Q2 2020 Teradyne Inc Earnings Call
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Thank you Vincent good morning, everyone and welcome to our discussion of Teradyne's. Most recent financial results I'm joined this morning by our CEO, Mark together and CFO subject matter.
Following our opening remarks will provide details of our pro forma 2022nd quarter, along with our outlook for the third quarter of 2020.
The press release containing our second quarter results was issued last evening, we're providing slides on the investor page of the website that may be helpful to you and following the discussion.
Replays of this call will be available via the same page after the call it.
That is 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 release is what was our most recent SEC filings. Additionally, those forward looking statements made as of today and we take no obligation to update them as a result of developments occurring after this call.
During today's call will make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measure were available on the website harp on the Investor page of the website also please take special note of the Safe Harbor statement in the press release in slide deck for risks related to the co.
Slide 19, pandemic and changes to U.S. export regulations.
Looking ahead between now and our next earnings call Teradata expects to participate in technology or industrial focus.
Mr conferences hosted by Keybanc, Citibank and Deutsche Bank.
Now, let's get over the rest of the agenda first Mark will comment on our recent results in the market conditions, including comments on the Cobot 19 pandemic and expanded trade regulations. Sanjay will then offer more details on our quarterly results along with our guidance for the third quarter well then answer your questions. In this call is scheduled for one hour Mark.
Good morning, everyone.
Today I'll summarize our results for the second quarter and the first half 2020 comment on the impact of current environmental conditions, including new trade regulations.
And then describe our view of the second half of the year. Sanjay will then provide the financial details on the quarter and our guidance for Q3.
Despite the pandemic trade issues and shut down related headwinds in industrial automation Teradata is performing exceptionally well.
And second quarter, our second quarter results affirmed the trend of growing test intensity and the efficiency of our business model.
As you can see from our Q3 guidance the market demand remains robust.
For Q2 saw record so see shipments three Q is being driven by growth in memory test and system level test.
Industrial automation continues to pull out of the effects of global industrial shutdowns as we saw sequential monthly growth in sales throughout second quarter.
We expect second quarter to be the bottom for I am Threeq, you sales to be back close to 2019 levels.
Support execution by the global Teradyne team was on full display in second quarter as we managed to deliver new ship at records and test supply constraints were largely mitigated and remote technical collaboration with both with in Teradyne and with our customers continues to show success.
It takes dozens two hundreds of engineers working in concert to develop new test products. It takes similar numbers working with customers to launch test programs for new silicon.
Turning to switch to do this remotely without missing a beat is a fantastic accomplishment and I congratulate and thank all the employees a teradyne for this achievement.
On the trade front, new regulations related to both why wait and China military end users were announced in the second quarter.
We expect to China military end user restrictions to increase our compliance work and costs, but we currently do not expect any material impact on our sales into China.
In the case of Wild way.
While the new regulations do not impose any new restrictions on our business with why wait directly we expect it will likely impact our business with Subcom customers, who test why wait devices using our test equipment.
However.
We expect the macro global test demand to be minimally impacted as alternative sources of silicon supply growth to fill in whatever gap has created by these regulations.
This alternative supply should absorb any idled test capacity as well this drive new demand in the future.
Shifting to the highlights.
As we reached a midpoint of the year our January FERC forecast for a $3.1 billion to $3.4 billion. So see test market is playing out about as planned.
Well our memory test market estimate has moved up to about 800 to 850 million.
And I also see our sales grew 60% in the first half and 82% compared to two queue up 2019 as our participation in this year's mobility tooling cycle is significantly stronger than in the last two years.
As expected Fiveg infrastructure related capacity adds remains weak after a strong 2019, well handset related silicon is driving the bulk of the demand.
Well fiveg related silicon is beginning to add a small piece to the mobility handset market. The vast majority of the test demand is complexity growth in non fiveg related handsets silicon.
Whether related to high resolution still or video photography artificial intelligence augmented reality gaming location sensing or advanced wireless connectivity. There was a rich set of features in addition to Fiveg that we expect will continue to drive mobility demand for the foreseeable future.
Specific to Fiveg, we're still in the early innings of a multiyear rolled out an expected to be an incremental demand driver going forward.
Additionally, our new Ultraflex plus platform will continue ramping in threeq, providing new revenue sources and mobility and computing going forward.
[noise] beyond mobility, the automotive and industrial segments of the SLC test market remained weak and we do not expect to see recovery until 2021.
And memory are to Q sales were about flat with Q1, but up 45% from Q2 2019.
Flash package test and DRAM wafer test combined with ramping shipments of LP DDR five package testers drove Q2 results.
DRAM test is growing faster than flash test in 2020 due to the LP DDR five transition and our design win in DRAM should allow us to hold our share position in the low fortys this year.
And the system Test group sales were up 43% for the first half compared to 2019 due to strong storage test demand.
We expect storage test shipments to grow sequentially and substantially in Q3.
Driven by both HDD demand and semiconductor system level test shipments.
System level test as a great example of derivative products opening new markets for Teradata.
By combining silicon test instruments with our HDD test products, we've grown the combined sales from $60 million in 2017 to over $200 million this year.
I'd like point sales were up 32% for the first half and 19% compared with two Q of 19.
Demand is being driven by Wi Fi six and growing shipments of Fiveg test sets.
Hi Fi six has recently been allocated additional frequency spectrum and the six to seven gigahertz range.
Testing this expanded standard called Wi Fi six E.
Will require new testers, which we expect will be a positive force in twentytwenty, one and beyond.
Moving to industrial automation.
The environment is mixed but improving.
You are the biggest unit of our eyes segment sales in Q2 contract at 32% compared with the same period last year.
Manufacturing shutdowns in Europe, and North America had a significant impact are you are.
Mere sales on the other hand grew 7% from last years Q2 level as they benefited from exposure to health care and mobile disinfectant markets.
Auto guide our newest <unk> business saw sales more than doubled from the same twoq period last year.
Overall I used sales for the first half were down 15% from 2019.
We have seen positive indications of improvement as we move through second quarter. For example, all three business that has businesses had sequential monthly sales growth across Q2 as customers began to reopen.
While we expect you demand will improve in the third quarter, we don't expect to return to year on year growth until Q4 or Q1.
Our longer term growth outlook for I.E. remains unchanged at 20% to 35%.
Social distance seemed than it and the need for more resilient manufacturing flow.
Should add additional drivers for our collaborative automation products.
Our R&D and distribution investments I E business continue.
As these macro different slowdowns provide opportunities to widen our competitive lead.
We continue to add distributors in the second quarter expanded or you are plus stable.
Certified plug and play products to over 250 items.
We also introduced you are plus applications moving to complete solutions for specific customer requirements like industrial been picking in welding.
Stepping back to look at full year at the company level, our latest estimates have revenue front half loaded at about 54% to 55%.
This is similar to what we experienced in 2016 and 17, when we saw especially strong investments for smartphone test capacity.
In summary.
First half of the year show Teradyne strengthen familiar test markets and demonstrated our ability to grow in new ones with differentiated products an exemplary execution.
Our business model is efficient and driving the plan drop through on incremental sales.
Our investments to broaden our competitive moat and I missed a global industrial downturn showed the value of teradyne's financial strength and these nascent industrial automation markets.
While our short term visibility remains limited we are confident that our long term strategy will continue to deliver outstanding results for our customers employees and investors now I'll turn things over to Sanjay for additional color and the financial details.
Thank you Mark good morning, everyone. This morning ill review, how the pandemic is impacting us from a financial supply line management perspective, I will then summarize our Q2 financial results in Q3 outlook.
Our priorities remain consistent run the virus pen.
Safety of our employees supporting our customers and crisp execution to achieve our financial.
In line with my Q1 earnings call remarks, I want to acknowledge the continued challenges our employees customers suppliers and their families going through during this pandemic.
From a financial point of view teradyne, a stronger than ever we generated $178 million of free cash flow in Q2 and ended the quarter with approximately 1.1 billion in cash and marketable securities.
No short term debt.
During the quarter, we established a 400 million dollar revolving line of credit for added security against future uncertainty and opportunities.
The strength of our balance sheet business model and business execution enabled us to put the revolver in place during a very uncertain time.
Our long term debt is a 460 million dollar face value convert which matures in December of 2023.
From an operations perspective, our team and partners have done a great job so far this year.
Over many years Teradyne has built a global supply line management teams second to none and the value of that team has never been more evident.
Colin related supply line issues did not have a material impact on our revenues in Q2, our combined teams produced the highest number of Ultraflex systems. However, in the second quarter ramps, new products and associate memory and across our businesses all operating at a very challenging environment.
This included overcoming numerous part and labor shortages, along with logistical constraints in one case, a shortage of scheduled air cargo capacity led us to charter a dedicated 747 to deliver quite literally planeloads testers to a customer to ensure timely delivery.
While operationally executing very well, we continue to take a critical view of how to strengthen our supply chain operations.
We have identified potential weaknesses and are taking actions to strengthen our operations further the short term covert 19 related actions along with these long term actions have a small impact margins.
While the operations team clearly shined in the quarter.
They were not alone I'd also like to extend thanks to the entire organization from HR to facilities and environmental health to engineering repair services finance legal.
Our global field applications teams, which collectively allowed us to meet our delivery commitments out a revolver introduce new products maintain our R&D programs and run the company safely and productively with a combination of at home and onsite staffing well done very well done.
Now onto the details of the quarter.
Revenue in Q2 was $839 million up 49% from Q2 of 2019 and up 46% for the first half of the year.
Q2 revenue was 5% above the high end of the range driven by accelerated shipments and associate test also while contracted year over year revenue was higher than expected in Q2.
Semi test revenue was $659 million up 76% year ago, driven by one associated revenue was $575 million up 82% from a year ago on broad strength in mobility and to.
Memory revenue of $85 million up 45% from a year ago.
Due to continued strength in flash test and ramp up of our Magnum epic solution for DRAM.
And system test revenues were $72 million, which included storage tough shipments of $36 million, which were down sequentially, but up 6% from Q2 of 2019.
Recall, our storage test business tends to have lumpy shipments first half storage test revenue was up 106% over the first half of 2019 on strengthen in both system level test and HDD product lines.
Growth in Esselte was driven primarily by processor demand, while HDD shipments were driven by strong exabyte growth for our drugs.
Lifepoint revenue was $49 million in the quarter up 19% from Q2 of 29 team on Fiveg Wi Fi sex and next generation Wi Fi Sixsix demand.
In industrial automation revenue was $59 million down 21% from Q2 of 2019 due to the krona virus and down 3% from Q1 20.
But above our plan entering the quarter.
You are contributed $43 million of revenue year $11 million.
AG and energy made up the remainder.
We believe in our ice segment.
Revenue bottomed out in Q2 and is on the road to sequential growth in Q3.
We had 110% customer in the quarter as a reminder, we disclose customers, who contribute 10% or more a full year company revenue and our annual 10-K.
Non-GAAP gross margins in the quarter was 56.2% down 130 basis points from Q2 2019 as forecasted.
Margins reflect the impact of concentrated mobility shipments in semi test.
And the added logistics and operations costs due to the pent up.
Non-GAAP operating expenses were up $11 million to $207 million from Q1, due to company performance, causing higher variable compensation.
Inventory increased to $206 million to support Q3 shipments and buffer against potential cobot related supply disruptions dsos in the quarter increased to 75 days due to the timing of shipments in the quarter.
Non-GAAP operating margin was 31.5% and non-GAAP EPS was $1.33 cents. Both are tracking ahead of our 2022 model.
Tax rate in Q2, 20 was 13% on a GAAP basis and 14.1% in the non-GAAP basis, our full year GAAP tax rate is expected to be 14% down from our prior estimate of 14.5% our full year non-GAAP tax rate is expected to be 14.5% down from.
Our prior estimate of 15%.
The decrease in tax rate is due to product mix.
We generated $178 million and free cash flow in Q2, we page $17 million in dividends in the quarter. We bought back 173000 shares for $9.4 million at an average price of $54.49 in the first few days in the quarter as noted in April we.
Suspended our share repurchase program as of April Onest.
We look at our share repurchase and the entire capital allocation program regularly and we'll update you next quarter.
Looking ahead of Q3.
Revenues will include a significant ramp in shipments of our new Ultraflex plus associate test system supporting recent design wins and memory. We expect continued strong momentum for our Magnum product line for flash and DRAM applications LP DDR five test shipments are expected to grow significantly in Q3.
And our in our system test group storage test demand driven by system level test and hard disk drive markets continue to see end market demand exceeding our expectations for the year.
While this business fluctuates from quarter to quarter Q3 is expected to more than double the Q2 level.
I'll also note that while we expect multiple waves of fiveg related demand for both handsets and infrastructure in the years ahead, we're not planning on significant infrastructure touched shipments in the second half like we experienced in 2019 as a result, we expect to revert back to pre 2019 pattern of lower Q4 SLC shipments.
And industrial automation, we are seeing incremental improvements and uarts business as the us in Europe start to open up we are seeing signs of increased momentum and quarter over quarter.
Recall to us and Europe, typically represent greater than 70% of you ours revenue you're continues to execute and in the first half of the year grew by 4% year.
Year over year, driven by ultraviolet light disinfectant demand in Q3, we are guiding a revenue range of $745 million to $805 million and a non-GAAP EPS of one dollar one cents to one dollar in 17 cents on $175 million diluted shares.
The ranges reflect continued corona virus supply risks and potential impact on end market demand.
The guidance excludes the amortization of acquired intangibles and noncash imputed interest on convertible debt.
In April we previewed expected gross margin headwinds in the second half of 2020 due to new product ramps.
While the ramps continue as planned our latest view is the impact does the impact will be less severe than earlier expected.
Q3, gross margins will be 55% to 56%, we expect to be back to historical gross margin levels in 2021.
In Q3 operating expenses are expected to be 26% to 28% of sales and are on track with our revised April full year plan to grow 7% to 8% from 2019.
The operating profit at the midpoint of our third quarter guidance is 29%.
Capex investments year to date are $84 million and we expect full year investments.
Total approximately $175 million, we're investing more and capex this year to support new product rollouts strengthening our supply chain and new facility projects.
To summarize we close out Q2 with outstanding financial and operational performance in a difficult working environment. We enter Q3 with a bright outlook on the strength of new product ramps and industrial automation market that is showing signs of early improvement.
While our visibility is limited and we're not immune to macroeconomic shocks im confident that we have a products people and processes to thrive in the quarters ahead with that I'll turn things back then.
Thanks Sanjay.
Vincent where 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, if you have a question at this time. Please press Star then number one.
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Your question has been answered already we student move yourself from the Q. Please press the pound.
Thanks.
Our first question comes from the line of maintaining those Jamie.
As I say Gee you line is open please ask your question.
Yes. Thank you for taking my question.
Two.
Question first.
I wanted to understand how to think about.
Earning power I think was two quarters ago that you highlighted.
3.5 to 425, earning by 20.
22, and your recent execution suggests that you already dead run rate and my question to you is.
Given to share gains scene.
In in memory and other areas do you think there is the reason upside.
With that earning scenario that you laid out six months ago or.
Caps and $4, earning is sustainable and it shouldn't be viewed as a onetime event.
A follow up question has to do with China.
Hi, how much of a revenue contribution to China provide thank you.
Hi, it's Andrew here.
Yeah, I think this year will will come close or be in the range of of hitting our earnings model out in 2022.
On the topline in the bottom line and obviously theres, many puts and takes relative to what we published in the earnings model, specifically strength in semi test and storage business offsetting the near term impacts of co within the portfolio.
What we will plan on doing is in January updating that earnings model and provide guidance for the future them.
And I think just I'll add Mehdi that you know as you know very well we have a very.
Volatile market that we play in and so to sustain linear growth throughout a decade is not the kind of business were in but the trend lines. We do believe support certainly reaching an exceeding that mid terms or any model that no way is going to be a peak for teradyne.
Great. Congrats and then just quickly on China.
What's the revenue contribution China.
So in the quarter, China was about 12.5% of revenue.
Okay.
Thank you.
Okay.
Next question comes from the line of Vic ARIA from Bank of America.
Thanks, Jonathan Please ask your questions.
Thank you for taking my question and congratulations on strong.
The execution.
You have bought of.
Yes, and density factored a few times, but honestly do not know how to put that in our moderate.
I look at your associated gas business, it's up.
Being on track for over 30% growth, but overall phone volumes are down according to TSMC in mid teens, even though the fiveg part has been relatively strong. So how do you quantified. This test intensity factor our unit is data fiveg versus full GE competitors and importantly, how is the best in density factor.
Evolve as you go into 2021, maybe 5% better 10%, but how do we size that because without knowing that it's very difficult to decide what youre FCC as they do.
Going forward.
Yeah I appreciate the difficulty because if we had a formula believe me, we would be using it and.
Advertising it but I do think what we've said is when we look at the Big Big picture, we see that the growth in transistors is what drives complexity and that over.
Average trend line gives us test growth market growth in that 6% to 8% range.
Now there is many puts and takes to go on every year depends if people are making a major transition from a note like a seven to five nanometer node that enables more transistors and typically has a lower yields that come with it. So it's very lumpy year to year and very hard to model year to year, but the net effects. When you look back historically for the past five to seven.
In years and at our projections are that sort of.
6% to 8% trend line growth for test. So I don't think anything changing in that but it's not going to be smooth, it's going to be lumpy and.
The other thing is.
That affects this if you look at this year for example, the market that market for Esso C test is really flat with last year.
It's about a three and we said three one to three $4 billion market and.
The underlying economic effects of what's going on in the world and cell phone unit declines in such as all the and automotive being off in industrial be an office netting output flat market teradyne on the other hand is obviously picking up a lot of market share this year.
That's that's both good news and bad and as I think the.
The bad news as we'd love to see the market grow every year, but in a very difficult macro year like this the fact that it's holding its own despite the weaknesses in the pockets I. Just mentioned is encouraging and then we expect as we come out of this pandemic and the global economy starts growing again those markets will continue to grow.
Along those trend line so.
I wish I had a formula.
Don't but I think the evidence and sort of speaking for itself.
And so my follow up Mark.
When I look at again.
On the business as it relates to Fiveg could you give us a sense for how much of your businesses infrastructure versus.
Handsets and as part of that.
Let's see if fiveg handsets triple next year.
Right.
Is that due to your Esso C test business in density being same or.
Does it mean, you're extra business or how do we give us some sense for how we kind of trying to correlate.
Your.
Growth prospects to the number of Fiveg handsets and the demand for infrastructure. Thank you.
Okay. So.
Fiveg is a piece of a phone with UBS the silicon related to Fiveg and a phone is one part of a phone so theres no way that tripling of Fiveg triples, our tester business.
But to give you some sense the infrastructure piece of Fiveg was very robust last year, and we talked about at all year long and you saw that our business level grew toward the back into the year due to infrastructure investments and then we talked about the fact that those investments would.
Taper off in.
2020, which they have and what will come into the market would be handset related growth.
But we're still talking about and we've also said fiveg.
In aggregate should add to our test business somewhere between $4 million to $500 million of market.
And if teradyne's at 50% of the market that should add let's say 250 ish million dollars to teradyne's business when its peaking but we're not peaking were not near peaking this year were or may be.
Couple of hundred million dollars into that 500 million dollar envelope.
So.
That will give you the sort of calibration on how much you might think fiveg could mean to us over the next four to five years on an annual basis, when we get to that mature 500 million dollar level.
Hopefully, we're running at that to 50 plus or minus.
Additional.
Revenue level.
Thank you.
Next question comes from the line as Brian Chin.
From Stifel. Your line is Nelson please ask your question.
I am market Sanjay great great results and thanks for letting us ask a few questions.
First as it was just discussed in the last question there but.
There are company and clearly company an industry specific factors contributing to your 50, 60% year over year year to date growth rate.
Semi test however, do you think a layer this growth could reflect your customers or customers customers attempt to put some inventory in place wafer chip or even end device to safeguard against future supply chain and demand uncertainties I would appreciate any thoughts.
Yes, hi, its Andrei so so we do a lot of work in trying to triangulate, our shipments and trying to understand utilization and inventory levels of testers out there.
And I think you what you saw in 2019 as Mark articulated earlier was a buildup of infrastructure test.
Tooling.
And which kind of built a capacity so they could have a run rate.
From a from an end market and inventory perspective, we're not seeing.
Tester inventory build we're always on the look out for it and concerned about it but are from arc.
Analysis, we've done we've actually don't see that inventory buildup.
Okay, great and you're talking more about the equipment versus further downstream in terms of.
That activity.
Yes, I mean, we from the test or equipment, it's very hard from an end market perspective.
What via smartphone or industrial or automotive to think about those inventories.
Sure. Okay, Yes, I was kind of your at more will further downstream, but I appreciate the commentary on maybe one last one I know youre not guiding fourth quarter per se here, but based on your 54 I think the 55% first first half weighted revenue comment does that roughly suggests.
Fortunately sales would be down something like 30, 35% sequential.
And you would you expect semi test sales decline is similar or higher lower rate.
Yeah.
Yes, we're effectively guiding down.
35% to 40% versus Q3 mid.
Yes, I think will be when you do the math it'll show exactly what you just did and.
Got it.
The composition of the various businesses in that Theres, a lot still influx so.
Hey tends to be up in the fourth quarter and we expect that will continue so I think.
Last year was atypical with a strong semiconductor. So I think if you looked at prior years, you get us essentially the same kind of mix.
Okay, great great appreciate it.
Next question comes from the line.
John Pitzer from Credit Suisse. Your line open. Please ask your question.
Yes. Good morning, guys. Congratulations on solid results. Thanks for me ask the question Mark you said in your kind of prepared comments that as the next wave of wall Wavebands come into effect, you don't see much of an impact global test capacity as other suppliers filled the void I'm just kind of curious and I know, it's a little bit of the guessing game, but when you look at the potential supply.
Ours to fill that void, how does your share with those suppliers look because of the wall way and I guess importantly, do you think the test capacity. That's out there just gets re purpose for these different suppliers or do you think it might actually cause some incremental buying.
Well I think over the.
Long haul, meaning let's say a year.
I don't think theres going to be I think there'll be re purpose and there could be incremental buying early on we're in a period right now where the testers are still very.
Full up being used through this September 15th date.
Until we get passed the sort of grace period into the embargo. So.
Posted that period of time, there could be some spot buying because they're not completely fungible, but overtime they'll work their way into the us to supply and demand will balance. So there's no long term consequence here that we see and our share position in the alternative sources of supply.
It's some are better somewhere a little lower but I think would we've analyzed it overall I think are neutral we don't see that we're going to be overly benefited or a detriment because of the shift in who's going to make the silicon for those products.
And then just going back to the implied guidance for the calendar fourth quarter that kind of implied sequential decline is not without precedent in your business model.
I'd go back to like that 2012, 13, 14 period, you saw that kind of fall off in Q4, but I'm just kind of curious given how one certainly environment is today is that your attempted a conservative place holder or do you actually had visibility out to the December quarter.
That informs kind of that view of a 50 545 half on half split.
Yeah, what I would say is that if even more recently you looked at 2016 and 17 one of the differences we are seeing right now is that.
Those were also heavy tooling years for smartphones for us.
We saw a pretty significant drops from Q2 to Q3 in those years, maybe on the order of 20% to 25% followed by another 5% to 7% in Q4.
So this year instead of the Twoq to Threeq you drop.
We're kind of seen it all come in Q4 is our forecast our visibility is actually quite limited out there.
We obviously when you look at what we've been doing this year and if you followed us a long time.
There's quite a bit of variability in the quarter in terms of what might materialize. So we don't have a lot of backlog that extends out that far and.
It will actually happen, there's quite a wide range around it but it's based on.
No. The modeling we can do the customer conversations, we're having and those kind of thing.
Helpful guys. Thank you.
Next question comes from the line of Atif Malik from Citi. Your line open. Please ask your question.
Yes. Thank you for taking my questions good job and results in guide.
Mark can you talk about the timing of to maybe to be opportunity.
When you expect the infrastructure part of the investments to.
Due to.
And walls and.
And also on the mobility site.
You know millimeter wave frankly, I think is quite a ways off from being a big part of the infrastructure and then subsequently handsets story, it's a big test intensive.
Event when it occurs but it's likely none of the geographies are moving aggressively with mill wave in the us Theres some boutique.
Deployments I would say in urban areas and some high density areas.
But what it appears most of the US carriers are going to do as rollout sub six GE in some flavor first.
And then slowly move toward millimeter wave so our view is.
There are certainly will be handsets hit the premium tier that have that capability.
To run on those scarce networks, and and there'll be some bumping we've seen it already this year or millimeter wave shipments of test equipment at both Lifepoint in semi test.
Our tens and tens of millions of dollars. So it's not insignificant even at the minuscule volumes were talking about.
But it's probably not until 2022 three before it starts to matter would be my estimate.
Great and then you talked about.
Design wins in computing, which is relatively newly area for you guys.
Plus.
We also heard that one of your customers customers moving to RMBS CP use for their notebooks.
And those CP use a much larger die size than.
Apps processor using smartphones. So how do you look at your computing.
Year to gain opportunity over the next 12 to 18 months.
Hi, good Sanjay here. So so what compute market is roughly annually five to 600 million.
And our share has been roughly 30% give or take historically.
Our new Ultraflex, plus product will help us grow that share.
This initial design win will will help along that journey. So that's how we're thinking about it.
In the near term.
Thank you.
Next question comes the line.
To see Oh, sorry from Goldman Sachs and lifestyle.
Your question.
Good morning.
Thanks for taking the question congrats on the strong results.
Mark I wanted to ask about your system test business.
Both on the HDD side as well as the vessel key side.
In terms of your HDD business.
You've been you've been speaking to this business and the strength there for a couple of quarters now how are you thinking about sustainability of that strength into.
I guess Q4 since regarding up Q3.
And on the ASO T. side.
Your nearest competitor here I guess, the they've been pretty vocal about this specific application as well over the past couple of quarters. How are you sizing the opportunity in esselte and how should we think about your competitive position relative to not just a dentist, but also some of the other players up like you would have a follow up thank you.
The whole storage test business, whether its HDD or SLP has been a tremendous.
Story, and it surprised us and it seems as though the sustainability of it is pretty robust. It doesn't mean, it's not volatile even in this year you can see that quarter to quarter, we can swing on shipments.
2030% of quarters, so its quarter to quarter volatile, but the overall underlying demand is very strong for both HDD and esselte.
The.
Esselte side of it as we've described before.
It's still somewhat of a nascent market. This is an additional test step that some high volume menu manufacturers. So some high volume digital centric devices are using to further reduce defects defects per million.
And.
The economics of this insertion.
Our something that both customers and equipment suppliers like ourselves and others are working to try to make more attractive for other classes of devices lower volume devices more mixed signal with RF and analog content and such so.
How the rate of adoption of SLP is just a big unknown.
In this but even with the limited adoption that exist today, you can see that from last year when the early.
Adoption occurred outside of compute which it's been doing this for quite some time, it's grown to be pretty significant might be a 300 million dollar tester market something like that this year.
And you know, we're probably splitting it roughly 50 50, or so with advanced test and just sort of the test area.
So I do think it's got legs.
I do think that the the underlying complexity issues, we're talking about compel these additional test steps in the very high end of complex devices.
And so it's going to.
Via growth industry.
It's going to be volatile, though and until we get a dozen customers adopting this wildly you are likely to see these quarter to quarter and year to year fluctuations that we've seen a pulled out.
Thanks for that isn't as my follow up I wanted to ask about industrial automation business and how you're thinking about the long term growth profile. There I think in your prepared remarks, you reiterated your.
Long term growth target.
But curious just given coded 19.
You know the potential impact it could have on how your customers and customers customers speak about their factory footprint I guess.
Could this drive a significant increase in adoption rates of things like you are cobots and.
And your robots.
Or is it a little early to call. Thank you.
Yes, hi, its Andrei here, so so I think.
Over the over since 2015, we've experienced significant growth and you are adding beer in 2018 of them as well as auto guide in 2019 and that that growth. We expected to continue in 2020, obviously coven hit and we're looking at potentially a contraction year, depending on how the market.
So in the second half however, our belief is that we're going to continue over the long run to grow at the 20% to 35% as Mark stated in his prepared remarks, and really I think that you consider over the short term I think theres going to need to be a balance of getting people back to work versus industrial automation how.
However in.
The business development activities were seeing a lot of activity in this plant managers on decision makers looking to harden they are there.
Production lines and social this so so we are seeing activity even in the short term I think in the long term.
It will provide a tailwind.
However, we're still in that mid term around the 20% to 35% growth and we still continue to invest in product differentiation and application differentiation in those businesses.
Thank you.
Next question comes from the line and CJ Muse from Evercore. Your line open. Please ask your question.
Yes. Good morning. Thank you for taking the question I guess first question in your prepared remarks, I just want to double check here I think I heard you say that system test would double from 72 million in Q2 into Q3 is that correct and as part of that.
Can you give us an idea of where we should be thinking about the growth.
Balancing storage versus.
Traditional system test.
Yes, you're right I did say that we would double and more than doubled in Q3, but it was off a baseline of of 36 million.
And storage.
The story.
Historic So you would that was just the storage comment not overall system just correct.
Okay.
Great and then I guess as my follow up question.
Thinking through the C market. It looks like your shares is probably going from 40% to low fiftys year on year.
And I guess was hoping for you to parse through the drivers there obviously mix plays a role.
And you do you have your largest customer.
Turning on there also bringing on.
Arm based processors I believe embedded AI that really helps.
You guys.
You had new Ultraflex loss, and then you talked fiveg.
Being only a minimal drivers so.
Mitch said backdrop, what are the key drivers of that share shift.
And more importantly, how should we think about the sustainability of that share looking into 2021.
So you're right, we think probably our share in Esso see moves up around 50% this year and much of it. The majority of it is due to the shift of who's buying so in the last couple of years, our share kind of came down it wasnt customers defecting. It was who was buying and this year the biggest.
Piece of the 10 point or so share gain and Esso see will be.
Opposite effect of our customers are buying more.
However, theres also this component we've talked about the Ultraflex plus on the designs wins, we've had in mobility and compute.
Those are going to into back half of the year had.
Additional new revenue streams for us and so we are picking up real customers to.
On this so that's not insignificant in that won't completely mature in twentytwenty, it's going to be more up at the beginning and so that will grow throughout 2021 and 2022.
So we do have a lot of headroom to continue to move our share north of 50 on based on those design wins other ones in the pipeline, but as you know the underlying sort of core buying will fluctuate year to year. So.
If you go back to 16 and 17, we had some very big years of tooling.
For our customers around.
Smartphone silicon.
18, and 19 was a bit down we picked up new business in infrastructure to sort of offset part of that now we come back it's gang busters.
And that that could persist for awhile, but it's going to its going to still be volatile im sure, but riding on top of that is this little new wedge of.
New revenue streams.
So see based on real design wins that gives us that ability to keep on average moving our share north and we've talked about long term getting to 60% share of this market is reasonable once you're past 60, there'll be a little bit more difficult.
Perhaps but 60, a certainly within a line of sight.
Great. Thank you.
Next question comes from the line of theme with the arc three from Bbs lines now open we sanctioned the question.
Hi, Thanks first of all I wanted to get what the Fiveg portion of the SNC 10, and this year, let's say, you're you're saying three one to three four I'm just wondering how much and Thats Fiveg and then I had an excellent. Thanks.
Yes, we struggled to estimate that one precisely but again, what I am just give you the context and give you my best guess so the numbers. So we've said that at peak Fiveg should represent about a $400 million adder to Esso C test in about 100 million dollar added Lifepoint test will have that Src 400 million dollar.
Max on below this year Fiveg is probably somewhere in the 200 ish million range for a team.
Got it and and and for wireless Mark there's.
I mean, how much of the how much of a wireless piece coming in wireless in all the 100, and we've actually seen that wireless may grow there'll be a bit bigger than 100 at or it could be a 150 out or so but this year.
The wireless is probably in that for this is production test not R&D test, but it's probably in that 70 $60 million to $70 million range for the market.
Got it Okay Awesome and then I just wanted to follow up on the last question. So I.
I mean, theres a lot of stuff going on beyond your big customer and certainly you have the ultraflex plus ramping.
But usually I mean, a significant portion will say of your share gain this year, you're going to gain 13 14 points a share is because you big customers, having an on year and usually they don't have to straight on years.
So im just sort of wondering if you strip away all the other stuff going on and you look at how sustainable that low 50 shares into next year Watt.
Why would it be different this time, where they would have to straight big on years versus history, where they had one on year and then they've got it. Thanks.
I think history is interesting and this if you look at 2016 and 17 actually our smartphone related.
Business was pretty flat and consistent and hot.
Those were peak years in the past and it was two successive year. So I think the on off on off pattern goes back to the earlier part of the decade, but I think 16, and 17 are equally valid thoughts and models around that.
So thats one thought it doesn't necessarily mean up and down but at some point, it's not going to be what's what's norm and baseline I think as a judgment, but I'd go back to that sort of trend line of the market, we expect to grow 6% to 7%. So if if the Esso C market. This year is again, let's say 3.3 billion Nama.
Finally, we're talking about a market that should be 3435.
Anything else being equal next year, so I do think.
We can have to sequential strong years, because we've had over the past and there's nothing wrong with that plus.
We have these new design wins coming online that havent.
Matured yet.
End of the thing we Havent talked about that's that's out there is memory memory.
Is having a pretty strong year this year and if you look into 2021.
The 2021 era is going to see this large shift from DDR 40 DDR five.
This year, we're at the very early innings of the LPD, our five ships for mobile devices, but the Gddrfive ship is coming and as we said that obsoletes. The installed base of DRAM test equipment for final test. So this is a big retooling coming there as well.
Okay. Thanks.
Next question comes from the line as.
Krish Sankar from Cowen and company. Your line is open please ask your question.
Hi, Thanks for taking my question that two of them first one multi just follow up on your comments from the previous question.
You said a couple of sequencing glucose it looks like you had like from Socit desk market standpoint, then like five years with continued growth compared acute as I understand the test intensity is going up and.
Seems to be long going into stronger cycle. So.
Leap forward two to three plus billion be a decent bogey to use for the next Lucy markets right.
A follow up.
Go a bogey I think has a.
So let me just out of a few more comments about where we are so you're right. We've seen the market show sequential annual growth and for quite some length of time here.
This year, it's maybe you're going to be about flat, but it may show up.
Four or 5% growth as well, but by the time the year is over and that absent any real.
Interesting participation of automotive and industrial buying this is heavy heavy mobility and it's also in the midst of a pandemic and it's also in the midst of all the regulations coming in and around China. So.
I'll go back and say I would model in 6% to 8% Tam growth rate for us so see over the midterm four to five years that is what we should be tracking at.
That's helpful and this Apollo.
Mark can you just tell us how much fueled revenue.
Well, if and when it liquidio memory market size. It doesn't talking about 808 50 million sequences that has more than 60% 60 million. Please upside is coming from DRAM. So I'm just trying to figure it out on the market size, how much of the upside is coming from Lpddrfour.
And that's in that how much of fuel revenues coming through LPD deals like.
Yes, I'm not going to breakout our lpddrfour revenue, but I will say that the increase in the market size is both flash and DRAM. It's about two thirds DRAM and one third flash compared to our estimate in January.
So we are seeing upside on flash too.
And much of the upside in DRAM is related to Lpddrfour. Five so you would expect and because our share as kind of going to be flat you can derive a close estimate of maybe how much revenues coming out of that for us this year.
And and we're working on design design wins to hopefully capture more of the DRAM market. We just introduced that product in Q4 last year and we're ramping at this year. So thats give what gives us upside.
Going into next year, we think around DDR five and we talked in earlier calls about are sort of 40% to 45% market share that we have.
With the products, we have today on the competitive position we have today, we should be able to move that into the 50% low 50% range here in the next couple of years, if if we really execute well so thats what were.
Focused on and planning.
Thanks, Good luck very helpful.
Next question comes from the line of Richard Eastman from Baird. Your line is now open. Please ask your question.
Yes, good morning.
Remarks on Jay.
Burnish burn this quarter to be sure.
Just a couple of questions I'm, just going to kind of focus for silicon or two and a business could you talk about.
How the business progress you took perhaps a little bit about some upside in the quarter here relative to your expectations, but could you talk maybe geographically what you're seeing in.
Around universal robots and maybe.
Just discuss any success as you might have you talked about some self help initiatives around distribution.
And around some new product applications coming to market. So maybe just to provide a little bit of color on there because it seems like that business is at least stabilized if not.
If not maybe getting back towards growth mode.
Hi, Sandra here, so I'll talk a little bit about kind of the geo and kind of monthly profile. So for you are.
When I went to take a look at China.
So first to go into covert and first to kind of come out and when we take a look at kind of a monthly profile. We saw improvement in March and then sequentially we saw improvement.
Throughout the quarter, and really kind of coming back strong and when we take a look at.
Not back to last years levels, but improving Q2 over Q1.
And based on the forecast, we see that improvement continuing but when we take that recipe of opening up and we look at the data and look at the us in Europe, which is over 70% of.
Historical you our business, we're very encouraged and so so we are seeing business development activities, we are seeing.
Growth coming, but but really the baseline is China and business activity in the us as well as Europe.
And from a product perspective.
From the applications, we're continuing to invest.
We've recently have launched in April our acting NAV for been picking.
And we continue to drive for ease of implementation.
Activities and really growing the ecosystem.
In.
Just just as a follow up at the 50 959 million revenue for IP in the quarter.
How did you manage again, if I if I do the math quickly on your gross margin is still hanging out in the high Fiftys, maybe just 60% how did you manage the opex in the quarter.
For a and was that.
How far from profitability, we are we in the quarter.
Yes.
So I think in I think I mentioned earlier in 2019, we were profitable and our full year plan in 2020 pre covert was a heavy investment year and I both on the engineering side as well as the go to market side, and we still plan to.
To be profitable at similar levels in 2020 Coven hits and then you were faced with the situation of.
Not having the revenue growth. So we metered down a lot of the go to market spends and that was a significant reduction. However, we continue forward with the engineering and application spend significantly. So so what you're seeing in the immediate short term aside from kind of the re.
Factoring that we did in metering down kind of the selling and marketing or go to market spending is you're seeing.
More and more online marketing more and more virtual trade shows et cetera, and kind of restricted trial restricted travel obviously, so so you're seeing a short term.
A reduction in selling and marketing expense. However, you are seeing a little bit of travel and those types of cost within the engineering ranks, but but we're continuing to significantly invest on that front.
As far as capitals to profitability.
Okay.
We are I don't believe in 2020, we will.
It's very uncertain, depending on the revenue levels in the back half of the year.
But we're we're we're teetering on it just really depends on the topline, but we are out I want to reiterate that we are encouraged by the activity of Q3 and as well as the ramp up in China for you are.
In Q2, and we expect that to continue.
Okay. Thank you operator.
Operator, we are out of time, so those in the queue I will get back to you at the conclusion of this call and thanks, everyone for joining us today and we look forward to talking you talking to you in the days weeks ahead bye bye.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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