Teradyne Inc (TER) — Q4 2019 Earnings Call Transcript

Thanks, Andy, and hello everyone. On today's call, I will note our Q4 and 2019 full-year highlights and comment on our outlook for 2020. Sanjay will then provide the financial details. As we do each January, we will update you on our earnings model and capital allocation plans. We ended the year on a very strong note with sales up 26% from the fourth quarter of 2018 and non-GAAP earnings per share of 40%. That brought our full-year sales to about $2.3 billion, up 9% and non-GAAP EPS $2.86, up 21% versus 2018. In the fourth quarter of 2019, our test businesses performed well above our plan. Industrial automation showed solid growth but came in below plan due to manufacturing sector headwinds in the US and Europe. In Semi Test, the above-plan results came primarily from three areas: First, 5G infrastructure build-out in China. Second, significant smartphone complexity growth. And third, memory test share gains. We estimate the 5G infrastructure build-out contributed about $200 million to the $3.3 billion SOC TAM in 2019, and we captured a sizable portion of that spending. As stated in prior calls, this build-out has, for the moment, mostly concentrated in China. In smartphones, complexity growth was very strong, driving test intensity and therefore tester demand. The growth is largely unrelated to 5G as 5G handset volume was insignificant in 2019. Rather, the steady increase in features like multiple cameras, enhanced photo and video processing, and new connectivity features drove this demand. In particular, image sensor test demand was very strong, as there was broad adoption of three to four backside cameras across a wide variety. The third driver was memory. While the memory market declined as expected by about 35% from 2018, our sales were down about 3% as NAND test spending was buoyed by investments for higher-speed devices and by investments from emerging suppliers in memory. Less significant in 2019 revenue but a significant impact going forward was the successful break into the DRAM market with our new Magnum Epic LPDDR5 DRAM tester. This expands Teradyne's TAM to now serve all four sectors of the test market with our Magnum platform. Our system test and LitePoint test businesses also delivered above-plan results. In system test, defense and aerospace, production board test, and storage test all delivered very strong growth for the full year. Storage test performance is particularly notable, contributing to 70% coming from the increased test intensity of terabyte HDD drives and a growing business in the system-level test of complex semiconductor devices. The new connectivity standards along with early buying for the 5G handset test market were the principal drivers of the 19% growth for the full year. While our test business performance was above plan, our IA business performance was solid but below plan for the year, growing 12% on a pro forma basis. Individually, UR grew 6% and MiR grew 43% on a pro forma basis. As we've discussed, UR has high exposure to the global automotive supply chain and the general European manufacturing sector, both of which faced strong economic headwinds throughout the year. On the other hand, MiR's mobile robots serve a more diverse range of end markets and showed solid growth in the year. 2019 was also a big year for Teradyne in launching new products. These new products, both strengthened our core positions and set us up to profitably grow in the future. In Semi Test, we introduced the UltraFLEXplus platform targeting the AI and big data markets, the Magnum Epic platform for LPDDR5 DRAM final test, and the MX44 instrument for 5G millimeter-wave device test. At LitePoint, we introduced new members of our IQgig and IQxel families of production testers for 5G handsets and devices with WiFi respectively. In system test, we ramped production of the spectrum high-speed tester for complex defense electronic systems. In industrial automation, we introduced the UR16e cobot for higher payloads and began delivery of our new solution for multiple beta site customers in Q4. In mobile robots, we introduced the MR1000 for increased payloads and the MiR AI camera system that utilizes AI to improve robot traffic flow in busy industrial settings. Our engineering pipeline is full of future products across all groups. Rounding up 2019, our balanced approach to capital allocation resulted in the strategic acquisition of AutoGuide serving the nascent autonomous mobile forklift market. We also continued our capital return program with $500 million in share buybacks and $61 million in dividends. Looking forward to 2020, we see continued strong momentum in our test businesses and an improvement in our IA growth. Early returns on our new products are positive, with UltraFLEXplus winning a significant competitive design win during Q4 in the mobility space, and the Magnum Epic tester winning in LPDDR final test at a major memory maker. These early wins in Semi Test contribute to our strong outlook for the first quarter. I'd like to give you some context on how we're looking into 2020. First, we expect our smartphone test demand to be strong, returning to levels similar to what we saw in 2016 and 2017. As then, we expect our 2020 revenue will be first-half weighted in the year. Second, we expect storage test to be especially strong in the first half for both HDD and system-level test applications. For the year, it's expected to grow about 40% from 2019. Third, the design wins for the Magnum Epic and UltraFLEXplus will begin to ramp in Q1 and this represents new customers and new segments that we expect to contribute revenue growth over the mid-term. Balancing this strength, we are seeing the expected pause in the 5G infrastructure test that powered our 2019 sales. At a high level, we're seeing the 5G demand evolve from infrastructure to smartphones, as we outlined in past calls. The global 5G infrastructure build-out is still in the early stages, and we expect test demand will cycle as various geographies build out their networks. 5G smartphone-related test demand will begin in 2020, but it will be somewhat modest as it's mostly low-band or sub-6 technology rolling out. Millimeter wave investments are still to come over the mid-term. Additionally, we do not expect to see any significant recovery in automotive or analog markets in 2020. As Sanjay will describe, we will be increasing our 2020 OpEx in test to expand these design wins, accelerate some new products and take advantage of what we now expect to be a faster-growing test market over the midterm. Taken all together, our outlook for the 2020 SOC Test market is in the $3.1 billion to $3.4 billion range and memory test is in the $650 million to $750 million range. Of course, this assumes no change in the current global trade regulatory environment. We will update you on this outlook as we move through the year. For reference, this compares to about a $3.3 billion SOC and about $600 million memory test market in 2019. Turning to industrial automation, we call our strategy using the power of advanced technology to democratize automation and make industrial warehouse applications more productive and safer. We remain confident in our growth opportunity as we execute this strategy. The addition of AutoGuide gives us access to an even broader set of opportunities. While we expect the automotive and general manufacturing markets in Europe and the U.S. will remain weak, we do think this headwind has dissipated. This, combined with our expansion into electronics manufacturing and other consumer goods manufacturing in picking and the industrial forklift automation market, gives us confidence that a higher IA growth profile in 2020 is likely. Additionally, the UR Plus ecosystem continues to grow, and we ended the year with 206 certified plug-and-play solutions available, up from about 130 at the start of 2019. A similar program for our mobile autonomous robots MiRGo launched in 2019 and will expand in 2020. Overall, we expect our 14% IA growth in 2019 to increase to above 20% in 2020. In summary, we enter 2020 very optimistic. While uncertainties remain in trade policies and global economies, the overall technological and economic trends that fuel our business are strong. Our new products are opening new markets and gaining new customers. Test market growth is strong, and we are still in the early innings of 5G. IA growth is solid in an environment of a U.S. and European manufacturing slowdown, and we expect that this headwind is dissipating. This, plus a strong M&A pipeline and a commitment to capital returns remain our strategy. Sanjay will now take you through the financial and modeling details. Sanjay?

Thank you, Mark. Good morning, everyone. Today I will cover the financial highlights of Q4 and review the financial details for 2019. Looking forward, I'll provide an update for midterm model, Q1 outlook, and color around 2020, which will include our capital allocation plans. Now to Q4, revenues were $655 million, which were $25 million above the high end of our guidance range. Semi Test revenue of $439 million led the quarter over quarter growth driven by memory and SOC test demand enabling 5G infrastructure and higher-speed flash and DRAM devices. System test group had revenue of $83 million, which grew quarter over quarter driven by our storage test solutions enabling system level test for SOCs. Industrial automation or IA revenue of $88 million had a seasonal increase in revenue over Q3 and grew year-over-year in an environment where significant auto industry headwinds exist. LitePoint revenue of $45 million grew quarter over quarter and year-over-year with the new connectivity standard WiFi 6 and cellular 5G driving revenue. Non-GAAP gross margins were 58.5%, a bit above our plan and slightly down quarter over quarter due to product mix. You'll see our non-GAAP operating expenses were up $19 million to $204 million from the third quarter due to higher variable compensation, increased test spending to support design wins, and ongoing IA investment. Non-GAAP operating profit was 27%, and non-GAAP EPS was $0.88. The tax rate, excluding discrete items for the quarter and the year, was 15.5% on a GAAP basis, and 16.5% on a non-GAAP basis. We bought back 2.1 million shares for $131 million at an average price of $62.44 in the quarter. For the full year, we bought back 10.9 million shares at an average price of $45.89. Since the start of 2015, we have spent $1.97 billion to repurchase 60.8 million shares with an average price of $42.38, which delivered significant shareholder returns over the five-year period. We ended the year with cash and marketable security balances of approximately $1 billion. Turning to the full year results of 2019, Teradyne revenues of $2.295 billion grew $194 million or 9%. $157 million of the growth is from our test portfolio and $37 million from IA. We had two customers with 10% or greater revenues in 2019 who will be disclosed in our 10-K filing. Gross margins were 58%, and operating profit was 25%, which is consistent with 2018. EPS was $2.86, or 21% growth year-over-year. Breaking down the components of 2019 revenues, as Mark outlined, the SOC test revenues grew $67 million or 6% on strength in 5G sub-6 infrastructure, increased complexity in mobile devices, and millimeter-wave development demand. In memory revenues were $266 million, down 3% in the down market. Demand for higher-speed NAND testers from existing customers and new entrants combined with DRAM wafer test demand highlighted the year. Late in the year, we also received initial revenue for our Magnum Epic LPDDR5 DRAM package test system. In system test, sales grew for the third year in a row. Revenue of $287 million grew $71 million or 33% year-over-year, primarily on growth and storage test for both system-level test and HDD test, which had sales of $115 million, up from $67 million in 2018. We also saw annual growth in our defense and aerospace and production board test components of that STG. At LitePoint, sales grew for a third year in a row as well. Revenue was $157 million, 19% above 2018 levels. New connectivity standards were the biggest driver of demand, but we also saw a surge in 5G cellular demand in Q4. IA revenue of $298 million grew 14% from 2018 on an as-reported basis or 12% on a pro forma basis. Universal Robots revenue of $248 million or 6% year-over-year growth was below our original plan. As discussed by Mark, UR demand has 40% plus exposure to manufacturing in Europe and the automotive industry, both of which face significant market headwinds in 2019. Recent Eurozone PMI data suggests a moderating trend, but no indication of improvement in the near term. The auto outlook is similar. MiR revenues of $44 million grew 43% on a pro forma basis, or 84% on an as-reported basis. Recall we acquired MiR in April of 2018. IA in total had a non-GAAP operating profit of 10% for the full year, which we're modeling for 2020 as well. Shifting to our mid-term earnings model, factoring in both recent history and our latest outlook, we've updated the high end of our $3.50 to $4 earnings target to $4.25 of non-GAAP EPS in 2022. We have growing confidence in the Semi Test end market drivers such as broader complexity for performance 5G subsets and millimeter wave driving capacity needs in infrastructure, phones, and IoT devices. We also expect a continuation of the growing performance trends in memory devices. This, along with some specific mobility and memory share gains and device unit growth, gives us confidence to raise the Semi Test revenue growth rates from 3% to 5% to 4% to 8% from our baseline 2019 revenue. At the same time, to reflect near-term industry conditions, IA's model growth rate has been reduced to a range of 20% to 35% off of our 2019 baseline revenue, as Mark noted. We expect above 20% growth in 2020. In 2019, we experienced a significant slowdown in sales growth tied to macro conditions noted earlier. However, our long-term outlook remains positive, and we'll continue to invest in scaling the business. Specifically, increasing our distributor capacity, sharpening our focus on marketing efforts for lead generation and closure, investing to expand our reach to major accounts, and continuing to invest in software solutions needed to scale our portfolio. The net result of these updated growth assumptions is a greater revenue contribution in 2022 from our test portfolio versus the prior model. Our gross margin target has increased roughly 1%, which drops down to operating profit, increasing that to 26% to 28% at the top end of our EPS rate, and increasing the top end of our EPS range to $4.25. Now to our outlook for Q1. Sales are expected to be between $670 million and $710 million, with a non-GAAP EPS range of $0.86 to $0.96 on 174 million diluted shares. The first quarter guidance excludes the amortization of acquired intangibles and non-cash imputed interest on the convertible debt. First quarter gross margins are estimated to be between 57% and 58%, down slightly from the fourth quarter due to mix. The first quarter OpEx running at 30% and 31% of first quarter sales is up about $6 million from the fourth quarter due to further IA distribution, and product development investments, including the addition of AutoGuide, along with incremental test investments I'll discuss shortly. The non-GAAP operating profit at the midpoint of the first quarter guidance is 27%. Now turning to some color around the full-year outlook to help your model. As Mark noted, we expect a strong first half similar to 2016 and 2017, when the first half revenues were 55% and 54% of the full year sales respectively. Key drivers of the first half revenue include handset test demand, system-level testers being sold to enable key product ramp, storage test demand, and early ramping of LPDDR5 DRAM memory test capacity. Unlike 2016 and '17, based on our very early estimates, we expect roughly similar sales levels in Q2 as in Q1. Regarding our OpEx plans for 2020, we expect our OpEx to grow 10% to 12% from 2019 to $758 million. This is driven by investments across the business. In IA, we will continue to invest to reinforce a competitive position across the sector, as noted earlier. For our test portfolio, we plan to increase our spending in engineering, sales, and marketing primarily in Semi Test. The engineering efforts will include memory and SOC investments to maintain our leadership position, as well as invest in areas of the market that we believe there are opportunities for us to grow. Increased sales and marketing investments are driven by share gains, which require effort to convert and ramp customers on Teradyne's products and then provide ongoing support. Beyond 2020, we model test OpEx to have flat to GDP growth. Capital expenditures in 2020 will increase above our normal run rate. In 2019, our CapEx was $145 million, used primarily for customer demonstration equipment, operations, and engineering. In 2020, we've earmarked an incremental $40 million or so for real estate investments in locations where we plan to grow significantly over the next several years. We are buying land and developing it to eliminate lease costs and enable a more cost-efficient spend profile over the long term. The projects will take two years to complete, with the majority of the spending this year. Our GAAP and non-GAAP tax rate for 2020 is estimated at 16%. Shifting to capital allocation, we will continue to balance strong cash positions to support our operating investments and potential M&A with direct shareholder returns through dividends and share repurchases. Recall we have a $460 million base value convertible bond that matures in 2023. Regarding direct returns, we will be increasing our dividend by 11% to $0.10 per quarter, which reflects our confidence in our operating level and growing markets we serve. With regards to share repurchases, we canceled the unused portion of the prior program and replaced it with a $1 billion share repurchase program. We plan a minimum of $250 million of share repurchase in 2020. The program does not have a fixed end date and, as in the past, there’s a programmatic and opportunistic component. Recall in 2018 and 2019, we spent approximately $1.3 billion in share buybacks, driven by 2017 tax reform, which enabled offshore cash to be repatriated efficiently. Our 2020 target represents us getting back to a more normal level on share repurchases. In summary, we closed out 2019 very strong and enter 2020 with good momentum powered by our strong test portfolio. Our updated capital allocation plan and earnings model reflect our confidence in test and industrial automation, while acknowledging the short-term impacts of the global slowdown in industrial spending. We will continue to invest in R&D, distribution, and internal capabilities to improve our competitive position and drive profitable growth across the business. While we can't predict what lies ahead, for the full year, we have the products, the team, and a proven flexible business model that can efficiently scale demand during a fluctuating time period, and the strategy to thrive in the New Year. With that, I'll turn things back to Andy.

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

Thanks for taking my question. So the first one, in the press release, you called out Huawei and HiSilicon as significant customers. I'm wondering how big were they directly or indirectly in 2019 and if you have a number for 2018 as well, and do you have a sense of how much of that related capacity is being utilized versus any extraneous effects due to tariff or trade or other issues?

Yeah, we're not going to get specific numbers for any specific customer. But what I will say is that certainly they are a significant customer and utilization is 100% plus. There's strong demand; there was demand all through the year. Utilization is high. At this point, that situation continues, with the exception of 5G infrastructure, which represents a subset of the demand being weaker now than it was running in the second half of last year.

Alright. And so my follow-up on the 5G side, you maintained the $200 million or so contribution or the market size for last year, and I think in the past you had mentioned that it was a $300 million to $400 million opportunity. How do you see your share playing out? Which areas do you think you are stronger versus your competitor? Thank you.

Yeah, good question. So that $200 million number for 2019 was predominantly infrastructure related. I think our share there was probably 70% plus. As we entered 2020, there'll be a shift toward handsets and infrastructure will come down a bit, and I'd say our share as a consequence of that will probably be somewhere between that 50% to 70% range in that kind of a mix. But longer term, as more millimeter wave comes online, again, we're talking probably post-2020, that's when the total market should grow with that $400ish million range for Semi Test. On top of that, in LitePoint, there's probably what we've been talking about, a $100ish million adder for 5G handset test. But the way we see it now, it's likely that could be a bit higher. Now that may peak at around $150 million or so. So that's how it progresses out through the next few years.

Yeah. Good morning, guys. Congratulations on the solid results. Mark, I'm just curious about your view of the calendar year 2020, half on half being 55-45. To what extent is that just lack of visibility into the second half and conservatism versus actually having visibility that the second half is going to be down? Also, can you help me understand why 2016 and 2017 are the right analogy years to compare to calendar year 2020? And as you answer the question, if we're going through a pause in 5G infrastructure currently, what's your expectation for that to come back?

Yeah, that's a good question. So, I'd just like to point out that we have very little visibility into the second half. So, the 55-45 split is purely based on a historical model or precedent where in 2016 and 2017, we had significant mobility handset test during the first half. We simply looked at that and said, everything else being equal, let's assume the year follows that pattern. But we don't have any data points that I would say are strong on that. And then with no infrastructure, we expect because most of the build-out in infrastructure was concentrated in China last year, it ran very hot, it's in a pause right now. But there's plenty of geographies that still need to build out. So, that has to come back at some point. If you don't think it's in the first half of the year where we do have visibility, it could be in the second half of the year or early next year.

That’s helpful. Then maybe for my follow-on to kind of add on to Vivek's first question, I understand the desire not to talk about absolute levels for a specific customer. But I'm kind of curious, just relative to some of the concerns investors have that might be a change in the de minimis role from 25% to 10%. Would that change, as you understand it, impact your business to Huawei? Or how should we think about that in the investment community?

Yes, hi. This is Sanjay. First, I want to emphasize that Teradyne will comply with all regulations. The revenue impact is somewhat uncertain, as there is much speculation regarding potential rules. If there is a possibility that we cannot ship to Huawei for any reason, we need to consider the end market as it stands. We believe there will be a shift towards other suppliers, but this will take some time to occur. However, it's challenging to predict because we don't fully understand what the regulations will be. In the midterm, I think the market will adjust, but there will be short-term fluctuations.

Thanks, guys. Appreciate it.

Hi, guys. Thanks. The first question, Mark, I just am going back to your comment that the $200 million extra SOC TAM that came from 5G this year. Your share was about 70%. But total SOC share, if I take a $3.3 billion market this year, you actually lost like 300 basis points worth of share for the year. So why would that be if you captured sort of an abnormally high portion of that incremental 5G? Thanks.

Yeah, so there's lots going on under the covers in SOC tests. The 5G bump was one component of it. But analog and automotive were at a very low level, which is another place where we have very high share. So low to you might say almost negated each other in terms of net share gain. Then the other effect going on is there's a segment of the SOC test market; it is probably the only segment we don't serve, which is the LCD driver or display driver. That market has grown quite dramatically and I believe added about $100 million to $150 million of market. It's pretty much all advanced test, and that kind of makes a difference in the calculations.

Okay, I understand. I have a follow-up question regarding export control. If we assume flat performance at June and expect the first half of the year to contribute 55% while the second half contributes 45%, that suggests an annual total of around $2.5 billion. What does this guidance assume regarding changes in export control rules? If the threshold is lowered to 10% and the sensitive content requirement is removed, does this mean you would still be able to ship to Huawei, or should we anticipate some impact? Thank you.

Yeah, I think with what we believe is being contemplated at the moment, and again, this is still in daily discussions obviously, in the Commerce Department and the Department of Defense and everything else, it would not have a significant impact on our plans for 2020. But what was said is true. Let's assume for a minute that something more draconian than we expect happens with restrictions. The demand in the market won't change, so the supply will shift to other suppliers. We're well-positioned to be a likely supplier that will shift to. So, it's simply a movement from one place to another.

Okay, awesome. Thanks so much.

Hi, guys, congrats on the strong results. Mark, you guys lowered your long-term growth assumptions around the IA business from 30% to 40% to 20% to 35%. I appreciate the near-term environment in Europe and automotive from an end-demand standpoint remains pretty weak. But why the change? Have you sensed any change in the competitive landscape or how you think about the economics around the adoption of cobots? What's changed there? Thank you.

Yes, it's no competitive and no long-term change. It's simply math, meaning we've got another ticket to that 2022 year. We've got three years to get there. We think 2020 is going to be better than '19 in terms of growth, but not in that 30% to 40% range that would make that viable. So we think we're going to, again, move back north on growth rates this year, will be north of 20 for the group. We would expect subsequent years to improve beyond that. But, with the average it out over three years, that's kind of the range we think will be it. Longer term, nothing's changed.

Got it. And then as a follow-up, I had a question on memory test. Can you confirm what your market share was in 2019 in NAND and DRAM relative to 2018? And then for the TAM for 2020, I think you guys are thinking about 15ish% growth on a year-over-year basis. That seems a little conservative, are you seeing in terms of the memory market? What's kind of pulling that down, if you will? Thank you.

Well, let's see. So first of all, share in 2018, we were roughly at 30% share, and last year we think it will be around 43% share. Looking to 2020 market, we're thinking around $700 million, roughly. We've said the long-term average should be about $750 million. I wouldn't be surprised if it was a bit higher. But again at this point, it's hard to forecast. Now, in terms of our share in 2020, the success we had last year, we talked about this target of cracking in the final wedge of the memory test market, DRAM final test that we didn't participate in. That was a yearlong project that finally came to fruition in December. So that sets us up going into 2020 to serve all four segments of the market. China will continue to be pretty aggressive. So that's a balloon, and I think our share, what I think in the last call, I said, expect our share to fall back into the high 30s, 35% to 40% range, as DRAM snaps back in 2020. But now that we're playing in that market, we think shares are going to stay up in the net 40% range in 2020.

Hi. Thanks for taking my questions and congratulations on strong results and guide and also good job in winning the LPDDR5 design win at the Korean memory makers. Mark, my first question is regarding your expectations on the industrial auto demand not recovering this year. Can you remind us how much that makes as a test demand down from the prior peak? Then as my follow-up, Sanjay, can you comment on the profitability of your memory test business relative to your overall Semiconductor Test business?

I'm sorry, Atif. I didn't get your first question. Can you just ask it again, please?

Yes, Mark. What I'm asking is, how far is your industrial and auto test business down from the prior peak?

Got it. Thank you. Yes. So automotive and analog tend to peak at around $500 million or so of the market, $500 million to $550 million. Last year, we expect that it was somewhere in the $300 million to $325 million range, so it's down by about $200 million.

And from the memory profitability standpoint, we see the margins in the profitability similar to the SOC market.

Thank you.

Yes, good morning, thanks for taking the question. Curious on your new test outlook of 6% growth at the midpoint versus your prior view of 4%. And that's off of a higher base in '19. How much of that outlook is based on just what you're seeing overall testing and in complexity versus some of the share games on the gaming console DDR5, etcetera?

Yes, I think you can see that our midterm growth is really driven by the complexity in end devices, both sub-6 and millimeter wave 5G, as well as share gains. I would estimate that about 30% of this growth is related to the market, while roughly 70% is connected to our product mix.

Very helpful. And then on the IA side, clearly help but you guys grew 23% sequentially on its own. Curious, what signal does that send to you? I mean, how much of that was programmatic as opposed to perhaps an early indication of cyclical recovery on the manufacturing side?

Well, I think on the UR front, as well as MiR, seasonally Q4 is generally a high quarter if you look back over time. So that's encouraging. And it was actually one of the drivers of us being higher than our guidance range. However, as we look into the first half, we are seeing that seasonal pattern come down from an IA perspective. I think it's really early innings to call a recovery in the industrials and automotive at this point from our standpoint.

So, when you're thinking about growing that business 20% plus in 2020, is that really an indication of kind of the programs that you see for MiR, or what's the underlying assumption for UR?

Yeah. So we see MiR and UR both contributing obviously to the 20% plus growth that Mark articulated. And we are investing and as I said, growing in distribution. As you know, MiR is coming from a little bit later in years as coming from a smaller base. But we see both contributing quite significantly to that 20% plus growth.

I would like to add that UR has a greater exposure to automotive and the general manufacturing challenges we are currently observing in the market. However, the strong sequential performance you mentioned indicates a slight year-over-year gain. Last year, we launched a new product with a 16-kilogram payload that is just beginning to ramp up. In April, we will be introducing the bin-picking solution in North America. The introduction of new products, along with the stabilizing challenges in the manufacturing sector in Europe and North America, are promising signs for us. Furthermore, we experienced significant growth in China last year, around 40%, where those challenges were not present. Even in a highly competitive region, UR is demonstrating strong performance. We are very optimistic about the impact of our new products as the headwinds continue to lessen.

Very helpful. Thank you.

Yes. Thanks for taking my question. I want to take a broader outlook. If I look at your commentary for 2020, the 55-45 mix, it seems to me that on the earnings side, you would come in at or slightly above the midpoint of your longer-term target. And I also understand that millimeter wave could be a big TAM for SOC. But that's most likely a 2022 catalyst. So given this kind of thought process, could we see some fluctuation in annualized earnings, as you think about the longer term of maybe a best case $4.25? And I'm just trying to understand the dynamics of different parts of the company, especially with the change of outlook on IA and how the SOC market is going to play out.

We've enjoyed a relatively stable and non-volatile test market for several years. It's certainly possible that as we aim for $4.25 and beyond, we might experience a downturn, although we haven't seen one yet. Our earnings per share have been consistently increasing for quite some time, and while some volatility is still likely, it doesn't appear to be imminent. The upcoming developments in 5G are set to be significant drivers. However, as seasoned participants in this industry, we know that a correction of around 20% can happen. This does not alter the fundamental advancements expected from 5 nanometer and 3 nanometer technologies, which will enhance the capabilities of devices like 5G transceivers and antennas in the coming years. We remain committed to our trend line projections and stand by our beliefs.

Thank you. And thanks for being sincere. Just as a follow-up, I'm just thinking that for millimeter wave, there will be some changes to the base station to the networking. And that would have to happen before there will be an SOC upgrade cycle. The base station CAM is like $200 for test and AP is $400. How do you see the impact of millimeter wave on networking versus the phone itself given the kind of picture that I just laid out?

I believe that from the perspective of test intensity, handsets will play a more significant role. Last year's remarkable progress in infrastructure was due to a concentrated effort over a very short time frame. To deploy China's sub-6G or low band infrastructure, a substantial amount of capacity was built within a year. The rollout of millimeter wave will occur over several years. While it may be slightly more test-intensive at the base station level compared to sub-6G, it won't see the same level of investment as last year's $150 million or $200 million. In contrast, the handset market is where the real revenue potential lies for both LitePoint and Semi Test. Achieving a tipping point in the U.S. deployment of millimeter wave base stations that shifts about half the domestic supply of handsets to millimeter wave capability is crucial. We still estimate this to occur around 2021 or 2022, and we are somewhat more optimistic about an earlier shift to millimeter wave. If we consider the $400 million increase in the SOC market, approximately $300 million of that for 2022 is expected to be linked to handsets.

Got it. Thank you so much, and thanks for all the details.

Hi, thanks for taking my question. I have two of them. First, and Mark, thanks for the color on millimeter wave. Do you think that when you look at millimeter wave now that you have a dual opportunity both on the SOC test side, as well as LitePoint side? Do you think they happen in tandem or does LitePoint lead or lag the AT business? And then I had a follow-up on cobots.

Yes. It is Sanjay. I think they come out in similar opportunities. I think what you're seeing right now in millimeter wave on the SOC test perspective, is a lot of engineering work and testers associated with that. Then you do have the LitePoint and device tester in parallel for what millimeter wave devices that are out there. As we say, it comes in waves, and arguably 2021 and 2022. I think you'll see both of them come up. Obviously, the chip guys on the SOC test will be slightly ahead, but I think they'll mainly come similarly.

And I've one more thing about LitePoint that we haven't mentioned. LitePoint's traditional strength has been WiFi connectivity testing. There's a lot going on in the next few years in WiFi that's really encouraging to us. So finally 802.11ax or what's now been rebranded WiFi 6 as well on phones. That's going to propel our connectivity business. Then we're going to open up the 7 gigahertz, 6 to 7 gigahertz band for WiFi. That's another new need to retool the tester install base for that frequency band. The industry is working on this new 802.11be standard that is 16x16 MIMO, 360 megahertz a channel bandwidth. Once again, requiring new test capacity. So unlike the past four years where connectivity has been kind of dormant, when we look over the next four years, connectivity is also going to see significant retooling shift.

Got it. That's very helpful. And I just had a follow-up on the cobot side. Two-part question. Where are we on the installation time reduction for cobots? And I think these three to four weeks, but you guys are trying to reduce it. Do you have any update on the partnership redeem on the vision side for cobots? Thank you.

I think on the deployment time, as I alluded earlier to where we're investing. I don't have specific metrics around that, but we continue to see improvement and improvement in the initial deployment, as well as the follow-on deployments at existing customers.

And vision.

We think yes, we have a UR plus partners that are suppliers.

Yeah, I think we're fielding a bin-picking solution that has a vision system embedded in it that we will be kind of a reseller for. But there's a wide variety of partners already in our UR plus ecosystem that are immediately embedded in our operating system. So all of that is sort of business as usual. No real new trends there.

Got it. Thank you, guys. Thank you very much. Appreciate it.

Yes. Good morning. Just a quick question around the industrial automation business in general. How does their P&L or gross margin and I think, finished the year? And then also, I think you referenced a nonprofit contribution, contribution margin there of 10%. That was the expectation going forward into '20 as well. So I'm curious, is there a kicked-up investment there below the gross margin line as a gross margin line kind of held around 60%?

Yes, it's Sanjay. I believe the gross margin is approximately as anticipated, showing no decline. I've mentioned that our operating profit in industrial automation is around 10%, which we expect to maintain next year. When I consider our strategy for the industrial automation sector, we plan to invest significantly as we experience considerable growth to enhance our competitive standing. We have confidence in this emerging market, and our long-term outlook, as Mark indicated earlier, remains steady. You should begin thinking about our performance when we expect growth in the single digits. At that point, we would anticipate achieving or exceeding our target profit, approximately 20% in operating profit, as growth begins to decelerate. However, given our perspective on the market and our belief in substantial double-digit growth moving forward, we will continue to invest to boost our top line. As growth eventually stabilizes, we would expect our operating profit to improve.

So regarding the 50%, is that increase related to R&D expenses, or are we still looking at costs for go-to-market support and expanding our distribution base? How do you arrive at the 50% figure that contributed to a 10% drop in the contribution margin? I've been estimating it at 15 to 20.

Yeah, it's a combination of both I'd say. The other point I would add in there is that our 2020 forecast includes AutoGuide. But it's both. Really, investments and in lead generation and closure distribution our partners, where we're really putting forward the go to market. Also, things like fleet management, system software, and different software capabilities to help drive the scalability of our solutions to customers.

Okay. And then just as my second question. Just Mark, I want to return to something we talked about the 5G infrastructure business in the Semi Test. You referenced there that the market there and the demand there is pausing in the China market. I'm trying to get my arms a little bit around the timetable here. Just from the standpoint of you continue to see some fairly aggressive production and deployment numbers around base station in China and the Asian market in general. And so is your reference to the test demand that that is in place ahead of the production, some of them were just some inventory of the chip content into the base stations? Or how do we reconcile the aggressive forecasts around production and deployment of base stations with your commentary about the market pausing now?

Yeah, that's exactly what you said. In advance of deployments of the actual base stations, a lot of silicon test capacity goes in place. Now those base stations are churning out like mad out of the factories, which is why utilization of test equipment is very high. It will require an additional bump in deployment rate of base stations to drive the next round of test equipment. So U.S., Europe, rest of the world. In China as well, there's not enough real capacity in China to totally facilitate where it needs to get to, but what they need to do for 2020 is probably sufficient.

I understand. Okay, great. Thank you.

Great. Thanks. You talked about the second quarter revenue to be flat quarter-over-quarter in Q2. And that’s different from how it was a few years ago, 2016 and 2017. Can you add a little more color on what are some of the factors that make it different than those two years?

Yeah, hi, it's Sanjay. So I think in Q1, we've had significant drivers outside of SOC test and then inside. The first one is storage test for system-level test in HDD, where we'll have significant revenue in Q1, which will decline in Q2. The second comment I'd make is that within Semi Test, we've got some share gains that require some initial tooling in Q1 that we will be moderating in Q2. The last point I'd leave you with is that it's still early stages of Q2. So it's roughly where we think we're going to end up.

Okay, that’s helpful. My follow-up is that you guided the SOC to be roughly flat in 2020. How do you think about the different moving parts in terms of end market? And related to that, how do you expect your share in SOC test to do this year? I think last year it was around 40%. Any color on end market customer mix and product mix that's driving these shares will be helpful? Thanks.

Yeah. So our expectation this year is that the mix, the combination of some of the design wins I alluded to in my remarks around the UltraFLEXplus platform, plus a little bit, I would say, of a shift toward our customers in this year will bring our share likely up into the mid-40% range is what we expect.

Sherry, we have time for just one more question.

Yes, hi. I was hoping you could talk a little bit more about the service components in semi, in particular going forward and how you see that playing out?

So the semi service for us for years has been a very strong part of the portfolio, it roughly runs around 20% of semi revenue. It's up into the $300 million range; we don't expect as a percentage of revenue it will vary that much. But that's roughly where it is.

Okay, so this is not a view into that increasing market over the next few years as you get to your target model.

Yeah, I think it'll scale with system revenue. I think on the industrial automation side, that's an area where service will go from when we acquire these companies having essentially no service business. We're now growing service in those businesses at a faster rate than the top line. So that will be a story that evolves here over the next few years, but in semi it should stay consistent.

Okay, that's it. Thank you.

Thank you. Alright, everybody, thank you so much for joining us today. I apologize for the static at the front end of the call. We look forward to talking to you in the days and weeks ahead. Bye-bye.