Teradyne, Inc. ($TER)

My name is C. J. Muse, semiconductor equipment analyst with Cantor Fitzgerald. Very pleased to have Teradyne. And with us is Greg Smith, President and CEO. Welcome.

Thank you.

Always good to see you in New York. So I guess, near term, wanted to start off with how we ended the last quarter, which was very strong visibility first half, some uncertainty around the second half. I'm curious how that visibility or the dynamics there have evolved over the last 4, 5, 6 weeks.

Yes. So one of the things that we've been trying to help describe is that we feel like we're in a new era in the way that our market works that for a very long time, we were working against a sort of a calendar sequence, that there was -- like Q2 and Q3 were always strong, and that was driven by primarily like mobile and consumer. The new pattern that we're in doesn't really obey year boundaries. And so what we're in right now is like a very strong period that started -- the leading edge of it was in the third quarter of last year, and we have visibility that it's going to continue at a really good pace kind of through the second quarter this year. And we're cautious about the year after that, not because we think there's going to be any kind of a pullback or that there's like a market turn or anything, but just that many of our largest customers are heavily investing during this 4-quarter boom, and we think that there's going to be brief period of digestion before they get into next-generation programs and ramps and everything else. So part of it is that we can't see all of the short-cycle business that will occur in the second half of the year. And there certainly could be strengthening in some parts of the market, like the place that I'd be looking most for like a second half boost tailwind would be like in the memory market. But a lot of the bullets that were in the gun are getting fired in the first half of the year. So we don't have as many opportunities to overperform in the second half.

Makes sense. Maybe moving to AI compute. I want to start with VIP. And you've talked historically around 50% market share for Teradyne. And you did a while ago talk about an $800 million-plus kind of framework for revenues by 2028. I think since then, things have obviously improved. Not asking kind of for an update on that revenue number, but how we should be thinking about the relative growth contributions and whether that share is still attainable?

Yes. So I think the plus is doing a fair amount of work in that sense that we definitely think that there's upside to the $800 million by '28. The thing -- in 2025, we think we held that sort of 50% share in this space. But there are only a very small number of hyperscalers that are driving a lot of volume. And so depending on the timing of program ramps between those 2 hyperscalers, we'll see the share swing. So we've got majority share at one. Our competitor has majority share of the other. As those programs take turns ramping, we'll see share move around. I think that we're going to continue to see over the midterm, additional hyperscalers ramp, and we think that we have a reasonable shot at capturing share in those hyperscalers as they ramp. So I think we feel pretty good that the TAM is probably trending above the $800 million mark. And we think that over time, that we're likely to maintain that 50% share, but it's going to be pretty erratic because it's very lumpy.

So I think historically, the business has been dominated by one large customer. And I think in our conversations in the past, you talked about good breadth of XPU attach as well in there. Curious, is there potential to secure other hyperscalers that are currently using your competitors' tester? Or are there other potential large players entering this market?

Yes. So there are a couple of things that are going on. One, that we think that hyperscalers are going to continue to show a limited amount of loyalty to the design partners that they're working with. So just because the hyperscaler is working with a particular ASIC company in this generation doesn't mean that they'll continue to work in that pattern. And those are not -- I wouldn't call them jump balls, but they are a much better opportunity for us to gain share than if it's just the next generation of exactly the same supply chain. The next thing that's going on is as these programs ramp to scale, the amount of tester capacity that they need tends to go up by a lot, and that makes supply chain assurance more important to them. So the idea that if they are struggling to get capacity from one supplier that they can get capacity from a different supplier gives them multiple shots on goal. So I think that's both a positive and a potential negative to Teradyne that like when a customer is sole source on our competitor, we think dual sourcing is a great idea. When we are the one that has the sole share, we don't think it's such a great idea. But overall, because of our share position in compute, we think that this trend towards dual sourcing is a net positive overall. We also feel pretty confident about our customer satisfaction and the value proposition for our testers. So we're not really worried about significant share erosion due to dual sourcing.

And are you seeing dual sourcing on the ASIC side? Or is that something you see in the future?

Oh, no, no, it's going on right now. So I mean, our strongest hyperscaler account is dual sourced, and they leave a fair amount of the decision to the OSATs and the foundries, and we do really well in that environment.

Got you. Maybe moving to the GPU side of things. You've talked at a very high level around initial win kind of this year and then the hope for incremental share next year and beyond. And I guess, what can you share with us today in terms of kind of customer feedback? And what is the kind of road map for success?

So I'm trying to figure out like we are in a -- like no news is good news kind of a mode. Nothing has gone particularly wrong in the process of achieving qualification. We still expect to achieve qualification in the first half of this year and be in production in the second half of this year. We believe that will start a long process of share gain in the account. So in 2026, we're talking about low-single digits of share of GPU in this merchant account. But the other thing that happens once qualification is achieved is you get follow-on projects. You begin to start on new parts that you are going to bring up on the tester and we'll be in what I refer to as a fast follower mode that like the engineering to introduce a new part to production would happen on the incumbent platform, but we would be able to work on a fast follower strategy from a much earlier point in that product's life cycle. So that is going to start as soon as we have qualification. And those parts when we are finished with our solution would still be in a much earlier part of their volume ramp. So that is kind of the story that what will happen in 2027 is we'll have more parts earlier in their life cycle, which will drive our share higher. But it's probably going to take us 3 or more years to get to a mature competitive dual sourcing environment where what we've seen in other accounts is that's like 2 competitors duking it out and the share is managed in a 30% to 70% range. And the company that gets the 70% is the one that delivers the right solutions for leading-edge technologies, delivers the best reliability, best time to market, best customer satisfaction. So it's not like -- when I say 30% to 70%, I want to make sure that people understand that we don't see like 70% is the lowest that the incumbent goes and 30% is the highest that we go to as a challenger. It's that the share would get managed in that range on the basis of customer satisfaction.

Makes sense. And if I look back at mobility, where you would have typical kind of dual sourcing, it was not for the same part, but different parts. So are you expecting it to be the same? Or would one actually -- let's make up an example, a logic die. Would there be an opportunity for 2 different testers for that part or?

For sure. I mean one of the big differences between mobile and the AI space is the capital intensity against one specific SKU. So -- and also, when you are building up to this competitive dual sourcing, since we will be doing this fast follower approach, we will not have any solutions on our tester that don't already exist on the incumbent tester. So by definition, those are going to be one part hosted on 2 different platforms. Do we expect that there are going to be some parts where we have much higher share than other parts? Yes, we do. But it's not like in mobile, it's like you get RF, you get digital, you get power management. It's going to be much more intertwined than that. And it may end up being like this die it goes to competitor A, this die it goes to competitor B. The final test is a competitive decision between the 2 platforms. That kind of thing could certainly happen.

Got you. If I think about the future road map for front-end manufacturing, high-performance compute is catching up to mobility. And it certainly feels like with Backside Power, GSM that they're going to leapfrog mobility. And so curious, as we see that transition, what impact does that have kind of on test intensity and test insertions. How are you thinking about the high-performance compute impact to the growth rate for Semi test?

Yes. So it's interesting because for like a decade, mobile was the place where the latest and greatest process technology was used in SoC, that like the first into 5-nanometer, the first into 3-nanometer and still the first into 2-nanometer. But the hunger for compute, sort of like anything that you can do to increase the tokens per watt is -- there's a very strong proposition to try and do that. So we think that despite the fact that these advanced nodes typically have lower yields and the die sizes in compute are huge, that these customers are willing to accept that proposition in order to leverage that technology in the data center. That's great news for tester companies because if you need to test 4 parts to get good part, you need a lot of wafer sort capacity to try and pull that off. And that -- so that's a positive to us. The other is in order to try to achieve the levels of compute per watt that they're looking to do, a lot of that has to do with die-to-die connectivity, right, that it's a scale up. And the basis of the scale up, the most efficient scale-up that you can do is by co-mounting as many compute die into the same package as you can before you even get to network-based scale up. So that means that these packages are going to go from having 2 accelerator dies to 4 accelerator dies. That puts an amazing amount of pressure on die quality. So not only do you have lower yield, but you are testing out to a higher level of coverage, which also expands the test time. So like this trend towards using the latest node for compute is a really good thing for the overall TAM.

Perfect. You mentioned scale up. So a good segue to AI networking, historically kind of the bread and butter for Teradyne. Are you worried about this market dual sourcing? Or how are you thinking competitively?

I think like I think it's pretty clear that dual sourcing is to be a thing for most important high-volume sockets. So we have to look at the networking business as something that needs to be defended with product differentiation and customer satisfaction. So I don't think we have a monopoly on like we'll be the sole beneficiary from dual sourcing. But we have a very good product for this space. And I think that the other thing that goes on in networking is if you look at the ratio of big networking die to accelerator die like in a rack, it's like 10:1. And so one of the key things that enables dual sourcing is you have a high volume, right? That -- and so the volume mechanics are different in the networking space than they are in the accelerator space. And that's one of the things -- that's one of the levers around like when would a company say, this part needs so much capacity that I need the supply chain assurance of dual source. So I think with networking, there's a pretty big order of magnitude difference in terms of the amount that you need to get there.

No, I think part of your networking growth rate was kind of muted a bit because of excess mobile capacity and kind of reallocation. I imagine that -- I believe that's now behind us. So I'm curious, with that no longer as a headwind, how are you thinking about kind of the relative growth rate here? And as part of that, would love to hear as networking becomes more complex, how are you seeing kind of the attach rate of networking dollars relative to compute dollars?

So we came into 2024 with a belief that networking was kind of like 15-ish percent of the space. And what we saw in 2024 and 2025 was a really rapid expansion of the TAM for the accelerators for the GPU itself. And later in 2025, we are now seeing networking catching up again. So moving forward, I think we're at kind of a new normal in terms of the size of all of these markets. And our assumption is that they're going to grow relatively proportional in terms of the core technologies today. And the X factor is how rapidly CPO and optical technology will enhance the networking TAM. So that's like on top of that sort of 15-ish percent ratio.

Makes sense. So you acquired Quantifi building out your portfolio for silicon photonics. I guess how do you see that kind of ramping as we focus on scale up?

Yes. So I feel like I'm like Mr. Cold Water at this conference around silicon photonics, even though it's something that I'm incredibly excited about, right? So if you look at silicon photonics right now, there's really no large-scale deployment of CPO in any way in 2025 and at the beginning of 2026. By the end of 2026, I think we will see the beginning of commercial scale deployment of CPO for scale-out applications. And that is like -- and I think it could grow geometrically from there, just in scale out, like '26 to '27, just scale out could be like an order of magnitude difference in terms of the size of -- like the number of CPO ports that are delivered. And then scale up would be another multiple beyond that. But that's just one factor in terms of the size of the test market. If you look at how CPO devices are tested today, it is very early days for that market. So all of the technologies around optical alignment, the tests that our customers are performing are very characterization oriented. The instrumentation required to do that testing is more sort of laboratory-focused instrumentation versus production focused. And when we've seen new technologies like this introduced into the ecosystem, what we see is a really rapid improvement in test efficiency. So between more efficient test equipment, reduced test lists, improved efficiency for alignment and eventually testing more than one device at the same time, the -- like the test intensity for these devices could go down by a factor of 10. And both Teradyne and Advantest are leaning into developing production-oriented optical test equipment. That's why we did Quantifi. That's really around what testers are going to look like in 2027. So those testers are going to -- for both Teradyne and for Advantest are going to be -- their ASP is going to be lower. We're going to be competing with each other. But we will be all native content or mostly native content. So right now, we're buying a lot of instruments from other people, putting them in a tester and then selling them again. That's a lower margin proposition than for natively developed testers. So the revenue in -- so what I think is going to happen? To directly answer your question, what I think is going to happen is that this initial deployment of scale-out is going to drive a rapid increase in the size of the TAM at the end of '26 and into '27. That TAM is probably going to reach somewhere in the mid-hundreds of millions of dollars. And then as the volume in the end market scales, we're going to simultaneously see this reduction in test intensity and reduction in capital required. And so even though we'll ship 10x as many CPO ports in 2028 as we do in 2027, the TAM is only going to be incrementally larger than not multiplicatively larger than what it was.

Makes sense. Maybe moving to memory. Teradyne has done a great job securing wins at 2 of the leading DRAM players for HBM and obviously, the third does internal testing. Maybe if you could update kind of where you've had success? And perhaps maybe more importantly, as we start thinking about HBM4 and start moving kind of higher layer counts, what that means for test intensity and perhaps incrementally more test insertions.

Yes. So let's -- first of all, let's just sort of talk about the insertions involved in building an HBM. So an HBM has multiple layers of DRAM die and then a base die. Each of those layers needs to be tested at the wafer level and the base die needs to be tested at the wafer level. Then you stack the DRAM die on the base wafer, you test it again for performance as a stack assembly, then you singulate it. And right now, some -- for some of that volume is being tested again in a singulated form and then you ship it off and it gets put on to a substrate to be used with an accelerator. So there's 3 major test insertions. We are essentially getting -- like our biggest impact is in the stacked wafer test -- performance test and the singulated stack test. The wafer sort is like the wafer sort has always that we have a strong presence in some manufacturers, not a strong presence in others. And so there isn't a lot of share movement there, whereas we have been gaining share in the post-stack tests. So the question is, okay, so what happens to that string as you go from HBM3 to HBM 4 to 4E and then when you go from 8 high to 12 high to 16 high. As the layer count increases, that primarily drives test intensity at that first step. You need to build more wafers to build 1 HBM stack. So that's kind of normal by customer share, not a lot of movement. The technology change is what drives the later insertions. And we have a tester that has higher data rates and higher signal fidelity. So as we get to the -- to like 4E, we believe that we're going to be able to continue to increase our share in that space and differentiate with our customers around letting them get to higher yields.

And you have the one company that does in-house, and I think they publicly stated that they're going to build the logic die at TSMC. Does that represent an opportunity for merchant test player?

Yes. So I mean, logic dies already get tested. And in most cases -- well, and sometimes they get tested on our platform, sometimes they get tested on an Advantest platform. And sometimes they get tested on memory testers. As we go to HBM4E, the complexity of that base die is increasing. And it is an incrementally larger part of this whole value chain, but it really is dwarfed in comparison to the memory investment, the memory ATP investment to support the whole chain.

Got you. Makes sense. Maybe conventional DRAM, obviously, a place of strength that we're seeing today despite shortage. Just curious if you've seen sort of any movement there.

So 2025 was a remarkable year for DRAM manufacturers because they were able to remarkably increase their revenue while shipping basically the same number or DRAMs. So not a lot of unit volume change in that space, but much higher ASPs. So from a test perspective, it was kind of normal capacity increases, not like proportional to the kind of revenue increases that you're seeing. The thing that we're looking at is there are big foundry investments going into memory for stuff that's going to come online in '27. And I think we're kind of in the -- the memory market that we're in right now is probably going to be stronger in '26 than it was in '25. But I think the breakout year for memory is really '27 when there's a lot more wafers that need to get tested. So that's kind of the way I'm looking at it is that we've got a little way to wait before you see a huge bump. The one short-term thing that I think is really interesting is there's more of a reliance on SOCAMM in the next generation of accelerators, content addressable memory. And that is often being built out of LPDDR, LPDDR5. And because we have a really good position in DRAM final test for that kind of a technology, that's a net positive for us. So the more SOCAMM that's going into the market, the better it is for us.

You said foundry investment in memory. Is that your way of saying kind of new greenfield investment by memory guys?

Yes, new fabs.

Okay. Perfect. And maybe on NAND, are you seeing any sign of life on the enterprise SSD side or elsewhere and do you have any kind of view on KV Cashe and what that might do?

So we are like -- we believe that we should be seeing those signs, and we are not that right now, the memory market is wafer constrained, wafer capacity constrained and the allocations of wafers towards flash have not been increasing. The equation doesn't balance, though, because the amount of flash required per rack in next-generation data centers is like multiples of what's required in current generation. So it's possible that flash is going to turn into a significant enough bottleneck that you'll see some changes in behavior, but again, I think the 2027 is when there's going to be enough incremental wafers to really make that flash market grow. I -- we have been seeing more strength in the HDD market. And I think some of that has to do with the inability to source enough flash to be able to do what they really want to do with flash.

Makes sense. It's surprising to a minute -- 2 minutes left to hit on your more cyclical business, but I think it speaks to how great AI is today. So in the last few minutes that we have, I would love to hear kind of your latest thoughts around mobile, auto, industrial.

So I think that like one thing that is becoming clear to me, and I think it's important is the next generation of AI accelerators are going to need next-generation equipment from both us and our competitor. And that's because you need more power, you need more pattern depth, you need things like PCIe 6 capabilities to test those generations of parts. What that means is there's a lot of really good testers, testers that have been introduced into the ecosystem even this year that are not going to be useful for leading-edge AI accelerators anymore. And I think mobile is going to get the hand me downs. So I'm expecting that the mobile TAM is going to be somewhat suppressed because of this really high buy rate for next-generation equipment and compute. So we've never been -- like we've been pretty cautious in terms of a recovery in mobile. And I think that's another reason why were kind of staying cautious about how much that could pop because there's going to be capacity coming available. The other -- like when you look at the other segments like automotive and industrial, I think we are kind of at the dawn of a cyclical recovery. Inventory levels are down. We're hearing more optimism in the way that those companies are talking about their results. So I think we'll see a modest recovery there.

Perfect. Well, I think we've run out of time. Thank you very much. Great. appreciate it.

No, it's always great to talk to you. Thank you.