Q4 2020 Teradyne Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by.
Welcome to the Board from 2020 Teradyne, Inc. Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone. If you are a priority further assistance. Please press star zero I would now like to.
I'll hand, the conference over to Mr. Andy Blanchard, Vice President of Investor Relations. Please go ahead Sir.
Thank you Sharon good morning, everyone and welcome to our discussion of Teradyne's. Most recent financial results I'm joined per our discussion. This morning by Teradyne, CEO, Mark <unk> and CFO Sanjay Mehta.
Following our opening remarks, we'll provide details of our performance for 2000, Twenty's fourth quarter and full year on what our outlook for the first quarter of 2021.
The press release can be net results was issued last evening, we're providing slides on the investor page of the website that maybe helpful to you in following the discussion replays of this call will be available via the same page after the call ends.
The matters that we 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 statements contained in the earnings release as well as our most recent SEC filings. Additionally, those forward looking at obligation. Those forward looking statements are made as of today and we take.
No obligation to update them as a result of developments occurring after this call.
During today's call, we'll make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure where available on the investor page of our website.
Looking ahead between now and our next earnings call Teradyne will be participating in technology or industrial focused investor conferences hosted by Goldman Sachs Citi and Susquehanna.
Now, let's get on with the rest of the agenda first Mark will comment on our recent results and the market conditions as we enter the new year.
Jay will then offer more details on our results along with our guidance for the first quarter. We'll then answer your questions on this call is scheduled for one hour Mark.
Good morning, and thanks for joining us in our call today I'll summarize our Q4 and 2020 full year highlights and provide some initial comments on our outlook for 2021. Sanjay will then provide the financial details Q1 outlook and review our updated earnings model on capital allocation plans.
Fourth quarter capped off an amazing year for teradyne with sales up 16% from the fourth quarter of 2019, and non-GAAP earnings per share up 25%.
That brought our full year sales to just over $3 1 billion up 36% and non-GAAP EPS to $4 62 up 62% versus 2019.
These annual results driven by strength in all of our test businesses more than made up for a soft industrial automation market that was impacted by COVID-19.
For the full year, our semi test business was especially strong driven by investments in smartphone related test capacity, our expansion into the compute sector, our <unk> with our new ultra flex plus product and the ramp of our Magnum epic product for DRAM test.
And smartphones global unit shipments contracted in 2020, but the growth in chipset complexity continued driving tester demand higher.
Each subsystem on the phone cellular power management connectivity display cameras and application processing has its own cycle and in 2020, both the processor and the cellular areas took big steps up and complexity.
We use transistor count as a proxy for complexity and the leading phone applications processors now exceed 10 billion transistors growing double digits each generation.
In 2020, we also saw the beginning of meaningful <unk> silicon content, which necessitated a build out of new tester capacity.
Together these lifted the mobility test market in 2020, roughly $200 million to about $1 7 billion.
This continuous refresh of smartphone silicon should be a tailwind for the semiconductor test business for the foreseeable future.
In 2020, we also ramped our ultra flex plus product and the compute portion of the Soc market.
Recall this has historically been a $500 million to $600 million market.
Where we've had relatively low share with the emergence of more players and applications in the processor market, including Hyperscale is an AI. We expect this sector to outgrow the general market.
On the plus brings a powerful value proposition and managing the unique complexity power dynamics yield learning and time to market requirements of this segment.
For 2020, we estimate the Soc market was in the range of $3 four to $3 5 billion.
Up from about $3 3 billion in 2019.
We estimate our Soc test market share moved up 15 points to about 54%. However, our internal view of.
Share smoothed out year on year swings due to the unique timing of investment cycles of both our and our competitors' customers by that measure we estimate our normalized 2020 Soc share at about 50%.
Another notable growth segment of our semi test business in 2020 was memory and.
In this call a year ago, we noted a significant design win for our Magnum epic product an LP DDR five portion of the DRAM market.
This new entry into DRAM test ramped through the year and combined with healthy growth in our traditional NAND business drove a 41% increase in memory sales from 2019.
We estimate the market was about $900 million in 2020 up from $600 million in 2019, and our normalized 2020 memory share at about 42%.
Beyond semi test or <unk>.
<unk> Test group also had a great year, delivering 43% growth with the storage test business more than doubling from 2019.
This is the second consecutive year of hyper growth in storage test driven by steady test intensity growth of terabyte HDD drives and similar growth in the system level test a complex semiconductor devices.
And our wireless test business at light point sales grew 10% from 2019 with solid demand for both our connectivity and cellular end markets Wi Fi six ultra wide band test and increased investments in <unk> related handset test all contributed.
The performance of our test businesses more than offset the weaker results in our industrial automation business, which contracted 6% for the year the.
The global slowdown in manufacturing activity led to a 12% decline in sales at our Universal robots unit.
Mirror on the other hand grew 1% as makers of ultra Violet of disinfecting products recognized the value of an easier to deploy fully autonomous mobile robot.
On a pro forma basis Auto guide also grew for the year.
While the environment in IAA was weaker than expected the business trough in the second quarter of 2020 and has improved dramatically in the second half including record sales that you are in the fourth quarter collectively the business has returned to year over year growth in Q4, with your growing 6% year over year and 41%.
Growth.
With test slowing with test showing continued strength in industrial automation returning to growth. We are set up for another exciting year in 2021.
Specifically, we are expecting a strong start to the year across all our businesses with Q1, showing greater than 6% growth at the midpoint compared to Q1 of 19, sorry Q1 of 'twenty.
As you know full year visibility is always a challenge as evidenced by our missing the.
The strength of the test market and the decline of the <unk> market and our forecast just one year ago.
That said, let me describe how we see things today and of course, we'll keep you updated in future calls.
I will preface my remarks with a note that the well publicized surge in the forecasted semiconductor capex in 2021 is a very bullish sign.
However, the impact on cash is likely to be felt in 2022 and beyond as fab capacity built this year will drive additional testers in future years aligned to fab commissioning and ramping volumes in yields.
In Soc test the dynamics that made 2020, such a strong year continue into 2021. In addition, we are strengthening demand in the long dormant automotive test market with orders for our Eagle test product line surging <unk>.
Smartphone shipments are expected to grow in 2021 after contracting about 10% in 2020 and five G content should increase on.
On the other hand, the Soc test market in China will likely be down in 2021 due to the expanded in full year effects of trade restrict restrictions that were widened in 2020.
Also as always tester demand from our largest customer will remain opaque until sometime in Q2.
Additionally, the global economic impact of Covid and its impact on electronics demand. After a surge in 2020, it's hard to forecast what the arguments for both positive and negative effects.
Taking all of that into account, we are a bit wider range in our Soc market size estimate for 2021 at three 3% to $3 8 billion up slightly from 2020 at the midpoint.
In memory test the transition to LP DDR five at DDR five should gain momentum in 2021 and beyond after growing about 50% in 2020, we view the memory market to be in the $800 billion to $1 billion range in 2021 about even with 2020 at the midpoint.
In storage test the underlying demand drivers of increased density in HDD and increased complexity in semi devices driving system level test remain in place.
However, visibility is limited and annual shipments can be very lumpy.
After more than tripling over the last three years, we expect 2021 sales to be in a band of plus or minus 20% from the 2020 level.
For the rest of our test businesses, we expect growth in the 5% to 10% range from 2021.
In industrial automation 2021, starting off on a strong footing.
Borrowing any additional COVID-19 related manufacturing sector shutdowns, we expect to deliver the highest ever first quarter sales in each of our automation businesses and we are well positioned to grow in excess of 30% for the year.
2000, Twenty's results reflect well on teradyne strategy execution and efficiency. Our test business is show the successful results of R&D bets made in years past and enable us to increase those bets for the future our industrial automation investments continue undeterred by short term impacts of Covid and we are well.
Well positioned to capitalize on a world emerging to invest even more in automation to improve resilience and productivity.
Equally significant 2020 showed the resilience of teradyne employees, our global suppliers and our operating model.
In the face of unimaginable challenges across communities worldwide team dealt with health safety and operations obstacles daily net R&D milestones executed steep new product ramps and delivered record shipments of SLC memory and storage <unk> products to meet our customers' needs.
We did all this while exercising the cost and schedule disciplined expected of Teradyne. This is truly extraordinary and I am very grateful to be part of such a powerful team.
As we move into 2021, the outlook appears bright across all our markets as Sanjay will detail. We are returning to our share repurchase program and have an active M&A pipeline.
As 2020 taught US no matter what comes our way in the short term I am confident our global team and market strategy will deliver exciting long term returns for our customers investors and employees.
Sanjay will now take you through the financial and modeling details and Jay.
Thank you Mark good morning, everyone today I'll cover the financial highlights of Q4 and review the financial details of 2020 looking forward I'll provide our Q1 outlook and update to our mid term earnings model and our capital allocation plans now to Q4 <unk>.
Revenues were $759 million, which were $19 million above the high end of the guidance range, we delivered a non-GAAP operating profit of 30% and EPS of $1 10.
Semi test revenue of $524 million was driven by Soc and memory test demand, enabling <unk> handsets and higher speed flash and DRAM devices.
System Test group had revenue of $104 million down quarter over quarter, driven by lower storage test shipments industrial automation or <unk> revenue of $92 million had a seasonal increase over Q3 and delivered year over year growth for the first time in 2020 like point revenue of $40 million was <unk>.
<unk> flat with Q3.
And down year over year with a decline in trailing edge connectivity products, partially offset by new sales of new connectivity technology like Wi Fi six and emerging <unk> technology.
Non-GAAP gross margins were 59%.
On plan and up quarter over quarter due to product mix youll.
Youll see our non-GAAP operating expenses were up $14 million to $224 million from the third quarter due to increased test spending to support design wins higher payroll due to four extra days in the quarter and ongoing investments we generated $222 million.
And free cash in the fourth quarter.
The tax rate, excluding discrete items for the for the quarter was 13% on a GAAP basis, and 14, 5% on a non-GAAP basis for the full year. It is $14, 75% on a GAAP basis, and 15, 2% on a non-GAAP basis.
We ended the year with cash and marketable securities of $1 55 billion.
Turning to our full year results of 2020.
Teradyne revenues of $3, one 2 billion grew $826 million or 36% year over year.
$845 million of the growth was from our test portfolio, while IAA contracted $18 million due to the pandemic related slowdown.
We had one customer that accounted for more than 10% of our revenue in 2020, which we will disclose in our 10-K filing.
Gross margins for the year were 57% and operating profit was 30%, which is up from 25% in 2019, non-GAAP EPS was $4 62.
An increase of 62%.
2019, we generated $684 million in free cash in 2020.
Breaking down the components of 2020 revenues.
As outlined by Mark Associate test revenues grew $595 million.
46% on strength in mobility market, driven by increased by device complexity and new standards like <unk>, along with growing growth in computing.
In memory revenues were $383 million up 41%, while LP DDR related DRAM revenues were a significant contributor to our results. We also continued to see strong NAND test demand through the year.
In system test sales grew for the fourth year running <unk>.
Revenue of $410 million grew $122 million or <unk>, 43% year over year, primarily on growth in storage test for both hard disk drive and system level test.
Storage test sales were $242 million up from $115 million in 2019, we.
We also saw annual growth in our defense and aerospace component of STG.
I'd like point sales grew for the fourth consecutive year.
To $173 million, 10% above 2019.
In 2020, IAA revenue was $280 million a decline of 6% from 2019 on an as reported basis or 9% on a pro forma basis as Mark noted the COVID-19 related driven slowdown in manufacturing impacted universal robots, reducing revenue to $219 million down 12% year over year.
Year after crossing in Q2 <unk> grew in the second half 2020 versus the first half of the year in Q4 revenue grew 6% year over year, giving confidence heading into 2021.
Mir grew slightly year over year.
With annual sales of $45 million and auto guide full year full year sales grew on a pro forma basis now.
Now to our outlook for Q1.
Sales are expected to be between 720 $780 million non-GAAP EPS range of 95 to $1 11.
On a 175 to 179 million diluted shares.
The first quarter guidance excludes amortization of acquired intangibles and the non cash imputed interest on the convertible debt.
First quarter gross margins are estimated at 58% to 59% first quarter Opex running at 29% to 31% of first quarter sales is about flat with Q4 at the midpoint of guidance.
Non-GAAP operating profit rate at the midpoint of our first quarter guidance is 29%.
Regarding our Opex plans for 2021.
We expect our opex to grow 8% to 10% from 2020 $840 million.
Approximately two points of the spend will be in the back half of the year related to travel, which we expect to resume to pre COVID-19 levels, along with Tradeshows and.
On our test portfolio, we plan to increase our spending in engineering sales and marketing primarily in semi test and IAA will.
We will continue to invest to reinforce our competitive product and ecosystem position across the sector.
Also on IAA go to market investments will be made to support expected revenue growth.
Turning to capital expenditures and.
In 2020, our Capex was $185 million.
This was used primarily for customer demonstration equipment operations engineering and initial spending on new facilities to replace leased ones in locations, where we plan to grow over the next several years.
We will continue to invest in these new facilities in 2021, so capex is expected to be similar to 2020.
Recall, we are buying land and developing it to eliminate lease costs and enable a more efficient spend profile over the mid to long term.
For 2021, our GAAP tax rate is estimated at 15, 5% and our non-GAAP tax rate is estimated at 16% based on current tax laws.
Moving to our mid term earnings model.
As you've seen with 2020, our non-GAAP EPS of $4 62, we've exceeded our 2022 earnings model two years early on the strength of our test businesses. We continue to have confidence in the long term growth outlook for test and we expect to return to high growth.
As the global industrial economy improves.
When building our midterm model given our year on year demand swings we've seen both in past Nia, we use the average of 2019 and 2020 revenues as <unk> as the baseline for our growth projections from that baseline, we expect test revenue to grow 4% to 8% compounded and IAA revenues to <unk>.
Low 20% to 35% through 2024.
And test, we expect that growth will be driven by steady increase in device complexity across our businesses along with the high single digits semiconductor unit growth trend line.
Market penetration of co bots on autonomous mobile robots on forklifts remains low while the range of applications. They economically serve continues to expand resulting in an attractive long term growth opportunity for teradyne.
We expect this will drive 2020 for company revenue to $3 9 billion.
And non-GAAP EPS to $6 at the midpoint of our estimates.
Gross margin is modeled at 58% to 59% Opex as a percentage of sales will decline to 28.
To 29% and non-GAAP operating margin will improve to $30 to 31%. The model assumes the current tax laws are in place.
Shifting to capital allocation.
We will continue to balance a strong cash position to support our operating investments and potential M&A with direct shareholder returns through dividends and share repurchases.
We are raising our minimum cash levels from 1 billion to 125 billion with the $250 million increase tied to the increased valuations of potential acquisitions.
Recall, we held $500 million for M&A and $500 million for severe economic downturn.
We will also be increasing our cash balance in 2021 through 2023 to service our convertible bond, which comes due in December 2023 to date $51 million of that bond has been redeemed early with payment planned in Q1.
With the remaining face value of $409 million.
Regarding share repurchases in 2020, we bought we bought back $1 5 million $1.
5 million shares for $88 million at an average price of $58 32.
Recall, we suspended our share repurchase program in April due to Covid related uncertainty, we are replacing our prior approved program with a new share repurchase authorization of $2 billion with no fixed end date, we plan a minimum of $600 million.
Of repurchases in 2021.
As in the past the plan has both programmatic and opportunistic components.
In summary, 2020 inflicted incredible human and economic hardship on society across.
We are respectful of the widespread pain and loss when the pandemic hit I noted our priorities, where the safety of our employees supporting our customers continued execution on achieving our financial objectives. The teradyne community responded with a collaborative and supportive spirit.
Incredible energy ingenuity and purpose, which delivered on all three of these priorities I'm incredibly proud and thankful to be part of this team.
We enter 2021 in the strongest position in our history.
The work in 2020 has made us more resilient and prepared us for the strong market demand that we currently see in both test Nia while.
While our visibility for the full year is limited we're confident in the underlying market fundamentals are competitive diversified portfolio and our team, which will enable long term growth prospects for the markets we serve.
Collectively we're excited to turn our new financial model into reality.
That I will turn things back to Andy.
Sanjay.
We now take some questions and as a reminder, please limit yourself to one question and a follow up.
At this time, if you'd like to ask a question. Please press Star then the number one on your telephone.
If you would like to withdraw your question my.
Your next question comes from Krish Sanka with low.
Yes, hi, Thanks for taking my question Mark I had two of them first one.
Thanks for the color on the calendar 'twenty, one I'm just kind of curious if you could feel the SLC cash markedly more to say I'll, let you think mobile if he would be and how much do you think auto test would be this year on.
On <unk> and the net a follow up.
Yes. So good questions certainly auto is going to be up sequentially in 2020, and we've talked about that market being at a normalized.
Let's see maybe more of a peak run rate in the $4 to $500 million range, it's been closer to $200 million last year.
So this year that should be up at least 150, maybe $200 million.
It's really right now a bit of a rush.
For capacity and we don't know exactly when the demand profile of the quarters are going to taper off here. So it could it could go higher if this persists.
So that's the color on autos.
Mobility, I think it's harder for us to see that at the moment because of the significant impact of our largest customer on both us and the market.
Which doesn't really become solidified until April ish of the year. So we're looking at it sort of flat plus or minus $100 million in mobility.
Got it got it that's very helpful. Mark and then just as a follow up on the IAA side.
You mentioned 30 plus percent growth.
Should we view.
Big driver of debt is going to be you on in other words, you are should be higher than 30 closer to anything you are going to be in line of industrial automation growth.
Yes, I think that's a good question.
I think all of the groups are going to be better than 30.
And.
Now some of them like auto guide are small so.
They will pull up the average.
Our head of U R and nearing euro should be about the same for the year.
Got it thank you very much from us.
Okay.
Next question comes from Matthew Mcnee with Nike.
Yes. Thanks for taking my question I just wanted to go back to U S. C commentary I'm Elizabeth surprise with your kind of flattish outlook and I say that because.
Millimeter wave is expected to account for a larger mix of <unk> phones and I believe last year was just the early investments. So why isn't the increased penetration of preliminary wave phone not giving you that incremental confidence and I have a follow up.
Yes, I think that's certainly a balloon for the year Mehdi.
Maybe we're going to double the number of millimeter wave enabled phones in 'twenty.
'twenty, one, but yes last year. If you recall there was also a significant step up in the hundreds of millions of units of millimeter wave enabled phones were brought to market last year. So if you add another $2 million to $300 million additional.
Millimeter wave enabled units this year and let's say that brings the global total to 600 million units out of $1 4 billion.
You're essentially adding about as much capacity, maybe a little bit more because there'll be more than let's say last year added $2 50, this year might add 350 million units. So.
So, yes, there will be a little bit of growth and additional millimeter wave test capacity.
But last year was a pretty big year too.
Got it.
And then looking at the.
Midterm model 2024, what are the key underlying assumption for market share, especially as you try to capitalize on the synergies between semi and assist in tests.
And in that context are you accounting for any incremental share shift in.
In the GPU and market.
Yeah, Hi, it's Sanjay.
So in the in the earnings model, we see obviously growth in the market as.
As Mark alluded to.
More players are coming into the compute space.
That we can address and with that we feel that with the ultra flex plus solution, we're very well positioned.
And we are projecting share growth.
When we think about from a memory perspective, you would go back, let's say 10 years.
We've been on this steady increase of memory share growth, where as we continue to execute we see.
Continued.
Share growth on that perspective, as well so so really growth in end market size as well as continued share growth drivers.
Drivers.
That includes the synergy between different sectors or segments.
Do you want to expand on that question.
Yes.
Just going back to the question.
I see opportunities between semi and assistant, especially as the system level test Diversifies and I'm just wondering if that's baked into your 2024 model.
Yeah. Okay. Thanks for the clarification, yes. It is you know with device complexity, we're going five nanometer and then to three nanometer I think both system level test as well as <unk>.
<unk> test takes.
Take that into account.
Got it. Thank you so much for details.
Right.
Next question comes from Tahira Hari with Goldman Sachs.
Good morning. Thanks, Thanks, so much for taking the question.
Mark I wanted to ask about your largest customer.
I appreciate it.
Things will remain pretty fuzzy or opaque.
As you said until sort of the April ish timeframe.
But can you sort of walk us through the potential range of outcomes Youre thinking.
Internally.
Obviously, you've got units you've got transistor density as it relates to the new chip.
Also curious.
There are efforts on the notebook side of their business and sourcing Cpus could have impact on your business as well and then I've got a quick follow up thank you.
Okay.
I always <unk>.
From a bit reluctant to be too specific on any one customer so I am going to speak more to this segment.
A bit which I'll bundle compute and.
Mobility mobility together here so.
Yes last year was incredibly strong in both our traditional mobility market because of the complexity growth of phones, which we alluded to and the fact that we did enter compute.
As a new segment. So we ended up with.
Additional revenues and compute last year that.
North of $50 million for the first year in that market.
So as we think about this year.
The issue of smartphone unit growth and complexity growth of the apps processor that camera systems and such in the phones is part of the equation and we have a reasonably good read on that.
On the compute side Theres, a lot of moving parts, there and Theres a lot since it's a new market for us in a new market for some of our customers that has the bigger range of potential.
Outcomes for the year.
So.
That's the one we're triangulating on that could be up significantly over last year.
Could be up modestly over last year, but at this point, we really cant.
Be too specific.
Got it. Thank you for the color and then as a quick follow up on industrial automation I wanted to ask about.
The profit margin profile of the business, where does it stand today I guess as of 2020.
You guys have done a great job in improving gross margin at you are in the other businesses that you've acquired over the past couple of years at the same time <unk> been aggressively spending from an opex perspective. So in your 2024 model what sort of margin profile for IAA as embedded.
And your numbers. Thank you.
Yeah, Hi, it's Sanjay so so.
IAA as a whole this year was roughly just a bit better than breakeven obviously with the <unk>.
With the Covid impact on multiple businesses and the contraction in U R.
Sure.
We're just above breakeven, but fundamentally we continue to invest in the portfolio of the ecosystem the go to market for product.
Differentiation ease of implementation and so.
And so you should expect that to continue over the midterm.
We're focused on driving the revenue growth.
And the investments and so with that we expect the margin profile to be.
Roughly consistent with.
With the current profile.
As we as auto guide is relatively new.
To the organization.
Just over a year.
We expect that to.
Improve with our.
R R teradyne supply chain as well as.
Other other quality processes, we step in.
Thank you.
Just one thing I want to add on to that commentary around the industrial automation business to remind people that.
What we focus on right now during the high growth phase of that business is sales growth and gross margin and the bottom line as Sanjay mentioned, if we're at breakeven we're happy as long as we can sort of adhere to or exceed the rule of 40.
And through the mid term, we think we expect to be close to that kind of up top line growth rates.
And.
What we bring down to the bottom line.
We will kind of depend on the size of the growth what we see ahead of us.
And if we're growing at 50% and breakeven, we're happy as clams, and if the growth rates come down below 20% will start dropping more and more down to the bottom line.
Thank you.
Our next question comes from Joe Moore with Morgan Stanley.
Great. Thank you following on the last question can you just characterize the tone of business for the Universal Robotics business and I guess in the context of.
It feels like a lot of the business activity in the last 12 months is business continuity and supply chain disruption, maybe that's negative for new technologies and manufacturing at the same time, I would think social distancing and stuff like that as an opportunity for you. So just kind of characterize those puts and takes and just what that tells you about what the trends may look like over the course of this year.
Yes, sure it's Angela here so so.
In the short run we actually saw a contraction.
As evidenced by.
Our revenues were however, I think your comments hit home with regards to.
Plant and warehouse decision makers seeking to build resilience into their into their supply chain.
And we view that over the midterm as a tailwind.
We are seeing we are seeing the market obviously come back from Universal robots, we've talked in our prepared remarks about the automotive and electronics.
Industry and then we're also seeing strength in a couple of other verticals.
Sure.
Okay. Thank you.
Next question comes from C J Muse with Evercore.
Yeah, Hi, Thanks for taking the question I wanted to follow up on on <unk> question regarding your 2024 model. So if I look at your implied semi test revenues versus 2020 actual you are up about $250 million to $350 million, which seems conservative, particularly when you reflect on.
What youre doing with system level test.
New Ultra flex plus.
Can you I guess walk through.
What assumptions youre, making in terms of market share for both Soc and memory.
Implied in that number.
<unk>.
Where you might.
Two as areas that might be conservative.
Yes, I think that as I articulated from.
Touch on memory <unk>.
Our share right now is in the low <unk>, we see that we could see that growing to.
The mid Forty's.
In the plan and then from an <unk> perspective, Mark talked about on a normalized share level of above 50% and we see that.
Increasing.
Over the midterm.
From the implied model are you, assuming a 50% 60% debt mark.
Spoke about back in July as to what a goal could look like.
Yeah.
So yes.
I think what we've been saying C.
CJ is that we can get about a point to a point and a half a share growth a year. So by 2024 as I mentioned I think our normalized share somewhere around 50, we should be up around $55 56 by then and SFC.
And in memory.
Share moves a little chunkier, because there's only a few players there.
So on the memory side, we could be in the mid to.
To upper mid Forty's by then I would say.
Is one way to think about it but the other piece of color in terms of aggressive vs. Conservative debt I'd add here is.
The recent investment.
Profile of the front end with Capex moving up into the $70 billion range. Its something we havent modeled into our midterm plan.
We've assumed debt incremental fab capacity across the midterm would be sort of consistent with the rate that its been added for the prior four years.
If 70, plus $1 billion of investment in <unk> is the new normal for the next.
Four years, that's certainly going to drive more tests than we modeled.
Very helpful.
My follow up.
Can you speak to what we should be thinking about for Soc test.
Test gross margins here in 'twenty, one versus 2020, I'm trying to get a sense of what uplift might look like particularly from Eagle test.
I mean gross margins.
We you should expect a relatively consistent with how we've guided Q1 and our.
And our long term model.
Okay. Thank you.
Next question comes from Brian Chin with Stifel.
Yes.
Hi, there good morning, thanks for letting us ask a few questions maybe the first question.
Capex on industrial automation auto.
Automotive has historically been a key portion of sales here and I was curious.
Do you expect or even need the other portion of your sales to grow 30% year over year, given sort of the increasing breadth of marketed option that you might be seeing.
Yes, I think that.
With an emerging market, there's still a lot of footprint to cover so we expect that to continue in the automotive vertical vertical as well as electronics and industrials as well as other vehicles.
Okay, Yes, I was just sort of debt.
Trying to gauge whether youre seeing a lot of adoption outside of auto and is it in terms of visibility youre, starting the year its pretty good visibility.
Yes.
Starting from that from a similar point or is it kind of mark a little bit more on the whole to start the year and youre going to expecting a bigger snapback later on there.
We're seeing also.
We're seeing market drivers in our verticals adoption and education.
R&D pharma as well as life Sciences.
But from a from a starting point, obviously, we have a very very strong.
<unk> installed base over the years that we built in the auto vertical.
And I'd just add to that debt.
Certainly automotive was one of the most hard hit.
Aspects of Urs business automotive has been running in the high <unk>, 40% of the business coming into 2020.
That contractor dramatically because of Covid down to the point that it was in the low twenties and I would say, it's certainly at this point, although back and growing it hasn't come back yet to where it should be in our portfolio.
As issues around the semiconductor supply chain and other things have sort of crimped.
Some of the ambitions of car companies to ramp volumes here Theres a little bit.
To go still but are <unk>.
Footprint over time since we acquired U R has been reducing in the automotive segment not so much because automotive is not growing of course, but it's just that our expansion into the other areas that Sanjay mentioned has been.
And we expect over time that automotive component will continue to decline as a percentage of our sales.
Okay great.
Maybe at that and then in the 2024 model granites four years out debt.
Can you give us sort of a rough sense of how much of the sales might be and mark.
Our mobile vehicle Giovanni I think the split.
Roughly is kind of 80% you are 20% mobile at the moment could that be sort of like two thirds, one third in that timeframe.
Yes, I think that obviously you are we've had for a little bit longer.
And it is a larger percentage, but I think you are spot on that the <unk> portion will grow with auto guidance mirror as a percentage of revenue.
Yes.
Okay, great. Thanks, so much.
Next question comes from Keith <unk> with Citi.
Hi, Thanks for taking my question and good job on results and guidance.
Mark the first one volume up on the last question Auto Guide how has the adoption going at larger enterprises and warehouse customers and then I have a follow up.
Yes.
Good question, so to be Frank with you we had a good year we grew.
50 ish percent in the year, but we didn't hit our target and.
Part of this is extended evaluations at the larger accounts that you are referencing and it's been very difficult in a small business like.
<unk> case, and a COVID-19 area to acquire new customers and get the pilot production validation work done in the same.
Timeframe that we could have gotten it done.
On a non COVID-19 world. So we've seen some extension of those E valves.
But we're in some of the boutique named brands for Eval that you would hope we are in both.
The industrial manufacturing side as well as the E commerce side and logistics side of life. So we're hoping that this year is going to be the big breakout year, it's the kind of business that should at least be doubling.
If not more once these big accounts latch, but we did.
If any place sort of had a big impact from Covid last year. It was auto guide because of.
On the whole new customer acquisition as the whole game there at this point.
Great and then as a follow up you mentioned, the China SSD test to be down this year, which makes sense given the restriction from lost share, but some of the front end peers have talked about maybe it's flattish.
China investments on the front end and backend is different day can you just walk us through the components.
And we're at China can be cut down and why you on benefiting on the mature technology nodes.
Yes.
So if you look at China, I think you need to separate memory and Soc.
Because it's quite different on the memory side, there will be growth in China. This year.
In test as well.
And we are we expect that at least and so that's a healthy growing mid term.
Profile I'd say for China.
On Esso see it's really a little bit more difficult to see growth occurring this year because.
The impact of the trade restrictions on Huawei on high Silicon are tremendous in terms of their buying power in the market historically.
What they buy in.
Both silicon and then test capacity for that Silicon has been severely.
Hampered and then further restrictions on other companies like SMA and such.
Our much smaller factors, but our headwinds against growth. So I think src is likely to contract memory is going to grow.
But net net it's not going to be hugely down, but it will probably be down a little bit on the test side of life.
Thanks.
Next question comes from Vivek Arya with Bank of America.
Alright, Thanks for taking my question.
Two one on operating leverage in the second on M&A.
On the operating leverage Sandra I believe you mentioned opex growth of 8% to 10%.
This year do you think that has the potential to Stewart.
<unk> leverage for that kind of growth and then when I look at your 2024, modern youre keeping operating margins.
And about 30%, 31% kind of where you are already even though sales are expected to grow and mark had outlined a number of interesting growth drivers. So I was hoping you could talk to operating leverage this year and then what would be the drivers as you look at your 24 model.
Okay sure Yeah. So obviously, it's another it's an investment year and I think in my prepared remarks, I noted that we're getting back to travel and trade shows which is a key point.
You really if you look at it in two portfolios.
We have for the year, we're going to have.
Leverage in the test business, where the growth in Opex as a percentage.
We will be lower but the growth of.
And the space that the Opex growth is higher.
And so the the leverage.
From a book, we're growing in the IAA space, but we will see we should see a degree of leverage on the short term in the test business.
Cascade that out to 2024, obviously with the revenues that we're predicting and IAA.
I think mark described it well if we're growing at 50%.
And continuing to have a forecast to continue to grow we will continue to drive the investment but as.
As the as the growth starts to.
Go down, let's say below the rule of 40, then we will start to drop more to the bottom line.
That's how we're thinking about it.
But when I look at that 24 model.
Right.
On the forecasting overall sales to grow at.
6% CAGR from 2020.
So that is below the 16% CAGR.
And Youre, saying operating margins are going to stay pretty much flattish versus I'm just positive.
If you were saying sales are not really going to grow as much as they have grown in the last three four years and operating margins are not going to expand from here is that model very conservative on what needs to be done to either grow faster or drive more operating leverage.
Yes, I think I think that will and Thats why in my prepared remarks, I comment we looked at the model not just off of a point or 2020, but off of an average of 19 in 'twenty just given the significant balloon in 2020 tightly tied to the mobility space and on the contraction Nia and when you look at it from from an average of 19% and 20, we believe.
On that growth overall growth of.
Of the 4% to 8%.
And then we are during that period going to be growing out the investments in the IAA portfolio.
And I would just say if you go back to what we said if you look at that Pie chart of the mix when we get out to 2020 for IAA should be a bigger mix of our revenues and <unk>.
Tests, So test will continue to grow and it'll have a very high drop through it'll be very efficient and if that's all you're looking at yes bottom line.
Profitability should increase.
But on the IAA side, it's more likely that we will be growing more rapidly and we will be pulling up gross margins for the enterprise with EIA business, but.
But on the bottom line, we're being a bit conservative on how much we plan to drop through there because we want to keep investing for more and more growth. So it kind of just depends on what's the investment profile in IAA and we've modeled in.
We're not going to optimize for profit in the midterm there we're optimizing for growth.
And as Tom and Mark just a follow up to that you mentioned the prospects for some additional.
M&A.
I presume thats in the IAA side of the business I was hoping you could talk to that.
Do you are you contemplating kind of smaller tuck in technology.
Technology type transactions or are you thinking about something that could be bigger than required the use of stock just how we should think about.
The M&A pipeline is on how it could impact this baseline model that you have set for us. Thank you.
Yes so.
Most of what we have on our pipeline is consistent with the kind of things, we've been investing and acquiring in the past five years to six years industrial automation.
Modestly sized investments, let's say relative to our market cap. However, we have expanded our.
Aperture a bit to look in the.
Test space and areas that are.
On correlated to test, which bring with it potentially some larger.
M&A things, it's always governed by the same.
Rich.
Internal rate of return metrics that we always use on these things so whatever we do.
<unk> is going to be something that's more attractive to the invest our investors than buying back our stock or.
<unk>.
Those kind of met our internal weighted cost of capital. So that's.
All I think I can say about debt.
Alright, thank you.
Next question comes from Timothy Arcuri with UBS.
Thanks.
Had a couple.
So for Opex this year, youre, saying its going to grow about 8% to 10%. So at the midpoint youre going to grow opex at about $76 million I'm wondering Sanjay if you can tell us how much of that is going to come in and I guess another way of asking that is sort of what sort of op margin. Do you think you can do this year on IAA. I mean, you were basically breakeven last year can you get to high single digits.
This year and is 10 to 15 still the long term target for that business I know that mark commenting that if growth slows you can sort of crank back on Opex and you can drop more but just wondering if you can comment there and then I had a follow up.
Sure Yeah, I think you hit it spot on I think when you take out the travel and the.
On the Tradeshows.
The majority of the of the spend will come.
And Opex.
From on a year over year basis, and from a profit perspective, we're assuming growth and we expect to.
To improve.
Back.
Two our original growth plans look if you think about 2020 is the anomaly and you look at the jump off point of 2019.
We were about 10%.
Profit level.
With our growth we should be in that similar level going forward in 2021.
Okay got it. So you think you can get to 10% op margin this year.
Yes, plus or minus but yes.
Okay, Okay, Great and then I guess a question for you Mark So when you were going to get a top customer.
You presented a couple of scenarios I know, it's very tough to predict but but the scenarios. You presented didnt include that debt revenue from that customer is down I guess debt. The compute piece is going to be up but they're also not going to shrink this year and in the past.
That's been sort of a harbinger of the potential decline in in.
And the number of testers day buy unless they are willing to live with the much larger die size, which may or may not be the case. So I'm just kind of wondering you know I'm not asking for any specifics on that customer I'm just sort of wondering if you can look back in the past and draw on your past experience you can say well, yes in the past when that happens that is sort of a harbinger of the potential there.
It could be down because you didn't present that as a down.
Possible.
This year thanks.
Yes, I think its a possible outcome, but let me go back to what I was outlining in my remarks, when you look at the phone there's various elements of the phone in terms of technology to apps processors. The modem the cameras the memory.
Those areas are the phone refresh and take leaps of complexity and different cadences and in 2020 the apps processor.
And.
Five G basically.
The apps processor had a big jump in complexity and five G proliferated throughout all the phone. So as you look at 2021, the need for incremental five G capacity, whereas in 2020, several let's say 100 million units worth of phones needed <unk> capacity.
This year it'll be.
Last because the incremental unit growth there is.
One factor in incremental <unk> capacity, plus complexity growth of the <unk> modem itself.
So five G.
Is.
Big in 2020, not as big in 2021.
That leaves what's happening with the cameras, what's happening with power management, what's happening with the screen resolution other things could be balloon.
Balloons that pull it back up but I do think you do have that.
Five G has happened for that one area of our mobility customer base.
Yeah, great. Okay. Thank you.
And operator, we have aside from just one one more question. Please.
Last question comes from John Pitzer with Credit Suisse.
Hey, Andy Thanks for sneaking me in and congratulations guys Mark.
My first question is just on the whole China dynamic you're clearly guiding it to be down this year I'm kind of curious if there is a date on between the U S. China relations is that a zero sum game on exercise in market shift or do you think it would be accretive and I guess more importantly, we're now seeing in the U S government kind of incentivize.
Domestic production of semi I'm, just kind of curious as to whether or not you could benefit that from that either indirectly as some of your customers build capacity domestically or directly as we think about your long term tax rate and then I've got a quick follow up.
Okay. So on.
China if for some reason.
The.
Restrictions on China, ease and more indigenous Chinese makers start to grow again I think its neutral.
His business shifted out of China in 2020.
It was pretty much neutral to us.
The customers that picked up the manufacturing of let's say applications processors or modems that would've been done by indigenous Chinese suppliers are teradyne customers and advanced test customers in a proportion that isn't that different than it was in China. So is it ebbs and flows back and forth I wouldn't say, there's a big ramification.
On the.
U S.
Domestic supply question.
I think it's going to take a long time and many many years of a steadfast set of incentives.
From the government for that to mature that something significant to our business.
If we stick at that in the U S for seven to eight years and really build up an infrastructure to manufacture semiconductors domestically.
I think it could have a bit of.
A positive impact, but I think it's small I don't think because semiconductors might be manufactured in the U S. All of a sudden there is a.
Propensity that theyre going to buy more teradyne equipment, it's at the margin, but nothing I would baked in as a trend line to count on.
That's helpful. And then just as my follow up going back to the 2024 model your explanation as to kind of how youre getting to the op profit targets you are getting to it makes a ton of sense I'm just kind of curious to the extent that the topline proves to be conservative how should we think about incremental operating margins above sort of the high end.
On the target model or maybe another way of thinking about it as IAA get scale, where do we think the longer term op margins of the business can GAAP.
Yes, I think that if the test business what drives the incremental revenue if the test businesses.
Come to fruition I think youll see.
On a higher drop through.
If.
And again just to repeat myself.
If if we are growing and we see continued growth and we're going to continue to invest in IAA.
That drop through maybe lower but let's say it comes let's say the revenues.
Gross significantly over the first couple of years and then at the end they start to the growth starts to tail down you may see a little bit more leverage, but it's really we have to see how the market unfolds in IAA, but over the short term we are planning a significant investment.
Helpful guys. Thank you.
Alright folks debt.
Wrap this up for today look forward to talking to you on the days ahead and those that are still on the queue I'll get back to you straight away. Thanks, so much.
This concludes today's conference call you may now disconnect.
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