The paragraph is an introduction to the Q3 2024 earnings conference call for Teradyne Incorporated. The Operator announces that the call is in listen-only mode and will include a Q&A session. Traci Tsuchiguchi, the Vice President of Investor Relations, welcomes participants and introduces CEO Greg Smith and CFO Sanjay Mehta. The call will cover Teradyne's third-quarter performance and fourth-quarter outlook. A press release and slides with additional information are available on their website. The presentation includes forward-looking statements with potential risks, and listeners are cautioned about placing undue reliance on these projections. Reconciliation of non-GAAP to GAAP measures can also be found online.

The paragraph outlines Teradyne's expectations and activities leading up to their next earnings call, including participation in conferences hosted by R.W. Baird and UBS, and a financial analyst meeting in March 2025. Greg Smith summarizes the company's third-quarter performance and industry trends, highlighting strong demand driven by Cloud AI in the SoC and Memory Test markets, resulting in record high revenue for the memory business. The SoC segment's growth is attributed to networking and vertically integrated producers. Semi Test segments show stabilization and improvement, with increased utilization for Cloud AI Compute devices. While customer forecasts are limited, Teradyne anticipates a broader market recovery by 2025 as lead times normalize by early 2024.

In the third quarter, the robotics and SAM expansion segment outperformed peers despite challenging industrial conditions. The company achieved high-end financial results, particularly in Memory and SoC, driven by AI applications. Cloud AI significantly boosted Compute Revenue, with strong performance in networking devices, and Compute revenue is expected to quadruple from 2023. The SoC SAM forecast for 2024 has been increased to $1.8 billion, signifying 30% year-over-year TAM growth. The VIP segment of Compute TAM is rapidly expanding, with a current estimate of $300 million for 2024 and the company holding a 50% market share. Memory operations are at record highs, led by high demand for HBM DRAM and enterprise SSD NAND flash due to AI servers. Memory TAM for 2024 is projected to substantially exceed the 2021 peak, attributed partly to initial HBM tooling. However, HBM-TAM may stabilize or decline in 2025. Cloud AI demand is expected to persist in the fourth quarter.

In the third quarter, memory shipments surged, suggesting a moderation in memory revenue for the fourth quarter. The Semi Test segment exceeded expectations, but other test businesses experienced sluggish demand, particularly in wireless due to slow Wi-Fi 7 adoption, and the HD and Production Board Test segments due to customer and automotive OEM issues. The Robotics business, despite showing steady quarterly revenue, achieved 8% growth year-to-date, outperforming peers facing declines due to an industrial downturn and cyclical capital investment cuts. The Robotics strategy focuses on an OEM solutions channel, which has increased revenue by over 50% for the year, facilitating faster and smoother customer production processes.

Teradyne Robotics has experienced strong innovation-driven growth, highlighted by the successful market performance of its new heavy payload UR robots and the upcoming commercial shipments of the MiR1200 Pallet Jack, which uses NVIDIA-powered AI. The company launched a new AI accelerator to assist partners in developing AI-based robotic solutions. Despite a softer market outside of Semi Test, Teradyne expects approximately 5% revenue growth for 2023, boosted by its Semi Test business and innovative robotics products. AI is seen as a transformational growth driver across Teradyne's operations. In Q3, the company reported sales of $737 million and non-GAAP EPS of $0.90, both exceeding expectations.

In the reported quarter, Non-GAAP gross margins exceeded expectations at 59.7% due to product mix, while Non-GAAP operating expenses rose to $275 million, aligning with guidance for investments in growth. The Non-GAAP operating profit was about 22%. Q3 saw $543 million in Semi Test revenue, with SoC at $393 million and Memory at $150 million, driven by demand in Compute and HBM DRAM shipments. The Memory sector is anticipated to remain dominated by DRAM. System Test revenue declined to $73 million due to market weaknesses, notably in automotive and mobile. Wireless test revenue decreased to $33 million owing to slow WiFi 7 adoption and a weak PC market. Robotics revenue was approximately $89 million, a slight increase year-over-year, driven by strategic expansions. The equity investment in Technoprobe affected the income statement, with 10% of TPI's profit recognized from one month of impact on Q3 results.

In the quarter, the company had three major 10% customers and reported a tax rate of 13.6% on a GAAP basis and 13.8% on a non-GAAP basis, with full-year projections slightly higher. The free cash flow was $114 million, largely due to earnings and working capital improvements. The company repurchased $25 million in shares and paid $20 million in dividends, ending the quarter with $678 million in cash and securities. For Q4, sales are projected between $710 million and $760 million with gross margins of 59.5% to 60.5%. OPEX is expected to be 36.5% to 38.5% of sales, with a non-GAAP operating profit rate of 23%. Non-GAAP EPS is projected between $0.80 to $0.97, and GAAP EPS between $0.73 to $0.91. The company has also revised its semiconductor test market estimates for 2024, expecting the SoC TAM to reach the higher end of $4.2 billion.

The company has updated its financial estimates, projecting increased revenue across various sectors, including Compute, industrial, Memory, mobile, Auto MCU, and Services. For 2024, Robotics growth is anticipated to be lower, between 5% and 10%, due to weak market conditions. In 2025, they expect increased operating expenses alongside revenue growth acceleration and plan to balance share buybacks with employee compensation. Despite subdued demand in non-AI markets, the company remains optimistic about future growth and has a scalable, resilient business model to manage economic fluctuations effectively.

The paragraph discusses the company's expectations and plans for 2025, anticipating an accelerated increase in operating expenses (OPEX) due to a variable OPEX model aligned with top-line growth. Specifically, there is a planned low teens percentage increase in OPEX year-over-year, driven mainly by growth initiatives in Semi Test, focusing on engineering and go-to-market strategies. Approximately 30% of this growth is due to the variable compensation model. The first quarter OPEX is expected to grow by 15% to 20% year-over-year. The company reports strong performance in the third quarter, with significant sales and earnings driven by Memory and Compute revenue. The Robotics team has also shown year-over-year growth despite challenging conditions in the auto and industrial sectors. The company remains confident in its midterm fundamentals and is investing to boost long-term growth. The paragraph transitions to a question from Mehdi Hosseini regarding the System-Level Test (SLT) opportunities, particularly in the Compute sector, and how Teradyne is positioned to benefit, noting that SLT has expanded from smartphones to more diversified markets. Greg Smith responds, indicating challenges in measuring the SLT total addressable market (TAM) due to its overlap with other methodologies like burn-in.

The paragraph discusses the role of SLT (System-Level Test) in the test strategy for processors used in smartphones, highlighting its growing importance over the past five years and its impact on business. In 2024, the company plans to add compute customers, expecting them to significantly contribute to SLT revenue by 2025. Despite a downturn in the mobile market, an additional mobile customer has been added, potentially boosting growth when the market recovers in 2025. The discussion also touches on increased test times for next-generation AI chips due to their complexity, with SLT potentially helping to manage these increased times effectively. The expectation is for a stronger performance in 2025 compared to 2024.

The paragraph discusses the growth prospects in the AI accelerators and compute space, highlighting that while there may not be significant opportunities for market share gains in specific areas like Blackwell, the growth is expected to come from vertically integrated producers, particularly hyperscalers deploying more compute power using their own silicon. The increasing complexity of AI model training means that networking is growing faster than the number of nodes, leading to a rise in test time for networking devices, which benefits the Automated Test Equipment (ATE) industry. The expectation is to see larger Total Addressable Markets (TAMs) and more testers, driven primarily by the growth of vertically integrated producers and networking. Mehdi Hosseini poses a question about sales growth prospects, and Greg Smith begins to explain factors contributing to TAM expansion.

The paragraph discusses two main points related to Teradyne's business outlook. First, Teradyne is observing stronger performance in AI Compute and HBM Memory sectors, and gaining clearer insights into the Total Addressable Market (TAM) in China, where local companies are meeting demand. Although Teradyne's exposure in China is low, this trend is pushing their TAM estimates for 2024. Second, regarding future growth forecasts, Teradyne is projecting 20%-25% growth in 2025 and plans to provide detailed estimates in January. The discussion touches on the company's historical growth in automation and robotics, noting a discrepancy in CAGR, and highlights internal reflections on factors needed to achieve future growth goals.

The paragraph discusses the challenges faced by the industrial automation industry, particularly from 2020 to 2023. While the semiconductor industry quickly recovered post-2020 due to its critical status during the COVID-19 pandemic, industrial automation, including the company's own operations, struggled to grow. Although there was a brief recovery in 2021, growth stagnated in 2022 and turned negative in 2023 amid low industrial PMI levels and rising interest rates, indicating contraction. In response, the company identified inadequate distribution as a key issue and broadened its offerings by adding high payload robots and introducing new products to expand its market reach. Despite weak market conditions, their OEM solutions channel has grown significantly.

The paragraph discusses expectations for growth in the robotics and industrial automation market, with an aim to outpace traditional suppliers by 15 to 20 percentage points per year. The market typically grows around 5% annually, leading to an anticipated growth of 20% to 25% under normal conditions. Sanjay Mehta expresses confidence in the company's growth strategy but acknowledges the need to adjust due to current weak demand in sectors like mobility, automotive, and industrial. The Operating Expenses (OPEX) are expected to rise by low teens next year, but revenue growth is projected to be higher, according to Sanjay. Although the Street forecast predicts revenue growth in the low 20s, Sanjay hints at potential variations and plans to provide more guidance in a future call in January. The overall environment is dynamic, and strategic planning is ongoing.

The paragraph discusses a company's strategic approach to operating leverage and investment decisions amid changing market conditions. It references historical market strength in mobility from 2008 and notes a shift to a successful VIP or hyperscaler strategy in computing. The company is carefully evaluating investments to align with its operating leverage principles. Greg Smith highlights concerns about potential misunderstandings regarding the company's OPEX trajectory for 2025 while expressing less worry about revenue growth implications for 2026. Timothy Arcuri asks about potential growth opportunities in the industrial automation sector, mentioning Amazon's interest in using cobots for warehouse and fulfillment as outlined in a new white paper.

The paragraph involves a discussion between Greg Smith and Samik Chatterjee about the potential of AI to advance the use of collaborative robots (cobots) in various industries. Greg Smith expresses excitement about AI's ability to enable cobots to handle complex tasks, such as managing a large number of SKUs daily in logistics and online grocery picking. He views online retailing as a significant opportunity for this technology to grow. Samik Chatterjee then shifts the conversation to financial projections, questioning the anticipated growth in 2025 versus 2024, and whether the company's expectations are focused on cyclical sectors like Mobility, rather than sectors like memory and HBM, where growth might be leveling off.

The paragraph discusses Greg Smith's perspective on the growth outlook for the technology market, focusing on the cyclical parts of the Total Addressable Market (TAM) for 2025. He highlights that while Compute is expected to continue growing, driven by increasing semiconductor content in the automotive and industrial sectors, the Memory market remains weak, with HBM expected to stabilize and potential room for improvement in the flash market. Smith emphasizes that while AI is a significant growth driver, incremental improvements are expected in the broader market. Samik Chatterjee then asks about seasonality concerns for the first quarter, directed at another individual named Sanjay.

The paragraph discusses the seasonality and cyclical nature of a business, particularly focusing on AI and Robotics. Sanjay Mehta explains that the company typically experiences a seasonal downturn in Q1 after a strong Q4, especially in Robotics. They are well-positioned to handle demand due to shorter lead times, though visibility into future demand is decreasing. While historically there is some seasonality in the test segment, much of it is driven by Robotics. Subsequently, Brian Chin from Stifel asks about the revision of the industrial test Total Addressable Market (TAM) for the year and its possible connection to China, to which Greg Smith responds affirmatively.

The paragraph discusses the improved understanding of the Total Addressable Market (TAM) in China, especially concerning indigenous suppliers. Greg Smith provides an update on the repurposing of mobile testers, indicating that over 100 have been repurposed, with expectations of more than 200 by the end of the year. Most of these testers have been repurposed for markets like Compute, AI accelerator GPUs, and ASICs. Utilization has increased, indicating less idle capacity than the previous quarter, and is expected to decrease further by year-end. Brian Chin acknowledges this information and notes the uncertainty regarding demand forecasts for the next year, while also mentioning a revised, potentially higher, TAM estimate for 2026.

The paragraph discusses the market potential and challenges for VIP Compute, with expectations that the total addressable market (TAM) will grow from $300 million in 2024 to potentially more than $500 million by 2026, though there's consideration to revise that number upward. The market is described as fluctuating due to few producers and part types, making it sensitive to large order fluctuations. Key constraints include limited availability of HBM Memory and advanced packaging capabilities. Additionally, the performance of these components is critical, with efforts to incorporate redundancy to ensure adequate yields.

The paragraph discusses the challenges and opportunities in predicting demand for testers in a rapidly evolving market. Brian Chin and Christopher Muse address the topic during a call, acknowledging the difficulty but noting faster-than-expected trends. Sanjay Mehta and Greg Smith respond to Muse's question about the potential for real leverage in 2025, indicating confidence in growth across several sectors, including mobility, auto, industrial, and compute, despite current challenges. They mention ongoing strategic planning and the expectation of operating leverage in 2025 while acknowledging that market conditions could change.

The paragraph discusses Teradyne's strategic response to changes in the market. Initially benefiting from a mobile demand boom, Teradyne operated efficiently without needing extra operational expenses. However, anticipating growth in total addressable market (TAM) that does not align with its historical strengths, Teradyne invested in aligning with the High Bandwidth Memory (HBM) market and Performance Stacked Dye Test, as well as boosting engineering, sales, and marketing efforts towards Compute Vertical Integration Platforms (VIPs). The company consciously decided to adapt to market shifts and maintain strong operating margins to keep its leadership position. Christopher Muse then inquires about the projected 50% sequential growth in Teradyne's Robotics business due in December and seeks clarification on the drivers, attributing it mainly to a new product cycle. Greg Smith is prompted to respond to this inquiry.

The paragraph discusses the Robotics business and its strong seasonality, particularly in Q4. There is expected growth in the OEM channel and heavy payload contributions. Service revenue is becoming more significant, though the focus is more on 2025 as the key year for development, especially with the introduction of a new Pallet Jack. However, this new product won't significantly impact Q4 growth, which is driven by the current business pipeline. In a conversation with Toshiya Hari from Goldman Sachs, Greg Smith is questioned about the long-term prospects of the mobile SoC Test market, which previously peaked at $2 billion and currently stands at $800 million. Greg envisions a medium to long-term opportunity in the range of $1.2 billion to $1.3 billion, expecting to utilize excess capacity by 2025.

The paragraph discusses expectations for the mobile market, suggesting that growth could push its value closer to $1 billion, depending on the impact of AI-enabled smartphones. These smartphones might drive demand due to requiring more complex processors and offering desired features that shorten upgrade cycles. Currently, smartphone lifespans are longer as there's no compelling feature motivating upgrades. Toshiya Hari then asks about the company's business strategy, referencing the acquisition of UR as a diversification move. With developments in Semi Test, such as HBM and VIP, Hari questions if the company still considers itself the right owner of the Robotics business and if there's any internal discussion about separating the two businesses.

Greg Smith discusses the strategic decision behind Paradigm's acquisition of robotics companies. Initially motivated by a stagnant semiconductor test market, and after doubling its market share, Paradigm sought sustainable growth beyond a declining industry. The acquisition revealed a unique value proposition in advanced robotics, leveraging Paradigm's expertise in delivering high-tech and highly reliable products. This expertise enables Paradigm to compete effectively against both large industrial automation companies, who lack high-tech delivery capability, and smaller pure-play robotics firms, which often face scale and financial challenges. Paradigm's international distribution and logistics further strengthen its competitive advantage.

The paragraph discusses Teradyne's strategy regarding its Semi Test business. Greg Smith responds to Krish Sankar's question about increased operating expenses (OPEX) in this area, explaining that the rise in expenses is mostly cyclical. Teradyne is investing heavily to support Very Important Product (VIP) customers who are developing complex devices, requiring substantial applications and technical support. These investments are expected to yield significant returns in the long term, despite the current phase of high expenditure. Teradyne anticipates growing revenue to align with these increased OPEX levels over time.

The paragraph covers a discussion about operational expenditures (OPEX) and market opportunities in the technology sector, particularly around VIP and networking spaces. Greg Smith explains that by maintaining these spaces, they aim to grow without significantly increasing OPEX. The conversation then shifts to High Bandwidth Memory (HBM) and post stack dye casting, where Greg mentions that Paradigm recently qualified with a major supplier, enabling them to partake in significant performance tests and potentially drive revenue by 2025. The discussion also touches on wafer storage, highlighting a traditional market share distribution in this area, where Paradigm holds significant DRAM wafer store share with major players and is performing well with memory manufacturers in China. Krish Sankar and Gus Richard pose questions about the growth of complexity in mobile processors, AI capabilities, and modem integration, looking forward to developments in 2025.

Greg Smith discusses the upcoming ramp-up of new devices, noting a modest increase in complexity primarily due to AI, while modem integration remains unchanged. However, there is potential for shifts in modem supply sources for both iOS and Android. Gus Richard asks about capacity utilization trends, but Greg Smith is unable to provide exact figures due to audit limitations. He indicates that utilization has risen consistently, showing a mid- to high single-digit increase quarter-on-quarter, and expects significant improvement in Q4 driven by seasonality and upgrades of underutilized testers, although he cannot offer precise numbers.

The paragraph describes the conclusion of a question-and-answer session in which Gus Richard expresses his gratitude. The operator then hands over to Traci Tsuchiguchi, who thanks the participants for joining and looks forward to future engagements during the quarter.

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