale demand during a fluctuating time period and the strategy to thrive in the new year.

With that, I'll turn things back to Andy.

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Andrew J. Blanchard, Teradyne, Inc. - VP of Corporate Relations [5]

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Thanks, Sanjay. And Sherry, we'd now like to take some questions. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Vivek Arya with Bank of America.

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Vivek Arya, BofA Merrill Lynch, Research Division - Director [2]

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For the first one, in the press release, you called out Huawei and HiSilicon as significant customers. I'm wondering how big were they directly or indirectly in 2019 and if you have a number for 2018 as well. And do you have a sense for how much of that related capacity is being utilized versus any extraneous effects due to tariff or trade or other issues?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [3]

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Yes. We're not going to give specific numbers for any specific customer. But what I will say is that, certainly, they are a significant customer of Teradyne, and utilization is 100-plus-percent. There's strong demand. There was demand all through the year, utilization high. And at this point, that situation continues, with the exception of 5G infrastructure, which represents a subset of the demand being weaker now than it was running in the second half of last year.

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Vivek Arya, BofA Merrill Lynch, Research Division - Director [4]

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All right. And for my follow-up, on the 5G side, you maintained the $200 million-or-so contribution or the market size for last year. And I think, in the past, you had mentioned the $300 million to $400 million opportunity. How do you see your share playing out? Which areas you think you are stronger versus your competitor?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [5]

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Yes, good question. So that $200 million number for 2019 was predominantly infrastructure related. And I think our share there was probably 70-plus-percent. As we enter 2020, there will be a shift towards handsets, and infrastructure will come down a bit. And I'd say, our share as a consequence of that will probably be somewhere between that 50% to 75% -- 50% to 70% range in that kind of a mix.

But longer term, as more millimeter wave comes online, again, we're talking probably post 2020, that's when the total market should grow to that $400 million-ish range for Semi Test. And then on top of that, in LitePoint, there's probably -- we've been talking about $100 million-ish adder for 5G handset test. But the way we see it now, it's likely that could be a bit higher. That may peak at around $150 million or so. So that's how it progresses out through the next few years.

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Operator [6]

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Our next question comes from John Pitzer with Crédit Suisse.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [7]

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Mark, I'm just kind of curious, your view of calendar year '20 half-on-half being 55-45. To what extent is that just lack of visibility into the second half and conservatism versus actually having visibility that the second half is going to be down? And I guess help me understand why '16, '17 is the right analogy year to compare calendar year '20. And as you answer the question, if we're going through a pause in 5G infrastructure currently, when's the expectation for that to come back?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [8]

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Yes, that's a good question. So I'd just like to point out that we have very little visibility into the second half. So the 55-45 split is purely based on a historical model or precedent where in 2016 and 2017, we had significant mobility handset test tooling in the first half, and we've simply looked at that and said, everything else being equal, let's assume the year follows that pattern. But we don't have any data points that I would say are strong on that.

And then with infrastructure, we expect -- because most of the buildout in infrastructure was concentrated in China last year, it ran very hot. It's in a pause right now. But there's plenty of geographies that still need to build out. So that has to come back at some point. We don't think it's in the first half of the year where we do have visibility, but it could be in the second half of the year or early next year.

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John William Pitzer, Crédit Suisse AG, Research Division - MD, Global Technology Strategist and Global Technology Sector Head [9]

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That's helpful. And maybe for my follow-on, to kind of add on to Vivek's first question, I understand the desire not to talk about absolute levels for a specific customer. But I'm kind of curious, just relative to some of the concerns investors had that there might be a change in the de minimis rule from 25% to 10%, would that change, as you understand it, impact your business to Huawei? Or how should we think about that in the investment community?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [10]

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Yes, it's Sanjay. So the first thing is, is that -- I'll just say that Teradyne is going to be compliant with whatever the regulations are. And then the revenue impact, I'd say, is a little bit hard to call. Let me give you some color around there. Depending on -- there could be a lot of conjecture about what the rules could be and whatever they are. I think that if there's -- our inability to ship to Huawei for whatever reason, you have to consider -- if you consider the end market to be the end market, we believe that there would be a shift in -- to other providers. Now that would have a time gap as that process takes place. But I think it's very hard, a, we don't actually understand -- know what the regulations are going to be; and then b, the end market impact, I think, over the midterm would kind of work itself out. But there would be this fluctuation in the short term.

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Operator [11]

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Our next question comes from Timothy Arcuri with UBS.

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Timothy Michael Arcuri, UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment [12]

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The first question, Mark, I just -- I'm going back to your comment that the $200 million extra SOC TAM that came from 5G this year, your share was about 70%. But total SOC share, if I take a $3.3 billion market this year, you actually lost like 300 basis points worth of share for the year. So why would that be if you captured sort of an abnormally high portion of that incremental 5G?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [13]

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Yes. So there's lots going on under the covers in SOC test. So the 5G bump was one component of it, but analog and automotive were at a very low level, which is another place where we have very high share. So those 2, you might say, sort of almost negated each other in terms of share -- net share gain. Then the other effect going on is the -- there's a segment of the SOC test market, it's probably the only segment we don't serve, which is LCD driver -- display driver, that market has grown quite dramatically in 2019. It added, I think, about $100 million to $150 million of market. It's pretty much all going to Advantest, and that kind of makes up the difference in the calculation.

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Timothy Michael Arcuri, UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment [14]

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Okay. Got it. And then I guess just a follow-up question on the topic around export control. So if I take a flat June, which you're sort of implying is going to be flat, and then if I assume that the year sort of plays out that the first half is 55% and the back half is 45%, that sort of says that you're going to be at around 2.5 for the year. Does that guidance -- what does that assume in terms of export control rule changes? Because if the threshold goes to 10% and they remove the sensitive content requirement, does that assume that you'll still be able to ship to Huawei? Or does that assume that there will be some impact?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [15]

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Yes. I think with what we believe is being contemplated at the moment, and again, this is still in daily discussions obviously in the Commerce Department and the Department of Defense and everything else, that it would not have a significant impact to our plans for 2020. But what Sanjay said is true, is that let's assume for a minute that something more draconian than we expect happens with restrictions. The demand in the market won't change. So the supply will shift to other suppliers, and we're well positioned at the likely other suppliers that will shift to, so it's simply a movement of one place to another.

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Operator [16]

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Our next question comes from Toshiya Hari with Goldman Sachs.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [17]

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Mark, you guys lowered your long-term growth assumptions around the IA business from 30% to 40%, to 20% to 35%. I appreciate the near-term environment in Europe in automotive from an end demand standpoint remains pretty weak. But why the change? Have you sensed any change to the competitive landscape or how you think about the economics around the adoption of cobots? Or what's changed there?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [18]

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Yes. It's no competitive and no long-term change. It's simply math, meaning we've got another -- to get to that 2022 year, we've got 3 years to get there. We think 2020 is going to be better than '19 in terms of growth but not in that 30% to 40% range that would make that viable. So we think we're going to, again, move back north on growth rates this year. We'll be north of 20% for the group, and we would expect subsequent years to improve beyond that. But when you average it out over 3 years, that's kind of the range we think we'll be in. Longer term, nothing's changed.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [19]

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Got it. And then as a follow-up, I had a question on memory test. Can you confirm what your market share was in 2019 in NAND and DRAM relative to 2018? And then for the TAM for 2020, I think you guys are thinking 15-ish-percent growth on a year-over-year basis. That seems a little conservative given what we're seeing in terms of the memory market. What's kind of pulling that down, if you will?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [20]

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Well, let's see. So first of all, the share in 2018, we're roughly 30% share, and last year, we think we'll be around 43-ish-percent share, 43%. Looking to 2020 market, we're thinking $700 million roughly would be the market. We've said the long-term average should be about $750 million. I wouldn't be surprised if it was a bit higher, but it's -- again, at this point, it's hard to forecast.

Now in terms of our share in 2020, the success we had -- all last year, we talked about this target of cracking in the final wedge of the memory test market, DRAM final test that we didn't participate in. And that was a year-long project that finally came to fruition in December. So that sets us up going into 2020 to serve all 4 segments of the market. China will continue to be pretty aggressive. So that's a balloon. And I think our share -- as I think in the last call, I said, expect our share to fall back into the high-30s, 35% to 40% range, as DRAM snaps back in 2020. But now that we're playing in that market, we think where -- share is going to stay up in that 40% range in 2020.

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Operator [21]

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Our next question comes from Atif Malik with Citi.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [22]

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Congratulations on strong results and guide. And also good job in winning the LPDDR5 design wins at the Korean memory makers. Mark, my first question is with respect to your expectations on the industrial auto demand not recovering this year, can you remind us how much is that semiconductor test demand down from the prior peak? And then as my follow-up, Sanjay, can you comment on the profitability of your memory test business relative to your overall semiconductor test business?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [23]

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I'm sorry, Atif, I didn't get your first question. Could you just ask it again, please?

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [24]

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Yes. Mark, what I'm asking is how far is your industrial and auto test business down from the prior peak. And then for Sanjay, the memory profitability.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [25]

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Got it. Thank you. Yes. So automotive and analog tends to peak at around $500 million or so of the market, $500 million to $550 million. Last year, we expect that it was somewhere in the $300 million to $325 million range. So it's down by about $200 million.

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [26]

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And from the memory profitability standpoint, we see the margins and the profitability similar to the SOC market.

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Operator [27]

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Our next question comes from C.J. Muse with Evercore.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [28]

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Curious on your new test outlook of 6% growth at the midpoint versus your prior view of 4%, and that's off of a higher base in '19. How much of that outlook is based on just what you're seeing overall testing as in complexity versus some of the share gains on the gaming console, DDR5, et cetera?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [29]

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Yes, I think that's -- it's Sanjay here. I think that you can view that as we see over the midterm growth really driven by, as you said, complexity in end devices, 5G, kind of both sub-6 and millimeter wave as well as share gains. So I'd say it's more like 30% tied to market and 70% tied to share gains roughly over the midterm.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [30]

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Very helpful. And then on the IA side, MiR clearly helped, but UR grew 23% sequentially on its own. Curious what signal that sends to you. I mean, how much of that was programmatic as opposed to perhaps an early indication of cyclical recovery on the manufacturing side?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [31]

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Well, I think on the UR front zone as well as MiR, seasonally, Q4 is a generally high quarter if you look back over time. So that's encouraging. And it was actually one of the drivers of us being higher than our guidance range. However, as we look into the first half, we are seeing that seasonal pattern come down from an IA perspective. And I think it's really early innings to call a recovery in those -- in industrials and automotive at this point from our standpoint.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [32]

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So when you're thinking about growing that business 20-plus-percent in 2020, is that really an indication of kind of the programs that you see for MiR? Or what's the underlying assumption for UR?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [33]

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Yes. So we see MiR and UR both contributing obviously to the 20-plus-percent growth that Mark articulated. And we are investing in, as I said, growing in distribution. As you know, MiR is coming from -- is a little bit later in years as coming from a smaller base. But we see both contributing quite significantly to that 20-plus-percent growth.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [34]

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And C.J., I'd just -- I would just add on that, that the UR is -- has higher exposure to automotive and sort of the general manufacturing issues that we're seeing in the market. But the fact that we did see the strong sequential performance that you alluded to, we did see a little bit of year-over-year gain, we introduced a new product last year with the 16-kilogram payload version that's just starting to ramp and we're just now -- actually, in April, going to be rolling out the bin picking solution in North America. So new products, bottoming of the headwinds in the manufacturing sector in Europe and North America are strong, strong indicators for us.

The other thing is that last year, we saw really good performance in China in terms of growth. We grew -- I think it was 40% or so in China last year where those headwinds were absent. So UR, in a very competitive region, and still showing that kind of lens. So we're really confident with the new products and the sort of diminishing headwinds.

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Operator [35]

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Our next question comes from Mehdi Hosseini with SIG.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [36]

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I want to take more of a broader outlook. If I just look at your commentary for 2020, the 55-45 mix, it seems to me that on the earnings side, you would come in at or slightly above the midpoint of your longer-term target. And I'm also under the impression that millimeter wave could be a big TAM for SOC, but that's most likely a 2022 catalyst. So given this kind of a thought process, could we see some fluctuation in annualized earning as you think about the longer term of maybe a best case $4.25? I'm just trying to better understand the dynamics of different parts of the company, especially with the change of outlook on IA and how SOC market is going to play out.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [37]

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Yes, we've been blessed with a pretty stable, nonvolatile test market here for quite some number of years. And so it's certainly possible on our way to $4.25 and beyond, we could see a drop-down. We haven't seen that -- our EPS have been monotonically growing here for quite some time. So there's still likely volatility. It doesn't seem imminent. So the drivers here, especially around 5G, are going to be pretty big balloons. But at the same time, you and I both know, being around for as long as we've been in this industry, something like a 20% correction can occur. That in no way changes the fundamentals of where 5-nanometer, 3-nanometer are going to take us with complexity and what these device -- the 5G transceivers and antennas and such that are going into their phones over the next few years are going to bring to the test world. So I'm not -- we don't plan and try to -- we're on a trend line projection, as you know, and that's what we believe.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [38]

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Just as a follow-up, I'm just thinking that for millimeter wave, there will be some changes to the base station to the networking. And that would have to happen before there will be an SOC upgrade cycle. And the base station, TAM is like $200 million for test and AT is $400 million. How do you see the impact of millimeter wave on a networking versus the phone itself given the kind of picture that I just laid out?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [39]

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Yes. So I think that from a test intensity point of view, handsets will matter more. So the thing that made last year incredible in terms of infrastructure was the concentration in a very short period of time. So to roll out China sub-6 to your low band, to put in the infrastructure to do that, a tremendous amount of capacity was built out in 1 year to make that happen. Millimeter wave is going to be spread over many years. I don't think that it's going -- it will be marginally more test intensive than -- at the base station level than sub-6G. But it's not going to have the same sort of $150 million, $200 million bump in the TAM that we saw last year.

On the other hand, the handset side of this is where the real money will be for both LitePoint and Semi Test. And there's going to be a tipping point that we need to reach, specifically in the U.S., on deployment of millimeter wave base stations to shift, let's say, half the domestic supply of handsets to millimeter wave capable. And we just still think that's probably 2021 or 2022. It may -- we're a little more optimistic that it's coming sooner on millimeter wave. But if we go back to that $400 million bump to the SOC market, if you're thinking about 2022, it's probably $300 million plus of that is going to be handset related.

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Operator [40]

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Our next question comes from Krish Sankar with Cowen and Co.

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Krish Sankar, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [41]

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I had 2 of them. First of all, Mark, thanks for the color on millimeter wave. Do you think that when you look at millimeter wave, now that you have a dual opportunity both on the SOC test side as well as LitePoint side, do you think they happen in tandem? Or does LitePoint lead or lag the AT business? And then I had a follow-up on cobots.

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [42]

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Yes. Sanjay. I think they come out in similar opportunities. I think what you're seeing right now in millimeter wave on the SOC test perspective is a lot of engineering work and testers associated with that. And then you do have the LitePoint end device tester in parallel for what millimeter wave devices that are out there. And then when the -- and as we say, it comes -- as we've said before, we believe it comes in waves. And arguably 2021 and 2022, I think you'll see both of them come up. Obviously, the chip guys on the SOC test will be slightly ahead, but I think they'll mainly come some early time.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [43]

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One more thing about LitePoint that we haven't mentioned that -- LitePoint's traditional strength has been WiFi connectivity test. And there's a lot going on in the next few years in WiFi. That's really encouraging to us. So finally, 802.11ax, or what's now been rebranded WiFi 6, is rolling out to phones. That's going to propel our connectivity business. Then we're going to open up the 7 gigahertz -- 6 to 7 gigahertz band for WiFi. That's another new need to retool the tester installed base for that frequency band. And then we're -- and the industry is working on this new 802.11be standard that is 16x16 MIMO. It's 360 megahertz of channel bandwidth, once again requiring new test capacity. So unlike the past 4 years where connectivity has been kind of dormant, when we look over the next 4 years, connectivity is also going to see significant retooling, we think.

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Krish Sankar, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [44]

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Got it. That's very helpful. And then I just had a follow-up on the cobots side. A 2-part question. Where are we on the installation time reduction for cobots? I think this used to be 4 to 6 weeks, but you guys are trying to reduce it. And also, do you have any update on the partnership you're doing with -- on the vision side for cobots?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [45]

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I think on the deployment time, yes, we -- that's -- I alluded earlier to where we're investing. We continue to invest -- we don't have specific metrics around that, but we continue to see improvement and improvement in the initial deployment as well as the follow-on deployments at an existing customer.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [46]

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And then vision?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [47]

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And the second question was tied to...

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Krish Sankar, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [48]

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Vision partnerships.

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [49]

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Vision partnerships. I think the answer is we have a lot UR+ partners that are suppliers.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [50]

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Yes. I think we're fielding a bin picking solution that has a vision system embedded in it that we will kind of be a reseller for. But there's a wide variety of partners already in our UR+ ecosystem that are natively embedded in our operating system. So all of that is sort of business as usual. No real new trends there.

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Operator [51]

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Our next question comes from Richard Eastman with Baird.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [52]

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Just a quick question around the Industrial Automation business in general. How did that -- how did their P&L or gross margin, I think, finished the year? And then also, I think you referenced an op profit contribution, the contribution margin there of 10%, and that was the expectation going forward into '20 as well. So I'm curious, is there a kicked up investment there below the gross margin line? Has the gross margin line kind of held around 60% there?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [53]

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Yes. This is Sanjay. So I think the gross margin is roughly as you'd expect it to be. There's been no degradation at all. And I did comment that our operating profit in IA in general is 10%. You should expect that next year. I think the -- when I think about the Industrial Automation business and our strategy towards it, fundamentally, as we have significant growth, we plan on investing to improve our competitive position. We believe in this nascent market, and our outlook in the long term, as Mark said earlier, is unchanged.

I think when -- you should start thinking about it, when you expect -- or when we expect growth in single digits, that's when you'd expect us to be at or above kind of our model profit or, let's say, 20% operating profit plus as growth tends to slow. But as we see the market and as we believe that we're going to grow significant double digits, and into the future, we're going to continue to invest to drive the top line and then when we see the growth taper off, you'd expect our operating profit to improve.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [54]

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So in the 50% that's OpEx there, is that kicked up on the R&D side? Or is this still kind of go-to-market support cost and expansion of the distribution base? Or where do you pull that 50% out to drop the contribution margin of 10%? Because it had been riding 15% to 20%.

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [55]

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Yes. It's a combination of both, I'd say. The other point I'd put -- I'd add in there is that our 2020 forecast includes AutoGuide. But it's both, really, investments in lead generation and closure, distribution, our partners. We're really putting forward the go-to-market. But then also things like fleet management, system software and different software capability to help drive the scalability of our solutions to customers.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [56]

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Okay. And then just as my second question, just -- Mark, I wanted to return to something you talked about, the 5G infrastructure business in the Semi Test. You referenced there that the market there and the demand there is pausing in the China market. I'm trying to get my arms around -- a little bit around the timetable here. Just from the standpoint of you continue to see some fairly aggressive production and deployment numbers around base stations in China, in the Asian market in general, and so is your reference to the test demand that that is in place ahead of the production? So in other words, there's some inventory of the chip content into the base stations? Or how do we reconcile the aggressive forecasts around production and deployment of base stations with your commentary about the market pausing out?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [57]

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Yes, it's exactly what you said. So in advance of deployments of the actual base stations, a lot of silicon test capacity goes in place. So now those base stations are churning out like mad out of the factories, which is why utilization of test equipment is very high. So it's required an additional bump in deployment rate of base stations to drive the next round of test equipment, so U.S., Europe, the rest of the world. And China as well, there's not enough really capacity in China to totally facilitate China where it has to get to. But what they need to do for 2020, it's probably sufficient.

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Operator [58]

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Our next question comes from Sidney Ho with Deutsche Bank.

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Sidney Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [59]

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You talk about second quarter revenue to be flat quarter-over-quarter in Q2, and that's different from how it was a few years ago, 2016 and 2017. Can you add a little more color, what are some of the factors that make it different than those 2 years?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [60]

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Yes. It's Sanjay. So I think in Q1, we've had -- we will have some significant drivers outside of SOC test and then inside. The first one is storage test or system-level test and HDD where we'll have a significant revenue in Q1, which will decline in Q2. The second comment I'd make is that within Semi Test, we've got some share gains that require some initial tooling in Q1 that will be moderating in Q2. The last point I'd leave you with is that it's still early stages for Q2. This is roughly where we think we're going to end up.

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Sidney Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [61]

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Okay. That's helpful. My follow-up is that you guided the SOC TAM to be, call it, roughly flat in 2020. How do you think about the different moving parts in terms of end markets? And related to that, how do you expect your share in SOC test to do this year? I think last year was around 40%. Any color, end market, customer mix, product mix that's driving the shares will be helpful.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [62]

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Yes. So our expectation this year is that the mix -- the combination of some of the design wins I alluded to in my remarks around the UltraFLEXplus platform, plus a little bit, I would say, of a shift toward our customers in this year will bring our share likely up into the mid-40% area is what we expect.

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Operator [63]

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Our final question will come from Tom Diffely with D.A. Davidson.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [64]

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I was hoping you could talk a little bit more about the service component in Semi, in particular, going forward and how you see that playing out.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [65]

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In Semi?

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Sanjay Mehta, Teradyne, Inc. - CFO, VP & Treasurer [66]

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Yes.

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [67]

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So the -- yes, Semi service for us, for years, has been a very strong part of the portfolio. It's roughly -- runs around 20% of Semi revenue. And it's up into the $300 million range. We don't expect as a percentage of revenue it will vary that much. But that's roughly where it is.

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Thomas Robert Diffely, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [68]

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Okay. So there's not a view into that increasing markedly over the next few years as you get to your target model?

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Mark E. Jagiela, Teradyne, Inc. - President, CEO & Director [69]

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Yes. I think it will scale with System revenue. I think on the Industrial Automation side, that's an area where service will go from -- when we acquired these companies having essentially no service business, we're now growing service in those businesses at a faster rate than the top line. So that will be a story that evolves through over the next few years. But in Semi, it should stay consistent.

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Andrew J. Blanchard, Teradyne, Inc. - VP of Corporate Relations [70]

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All right, everybody. Thank you so much for joining us today. I apologize for the static at the front end of the call, and we look forward to talking to you in the days and weeks ahead. Bye-bye.

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Operator [71]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.