Teradyne Inc (TER) — Q4 2024 Earnings Call Transcript

Thank you, operator. Good morning everyone and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith; our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for the fourth quarter and full year of 2024 and our outlook for the first quarter of 2025. The press release containing our fourth quarter results was issued last evening. We are providing slides as well as a copy of this earnings script on the Investor page of the Teradyne website that may be helpful in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risks that could cause Teradyne's results to materially differ from management's current expectations. We caution listeners not to place undue reliance on any forward-looking statement included in this presentation. We encourage you to review the Safe Harbor statement contained in the slides accompanying this presentation as well as the risk factors described in our annual report on Form 10-K for the fiscal year ended December 31, 2023 on file with the SEC. Additionally, these forward-looking statements are made only as of today. During today's call, we will refer to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures were available on the Investor page of our website. We hope that you plan to join us for our financial analyst meeting which will be webcast beginning at 1:00 p.m. Eastern Time on March 11, 2025. Following Greg and Sanjay's comments this morning, we'll open up the call for questions. This call is scheduled for 1 hour. Greg?

Thanks, Traci and thank you all for joining us today. I'll start off by summarizing our fourth quarter and full year 2024 results and provide some context for our initial view of 2025. Then I'll provide context around our updated midterm earnings model. I'll describe the trends we expect to drive the markets and Teradyne's strategy to drive highly leveraged earnings growth through the midterm. Sanjay will then go into greater detail on all of these topics. Our fourth quarter came at the high end of our guidance range as trends we noted previously continued through the end of the year. Cloud AI has been the dominant driver of our Semiconductor Test business and we have seen some short-term improvement in the mobile space, driven by supply chain shifts in our customer base. In Industrial and Automotive, our fourth quarter benefited from customer-specific equipment purchases. Strength in our Test business more than offset the continuing weakness in the Industrial Automation market which impacted our Robotics business. In 2024, after two years of Semiconductor Test market declines, our SOC and memory test revenue grew 17% year-over-year, excluding DIS. AI was the dominant driver of our growth, specifically AI accelerator ASICs, networking, and HBM, DRAM. We have previously described a class of customers called VIPs or vertically-integrated producers. We use this term because these customers develop custom silicon to provide differentiation in their end products, whether they are phones, cars, or Cloud AI computing. In the first half of 2024, we saw VIP strength for Edge AI in Automotive. In the second half, strength was driven by Cloud AI compute VIP customers. Our goal in 2024 was to achieve 50% market share in computing VIPs and we believe that we achieved that goal. This is particularly notable because much of the VIP test demand in 2024 came in the form of upgrades to systems left underutilized by the weak mobile market. If this demand had come in the form of system sales, our 2024 VIP revenue would have been more than double what we recognized in the year. At the company level, we grew 5% in 2024. If one excludes the divestiture of the DIS business, our total revenue growth was 8%. We grew earnings per share by 10% year-over-year and generated over $470 million in free cash flow. Our full year financial results reflect an inflection in our business, both in terms of semiconductor test cyclical recovery but more importantly, a successful pivot to diversify our customer base and reduce customer concentration. In the 2020 and 2021 timeframe, our business was dominated by mobile with high customer concentration in that market. Back then we were highly exposed to mobile in SOC, memory, and wireless test. Now in 2024, the compute end market was a larger component of our revenue than mobile as our SOC business in the compute market grew more than 3.5x the prior year. We have been investing to capitalize on the secular shift towards VIP ASICs and that yielded roughly 50% share in what we believe was around a $300 million TAM in 2024. We have seen growth driven by our historical strength in the networking space. And we see opportunities in System Level Test for AI Compute. The pivot we have executed in SOC over the past couple of years is remarkable. In 2023, 11% of our SOC product revenue was in Computing and 51% was in Auto and Industrial. In 2024, 34% was in Compute and 34% was in Auto and Industrial, a balance that underpins our longer-term model. Recent advancements in AI inference which appear to reduce the cost and time to develop AI applications may be a catalyst to accelerate Edge AI development. We think this could directly benefit the markets where we have historical strength, Mobile and Automotive. It’s early days but we believe that the lower cost, lower power, and faster time-to-market AI solutions can drive complexity growth and increased unit demand at the Edge which are key inputs of improving demand for test equipment. Looking forward to 2025, we expect the SOC TAM to continue to grow, roughly 7% year over year. While some of this growth is driven by AI Compute, we expect a modest recovery in Mobile, Automotive, and Industrial in the back half of the year. We believe that we are positioned to gain share in the low single digits in SOC test. Now shifting gears to memory. In 2024, our Memory business grew to over $500 million, up 30% year-over-year. Strength in the market and our growth was fueled by AI Compute demand for HBM, DRAM. In the second half of 2024, we were qualified for HBM performance test at a major memory supplier. Our higher throughput and forward compatibility created competitive differentiation, enabling us to capture significant share of the HBM performance test market in the second half of 2024. We expect the HBM device end market to be strong through 2025. However, from a test equipment perspective, we expect the market to soften as customers absorb capacity with higher productivity tools. We expect the HBM TAM to recover in 2026. As a result, we expect the entire Memory test market to be flattish in 2025, although we do expect to gain share in the low single-digit range. Beyond AI Compute, we believe that there are other segments in the semiconductor test market that offer the opportunity for accelerating long-term growth. One of these areas is power semiconductors. These devices will continue to grow long-term with the crossover to EVs and the demand for more efficient power generation, storage, and distribution. We are announcing a strategic partnership with Infineon, the market leader in power semiconductors to acquire their internal tester development team in Regensburg, Germany. This group will enable us to accelerate our road map in power semiconductor space specifically in areas like silicon carbide and gallium nitride at the scale needed to serve the automotive and renewables market. While the Semi Test business was strong in 2024, Teradyne's other product test businesses which include our System Test and Wireless Test operating segments continued to be impacted by weak end market conditions. Within our product test businesses, we saw some programs push out from 2024 into 2025 but scored key program wins that we expect to drive healthy growth in 2025. We expect our Wireless Test business to return to growth in 2025 after securing 74 out of 80 tracked WiFi 7 design win opportunities in 2024. Turning to Robotics. The industrial automation market continued to be weak in Q4. We typically see strong fourth quarter seasonality as customers place quick turn orders in the back half of the quarter. Visibility is inherently low in this high-turn business. In Q4 of 2024, this seasonality was far more muted than in prior years, and we ended the year down slightly for UR and roughly flat for MiR. This underperformed our expectations but outperformed our industrial automation peer group. Despite the headwinds, there were highlights for Robotics. The UR channel transformation continues to progress with the OEM channel delivering 20% growth and the MiR large accounts also delivering 24% growth year-over-year in 2024. In the fourth quarter, as part of our multifaceted partnership with NVIDIA, UR launched its AI accelerator. Late in the fourth quarter, MiR's new flagship product, the AI-enabled MiR 1200 Pallet Jack began shipping to customers. And most recently, Teradyne Robotics announced a strategic partnership with Analog Devices to develop and deploy robots, AI, and software to support ADI's automation initiative. In 2024, we combined UR and MiR operations into a unified robotics operations group. Now in Q1 of 2025, we are consolidating our go-to-market functions at the robotics level to enable our best partners to sell the full UR and MiR product line and to serve our customers better with a single customer service organization. This restructuring increases our efficiency and reduces our Robotics breakeven revenue from $440 million in 2024 to $365 million in 2025. Looking ahead to the next four years, we are very optimistic. A year ago, there were questions as to whether VIPs would matter. And if they did, could we win their business. At that time, we thought the Compute VIP market would be a $100 million to $200 million opportunity in 2024, growing to $400 million to $600 million in the 2026 time frame. Our latest estimate is that the Compute VIP market was $300 million in 2024, and the Compute VIP market will be centered around $600 million in 2026 and could approach $800 million in 2028. We believe that Cloud AI will continue to drive share gains for us in SOC and Memory. By the later years of this midterm as AI moves to the Edge for mobile, enabled by process technology like 2-nanometer and gate-all-around, we expect robust growth of the mobile TAM. With the remarkable complexity of AI computing systems and the need for highly reliable performance in the training and use of AI models, we expect growing demand for additional test steps. The addition of system-level test insertions for AI Compute both in the Cloud and at the Edge creates an additional growth vector for Teradyne. This was a primary consideration in our decision to align the integrated System Test unit within Semi Test. Going forward, we believe that AI will have an outsized impact on the longer-term growth of Edge devices, specifically in Mobile and Automotive applications. Also, the trends towards electrification, whether pure EV or hybrid, provide considerable growth potential with increasing silicon content per vehicle. Our investments in this space, including our strategic partnership with Infineon will help us drive share gains in this highly complex test-intensive segment of the market. Based on these long-term trends, we expect to see healthy TAM growth in the Automotive and Mobile segments of the market over the midterm. Our strong market position in these segments will help fuel our revenue growth. These positive trends underpin our 2028 earnings model. At the midpoint of our model, we expect to grow from $2.8 billion of revenue in 2024 to $5 billion in 2028. We expect EPS to grow from $3.22 per share to $8.25 per share over the same period, implying a 12% to 18% revenue CAGR and a 21% to 31% EPS CAGR over that period, demonstrating considerable operating leverage in our business model. To sum up, 2024 was a very good year. We have repositioned the company and are seeing the success from our investments in AI, in Compute, and in Memory. We expect that 2025 will be another good year. We are setting our Robotics business up on a sustainable path for long-term growth, and our Test business will grow, driven by continued strength in share gains in VIPs, tightening capacity utilization, and the return of higher demand in Mobile, Industrial, and Automotive. With that, I'll turn the call over to Sanjay. Sanjay?

Thank you, Greg. Good morning, everyone. Today, I'll cover our Q4 and full year 2024 financial summary, provide our Q1 outlook, some planning guidance for the full year 2025, and discuss our updated earnings model and capital allocation plan. Now to Q4. Fourth quarter sales were $753 million, with non-GAAP EPS of $0.95, both at the high end of our guidance range. Semi Test revenue, which now includes our Integrated System Test business, or IST, comprised of product lines for System Level Test and HDD test, was $561 million. Within Semi Test, SOC revenue was $429 million with memory shipments of $112 million and IST shipments, $19 million. The other product test businesses comprised of Defense and Aerospace, Production Board Test, and Wireless Test contributed $94 million. Robotics revenue was $98 million, was up 11% sequentially with muted seasonality due to ongoing weak industrial spending. As Greg noted, we had softer-than-expected performance in the Robotics business tied to typical turns business that did not materialize. Non-GAAP gross margin was 59.4%, just below our guidance range due to Robotics. Non-GAAP operating expenses were $284 million in Q4, higher than our guide. A majority of the increase was tied to accelerated engineering spend in Semi Test. Non-GAAP operating profit rate was 22%. Some other financial facts. The tax rate, excluding discrete items for the quarter was 7.6% on a non-GAAP basis and lower than planned because of product mix shift to Semi Test. GAAP tax rate was 8.7% in Q4, excluding discrete items. We repurchased $144 million of shares in the quarter as we opportunistically accelerated our share buybacks. Dividends were $19 million and we had one 10% customer in the quarter. Turning to the full year results. Our revenue was $2.82 billion. Samsung was the only customer greater than 10% of our revenue for the year. Gross margin for the year was 58.6%. OpEx was $1.08 billion, and operating profit was 20.4%. Non-GAAP EPS was $3.22. We generated $474 million in free cash flow in 2024. We returned $275 million or 58% of free cash flow to our shareholders through share repurchases and dividends. We ended the year with $724 million of cash and marketable securities. Our tax rate for the full year, excluding discrete items, was 12.6% on a non-GAAP basis and 12.5% on a GAAP basis. Business unit revenues for 2024 were as follows: Semi Test revenue for the year, including IST, was $2.124 billion, with SOC revenue contributing $1.537 billion, memory, $502 million, and IST, $85 million. Excluding the impact of our DIS divestiture, our SOC and Memory revenue was 17% year-over-year. SOC growth in the year was driven by AI Compute, specifically custom ASICs for VIPs and networking. Our Memory sales were up 30% year-over-year, driven primarily by AI Compute demand for HBM, DRAM. IST revenue declined 39% year-over-year, primarily due to underutilized test capacity in HDD. Turning to our other product test businesses. The System Test group, which is combined Defense and Aerospace and Production Board Test, had revenue of $201 million in 2024, flattish in 2023. Wireless Test revenue was $130 million, down from 2023 due to slower ramp of WiFi 7. The combined revenue of the two operating segments in 2024 was $331 million, down 4% year-over-year. Now to Robotics. Robotics revenue in 2024 was $365 million, with UR contributing $293 million and MiR, $72 million. Considerably lower than expected volumes in the fourth quarter drove profitability well below our expectations; the group had a 13% non-GAAP operating loss in both Q4 and the full year. As Greg mentioned, we are restructuring the Robotics business to create a single point of contact for customers and partners across UR and MiR sales, marketing, and service organizations to improve customer experience. The result of these actions will help drive top-line growth in 2025 and improve our efficiency. These actions will enable our Robotics business to continue to outperform peers in the industrial automation market. Now to our outlook for Q1. Since our October call, our Semi Test outlook has remained strong. However, Robotics forecast remains seasonably soft. Q1 sales are expected to be between $660 million and $700 million with non-GAAP EPS in the range of $0.58 to $0.68 on 163 million diluted shares. The first quarter guidance excludes the amortization of acquired intangibles and restructuring charges. First quarter gross margins are expected to be in the range of 58.5% to 59.5%. OpEx is expected to be roughly flat with Q4 and run at approximately 41.5% to 42.5% of first quarter sales. The non-GAAP operating profit rate at the midpoint of our first quarter guidance is 17%. As Greg noted, we believe the Semiconductor SOC Test TAM will see healthy growth in 2025, driven by a second-half broad-based recovery. We expect the SOC TAM to be between $4.7 billion and $5.1 billion or $4.9 billion at the midpoint. For a more detailed view of our end market expectations for SOC, please refer to the table in our earnings deck. We are forecasting the Memory TAM to be between $1.3 billion and $1.5 billion. Recall that within this, HBM has grown from around $100 million in 2023 to over $500 million in 2024. Our Memory TAM forecast for 2025 is roughly flat year-over-year with the HBM tester market going through a period of digestion. In both the SOC and Memory Semi Test markets, we expect to gain low-digit share in 2025. In Robotics, we are currently operating in a difficult low-visibility industrial spending environment. The business is still driven by turns. When we look at our plans for 2025, we see SAM expansion and channel growth initiatives expected to yield approximately 10% revenue growth in current market conditions. Of course, there is a wide range around this growth expectation. A few points to assist you in the modeling 2025 for the enterprise. In Q2, we expect 5% to 10% sequential growth from Q1's midpoint. We expect first half revenue to be approximately 43% to 44% of full-year revenue. Now to gross margins. We expect full-year gross margins to be 59% to 60%. We expect second-half gross margins to slightly improve from current levels tied to higher revenue expected in the second half of the year. Regarding OpEx for the full year. We expect full-year 2025 OpEx to increase 8% to 10% year-over-year, which is a reduction from our low teens view in October. The key changes were restructuring to capture synergies between UR and MiR and Robotics and the acceleration of Semi Test projects in Q4. Interest and other lines are forecasted at $1 million of income per quarter. While we have cash driving the yield, we also have items like FX gains and losses included in this line in our P&L. Our GAAP tax rate is forecasted to be 15.25% and 15% non-GAAP in 2025, excluding discrete items. Turning to capital allocation. Our strategy remains consistent as we take a balanced approach to maintain cash reserves that enable us to run the business and have dry powder for M&A. For reference, from 2015 to 2024, we've returned over $4.6 billion to shareholders through share repurchases and dividends which is 93% of free cash flow. In 2025, we plan on executing up to $400 million of share buybacks along with our current level of dividends. Moving to our midterm earnings model. As we do each January, we've updated our model. We share this model with investors to provide insight into how we look at the markets we serve, our competitive positioning, and ultimately, the growth and earnings power of the company. A few points for context. We're rolling forward our midterm model to 2028 which replaces our prior 2026 midterm model. That said, we believe we are tracking with our prior 2026 model in terms of ranges of revenue and earnings. Over the midterm, we expect test revenue to grow at a 12% to 17% CAGR off of our 2024 results driven by continued strength in AI Compute, related demand, and recovery with long-term growth in broader end markets, including Auto, Industrial, and Mobile. Our Mobile assumption is for recovery, but we're not assuming a return to the prior peak 2021. In Robotics, we're expecting the industrial markets to begin to recover with AI expanding the SAM and persistent labor shortages. We expect these dynamics to drive a top line of 18% to 24% CAGR off of 2024 with modest growth in 2025, which we expect to accelerate over the midterm. Going forward, the Robotics operating model will deliver increasing operating leverage through the midterm, ending towards the high end of our target 5% to 15% operating profit range for this business. Our updated midterm model is expected to drive 2028 revenue to $4.5 billion to $5.5 billion and non-GAAP EPS between $7 and $9.50. As Greg mentioned, this implies a 15% CAGR from 2024 to 2028 and a 27% EPS CAGR at the midpoint, demonstrating the operating leverage of our Test and Robotics businesses. Summing up, 2024 was a good year overall, driven by strength in Semi Test. Excluding the DIS divestiture, our overall company revenues grew 8% year-over-year and our SOC and Memory combined grew 17% year-over-year, helping to achieve a 10% increase in our EPS to $3.22. We are making strategic investments to drive competitive advantage in the Semi Test business and we are leveraging logical synergies between UR and MiR to drive long-term sustainable growth in Robotics. We enter 2025 feeling good about the year and our line of sight to our midterm model. With that, I'll turn the call back to the operator for questions.

I guess first question, I was hoping you could spend a little bit of time expanding on your outlook for low single-digit share growth in Semi Test. Can you kind of walk through the moving parts in terms of what's driving that? And then considering that you're expecting a bit of a recovery in your non-compute businesses in the second half, can you speak to what we could see potentially in terms of upside to that low single-digit number if that were to come in incrementally better?

Yes, there are several factors contributing to our outlook for low single-digit growth in share. In the SOC sector, we believe we will continue to progress with the Compute VIPs and maintain the 50% share we've achieved this year as our total addressable market grows. We're also anticipating some incremental improvement in the Mobile sector, mainly due to consistent increases in complexity that are helping to utilize a large pool of underused testers. This ongoing rise in complexity should lead to incremental growth in that market this year. Regarding the Auto and Industrial sectors, we currently see a short-term slowdown. However, the rising semiconductor content in automotive continues to advance with each model year. Even with similar or reduced end unit sales, we expect modest growth in automotive. Additionally, the electronic content in hybrids is close to that of fully electric vehicles, and the market's shift towards more hybrid vehicles is affecting plans for pure EVs while impacting auto semiconductors less substantially. In the Industrial sector, one key driver is the indirect influence from the AI Compute area. AI Compute requires significant power, necessitating high-quality power solutions for GPU-powered servers. This demand is benefiting some of our power and electronics customers, helping to sustain the market even amidst a weaker traditional industrial sector. Turning to Memory, the gradual recovery in Mobile is expected to positively influence parts of the market, making it a bit stronger year-on-year. Conversely, the HBM market may experience some weakness due to digestion factors. Nonetheless, there is a tremendous demand for DRAM in AI servers, fueling both LPDDR and DDR memories. We expect that the non-HBM segment of the DRAM market will perform relatively better than the HBM segment. Overall, when considering our share gains and new test insertions in HBM for 2024, alongside our strong position in final testing for DRAM, especially LPDDR DRAM and flash, we predict a low single-digit growth in memory as well.

Very helpful. And then, I guess, as a follow-up question, on the Robotics side, you're restructuring that business once again. Obviously, I think you had multiple kind of paths that you could pursue on that front? And I guess, what gives you the confidence that this is the right path? And what kind of time frame are you giving yourself for proof points of success given the struggles that Teradyne has had within this business for many years?

One of our goals is to distinguish between the challenges specific to Teradyne and those related to the overall market. Our Robotics unit's performance has not met expectations, yet it is performing better than our industrial automation competitors. This indicates that we have made notable progress despite a challenging market. However, there are areas where we believe we can implement changes for improvement. A significant positive for 2024 is the speed of our new product launches. Our R&D teams for UR and MiR are performing well, and the introduction of AI features into our products or enabling our partners to adopt AI-driven robotics is a key advantage. Additionally, enhancing our OEM channel for UR is something we view positively and aim to maintain. We've also made substantial strides in building expertise within large accounts for the MiR team. Regarding our restructuring efforts, we are making minor adjustments in product development and have already modified our operations. Our current focus is on the commercial side, where we are pursuing two main objectives. First, we want to enhance the success of our partners by providing them with a wider range of products to sell, which we believe will drive efficiencies. Fifty of our largest partners already market both UR and MiR, allowing us to improve efficiency by servicing them collectively. Furthermore, as we continue to achieve success with large accounts for MiR, we recognize that service plays a crucial role. By establishing a unified service organization, we aim to replicate our large account success with MiR across the UR product line. Ultimately, our restructuring aims to increase robot sales while also setting up a breakeven point that enables us to achieve better operating margins despite external market growth challenges.

Two from my end, focusing on semi. I want to better understand this partnership with Infineon. It's interesting that you're doing this at the bottom of the power semi. I'm not sure if silicon carbide could get any worse. But what's in it for Infineon? And how should I think about partnership benefits to Teradyne and benefits to Infineon? And I do have another follow-up.

Sure. It is definitely challenging times in the discrete semiconductor market, particularly in wide band silicon carbide and gallium nitride. We view this as a classic hype cycle situation where the potential of these technologies for higher efficiency power conversion for both vehicles and alternative energy applications was initially overestimated. There was considerable excitement around this market, and we believe that enthusiasm has diminished. We see this as an opportune moment for us to make a strategic move. Looking at the long-term from now until 2028, we believe the discrete semiconductor test market will grow significantly. Additionally, we anticipate that other semiconductor components related to battery management systems, conversion products, and isolation products will also see increased demand. By partnering with Infineon, Teradyne is positioned to expedite our development plans to accommodate these new device types and the higher power levels they aim to achieve. For Infineon, the technologies and specialized testing equipment they had been using to support their leading market position will now benefit a wider market by being integrated into a commercial ATE company like Teradyne. This expansion allows their products to serve a larger audience beyond just the Infineon market. Teradyne can fast-track our roadmap, while Infineon can concentrate on chip design and production, which aligns with their core business objectives.

Should I assume there's a payment here? Are you actually acquiring this asset for a purchase price?

Yes.

Have you disclosed how much it is?

No, we're not disclosing the purchase price. It's not at a material level for disclosure.

Understood. Moving on to Industrial Automation, considering your guidance for Q2 and projecting to year-end while evaluating the margin and operating expenses, it appears that you would benefit from reduced input from Industrial Automation, and the figures reflect that. So my inquiry is about your contingency plan. You've invested several years in restructuring and improving relationships with channel partners. However, it seems you may need to collaborate with a system integrator or find additional solutions. Therefore, my question to the management team is, do you have a contingency plan? How much more are you prepared to invest before considering the option to separate from Industrial Automation?

We are not at a stage where we are considering a decision to part ways. I want to emphasize that we are definitely not better off with less Industrial Automation; in fact, we benefit from more of it. The business model for Industrial Automation has built-in leverage. We have reset our breakeven point to $365 million for 2024, and given current market conditions, we anticipate achieving 10% growth above that threshold, along with positive operating margins from this sector. While it may dilute overall earnings percentage for the company, it remains accretive to earnings and represents a significant growth opportunity for us in the long term. We have identified ways to enhance customer experience, reduce costs, and focus our investments on the highest growth areas. However, we are not at a plan B stage at this time.

This is Jacob Moore on for Steve. First one for me is on 2-nanometer gate-all-around. What does your outlook for the timing of that ramp look like over the year? Has that changed at all? And are there any notable differences you'd call out in testers for the new transistor architecture versus current generations?

This is Greg. I'll take that one. Currently, we're anticipating that devices using 2-nanometer technology will begin very early production in late 2025, with the majority of production happening in 2026. We expect both computing and mobile devices to benefit from this development. The main difference with these devices is their increased complexity, which leads to higher peak power requirements from the tester and a much greater need for tester memory. As a result, this complexity will create some technical obsolescence, presenting opportunities in the ATE and System Level Test markets for us. While we don't foresee a dramatic surge in demand due to the shift to 2-nanometer technology, we believe this transition will act as an accelerant.

Got it. That's helpful. My second question is about end markets. While AI and Compute are clearly strong drivers, the PC, notebook, and mobile segments still represent significant volume. I understand you mentioned a gradual improvement over the year, but could you provide more insight on your expectations for total growth in those segments? Additionally, has there been a significant shift in tester conversion to HPC from mobile that might influence that trend?

We believe that the recovery in the second half will be fairly balanced. In the Compute sector, we expect AI Cloud-related demand to remain the main driver for accelerators, CPUs, and networking in that market. There could be a slight increase in client compute, and we anticipate that our Wireless business unit in the LitePoint group will benefit the most from this rise. Regarding mobile, opinions vary among analysts, but overall, there is a sense of optimism about unit growth, alongside an increased complexity in smartphones. As for the Industrial and Automotive sectors, we see an uptick in semiconductor content with each model year. Currently, we are experiencing an inventory digestion phase, but we expect to return to more typical market dynamics by the end of the year.

I had two. So Greg, I wanted to ask about your VIP test TAM forecast. I think you said $600 million in '26 and going to maybe $800 million in '28? So my question on that is, if I listen to what Marvell and Broadcom are basically saying about the custom ASIC TAM, one is saying it's going to be $40 billion in 2027. The other is saying it's going to be $140 billion in 2027, 2028. So if I average those two, I can pretty easily get to $80 billion plus in that timeframe. So these numbers would imply that the test intensity is like less than 1% for that stuff. And this stuff all has tons of transistors and it seems like that's a pretty conservative forecast. So I'm wondering what your custom ASIC end market revenue number is that would underpin this because it seems like your test intensity number is very low based upon what the end customers are talking about relative to the size of the market.

Yes, our model is primarily built on unit quantities and device complexity. One factor that is not included in our model is the variability in the margins that companies like Marvell or Broadcom might be receiving on the devices they manufacture. This represents a gap in our forecast compared to theirs. To directly address your question, we are more aligned with the lower end of the $40 billion to $140 billion outlook for 2027 rather than the higher end. This is largely due to our insights from actual hyperscalers compared to what we're hearing from the chip manufacturers in between.

Okay. Yes, it seems low. But okay. So then on IA. So PBT has been negative for the past 6 years. Cumulatively, you've lost $150 million. And usually, when companies lose money like this, the markets are growing very fast and we're chasing growth. So can you just talk like, is the plan here to cut costs and try to maximize profitability? Or do you really see something bigger coming that you still want to do this? And I kind of ask this in like the context of do you need outside investment to really scale this business? Or is it not a dollar investment thing? It's more just that the market hasn't grown what you thought it would. And I guess the question there is what's going to change to actually make this market grow?

Yes. I believe the key issue here is the prolonged downturn in Industrial Automation investment, which has persisted since 2022. The PMIs have consistently remained weak, impacting us. Although we have outperformed our competitors, we haven't achieved the expected growth. Our perspective, which may differ from other advanced robotics companies, is that growth in this sector will be a long-term journey rather than a quick fix. Our aim is to align our operating expenses so that we can achieve a positive operating margin even in tough market conditions and gradually increase that margin by leveraging any top-line growth while managing OpEx and improving our gross margin over time. We see significant growth potential in this area that is currently obscured by broader market challenges. Unfortunately, we lack visibility on when these challenges will subside. Therefore, we are focused on maximizing our efficiency during this period to minimize any negative impact on our earnings from the robotics business, despite the weak market conditions. That’s the main point. Now, I’d like to hand it over to Sanjay for some additional insights.

Yes. Just really quick, Tim. Just for a point of reference, since 2019 to 2022 at an operating profit level, we were profitable. I'm not sure where you're getting $150 million. In the last two years, it's true. We have lost money. But cumulatively, since 2019 to 2024, we'll have lost an operating profit level of about $23 million, just for context.

I had two of them. First one, Sanjay or Greg, if I look at your color on calendar '25, it looks like your revenues in '25 are going to grow about 15% from 2024 levels. A, is that right? And along the same path, a couple of months ago, you seemed a little more confident on maybe high teens growth for the year versus mid-teens right now. So what kind of changed on Teradyne's outlook for 2025? And then I have a follow-up.

Sure, it's Sanjay here. Yes, at the midpoint of our guidance, it's 15%, or the midpoint of our estimation, which may vary slightly. Over the last 90 days, our perspective on the market has shifted, particularly from Q4, and our growth expectation for Robotics has decreased to about 10% year-over-year. However, our outlook on Semi Test has actually improved over the past 90 days. We observed an increase in business leading into Q4 of '24, but we've kept our plans relatively consistent. So, over a five-quarter period, it has been strengthened, which gives us confidence for Semi Test this year. The other product test businesses are generally in line with our expectations.

Got it. And then as a follow-up, thanks for the color. You kind of spoke about how your SOC Compute revenue has been growing from 11% to 34% last year. I'm curious where do you think it could end up being this year in the context of your $4.9 billion SOC TAM? If you can just give some color on how much of that is Compute, how much is Mobile, and what percentage SOC revenue you could get from both compute and mobile this year?

I believe Compute will become one of our fastest-growing segments and will increase its share of the overall SOC revenue. We also see the total addressable market for Compute expanding. We're tracking this closely and observe continued strength in VIPs. According to Greg, the total addressable market for Compute VIPs is projected to be $300 million in 2024 and around $600 million by 2026. As expected, we anticipate growth in 2025, and we are on track for that in Compute. From a Mobile perspective, we expect it to continue to experience slight growth in line with 2025, similar to 2024. Additionally, we foresee growth in both the Auto and Industrial sectors alongside our business growth. In summary, we anticipate stronger growth in Compute and its total addressable market, as well as growth from our shipments, while mobility remains stable to slightly increasing.

My first question is about the VIP business. Looking ahead to the growth prospects in 2025 and 2026, could you discuss the diversity of your customer base in that area? Is the anticipated growth primarily coming from existing customers, or do you expect to introduce new products or attract new customers in 2025 and 2026, particularly in the VIP business and AI Compute sectors?

Yes. So it's Greg. The VIP business is pretty concentrated. I mean there are very few companies that have the scale necessary to pay for a 2-nanometer ASIC accelerator. So this is definitely going to be lumpy. If you look at our 2025 business, we are expecting a robust ramp of the existing customers that we have. And we're expecting between '25 and into '26 that we'll be adding one or two logos to the customers that we have. But like if you're trying to get an understanding for this, this is always going to be a situation where it's like very big single sockets that drive a lot of capacity adds, not a broad-based thing.

Yes, that makes total sense. As a follow-up on HBM testing, you mentioned digestion in 2025 and a potential recovery in 2026. Is that perspective primarily driven by customer forecasts? Are you making internal assumptions regarding HBM bit growth and technology evolution? Is it a combination of factors? I'm interested in how you developed your outlook for 2025 and 2026.

We have strong relationships with most major memory producers, and our insights are largely grounded in discussions with them and their advanced capital planning. There is currently a significant amount of capacity that is suitable for HBM3E that still needs to be utilized. The timing of the shift to HBM4 is a critical variable in our model. If the transition occurs as expected, it could enhance the total addressable market. Conversely, if the transition is delayed, it could weaken that market further. At this point, we are relying on our best understanding based on feedback from our customers regarding when this transition may take place.

And when you say in time, do you mean the first half of 2026? I just wanted to clarify.

Yes. The real question is whether people are certain that HBM4 will enter volume production in early 2026. There is definitely customer interest in achieving larger volumes of HBM4 in the latter half of 2025. If the schedules allow for that, it would bring the capacity needs into 2025 from 2026.

I guess for the first one, the seasonality between the first half and the second half that you're indicating this year is definitely more second-half skewed than sort of the last couple of years. And that brings into sort of the question in terms of you're talking about the second half recovery in some of these markets like Mobile and then Auto Industrial. How are you sort of derisking that second half when we think about upside, downside risk, particularly given your visibility, how should we think about sort of that first half versus second half improvement and sort of upside downside risk around it? And I have a follow-up.

Yes. It's Sanjay. So that's right. As we have the visibility into Q1 or the first half, second half, I'd say we're in an environment where we see the upgrades that have occurred that we've talked about to underutilized capacity, we see that as coming to an end sometime of these upgrades, really getting to really high levels of utilization first half-ish. And while there'll still be probably some minor upgrades, we see capacity tightening. You can see that with the VLSI reports as well as how when we go and count the testers and utilization and our methodology of getting there. So we see a tailwind as utilization tightens. The second thing is that we do have a pipeline as we think about the customers we're engaging that gives us confidence in the second half. And in the second half, it's broad-based. I'd say more focused around Compute as well as Auto and Industrial from a Semi Test perspective and then also tied to the end market recovery. And as Greg noted, end market recovering in Industrial Automation as well.

Going back to the VIP ASIC total addressable market, you mentioned some points in response to the last question regarding the logos you anticipate. Specifically, there seems to be a greater concern among investors about your capacity to maintain the 50% market share that you've discussed. Looking ahead to 2025 and 2026, do you have good visibility on sustaining that 50% share? Will it mainly rely on continuing relationships with your existing customers, or how does your pipeline appear in terms of new business opportunities, whether with current clients or new clients, to support that confidence in retaining the 50% share?

Yes. This is Greg. I'll take that one. So we believe that we have the best product for these leading-edge devices. But one of the critical factors in ATE selection is the installed base of tools and training and everything else that you have around the platform that you're using. So Teradyne's traditional low share in the compute space has a lot to do with the way the market was shaped for the last ten years. The success that we're having in VIPs is that with these new devices and the use of these design service providers like a Broadcom or a Marvell or a Samsung, Alchip, GUC that we have excellent relationships with these customers and we are able to demonstrate the differentiation of our product. And we think that people are getting a good result by using our product and they're choosing our product for that reason. So from a product differentiation perspective, we think we have the right recipe in order to maintain that share. We think that we have the right customer relationships to be able to do that. And we believe that we have the right relationships with the hyperscalers themselves to try and add the logos that we need. So we're pretty confident that we're going to be able to keep going at this 50% level.

So first one, Compute TAM grew 57% last year but you're expecting it to grow only 5% in '25. I'm curious what is causing that slowdown? And then versus the, I think, $300 million in VIP last year, what is the VIP TAM for '25?

In terms of Compute growth, you can view this situation similarly to HBM. The end market for these products is expected to remain very active. However, the capital or test equipment needed to support the produced volumes doesn't necessarily align with that demand. Currently, many devices in this area are still navigating the experience curve and have extensive test times that could be shortened as parts mature. We believe this will limit the sequential growth in the compute sector. Thus, we see the main opportunity in compute coming from these new sockets introduced by the VIPs, rather than the traditional sector which tends to follow a year after introduction and experience curve patterns. There are factors influencing this growth—on one hand, substantial capital expenditures for data centers, and on the other, the improving efficiency in production of the devices.

Okay. But then how do we reconcile that with the strong, I think almost 30%-plus half-on-half growth that you are expecting this year driven by Compute? If the TAM is not growing, then how can one depend on that to grow much more than what Teradyne's normal seasonality has been half-on-half in the second half?

Yes. It's going to have a reasonable increase.

But I think that the logic behind that is related to this new part introduction that if you're introducing new parts, you need capacity to support that. If you are increasing volume on parts that are already in production, then that's affected by the experience curve.

And then, Vivek, you had a question on VIP TAM?

The VIP part of the TAM. I think the $300 million. What is it this year in '25?

Yes. What we've said in our prepared remarks that it's $300 million and then growing to what we expect to be in 2026, centered around $600 million. You should expect that, that's going to grow on a trend line. It has a range. But if you think about a $400 million to $500 million, maybe biased towards the higher end of the range for 2025 is how you should think about it.

Sorry if I missed this, but I know there was some movement around certain revenue streams in different categories. What was the size of the SOC test market in 2024? Additionally, if no one has asked yet, can you break down how the $4.9 billion total addressable market for 2025 is distributed across Compute, Mobile, etc.?

Sure. In '24, I believe we have a slide in the backup but Compute is $2.2 billion, Mobile is $0.8 billion. Auto and Industrial is $0.9 billion, service is $0.7 billion and $4.6 billion SOC TAM in '24. And then if you go to '25, you've got $2.3 billion in Compute, Mobile at $0.9 billion, Auto and Industrial at $1 billion, and service at $0.7 billion to get us to the $4.9 billion at the midpoint.

Got it. That's helpful. You touched on this a little bit, but can you provide more clarity on the current Semiconductor Test cell utilization rates compared to a year ago to help us understand how close we are to bridging that gap?

Yes. We've previously mentioned that we are cautious about the absolute accuracy of utilization figures. We generally focus on the changes from quarter to quarter. I can say that utilization has increased as we moved through 2024, with a more significant rise at the end of the year compared to earlier. This improvement is primarily due to the upgrades we introduced during the year, which transformed previously idle testers into actively used ones. There was roughly a one-quarter delay from when these upgrades were shipped to when our customers began utilizing them. Overall, we anticipate about a 10% year-on-year increase in utilization by the end of 2024 compared to the beginning of that year. Currently, we believe our business has shifted more toward system sales rather than upgrades, indicating that we have passed a critical point in this transition.

Okay. Maybe if I could just sneak in a Robotics question. Would you mind unpacking a little bit what you mean by consolidating the go-to-market? And also in 2025, does your kind of modest growth outlook suggest that you think the benchmark of the broader robotics industry is down something like 10% this year?

Yes. So the details of the consolidation is that we've combined the marketing functions, the sales functions, and the service functions of UR and MiR together so that we have one unified go-to-market organization. And that is the primary way that we are going to improve our interface to our partners and improve the interface to our largest customers. There's a lot of overlap in terms of our largest partners and our largest customers where they are customers of both UR and MiR. So it was an obvious place where we could make things simpler for them and also drive some efficiency for us. There's really no change in terms of the primary go-to-market growth vectors that we see for these groups. And that really is OEMs and for large customers. And so we're continuing to lean into those programs but now we're doing those across both product lines versus on an isolated basis. Now, could you remind me what your second question was in there?

Yes. I believe you mentioned before that you have set growth targets that aim to outperform the industry benchmark by about 10% to 15%. If you are projecting modest growth this year, does that suggest that the benchmark may be down around 10% this year?

Yes. I think everyone is trying to figure out what the recovery in Industrial Automation will look like. You're right that our goal is to grow faster than the traditional automation companies by about 20% per year, or perhaps more like 15% per year. We are probably looking at a 5% decline, while we aim to perform better than that. If the automation market remains flat, we would likely see growth around 20%. If it's down to around 15% growth or a 5% decline, then we would achieve roughly 10% growth.

So I understand the importance of giving investors long-term forecast of the 2028 model but I just wanted to better understand what are the kind of more finer details behind the revenue assumptions for that model and sort of how far your visibility extends? The context of this question is that since 2022, it appears as though you are continuing to set up a little bit of a higher bar for your business.

Yes, this is Sanjay. As we stated in our prepared remarks, we anticipate overall revenue growth of 12% to 18%. Specifically, we expect Test revenues to grow between 12% and 17%, while Robotics is projected to grow between 18% and 24%. Focusing on Robotics, there are several key drivers contributing to this growth, including AI-enabled market expansion, a strong emphasis on channel growth through OEMs and large accounts, and the introduction of new products. We believe we are operating within a market that is less than 5% penetrated. Although the market has faced significant challenges in recent years, as noted by Greg, we are optimistic that our development of advanced solutions with AI capabilities will help us tap into new segments. We are confident that we need the market to rebound, and we have incorporated this expectation into our model. Regarding Test, we approach the Total Addressable Market (TAM) analysis carefully. We examine various segments like Compute and assess aspects such as AI Compute or high-performance computing in networking, alongside industry forecasts and insights from our customers related to custom ASICs. Our analysis is both top-down and bottom-up, considering high-level drivers. Greg pointed out that the increased silicon content for electric vehicles is a significant factor, especially in the rapid growth of hybrid and electric vehicles.

Yes. One bit of color in terms of the Semi Test growth. I think one way that you should think about it is that there was this incredible inflection in 2024 for the Memory market. So the Memory market like really bumped up in 2024. So if you're looking at 2024 to 2028 growth rates, we think that the Memory market has already sort of built in some of the growth of that longer period. So we're expecting sort of a lower incremental TAM growth in the Memory market going out to 2028 and a more linear model of growth rate for the SOC TAM through that period.

And maybe I'll add one more point on share. In the Compute space, as we see the market shift to more custom ASICs, we also see share gain as we believe we're going to continue to win kind of 1 in 2 sockets. And then as the market recovers in Mobile as well as Auto and Industrial, markets that we've had traditionally higher share in, as those markets become a larger portion of the TAM relative to 2024 and those markets recover, we should inherently gain share in those markets.

Another aspect to consider while developing your perspective for 2028 is our belief that System Level Test will be a significant long-term growth opportunity. Adding these test insertions will be crucial to meet the quality standards our customers expect. Consequently, we anticipate that this will contribute to the test group's projected growth of 12% to 17%, with a portion of that growth driven by System Level Test initiatives.

Got it. Thank you very much.

Thank you again for joining us this morning. We hope that many of you will be able to join us for our Analyst Day on March 11. Until then, we look forward to speaking with you soon. Bye.