Q1 2021 Teradyne Inc Earnings Call
2021 Teradyne earnings conference call at this time, all participants are in a listen only mode. After the speaker presentation, there will 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 require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Andy Blanchard. Thank you Sir you may begin.
Good morning, everyone and welcome to our discussion of Teradyne's, most recent financial results.
This morning by our CEO, Mark <unk>, and our CFO Sanjay Mehta following our opening remarks, we'll provide details of our performance for 2021, the first quarter, along with our outlook for the second quarter of 'twenty one.
The press release containing our first quarter results was issued last evening, we're providing the slides on the investor page of the website that maybe helpful for you.
All of the discussions replays of this call will be available via the same page after the call at the.
Matters that we discuss 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 the most recent SEC filings. Additionally, these forward looking statements are made as of today and we take no obligation to update them as the result of <unk>.
<unk> 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 reconciliations for the most directly comparable GAAP financial measure where available on the investor page of the website.
Looking ahead between now and our next earnings call Teradyne expects to participate in technology or industrial focused investor conferences hosted by Wolfe Research ISI Evercore Baird Bank of America Bernstein and Stifel.
Now, let's get out of the rest of the agenda first Mark will comment on our recent results and the market conditions as we enter the new quarter. Sanjay will then offer more details on our quarterly results along with our guidance for the second quarter and we'll then answer your questions. The call is scheduled for one hour Mark.
Hello, everyone and thanks for joining us today.
In my remarks, I'll summarize our Q1 results review current market conditions and provide an update on how we're looking at Q2 and the full year.
Sanjay will then take you through the financial details of the quarter and our outlook for the second quarter.
As you saw in our press release, our Q1 sales and profits grew double digits from Q1 of 2000 Twenty's record level.
Net sales grew 9% on broad based demand with notable strength in automotive industrial compute memory and storage.
Industrial automation sales grew 33% in the quarter with strong demand at both of you are in mirror.
Notably since our January call the market demand in both test and IAA has been greater than we expected as you can see from our Q2 guidance.
In the semiconductor test customer orders are very strong as complexity continues to increase and chip units are expected to grow almost 15% this year more than twice last year's rate.
Regarding the sustainability of this demand our visibility is limited to just a quarter or two but the growth in Wi Fi from $50 billion in 2017% of <unk> 60 billion of last year to over 75 billion. This year should translate.
Into a healthy tester market in the years ahead.
Looking at Soc demand the auto industrial segment is especially robust with our Q1 eagle shipments up nearly 90% year on year and deliveries expected to grow further in Q2.
Test demand for mobility and compute devices is also running ahead of our January estimates as these end markets pushed the performance limits of advanced process nodes and drive the highest complexity growth.
This higher complexity drives longer test times and of the demands unique tester capabilities.
Our ultra flex platforms are well aligned to these performance dynamics.
As a result of this demand strength, we now expect the Oc test market to begin the four to $4 $4 billion range up about $700 million at the midpoint from our January estimate.
This equates to about 16% growth from 2020, and we expect our share of <unk> Soc to be at about the 50% level.
In memory test, we are seeing continued strength in both flash and DRAM.
We now expect the full year memory test market to be in the 900 to $1 $1 billion range up about $100 million from our January estimate and up about 5% from 2020 levels.
Our Magnum platform is in lockstep with the performance trends in both markets and we expect another strong year in 2021.
However, since most of the test market growth is expected to be wafer test applications, where we have less exposure, we're likely to see our share dip of few points into the upper thirties.
For the system test revenue grew 14% from Q1, 'twenty, primarily on higher storage test shipments as we've noted in past calls storage test is linked to increasing density and complexity of datacenter hard disk drives and the expanding adoption of system level tests per chip test.
Our full year outlook for this business has improved from January as well on strength in both applications.
The defense and Aerospace and board test units of STG are also performing well and we expect the overall group will grow revenue, 5% to 10% this year.
Our light point business is driven by the complexity of new wireless standards and the connectivity cellular and other wireless markets.
In Q1 connectivity demand was the dominant revenue driver as Wi Fi six <unk> ramps in smartphones and access points.
We expect like point to to grow in the zero to 5% range in 2021.
Shifting to industrial automation, we are on track to grow 30 plus percent for the year at the macro level industrial economies are recovering with global PMI above 50, indicating growing manufacturing investments.
At the ground level, we are seeing increasing customer buying driven by economics quality and lack of available shop floor of labor.
At <unk> revenue grew 32% from Q1, 'twenty with a notable recovery in China, where sales more than doubled in the quarter.
Our China performance reflects the compelling value proposition you are offers even in the face of low cost competitors.
We not only have the durability to operate in the high intensity production environments, where downtime cannot be tolerated, but we also offer a unique suite of organic and ecosystem provided software and peripherals to address a wide range of task with short deployment times.
We're also seeing growth outside of the traditional manufacturing tasks and.
In the last several quarters, we've seen volume shipments of Cobalts to perform industrial service task such as maintenance of high power transition transmission lines, while energized and robotic inspection of wind turbine blades.
Together. These two applications account for over 500 install cobalt and this should approximately double in 2021.
Both examples highlight the flexibility of your arms and the value and performing dangerous service tasks.
Mirror also delivered strong results from the quarter growing 55% year on year, a big part of that success has been the new mirror to 50, which was introduced in March of last year and was our leading seller in Q1.
We are also seeing a nice expansion of applications from your products. Initially most applications, we're moving goods to and from last year. We saw a dramatic expansion of the use of mere robots as a platform for mobile tasks, such as disinfecting Workspaces and.
And now we're seeing growing use in the conveyor market, where our mobile platform replaces fixed conveyors. This provides owners greater flexibility than traditional fixed conveyor system and allows them to reconfigure their factory on the fly as production requirements dictate.
Although both U R.
At both U R and mirror, our expanding range of plug and play apps now totaling over 430 in our U R plus the <unk> ecosystem shortens the deployment time and increases the addressable market for cobalt, adding additional growth vectors for us.
But were not firing on all cylinders and IAA yet at auto guide, we have lowered our expectations for 2021 the.
This year, we will focus on expanding existing customer deployments, while we complete a series of engineering projects designed to scale and win new customers in the future.
While this is surely a reset at our auto guide plan.
We remain confident in the potential of the nascent market for high payload of autonomous mobile robots, and our ability to leverage <unk> unique product architecture to deliver differentiated value to this growing market.
Rolling It all up.
The demand environment in our test businesses has strengthened dramatically since January and the wafer front in the equipment forecast.
The suggests the tester demand over the next few years will continue to grow in.
In industrial automation, you, our EMEA benefiting from their differentiated products and the improving global economy, which puts us on track for a total of IAA group revenue growth of 30 per cent for the year.
Our employees are doing a great job and our operating model is delivering strong financial profit and free cash flow.
And finally I'd.
I would like to recognize and thank our board share Roy Vallee, who will be retiring next month. After 20 years on the Teradyne Board.
We're always the leadership integrity and wise counsel have been invaluable to me and the executive team and we all wish him the best in his future pursuits.
Sanjay will now take you through the financial detail Sanjay.
Thank you Mark good morning, everyone. Today I'll provide details on our Q1 results offer additional color on the operating environment, along with our plans to address the very strong demand environment and describe our Q2 outlook.
During the appropriate sections I'll provide some full year expectations now.
Now the Q1.
First year or sorry, first quarter sales were $782 million with non-GAAP EPS of $1 11.
Non-GAAP gross margins were 59, 1% and our non-GAAP operating expenses were $230 million.
Above our high guidance due to the high variable compensation and G&A expenses non-GAAP operating profit rate was 29, 6% we.
We had 210% customers in the quarter.
Tax rate, excluding discrete items for the quarter was $14, 75% on both the GAAP and non-GAAP basis.
Looking at the results from a business unit perspective semi test revenue was $528 million.
Was up 9% from Q1 'twenty one.
Soc revenue was $420 million up from prior year, driven by strength in compute industrial and automotive market offset by decline in our mobility shipments. The memory revenue was $108 million up from prior year driven by strength in Flash final test segment.
System Test group had revenue of $133 million, which was up 14% year over year.
This was driven by $95 million of storage test sales, including HDD, and <unk> solutions and $38 million in defense and aerospace and production Board test at.
I'd like point revenue of $41 million was above plan, but down about 6% from prior year due to lower cellular test shipments.
At our test portfolio overall for <unk>.
Very optimistic about the market and technology trends unfolding over the midterm the growing attach rate of electronics across the economy, the increasing complexity of those devices and significantly faster refresh rate for many of these complex devices benefit all of our test businesses looking at a significant example, the increasing number.
Of companies, creating high performance processors to serve a growing range of end applications. Each with unique performance and design cycles is driving an estimate of doubling of the compute portion of the Soc test market this year compared with 2018.
We've designed our ultra flex plus platform to serve this growing market and are having early success.
This trend is complementary impacts on memory and <unk> markets as well now.
Now to industrial automation.
Given 2020 was of contraction year I'll provide revenue metrics comparing Q1, 'twenty one results with Q1, 'twenty and Q1 19 industrial automation revenue was $80 million was up 33% year over year and 21% over Q1 19.
Q1, 'twenty, one was a record for the seasonally soft first quarter of the year.
U S and Europe represented over 70% of our IAA revenue in the first quarter as Mark noted.
Strength in China for you or I'll add that we saw the IAA group revenue in China more than double year over year and grow greater than 50% over Q1 19.
You are sales were $66 million in Q1 up 32% year over year and 15% over Q1 19.
Mirror sales were $14 million up 55% from both Q1, 'twenty and Q1 19.
Sales increased in every region over Q1 'twenty.
In addition to the success of near $2 50 that Mark noted. We also are starting to see of positive shipment trend towards higher payload mirror 500, and Mir 1000 models, which should improve our asps over time.
Demand at both of you are in mirror continues to improve as the global economy recovers and companies work to add production capacity.
The opportunity of automation is growing our IAA portfolio of solving problems for companies such as improving economics with the typical ROI of approximately one year addressing labor shortages experienced by manufacturing and warehousing firms and adding supply chain resilience over the long term for.
From a financial perspective, and we continue to lean into engineering ecosystem of distribution investments to expand the range of applications and our IAA products, our <unk> products address and extend our global distribution reach.
Our goal in the short term as the balance of investments with sales growth in order to deliver an annual IAA group operating profit of between 5% and 15%. However, given the reset Mark described at Auto Guide, we now expect revenues of less than $10 million in 2021, and AG will not be profitable in <unk>.
The one.
As a result at the IAA group level.
We expect we will operate above breakeven in 'twenty, one, but below that target profit range we.
We do expect both U R and mirror each operate above the rule of 40 in 2021.
That is the sum of the operating profit.
Growth will be over 40.
We continue to have confidence in our IAA growth over the midterm as articulated in our January earnings model update and expect the overall group to grow revenue over 30% in 2021.
Shifting to supply.
As Mark noted the test market size has increased significantly across the board from a supply perspective, we are dealing with increasing lead times and cost increases predominantly in the semiconductor area given.
Given the significant demand increase and the challenging supply environment, we are experiencing some shipment delays.
This is most acute in the automotive and industrial tester markets, where demand is significantly outstripping supply.
We are working with our customers on the daily basis to minimize the impact of these delays we see this challenge accelerating into the third quarter the supplier lead times increasing.
I appreciate the incredible pace of our operations team and partners around the world.
Of operated.
For over a year and continue to be impressed with their efforts to meet the needs of our customers.
To sustain that pace and create a more resilient operation, we're continuing to invest in manufacturing capacity around the world. This includes qualifying redundant suppliers production sites for critical components and redundant manufacturing capacity of new locations.
Shifting to the balance sheet and cash flow.
Our cash and marketable securities at the end of the quarter totaled 143 billion.
We had $1 million of negative free cash flow in the quarter and spent $45 million and $17 million on buybacks and dividends respectively.
To date $67 million of the convertible bond convertible bondholders have elected to convert early and in Q1, we paid $51 million of it to the bondholders.
Regarding the buyback we plan to increase our daily buying throughout the year and expect to purchase of minimum of 600 million Inc.
<unk> 2021 as noted in January the relatively low volume of buybacks in Q1 was planned for three reasons for.
Recall Q1 is the seasonally high use of cash where we typically payout of variable compensation and ramp up our prepayments to support increased Q2 test production.
Second we wanted to understand how much of our convertible debt would be redeemed in Q1 third we wanted to confirm the global recovery from the pandemic remains on track.
Now the Q2.
As you've heard this morning customer demand is strong and of nearly all parts of the business. Our guidance assumes that we will continue to be successful dealing with the numerous material shortages. We noted earlier and that we won't see additional pandemic related issues with that said sales in Q2 are expected to be between 1.01 billion and $1.
Zero 9 billion with.
With non-GAAP EPS in a range of $1 62 to.
The $1 83 on a 177 million diluted shares the second quarter guidance excludes the amortization of acquired intangibles and the non cash imputed interest on the convertible debt.
Second quarter gross margins are estimated at 58% Opex is expected to run at 23% to 25% in the second quarter sales.
The non-GAAP operating profit at the midpoint of our second quarter guidance is 34%.
Regarding opex for the full year.
We now expect Opex will grow 17% to 19% from.
<unk>.
I will note that this is up from our January plan for 2021, where we guided growth over 2020 at 8% to 10% the.
Increased from January in order of magnitude is in three general categories.
<unk>.
Higher revenue driving higher estimated variable compensation and higher engineering costs related to mitigating supply constraints.
Two.
Higher incremental spending to accelerate several engineering projects and test Nia and.
And three.
Higher than expected G&A spending related to legal insurance and it costs.
As we noted in January and included in the estimate we expect travel and marketing expenses to increase through the remainder of the year as pandemic restrictions ease.
As outlined last quarter, we set our site on reaching $5 25 to $6 75 in EPS by 2024, and our earnings model in 2021, we expect our largest end market semi test to grow 14% at the estimated midpoint above the estimate and.
Of our earnings model.
Combined with industrial end markets recovering from the pandemic slump. These data points reinforce that our midterm earnings plan is on a solid foundation.
We update our earnings model each January and our next update will look closely at both the WSI forecasts and test growth rates.
To sum up the demand environment across nearly all of our markets remained strong and we are working closely with our suppliers and customers to expand shipments and minimize the impact of material shortages.
Had an outstanding start to the year and we are on a path to healthy sales growth and profit growth for 2021.
At the midpoint of our Q2 guidance, we will see sales grow 19% of non-GAAP EPS grew 21% above the first half of 2020.
Which itself was a record.
We are well on our way to achieving our mid term revenue and earnings goals, we set in our new earnings model.
With that I'll turn things back to Andy.
Thanks Sanjay.
April we'd now like to take some questions and as a reminder.
Self to one question and the follow up.
As a reminder, if you would like to ask a question. Please press Star then the number one on the telephone keypad again. It is star then the number one and you for.
First question is from C J Muse with Evercore.
Taking the question.
I guess first question as it relates to the higher HFC test outlook.
Can you share with us what youre seeing in terms of arm gaining momentum in both servers and Pcs and how we should think about that impacting your associated cash revenue growth and market share.
Yes, I think it's a sub of the theme of what's happening in the compute area. The compute market for test this year will potentially double arm is.
He routing certain established share positions and we're doing very well with our.
So, but I think we're still in early early innings, there I don't think.
This is sort of the and it's the sort of the beginning and the proliferation of other be spoke architectures that are high 10 billion plus transistor count devices is proliferating at least in design. They haven't started to ramp yet, but theyre being worked on and design. So.
It looks to me like over the next few years that compute segment is going to be very strong.
Very helpful. I guess just follow up can.
Can you share with us your outlook for system level test combined with HDD growth in 'twenty, one and then thinking about the.
The acceleration in near line demand, how we should think about the growth CAGR there beyond 2021.
Yes, I think.
The system level test and HDD markets are both still on a growth trajectory, we had a big big year last year, we didn't expect that we might have a little digestion this year, but it still had north.
And I think on the HDD front that one looks like line of sight for several years ahead is.
Is positive the exabyte growth in the 18 terabyte and above drive space, just as from very test intensive.
And I don't see anything sort of blunting the transitions in.
The cloud storage to anything, but those high intensity drives.
<unk> is a little more of a what I think of lumpy market at this point.
It could continue to sequentially grow, but it's still limited to vary.
I would say a small subset of the market manufacturers building very high complexity devices in high volumes.
Engineering work is going on to make esselte more meaningful to lower.
Complexity devices, and I think as those products come to market over the next few years, you'll start to see customer expansion in esselte and the market will grow, but but I would sort of say I wouldn't be surprised to see plus or minus 25% fewer swings as we try to get to a broader adoption of <unk>.
Thank you.
Your next question is from <unk> Malik with Citi.
Hi, Thank you for taking my questions and congratulations on another strong quarter and guide and Mark can you compare or contrast, the mobility and compute piece at your largest customer which was 25% of sales last year versus the 2018 2019 period, where you saw connection obviously.
The dynamics that are quite different with <unk> and now the compute piece of this year.
Unfortunately, I'm not going to be able to breakdown anything related to any customers mix. So I can address your question, specifically I do think though that the lumpiness compared to prior years.
Has smoothed it a bit because of the bigger portfolio of devices that are at play here.
So.
One of the big.
Revisions I would say to our market size estimate as we move through the year I've always talked about that are in our largest customer the demand profile becomes clear in April and up until April there is a lot of variability.
It is starting to become clear and it is stronger than than we had expected. So that's part of the story of what's driving up the market and our and our revenue this year.
Great and as a follow up for Sanjay if you can comment on the M&A strategy from here in the last earnings call you mentioned.
That even in the areas in semiconductor test are interesting for you guys. So just curious with the the.
The setback in the guide.
What are you thinking about M&A.
Sure, Yes. So as you know M&A is a key part of our allocation strategy and over the years. We've had we've had a focus on industrial automation.
We have an active business development organization that continues to look at different opportunities.
And we will continue to do so and we're spending time as the management team kind of reviewing them and when an opportunity makes sense, both financially and the strategic project product fit we will we will act and we will we'll advise at that time.
Thanks.
Your next question is from David <unk> with Bank of America.
Thanks for taking my question I think Mark you mentioned something interesting in your prepared remarks, which is that.
There could be some correlation between the rising front end W. The fee investments.
Got at some point they will have the pull through effect from testers.
Curious what have been your impressions of over this correlation from the historical.
Perspective, because this year was the kind of the second very strong deal flow for WMC and the.
Of that an expectation for almost 30% kind of growth. This year when do you see that.
The demand for index does does it happen for the six month lag does it happen for the one year lag.
What is the kind of.
Should we be expecting of 30% growth investors next year. So just curious what do you think of the correlation is.
Yes, so there is a correlation and of lag.
As you alluded to so for.
Front end equipment, usually goes into Fabs. There is a period of time then after all of that is installed revenue gets recognized on behalf of those equipment makers and the the fab gets tuned the recipe the.
Yields and things before the fab is put into commission for real customer shipments so that can take anywhere from the.
The good suppliers. These days, maybe get through that phase in about three to four months, but then it's not.
A light switch that turns on its more like a <unk>.
Knob on a faucet, because you start to ramp wafer outs slowly and you proportionately start adding tester. So what you can expect to see as let's say maybe.
The beginning of tester orders lag for the five months, but they really get going kind of a year.
After the fab.
Equipment goes in so if you offset the.
Of the tester market from the fab investments by about let's say a year plus or minus three months, you'll get a good indication of of <unk>.
Growth now if you go back for the past five years Youll see theres been pretty steady.
Steady monotonic.
Growth in <unk> and has been pretty steady monotonic growth in the tester market.
It's just I think the most recent step though from 60 to 70 plus is the.
Larger than we've seen historically, so if all of that happens and it's truly put into commission.
I would expect it to be something that pulls up the growth rate a little bit higher than we've seen in the past, but the one caution I would add is.
That what drives test again, as transistor count of which we sometimes call complexity, but it's transistor count.
And the.
The capital intensity to build transistors at three nanometers and such on a per transistor basis is getting to be quite high so.
So it may turn out that it takes.
More capex per transistor at some of these nodes than it has historically, so that could mute a little bit the cause and effect.
If you follow what I'm, saying, but but overall of the big Big picture as you are right. Its correlated maybe it's a year plus or minus three months delay.
Got it and for my follow up maybe one for Sanjay on on the cost and the operating leverage.
Perfect.
On the cost side are you seeing any rising input costs and what are you doing in response.
Bossing dose.
Along the.
Those be sticky overtime, and then kind of part B of that I think Sandra you mentioned operating expenses with growth of 17 to 19.
<unk> do you think of when you grow opex back much of that is still leverage left in the morning that book sales also growth in that neighborhood.
For this year. Thank you.
Sure. So first on the cost of sales, yes, we have seen certain.
The cost increase.
The raw materials.
Semiconductor of components et cetera.
Fundamentally we've been able to manage through those and we expect.
From a full year perspective, we will be at model from a gross margin of 58% to 59%.
And so we're just kind of managing through those.
Of those cost increases.
And in and from an operating expense perspective.
Yes, we are seeing a lower operating leverage in Q1.
Really some opex increases, but really throughout the year, you should expect to see us improve our operating leverage.
Throughout the year.
Great. Thank you.
Your next question is from Mehdi Hosseini with LSI.
Yes, thanks for taking the question Mark I just wanted to go back to your earlier comment regarding.
The transistor.
This is interesting.
In your press release last night, you also talked about.
From the unit as contributing to the upside too.
C test growth so in that context can you pass growth. So in the context can you. Please help us understand how.
Smartphone unit growth and transistor density.
Driving.
The SFC test growth or which one do you think is going to be of bigger factor. This year versus 2020 on how the follow up okay.
Okay. Good good question, obviously the related into the correlated but for example in 2020, we saw a dramatic increase in the tester market when cell phone units werent growing.
And that was all driven by complexity growth. So you can see the power of complexity growth alone by examining 2020, it's big.
Now in 2021.
Interestingly, we're getting a year, where the I would say.
Laxity growth of the silicon going into phones is less than it was in 2020, but that's been more than offset by the fact that units are going to grow.
So now we have units working for us a little more.
In a year, where complexity is going up but not as dramatically as it did last year.
So it's almost a multiplicative effect of the two.
<unk>.
And this year is really a story of both but I would say the without the unit growth, we would be looking at a smaller market of <unk>.
Smaller overall Tam than we're seeing.
Got it.
And just moving onto the system cash.
What is the mix between SLT in HDD and how each one of these two pieces.
Growing on a year over year basis. Thank you.
Yeah, Hi, it's Sanjay here, it's roughly a 50 50 split plus or minus a bit.
And.
As Mark indicated from an HDD perspective, really strong end market growth.
And esselte Theres, some investments going to to expand that market.
But we see growth in both.
Great. Thank you.
Your next question is from <unk> Hari with Goldman Sachs.
Hi, good morning, Thanks for taking the questions.
Mark I wanted to ask about.
Your market share traction in memory test.
2020 was a very strong year for you guys.
Particularly in the DRAM package test you talked about.
Customer mix of spending mix this year, driving maybe a little bit of a decline year over year, but in terms of.
Customer pull in your expectations through cycle, what are you seeing in memory test right now.
Yes, so of memory test is strengthening.
At the midpoint of the new market estimated will actually grow compared to last year, which again was the fifth year.
It's.
The sort of areas.
That are growing some of them were participating in and some of them are not so China is growing dramatically and we're doing very well in China. So we're seeing good pickup there of the products in both flash and.
DRAM.
And we're gaining market share.
In other geographies, where DRAM is growing the <unk>.
Of the DRAM market final test for LP DDR five that we targeted our new product for and have of design wins. That's also looking very good and growing but what's growing even faster is wafer test for DRAM, which is an area, we really don't participate.
It's it tends to be a low low.
The.
Technology Kessler product that serves that market.
It's not a big profit pool, and because of that I alluded to the fact that our share might drop from 40%, 41% down to maybe 38, 39% for the year.
Got it that's helpful and then as a quick follow up I just wanted to go back to the auto guide reset.
And sorry, if I missed this mark, but what's changed in that business over the past three to six months and perhaps more importantly does this change how you think about your growth strategy of M&A strategy.
Within overall thank.
Yeah. It doesn't change anything about our thinking on M&A and growth strategy NIH to sort of take that one first and over the course of many acquisitions, we've done in the past 10 years.
We've had various levels of <unk>.
Success, I would say the bigger acquisitions like the next test of the Eagles. The <unk> of the mirrors of the world have gone really really well and some of the smaller ones.
Have taken longer to realize the potential that we expected at the beginning and so auto guide the case, where we're kind of in that same situation. We've we started out.
Last year deploying the product into multiple big name of high potential accounts, and we're sort of Lily pad to Lily pad getting these initial deployments up and running.
As we reflected back on where we stood we were getting overextended on new accounts, where the current accounts potential could be jeopardized by not doing more to augment the product with the ability to dock into other factory automation systems that these customers are implementing so we just decided.
Let's retrench around the five or six big accounts, we have today.
Get them rock solid develop the linkages to.
Warehouse automation manufacturing systems strengthen our linkage to our mirror product line. So we have more of a seamless.
Connection there and just grow.
Within those accounts and then.
Go on to a more expansive footprint.
<unk> footprint, so it's absolutely.
Not what we planned a year ago, when we acquired auto guide, but in the light of day today the opportunity looks so large that we think we're better off doing taking this tack than just trying to proliferate more and more accounts.
Makes sense. Thank you.
Your next question is from John Pitzer with Credit Suisse.
Yes, good morning, guys. Congratulations on the solid results. Thanks for let me ask the question. So I just want to go back to your commentary around supply constraints and duration of it sounds like from your prepared remarks that this is going to last at least into the calendar third quarter. The things get worse from here is there any way to quantify the impact it's having to your revenue and usually when cut.
<unk> can't get what they want they tend to order more than they need sort of how are you safe guarding against the inevitable sort of double ordering in excess of buildup.
Yeah, Great question so.
So we are seeing shortages and we've been able to through our inventory strategies as well as.
Multiple suppliers.
<unk> been able to work through them fundamentally.
<unk>.
The rate of the rise of the demand in 2020 and through COVID-19 and then in 2020 in Q1.
We're seeing it in Q2, and we see it getting supply getting tighter we're seeing lead times.
The increase from our suppliers across the board.
And we're booked out pretty much for the year and we're as I said in my prepared remarks for spending.
More engineering dollars in qualifying different supplier. So it is getting tighter as demand continues to <unk>.
Increase throughout the year and Q2, we feel pretty good about.
Where we're at in the range of of course, Theres always things, we're managing and but Q3, we see we see it getting tighter.
The visibility we have good visibility into Q3, some issues, we're working through and then Q4 of the visibility obviously further out it goes down.
<unk>.
I'd say on the duplicate orders perspective.
I don't really see it.
In the in the demand statement.
A whole set of duplication of orders, we're working with our customers. We're understanding the specific needs and working to get them, what they need and just working through that.
No. That's helpful and then Mark as my follow up clearly a lot of conversation coming out of Washington about trying to get more domestic front end production inside the U S. If the goal here is to kind of secure the supply chain. It seems kind of silly to build the wafer here that you have to then ship over to Asia. The.
The test and package I'm, just kind of curious from your perspective are you seeing any drive towards sort of regionalization of test.
The capacity what might that mean for your business in the future and maybe beyond even the semi test are you seeing across other supply chains sort of of re domicile ing of that supply chain that might actually help your IAA business.
Yes, so I think.
There's a lot in what you just said it's interesting and also possibly a deterrent to these regional fabs because our regional fab is in my view of meaningless without the associated.
Infrastructure around it including test.
The supply of the chemistry, the local supply thing makes the whole.
Venture economical and as an alternative to doing everything in Taiwan. If you wanted to do with the use of the Japan or Europe, you really need of <unk>.
<unk> of infrastructure to get it done so it will necessarily required cash if it's not going to be an orphan.
And.
And im a little bit skeptical will all of these jurisdictions have the 10 year.
Sort of.
Intestinal fortitude to move forward and invest in that kind of infrastructure build out, but I think in the U S case my read is that the answer is probably yes.
The.
National security issues of just a lot behind.
This that suggests it's probably going to happen in the case of test.
And and robots as well.
I think the.
Fracturing of the supply chain to be more geographically dispersed.
On the one hand, maybe for a global economy is a little bad because it creates some inefficiency in the market.
But for a supplier of equipment into that market. Its a helpful at the tail.
Tailwind and.
And so I do think youre going to find probably globally, a little bit less utilization efficiency of equipment because of this trend.
But the national instincts around secure supply chain, we're going to overdrive that and probably subsidize it to some level and I think both of our businesses will be.
Beneficiary of that.
Thank you.
Your next question is from Timothy Arcuri with UBS.
Hi, Thanks.
Yes, I guess of couple of things first Mark I think you said the compute so I guess my question really is for you to break down what the semi test here in the high take your $4 2 billion midpoint this year for <unk>.
So I'm just wondering if you can break that down I think.
You had said last year of the 345 it was like 600 compute.
And so I'm wondering out of the 800.
That that's going to grow this year from $3 four of five up to $4 two.
Wondering if you can kind of break that down it sounds like most of its computer because you said compute is going to double from 600 last year, but I'm. Just wondering if you can sort of lease at the segments for us as well.
Yes, I will.
Give you some rough numbers, but take it a little bit with a grain of salt because here. We are three months later talking about a big revision to our view of what the market sizes. So I don't profess.
To be overly wise on this but our current view on compute would be about $1 billion ish market. This year for example, so not quite doubling.
The year is not even halfway over so who knows what could happen, but that's our current view.
Sure.
Mobility compared to last year is probably flattish could be down a little bit compared to last year. The one part of mobility, we haven't talked about that.
Of all of the places that are surging for demand there is a pocket where demand is softer this year and thats in millimeter wave test capability.
And last year, there was a lot of tooling for millimeter wave is <unk>.
Some of the phones were early adopters of millimeter wave technology.
But the fact of the matter is the.
Telcos globally aren't deploying millimeter wave to any large extent.
Spotty deployment in the U S and almost nothing outside of the U S.
And so that's suppressing demand this year for millimeter wave test equipment that makes the it's a little bit of a headwind for the mobility market so call it.
Flat to slightly down in mobility at about let's say, it's about 1.6 of $165 billion or so.
The.
Automotive and MCU market.
Is closer to $4 50 for the year.
That's up from about 225 last year.
The big Big jump, there and the last segment that we sort of track is industrial.
And that one's up to about 500 million for maybe $343 25 last year. So that's how we segment it right now.
Awesome Awesome. Thank you and then I guess I just wanted to maybe push back a little bit on the correlation between <unk> and <unk>.
And the test him.
It's been a little more consistent in memory of the past couple of years of course, when you get these big pricing swings thats going to probably go away, but but on the SSD side wouldn't wouldn't you agree.
You're a big customer is a significantly larger portion of the SSE tax Tam than they are of consumption in the.
Front end non memory Wi Fi World, So doesn't the SSC market dependent a lot more on what the large customer is doing in the test world than that in the <unk> world. So the.
Correlation and SSC could sort of breakdown a bit.
Because of what the large customers doing and I guess on that point they've never been good three years in a row not once and this is the second big years. So.
How do you handicap the odds that next year as the big down year in that works against you in terms of share even if the market doesn't come down that much. Thanks.
Alright, all of that in there, Tim but I'll try to take it on.
So your point about the large customer or our large customer.
Never having sort of.
Portion of our revenue of three big years of ROE I think.
There's truth to that but there's also a difference in what's happening because the portfolio there is growing.
You go back to the sort of 2014 15.
13, 14, 15 16 area. It was kind of one device type that was driving the.
The story and the demand and now we're into a much broader footprint. So I would just offer that that dynamics changed in that.
The fact that could propel this more sequential growth for a longer period of time.
On the correlation between W. E T.
Test Soc test demand.
Whether that's stronger than who's buying let's say the.
Certainly customers have different test intensities.
And so.
Part of the noise, that's running under the Hood.
Certainly as it relates to our revenue.
As related to large high test intensity customers and how much they're buying we're fortunate that we participate in segments of the market. The tend to have high test intensities, but thats by design, we target the.
The segments and it's not just.
One large customer.
Customer that produces devices that have high test intensity, theres, others, and Thats, where we play.
So.
I would agree with you that.
If the market shifted away from high test intensity customers, meaning high complexity devices, you could see a disconnect and anchor on the test market that was disconnected from WSI, but it just doesn't seem likely because of the reason. These investments are being made in the front end and the reason.
They are so expensive to make is that they are going after the three nanometer EU the.
Our lines to build devices for these very customers. We're talking about so I just don't see that the disconnect can emerge on less of the fab sit idle at the Fabs are going to sit idle, yes, but if the fabs arent going to be idle if the <unk>.
Exact customers, we're talking about that are going to utilize them.
I don't Disabuse you point it actually has some merit, but I just think the correlation.
By definition of has to occur unless the fabs are idle.
Okay. Okay also mark thank you.
Your next question is from Krish Shankar with Cowen.
Okay.
Yes, hi, Thanks for taking my question and Mark Thanks for the color on the Soc test I just wanted to make.
Lucas on the computers Mark It looks like you said is going from 600 million two of $1 billion.
The incremental growth all coming from custom silicon.
And if that is the case can you just tell us how what's your market share in computer was last year and how much do you think is going to be just given the amount of follow up.
Yeah.
So most of the growth is I would say humming.
What is it non cash.
Custom silicon.
I Couldnt say that I think growth is coming from the non traditional suppliers of compute devices.
It's a disproportionate amount of it but the other usual suspects are growing too.
AMD, obviously is growing and Nvidia is obviously growing.
So it's broad based but as a proportion I'd say, yes, you are right. It's probably some of the newer players that are growing the market faster than others and as to our share position historically our per share in compute has been below our overall market share. So maybe in the thirties and it moves around in the <unk> is where it's been.
Yeah.
We're trending into a period of time because of this change of Who's building. These devices, where our share is more likely to move up closer to our overall average.
Share in the market so far the average share of somewhere in the 50 ish range it might take a little bit of time, but thats kind of where we're trending to.
Got it got it that's really helpful. Mark and then just a follow up I think you made a comment that you had kind of book does for the rest of the year is that of semi test in the store, which just comment and.
So should we assume that you would not see seasonality in the back half for in Q4.
Because the demand is strong on in other words Q2 semi test revenue of 100 sustainable.
It's Sanjay so I made the comment that we were booked out and it was really tied to our supply perspective, we're working with are both contract manufacturers and our direct suppliers. The fundamentally make sure that we have orders on the books until the end of the year just given the supply.
Strange environment.
Got it thanks.
Your next question is from Brian Chin with Stifel.
Good morning, and thanks for letting us asking for your questions.
First on the semi test business.
Definitely respect that visibility in this or any year has limitations, but if I do take the mid point of view of new expectations for the test markets.
Pick your market share projection and assume the majority of the second quarter growth will.
It will be semi test driven.
The back into about a 10% or so.
The sales decline in semi test in the second half of the year am I kind of in the ballpark here and to what extent is your backlog coverage supportive of this.
Okay.
Yes, when you take a look at the numbers.
That's the.
We do overall and maybe I'll comment overall.
We are expecting to see given the visibility and obviously with the significant reset of the market size.
And as we move throughout the year of the lack of visibility in the second half, but with all of those provisions we are seeing overall.
And expectation for the second half of the year revenue will be slightly down.
Both for the enterprise.
And that's a similar direction.
The down for semi test.
Okay got it got it thanks Sanjay.
And then maybe just on the industrial automation business and sorry, if I missed some of this but I definitely heard about China is the geography, showing strong year over year growth.
A lot of growth in Nir and the snapback in the EUR business as well can you characterize maybe Europe and North America, obviously clear key markets as well sort of well day in terms of their snapping back.
Relative to where you might expect them to get this year.
Yes.
Yes, Hi, it's Andrew Yeah, so from a U S perspective.
We're seeing the snapback.
Whether you look at Inc.
<unk> over Q1 of 19.
Pre COVID-19 year or even in Q1 of 'twenty.
Similar with Europe, a very strong kind of double digit snapback.
Over either year.
Okay, great. Thank you.
Your next question is from Joe Moore with Morgan Stanley.
Great. Thank you I Wonder if you could talk about in the <unk>.
Automotive and the broader markets.
The degree to which test is one of the bottlenecks of Theyre dealing with like we share about shortages on the way.
The first packaging a little bit test just how severe do you think your bottlenecking them and then when you look at it 90% comparison in auto.
It would seem like there's some catch up in that line.
Does that create sustainability of risk in your mind, maybe next year.
Yes, I think the big Big issue is wafers.
In terms of the bottleneck theme.
The.
The automotive manufacturers that that doesn't mean that we're completely aligned on deliveries for test equipment to the chip suppliers, who are trying to ramp shipments were missile line by.
A few weeks here and there.
And we're pulling like Mad and they're pulling like Matt, but the big Big bigger issue is getting wafer capacity. So.
No big we're.
We're not in the headlights quite yet, but we're certainly in tense conversations to try to pick up a week or two here of there so that they can get a little bit more out of <unk>.
Weaker so sooner.
Great.
The absolute level yeah.
The sustainability of the automotive always kind of goes in fits and starts.
I think the supply chain in automotive is going to.
Come out of this having learned the lesson that they can't be so lean on just in time.
And I know that raises the specter of everybody is worried that there's inventory being going to be built in addition to realign demand and I think that will happen, that's certainly not happening yet that's to come.
So there's going to be of phase here, where we get through the urgency then there'll be investments made to build more I'd say slack in the system for the devices that go into Automotives, so that'll be a bit of of balloon, but then it will settle back to I think its normal rhythm.
<unk>, increasing electronic and chip.
Attach rates in automobiles will drive the market.
And we're going to get to.
Kind of a peak level of test investment in automotive this year close to that $500 million number.
And that could even.
Certainly I think it could sustain through the end of the year because of this inventory catch up but my guess is as we get into the 2022 area and beyond it'll sort of back into oscillating between the $3 million to $500 million right.
Very helpful. Thank you.
Your next question is from Blake Gendron with Wolfe research.
Yeah.
Hey, Thanks for squeezing me on here I wanted to come back to the arms Soc the commentary not from a market share perspective, but rather the complexity of discussion.
Because as we've seen large customers accelerating the <unk> rollout here a bit so it seems like the architecture consolidates the number of wafers for various compute functions simplify the circuit of bit so.
Share opportunities notwithstanding I'm wondering what the complexity.
And test intensity puts and takes are with this arms trends specifically.
Yes.
A little tricky for so first of all let me say that most of the applications processors and your phone which is of one $5 billion.
1 billion unit market, our arm based processors.
And.
Those devices in the high end phones, which comprise maybe 4% to 500 million units out of the one five have transistor counts on par with any desktop or laptop computer you might buy.
The 10 billion plus kind of transistors. So the test when you look at the test intensity, there compared to a traditional microprocessor.
It's a little bit more efficient.
I would say than a traditional microprocessor, but not a lot more efficient so for the same let's say 10 billion transistor.
Ex 86 architecture compared to our Mac devices your phone.
Maybe it's at 90% versus the 100% kind of test time Delta so not big.
Now when you get into arm based.
Compute devices for more non phone applications.
Theres different cash requirements different Io technologies needed the further complex of Phi.
The arm implementation that bring it back up to test intensity is very similar to the ex 86.
So I don't see a big difference there.
That's really helpful. And then a follow up on industrial automation, you noted a peripheral services the demand additional software apps and likely hardware.
We've seen a bit of a proliferation of companies that are attacking things like computer vision machine learning other AI capabilities. So I'm wondering what kind of artificial intelligence capabilities Teradyne has nia to keep up of these trends.
It seems like robotics peers, both large and small really to spec depending on the cobalt space here or could this be a focus of M&A moving forward.
So it certainly.
And our M&A funnel, there's various opportunities like that but what I would say is that many of the startups in the IAA and machine learning space that are exploring ways to enhance.
Robots co bots are doing it on our platform as a partner if you go into or again, you are plus ecosystem of were a year ago ecosystem Youll see a variety of machine learning.
AI tools that have been targeted and customized for our products. So we're benefiting from them, whether we own them or not.
We do have organic I E.
<unk> that we have on our near platform already.
But it's going to be important for the evolution of ease of use and applications expansion for cobalts for sure and whether we need to own it or whether we need to be the preferred platform that they all of <unk>.
Their apps for.
I think as is still kind of a case by case consideration for us.
Very helpful. Thank you.
We're just about at the limit, but we can sneak one quick question. If you would April please.
Okay and your last question is from Sidney Ho with Deutsche Bank.
Thanks for taking my question.
Can you just give us an update on the revenue opportunity related <unk> for both the SLC test and light point and maybe in the flashy infrastructure side are you seeing a recovery of that market.
And any regions right now.
Yes, I think infrastructure is really not driving much tester demand generally.
It did for US back in 2019, when China was going Crazy Rolling out sub <unk>.
And Huawei was investing heavily at the time, but the.
Kind of what is now of a $5 billion tester market infrastructure of <unk> investments are.
<unk> always going to be sub $100 million and maybe more in the sort of $60 million to $70 million range.
The bigger one is what happens with the phones and the and the terminals and such and there.
The U S. The spectrum auction around sub 60 is concluded I think the carriers are kind of clearly going to roll that out is there a next step.
As I said earlier going to suppress the demand for millimeter wave, which is the most test intensive portion of <unk> and so in the past calls Ive talked about light point in semi test combined driving an incremental $4 to $500 million worth of tester demand in the <unk> era.
And I think where we are and that now is we're probably in that $2 $50 million to $300 million piece of it and I think it's kind of go sideways here for a while.
<unk> of the fact that millimeter wave this year will be less probably investment than last year.
And that will be the last kicker maybe it's still a couple of years out to bring it up to that full potential.
Great maybe just lastly on the system level test.
What is the size of that market today, and how big could that be one dose lower complexity devices.
<unk> alluded to starting to come into the market.
Just a little bit on the competition side, how the sustain your market share that mark. Thank you.
Yes, I think the the market's pretty soon we don't have a good number to give you a market size, but I think if you look at us and advantest, you can kind of get a general sense, we probably again have 80% of the market between us.
Other bespoke custom products that certain suppliers provide but that's the way it could get at the market.
And in fantastic teradyne or kind of I think both.
Hardcore players here, we each have our own benefits and.
As we said earlier.
This additional test step that high complexity of devices are requiring is.
Is likely to proliferate into other markets.
At the two things are kind of important I think from like the automotive market. As an example is of very high quality.
<unk> market, but the volume frankly are relatively low compared to something microphone of 100 million cars versus the $1 5 billion phone.
So for a market like that with lower volume devices to take advantage of SLT, which.
They would love to.
We need of different architecture that we're developing to address these I'd say higher mix lower volume markets.
And I think our position in the sustainability of this is pretty good.
Semiconductor tests, where the changeover costs are pretty high.
Once you're in you have somebody else has really got to have a better mousetrap.
Bye bye bye of long shot to sort of dislodging.
Okay. Thank you. We are we are out of time. Thanks, so much for joining us today and we look forward to look forward to talking to you in the days and weeks ahead. Thanks again bye bye.
Okay.
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