Greetings. Welcome to Teradyne’s Fourth Quarter 2023 Earnings Call and Webcast. [Operator Instructions] Please note this conference is being recorded. At this time, I’ll now turn the conference over to Andy Blanchard, Vice President, Corporate Communications. Mr. Blanchard, you may begin.

Good morning, everyone and welcome to our discussion of Teradyne’s most recent financial results. I am joined this morning by our CEO, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we will provide details of our performance for 2023’s fourth quarter and full year, along with our outlook for the first quarter of 2024. The press release containing our fourth quarter results was issued last evening. We are providing slides on the Investor page of the website that maybe helpful to you 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 risk factors that could cause Teradyne’s results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release as well as our most recent SEC filings. And additionally, those forward-looking statements are made as of today and we take no obligation to update them as a result of developments occurring after this call. During today’s call, we will make reference to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP measures, where available on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Wolfe Research, Citi, Susquehanna and Morgan Stanley. Now, let’s get on with the rest of the agenda. First, Greg will comment on our recent results and the market conditions as we enter the new year. Sanjay will then offer more details on our quarterly results, along with our guidance for the first quarter. We’ll then answer your questions and this call is scheduled for 1 hour. Greg?

Hello, everyone and thanks for joining us this morning. Today, I will summarize our fourth quarter and full year 2023 results, comment on our early view of 2024 and describe the market assumptions underpinning our updated midterm earnings model. Sanjay will then provide financial details on all of these topics. We delivered Q4 financial results in line with our guidance. The clear highlights for the quarter were the – were Memory Test, where DRAM tester revenue more than doubled from Q4 2022 on HBM demand and our Robotics team’s execution in growing sales, 17% from Q4 2022 and 50% sequentially, as we ramp shipments to address the record backlog of our new UR20 Cobot at Universal Robots. Balancing these strengths in Memory and Robotics was continued softness in our other test markets. Shifting now to the full year, 2023 was the second consecutive year that the size of the semiconductor test market declined, as the industry digested record shipments in 2020 and 2021, driven by COVID-related demand. The SOC test market has declined 21% from 2021 and the mobility portion has contracted 55% over the same period. Most of that decline occurred in 2023, with SOC demand down 17% year-on-year. Mobility has historically been the largest sub-segment of the SOC market and an area of strength for us in semiconductor test and in wireless test. Despite the weakness in demand, the trend towards vertically integrated producers is continuing. This new class of customer provides an opportunity for Teradyne to gain share in high-performance computing, a segment where we have historically had low share. These customers will take time to ramp. And so we are focusing on capturing sockets. On that front, 2023 was a great year for us, capturing the majority of key VIP sockets, where we targeted at customers…

Thank you, Greg. Good morning, everyone. Today, I’ll cover the financial summary of Q4, the full year 2023, provide our Q1 outlook, some planning guidance for full year 2024, review our updated earnings model and outline our capital allocation plan. Now to Q4. Fourth quarter sales were $671 million, with non-GAAP EPS of $0.79, both in line with our guidance. Semi Test revenue of $431 million at SOC revenue of $327 million, with high memory shipments of $104 million, as Greg noted in his highlights. System Test group had revenue of $86 million, down 14% from Q4 ‘22. Growth in Defense and Aerospace was offset by weakness in storage test and production board test. LifePoint revenue of $25 million was weaker year-over-year due to continued weakness in cellular, PC markets. Robotics revenue of $129 million was up 17% from the fourth quarter of last year and up 50% sequentially on seasonally high demand and the impact of UR20 and UR30 new product shipments. Non-GAAP gross margin was 56.6% in the middle of our guidance range and non-GAAP operating expenses were $245 million in Q4, up $2 million from Q3 ‘23. Non-GAAP operating profit rate was 20.1%. Some other financial facts. We had one 10% customer in the quarter. Tax rate, excluding discrete items for the quarter was 12.6% on a non-GAAP basis and lower than planned because of geographic mix. GAAP tax rate was 14% in Q4, excluding discrete items. We repurchased $51 million of shares in the quarter. Turning to the full year results. We had revenue of $2.676 billion. Texas Instruments was the only customer greater 10% of our revenue for the year. Gross margin for the year was 57.4%. OpEx was $990 million and operating profit was 20.4%. Non-GAAP EPS was $2.93. We generated $426 million in…

Thanks, Sanjay. We’d now like to take some questions. And as a reminder, please limit yourself to one question and a follow-up.

Thank you. [Operator Instructions] Our first question will be coming from the line of Mehdi Hosseini with SIG. Please proceed with your questions.

Yes. Thanks for taking my questions. The first one has to do with the midterm guide. It seems like there is about a 13% decline in your SOC TAM for 2026. What I want to better understand is how do you think about the mobile app processor and especially the transistor density versus a slow start in Industrial? How should we think about those two end markets impacting that 13% reduction to your 2026 TAM for SOC and I have a follow-up.

Hi, Mehdi, this is Greg. So the composition of the TAM in the mid-term model, if you compare this year to last year, I think the biggest change is that we think that the that the compute part of the market is going to be at a higher level, than we did last year. And we think that the mobile portion of the market is going to be up from where it is now but will not be at the level that we were modeling last year. So we believe that the pace of transistor density is proceeding basically at the same rate that we thought it was proceeding last year. The real difference is that the end market sort of end unit market predictions going out through the mid-term are a bit softer in this model than they were last time. And certainly, the impact of cloud and Edge AI in the market is a relatively new factor and is strengthening the compute part of it.

Okay. Great. And the follow-up has to do with your prepared remarks. I believe you said you have a new compute customer. And if that’s true, if I heard you correctly, how does the ramp of that new customer would look like? Is it more like a ‘25, ‘26 impact? And if you could just provide any additional color would be great.

So there are sort of two comments in my prepared remarks. One talked about socket wins for VIPs. And those socket wins are in both cloud compute and in EDGE devices. And the right way to model that is perhaps a little bit starting towards the end of 2024, but definitely hitting much more seriously in 2025. The other reference that I made was for an SLT win for a compute customer, and that’s definitely something that’s going to take until 2025 to build to material volume.

Okay. Great. Perhaps I will follow-up with Andy, what VIP is?

That’s – sorry. We – because most of the – there are a number of players that are designing their own silicon. And typically, a big portion of those are the hyperscalers, but there are – there are players in that space that don’t fit the traditional hyperscaler model. So like a large integrated automaker or people that are doing custom silicon development for their own handsets or customer devices. So we prefer the term vertically integrated producer, but you can read that as hyperscale.

Okay, thank you for the color. Appreciate it.

Our next question is from the line of Timothy Arcuri with UBS. Please proceed with your question.

Thanks a lot. I’m wondering if you can go through the TAM numbers, how the different segments came in, in ‘23? I know the breakout before was compute $1.3 billion, Mobility was $900 million, Auto is where I think a little more than $600 million. If you can just – did the market come in about as you thought it would for ‘23 and then can you shape ‘24 for those segments? I know it’s flat at a high level, but I would imagine Autos are probably down a couple of hundred million. And maybe Computes up a couple of hundred million. That’s the delta. Can you just run through that?

Sure. Hi, Tim, it’s Sanjay. So we estimate the SOC TAM in 2023, you were going down the correct numbers that haven’t really changed. But just for specifics. We view the Compute market at $1.3 billion, Mobility at $900 million, Auto at $600 million, Industrial at $400 million and Service at $700 million. That’s how you get to the $3.9 billion. And then the midpoint of 2024, Compute is $1.4 billion, Mobility at $0.9 billion. Auto and MCU at $0.5 billion, Industrial of $0.4 billion and Service – SSC service at $0.7 billion to get to the $3.9 billion at our midpoint.

Got it. Okay. So it is Compute. It’s just a little bit of mix shift. Okay. And then can you talk about your largest customer? Your big customer on the mobility side, which was actually not your largest customer in 2023. I know you have a range of outcomes this year. I’m not asking for numbers on that range, but can you talk about sort of what you think at the midpoint, how big they could be as – is there a case where they are back percent of your revenue range in 2024? Or is that just off the table?

So, hi, this is Greg. Our historically largest customer, we’ve said that like in 2023, they are going to come in at under 10%. Looking forward into 2024, our base case, again, has them at less than 10% of total revenue. Right now, our visibility into their second half demand is quite limited. And we usually have a better picture of that in the April time frame. So if we get any better information about it, we will share it at that time. But the thing that you should think about is that there isn’t there isn’t much downside to our base case around anything that happens with our historically largest customer.

Got it. Okay, thank you, Greg.

Our next question is from the line of C.J. Muse with Cantor Fitzgerald. Please proceed with your question.

Yes, good morning. Thank you for taking the question. In your prepared remarks, you talked about confidence in the second half recovery for SSC test. So I was hoping you could walk through, what’s giving you the confidence and how you see that recovery emerging? And perhaps you could speak to OSAT versus end customers, content, edge AI, whatever you think is really going to move the needle for you guys and drive that second half recovery over the first half?

Sure. So the leading indicator that we tend to look at most is really around utilization rates. And right now, those utilization rates are low, but we did start to see OSAT utilization start to tick up. So they are still below normal seasonality, but they are definitely improving. And we believe that they could reach sort of the point – the levels that would trigger buying by the third quarter of this year, if the trend that we’re seeing continues. The key end market trends that we’re looking for is unit growth in smartphones and PCs. PCs have been in a real pit. And so just from a refresh cycle, we’re expecting to see that recovering a bit and that would be a tailwind for us. The thing that we also saw in the fourth quarter was that utilization came down a bit in IDMs. And so they are primarily the – that’s where most of our business is concentrated for Industrial and Automotive. So we saw the Industrial part of that start to weaken in the second half of 2023. And then late in 2023 – late in Q4 of 2023, we also started to see Automotive begin to weaken. The – our model right now has that that’s a relatively short lull in demand. And we think that that’s mainly driven by the fact that new model year introductions, every year for the automakers has a significantly higher attach rate for electronics and that’s driving a pretty good CAGR in the Automotive Semiconductor market. So we think the fundamentals are good to drive growth in Automotive. So we think that this demand lull is going to be relatively short.

Very helpful. And if I could follow-up on the SLT side. You talked about wins across both mobility and HBC. I know you have one very large customer. Would be curious the timing of the ramp of revenues here? And could they, in aggregate, get to kind of the scale of your very large customer or that will take years to do that?

So the – in the prepared remarks, I was referring to system-level test wins for Mobility and for Compute. And if you put that into context, the customer that we won for Mobility is not as large as our primary SLT customer, but they have the potential to drive significant volume. In Compute, that’s something that’s going to take a while to take off. The device plans basically for SLT, it was a hyperscaler customer in Compute and the volumes for those devices is going to start at a relatively small level and then increase over time. So I don’t think that any of those in isolation would rise to the level of our historically largest customer, but it’s more additional incremental tailwinds for us.

Great. Thank you.

Our next questions are from the line of Vivek Arya with Bank of America Securities. Please proceed with your questions.

Thanks for taking my question. And I appreciate you giving the Compute TAM, which is now the largest end market. Could you help us break that between more client Compute versus data center? And then the growth rate that you’re mentioning, the 1.3% to 1.4%, that seems very modest compared to all the very high growth rates that we see in AI and data center right type products. So, if you could just give us a little more color, how much is client versus data center? And then why only such modest growth in testing? Why don’t we see more of a correlation with the growth in data-centric products?

Hi, Vivek, this is Greg. So first of all, let me talk a little bit about client versus data center. As far as we can tell in 2023, most of the Test capacity adds in Compute, were really in support of data center. That the client market has been very, very quiet. Looking forward into the future, we think that the capacity adds required for cloud are going to moderate a bit. They have added a ton of productive capacity in 2023, and that is going to be felt in higher-end volumes in 2024, so they are at sort of a new high watermark in terms of that part of the market. The client side, there are two things that I think are going to accelerate things. The first is that the unit volume in PCs is at a very low point right now. There is really nowhere to go but up. And the other is that we’ve been seeing the push in large language models in AI, primarily on the training side right now. And looking at the roadmaps for our customers, they are putting a huge push on custom silicon for Edge AI inference versus the training part. So, I think we are going to see a shift over the next 3 years, to a much more balanced market, whereas 2023 was dominated by data center, as we get out through this mid-term, it’s going to be much more balanced between data center and client. Now, in terms of the modest size, the thing that I want to just – I want to try and provide a little bit of context, that if you look back to the high watermark for the total SOC TAM, back in 2021, it was about a $4.9 billion market. And in that $4.9 billion market, less than $1.2 billion of it was in compute. Now, fast forwarding to this year, the overall TAM is down to $3.9 billion, and compute is representing of $1.3 billion of that total. Now, as you look into 2024, that’s a very high level that it’s at right now. And that level supports significantly increased production for these devices. The last thing that I will point out is these devices are big and complex, and they have a high test intensity. But the unit volumes are relatively small, and the margin, the margin in the end market for these devices is very high. So, the revenue that compute makers are getting on these devices is pretty great. But it means that the number of testers required to fulfill that revenue demand is a little bit lower than it would be in the mobile space.

Right. And for my follow-up, I actually had two small ones. I don’t know whether they are related or not, but there was some media reports about Teradyne kind of pulling out of the China market from just the manufacturing footprint. I just wanted to see if there was any clarification around that? But the bigger question, Greg, that I have is, when I look at this mid-term model and the forecast of growing, right, kind of low, mid-20s in ‘25 and ‘26. If I look at the last decade, the only year Teradyne grew above that rate was just like one of the years, and that too was 2020. So, why keep such a high forecast and back to for 2 years, what is the kind of the visibility and confidence in hitting those kind of growth rates?

Yes. So, first, just a quick comment on China. The news report is really nothing new. We have had a multiyear effort going on to increase the resilience of our supply chain. And that involved moving production locations for some of our products. We still have an extensive supply chain that is in China. We have over 600 people in China. We are competing for business and winning in China. And I think that it’s a good headline, but there is nothing new in that story or in our commitment to that region, as a place where we expect to grow. So, on the mid-term model, if you look at the – if you look with a longer lens than you are talking about, we have been in this market for 60 years. And we have seen the dynamics of the market as it comes out of downturns. So, in coming out of 2001, coming out of 2009, and then, again, the COVID-related demand increase in 2020. It’s not that unprecedented to see significant growth in the years following a downturn. And looking at the state of the end market for mobile phones, and the end market for PCs, we really expect to see a pretty good snapback. The other X factor that I think we are becoming increasingly confident in is how generative AI is going to impact complexity of devices. So, we were really kind of wondering what was going to be the next thing that drove complexity at the in handsets, in cars, at the edge. And it appears that the technology is incorporated in these large language models and the amount of compute that they need to execute is something that is a very positive tailwind both in the mobile and the compute part of the market. One final reminder is, as you look at this, when you think about Edge AI, a lot of that is going to accrue to growth in the mobile part of the market and the automotive part of the market, not in the compute part of the market.

Thank you, Greg.

Thank you. Our next question is from the line of Krish Sankar with TD Cowen. Please proceed with your question.

Yes. Thanks for taking my question. The first one is for Greg or Sanjay. When I look at your Q1 guidance compared to the last time we had that revenue run rate, your earnings power is almost half of that. I am just wondering, is there a function of maybe lower gross margin due to product mix like less auto analog testers, or is it because of higher investments in IA, a combination? I am just kind of curious. And then a follow-up after that.

Sure. So, I think it’s really fundamentally two things in Q1. One is much lower volume, but then really product mix. Say, product mix is a little bit of a bigger driver, nothing more than that. It’s product mix and volumes.

Got it. Kind of like a more philosophical question for Greg. Greg, clearly, obviously, on the mobile test side, you have a good position. And then the last several years, it seems like your focus was on IA. And then now you have got the big investment in Technoprobe, which kind of came out of the blue and historically like vertical integration between test and probe card has never worked. I am just kind of curious [ph], is it because the last few years, you took your eye off the test market, but now you are beginning to see a shift away from mobile to compute and you need to do certain things, or is there something else going on?

So, I think the – there is no real change in our strategic priorities. And so our strategic priorities has always been to look for accretive investments and opportunities to put free cash flow to work for our investors in the most effective way. We didn’t take our eye off the ball on test, when we were talking about our industrial automation business. And as a matter of fact, over the period of time that you are talking about the industrial automation business was accretive that we were making money, and that IA business had a rough year in 2023, mainly because of end market conditions. So, we haven’t changed our strategy. The thing that’s different and the thing that really motivated the investment in Technoprobebe is that there is a trend in the test market that is drawing the tester and the interface closer together. And that’s really driven by the complexity and performance in the end market. So, if you look at the data rates that are required for SOC and memory devices, if you look at the bandwidths required for RF devices, if you look at the number of devices that customers want to test in parallel, all of those are driving a tighter integration between tester and interface. And by establishing a partnership with TPI, we believe that we were going to be able to achieve an advantage in terms of unlocking value for our customers that exists in the technology that Technoprobe has in those interfaces and our testers have in their architecture. So, I wouldn’t say that the – like the Technoprobe investment reflects a change in strategy, more it reflects the fact that we have been monitoring the trends in the test market, and we discerned an opportunity for us to do something great for our customers and our investors.

Thank you, Greg.

Our next question is from the line of Brian Chin with Stifel. Please proceed with your question.

Hi there. Good morning. Thanks if I can ask a few questions. Maybe Greg, in the past discussion, my numbers are a little bit off, but I believe you have anticipated the hyperscaler ASIC companies maybe driving or representing $400 million or so of incremental growth in the compute TAM in coming years. I guess how large do you see this market by 2026? And based on your customer wins and ongoing traction, what do you think your market share of this incremental could be in that timeframe?

So, I think I will end up phoning a friend with Andy here in terms of what we have said in terms of projected TAM for that market.

Yes. We have said it’s in the $400 million to $600 million range in ‘26, ‘27 time…

Right. And we have said that has – there is modest growth in the overall Compute segment over that period of time. So, both, we are going to see a slight decline in sort of the traditional compute part of the market and this $400 million to $600 million of new hyperscaler VIP. The way that you can think about this is we are always putting up a good fight to try and win share in the traditional compute space. But we really think that our opportunity is to gain share in that $400 million to $600 million chunk. And what we have seen is, we are like – say, we are at below 20% share in the traditional market. In terms of socket wins, the sockets that we see in the market, and we are competing for, we are definitely winning more than our fair share. So, we are winning the majority of sockets that we are targeting. And so we are very hopeful that we will end up with a pretty good split inside of that $400 million to $600 million.

Okay. That’s helpful. And then maybe focusing on the memory test part of the test TAM, I think your main competitor as of last night is forecasting much stronger year-over-year growth in memory test than you this year. They are largely tied off to DRAM. I guess how can we reconcile your up 10 with their sort of maybe more optimistic forecast? And does that do you think potentially represent upside to your view this year?

I think it could represent upside to our view. But the thing that I will remind you is that if you look at the memory test market, we typically break it up into four chunks. So, two types of memory DRAM and NAND Flash and then the wafer sort and then the final test. Our highest share is in the final test for both DRAM and for Flash memory. What we have seen in 2023 is technology-related buying in those spaces, and that has been a great tailwind to our share in that market. What we don’t have clear visibility into or real forecast from our customers is how much capacity they are going to need to add at wafer sort. So, that’s not a technology-driven retooling space. That’s something where they can use the same testers for new generations of parts. And they need to have production volumes that drive additional acquisitions. It’s entirely possible that our competitor has a better view into the long-term needs in the wafer sort for some of those customers than we do. So – and it’s also possible that we have not seen the benefit in that part of the market. So, I am pretty confident in our – in that we have a good view of our memory business for 2024. I think there is an upside potential depending on how much capacity add is required as the memory inventories come down.

Okay. Very helpful. Thanks Greg.

Our next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Hi. Good morning and thanks for taking my questions. Maybe for the first one, if I can ask you in relation to the long-term model of the 2026 model, you are outlining strong growth in the Robotics segment, as you see a lot of opportunities for growth. How should we think about as you sort of invest towards that growth, what profitability can you drive to in that 2026 model for robotics? And I have a follow-up. Thank you.

Hi Samik. So, in terms of the long-term model, our goals remain kind of consistent for our robotics group that our target performance is 20% to 30% growth and our target profit is 5% to 15%. What we have said previously and what we are still operating to is, as we are watching the growth develop in that market, if it appears that incremental investment is not yielding higher growth rates, then we will feather those back to try to increase the profit range. But as long as we believe that we are at this low penetration and there are fruitful investments that we can make, we would prefer to make those investments and continue to drive growth. The key thing that we are doing in operating that group is we are really focusing on maintaining high gross margins. So, we are in excess of 60% gross margins for the group now and we are intent on keeping those gross margins at that level so that we have the option to sort of dial the profit that is appropriate to the growth rate we are achieving.

Got it. That’s helpful. And for my follow-up, just a question on gross margin for the year, I think for the full year 2024, you are guiding to 58% to 59% million with the starting point you have, that does imply, I think if I do the math that you would be at some point during the year crossing 60%. Am I sort of calculating that right? Is that sort of what you are implying? And what are the drivers to get to that 60% level during 2024 itself with the volume challenges that you are seeing right now in the test market? Thank you.

Yes. So, you are right. I think some of the quarters, we do anticipate to be higher than our model, really coming back with a stronger product mix. In various quarters, we have obviously higher volume. And then some of our higher product lines or some of our higher margin product lines do come back. So, it’s volume in the quarters, but mainly product mix and product line mix that are driving the improvement. I should add that there is also operational efficiencies that we are working on that we anticipate that will help margins as well in the back half.

Great. Thank you. Thanks for taking my questions.

The next questions are from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.

Hi. Good morning. I had two as well. The first one on HBM, Greg, can you characterize your competitive position in this market, I guess number one. Number two, how big was HBM as a percentage of your memory business either in calendar ‘23 or Q4? And with your customers sort of expecting 50%, 60% growth on an annual basis over the next couple of years or several years, should we think about – should we think – should we assume the growth rate in your business to be in that ZIP code, or could there be retooling or parallel test that sort of deflates that number?

Okay. So, you packed a lot of parts into that question. So, let me start unpacking it. So, first, in terms of competitive position, right now, we are roughly splitting the HBM test market with our competitors. So, if you look at overall share, that’s a positive to our share that there are multiple competitors in the overall memory space. But the HBM part of the market is pretty much a clean split between us and our competitor. In Q4, we think HBM represented more than 50% of our memory shipments. So, it was a huge factor in that quarter. And in terms of growth, we think that there is the potential for growth that there are new HBM competitors that are coming on the scene. So, there is both a unit volume growth. I think that a lot of that – the capacity for a lot of that is in place now. But there are also standards changes, HBM3E and HBM4 that are coming, and those are driving retooling for performance tests. And we think that, that is going to be a potential driver for us in the back half of the year in memory.

Got it. Thank you. And then as my follow-up on the robotics side, just wanted to get your thoughts on ‘24. You are guiding the business up 10% to 20%. You talked about obviously, the long-term value proposition, which makes sense. You are ramping the UR30, you talked about some of the initiatives you are doing from a channel distribution perspective. So, I am just curious, if you are guiding the long-term up 20% to 30%, why up 10% to 20% this year particularly given the fact that ‘23 was down close to 10%. What’s sort of weighing on growth this year? Thank you.

Well, I think, the key thing that is limiting our optimism is that even though we had a really great Q4, we had a really great Q4 because we introduced basically a blockbuster product. 24% or so of our revenue in Q4 came from that product. Underlying that, there is still some fundamental weakness in the industrial end market. And there are predictions that, that is going to ease, that the demand is going to come back relatively strongly. But we are entering Q1 of 2024 with PMIs at a relatively low level and a fair amount of some regions that are quite quiet. So, we have optimism for continued growth through the year, both quarter-on-quarter through the year and each quarter in comparison to the year prior. But we are coming in with a relatively low Q1. So, we wanted to be careful in terms of where we set the bar for growth for the full year.

Thanks Greg.

Okay. And operator, we are out of time. So, folks that are still in the queue, I will get back to you later this morning. But thanks everyone for joining and we look forward to talking to you in the days and weeks ahead. Bye.

Thank you. This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.