Teradyne Inc (TER) — Q3 2017 Earnings Call Transcript

Thank you, Zetania. Good morning, everyone and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Jagiela and CFO, Greg Beecher. Following our opening remarks we'll provide details of our performance for 2017's third quarter and our outlook for the fourth quarter. The press release containing our third quarter results was issued last evening and we're providing slides on the Investor page of the website that may be helpful to you in following today's discussion. A replay 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. 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'll make reference to non-GAAP financial measures. We've posted additional information concerning those non-GAAP financial measures, including reconciliation to the most directly comparable GAAP measure, where available on the Investor page of the website. Also between now and our next earnings call, Teradyne will be participating in investor conferences hosted by R. W. Baird, UBS, Goldman Sachs and Bank of America. Now let's get on with the rest of the agenda. First, Mark will comment on our recent results and the market conditions as we enter the fourth quarter. Greg will then offer more details on our quarterly financial results, along with our guidance for the fourth quarter. We'll then answer your questions, and this call is scheduled for one hour. Mark?

Good morning, everyone, and thanks for joining us today. In my prepared remarks, I'll cover four topics: our 2017 highlights, key trends which we expect to drive long-term growth in our test businesses, an update on Universal Robots expansion and strategy, and an early view on how we're thinking about 2018. Greg will then provide additional color, along with the financial details. As you saw in the release, our sales and earnings for the third quarter were above our guidance, and our fourth quarter outlook is substantially above our earlier view. This performance is a result of a very healthy Semiconductor Test market, especially in Memory Test. Seasonally, our third quarter Semiconductor Test orders were the highest level since Q3 of 2000. Additionally, Universal Robots continue to show strong growth, with sales up 70% from the same quarter of last year, well above our 50% baseline rate. Through nine months, we've generated over $1.65 billion in sales and non-GAAP earnings of $1.88 per share. For the full year, at the midpoint of our fourth quarter guidance, we expect sales of above $2 billion and non-GAAP earnings of around $2.22 per share. This puts us well ahead of our $2 per share EPS goal that we originally targeted for 2020. 2017 will be the second consecutive year of growth in the SOC Test market, with an estimated $2.6 billion market size, up 8% from last year. We expect Teradyne SOC test sales to grow above that rate at about 20%, and our market share will increase several points from 2016's 51%. In Memory Test, we expect the 2017 market to be about $650 million, up roughly 55% from last year. Q3 Memory Test orders of $65 million were at record levels, and our full year Memory Test sales will grow about 20% to about $180 million. Our memory share will fall back a few points as some of the segments we do not yet serve are growing faster than the overall market in 2017. Combining memory and SOC Test for the first nine months, our sales were up about 23% from last year to $1.3 billion while the combined market is growing about 15%. Clearly, a strong year of market growth and an even stronger year for Teradyne growth. At Universal Robots, third quarter sales were about 70% above the same period last year, with all regions above our 50% growth baseline. Through the first nine months, we've grown 77%, a rate that will likely moderate a bit in Q4. For the full year, we expect UR to grow about 65%. In addition to top-line growth, we are also showing improved gross margin as the benefit of cost down and selective price increases are having an impact. In System test, year-to-date revenues up $112 million are down 20% from revenues in the same 2016 period, mainly due to a follow-up in Storage Test demand. However, we expect to recognize revenue in Q4 for a new application of our Storage Test product that will bring the group to about flat top-line performance with 2016. This new product tests chips in a simulated system-level environment to capture elusive failures that are hard to detect on traditional ETE. The initial application is in complex, high-volume, mobility-focused semiconductors. At LitePoint, sales in the quarter were up 11% from Q3 last year and up nearly 20% for the first nine months off a weak 2016 market environment. This growth has been the result of modestly expanding demand in the connectivity space. New connectivity standards like 802.11ax Wi-Fi are not expected to drive meaningful new demand until 2019. In cellular, 5G is in the early preproduction stage and not yet driving volume. However, we are seeing growth in the LTE narrowband IoT space. For the full year, we expect LitePoint to grow at about a 10% to 15% rate from last year. As we first noted in 2014, after many years of trending down, the Semiconductor Test equipment market inflected and has been growing since 2015. In 2016, we modeled the SOC Test market to grow at about 1% CAGR on a trend line basis from the average of the 2014/'15 market sizes of approximately $2.2 billion. Through 2017, actual SOC market growth has been about 8% from that level. In light of these trends, we will update our model and targets in the January call. While recent signs are encouraging, we expect volatility to be a part of the test markets in the future as they have been in the past. The key point is even with volatility, the market is on a growth trajectory, and the demand drivers we identified earlier remain in place. These include the diminishing impact of parallel test, increasing device complexity and increasing quality demand from semiconductor customers. In memory, volume increases, higher bit density of 3D NAND and the proliferation of high-speed interfaces that are now commonplace for smartphones and SSD applications has driven growth of the Memory Test market this year. For Teradyne, we've been successfully growing share in the demand package test segment with our Magnum family of testers through the discontinuity created by the emergence of high-speed Flash interface. At Universal Robots, our strategy remains unchanged. Beginning in 2016, to accelerate growth, we aggressively increased our quarterly OpEx investments by about $5 million per quarter for nearly 70% up from the prior year. We followed that by increasing our 2017 spending by a similar amount. Those investments have enabled UR's growth rate to increase from 57% on a stand-alone basis in 2015 to the mid-60s for the full year 2017. We've also improved gross margins along the way. And the same way, in 2018, we'll continue this pattern of investment at UR to deliver further growth. Greg will outline specifics of those investments, but one I'd like to highlight is that UR Plus open architecture partner program. Building out our ecosystem of partners that provide the hardware and software for referrals for specific end market applications is essential to drive our growth. UR Plus provides partners with the ability to adapt their products to natively operate on our UR platform. Through an API that links into our ease-of-use software paradigm, the customers get both application's breadth and a seamless ease-of-use experience, allowing faster, simpler cobot deployments. At UR, we provide a universal cobot and a universal software platform that enables an ecosystem of innovators to provide plug-and-play add-ons that customize our products for specific end applications. UR Plus continues to enable an expanding breadth of applications. For example, next month, at the Fab Tech Trade Show in Chicago, there will be a demonstration of a UR Plus gas metal arc welding package. The product is for high-mix, low-volume applications that can be deployed in existing manual welding booths with no floor plan changes or special facility changes needed. This reduces the cost and improves repeatability for metal fabrication shops. From a programming perspective, the operator has only to identify the start and stop points for the welder, and the cobot does the rest. A very different application is a small U.S. eyeglass maker that is using the UR Plus partner gripper with our UR5 cobot to manufacture frames. The ability to change tasks quickly gives this customer the flexibility to compete with much larger players. The common thread between these applications is the tight software integration, allowing fast programming and short implementation cycles. As we look ahead, we expect UR growth to remain at a 50% plus clip for the foreseeable future. We continue to explore additional opportunities, both organic and through M&A to further accelerate UR's growth. We expect labor availability, cost and product quality requirements will continue to drive demand for UR's unique human-scale collaborative automation solutions. As is typical this time of the year, visibility into our customers' demand for next year is limited. That being said, our preliminary estimate for an SOC test equipment market of about $2.3 billion to $2.7 billion. In Memory Test, we forecast the market to be between $700 million and $800 million. We expect the key end demand drivers to be memory, the mobile market, automotive and industrial markets. While the next year is difficult to forecast, we are confident that expanding complexity, short semiconductor lifecycles and increasing use of semiconductors across all segments of the economy will drive long-term growth. This, combined with the continued market share gains, provide positive momentum for Teradyne's Semiconductor Test business. At Systems Test and LitePoint, we expect similar market conditions next year as we saw in 2017. Wireless Test growth will likely begin to turn up in 2019, followed by a more significant buy-in in 2020 as 802.11ax and early 5G cellular buying picks up. In summary, for the full year 2017, we expect revenue of over $2 billion and to exceed our $2 EPS target, well ahead of our 2020 plan. While it's difficult to actively forecast the size of the Semiconductor Test market in 2018, we're confident of the long-term drivers powering that market. Combining the strong test business with the continued 50% plus growth at Universal Robots positions us well for the road ahead. With that, I'll turn it over to Greg for the financial details.

Thanks, Mark, and good morning, everyone. I'll start with a quick summary of 2017 as the finish line is in sight. We'll also add some commentary on the trends and actions that are driving our growth, along with the third quarter results and fourth quarter guidance. Starting with the 2017 financial summary. Both our top line and non-GAAP EPS are projected to be up quite nicely over last year. Factoring in our fourth quarter guidance at the midpoint, sales are tracking to be up 19% over last year while non-GAAP EPS is expected to be up 47%. For the full year, the projected non-GAAP EPS of $2.22 is three years ahead of our midterm $2 target outlined last year. This favorable polling is principally due to a stronger SemiTest market, along with ongoing share gains. We're also getting solid earnings lift and high growth from Universal Robots while managing our average share count. We'll update our model in 2018 capital return plans on our next Investor Conference Call in January after we complete our midterm planning. As Mark noted, we remain driven by rise in complexity and unit growth rather than new nodes. Semiconductors are at the heart of today's connected world and ubiquitous in many products or services that we use in our daily lives. This central role fuels a constant flow of new designs and strengths and packaging advancements. These changes bring added complexity, which often leads to longer test times and initial yield degradation, both of which trigger added test capacity. The added complexity also drives the need for more robust test coverage to find the harder-to-detect faults earlier and in certain cases, to fine-tune electrical characteristics to hit optimal performance. On a more granular level, ATE customers have high switchover costs from one platform to another as they develop proficiency and tools around the programming and debugging environment. Businesses gain significant advantages by moving market share. Consequently, targeting the right segments and winning customers remains critical so that share gains come largely from a rising tide in the waters rather than trying to get every point of share gain from battling incumbents. We're also directly driven as a front-end is by new nodes. Nonetheless, these performance advancements and strengths add complexity, big growth and often unit growth as well, so eventually we get our share. We'll remain volatile simply due to the nature of being a derivative to a very large market, with small inflections having a pronounced impact on us. Our volatility on a quarterly basis is tied to predictable consumer cycles, principally tied to new mobility launches in the fall, along with back-to-school and holiday electronics buying. Our volatility on an annual basis is somewhat more opaque, but it's largely tied to the jump in device performance. Compared to our past, we're far less volatile than in the prior decades due to a more efficient supply chain, shorter device lifecycles and a broader portfolio. The key actions to SemiTest remain keeping a sharp focus on selective segment and customer targeting while maintaining strong gross margins and lean OpEx. In the near term, we expect growth in China, memory and the continuation of the past demand trends. This disciplined approach has allowed us to maintain an average non-GAAP PBIT rate of 22% at the company level since the start of this decade. By comparison, this is 23 points of non-GAAP PBIT above the prior decade when we gave profits back during downturns. We're also pleased to report that we're on track to gain about two points of ATE share this year to about 50%, which makes this the sixth straight year of SemiTest share gains. Shifting now to our high-growth automation business, Universal Robots. The trends are clearly very favorable. There are several third-party reports projecting a cobot market of $1 billion or more by 2020, aligning with our assessment. In short, there are tens of thousands of tedious and highly repetitive human scale tasks that would benefit from UR's safe, low-cost and easy-to-program cobots. We expect that it will become increasingly critical to automate these repetitive, tedious tasks to maintain high quality and cost competitiveness. In addition, we see some cobot subsidies being offered in China to ensure that their local companies take advantage of cobots. Shifting now to the key actions to stay ahead and continue to grow at 50% or more. First is about building greater awareness of what is possible today with cobots. Many potential buyers do not understand how easy it is to automate repetitive tasks without reconfiguring or redesigning the workshop. Much of our business comes from plant managers at large companies who buy locally without corporate involvement or from small and medium-sized enterprises that move quickly from awareness to sale. We do expect an inflection with larger buying in the future versus the small orders of about two cobots on average today, as larger companies, which tend to move cautiously to new technology, embrace the power of UR's cobots. To accelerate this inflection, we're sponsoring many more trade shows, advertising programs, web educational content, cobot and distributor sales resources, and more. This awareness campaign will continue at a very big task with many potential cobot end-users. We expect these end-users will expand over time as easier-to-use accessories address more tasks or are developed on the UR platform. Additionally, we will strengthen our sales channel of distributors and integrators, increasing their sales velocity and ensuring we have the best channel partners aligned to our platform. Through more U.S. sales and tech support, along with advanced training programs, we're growing product sales velocity this year by about 50% for partners that onboarded with us last year. We're also developing a global map with strategic partners who will cover areas that we feel are not adequately represented. Lastly, if you're going to ask, we are creating an ecosystem of turnkey solutions on our platform so that we lower the implementation cost and risk. This allows us to have many third-party developers create plug-and-play solutions that can be accessed from our UR Plus portal. We're not aware of anyone else with this type of third-party ecosystem backing them. Third is, of course, continued investment in R&D to make our cobots even easier to program, which, for example, is adding shortcuts to programming even further. Lastly, we'll continue to leverage Teradyne's strength to improve UR's overall performance. Shifting to the Systems Test Group. Our new mil/aero group is driven by avionics upgrades such as faster bus interfaces for advanced radar and advanced sensors, while production board test is driven by automotive, industrial and server PCB demand. In mil/aero production board tests, we're growing sales at about 3% this year and tracking to move towards profitability. Our third leg in the Systems Test Group, Storage Test, is tied to sporadic HDD and SSD demand, and the new system-level test application, which Mark outlined, is launching in the market now. We expect to be solidly profitable starting in the fourth quarter. In wireless test, LitePoint remains low before the tune for 802.11ax and further out in time for a sizeable 5G production cycle start. Our actions have resized the business last year and stayed focused on new growth. So far, this year, we're running a model profit for synergies and getting good traction on the longer-term opportunities. Now a reminder on our capital allocation plans. We're buying a minimum of $200 million of our shares this year while returning about $56 million in dividends to shareholders. So for this year, we spent $152 million to acquire 4.6 million shares at an average price of $32.66. Since 2015, we bought back 27.1 million shares in aggregate at an average price of $22.06, totaling $598 million. Our cash and marketable securities totaled $1.848 billion, up $228 million from the end of the second quarter due to strong profits and strong accounts receivable collections in the quarter. We have $742 million in the U.S., and the balance is offshore. About 85% of our annual cash generation will be offshore this year. Moving to the details of the third quarter. Our sales were $503 million. Gross margins of 59% were our highest quarterly rate in four years, driven by favorable product mix. A clear bright spot in gross margin is the improvement of Universal Robots margin to 58% from 54% in the third quarter last year. Company non-GAAP operating profit rate was 26%, and non-GAAP EPS was $0.54. We had one 10% customer in the quarter. We see our non-GAAP operating expenses worth $163 million, down $10 million from the second quarter due to lower variable compensation accruals on decreased profit levels. Total company OpEx in the third quarter this year at $163 million is up $13 million from the year-ago third quarter due to higher variable compensation accruals on higher profits and higher spending at Universal Robots. We expect our full year 2017 OpEx, excluding Universal Robots and normal changes in variable compensation, to be essentially flat, while UR's full-year OpEx will grow year-on-year to about $64 million from $43 million in 2016. Looking ahead, we plan to keep aggregate spending flat in our test businesses, except, of course, where variable compensation will move profitability and growth. OpEx at UR will step up in the first quarter and grow in the second half as well. Included in this slide are all of our OpEx changes due to Universal Robots growth or swings in variable compensation. Now moving to segment-level detail. Semi Test bookings were $295 million, with broad-based strength in memory, microcontrollers, analog, image sensor, and mobility. SOC Test orders were $230 million, and Memory Test orders were $65 million, a quarterly record driven by Flash applications. Semi Test service orders were $43 million of the total. Semi Test sales were $397 million in the third quarter, with SOC making up $350 million and Memory Test, the balance. Semi Test service revenues totaled $7 million in the quarter. Moving to Systems Test. Orders were $42 million in the quarter, and sales were $35 million. Shifting to Wireless Test, we booked $33 million, and sales were $31 million in the third quarter. At Universal Robots, orders in the third quarter were $40 million, and sales were also $40 million. We joined UR's third quarter sales growth down 43% in Europe, 26% in Asia, 23% in North America, and 8% in the rest of the world. Sales for the fourth quarter are expected to be between $420 million and $450 million in a non-GAAP EPS range of $0.31 to $0.37 and 199 million diluted shares. Q4 guidance excludes the amortization of acquired intangibles. The fourth quarter gross margin should run about 55%, down from a very strong third quarter due to product mix, and total OpEx should run from 35% to 38%. The operating profit rate at the midpoint of our fourth quarter guidance is about 18%. Shifting to taxes, our full-year tax rate is expected to be about 17.25%, up 75 basis points from the July estimate due to strength in the memory business, which is a U.S. business that carries a higher tax rate. Please note that we expect our tax rate to step up to 19% for 2018. On a quick housekeeping note, be advised that we expect no material changes from the pending revenue recognition changes required under AIC 606, which takes effect from January 2018. Our free cash flow year-to-date totaled $406 million, driven by strong profits. In summary, we're on track to hit our $2 non-GAAP EPS plan three years early. We're gaining share in ATE for the sixth straight year. We have grown Universal Robots about 50% again this year. And we're maintaining steady financial discipline and returning capital. With that, I'll turn the call back to Andy.

Thanks, Greg. Zetania, we'd now like to take some questions. And as a reminder, please limit yourself to one question and a follow-up.

Yeah. Thanks for taking my question. Two questions. First, I was just wondering why there is a resurgence in Memory Test? Is there an inflection interesting that you can bring to light? And how should we think about DRAM and NAND split here? And I have a follow-up.

Yeah. So Memory Test really took off this year. It surprised us. If we go back to this time last year, we were estimating that the Memory Test market would be roughly $500 million. It's going to be perhaps $650 million. It's really driven not by a technology change per se. The bit density growth is one thing that drives Memory Test demand, the unit volume, and then changes in device interface speeds obsolete older equipment. So we do see obsolescence going on in Flash and DRAM tests because of the higher speed interfaces. And then outside of that, most of it is just bit growth and unit growth. There's also a lot of construction going on of fabs for memory expansion in China. Those have actually not yet affected the Memory Test demand. Those are still to come online and will probably be a late 2018 or early 2019 heavy test equipment tooling cycle. So as we look out over the horizon, provided the bit demand remains robust, which it looks like it will, we should have several good years for memory demand, and Memory Test demand.

That's correct. And as a follow-up, will you continue to invest in UR, and when can we see an inflection in the operating margins going forward? We've seen some uptick in the gross margins, but realistically, how should we think about the operating margin as we look at say over the next 12 to 24 months?

Jagdish, this is Greg. This year, for example, we expect to meet our 50% operating target, and we will be slightly above it, so it's happening this year. We think long-term we'll get to 20%. And the long-term isn't 3 years away, so it could be sooner than we were earlier modeling. The gross margins have improved nicely, and we're growing sales at a very high rate. So I'd expect the 20% operating margin will become more insight as we get further into the next years too.

Next question please.

Yeah, hi. Thanks for taking my question. I have 2 of them. First one, Michael, Greg, this year out of $2.6 billion of SOC, Test market was $1 billion, $1.2 billion GPU, $100 million and automotive $400 million. Can you give us similar compositions for what you think SOC looks like in 2018?

Yeah. For 2018, again, it's a little bit of reading the tea leaves at this point, but I do not expect that mix to change much. The automotive and mobility spaces that came on strong this year should continue to be strong next year, and memory again should be strong next year, so not a lot of change in the mix.

Got it, got it. And then a follow-up on the cobots business. Some of your competitors have higher payloads while you guys still have just 3 SKUs of URs. Do you plan on developing a higher payload for the cobot business?

No, we have no plans for higher-payload cobots. Our cobots are exactly human scale and very flexible as we are redesigning ourselves. So we don't see the high payload market fitting what we're trying to do.

Next question, please.

Hi. Thanks for taking my question and congratulations on the strong results and guidance. Mark, if I look at the comments from your peer in Japan, they're talking about a $3 billion market for next year. You guys are a little bit below that, $2.3 billion to $2.7 billion. You're generally more conservative. What takes us to the high end of the SOC test market next year? And then I have a follow-up.

Yeah, first of all, the peers' advance test forecast for the market sizes exclude service, and our sizes include service. So actually, there are $3 billion excluding service and $800 million for memory, and I believe $2.2 billion for SOC. In the service business, you have to add another $500 million to $600 million to their number. So in truth, we're pretty close to each other. And for us, this year, the $2.6 billion market is a tale of the tape in a complete year. We could end up with a slightly higher market than $2.6 billion by the end of the year. But as we run into next year, the visibility we have at least through the early part of next year shows continued strong demand. We could easily be at the north end of the range. We're talking about now. As we were last year, this time last year for the SOC market, we said $2.1 billion to $2.5 billion, coming into $2.6 billion. So the message I really want to give is it's very difficult for us to create a precise forecast at this point in the year. We take a lot of top-down factors. Very few customers give us forecasts because they're unable to forecast. So we're looking at what we see in the pipeline around complexity trends for the devices that are coming out of design and into production to try to estimate next year's demand.

Got it. Thank you, very helpful. And then Greg, on the gross margins, you have made improvements this year. Can you talk a little bit more about what drove the margins higher this year? You mentioned product mix. As Mark commented, you're looking at a similar mix next year. How should we think about gross margin broadly for next year?

Yes. This was a very strong year for our gross margins. SOC was very strong. LitePoint was stronger than we expected. On the flipside, we had less Storage Test business, which pulls margins down. When you turn that around, we expect next year to have more Storage Test business, so that would be one thing by itself that would move the margins a bit down. And there's probably helping on the memory business coming our way too. Some of that might have lower margins as well. So margins are always a bit difficult to forecast. The good news is we're able to get material costs down year-over-year and make significant improvements at Universal Robots, for example. So we have a stronger starting point, but we do see a couple of headwinds with Storage Test and the memory business. But apart from that, I thought there were two things that could have a quantifiable impact.

Next question, please.

Yes. Good morning. Just two quick questions on the SemiTest business. Mark, when you look into the fourth quarter here, we've had two years in 2015 and 2016 where we've had this pull-forward of orders into the queue given one of the big mobility customers' plans for new products. As we move here into this fourth quarter, does that order trend on the mobility side for SemiTest look more like 2013 and 2014 where we have a normalized kind of order pattern? Or is there still this expectation that we'll see the big mobility vendors, chip vendors pull and make sure they get their test orders in the queue earlier?

Yes, that's always for the last several years been a question. And it's really hard to call because the order window is about eight weeks that can move depending on their internal planning cycles and their order release timing. So the timing isn't clear. It could be late Q4. It could be early Q1. I think the ship off schedule, independent of when the orders book, will be similar, meaning Q2, Q3 kind of concentration as it's been in prior years.

Okay. And then just a question on the SemiTest. The orders here in the third quarter, I presume were kind of on the ultra-flex M side or Magnum test side given that you referenced memory. Does that impact the gross margin that's in backlog in the SemiTest side?

A little bit. Our Memory Test gross margins are a bit below the average in SemiTest. It's maybe 4 to 5 points of swing there. But given that relative size of memory at $65 million, let's say, to the total, it's not overly impactful.

And the fourth quarter gross margins, we've got it down because of Storage Test and memory. I should add that both of those businesses generally have lower OpEx. But the lower OpEx comes with lower gross margins, so they all have good PBIT.

Okay. And can I just need to ask a question on UR, could you just maybe speak a little bit to the 400 basis points of gross margin improvement year-over-year? Is that coming from price, is it components cost down, supply chain stuff? Just trying to understand maybe how do you get that kind of gross margin improvement year-over-year?

Most of it is from price. We announced a price increase early in the year, which we have now pulled through. Orders were shipping now. We've done material cost. That's a smaller part of the improvement. The good news is material cost continues to come down next year and beyond. So we do expect our supply line group from Teradyne should be able to help robots continue to lower material costs and get the best commercial terms and strategic sourcing in place. So that will continue. So we're very pleased with the performance overall with Universal Robots' gross margin. In truth, it largely comes from software, which we are delivering here. It's very reliable, the chemical components. So we do see over time the opportunities to keep the margins quite healthy.

Understand. Great, thank you.

Next question, please.

This is Brian Cheng calling in for Patrick. Thanks for letting me ask a few questions. First question, just going back to the SemiTest business and the SOC business in particular. Could you just characterize the utilization environment right now at your customers from a strategic perspective now versus what you typically expect and how that again sets you up maybe for your typical seasonality and the business into early next year?

Yes. This is always a strong utilization period after having installed a lot of equipment in the summer period. Right now, new consumer electronic products are keeping in production. So utilization is very high. Compared to prior periods, it is running roughly close to where it's been prior period, a little bit stronger, Q4 to Q4 of the prior period. Now that doesn't necessarily - we've not found that to be a prognosticator of what's coming next year, but that is where we are right now.

Okay, that's helpful. Switching over to the UR business. Just curious, what is your install base now for cobots? Curious how much of that is still in Europe on a relative percent basis? And sort of, if you think about those metrics, what from an install base perspective we are that could be exiting next year? And the second part of that is just the different tact on your margin growth in the business. Is it possible, given the strength in the SemiTest side of the business, that you're even under-investing in UR and you could even pump up investments even more and push up maybe some of the margin targets just to continue to set yourself up for a really strong trajectory in that business moving forward?

Right. That's a good point, and we do expect to invest more in OpEx growth next year. Obviously, as we continue to grow by 50%, the sales growth is higher on a bigger number. So the OpEx is going to probably grow up more than 20 million; it could increase in the last two quarters. But we'll pencil that as we go towards the end of the year. We see many opportunities to fan out Universal Robots into different regions, distributors, and ecosystem partners, with no short-term opportunities. In terms of where the cobots are, the mix that we described in the prepared remarks has been fairly consistent. Europe is about 43%, and I'm losing that a little bit. Asia is 26%. North America is 23%. This past quarter, 8% is the rest of the world. All regions are growing at a very high rate. Long term, we expect China to be very significant. But today, there are many applications in these higher-cost countries that are being deployed. As I mentioned in my remarks, in China, you have some subsidies from government entities that could accelerate the cobots faster in China as policymakers see the advantage of bringing cobots to their workforce.

Great. Thank you.

Hey, good morning, and thanks for taking my questions. My first one is on Semi Test. Mark; you guys have talked about strength in the automotive and industrial end markets for I think several quarters now. I think historically, these end markets, whether it'd be digital or analog, would be on for several quarters and offer several quarters and kind of back on again. But I think at this time, it seems like the cycle is extended in a positive way. What did you see in these end markets, I guess, this Q3? And what are your expectations going forward?

You're correct. Typically, the pattern you mentioned has been true, and this one has extended longer. The third quarter was strong again. What happened in the fourth quarter looks to be pretty good. I think there are several things that are new in the dynamic here. One is that the electrification of the automobile is something that, although in the past has been a slow bleed, it's starting to become an avalanche of electronics moving toward model years one to three years away from now. Whether that's hybrid vehicles, EVs, or traditional vehicles with ADAS, all of that is fueling a lot of new designs and new complexity. I mean, the complexity of the semiconductors we're talking about next-generation in automotive is much higher than prior generations. So you have this double effect for test, where there's a high-test intensity environment to start with, plus a step-up in complexity and ubiquity has really changed that sort of bits and starts dynamics of things. So we're pretty positive on the next few years for automotive electronics.

Great. And then I have a follow-up on Memory Test. Can you remind us what percentage of the TAM you guys actively addressed today within Memory Test? And I know you have new initiatives in place to potentially expand your TAM, but where could a percentage number be in 12 months to 24 months? Thank you.

Yeah. So the primary segment that we serve is Flash final test. We think we have a pretty high share of that segment. It's roughly a $200 million portion of that, let's say, $650 million TAM this year for Memory Test. The concentration we have now is there. We are moving the Magnum product line now into more wafer applications, which is closer to a $350 million new market opportunity for us that we should start seeing next year as an addition.

Next question, please.

Yeah. Thank you. I wanted to go back to, you briefly mentioned M&A, and given the prospect of changes in taxation, would that accelerate the M&A strategy? Or does it have no impact on pretty fair use of any change in taxation to strengthen the capital return program?

Mehdi, I don't see any possible tax changes that would cause us to do anything different in our M&A approach. Much of our M&A approach is to expand Universal Robots' growth with differentiation, obviously, with the financial return. If there's any sort of tax planning, that's more of a bonus thing that we consider, but we don't prioritize that as something that should redirect our strategy. It's much more about the fit and the advantage that can provide us.

Okay. And then you mentioned new wafer application wafer test, is that driven by increased adoption of wafer-level packaging? Or is there any other driver that you can help us understand?

Well, that segment of wafer test for memory has been a relatively large segment for many years. We, in introducing the Magnum, chose to focus on Flash final test because that is where we interface discontinuity first presented itself, giving us the opportunity to take market share. Now that we're established there, we've been able to take some of the architectural benefits of Magnum and see places in the wafer test, pre-existing wafer test market where we can exploit that technology. I wouldn't say that something is changing, but now we're in a position to take that platform into a pre-existing large wafer market.

Got it. And if I may just ask one clarification to your comment about the demand trend. In Q1, there is typically a strong backlog. This year, your backlog had a historical high of almost $870 million. Given the demand trends that you highlighted, the strength in the underlying trend for each business unit, should we assume that you can hit a similar backlog level by early next year?

No, I don't think you should assume that. It gets back to the discussion we had a bit earlier because the timing of the orders can move from late Q4 versus early Q1. It's not a one lump order that typically drives the summer demand. There's an initial baseline order that takes place and then follow-on incremental orders as true demand for the summer peak starts to unfold. So those orders run from anywhere late Q4 all the way through, let's say, May, and they're spread across their periods. So it's hard to say that you can snap-align a backlog at the end of Q1 or at the end of Q4 and make meaningful judgments from that.

Next question, please.

Good morning. Thank you for taking my question. I guess first question, when I look at your sizing of the SOC market for '17, your expected revenue of Semi Test, and when you talk about memory, it looks like your market share is up about 600 bps, around 57%. So the first question is, is that the right math? And is that the kind of market share that you would expect to retain in SOC going forward into 2018?

Well, yes, I think, first of all, the actual market share gains for 2017 will depend on our shipments in Q4 and the market size. We said $2.6 billion. It could be $2.65 billion. It could be $2.7 billion when everything is done. But we will likely be up in share anywhere from 2 to 6 points, let's say, in SOC. Next year, I think what we'll end up doing is probably consolidate next year. Our plan typically is to try to pick off one to two points a year beyond that pace. We've done much better this year. So I think for next year, as we're looking at it now, we'll try and maintain the share position we hit this year and look for in the SOC side more market momentum. In the case of memory, we're going to see both market momentum and an expected share gain there to allow for growth.

Very helpful. And as a follow-up question, as you think about gross margin specifically for your SOC business, obviously, it's very early predicting what the margin sizes will be next year. But if I take kind of the midpoint, it's still roughly 5% year-on-year. As you think about the mix shift going into this year, next year, how should we think about it? Again, I know it's early, but how should we think about gross margins for the SOC business year-over-year?

I think the SOC margins will be generally similar. It's possible they're down half a point or so. We had a few credits that will reverse, meaning some inventory that was digitally reserved that we sold, so that comes out in profit. So we could have some charges we're anticipating, retrofit or - but we can't really forecast those, so there may be a little bit of movement there. However, as you said, the product itself, ignoring the credit or the obsolete-type charges, I don't think SOC would largely be different from the previous year. We expect material costs, but there may be little price erosion this year. They tend to stay in some equilibrium over time. One thing we can point out is that Storage Test and Memory will certainly be much bigger next year, and that will have a downward impact. Obviously, Universal Robots, which has improved their margins throughout the year, is doing well as well. So there are many things in the mix, and as we get closer, we'll have a better analytical sense of what to guide for the year.

Next question, please.

Great. Thanks for taking my question. First question just I guess is on SemiTest. I think one of your customers with foundries talked about high-performance contributing potential becoming a big driver longer term. How do you see that driving the test market? Do you think that could become an incremental big driver for the test market?

Any high complexity digital device is a driver. To the extent more, let's say, AI and deep learning applications require specialized, complex processing-type digital, that will be a balloon effect, absolutely.

Are you seeing that right now? Or is that something callable in the long-term?

Well, I think, no, not right now. There's a lot of discussion and buzz around that type of application. Even if you look at places like GPUs, which are those kinds of processors, it falls somewhere in the $100 million to $200 million test market per year. So it's relatively small, anywhere from 5% to 10% of the market.

Okay, great. That's helpful. And then jumping on UR, I think you guys talked about investing OpEx and have grown OpEx over the last two years as you comp your bigger distribution, right? I'm just curious as you look into 2018, do you see needs to further invest in R&D, especially software, things like that to increase the capability of UR robots? Is there a way we should expect increased spending in 2018? Is there a way to kind of think about how you spend on your OpEx or how you could increase your OpEx going into 2018 OpEx between R&D and SG&A?

I would expect in 2018, we're going to increase both the distribution and marketing. Similar to what we've done in prior years, we're expecting higher dollars because, again, last year 2020, our plan is to grow 50% or greater from 2017, which will represent considerably higher sales growth in dollars, so we're going to need more OpEx to field all of those distribution initiatives and programs. In terms of R&D specifically, we are going to continue to up R&D. We see a number of opportunities to make the cobot extend into other spaces that it's not in today. This goes back a little bit to the question earlier when we discussed a different cobot size. Frankly, we see so many opportunities with the three cobots. The challenge for us is getting as many talented people onboard working in the right direction. That's the bigger challenge versus any shortage of attractive opportunities.

Next question, please.

Hi. Thanks for taking my question. First, addressing Universal Robots a bit, on the SOC market outlook for next year, you have it down just a little bit at midpoint. I'm wondering if you could be more specific on what you had a little bit concerned about, which segment had you a little bit concerned about the market maybe being a bit lower next year?

I don't think it's any particular segment. It's just maybe a lot of experience over many years in the industry is that the visibility at this point is low. I would be reticent to be too aggressive. I think come January, we'll be able to have a better view of that. So maybe we'll stock it up to some stage conservatism at this point.

Okay. That makes sense. The other question I had was on the Universal Robots side. I'm wondering if you could update us on what you think your current market share is? And also, just why the Q3 revenue related to grow much sequentially. Was there anything that prevented is a bit faster growth quarterly or sequential quarterly growth?

So on the second point, the sequential quarterly comparisons were really tough in UR's case. Q3 tends to be a slow quarter because of vacations in Europe. Q4 tends to be a big quarter in the past because of people trying to meet year-end goals. I think I mentioned that this year's Q4 year-over-year compare will probably be closer to the 50% growth number, meaning the year for us will finish at about mid-60s. That's because we changed our incentive programs to try to smooth out the end-of-year rush to buy that we've seen in prior years. So sequential ordering in UR is not something that's very meaningful, I would say. Year-over-year comparisons are better.

Okay. And market share?

So market share is a tough one because there's no reliable third-party reports on this, and there's a growing population of cobots. If you go out and Google cobots, every quarter, you'll see a few more and a few more out there. None of them are competitive with us in terms of the situations that we're settling into. It's still a pretty meaningful environment, but we said in the past roughly 60% share is based on reports that are over a year old on market size estimates. I don't believe we lost any share. However, I think it's going to be hard for us to be too precise on that until we get some reliable third-party reporting.

Zetania, we have time for just one more question, please.

Hi. Thanks for taking my question. Can you just talk about how you are forecasting the SOC test market for next year? If I think about the SME revenue growth, it's been stronger this year since 2010 and almost tracking about 10%, excluding memory. Can you just give us a sense of how you're going about the SOC Test market? And what kind of SemiTest growth are you assuming for next year?

So the things that drive our market, certainly unit growth is important for us, that generally correlates to SemiTest revenue growth, not always, but unit growth is important. Complexity growth is important. So at this stage, what we're looking at is, it's hard to forecast next year's unit growth, so we're looking at complexity growth. We're looking at devices that our major customers that are in preproduction that will grow, which will ramp next year, and trying to get a sense of whether we see the same trends in terms of complexity, which means test intensity and test time. What do we see happening with parallel testing? Next year's amount of parallel testing is going to be a clear indicator at least through Q1 because the programs are in development. So we look at trends around complexity, parallel tests, test time, and we don't have a good read on right now is what unit growth could look like.

I'll just add, inside the company, there isn't an enormous amount of time trying to literally answer those questions because they're really not answerable. There's so many uncertainties. We're much more focused on whether we are executing our market share goals, our gross margin goals, and so forth. Every time we speak to you guys, we might discuss the market. But it's not something that we put enormous energy into, namely because it's something that it's not very notable.

Got it. But can you just give us a sense of what kind of unit growth are you assuming in the forecast, the acceleration this year or similar, at the high end maybe and maybe the deceleration at the low end?

I think that at the high end, it will be similar unit growth to this year. The low end will obviously be a significant fallback. But again, as Greg said, there's not a lot of analytics that go into the ranges I'm giving you.

Got it. And then in terms of your margins, this year has been pretty phenomenal. The operating margin has been above 25%. Can you just maybe talk about at a high level, do you think these margins are sustainable and can we grow from here? As your revenue grows, should we expect somewhat of a moderation next year?

I think so much of it is tied to the prior conversation, where exactly is the market size next year for the point in time; however, we feel good about the long-term trends. But calling any 12-month window is more difficult for us with precision. But that was really drives our profitability, because there are such good drop-through and higher sales in Semi Test. We don't need to add manufacturing people. We don't need to add engineers or salespeople. So that's the biggest swing factor in our P&L is the market size. The things that we can control, obviously getting more market share, we've been doing that, improving robots we've been doing that, and then improving our other businesses like LitePoint as well. But the wildcard in all of this is what the SemiTest market looks like. That's the biggest single factor for our profitability.

Okay, thank you, everyone, for joining our call today, and we'll look ahead to speaking with you again in January. Thank you.