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

Ladies and gentlemen, good morning, and welcome to the Teradyne Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Amy McAndrews, VP of Corporate Relations for Teradyne. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith; and our CFO, Michelle Turner. Following our opening remarks, we'll provide details of our performance for the second quarter of 2026 and our outlook for the third quarter. The press release containing our second quarter results was issued last evening. We are providing slides as well as a copy of these prepared remarks on the Teradyne Investor website that may be helpful in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risks that could cause Teradyne's results to differ materially from management's current expectations. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation. We encourage you to review the safe harbor statement contained in the slides accompanying this presentation as well as the risk factors described in our annual report on Form 10-K for the fiscal year ended December 31, 2025, on file with the SEC. Additionally, these forward-looking statements are made only as of today. During today's call, we will refer to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures, were available on our investor website. Looking ahead, between now and our next earnings call, Teradyne expects to participate in technology focused investor conferences hosted by Goldman Sachs and Citi. Our quiet period will begin at the close of business on September 11, 2026. Following Greg and Michelle's comments this morning, we'll open up the call for questions. This call is scheduled for one hour. Greg?

Good morning. For the second quarter in a row, we delivered record revenue, and once again, AI was the driver. Total company revenue topped $1.3 billion, up over 100% year-over-year, with non-GAAP EPS of $2.47, up over 300% year-over-year. All 3 of our business groups, Semi Test, Product Test and Robotics grew year-over-year and quarter-over-quarter, highlighting the AI demand across all parts of the business. At more than 60%, AI-driven revenue is the key proof point that our wafer-to-AI-data-center strategy is delivering results. There are many superlatives that we could use to describe this quarter's results, and Michelle is going to walk you through the details. I'd like to use my time today to set context for what we believe is a multiyear growth phase for our entire business driven by the continued AI buildout. Certainly, this is clearest in Compute, across CPUs, Accelerators and Networking, and in Memory for HBM and DDR. However, data centers are now also the primary growth drivers for Flash memory, hard disk drives, power, board test, high-speed interconnect and robotics. The long timeline of data center investment plans has given our SOC and memory customers the confidence to aggressively invest in wafer fabrication equipment for new process technologies and additional wafer capacity. For years, semiconductor capital investment grew slowly, and ATE grew even more slowly within it. That's changing. Two factors are now tailwinds for the ATE TAM. The first is overall semi-cap investment, particularly wafer fab equipment, WFE, which has begun accelerating. More WFE means more wafers and new equipment generations enable denser process nodes. More wafers and higher density together mean more transistors to test an SOC and more bits to test in memory. WFE CapEx is now forecasted to approach $250 billion by the end of the decade, driving 5% to 10% annual growth in 300-millimeter wafer production and 15% to 20% CAGR in total transistor production over the midterm. Total non-memory transistor production is a reasonable first order predictor of the SOC TAM. Every transistor must be tested, and a given process node yields roughly the same transistor count per wafer regardless of device type. Memory bit production is the analogous predictor for the memory TAM, also forecast to grow at a 15% to 20% CAGR over the midterm. Neither of these predicts the ATE TAM precisely in any given year, but both signal direction. Transistor and bit growth rates have inflected upward and are expected to hold a steeper slope through the end of the decade. The second factor is advanced packaging. Wafer transistor counts don't vary with die size, but the required test volume scales with acceptable quality level for the devices being tested. As accelerators, CPUs and networking devices pack in more chiplets, memories and eventually CPO, a single latent defect has a greater impact on final device yield, raising test intensity per die in multichip packages. Both package volume and dies per package are forecast to keep rising through the end of the decade, providing a sustained tailwind to the compute TAM. The result, after more than a decade of semi-cap equipment outgrowing the test TAM, the trend reversed in 2024 and test is now outpacing fab equipment. With WFE long-term forecasts becoming clearer, we're increasingly confident in long-term ATE growth. As WFE CapEx approaches $250 billion by the end of the decade, we see a path for overall ATE TAM to reach or exceed $20 billion. In addition to being in a growing market, we are confident that we will be able to gain share over the midterm. With the ramp of merchant GPU and the initial dual-platform qualification in our second major hyperscaler, we are positioned to gain share in the core compute segment. Our leadership position in HBM and DRAM maximizes our exposure to DRAM-driven growth. And segments where we have historically had high share like flash memory, mobile, industrial and automotive are positioned for growth driven by cloud, edge and physical AI, whether it's in cars, robots, phones or wearables. Before I hand off to Michelle, I'd like to share a few demand highlights and their impact to share gains. First, in Memory, demand has increased from strength in HBM and DRAM and a resurgence in the NAND final test. The 2026 memory TAM is likely to be more than 40% larger than 2025 with notable growth from the first half of 2026 to the second half. A highlight in memory is the growth in HBM based die test. Our Magnum testers have logic test capabilities provide attractive swing tool advantages for memory makers. Now on to compute. In the first quarter, we received our first order from -- for a merchant GPU customer, which was delivered in the second quarter. Also in Q3, we completed correlation at a second hyperscaler increasing our confidence in 2027 market share growth. As we discussed last quarter, our expectation is that our compute business would be concentrated in the first half. We have multiple programs across networking and hyperscalers that build out capacity in the first half that is now being utilized. The next surge for these customers is expected to be in the first half of 2027. Since dual-vendor strategies are emerging at the largest compute customers, I'd like to give you a bit more color about how we think this will play out. These customers recognize the importance of derisking their supply chain. We see this as an important share driver over the next few years. The dual vendor qualification process generally runs through 4 phases: the first, an opportunity to compete; second, developing a working solution; third, correlation; and then finally, a production ramp. If successful, it takes 9 to 12 months from the start to the ramp. After the initial dual-sourced part ramps, we enter a fast follower phase where additional parts are converted and ramped. Ultimately, the account reaches a mature dual vendor stage where either platform is used for initial part release. It can take a few years to get from fast follower to mature dual vendor. During the fast follower phase, we expect market share to grow incrementally from 0 up to about 30%. Right now, we have one compute customer in the mature dual vendor phase, one in fast follower and one in qualification prior to ramp. I'd also like to add a little color around networking. Frontier models require ever larger accelerator clusters. This is driving extreme growth in networking for scale-out, scale across and scale-up applications. While the total number of network connections is growing fast, the timing of transitions from cable to backplane, and from pluggable to XPO and CPO is in constant flux. Our belief is that there is robust growth in all of these technologies. This drove our acquisition of Quantifi Photonics, the development of the Photon 100 solution for optical connections and our MultiLane Test Products JV for copper connections. We are working with multiple ecosystem partners to develop leading-edge solutions from silicon photonics wafers to full data center racks. We expect CPO alone will be a $300 million to $700 million market by 2028. Our IST business grew revenue 2.5x quarter-over-quarter on strength in HDD fueled by AI. We expect continued growth of our IST business in the second half. Given the strong forecast for greater than 20% annual exabyte growth and our design wins, we are confident this business will grow over the midterm as well. The data center build-out will drive growth for our Product Test and Robotics Groups through the end of the decade as well. The logic chain is straightforward: more data-centric construction drives more rack shipments per year, which is driving growth at Contract Manufacturers and Original Design Manufacturers. This, combined with the rapid advancement of data center architectures creates a significant opportunity for Teradyne to provide solutions well matched to the volume, quality and flexibility data center applications required. This is best reflected in the total available market for automation and test among contract manufacturers and ODMs. We believe that there is currently a multi-billion-dollar market for assembly, automation, test and burn-in equipment, and we expect double digit -- mid-double-digit growth rates through the end of the decade. By addressing these applications with enhanced production board test, optical test, backplane test and robotic-assisted test and assembly, Teradyne is uniquely positioned to follow the value chain from wafer to data center. Our wafer to data center strategy is working. Our optimism around 2026 and 2027 and through the midterm has grown. We are leaning further into investments to capture opportunities across the value chain, both organically and inorganically. And we are investing in next-generation products across our entire portfolio. As we win business, we build out customer teams for major hyperscalers and semiconductor suppliers. The fact that we are leaning into these investments now is a sign of our confidence in the sustainability of this market growth. We expect 2027 to be another year of healthy growth for Teradyne, consistent with the transistor and bit growth dynamics I described earlier. It's clear to us that increases in WFE spend will be a primary driver to ATE TAM growth, and this sets the approach for how we will be updating our target earnings model, which we will share in our Q4 earnings call. With that, I'll turn the call over to Michelle.

Thanks, Greg. Let me build on that with the detailed results for the quarter, starting with total company performance. Both revenue and non-GAAP EPS came in above the high end of our guidance range as strong AI-driven demand continued across all parts of our portfolio. Sequentially, total company sales were up 4% from last quarter's previous record. For the first half of 2026, we delivered $2.6 billion in revenue and $5.02 of non-GAAP EPS up close to 100% and 275% year-over-year, respectively, driven by all things AI. Building on that, let's take a deeper look at revenue starting with Semi Test. Our Semi Test team once again cleared the $1 billion high watermark established last quarter with revenue up $11 million from first quarter and 128% from Q2 2025. The revenue breakdown within Semi Test was SOC of $843 million, memory at $212 million and IST at $67 million. As expected, compute order timing was more than offset by another record memory quarter and IST growing over 150% quarter-over-quarter. Within SOC, compute remains the largest portion of our SOC product revenue at 70%. Compute revenue grew nearly 600% year-over-year on strong AI-related demand. In the quarter, as Greg mentioned, we have completed correlation with a second AI hyperscaler customer, and we shipped the previously announced merchant GPU order. This further diversifies our compute portfolio, creating a foundation for future market share gains over the midterm. Auto and Industrial continued to strengthen over last year, driven by power management demand increases for AI data center build-outs. Mobile grew seasonally quarter-over-quarter double digits though it remains below historical levels and a muted part of the overall SOC portfolio. Business delivered another strong quarter at $212 million in revenue. This is another record quarter up from the previous one set in Q4 2025. This represents our third consecutive quarter of revenue over $200 million driven by robust HBM and DRAM test solutions demand and resurgence in NAND. Demand signals remain strong as memory manufacturers are planning capacity additions further out in time, driving our book-to-bill ratio in the quarter over 2. Finally, turning to IST. Revenue in the quarter was $67 million, up 94% from the prior year, driven by AI-related HDD storage demand from all 3 major suppliers in this space. Now on to Product Test Group. Revenue was $107 million, up 26% year-over-year and 33% quarter-over-quarter. The group experienced broad-based growth across all end markets from production board test to optical test, to defense and aerospace to scale up networking at our newest portfolio addition, the MultiLane Test Products JV, also known as MLTP. Last quarter, we announced our new production board test platform, Omnyx, which is focused on enabling earlier detection of defects that are impacting the build-out of AI data centers. The initial customer traction is strong with units already shipping in the second quarter and continued growth expected in the second half. Similarly, momentum is building in MLTP as the need for high-speed I/O and data center interconnect test solutions is increasing. Both Omnyx and MLTP are examples of our wafer-to-AI-data-center strategy in action both solutions focus on solving our customers' most critical pain points along the value chain. As a result, we anticipate their continued growth in the second half of the year. Robotics revenue was $100 million, up 33% year-over-year and 9% quarter-over-quarter. Electronics manufacturing and semiconductor revenue increased by 50% from Q1 and is now the largest end market segment in this group, which includes AI data centers. Our U.S. sales increased to 32% of the robotics overall sale. Our U.S.-based manufacturing center is on track for opening later this year. Now moving down the P&L. Strong earnings results continued in the second quarter, driven by robust AI-driven volume and favorable product mix. Gross margins for the quarter were 59.8%, up 250 basis points year-over-year, driven by strong Semi Test volume and product mix, while sequentially, gross margins were down 110 basis points, driven in part by onetime benefits in the first quarter. OpEx increased as expected, driven by more R&D and go-to-market investment for 2027 growth, plus higher variable compensation on stronger results. Finally, non-GAAP operating income was $448 million, with an operating margin of 33.7%. Now moving to capital allocation. Our first priority for capital continues to be reinvesting back into the business, aligned with the growth opportunities we see along the wafer-to-AI-data-center value chain. That means continued R&D investment in innovation and next-gen technologies as well as continued investments in cost of goods sold and CapEx aligned with scaling our operations and supporting our current and future customers with demo assets. Beyond that, our capital allocation strategy remains consistent, maintain cash reserves to run the business and keep dry powder available for accretive M&A. We ended the quarter with cash and investments of $517 million, up over 30% from last quarter. We had free cash flow of $378 million in the quarter. For the first half of 2026, free cash flow was $579 million, up 150% from the prior year period. Working capital, predominantly inventory investment, increased and supported future sales. As discussed last earnings call, capital expenditures increased $26 million from last quarter, driven by continued investments in innovation and operations scaling. We paid $20 million in dividends in the quarter, and our share buybacks were $69 million. Now looking ahead to our third quarter guidance. For the quarter, we expect revenue in the range of $1.2 billion to $1.3 billion and non-GAAP EPS of $1.85 to $2.15. Gross margins are expected to be in the range of 58% to 59%, reflective of product mix and new product launches. Operating expenses are expected to run at approximately 29% to 30% of third quarter sales, driven by continued investments in R&D and go-to-market. The non-GAAP operating profit rate is expected to be between 28% and 30%. Based on current customer order visibility, we are updating our first half weighted revenue to 50% to 52% of annual revenue. The outlook for the second half has strengthened, and we've narrowed the range from 3 months ago with increased visibility and continued robust demand signals from our customers. The range also takes into account the timing of orders that could impact revenue timing across quarters or years. To aid your modeling, we expect growth in the second half in comparison to first half in memory, auto and industrial, IST, Product Test and Robotics Groups. We expect this growth will be offset by softness in mobile and order timing in compute. We anticipate a resurgence in growth in 2027, driven by overall ATE TAM expansion and market share gains. Aligned with the strengthened demand signal, we expect OpEx in Q4 to be comparable to Q3 guidance, positioning us for further growth in 2027. So in closing, once again, our team delivered exceptional financial results, meeting our customers' increasing AI demand needs through strong execution and a maniacal focus on customer satisfaction. We remain confident in achieving our target earnings model at an accelerated pace and look forward to providing an update in our Q4 earnings call. I'll close by thanking our Teradyne team for their execution and discipline this quarter delivering for both our customers and shareholders. With that, we'll open the call for questions. Operator?

[Operator Instructions] Our first question today comes from Timothy Arcuri with UBS.

Greg, in -- correlating the Test TAM to the WFE TAM, typically, it's been about 8%. And if I look at your TAM slide, it looks like the upper end of the range is like $16 billion to $17 billion for next year when some of us like me think that WFE is going to be $200 billion. So it seems like that number holds. Looking out to 2028, I mean, some of those things WFE could be $250 million, so that's like $20 billion, which is quite a bit higher than even the upper end of what this slide shows. So I guess the question is like is 8%, like in your mind when you think about it, is 8% the right number? And what are the puts and takes on that?

Tim, first of all, I want to thank you, the investor meetings that you helped mediate for us recently really gave us a ton of insight in terms of how people were thinking about our market and our model. And so we've been going back and doing some homework on this. The thing that you're bringing up in terms of that 8% is a really interesting trajectory that if you look back to 2023, it was down near 4% of the total CapEx spent on test equipment. And by 2025, that had gone up to 7%. The first 5 months of 2026, it's 8% of total Semi CapEx has been on test equipment. So it's kind of this rocket trajectory. As I said in my prepared remarks, there are some reasons why we think that is happening -- connected [indiscernible] we're not sure whether it's going to settle -- WFE is going to settle somewhere in the 7% to 9% range, but it's not going to continue to go up from there. So we're -- like -- I think we're kind of thinking it could settle down in the 7% to 8%, but it could go up to 9%.

Okay. Great. And then from your slide, it looks like you think the range of like 12% to 14%, it's pretty similar to the new TAM [indiscernible] that Advantest has put out last night because they don't include [indiscernible] in their TAM. If I use those TAM numbers and I use your loading for the back half, it basically implies that Q4 is basically flat Q-on-Q. I get your Test share for this year is up just a touch, but it's still basically flat sort of in the 37% range. So the question is, when do all these new calls start to add to share gains? You talked about these calls. And like what's the right long-term share to use? Like it's 40% your sort of aspirational share is 42% the right number? And like when will these start to show up in share gain?

So sort of taking that bit by bit, I think that the numbers that Advantest put out for the total TAM, both SOC and for Memory, are kind of in the right zip code that -- we were surprised when they hadn't brought it up last quarter because it seems like the writing was on the wall that the TAM was increasing pretty strongly. The other commentary that they had was that they believe that they were going to continue to gain share in SOC and that they were going to lose a bit of share in Memory. I have to say I agree with their commentary about Memory. But I think in terms of SOC, it's probably going to be pretty flat, maybe a slight incremental gain for us year-on-year. So I would say that the -- we are gaining share in most of the segments of the market. But the part of the market that is growing most strongly is the part of the market where we're starting with the lowest share. The important thing for us in 2026, is that our share in the compute segment is actually stabilizing and starting to inflect upward. So I would say -- to answer your question directly, I think you'll start to see some of the effective share change in 2027 but it's going to be gradual. It's a socket-by-socket thing, and we are riding a big upward with.

We'll take our next question from Mehdi Hosseini with SIG.

Yes, 2 from my end. Greg, when I'm look at the company's strategy, especially how you illustrated in your slide, it seems like you're looking because as holistic -- starting from wafer and going all the way to the rack and data center. And what I wanted to ask you is, to what extent are you still focused on consolidating the test insertion, especially before we get to the complete package? Are you facing challenges? Or is that -- does that get lower priority and you're more focused on a holistic approach that you've laid out in your slide?

So I think the -- as you look at this wafer data center journey, there's a through line of Teradyne is a company that test things and our robotics help build things. And just about at every step of that process, we are a participant in an ecosystem. So when we are building -- when we're building test equipment, it's being put into test cells with material handling equipment that come from a number of different suppliers. The same thing is true at every step. And so we're trying to be very mindful that our customers appreciate what that open ecosystem has delivered. So the best example of that ecosystem developing is really in the whole silicon photonics space that it's early days where there's individual partnerships sort of against the initial customer ramps. But ultimately, that's going to turn into the same open ecosystem where all of the -- like each test company works with all of the suppliers of material handling and vice versa. I don't know if that answers your question. I do think that there is some potential pull-through or customer value that customers can get by getting more of their tests from the same supplier. So in terms of leveraging the work that's done from wafer sort to final test to system test to burn into the board test and beyond, there is some advantage to being able to leverage things across those boundaries. But our customers are quite adept at choosing the best solution at each stage. So we have to really compete for everything that we're getting. Did I get what you were talking about?

Yes. I'm not sure if there's a very precise answer, it's evolving supply chain with some disruption as to how it's all going to go together is to be determined. Does that summarize your answer?

So I think the supply disruption is definitely on the mind of everybody in this space that we're only as strong as the weakest link in our whole supply chain and our customers feel the same way that -- and that's one of the key things that's underpinning the drive towards a dual vendor strategy from players in the compute space. So they are working to qualify multiple test suppliers because they want to be sure that they're going to be able to get the capacity that they need when they need that capacity. And it's not just a matter of how big any one test supplier can get, it's also that they need to have the assurance of different suppliers to be able to do each step in the chain.

Got it. And I don't want to monopolize your time, but if I may ask my second question, which has to do with robotics. This is the part of business that is not getting as much headline. But it is part of the AI -- it's one of the verticals. Has there been any update to the strategy? I know you have been expanding capacity in the U.S. to capture some of the opportunities there. But how should we think about the trajectory of AI recovery, especially as it fits into your longer-term model?

So robotics, we believe that robotics is positioned to essentially grow in proportion with the rest of the company over this midterm. And the important stuff that's going to drive that growth are physical AI applications. Our fastest-growing segment in robotics is really electronics, manufacturing and semiconductors. And that's like, as Michelle says, that's part of the all things AI, the data center build-out and the desire to reshore a lot of the data center build-out is pushing automation of the assembly process and the test process with a fair amount of budget behind it. So we think that, that robotics is going to basically follow the same kind of growth path as all of the chunks that are connected to data center buildout.

Our next question comes from C.J. Muse with Cantor.

I guess first question on memory, you talked about growth half on half. I'm curious if you could speak to any changes in the drivers there, whether you're seeing an uplift in NAND and D5 versus HBM? And then perhaps more importantly, how are you thinking about memory into '27? And should we expect lumpiness in the first half? Or will that strength continue in the first half?

So this year, I think the -- coming into the year, we expected that HBM was going to be significantly stronger. That if you remember, was a big, big year for HBM, 2025. There was a little bit of digestion, but it was clear from the long-term capacity add plans for HBM that '26 was going to be very strong. The thing that surprised us a little bit was just how strong the DDR business is and I think that is, to a certain extent, coupled to the resurgence in like CPU-oriented applications, so agentic AI. There's also use -- like some of the -- like [indiscernible] use LP DDRs that are driving that market harder than we would have expected. So the DDR market is stronger now than we thought it would be in January. In January, we were talking a little bit about that we anticipated that we would see a strengthening in NAND, but we didn't see -- we didn't hear that from our memory customers yet. That like we were waiting to hear that they're going to need more capacity in NAND because there was a gap between what data center demand was and what memory capacity planning was providing. Like what's different now is we actually have seen the beginning of that inflection and are actually getting pull from our customers for more NAND capacity. Looking into 2027, I don't think we are looking at particular lumpiness in memory. I think that that's going to be -- the capacity adds are -- there's significant WFE investment increase in memory. There are fabs that are coming online. There are wafers that are being planned for output and they are all making their test capacity add plans out into 2027 now.

Perfect. And I guess as a follow-up, if you could speak to gross margin and the guide and what's driving kind of the 130 bps headwind? You talked about kind of new products, but would be curious how much is from new products? How much is just kind of a mix shift? And then any help into thinking the trajectory into December and '27 would be very helpful.

C.J., it's Michelle. So I'll start, and then, Greg, feel free to add any additional color. So just taking a step back, let me share some context, especially for some that are new to the Teradyne story. So overall, gross margins within our business tends to be variable quarter-to-quarter. So if you look at past, like the last 5 years, you'll see about 400 basis point swing when you look quarter-on-quarter. However, when you look at kind of the annualized gross margin amount, we tend to be pretty tight within about 200 basis points. So part of what you're seeing first half to second half is just kind of the normal quarter-on-quarter durability that we experience. But we also did have some nonrecurring nonoperational impacts that were favorable in the first half that aren't repeating. So as you look at going from Q2 to Q3 and the guide at 58% to 59%, part of that is product mix. So coming off the high volumes that we had in Semi Test and compute as we're starting to ramp the other parts of our portfolio. So just going back to our opening remarks, we are going to have more auto and industrial in the second half, more IST, more robotics as well as more Product Test along with memory. And so all of that netted together gets us to a full year gross margin range, which is just shy of our target earnings model. So right around the 59%. So there's going to be a product mix element. There's going to be the new product introductions. And they're going to continue to be some pricing elements as well as we know and you guys know as well, memory is going to continue to be a strain from an overall margin perspective, and we expect that, that will continue into 2027.

We will take our next question from Vivek Arya with Bank of America Securities.

Greg, I just wanted to dig into how tight this correlation is between WFE and your growth prospects. When I look at the current year, your sales are roughly growing twice as fast WFE growth this year. So I'm curious as to why that is? And then if I were to carry that argument into '27, if WFE does indeed grow 30%, what scenarios would make you grow faster or slower than that base?