Q2 2023 Teradyne Inc Earnings Call
And now on our next earnings call Teradyne expects to participate in technology or industrial focused investor conferences hosted by Keybanc Jefferies Deutsche Bank Goldman Sachs Citi and Evercore ISI.
Now, let's get on with the rest of the agenda first Gregg will comment on our recent results and the market conditions as we enter the third quarter.
Sanjay will then offer more details on our quarterly results along with our guidance for the third quarter. We'll then answer your questions. This call is scheduled for one hour Gregg Thanks, Andy and good morning, everyone.
Today, I will summarize our Q2 and first half results comment on the current business conditions and our view of the second half.
Sanjay will provide the financial details on Q2, our outlook for Q3 and offer some financial guideposts for the rest of the year.
Second quarter sales were at the top of our guidance range as supply constraints eased.
Earnings were above our guide on higher gross margins.
At the halfway point of the year overall company performance has unfolded as expected, but at the segment level test was incrementally stronger in robotics weaker.
In semiconductor test, we're four quarters into a correction cycle driven by excess inventory, which has hit the mobility part of the market hardest.
Automotive demand has remained strong and in memory test the growth of DDR, five and HBM devices for data center applications are driving retooling.
In our wireless and system test businesses demand remains muted unchanged from our April view.
Robotics demand has softened over the past three months with worsening <unk> and the short term impacts of the transformation of the U R distribution channel.
Looking forward to the rest of 2023, we estimate the 2023 Soc test market will be three seven to $4 1 billion down.
Down 13% to 21% from 2022.
Up from our outlook in April .
The continued weakness in mobility has been offset by sustained strength in the automotive segment.
Also since April the accelerating Buildout of AI enabled cloud computing is driving test demand for compute and networking.
In memory test, we expect the market will be at the low end of our $900 million to $1 billion range. We described in April .
In this market the impact of AI is evident, especially in the HBM DRAM segment, where we see incrementally stronger test demand for magnum products through the second half of 2023.
Although HBM represents a small portion of the overall memory market. It is in a rapid growth phase moving from under 5% of the test market last year to 10% to 15% of the market in 2023, and our <unk> share is higher than our overall memory share.
This technology, driven strength is offset by weaker capacity buys, especially in flash for mobile applications.
Despite the current downturn, we remain confident about the future of the semiconductor test market.
The primary growth driver is an insatiable demand for increasing device complexity.
This can be seen in cloud and edge AI applications like Adas systems spatial computing and privacy focused consumer applications.
These require enormous compute power tireless higher wireless data rates and more sophisticated power management.
We expect the automotive Tam will grow at a faster rate than the rest of the Soc market through this midterm driven by the growth of Evs and hybrids broader adoption of features such as Adas cabin lighting and infotainment.
And the high end test intensity required to achieve automotive quality levels.
The trend to vertically integrated producers or Vips is a fundamental disruption to the computing segment and is beneficial to teradyne.
Companies that provide cloud computing cloud AI and edge AI are seeking to differentiate their solutions by taking control of chip design.
Efforts that began a few years ago are now beginning to proliferate in data centers and vehicles and this trend will accelerate.
Over the mid term, we expect the VIP portion of the compute segment will grow faster than the overall compute segment and our share will be higher than in traditional compute customers.
The semiconductor industry has a process technology roadmap that supports these new more complex devices.
Three nanometer is ramping now and two nanometer and gate all around or coming soon and.
In advanced packaging, we see broader adoption of stack die for high bandwidth memory and ship lets for processors.
These new technologies will drive longer test times, and retooling to test new interface standards.
Rolling that all up our growth hypothesis for the semiconductor test market remains unchanged.
A similar complexity roadmap drives our wireless and system test businesses and.
In wireless test new standards like Wi Fi six and seven require new or upgraded test equipment.
In system test <unk>.
Increased device complexity is broadening the adoption of <unk> and a very solid pipeline in defense and aerospace puts our system test group on a solid foundation for growth.
Shifting to the robotics portfolio I want to take a moment to highlight that <unk> Kumar joined Teradyne earlier. This month as the new President of our Robotics group, which includes <unk> and mirror.
<unk> joins us from Honeywell, where he ran the process solutions business.
His industrial automation and software background combined with the deep experience in building businesses through organic and inorganic growth across multiple end markets is a great addition for teradyne and we're delighted to have him join our leadership team.
In the second quarter robotics demand softened significantly.
The trends that we noted in April have continued and intensified.
<unk> economic conditions, particularly low PMI is in Europe , and the U S have resulted in lower demand in our highest revenue regions.
We have previously noted the channel transformation work at U R was having an impact on pipeline conversion.
This trend has continued in Q2 large account development and the Buildout of the OEM channel are progressing well, but not quickly enough to cover for the market softness in the quarter.
With lead times under five weeks change in end market demand, especially with our current high exposure to small and medium sized businesses is felt quickly.
However, there is no shortage in interest in our human scale automation products.
We saw record lead generation from two major automation tradeshows in the quarter, but there is a clear reluctance from customers to place orders in the short term.
As a result, we are now projecting full year revenue for our robotics group to be flat to down 10% from last year.
Despite the difficult macro environment and the short term impact of our distribution changes, we believe that we will emerge from 2023 and a stronger position in robotics.
On the new product front, we began shipments in the quarter of our higher payload longer reach EUR 20.
Customers, serving welding and metal fabrication and pelletizing across a number of industrial verticals have driven demand for the U R 20, and a triple digit unit backlog.
We will see our first U R. 'twenty revenue in Q3 and ramp shipments through the second half.
We also introduced mirror insights a cloud based tool to enable mirror customers to monitor and optimize large fleets across multiple workflows and sites more effectively.
We are transforming the EUR distribution channel in 2023.
Recall, we are complementing our existing distribution channel with direct touch coverage at large customers and adding OEM partners that have high long term growth potential in.
In the short term. It appears this shift is slowing sales from distributors that were dependent on a high level of you our sales support.
Longer term however, the change puts our focus on customers with the highest revenue potential.
Although these changes will take several quarters to yield we're confident that we're on the right path.
We've added 28, new OEM partners. So far this year and are working with our distribution partners to directly engage with over 200 large customers.
At near our focus on large accounts is yielding good results. This year, our installed base at large customers has grown three times the rate of our overall installed base.
We view robotics as a long term opportunity the market drivers are clear.
<unk> populations rising wages labor shortage and the re shoring of production to reduce cost and cycle time.
We have innovative market, leading products, serving a market that has the potential to grow to tens of billions of dollars per year.
Our customers have already demonstrated the value of our products and ecosystem in their operations and they're partnering with us to extend our robots performance to expand the range of tasks. They are planning to automate.
Teradyne brings the foundational expertise in engineering operations and customer support needed to enable EUR in mirror to become premier providers of human scale automation.
We are putting the structure in place to support a $1 billion in profitable sales by the end of the mid term.
This is a long term project, but we are seeing the early signs of this work yielding.
Wrapping it all up our test businesses are performing better than planned through the first six months and we expect that performance to continue through the second half.
Automotive and memory, our strongest markets and test this year and a combination of inventory reductions in new products should enable the mobility market to recover next year.
Our robotics business was below plan in the first half and while we expect a stronger second half for the group, we expect to be below our growth and financial plan for the full year.
Our plans to transform our distribution and expand our product line are on track we are carefully managing our spending in this business, while we execute these changes.
With that I'll turn things over to Sanjay for the financial details Sanjay.
Thank you Greg Good morning, everyone. Today I'll cover the financial summary of Q2 provide our Q3 outlook and full year planning assumptions I will also update you on our supply chain and resiliency progress now to Q2 second.
Second quarter sales were $684 million.
Which was at the high end of our guide with non-GAAP EPS 79.
Which was above our high guide of 74.
non-GAAP gross margins were 58, 8% above our guidance due to deferred resiliency costs until later in the year and improved product mix.
non-GAAP operating expenses were $251 million flat with the first quarter.
non-GAAP operating profit was 22%.
One we had 110% customer in the quarter.
Tax rate, excluding discrete items for the quarter was 16, 5% on a GAAP basis, and 17, 2% on a non-GAAP basis semi.
Semi test revenue for the quarter was $475 million with Soc revenue contributing $355 million in memory $120 million.
As Greg noted, we continue to see Soc strength concentrated in the auto end market.
Memory sales were weighted towards technology, driven buys as the industry ramps, new higher speed devices like protocol flash for smartphones DDR, five and HBM DRAM for server applications.
System Test group Q2 revenue was $94 million with $38 million in storage test, which has been down all year on continued low esselte and HDD production demand.
In wireless test revenue was $44 million in Q2 with ongoing low demand from both PC and smartphone end markets.
Now to robotics.
Revenue in Q2 was $72 million with you are contributing $58 million in mere $14 million, which was below plan as Greg noted.
FX did not have a material impact on our top or bottom line results.
Shifting back to the company level financials, our free cash flow was $104 million in the quarter, we repurchased $135 million of shares in the quarter paid $17 million in dividends and settled $2 million of debt.
We have $33 million of convertible debt remaining.
We ended the quarter with $813 million in cash and marketable securities.
Now to our outlook for Q3.
Q3 sales are expected to be between 650 and $710 million with non-GAAP EPS in a range of 61 to 81.
On 163 million diluted shares.
Third quarter guidance excludes the amortization of acquired intangibles and restructuring and other charges.
This outlook is above our April view at the company level, but under the covers test is incrementally stronger and robotics softer.
Third quarter gross margins are estimated at 56% to 57% Opex is expected to run at 35% to 38% of third quarter sales down slightly from Q2.
non-GAAP operating profit rate at the midpoint of our third quarter guidance is 20%.
A little more color on our revenue and gross margin profile for the second half.
Our revenue guidance excludes approximately $35 million of test demand tied to supply constraints in Q3, which we expect to resolve in Q4 as a result, we expect Q4 revenue to be similar to the Q3 level.
If we clear some of these supply constraints earlier, some Q4 revenue and resulting profit will shift into Q3.
That will put second half revenue at roughly 51% of the full year.
Shifting to gross margins, our long term model has gross margins at 59% to 60%.
In 2021, and 2022, we were in our model range with margins at 59, 6% and 59, 2% respectively.
In April we noted that we expected full year 2023 gross margins to be at 57% to 58% due in part to transitory cost of adding new manufacturing sites for our test products.
Geographically multi sourcing components and sub assemblies to reduce supply line risks.
We're also developing multi country capability of.
Some of our design services work.
In past calls we noted the expected margins to be lowest in Q1 and improve through the year. However, the timing of these resiliency costs shifted to later in the year, which was a driver of outperformance on gross margin in Q1 and Q2.
Since that spending will now happen in the second half our margins in Q3, and Q4 will drop to reflect these costs net net we continue to expect 57%, 58% gross margins for the full year. However, some of these transitory resiliency costs have been deferred until the second half of the year.
Regarding opex for the full year <unk>.
No change from our prior guide as we expect full year 2023, opex to be roughly flat compared with 2022.
And now to profitability for robotics for the full year.
As Greg mentioned, we expect lower robotic sales for the year.
Even at these reduced revenue levels robotics gross margins are above the corporate average and while we expect <unk> to be profitable. The robotics group. Overall is now expected to have an operating loss for the year.
Our GAAP and non-GAAP tax rates are forecasted to be $16, five and 17% respectively in 2023.
Summing up.
Our stronger test businesses in Q2 more than balanced weaker robotic shipments leading to sales at the high end of guidance with gross margin improvements yielding profits above our high guidance where.
We're executing our plan to improve the resiliency of our supply chain and engineering services.
We're modeling full year gross margins in the 57% to 58% range in line with our April outlook.
And are on track to hold our full year Opex flat with last year.
We have a strong balance sheet to support organic and inorganic growth, while we continue returning excess cash to shareholders through share repurchases and dividends.
With that I'll turn the call back over to Andy Andy.
Thanks, Sanjay operator, we'd now like to take some questions and as a reminder, please limit yourself to one question and a follow up.
Thank you we will now begin a question and answer session.
Like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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Please while we poll for questions.
Thank you. Our first question is from Timothy Arcuri with UBS. Please proceed with your question.
Thanks, a lot I had a question on the revision of the Tam.
<unk>. So you took it up about 300 million box can you talk about where that's coming from is that all in autos. So autos goes from six to nine this year and then also in that you I think you previously had said at your share would be in the kind of 38% to 39% range. This year is that still the expectation even on this higher tan.
Sure.
Roughly at the midpoint last time, we got to the Soc Tam at the mid point of a $3 six now obviously as Greg noted three seven to $4. One so roughly a $300 million increase and thats really tied to the compute market.
As a key driver.
And theirs.
We're rounding to one hundreds of millions so it's but it's mainly in compute.
Then I would say from a share perspective, our view on the full year or is that were roughly flat in may tick up a bit.
Okay. Okay.
Okay got it.
<unk> can you can you give a sense of.
Of just storage for the full year and sort of how you see that evolving next year I think.
The expectation is still that it's going to be very soft in Q4.
And then.
Do you think that's going to rebound as you kind of get into the first part of next year.
So.
This is Greg.
Yes, we think that storage is.
Sort of running along at a minimal ship right.
We're going to expect to continue at that rate and.
There might be a recovery in 2024, but I don't think it would be a first half I think that there is.
There is still a fair amount of softness in the end market for HD deal a fair amount of oversupply.
So it's really only one were going to see significant capacity inflection when hammer comes online and demand increases.
That will drive higher test times, and ultimately drive additional capacity purchases, but thats, probably further out in time than the first half of next year.
Thank you. Our next question is from Mehdi Hosseini with.
Please proceed with your question.
Yes, Thanks for taking my question just going back to <unk>.
So see Tam I wanted to get an update on how you see the transistor density growth.
Into 2024.
And remind you of a couple of years ago.
<unk> was benefiting handsomely and then we hit the pause and I'm just trying to get an understanding of how.
The growth rate, usually bumping into next year and I have a follow up.
Good morning, <unk> This is Greg.
So the.
The semiconductor process.
<unk>.
Growed map seems to be.
Pretty much in line with what we saw before.
Perhaps a little bit.
Ramping three nanometer a little bit more slowly than we would've expected maybe back in 2020, but.
In terms of compared to recent events, it's pretty much on track.
The.
The key thing is that those.
Those complexity transitions are occurring in a market, where and unit volumes, especially in mobile are significantly down.
So.
Even though the the complexity increases are happening and we are seeing sort of the expected changes in tough time. There is a fair amount of idle capacity because of the unit declines that's being filled versus at driving new tester purchases. So.
I hope that answers your question, but basically we think that the pace of new process adoption is kind of going as we expected.
Does that imply that the growth rate would accelerate in 'twenty four or would that remain the same.
So I think our view of 2024 is that the the number of high volume three nanometer devices is definitely going to increase so there'll be more chips on three nanometer and.
The third.
Third party reports that we see around end market is that it's up but not up dramatically. So I've seen numbers between three and 5% in terms of smartphone unit volume increases. So we definitely think that there is going to be three nanometer coming from more fabs theyre going to be more parts on three nanometer and volumes.
Going to be up so we think that 2024 is going to be incrementally stronger than 2023.
Thank you. Our next question is from Vivek Arya with Bank of America. Please proceed with your question.
Thanks for taking my question.
Greg I think in the last call you said that the utilization in Q1 was.
That kind of a generational low video thing it is now because when I look at.
Where consensus expectations are for <unk> next year, but almost 25% case growth and I'm trying to understand.
When do you start to see the orders to justify those kind of growth expectations that utilization still remains at these kind of generation of loads.
Good morning, Vivek. Thanks for the question so.
The good news is that utilization hasn't gotten any worse.
So the.
And frankly, it's up up a bit so in the 2% to 5% incur.
Increase in terms of utilization of teradyne equipment. So our view is really of our own fleet.
The thing that I will tell you is that there is a significant disparity in utilization between <unk> and sub cons. So.
Utilization inside of Idms is in.
In the upper eighties, and that's that's well into the range, where our customers are.
Actively adding capacity and thats really the strength that we see in automotive and sub cons.
<unk> utilization is nearly 20 points lower but it is heading in the right direction. So I think it's a really good question in terms of how much that idle capacity will impact.
The size of business in 2024.
We are.
That's sort of factored into our plans, we think 2024 will be stronger, but we really don't have a great idea about how much stronger it will be.
Okay.
And then maybe one follow up on the IAA business, it's very innovative value proposition makes sense, but it tends to sort of consistently underperformed its potential and I don't think it's ever been profitable and I'm curious what has been the disconnect is it really a structural growth business because it's actually declined two out of the <unk>.
Last of 40 or so.
What's been that disconnect what are your change in the future and just kind of related to that do you think the competitive and pricing environment will be more or less favorable in that business over the next few weeks.
So it's a good question.
The first thing that I'll point out is that.
The group has consistently underperformed our profit targets.
It Hasnt consistently lost money.
So this is the I think this is really the first year where were projecting a loss for that group.
But you are right.
We are in robotics for growth and we're not delivering the growth that we expected to from this from this business and what we're really discovering is that.
There is a.
If I'm, if I'm going to sort of sum it up we misunderstood how large the potential end market is.
How much the early years of those business was driven by.
Very sophisticated early adopters people that were.
Like robot enthusiasts.
And what we found is that as we satisfy those early enthusiasts and started moving into a larger.
Market, where people were more focused on just buying a solution that.
They didnt have the skills that they needed to put these robots into operation. So that's the logic behind our transformation in the channel at EUR that by shifting more emphasis towards solution providers like Oems, we're going to be able to provide solutions.
That are at the level of the capability of our customers and by directly connecting to larger customers. Those are customers that have the.
The heft to be able to maintain and implement the robots within their organizations. So I.
I think the thing that's.
That we're discovering is that the challenge in robotics isn't as much around technology as it is a go to market and our product market fit challenge and we have a lot of evidence that our products do deliver value. We just are working out the best way to get them into the <unk>.
<unk> of our customers in a way that they're going to be able to easily adopt them competitive environment Oh, yes. So.
Thanks for the Q, Andy so in terms of the competitive environment.
You are is a clear leader in its space. It has more than three times the market share of our nearest competitor and our share is in the mid thirties.
We are we see two kinds of competitors industrial robot makers that are pivoting into co bots and <unk>.
And sort of pure play cobalt companies, mostly from China.
We have not lost any significant share to the industrial robot players that have entered the cobalt market in the past couple of years, but we have lost a few points of share to the Chinese pure play entrants and almost all of that share losses, specifically in China. So I said that our share was like mid thirties worlds.
Slide <unk>.
If you exclude China, our share worldwide is over 50% around 50%.
And it's much much lower in China and to be really Frank we are we are struggling with coming up with the best solution to gain share in China, because a lot of that market is being served at prices that are profitable for us and we're not really interested in growth at the expense of overall profitability in <unk>.
It's the wildfire west we have.
About.
Yes.
Total EMR market is about $2 billion per year, and our share is probably in the range of about 3% and were in a crowd of a whole bunch of other companies that are in that 1% to 6% range.
The the thing there is that it's very fragmented there is no clear leader and.
I think we see competition, but we believe that it's fragmented and we'll be able to outperform.
Thank you. Our next question is from C. J Muse with Evercore ISI. Please proceed with your question yes.
Yes. Good morning. Thank you for taking the question I guess first question was hoping you could.
Speak in more detail.
Around the 35 million shortage.
Specific to auto and.
I guess, what would enable those revenues to come in earlier in Q3.
Sure Hi, it's Andrew Thanks for the question.
I'd say, it's spread across the entire semi test portfolio.
Across.
Many of the product lines and the supply shortages are as.
As I've noted in the past really tied to analog and linear logic.
Couple of other items, but those are the ones that as we're working with our supply chain partners to a supply comes online.
To enable that and so.
Right now it's excluded from the range and we're trying to be transparent just as we have over the last couple of years.
Okay.
I just want to be clear that.
Got.
I was hoping perhaps you could kind of rank order.
Three nanometer complexity of unit growth.
Potential for edge AI demand and any other kind of drivers we should be thinking about it to support growth for that business next year.
Specifically in mobile.
Sure.
Yes so.
In mobile.
I would say that.
We bake edge AI into the complexity factor. So the edge AI is is the market poll that is causing.
The chipset that mobile processor developers to go to three nanometer and increase their transistor counts a lot so I <unk>.
I think thats, probably the key driver for complexity in mobile is.
For AI in the handset.
Having said that the the pace at which complexity increases.
Is kind of the linear its not it hasnt inflected up its not inflicting down it's been a pretty consistent factor the thing that we see inflect in 2024 is a.
Hey.
Is the unit volume so.
Yes.
When we look at this we tend to look at peak quarters peak shipment quarters.
And the peak shipment quarter in 2020, and 2020 was 20% higher than the peak shipment quarter in 2022 for smartphones.
And that's a pretty big hole to try and dig out of.
Next year unit volume is going to inflect and complexity is and has been increasing over the past.
We'll have been over the past four years.
So we expect to see unit volume being the driver.
Thank you.
Thank you. Our next question is from <unk> with J P. Morgan. Please proceed with your question.
Hi, Thanks for taking my questions I guess, if I can start on somewhat related topic. When you mentioned the <unk>.
Benefit of demand Youre seeing on the memory side, but maybe if you can share your thoughts about crane for any for looking at next year, where the biggest impact on the business would it be from AIA demand perspective memory and any other pieces that you see that demand coming through and I have a follow up thank you.
So.
The.
Cloud AI driving.
HBM and DDR five is something that we expect to continue.
It's still a.
The.
The application of AI in mobile is going to drive the adoption of <unk>.
Next generation Flash protocols and that will also drive performance tester sales into that segment.
And then when you look in the Soc space.
There is significant business of course for traditional compute suppliers.
But it is the primary driver for vertically integrated producers too.
<unk>.
To be developing their chips and so.
We're looking for growth in those Vips in 2024 for both.
Especially for cloud AI, hyperscale or type stuff, but also in terms of AI capabilities in vehicles, we expect that that's going to be a driver.
Of business from those non traditional compute players.
Okay, Okay, and a follow up.
Just going back to <unk> question on robotics profitability I mean, we can see that based on what you've done in that segment looks like breakeven point is more sort of around $3 $60 million to $400 million annually in terms of revenue.
Any thoughts in terms of what level of scale, you need to get to year end sort of targets in relation to profitability in that segment.
As you think about the sort of next few quarters, what does the donut owned and revenue look like how long how much longer before the distribution channel hiccups or out of the way and then you're more dependent on the macro any views on that as well. Thank you.
Sure. So let me let me take that backwards. So the in terms of how long does it take.
We expect that we're going to see significant improvement in Q4 of this year related both to the release of the U R 20 and also.
That will have given us kind of 12 months of direct account coverage and some large accounts, which is on par with what our normal sales cycle is so we're hoping to see some some improvement in Q4 results over where we are now.
In terms of the scale for profitability I think it's probably best to talk about that in terms of where we are now and where we're heading to so our target going into 2023 was that this group was going to yield 5% to 15% profit and we have capitulated against that because we're not achieving the growth.
With.
That is our baseline in terms of our planning for next year is to return to that range.
And by the time, we are at the end of this mid term and the 2026 timeframe, we expect that profitability range too.
Eek up a couple of points from there, but the answer to when the profits that we make from robotics is in the same range as our sort of mature semi test business.
That really depends on the growth rate that we're seeing as we exit this midterm. So if we're if we're on track and that business is growing 20% to 30% per year. Then we're going to continue to drive it in that 10% to 20% profit range, because we see a tremendous larger.
A larger future value by doing that if we're seeing that we've misunderstood the scale of this 500 billion dollar potential end market, then we will be changing gears and trying to.
To reduce our opex in those groups to try and get into the into the same range as the rest of the company. The rule of thumb that we are that our we're planning two is we want that group to operated at rule of 40 and.
I would be.
I would be delighted to have it.
Delivering 30% growth in 10% profit exiting the midterm because that means that we'd be on track for having that unit. It at multiple billions of dollars over the long term.
Okay, great. Thank you thanks for taking the question.
Yes.
Thank you. Our next question is from Toshi Hari with Goldman Sachs. Please proceed with your question.
Hi, Good morning. Thank you for taking the question Greg a question on the.
The auto and industrial.
Semiconductor test businesses.
I guess the levels that I was hoping you could share.
What roughly what percentage of Soc test revenue in calendar 'twenty, three will likely come from auto and industrial and I guess more importantly, how are you thinking about sustainability into 'twenty. Four I think this has been one of the most extended upturns for your customers and for you guys as well.
I think collectively we appreciate the long term secular drivers and then you spoke to some of them in your script, but how are you thinking about the cycle enter into 'twenty four.
Yes so.
Why don't I I'll take the second half of your question and I'll pass it off to Sanjay for the sort of exact splits in terms of this year.
<unk>.
In terms of sustainability the.
Key thing that we're looking at is the increasing attach rate of semiconductors in.
In cars. So there is.
The the rate of Evs.
As a percentage of the whole fleet is is about a 20% CAGR I like the the portion of Evs is growing as a portion of the total car market and there is twice as much semiconductors in in an EV as there is in a standard internal combustion car when you roll all that together what we're seeing.
Is that the dollar value of semiconductors in each car shipped is increasing at about a 12% rate and thats a lot faster than the total semiconductor revenue CAGR. So theres. This this underlying driver in terms of an increasing attach rate that's pretty fair amount larger than the very.
Asian in automotive demand. So the automotive demand is going to continue the cycle and there certainly could be periods of over buying in periods of of absorption coming in the future, but the fact that the utilization is as high as it is right now and the end market fundamentals.
Our this strong we don't see that kind of softness coming into this year. We were we weren't as confident that it was going to sustain.
Now I do separate industrial out from automotive and industrial is.
It doesn't show the same kind of fundamental strength there are some parts of the industrial market that are booming.
Around clean energy and in terms of the manufacturing infrastructure for Evs in batteries and stuff like that that is certainly consuming semiconductors and it has helped driving significant growth of our business testing our high power discrete devices like Gan.
<unk> silicon carbide so we.
We see we see strength in industrial it's not as.
Pervasive as the strength, we see in automotive.
Is that does that answer that part of your question.
Super Helpful and then Sanjay any color on how yes. Thank you.
Sure from a.
Let me take it from a market and then bring it down to revenue for contact So we view an R. R.
Our view of the market size, we view that auto and industrial is about 25% of the Soc Tam this year.
And relative to our revenue we believe that of the <unk> revenue that we have it's about 35% of our revenue or just under.
Roughly 20% of our revenue overall.
That's how we see the year unfolding.
That's very helpful. Thank you and then as my follow up.
Curious, Greg how youre thinking about the memory test Tam and to 'twenty four.
I think the market has been very consistent over the past several years somewhere in the 900 million to.
A $1 billion range. This year is no exception.
But given what youre seeing in HBM, given what we hope to be a recovery in 'twenty four.
Across DRAM and NAND.
Is there a possibility the market kind of breaks out and it's closer to $1 5 billion is that is that realistic and I guess importantly.
How should we be thinking about your market share.
You spoke about your presence in HBM being higher than your average in DRAM, but if you can kind of provide a little bit more context, there that'd be helpful. Thank you.
The memory market is famously volatile and it is remarkable that the teams have been as stable as they have been over the past couple of years.
I, it's too early in the year right now for us to really.
Peg a dollar value or even a range for next year.
I am optimistic that there is.
There are more up forces than down forces against the the memory Tam next year. So you have.
Our consistent pace of technology adoption that we think is going to continue we think that <unk> is going to continue to grow as a portion of the memory business. We think that the transitions to new protocols are going to happen and from what I've seen in.
In the analysis of the memory makers it appears that they're working through their inventory and that they <unk>.
It may be in a position to start adding more capacity in just in terms of the mainstream of their business. So I think it's I think it'll be up but I am not going to I'm not going to agree with the number that you put out there.
Thank you. Our next question is from Brian Chin with Stifel. Please proceed with your question.
Yes.
Hi, there good morning, thanks for letting us ask a question.
Maybe I should just re clarify something.
Sort of the math around industrial automation.
I think to achieve the low end of your revised flat to down 10% forecast I might have to put input a pretty very strong sequential growth in <unk>, even beyond kind of normal seasonal is that correct and if so what are you factoring in.
And does that include like Rev. Rec on that backlog of your <unk> that you have or something else.
Yes, so I think the way I would model it is.
Normal seasonal Q4, plus the additional shipments of EUR 20.
We're expecting our Q4 is always our strongest quarter of the year and we have.
We've been taking orders for the EUR 24, nearly a year at this point and and we have we have a significant backlog that will support.
Sort of a new layer or basically it represents additional Sam that we're serving that we were unable to serve before.
Got it.
Is that just sort of the release point is <unk> why that's sort of.
Backlog up to the end of the year now so we.
We began shipments of the robot at the end of the second quarter, we will recognize that revenue.
Plus continue shipments in the third quarter, but the the.
The volume per week is increasing as we go through Q4. So the bulk of the revenue is going to be in Q4.
Okay got it got it thanks, Thanks, Greg.
And then.
I'm just curious on the other side of sort of this inventory correction I'm. Just curious how are you thinking about sort of native demand a lot of talk about complexity here testing understandably. So when you think about native demand for smartphones on the other side of this unit correction do you kind of even though it's been a big driver of the test.
CAGR historically.
In relation to auto in relation to high performance compute maybe parts of the memory Tam as well.
You think SFC mobile potentially as a bit of a drag on the test CAGR over the midterm.
So.
It's interesting we had a conversation about this yesterday and.
We expect.
A pretty robust recovery in mobile over time.
But at this like while this has been going on.
<unk>.
Mount of semiconductors in cars and the complexity of semiconductors in cars is really accelerating and the investments around cloud computing, and especially AI accelerated cloud computing R.
Are proceeding at a pretty good clip. So when you look back in time are sort of.
Sure.
A large.
A large portion of the whole Soc Tam was mobile.
We're years for us where it was over 50% of our Soc sales went into that space. What we what we see looking forward as we think the whole market is going to grow at kind of 8% to 13% CAGR.
<unk>.
That mobile will come back, but the rest of the market will have grown so that it's less concentrated in that area. So it's not like mobile's dead, but we think that there is a greater level of diversity across segments looking forward.
Okay.
Thanks, Greg.
Thank you. Our next question is from Sidney Ho with Deutsche Bank. Please proceed with your question.
Great. Thanks, I just wanted to follow up with that Brian's question. If you look at Q4 guidance.
Being flat.
Over the quarter you talk about.
The robotics business up quite a bit.
In Q4, but what gets you to flat revenue in terms of what are the businesses down taking any particular segment you would call out that may.
To be below normal seasonality.
Hi, it's Angela here. Thanks for the question I think it's just the timing within our semi test portfolio that youre seeing kind of the ebbs and flows it's not uncommon for Q4 and some of our test businesses to have a lower Q4.
Nothing more than that.
Okay, that's fair.
Let me switch over to talk about the compute SSD.
Sounds like that is definitely stronger you raised the overall Tam.
But maybe within a computer.
Now $1 3 billion instead of $1 billion that you talked about a quarter ago within that number how should we think about that vertically integrated producers today and how that could look like next year, and maybe what kind of market share how you're expecting within VIP group.
You mentioned.
So.
One of the one of the things that we have highlighted about vips is because.
There are.
Relatively small number of players and the parts that they are producing are quite complex that it's going to be spotty that there will be.
Capacity buys that happened for particular devices.
And they will.
So one customer will pop and then a different customer or pop. So we think that year on year from 2022 to 2023, the VIP Tam is going to be down a bit.
The our share.
Like last year, we had more than $100 million of revenue and Vips. This year, its probably between 50 and 100.
<unk>.
So I don't I don't know exactly what will be in 2024, but by the time, we get out to 2026, we think that that Tam is probably going to be somewhere.
We're north of $500 million, so it's going to be.
Significant chunk of the overall Soc Tam by the time, we exit this midterm.
Thank you. Our next question is from Krish Shankar with TD Cowen. Please proceed with your question.
Yes, hi, Thanks for taking my question that drove them, Greg I'm, just curious on the DDA.
<unk> high bandwidth memory test.
Is it skewed more towards wafer test of final test and what are the markets you're in either of those and then I had a follow up.
So.
The.
The fun thing about <unk> is that.
It doesn't go into a package. So it's essentially all wafer test. The there are two phases of that wafer test. So there is a.
Test of.
The memory itself and then there is an interface performance test.
Which is done at the wafer level and.
So.
Once all of that test it takes place and the HBM has been built up then it gets shipped off to be incorporated into a.
Chip, let based design for the final product.
The Tam that we're talking about for HBM test is probably roughly split about half and half between the core testing and the performance testing.
Got it got it very helpful.
And then just to follow up on the VIP.
You said, it's going to be 50 to 100 million this year compared to almost over $100 million last year.
Is that basically skewed towards one customer one auto customer for you or is it more to diversify.
It's much much much more diverse so last year.
What you could probably think about as that.
The broad diversity of customers from last year to this year is actually increasing.
But last year on top of that broad base or.
A single customer did pop for a lot of a lot of capacity. So I think that's so I guess the answer to your question is yes and no.
Got it okay. Thank you.
Thank you. Our next question is from <unk> Malik with Citi. Please proceed with your question.
Hi, Thank you for taking my question, Greg I have a question on your robotics business you spoke about.
Two challenges.
Teradyne not be able to build OEM channels.
Fast enough and then macro environment and I'm just trying to understand how much of this is on you guys and how much of it is in macro is it more like 60% on you guys, but not filling the channel.
Could be.
Hi.
Wait robots and 40% macro if you can help us out on that.
Split.
So.
It's a it's a tough split to make because.
The.
If you if you compare us to peers in industrial automation, we have.
Have a significantly different lead time profile than most industrial automation players. So we're working with kind of a five week lead times.
And for industrial robots and for standard automation those lead times are out kind of two quarters.
So we tend to compare what our business is doing to what their businesses are doing looking at order rates.
And so if you look at order rates for say EUR were down roughly 10% year on year.
So first half a 22% in the first half of 'twenty three.
If you look at some of our robot industrial robotics peers, they're down 20% or greater over that over that same comparison period. So there is definitely a broad economic headwind that we're facing but because we're coming into this space as a disruptor, we would expect to have significantly higher growth.
Then the main players and right now we're not happy with the growth that we're seeing we also think that we should have greater immunity to these cycles, because we're solving a problem that these manufacturers have whether it's it's good business or bad business and so I think the what Youre seeing is our current.
Distribution is quite vulnerable to macroeconomic cycles and the distribution the distribution setup that we're moving towards is going to be more suited to deliver consistent results.
I would I would say that it's.
Honestly I think it's mostly macroeconomic that the macroeconomic headwinds are particularly bad given the types of customers that we serve and the way that we serve them.
The build out of OEM and large account coverage is something thats going to give us.
<unk> immunity in future.
Future headwinds.
Thank you that's all I had.
Okay. Operator, we are out of time, so everyone. Thank you for joining us today and those in the queue I'll follow up shortly.
Shortly after this call and we look forward to talking with you in the days and weeks ahead bye bye.
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