Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Teradyne first quarter 2020 earnings Conference call.
This time all participant lines have been placed in listen only mode and later, we will open the floor for your question.
To ask a question at that time simply press Star then the number one on your telephone keypad.
Thank you. It's now my pleasure to turn the call over to Andrew Blanchard to begin. Please go ahead Sir.
Thank you Maria and good morning, everyone and welcome to our discussion of Teradyne's. Most recent financial results I'm joined this morning virus CEO, Mark to Gil and CFO subject matter.
Only our opening remarks will provide details of our performance for 2021st quarter, along with our outlook for the second quarter 2020.
The press release containing our first quarter results was issued last evening, we're providing slides on the investor page of the website that maybe helpful to you and following the discussion.
Replays of this call will be available via the same page after the call him.
The matters that we discussed 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 releases on her most recent FCC farm.
Actually the forward looking statements were made as of today and we think no obligation to update there was a result of developments 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 doesn't work on the investor page or what's like.
Also please take special note sleep overstatement asleep.
Deck for risks related to cope with my team.
And potential changes to U.S. export regulation.
Looking ahead between now and our next earnings call Teradyne expects to participate in technology or industrial focused investor conferences hosted by Wolfe Research RW Baird Bank of America Collyn, Yes at Stifel.
Now, let's get all the rest of the agenda first Mark will comment on our recent results in the market conditions, including how we're responding to the cold with Nike pandemic.
Jay will then offer some more details on our quarterly results along with our guidance for the second quarter well that answer your questions. In this call is scheduled for one or more.
Hello, everyone and thanks for joining us.
Today I will describe how we're responding to the cobot 19 pandemic, including our high level results for the first quarter.
I'll then provide some context for how we're looking at the second quarter and the market conditions were observing Sanjay will then provide the financial details and more specifics on how we're managing into current environment.
Probably nineteena shaken the global economy, and it's unclear how long the restrictions on daily life will continue or what the longer term economic implications might be.
However, as.
Yes, you're right in our press release demand for test products remains very strong throughout the first quarter and we were able to deliver revenue and earnings nearer and above the top end of our guidance respectively.
As you might expect the teradyne team and our partners overcame numerous supply production and logistics obstacles during the quarter and I could not be more proud of their work.
Employee health and wellbeing has been our top priority of teradyne globally. The majority of our employees working from home.
Well some of our operations supply line and customer support teams must be on site, we're providing them with the necessary protective resources in procedures to minimal exposure risk.
Supply line challenges continue to come our way and the unusually large revenue guidance range. In Q2 reflects this challenge Sanjay will give you more details on our supply line response.
Application support projects are vital to the short term in long term success about teradyne and our customers. These projects are largely on track with employees assisting customers onsite where necessary, but using enhanced safety protocols.
R&D projects are moving full speed ahead, and with minor exceptions are on schedule. Despite the rapid rapid shift to significant number of engineers working remotely.
Well, we are watching this closely to ensure we get ahead of any potential productivity lost from this remote work range, but so far things seem to be proceeding on plan.
So in summary, despite the numerous challenges presented by the Cobot 19 pandemic. The teradyne team is executing and delivering one of the largest ramps up tester shipments in history.
Moments like these really stand out in our careers and it feels great could be part of this team.
Turning to the business.
As of yet demand for test equipment remains little impacted by the cobot 19 pandemic.
Well there is incremental softening in the automotive sector, that's being more than made up for by strengthening of mobility, Fiveg and memory test demand.
On the other hand, our industrial automation business saw a decline in Q1, which we expect will deepen in Q2 as Europe and North American manufacturing remains impacted by shutdowns.
Now, let's review, how Q1 unfolded and how we're looking at Q2, given the uncertainty in both supply and demand, we will not be making any full year projections in our comments today.
At the total teradyne level, our first quarter sales were up 43% from first quarter of 2019, and our non-GAAP earnings per share were up 85%.
In semi test sales were up 42% from Q1 90 of that Esso see TEP. That's a C test was up 37%.
As expected Fiveg infrastructure test buying slowed in the quarter in handset related buying strengthened.
This trend continues into twoq as well.
Part of our growth comes from the mobility design wins, we highlighted last year, but the biggest driver is the same theme we've been describing for years <unk>, increasing complexity of silicon in handsets drives up test time, which in turn drives demand for more testers, even in the face a flat to down handset unit.
Volume.
Increased complexity comes from more powerful apps processors, new technologies like why probably six in fiveg more cameras with higher pixel count and increasingly sophisticated sensors and displays.
Tester demand for the specific five GE modem and RF components in handsets is growing in 2020, but remains modest.
Much of the early Fiveg deployment will use low band sub 60 technology, while millimeter wave will be a small percentage of fiveg handsets shipments this year.
However, there is growing demand for millimeter wave test capabilities, both in semi test and at Lakepointe.
The industry is building capacity for this technology from near zero. So much of this demand is to put initial capacity in place for early production.
On the infrastructure side, the global Buildout is still in the early innings, and we expect test demand to ebb and flow as the network build out moves through various geography.
Memory test is another bright story revenues were up 76% from Q1 19.
The L.P. DDR five ramp on or Magnum epic test system was the highlight of the quarter as DRAM final test as a new and promising segment for us.
We expect that ramped to continue in second quarter.
From a revenue perspective, though flash test shipments, where the dominant control during the quarter.
The latest protocol interface standards, and flash or pushing interface speeds higher driving a refresh of package test systems. We expect this trend to also continue in the second quarter. Additionally, we saw healthy shipments for indigenous Chinese memory production into first quarter.
And the system test group sales doubled from the first quarter of 2019 with storage test standing out with sales of over $75 million in the quarter.
This was more than three times the level of a year ago quarter as demand for both HDD and system level test remains strong.
Our defense and aerospace defense and aerospace business grew over 30%.
Quarter year on year, well production board test softened and slower automotive electronics demand.
In wireless test like point sales were up 50% year on year on increased demand for both connectivity and cellular related test systems like semi test lifepoint shipments are building foundational capacity for Fiveg handset test and benefiting from the wife Fightsticks transition.
Shifting to industrial automation revenue in Q1 was down about 10% year on year as the improving outlook for Universal robots in Asia, which we saw in Q4 was stopped that didnt. Its tracks by the Cobot 19 pandemic in Q1.
In Europe, and North America, you are also faced increasing headwinds as the quarter progress on the other hand, Mears autonomous mobile robots delivered roughly flat sales in the quarter compared with a year ago period.
We believe the opportunities for automation will accelerate post pandemic as businesses see the resilience benefit of up more automated workflow.
There will also be the opportunity in the likely realignment of localized manufacturing of critical supplies and a heavy reliance on warehouse automation and logistics automation.
To that end, our investment in new products distribution and organizational capability continues at full speed.
In March we introduced the mere 250 autonomous mobile robot and the auto guide Max in 10 pellet stacking autonomous forklift.
In April Universal robots formally introduced the markets most capable industrial been picking product acting now.
Actually NAV is a you are plus application that uses threed vision and a proprietary path planning software in an easy to deploy plug and play solution.
It provides the necessary hand, I coordination to both precisely pick parts from bins and precisely placed parts in a manufacturing flow.
Finally.
Let's jump up and look at the Big picture.
Our once you demand was very strong and we were nimble enough to fulfill that demand. Despite the cobot 19 challenges.
Our Q2 demand looks even stronger and the team is focused on knocking down supply bottlenecks to realize another great quarter.
However, we recognize that were not operating in a vacuum.
Mid term the midterm impact of rolling economic shutdowns remains uncertain in many industries, including our own.
Bear in mind that volatility is not new to us we have an operating model that can flex up and down with extreme demand swings and still remain profitable we have employees across the company that have weathered severe economic storms in the past and in each case, we've emerged better positioned competitively.
You will note that we have suspended our stock buyback as a prudent hedge until the future impact it becomes a bit clear at the same time. We also anticipate an increased likelihood of M&A opportunities later in the year.
Either way, our rock solid balance sheet will be an asset in the quarters to come.
Longer term, we know technology relentlessly marches I, we're providing solutions to global challenges and enriching all of our lives.
We remain confident in the long term outlook for our test in automation markets and in our strategy to accelerate serving them.
Sanjay will now take you through the financial details Sanjay.
Thank you Mark good morning, everyone. This morning, I'll provide details on how we're managing our operations spending and capital allocation and this uncertain environment I will then cover our Q1 results and our Q2 outlook.
I first want to acknowledge the tough environment, our employees customers suppliers and their families are going through.
For those that have for those that have family or friends with Cobot 19, I wish you a speedy recovery and hope this pandemic will be behind the soon.
We'd like to thank our employees and suppliers for your extraordinary efforts and our customers for your patience and confidence in teradyne.
As Mark noted earlier, our priorities are the safety of our employees supporting our customers and continued execution on achieving our financial objectives, while we can't predict the duration of this pandemic and its economic consequences. We entered this pandemic it in a strong financial position with a flexible business model, specifically, we have 905 million of cash in March.
A couple securities at the end of Q1 with no shirt for termed up.
We have a 460 million dollar face value convertible bond that's due in December 2023.
We have a diverse portfolio of businesses in test and industrial automation. These businesses continue to service their markets with a leading set of products.
Our test businesses continued to have tailwinds behind them with new technology introduction.
Introductions like various flavors of Fiveg and new memory standards like Lpddrfour. Five this is balanced by the construction of our industrial automation businesses due to both weaknesses in the auto industry and cobot 19.
A couple of points on our expense bottle the test equipment market cyclical, hence we've structured our company's expenses to be able to handle large demand swings total expenses are several level to ensure we generate cash during periods of low market demand, while retaining maximum flexibility to scale up for example manufacturing for our test portfolios mainly.
Outsourced to contract manufacturers therefore, much of our cost of goods sold our flexible as we are not burdened with the extensive fixed costs. We have an efficient operating expense model, where portions of our engineering operations and Gionee functions are low cost regions lastly, our compensation structure varies with our revenue and profit levels.
As Mark noted, we're continuing to invest in our engineering roadmaps across the company. This includes significant fiveg AI and memory related investments in test. We're also investing to support pulled out of our you are plus application kids, including are acting up industrial been picking product just introduced by universal robots.
And new product rope Roadmaps at near an all guide as well as as well as key IP that will benefit us in the years to come.
Another key investment focus this year.
We will be our supply line, while the bulk of our production has in Asia close to where customers. The supply line supporting got production is truly global.
As Q1 demonstrated our internal team and partners did an outstanding job and difficult circumstances to meet our customer delivery requirements. This experience is not only reinforced the value of our operations team, but has identified areas that we could improve these are primarily in areas of adding redundancy for critical components and manufacturing capacity.
We are taking these lessons learned to strengthen the supply chain further in the days ahead and these will have an impact on our costs out of Q1.
Company revenues were 704 million up 43% year over year semi test revenue of 484 million was up over 40% from Q1 of 29 team driven by handset related SLC demand and strengthened flash final test and memory. We also ramped LP DDR five revenues tied to our Q4 design.
System Test group had revenue of $116 million, which doubled year over year, driven by strong driven by storage test solutions, primarily for terabyte class Nearline drives as system test as well as system test solutions.
Industrial automation or IP revenue of $60 million was down year over year.
On manufacturing weakness amplified by the covert 19 pandemic in March we did see some improvement in China, our fastest growing market in 2019, which has an encouraging sign and hopefully a leading indicator for countries, who get back towards pre cobot 19 work environments Lifepoint grew.
Good point had revenue of $43 million and grew 50% year over year with cellular fiveg.
And the new conductivity standard by five six driving revenue.
Non-GAAP non-GAAP gross margins were 57.6% down a point quarter over quarter due to product mix. Our non-GAAP operating expenses were down $7 million to $197 million from the fourth quarter due to lower discretionary spending and timing of expenditures.
Slightly offset by higher variable compensation on higher profit.
Non-GAAP operating profit rate was 30%.
Non-GAAP EPS was a dollar.
The tax rate, excluding discrete items for the quarter and year.
Was 14.5% on a GAAP basis, and 15% on a non-GAAP basis.
The improvement in tax rate is driven by higher revenue mix from our test portfolio than plan.
Turning to share buybacks.
We bought back 1.3 million shares for $79 million at an average price of $58 in 81 cents in the first quarter effective April Onest, we've suspended our share repurchase program. There are two reasons why we made the decision to preserve cash at this time firstly as we look forward there was uncertainty of the depth and the duration.
The economic impact of Cobot 19, secondly, we wanted to retain more cash on the balance sheet to enable M&A opportunities, which may present themselves in the near term.
As Q1 is typically our lowest cost cash generation quarter, we generated $6 million in free cash flow as we paid annual variable compensation.
Share buybacks and dividends primary driver drivers of our $111 million of cash declined in Q1.
Turning to Q2.
Given the volatile environment and turning to Q2 revenue rate sorry.
Given the volatile environment that we're facing.
Widened our guidance range to reflect the various scenarios were considering.
First assumption is that second or third waves of the virus do not forced countries to shutdown essential semiconductor businesses.
The second assumption is semiconductors retain the status of being considered a central by governments when imposing stay at home work orders.
Third assumption.
Was that our operations team continues to be able to mitigate supply chain and production issues globally.
From a demand perspective, but also like to remind you a couple of important points first we have a concentrated demand in Q2 related to smartphone handsets and their associated launches as you know smartphone demand can change quickly and while our guidance.
Next our latest estimates were not immune to the short term changes in demand it could materially change our outlook for Q2.
Second we're not operating in normal conditions, so normal seasonality may not come into play in the future quarters.
Now to where Q2 outlet sales are expected to be between 690 and 800 million.
Million dollars non-GAAP EPS of 86 cents to $1.16 on 173 million of diluted shares.
Second quarter guidance excludes the amortization of acquired intangibles and the noncash imputed interest on the convertible debt.
Second quarter gross margins are estimated at 55 to.
The 6% down approximately 2% at the midpoint for Q1.
There are two factors, causing the margin decline.
First incremental costs associated with Covance 19 are being incurred to ensure our supply line as noted prior.
This impact results in just under half of the margin decline.
Second increase.
Mix of mobility business on the quarter drops just over half of the margin decline.
Margins expected in Q2 follow similar historical pattern when there is a sales mix biased towards mobility.
Second half of 2020 gross margins are expected to further decline from Q2 due to continued growth in new product ramps, which.
If not come down the cost curve, such as the Ultraflex plus and millimeter wave solutions.
Expected return to our historical gross margins in 2021.
Opex spending will increase from the first quarter due to incremental test investments in both R&D.
NSG any incremental investments will focus on.
Distribution and product development investments.
Opex is expected to run at 27% to 30% of second quarter sales. The non-GAAP operating profit at the midpoint of our second quarter guidance is 27%.
Regarding our Opex plans for full year in light of the changes we've discussed earlier our latest.
We estimate project 2020, opex to grow the 7% to 8% from $758 million in 2019. This is down from our January guide.
In closing these are challenging times and we believe we are well positioned to execute over the period.
Of demand volatility.
We have a.
Slide portfolio businesses and customers strong cash position and balance sheet.
Taking actions to reinforce our business against an uncertain future, while continuing to strategically invest in customer support and product roadmaps that will power or future success.
As we proceed ahead, we'll make changes if needed in line with the foundation.
Noted.
When this pandemic and resulting suicidal impacts recede, we're confident that the global economic and demographic horses.
We continue to make the electronics test and industrial automation industries attractive growth markets with that I'll turn things back to Andy.
Thanks Andre.
It would not willing to take some questions.
As a reminder, please limit yourself to one question and a follow up.
Thank you. Our first question comes from the line of Brian Chin of Stifel.
Hi, there good morning, congratulations on the strength of the results and appreciate you're not making that need to assume conference call.
Oh, yes.
My first question would be.
Maybe just sort of reconcile the strength you're seeing in your business. There clearly is a wide range of expectations for what semi growth could be in 2020 and understandably their skewing lower.
As expectations for markets like smartphones automotive.
Lowered.
Complexity and sort of your success in terms of expand platforms in test and new customers is certainly one factor.
Further reconcile the strength of your business was sort of the declining growth expectations further downstream and I guess more bluntly do you also planned for some form of rationalization of test capacity.
Beyond the second quarter.
Okay. There's a lot in there, but I think it is perhaps a little bit incoherent to see such strong tester demand when people are talking about the uncertainty or declining unit volumes, particularly in handsets, but I think this is not unprecedented this is.
Back to.
To the issue of its not so much.
The number of phones that are being produced its the complexity of the silicon in the phones and associated test time, and that's obviously, an absolutely whats occurring at the moment. So whether we were in the midst of a cobot pandemic or not the.
The business right now would be equally robust.
And.
I don't believe its overbuying or sort of there's a rationalization necessarily provided that economic impact doesn't persist into next year and slow down the rate of complexity growth, which is a possibility. We don't know if that will happen, but it's a possibility, but I think with so many things coming together.
Earlier this year around features in phones like.
The new Wi Fi standard the some of the new sensor technologies.
And of course, Fiveg that it's just driving.
A lot of complexity increase.
So I don't think the test business you can necessarily.
Correlate that well with the end markets for semiconductors, because of that you certainly see automotive down way down or we see that in our business industrial down and we see that in our business.
For test, but mobility is quite strong.
I appreciate that and maybe even sort of against that.
Those comments.
I think it was early early 2017, there was also quite a great deal of strength from mobile processor.
That you saw on your business in terms of the test capacity additions that occurred in early 2017 would you use that as an analog relative to what you're seeing now in terms of maybe complexity or.
Awesome that maybe exceptionally strong.
So in unit environment as well.
Yeah, I think it's reasonably analogous and therefore year to year, what you've seen in our business for test is that it's not monotonic or consistent year to year in terms of our business.
In the.
Third quarter related to mobility in the years, where theres a lot of technological change we get incrementally more growth in revenue and then there's some years, where the changes more modest and there will be down so that's going to be part of our future.
As far as the I can see so we really look at it as a trend line and yes. This is a particularly strong year.
All right appreciate that thank you.
Our next question comes from the line Mehdi Hosseini.
Sorry.
Yes, Thanks for taking question Mark I want to go back to you on common backing gender the early.
Can.
You characterize.
Burris loosened synchronize.
50, 540 client and that awards at 55% Alteon 2020 revenue would be captured in the first but I do understand lack of visibility, but just given how is strong.
Thank you for sensors.
Would you agree that Youre correct stuff could actually be more than 55 could sooner the 2020 revenues.
It certainly could be.
I think what we've seen since the January call is that.
What we described to sort of the first and second quarters.
Roughly equal.
It is close to right I think we've seen a little more strengthening in the second quarter than we.
Projected back then.
And we've seen Q1 turn out to be a little bit higher at the high end of our guidance back then.
So.
It's comment a little bit hotter.
And therefore, it certainly could be that the percentage skew toward the first half could be higher the thing about the second half, though it's not a it's not a marginal model out there we can rely on to predict what's going to happen. So.
At the moment the demand even you know the backlog in the deliveries were quoting through the third quarter are pretty strong but.
We know that can change in a moment's notice.
Sure. Thank you and I want to go.
Thanks to your use of cash.
In terms of the priorities for M&A, if you look to help and discipline.
What is.
What is a priority for you with 70.
The tests or.
Areas agents into some weakness now become a priority or would you be wilkinson industrial automation and making additional investments.
Yes, hey by the at Sanjay here. So so I think that we have an active.
In a group that we look at.
Many different opportunities in the last several years, obviously the focus has been on industrial automation.
But we are actively looking and I want to keep part of that strategy is that.
You know as valuations potentially come down in the future.
Products.
Companies.
Good fit and become more attractive financially and so I'd say.
Historically, and even looking forward there will be a focus on industrial automation, but I wouldn't count anything.
Okay. Thank you.
Our next question comes.
Comes from the line as busy Ari of Bank of America Securities.
Hi, Thanks for taking my question.
I understand the argument about.
Makes it a growing in mobile.
That was known at the start of the year.
Since then smartphone volume expectations have come down I think the.
He said.
Single digit.
So is it that fiveg mixes better I'm, just curious what could have cost dexter demand to improve when volumes have been revised downwards and that's part of that.
Give us some color about how much of that incremental strength that youre seeing is from.
China domestic customers versus the U.S. Korean customers.
Yes, so I think first of all so it's good question.
Most of the.
Yes capacity that has been installed in second and third quarter is for production of handsets that will occur in third.
Fourth quarter of this year. So the fall off in handsets that we've seen in Q1 in Q2 Theres no relationship on that demand. It's it's related to what two people think the unit volume for new phones, not an aggregate, but for new phones will be in the second half of the year and apparently Joe just.
By the strengthens the business that view is still pretty robust. The other thing that changes as you go from January till now is.
People start to get a better sense of the complexity impact on test time. So there's some preliminary views back in January but as you get closer to mass production. The reality of what that test time is sets and.
And can drive up or down demand. We saw several years ago. If you remember a situation where progression from January to April resulted in a reduction.
Test capacity, because test time turned out to be better than people thought in this particular situation. That's not the case, it's moving a bit in the other direction. So those are the two things I think that are going.
And on that are causing man to be incrementally stronger. Despite the fact that in the first half the old handsets unit volumes are down and then on China versus any place else, we're seeing very strong demand across the board. It's not one geography, It's Korea, it's China. It's us it's just a generally.
Additive robust plan around new technology for phones.
Got it very helpful and so my follow up some do you mentioned some pressure on second half gross margin I think you said Q2 would be 55% to 56% could you give us a sense for.
What specifically in the makes I understand of course industrial automation is lower so maybe that's not just having an impact but beyond that what is having the impact on Q2. Gross margin. Then then we can second half gross margin B I don't understand what about new apps can think gross.
Just down so much in these quarterly sales growth is so strong year on year.
Sure. So so going down about 2% from Q1 is at the midpoint.
It is what I said and really half think about it as over half of the decline is tied to the concentration of of sales mix.
Yes and mobility.
That's not unlike the patterns we've seen in the past.
The second part would be Weve and I mentioned in my prepared remarks, we've had to strengthen our supply chain.
And many costs associated with the Covance 19 impact, which is under just under half of the impact so that really.
Kind of bridges you from.
Q1, Q2, and then getting onto your second question about the second half first let me comment in say the second half theres tremendous demand uncertainty.
As you'd expect with.
Different businesses, we have could have come in.
Or not commence a lot product mix would have an impact but that being said, we're really seeing the adoption of several new products and solutions, specifically, the ultraflex plus platform and millimeter wave.
Really take hold and volumes.
Being a little bit faster than we had predicted.
And these are platforms. If you recall that last over 10 years on there and your infancy stage they come down the cost curve.
And so and we do expect margins to come back in 2021.
Thank you.
Our next question comes from the line from I.T. Smith Inc. a city.
Hi, Thanks for taking my questions and great job and execution.
Mark you talked about strength of indigenous China in first quarter and be here about U.S. government looking into.
Perhaps licensees for for the chip makers exposed to Hawaii people, you with Kopin suppliers and what's the demand in this in digits China.
What you expected Bakken in Jan videos or was it and you can pull in what were any discussions with your customers that they would what about the license consent.
I don't want to talk about any specific customer situation. All I would say is that the there's really been no change in demand from the.
The China region for Us, let's see test since the.
January call, we've had a little bit of incremental demand maybe on the memory.
Right, but things are playing out pretty much as planned on test equipment for.
China Lifepoint may also have seen a little bit up but nothing material.
Great and then maybe just one for Sanjay and how will you positioning the industrial automation.
In business.
Differently going into recession, you talked about targeting we had houses logistics end markets and more are you looking into maybe.
Moving away from the actual end market.
Yes, I think industrial automation had some weakness building up to cope with 19 in the auto.
Which is a large part of the business.
And with the with the Rolling shutdowns.
In manufacturing in the U.S. and Europe are predominantly big regions for the business.
We're seeing that impact and obviously contract year on year.
We did see some encouraging.
Uh huh.
Demand in China, and the last couple of weeks of March as well as.
April to date.
We are seeing demand pickup back to pre covance levels, and that's an encouraging sign as an indicator of how things might return back to normal, but we're still in the early innings on that.
I think about the business.
We guided.
10% to 12% Opex growth in 2020, and we brought that down to 7% to 8% a lot of that investment decline was really tied to the go to market for industrial automation that weve kept the.
On the product the ecosystem et cetera, but but really we had an investment strategy.
That one tied to investing for growth and as that as the contraction and the uncertainty remains we've moderated that span and our plans to come down, but we believe in the fundamentals in the.
On run and we and we will you know as as the market comes back and manufacturing comes back we actually think Covance 19.
If ever there is.
Hope there.
Or benefit out of it is highlights the advantages.
And strengthening your supply chain with industrial automation this would need to be.
Balanced by getting people back to work, but but we will continue to invest in the ecosystem as well as distribution. It just in 2020, it'll be little bit less than we anticipated just given the moderated revenue were seeing.
Thanks.
Our next.
Question comes from the line of Toshiya Hari of Goldman Sachs.
Hi, Good morning, guys and thanks for taking the question Mark you talked a little bit about millimeter millimeter wave in your prepared remarks.
I think you noted that contribution in 2020.
Should be relatively small but.
You do expect.
The technology to contribute to growth and 2021 and beyond.
Can you help us quantify how big or how small millimeter wave could be for your business. This year and what your expectations are for the next couple of years.
I've got a quick follow up thanks.
Yes, so I think.
Certainly people are beginning to ramp production now of millimeter wave.
But in a small fraction of the handsets it will be produced this year in yen.
And related to the impact this year.
I found it somewhere in that.
Hi, tens of millions of dollars across the company somewhere in that sort of range.
Now we've said longer term the total fiveg waves should build towards started this $400 million to $500 million at or to the Tam and with everything going on right now with sub six Gi and with millimeter wave and.
Such.
Maybe were two thirds of the way into that because we are seeing strong demand for the sub 60 cited as its just less test intensive.
So as we go into 2021, I would expect that to grow and.
I think those are the sort of bookends.
Got it.
A quick follow up on the.
On the side of your business.
Over the past couple of years I think you've talked about.
Going more direct to large customers.
But I just wanted to check and then sort of confirm how significant are insignificant your direct businesses today.
As a percentage of sales.
And on the distribution side I'm curious how much visibility you have to into how much inventory.
Your distributors hold today, just given the current environment. Thank you.
Yes.
So on the direct sales part that's that's a program we launched last year and it's something.
We are doing both in.
All three of our automation companies that started out.
Heavily distribution oriented for large accounts Muir you are.
Have moved toward direct sales, but that's really been in effect for a couple of quarters.
You know we're into a.
A downturn now.
And a lot of those customers were automotive related so I don't have the numbers in front of me, but I don't think the.
Revenue percentage would be.
All that significant at this point.
On inventory I don't think theres very much if any build up inventory in the channel around automation, it's a very quick turns business.
When you look at that pretty carefully every quarter. So so no overhang there.
Thank you.
Our next question comes from one of C.J. Muse Evercore.
Good morning, Thank you for taking the question.
I guess first question is.
Regarding supply chain and so curious can you can you speak to in particular, what kind of issues, you're seeing in Malaysia elsewhere in southeast Asia.
Sure downstream customers, whether you are not you're seeing plans for any sort of redundancy.
Those customers given.
Uncertainty around Covidien desire to perhaps test and assembly at multiple locations and then I guess, particularly the teradyne.
Do you think about this is kind of.
Hopefully just a short term speed bump here how are you.
Planning.
To manage your own inventories so you know if I.
Recall back it during the financial crisis.
Yes, shortages and that Pgas et cetera, which made it difficult to ramp testers coming out of the correction I would love to hear what your plans are gay for.
Hopefully a recovery into the future. Thank you.
Yes, hi.
Sandra here, so so from a supply chain perspective from a perspective.
I think weve, our operations team in our supply partners on yeoman's effort.
And and if we break it down when this first.
Pandemic first broke out in China, where we have a large contract manufacturer as well as as well as.
You know supply chain kind of feeding it.
Specifically we drove.
A top or a task force on ensuring to get labor back ensuring to get materials and the first thing. We did as you know we kicked off our supply chain and other parts of the world.
And we invested in redundancy from different supply lines in the different geographic patient and so the key takeaway is that we are building both redundancy in the component qualification that feeds our test equipment and industrial automation products.
And then secondly in building capacity and different territories, and then as as the pandemic grew throughout the world and as you mentioned, Malaysia, the Philippines and different so selfish countries you had to build redundancy in the logistics and the flight lines to both.
For our products to get to customers, but also for our components to actually get to the contract manufacturers to get deployed so theres been a significant.
Investment and that will that we're going to strengthen our supply chain and make sure we have clear diversification of of supply.
If any of that pandemic, which who knows how long it's going to go.
We'll have that strength.
And so I think part one and the second thing is.
We are we are building obviously, our inventories went down just really to to kind of meet our demand and those were growing we are we are currently.
Building inventory in anticipation of delivering as you saw the significant range and and the range is really tied to where do we believe were we can have a high assurance of delivery of that so we are we are building inventory at this time.
But I think it will normalize as as as demand.
And starts to shake out and.
And as the market unfold.
Helpful as my follow up.
Yeah, I guess kind of a two part question you talked mobility really the drivers for Q2, but given the commentary around gross margins impacted by millimeter wave and Ultraflex plus.
Reduction.
Into the back half would suggest perhaps.
That could continue into the second half so I guess, how do we think about mobility seasonality.
And then as part of that my understanding what the plus is that same software very different hardware from the nonpluss.
So curious what kind of obsolescence you might see there.
As you get new product introductions are only use that.
Yes.
What impact might that have on.
The types of demand for God tools.
During 2020 and into 2021.
Yes, so I think at the beginning of the year.
We anticipated strong first half.
Half its kind of playing out the way, we anticipate it's a little bit stronger in Q2 as as we guided in our range.
The second half of the year is is really opaque the impact of of the economic disruption of of the pandemic is really is really it's unclear at this point.
We do know that there has been relative to our expectations in January.
A little bit more of an acceleration of adoption of the ultraflex, plus and millimeter wave that and as I said earlier.
Given the volatility in the second half.
There could be a bunch of puts and takes in the gross margin.
With regards to the ramp up of the Ultraflex plus.
The Ultraflex has been around for decades and has a long tail. So we don't necessarily see a huge obsolescence risk with the transition as it occurs.
Could we have next question please.
Our next question comes from the launch of Tennessee occurring as GPS.
Hi, Thanks, I guess I had two questions first as on while away. So I know that you disclosed in the case, so direct and indirect studios that was 11%.
Revenue last year.
I would say that they were greater than 10% customer in December it sounds like they were greater than 10% in March I guess two part question is that the case and are they still expected to be greater than 10% in the June number I asked that because the disclosures in the safe Harbor get changed quite a bit and it.
Seems like something is clearly likely to happen there so that revenue seems to be at risk for the back half a year and then I had a follow up thanks.
Yes, so essentially here so first of all we don't comment on specific customers. We obviously did disclose.
On the annual report that.
While way and its associated with Philly.
And it's affiliates.
The procure.
11% of our business last year, but we specifically.
Wont comment we did have 110% customer.
This quarter.
Okay, Yeah, I ask because you did say that last quarter. So so it seems like you have said that the past but okay.
Okay and I guess my second question is.
Can you give us a sense of what the mix is for June it sounds like on the semi test side.
You know number is going to be flat to up.
I would assume systems tasks comes down a little bit.
He said I is going to remain pretty weak. So I guess I'm wondering if you can give any.
On the mix, particularly assets fee, which seems like it has to be in the high 50 to 575 million range I just I just wonder if you give us any comment.
I think from a mix perspective.
I will comment on the specific numbers, but.
Semi test is.
As well as you said will be very strong and.
As we messaged as part of mobility.
We do expect system test to to decline a tad.
Or to decline.
Okay.
All right.
Okay. Thank you.
Our next question comes from one of Krish Sankar of Cowen and company.
Okay.
Thanks, I should accelerate your line is not on mute.
Well, let's come back to Krish.
Our next question comes from the line of less than two of Keybanc capital markets.
Hi, Thanks for taking my question actually I had two.
Quick ones, one on the industrial automation business.
You mentioned that on the other side of this pandemic there should be a nice acceleration demand, which makes total sense, but im wondering.
Have you been having conversations with some of these smaller manufacturing operations.
That may realize they need to invest in automation or is that just an expectation in other words.
And that comment based on.
Conversations you're having today are just just the expectation that would recover.
Yeah, I think the conversations today are really not that far out in terms of there.
Headlights, but it's an expectation, but I would say that we commented that the mobile platform. It mirror saw.
Flat sales quarter over quarter hasn't been as robustly impacted.
By this.
Pandemic and part of the reason for that is that there is already applications for that platform in the healthcare.
Space that are growing so while industrial has been moving down that's.
Been increasing and so I think theres, partly small to medium sized enterprises will look at automation coming out of this as an as a strategic asset but.
Moving toward some of these other verticals that are likely to disproportionately grow is another part of the calculus on how this.
Growth in industrial automation accelerates coming out of this.
Okay. That's helpful.
And then my follow up this is you talked about supply chain redundancy manufacturing capacity redundancy and I haven't heard that from.
Other companies as well related to building out semi test demand.
And I'm wondering if that is part of the near term strength, you're seeing for test in other words are your customers building out some some test redundancy is that a temporary function.
You know I think thats something we.
We're concerned about in to the extent, we've checked and look we don't see that really.
It would be pretty obvious if we saw.
So customers that are trying to test silicon.
Shift or move capacity to Uno separate the typically speaking to the testers are purchased by third parties Osats and they're not very.
Willing to invest in capital unless it's going to be utilized really quickly.
And as we've looked at the utilization of the equipment that we've been installing it seems to be.
Pulled quickly and turned on and utilized right away. So there's not idle capacity being put into the test semi test channel that we're aware of.
Okay very helpful. Thank you.
Our next question comes from the line as John <unk> of Credit Suisse.
Yeah. Good morning, guys. Thanks, Let me ask the question Mark Mark there's been a lot of questions on the association business, maybe I'll give you one on the memory test, which had a really strong march quarter in fact.
You kind of back above levels, we were seeing in 2018 when the.
I think environment in memory was just significantly better in pick growth was sort of accelerating versus de certainly writing some kind of curious you can talk a little bit.
About some of the complexity drivers there and the market share drivers there and how sustainable do you think that is in the back half of the year.
Yes, the back half of the year as God knows but.
No. There there are couple of things going on there that are interesting one piece of it is that we opened up a new segment of memory test that we haven't participated in before which is DRAM final test.
And the DRAM World there is a transition occurring to lpddrfour five.
That obsolete the existing fleet of equipment out.
So to the extent memory manufacturers are beginning that shift.
Just from a technological point of view they have no choice, but to buy incremental capacity for it and that's something that's benefiting us in Q1 unlikely we will continue through the year, not just Q2, but and beyond.
And that has years to go so that's a.
Tailwind for sure.
The bigger piece of memory in terms of revenue.
As flash and flash is.
For many years now been undergoing a similar generational shift toward high speed.
And unlike I would say DRAM that so that's kind of very controlled and not.
I wouldn't say a commodity but the standards around DRAM or kind of ubiquitous in the case of flash there's much more bespoke design going on around the protocols for the interface speeds, depending on the handset theyre going to enter the application that going in and that diversity drives a lot of incremental test in.
German buying to test all that variety. So that's been true historically it has just as strong right now.
And then the other comment I'll make is that and new manufacturers that we see coming online in China are not slowing down there putting capacity in and that's that's also a tailwind.
That's helpful. Mark and then maybe as my follow up there the stand up segment. This quarter was because the system test both sequentially and year over year, you had some comments about strength and Nearline drives I'm, just kind of curious how big of component.
The growth was hard drives and again can you help us think about sustainability.
Complexity and share versus just happened to rely upon volumes.
Yes. So you know hard drives have been a standout you both both aspects of what we do with that storage test product are interesting.
And I think the hard drive piece.
Is sustainable and its.
Double pretty much as far as the I can reasonably seeing through next year.
And this has been going on for several years now and there's only really too.
Predominant.
Manufacturers out there and.
And so share as a little bit not an issue as much as just is the.
Demick underlying growth there and it definitely seems to be there with the increasing density of these drives and volume.
On the system level test side.
That's a nascent market it's still early develop its a semiconductor test market, it's an additional ins.
Certain of test for semiconductor test and very few manufacturers have adopted that methodology yet.
We're fortunately on the leading edge of that adoption will become an industry pervasive methodology, where more and more manufacturers decide to add an additional insertion or test step before.
For the ship their final product or not is unclear, but compared to what our expectations were a year ago. The volume there was certainly exceeded our expectations. So it's a good secular sign.
Thanks, Congratulations again.
Our next question comes from.
One of Richard Eastman of Baird.
Yes, great. Thanks for sneaking in here, but just first question just just around the industrial automation business with the business model, there and I don't know how the variable fixed cost mixes oh for the for the entire I'd business.
And Sixtyv.
1 billion dollar kind of revenue run rates here.
First quarter and that perhaps decreased a little bit.
In the second quarter.
Is that business.
A profitable contributor.
In the in the first quarter.
Okay.
Yes, Hi, it's Andrew here, so so first thing with Ita.
As we enter into this market we believe that.
On a rapid growth trajectory over the mid term, we're we're seeing the impact obviously of the auto weakness of the pandemic, but but inherently in that our fixed cost as a percentage of the businesses as much higher because we do do internal manufacturing.
And.
So we do outsource some sub components, but fundamentally we we inherently have a higher fixed cost structure, just because we believe we have a leadership position and thats one of our our attributes still hold onto that leadership position. So there is a higher fixed cost component.
The second comment as you know in 2019 were profitable we.
Had plans, even though it was a heavy investment year that we've got over docket down tied to revenue.
We believe we would have profitable year in the first quarter.
We with the contraction.
We weren't.
Profitable.
Okay.
In the development under.
New product side there.
The mere new products and obviously.
Maybe the deal weighted act in that product now being introduced.
Yes, it is a reasonable assumption that as we push out to the fourth quarter.
New products, plus you know again, making some assumption to.
On the global economy, maybe improving.
By the fourth quarter, but do we do this does tend to look at the businesses, but potentially seeing sales growth in the fourth quarter is that still on the table year over year.
It's on the table for sure whether it'll happen or not as a question.
Fourth quarter is always strong.
If the if the.
Early signs in China, China.
Certainly was it an anchor in Q1 on our <unk> a sales, but as we've gone into March and into Q2.
They've come back pretty strong and are in <unk> buying and could very well set year over.
Year Records in our business.
So if that is a mirror image of the rest of the world, which we don't know we could certainly see a Q4 in is that was sequentially up.
Okay and Mark in the in the commentary in the slides I didn't notice any.
Updates around the semi so see test market for memory test market and I gather from your comments just.
Well the puts and takes in the US we'll see market, obviously strength in mobility.
Or in the industrial piece was softer autos softer even in the memory side it seems like a.
A lot of the with the strength there for you guys. This year, but are you should do you still comfortable at this time just with the with the previous maybe thoughts to run on the size of the US we'll see a test market as well as memory test market are they still.
Simply.
Good assumptions your point, but at this time.
Yes.
Yeah, I would I would kind of toss all that overboard. Unfortunately, because we just don't know about the second half, but what I can say is if what we do know about is the first half of the year and if you look at the first half of the year.
We're running toward the high end in market size in both memory.
So see compared to what we projected that led to the prior estimates so.
If anything if this had been as sort of normal year without co that we probably right now be revising up some of our market size estimates for the year for each segment, but in light of what's happening we really can't comment.
Understood Okay, great. Thank you enough.
Fantastic quarter your team.
And operator, we were going to try to squeeze just one more one more in please I know we started a little bit leads so could you just give us one more question. Please.
Certainly our last question will come from the weren't Sidney Ho of Deutsche Bank.
Great. Thanks.
For actually squeezing me in the question is just a follow up to look at previous question I understand you don't want to give full year that full cash flow SLC Tam.
Is that you view that most of the SLC tens that you get I guess a market is going to lose a this year will be recovered next year, assuming the Cohen of every situation is on.
To control say by the end of this calendar year or will that at least some would that be lost permanently maybe you can talk about that by end market be great. Thanks.
Yes, I think it's it's just very speculative, but I'll give you maybe just a little bit of color I'll probably regret it.
If you go back to what happened in 2008 nine.
As a reference it came back with a vengeance in 2010 and you could argue that it sort of on a trend line basis filled the whole and that was created in 2009.
So so.
The technological progress just drives a underlying.
Test demand.
And in terms of this complexity growth that is cumulative.
It can be temporarily squashed.
Through things like a sharp drop in unit volume demand, which is what occurred there but it comes it came back with the vengeance. So the real question Dan in this.
Situation is when will the unit volume demand.
Recover because the underlying technological growth will likely continue unabated.
And I think Thats everybody's guests we expect.
Things.
Mobility in handsets have been slightly declining now for a couple of years and it's really had little impact on the test demand if the handset market starts into double.
Digit declines and that persists through next year I would say it must have some impact.
On test demand because the complexity underline complexity growth. This year is quite high it's likely that it'll oscillate year to year. So those are just sort of touchstones, but no no prediction.
Okay, that's fair.
Maybe my follow up question is in the industry automation business just to level set given a pretty sharp deceleration over last few quarters for the segment and I'm guessing that will continue in Q2 and whatnot, how should we think about the revenue exposure today Q1 GAAP.
Q2, whatever you want to use.
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Area said I expect it to continue to see weakness, namely automotive by end market that maybe some geography, just trying to understand if things continue to go to Raleigh, how much of that is at risk.
Yes, so with century here. So so really we're we're predicting a downward bias in Q2 just.
Given the the fact that Theres a lot of filter in place manufacturing locations are still down.
And so it is we do see a further contraction.
Looking forward.
As I said earlier, we did see signs of improvement to what I would call getting back to.
And initial learnings in China pre co with levels, but it's really too early to tell how how fast the recovery would be.
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You know and we did enter it we did enter in the last.
Quarter little bit of weakness with automotive.
Okay, great. Thanks.
Okay folks. This this concludes our call. Thanks for your interest in Teradyne, we look forward to talking to you in the weeks ahead and those still into Q I'll get back to your straight away. Thank you much.
Thank you ladies and gentlemen, this does conclude teradyne's first quarter 2020, <unk> earnings Conference call you may now disconnect.
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