The operator welcomes listeners to Teradyne's Fourth Quarter 2023 Earnings Call and introduces the speakers, CEO Greg Smith and CFO Sanjay Mehta. The speakers will discuss the company's financial performance for the fourth quarter and full year of 2023, as well as their outlook for the first quarter of 2024. Listeners are encouraged to review the Safe Harbor statement and non-GAAP financial measures. Teradyne will also participate in upcoming investor conferences.

In the second paragraph, Greg Smith discusses the company's recent results and market conditions, with Sanjay providing further details and guidance for the first quarter. The company's Q4 results were in line with their guidance, with highlights in Memory Test and Robotics, but continued softness in other test markets. The semiconductor test market has declined for the second consecutive year, with a significant decline in SOC demand. However, the trend towards vertically integrated producers presents an opportunity for Teradyne to gain share in high-performance computing. The company is focusing on capturing sockets in this segment.

In 2023, the company had success in capturing key VIP sockets in the United States and China, but towards the end of the year, automotive customer inventories slowed down the rate of test capacity growth. This resulted in a decrease in sales and earnings compared to 2022. Moving into 2024, the company is cautiously optimistic about the market, but there are still challenges such as high chip inventories and limited visibility. However, they are expecting a stronger second half, as there are signs of improvement such as a healthy product pipeline and increasing utilization levels.

The use of AI in mobile phones is expected to increase in the premium tier in 2024 and more broadly in 2025, leading to higher demand for testing. Despite a slowdown in the automotive market, the increasing electronics content per vehicle will drive demand for semiconductors. In Memory Test, demand for new testers was driven by the retooling required for higher speed flash and DRAM devices, leading to a record 43% market share in 2023. Other test markets, such as wireless, defense and aerospace, and storage, are expected to remain at current levels or experience modest growth. The addition of new customers in mobility and high-performance computing is setting the company up for mid-term growth. The Robotics sector had a strong Q4 with the launch of a new product, and overall growth is expected in 2023.

The company saw progress in the new product front and in channel transformation, with OEM sales growing and an increase in the number of large accounts managed. They expect a dip in Q1 of 2024 due to high Q4 shipments, but anticipate year-on-year growth for the rest of 2024. The company predicts flat revenue for 2024, with lower test revenue due to the sale of their DIS business. They estimate the Semiconductor Test market to be $4.95 billion and expect Robotics to grow in 10-20% in 2024. Despite challenges in the Mobile Test market and softness in Robotics, the company remains optimistic about the long-term potential of their test and robotics businesses and expects significant growth in earnings and revenue by 2026. This growth is driven by advancements in process nodes and power delivery.

The company is seeing progress in various areas such as higher transistor counts, advanced packaging, and emerging VIP space, which are driving demand for longer test times. The application of AI is also expanding the range of tasks for robots and the company is confident in its channel strategy to unlock growth potential in the robotics market. However, the duration of the downturn in mobile demand and softness in the industrial automation market have impacted growth expectations for 2023. The company will focus on improving gross margins and making necessary investments to capture long-term growth potential in both the test and robotics markets.

The company is focused on maintaining financial discipline and is looking for signs of top line growth before increasing expenses. They have a reliable baseline for planning based on historical trends and future demand drivers. 2023 was below trend line, but the demand drivers remain in place and the company is confident in their team's ability to capture future opportunities. The financial summary for Q4 includes sales of $671 million and non-GAAP EPS of $0.79, in line with guidance. The Semi Test group had revenue of $431 million and the SOC group had revenue of $327 million. The System Test group had revenue of $86 million, down 14% from the previous year. Robotics revenue was up 17% from the previous year. Non-GAAP gross margin was 56.6% and non-GAAP operating expenses were $245 million. The non-GAAP operating profit rate was 20.1%.

In the fourth quarter, the company had one customer that accounted for 10% of their revenue. Their tax rate was lower than expected due to geographic mix. For the full year, their revenue was $2.676 billion and their only customer with over 10% of revenue was Texas Instruments. They had a gross margin of 57.4% and an operating profit of 20.4%. They generated $426 million in free cash flow and returned $468 million to shareholders through share repurchases and dividends. Their tax rate for the year was 15.5% on a non-GAAP basis and 15.25% on a GAAP basis. Their SOC sales declined 16% due to weakness in the mobility market, but their Memory sales grew 4% thanks to new technologies. The System Test group had revenue of $338 million, with flat sales in Defense and Aerospace and production board test, but a 50% decline in HDD and system-level test. Wireless Test revenue was down due to declining handset units and weak networking and PC markets. In Robotics, revenue was $375 million with a mid-teens profitability in the fourth quarter, but an 8% non-GAAP operating loss for the full year.

Teradyne's profits were strong in 2023, but they are still investing in research and development for their MiR channel. However, their Q1 outlook has been impacted by a softening in SOC test demand. They expect sales to be between $540 million and $590 million with a non-GAAP EPS range of $0.22 to $0.38. Gross margins are expected to be low in Q1 but improve throughout the year. They also announced a strategic partnership with Technoprobe, which includes the sale of their DIS business and an equity investment in Technoprobe. This will reduce Teradyne's expected revenue by approximately $100 million in 2024.

The company's investment in Technoprobe is not expected to have a significant impact on earnings and will be accounted for using the equity accounting method. OpEx is expected to increase in 2024 due to strategic projects, with Robotics projected to be profitable. The company plans to maintain a minimum cash level of $800 million for business operations and potential M&A opportunities. They have returned a significant amount of cash to shareholders in the past and recently announced a dividend increase. The company will limit share buybacks in 2024 and does not expect a significant reduction in share count. They have updated their mid-term earnings model to provide insight into their growth and earnings potential.

The company has revised its financial ranges to reflect their view of the markets. The Test portfolio is expected to grow at a CAGR of 12% to 18%, driven by device technology trends and a recovery in Mobility Test demand. The Robotics portfolio is expected to grow at a CAGR of 20% to 30%, driven by labor shortages, new products and applications, and channel transformation. The updated earnings model predicts a revenue of $4.3 billion and non-GAAP EPS of $6.50 in 2026. The company had a challenging year in 2023 but still delivered a 20% operating profit and generated $426 million in free cash flow. They plan to return to growth later this year and beyond, driven by favorable trends in both Test and Robotics.

The speaker reminds listeners to only ask one question and a follow-up. The first question is about a 13% decline in the company's SOC TAM for 2026 and how the mobile app processor and slow start in Industrial will impact this. The speaker explains that the composition of the TAM has changed, with the compute market being higher than last year and the mobile market not as strong. This is due to the pace of transistor density remaining the same, but the end market predictions being softer. The speaker also mentions a new compute customer and explains that the ramp for this customer will likely have an impact in 2025 or 2026.

The TAM numbers for different segments in 2023 are as expected, with compute at $1.3 billion, mobility at $900 million, and auto at over $600 million. The overall market is expected to remain flat in 2024, with compute increasing and auto decreasing.

The company expects the Compute market to be worth $1.3 billion, Mobility at $900 million, Auto at $600 million, Industrial at $400 million, and Service at $700 million, totaling $3.9 billion. By 2024, they predict Compute to be worth $1.4 billion, Mobility at $0.9 billion, Auto and MCU at $0.5 billion, Industrial at $0.4 billion, and Service at $0.7 billion. The largest customer is expected to contribute less than 10% of total revenue in 2023 and 2024, and there is limited visibility into their second half demand. The company is confident in a second half recovery for SSC test, but did not provide further details.

The company is seeing improvements in utilization rates, particularly in OSAT. They expect this to trigger buying in the third quarter of this year. They are also looking for unit growth in smartphones and PCs, which could be a tailwind for them. In the fourth quarter, they saw a weakening in the Industrial and Automotive sectors, but they believe this is a short lull driven by new model year introductions. On the SLT side, they have wins in both mobility and HBC, and the timing of the revenue ramp is unclear.

The speaker, Greg Smith, discusses the potential for growth in the company's Mobility and Compute divisions. He mentions that while the customer for Mobility is not as large as their primary customer, it has the potential to drive significant volume. In Compute, the company has won a hyperscaler customer, but the volumes for those devices will start small and increase over time. Smith also notes that the Compute TAM is now the largest end market, with most of the Test capacity adds in support of data center rather than client markets. Looking forward, the company expects capacity adds for cloud to moderate.

In 2023, there will be a significant increase in production capacity and higher-end volumes in the market. The low unit volume in PCs and the push for custom silicon for Edge AI inference will accelerate the market. The market will become more balanced between data center and client, and the overall market TAM is expected to be $3.9 billion. These devices have a high test intensity and generate high margins for compute makers.

The speaker asks about recent media reports of Teradyne pulling out of the China market and the company's forecasted growth rates for the next few years. The company's CFO clarifies that the supply chain changes in China have been ongoing and they still have a strong presence in the region. He also explains that Teradyne has a history of seeing significant growth after downturns and they expect a similar trend in the coming years due to the demand for mobile phones and PCs, as well as the impact of generative AI.

In the paragraph, Greg Smith discusses the driving factors of complexity in the handset and automotive markets, particularly the incorporation of large language models and the need for increased compute power. He also addresses a question about the company's Q1 guidance and attributes the lower earnings power to a combination of lower volume and product mix. In response to a philosophical question about the company's focus, Greg mentions their strong position in mobile testing and their recent investment in Technoprobe, which may have come as a surprise due to the historical challenges of vertical integration between test and probe card companies.

The company's strategic priorities have always been to make accretive investments and put free cash flow to work for investors. They did not take their eye off the test market, but rather focused on their industrial automation business which had a rough year due to market conditions. The decision to invest in Technoprobe was driven by a trend in the test market where there is a need for tighter integration between tester and interface due to increasing complexity and performance requirements in end markets. This partnership is expected to unlock value for customers by combining Technoprobe's interface technology with the company's testers.

The company's investment in Technoprobe does not reflect a change in strategy, but rather an opportunity to benefit customers and investors. The projected TAM for the hyperscaler ASIC market is $400 million to $600 million by 2026, with modest growth in the overall Compute segment. The company's goal is to gain market share in this segment, and they have been successful in winning a majority of the sockets they target.

The company is optimistic about their expected split of $400 million to $600 million. They have a lower forecast for memory test growth compared to their main competitor, who is forecasting stronger growth due to technology-related buying in the final test market. The company is uncertain about the potential for additional capacity needs in the wafer sort market, which could potentially lead to upside in their forecast. The analyst from JPMorgan asks for clarification on the difference in forecasts between the two companies.

In response to a question about the long-term model for 2026, Greg Smith, a representative from the company, stated that their goals for the Robotics segment include 20-30% growth and 5-15% profit. They are willing to invest in this segment as long as it yields higher growth rates, and they are focused on maintaining high gross margins of over 60%. In regards to gross margin for the year, they are guiding for 58-59%, which could potentially cross 60% at some point during the year.

The speaker is responding to a question about the company's drivers for reaching a 60% level in 2024. They mention that the increase is driven by a stronger product mix and higher volume, as well as operational efficiencies. They also discuss their competitive position and share in the HBM test market, which is split evenly with a competitor. The speaker also addresses the potential for growth in the memory business and the impact of retooling and parallel testing.

In the fourth quarter, HBM made up more than 50% of the company's memory shipments and is expected to continue driving growth in the back half of the year. However, there are new competitors and standards changes that may affect growth. In terms of robotics, the company is guiding for a 10-20% increase in 2024, but there is still some underlying weakness in the industrial market. The company remains optimistic for continued growth throughout the year, but they are starting with a relatively low Q1.

The speaker wanted to be cautious about setting expectations for growth for the full year. The call is ending, but they will get back to anyone still in the queue later.

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