This paragraph introduces the Teradyne Second Quarter 2023 Earnings Call and Webcast. Andy Blanchard, Vice President of Investor Relations, is joined by CEO Greg Smith and CFO Sanjay Mehta to discuss the company's financial results. The press release containing the second quarter results was issued the night before and slides are available on the Investor page. Forward-looking statements and non-GAAP financial measures are discussed, and more information is available on the Investor page.

Teradyne is expecting to participate in various investor conferences before their next earnings call. Greg Smith will summarize the company's Q2 and first half results, while Sanjay will provide financial details and offer guidance for the rest of the year. The semiconductor tester market is in a correction cycle due to excess inventory, while automotive demand remains strong. Robotics demand has softened due to PMIs and the transformation of the UR distribution channel. For the rest of 2023, Teradyne estimates the SOC test market will be between $3.7 billion and $4.1 billion, down 13-21% from 2022 but up from their April outlook.

The semiconductor test market is experiencing a downturn due to weaker capacity buys, but is expected to grow due to the increasing demand for device complexity. The automotive segment is expected to grow faster than the rest of the SOC market, driven by the growth of EVs and hybrids, as well as the adoption of features like ADAS and infotainment. The trend of vertically integrated producers is a disruption to the computing segment, and is beneficial to Teradyne.

The semiconductor industry has a process technology roadmap that is driving the growth of the semiconductor test market, as well as the wireless and system test businesses. New standards like Wi Fi 60 and 7 require new or upgraded test equipment, and increased device complexity is broadening the adoption of SLT. Ujjawal Kumar recently joined Teradyne as the President of the Robotics Group, and in the second quarter, robotics demand softened significantly due to challenging economic conditions.

In Q2, UR continued to experience market softness, leading to a projected flat to 10% decrease in revenue for the robotics group. Despite this, the company saw record lead generation from two automation trade shows, and began shipments of their UR20 product. They have also introduced MiR Insights, a cloud-based tool to monitor and optimize fleets. UR is transforming their distribution channel in 2023, which has slowed sales from distributors in the short-term, but will focus on customers with the highest revenue potential in the long-term.

MiR and UR are working to become premier providers of human scale automation, with Teradyne's foundational expertise, engineering operations, and customer support. They are putting the structure in place to support $1 billion in profitable sales by the end of the midterm. MiR's focus on large accounts is yielding good results, with their installed base at large customers growing 3x the rate of the overall installed base. 28 new OEM partners have been added so far this year, and they are working with distribution partners to directly engage with over 200 large customers. The test businesses are performing better than planned through the first six months, with automotive and memory being the strongest markets. The robotics business was below plan in the first half, but is expected to have a stronger second half. Plans to transform distribution and expand the product line are on track.

In the second quarter of the year, sales were at the high end of their guide with non-GAAP EPS of $0.79, above their high guide of $0.74. Non-GAAP gross margins were 58.8%, due to deferred resiliency costs and improved product mix. System test group revenue was $94 million, with $38 million in storage test and $44 million in Wireless Test. Robotics revenue was $72 million, with UR contributing $58 million and MiR $14 million. Free cash flow was $104 million in the quarter.

In the third quarter, the company expects sales to be between $650 million and $710 million, with non-GAAP EPS in a range of $0.61 to $0.81. Gross margins are estimated to be 56-57%, and OpEx is expected to run at 35-38% of sales. For the full year, gross margins are expected to be 57-58%, with the lowest margins in Q1 and improving throughout the year. The company has also repurchased $135 million of shares, paid $17 million in dividends, and settled $2 million of debt.

Sanjay provided an update on the company's financial outlook for the full year of 2023. He mentioned that the timing of resiliency costs shifted to later in the year, resulting in outperformance on gross margins in Q1 and Q2. However, these costs will now be reflected in Q3 and Q4, causing margins to drop. Despite this, the company expects 57-58% gross margins for the full year. Additionally, the company expects OpEx to be roughly flat compared to 2022 and the robotics group to have an operating loss for the year. Finally, the company expects a GAAP and non-GAAP tax rate of 16.5% and 17% respectively.

Sanjay Mehta and Greg Smith discussed the revision of the SOC TAM, which is increasing by $300 million due to the compute market. The expectation is that the share of the full year will remain flat or tick up slightly. Storage is expected to remain at a minimal ship rate and may see a recovery in 2024. They also discussed the transistor density growth, which is expected to evolve into 2024.

Greg Smith is answering Mehdi Hosseini's question about the growth rate of the SOC test. He explains that the complexity transitions are happening in a market where end unit volumes, especially in mobile, are significantly down. Smith believes that the number of high volume three nanometer devices will increase in 2024 and that volumes will be up, making the year incrementally stronger than 2023.

Greg Smith answers Vivek Arya's question about the test utilization of Teradyne equipment, noting that it has increased from a generational low of 2-5%. He explains that there is a disparity in utilization between IDM and subcons, with IDM in the upper 80s and subcons nearly 20 points lower, but heading in the right direction. He then addresses Arya's question about the IA business, noting that it has consistently underperformed its potential and has not been profitable. He states that he does not know what will change in the future, but that he expects the competitive and pricing environment to be more or less favorable over the next few years.

UR is a clear leader in the robotics space, with a market share of more than 3x its nearest competitor. However, the group has consistently underperformed profit targets and is now projected to have a loss this year. This is due to a misunderstanding of the potential end market and the need for sophisticated early adopters. The company is now shifting more emphasis towards solution providers such as OEMs to provide solutions that are at the level of the customer's capability and to directly connect with larger customers. The challenge in robotics is not as much around technology as it is a go-to-market and product market fit challenge.

Sanjay Mehta states that the company has been losing a few points of share to Chinese cobot companies, and their share in China is much lower than their share worldwide. He also states that in AMR's, the total market is $2 billion per year and their share is around 3%. He believes that the competition is fragmented and they are working to establish strategic relationships with global customers to help them gain market share. Lastly, he states that the $35 million shortage is spread across the entire semi test portfolio.

Greg Smith states that edge AI is the main driver for complexity in mobile processors, and that complexity has been steadily increasing over the past four years. However, unit volume for smartphones is expected to inflect in 2024, as the peak shipment quarter in 2020 was 20% higher than the peak shipment quarter in 2022.

Greg Smith discussed the impact of AI on the business in 2024, such as driving HBM and DDR5, next generation flash protocols, and the development of chips for traditional compute suppliers. He also noted that for robotics, the breakeven point is around $360 million to $400 million in annual revenue.

Greg Smith explains that they expect to see improvement in Q4 of this year due to the release of the UR20 and 12 months of direct account coverage. The target for 2023 was a 5-15% profit margin, however this has not been achieved. The goal is to return to this range and increase it slightly by the end of the midterm in 2022-26. If the business is growing 20-30% per year, the profit will remain in the 10-20% range. If the potential of the $500 billion market is overestimated, they will reduce their OpEx to match the rest of the company.

Greg Smith discussed sustainability in the auto and industrial semiconductor test businesses for 2024. He highlighted the increasing attach rate of semiconductors in cars due to the growth of electric vehicles, which contains twice as much semiconductor as a standard internal combustion car. This is resulting in a 12% rate of increase in the dollar value of semiconductors in each car shift, which is larger than the total semiconductor revenue CAGR. Sanjay was asked to provide the exact splits for this year.

The automotive demand is expected to continue to cycle, and the end market fundamentals are strong. Industrial demand is not as strong, but there is growth in clean energy, EVs, and batteries. The SOC market is estimated to be 25% of the total market, and 35% of Avago's revenue in 2021. Memory test TAM is expected to remain between $900 million and $1 billion in 2021, but may increase to $1.5 billion in 2024 due to growth in HBM, DRAM, and NAND.

Greg Smith explains that the memory market is volatile, but the TAMs have been stable in recent years. He is optimistic that the memory TAM will be up next year due to technology adoption and HBM growth. He suggests to factor in normal seasonal Q4 plus additional shipments of UR20 when predicting the low end of the revised flat down 10% forecast.

Greg Smith and Brian Chin discuss the UR20 robot, which has been taking orders for nearly a year and has a significant backlog. Shipments began at the end of the second quarter and will continue through the fourth quarter. They also discuss the native demand for smartphones and how the complexity of semiconductors in cars and investments in cloud computing and AI are accelerating. Smith believes that the whole SOC TAM market will grow at a CAGR of 8-13%.

Sanjay Mehta and Greg Smith from the company discussed their Q4 guidance for being flat quarter-over-quarter and how the robotics business is up. Sanjay attributes this to the ebbs and flows of their semi test portfolio. Greg then talks about the computer SOC Tam being raised to $1.3 billion and how they expect the VIP group to have spotty capacity buys and that their share of the VIP TAM will be down slightly from 2022 to 2023.

Greg Smith discussed the current market size of their test and verification intellectual property (VIP) business, which is estimated to be between $50 million and $100 million this year. He also mentioned that the test and verification market for high bandwidth memory (HBM) is split roughly half and half between core testing and performance testing. Finally, he noted that the broad diversity of customers for the VIP business is increasing, although a single customer accounted for a lot of capacity last year.

Greg Smith explains that Teradyne's robotics business is experiencing a 10% decrease in orders year-on-year, but this is still better than their peers in industrial automation, who are experiencing a decrease of 20% or more. He attributes this to Teradyne's disruptive approach, but acknowledges that their current distribution setup is vulnerable to macroeconomic cycles. He believes that their new distribution setup will be better suited to delivering consistent results.

Andy Blanchard concluded the call by thanking everyone for joining and stated that he would follow up with those in the queue shortly. He then noted that the macroeconomic headwinds have been particularly bad for the company due to the type of customers they serve and how they serve them. He suggested that building out OEM and large account coverage would provide better immunity from future headwinds.

This summary was generated with AI and may contain some inaccuracies.