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Edited Transcript of TER earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Teradyne Inc Earnings Call

NORTH READING May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Teradyne Inc earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Blanchard

Teradyne, Inc. - VP of Corporate Relations

* Gregory R. Beecher

Teradyne, Inc. - CFO, VP and Treasurer

* Mark E. Jagiela

Teradyne, Inc. - CEO, President and Director

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Conference Call Participants

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* Atif Malik

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

* Christopher James Muse

Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst

* David Duley

* Farhan Ahmad

Crédit Suisse AG, Research Division - VP and Senior Analyst for Semiconductor Capital Equipment sector

* Jagadish Kalyanam Iyer

Summit Redstone Partners, L.L.C - MD and Senior Analyst

* Mehdi Hosseini

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Richard Charles Eastman

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

* Sreekrishnan Sankar

BofA Merrill Lynch, Research Division - Director

* Stephen Chin

UBS Investment Bank, Research Division - MD in the Technology Group and Research Analyst

* Timothy Michael Arcuri

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

* Toshiya Hari

Goldman Sachs Group Inc., Research Division - MD

* Yeuk-Fai Mok

Needham & Company, LLC, Research Division - Senior Analyst of Semiconductor Capital Equipment

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Presentation

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Operator [1]

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Good day. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne's First Quarter 2017 Earnings Conference. (Operator Instructions)

I would now turn the call over to Mr. Andy Blanchard. Please go ahead.

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

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Thank you, Carmen. 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 our Chief Financial Officer, Greg Beecher. Following our opening remarks, we'll provide details of our performance for 2017's first quarter and our outlook for the second quarter. The press release containing our first quarter results was issued last evening. We're providing slides on the Investor page of the website that may be helpful to you in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in the earnings release as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call.

During today's call, we'll make reference to non-GAAP financial measures. We posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure, where applicable, on the Investor website. Also between now and our next earnings call, Teradyne will be participating in investor conferences hosted by Stifel, BofA, Cowen, R.W. Baird, Pac Crest and Citi.

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 second quarter. Greg will then offer more details on our quarterly financial results along with our guidance for the second quarter. We'll then answer your questions, and this call is scheduled for 1 hour. Mark?

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

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Thanks, Andy, and good morning, everyone. Today I'll cover 4 topics: Our first quarter highlights, an update on Universal Robots, our outlook for the full year and finally, I'll close with a few comments on capital allocation. Greg will then take you through the financial details. As you can see from our financial results, we had a very strong first quarter that puts us on track for another year of growth at Teradyne. Compared with the year ago quarter, we delivered growth in orders, sales, operating margin and EPS. Orders in the quarter were up 53% and sales were up 6% when compared to the first quarter of 2016, due mainly to continued strength in Semiconductor Test and growth at Universal Robots. In Semiconductor Test, the strong and broadening customer demand we saw in Q4 continued in the first quarter. While mobility remained the strong buying trend, there was a marked increase in analog, memory and image sensor test demand. Rising device complexity, combined with a healthy SOC unit growth, continued to provide a positive environment for test. The mobile phone related segment remains the largest bookings contributor, as our UltraFLEX platform continues to deliver differentiated software and hardware performance to customers who operate under tight cost and time-to-market constraints. Beyond mobility, the automotive end market continued to drive orders stretching across our entire SOC product line. Demand range for microcontrollers and related devices for engine control, adaptive driving and infotainment, to power devices for hybrids and EUVs, to safety devices for airbags and braking. This string is combined with demand from the catalog/analog space contributed to our highest Eagle Test orders in 7 quarters. Within Eagle Test, our ETS-88 platform had record orders as its unique architecture for testing low-cost, high-volume devices continues to attract new applications. The IP750 image sensor test platform also had a good quarter, delivering its highest order level in 6 quarters, as the variety of applications for image sensors continues to expand. Increases in both the pixel density and the number of image sensors per phone are key drivers of test demand.

Additionally, automobiles are rapidly increasing the quantity of image sensors to aid in safety and navigation. Automotive image sensors tend to require more extensive testing to ensure long-term reliable operation in broad extremes of temperature and vibration.

In Memory Test, our Magnum family of low-cost, high-throughput testers continued to gain traction in the quarter. Orders were up 75% sequentially as customers add test capacity for high speed flash devices for both smartphone and SSD demand. As we've noted in past calls, dramatic growth in flash interface speeds is driven in part by 4K video for smartphones and cameras. This is driving a refresh of the installed base of testers. Growing unit volume of flash devices provides another demand driver. Universal Robots continued its rapid growth with revenue in the first quarter more than doubling from the year-ago period.

Demand was strong across all 3 products, and we continue to see good mix of developed and emerging market sales. I'll come back to UR with more details in a few moments. At LitePoint, orders, sales and profitability improved significantly from a year ago. Demand was primarily driven by WiFi connectivity testing of gateway and networking devices. 802.11ax is also starting to see some increased buying in the access point space. On the other hand, next generation technology buys for 802.11ad, 802.11ay and millimeter wave cellular remain at R&D and preproduction levels. Therefore, we expect WiFi will remain the driver at LitePoint until millimeter wave WiFi and 5G cellular hit the market. In system tests, we had a continuation of Q4 strong order levels in defense and aerospace. But the business level in Storage Test was disappointing. However, we're making significant investments to extend the Storage Test platform into new markets. These investments will push the System Test Group into the red for the next few quarters. But we expect the group to return to profitability in the second half.

Turning back to Universal Robots. UR continues to reshape how companies think about industrial automation. After growing 62% in 2016, we're on track to continue the rapid growth again this year. The universal nature of our human-scale cobots makes the breadth of applications nearly limitless. We are regularly surprised by the new uses customers have for their cobots. For example, a start-up in the manufacturing space demonstrated UR cobots tending their 3D printer farm, freeing up employees to focus on higher value-added activities.

In a more traditional example, an Italian power tool maker is using our cobots to eliminate wasting defects in their production line, delivering higher quality products while improving the working conditions of its employees. UR's growth depends on expanding the awareness of our cobots economical application to a wide variety of manufacturing and service tasks for all size enterprises. Growth is also dependent on our partners and distribution network's ability to do the final tweaks necessary to put the cobot to work in a given application. As you recall, last year, we accelerated our level of investment in our channel to increase growth above our 50% benchmark. We made investments to expand our footprint around the world to deliver the value of UR cobots to a broader audience. We also work closely with our expanding distributor and integrator base to train their sales and their support teams. We are encouraged that those investments are paying off as shown by our 62% growth last year and strong growth in this year's Q1. To accelerate and leverage UR's easy-to-use programming environment, we recently launched UR Academy, a free online training program that provides the basics of cobot programming in 6 online segments totaling just 87 minutes. In addition to continuing to expand our distribution capacity, we are increasing investments in our UR+ platform to attract a growing variety of third parties to our platform, thus creating an unparalleled ecosystem of capabilities to speed the deployment of our cobots. Our R&D programs are focused on maintaining our leadership position as having the best universal collaborative robot product in the world with the broadest third-party ecosystem, fastest time to deployment and quickest payback for our customers. Greg will take you through the financial details of these investments.

Turning to the full year. Based on the past 6 months of strong SOC orders, we are now projecting the SOC test market to be in the $2.4 billion to $2.6 billion range for 2017, up $150 million at the midpoint from our January estimate. As we described in the past, we also expect to gain a point or so of share from last year's 51% SOC share. In memory, we expect the market to be at the high end of the $450 million to $550 million range we discussed in the January call. A portion of that incremental growth will be in the DRAM sector of the market, where we have lower exposure. So our overall memory market share will likely fall back a few points from its level of over 30% in 2016. However, our overall memory sales should increase. The production Wireless Test markets served by LitePoint will likely remain around $200 million for the year, unchanged from our January estimate. We expect the meaningful adoption of new WiFi standards such as 802.11ax to take place in 2018 or later. The collaborative robot market is tougher to estimate given the limited third-party data, but we put the market in the $250 million to $350 million range for the year.

From a seasonality perspective, we expect the revenue to be more heavily weighted to the first half of the year than last year. Since 2014, we've seen 51% to 55% of sales in the first half. This year, it will likely be in the high 50s, as customers are driving hard to get capacity in place a bit sooner than in prior years. On the capital allocation front, we'll continue to strike a balance between dividends, share buybacks and M&A. In our view, we're in the very early stages of a long-term reshaping of global manufacturing, which presents a broad range of opportunities for Teradyne. We continue to look at a range of technologies and businesses that could accelerate UR's growth further or leverage our unique position in cobots to take advantage of long-term automation in growth opportunities.

I'll now turn it over to Greg, who'll take you through the financial details of the quarter.

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [4]

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Thanks, Mark. And good morning, everyone. I'll provide some brief comments on the strong start to 2017, outline our key annual goals and then cover the first quarter results and second quarter outlook.

As Mark noted, 2017 opened with a bang, with first quarter bookings of $595 million and sales of $457 million. Using the midpoint of our second quarter guidance, our first half non-GAAP EPS is tracking to $1.29, which is above any of our recent prior first half results and positions us nicely against our midterm $2 annual non-GAAP EPS target.

The drivers to this very strong start are SemiTest and Universal Robots. In SemiTest, first quarter bookings and sales are up 56% and 4% versus the first quarter of a year ago and above any of our first quarter starts in recent history. Universal Robots is also off to a strong start, with first quarter bookings and sales up 148% and 117% from the year ago first quarter. Recall that we invested heavily in our field distribution in 2016 to get further ahead. So we're starting to see some early benefits of these aggressive investments. Please note that we also implemented some regional pricing changes in the quarter, which likely accelerated some orders into the first quarter from the second quarter. I'll now describe how we're playing a SemiTest chess game, aggressively growing Universal Robots and the trends that we're riding. So first in SemiTest. We select and target the healthier long-term device growth segments and customers, where we can differentiate through a combination of providing higher throughput, tighter accuracy specs and superior software tools. This allows customers to meet their cost of test goals, improve yield and go from tape out to volume production without delay despite the increasing chip complexity. This also allows us to grow share with fewer head-to-head battles. I highlight this careful targeting as you often need a 30% advantage to convince a customer to switch platforms. So you can't go to market with a me-too or marginally better product. This product strategy has driven an evolution in our engineering investments from being majority hardware to majority software. Customers appreciate the performance and time-to-market value of our software programming tools, which ultimately also makes them stickier. On SOC device segment selection, recall that we focus on mobility, automotive, image sensor, analog and Microcontroller Test rather than PC chipsets. In our largest SOC segment, mobility, the test market has remained healthy despite smartphone unit growth flattening, as chip complexity growth has extended chip test time. Elsewhere in automotive, semiconductor content and test intensity are both growing with advanced driver assistance systems, hybrid vehicles and telematics all expanding beyond premier models. In analog and microcontroller, devices are now ubiquitous finding more applications in health monitoring, home automation, factory automation and environmental applications. Our SemiTest business has also been less volatile with a more efficient supply chain up and down the line. The customer consolidations in the semiconductor industry have not had a significant impact on our business. However, one customer does drive significant demand for our products both through direct sales and sales to the customer's supply partners. As you've seen, this can concrete swings in our sales and gross margins. The healthy SemiTest market since 2010 coupled with our careful segment targeting is how we average a 20% non-GAAP operating profit rate over the last 5 calendar years at the company level, while gaining over 10 points of ATE share. Turning to Universal Robots, the market leader in cobots with approximately 60% share. UR has expanded the definition of cobots from robots that do not need shielding or fencing to also mean robots that a shop floor operator can easily program and repurpose as production conditions change. Our cobots are the ultimate equalizer for small and medium enterprises, as they too can automate repetitive task on par with our larger industrial customers. This ease-of-use and flexibility is a significant differentiator and is one reason why UR is the clear leader in this greenfield market.

UR cobots are also truly universal. We don't customize for specific end markets. Rather, we work openly with a vast array of developers, third-party accessory providers and channel partners who adapt our cobots to a wide variety of human-scale tasks. Our sizable market share lead and universal open platform have attracted a large ecosystem. Currently we have over 300 channel partners and over 200 third-party developers. For example, at the Automate Trade Show in Chicago recently, UR robots were used in the booths of 23 other companies to demonstrate automation solutions ranging from bin picking, to assembly, to polishing and so on. We're building on that momentum to make it easier for customers to shorten the development time, reduce the integration costs and lower project risk with our UR+ web portal. In addition to traditional manufacturing applications, UR partners have also developed a wide range of emerging service tasks, such as assisting in milking cows, providing sports massages and even assisting in surgery. Unlike our test businesses, Universal Robots has no noteworthy customer concentration. Our top 3 channel partners in 2016 who each sell to different end users taken together make up just 9% of our 2016 sales.

Moving on to our System Test business. Defense and aerospace and production board test remain solid contributors with both groups expected to operate at 15% PBIT or better for the second consecutive year in 2017. However, as Mark noted, in Storage Test, we are investing to bring a new platform geared towards a new application to market. The impact of this investment will push System Test overall into a loss position for a few quarters, before returning to profitability later in the year. Shifting to Wireless Test. Let me add some color on how we're thinking about LitePoint. Our Wireless Test methods have historically been driven by growing units and an alphabet soup of new standards. In our core connectivity market, the steady stream of new WiFi standards will expand wireless into more applications, such as virtual and augmented reality and provide the need for new test capabilities. The current market driver is 802.11ac wave 2, while the future WiFi drivers are 802.11ax, 802.11ad and 802.11ay. These standards all get more data to more users and the latter to provide extremely high bandwidth. In cellular 5G, it will come in 2 forms, sub-6 gigahertz and several millimeter wave frequencies. We expect the latter will require a large tooling cycle. The timing of new technologies will create peaks and valleys in customer buying as a tool to their production lines. The market is currently in a valley and we've altered our model to weather the current conditions. We're pleased that LitePoint was in the black again this quarter and investing in new technologies for growth.

Shifting to our key 2017 goals. First is to stay on our $2 EPS path by 2020 or earlier. Remember this path may not be linear due to variability in product demand and market size in any given reporting period. Second is to continue with our balance capital allocation strategy of healthy capital returns through buybacks and dividends and highly selective M&A. Recall we plan to buy back at least $200 million of our stock this year and return approximately $56 million in dividends. We'll remain opportunistic in M&A with a focus on industrial automation.

Moving to the operating businesses. We plan to grow market share carefully again this year in SemiTest, while maintaining strong growth in operating margins. At UR, we target annual top line growth of 50% or more, while moving the operating profit rate up a few points from about 10% to closer to 15%.

In System Test, the goal is to operate at model 15% profits in our mature defense and aerospace and production board test businesses and execute the plan for new applications for our Storage Test platform.

At LitePoint, the goal is to break even or better or getting securely positioned for the next WiFi buying wave.

Shifting to the company level. We paid $40 million in dividends and used $38 million to buy back 1.3 million shares at an average price of $29.38 in the first quarter. This leaves us with $462 million remaining under our current $500 million stock repurchase authorization. Our U.S. cash and marketable securities totaled $778 million, down $67 million due to seasonal payments and of course, our share buybacks and dividend payments. Our total cash and marketable security balances of $1.48 billion was down $131 million due to the aforementioned seasonal payments and capital return along with a buildup in inventory to support increased shipments in the second quarter. We also saw an increase in receivables due to the delivery profile of the first quarter shipments.

Moving now to the details of the first quarter. Our sales were $457 million and non-GAAP operating profit rate was 23% and non-GAAP EPS was $0.44. For 2017, $0.13 above the first quarter non-GAAP started a year ago due to favorable product mix in SemiTest and year-on-year growth in Universal Robots. We have one 10% customer in the quarter. Gross margins were 58%, reflecting that same favorable product mix. You'll see our non-GAAP operating expenses were $161 million, up $13 million from the fourth quarter, primarily due to higher variable compensation accruals on increased profit level and an expansion of UR's distribution programs.

Comparing our first quarter OpEx of $161 million versus the year ago period, it's up by $8 million for similar reasons, partially offset by lower Wireless Test spending.

Moving to the segment level details. SemiTest bookings were $476 million, down 9% sequentially from record fourth quarter bookings of $524 million, with demand principally driven by Mobility, SOC Test orders were $436 million and Memory Test orders were $40 million.

SemiTest service orders were $81 million of the total. SemiTest sales were $356 million in the first quarter, with SOC making up $332 million and Memory Test the balance. SemiTest service revenue totaled $64 million in the quarter.

Regionally, UR's first quarter sales broke down 42% in Europe, 29% in North America, 24% in Asia and 5% rest of the world.

Moving to System Test. Orders were $46 million in the quarter and sales were $40 million.

Shifting to Wireless Test. We booked $27 million and net sales of $25 million in the first quarter. At UR, orders in the first quarter were $45 million and sales were $36 million, both quarterly records.

Turning to guidance for the second quarter. Sales are expected to be between $660 million and $700 million and the non-GAAP EPS range is $0.81 to $0.90 on 201 million diluted shares. Q2 guidance excludes the [imposition] of acquired intangibles and the noncash convertible debt interest. The second quarter gross margin should run at 55%, down from the first quarter due to product mix, and total OpEx should run from 25% to 26%. The operating profit rate at the midpoint of our second quarter guidance is about 30%. I should add that we plan to continue building UR's distribution capabilities to capture even more of the growth available in the cobot market, which should add a few million to our quarterly OpEx run rate, with quarterly UR OpEx increasing to about $18 million in 2017. Also, as noted, we're increasing investment in our Storage Test Group to bring a new platform and a new application to market. Nonetheless in our test businesses, we expect full year OpEx planning to be essentially flat year-over-year apart from normal changes in variable compensation tied to profitability levels.

Shifting quickly to taxes. Our full year tax rate is expected to be about 16%, up 1 point from our January estimates. We started 2017 above the prior 3 sequentially strong years, driven by SOC test strength and Universal Robots. Our test businesses in aggregate have consistently generated solid profitability and free cash flow since 2010. We now have the market leader in cobots, Universal Robots, racing far ahead in a market that has many years of high growth ahead. We see 2017 as another sequentially strong year, keeping on our midterm $2 non-GAAP EPS target on track. This consistent strong performance provides the confidence to continue buying our shares back and of course, was a driver of the dividend increase announced earlier this year. With that, I'll turn the call back to Andy.

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

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Thanks, Greg. And Carmen, 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) Your first question comes from the line of Edwin Mok with Needham & Company.

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Yeuk-Fai Mok, Needham & Company, LLC, Research Division - Senior Analyst of Semiconductor Capital Equipment [2]

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So first question just on the ATE space. You mentioned that the Eagle has strongest quarter after 7 months -- last 7 quarters. Just curious if that is call it, just the market generally seeing overall strength in the market or you guys seeing any specific share gain around that? And if there is any share gain, then any kind of example where you guys are gaining share?

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

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Yes, most of that is strength in the market and share. The analog market, especially related to automotive, has been strong for several quarters now. But in addition to automotive, more catalog analog buying really picked up in the first quarter. The only place where there is some share gain is a little bit in China. But overall, it's the market.

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Yeuk-Fai Mok, Needham & Company, LLC, Research Division - Senior Analyst of Semiconductor Capital Equipment [4]

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I see. Okay. That's helpful. And then on UR, you mentioned that, this year, it's going to be a little bit more front-end loaded. And some of that is due to regional pricing. Can you give us a little more color around that? And is there a way to kind of think about seasonality for that business? Is that just a onetime event that we've seen this year? Or that the seasonality changing? I remember if I go back historically, you guys tend to be more back-end loaded. Maybe I'm wrong on that, but give us some color on that?

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [5]

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Right. Yes, UR tends to be more back-end loaded. What my comments were trying to indicate is, in the first quarter, there were some regional pricing changes made principally to, I'll say, discounts. There were some other changes made as well. But basically, incentivizing the channel partners to get a higher level, much high-level growth to earn higher discounts versus they might get them on the early orders in the year. So with that change in the program, there probably were some number of orders that came in a bit earlier under the old program versus the new program. Having said all that, we do believe Universal Robots has very strong growth hereafter and whatever early buying there may have been in the first quarter, that will all be worked out early in the second quarter. So it should not affect third and fourth quarter.

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Yeuk-Fai Mok, Needham & Company, LLC, Research Division - Senior Analyst of Semiconductor Capital Equipment [6]

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Okay, great. Just maybe just (inaudible) so you're already talking about seasonality first half versus in the second half. Is it still 50 -- 150?

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [7]

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Yes, the reference to first, second half was for the total company. In the case of Universal Robots, we would expect, as in prior years, that the second half will be stronger than the first. It's Semiconductor Test that tends to swing the total company towards the first half weighting.

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Operator [8]

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Your next question comes from Mehdi Hosseini with SIG.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [9]

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It's actually Mehdi Hosseini from SIG. Two follow-ups. Mark, going back to the SOC market, it seems like even and odd year trend from the past several years is no longer playing out. And in that context, would you be able to provide any color as how we should think about the SOC market beyond 2017? And I have a follow-up.

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [10]

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Okay, good. Yes, I think the pattern of even-odd year swings in the SOC test market are diminishing or behind us. But remember, the thing that drove that pattern wasn't some astronomical event, it was in any given year how much incremental complexity in the silicon that went into phones was added and how much unit volume growth. So what we've seen in the past few years and in particular this year, which might have traditionally been somewhat soft based on that old pattern is that the complexity increase year-on-year is now accelerating. So you don't find -- we haven't seen, for example, the same odd-year pause in complexity growth. So that trend, and it's driven by things like new features, 4K video, VR and competitive pressures, that kind of trend we expect will continue. But it's really complexity growth that's been the key.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [11]

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Got it. And then on the UR, and I really appreciate that the disclosure and especially with Europe accounting for 42% of the mix, would your M&A activity be focused on increasing the revenue mix in U.S. and Asia? Or would it focus more on complementary or segments that are adjacent to where UR is focused on?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [12]

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Yes, I wouldn't disclose too much there. Although both of those are certainly within the scope of what we are looking at. I don't think the geographic weighting of revenue at any -- in any given quarter or point in time is the main strategic issue that we're trying to address. Although that's something that if there is an opportunity would solve that -- would accelerate that, we'd take advantage of it. I think we're really more looking to improve the differentiating capabilities of the product. And in that regard, accelerate in all geographies growth.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [13]

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Let me rephrase my question. Is your -- the UR revenue mix, is that a reflection of the system integrators that buy your system or your resellers?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [14]

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I think it's a reflection of Europe and U.S. have had higher costs, so there's a much easier ROI payback. So you tend to have higher penetration there. Europe, we got an early start, and Universal Robots is located in Denmark. North America now is growing at a rapid rate as is Asia, including China. Longer term, we expect China and Asia to grow quite significantly, as there is countless scores of tasks that can be automated to improve quality as well as lower cost. So I think the big opportunity long term is keeping an eye on what goes on in China, while also continuing to grow North America and Europe at a healthy pace, because we are so early in the adoption. There are still many companies that are vaguely aware of what's possible or starting to become aware.

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Operator [15]

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Your next question comes from Atif Malik with Citi.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment and Specialty Semiconductor Analyst [16]

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Mark, TSMC talked about the proliferation of -- in the fan-out packages from smartphones into high-performance computing data center applications. I was curious, if that is going to be a driver for keeping tailwinds on this growing SOC TAM longer term, and then I have a follow-up.

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [17]

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Certainly, the more the semiconductors are packaged in these advanced packages, whether it's any one company's technology, I don't think is as important. It is a tailwind for the market, because the complexity of test. It goes back to the complexity issue. The complexity of test is high and, therefore, the test time and the parallelism. Test time is high, parallelism tends to be lower. So it is a tailwind.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment and Specialty Semiconductor Analyst [18]

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Okay. And then on Universal Robots, at the recent Hannover Automation Fair, there was a lot of buzz about your software and Eagle set up. But there was another topic that came up, which was on the smart tools that bypass robot control and linked directly to programming logic controllers. Can you talk about your offerings and how these offerings can expand your ASPs and the cobot TAM longer term?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [19]

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Yes. In most applications in an integrated production line for our cobots, there is a programmable PLC as a part of the mix. And it's a -- the question always sort of dovetails around what's the master/slave arrangement there. We support already a very simple, easy-to-use interface with variety of PLCs out in the market. It is one of the things that lowers the barrier to deployment in a more -- as opposed to an island of automation, let's say, a more sequentially automated factory. So I think much of the capability around that is in place. It will continue to grow in sophistication with each software release over time. But it's already a factor in many installations.

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Operator [20]

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Your next question comes from the line of Richard Eastman with Robert W. Baird.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [21]

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Mark, could you just kind of speak to a couple of things, if you would, on UR? Could you kind of -- could you speak to the growth rate there relative to the components, meaning more distributors, more channel partners versus do you have any sense of kind of same-store sales, if you will, out of channel partners that have been with you for more than a year?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [22]

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Yes. Good question. We've been focused on both metrics. We -- I'd call it the velocity through the existing distributor network year-over-year, how can we grow the per distributor or per integrator sales as well as incrementally adding new distributors to the mix. So those are metrics we track very carefully. And generally speaking, if you break down, let's say, the 60-some-odd percent growth we had last year, that about half of that growth came -- a little more than half actually of that growth came from increasing the sales per distributor or same-store sales in your terms. And the rest came from adding additional distributors.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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And then, are you seeing growth in, again, I realize the base is smaller at UR, but obviously, the opportunity much bigger in the Asia Pac. Again, some of this goes to channel partners. I don't know if that same structure exists in Asia Pac, but are you seeing the growth for UR faster in Asia Pac, just given the base?

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [24]

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Yes, it depends on the geography. It still uses that same distributor model. The distributor networks in some countries is not as mature as it is in North America and Europe. So part of this is developing that network. And that's part of the reason it's taking a little bit longer, I'd say. But the basic game plan is the same. It's just a less mature market. But if you look at the various geographies, certain geographies in Asia Pacific that aren't heavily industrialized are growing a bit slower, but other areas, certainly China for example, have quite high growth rates, albeit off a relatively lower base.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25]

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Okay, okay, I understand. And just one last question. Maybe this is for Mark. But when I look at the orders for SemiTest over the trailing 2 quarters, so kind of the 6 months' orders. And I look at maybe your revenue guide for the second quarter and what that must capture on the SemiTest side, it appears as though more of your backlog will extend into Q3 to ship. And I'm wondering if that is due to more of the orders being nonmobile in origin, if you follow my question? The conversion rate...

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [26]

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Yes, let me take that one. It's due to some of these systems that are sizable. There is an acceptance procedure, so systems may shift in the second quarter. But we don't take revenue until it's formally accepted. So there can be a delay in that. So we may have some sales that are sizable that are early in the subsequent quarter. They just don't make it into the second quarter.

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Operator [27]

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And your next question comes from Jagadish Iyer with Summit Redstone.

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Jagadish Kalyanam Iyer, Summit Redstone Partners, L.L.C - MD and Senior Analyst [28]

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Two questions. First, how should we think about UR's profitability across different geographies? And what is your road map for improving UR's profitability? And when do you think that you will hit that EBIT margin targets? Then I have a follow-up.

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [29]

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We don't spend a lot of time on UR's profitability across geographies. We tend to look at it on gross margin and as well as growth rates and what we need to grow faster in each region and -- what the impediment is. But at a high level, let me try to summarize it that, last year, we operated at about 10% operating profit rate because we put a lot of distribution in place, anticipating there will be competitors in this space. Well, we don't see them today. We expect to at some point. And we want to have very strong distribution in the places that will be hard for them to replicate. And again, many of the competitors may be eventually -- call on Automotive for us, but we call on many other regions and applications through our channel partners outside of Automotive that gives us, I believe, the big leg up. So we said this year, we expect to get closer to 15%, so whether we end up at 13%, some number like that, that all depends upon the sales and how much we meter out in investing. Long term, I'd expect by 2020 to get to a 20% operating profit rate at Universal Robots.

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Jagadish Kalyanam Iyer, Summit Redstone Partners, L.L.C - MD and Senior Analyst [30]

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Okay, okay, great. Then I just had a quick question. Given how strong your first half revenue numbers are, how should we think about second half on a year-over-year basis?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [31]

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Is the question UR or the total company?

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Jagadish Kalyanam Iyer, Summit Redstone Partners, L.L.C - MD and Senior Analyst [32]

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No, for the total company.

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [33]

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Total company. Yes, what I mentioned in my comments is typically we see first half in the sort of 53% to 55% of the annual revenue. This year, I think, it will be more swung toward a high 50s in the first half versus the back half simply because a lot of the installations in the mobility space are a little bit more accelerated this year than in the prior years.

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [34]

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I would just add to that. I think in Mark's comments, he described that the SOC test market is tracking a little bit higher than what we thought a quarter ago. So we're seeing some positive signs in our major markets.

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Operator [35]

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Your next question comes from the line of Stephen Chin with UBS.

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Stephen Chin, UBS Investment Bank, Research Division - MD in the Technology Group and Research Analyst [36]

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I just had a follow-up question on that linearity question in the high 50s. So is this what you expect, Mark, to be kind of the new normal? Or is this just a one-off year because of the higher demand this year early on from automobile sensors and analog?

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

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Yes, it's hard to say that this is the normal. Like, I don't think there is anything that's happened this year that suggest that's the case. I would just point out, as I have in the past around the bookings volatility, that just a few weeks of shift in shifts or orders can make these kind of swings. So there's nothing significant, I think, to be read into the pattern.

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Stephen Chin, UBS Investment Bank, Research Division - MD in the Technology Group and Research Analyst [38]

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Okay. And then follow the question on the UR business. Is this a business where you think you can generate even higher order growth, if you wanted to, but, perhaps, you're choosing to not right now, as you want to make sure the experience is very positive for customers?

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [39]

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We're certainly trying to balance all elements, and we're most focused on growing faster now and getting further ahead in terms of our channel partners with their velocity, their training, their strength, repeatable solutions, this Universal Robots+ portal. So we want a whole bunch of ammunition so that when we see competitors in the future, we're far ahead beyond ease-of-use and reprogramming. So we are investing aggressively to get further ahead and we will continue to do so.

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [40]

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I would just add a little color to that around. To install a cobot into a customer’s production line takes a system integrator some handful of weeks' worth of work for the final amount of customization. So having that net bandwidth globally growing at, I'd say, a 50% to 100% rate, is a key enabler for faster growth. That's something we started investing in last year. We'll continue to invest in this year. But tying that back to an earlier comment that to the extent we can increase the velocity or the amount of cobot installations that can be done per technical engineer in the field, that also has a multiplying effect on our growth. And so in that vein, the R&D investments that we're putting in place both last year and this year and going forward focus a lot on reducing that handful of weeks further to allow for this sort of higher velocity. So we're pushing at it both in R&D and in distribution to try to incrementally raise that growth rate.

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Operator [41]

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Your next question comes from Farhan Ahmad with Crédit Suisse.

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Farhan Ahmad, Crédit Suisse AG, Research Division - VP and Senior Analyst for Semiconductor Capital Equipment sector [42]

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First question is regarding the growth this year. It seems like the SOC test market overall is up quite a bit. Can you help me understand like how much of the growth is coming from the mobile side of things and how much is coming from the autos and industrials in other applications? And just a clarification on the market as well, like do you think any part of this growth is sustainable next year?

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

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Well, first of all, on mobility, I think, year-over-year, if you look at mobility this year compared to last year, it's not that different, it's pretty close. So the growth that we're seeing is in the other parts of the market in 2017 and it's automotive, it's image sensor, it's analog, it's those kind of things. So -- and it's very difficult to look forward into '18 to say what might happen there. It's all going to be predicated on -- in the mobility space, the degree of complexity increase in the devices going into handsets next year. I do think that the analog and automotive space historically have had some volatility to them. We just come through a pretty strong tooling cycle over the past few quarters. So I would expect that automotive will settle back down a little bit, but that image sensors, on the other hand, I think have much more upside. So getting beyond '17 is a fool's errand to try to predict, but those are the sort of macro trends I see happening.

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Farhan Ahmad, Crédit Suisse AG, Research Division - VP and Senior Analyst for Semiconductor Capital Equipment sector [44]

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That's very helpful. And just on the second question on the competitive side. Recently there was announcement that one of your -- one of the smaller players in the test market, exida, there was -- there is a bid from China to acquire them. How do you see that changing the competitive landscape in the long term and do you think it could be -- it could have a meaningful impact on your business?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [45]

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We don't think that will have a meaningful impact whatsoever. We would suspect that Chinese semiconductor companies need to get the best test solutions so they are competitive globally. So therefore, we don't think it has any meaningful impact to us.

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Operator [46]

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Your next question is from the line of C.J. Muse with Evercore.

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Christopher James Muse, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [47]

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I guess, first question on the SOC side. I wanted to try to dig a little bit deeper into the growth trajectory here. You've talked about reduced benefited parallelism, the buy rate bottoming and clearly, I think, given what you're seeing on the SOC side, a nice pick up there. But as we think about shrinks down to the 10-nanometer, 7-nanometer nodes where you're getting 30%, 40% die shrink. And if you put some sort of unit growth on that, is there enough changes to complexity and how should we think about those changes? And what should we be watching to see solid unit growth and for you to get away from that historical kind of tick-tock spending cycle on the mobility side?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [48]

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Yes. I don't -- C.J., I don't think it's driven as much by the no changes. I'll go back to that in a minute. There's a minor effect there. It's really the complexity increase. Hence, the correlation is that obviously 7 nanometers versus 10 nanometers allows for a lot more transistors to be put on a device at the same cost. And the trend line is especially related to video processing, high resolution 4K video processed in real time, is something that needs a lot of GPU intensity. And so my guess is that trend line is going to persist for a while in terms of complexity growth, which is the key driver in test time for the devices. Unit growth is probably pretty stable, as far as I can tell, but complexity growth is the key thing to watch. And the other thing around the 7-nanometer node, more and more of these shrinking lithographies create new types of defects that raise -- incrementally raise the test intensity. So we do see a little bit of incremental growth just because of the complexity or the nature of the failure mechanism. But it also creates the need for more fanout-type advanced packaging, because the size of the devices is getting to be so small that they become impractical to mount on a conventional circuit or substrate. It needs some sort of advanced substrate to adapt it to the factors in a consumer product. So that's another sort of related bank shot effect of 7-nanometer and lower.

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Christopher James Muse, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [49]

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That's very helpful. I guess, as my follow-up, if I look at what you did for UR in Q1, you had a backlog of $1.3 billion and if I just flatline that, that's 44% growth. So clearly, it looks like you're going to easily beat that 50-plus percent. So wondering if there's sort of a framework we should be thinking about for growth just here in calendar '17 for that part of your business?

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

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There is no other number, C.J., other than 50% or greater, and we've invested heavily last year to raise the growth rate. So time needs to unfold to see where we end up relative to, let's say, the 62%, and we've invested to try to beat that, but we want to stay on that 50% or greater and not raise it too high in terms of with investors. But we're putting a lot of energy and focus into growing it as fast as possible.

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Operator [51]

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And your next question comes from the line of Timothy Arcuri with Cowen and Company.

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Timothy Michael Arcuri, Cowen and Company, LLC, Research Division - MD and Senior Analyst [52]

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First question, I guess, is for you, Greg. You did the big convert last year and you announced that you're going to buy $200 million back this year. But even in the first quarter, you're running below that sort of $50 million per quarter run rate for the repo and you still have like $500 million give or take worth of excess U.S. cash. So given how much you're going to generate throughout the rest of this year, I guess, I'm wondering why that is? Why you have so much excess cash? Are you sort of waiting for an asset that you want to buy and you're sort of weighting that out on price? And also, why the repo is running below the run rate?

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [53]

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Sure, Tim. On the latter, we got the board approval for this in January -- late January. So therefore, we didn't have a full quarter to work with. So we took the $200 million and divided it over the remaining days. So therefore, the whole month of January was not in the calculation. So it's just when we started it and how we allocated it. We chose not to put 1/4 of it in a short time period in the first quarter. We just spread it out evenly. So we constantly look for new opportunities on the M&A front, but we're patient and there aren't -- there isn't a long list of attractive targets, there tend to be 1 or 2 that we're looking at. And we have to be careful, because we don't want to disrupt Universal Robots; that's the last thing we want to do, given their growth rates. So it'd likely be something that could operate side-by-side independently, but still have leverage in that, just makes it harder to find something. So we continue to look, but we're patient in that endeavor.

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Timothy Michael Arcuri, Cowen and Company, LLC, Research Division - MD and Senior Analyst [54]

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Okay. And then can you also break out the backlog, the $868 million? Can you break that up by product?

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [55]

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Mate, do you want to, Andy, do that offline?

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Andrew J. Blanchard, Teradyne, Inc. - VP of Corporate Relations [56]

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Yes, let me pull that data for you, Tim, because I don't have it in front of me right now, but I'll get back to you right after the call.

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Operator [57]

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And your next question comes from the line of Krish Sankar with Bank of America.

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Sreekrishnan Sankar, BofA Merrill Lynch, Research Division - Director [58]

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I just want to find out, on the Universal Robot side, the competition catching up. How do you describe the unique selling proposition and the technology lead you have in terms of number of years versus guys like Fanuc, Yaskawa, even guys like Rethink? And then I had a follow-up.

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [59]

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All right. Well, we have been frankly surprised when we go to trade shows that we still have such a substantial lead. And what's been made clear is, it's very difficult to break the traditional robotics model and make robots designed for a shop floor operator to program versus an engineer. That was a very big change that Universal Robots brought to market. It's hard for others to encapsulate all the complexity into wizards or into buttons you can press to simplify the automation. The other -- and having the first reliable cobot that was highly repeatable, some of our competitors had different technologies and it wasn't quite repeatable or it came with 2 arms or it came with things that weren't valuable. We had a big lead in terms of being industrial, reliable, highly repeatable, easy-to-program, light cost point. So we hit all the things that mattered. The competitors we see at trade shows tend to be Universal Robots copiers and it's proven harder to copy us. With that said, we're investing a lot to make it even easier to program our cobot. The idea is the simpler it is to program it, you open up new applications, the more customers or end users can look at our website and say, "Hey, this can be automated and here's a number to call to get that accessory." It has opened up more people looking at automating these repetitive tasks. So there's a lot going on to get further ahead, but we have a very substantial first product mover advantage that we're investing aggressively to get further ahead.

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Sreekrishnan Sankar, BofA Merrill Lynch, Research Division - Director [60]

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Got you. Got you. That's very helpful. And then a follow-up on the M&A. Thanks for giving some color on the way you think about it. If you look at the last few years, you guys have done more bolt-on M&A and in the past, whether it's Wireless Test or Eagle Test, it leveraged the "Teradyne infrastructure" and then you kind of deviated from there and you went to Universal Robots. I'm curious like, is that the thought process still where you do more bolt-on M&A kind of aiding Universal Robots? Or would you consider something more transformation in the artificial intelligence or some other vertical that would be -- dramatically change the scope of the company?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [61]

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I think the best way to characterize it would be something that helps accelerate UR. Now take the example you gave of deep learning software or artificial intelligence. That's an example of something that could be applicable both to the UR product line and also be a standalone product in other dimensions even of itself. So something like that is within the realm of possibility. But it would -- in any of these cases, it would likely be a tangent to UR or a benefit to UR as well as its own potential standalone revenue possibility.

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Operator [62]

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Your next question comes from the line of David Duley with Steelhead Securities.

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David Duley, [63]

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You increased your size of the SOC market by, I think, $150 million from the beginning of the year. Could you help us understand and you cited an assortment of segments, which segments contribute the most to that increase for the year?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [64]

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Sure. So first of all, for the test -- the SemiTest market, both memory and SOC, we have increased. I don't want to lose sight of the memory piece. But on the SOC side, one of the things growing this year compared to last year is image sensor testing. Power linear is another example, microcontrollers is another example, and our service business will also grow and power management. So when you look at it in total, those are the growth pieces. As I said before, mobile processing is kind of flat year-over-year, which is a good thing, because traditionally, historical patterns might have suggested that this year was going to be down. But that being flat, those other segments being up is what's driving SOC. In memory, the memory side is both NAND, Flash and DRAM growth. And so that market after last year coming in, in the sort of mid-4s could easily be up around $550 million. So there's another $100 million of growth there.

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David Duley, [65]

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So just to clarify the $150 million of incremental market in SOC versus the beginning of the year. So the variance was not in the mobile market, it was in these other markets.

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [66]

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Correct, correct.

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David Duley, [67]

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Okay. Now as a follow-on to that, could you help me understand what the seasonality of your SOC test business is outside of the mobility space in the second half of this calendar year? And what I'm getting at is you've seen the shift to your seasonality of your SOC test business and, I think, it's mainly driven by mobility. But I get the sense maybe that some of these other sectors starting to show the same patterns. So I'm just kind of wondering what -- if you could help us understand that?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [68]

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Yes. There is really no seasonal pattern outside of mobility that I would cite as some trend to watch. Take the Eagle platform as an example, which serves automotive and power linear. That product has gone on a surge 2 quarters ago and still continuing. But it had been at a much lower level for about 7 quarters before that, 6 or 7 before that. So it's not even on an annual basis there. It tends to revolve around -- in the automotive space, new model year cars, what extent they're taking a step up in silicon content and complexity. And so what we see driving this round of tooling is that for model years starting in '18 and '19, that outside of the premium brands, a lot of the other brands are going to have a significant step up in electronic content.

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Operator [69]

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Your final question will come from Toshiya Hari with Goldman Sachs.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [70]

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I had a question on OpEx in UR. I think you increased OpEx in 2016 and the business by about $30 million. Given the current run rate, I think you're on your way to grow OpEx and the business again this year by about $30 million. How should we think about the rate of change in 2018 and beyond? Then I have a follow-up.

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [71]

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Yes. Look, OpEx in '15, we ended the year '15 with about $7 million a quarter. When we closed last year, it's about $12 million a quarter in the fourth quarter. And as we get to second quarter of this year or -- it's probably about $18 million a quarter. So yes, we've increased UR OpEx along with the sales, given we've got more distributors and many more programs to improve the velocity. So I would expect Universal Robots $18 million per quarter this year to increase, probably another $6 million next year and then there will come a point, I don't have the exact time period, where it will move at a slower rate and will be able to drop more of the sales growth through -- to the operating profit line.

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Toshiya Hari, Goldman Sachs Group Inc., Research Division - MD [72]

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That's helpful. And then on your long-term EPS target of $2 or higher, you're sticking to that number despite the strength you're seeing across both SemiTest and UR. What would you need to see in those businesses for that number to move to $2.50 or $3 down the line?

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [73]

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We tend to look at that model once a year in the October call and/or the January call. So we tend to leave it alone during this period. We understand that we're doing quite well against it which -- most plans you set, you need to have a more aggressive plan that what you tell investors. So that shouldn't be a surprise to you. So I think at the end of the year, we'll revisit, do we stick with that plan or do we modify it in some fashion?

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Andrew J. Blanchard, Teradyne, Inc. - VP of Corporate Relations [74]

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Great. Thanks, everybody, for joining us. And for those still in the queue, I'll get back to you when this call concludes. Look forward to talking with you down the road. Bye-bye.

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Mark E. Jagiela, Teradyne, Inc. - CEO, President and Director [75]

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Thank you.

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Gregory R. Beecher, Teradyne, Inc. - CFO, VP and Treasurer [76]

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Thank you.

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Operator [77]

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Thank you again for joining today's presentation. You may now disconnect.