Q3 2020 Teradyne Inc Earnings Call
[music], ladies and gentlemen, thank you for standing by.
Hi, and welcome to <unk> third quarter 2020, Teradata earnings Conference call. At this time, all participants are in a listen only mode. After the speakers presentation. There will be a question answer session Cascade question. During the session you'll need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.
I would now like turn the conference over to your Speaker today, Andy Blanchard, Vice President of Investor Relations. Please go ahead Sir.
Thank you Josh good morning, everyone and welcome to our discussion of Teradyne's. Most recent financial results I'm joined this morning by our CEO Mark to Gail and our CFO Sanjay matter.
Following our opening remarks, we'll provide details of our performance for 2000, Twentys third quarter, along with our outlook for the fourth quarter of 2020. The press release containing our third 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 discussion please.
<unk> of this call will be available via the same page after the call it.
The matters that we discuss today will include forward looking statements may involve risk factors that could cause teradyne's smells different materially from management's current expectations, we incur.
We encourage you to review the Safe Harbor statement contained in the earnings release as well as our most recent SEC filings. Additionally.
Additionally, those forward looking statements are made as of today and we take no obligation to update them as a result of developments occurring after this call.
During today's call, we will make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures, including the reconciliation to the most directly comparable GAAP financial measure where available on the Investor page of our website also please take special note of the Safe Harbor statement in the press release and slide deck for risks related to the cobot.
19, pandemic and changes to the U.S. export regulation looking.
Looking ahead between now and our next earnings call Teradyne expects to participate in technology or industrial focused investor conferences hosted by Baird Wolfe Research credit Suisse and you'd be yes.
Now, let's get on with the rest of the agenda first Mark will comment on our recent results current market conditions trade regulations and our future.
Jay will then offer more details on our quarterly results along with our guidance for the fourth quarter. We will then answer your questions and this call is scheduled for one hour mark. Thanks.
Thanks, Andy Good morning, everyone and thanks for joining us my.
My prepared remarks today will cover three topics first the highlights of our third quarter and first nine months of the year. So.
Second the impacts of the latest trade regulations on Teradyne and third I'll share with you how we're thinking about the test in automation markets as we close out 2020 and look into the next year and beyond.
Our third quarter results were above guidance and reflect the continued strength of our test businesses. Additionally, our industrial automation businesses grew 17% from the Q2 trough and we're now operating at 2019 quarterly levels has manufacturing activities in Europe, and North America improved.
At the company level sales in Q3 were 41% above Q3, 19, and non-GAAP GAAP EPS grew 53% from a year ago level.
Throughout Twentytwenty, we've seen increased short term upside demand across our semi test and markets the m.
The impact of this is clear in both or above guidance results in Q3, and in our Q4 guidance, which at the midpoint is substantially higher than we forecast in July.
Throughout 2020, the semiconductor ecosystem has seen somewhat cautious initial forecast, which were replaced with better than expected actual demand and test has been no exception.
We continue to run a manufacturing pipeline that allows us to respond to this upside.
Stepping back and looking at our performance through the first nine months of the year. The results show the success of our new products and related design efforts and the resilience of our employees supply line partners and operating model.
Teradyne sales through nine months are up 44% and our non-GAAP earnings per share are up 79%.
Our test businesses collectively grew 52% year to date, while industrial automation revenue on an as reported basis contracted 10%, reflecting the pandemic impact.
In semi test we estimate the SSD market will be about 3.3 billion roughly flat with 2000 <unk> level as automotive industrial linear markets remain depressed how.
However, our s., our SLC test business is up 53% year to date due to strong investments in mobility test and the shipment of our new Ultraflex plus platform, which is ramping significant design wins.
The principal driver of mobility test demand continues to be increases in complexity of cell phone silicon.
This is especially notable in 2021 smartphone unit shipments are expected to decline about 10% to 1.2 billion yet the collective test intensity of each unit continues to grow at a rate in excess of this unit decline.
Within smartphones the mid to high tier is the place to be in test and that's where teradyne is solidly positioned these phones are seeing disproportionate growth in complexity related to multiple high density camera, a raise and the associated processing power and storage to manage this data.
Another complexity driver is fiveg and these high tier phones are early adopters of the extra silicon needed to enable these features.
Less than 250 million phones are expected to be fiveg enabled in 2020 and older.
And only a fraction of those will support millimeter wave communication. So despite the bump in 2020, we are still in the very early stages of Fiveg adoption.
Memory test is another bright spot the market is likely to be up about 50% from $600 million in 2019 to about $900 million in 2020.
The shipment ramp of our Magnum EPIK products Lpddrfour five when last year combined with continued strength in flash demand has driven our year to date memory revenue is up 70% from 2019.
In system test revenues are up nearly 50% through nine months on growth in storage test and defense related investments.
Recall storage test serves HDD and system level test markets, and we expect sales to more than double and 2020 two over $200 million.
And at Lifepoint sales are up 18% year to date due to increasing adoption of advanced connectivity standards like why fight six E and our growing share in Fiveg production test.
As noted earlier and industrial automation, we saw a significant uptick in demand in Q3 with growth of 17% off the second quarter trough.
You are grew 23% as demand in Europe, North America, and China showed steady gains are.
Auto guide continues to win new accounts, and we expect over 50% growth in 2020 on a pro forma basis.
Regarding trade as we noted last quarter, the China military end user restrictions require increased compliance work and costs.
But we do not expect any material impact on our sales into China.
In the case of while we restrictions the fleet of testers previously installed it owes sets to support their device test are already being re absorbed into the market to test. The alternative sources of silicon supply that's growing to fill in the gap created by these regulations at Wawa.
For example in the third quarter, we have seen an increase in upgrade orders at these offsets customers to reconfigure installed testers to meet the unique needs of new customers.
Just upgrading and repurchasing continues in fourth quarter.
Shifting to the future.
It's difficult to make the call on how 2021 will shape up as it's been difficult to predict 2020, even on a quarterly basis.
Customers will likely continue to forecast conservatively and respond close into demand how.
However, semiconductor complexity growth has proven itself resilient to covet and is the fundamental driver of our test business with that in mind I will comment on a few of the key indicators that we are watching.
In Esso C test, we will be watching the smartphone market for complexity increases to support higher performance video and still photography, the adoption rate of Fiveg and millimeter wave AI integration and handset unit growth.
I'll also be watching the automotive and analog markets for signs of a sustainable recovery in test demand.
Longer term the increase in edge devices should drive billions of additional complex chip units into the market by 2025. So early design wins in that area are key.
In memory the transition to higher performance DDR five standards is just underway and should accelerate in Twentytwenty, one along with newer high speed, you Fs and the flash interfaces.
The Roadmaps for both Flash and DRAM show continued growth in interface speeds with US which is another driver of test intensity beyond the traditional bit growth and should drive healthy memory test demand over the mid term.
At Lifepoint the continued growth of Wi Fi 660, and ultra wide band connectivity standards, along with Fiveg will be drivers for continued growth.
A bit further out we expect the next generation Y. pipe seven standard will require another refresh of the entire existing connectivity installed base of testers.
Consistent test storage test is the interesting wildcard.
After a torrid growth in 2020, the underlying demand drivers remain in place and.
In HDD, both increasing complexity and 30% plus annual exabyte growth and in system level test, increasing device complexity and higher quality requirements are driving the additional test intensity.
However, both our narrow markets and prone to swings in investment levels at individual customers.
Our industrial automation businesses are well aligned to long term economic and technical trends in manufacturing and material handling. So we are confident in their ability to return to high growth. The only question is how quickly the manufacturing economy returns to help we can you.
We continue to scale our distribution capability.
And invest in R&D to widen our leading position among other things auto guide adoption by key logistics E Commerce retail and automotive customers in 2021 will set the stage for multiple years of double digit growth.
Despite these comments as I've noted in the past, we do not spend too much time trying to predict the various short term demand drivers as they generally don't affect our investment plans.
We do spend a lot of time trying to predict the underlying long term growth drivers we want.
We want to be positioned with the right products at the right customers at the right time.
We believe the use of semiconductors across the global economy will continue to expand and chip complexity will grow along with that expansion.
Similarly in industrial automation, the cost performance of the sensor software and mechanical building blocks of advanced automation continues to improve making our product economically attractive to an expanding universe of customers we.
We have built our strategy on these fundamental beliefs and built our operating model with the flexibility to deal efficiently with the inevitable ups and downs of economic cycles.
So while we can't predict what lies ahead in 2021, we finished 2020 on an optimistic note the company and across the company. Our employees delivered remarkable result, under very difficult circumstances, our new test and products are seeing strong market acceptance and our R&D pipelines are well stocked with few.
Your products to drive future growth.
With that I will turn things over to Sanjay for the financial details.
Thank you Mark and Hello, everyone and my role.
In my remarks, I'll review, our Q3 financial results comment on how cold weather is impacting our business provide Q4 guidance and comment on our full year financial outlook at the midpoint of our Q4 guidance.
Our third quarter sales of $819 million were just about just above the high end of the guidance range, which enabled a 30% non-GAAP operating margin and the dollar 18, non-GAAP EPS, which was also above the high end of our range strength in semi test in storage test, where the revenue highlights improved profit was the result of higher.
Your sales, partially offset by a higher than forecasted tax rate.
Our non-GAAP operating expenses were $211 million and our non-GAAP diluted share count in the quarter was 175 million.
In Q3, our non-GAAP tax rate was 17.4%, which included a year to date catch up as our estimated 2020 annual non-GAAP tax rate increased to 15.5% from our prior forecast of 14.5% increase tax rate was driven by higher foreign earnings which resulted in an increase.
In the us minimum tax on foreign earnings.
We generated $280 million and free cash flow in Q3, okay.
A $17 million in dividends had capital expenses of $63 million and ended the quarter with cash and marketable securities of approximately $1.3 billion and no short term debt and Vince.
Inventories decreased to $191 million.
DSO in the quarter decreased to 65 days we had.
We had 110% customer in the quarter.
At the business unit level semi test sales were $592 million up 49% from Q3 19.
We'll see shipments were $449 million and memory test had record shipments at $143 million semi test saw strength and mobility and compute applications in associate where we continue to ramp our ultraflex plus test system and memory, we saw broad shipments across flash and our magnum epic solution.
Enabled continued strength in DRAM, we expect these products to continue to gain new applications as market acceptance has been very encouraging to date and they are well aligned to technology trends in both vessels see in memory test as much.
As Mark noted the automotive microcontroller and analog markets remained at historically low levels in 2020.
But we did see some pick up in the analog markets in Q3 versus our expectations. Several analog companies have outperformed their expected results and we are seeing some unexpected short lead time demand as a result.
Shifting to system test.
Sales in the quarter were up 61% from Q3 $19 million to $118 million storage test with the star of $76 million was both HDD and system level test delivered strong results defense and aerospace and production Board test combined to deliver $43 million in the quarter right.
Rounding out the test portfolio after a very strong second quarter light points sales softened to $41 million down 4% from the Q3 19 level.
Industrial automation revenue was $69 million flat from Q3, 19 and growth of 17% quarter over quarter. You are contributed $53 million near $10 million and AG and energy made up the remainder Walter.
While the cobot pandemic has negatively impacted our go to market efforts in industrial automation, we are seeing signs of improvement in several geographies across the globe and some seeing year over year increases in sales.
These positive signs in different territories should be balanced by.
Continued uncertainty tied to cope with 19 and predicting the pace of the global recovery and all year over the short term.
Turning to the impact of COVID-19, teradyne, our priorities remain consistent during the krona virus Pandemics safety of our employees supporting our customers and a focus on execution to achieve our financial objectives and.
In line with my prior earnings call remarks, I want to acknowledge the continued challenges during the pandemic that our employees customers suppliers and their families are going through our.
Operationally, we continue to work through supply pipeline issues in the quarter and the.
And again I must recognize the incredible work and skill of our operations team and our supplier partners to successfully overcome a wide variety of challenges to meet our customer requirements Gray.
Great execution also by our engineering teams and introducing new products and delivering products during the quarter, while overcoming significant supply chain issues, along the way and.
In late October we're in a much better spot than six months ago that.
That said there is still uncertainty of how this pandemic will impact global supply chains and market demand going forward.
We still expect to encounter spot shortages and other issues through the remainder of the year and likely into 2021.
Our guidance range continues to be wider than typical to reflect the potential impact of these uncertainties and some short lead time business noted earlier.
Our test portfolio continues to execute grow share and revenues as a result.
We are investing alongside our contract manufacturers to increase capacity and resilience in our supply chain specific action.
Specific actions include building larger buffer stocks and some components and increasing the geographic diversity of our supply and contract manufacturing.
During the pandemic, we reduced our opex spending tied to travel trade shows and other go to market activities. The savings were approximately $8 million to $10 million per quarter.
Post the pandemic when returning to normal we expect these expenditures to come back to our PML.
Moving to the fourth quarter.
Moving to the outlook for the fourth quarter, we expect revenue of $680 million to $740 million and on a non-GAAP and a non-GAAP EPS of 90 cents to one dollar six on a 175 million diluted shares.
This guidance excludes the amortization of acquired in.
Of acquired intangibles and non cash imputed interest on convertible debt.
In prior guidance I noted headwinds on gross margin in the second half of the year before returning to historical levels in 2021 I'm happy to.
I'm happy to report we are ahead of that plan and gross margins are now expected to be 58% to 59% in Q4 up 56% in Q3.
The earlier than expected improvement in margins is driven by increased volume improved mix and supply chain execution in our new product ramps.
In Q4, we expect operating expenses to be 29% to 31% of sales the operating profit at the midpoint of our Q4 guidance of 29%.
As Mark noted you can see we have been positively surprised by both SLC in memory test demand since our last call.
Continued strength and mobility test solutions for several customers was the primary driver, but we've also seen unforecasted demand with expedited lead times elsewhere in our test portfolio. For example, analog solutions utilizing our Eagle test systems, and DRAM memory applications for our Magnum EPIK systems have also driven up demanding.
Q4, we have.
We have seen this pattern play out over the last several months.
Looking at the full year from a financial perspective short term slowdown and has been more than offset by the growth in our test business at.
At the midpoint of our Q4 guidance, our 2020 revenue should be about $3.1 billion and non-GAAP EPS will be approximately $4.50 gross.
Gross margin for the full year should be about 57% down from 58% in 2019, reflecting the impact of high semiconductor shipments for mobility, along with a short term impact of faster than expected ramps of new products are too.
Our 2020 non-GAAP operating profit rate will be in the high twentys up from 25% and 20 on team and our full year tax rate is expected to be 15.5%.
Through nine months, we spent 147 million on Capex and we expect we will spend $193 million for the full year.
At the start of the pandemic it was unclear as to the depth and the duration of the economic consequences. As a result, we took actions to strengthen our liquidity and cash position.
For example, we suspended share buybacks on April Onest and expect to end the year with approximately 175 million diluted shares given that.
Given the share repurchases has historically been a part of our balanced capital allocation strategy. We'll update you in our January call on our on our capital return plan for 2021.
Looking ahead at 2021 from a modeling perspective macroeconomic conditions timing of pandemic recovery and political environment all add uncertainty.
Environment and demand uncertainty prevents us from speculating on 2021 market sizes, but at a high level, we expect gross margins to return to historical levels and opex to grow.
From a longer term model perspective, you can see that at the midpoint of our Q4 guidance will be inside the revenue range and above the EPS range of our 2022 earnings model will.
We'll provide you an update of the earnings model in our January call.
To summarize we close out Q3 with outstanding financial and operational performance in a difficult working environment and again, thank our employees and partners for their incredible efforts, we enter Q4 with a forecast of higher than expected sales and earnings on the strength of mobility and memory.
For the full year share gains in semi test and increased traction in our storage business enable us to exit the year stronger than when we entered.
The industrial automation market is showing early signs of improvement and we continue to invest in this segment as we monitor the market progress closely.
While we're not immune to the macroeconomic shocks and or market visibility is limited as you.
As you've seen since since early July overall.
Overall, we feel good about our execution during 2020 in a challenging environment. It's too early to estimate demand in 2021, but we'll be prepared from a product operations and balance sheet perspective for whatever comes our way.
With that I'll turn things back to you.
Thanks, Sanjay Josh would 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 or comment at this time. Please press Star then one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue simply press the pound cake again, if you have a question or comment at this time. Please press Star then one on your telephone keypad our first.
Our first question or comment comes from the line of Steve are you from Bank of America. Your line is open.
Hi, Thanks for taking my question and congratulations on the strong results on your execution.
I'm curious how much did fiveg contribute to your design, it's in the calendar 20 versus what Youve talked at the start of the year.
And the context is that largely mobility customer now already has all the models with Fiveg and I think the U.S. ones already feature millimeter wave. So does it mean that going forward you are more dependent on unit.
Growth rather than content growth at least when it comes to mobility related.
Function so just.
What what does the Fiveg damn as you see it now and where are you in that journey.
Yes, so just to refresh on the Fiveg Tam we've been talking about a $400 million adder to the market.
And were roughly two to 50 ended at $400 million Adder, and we expect that will peak out in the 2023 four timeframe as the energy in that timeframe, we would expect.
Most greater than 50% of cell phones would have millimeter wave capability built in and that would run at that $400 million level for three or four years. So that's sort of the baseline where we are this year was.
Just on the five g. content of cell phones, it's probably about $50 million higher than we expected. This year, so certainly more than we expected, but not dramatically more so instead of the market being at what we might have thought a $200 million market, it's been closer to 250.
Now the other point you make about.
Without speaking to any specific customer situation.
The market in terms of test equipment for Fiveg is facilitated to support about 300 million, maybe 250 million units of Fiveg capability.
And.
And so it's still a small fraction of what will happen over the next few years. So.
Now teradyne's concentrations a different matter, but I do think.
For the market that remains out there. The other 1.25 billion phones that are going to move to fiveg over the next few years, you can assume that our market share in that space is roughly 50%. So.
So.
We're pretty.
Concentrated in what happened this year, but we have a very good position and what's happening over the next few.
And.
Hi, Paul.
I know you're not giving.
Specific to 2021 outlook, but im curious after this very strong year that you had across the board and almost every division on outside I.
Of those mark.
Of those markets do you think face a tougher comparison next year that was there wasnt any one offs either from an end market customer product perspective that you would think face tougher comparisons year on year as you look into next year.
Trend wise thank you.
Yes.
It's probably sounds like a copout, but no I don't.
All of the markets that in test that showed growth this year.
Have their own story and an and.
The one thing I would maybe site that I said in the script its a bit of a wildcard is the storage test piece, where we've had a phenomenal year dump more than doubling of sales there.
Again, if we listen to what customers are telling us we think that still has room to run.
But it's a thin market in terms of the customer base and that one's a bit more of a wildcard than the others, but I don't see any other one off.
Issue with what we've seen in 2020 that would sort of say boy, that's going to be tough to beat next year.
Got it thanks very much.
Thank you. Our next question or comment comes from the line of Brian Chen from Stifel. Your line is open.
Hi, good morning, and thanks for letting us ask a few questions I guess.
I guess first.
Maybe for you Mark.
Yes, just curious again it does what you're seeing from a test utilization and or market breadth standpoint give you at least say a degree of confidence that these stronger market conditions.
Are likely to sustain into next year and I realize that again, it's early to provide any official outlook.
On the test Tam, but can you at least give us a directional sense because in a vacuum.
Smartphone unit demand grow say, 5% to 10% next year instead of contracting 10%.
In Fiveg next continues to shoot up is there a reason to think that yours and the market Tam would not grow next year.
Yes, I think in that scenario that you cite it would hard it would be hard to imagine it the market Tam wouldn't grow.
And so but there's so many variables we've proven to ourselves and to you that we're not even that good at predicting the current quarter or the next one out and so we're a little more gun shy about speculation I say, but.
But the the issues that you cite around the suppressed unit demand for automotive.
Cell phones, both are significantly down in units. This year at test is still jumping out of the gym. So.
A recovery next year in those two unit volume areas should bode well, but coded still out there the economic situation. The world's unknown. So we're just we're not going to go too far out on a linked here and try to speculate.
Okay, that's fair enough.
And maybe second.
Deciding the recovery you're seeing in the.
You are sales in Threeq, Q and sounds like Thats ongoing and as for Q.
I would assume maybe this is occurring absent any real sizable recovery in key markets such as auto and maybe you can provide more color on the applications in markets that have begun to exhibit some improvement.
Yes, hi, it's Andrew so so just obviously, we've seen growth quarter over quarter and a little bit more color. When you are we grew 23%.
23%.
And actually it was one of the reasons why we exceeded our guidance this quarter.
What we've seen as manufacturing kind of comes back online Weve seen have you.
Yes, Europe and China.
Bode strength and and really it's it's a function of both growth in the quarter and a couple of those markets were actually seeing year over year growth and so.
Then also from an AG perspective that continues to grow.
Okay, great. Thank you.
Thank you. Our next question or comment comes from the line of Trisha Hari from Goldman Sachs. Your line is open.
Good morning, Thanks for taking the question and congrats on the strong quarter and guidance Mark.
Mark I wanted to ask you on market share.
C test and memory test, you're clearly executing really well in both segments.
On the test side I guess the question is is the growth that you're seeing in market share. This year, primarily due to your largest customer having strong year are you picking up share elsewhere within us So see test and then similarly on the memory test side again very good quarter in Q3.
How should we think about sustainability into 2021 are you are seeing wins that would support.
Continuity and the current trajectory or should we consider this to be more of a one off because I've got a quick follow up.
Yes, it's a good question because the whole market share.
Year to year is very volatile so how do you make any sense out of it just to give you. An example, teradyne's market share last year and Src was probably around 40%. This year, it's going to be somewhere in the mid fiftys. So what's real.
So here's here's how I would characterize it.
Last years, 40% wasn't real it's probably it was it was probably in terms of real market share closer to the mid Fortys.
We have and this year it'll probably be in that like I said, the mid fiftys, but what what we have done is pickup real non customer buying pattern share year over year due to design ins, we had last year in debts to the tune of let's say five or six points of real market share so off that base of 45 last year.
This year, we're probably really normalized running at in the low 50 to low Fiftys is the.
Is the market share position I'd say, we're at today and.
And there's been a lot going on that influences that some some buyers of equipment have exited the market like wawa.
That causes some systemic shift in share and in Teradyne's case, we certainly was a huge customer of teradyne's, but we were it was a bit below our average share point and as that silicon supply redistributes that helps us the ultraflex plus has designed into some new segments that we've really not participated in for.
The past decade, that's real new share.
It's also designed into some some other segments that are that are new to us. So under the covers of what looks like mathematically a 40 to 55 lets say point point share gain in 2020, what's really I would say happened as we've gone from mid Fortys to 50 to low fiftys.
Based on that and memory.
No memory is a market where we see the.
The Tam growing significantly this year, it's gone up $300 million from 600 to 900 million about $200 million Thats in DRAM at about 100 millions in flash.
And Fortunately.
We were successful in entering that DRAM segment last year with our new Magnum epic.
And so we've been able to grow as that DRAM segment has grown this year and that brings us to a I'd say, our two market share in our reported market share are going to really be close in memory in the low fortys.
And what we've said is that given our footprint now with our products and customer base, we legitimately see a way to get that to that 50% level over the next few years.
So maybe that's a long winded answer but.
Those are the two touch points I'd give you.
Thank you for the color and then as a quick follow up I wanted to ask on.
Industrial automation profitability.
I suppose over the past several years, you've been in investment mode and the business growing your distribution network.
Investing in R&D.
I think currently you're you're around breakeven given muted revenue levels, but how should we think about kind of through cycle profitability and if you could remind us what your long term margin target is for the business that would be super helpful. Thank you.
Sure Hi, it's Andrew so.
One question, there, but we will give you a little bit of color.
You will recall in 2019 or.
Our IEI business had an operating.
Operating profit of about 10%.
We entered the year end 2020.
Big investment year, but we expected to be around that same operating profit Cove. It hit a lot of the go to market Opex, we reduced obviously.
Because it was.
Run rated towards the higher revenue levels and in the fall.
And in the first half of the year, we lost money in Q.
In Q3, we were slightly profitable and and as we've said in Q or in Q4, we expect revenues to continue to increase and to grow that profit level.
Haven't concluded on our 2021 plans, but my expectation assuming that revenue continues.
We're going to obviously increase some of the go to market, obviously with travel trade shows et cetera.
But the engineering investment because there's not really wavered from that standpoint, and so we expect to continue to heavily invest in industrial automation. So over the next several years you would expect that our profitability wouldn't be at kind of the company average.
Because it's still in investment mode, as we grow and then.
And then what we said over the over the horizon is that over the story over the mid term is that we expect revenues to grow between 20% to 35%.
Thank you.
Thank you. Our next question or comment comes from the line of CJ Muse from Evercore. Your line is open.
Yeah. Good morning. Thank you for taking the question I guess Mark wanted to I guess go back in.
Go back in time and use your memory, because I can't remember, but if you look back to eight.
And all of mobility and the.
Got it.
2015, 16, 17 18 period.
Despite I guess some consternation around.
Apple fully buying testers, you continued to see strength in that business as other players came in.
Just curious as you look back in time around the Fourg ramp and then look forward to Fiveg.
And what you're seeing in terms of silicon content.
On the RF side in particular millimeter wave as well as some of the processing capabilities required.
You know how does that make you feel around what you think the trajectory 40 tests could look like over the coming one to three years relative to the strength that you're seeing here in 2020.
Yes, good question.
So just put a little bit in perspective, so the the Tam or the test market for mobility. If you go back to lets say 2017, 16 timeframe was roughly roughly $1 billion of test equipment for mobility.
This year, we estimate it will be close to 1.6 billion.
And.
That's one data point.
And that's in light of lower unit volumes. Another data point I'll give you is that if you look at a fourg phone and add up all the silicon in a typical fourg phone from a few years ago and say how how much time does it take to test all that silicon.
And then you take let's say a high end fiveg phone today that are just coming on the market and asked the question how long does it take to test all of Thats Silicon and all I'm talking about now is the the RF content in the apps processor I'm not talking about the cameras in the power management and all that other stuff, it's up about 60% on a per unit phone basis.
And we're just getting into fiveg content phones.
So you can see that there should be.
As long as the units stay reasonable on cell phones, and Fiveg keeps rolling out a lot of.
Tailwinds around continued growth of the mobility Cam.
That's very helpful. I guess as a follow up question.
You talked about mid Fiftys share here.
Hearing 2020.
On the last earnings call, you talked about a target of 60% and I guess.
And I guess can you kind of speak to.
What can bridge those five points, particularly.
Around.
Anything you can say around wins with the Ultraflex plus.
As well as the fact that auto in linear are probably down 35%.
This year versus last year.
So I would say, it's simply right. There you know that could bridge you to 60 in 2021. Thank you.
Yes, so just on the share first of all I'm not going to use as I mentioned earlier 55 is our normalized share right now I'd say, it's somewhere around 50 plus or minus.
So how do we get 10 more points. This is probably the right way to think about it.
And.
There's there's a clear path there in my mind. So one piece of it is as you cited when automotive.
And linear comes back.
That's a place where we have.
Higher than normal market share and that will be a bit of inflator to our share.
The Ultraflex plus though is a key.
Component of the strategy, we've already secured some segments that we've not participated in a long time. They are just beginning to ramp this year.
So that platform designing into those segments alone.
Should bring us half way at least to that 60 or extra 10 points you need to get there. So if analog brings us a couple of points and the Ultraflex plus brings us maybe another five now we're talking we're up in that sort of seven ish range and then.
And then the last piece that I alluded to in my script is.
He is.
There is this.
And this is another ultraflex plus story I think but edge devices are growing our position there is encouraging and I see that that segment as it establishes itself if we can get.
That early design wins to kind of ramp with that growth of devices at the 60% share kind of level that can pull us the rest of the way.
But we're talking by the way we're talking maybe this is.
Five years six year journey, it's not something that's around the corner.
We have the next question. Please operator, yes, Sir next Sir our next question or comment comes from the line of Mehdi Hosseini from Sig. Your line is open.
Yes, thanks for taking the question.
A little follow ups regarding your Q3.
So if.
For.
Upgrading some of that you still just or is that.
Last year, we use will walk away.
Helped with the semi services, how should they seem to have a look.
Looking forward and its impact on the sea tester.
To what extent system upgrades have surpassed.
Six months would.
At the impact on the new as to see and test demand and as a second question or follow up can you elaborate on the mix of HDD system and to what extent is.
Strength in.
Advanced packaging look chipsets.
Impacted in any detail color.
That would help us separate it's to be from system level test would be great. Thank you.
Yes, Hi, Matt its Sanjay will take the first one so from a services perspective, yes in the quarter, we did see some some drop in our surprise demand and really some of it was tied to the upgrade.
Of kind of existing testers that are being kind of reconfigured.
At Osats to us.
To test other.
Other silicon provider Silicon and it was it was a very high quarter from a services perspective, we did have some increases on new testers as well, but we expect that business to kind of continue.
Once we get through.
I would say the migration of repurchasing of existing testers at the Osats for other customers. So we expect that to be a little bit up in the very short term, but get back to normal over the.
Over the mid term.
And then the HDD and esselte.
Yes, so an HDD and esselte, so roughly the way to think about it is today the revenue split Theres almost 50 50, it fluctuates, but roughly 50 50 goal.
Going forward, you know Theres a lot.
There is actually upside on both sides of this.
So on the HDD side.
What you really has been driving that business historically has been exabyte growth.
Growth rates.
But.
The this is a similar story to test intensity. These 18, plus gigabit terabyte plus drives that are being produced and the roadmaps that we have have rather sophisticated.
Electronics to allow for high density error free read write operations that require more test intensity. So we're getting a multiplicative effect on the HDD side a bit on top of exabyte growth. So we are optimistic that that leg of the stool in storage.
Can continue to grow.
Esselte is a little more.
Our.
The hardest to topline monitoring so.
Operator, we are getting some noise here by the way.
And so the.
The other side of it the esselte side triplets and things like that certainly that complexity per.
Presents an opportunity for more system level test test in the module so to speak before.
Before they go into a higher value added sub assembly is going to be a premium so thats the theory.
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And we're in various trials around various customers to see if economically it makes sense to for those class a partner at a test insertion, it's made sense for some mobility parks.
But remember those are billions of units a year. So the question really that we havent gone out on a limb yet really answered for ourselves is how far down the unit volume equation can esselte go to make sense. So that when I'd say, it's still a bit of a wildcard.
Thank you.
Thank you. Our next question or comment comes from the line of 18, well Lee from Citi. Your line is open.
Hi, Thank you for taking my questions. The first one for Mark Mark If you can remind us about your opportunity on the computer side.
There is a discussion that the die sizes for the CP use for a north American customer notebooks next year could be three to five times larger than whats used in tablets can you just talk with.
Talk about the compute opportunity for Teradyne this year next year.
Well you know compute is an area the teradyne really hasn't participated in since the nineties.
The Ultraflex plus was specifically designed to give us that.
Opportunity to break back into that segment and again roughly just to give you numbers you can think of compute.
Somewhere in that 600 million dollar a year Tam in the total market.
Right now I expect thats going to grow because of the diversity of.
Suppliers of compute devices is growing there is a bit of a disaggregation of the of the.
The supply chain for compute devices. So the Ultraflex plus is targeted there it's had some success already.
In that mission and we expect that will continue so I do think it's a rich area for us but to put it in perspective, it's a market that's about it.
Maybe run $600 million on average now could grow to $800 million in the next year or two.
Great and then Sanjay and there was no material impact to your sales from military end use China instructions like you talked about.
Can you talk about if the demand from domestic China semiconductor memory and logic was higher than what you expected in both Q3 and Q4 and how big is domestic China semiconductors as a percentage of total sales.
Yes, so so maybe I'll start with the end so.
So roughly 15% in Q3 of our sales.
We're we're China based and so it's true that with the regulations.
Either tied to walk away or discussions about SMIC or the military and end use.
Really from a military end use perspective, there is a tremendous amount of internal compliance work that we're doing two inch.
To ensure that we are compliant with the right.
The regulations.
And it has not had a material impact.
On our on our revenue stream and.
And I think in earlier remarks, we've made is that as the.
End market remains the same and the silica and different silicon providers are providing solutions for that end market, we feel good about our position.
On that front so its.
Some short term disruptions, we talked about service.
Upgrades for testers that are being redeployed at the gross adds that we're servicing.
Yes, Hi, Silicon solutions and now we're going to be servicing other solutions. So that's the type of stuff, we're seeing in the short term, but in the long term, we feel we feel good about our position because we see it as a share shift where were positioned well.
Okay.
Thank you. Our next question or comment comes from the line of Krish Sankar from Cowen and company. Your line is open.
Yeah, Hi, Thanks for taking the question I have two of the March guidance for the qualitative color on kind of the 21 and understands how to quantify it at this time, but if you.
But if you look at the associates market its kind of going for the last four or five years lot of it is because of increased complexity, but.
But the memory test market in the last four years has been most cyclical up and down you think memories of an inflection that you could see MPD.
Lpddrfour high in everything else comes along that you might be in a prolonged.
Transfer memory like associate and then at a follow up.
Yes, so on memory, you're right absolutely it's been cyclical for the past few years. There are good compelling arguments that it could be pretty less volatile and more sustained high level investments over the next few certainly our memory team believes that.
And because of LPD LPD are five and DDR five transitions that are imminent.
Thats going to compel a lot of investment on the DRAM side. So.
So I just don't see that.
The downside in memory nearly as typical as we've seen in the past decade, I think the DRAM story alone is going to keep the memory market pretty healthy. So then the question is flash.
In flash is a tougher one to re is the only thing I'd say that's encouraging is this relentless.
Innovation around the interface speeds of flash.
Drives a lot of tester demand and drives obsolescence of the fleet and the Roadmaps there are pretty robust these.
Cell phones, and the camera systems and the cell phones, just generate an intra incredible amount of data that needs to be quickly moved in and out of flash.
So I'm kind of.
Optimistic that memory in the next four years won't be as volatile as it's been let's say in the last four or five.
Got it thanks, Mark Thats helpful and then as a follow up.
On the industrial automation side, what's your view of our revenue.
From the auto vertical in homeowners are coming from small and medium business.
35.
Yes, so from an Sanjay here so from the auto perspective, it's in the neighborhood of 35 Percentish.
And sorry, your second question.
How much from SMB.
Small and medium sized small to medium size businesses.
I don't know Weve, we'd have to dig that one out.
But it's been it's been running in that sort of I'd say, 75% range. So it's still the vast majority of our sales.
The the larger enterprises have been a growing percentage over the past three to four years, but thats a rough number.
Got it. Thank you folks thank you very much.
Thank you. Our next question or comment comes from the line of John Pitzer from Credit Suisse. Your line is open.
Yeah. Good morning, guys. Thanks for let me ask the question Mark just a follow up to Medici earlier question on Wild way due to the extent that they were historically, a large customer and a lot of those testers, you're sitting on those assets.
Can be re purpose I'm just kind of curious how much insight you have into kind of that installed base and its ability to move to two additional customers or new customers and I guess are you putting up these results. Despite the fact that or is that something that we need to kind of worry about it.
In future quarters.
So we have decent visibility into the utilization of those testers, but.
But the high level picture I'd give you is let's say, there's 100 testers out there for wild way that we're testing a billion parts a year as wild way ends up unable to supply those billion parts. The first knee jerk reaction is Oh, Thats 100, idle testers, they've got to go somewhere but the fact of.
The matter is that somebody else has to supply those billion parts because the end user demand isn't changing that.
That much.
Because of this so and typically by the way those suppliers at the moment are outside of China suppliers that are.
Filling in that.
Billion unit gap to use this analogy so that rate and then those testers that are were idled just sort of shift from testing parts that had the high silicon, while we brand stamp on them to testing parts that have these other suppliers brands on them, but they are very similar in nature. So the upgrades to.
Facilitate that shift of the fleet over to those new sources of supply started in earnest in Q3.
And so despite the fact that theres already re purpose seeing happening at a pretty good clip of those testers were putting up the numbers, we put up and we're guiding the numbers were guiding and we expect that will continue in Q4 when will that entire fleet get re purpose is kind of the last.
Endgame question in that and that's hard to tell we may end up not seen that fully flushed out until.
So somewhere in the second quarter of next year.
That's really helpful and then Mark as my follow up in the quarter you guys created a new role.
Division and you put in place there a very credible guidance from a.
Greg Smith I'm wondering if you could spend a little bit of time, just kind of helping us understand the rationale and how we should think about greg's sort of efforts.
What it means to the overall strategy there.
Yes.
Thank you for asking that because.
Greg is a very poor.
Proven.
Exceptional leader as it has driven our semiconductor test business here for the past five years and it's a significant testament to both what we as a company and Greg personally believes the opportunities are in Hawaii for future growth and Greg's mission really is in looking at the portfolio. We have is to.
You look for areas, where we can get leverage in.
And enhance our M&A strategy look for common investments that will give us both in software and hardware further differentiation and.
And sort of bring more of the resources the company to bear on those businesses. Most of them are now through their earn out phase, which gave us a little bit of.
There were a little bit of handcuffs on there of how we could think about operating those businesses, but now that thats behind us we have a lot more degrees of freedom and and.
And Greg is going to be a great resource to figure that out for us.
Perfect. Thank you.
Thank you. Our next question or comment comes from the line of Sidney Ho from Deutsche Bank. Your line is open.
Great. Thanks for taking my question.
My first question is on the SLC test market that mobility is roughly half of the SFC Tam today, I think Mark you mentioned $1.6 billion at the 3.3. This year can you remind us what are the other main buckets within the NFC test markets and which segments are still below the normal run rate maybe help us.
How much below to normal levels in some of those markets.
Okay I'll give you did.
Sort of the rough numbers so.
Theres a compute segment.
His CP use and FPA fees, and AI and all that good stuff.
That's roughly 600 million that we just spoke about.
And it's it's actually a little bit hot too.
I'd say, it's running.
It's another growth segment for some of the reasons I talked about earlier.
Theres automotive.
And linear and Microcontrollers that this year again. These are rough estimate is roughly around a $200 million to $250 million market, that's less than half of its normal run rate normal run rate for that business would be 500 ish million. So.
So that one is certainly.
As as and it's down from last year as well so.
So, it's it's trending down and its half and then the last one we track is industrial industrial is somewhere like around 300.
And it's also down from a normal run rate that might be closer to its not as volatile, but it's probably up in the high threes to $400 million.
Great Thats Super helpful. Mike.
My follow up question is you talk about an increase in demand for short term recurring recurring businesses in Q3 does that at all.
So for Q guidance assume any kind of headwinds from any kind of supply constraints in any of the product lines.
Right now it's Andrew here, so right now.
We're not we're we believe that there could be some issues that arise, but the last six months has clearly.
Shown us that we can overcome those hurdles are.
Nothing is perfect, but we feel that we're in a very good spot and Rick.
And replenishing our components and manufacturing.
And if there are things that come up we've we've.
Got some capability to solve those problems. So at this point there is no supply constrained.
Okay, great, Thanks, and operator, we're going to sneak.
Operator, we're going to sneak one more in please.
Yes, Sir our final question or comment comes from the line of Timothy Arcuri from Yes. Your line is open.
Thanks, Thanks for fitting me in any thanks.
I had to.
First thing I'm still trying to figure out on the associates share point.
The Tam of 3.3, it's not a whole lot different than what you thought it would be.
Good.
I started the year and at that time, you thought your share would go from roughly 40%.
Roughly mid Fortys yet here, we are we're kind of mid fifties. This year. So I guess I'm trying to understand where the incremental thousand basis points of share came from was this your biggest customer ordering more was there something else maybe you can double click on that a little bit and then I had a follow up because it sounds like it's not really Fiveg you said that fiveg is only like a 50 million sorry.
Factor for the whole market, so I'm still trying to figure out where that share came from versus your expectations. Yes.
Yes, with it at the highest highest level. It's it's just that the market.
The supply side of the semiconductor market has shifted more favorably to our customers, but underneath that why is that well one thing we didnt see happening when the year started was that further regulations would come in to place on while way and drive them out of the market for silver.
Okay and test.
And since that occurred what happened as I described a bit earlier was other suppliers have had to step in and fill fill the void and we're better positioned at those other suppliers. So.
So that is an upside.
Our customers are traditional customers.
Independent of that particular situation are also buying.
More than we had forecast so that is absolutely another piece of the upside I'd say those are the two most significant one.
And then the third one.
Which isn't it Esso see thing, but I think as a total company thing is on the memory side. The fact that the market has been.
Has been so.
Hi, and at our.
LPD or five ramp has been probably better than we expected has had.
Has helped on that side as well.
Got it and then I just that for me.
Second question just on the point about why wait so you saw the original in the capacity required for highway from the Osats and now you are seeing some boost from upgrades to that fleet can you sort of quantify how.
How much of a boost these upgrades are giving you. So I guess how much of the 449 access fee revenue is related to the upgrading of this fleet for non hallway Oems.
Yes.
It's less than 10%, but more than five.
Okay all right.
All right. Thanks.
Okay folks we are out of time. Thanks, so much for joining US again, this quarter and I'll follow up with the with folks individually that are still in the queue.
Again, thanks, so much take care.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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