Q3 2019 Earnings Call
Conference operator today.
At this time I would like to welcome everyone to the Teradyne third quarter 2019 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
She would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If he would like to withdraw your question. Please press the pound Keith Thank you.
And you Blanchard you may begin your conference.
Thank you Simon good morning, everyone and welcome to our discussion of Teradyne's. Most recent financial results I'm joined this morning by by our CEO Mark to do it and our CFO Sanjay.
All we are opening remarks will provide details of our performance for 2019 third quarter, along with our outlook for the fourth quarter 20 I think.
The press release containing our third quarter results was issued last evening.
Providing slides on the Investor page of the website. It may be helpful to you and following the discussion replays of this call will be available via the same page.
The matters that we discussed today will include forward looking statements involve risk factors that could cause actual results to differ materially from management's current expectations.
We encourage you to review the Safe Harbor statement contained in the earnings release. This was 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 developed what's occurring after this call.
During today's call will make reference to non-GAAP financial measures, we posted additional information concerning these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measure when available on the Investor page of our website.
Also between now and [laughter] in Investor conferences hosted by Beard Cowen Credit Suisse you'd be yes.
Now, let's get on with the rest of the agenda first Mark will comment on our recent results in the market conditions as we entered the fourth quarter. Sanjay will then offer more details on our quarterly results along with our guidance for the fourth quarter well then answer your questions on this call is scheduled for one hour.
Okay.
Thanks, Andy.
Good morning, everyone and thanks for joining us in my prepared remarks, I'll cover three topics highlights from the third quarter at the company and business unit level.
Our recent agreement to purchase autonomous mobile robot maker Auto guide fits into our industrial automation strategy.
And how we're looking at next year and beyond.
Sanjay will then provide the financial details of the quarter, our view of the Fiveg test opportunity and our guidance for the fourth quarter.
We delivered results above our third quarter guidance on continued strength across all of our test businesses.
Our mere mobile robot business also performed well in the quarter.
However, sales at Universal robots were roughly flat year on year as the impact of softening manufacturing activity in Europe , and U.S., where a strong headwind over.
Overall, our year to date revenue was up 4% from 2018 and non-GAAP EPS is up 13%.
For the fourth quarter, we expect strong test demand to continue combined with single digit growth and I, a on a year over year over year basis.
That's a business unit level semi test us, we'll see test demand for digital broadband and RF devices related to Fiveg infrastructure remain very strong.
That infrastructure demand combined with strength in handset related test is driving our estimate of the s. So see market size for 2019 up to a three to 3.2 billion dollar range compared to last years 3 billion dollar level and above our earlier estimate of $2.6 billion to $3 billion.
Geographically China's s., so see test market will be up $300 million year on year, while the rest of the world's market will likely be down.
This reflects strong tooling for fiveg infrastructure in handsets as the combination of device complexity and base station unit growth are fueling demand.
On the product front in early September we introduced an extension of our flagship Ultraflex product the Ultraflex plus.
The plus extends our performance front emerging classic AI and big data devices that require a new test architecture to efficiently and comprehensively test the rapidly growing complexity of these devices.
Multicore chip architectures are driving billions of transistors per died which operate in parallel to process. The vast data streams associated with machine learning and Fiveg networks.
This is yet another example of the complexity growth, we've been describing that drives up 10 seconds and drives our markets.
The Ultraflex plus puts in place and architecture with the headroom to test this complexity growth for the next decade.
At the same time it maintains software compatibility to leverage the accumulated flex family software experience of over 10000 trained customer test engineers.
Systems are now when you set multiple customers and we recognized our first revenue from product in Q3.
In memory test.
Demand remained strong in Q3, driven by both flash package and DRAM wafer test.
Although the memory test market will likely be down about 40% this year to around $600 million, our market share will be up from about 29% last year to the low 40% level. This year.
Building on our strong foundation in Flash package test our Magnum product family now covers the entire memory test market wafer in package test for both flash and DRAM.
Like point and the system Test group sales were about flat with the second quarter and up 23% and 48% respectively from the third quarter of 2018.
Advanced conductivity standards and early Fiveg related buying powered light points results, while in system test our storage test products, where the standout as revenues more than doubled compared to a year ago quarter on terabyte class HDD demand and system level test shipments.
Shifting to our industrial automation segment.
Universal Robot sales were flat with the third quarter 2018 as demand in our largest geographic markets Europe , and North America, and our largest end market automotive supply chain remained weak.
Conversely, this was balanced by strong demand in China, and Japan with year over year growth in the quarter running 30% and 44% respectively.
We are on the other had continued to grow at a healthy clip posted year over year sales gains or 40, Prefs <unk>, sorry, 40%, 47% in a quarter.
We believe the lower your today growth that you are is a short term phenomena.
Consistent with the slowing industrial activity in Europe , and North America.
Our automation solutions are not immune to the decline in industrial output.
Our faring better than the market in general.
We also see opportunity to expand our market coverage in the U.S. in Europe to offset these headwinds and we'll be investing to support underserved verticals and geographies in these regions.
In addition, we continue to expand our product offerings in September we introduced the you are 16 E, which opens up new applications by extending the payload capacity of the product line.
We also shipped our first industrial been picking application in the quarter utilizing new ours.
Utilizing a you are robot Threed vision and energy its unique path planning software to ease deployment and opened new applications at new customers.
You are also passed the 200 product threshold of you are plus certified plug and play peripherals, expanding the range of applications and reducing the deployment time for our cobalt customers.
Mir has also introduced a similar plug and play strategy for peripherals called mere go.
Both programs are consistent with our strategy it make an automation safe low risk and easy to deploy by shop level technicians with short ROI.
With the announcement earlier this week of our plan to acquire Auto guide a maker of autonomous mobile robots for industrial and warehouse material handling we are expanding our capabilities to include high paid load pallet immaterial moving.
The global market for manually driven forklifts is prime for automation as technological advancements have been able cost effective autonomous solutions.
Auto guides products use many of the same sensing guidance software and drive technologies as mere to provide a ton of us operation to higher payload tugging and pallet moving applications.
Additionally, agee's unique modular architecture offers customers greater flexibility than either a dedicated forklift work together.
With reduce cost and safer operation.
Like our other I investments Auto guide is a small but differentiated and fast growing player in a nascent market.
We expect full year sales to more than doubled to over $10 million. This year. Furthermore.
They are there are natural synergies and engineering marketing and distribution with mere and we expect our broad lineup of low and now hi, payload autonomous material handling robots to be attractive to global customers.
Finally.
As you can see from our guidance, we expect to finish 2019 on a very strong note.
As we've described in the past our visibility in the test business is a quarter or so and an industrial automation less than a quarter.
While we expect volatility in our markets. We also expect overall trend line growth consistent with our midterm growth planned in earnings model.
Paradigms cost structure and business plans are architected with this volatility and growth in mind.
And semi test Esso C test is seen another strong year, despite an overall soft semiconductor device market.
As I noted at the outset this year strength in China for testing smartphone handset in base station devices has more than offset the decline elsewhere in the world in automotive linear and see you test.
As we looked at 2020.
With the aggressive Fiveg base station ramp will the investor aggressive Fiveg base station Unwrap continue or will there be a pause for digesting.
Well 2020 phones adopt fiveg millimeter wave and meaningful volumes.
Well the health of the memory business improve well, the automotive and industrial markets stabilize and recover or further contract. All of these questions have implications for our 2020 business levels and all are hard to predict and frankly.
We don't spend too much energy I'm trying to predict this as it doesn't really affect our plans our strategy and plans are based on the fundamental belief that the pervasiveness and complexity of semiconductors will continue to grow on a trend line and continue to drive growth in our test business.
Similarly, we believe the inflection point Weve reached an industrial automation, where new powerful get cost effective technologies like light our three vision.
Okay, and others have opened new markets will drive opportunity and growth for decades to come.
We strengthened our competitive position, our test and <unk> businesses with a steady flow of new products through the year and auto guide adds another exciting and technically differentiated building block to our stable of advanced automation tools.
We don't know what 2020 will bring in terms of test Tonight demand, but we are confident that our product lineup financial position and growth strategy position positions us well for the long term success.
With that I'll turn things over to Sanjay for financial details.
Thanks, Mark and good morning, everyone. Today I'll review, the third quarter results and performance of each business comment on the full year results at the midpoint of our Q4 guidance provide some insight on how we're looking at mobility as a long term driver of the test business and then provide additional detail on the auto got acquisition Lastly, I'll offer some early.
Nation for model in 2020.
Now to our results for the third quarter third quarter revenue of $582 million.
Was above the high end of the guidance due to strengthen our semi test business sorry, due to strengthen our test businesses, partially offset by lower industrial automation revenues.
We had one customer greater than 10% of sales in the quarter gross margin of 59% was driven by favorable product mix and semi test non-GAAP operating margin of 28% and non-GAAP EPS of 77 sites were above the high end of the Q3 guidance driven by slightly higher revenues with improved product mix and low.
We are spending relative to the third quarter plan.
You'll see our non-GAAP operating expenses were 185 million down $5 million from the second quarter due to seasonally lower spending in industrial automation and lower project spending in semi test slightly offset by higher variable compensation accruals on higher profits.
Turning to the individual businesses semi test revenue of 398 million grew 6% over Q2, notably memory test revenue grew 70.
Of 72 million grew 23% over the prior quarter, driven by Flash final and DRAM wafer test demand.
As I've met investors over the last several months one of the common questions asked.
Yes revolves around the surprising strength and the handset test demand in an environment, where volumes are down year over year.
And the transition to Fiveg is in its infancy stage.
I see two primary drivers of this trend first devices at each tier of the phone are getting more complex typically leading technology gets introduced at the premium tier or devices greater than $600 innovations such as lower process nodes for power and performance increased compute capability more camera sensors and increase.
Yes memory requirements on the device or a few examples of higher complexity. This complexity enters a premium tier and then in one to two years key technologies waterfall down from Hite. Your devices. This waterfall down of technology continues from high to mid tier devices and mid to low tier devices, hence a continuous increase of device company.
Nextcity drives the need for more test time per device.
Second.
In the smartphone market historically people, who purchase a low mid or high tier smartphone typically upgrade at some point to the next tier up. These two drivers increase the test Tam so while the mobility market is not without volatility we do expect it to be a multiyear positive driver of our semi test business.
Moving on to system test the group continued to deliver strong results in Q3 with revenue of $73 million within the system Test group defense and aerospace grew sequentially on increased defense related by.
Production Board test grew quarter over quarter and was slightly ahead of plan as Mark noted on a year over year basis, we delivered 48% growth and system test in the third quarter, while storage test more than doubling.
Benefiting from growth and terabyte drives and cloud storage defense and aerospace grew 30% year over year. As we are seeing continued growth and long term projects within many branches of the military.
For the full year system test is on track to grow over 25% from last years $260 million of revenue.
I'd like point, we saw continued momentum with sales of $42 million on the strength of new Wi Fi standards and early buying Fiveg development test.
For the full year, Lifepoint will grow above 10% from $132 million last year.
In industrial automation sales were $69 million down, 8% from Q2 and up 4% year over year.
Within Ita you are was $58 million of revenue decline from Q2 and about flat year over year.
Mere revenue of $10 million was slightly down quarter over quarter and up 47% year over year.
As Mark noted, we view the slower growth and.
So far this year, primarily as a result of a slowdown in global industrial investment, especially in Europe , and North America, and not a long term market to tractor.
However, we also recognize we have to continue to improve our organizational capability in order to fully capture the opportunity ahead of US we will continue to invest to strengthen those capabilities.
Turning to the acquisition of Auto guide.
The upfront purchase price was $58 million with an earn out of up to an incremental hundred 7 million if certain revenue and profit profit targets are achieved through 2022.
We expect the transaction to close later this quarter post regulatory approvals Auto guide us on track to achieve revenue of over $10 million on a standalone basis in 2019 up from $4 million in 2018, we expect auto guide to grow over 100% in 2020.
Theres sales today are primarily in North America with a plan to broaden their distribution to sort of global customers, we expect them to incur a small loss this year and to be slightly positive on an EBITDA basis in 2020.
Relative to share buybacks, we forecast this acquisition will be a boat neutral EPS.
In 2021 and will be accretive on an EPS basis in 2022.
Auto guide will operate as a standalone business within the industrial automation reporting segment.
Partnership between you are Mir energy it and now auto guide coupled with our central core competencies will enable them to efficiently and effectively scale their business, taking advantage of technologies processes external relationships and experts across all of teradyne's businesses.
As stated in prior calls our industrial automation acquisition strategy is to acquire growth companies with leading technologies, serving nascent markets that have short our allies and make the workplace safer and more productive auto guide as another example of teradyne executing on the strategy Auto guide has a modular purpose built architecture.
Further autonomy mobile robots, along with intuitive user and fleet management software. We believe this approach differentiates them from the competition, enabling flexible scalable solutions with compelling economics to be efficiently implemented a customer's location.
We've provided a slide in the earnings deck, which summarizes the transaction along with the schedule of the earn outs. So you have a sense of the revenue growth required to reach the performance targets. Additional auto guide details are included in the deck supplemental information.
Back at the company level, our operating model continues to deliver strong results, we generated 162 million in free cash flow and third fourth and we ended the quarter with $1.040 billion in cash and marketable securities, we repurchased $122 million.
In share.
Sort of shares in third quarter. This brings the year to date share repurchase total to $369 million at an average purchase price of $41. A 93 cents, we paid $15 million and dividends in the quarter for the full year, we expect to repurchased $500 million of our shares as usual, we'll update our capital.
Allocation plan for next year in the January earnings call.
Turning to our guidance for the fourth quarter revenue is expected to be 590 million to $630 million.
And a non-GAAP EPS range of 73 to 84 cents on a 174 million diluted shares.
Q4 growth will come from both our test and industrial automation businesses historically, our semi test business has been seasonably lower in Q4, but this year continued strength in fiveg infrastructure and memory will drive growth.
The guidance excludes.
The amortization of acquired intangibles and noncash convertible debt interest.
First quarter gross margin should run approximately 58% and Opex should run from 31% to 33% of revenue.
The operating profit of our fourth quarter guidance is forecasted to be 25% to 27% of road.
A quick comment on diluted shares Theres, a GAAP requirements as or undisclosed EPS with the most dilutive calculation. We've applied this concept to the non-GAAP EPS with respect to the treatment of our convertible debt diluted shares are higher in both Q4 guidance in Q3 results versus Q2, a current share price levels.
It is more dilutive from an EPS perspective to assume the convertible debt has converted and include the associated shares than to include the interest expense related to the debt and not include the shares.
Shifting to taxes.
Our non-GAAP full year tax rate is expected to be 16.5%, we expect the tax rate to be 16% in 2020.
Related to modeling 2020 as in past years, you should expect Q1 industrial automation sales to be seasonably.
Down versus fourth quarter.
From a full year perspective at the midpoint of our Q4 guidance, we expect sales to grow 7% non-GAAP EPS, 16% from last year.
From a longer term perspective. This is this is the sixth consecutive year of non-GAAP earnings per share growth CAGR of 17%.
Over this period, we averaged a non-GAAP operating profit 23% in.
In summary, we are delivering very strong results across all of our test businesses in particular semi test over the past few quarters has enjoyed a wave of fiveg infrastructure investments that will continue in Q4. However, we expect the global Fiveg rollout to drive lumpy test demand as Mark described we don't have much visibility.
The into 2020 test demand, but our operating model has been tuned to handle any potential volatility the industrial automation portfolio is well positioned to get back to consistent levels of growth when global industrial spending recovers and will be foot further bolstered by auto God's rapid growth.
We're continuing to take actions necessary to drive incremental demand and investing to strengthen our position.
With that I'll turn things back Danny.
Thanks centric Simon we'd now like to take some questions and as a reminder, please limit yourself to one question and a follow up.
Ladies and gentlemen that this time I would like to remind everyone that in order to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to can policy couponing roster.
And your first question comes from the line of Vsec ARIA with Bank of America. Your line is open.
Thank you for taking my question then congratulations on strong design.
Mark I'm curious your number of.
Semiconductor companies.
Hi, tougher this year, because it pull ins from China last year.
Im curious how sensitive is your 2020 outlook, if China demand normalizes versus what the are seeing.
Right now I understand that the visibility at this time as low but.
You have some sense of what the utilization is off the dusters blocked by Chinese customers. So far this year.
Yes, I think so a couple of comments utilization of the existing installed fleet of testers is very high.
And as we described in in Q4, we have still continued shipments in strength into China. So the pull for demand through Q4 is strong and unabated I also mentioned in my remarks that China is the one geography. This year, that's up for test where all the rest of the world is down so.
So.
The key question is what's normal and.
I think theres been a heavy heavy investment for infrastructure Fiveg infrastructure test tooling this year.
And important and up and we've been surprised as well by how long. Its continued the view going into next year is that there should be a little bit of a pause in some of the rate that theyre, adding capacity.
But that the long term trend line is still intact and that could pick up again in the back half of the year, but frankly.
The forecast that we've been looking at throughout this year as you can see from our results have been.
Somewhat weak and the result, and the actuality has been stronger so it's really hard to predict at the moment.
All right.
As a follow up I think in the past you outlined I believe we're down to three to 400 million dollar opportunity if all smartphones get converted.
Fiveg.
I think from what DSMC said they expect.
Penetration to be about maybe begins next year.
So it doesn't matter working a linear way so lets say mid teens smartphones on converter that doesn't mean, it's like a mid teens part of the three to 400 million time and do you have some similar Mac far from base station perspective also.
Yes, so that's a good question.
The three to 400 million dollar increment is based on Fiveg in general and what we've said in the past is that somewhere around 2021 2022, when the majority of smartphones crossover with Fiveg millimeter wave capability, we would see that kind of bump.
Much of what were we May see next year in smartphones for Fiveg is sub 60, which has an impact but not as much as as millimeter wave.
However.
The five the infrastructure demand this year has been so strong that.
What I would.
Suggest as that of that three to 400 million were probably this year seeing 200 million or so of that bump from fiveg.
Now the infrastructure piece comes first that will likely waned a little bit as we go through the next few years as the capacity gets built up to run out a lot of base stations and then the phone think will kick in it will kick in a little bit next year for sub six Gi and then in subsequent years to a greater extent with millimeter wave as how to think about it.
Thank you.
Your next question comes from the line to the C are Curry with yes go ahead. Your line is open.
Thanks, a lot Mark I just wanted to follow up on what you just said so we began the year.
For the SSC Tam was about 2.5.
For this year and then we went to 2.8 and now we're at 3.1 at a Fiveg is adding maybe 200 to that 600 increment, what whereas the other 400 coming from.
Well, there's strength in I would say general computing.
And.
Sort of a high type big digital.
Applications out there.
I think Theres also strengthen handsets in general not fiveg related, but just fourg the complexity of the processors the extra sort of.
Mimo and RF side of the Fourg phones. This year has driven a lot of test demand as well.
So.
It's sort of all on the digital side and I'd say cell phones Fourg phones are the principal other half of the equation.
Okay got it thank you.
And then I guess I had a question in industrial automation. So with respect to you are I mean, obviously the businesses suffering from some.
Industry trends, but we've also heard about some price competition, there's a lot of offerings now coming at a lower price I think Tech man has now partnered with omron.
So.
How do you think about that in the context of.
You went out and spend a decent amount of money for a company, that's not really going to be accretive to earnings for couple of years. So.
There seems to be a lot of sort of investor concerns I get a lot more questions about this.
We're getting a bit concerned that theres some.
Deterioration happening in your core business can you sort of talk about that and what your longer term strategy is and also whether you think that this change is your view of this being a billion dollar business by 2022 or something like that thanks.
Yes, hi, its Andrei here I'll comment on the on the you are pricing competition first.
I think first of all.
You are margins actually ticked up this quarter.
Slightly.
When we look at our win loss and evaluate the competition pricing is obviously out there from other competitors looks much lower however, we haven't lost significant business.
On that front. So I think we have a quality product offering it's it's recognized well by the customer base and it's being priced appropriately.
And so I think from you are standpoint, we are planning that competition. Eventually we'll get the quality levels up and then we'll have to deal with a little bit of pricing, but currently but that's not necessarily the case, where we're losing business from a price perspective.
From a long term perspective on auto guide I think in both marks in my prepared remarks, I think you need to consider this as a complement tool.
Or complement set of offerings in our portfolio of higher payload of which there'll be some potential.
Product go to market.
Synergies with mirror and an entire portfolio coupled with the scale of teradyne in the core competencies.
We believe very strongly in completing a portfolio of industrial automation and this is just another example.
And I would also just on the specific comment around.
Tecnonet Omar on we've talked about them as you know, it's an interesting product but.
It's really not a price.
Deflator and even in its home turf of Japan, that's our strongest growing region. This year with you are so I think the thought that somehow price competition or competition in general is causing the growth.
Sort of.
Slowing in you are is really not how we see it it's more the macroeconomic effects.
Got it guys. Thanks, so much.
Your next question comes from the line of CJ Muse Evercore go ahead. Your line is open.
Yes. Good morning. Thank you for taking the question just first question.
Regarding gross margins and mix as we move from September to December .
I think in your prepared remarks, you talked about.
System test growth about 25% for the calendar year, which would imply storage test I believe roughly flat and that your lower margin business. So curious what's driving the year.
The sequential decline in gross margin.
It's been more mobile base.
Yes, if there's other.
Drivers within your core associated business Thats getting to that.
Yes, I think it's Andrew here so.
I think Q3 gross margins had favorable product mix, specifically tied to the semi test business.
We got to.
The steam semi test business has a little mix change and thats driving kind of a margin percentage.
Down the types of 59% to 58% roughly but it's kind of in our plan and as expected.
I guess, just just curious I mean does that mean, we're seeing a pickup in mobility or there are other.
Right, so see that have similar margins to mobility.
Yeah.
Overall the mix.
The mix is as we plan we are seeing continued strength in mobility that is a key driver.
It's not anything more than not.
Okay.
I guess as a follow up.
Sure North of 40% in memory is pretty pretty incredible.
Yes can you kind of walk through how you're thinking about 2020 , particularly as we move to use three standards and the requirements for higher speed.
Well move to DDR, five and your competitive positioning there.
Yes, so those two trends are great we love it.
That helps our product line, but I would say that it's likely that low 40% share position. We will have in 2019 is a bit inflated because the DRAM portion of test buying this year is quite low man's been better than DRAM and DRAM sort of the new space, we're entering our shares.
There is still relatively small so.
If we think about 2020.
If the market. This year is 600 million, we've talked about it trend line market of 700 million for memory.
If we think about the trend line going market going back it's likely to be on the DRAM side and our shared next year could come down into the high Thirtys.
But given.
The products and the trends that you cited if we think about another couple of years out we should be routinely.
Operating in that sort of mid 40% ranges our view.
Thank you.
Your next question comes from the line of Brian Chin with Stifel. Go ahead. Your line is open.
Hi, good morning, Thanks for letting US asks few questions congratulations on the nice.
Results.
I guess my first question would be on.
What are the Youre in industrial automation business and sorry, if I missed this but what is the current expected growth rate for you are in for a as a whole in 2019 also can you flesh out some of the underserved verticals in regions you expect to invest more heavily in as it relates CR and also just curious kind of where you think margins on the either.
This will come in at this year.
Yes, so I think from an industrial automation perspective, you should expect us to be in the in the teens for 2019.
Operating margin, you're talking growth growth growth okay.
Growth and so.
Yes, yes, yes, so expected to be in the teams.
And then from and that's a full year.
2019 over 2018.
On an as reported basis pro forma you think it a little bit lower as we acquired mirror in April .
Maybe around 910%.
On a pro forma basis, and then from an investment perspective, I think should think about different verticals and consumer electronics.
And the like.
Yes, and I think geographically as we look at United States.
As an example, we've had some.
Areas of.
North America and to us that we've been a little light and our distribution networks are going to fill that out.
And.
On the verticals front, we do see that electronics remains strong it's not like we haven't invested in electronics, but we havent leaned into it disproportionately I think thats an area one area, where we will have more concentration looking forward.
Okay. That's helpful guys. So it sounds like with the I may be in Fourq, you some seasonality that maybe not quite the seasonal bump maybe you've seen in kind of recent years and then.
Maybe switching gears to the acquisition in terms of auto got just curious where you go go to market differently with those autonomous vehicles, perhaps more of a direct sale.
When some of the extensive distribution integration partners, you've leveraged for you our Amir.
And I guess that was mentioned that if that was the case and that nice feeding the sort of the timeframe you've talked about some accretion standpoint.
Yes, so that's exactly right, it's it's classic customer or the big opportunities for auto guide tend to be larger enterprises.
And the direct sales approach there will be the predominant approach not that we won't have channel partners, we do and will expand that but.
The early going here that will be the majority of the story versus Mirren, and you are which come at it from the other way or today 90, plus percent is through the channel and we're just developing a few enterprise direct sales accounts.
Okay, great. Thank you.
Your next question comes from the line.
Hi, sorry, with Goldman Sachs. Your line is open.
Hi, guys. Thanks, very much for taking my question.
Mark I wanted to follow up on the memory test business.
The improvement in market share this year, it's the low 40% range.
How much of that is due to.
Mix shift within the Tam DRAM being lower and then being better and how much of that is due to real share gains that's expensive your competitor and kind of related to that given memory test has been sort of the bread and butter for your competitor or have you seen any price retaliation from.
From them.
So I would say very.
Little pricing activity that would be abnormal in this environment.
And what I said earlier about DRAM is kind of weak. This year. So if you normalize about DRAM, maybe the way to think about it is our 40% to 43% percent share would be more like 30 738.
And so that's probably more our natural share position at this point.
And it's.
And I were basically picking up.
Business at existing memory manufacturers, so there's some real share gains happening at the traditional.
Suppliers that you might think of for memory and then there is emerging players in China.
You are kind of a jump ball that we're competing within our share in China is above our kind of average share glow.
Globally, so those two pieces or what combined to sort of put us at that natural 30, 738% point.
Got it I assume most of the activity in China in memory. So far has been on the downside as opposed to DRAM.
Well there's activity in both I don't think I would break it down too much but.
Both areas, we see activity.
Okay, and then as a quick follow up on analog test can you remind us how big that.
Sub segment is within semi test today I know, it's a business that's been in sort of correction mode for for the past few if not several quarters, but how big was that in Q3 and is it fair to say that you're pretty close to the bottom or could there be further downside given some of your customers commentary overnight. Thank you.
Yeah I think.
We see analog.
In the pure a sense linear analog is a market that.
Traditionally sort of in the three to 400 million dollar range and this year, it's probably at the low end to that.
Then there is another segment that's related to the discussions going on in the.
Sort of general.
Linear analog area are related to automotive and and see you in logic. That's that's a market that probably affiliates between three to 500 million and is also down at the low end of its range. This year, probably even a little bit below 300 million.
And we had a couple of strong years of automotive leading up into the coming into this year. This year is obviously down quite a bit in automotive.
And if past trends sort of hold it will stay down for another nine months to a year, perhaps before we start to see that recover.
Got it thank you.
Your next question comes from the line of John Pitzer with Credit Suisse. Your line is open.
John Pitzer with Credit Suisse go ahead your line is open.
Okay.
Okay, let's move on please.
Certainly your next question comes from the line of Krish Sankar with Cowen and company go ahead. Your line is open.
Hi, Thanks for taking my question I had a couple of them.
He has his last time do this will lead to quantify.
How much if your sales and Socit does so this will seek us less wireless business coming from Fiveg.
At Apollo.
From five G.
I don't think we have that broken down well for you.
So no I can't do that for you on the fly here I'm not sure that's something we're going to be able to breakout to easily but.
I can't do it off the top of my head sorry.
That's a noise.
A question on.
Industrial automation and get strategy.
It looks like you ought to go the slowing I understand that external factors like macro and competition.
But you know over the last couple of years quite admitted and auto guide does it make sense to move would on more downstream to a defensive salt stood at a.
Optics vision based technology acquisitions in the robotics Hog <unk> said that has the potential to be Commoditized Aldo.
Yes, I think theres, a view that the hardware as a commodity in the software is where all the money is going to be.
And.
I would just reiterate that the differentiation we have in hardware has been incredibly strong and powerful throughout the four and a half years. We've owned you are and continues to be.
So.
And then on the second point around software isn't that sort of the pot of gold at the end of the rain, but I think there is something to that over time that more and more.
Value can be captured through software not at the expense of hardware. However, I don't believe it's that but I do think it's another.
Market that will grow.
In conjunction with the hardware. So it's something we're looking at we do have a good.
Platform to develop some capability around that.
But I Wouldnt disabuse hardware for the sake of software I think they're both attractive an interesting.
Got it thanks month.
Your next question comes on the line of Richard Eastman with Baird Go ahead. Your line is open.
Good good morning, Thank you.
Just to round run the business. In particular, you are you made reference to Asia Asia Pac strength, both in China and Japan.
Different mix of end markets, there would be added some distribution or were what would you attribute that strengths to because.
Again, some of the verticals certainly have slowed their in industrial automation as well, but curious as to where that strengths come from and then maybe just a second question similar thoughts we know introduced its been picking product we had some enterprise agreements in the backlog there issue as we.
Moving forward with few are I'm not sure. If you references but would you expect you are too to maybe drop a little bit further here in the fourth quarter and in the first quarter seasonally it does that but where do we start to inflict towards core core growth that you are I mean middle middle of next year, what would your best guess either.
So.
So maybe on that last 0.1st I think.
You are is going to grow in fourth quarter over third because typically fourth quarter is a big bump for us it probably won't it'll be single digits compared to year over year fourth quarter, but it will likely be up a little bit.
We're doing this in light of the fact that if you look at the.
Macro economic indicators of industrial output in the U.S. and Europe . They are significantly weakened down if you look at the traditional suppliers of industrial automation for example, whether its Japanese machine tool.
Sales or some of the specific companies that have announced recent trends, you'll see that theyre down anywhere from 10% to 30% year over year, where were roughly low single digit growth. So I think we're going to have that kind of a headroom over the traditional cyclical.
Industrial automation market, where we will oscillate.
With no.
10, 15 point.
GAAP on top of those guys. So the real question is when will the industrial manufacturing sector in North American Europe returned to.
An expansive mode and and that one I think it's hard for us to call. We think that we can grow next year, even in light of the current economic conditions, we see an industrial automation.
So we think it will be a growth year next year, but is it going to be single digits are back into that 30 to 40 range. It's a little tough for us to call that right now on Japan, specifically.
Interesting in Japan.
Japan as a country that really sees the value of automation, they've got a demographic issues that requires that for them to stay productive.
And we're seeing that our product is able to win a disproportionate amount of collaborative robot business. There. Despite the fact as somebody mentioned earlier Omar on home turf is there they've decided to rep tepid demand there.
But the the universal robot product and cobalt is winning.
So that's all very encouraging to us and if you look at the PMI and other indicators in Japan. They are actually not quite down as much as they are elsewhere in the world.
And then in China, It's a similar believe it or not demographic concern that there's a.
An issue of finding.
Staff to do a lot of this manual labor that has resulted in companies in June in Korea, and China continued to invest even though theres a lot of economic uncertainty and some industries downturn, there we have automotive suppliers in China and elsewhere, even though the automotive.
Industry is down they've got in there and they're letting go people in some cases closing factories they are still.
Steady Eddy, adding collaborative robots at a good clip because they see the long term trend line. So.
All of that to me is is positive I think we're learning we're not immune the ROI for collaborative robots is fantastic, whether it's an economic upturn or downturn. So we'd like to believe we can fight through the downturn and still get growth.
And we are but.
It's kind of single digit and.
And I expect we're always going to right above the curve here throughout these cycles.
Okay. Thank you.
Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.
Thanks for taking my questions.
I wanted to clarify one thing you said to Fiveg infrastructure added about $200 million to the 10 this year and next year, they will be paas and infrastructure side that maybe some pickup in the handset side, but the real next big opportunity is until the millimeter wave, which is a couple of years.
It's early but are you implying that the fiveg related incremental revenue for next year.
Well, we will be can tend to be flat I guess, that's net ft any decline in full Jamie.
Yeah, Sandra here I think that.
We believe it's roughly a couple of hundred million I said I think I believe we said in the past that we believe all in all Fiveg will have about a three to 400 million Tam uplift to the market and so right now we're trying to calibrate as Mark said earlier.
Realization of testers is high but we're trying to calibrate.
The build out that is getting ready for the infrastructure rollout of sub six in 2020 and and have have the customers created the capacity to handle the throughput required in 2020. So we're kind of trying to triangulate that and we'll provide an update of our best estimate in Q1.
I think from a from a fiveg handset perspective.
Thank you should think about.
Sub six is going to is going to increase in 2020, and then also millimeter wave first infrastructure and then handsets in the following years and so there will be this wave of adoption first started with fiveg infrastructure and Fiveg handsets for sub six and then going to millimeter wave.
Infrastructure more in 2021, and then handsets 2021 2022 is the way we see it now.
Okay great.
That's a follow up if you look back at the Fourg opportunities, which are the started earlier this decade.
The need to still growing right now and.
If you look at the shape of that Tam Holly we will be time for you guys as well.
How long until for the opportunity to plateau.
And you actually stopped falling off how do you think the shape of Fiveg OLED mix.
As the cycle.
How is that can be different that fourg.
So I think I want to break that into two different test markets. There's the light point business. We have that saw tremendous spike when fourg rolled out of handsets shifting over to Fourg, which happened.
Quite rapidly.
And Lifepoint is fueled by those standards shifts and so.
When you think of Lifepoints business, you know that market grew to like a billion dollars in size Lifepoints business grew up or upwards of $100 million. It was a huge boom and then a bust fiveg for Lifepoint I think is going to go slower because there's more under the fiveg umbrella theres more subs standards and as a slower rollout.
In semi test I think it's a different issue semi test has been.
Benefiting less from sort of the standards change to fourg than the complexity growth associated with the standard its evolution and all of this sort of other features in phones. So we've had a decade almost now have strong mobility semi test demand some of that.
You can attribute to the Fourg standard much more of it you attribute to the complexity growth and the phone and other perhaps correlated but other areas like the apps processor. The AI getting built in the image sensors et cetera.
So when we look at the Fiveg world for semi test.
There is that there's a difference.
One subtle difference, but I think the net results going to be the same subtle differences the fiveg millimeter wave step and.
As a much bigger technological impact than the Fourg LTE east up for semi test the silicon to go at millimeter wave frequencies is going to be more test intensive and require higher test intensity for semi test.
So that's a balloon.
And it will be it'll be its metered out over years.
The complexity growth as a constant so that one I think continues and so you've got a little bit more of a bump on top a bit with millimeter wave being more complex. So looking forward marginally more test intensive than looking backwards is how I think about it.
Great.
Last question for me.
A couple of years ago Esso fee test share was in the mid Fiftys. It dropped off last year, maybe coming back a little bit.
This year.
I guess nics shared.
Probably should be up as well because of better end market customer mix and whatnot, but one would it take for you guys again.
Back to that 50%.
Well I think overall.
We've got to get.
Hey.
Kind of rollout of millimeter wave. So that's a key part that drives a lot of the RF test intensity that were.
Solid and good at.
The and the memory story has to play out as it's playing out are sort of two key elements of that.
And then less important but also in there is picking up a little more.
What we would look at as edge AI type test business, we have to get.
More.
Devices in automotive and consumer products that.
Our digitally intensive and executing these inference algorithms that have been developed in the cloud were strong there that growth.
It's sort of the third leg of the stool that gets us there.
Great. Thank you very much.
Okay.
Your next question comes from the line of David Duley with Steelhead. Your line is open.
Yes, Thanks for taking my question a couple of.
A couple of things on Fiveg handsets.
Could you take a stab that how much more test time is involved in the fiveg handset versus a fourg handset I realize there's more RF and power management content.
More complexity and some of the part, but if you could give or take a stab at estimating how much more test time intensity there is with the handset.
Cheaper sport you that'd be great and the second question is have you seen an acceleration in customers plans to roll out Fiveg phones next year.
Hum.
So on the second point X. I'll leave that well on the second point, yes, there's an acceleration of Fiveg rollout.
In general that's happened this year. So if you if you fast if you went back to the beginning of the year and said, what's the pace of five you rollout to today, it's quite accelerated in both base stations and enhance that's however, the difference.
A significant point and all that is that most of the acceleration is in sub 60.
It's the base stations and the handsets that are really starting to roll fast are in Asia.
Were sub 60 is rolling out ahead of.
The rest of the world.
Now next year, we'll probably get a little bit of.
Broadening that that's what's expected and I would expect that too.
But the infrastructure in the United States in Europe , really isn't going to be in place to take advantage of a lot of that so that's going to be a bit about anchor.
But thank God Asia is running because it's been great for us.
Now.
The test time question.
There's two different ways I'm, not sure which question you're asking theres the testing of handsets that Lifepoint does in a fiveg phone and then there's the testing with all the silicon that rolls into the Fiveg phone, which one are you.
I was referring to all the silicon in the phone okay. So in the on the silicon side.
That was a tough one does call right now because.
People are still developing early early test cases for the silica fiveg silicon the fiveg specific silicon tends to be Theres, transceivers theres antennas and there's a modem.
And all of those arent early pilot phase production all of them have today much higher test times, which if you extrapolate it will come up with stupid numbers for test markets and we expect they'll get optimized as always over the next year as they go to production.
So I.
I think in the end, we're going to see.
Small.
Maybe handful, 10% plus or minus kind of test time increases when people finally sort through all this.
But that's sort of a rough number we use.
I think I just had one quick point on the Fiveg acceleration I think on the millimeter wave, we're seeing a lot of engineering.
Efforts.
And testers to support that endeavor so.
The handsets as I said earlier would come out we believe would ramp in a year plus we are seeing an uptick in the engineering efforts on Fiveg millimeter wave.
Okay, great. Thank you.
Operator, we have time to sneak in just one final question. Please.
Certainly your next question comes from the line of Tom Diffely with D.A. Davidson. Your line is open.
Yes, good morning, I was hoping to get a little bit more on the automotive market I know, it's down quite a bit this year, but what is your long term view there and it gives you more is that capacity planning or is it the technology drivers as well.
Yes, it's primarily a technology driver.
The automotive unit volume in the world's not going to move much over the next decade, probably or at least for the next five years.
But the complexity growth of the silicon in automotive is what's important.
And.
Much of that relates to more.
Economists driving driver assistance.
Technologies flowing into the cars and from the design point of view a lot of tooling was put in place for that last year.
This year I think because unit volumes are down in such that the manufacturers are kind of holding off but I expect like I said before that will return to growth late next year and that trend line for automotive elect test, let's say automotive test.
Should be above the trend line of the rest of the industry in terms of growth. So we look at that it's going to grow probably greater than 10% on average, whereas the rest of the test market, we've modeled and that sort of 4% to 5% range.
Great very helpful. Appreciate it.
Great. Thanks, everyone and we look forward to talking with you in the in the days weeks ahead about.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.