Teradyne Inc (TER) — Q2 2025 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; and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details on our performance for the second quarter of 2025 and our outlook for the third quarter of 2025. The press release containing our second quarter results was issued last evening. The slides as well as a copy of this earnings script are on the Investor page of the Teradyne website. 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 differ materially from management's current expectations. We caution listeners not to place undue reliance on any forward-looking statements 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 ending December 31, 2024, on file with the SEC. Additionally, these forward-looking statements are made only as of today, and we do not undertake any obligation to update forward-looking statements to reflect subsequent events or circumstances, except to the extent required by law. 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, where available on the Investor page of our website. Looking ahead, between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused Investor Conferences hosted by Evercore, KeyBanc, Citigroup, and Goldman Sachs. Our quiet period will begin at the close of business on September 19, 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. Good morning, everyone, and thanks for joining us. Today, I'll discuss our second quarter results and provide an update on what we're seeing across our businesses. Sanjay will then provide more detail on our second quarter results and third quarter guidance. Through the second quarter, end market trends noted in prior quarters were generally consistent with a strengthening second half. Strength in AI compute is more than offsetting lower demand in auto and industrial end markets. Pockets of improvement in mobile are driven more by customer-specific dynamics than an uptick in the end market demand. Visibility is starting to improve. In terms of capacity utilization, we believe that we have turned the corner towards more new system sales rather than selling upgrades of existing idle mobile capacity for new compute and mobile applications. Demand is strengthening in AI compute, and we are seeing a broadening of opportunities where Teradyne and especially the UltraFLEXplus is getting strong consideration in areas where we have not historically had a seat at the table. While new program ramps and new test insertions can drive a lumpy order pattern, we are optimistic about the opportunities on our horizon. In the second half of 2025, we expect AI compute to be the dominant driver of our SOC business. The long-term themes we've discussed, AI, verticalization, and electrification remain intact with AI and verticalization emerging as the primary growth drivers in the near term. Our Q2 results reflect the evolving composition of our business. In the past, the typical seasonality in our revenue was heavily driven by consumer mobile demand. This has now been superseded by the waves of demand driven by specific customer program ramps in AI compute. These have no correlation to consumer holiday buying patterns. In the second quarter, we delivered revenue, gross margins, and earnings per share above the midpoint of our guidance ranges. Semi Test, specifically SOC for AI compute, drove results above our expectations. End demand trends in mobile persist, but we saw pockets of customer-specific strength in RF and mobile power in the quarter. In the industrial and automotive end markets, demand has stabilized at a low level. As expected in Q2, Memory revenue was lower quarter-on-quarter due to the timing of shipments and is expected to snap back in the second half. In the quarter, our Memory business unit secured an important HBM4 post-stack singulated die win. HBM suppliers are adding test coverage to improve device quality. Some suppliers are adding a test insertion for HBM singulated stacks. And while this new insertion is not yet pervasive across the broader industry, we believe that it is an important growth driver for the Memory TAM in the future. This win builds on momentum from the HBM4 post-stack wafer test win in Q1 for our Memory business unit. As we discussed in our Analyst Day, there are four elements to growth in our IST business: accelerated bit growth in HDD, share growth and recovery in the mobile SLT market, emerging SLT for AI accelerators, and solid-state disk drives. In Q2, IST revenue more than doubled compared to the same period last year, mainly driven by HDD and mobile. All of the businesses within our product test group delivered second quarter results generally in line with our expectations and up year-on-year. In the quarter, we closed the acquisition of Quantifi Photonics, accelerating an important element of our strategy to gain share in AI compute by establishing a leadership position in silicon photonics test. In Robotics, recall that we executed a structural reorganization that consolidated the customer-facing sales, marketing, and service organizations of UR and MiR in the first quarter of 2025. In Q2, this new organization delivered 9% quarter-on-quarter growth despite persistent difficult market conditions, and we continue to optimize our OpEx envelope to respond. In the second quarter, as part of our pivot to large customers, we secured a plan of record decision from a large customer. This is not expected to have a material impact on Robotics revenue in 2025, but is expected to be a significant growth driver later in 2026. In support of this opportunity and others, the team plans to open a manufacturing operation in the United States to best serve customers in this region. Moving on to Q3. As we progress through the third quarter, we are gaining confidence in AI compute-related revenue inflecting in the second half of the year, driven by both SOC and Memory. We are less certain of the quarterly timing of shipments between Q3 and Q4 and then between Q4 and Q1 due to customer schedules. That said, we expect the relative size of AI compute in our SOC and Memory business to represent the majority of our semi test revenue in the second half. Our expectations for mobile are modest in the third quarter and the second half generally, expecting that the bulk of the demand we'd see for the year has been satisfied in the first half. Growth in the mobile segment is coupled to the ramp of 2-nanometer gate-all-around and the expectation of more compelling AI applications in the generation of smartphones coming in the back half of 2026. In the auto and industrial end markets, our end customers remain cautious about significant capacity adds, but we do not expect test equipment order patterns to deteriorate further. There are areas within this end market that are showing strength like the power semiconductors for data center build-outs, and we believe that the long-term trend towards electrification will drive growth beyond 2025. Overall, we feel good about where we're headed in the third quarter and the second half of the year. We are significantly more confident than we were 90 days ago. Demand trends in AI compute have strengthened and forecasts are materializing into orders. Utilization rates have improved considerably, leading to an increase in UltraFLEXplus system orders. With the work that we have done to increase the resilience of our supply chain and dual-source our manufacturing, we are in a position to effectively scale volume with increased demand and provide timely delivery of our testers to fast-moving customers. I want to emphasize that we are opening these new opportunities because of the scalability of our newest systems, our capabilities in silicon photonics, our parallelism, and higher throughput that lowers the cost of test for our customers. And with that, I'll turn the call over to Sanjay.

Thank you, Greg. Good morning, everyone. Today, I'll cover the financial summary of Q2 and provide our Q3 outlook. Now to Q2. Second quarter sales were $652 million and non-GAAP EPS was $0.57, both above the midpoint of our guidance ranges. Non-GAAP gross margins were 57.3%, consistent with our guidance range. Non-GAAP operating expenses were $275 million, up year-over-year as we have increased our R&D investments and targeted opportunities to drive longer-term growth. OpEx came in flattish sequentially as we continue to practice disciplined spending controls. Non-GAAP operating profit was 15.1%. Turning to our revenue breakdown in Q2. Semi test revenue for the quarter was $492 million with SOC revenue contributing $397 million. Memory, $61 million; and IST, $34 million. Strength in SOC was driven by mobile upgrades. AI compute growth exceeded our plan. Expected Memory revenue was considerably lower sequentially and year-over-year due to the timing of customer deliveries, which is expected to be back half weighted this year. In the first half of this year, customers have been digesting the HBM test equipment delivered in 2024. We expect DRAM to dominate the Memory mix in 2025, just as it did in 2024. IST revenue of $34 million was up both sequentially and year-over-year, driven by mobile SLT and HDD testers. In product test, Q2 revenue was $85 million, up 7% year-over-year with all business units within product test up year-over-year. As Greg noted, we closed the acquisition of Quantifi Photonics in the quarter as its results are included in this segment. Now to Robotics. Revenue was $75 million, up quarter-over-quarter, but down year-over-year. In the quarter, UR contributed $63 million and MiR contributed $12 million. While the long-term drivers of AI and onshoring and advanced robotics remain intact, near-term macro factors continue to be a headwind. Our second quarter operating results were better than our first quarter, and we expect the second half of the year to be better than the first half. Despite this, due to the weak end market, we had lower volumes yielding a lower gross margin. We expect the weak market to persist and do not expect robotics to break even this year. Some other financial information in Q2. We had one customer that directly or indirectly drove more than 10% of our revenue in the second quarter. The tax rate, excluding discrete items for the quarter, was 13.5% on a GAAP and non-GAAP basis. At a company level, our free cash flow was $132 million, primarily driven by improvements in net working capital in the quarter. We repurchased $117 million of shares in the quarter and paid $19 million in dividends. In the first half, we returned $316 million or 138% of our free cash flow through dividends and buybacks to shareholders. We ended the quarter with $489 million in cash and marketable securities. Now turning to Q3. Q3 sales are expected to be between $710 million and $770 million. Third quarter gross margins are expected to be at 56.5% to 57.5%. Q3 OpEx is expected to run at 36.5% to 38.5% of third quarter sales. The non-GAAP operating profit rate at the midpoint of our third quarter guidance is 19.5%. The Q3 tax rate is expected to be 16.3% on a GAAP and non-GAAP basis. The increase in rate is driven by the impact of the new tax legislation, which goes into effect in Q3. Hence, the year-to-date catch-up is included in Q3. The full year tax rate is expected to be 14.5%. Q3 non-GAAP EPS is expected to be in a range of $0.69 to $0.87 on 158 million diluted shares. GAAP EPS is expected to be in the range of $0.62 to $0.80. In terms of guidance, we will continue to guide one quarter at a time. Summing up, we delivered sales and earnings above the midpoint of our guide. We feel more confident in our near-term outlook than we did 90 days ago. Looking ahead, our visibility is improving, driven by demand in artificial intelligence in both SOC and Memory. The second half of the year is shaping up to be stronger than the first half as we expected earlier in the year. Our multiyear investments in testing artificial intelligence are beginning to deliver new opportunities and accelerating top line growth. We are confident in the long-term growth drivers of AI, electrification, and verticalization trends that will drive our business in the coming years. With that, I'll turn the call back to the operator to open the line up for questions.

I guess first question, your tone on your outlook, clearly much more positive versus 3 months ago. And curious, is that a reflection of a pickup in business that you're seeing today in the second half? And is there any way to sort of frame whether growth continues into Q4? And then perhaps more importantly, is it also related to new design wins that give you confidence beyond 2025?

Yes, the confidence is certainly tied to an increase in demand, particularly in AI compute for both SOC and Memory. We expect this to be the main factor behind our Q3 guidance, and it fuels our optimism for the entire year. As I mentioned earlier, many of the programs we've invested in are ramping up later this year. This creates some uncertainty regarding the demand split between Q4 and Q1. We know the demand exists, but the precise timing is unclear. Regarding your question about the second half of this year being connected to new wins or existing programs, I would say that many of the developments we anticipate in the latter half of '25 are actually results of wins that we secured primarily in '24. In both Memory and SOC, there are customer wins from '24 or early '25 that are starting to ramp up. We also have additional opportunities in the pipeline that we hope to finalize before the year ends, but we believe those will have a more significant impact in '26 than in '25.

Very helpful. And then I guess a follow-up to that. As you look to 2026, is there a framework for thinking about AI contributions to you and segmenting between custom silicon, networking, HBM and other?

Looking ahead to 2026, we have not analyzed how that demand will be segmented. Generally, we expect a similar distribution in the Memory market as we see now, with around 85% to 95% of the Memory market being driven by DRAM, primarily fueled by cloud compute AI applications. In the SOC market, we've experienced significant strength this year in both VIP compute and networking segments, and we anticipate that this trend will continue into 2026. We are optimistic about the potential to increase compute revenue from merchant suppliers, but this remains an opportunity rather than a guarantee at this point.

So Greg, regarding the Robotics business, you mentioned a plan of record opportunity and the opening of a manufacturing facility in the U.S. Given the challenges the business has faced, it seems you must be optimistic about the potential of that opportunity. I believe this customer has shared some details on their website. Could you help us understand the scale of this opportunity and when it might begin to impact your business? You indicated it could be a significant growth driver for next year. Any insights on this would be appreciated.

Yes. The opportunity for us primarily lies in the U.S. and North America, although it may extend to other regions. We are effectively serving the European market from our manufacturing in Denmark. I want to underline that larger customers we are targeting require supply chain resilience, meaning they prefer companies with multiple production facilities to ensure they receive their materials consistently. Therefore, having geographic diversity in our operations is a key aspect of our strategy for major customers. Regarding this specific opportunity, the solutions are mostly developed, but there is significant new product introduction work planned for 2025. Consequently, the demand from this opportunity will not significantly impact our robotics results in 2025. However, in 2026, I cannot provide an exact figure, but it will constitute a significant portion of the UR business, which is the majority of our Robotics segment. It certainly has the potential to be a major contributor in 2026, though I can't specify a precise number.

Okay. Great. I know you're not particularly enthusiastic about the mobile opportunities this year, but it looks like your major mobile customer is transitioning to a new package next year. What do you think the impact will be on test times? It seems that as transistor density increases, test times are likely to rise as well. While you recorded some modem test orders this year, does that give you any hope for the mobile market and your large customer next year? I realize you haven't been very optimistic lately, but could you share your thoughts on that?

Yes. We've discussed the factors driving demand in the mobile sector, including unit volume, device complexity, and yield efficiency. The introduction of 2-nanometer gate-all-around technology will significantly increase transistor count and complexity. Additionally, packaging methods and memory bandwidth contribute to this complexity. For example, wider buses between the processor and memory require more testing resources per device, which means fewer devices can be tested simultaneously. This complexity is expected to be reflected in our model. Looking ahead to 2026, we anticipate a possible shift in transistor complexity and advancements in memory technologies and packaging, making us optimistic about improvements in the mobile segment next year. However, it's important to note that mobile will represent a smaller portion of our overall portfolio in 2026 due to the strong performance in the compute sector. Thus, if mobile expands, it will be part of a more balanced mix compared to previous years.

Greg, I just want to follow up to the last statement that you made. And I'm looking at the trend. And to me, 2026 could be an inflection point in both mobile catalyzed by 2-nanometer and increased complexities as well as Teradyne's ability in scaling AI and then the robotics, which is a second derivative beneficiary of AI, from AI to IA. And I'm not asking for a guide. We all understand that you have a 2028 EPS target. But if all of these inflection points were to start happening in '26, we could see the mix changing and we could see finally a strategy coming together. Am I thinking about this the right way? And I have a follow-up.

Yes, I appreciate your optimism. Our strategy focuses on driving growth across all of our business segments, including semiconductor testing, computing, automotive, industrial, mobile, and memory. We believe each of these areas is positioned for growth in the midterm. Some markets are experiencing significant growth, while others are set to recover cyclically. We expect our IST business to grow due to the increasing demand for HDDs, the rise of SSDs, the necessity of SLT for AI accelerators, and our gaining market share in mobile. Our product test group is also positioned for midterm growth across all units, particularly with the addition of Quantifi Photonics, which we anticipate will perform strongly. In robotics, we are shifting towards higher-growth segments and adapting our organization to effectively cater to large customers and secure their business. Therefore, our plan demonstrates resilience, with the combined strength of our parts being greater than the whole. However, there is uncertainty regarding the pace of this growth.

That's fair. And more of a near term, last night, one of your key HDD customer guided to almost a doubling in CapEx. How should we think about the system-level test? And if there is an uptick in HDD test catalyzed by a new technology HAMR, is this going to be an immediate impact? Or is it going to take some time for you to actually see it?

I think it will take some time. In that market, the testers we manufacture have a relatively long lead time because they are built to order, and installation takes a while. Therefore, we won't be able to produce 100 of these in a single quarter. However, we expect demand to strengthen through 2026. It's important to note that there is significant idle capacity in the HDD market, which is being filled more by increased test time for drives than by the volume of drives produced. We are optimistic about the transition to HAMR and similar technologies from other HDD manufacturers, as these drives require longer testing and configuration processes. Overall, we anticipate strengthening through 2026, but the growth will not be as rapid as the earlier increase in capital budgets for the player.

For the first question, Greg, could you help quantify the size of your AI compute business in Q2? If your SOC was about $400 million, how large is the AI compute sector? Can you also break that down between compute and networking? You mentioned new opportunities; I assume that relates to the potential for involvement in GPU testing. What needs to occur for you to gain more confidence in this? If it materializes, will it be a contributor in 2026 or 2027? Additionally, can you provide clarity on the GPU timeline—will it be in 2026 or 2027?

Let's address those questions in reverse order. I'll start with the GPU-related inquiry and then pass it to Sanjay for the Q2 breakdown. To gain market share in the merchant compute space, we need to demonstrate that our testing capabilities are on par with others, ensuring our quality is comparable and that we offer superior value. We are confident that we are on the right path to achieve this. If successful, we anticipate a modest positive impact in 2026, with potential for growth over time. When working with clients that adopt a dual vendor strategy, they typically will need to maintain purchases from their previous sole source while gradually increasing the number of devices tested on our new platform. The positive aspect is that this approach allows us to compete equally for new devices, and we believe our product stands out in the market. We are optimistic about future developments, but it's crucial to acknowledge that shifting test strategies for clients of this scale requires time.

And then on the first question, in round numbers, the compute was as part of SOC was roughly about 20% and it was a key driver of growth in Q2 versus expectations. And as Greg noted prior, we're seeing significant traction in the back half of the year where compute, and I'll add memory in there, is going to be the majority of the revenue in semi test.

Got it. And for my follow-up, Sanjay, how much did Quantifi Photonics contribute to Q2, if any? And how much are you assuming in Q3? I assume you include this in AI compute. And I know you're not giving a specific number for Q4, but based on everything you are suggesting, is it reasonable to assume that Q4 perhaps grow sequentially and year-on-year to give Teradyne at least some modest top line growth overall for '25?

Sure. So just Quantifi Photonics, which we closed on May 30, is actually in the product test group. We're not breaking those numbers out, but we've had it for about a month of the results. Regarding the growth in compute, we're not providing a Q4. But generally speaking, yes, we are seeing incremental growth. As Greg noted in his prepared remarks, we're seeing program launches toggle or straddle between Q3 and Q4 as well as Q4 and Q1. But it's our expectation that there will be significant growth Q3 over Q2 and then Q4 over Q3 as well in compute.

And just also, I think what you said in terms of significant growth for Q4 year-over-year I think that's right. I think that definitely this Q4 is going to be stronger than 2024's Q4.

Sorry, I meant overall for the company, not just the compute side, like an overall Teradyne sales in Q4?

Yes, that was what I meant as well.

Could you share your thoughts on the trends you mentioned regarding mobile SOC and when we might see a recovery? Do you believe that this recovery is likely to start meaningfully around the middle of 2026 as you get ready for the upcoming product ramps, or could it happen a bit sooner?

Well, the typical mobile pattern is capacity adds in Q2 and Q3. That is not a hard and fast rule, and it has a lot to do with sort of the loading of testers through the year. So if there is sufficient capacity, then we'd see the demand drifting towards the second half of the year versus being in the early half of the year. We'll be able to give you more color about that kind of early in 2026 as we get more firm forecasts about the demand. But right now, I think it's definitely more of a second half thing than a first half thing.

And then as a follow-up, can you maybe just kind of talk about as you continue to ramp the compute SOC business in the back half of this year, is there any impact on the gross margin line, either positive or negative in terms of the mix of that business contribution above and beyond just the absorption piece?

Yes. So I think overall, as volume scales up, we'll generally get some efficiencies. But I will remind you that, as you recall, our product margins are really driven by tester configurations. And we operate the business model at the overall portfolio about 59%, 60%. And we do expect that we'll continue to operate in that level.

Maybe just going back to the opportunity on the GPU front that you're looking to execute on and totally understand you're saying it is more modest in 2026 if you're successful and ramps up over time. In the past, you've quantified the VIP ASIC compute TAM for us, $300 million going to $800 million. How should we think about the size of the test equipment market when it comes to GPUs? I think you've historically excluded that because you didn't have a seat at the table, but how should we think of the magnitude of that opportunity, which can sort of translate over time? And I have a follow-up.

In the merchant AI accelerator space, GPUs represent a significant portion of the total addressable market for computing. Looking ahead to 2024, we estimated around $2.3 billion in computing opportunities. Progressing into merchant compute puts us in a substantial market, likely around twice the size of the VIP compute as we move into the later parts of the term, possibly even more. Capturing a share of this market will have a positive impact.

Got it. And then maybe for the follow-up, for the large customer that you have the plan of record on the robotics business, I know you said this year, robotics, you expect it to not be breakeven, but is that embedding some of the cost related to supporting sort of the product-related expenses for this new program? And does that give you better leverage on the operating line on the robotics segment as you go and sort of get that revenue next year? Just trying to understand when the expenses related to supporting that program are largely expected to hit? Is it this year or next year?

So yes, as I said, the revenue impact is going to be positive in 2026. There are some expenses that we're taking in 2025, mostly associated with establishing manufacturing in the U.S. That is not specifically for one customer, but certainly we will see benefits from being able to do that manufacturing in the U.S. for that and other opportunities. So the term leverage is good that as our robotics volumes increase, since we are internally manufacturing most of robotics, we will be able to absorb our fixed costs associated with operations as our volumes go up, and we would expect to see that absorption having a positive effect on gross margins. So we'll have to see how that develops, but there's definitely a few of the expenses that are going to come in, in the second half of this year.

Greg, you talked about HBM memory snapback in second half. In the past, you guys have been of the view that the TAM is more flat this year because of higher productivity of your testers. So what has changed? Are you more optimistic on new HBM qualifications in Korea? Or is it HBM4 that's driving the improved outlook?

To clarify, our perspective on how the memory market is developing for 2025 remains largely unchanged. When I mentioned the snapback, I was referring specifically to the timing of quarterly revenue. This quarter, we experienced a low in memory revenue at $63 million. We anticipate that the overall total addressable market for memory is stable, with the primary demand for high bandwidth memory expected in the fourth quarter of this year. There is some uncertainty regarding the ramp timing between the fourth quarter of this year and the first quarter of next year, particularly for HBM4, as it is designed for specific devices. Unlike DDR, which is more of a commodity across various designs, HBM has a close relationship with particular AI accelerators and different generations of HBM. This will be the key driver for capacity ramps. Consequently, I believe that the majority of capacity demand in 2025 will focus on increasing capacity for HBM4.

Understand. And then in response to an earlier question, you mentioned that complexity is going to be a friend on the mobile side as the packaging moves from integrated fan-out to wafer-level multichip modules. There's also a discussion going on, on substrate less packaging for new AI chips in the next 2 to 3 years. And I was hoping that you can kind of pull the curtain a little bit on your optimism around the merchant GPUs. Is that packaging technology the driver where you feel like you can insert your testers?

No, I think that in general, changes in packaging strategy are driving our customers to invest more in wafer level testing of their devices to reduce fallout later on. However, the opportunities we have to compete in new areas of computing are more about these customers wanting more resilience in their supply chains and the ability to leverage the unique technology that each tester company offers. The opportunity does not rely on new technology or the introduction of a new device generation; it is primarily centered around operational strategies for these companies.

I had two questions. First, regarding the GPU test win, did having the networking business assist with the GPU side, or was it more about a direct comparison and value proposition against your competitor? Also, how should we consider potential share gains on the ASIC side, especially since your competitor has been a long-standing test supplier?

First of all, we haven't achieved a win yet. To clarify, we have an opportunity to compete in market areas that were previously unavailable to us. Serving a customer in a different segment helps establish our reputation and lets us compete in other areas of that customer's business. We believe that our reputation with Teradyne's customers is advantageous for us. It opens doors and allows us to showcase our equipment and team capabilities. I won't go into specifics about any particular customer. Regarding our share in the ASIC market, it is becoming increasingly complex, especially for VIP compute. Initially, when the VIPs or hyperscalers were in their first generation of products, they primarily followed the recommendations of their design aggregators on how to test their parts. As their volumes and internal expertise have grown, they have begun taking more control over their testing and operational strategies. While we are working hard to increase our share with design aggregators, most of our focus is on the key players—the foundries and OSATs—demonstrating that we offer a superior platform that can enhance their profit margins. Additionally, we’re targeting the specifications by the hyperscalers and VIPs, convincing them that they can bring their products to market more quickly and efficiently on our platform compared to competitors. The influence initially came from the middle of the market, but we believe it is shifting towards the ends.

Got it. Very helpful, Greg. And then just a follow-up on the robotics win, is there a way to size it in terms of the number of units you'll be shipping either in 2026 or longer term? And also, are you just providing the arm or even some of the bells and whistles like the grippers, vision, et cetera, for this big robotics win?

I can't provide exact numbers regarding units at this time. As we progress further into the program, we might be able to share more details. However, for now, we will need to wait and see. Many factors influence this situation, including how quickly and effectively the technology can be rolled out across numerous locations for this customer. Therefore, I am hesitant to provide a specific figure. Some analyses have been conducted that seem to use appropriate methodologies, but they come with significant error margins. To address your other question, we are supplying the arm. In terms of deliverable hardware, it mainly consists of the arm and the robotic software platform. Additional software and end-of-arm tooling, such as vision systems, are being developed by the customer. Thus, our focus is primarily on the arms and the associated support and service.

A question or two. Greg, maybe just to kind of frame and contextualize some of this. Taking a step back, how are you sizing the overall compute TAM this year and also a subsegment of that, the VIP SAM, again, inclusive of those AI-related ASICs and GPUs. I think in the past, earlier this year, you referenced sort of a $2.3 billion for the compute market, $400 million for VIP. I know those numbers have probably upticked since then. Can you maybe sort of provide some color? And also, do you expect to perform at sort of a 50% share of that VIP SAM?

As I mentioned, much of the VIP compute is typically purchased in the fourth quarter and carries over into the first quarter. Therefore, predicting the VIP total addressable market for 2025 is quite challenging. I concur that there is likely upward pressure, suggesting some potential growth beyond last year's $400 million. Regarding the compute total addressable market from last year, I think we can anticipate notable growth this year, particularly in the merchant GPU sector, where it's evident that the market will exceed previous estimates. However, we are not providing a specific estimate for the total addressable market at this time.

Got it. I guess on one hand, does that provide some sense that networking is a very big component in some of this improvement as well as on the memory side in terms of some recovery or pickup on the HBM4 test and new test insertion activity?

Yes. Networking is an important part of our compute revenue in 2025, certainly. And it has strengthened from where we expected at the beginning of the year.

Got it. Okay. That's helpful. And then just kind of lastly, for the follow-up. Would you attribute any of the uptick in test utilization rates to any pull forward of supply chain activity?

No. The earlier demand has been reflected in some of our customers' results, but those customers were accelerating demand in a situation where they were able to increase utilization instead of significantly expanding capacity. So I don't believe it has had a significant impact on us.

I just want to clarify on the GPU customer question from earlier. You said you don't have the win yet, but the tone from the call has been that you're very confident that you will. Could you just level set on whether these wins beyond networking are looking concrete? Or are we still kind of in discussion with that customer?

I can't really assign probabilities to it. However, I believe we have strong support from our customers in the areas where we are competing, as they are eager to implement strategies that enhance their supply chain resilience. When we commit to a goal, we usually achieve it, but I don't want to suggest that something is assured when it might not be. While I hope this information is valuable, we are moving forward with the intention of succeeding in these designs. Nonetheless, until we actually have the product in production, we must remain cautious about unforeseen challenges. Additionally, we've observed that the time required to complete the qualification process can vary significantly, making it difficult to predict timelines. Nevertheless, we are pleased to have the chance to compete for opportunities we haven't encountered in two decades. However, I can't promise that we will secure a win.

That's very helpful. And my follow-up is, so you spoke about VIP driving compute revenue this year. Could you just talk about the kind of customer breadth you're seeing there and just visibility towards further market share gains with those customers?

Well, one of the key trends that we identified was verticalization. And there aren't all that many gigantic hyperscalers in the world. And their importance in this space is kind of directly proportional to their capital spend on data centers. So it also has a great deal to do with the number and the number of chips that they're designing, the different chips that they're designing and the applications that they're going into. The real prizes in this space are the CPUs and the GPUs. The CPUs are the ones that are being developed by the hyperscalers, the VIPs in general, they're ARM-based and they have very high volume because they're pervasive across data centers. The AI accelerators are also very important to win because they have so much complexity, a lot of test intensity to them. So to answer your question directly, our VIP compute is driven by a few customers, not a single customer and certainly, it's like less than 6, more than 1.

Greg, you talked about the consolidation of customer-facing functions in robotics. Was that 9% growth primarily a function of that change? Or were those deals already in progress? Just trying to get a sense for how quickly that change can drive sustainable improvement in sales.

We were very pleased that robotics achieved quarter-on-quarter growth despite the significant restructuring. Typically, we see stronger performance in the second quarter compared to the first. My main point is that the restructuring was executed successfully and did not have a major negative impact on our second quarter results. Moving forward, we expect that the positive effects of this restructuring will enhance our sales and service offerings. By combining sales efforts, we will provide our partners with a wider range of products to sell and give our sellers a broader portfolio to represent. This is anticipated to positively influence our top line. Additionally, by merging service operations, we will deliver more consistent and improved service packages for customers purchasing both types of robots. We expect the benefits from this restructuring to manifest in 2026 rather than in 2025, as our main focus next year will be on new product introductions and securing large customer accounts that we aim to achieve in the latter half of the year. Overall, it was a significant change, and we are delighted with how smoothly it was implemented.

Got it. If this change leads to a significant improvement in robotics by 2026, along with the plans you've mentioned, could you share how you intend to develop your internal manufacturing capacity? Will you adapt your production to meet projected future demand, or will some of this production be outsourced to EMS companies? Additionally, what sales level are you aiming to reach with this capacity?

We have a significant amount of production capacity. Our efforts in North America focus more on operational resilience and customer intimacy rather than just meeting immediate demand. In response to your question about internal operations versus EMS, our strategy in Europe and the U.S. revolves primarily around internal manufacturing. In the Asia-Pacific region, as we localize production, we will likely partner with local firms, as they can manage supply chains more effectively than we can. Therefore, we will adopt a blended strategy that incorporates both internal and outsourced manufacturing for robotics.

Just in terms of China, as the domestic Chinese semiconductor industry grows and you have more fabless and IDMs there, how is that impacting your business, particularly as it pertains to industrial and auto?

Currently, in the ATE market in China, some segments are unavailable to Teradyne due to trade regulations. Excluding those segments, the largest portion of the market consists of Chinese memory manufacturers, where we actually hold a higher market share compared to our global average. We perform very well in this area. In the rest of the SOC market in China, similar to other regions, we see competition in computing, mobile, and automotive and industrial sectors. We are competitive across all three markets. Most local ATE competition in China focuses on automotive and industrial applications. We face significant competition there, but we prioritize partnerships with higher volume and quality suppliers in these sectors, as they appreciate the throughput and accuracy of our equipment.

Got it. Super helpful. And then just in terms of robotics, 1 out of 2 robots in the planet is installed in China. The EV market is shifting to China and production. And I'm just wondering, again, is your SAM shrinking because of that transition to manufacturing in China of autos and a little bit of color on how competitive the Chinese manufacturers of robotics have or have not become?

There are several competitors in the cobot and AMR markets in China, and while they offer strong products, we believe ours are superior. They also have a strong understanding of customer needs in that region. Since 2018, the growth rate for the cobot market in China has been about twice that of the market outside China. We are focused on competing in China and ensuring we maintain and grow our market share, but it's a highly competitive landscape. Chinese automakers are producing excellent EV products and are growing more rapidly than those in other regions. However, I am uncertain if this trend will continue or if we will see shifts in the automotive industry in the U.S. and Europe that might alter this situation in the next few years.

I also have a question on the GPU space. After the Analyst Day, it seemed like your opportunities to break into GPU tests were based on a combination tester with silicon photonics and you closed your Quantifi acquisition. So I guess the first part of my question is, when can we expect a kind of a combo product that can do electrical and optical test? And the second part of the question is, it sounds like you also have another cut-in opportunity with the big GPU guy. And I'm wondering the key reason that why that is competitive-wise? Is it because you have twice the throughput? Or which would obviously make your economics much better than your competitor? Or why is there an earlier cut-in point besides silicon photonics, I guess, is really the question?

In response to your first question, Teradyne is currently providing an electro-optical test solution. Over the next 24 months, this solution will increasingly integrate more Quantifi Photonics instrumentation. We anticipate growth in that market segment and believe that having a leading solution will enable us to gain market share in the AI accelerator sector, including both merchant and VIP. Regarding the opportunity in GPUs, it primarily stems from customers seeking greater resilience in their supply chains. This need has led to our inclusion in the conversation. Moving forward, our success will depend on how distinct our product offerings are. We believe we have advantages in terms of throughput, reliability, and time to market. We need to demonstrate these advantages, as the extent to which we succeed will impact how quickly we can enter those accounts.

Okay, great. My second question is, could you elaborate a bit more? You mentioned another HBM win at the stack level and it seemed like you were describing another insertion point. Could you help us understand the current number of insertion points for HBM and how you operate in that space?

Sure. Thanks for allowing me to share my insights. Let me provide some context. An HBM memory stack consists of multiple DRAM dies, currently ranging from 8 to 12, along with a base die. Each of these memory dies and the base die undergo a wafer level test. After that testing, all the DRAM dies are diced and assembled onto the base die wafer. At this point, you have a wafer with several HBM stacks. The first test occurs at the wafer level, and the second test is performed after the HBM dies are stacked on the base die, which we refer to as the post-stack wafer test. Currently, the production process involves cutting the wafer of stacked dies, packaging it, and sending it off for assembly into an AI accelerator. However, once these AI accelerators are assembled, there is a notable yield fallout due to issues with the HBM. Therefore, efforts are being made to reduce the number of defective HBM stacks that are installed in these accelerators. The idea is that by conducting a test after slicing the HBM stack die wafer into individual HBM stacks, we can identify certain faults that were previously unnoticed.

So I just want to add a final thought. AI, as we talked about in our Analyst Day, we believe that AI was going to have a profound and positive impact on Teradyne's business. The investments that we've made in our SOC, memory, and IST businesses to align with AI trends are now delivering new opportunities, socket wins, and financial returns. We expect that the majority of our semi test revenue in the second half will be driven by AI applications, and it's clear that our momentum is building. I'd like to thank you very much for joining today.