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

Great. Finally, networking for AI. That's another area where we have a strong presence. Talk to the size of that business you saw in 2026 and whether or not it's reasonable to expect you could actually see that business outgrow hyperscaler CapEx growth in '27?

So I think we've actually had this question in 1 or 2 of the smaller meetings that we've had today because if you look from '25 to '26, we saw really strong growth in both our networking business and in the AI ASIC business. And we didn't have the numbers in front of us, but our rough guesstimate is that they grew proportionately, that they kind of grew about the same. Looking forward from '26 to '27, there is probably more upside potential for the ASIC business than networking. They're both going to grow strongly. But the sheer test intensity associated with AI accelerators is such that, that has the potential to really sort of blow the doors off in terms of the total capacity needed. Whereas in networking, it's a more mature market and one that has probably a more predictable TAM growth.

Yes. Finally, on related networking, co-packaged optics, that's been an area of a lot of investor debate recently, especially when it actually happens and when it ramps. What is the market size like as you see it today? And can you maybe speak to your relative market position versus your competitive advantage?

Okay. So let's start with the numbers. In 2026, we think that the test equipment TAM for silicon photonics co-packaged optics is about $100 million. And we expect by 2028 that, that is going to be between $300 million and $700 million. And that's for just the test equipment part of this opportunity. There's also optical alignment and interface hardware and material handling. That's a different TAM, but it's all kind of mixed together. Right now, this is a very concentrated market. There's one customer and a very small number of devices at that customer that are driving most of the capital intensity in 2026. The thing that I want to try and emphasize is that this is really early days that what you're seeing is companies trying to figure out how to scale this stuff into production. And they are running into all of the things that you normally run into when you try and scale a complex new technology in production. So you see this playing out in a number of different ways. One is you can see that there is increasing excitement about copper networking for scale up. You can see that there's increasing excitement for technologies like NPO so that you don't have the same kind of yield risk associated with the full CPO device. And you can also see it in terms of people like asking everybody who knows anybody inside of these companies who's up and who's down on a daily basis. But in terms of CPO, let me just sort of give you the lay of the land. If you're trying to build a CPO device, there are 4 major optical test insertions. There's insertion 1, where you're testing just the photonics wafer. There's insertion 2, where you're testing a photonics wafer that has the electronics ICs bonded to it. There's insertion 3 where you're testing the singulated optical engine dielets and those usually have been a mounting plate has been put on them to align the FAU. And then the fourth is the assembled CPO device and they're insertion 1, insertion 2, insertion 3, insertion 4. For this first device, first customer, the way things have played out is that Advantest is strongest in insertion 1. Teradyne is strongest in insertion 2. A Taiwanese supplier is strongest in insertion 3 and Teradyne is strongest in insertion 4. But what is going to happen as more customers get in and more parts are developed and the technology changes is that all of that is going to change, that the relative importance between insertion 2 and insertion 3 will change, the technology in terms of the lane counts and data rates is going to change and whether or not you go to NPO or CPO is going to change. So the way we think this is going to end up happening is that there are going to be players in the market that are experts at the device handling and alignment. And then there are going to be players in this market that are focused on test. So Teradyne and Advantest are going to duke it out in test. There are going to be partners that we work with. Both of us will work with all partners that are handling the device alignment and device handling. And by the time you get to 2030, when you got $1 billion of test equipment being sold, that market is going to look a lot like the rest of the test market where we're competing head-to-head on who has the highest performance test equipment and other players are going to be competing on the alignment.

Got it. Okay. Memory. That's been an area, especially HBM, which has really driven a lot of momentum in your results. I think you've kind of, in the past, talked about some uncertainty well maybe we could see a digestion phase, but it sounds like you see most recently that's going to maintain its strength. As we sort of think about the next 4 or 6 quarters, how do you handicap that relative level of strength and whether or not we see any kind of pullback in that space?

Well, so a little bit of historical context, 2024 was like Yahoo time in HBM. That was like the initial capacity ramp. And from a test capacity perspective, it actually got ahead of production. So in 2025, there was a significant HBM TAM, but it was actually basically flat year-on-year. 2026 is back to strong growth above 2025. And our initial view of 2027 is that it's not going to be a digestion. It's going to be continued growth from there. The thing that has changed in 2026 is that the rest of the DRAM market has really come alive. It's like much, much stronger than we expected coming into the year. We expected 2026 to be a strong HBM year. We did not expect as strong of a burst of activity in LPDDR and DDR. LPDDR, it's all about CPUs and SOCAMM and all of the memory that you need to do agentic AI. And so that was a happy surprise. The other thing that we are beginning to see towards the end of 2026 is a resurgence in the NAND market. So back in the olden days, the memory market was almost 50-50 between NAND and DRAM. In 2026, it's like -- in 2025, it was like 85% DRAM, 15% flash. And the flash market used to be that the flash market was really dominated by mobile and the DRAM market was kind of split between mobile and server cloud. Now cloud is everything for everyone. And that's true for flash as well. So the big growth driver in flash is really eSSD and solid-state drives for data center applications. And that is driving TAM growth in flash in 2026, and we expect that to be an even stronger year in '27. So I guess, modest up for HBM and strong growth for DRAM and flash in '27.

Great. Finally, on your robotics business, I think there's been a lot of optimism around that business, specifically centered on like key marquee customer as we head into next year. When do you think that dynamic starts to become meaningful for you in terms of revenue?

So there's two end market dynamics and one underlying technology that get us really excited about robotics. So the two end markets, one is in logistics, and that's where our marquee customer is, is in the e-commerce logistics space. And that is like on plan. So revenue from that major customer tripled from '25 to '26. We expect it to triple again from '26 to '27, and we are still discovering new workflows within that customer that we'll be able to serve with variations of the solutions that they're developing using our products. The second vertical that we're very excited about for robotics is in electronics manufacturing and all the way back into the semiconductor value chain. So we've been calling this test -- robotics-assisted test and robotics-assisted assembly and robotics-assisted operations for data centers. And this is the fastest growing. It's now the largest vertical that we have for our robotics business is really serving all of the contract manufacturers and other manufacturers that are helping to build out data centers. The thing -- so those are the 2 verticals. The common thread between them is physical AI. So the reason that this e-commerce customer is able to ramp this application is because this application is actually able to recognize product without pretraining on the product itself. Like whatever the thing is, it figures out how to pick it up and what to do with it. And in order to do that, it needs a sophisticated physical AI application. The same thing in terms of electronics manufacturing for the kinds of stuff that go into data centers. There's a lot of things that stymy traditional automation, floppy cables, gooey thermal interface materials, adhesives, screwed fasteners and very short product life cycles. All of that really needs AI so that you can get the application released and useful in a factory before the product goes obsolete. So that's become like physical AI underpinning our robotics applications is probably the most important trend that's going to drive our business over the next few years.

Great. Integrated system test, that business, maybe unpack the moving pieces there between the hard drive business and system-level test and how that segment has kind of evolved over the past few years? How much time do we have?

It makes me happy because my first job in semiconductor test, I was an applications engineer working on a hard disk drive read channel. This is like in 1995. And back then, everybody was wondering how long it was going to be before hard drives were obsolete. Like any day now, NAND memory is going to take over. Anyway, now fast forward today, 30 years later, and hard disk drives are showing the fastest exabyte growth that they've shown in years. So the most important thing that's driving our short-term results in our Integrated System Test group is actually traditional hard disk drive test. And that's both higher exabyte growth, but also share gain that right now, we serve all 3 major manufacturers of data center class hard drives. And that's the part of the market that's growing most rapidly. So that's kind of our core. On top of that, we have a business doing system-level test for mobile. That's another case where we've gained share. We've won additional customers. The market itself is not growing robustly in units. So we're doing mostly helping to facilitate next-generation parts on existing platforms, but we expect that to provide growth over the next few years. And then the thing that we're working on right now that we do expect to drive strong growth over the next few years is system-level test and burn-in for AI-related products. So we're doing that for some AI accelerators for hyperscalers. We're also doing that for edge AI products that are going into applications like automotive. So very aggressive temperature ranges and very thorough testing to try and make sure that they are delivering products at a higher quality level than you get from traditional test. So those are sort of the 3 existing areas. The last area that we are just getting into in 2026 is in the test of solid-state drives. So we test hard disk drives and we test flash memories. Before we were not testing the actual SSD. The transition of SSDs to PCIe 6 is creating a discontinuity and increasing the test intensity. So we see an opportunity there as well.

Great. And just in the last couple of minutes we got left, I want to ask you about the financial management of the company. Clearly, you've got a very strong path for growth over the next several years. How are you managing that both -- I think gross margins, 60% kind of like kind of where you've been landing. But how do you think about the OpEx growth thesis for all the things you just talked about while still getting financial leverage in the model?

Yes. So from a gross margin perspective, our margins have -- like as we've grown, we've definitely gotten sort of into this 59% to 61% range. And I would expect it to continue to operate in that range with both tailwinds from cases where we have differentiation and we get more pricing power and headwinds from material costs. So I don't expect to see a significant trend in gross margins. Around OpEx, we have a general rule of thumb that we want to constrain our OpEx growth to less than half of our revenue growth. And obviously, if we're growing revenue very, very rapidly, that's going to be on a lagging basis. So we expect to get significant leverage out of operating expense as we get to be a larger company. But many parts of our business are really fueled by the investments we're making in OpEx. If you look backwards in time, as the semiconductor industry pivoted hard towards AI, we leaned into OpEx at the same time that we were seeing headwinds in our mobile business. So we leaned into the investments that we needed to make to be able to win in compute eventually. And we think that, that was the right decision to make. And we're still in a situation right now where the marginal utility of additional investment is very high. So that's the stuff that's winning us a second hyperscaler. That's what's going to allow us to expand share inside of merchant compute and align to silicon photonics. So we certainly don't think we need to grow OpEx at the same rate that we're growing our revenue. But the increase that this 50-50 increase thing, we definitely have opportunities to spend on that, that are going to deliver growth.

Excellent. I think with that, we're on time. Thanks, Greg, for being here with us. We appreciate it.

Awesome. Thank you.