Ladies and gentlemen thank you for standing by. And welcome to the Teradyne First Quarter 2020 Earnings Conference Call. At this time, all participant lines have been placed in a listen-only mode and later we will open the floor for your questions. [Operator Instructions]. Thank you.

It is now my pleasure to turn the call over to Andrew Blanchard to begin. Please go ahead sir..

Thank you, Maria and good morning everyone, and welcome to our discussion of Teradyne’s most recent financial results. I’m joined this morning by our CEO, Mark Jagiela; and the CFO, Sanjay Mehta.

Following our opening remarks, we’ll provide details of our performance for 2020's first quarter and full year along with our outlook for the second quarter of 2020. The press release containing our first quarter results was issued last evening.

We’re providing slides on the Investor page of the website that may be helpful to you in following the discussion. Replays of this call will be available via the same page after the call ends.

The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne’s results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statements contained in the earnings release as well as our most recent SEC filings.

Additionally, those forward-looking statements are made as of today and we take no obligation to update them as a result of developments occurring after this call. During today’s call, we’ll make reference to non-GAAP financial measures.

We have posted additional information concerning these non-GAAP financial measures including reconciliation to the most directly comparable GAAP financial measure were available on the Investor page of our website.

Also, please take special note of the Safe Harbor Statement in the press release and slide deck for risks related to the COVID-19 pandemic and potential changes to U.S. export regulations.

Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial focused investor conferences hosted by Wolfe Research, R.W. Baird, Bank of America, Cowen, UBS, and Stifel. Now, let’s get on with the rest of the agenda.

First, Mark will comment on our recent results and the market conditions including how we are responding to the COVID-19 pandemic. Sanjay will then offer some more details on our quarterly results, along with our guidance for the second quarter. We’ll then answer your questions. And this call is scheduled for one hour.

Mark?.

Hello everyone and thanks for joining us. Today I will describe how we're responding to the COVID-19 pandemic including our high level results for the first quarter. I'll then provide some context for how we're looking at the second quarter and the market conditions we are observing.

Sanjay will then provide the financial details and more specifics on how we're managing in the current environment. COVID-19 has shaken the global economy, and it's unclear how long the restrictions on daily life will continue or what the longer-term economic implications might be.

However, as you read in our press release, demand for our test products remains very strong throughout the first quarter and we were able to deliver revenue and earnings near and above the top end of our guidance respectively.

As you might expect, the Teradyne team and our partners overcame numerous supply, production, and logistics obstacles during the quarter and I could not be more proud of their work. Employee health and well-being has been our top priority at Teradyne.

Globally the majority of our employees are working from home while some of our operations, supply line, and customer support teams must be onsite we are providing them with the necessary protective resources and procedures to minimize their exposure risk.

Supply line challenges continue to come our way and the unusually large revenue guidance range in Q2 reflects this challenge. Sanjay will give you more details on our supply line response. Application support projects are vital to the short-term and long-term success of both Teradyne and our customers.

These projects are largely on track, with employees assisting customers onsite where necessary but using enhanced safety protocols. R&D projects are moving full speed ahead and with minor exceptions are on schedule despite the rapid shift to significant number of engineers working remotely.

While we are watching this closely to ensure we get ahead of any potential productivity loss from this remote work arrangements, so far things seem to be proceeding on plan.

So in summary, despite the numerous challenges presented by the COVID-19 pandemic, the Teradyne team is executing and delivering one of the largest ramps of tester shipments in history. Moments like these really stand out in our careers and it feels great to be part of this team.

Turning to the business, as of yet demand for test equipment remains little impacted by the COVID-19 pandemic. While there is incremental softening in the automotive sector that's been more than made up for by strengthening of mobility, 5G, and memory test demand.

On the other hand, our industrial automation business saw a decline in Q1, which we expect will deepen in Q2 as Europe and North American manufacturing remains impacted by shutdowns. Now let's review how Q1 unfolded and how we're looking at Q2.

Given the uncertainty in both supply and demand, we will not be making any full year projections in our comments today. At the total Teradyne level our first quarter sales were up 43% from first quarter of 2019 and our non-GAAP earnings per share were up 85%. In semi test sales were up 42% from Q1 2019, of that SoC test was up 37%.

As expected 5G infrastructure test buying slowed in the quarter and handset related buying strengthened. This trend continues into 2Q as well. Part of our growth comes from the mobility design wins we highlighted last year, but the biggest driver is the same thing we've been describing for years.

The increasing complexity of silicon in handsets drives up test time, which in turn drives demand for more testers even in the face of flat to down handset unit volume.

Increased complexity comes from more powerful apps processors, new technologies like Wi-Fi 6G and 5G, more cameras with higher pixel counts, and increasingly sophisticated sensors and displays. Tester demand for the specific 5G modem and RF components in handsets is growing in 2020, but remains modest.

Much of the early 5G deployment will use low band sub 6G technology, while millimeter wave will be a small percentage of 5G handset shipments this year. However, there is growing demand for millimeter wave testing capabilities both in semi test and at light point.

The industry is building capacity for this technology from near zero so much of this demand is to put initial capacity in place for early production. On the infrastructure side the global build out is still in the early innings and we expect test demand to ebb and flow as the network build out moves through various geographies.

Memory test is another bright story. Revenues were up 76% from Q1 2019. The LPDDR5 ramp on our Magnum epic test system was the highlight of the quarter, as DRAM Final Test is a new and promising segment for us. We expect that ramp to continue in second quarter.

From a revenue perspective though, flash test shipments were the dominant controller in the quarter. The latest protocol interface standards in flash are pushing interface speeds higher, driving a refresh of packaged test systems. We expect this trend to also continue in the second quarter.

Additionally, we saw healthy shipments for indigenous Chinese memory production in the first quarter. In the system test group sales doubled from the first quarter of 2019, with storage tests standing out with sales of over $75 million in the quarter.

This was more than three times the level of a year ago quarter as demand for both HDD and system level test remains strong. Our defense and aerospace business grew over 30% in the quarter year-on-year, while production board tests softened on slower automotive electronics demand.

In wireless test light point sales were up 50% year-on-year on increased demand for both connectivity and cellular related test systems. Like semi test light point shipments are building foundational capacity for 5G handset tests and benefiting from the Wi-Fi fixed transition.

Shifting to industrial automation, revenue in Q1 was down about 10% year-on-year as the improving outlook for universal robots in Asia, which we saw in Q4, was stopped dead in its tracks by the COVID-19 pandemic in Q1. In Europe and North America UR also faced increasing headwinds as the quarter progressed.

On the other hand, MiR's autonomous mobile robots delivered roughly flat sales in the quarter compared with a year ago period. We believe the opportunities for automation will accelerate post pandemic as businesses see the resilience benefit of a more automated workflow.

There will also be the opportunity in the likely realignment of localized manufacturing of critical supplies and a heavy reliance on warehouse automation and logistics automation. To that end, our investment in new products, distribution, and organizational capability continues at full speed.

In March, we introduced the MiR250 Autonomous Mobile Robot and the AutoGuide MaxN10 Pallet Stacking autonomous forklift. In April, Universal Robots formally introduced the market's most capable industrial bin picking product ActiNav.

ActiNav is a UR Plus application that uses 3D vision and a proprietary path planning software in an easy to deploy plug and play solution. It provides the necessary hand-eye coordination to both precisely pick parts from bins and precisely place parts in a manufacturing flow. Finally, let's jump up and look at the big picture.

Our 1Q demand was very strong and we were nimble enough to fulfill that demand despite the COVID-19 challenges. Our Q2 demand looks even stronger and the team is focused on knocking down supply bottlenecks to realize another great quarter. However, we recognize that we're not operating in a vacuum.

The midterm impact of rolling economic shutdowns remains uncertain in many industries, including our own. Bear in mind that volatility is not new to us. We have an operating model that can flex up and down with extreme demand swings and still remain profitable.

We have employees across the company that have weathered severe economic storms in the past and in each case we've emerged better positioned competitively. You will note that we have suspended our stock buyback as a prudent hedge until the future impact becomes a bit clear.

At the same time, we also anticipate an increased likelihood of M&A opportunities later in the year. Either way, our rock solid balance sheet will be an asset in the quarters to come. Longer term, we know technology relentlessly marches onward providing solutions to global challenges and enriching all of our lives.

We remain confident in the long-term outlook for our test and automation markets and in our strategy to excel at serving them. Sanjay will now take you through the financial details. Sanjay..

Thank you, Mark. Good morning everyone. This morning I'll provide details on how we're managing our operations, spending and capital allocation in this uncertain environment. I will then cover our Q1 results and our Q2 outlook. I first want to acknowledge the tough environment our employees, customers, suppliers and their families are going through.

For those that have family or friends with COVID-19, I wish you a speedy recovery and hope this pandemic will be behind us soon. I would like to thank our employees and suppliers for your extraordinary efforts and our customers for your patience and confidence in Teradyne.

As Mark noted earlier, our priorities are the safety of our employees, supporting our customers, and continued execution in achieving our financial objectives. While we can't predict the duration of this pandemic and its economic consequences, we enter this pandemic in a strong financial position with a flexible business model.

Specifically, we have 905 million of cash and marketable securities at the end of Q1 with no short-term debt. We have a $460 million face value convertible bond that's due in December 2023. We have a diverse portfolio of businesses in test and industrial automation. These businesses continue to service their markets with a leading set of products.

Our test businesses continue to have tailwinds behind them with new technology introductions, introductions like various flavors of 5G, and new memory standards like LPDDR5. This is balanced by the contraction of our industrial automation businesses due to both weaknesses in the auto industry and COVID-19.

A couple of points on our expense model, the test equipment market is cyclical, hence we've structured our company's expenses to be able to handle large demand swings. Total expenses are set at a level to ensure we generate cash during periods of low market demand while retaining maximum flexibility to scale up.

For example, manufacturing for our test portfolios mainly outsourced to contract manufacturers. Therefore, much of our cost of goods sold are flexible as we are not burdened with the extensive fixed costs. We have an efficient operating expense model where portions of our engineering, operations, and G&A functions are in low cost regions.

Lastly, our compensation structure varies with our revenue and profit levels. As Mark noted, we are continuing to invest in our engineering roadmaps across the company. This includes significant 5G, AI, and memory related investments in test.

We're also investing to support the pullout of our UR Plus application kits, including our ActiNav industrial bin picking product just introduced by Universal Robots, a new product roadmaps at MiR and AutoGuide as well as key IP that will benefit us in the years to come. Another key investment focus this year will be our supply line.

While the bulk of our production is in Asia close to our customers, the supply line supporting that production is truly global. As Q1 demonstrated, our internal team and partners did an outstanding job in difficult circumstances to meet our customer delivery requirements.

This experience has not only reinforced the value of our operations team, but has identified areas that we could improve. These are primarily in areas of adding redundancy for critical components and manufacturing capacity.

We're taking these lessons learned to strengthen the supply chain further in the days ahead, and these will have an impact on our costs. Now to Q1, company revenues were 704 million, up 43% year-over-year. Semi test revenue of 484 million was up over 40% from Q1 of 2019 driven by handset related SoC demand and strengthened flash final test.

In memory, we also ramped LPDDR5 revenues tied to our Q4 design win. System test group had revenue of $116 million which doubled year-over-year driven by strong -- driven by storage test solutions primarily for terabyte [ph] class near line drives as system tests -- as well as system tests solutions.

Industrial automation or IA revenue of $60 million was down year-over-year on manufacturing weakness amplified by the COVID-19 pandemic. In March, we did see some improvement in China, our fastest growing market in 2019, which is an encouraging sign and hopefully a leading indicator for countries to get back towards pre-COVID-19 work environments.

Light Point had revenue of $43 million and grew 50% year-over-year with cellular 5G and the new connectivity standard Wi-Fi 6 driving revenue. Non-GAAP gross margins were 57.6%, down a point quarter-over-quarter due to product mix.

Our non-GAAP operating expenses were down $7 million to $197 million from the fourth quarter due to lower discretionary spending and timing of expenditures, slightly offset by higher variable compensation on higher profit. Non-GAAP operating profit rate was 30% and non-GAAP EPS was a dollar.

The tax rate excluding discrete items for the quarter and year was 14.5% on a GAAP basis and 15% on a non-GAAP basis. The improvement in tax rate is driven by a higher revenue mix from our test portfolio than planned. Turning to share buybacks, we bought back 1.3 million shares for $79 million at an average price of $58.81 in the first quarter.

Effective April 1st, we have suspended our share repurchase program. There are two reasons why we made the decision to preserve cash at this time. Firstly, as we look forward there is uncertainty of the depth and the duration of the economic impact of COVID-19.

Secondly, we wanted to retain more cash on the balance sheet to enable M&A opportunities which may present themselves in the near-term. As Q1 is typically our lowest cash generation quarter we generated $6 million in free cash flow as we paid annual variable compensation in Q1.

Share buybacks and dividends were primary drivers of our $111 million of cash decline in Q1. Turning to Q2, given the volatile environment -- Turning to Q2 revenue range, sorry, given the volatile environment that we're facing we've widened our guidance range to reflect the various scenarios we're considering.

The first assumption is that second or third waves of the virus do not force countries to shut down essential semiconductor businesses. The second assumption is that semiconductors retain the status of being considered essential by governments when imposing stay at home work orders.

The third assumption is that our operations team continues to be able to mitigate supply chain and production issues globally. From a demand perspective I would also like to remind you of a couple of important points. First, we have a concentrated demand in Q2 related to Smartphone handsets and their associated launches.

As you know, Smartphone demand can change quickly and while our guidance reflects our latest estimates, we're not immune to the short-term changes in demand that could materially change our outlook for Q2. Second, we're not operating in normal conditions, so normal seasonality may not come into play in the future quarters.

Now to our Q2 outlook, sales are expected to be between $690 million and $800 million. Non-GAAP EPS of $0.86 to a $1.16 on 173 million of diluted shares. Second quarter guidance excludes the amortization of acquired intangibles and the non-cash computed interest on the convertible debt.

Second quarter gross margins are estimated at 55% to 56% down approximately 2% at the midpoint from Q1. There are two factors causing the margin decline. First, incremental costs associated with COVID-19 are being incurred to ensure our supply line as noted prior. This impact results in just under half of the margin decline.

Second, increased mix of mobility business in the quarter drives just over half of the margin decline. Margins expected in Q2 follows similar historical pattern when there is a sales mix bias towards mobility.

Second half of 2020 gross margins are expected to further decline from Q2 due to continued growth in new product ramps which have not come down the cost curve such as the UltraFLEX Plus and Millimeter Wave solutions. We expect to return to our historical gross margins in 2021.

OPEX spending will increase from the first quarter due to incremental test investments in both R&D and SG&A. Incremental IA investments were focused on distribution and product development investments. OPEX is expected to run at 27% to 30% of second quarter sales. The non-GAAP operating profit at the midpoint of our second quarter guidance is 27%.

Regarding our OPEX plans for the full year, in light of the changes we discussed earlier, our latest estimate projects 2020 OPEX to grow about 7% to 8% from $758 million in 2019. This is down from our January guide. In closing, these are challenging times and we believe we are well-positioned to execute over the period of demand volatility.

We have a diversified portfolio of businesses and customers, strong cash position and balance sheet, taking actions to reinforce our business against an uncertain future while continuing to strategically invest in customer support and product roadmaps that will power our future success.

As we proceed ahead we'll make changes if needed in line with the foundational [Technical Difficulty] noted. When this pandemic and resulting societal impacts recede we're confident that the global economic and demographic forces will continue to make the electronics test and industrial automation industries attractive growth markets.

With that, I'll turn things back to Andy. .

Thanks, Sanjay. Maria we would now like to take some questions and as a reminder, please limit yourself to one question and a follow-up. .

Thank you. Our first question comes from the line of Brian Chin of Stifel..

Hi there, good morning. Congratulations on the strength of the results and appreciate you are not making this into a Zoom conference call.

My first question would be maybe just to sort of reconcile the strength you're seeing in your business, there clearly is a wide range of expectations for what semi growth could be in 2020 and understand why you are skewing lower as expectations for markets like Smartphones and automotive have been lowered, what's the complexity and sort of your success in terms of expanding platforms in test and to cut new customers is certainly one factor, how would you further reconcile the strength of your business with sort of the declining growth expectations further downstream? And I guess more bluntly, do you also plan for some form of rationalization of test capacity beyond the second quarter?.

Okay, there's a lot in there. But, I think it is perhaps a little bit incoherent to see such strong tester demand when people are talking about the uncertainty or declining in unit volumes, particularly in handsets. But I think this is not unprecedented.

This is back to the issue of it's not so much the number of phones that are being produced, it's the complexity of the silicon in the phones and the associated test time. And that's obviously and absolutely what's occurring at the moment. So whether we were in the midst of a COVID pandemic or not, the business right now would be equally robust.

And I don't believe it's overbuying or sort of there's a rationalization necessarily provided this economic impact doesn't persist into next year and slow down the rate of complexity growth, which is a possibility. We don't know if that will happen, but it's a possibility.

But I think with so many things coming together this year around features in phones like the new Wi-Fi standard, some of the new sensor technologies, and of course 5G, that it's just driving a lot of complexity increase.

And so I don't think the test business, you can necessarily correlate that well with the end markets for semiconductors because of that. You certainly see automotive down, way down. And we see that in our business industrial down and we see that in our business for test. But mobility is quite strong..

I appreciate that. Maybe even sort of against those comments, you know, I think it was early 2017, there was also quite a great deal of strength from mobile processor that you saw in your business in terms of the test capacity additions that occurred in early 2017.

Would you use that as an analog relative to what you're seeing now in terms of maybe complexity or also not maybe exceptionally strong, phone unit environment as well?.

Yeah, I think it's reasonably analogous. And therefore, year-to-year, what you've seen in our business for test is that it's not monotonic or consistent year-to-year in terms of our business in the second and third quarter related to mobility. In the years where there's a lot of technological change, we get incrementally more growth in revenue.

And then there's some years where the change is more modest and it'll be down. So that's going to be part of our future, as far as the eye can see. So we really look at it as a trend line and, yes, this is a particularly strong year..

Alright. I appreciate that. Thank you. .

Our next question comes from the line of Mehdi Hosseini of SIG..

Thanks for taking question. Mark, I want to go back to your comment back in January earnings conference call, you characterized the first half versus second half as 55-45. In other words, it's 55% of your 2020 revenue would be captured in the first half. And I do understand lack of visibility.

But just given how strong your first answer is, would you -- I agree that your first step could actually be more than 55% of the 2020 revenues?.

It certainly could be. I think what we've seen since the January call is that what we described as sort of the first and second quarters being roughly equal is close to right. I think we've seen a little more strengthening in the second quarter than we projected back then.

And we've seen Q1 turn out to be a little bit higher at the high end of our guide than back then. So it's come in a little bit hotter and therefore, it certainly could be that the percentage skew toward the first half could be higher.

The thing about the second half though it's not a -- there is no model out there we can rely on to predict what's going to happen. So, at the moment the demand, even the backlog and the deliveries we're quoting through the third quarter are pretty strong, but we know that can change in a moment's notice..

Sure, thank you.

And I want to go back to your use of cash in terms of the priorities for M&A if they were to happen in the second half, what is the priority for you, would semi tests or areas adjusting to semi tests now become a priority or would you focus on industrial automation and making additional investment there?.

Yeah, hey buddy, it's Sanjay here. So, I think that we have an active M&A group that we've look at many different opportunities in the last several years.

Obviously, the focus has been on industrial automation, but we are actively looking and the key part of that strategy is that as valuations potentially come down in the future, products -- or companies have a good fit and become more attractive financially.

And so I'd say, historically and even looking forward there'll be a focus on industrial automation. But I wouldn't count anything now..

Thank you. .

Our next question comes from the line of Vivek Arya of Bank of America Securities..

Thanks for taking my question. Mark, I understand the argument about complexity growing in mobile, but I imagine that was known at the start of the year but since then, Smartphone volume expectations have come down. I think the assumption is that down high single digit or so. So is it that 5G mix is better.

I'm just curious what could have cost a tester demand to improve when volumes have been revised downwards? And as part of that, if you could give us some color about how much of that incremental strength that you are seeing is from China domestic customers versus the U.S.

and Korean customers?.

Yeah, so I think first of all, it's a good question. Most of the test capacity that is being installed in second and third quarter is for production of handsets that will occur in third, fourth quarter of this year. So the falloff in handsets that we've seen in Q1 and Q2, there is no relationship on that demand.

It's related to what do people think, the unit volume for new phones, not in aggregate, but for new phones will be in the second half of the year. And apparently going just by the strength in the business that view is still pretty robust.

The other thing that changes as you go from January till now is people start to get a better sense of the complexity impact on test time. So there's some preliminary views back in January but as you get closer to mass production, the reality of what that test time is sets in and can drive up or down demand.

We saw several years ago if you remember a situation where the progression from January to April resulted in a reduction of test capacity because test time turned out to be better than people thought. In this particular situation that's not the case, it's moving a bit in the other direction.

So those are the two things I think that are going on that are causing demand to be incrementally stronger despite the fact that in the first half the old handsets unit volumes are down. And then on China versus anyplace else, we're seeing very strong demand across the board.

It's not one geography, it's Korea, it's China, it's U.S., it's just a generally competitive robust plan around new technology for phones..

Got it, very helpful. And for my follow-up Sanjay you mentioned some pressure on second half gross margin and I think you said Q2 would be 55% to 56%. Could you give us a sense for what specifically in the mix -- and I understand of course industrial automation is lower so maybe that is having an impact.

But beyond that what is having the impact on Q2 gross margin and then where can second half gross margin be, I don't understand what about new product ramps can take gross margins down so much in these quarters when your sales growth is so strong year-on-year?.

Sure, so going down about 2% from Q1 is at the midpoint is what I said and really half -- think about it, over half of the decline is tied to the concentration of sales mix and mobility. That's not unlike the patterns we've seen in the past.

The second part would be and I mentioned in my prepared remarks we've had to strengthen our supply chain and many costs associated with the COVID-19 impact which is just under half of the impact. So that really kind of bridges you from Q1 to Q2.

And then getting on to your second question about the second half, first let me comment and say the second half there's tremendous demand uncertainty. As you'd expect with different businesses we have we could have -- could come in or not come in so that product mix would have an impact.

But that being said we're really seeing the adoption of several new products and solutions specifically the UltraFLEX Plus platform and Millimeter Wave really take hold and volumes ramping a little bit faster than we had predicted. And these are platforms if you recall that last over 10 years and in their infancy stage they come down a cost curve.

And so -- and we do expect margins to come back in 2021..

Thank you. .

Our next question comes from the line of Atif Malik of Citi. .

Hi, thanks for taking my questions and great job on the execution. Mark you talked about strength of indigenous China in first quarter and we hear about the U.S. government looking into perhaps license fees for chip makers exposed to [indiscernible] for U.S.

equipment suppliers and was the demand in this indigenous China what you expected back in January or was there any kind of pulling or any discussions with your customers that they were worried about the license concerns?.

I don't want to talk about any specific customer situation. All I would say is that there's really been no change in demand from the China region for SoC test since the January call. We've had a little bit of incremental demand maybe on the memory side but things are playing out pretty much as planned on test equipment for China.

Light Point may also have seen a little bit up but nothing material..

Great and then maybe this one for Sanjay and how are you positioning the industrial automation business differently going into recession. You talked about -- warehouses logistics end markets and more.

Are you looking into maybe moving away from the auto end market?.

Yes, so I think industrial automation had some weakness building up to COVID-19 in the auto industry which is a large part of the business. And with the rolling shutdowns in manufacturing in the U.S. and Europe are predominantly big regions for the business. We're seeing that impact and obviously contract year-on-year.

We did see some encouraging demand in China in the last couple of weeks of March as well as April to date. We are seeing demand pick up back to pre-COVID levels and it's an encouraging sign as an indicator of how things might return back to normal. But we're still in the early innings on that.

When I think about the business, we guided 10% to 12% OPEX growth in 2020 and we brought that down to 7% to 8%. A lot of that investment decline was really tied to the go to market for industrial automation that we've kept the focus on the product, the ecosystem, etc. But really we had an investment strategy that one, tied to investing for growth.

And as the contraction and the uncertainty remains, we've moderated that spend in our plans to come down.

But we believe in the fundamentals in the long run and we will as the market comes back and manufacturing comes back, we actually think COVID-19 if ever there's a hope there's a benefit out of it is to highlight the advantages and strengthening your supply chain with industrial automation.

Now, this would need to be balanced by getting people back to work. But we will continue to invest in the ecosystem as well as distribution. It's just in 2020, it'll be a little bit less than we anticipated, just given the moderated revenue we're seeing..

Our next question comes from the line of Toshiya Hari of Goldman Sachs..

Good morning, guys and thanks for taking the question. Mark, you talked a little bit about Millimeter Wave in your prepared remarks. I think you noted that contribution in 2020 should be relatively small, but you do expect the technology to contribute to growth in 2021 and beyond.

Can you help us quantify how big or how small Millimeter Wave could be for your business this year and what your expectations are for the next couple of years? Then I've got a quick follow up. Thanks..

Yeah. So, I think certainly people are beginning to ramp production now of Millimeter Wave, but it's in a small fraction of the handsets that'll be produced this year in the end. And, related to the impact this year, I bound it's somewhere in the high tens of millions of dollars across the company, somewhere in that sort of range.

Now, we've said longer-term the total 5G wave should build towards sort of this $400 million to $500 million added to the TAM. And with everything going on right now with sub 6G and with Millimeter Wave and such, maybe we are two thirds of the way into that because we are seeing strong demand for the sub 6G side of this. It's just less test intensive.

So, as we go into 2021 I would expect that to grow. And I think those are the sort of bookends..

Got it. Then a quick follow up on the IA side of your business. Over the past couple of years, I think you've talked about going more direct to large customers but I just wanted to check in and sort of confirm how significant or insignificant your direct business is today as a percentage of IA sales.

And on the distribution side, I'm curious how much visibility you have into how much inventory your distributors hold today, just given the current environment? Thank you..

Yeah. On the direct sales part, that's a program we launched last year and it's something we're doing both in all three of our automation companies that started out heavily distribution oriented. For large accounts MiR UR have moved towards direct sales, but that's really been in effect for a couple of quarters.

We're into a downturn now and a lot of those customers were automotive related. So I don't have the numbers in front of me, but I don't think the revenue percentage would be all that significant at this point. On inventory I don't think there's very much of any buildup inventory in the channel around automation. It's a very quick turns business.

We look at that pretty carefully every quarter so no overhang there..

Thank you. .

Our next question comes from the line of CJ Muse of Evercore..

Yeah, good morning. Thank you for taking the question.

I guess first question is regarding supply chain, and so curious can you speak to in particular what kind of issues you're seeing in Malaysia, elsewhere in Southeast Asia for downstream customers, whether or not you're seeing plans for any sort of redundancy from those customers given the uncertainty around COVID and your desire to perhaps test and assemble at multiple locations? And then I guess particularly the paradigm as you think about this is kind of a hopefully just a short-term speed bump here.

How are you planning to manage your own inventory, so if I recall back during the financial crisis, you had shortages in FPGA etc., which made it difficult to ramp testers coming out of the correction, would love to hear what your plans are today for hopefully a recovery into the future? Thank you..

Yeah hi, it's Sanjay here. So, from a supply chain perspective I think we've -- our operations team and our supply partners have done yeoman's effort.

And if we break it down, when this first -- pandemic first broke out in China, where we have a large contract manufacturer as well as supply chain kind of feeding it specifically, we drove a path or a task force on ensuring to get labor back, ensuring to get materials.

And then the first thing we did is we kicked off our supply chain in other parts of the world. And we invested in redundancy from different supply lines into different geographic locations.

And so the key takeaway is that we are building both redundancy in the component qualification that feeds our test equipment and industrial automation products and then secondly, in building capacity in different territories.

And then as the pandemic grew throughout the world and as you mentioned, Malaysia, the Philippines and different South Asian countries, you had to build redundancy in logistics and the flight lines to both -- for our products to get to customers, but also for our components to actually get to the contract manufacturers to get deployed.

So there's been a significant investment that we're going to strengthen our supply chain and make sure we have clear diversification of supply if in the event the pandemic, which who knows how long it's going to go, will have that strength. And so that's I think part one.

And the second thing is we are building obviously our inventories went down just really to kind of meet our demand. And as we're growing, we are currently building inventory in anticipation of delivering, as you saw, the significant range. And, the range is really tied to where do we believe where we can have a high assurance of delivery of that.

So we are building inventory at this time. But I think it'll normalize as demand starts to shake out and as the market unfolds..

Hopeful, as my follow-up, I guess kind of a two part question. You talked about mobility really the driver for Q2 but, given the commentary around gross margins impacted by Millimeter Wave and UltraFLEX Plus introduction into the back half would suggest perhaps that could continue into the second half.

So I guess how do we think about mobility and seasonality? And then as part of that, my understanding with the plus is that same software, very different hardware from the non-plus.

And so curious what kind of obsolescence you might see there and as you get new product introductions that are only using the UltraFLEX Plus, what impact might that have on the types of demand for that tool here in 2020 and into 2021?.

Yeah, so I think at the beginning of the year we anticipated a strong first half. It's kind of playing out the way we anticipated it. It is a little bit stronger in Q2 as we've guided in our range. The second half of the year is really opaque. The impact of the economic construction of the pandemic is really unclear at this point.

We do know that there has been, relative to our expectations in January, a little bit more of an acceleration of adoption of the UltraFLEX Plus and Millimeter Wave and as I said earlier, given the volatility in the second half, there could be a bunch of puts and takes in the gross margin.

With regards to the ramp up of the UltraFLEX, the UltraFLEX has been around for decades and has a long tail. So we don't necessarily see a huge obsolescence risk with the transition as it occurs..

Could we have the next question please..

Our next question comes from the line of Timothy Arcuri of UBS. .

Hi, thanks. I guess I had two questions. First, is on [indiscernible]. So I know that you disclosed in the case so direct and indirect through the offsets was 11% of revenue last year. You did say that they were greater than 10% customer in December. It sounds like they were greater than 10% in March.

I guess two part question is that the case and are they still expected to be greater than 10% in the June number, I ask that because the disclosures and the Safe Harbor did change quite a bit and it seems like something is clearly likely to happen there, so that revenue seems to be at risk for the back half of the year? And then I had a follow-up, thanks..

Yeah, so Sanjay here. So, first of all, we don't comment on specific customers. We obviously did disclose in the annual report that ValveA [ph] and affiliates did procure 11% of our business last year, but we specifically won't comment. We did have one 10% customer this quarter..

Okay, yeah. I ask because you did say that last quarter so it seems like you have said that in the past but okay. Okay, and then I guess my second question is, can you give us a sense of what the mix is for June, it sounds like on the semi test side memories could be flat to up. I would assume systems test comes down a little bit.

You said IA is going to remain pretty weak. So I guess I'm wondering if you can give any color on the mix particularly SS [ph] fee, which seems like it has to be in the 550 million to 575 million range. I just wonder if you can give us any comment there? Thanks. .

I think from a mix perspective I will comment on the specific numbers, but semi testers will -- as you said will be very strong. And as we've messaged as part of mobility, we do expect system test to decline a tad or to decline..

Okay, alright. Okay, thank you..

Our next question comes from the line of Krish Sankar of Cowen and Company. Krish, make sure your line is not mute..

Well, let's come back to Krish..

Our next question comes from the line of Weston Twigg of KeyBanc Capital Markets..

Hi, thanks for taking my question. Actually, I had two quick ones, one on the industrial automation business. You mentioned that on the other side of this pandemic there should be a nice acceleration of demand which makes total sense.

But I'm wondering have you been having conversations with some of these smaller manufacturing operations that may realize they need to invest in automation, or is that just an expectation.

In other words, is that comment based on conversations you're having today or just the expectation they would recover?.

Yeah, I think the conversations today are really not that far out in terms of their headlights, but it's an expectation. But I would say that we've commented that the mobile platform hit near, saw a flat sales quarter-over-quarter, hasn't been as robustly impacted by this pandemic.

And part of the reason for that is that there's already applications for that platform in the healthcare space that are growing. So while industrial has been moving down, that's been increasing. And so I think there's partly small to medium sized enterprises will look at automation coming out of this as an -- as a strategic asset.

But moving toward some of these other verticals that are likely to disproportionately grow is another part of the calculus on how this growth in industrial automation accelerates coming out of this..

Okay, that's helpful. And then my follow-up is you had talked about supply chain redundancy, good manufacturing capacity redundancy.

And I have heard that from other companies as well related to building out semi test demand and I'm wondering if that is part of the near-term strength you're seeing for testing, in other words, are your customers building out some test redundancy and is that a temporary function?.

You know, I think that's something we're concerned about and to the extent we've checked and looked. We don't see that really.

You know, it would be pretty obvious if we saw customers that are trying to test silicon shift or move capacity to an OSATs but typically speaking, the testers are purchased by third party OSAT and they're not very willing to invest in capital unless it's going to be utilized really quickly.

And as we've looked at the utilization of the equipment that we've been installing, it seems to be pulled quickly and turned on and utilized right away. So there's not idle capacity being put into the test, semi test channel that we're aware of..

Okay, very helpful. Thank you. .

Our next question comes from line of John Pitzer of Credit Suisse..

Yeah. Good morning, guys. Thanks for letting me ask the question. Mark, there's been a lot of questions on the SoC test business.

Maybe I'll give you one on the memory test, which had a really strong March quarter in fact, you kind of back at both levels we were seeing in 2018 when the spending environment and memory was just significantly better and pick growth was sort of accelerating versus decelerating.

So I am kind of curious if you can talk a little bit about some of the complexity drivers there and the market share drivers there, and how sustainable do you think that is in the back half of the year?.

Yeah, for the back half of the year God knows. But, there are a couple of things going on there that are interesting. One piece of it is that we opened up a new segment of memory tests that we haven't participated in before, which is DRAM final test. And in the DRAM world there's a transition occurring to LPDDR5.

That obsoletes the existing fleet of equipment out there. So to the extent memory manufacturers are beginning that shift just from a technological point of view, they have no choice but to buy incremental capacity for it and that's something that's benefiting us in Q1. And likely we will continue through the year, not just Q2 but in beyond.

And that has years to go. So that's a tailwind for sure. The bigger piece of memory in terms of revenue is flash and flashes for many years now have been undergoing a similar generational shift towards high speed.

And unlike I would say DRAM, that's kind of very controlled and not -- I wouldn't say a commodity, but the standards around DRAM are kind of ubiquitous. In the case of flash, there is much more bespoke design going on around the protocols for the interface speeds depending on the handset they're going in or the application they're going in.

And that diversity drives a lot of incremental test instrument buying to test all that variety. So that's been true historically. It is just as strong right now. And then the other comment I'll make is that new manufacturers that we see coming online in China are not slowing down. They are putting capacity in and that's also a tailwind..

That's helpful Mark. And then maybe as my follow up the other standout segment this quarter was the system test both sequentially and year-over-year. And you had some comments about strength and near line drives.

I'm just kind of curious how big a component of the growth was hard drives and again, can you help us think about sustainability around complexity and share versus just having to rely upon volumes?.

Yeah. So, hard drives have been a standout and both aspects of what we do with that storage test product are interesting. And I think the hard drive piece is sustainable and it's sustainable pretty much as far as the eye can reasonably see and through next year. And this has been going on for several years now.

And, there's only really two predominant manufacturers out there. And so share is a little bit not an issue as much as just as the systemic underlying growth there. And it definitely seems to be there with the increasing density of these drives and volume. On the system level test side, that's a nascent market that's still in early development.

It's a semiconductor test market. It's an additional insertion of test for semiconductor tests. And very few manufacturers have adopted that methodology yet. We're fortunately on the leading edge of that adoption.

Will it become an industry pervasive methodology where more and more manufacturers decide to add an additional insertion or test step before they ship their final product or not is unclear but compared to what our expectations were a year ago the volume there is certainly exceeded our expectations. So it's a good secular sign..

Thanks and congratulations again. .

Our next question comes from the line of Richard Eastman of Baird. .

Yes, thanks for sneaking me in here.

But just -- first question is just around the industrial automation business and with the business model there and I don't know how the variable fixed cost mix is for the entire IA business but at a $60 million kind of revenue run rate here you know in the first quarter and that perhaps ticks a little bit in the second quarter, was that business a profitable contributor in the first quarter?.

Yeah hi, it is Sanjay here. So, first thing with IA, as we enter into this market we believe that it's on a rapid growth trajectory over the mid-term. We're seeing the impact obviously of the auto weakness in the pandemic but inherently in that our fixed cost as a percentage of the businesses is much higher because we do internal manufacturing.

And so we do outsource some subcomponents but fundamentally we inherently have a higher fixed cost structure just because we believe we have a leadership position and that's one of our attributes to hold on to that leadership position. So there is a higher fixed cost component.

The second comment is in 2019 we were profitable, we had plans even though it was a heavy investment year that we've kind of redacted down tied to revenue. We believe we would have a profitable year. In the first quarter with the contraction we weren’t profitable. .

Okay the development on the new products they are with the MiR new products and obviously maybe the awaited ActiNav product now being introduced.

Is it a reasonable assumption that as we push out to the fourth quarter that the new products plus again making some assumption around the global economy may be improving by the fourth quarter but do we do -- does this sort of kind of look at the IA businesses potentially seeing sales growth in the fourth quarter, is that still on the table year-over-year?.

It's on the table for sure whether it'll happen or not is a question. I mean fourth quarter is always strong. And the early signs in China, you know, China certainly was an anchor in Q1 on our IA sales but as we've gone into March and into Q2 they've come back pretty strong in IA buying. It could very well set year-over-year records in our IA business.

So if that is a mirror image of the rest of the world which we don't know we can certainly see a Q4 in IA that was sequentially up..

Okay and Mark you in the commentary and the slides I didn't notice any updates around the semi SoC test market or memory test market. And I gather from your comments just on the puts and takes and the SoC market obviously strength and mobility IA and the industrial piece was softer.

And even in the memory side it seems like a lot of the strength there for you guys is here.

But are you still comfortable at this time just with the previous maybe thoughts around the size of the SoC test market as well as memory test market, are they still reasonably good assumptions here at this time?.

Yeah, I would kind of toss all that overboard unfortunately because we just don't know about the second half.

But what I can say is if what we do know about is the first half of the year and if you look at the first half of the year we're running towards the high end in market size in both memory and SoC compared to what we projected that led to the prior estimates.

So, if anything -- if this had been a sort of normal year without COVID we probably right now be revising up some of our market size estimates for the year for each segment. But in light of what's happening we really can't comment. .

Understood, okay, great, thank you and really fantastic quarter to your team. .

And operator we are going to try to squeeze just one more and please I know we started a little bit late so could you just give us one more question please. .

Certainly, our last question will come from the line of Sidney Ho of Deutsche Bank. .

Great, thanks for squeezing me in. The question is just a follow up to the previous question. I understand you don't want to give full year forecasts for SoC TAM.

Is that your view that most of the SoC TAM that get -- I guess the market is going to lose this year will be recovered next year assuming the Corona Virus situation is under control say by the end of this calendar year. Well some of that be lost permanently, maybe you can talk about that by end market? Thanks. .

Yeah, I think it's just very speculative but I'll give you maybe just a little bit of color and I'll probably regret it. If you go back to what happened in 2008 and 2009 as a reference, it came back with a vengeance in 2010 and you could argue that it sort of on a trend line basis still the hole in that was created in 2009.

So the technological progress just drives a underlying test demand in terms of this complexity growth that is cumulative. It can be temporarily squashed through things like a sharp drop in unit volume demand which is what occurred there. But it came back with a vengeance.

So the real question then in this situation is when will the unit volume demand recover because the underlying technological growth will likely continue unabated. And I think that's everybody's guess. We expect things, mobility in handsets have been slightly declining now for a couple of years and it's really had little impact on the test demand.

If the handset market starts into double-digit declines and that persist through next year I would say it must have some impact on Testament because the complexity underlying complexity growth this year is quite high. It's likely that it'll oscillate year-to-year. So those are just sort of touchstones but no prediction..

Okay, that's fair.

Maybe my follow up question is in the industrial automation business just to level set, given the pretty sharp deceleration over the last few quarters for the segment and I'm guessing that will continue in Q2, how should we think about the revenue exposure today Q1 or Q2 whatever you want to use to areas that I expected to continue to see weakness namely automotive by end market or maybe some geography.

Just trying to understand if things continue to go the wrong way how much of that is at risk?.

Yeah, so it is Sanjay here. So, really we're predicting a downward bias in Q2 just given the fact that there's a lot of filter in place, manufacturing locations are still down. And so we do see a further contraction.

Looking forward as I said earlier we did see signs of improvement what I would call getting back to an initial innings in China pre-COVID levels but it's really too early to tell how fast the recovery would be. And we did enter it -- we did enter in the last quarter a little bit of weakness with automotive..

Okay, great, thanks. .

Okay folks, this concludes our call. Thanks for your interest in Teradyne. We look forward to talking to you in the weeks ahead and those still in the queue I'll get back to you straight away. Thanks so much..

Thank you ladies and gentlemen. This does conclude Teradyne's first quarter 2020 earnings conference call. You may now disconnect..