Q3 2022 Teradyne Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Hello, and thank you for standing by and welcome to the Teradyne Q3 2022 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 this session.
One one on your telephone.
It is now my pleasure to introduce vice President of Investor Relations Andy Blanchard.
Thank you Andrew Good morning, everyone and welcome to our discussion of Teradyne's. Most recent financial results I'm joined this morning by our CEO , Mark together, President, Greg Smith, and our CFO Sanjay Mehta.
Following our opening remarks, we'll provide details of our performance for 2020 twos third quarter, along with our outlook for the fourth quarter of 'twenty to the press release containing our third quarter results was issued last evening.
We're providing slides on the investor page of the website that may be helpful to you in following the discussion.
Replays 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 statements 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.
A result of developments occurring after this call.
During today's call, we will make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure where available on the investor page of our website.
Looking ahead between now and our next earnings call Teradyne expects to participate in technology or industrial focused investor conferences hosted by Baird Credit Suisse and UBS.
Now, let's get out of the rest of the agenda first Mark and Greg 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 fourth quarter. We'll then answer your questions and this call is scheduled for one hour Mark.
Thanks, Andy and Hello, everyone and thanks for joining us this morning, and today's call Gregg will review our <unk> results in poor Q outlook. I will then describe the longer term view and Sanjay will provide the financial details of the quarter Greg.
Thanks, Mark and good morning, everyone.
Teradyne's third quarter sales and profits were above the midpoint of our guidance and revenue and profit with sales of $827 million.
And $1 15, and non-GAAP earnings per share.
At the company level the quarter unfolded generally as planned it but at the operating level, we cleared some supply bottlenecks, which allowed us to ship more semiconductor test products and planned in the quarter.
On the other hand, industrial automation was weaker than we forecasted in July .
Putting the third quarter into context, when we spoke in July we noted that slowing Soc and wireless tester demand in the second half were related to declines in the end market shipments of smartphones compute products and associated infrastructure.
With that backdrop, we reduced our estimate for the Soc market size and reduced our second half shipment plan approximately $300 million.
About one third of that amount was already confirmed in June and about two thirds $200 million was our judgment on how the second half would unfold.
And the subsequent three months about $110 million of the $200 million additional decline was realized and about $90 million was not as overall test demand held up better than we expected in July .
This incremental strength in test has been partially offset by weaker demand as reflected in the Q4 guidance.
The highlight in semi test is the continued strength in automotive test demand. This.
This year, we're seeing a step increase in our shipments for Adas processors, silicon carbide, driving charging Ics and battery management devices.
Our ultra flex platform is well aligned to the unique requirements of multibillion transistor Adas processors, and our Eagle platform is well suited for thousands of calls and hundreds of amps often required for silicon carbide devices.
It is notable that these three device device types collectively will add over $100 million of incremental Soc Tam in 2022, and they were insignificant five years ago.
Shifting now to industrial automation.
Only about 30% of our sales are transacted in dollars and there has been significant changes in exchange rates in 2022, well described results in both constant currency and dollar terms.
In constant currency automation group Q3 revenue grew 7% from last year's Q3 and is up 19% for the first nine months of the year.
In dollar terms, however, revenue contracted 2% in the quarter compared with Q3, 'twenty, one and growth is 11% for the first nine months.
Looking at the full year, we expect <unk> growth from 2021 will be about 6% in dollar terms at the midpoint of our Q4 guidance and.
In constant currency terms IAA growth will come in at about 14%.
Even using constant currency terms. This is below our 2022 plan to grow in the mid <unk> from the 2021 level and reflects two additional factors.
First slowing industrial activity, especially in Europe , where PMI has dropped below 50 in July and have remained in that contraction zones.
Europe is our largest end market for automation and this is a 10 point headwind to growth.
Second labor scarcity continues in our distribution channel, which we expect to reduce growth by about five points.
While 2022 growth is below our plan, we have a number of bright spots in IAA and I will highlight just a few.
At Universal robots customer demand customer demand for our higher payload longer reach EUR 20 has been stronger than expected since its introduction mid year and we expect it to be a meaningful contributor to results when it begins shipping in 2023.
<unk> expands our capability in the Pelletizing welding and machine tending end markets.
So we've continued to grow our OEM channel AUR, including supporting partner expansion from National to International sales coverage. The OEM channel is a powerful growth driver for US for example, our welding channel grow grew over 80% in the first nine months compared with last year and for this year.
Here, we expect to ship well over 1200 robots in that vertical.
At near our sales to large customers continued to expand with more than 30 customers, having fleet sizes greater than 20 robots.
The number of customers with these large fleets has increased 30% in 2022.
This is significant as our fleet management software is an increasingly important differentiator as fleet sizes grow.
On a related note at the end of Q3, we merged auto guide into mirror as we prepare to offer customers a broad payload range from hundreds to thousands of kilograms sold by the same team using the same fleet management software backed by the same global distribution.
Same global network of distributors, all while increasing our engineering marketing and back office leverage.
Finally, near service and spares revenue has more than doubled to about 5% of revenue through the first nine months compared with 2021 as we begin to expand our customer support offerings.
Across industrial automation the investments, we're continuing to make are giving us the foundation to support high growth with differentiated products to global customers through multiple distribution channels. While we are not satisfied with 2020 two's growth rate and have taken actions to improve we remain confident of.
Our long term strategy in these growing markets with that I'll now pass it back to Mark. Thanks.
Thanks, Greg.
I'll comment on the longer term view of our markets and the impact of changes in the regulatory environment.
Although better than estimated in our July call. The demand has slowed across our test markets as we enter Q4.
As I noted at the time predicting the depth and duration of these corrections is challenging but in each of the last three corrections growth has returned after six to 12 months, we haven't seen anything in the last three months to change that view.
So while it's too early to offer estimates on 2023 full year market size.
Based on the historical patterns and current market conditions, we expect next year's first quarter and first half demand to remain relatively weak.
That combined with the weak macro environment in industrial markets suggest that our Q1 revenue will likely be about 10% softer than Q4.
Looking at the full year 2023, it's too early to make quantitative predictions, but I'll point out how we're thinking about the balloons and anchors for the year ahead.
First the balloons, we expect the semiconductor industry to begin to transition to three nanometer technology, and our largest customer to grow from less than 10% of company sales in 2022 to more than 10% next year.
However, we expect them to be at a lower than historical past peak level is three nanometer will not hit full stride until 2024.
In industrial automation, we also expect to grow year over year with the exact amount governed by macro conditions.
Balancing these balloons are a few anchors.
Semiconductor unit volumes and revenue are expected to decline in 2023, due to inventory digestion and macro headwinds and.
In industrial automation slowing industrial growth worldwide, and a pronounced slowdown in European manufacturing or additional anchors.
So we're keeping a balanced view of next year and we should have a better view of the full year in January .
Looking longer term the case for growth in both test and AA remains intact and compelling.
In semi test, we're operating on a market growth trend line of 10% since 2017.
Growth in our test businesses is driven by unit growth and complexity. We expect those drivers to remain in place as new semiconductor technologies, such as three nanometer gate, all around and chip, let's ramp over the next few years.
These technology building blocks enable applications to continue to grow in complexity, including emerging applications like AI <unk>.
And new compute architectures.
In industrial automation, we remained bullish on the future, while we're not immune to macro conditions, we recognize the underlying drivers of demand are favorable for cobalt and automation.
Labor demographics, and economics, and the growing range of task or co bots can perform ensures an expanding market opportunity and our strategy enables us to capitalize on that opportunity.
Trinity for many years to come.
Regarding the recent changes in trade regulations indigenous Chinese memory makers have been a significant and growing part of our memory business and while the new regulations, mainly focus on fab equipment, rather than test tighter restrictions combined with potential reduction in their wafer volume will likely impact our business.
This situation is dynamic but as of now we see these regulations as about a $75 million to $100 million headwind going into 2023.
On the supply side of the trade equation, we have a large manufacturing footprint in China and our global support team has a professional services operation in place to support local and global customers.
As part of our resiliency planning, we've been enabling additional global sites for these activities.
Given the current environment, we will be accelerating the capacity growth of these other sites Sanjay will take you through more details of those plans.
Stepping back to look at the full year. Despite the drop in demand in the second half we're on track to deliver our second highest revenue in history, we balanced our growth investments with financial discipline, and we've positioned teradyne for high growth as our core testing markets improve Sanjay will now take you through the financials.
Details Sanjay thank.
Thank you Mark good morning, everyone. Today I'll provide details on our Q3 results update you on the impact of the new trade regulations and describe our Q4 outlook now.
Now to Q3.
Third quarter sales were $827 million with non-GAAP EPS of $1 15.
non-GAAP gross margins were 58, 7% and our non-GAAP operating expenses were $247 million.
About flat with second quarter Opex due to implemented spending controls.
non-GAAP operating profit was 28, 8%.
We had 110% customer in the quarter.
The tax rate, excluding discrete items for the quarter was 18, 7% on a non-GAAP basis. Please note you should now use $17 two 5% for the full year non-GAAP tax rate.
Looking at the results from a business unit perspective.
Test revenue was $576 million with Soc revenue contributing $451 million in memory of a $125 million.
We cleared some supply constraints, which enabled the highest level of memory shipments in this in the past two years.
In memory the <unk>.
Transitions to new memory standards in both flash and DRAM, along with strong demand from indigenous China customers drove the results.
And so the.
The increasing semi content for Evs autonomous driving and infotainment and autos along with continued strength in analog industrial contributed to the demand.
System Test group had revenue of $116 million with storage tests, delivering $70 million in defense and aerospace and production Board test $46 billion.
In wireless test at <unk> revenue was $46 million in the quarter down 33% year over year, primarily because of lower Wi Fi revenue tied to declining PC and smartphone end markets now to industrial automation.
<unk> revenue was $89 million with you are contributing $73 million and Mir $16 million.
<unk> results include Auto guide.
As Greg noted a large portion of <unk> sales are outside the U S. For the first nine months, 41% of IAA sales were in Europe .
9% in the U S and 11% in China, and the remainder in the rest of the world.
I'm a financial perspective in IAA.
The group was slightly above breakeven on a non-GAAP operating basis in the third quarter and for the full year, we expect to be about breakeven.
Below the 5% to 15% profit range planned for the group.
As growth has slowed this year, we've also slowed the growth in opex.
Shifting to supply.
Looking at Q4, we continue to face supply issues, but the supply trend continues to improve relative to three months ago. These.
These supply bottlenecks noted at the beginning of each quarter have moved from $50 million in Q3 to about $15 million in the fourth quarter.
These amounts are outside the high end of our guidance range.
Switching to a strategic issue, we manufacture of certain products and deliver certain engineering services in China for our global customers.
While recent U S government actions have no immediate impact to these operations due.
Due to concerns about potential future impacts we are accelerating our strategy to expand our manufacturing and engineering service capabilities and other countries and manufacturing. This work has been underway for several years several years and we are accelerating the work to complete our expansion strategy in the next several quarters and.
In engineering services the transition the transition will likely take most of 2023 to achieve.
Shifting to the balance sheet and cash flow.
Okay.
Ladies and gentlemen, please standby.
Okay.
Ladies and gentlemen, please standby.
Okay.
Yes.
Got it.
Okay.
Ladies and gentlemen, please standby.
Your conference will resume momentarily please standby.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Uh huh.
To John say, where we lost it it was later ladies and.
Please standby your conference will resume momentarily.
Hey, Andrew Yes. Please go ahead alright, we're.
We're ready to go yes, we are alive with the audience. Please go ahead.
Back to use and Jonathan.
I'll go back to.
Shifting to the balance sheet.
Shifting to the balance sheet and cash flow, our cash and marketable securities at the end of the quarter totaled approximately $900 million about flat with Q2, we.
We had $233 million in free cash flow in the quarter and our DSO came down from 74 to 58 days.
Uses of cash in the quarter included share buybacks for $217 million dividend payments of $17 million and debt retirement of $10 million due to opportunistic buying through the year, we finished our $750 million.
Our share repurchase plan for 2022 full three months ahead of the original schedule.
Our board has authorized continued opportunistic share repurchases in Q4.
Since our program began in 2015, we have repurchased 74 million shares at an average price of $45 and 85.
Regarding debt to date $397 million of convertible bonds have early converted.
Now to our revolver.
During Q3, we worked with our banking partners and have increased the capacity of the revolver to $750 million from $400 million.
Our credit facility is in place until December 2026.
Now to our outlook for Q4 as Greg noted our outlook is ahead of what we expected three months ago, driven mainly by semi test sales in Q4 are expected to be between 670 $750 million with non-GAAP EPS in a range of 62.
<unk> 86.
On a 164 million diluted shares.
Fourth quarter guidance excludes the amortization of acquired intangibles.
Fourth quarter gross margins are estimated at 56% to 57% down from Q3 due to lower volume product mix and spending on accelerated on accelerating our manufacturing and service delivery resiliency.
Opex is expected to run at 34% to 38% of fourth quarter sales.
On a non-GAAP operating profit the non-GAAP operating profit rate at the midpoint of our fourth quarter guidance is 21%.
Looking at the full year of 2022 at the midpoint of our guidance 2022 revenue will be $3 1 billion with.
With an EPS of $4 and <unk> <unk>.
Gross margin for the full year should be approximately 59%.
Regarding opex for the full year, we spent a bit lower than planned in Q3 in both test and <unk> businesses. We expect the full year opex will be about $1 billion.
About 3% from 20 from 2021 at the midpoint of our Q4 guidance.
Color operating model flexes Opex with revenue so growth is naturally trended down through the year.
A couple of points looking ahead at 2023 first gross margins I will note that because of the additional spending on supply resiliency.
Cost of product mix, we expect Q1 gross margin will be similar to Q4's level.
<unk> tax rate in 2023 is forecasted to be at 17%.
We will update our mid term operating model in our January call.
Summing it all up we're expecting higher revenue and profit in the second half of the year than prior update in July decline.
Declines in our test portfolio, where less than forecasted offset by weaker IAA business driven by FX continued economic challenges in Europe and labor scarcity in the channel.
For 2022, Opex spending will increase year over year, approximately 3% versus the 11% to 13% anticipated at the beginning of the year as revenue forecasts have declined from our view in January .
In a challenging environment, regardless, if the driver is economic downturn regulatory changes supply shortages labor scarcity or whatever may come our way, we're confident we have a great team.
Strategy operating model and experience to lead us through whatever lies ahead.
We'll continue to focus on our customers and our long term opportunities in test and industrial automation markets with that I'll turn things over to Andy.
Thanks Sanjay.
With that I'd like to take some questions and as a reminder, please limit yourself to one question.
Got it.
Certainly.
Also as a reminder to ask a question you will need to press star one one on your telephone.
Please stand by while we compile the Q&A roster.
Okay.
And our first question comes from the line.
With Craig Hallum.
Okay.
Yes.
Pardon me, Chris Please check your mute button.
So hi can you hear me.
Yes, we can.
Yes, hey, thanks for that thanks for taking my question two of them first one mark I'm just kind of curious.
You know youre seen industrial automation, so you're seeing mobile compute slow and then I understand the demand drivers for aid us in Ontario.
Do you worry that auto and industrial test as the next shoe to drop or do you think that it could be resilient into 2023.
Yeah, I think that.
Industrial is probably something we're looking to soften a little bit in 2023 and automotive at the moment is just there's no sign of that.
It's very strong we're in a year, where the market size for automotive semiconductors is all time peak, but the.
A das and EV content is is on such a dramatic rise that it could very well be that next year has a flattening.
But.
At the moment, we don't see it softening certainly not through Q1.
Got it got it that's pretty helpful. Another quick follow up I think you mentioned that the China impact was.
We paid 100 million headwind.
In 2023, I'm kind of curious you mentioned a lot of exposure was through memory, what the China <unk>.
You had pretty high exposure over there too or is that part of part of their spending about $100 million headwind.
Most of that headwind is memory, there's not really a lot of incremental restrictions that we have related to China <unk>. So that's not really a headwind for us.
Got it got it thank you very much.
Okay.
Thank you.
Okay.
And our next question comes from the line of C J Muse with air.
Yes, good afternoon or good morning, sorry, Thank you for taking the question I guess.
Was hoping to get a little bit more detail on gross margins.
I think you've talked about manufacturing engineering, resiliency and kind of investments outside of China are negatively impacting margins into Q1, and I guess can you give a little bit more color on the plans there and how we should think about the impact to overall calendar 'twenty three.
Sure Hi, C. J, it's Sanjay so so addressing gross margins then I'll get to the.
Our resiliency plans, so think of Q4 as roughly a third a third a third.
Volume decline product mix, and then resiliency spending.
The bridge from Q3 to Q4.
And a lot of that continues into Q1 hitting into the resiliency plans for the past couple of years, we've been working to on what I call a multi country manufacturing approach.
We've obviously grown over the last several years and we had to increase capacity. So we fundamentally took the approach to have.
Redundant capacity in both different geographies and not just for manufacturing, but from a supply chain perspective.
Hum.
From that we've chosen to accelerate over the next couple of quarters. So what youre seeing is an accelerated spend on the manufacturing and then from an engineering services perspective again to create.
Capacity.
In different locations that'll take a little bit longer into the second half of 2023.
Very helpful. As my follow up you talked a bit about 2020 outlook highlighted your top customer accelerating higher but not getting back to prior peak I guess.
Any color there in terms of kind of the diversification of the business <unk> win when you'll have.
Clear visibility to what kind of the magnitude of the growth might look like.
Yes.
Yes, as usual with our largest customer the visibility comes.
Pretty late April of next year, we do get signs as early as this time of the year, which is why we have.
The sort of commentary on it going back above 10% for them.
But it's not going to go back to greater than 20, we don't believe we're we've seen prior peaks, primarily because the three nanometer move in 2023.
<unk> will be.
For a fraction of the.
Phone models.
It will be introduced so.
That will expand.
Expand as we go beyond 2023, and we would expect it to continue to grow therefore that that business piece outside of that we've talked a bit in these calls about design wins in emerging vertically integrated non traditional semiconductor companies.
That should be another growth engine for us as we look into 2023, so I didnt call that out as a specific balloon, but that sits there as well.
On top.
Thanks, so much.
Okay.
Okay.
Thank you.
And our next question comes from the line of Timothy Arcuri with UBS.
Hi, Thanks.
So I'm wondering if mark maybe you can you can help bridge the gap between Q4 is better because things aren't as bad as you saw when you guided particularly on the semi test side, mostly it sounds like because of supply, but then Q1 being worse. So.
To get to get Q1 down 10% you have to assume.
Pretty significantly worse than normal Q1, which I assume would mostly come from semi test. So can you sort of help us bridge that gap.
Well first of all in industrial automation. Our Q1 is always down from Q4, so that is a factor here.
Yes.
And it's reasonably significant so that is one thing but in the case of.
Semi test, we do see some incremental weakening in industrial which we spoke about.
The China headwinds, we talked about around memory will start to impact us in Q1 as well so.
The combination of those two are kind of what leads us into that.
Estimate for Q1.
Got it Okay, and then and then can you can you also talk about I know that you did.
It's a bit early to kind of talk about what the outlook is for the full year next year, but can you talk about any sense of directionality for the.
SSE Tam I assume that the memory Tam will be down clearly you have front end.
<unk> down 40% plus next year for memory, so I assume that the memory test time would be down, but front end foundry and logic WP Tam is not down that much next year, it's down probably 5% maybe 10%. So do you have any sense in terms of where the Soc Tam could go next year at least from a directional perspective. Thanks.
Well, it's interesting so first on memory.
Although you are right on the WSI <unk> estimates a lot of what's going to happen in memory, especially DRAM next year is the shift to DDR. Five finally for server applications that requires a brand new test platform. So we actually think that memory next year for a test will actually be pretty good.
It may be let's say flattish with 2020.
Two levels.
It could because on the NAND side, it could come down a little bit, but but we're pretty optimistic given what we're hearing from our customers because of the DDR five transition.
And Src.
Yes.
From a Tam point of view I would expect the overall tam to be a little bit weaker because.
The <unk>.
Late in the year declines in the PC markets.
<unk> markets I think will precipitate into a lull in capacity adds early next year.
And that will get offset of course by let's say.
Some mobility growth related to three nanometer.
But the.
Maybe the person the falloff on the PC side, the impact of the falloff on the PC side might be more pronounced than the growth on the mobility side. So.
Let's say, let's say automotive remains relatively strong industrial weakens a bit.
I could see it being marginally down next year. The first half much more so I think that's where we're going to see the sort of digestion around capacity preparing for PC test and such come to fruition.
Great Awesome. Thank you so much.
Thank you.
And our next question comes from the line of Cemig <unk> with J P. Morgan.
Hi, good morning, Thanks for taking my questions.
The first one if I could start on gross margin you gave us some color for what Q I was just thinking if you could give us a bit more color of steep trajectory for the your particularly the obligations of the drivers of growth.
Outlining wishes seems too good a lot of the growth will come from Brian Lee comfortable next year, and then some from E, but as OSB demand slowdown across the board as well as the headwinds that you outlined so and Theres also I guess supply improvement. So as we sort of look at the puts and takes how should we think about the cricket Creek of gross.
Margin given the growth drivers.
Hello.
Sure. So first let me ground you and as I've said in my prepared remarks. This year, we plan to come in approximately 59% are on model.
There's no change to our operating model that we're managing the business with 59% to 60% I think I outlined in Q1 that we'd expect some headwind tied to product mix as well as spend.
Spending on resiliency acceleration.
We're just going through the planning phase right now for 2023.
And we will be able to provide a little bit more color in the January call, but we fundamentally manage the business at 59% to 60% gross margins and in any given quarter those are going to oscillate tied to product mix.
And kind of what's happening and what's.
What's happening in the environment.
Okay.
A follow up.
Do you see for the industrial automation slowdown that you're seeing some level of that slowdown come through because of labor shortages.
But I was just curious what are you hearing from your customers is more of a pull back in terms of capital investment plans, that's driving the slowdown that you're seeing right now or is that sort of more of a mixed stand right now it's more about labor shortages that you sort of okay. Thank you.
I pointed out there were sort of two factors involved.
There is a slowdown in spend.
Primarily in Europe , due to economic conditions and there you do see some customers that are implementing capital freezes or limiting their investments in.
In other regions the labor scarcity in the channel is the primary factor what we see with our partners is that they actually are maintaining very high project backlogs and they're trying to work through those projects and add to their capacity at the same time, so that they are able to support a higher level of business.
So we haven't seen a pullback in regions other than Europe is much more a constraint capacity constraint in our traditional distributor channel.
Alright, great. Thank you for the clarification. Thank you.
Thank you.
Our next question comes from the line of Matti Hussaini with S. G.
Yes, thanks for taking my question.
The first one for Sanjay in a scenario and I'm not asking for guidance in a scenario, where your 2023 revenues.
Be flattish would you expect opex flat up or I don't have in front of them.
Yes, good question.
As I said earlier in the Q&A, where we're currently preparing our.
Our plans for 2023, and we will provide an update but I will say that in January we thought opex was going to grow this year, 11% to 13%.
Our operating model, obviously with the macro environment and our projections coming down for the back half of 'twenty, two and then for the full year.
Our operating model has a variable compensation declining opex and we also implemented spending controls.
What I can guide is that we're going to have a plan that's integrated and ties to revenue in a market view and then.
The environmental conditions change, we'll course, correct as you've seen us do this year.
Okay, Let me come.
Come back to the question differently.
You guys have been very.
We're active in helping us.
Investors.
The first one.
Nine to 12 months, you're going to talk about.
Mm three nanometer pushed up and this morning again your recent expectation with three nanometer.
Nine months ago, you were referring to.
Okay.
Significant front end capacity being added.
N C use analogue.
And now I'm looking forward and some of those front end equipment being added.
It may not be fully utilized so why not take opportunity.
And be more conservative and I understand youre, helping us like given.
Olivia of Q1.
But why not just be more.
Aggressive in being conservative.
I don't think we're being conservative or optimistic in terms of beyond Q1, we just don't see.
We have visibility and so we could be speculative maybe but it's just.
Being a little bit prudent of what we know versus what we speculate in.
I think the days of inventory in the semiconductor supply chain suggest theres just digestion needed.
And that should be something thats already starting and perhaps works its way through by next summer.
And many of these markets but.
The bottom line is we don't know and so we don't want to go out too far on a speculation.
Yes.
I'm not asking for as effective or anything, but if I go back to the nine months ago.
We were.
Thinking.
Yes.
Variable amount of front end investment being added.
Finally, looking at the inventory situation.
He is programmatic twenty-five your high end of your customers have to cut back on production. So even if they have added investments with front end those equipment I'm not going to be fully utilized.
Within non.
Compute C b week into mid year as your customers become more aggressive in working down inventories.
Sure. It's very it's likely that's the case, but on the other handlers to offsets to that that I mentioned, our largest customer probably is going to be stronger.
And so.
There's offsets to what is let's say likely to be digestion in some of those markets, but in our <unk>.
Our neck of the woods around mobility, 2022 was unprecedented Italy weak because of the factors around product migration and complexity growth that worked against our neck of the woods, that's going to work in our favor a little bit next year to offset some of what you're referring to.
Got it thank you.
Thank you and our next question comes from the line of Vivek Arya with Bank of America.
Yes.
Alright. Thank you for taking my question first one on smartphone test I'm curious how much of the existing.
Capacity, that's for five nanometer can be repurposed for three nanometer desk is they're large.
Reuse element that would be should be.
And kind of related to that.
That one of the incremental growth areas for next year, what's the possibility that.
Your large customer.
In source their <unk> modems.
That could provide you incremental opportunity, but that seems to be pushed out as well. So just wanted to get your insights on the reuse aspect and the.
Large customer gaining the <unk> more than what impact does that at all.
On how youre thinking about next year.
So first of all testers.
Reuse, yes, 100%.
Theres no obsolescence in the short term on the Src AP test side. This has been true for 10 plus years, the testers do not.
Often obsolete themselves, we will come to that point.
At some point in the next.
Four or five years, where that will begin to happen, but not in the short term.
On.
The.
Drivers of test demand at our largest customer subject for a little bit.
I'm going to answer it in a little bit broader than just the modem because I don't want to speculate or get into our customers' introduction plans on any specific device.
In general.
When we look at 2022.
Now that we understand and it's public that a the new processor for phones that was introduced in 2022 only went to the high end phone models and that new processor being the last processor built on five ish nanometer was only a 6%.
Growth in transistor counts, so very modest.
Complexity growth really muted the demand from that our largest customer this year.
Drove them below 10%.
That's all kind of clear.
Now if we look forward.
The combination of what you described the introduction of a new line of Silicon when that happens will be a bump and I am not going to say, if it's win but but thats obviously in the pipe.
Another bump is three nanometer for the apps processor for 2023 phones, if in fact that occurs.
It's likely that it'll be a pretty significant complexity bump not 6%, but probably back in the 20% to 30% complexity growth that we've seen historically with a new node.
That gets muted a little bit, though because it's likely it will still only go into the top end phone models.
While this year's 6% incremental complex part waterfalls down to the other models. So the other models in 2023 arent going to see much of a bump, but the high end phone well, that's what kind of gives us. This view that they could go back to being greater than 10, but less than historical peak.
<unk>.
Then.
Let's look forward to 2024.
We would see another significant bump in complexity.
At the high end that.
Phone App processor that was introduced in 2023 would likely waterfall down to the other models and then the full product line in 2024 is likely to see a significant jump in.
Complexity.
So this this is sort of how the movie plays out and then on top of that there's new Silicon. There's also high performance computing.
All of that that moving to three nanometer, but it's just going to move.
<unk>.
Partially I think in 'twenty, three and probably more fully in 24, I'm, sorry, if thats too long an answer.
No no very helpful. Thanks, Mark for that my follow up question is it's interesting that you are keeping your calendar 'twenty four earnings model of $8, which is roughly a doubling from the 22 level, even though Tony please seems to be facing some of these macro headwinds mark.
Sure Doug.
The bottom of the cycle for you right is it Q1 Q2 next year like when do you start making the recovery to your 24 plan or is the 24 plan looking ambitious at this point.
We will update you on the 24 plan in January but what I. Just described gives you some understanding of why we think 'twenty four is probably a pretty strong year.
In 'twenty three.
As usual our quarters are lumpy, so our largest customer tends to tool in Q3 and Q4. So we would expect a bit of a bump there, but one thing we can't.
Predict very well is the macroeconomic conditions that are going to occur the digestion of inventory in the channel and those things we have some ability to think about model.
But.
If the world is going to be in a recessionary environment.
Or and the effect of that on both semiconductors, and IAA is a little bit harder for us at this juncture.
Sauce out what I did say, though is that <unk>.
12 months is kind of a normal cycle here to go through so that would suggest come third quarter next year, we should start to see a broader.
Recovery, if it's like anything in the past.
Thank you.
Thank you.
And our next question comes from the line of Joe Moore with Morgan Stanley .
Okay.
Great. Thank you.
About memory test.
From the perspective of the.
DRAM and NAND vendors are building a lot of inventory right now.
Is that untested and is that like is there volume picks up do you see a recovery in test volume that maybe.
Alps, you next year and then on the flip side of that I think you talked a little bit about what the deceleration.
<unk> you might mean, but do you have any kind of sense of like memory supply does next year.
Above and beyond the DVR fiber okay. Thank you.
Yes, I think <unk>, the only bright spot next year.
The rest is kind of a very tenuous and.
I would expect the first half of next year, we're going to see other than DDR five pretty weak demand.
People are trying to balance fab capacity inventory with end market demand. So.
I don't.
Earlier, I said, maybe memory, Mike there is an argument that memory will hold up next year as a market for test because of the DDR five transition.
I think thats.
Possible I think its more likely though we see that happen, but NAND.
And fall off a bit stronger and so a little bit more of it.
Anchor on the market next year for memory than a balloon because of DDR five.
And then we know we have the specific issue around China, where we've been.
Our overall market share in memory test is somewhere around 40%, but in China, it's been.
North of 50.
And.
This issue with.
One of our customers in China, which we may be prohibited from selling to is kind of going.
We're going to be for teradyne, probably a net.
Negative for memory test revenue in 2023.
Okay.
Those large inventory builds on the producer balance sheets.
Is that is that die bank that has yet to be tested or is there already some tests that you think is occurring on that inventory.
Some test that's occurred but a lot of it is in that sort of die bank area, keeping the fabs running is kind of.
Or something that makes economic sense, but finishing the product doesn't make sense until the demand materializes.
Great. Thank you very much.
Yes.
Okay.
Thank you.
Our next question comes from the line.
Total than sacs.
Hi can you hear me Okay, yes, we can okay, great. So I had one clarification and one question.
In terms of my clarification, just on the China export control you talked about the headwind in 2023 being $75 million to $100 million.
Just curious how significant China memory test was in Q3 and I assume that number should be zero in Q4 am I thinking about that correctly and.
Can you speak to the profitability of some of these China memory customers.
Yes Hello.
Zero in Q4.
Or next year.
So that's maybe one comment the profitability is not.
I think typically different than any than our global.
Margins, so theres no difference there.
Sure.
But there is a portion of the of the market in China will continue to serve.
China overall, I think Sanjay mentioned is.
Roughly $16 15, 16% of the company's revenue half of that is multinationals that really are not subject to any restrictions around this set of regulations. So about 8% of our annual sales, let's say or to indigenous Chinese.
Companies.
And then.
Roughly half of that might be memory, and then a fraction of that is this headwind of with this one customer.
Okay, Mark just a quick follow up so I meant local China memory.
That should be near zero or zero going forward correct.
Yes, multinationals youll serve well serve the multinationals, but theres a theres a portion of the indigenous China memory market that we still can serve under the current regulation regime.
Okay, Okay got it.
And then my question is on the IAA side, maybe one for Greg.
I realize it's hard to predict what 2023 could look like but.
Hoping to get your preliminary reviews, there you talked about labor scarcity outside of Europe being a five percentage point headwind you talked a little bit about.
Some of the idiosyncratic stuff that youre working on in terms of the new product the higher higher payload longer reach product you talked about the OEM channel.
Could those be sort of impactful enough for.
Your growth to accelerate in 'twenty, three or is it a little premature to.
To talk about those things thank.
Thank you.
So it's.
It is a little premature we haven't fully worked out our complete plans, but I think you have hit some of the major factors that are going to go into that equation. So one thing is that the reason that we're talking about our results in constant currency is that we do expect a more stable.
FX environment in 2023, and that alone would add significantly to the growth that we saw in 2022 because that was.
Like a 10 point headwind to where we are.
Beyond that we do expect significant impact from new products.
From from you or from mirror in 2023, and we also are going to continue to grow our complementary channels like OEM.
Similar rates to what we saw in 2022, but off of a larger base. So overall theyre going to have a greater impact on growth in 2023 than they had in 2022. So.
In other words.
We are expecting these new things to help out with growth. We believe that our distribution partners are going to work on labor scarcity, but we're not counting on them to completely solve it in 2023.
Thank you.
Thank you.
And our next question comes from the line of <unk> Malik with Citi.
Hi, Thank you for taking my question.
Mark.
Your comments on next year as end markets. They all make sense to me.
Okay stable on DDI, five industrial coming down mobile improving on the large customer only one thing that I struggle is on the auto side.
Pam.
$700 million this year from historically $250 million 100 million of that like you said, it's coming from new opportunities in Adas Silicon carbide power management, but what about the EBIT the.
The opportunities outside those areas like when that see a correction next year. If there is a recession.
Yes, I think that's likely.
Youre right I think some of the things that have contributed to getting the auto market up to the $700 million Tam level are a lot of these new technologies, but underneath that there is a kind of a key.
Core piece of legacy technologies that.
I would expect would soften as we get out of this sort of frame.
<unk> Z of trying to replenish the supply chain on those parts.
No.
What I was what I was saying is we don't see that coming in Q1, it's not something we baked into Q1, but for 2023 that underlying let's say legacy piece of automotive technology is likely to come down.
Got it and then Sanjay can you talk about what are the other geographies you are looking at.
And improving your supply chain resiliency moving out of China.
Sure from a manufacturing standpoint, you should think about it from both manufacturing and supply chain, but think about.
Other countries in Southeast Asia.
Malaysia, Thailand.
And then from a from an engineering services resiliency think about southeast Asia, but also think about other parts of the globe like in Europe .
Thank you.
And operator, we have time for just one more one more question. Please.
Certainly our next question comes from the line of Steve Barger with Keybanc.
Pardon me, Steve Please check your mute button.
Okay.
Pardon me, Steve Please check your mute button.
Right.
Okay.
Okay, I will now turn the call back over to Vice President of Investor Relations, Andy Blanchard for any.
Alright, well thank.
Thank you. Thank you everyone for joining us today and apologies for the technical pause along the way there.
We look forward to talking to you in the in the days and weeks ahead and certainly if you have follow up questions reach out to me directly. Thanks, so much.
Ladies and gentlemen, ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
Okay.
[music].
[music].
[music].