Teradyne, Inc. (TER) Earnings Call Transcript & Summary

Welcome, Sanjay.

Thank you, for having me.

First question on the [indiscernible] equipment forecast no longer forecast full year. But would be helpful for investors if you walk us through what has changed [indiscernible] did provide a forecast.[indiscernible]

So yes, that's true that we have stopped providing our TAM update publicly. But I will share a little bit of color as what's going on in the market from our perspective. So when I think about it, I'll cover -- first, I'll talk about compute. The compute segment has consistently grown and is very strong, really driven by AI. And from our perspective, what's driving our growth, and we'll have a strong second half, but what's driving our growth is really tied to AI driven by custom ASICs at vertically integrated producers or VIPs, also known as hyperscalers. And we talked about on our call that these shipments, we expect to be lumpy because they're really tied to project ramps. We have some projects toggle in Q3, Q4 and Q4 and Q1. But overall, from a market perspective, compute continues to be the dominant market segment in semiconductor test. Moving to mobility. Mobility was really first half dominated in the market tied to, I would say, supply chain transitions. In our call, we talked about this being transitory and specifically that it wasn't end market driven, but really tied to supply chain shifts versus complexity or incremental volume in the smartphone market. Moving along to auto and industrial. I think the best way I'd describe it is it's still in a well. While we haven't and moderating at that low, while we haven't seen it weaken. We haven't seen it increase as well. So it's operating at a low level or as I called it a well. Moving to memory. Memory is very exciting. In 2024, there was a very strong memory TAM. And we called for a decline in January of the memory TAM in 2025. We still view that as reasonable. And we anticipate -- the reason is, is that there's a significant amount of HBM testers shipped in the marketplace that need to be digested. And in Q2, as we anticipated, there was a decline in shipments in Q2, but second half appears to be quite strong. Again, driven by HBM memory testers. Flash continues to be weak really tied to the smartphone market. And just looking forward, I'm not necessarily going to talk about 2026 or maybe I'll have a comment at the end about 2026. But looking forward, from a market perspective, we really see, as we talked about in our Analyst Day, 3 key themes tied to enabling a continuing growing market. First is AI. It's going to continue to drive compute and memory. The second is electrification and third is Verticalization. We have a strong conviction that those are going to continue to drive the end markets up into the right. And I would say about 2026, if I reflect on our view of the second half of 2025, and we've only guided Q3, but in general terms, our business is really driven by high-performance compute and memory or really AI. And when I think about looking forward in 2026 or even beyond, we see that continuing. And our business is no longer tied to mobile end market launches, which are typically in the second half of the year. And so if mobile comes back and you know there's tailwinds and headwinds. The tailwinds are obviously 2-nanometer gate all around and that complexity of products being launched, we'll be ready, and we'll be ready to ship, but our plans are such that our revenue is such -- is diversified now that it really is tied to AI.

That's very helpful. Sanjay, let's start with the compute market first. It was great to hear on the last earnings call that Teradyne has been invited to the GPU game. Can you share Teradyne's strategy to break in? And how does Teradyne differentiate from the incumbent?

Sure. So first, let me reiterate what we said on the call. We haven't won anything yet. We don't have any orders. We haven't been qualified, what have you. So just clearly, I want to just comment. And I don't want to talk about any specific customer. But when we think about kind of merchant GPU customers. Yes, it's true. As we noted on the call, we have being invited to qualify and go through the qualification process at a merchant silicon provider. And you measure that process in quarters. And so the outcome of that has yet to be determined. But think about that if we're successful or not as a 2026 outcome, and so our UltraFLEX -- our strategy, getting back to the strategy is that we designed the UltraFLEXplus product tester specifically for high-performance compute kind of bottoms up for this as opposed to an evolutionary increment to an existing tester. So it was designed for this particular market, which we feel very good about. And historically, when we've given the level playing field, we've had the opportunity to be very successful. And we continue -- and that's why when we think about our success in VIPs that we have a level playing field, and we usually have a very good success. And just given the opportunity, it provides us with that opportunity to demonstrate what our capability is. And really, the last point I'll make -- and we made this on the earnings call was that we were giving this opportunity. It was really tied to very large companies, they want to have security of supply. They want to make sure they're not single-threaded from a supply chain perspective, and they want to have the ability to scale. Test is a derivative market. And when the wafers come out depending on the yields or the product quality, to get more known good die, you have to throw more -- sometimes you have to throw more test seconds at it, more testers. And so I think companies are really starting to believe that and are executing against that strategy.

Sanjay the pushback I get from investors is that the test equipment market is very sticky. You have lifetime of 10 to 11 years for these testers. So for Teradyne, and you guys have done historically very well in entering a market and taking share, and I would say LPDDR was 1 example. HBM has been another example. So when you put your R&D dollars to work and you create products that are differentiated, but -- so second sourcing might not be the most compelling reason if the competitor decides to lower pricing or something like that. So the question we get is like, is there a big technology, reason or inflection, whether it's, let's call it, Ruben or whatever platform is being designed for GPU makers that requires an entry point for you to come and differentiate substantially?

Yes. So clearly, cost of test and quality are clear objectives of our customers. And when we come in and supply chain service, there's many factors that really drive a very good relationship. And at Teradyne, we pride ourselves on really demonstrating our capability and making our customers successful. So when we enter a customer situation and you use the example of memory where -- for those that don't know, in 2004, Teradyne entered the memory space through acquisition, we had 4% market share. Roughly round numbers, we grew that to about 40%, 40% plus market share. And we did that by solving complex problems for our customers and driving the economics and the quality and the service that they really enjoyed and were passionate and rewarded us financially for it. And so we believe that recipe is going to continue going forward.

And on the VIP side, and I have to say you guys love your acronyms at Teradyne. On the vertically integrated ASIC suppliers, can you walk us through -- you have a pole position on the networking side. But is the demand for compute a lot stronger than the networking piece. And just kind of help us understand the 2 pieces within compute.

Yes. So we have a very strong position in networking, and we have a growing revenue in our high-performance compute, really tied to the vertically integrated producers of the VIPs and not all of the VIPs are created equal. These are complex chips. And my prior role, I spent 15 years at Qualcomm. These are complicated ASICs and you need very deep technical teams that really understand the ecosystem and how to hit both the time to market and the cost performance of what you're trying to do. But there have been successes with VIPs and there have been, unfortunately, failures at some of these VIPs. We've been fortunate enough to be utilized and some of the more successful VIPs. And our strategy, and I've talked about it, when we have a level playing field, we believe we can compete and win our fair share and our target is to win 50% of these new participants, these VIPs in the market. And so far, we've been hitting that target. And we track things from design wins to tester loading to obviously, the amount of testers we ship relative to the competition. And we're roughly in the 50% level, and we feel pretty good about our position. The last thing I'd say about the VIPs is that they are growing in experience and some with success, some not having so much success, but they're coming back really strong. And as they become more technically capable, they're starting to behave a little bit more and more like a merchant silicon provider, where in the ecosystem, typically test is defined by the design team that specifies the test will specify the tester. And as the engineering capability and their experience gains, those decisions are starting to be made more and more by the designer of the chip and the VIPs. So we feel that this opens up the level playing field where we will continue to compete and feel very good about our position.

All right. Let's switch gears and talk about your Universal Robots. Amazon could be a big opportunity into next year, you guys talked about on your call. Can you touch on why there is a [ lot ] near term. I think in the September quarter, you're expecting industrial automation to grow the slowest among the 3 segments. And you guys have been kind of working towards bigger customers in the last few years? And where are we in terms of that big adoption with the big warehouses?

Sure. So you mentioned the particular customer. So again, I don't want to talk about a particular customer. Now I'll sit here and say, we're not preventing our customers to share their experience with our solutions, which I think is very clear in videos and publications and pictures that I'm sure many in the audience have seen. But my comments won't discuss anything in particular, but I'll share a little bit about our strategy in robotics. And I think you hit the -- what is our strategy, just to recalibrate. One is to -- and we pivoted maybe 1.5 years ago. One is to really drive large accounts. The second is to drive OEMs. So OEMs are, they create a full solution. They purchase robotic arms or AMRs, and they go to market with a full solution and help enable customers' applications. And then third is new product introduction to really address different market segments. And on the large accounts, we have specifically with this focus in place and really why large customers have technical teams that have the ability to ingest the technology and solve problems, they can then really scale. So the repeat business is at a very high level. Same thing with OEMs. They solve hard problems. We sell robots, they fan it out. So that's why we kind of made that strategic pivot. And our large accounts, it's kind of talking about when the volumes would really take off. You should think about it like a second half of '26, really ramp period or kind of key large accounts. And in the industrial market, I think you noted, is in a very weak consistent position. Capital budgets are tight. And even though the ROIs are great for automation, CFOs like me and companies are saying, "Gee, we don't have the cash flow to actually make the capital investment. We're going to continue on with the labor and go, but we're working through it. We're starting to see our strategic pivot take hold as some of the publications and videos you've seen.

And in terms of the profitability of this segment, it still comes up in conversations. Are we still around breakeven level? And are there significant investments required to chase that opportunity in the second half of next year?

Yes. So our expectation is we are not going to break even. So in the beginning of the year, we restructured. We took about 15% of our operating expense, but we really did it thoughtfully and strategically. When we looked at kind of the -- like the overlap of the customer base. We had an individual product line of MiR and a product line of UR that we're servicing a global market in all these different territories and many of them were calling upon the same customer. And so what we did was we combined the teams and changed our sales solution to not only be product focused, but platform focused to enable kind of a more comprehensive dialogue with customers that brought some efficiency as well as some other things. And we had an initial design point similar to the 2024 revenue levels. Unfortunately, the market continues to be weak, and we don't believe that we are going to be at breakeven this year.