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

Hi, I'm Shane Brett, a U.S. semiconductor and equipment analyst. I have a quick disclosure to write. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I'm honored to host Greg Smith, President and CEO of Teradyne. So let's get started.

I want to start with a few longer-term questions about Teradyne and the broader test industry as there's just some remarkable developments underway. So just beginning with kind of the industry environment right now, semiconductor test was about $9 billion in 2025. And it surpassed the 1% buy rate relative to the semi industry. Could you walk us through the kind of key drivers behind this increase in test intensity to sort of these levels we haven't seen before?

So it's a really good question. So the first thing that I'll say is that like buy rate, as an engineer, I kind of object to the notion of buy rate because it doesn't -- like it's accidentally right, but it doesn't reflect the actual dynamics of the market. So people need to buy new capacity to support revenue growth, not to support the same level of revenue that they had before. So what you'll see in markets that are strongly growing is that the buy rate relative to revenue is actually going to go way up but at -- when the revenue ends up being stable at that higher level, then the buy rate drops down. But it's not that the capital intensity is reducing. It's that you need new stuff to build that increased capacity. And so what we're seeing right now is a massive increase in the capital intensity associated with AI compute. And that's in the memory space and in the SOC space. And it's even more remarkable because if you're talking about a buy rate, that's the ratio of revenue, IC revenue on the bottom and tester revenue on the top. If you look, the things that are driving the revenue are actually the high-margin part of the memory business, so HBM, and the high-margin part of the SOC business, which is the AI accelerator stuff. So if you look at the test intensity as like a ratio of the device COGS, it's a much larger increase because so much of the money that's being made in memory is on ASP increase and so much of the money that's being made in the AI accelerator space is on the high margin in those devices. So it's actually -- like it's crazy, high increase in test intensity.

So I guess to kind of sum up the argument, buy rate is probably something we should look at through cycle, and the kind of buy rate relative to COGS will be the homework that we should do.

I think the thing that I would -- for model builders, I would say that the thing you want to do is you want to look at it's a derivative market. So you want to look at revenue growth as the primary thing that drives ATE TAM, not total revenue.

Got it. I kind of want to -- on that sort of -- I'm sorry, I'm going to dig into this buy rate a little bit, but it doesn't appear that the sort of test intensity is set to slow down anytime soon. But we all sort of remember what happened in 2020 and 2021. Just how is the current cycle different from the kind of SOC boom we saw 5 years ago? What differentiates this environment from that period?

Yes. So in -- so by the way, like I think of this as what happened in 2022 and 2023. So in 2020 and 2021, there was a really rapid increase in the size of the ATE TAM and Teradyne revenue growth was really terrific. And it was really all around the mobile boom. And what happened during that period of time was it was a period of rapid improvement in mobile phones, which drove a higher refresh rate. People bought phones more often. We had a global pandemic, and so disposable income, like people no longer were spending money on going out to restaurants. And so all of a sudden -- but they were spending hours every day staring at their phones. And so they wanted to -- they wanted the best latest phones. So there was a increase in the refresh rate and also an increase in the mix of phones towards the premium tier. All of that combined to really create a surge of demand around the mobile segment. But it was very, very concentrated and very driven by the external factors around the COVID pandemic. What we see here is something that is much broader and driven by factors that have much more longevity. Essentially, we are already hearing about NVIDIA talking about demand firming out in '27. The time line to build up data centers is such that people are like buying the land, trying to get the gas turbines, all this stuff out multiple years, and the rate of growth of AI revenue for the AI players is such that they're leaning very, very hard into this capital expenditure. For sure, there are downside risks against this cycle, but it looks entirely different than what happened in 2020 and 2021. It's far more of a like the difference between a hype cycle and something that is probably sustainable at least over the midterm.

If I were to be a bit of a pessimist and say, 2026, super high semi test intensity. '26, we may see a digestion. Your kind of rebuttal will be there's a much broadening of the customers. AI revenue seems to have a little bit more durability and longevity. These kind of CapEx plans are kind of spread through years.

So I feel like there's waves in the AI space. So in 2025 and into 2026, most of the growth in memory is really revenue growth driven by ASP increase. Like more people are chasing after the same number of parts. We are not seeing -- we're seeing very good, healthy TAMs, but we haven't seen the impact of significant capacity increases in memory. That's more of a '27 and beyond thing. We are seeing significant growth in AI accelerator and in networking, but none of that incorporates the complexity and the TAM expansion that we would expect to see from the introduction of co-packaged optics for scale out and scale up. Those are things that are likely to like be the next waves falling on the shore. And beyond that, we are still in a world where Edge AI is not yet a market driver. But in terms of delivering a compelling user experience, there's a future where smartphones are running large language models. And in order to do that, the complexity of the silicon in those phones, the amount of memory in those phones is going to need to be significantly increasing. And so that would be like the next wave crashing on the shore. And because of Teradyne's exposure beyond just wafer to package, we go all the way from wafer to data center. The changes in data center architecture are a tailwind for our product test business. The need to build and maintain these data centers and to build the equipment is a tailwind around our physical AI and robotics business. So we think that there's a fundamental transformation of the global economy that is happening because of AI. And the thing that drives that whole transformation is the silicon.

Great. Great. I guess then let's jump right into compute. So 40% of your SSD revenue, just largely driven by networking and VIP. Just can you discuss what you're seeing across those kind of 2 customer cohorts?

Yes. So in networking, Teradyne has a very good market position in the networking part of the business. The most remarkable thing in the networking business has been how quickly NVIDIA has grown in that space. And so if you look back a few years, the network part of the market was it wasn't very fragmented, but there were a lot of players that mattered. Now essentially, it's kind of 3 players that matter, and we have a good position with all of them. And so as data center architectures are becoming increasingly dense from a network connection perspective and the network switch technology is increasing, we're seeing increased test intensity and increased unit volume for this business. So we think that, that showed significant growth from '24 to '25, and we think that it's positioned for growth out in the future. So that's networking. Now VIP compute, the thing about VIP compute is there are a lot of hyperscaler ASIC programs, different device types, different hyperscalers that have their own ASIC development programs that are going on. At this point in time, there are only really 2 that are at scale. And then if you include Edge AI, automotive applications, it's 3. It's possible and even probable that other hyperscaler ASIC programs are going to scale, but they have a really high bar to try to produce more tokens per watt than what you can do with merchant GPU. And networking is a -- like it's a very difficult challenge. And so for particular hyperscalers, if a lot of their workload really comes down to something that can be reduced in silicon, video encoding or something like that, I would expect those things to ramp but at a much lower complexity than the merchant GPU or the ASIC programs associated with training. So right now, that market is very concentrated. There's kind of 2 major programs that you want to be a part of. And as of the end of 2025, Teradyne has kind of fought our way to about a 50-50 share of that market, which is much higher than our position in merchant compute.

I want to go back to the networking portion. As customers are sort of pushing the envelope with increasingly complex silicon photonics or co-packaged optics and you're sort of enabling that, just how high do you think that sort of -- what are you seeing in terms of test intensity for networking and kind of your demand for that end market?

So there's a lot of preparation work going on right now for silicon photonics and co-packaged optics. It is not a meaningful part of the end market at this point in time. It's certainly optical networking is a big thing and optical connections at the sort of data center level and long haul totally in the optical domain. But for scale out rack to rack and scale up, it is not yet really had an impact on the market. That being said, there are many, many development programs that are going on as we speak. And those are driving a lot of activity in the market, and Teradyne is a very good position. We believe that this is going to begin to have a volume impact beginning in the second half of this year. And in 2027, it will be meaningful but not a huge deal. The best way to put this into context -- and by the way, there might be upside from this view. But if you look at our long-term model, we have this long-term model that is around like what are the conditions for a $6 billion revenue at Teradyne? In order for Teradyne to be $6 billion of revenue, we expect the ATE TAM to be in the $12 billion to $14 billion range. Inside of that $12 billion to $14 billion TAM, we think that the total computing TAM, so that would be merchant computing, VIP computing and networking, that that's probably about $8 billion of that $13 billion, so big. But as you divide that, the merchant computing part of that is probably more than half of that. And then the rest is divided between VIP compute and networking. In the time frame that we're talking about for this model, where you're talking about this $12 billion to $14 billion TAM, we would expect that the silicon photonics and co-packaged optics would be 1/3 -- 1/4 to 1/3 of that networking TAM, so hundreds of millions of dollars but not like a game changer for the whole ATE marketplace.

I guess I want to go back to that $8 billion compute TAM. So when we think about it, you said half of it comes from the merchant GPU opportunity where you're starting to make inroads. Half of it comes from networking and VIP, networking, where you have dominant share; VIP, where you're splitting it. When I think about the kind of merchant GPU opportunity where you haven't historically had exposure, could you kind of remind us what's the progress on kind of penetrating into that market and what's the kind of next steps in that progress?

Yes. So what we've talked about before, and we are on track with what we've said before, is that we believe that we will achieve a tester qualification in the first half of 2026 and that we will start to see some revenue -- some production revenue associated with this in the second half of 2026. But it would be like single-digit -- low single-digit percentage of share for merchant GPU in 2026. So it's going to take a while to take off from where it is. That program is proceeding on schedule. We are still on track to achieve that. And let me describe a little bit about how this works. When you're trying to qualify a new tester, what you want to do is you want to make the new tester the only variable. So you pick a stable high-volume device as your vehicle to do that. And so as you go through it, you can be pretty sure that if there's a difference in the results, that the difference in the results is due to a difference in the tester platforms, not anything related to the device itself. Once you've -- and that project is pretty extensive because you have to convert all the libraries. You have to develop all the test algorithms to work across 2 platforms. Once all of that's done, then you've shown that, that tester is an equivalent and you've qualified the tester and the libraries. Now you can go into a mode. So the first thing that can happen once you achieve that is you can test that part. And so that would be the first production usage, is testing the specific part that you've converted. The second thing that happens is you can go into, what I would call, a fast follower mode for other devices. And you would be focusing on devices that are earlier in their life cycle, and you would be trying to develop a test solution for those devices so that the customer would have the choice of loading the incumbent platform or the challenger platform. So that's the second phase, is this fast follower phase. We believe that between this initial qualification in the fast follower phase that, that is enough for us to get up towards like meaningful share towards 30% share of GPUs. To get higher than that, there are 2 things that need to happen. One is that most customers in this space, including merchant GPU customers, are exploring a DevOps approach called tester agnostic development. So what they're trying to do is they're trying to develop the test solution without -- with abstracting the characteristics of the tester that they're going to put it on. And we've done this in the VIP compute space. We are applying it in the merchant GPU space. And so what that means is that the customer can defer the decision about which tester to put it on until later in the process. The other thing that happens is as you do more parts in a fast follower mode, the customer gets more familiarity with your platform, and you have the opportunity to compete for -- to be the sort of the primary platform for a new device. And that's something that's probably 3 years out in the future. It takes a while to get to that point. But at the point in time when you have a qualified platform, then it becomes more around the characteristics of the tester. So if, for example, we have a better solution for a new technology like PCIe 6, then we might be selected for a part like that as the primary; or if we're able to handle higher device power requirements, that would be a way that we could -- like once you're qualified, you can then win those kinds of opportunities. And it's like -- it's not that I would expect to run the table and own the account, but it gives you more opportunities for share gain once you've achieved qualification.

I guess to kind of sum up what you said there, so I guess the initial step is getting into a high-volume manufacturing product. And then the next step would be getting to a fast follower status and starting to get -- kind of expanding your share from there. And if your customer goes towards a tester agnostic platform, then you're kind of on a level playing field.

Yes. So like a tester agnostic platform, you can almost think of that as faster follower. So it makes the supporting multiple platforms even easier than if you have to do a part-by-part conversion because they would use that tester agnostic development approach even in new part development, but they would like, by default, go to their incumbent platform because they know it so well. And so it just -- it reduces the level of effort to support multiple platforms by a lot.

Got it. Got it. Got it. I want to shift over a little bit towards memory. As DRAM kind of -- you've broken into compute. DRAM is also an area where you've sort of gone back to that level playing field. Just could you begin by just discussing the changes you're observing in DRAM, particularly as just wafer test evolves from a commoditized step to, I guess, a more performance-oriented one and just where this DRAM test intensity could get to? Loaded question.

Well, no. It's -- there's a lot of DRAM wafer sort that is still commoditized. So let's talk about an HBM memory for a minute. So to build an HBM memory, you have a stack of DRAM die. Those DRAM die get tested at the wafer level and that test at the wafer level, before anything gets stacked, that is a relatively low-tech test insertion. You're validating the core of the memory. You're testing that every bit works. You're validating various timing parameters. That is a tough test step to differentiate on because the test time is largely set by the architecture of the device. Once the DRAM die gets stacked on the base wafer, now you're into the performance test. And that performance test is quite differentiated between tester suppliers that you have differences in capital lifetime, in signal integrity, yield, throughput. All of that is there's a lot more differentiation potential at that test step. And then after the wafer gets diced up, each of those singulated HBM stacks, in some cases -- in most cases, that stack is not tested again before it's put onto a substrate with an accelerator, but there is an increasing trend towards testing each one of those stacks by itself. Okay? So singulated stack test. Our gains have been primarily in the area of stack -- wafer stack test. And in that space, we've been able to get better than 50% share against the commercial part of the market. There is one major memory manufacturer that has their own test solution, and so neither us or Advantest is getting that part. But for the part that's up for grabs, we're kind of splitting that. Advantest's share is higher in the wafer, the nondifferentiated wafer sort space. Our share is very good in the stack test and also in like traditional DRAM, DDR5, LPDDR6. We have good share in that final test as well. Now the way to think about this is for HBM, as you look at HBM, there are kind of 2 parameters around what -- describing HBM stack. One is how high and the other is the HBM standard. So if you go from 8 high to 12 high, that is a driver for the TAM of wafer sort. But if you go from HBM3 to 4 to 4E, that is primarily a driver for the post stack wafer test because you have new data rates. You have new test coverage that you need. That's the part of the market that gets driven by -- where we are strongest.

So across all 3 steps of DRAM test, we're sort of increasing intensity. So you guys are all kind of -- it's like a high tide lifts all boats situation with DRAM test.

With -- for DRAM test, yes. I mean there is -- it is unlikely that there is going to be something that takes the wind out of those sails. If you look way back in time to like 2008, there was a fundamental change in like flash memory, where flash memory controllers could begin to work with imperfect flash memories. And more and more built-in self-test was being incorporated into devices, and the site counts went way high. We're now at a point for like memory wafer sort, it's one touchdown and getting to higher throughput than one touchdown per wafer is very high. And the rate of technological change for the final test is also very high. So the kinds of things that depress the TAM are absent and the kinds of things that increase the TAM like unit volume and complexity are going up.

Got it. Got it. I want to move over to a market where you've historically had really high share, which is SSDs and HDs, just storage. What do you see in that market? Just now that we're seeing kind of the end markets for that market get stronger, are you starting to see signs of that tester purchases pick up?

So from a HDD rotating storage, we are definitely seeing signs of life that -- and this is a part of the market that works against pretty long lead times. And they had -- even when demand in that market was quite low, we were still shipping at low rates and increasing the amount of capacity in the market because, essentially, the players there wanted to keep our -- they wanted to keep us in the market so that we -- like when they needed more capacity, that we would be there to do it. So we went through that whole period of time. We have now gotten to the point where all of that installed capacity has been filled up. And the market for that is growing significantly from '25 to '26, and that's HDD. In HDD, we also are winning new customers. So we've historically had 2 big customers in HDD. In -- we've now won a third customer in that space, and so we expect to grow associated with that from a share gain perspective.

And that will be in system test.

Yes. So this is all part of the integrated system test group, and those results -- we aggregate those results financially into our semi test group, but we don't count that as part of the semi revenue or the semi TAM. So -- but because what we discovered is that as that integrated system test group was doing more and more system-level test of semiconductor devices, it really made sense for us to aggregate the go to market and the technology between the semi test group and that group. So we combine that. We combine those results, but we do break it out in terms of the SOC and memory revenue and the TAMs that we serve. Now on the flash side, there's a disconnect that we haven't figured out yet. We see that from a data center perspective, data center architecture, server architecture, that the amount of flash storage, like the SSD that are required going from generation to generation, is significantly like a triple in flash capacity. At the same time, we don't see the investment in capacity from the flash manufacturers.

On the front-end side.

On the -- well, from the manufacturing side, so in terms of the foundry investments that they're making or the test forecast that they have. So I don't think that, that mismatch is going to last forever. So it's either going to turn into additional upside in HDD or we're going to see sort of more investment allocation from the memory manufacturers in the flash space, and that's probably going to drive TAM increases for us there.

Got it. So DRAM, pretty strong; HDD and SSD, sort of waiting for demand to pick up.

No, no. So DRAM, really strong. HDD has inflected, will grow. SSD, we're waiting for a shoe to drop. Like we haven't seen that inflect yet.

Got it. Got it. Got it. I want to move over to mobile, so historically, really strong end market for you. We're seeing packaging transition towards more chiplet architecture, but unit demand is -- probably feels a little bit lackluster this year. Just how are you thinking about this mobility end market? What are your kind of outlook for '26 there?

So if you look at the -- there's sort of 3 things that affect the size of the mobile market. One is device complexity. The [ X ] is unit volume, so handset volume; and the third is tester fleet utilization. We think that 2026 is going to be like one of the best years we've had in a long time in terms of device complexity. And that's both transition -- node transition and also for the premier tier, a transition in memory technology. So that is a tailwind. The unit volume right now, it looks like that is likely to be a headwind. And that is kind of price elasticity with demand that if phones cost more because memory costs more, then people are going to buy fewer phones is the equation that people are working through in their minds right now. So we'll see. We'll see how much margin phone manufacturers are willing to eat in terms of higher memory costs in order to maintain unit volumes. The third thing is tester utilization, and we have a huge fleet of testers to test mobile devices. And that gives our customers a lot of ability to optimize the way that tester fleet is used, and they've been able to -- they've been able to increase utilization in a pretty significant way over the past few years. We always think that they're just about out of cards to play there, but they continue to surprise us. So we believe that we're looking at a mobile market that is as strong or a little bit stronger than it was in 2025 in 2026, but there's some upside potential around complexity, and there's some headwinds associated with the unit volume.

Got it. Got it. And I guess kind of wrapping up this talk on semiconductor test. Great things happening in compute. DRAM is great. Mobile, we'll see. How are you getting your supply ready to meet this idle wave of demand?

Well, I think the same thing -- the same reason that we're seeing opportunity in the customer space. The main reason we're seeing opportunity in like merchant GPU is really around supply chain resilience, that, in essence, dual -- like competitive dual sourcing is a way to provide significant resilience in your supply chain. So we know that from the customers that we serve. We apply that same approach to our procurement. So we are primarily outsourced manufacturing. We have enabled our highest volume platform to be produced by multiple CMs. And we are working with both of those CMs to increase their capacity. And behind them, all of the component suppliers, we've established an envelope that is very aggressive against our 2026 demand picture because we are on a platform that has legs. We're going to be -- that this platform is going to last a very long time. We want to make sure that we have enough material to be able to respond to upside demand. But the key difference between us and our competitor is this idea of using competitive dual sourcing in our supply chain.

If your customers come over to you and tell you, "Greg, we need more testers," you will be ready.

Yes, and we'll be ready with really competitive lead times.

Great. Great. I guess last question. We've spoken about a really strong demand environment for '26, but at your latest earnings, you did talk about a first half weighted demand environment. Can you just kind of talk about that? Just what do you see between the first half and the second half? Is there anything different?

Sure. I mean, one of the things -- we talked about a first half weighting, and part of that is limited visibility into the second half of the year. Economic conditions, programs that have not yet ramped, share gain that we're not sure of, so part of it is uncertainty. But part of it is also that many of our most important customers are leaning hard into capacity adds in the first half of the year. So if that's the case, those -- it's like you have a certain number of bullets in the gun. If you shoot a bunch of bullets in the first half, you don't have that many bullets to shoot in the second half. So that's part of it, is that we don't see the same kind of like untapped potential for the second half that we do in the first half. That doesn't mean that like we think that the market is calming down. It's more that the market doesn't follow pure calendar year cycles anymore, that -- and the -- like one way to look at it is that 2025 was back half weighted. 2026 is front half weighted. The other way to look at it is we're in the middle of a 4-quarter boom, right, that started in Q3 of last year, continues through Q2 of this year. And then there'll be a digestion, and then we'll go into the next. And I don't know whether we're working in a 5-quarter, 6-quarter, 7-quarter new world based on what we're seeing right now.

Got it. Well, I think that takes us to time. Thank you very much, Greg. That was amazing.

Awesome. Thank you. Yes.