Q1 2022 Teradyne Inc Earnings Call
Good day and thank you for standing by welcome to the Q1 2020 to 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 that session you will need to press star one on your telephone TJ about that today's conference is being recorded and if you require any assistance during the call. Please press star zero.
I would like to hand, the conference over to your speaker today, but the anti Blackheart disciplined chart the floor is yours.
Thank you Chris Good morning, everyone and welcome to our discussion of Teradyne's. Most recent financial results I'm joined this morning by our CEO , Mark <unk> and our CFO Sanjay Mehta.
Following our opening remarks, we'll provide details of our performance for 2022 first quarter, along with our outlook for the second quarter of 2020 to the press release containing our first quarter results was issued last evening, we're providing slides on the investor page of the website that may be helpful to you in following the discussion.
As of this call will be available via the same page after the call ends.
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 statement contained in the earnings release as well as our most recent SEC filings. Additionally, those forward looking statements are made as of today and we take no obligation to update them as a result.
Of developments occurring after this call.
During today's call, we'll make reference to non-GAAP financial measures, we've posted additional information concerning those non-GAAP financial measures, including reconciliation to 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 Cowen Loop Capital Bank of America Stifel and Bernstein.
Now, let's get on with the rest of the agenda first Mark will comment on our recent results 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. We'll then answer your questions and this call is scheduled for one hour Mark.
Hello, everyone and thanks for joining us today I'll summarize our Q1 results review current market conditions and provide an update on Q2 and the full year.
Jay will then take you through the financial details, including our outlook for the second quarter.
The first quarter played out as expected from a financial perspective, we delivered results towards the high end of guidance as we cleared a few more supply chain bottlenecks than expected.
As outlined in January we expect revenue growth throughout the year as we build towards 2023 and the transition to three nanometer. Consequently, we expect roughly 7% to 9% sequential quarter over quarter growth throughout the year.
Since January we've seen incremental strengthening of demand for semi test and wireless in the areas of automotive memory Wi Fi six and seven.
On the other hand for the first time in two years supply chain challenges are materially impacting our semi test shipments. This is reflected in our wider than normal revenue guidance range in Q2.
Sanjay will describe these details shortly.
From a full year market perspective, we estimate the Soc market is trending to the high end of the four $6 billion to $5 billion range, we discussed in January strengthening.
Strengthening automotive test demand as one element driving the market increase has both per car content and unit complexity are growing quickly.
The accelerating move to electric vehicles is a key part of this increase with EV is growing at a 20% plus CAGR, while the chip content of these vehicles is running more than three <unk> compared to gas powered cars.
This year, we are seeing particular strength emerging and high end automotive Adas processes.
<unk> of these processes is approaching the level of high end cell phone applications processors.
Additionally, high end Adas processors have about a three to four times longer test time due to the more stringent test requirements for devices used in automotive safety applications.
Furthermore, there are usually multiple adas processors per vehicle amplifying the unit demand.
Combining the enhanced EV semiconductor content with these Adas trends, we expect the automotive test market to outgrow the core test market for the foreseeable future.
Another area of growth is in Hyperscale of Silicon development.
While the material test revenue impact from these complex chips as in 2023 and beyond both the complexity and pace of development is accelerating.
This has been a focused investment area for us over the last 18 months and we are pleased with our Windward sorry pleased with our win rate for these new opportunities.
Shifting to the memory test market our market size estimates for the year remains at about $1 billion, but within that we have seen the DRAM demand soften a bit offset by an increase in flash demand.
In system test defense, and aerospace and production Board test groups collectively grew over 30% from Q1 'twenty one on strong automotive board test demand and program buying in defense and aerospace.
In storage test sales were down 28% as expected versus <unk> of 'twenty one customer.
Concentration here causes this lumpiness, but the long term complexity and unit demand drivers remain in place.
Our wireless test business at light point remains very healthy with sales growing 26% year over year in Q1.
Strong demand for emerging Wi Fi <unk> Wi Fi <unk> standards is driving this growth and the outlook for the year.
Flight point strategy delivers high throughput easy to deploy test solutions for the full array of wireless standards our.
Our chipset test library approach to programming allows customers to shorten their time to market and achieve superior test economics for these emerging standards.
Moving to industrial automation group revenues were up 29% from Q1 of last year demand in North America was particularly strong with 55% growth year over year.
While we cleared some supply issues that you are late in the quarter Ie shipments overall continued to be constrained by material shortages.
Globally, the PMI for the U S and Europe remain over 50, while in China. The PMI dipped below 50 in March we are closely watching to confirm the China data point is a short term short term COVID-19 lockdown issue and anticipate recovery in <unk> and <unk>.
Similarly, the conflict in Ukraine slowed EU demand in March and it has the potential to impact of European industrial activity throughout the year.
While we expect these constraints to continue in <unk>, we do expect growth rates to increase through the year as supply constraints ease auto guide begins to ramp shipments and you are a mere see increased growth on China and EU recovery.
At you are our OEM welding application continued on a tear with <unk> growth of over 100% compared to one year ago.
The U S. Geography was also strong with over 50% year over year growth.
Are you are plus program of plug and play applications for our cobalt is passing the 400 product milestone this quarter.
Each of these applications Leverages, an independent third party developers knowledge of a specific market vertical to solve a specific problem.
This application has been certified by EUR. So our customers can deploy automation solutions quickly by spending less time on programming and integration work.
The resulting network effect of our power is a powerful differentiator for us and we continue to invest to support this growing army of developers.
At Mir we are seeing two positive trends emerge as we grow the business first we are seeing a steady movement towards higher payload higher asps.
In 2020 about 10% of our sales were above the 500 kilogram payload range. This move to 22% in 2021 and in Q1, we saw over 30% of our sales in this class.
This represents a broadening of EMR applications to a wider range of material handling tasks in manufacturing and logistics.
Second we are seeing the trend toward both growing fleet sizes, and increasing multifactor deployments at major customers. Within these environments are fleet management software is an increasingly important product differentiator.
These larger customers also have demanded uptime and support requirements, which also plays to our strength as mirrors, leveraging teradyne's global support and large account experience to meet these customers' needs and ways that smaller players cant.
With one quarter of 2022 in the books for the year is unfolding roughly in line with our forecast the incrementally stronger demand in test is being balanced by supply constraints longer term I am encouraged by the continued strength in Wi Fi investments, which fuels our growth the progress from industry leaders on three nanometer technology.
<unk>.
The growing opportunity for our human scale automation projects and the resilience of Teradyne's global team and our partners that are enabling us to muscle through some very tough supply and operational constraints.
And before closing I want to note an important milestone at teradyne.
Bradley will retire from our board of directors in May.
Teradyne career spans over 40 years, including 10 years as CEO , helping shape teradyne's products business model and culture.
Mike has had an incredible impact on our company, our customers and shareholders and I am, especially appreciative for the help he has given me along the way thanks, Mike.
Sanjay will now take you through the financial details Sanjay.
Thank you Mark.
Everyone today I'll provide details on our Q1 results offer additional color on the operating environment, including the supply line update and describe our Q2 outlook.
Now to Q1.
First quarter sales were $755 million with non-GAAP EPS of <unk> 98.
non-GAAP gross margins were 62% and our non-GAAP operating expenses were $248 million slightly below our guidance due to slower than planned hiring non.
non-GAAP operating profit rate was 27, 4% we.
We had no 10% customers in the quarter.
The tax rate, excluding discrete items for the quarter was 16% on both a GAAP and non-GAAP basis.
Please note you should now use this for the full year tax rate as well.
Looking at the results from a business unit perspective.
<unk> revenue of $482 million was down 9% from Q1 'twenty one as expected <unk> revenue was $387 million driven by strength in mobility and computing end markets.
Memory revenue was $96 million driven by Flash final test and DRAM wafer sort.
System Test group had revenue of $119 million, which was down 11% year over year again as expected.
Storage test sales, including HDD and system level test solutions were $68 million in the quarter down from $95 million in Q1, 'twenty, one defense and aerospace and production Board test grew year on year.
I'd like point revenue of $52 million was up 26% from prior year due primarily to strong shipments of Wi Fi and Uwp test systems looking.
Looking at our test portfolio overall.
Positive demand environment, Mark noted reinforces the trend line growth built into our 2024 earnings model and semi test growing device complexity supported by no transitions and unit growth will provide a long term tailwind to that business at light point and in system test similar increases in complexity continue to drive growth.
A couple of examples one <unk>.
<unk> revenue in 2021 was approximately double the 2017 level to our storage test business revenue in storage test has more than quadrupled from 2017 to 2021.
<unk> point, we expect growth to continue to be driven by more complex wireless standards for connectivity.
Sophisticated location tracking and security technologies and cellular applications.
Storage test chip complexity combined with higher density our disk drives our drops are driving long term growth.
Now to industrial automation industrial automation revenue of $103 million was up 29% year over year.
This was ahead of what we planned and our Q1 guidance as we were able to work through several supply line constraints in the quarter at EUR.
Also note that we expect <unk> revenue to follow the historical pattern and grow as we move through the year.
You are sales were $85 million in Q1 up 30% year over year with the highest growth in North America mirror.
<unk> sales were $17 million up 22% from Q1, 'twenty, one as Mark noted higher payload products with higher Asp's contributed to that growth and we expect this trend to continue.
Overall demand at both <unk> and <unk> remained strong as labor availability and rising costs make the financial case for our human scale automation compelling, but as noted we are watching for the impacts of COVID-19 events in China, and Russia, and Ukraine more closely.
From a financial perspective in IAA. The group was breakeven on a non-GAAP operating basis in the first quarter and for the full year, we expect to operate in the 5% to 15% range. We discussed in past calls with 2022 trending towards the low end of the range.
Call in 2021, IAA delivered a 4% non-GAAP operating profit for the full year.
As noted in the past with market penetration for co bots and <unk> below 3%.
And high market growth our strategy is to prioritize growth over obtaining model profit simply put we are investing to capture these markets as we see significant growth beyond the midterm.
Shifting to supply.
While the demand environment is strong supply issues are getting progressively worse, we continue to manage through a very challenging supply environment as we have for the past two years.
Our supply management operations teams and partners have done an incredible job, including navigating through a multi week plant shutdown at one of our major contract manufacturers in Q1. Fortunately it was mid quarter and we had time to recover had the shutdown happened later in the quarter the recovery could have shifted into the following quarter.
It highlights the risk, which will persist during the global Covid pandemic.
In Q2, there was more demand to ship, if we could align supply.
Issues range from chip shortages to Covid related delivery shutdowns were taking numerous actions to harden our supply chain, including expanding our production operations geographically, adding new geographically diverse suppliers redesigning products to use available components and many other actions however, even with these.
Actions, we expect supply line constraints to remain an issue through at least the first half of 2023.
Shifting to the balance sheet and cash flow, our cash and marketable securities at the end of the quarter totaled $1 2 billion.
We had $37 million in negative free cash flow in the quarter cash.
Cash burn in the first quarter is typical for us as we pay variable compensation and profit sharing in the quarter.
We spent $201 million and $18 million on buybacks and dividends respectively in Q1.
As noted in January we expect to purchase a minimum of $750 million $750 million.
<unk> of shares in 2022 rigs.
Regarding debt to date $384 million of convertible bonds.
Early converted in Q1.
We paid $21 million to bondholders in the quarter.
Now to our outlook for Q2.
As you've heard this morning customer demand is strong in all parts of the business.
Our guidance range is wider than normal as a number of material shortages continues to expand and while we've been successful to date in addressing these issues. The margin for error continues to narrow and the guidance assumes we won't see extended shutdowns of our production facilities due to COVID-19 .
With that said sales in Q2 are expected to be between 780, and 807 $870 million with non-GAAP EPS in a range of $1 to $1 29 on.
On the $170 million diluted shares the.
Second quarter guidance excludes the amortization of acquired intangibles.
Second quarter gross margins are estimated at $60 to 61% Opex is expected to run at 31% to 34% of second quarter sales. The non-GAAP operating profit rate at the midpoint of our second quarter guidance is 28%.
Turning to the impact of inflation on our P&L.
<unk> gross margins, we are seeing increased costs, primarily in components and labor both internally and at our partners. We are mitigating these those increases through a variety of measures, including product pricing operational efficiencies multi sourcing and seeing the benefit of our prior investments to reduce our bill of.
<unk>.
Our gross margin performance in Q1 and outlook for Q2 reflects our success to date with these measures.
I'll remind you this is a very dynamic environment.
On the Opex front, we have planned for increased cost tied to inflation and we still plan on growing opex, 11% to 13% over 2021 as noted in January .
Yes.
Looking at our revenue profile for the year.
The first half is shaping up a little bit better than expected with very tight supply.
Second half is looking to be slightly up versus last year's second half.
Reasonably consistent with our expectations at the beginning of the year.
Even though test demand as incrementally higher <unk>.
Supply issues may push some of that incremental demand into 2023.
We expect third quarter revenues will grow high single digits from the Q2 level and Q4 will grow sequentially as well.
Our current view is that the first half revenues will be 46% to 47%.
Second half revenues will be 53% to 54%.
To sum up demand across the company remains strong and growing supply constraints are moderating our shipments more than more than at any other time since the pandemic began.
We're expanding our playbook to address these issues, but it's a very dynamic playing field and we are calling a lot of audibles along the way.
Our global teams and go to market operations engineering and support functions continue to execute and collaborate in a challenging and dynamic environment to meet customer demand and deliver shareholder value the passion as enjoyable to observe.
Well done team.
I will turn things back to Andy.
Thanks, Sanjay Chris would not like to take some questions in mind.
Binder, please limit yourself to one question and a follow up.
Yes.
Thank you Sir.
Again as a reminder to ask a question you need to press star one on your telephone.
Your question. Please press the pound key once again, please limit yourself to one question and one follow up and standby as we compile the Q&A roster.
Our first question comes from C. J Muse of Evercore your.
Your line is open.
Thank you. Thank you for taking the question I.
I guess first question regarding your largest customer heading into 2023, and obviously thats a long time from now but curious as you think about the move to three nanometer. How are you thinking about test demand as it relates to units versus complexity and I guess the worry in the marketplaces that.
The adoption of three could be spread out over two years as opposed to one and that would reduce the demand for testers from you guys. So we'd love to hear how you're thinking about that and obviously the caveat is it's very early.
Have a great great view there.
Yes C J, it's really early on that but.
First of all I think there's two parts of your question.
I think overall, we're looking at three nanometer in 2023 is mostly a complexity growth equation versus a unit growth driver in the cell phone device Arena I think the other part of your question is well what if the adoption is partial for three nanometer certain devices go to three and other one sort of lag.
I think that is something we've seen before in.
Ipads and other kinds of products in the market, where they bifurcate.
Migration.
If if and when that ever occurs there could be a one year.
Depressed demand for test, but then in subsequent years.
Those sort of bifurcated product lines kind of then move in lock step again, north maybe ones waterfall back a year, but the complexity growth resumes thereafter, so it's all hypothetical but something like that would have an impact.
Very helpful.
I guess for my second question, just trying to think.
Through.
Youre kind of stronger second half versus first half and obviously.
Robotics piece is helping on that but this is the first time I think I've ever seen you guys have kind of a stronger outlook for semi test.
Into the back half we're normally.
Q2 is seasonally is your strongest quarter. So is that all a.
A factor of supply constraints or are there other drivers.
To that that change in trend.
Well there is.
Three things going on there the biggest thing Q2, it's usually large because our largest customer has a big tooling peak in <unk> and <unk>. So that's absent but the other thing is that the visibility is a bit longer now with lead times, our customers are ordering a little bit.
In advance for capacity, so we do see a little more of what's to come towards the back end of this year and early 'twenty three.
And it sort of aligns to this complexity growth related to new nodes that we're seeing so I think this year is a little unique in that.
Absent up mobility bubble, we usually see in the summer.
Adding in the move toward this node transition next year, we get this more linear ramp through the year of demand.
Very helpful. Thank you.
Thank you.
Our next question comes from Mehdi Hosseini.
Your line is open.
Thanks for taking my question.
I wanted to go back to your outlook, especially.
Looking to next year and you made a reference with WD a fee which is very.
Positive given all the investment this year, but it also appears that investment for trading niche is growing much faster and particularly.
The level of investment in China.
Ask you is how are you positioned for China, especially for.
<unk> houses and is there any incremental opportunity for share gain and I have a follow up.
Yes, I think.
In China, we're positioned very well in legacy non leading edge you know the one place in China, we're not positioned well is with Huawei and the Huawei associated companies, which tends to.
Trying to skew as best they can toward more.
More leading edge positions, but.
To the extent, China will continue to grow on trailing edge.
Overall, our share of let's say the non Huawei part of China.
Is roughly the same as it is outside of China. So.
It's not a balloon or an anchor so to speak we're kind of going to float up and down there I think with.
The investment in demand.
Okay. So nothing really out of ordinary if they indeed investing more issue trickling down to the backend than U S. One of the two okay, and then moving on to industrial automation and thanks will.
Color on eight us incremental opportunity, but also it seems to me that in order for you to fully realize the synergies between your semi test and industrial automation for EV and Adas application.
You would need to have more of the software content and I'm just curious if.
If I'm thinking about this the right way and whether you would have to go to the market acquires software IP. So that you can have a more comprehensive portfolio for these growth end markets.
No I don't I don't see that many I think where we are positioned now we're completely aligned to the technology trends in <unk> and a das.
And every everything else there so.
No I don't see the need for that.
Thank you.
Thank you.
And next we have Timothy Arcuri of UBS. Your line is open.
Thanks, a lot.
So mark.
You were saying that the Soc Tam.
<unk> is trending towards the high end of the $4 $6 5 billion I'm. Just wondering if you can give us some idea of sort of what end markets driving that towards the high end I think last quarter, you gave us some breakdown compute you thought would be a $1 billion. Three I think you said mobility would be 1 billion eight.
Auto is would be about 500 billion. So can you just give us sort of what end market is driving that towards the high end. It sounds like auto is might be a little better.
Sure Hi, it's Sanjay here I will take that one so we're seeing strengthen incremental strength in compute.
And in auto.
It's driving us to the high end.
Okay.
And then I guess a question just around China. So.
Are you seeing any impact or any push outs or.
Delays in shipment timelines.
From Chinese customers.
Customers as a result of the Lockdowns and maybe just as a result also of <unk>.
Weak.
Demand in the consumer segment so.
Obviously demand still very strong if you look holistically, but if you look at the consumer markets and you look specifically in China are you seeing any examples of customers.
Delaying shipments of <unk>.
Testers.
No, we're not seeing any texture real meaningful delays at all yet in China, we have seen in the industrial automotive sorry, industrial automation business, the robotics business some slowdown in China Sanjay referred to the Q1 performance there was a bit weak.
And we're watching that so that's more immediate and factories shut down and things, we feel that but I think on the test side.
<unk>.
The headlights and the investments needed.
Along the trend lines are kind of obvious and compelling and there is no yet any blips.
Thank you very much.
Thank you.
And next we have Brian Chin of Stifel. Your line is open.
Hi, good morning, Thanks for letting us ask a few questions.
I guess the first one focused on past.
Given the supply challenges that Youre discussing do you think you are baking into enough conservatism on the 22 <unk> outlook and I ask in part because I think despite strong order rates you are competitive advantages. They widen their 2022 10 outlook that the lower not higher end of the range.
So kind of curious about that and also beyond your largest customer.
Telegraphed last call have you seen any incremental signs of capacity digestion in the broader SFC mobile SSC market.
So just a quick comment from me first and I'll, let Sanjay talk a little more about it I do think that compared to advance test. We're in a very different supply chain situation you look at their backlog out at almost a year.
There is a very.
<unk> limited ability for them to see our road to incremental revenue in the year.
Whereas we're.
Six months into less versus one year, and we do have capacity growth capability in the back half. So that's a difference but I'll, let sanjay address the broader question I think overall supply is getting tighter.
As I've said on prior calls I thought with substrate and fab capacity coming online in 2022, we'd be a little bit more in balance with supply and demand, but that hasnt been the case and.
As I said, our current view is that we see the tightening continuing into.
Into the first half of 2023.
From an overall market perspective, we do believe that there is.
A constraint element of supply to meet the overall demand and it's in the.
It is in the places where you would expect in semiconductor parts FPGA linear logic memory and other asics.
Okay.
Yes.
Got it.
As I missed the part I think I asked about what are you seeing any signs of digestion in the broader SSD and mobile market.
No not really and I think the.
The demand is still strong.
The requests for.
<unk> shipments are not pushing out.
So I don't see.
Any signs yet in test of sort of slacking.
Demand.
Maybe just for my follow up in industrial automation and sorry, if I missed this but it's sort of mid 30% plus still the bogey there in terms of growth rates obviously.
So im not accelerated growth rates moving through the year improvements on your lead times, but also still some constraints.
I think it was a discussion and also some <unk>.
To see sort of how the pattern unfolds in China.
So maybe can you discuss that and also what.
That China exposure I think it's a fairly minority part a portion of the business right.
Yes.
Andrea here, so 35% plus is still.
Our objective or our plan. This year, it's progressing as we would expect I would say that as Mark noted.
China, which has traditionally been a very high growth environment for IAA.
<unk> was slightly down.
Year on year and as Mark noted, we believe it's really tied to the plant shutdowns. So we're watching it very closely I would say on the supply front, a large or a significant portion of that range increase is tied to supply.
What you are.
The range is approximately let's say $20 million, which is really a supply driven range and then secondly.
I'd say secondly.
We are seeing.
Supply from.
From an IAA perspective lead times or sorry, our backlog will still be we expect it to be between four to six weeks as opposed to our objective of one to two weeks to keep it a fast turns business.
So I do think the.
The China piece is at roughly 10% of our overall business. So it has flat lined in Q1 kind of on growth, but part of how we get to 35 plus through the back end of the year is assuming some of this COVID-19 stuff.
It goes away in China in Q3 and.
Presuming it persist through second quarter, but Q3 and Q4 it it goes away.
Okay. That's fair. Thanks, so much for the help.
Thank you.
Sure.
Our next question comes from <unk> Malik of Citi.
Your line is open.
Alright, Thank you for taking my questions.
Mark you talked about weakness in the DRAM market.
If you can just provide some more color is this because of DDR five.
The option pushed out because of the pilot rapid delay or are you seeing some more.
No. It's exactly that <unk> is moving slower than planned kind of server Sapphire Rapids delay.
Nothing fundamental.
The three elements of the memory market between DRAM wafer test final test and then flash.
Wafer test final test kind of are a quarter a quarter a quarter each of the total $1 billion Tam.
There is a bit more tooling this year for DRAM wafer test, but that's nothing.
Think that's noise not signal and as I mentioned, we're seeing some strengthening in.
The flash side, Thats sort of making up more than the difference on the DDR five weakness. The other thing about memory, that's very encouraging for US is that we've talked about our market share being about 40%.
Hello, <unk> globally there.
In China, which is still investing heavily in growing quite rapidly in memory.
It's moving closer to the high <unk>. So we've got some good potential here with DDR five hopefully coming back next year with Sapphire Rapids, and the continued investments going into China.
Great.
I wanted to go back to <unk> question earlier about the.
The mobile compute adoption said, maybe a couple of years.
No that's full and Nico has publicly talked about facing physical limitations in creating the larger die.
Some of it more transistors at five nanometer, which I don't believe was the driver in iPad type decision historically so.
I mean is it fair to assume.
You know that that device maker.
Could could adopt three nanometer more widely moving forward given the limitation on the dice site.
Yes, I think thats more likely with a hypothetical question I think C J was asking but.
I do think so just to walk it back a little bit.
This year, we've seen a slackening demand in tester demand because the complexity growth.
Is low end phone.
Silicon.
Highly correlated with the fact that we're kind of in our third year of five nanometer production and yes, you just can't afford to grow the die size. It doesn't make economic sense to grow the die size and absent that it's hard to get more transistors, unless you do a node transition.
So theres a bit of a.
Backlog and a pent up demand to get to this next turn of the screw the next node of three nanometer.
No.
This is this all depends kind of on the yields of what three nanometer, it's going to look like but on the other side of the argument you could see a larger portfolio of devices draw.
Driving to move to three nanometer next year and people will be competing for.
Fab capacity, if the yields proved to be good.
And I think you want to be positioned with the customers who are in the front of the line on that fab capacity, which I hope we are.
I think we are.
Yes.
I would subscribe more to the fact that people.
Are there is a pent up demand and it could swing the other way.
Thank you very helpful.
Thank you.
And next we have Vivek Arya of bank.
Bank of America. Your line is open.
Thanks for taking my question.
I just wanted to revisit the notion of the supply situation getting tighter how do we reconcile that with your forecast of growing high single digit in Q2, Q3 and Q.
Q4, if this demand situation is getting better how are you able to grow faster.
While we have been planning for it.
I think a.
A couple of things we've been investing in multi sourcing.
Components geographically diverse thing we've been building capacity.
Really tied to our plans that we published with our earnings model and you can see by our balance sheet, we are building inventory.
So fundamentally we're planning for it and we're looking to execute in.
And the other thing we've been doing is.
Some redesigns to remove some of the bottleneck parts and as those redesign sort of flow into the shipment stream in the second half of the year that gives us some incremental flexibility. So it's usually it's a few critical parts that bottleneck.
That go through Mad Scrambles negotiations phone calls and things to try to unlock.
Some some supply from the suppliers during the course of the quarter.
And we've been largely successful for the past two years doing that we're still able to grow here in Q2 doing that it's just that the.
The likely outcome is more and more.
Sure.
Sort of constraints on the top end of what we might otherwise be able to ship. So for example in the.
Second quarter, Sanjay roughly how much revenue in test are we thinking.
Thinking we bottleneck because that line of sight, we have on supply yes. So in test I'd say, it's in the $40 million range I'd say in IAA, it's in the $10 million range.
And that is outside of our high end of our range, which is really <unk>.
Unprecedented for us right.
So that gives you some flavor of the magnitude and Thats Thats test in the past quarters might've been.
10 million kind of numbers are small, but it's growing from 10 to 40, that's significant and we look out in Q3 and Q4.
Its judgment still but we still think everything that Sanjay says we've done positions us to grow.
With reasonable.
Performance on clearing some of these critical parts and anticipating this constrained environment persisting and getting a little bit worse.
Very helpful. And then for my follow up Mark I wanted to revisit this content growth argument when you move from one node to another.
So a few questions on that first could you give us a range of how much your average content grew in prior cycles.
In mobile <unk>.
The customer will move from one generation to another was it 10% to 15%.
20%.
Could you just give us some sense of what that Zane has been historically and the other thing I'm curious about is that will this require brand new testers or again part of the deployed base be upgraded just how much incremental as this move to three nanometer. So we are not surprised when it happens next year. Thank you.
Im not sure what you mean by the content growth. So just clarify that for a minute.
Sure so.
How does one quantify complexity.
Alright.
Average.
Yes.
Unit.
Smartphone is X when that <unk> moved from five to see then how much extra.
Revenue can you get from that for the same number of units.
Yes so.
First of all the second part of your question, which was reuse of testers testers are absolutely reuse node to node generation to generation and testers. We put in 10 years ago are still being used for mobile device testing. So long long product life, they do need to be upgraded a bit now and then.
That's part of the flow, but theres no obsolescence event.
I mean in the short term around testing that's not in our midterm plan than anything else and hasn't been in the past.
So the node transitions typically enable transistor count bumps and Thats, what drives incremental test capacity because.
The same device requires more test time.
And so.
I think you could expect something in the rough.
Jump of 30%, 40% jump in transistor counts drive, maybe a 20% jump in tester capacity.
So <unk>.
You've got to do the math across.
The whole installed base of testers and everything else. So I haven't recently sat down and tried to pencil that out.
So I can't sort of do it off the top of my head, but that's roughly.
The ratio is that.
What a node transition will give us is that big jump in transistor count and then you could say okay.
Take an example that the installed base of testers is 100.
And there is no unit growth all the risk is a node transition of about a 30% to 40% complexity bump.
You would need 20 more testers to cover that.
In that year.
The model is much more complex than that of course, you'd have to sort of do it over years and model it but.
Thats the tips of the waves on it.
Alright very helpful. Thank you.
Thank you.
And next we have Chris <unk>.
Cowen Your line is open.
Thanks for taking the question that drove them to mark Thanks for the color on the industry market sites.
Given that the Incrementals trend.
<unk> is coming from auto.
In memory is kind of more <unk> NAND versus DRAM.
Is it fair to assume that your market share in Soc and memory is going to be about 40% this year.
You think youll see maybe slightly higher memory slightly lower than at a follow up.
Yes, I think.
For the year.
Memory is probably still around 40%.
Plus or minus a percent or so but round 40, I don't think it changes significantly with this <unk>.
Slash shift and.
In the case of S O C.
I wouldn't characterize it as much of a change it's also probably slightly short of 40% for the year.
And it will kind of depend on.
What happens in the supply chain.
Issues as we get into Q4, I anticipate will be and we anticipate in our discussion here that we're going to be bottleneck, another $30 million to $48 million were bottleneck here in Q2 will likely grow as we get toward Q4.
And if that in fact happens then we'll probably be 38% to 39% share. If we can unconstrained that we can ship more testers off it could be in the 40% range.
Got it got it and then you kind of spoke about the three nanometers from a large customer next year historically that's been <unk>.
Little bit of a headwind to gross margin when they spend and you just kind of curious should be both.
Alright.
Similar to historical trends.
Next tier Autodesk flows and.
The tailwind you have this year from the Eagle II margin testers moderates as your largest customer.
The bigger portion in 2023.
Yeah, Hi, it's Sanjay so so I think it's a good observation that.
Mobility will call the bubble.
We see that in 2023 on a margin percentage it will have.
Have an impact, but I will say that we are having investments.
But continually work to both add supply.
<unk>, but also <unk> and gives us flexibility, but also drives from a bill of materials.
And we've been fighting the cost or the component inflation, but we plan to to execute an hour.
At our earnings model level of 59% to 60%.
Our expectation.
Alright, Thanks, Sanjay Thanks, a lot.
Okay.
Thank you.
Up next we have tissue honey.
Goldman Sachs. Your line is open.
Great. Good morning, and thank you so much for taking the question I had two as well Mark you talked about the Hyperscale opportunity in your prepared remarks, I think you noted that some of the customer activity seems to be accelerating and that <unk> been pleased with your run rate.
I was hoping you could elaborate on that a little bit and to the extent possible kind of speak to the timing of a potential inflection in that business.
I realize it's sort of a medium to long term opportunity for you but.
I'm curious to hear any new developments there.
Yes.
Boy, it's tough to speculate because theres two classes of Hyperscale is silicon development that are going on.
There is a class of development around new consumer products that one is incredibly difficult for us to forecast because it's unprecedented.
Dented type product introductions to see if the market will develop or will they even be introduced so.
To me those are they are active we're highly engaged they're wildcards then theres another class that I would say is more.
Compute cloud infrastructure chips going into the cloud for specialized could be AI applications going into the edge.
Those were a little more I would say a precedented applications and we have long term plans.
And those I expect are going to start ramping next year I think some of these are going to ramp now how material will they be I think we're still talking from a tester point of view tens of millions versus hundreds of millions of dollars of incremental revenue. So we're still going to be early innings, but.
<unk> gives you some sense.
Got it that's helpful. Thank you and then as a quick follow up.
Maybe one for Sanjay you guys seem to be executing really well from a gross margin perspective despite.
Everything Thats going on I think you beat.
The midpoint of your guidance in Q1 by by more than 100 basis points, you're guiding to another.
Higher than 60% quarter for Q2, despite everything everything that's going on so.
I guess the question is this primarily a function of your largest customer being absent or at least being a small percentage of your revenue than typical.
And that driving a better mix or are there I know you guys are working on a bunch of things is there anything sustainable.
Drive margins.
Above your long term model. Thank you.
Yes. So in Q1, it was really a function of product mix.
And really operational efficiencies and execution that drove us beyond.
What we guided.
In Q2 and beyond.
Fundamentally.
We are growing.
Light point is growing as examples and.
In 2022.
We see those businesses, having higher than corporate average margins.
I do believe that.
As we continue to work we have plans and we're working towards.
Margin plans that are accretive, but let me remind you that there has been significant inflation.
In component costs and labor are increasing so we feel like we manage the business to a 59% to 60% gross margin over the midterm. We have internal plans that are challenging those to make them higher but we're also realistic about some of the headwinds in play in.
The environment.
Very helpful. Thank you.
Yes.
Thank you.
And we have Joe Moore of Morgan Stanley .
Your line is open.
Great. Thank you.
In terms of the supply constraints that you have can you kind of frame that competitively I feel like last year, you had sort of a better supply situation then advantage is.
Is that still the case in any ramifications for.
Market share in the more transactional parts of the business.
Well.
We're not inside advance has to know a lot, but we do what we do know from the outside is there backlog is close to a year.
Their customers are forced to order in advance around a year.
And so yes, apparently whatever's going on in terms of supply chain strategy, it's been slightly more favorable.
On our side, but we've worked this.
<unk>.
Since 2019 2018 sort of.
As a sort of a business continuity planning exercise around a whole series of things that could have gone wrong in the world, we never anticipated COVID-19 , but.
But generally built up inventory resilience and backups that have.
Third well for us for two years. So it's kind of we've been hoping we would get through all of this without any significant.
Bottlenecks and we're seeing our first.
Sort of headwind here in test at about a $40 million bottleneck in Q2, so 5% of our revenue roughly we might have been able to increase revenue 5%.
And maybe that's going to be about the percentage through the year that we're going to be bottleneck. We hope that we can keep it at that keep lead times and sort of a six month range and test and incrementally get some of advantest customers to consider us as a more responsive supplier we will see.
Great. Thank you very much.
Thank you.
And next we have Sidney Ho of Deutsche Bank. Your line is open.
Thanks for taking my question.
One question for me.
Now to your largest customer are you still expecting them to be a 10% revenue this year and given.
Normally you have some good visibility into them in about this time June April may timeframe established variability for the rest of this year. Thanks.
Yes, Hi, Sidney Sanjay Thanks for asking the question. So right now our expectation is we will not have.
Large customer be over 10%.
System with what we thought in January .
And I think.
Is there anything for the rest of the year I think for <unk> and <unk> no. It's pretty locked in <unk> frankly is a wildcard because that in past years has been a surprise for us.
It depends on sort of the.
Ramp in 2020 to the early silicon prove outs and all kinds of factors in and other products that might be launching so fourth quarter is kind of still opaque to us. So I would say that if there is a potential for something in the fourth quarter that we might not see yet yes, but.
But.
It will be somewhat constrained there too based on the earlier supply discussions.
Okay. Thank you.
Thank you.
And I see no further questions in the queue I will turn the conference back over to Mr. Blanchard.
Sir you May continue.
For the first time in over 40 quarters were finished in early.
<unk> everybody for joining us look forward to talking to you in the days and weeks ahead.
Yes.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
Okay.
Okay.
Sure.
[music].