Greetings, and welcome to Q1 2024 Teradyne, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. .

It is now my pleasure to introduce your host Traci Tsuchiguchi, Vice President, Investor Relations. Thank you, Ms. Tsuchiguchi. You may begin. .

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 of our performance for the first quarter of 2024 and our outlook for the second quarter of 2024. .

The press release containing our first quarter results was issued last evening. We are providing slides on the Investor page of our website that may be helpful in following the discussion. Replays of this call will be available via the same page after the call ends. .

The matters that we discuss today will include forward-looking statements that involve risks that could cause Teradyne's results to 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 slides accompanying this presentation as well as the risk factors described in our annual report on the 10-K with the SEC. .

Additionally, these forward-looking statements are made only as of today. During today's call, we will 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 where available on the Investor Relations page of our website.

Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or investor-focused investor conferences, hosted by JPMorgan, KeyBanc, Cowen, Bernstein and Stifel. .

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. Hello, everyone, and thanks for joining us this morning. Today, I will summarize our first quarter results and discuss some of the trends in the semiconductor industry and robotics that we believe position Teradyne for long-term growth.

It is useful to comprehend these longer-term growth drivers because the industries in which we operate are inherently cyclical. Sanjay will then provide greater financial detail on our first quarter results, our current outlook and additional financial information. .

We delivered first quarter financial results above our revenue, gross margin and earnings guidance ranges. Memory and SOC delivered above our plan and showed strong performance in the quarter driven primarily by AI applications. The impact of AI on our business was seen in networking as well as in Edge AI applications like ADAS.

Over 40% of our memory shipments in the first quarter were driven by AI applications. .

As we expected, mobile continued to be soft in the first quarter. Our robotics business delivered to planned for the third consecutive quarter as their go-to-market execution continues to improve. .

Moving on to Q2. The impact of AI on test demand we experienced in the first quarter is continuing into the second quarter, improving our outlook in memory and in compute. However, a meaningful upturn in mobile, legacy auto and industrial end markets may not occur until the 2025 time frame. .

Looking ahead, within the semiconductor test market, we expect that the compute TAM, which includes networking in many vertically integrated producers to grow at a faster pace than previously expected. We now estimate the compute TAM in 2024 to be $1.5 billion, up from $1.4 billion.

We have lowered our TAM estimates for auto, industrial and mobile markets as recovery in these end markets appears to be pushing out in time. With the combination of our stronger first half and limited visibility into the second half, our estimate of the 2024 SOC TAM remains unchanged at $3.6 billion to $4.2 billion. .

In memory test, we are increasing our expectation TAM growth to $1.2 billion to $1.3 billion from our prior estimate of $1 billion to $1.1 billion, driven mainly by stronger demand for HBM, which we expect to grow 5x last year's level.

As I'm sure you've noticed, our first quarter results and second quarter expectations are significantly above our view from January. For the full year, at the company level, we continue to expect low single-digit growth from 2023. .

In January, we are expecting the year to be back half loaded with mobile driving that recovery. We also shared that lead times were decreasing and our visibility was limited. The sustained strength and new demand in AI-driven applications are boosting our business in the first half.

However, we are being cautious on the second half on what looks like continued weakness in the mobile market. Our operations team is continuing to enable us to pursue short lead time opportunities, so it certainly feels as if there's more upside opportunity than downside risk. .

first is SAM expansion through new offerings. Second is growing our OEM solution provider in large account channels. Third is building increased recurring revenue through service and software offerings. .

In the first quarter, we made good progress in all of these areas. We executed on new SAM expanding initiatives with the announcement of UR's collaboration with NVIDIA and the new MiR1200 pallet jack. We grew our UR OEM business 58% year-on-year, and we received the single largest order in the history of MiR from a strategic customer. .

Zooming out, we see AI as the transformational secular growth driver across all of our businesses. AI applications are already having a profound impact on the test market, but we are in the very early days of the growth trend that will play out over the coming years.

Today, the profit pool generated from AI is concentrated in the build-out of cloud AI capabilities, especially for training LLMs on huge data sets. .

The hardware requirements for training are massive and include general purpose fine grain compute, high bandwidth memory, dense network interconnection, and mammoth amounts of power, all of which are driving our business today. However, these LLMs will only deliver a business impact when they're used to solve problems in the real world.

In other words, through inference applications, both in the cloud and at the edge. .

This is the key opportunity that is driving vertically integrated producers to develop their own devices and will materially affect the complexity of edge processors in automotive, industrial and mobile applications. .

While our business is benefiting today from the considerable AI-driven growth in memory, networking and a few early ramps of vertically integrated producers, our greatest opportunity lies ahead as inference applications and edge AI accelerates because of our strong position with many of the leading providers of mobile and embedding computing in industrial and ADAS applications.

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AI will also have a profound impact on the robotics industry. Teradyne Robotics is focused on collaborative applications, where robots need to work safely and efficiently in complex environments.

AI provides an opportunity to more easily deploy robots that understand and adapt to their surroundings, making them more resilient and expanding the range of problems that they can address.

With our layered approach to safety, high product quality and an open platform ecosystem, UR and MiR, are positioned as the preferred robotics platforms for the development of AI manufacturing and logistics solutions. .

Last month, we announced a collaboration with NVIDIA to utilize their robotics stack on UR hardware and demonstrated the power of that collaboration at GTC with a visual inspection application.

Also in the first quarter, we announced the MiR1200 pallet jack, a new AI-powered solution that uses 3D Vision to identify, pick up and deliver pallets even in dynamic and complex environments, making it a valuable resource for autonomous material handling in factories and warehouses. .

Advanced robotics is just one of the many early examples of Edge AI applications positively impacting our business. Others include advanced driver assistance systems and AI capabilities being added to premium tier mobile handsets. Edge AI is becoming a material driver of TAM growth for Semi Test, but we're in very early days.

We expect AI will be an overarching growth driver for years to come in test as a primary demand driver and in robotics as a key enabler of market growth. We're positioned to benefit from this megatrend, and we're investing R&D and field resources to capture this opportunity. .

Summing up the quarter, we're off to a strong start with Q1 results and our outlook for Q2 well ahead of our view just 3 months ago. The strength and test is focused on cloud and edge AI applications, while other parts of the semiconductor industry work through inventory. Calling the end of these corrections is a challenge.

So we're being cautious about our second half outlook. That said, our flexible operations model will enable us to serve upside demand. We expect that industrial, automotive and mobile will rebound from their current low levels and entirely new demand drivers like AI are already contributing to our Test business.

The industry's increase in WFE spend in 2024 and 2025 will drive unit volume and device complexity growth, reinforcing our confidence in our midterm outlook. .

And with that, I'll turn the call over to Sanjay.

Sanjay?.

Thank you, Greg. Good morning, everyone. Today, I'll cover the financial summary of Q1, provide our Q2 outlook and full year planning assumptions. Now to Q1. First quarter sales were $600 million, which was $10 million above the high end of our guidance with non-GAAP EPS of $0.51, which was above the high end of our guidance of $0.38.

Non-GAAP gross margins were 56.6%, above our guidance due to favorable product mix, higher volumes and improved operational efficiencies. Non-GAAP operating expenses were $251 million, both flat year-over-year and up slightly compared to our fourth quarter. Non-GAAP operating profit was approximately 15%. .

Turning to our revenue breakdown in Q1. Semi Test revenue for the quarter was $412 million, with SOC revenue contributing $302 million and memory, $110 million. In memory, our sales were strongest in DRAM as AI-driven demand remains strong.

Test for HBM is being prioritized by our customers, and we are seeing customers transition capital spending for testers away from flash to DRAM, in part due to HBM and the return of capacity adds and other DRAM test. .

Historically, we've seen split between flash and DRAM markets be more balanced. In System Test group, Q1 revenue was $75 million, with $23 million in storage test on low SLT and HDD demand. Recall, SLT has high exposure to the smartphone market. And even as HDD end markets begin to recover, tester capacity utilization rates remain low.

In Wireless Test, revenue was $25 million in Q1, reflecting continued weakness in PC and mobile markets. In Q2, we expect wireless test to improve due to gaming end market and are now beginning to see the ramp of WiFi 7. .

Now to robotics. Revenue was $88 million as planned with UR contributing $68 million and MiR, $20 million. Shifting to some cash metrics. At a company level, our free cash flow was an outflow of $37 million in the quarter. We typically consume cash in the first quarter as we pay taxes and variable employee compensation.

We repurchased $22 million of shares in the quarter and paid $18 million in dividends. We ended the quarter with $871 million in cash and marketable securities. .

Some other financial information in Q1. We had one 10% customer in the quarter. The tax rate, excluding discrete items for the fourth quarter was 15% on a GAAP basis and 15.5% on a non-GAAP basis. In Q1, we incurred an FX loss on the fair value of the currency exchange hedge related to the expected investment in Technoprobe.

This drove a larger than typical variance between our GAAP and non-GAAP earnings in the quarter. .

Turning to our current operational environment. In Semi Test, supply lead times continue to decline as supply versus demand is more in line. Our lead times continue to hold at 1 to 2 quarters. However, in some cases, we have been able to service demand inside these lead times.

As a result, our customers are moving back towards historical buying patterns with shorter lead times, thus yielding lower second half 2024 visibility consistent with the pre-pandemic environment. Robotics remains a quick turns business and our execution continues to deliver to these market conditions. .

Now turning to our outlook for Q2. Q2 sales are expected to be between $665 million and $725 million with non-GAAP EPS in a range of $0.64 to $0.84 and 162 million diluted shares. The second quarter guidance excludes the amortization of acquired intangibles and the anticipated gain on the expected sale of DIS, which is $0.29 in our GAAP forecast. .

Some color around the forecasted increase to Q2 revenue versus our January view. The increase is driven by our Semi Test business where ADAS, compute networking and HBM demand has strengthened.

As noted, this AI strength has continued into the second quarter and some orders initially scheduled for shipment in the third quarter have moved into the second quarter, improving our near-term outlook. Second quarter gross margins are estimated at 57% to 58%. OpEx is expected to run at 36% to 39% of second quarter sales, up modestly from Q1.

Non-GAAP operating profit rate at the midpoint of our second quarter guidance is 20%. .

A few points to assist you in modeling the rest of the year. I'll start with a few more details about the market estimates Greg provided. While our view of the SOC TAM is unchanged in total, under the cover, there are some puts and takes.

Compute is up approximately $100 million, while mobile, auto and industrial are down a little over $100 million in aggregate. In anticipation of questions, let me provide the midpoint of our estimates by segment.

Compute, $1.5 billion; mobile, $0.9 billion; auto MCU, $0.5 billion; Industrial, $0.3 billion; and service, $0.7 billion, summing up to $3.9 billion for SOC. .

You'll notice the aggregate decline change has been allocated to the Industrial segment. Our memory estimate has increased $200 million with the midpoint of $1.25 billion. Please note, our final estimate for the 2023 SOC TAM is $4 billion, up $100 million in the Compute segment from our January view. .

Back to revenue. We expect Q3 sales to be similar to Q2 and Q4 to improve from there. Note that our flattish sequential growth in Q3 does not assume any revenue from DIS. Excluding the impact of the anticipated divestiture, we would expect revenue to grow sequentially in Q3.

Our expectation for revenue distribution for the full year is now less back half weighted than our view in January. We currently expect around 47% of the company revenue to be in the first half and 53% in the second half. We expect full year revenue to grow in the low single-digit range compared to 2023. .

Now to gross margins. Gross margins are expected to continue to improve as we progress through the year and should be at our target gross margin model for the fourth quarter. Full year gross margins will likely be in the 58% to 59% range unchanged from our January outlook. .

Regarding OpEx for the full year. We expect full year 2024 OpEx to grow 5% to 7%, consistent with prior guide as we continue to make engineering and go-to-market investments. Our GAAP and non-GAAP tax rate, excluding discrete items, are forecasted to be 15% to 15.5%, respectively, in 2024. .

A quick update on our previously announced strategic partnership with Technoprobe. As a reminder, the agreement has several key components. First, Technoprobe will purchase Teradyne's DIS business, which provides advanced interfaces that connect our testers to customers' chips for test.

Second, Teradyne will make an equity investment in Technoprobe, acquiring 10% of the company. Third, Teradyne and Technoprobe will work together on a series of projects to expand the performance of semiconductor device interfaces to enable customers to realize the full performance of our test systems.

We continue to expect the transactions to close in the second quarter. .

DIS revenue contribution for the first quarter was approximately $21 million. Post closing, our cash position will decline as the transaction is expected to consume an estimated $440 million of net cash.

We will continue to limit our share buybacks in 2024 to an amount necessary to offset dilutions from equity compensation and our employee share purchase program in order to build cash back to a minimum goal of $800 million. .

Summing up, we delivered sales and earnings above the high end of our guidance range as memory and networking exceeded our plan in Semi Test, mainly driven by AI. The mobile, industrial and legacy auto markets remain soft.

Our robotics team delivered to plan for the third consecutive quarter, as we continue to execute our new product development and go-to-market strategies. Overall, visibility beyond the second quarter is limited, given the increased level of turns business in Semi Test.

Our first quarter performance and the improvement in our second quarter outlook elevates our confidence for the year. Midterm fundamentals remain intact, yielding continued optimism beyond 2024. .

With that, I'll turn the call back to Traci.

Traci?.

Thanks. We will go ahead with questions. .

[Operator Instructions] The first question comes from the line of Mehdi Hosseini with SIG. .

Yes. Two follow-up. It seems to me that despite the fact that you highlighted mobile as an area of weakness, it had already been dialed into your January guide or commentary for the full year.

Would that be fair?.

Yes, it would, Mehdi. .

Okay. And this brings up what I want to really ask you. When I look at TSMC, they just announced their annual report, and obviously, Apple's mix of revenue went up. And I'm using that as a kind of trying to better understand the dynamics. So if TSMC is running or generating more revenues, that means more chips for that particular customer is coming out.

And at some point, utilization rate for those testers are going to hit that 85%, 90% threshold. And I'm trying to look beyond the next couple of quarters. .

Are you also thinking that at some point in the next 2 to 4 quarters, those utilization rates are going to get to the point where even if that particular customer of TSM were to continue with kind of bifurcation of their technology node, they would still have to come back to the market and buy more testers?.

Mehdi, this is Greg. I think you've got it right that utilization is continuing to increase. The equipment that is in place is being used quite efficiently through the year. So the loading is relatively constant.

And we definitely believe that it's a matter of when, not if there's going to be a need for significant additional capacity to support that kind of product line. .

Next question comes from the line of Vivek Arya with Bank of America Securities. .

On the compute TAM, the $1.5 billion, I think that's up roughly 15% from last year. When I look at the size of the accelerator market this year, it's supposed to double.

So is that one kind of high-level way to look at how much the accelerator market is growing versus how much your tester compute TAM is growing? Or is there a different way? So for example if, let's say, the accelerated market grows 30% next year, what does that imply for your compute TAM?.

Interesting question. Thinking about the TAM, that is the overall size of the market, so what we would get, what our competitor would get. And the size of the accelerator market has gone up a lot this year. Most of the testers to support this year's revenue in accelerators was put in place last year.

So if the TAM that was supported last year supporting that sort of big growth that we've seen in the end market this year, what's going to happen this year, the $1.5 billion that we talked about is going to support a significant increase again next year. .

And this year, the primary beneficiary in terms of that end market is NVIDIA. What we're seeing now is that we are having some vertically integrated producers start to have significant ramps and they're already loading significant numbers of testers.

The TAM in 2024 for compute is actually a little bit constrained below what it would otherwise be because these new entrants are actually able to work with their OSAT partners and convert idle testers that would have been in mobile into the compute space. .

So right now, the loading of compute testers is higher than it was than what you'd see in terms of the buys in the market. As mobile starts to come back, that means that there's less idle capacity to fill. It also means that the compute market is going to be translated into more direct buys. .

And if I could add just a quick comment. In my prepared remarks, we noted that the -- our estimate was revised for 2023 for the compute market. When I do the math of our midpoint of $1.5 billion in '24 versus our old, you do get a 15% increase, but we revised that in my prepared remarks, I noted to $1.4 billion. So I think the growth is 7% versus 15%.

I just wanted to point that out. .

And just a quick follow-up. A number of your WFE peers have started to see the benefits of 2-nanometer and gate-all-around. I'm wondering what does that mean for Teradyne? When will you start to see those benefits? And what does that mean for tester intensity? I assume that's more '25 or '26. Any color around that would be very useful. .

Sure. So we are expecting to see some testers being used to support the engineering work in early parts in 2-nanometer probably towards the end of 2025. We don't expect any volume associated with 2-nanometer gate-all-around until 2026.

And the way that we're looking at that right now is that there's nothing particularly idiosyncratic about that node in terms of tester demand. .

So we're thinking of it primarily as an enabler to more complex parts. There are a lot of parts, for example, for cloud AI training that at this point are actually reticle limited, and so anything to allow increased complexity within the same die size is likely to be soaked up by AI.

And so the faster that 2-nanometer comes online, the faster these more complex parts will be developed, and those will likely have longer test times, higher test intensity, which will drive the TAM. .

Next question comes from the line of Toshiya Hari with Goldman Sachs. .

I had one question on memory and another one on your VIP business. On the memory side, you guys talked about a $1.25 billion TAM for '24.

I was hoping you could provide a rough split between DRAM and NAND, how you're viewing the market, what the contribution could be from HBM, and if you can speak to your competitive position, your market share position within HBM, that would be helpful. .

Sure. Why don't I take the numbers, and maybe the competitive position, Greg, if you want to take? So the range that we provided was $1.2 billion to $1.3 billion, with the midpoint of $1.25 billion. And we think from a DRAM perspective, it's roughly 80% of that versus flash of 20%.

Historically, I would say DRAM has been in the 40% and 50% of the overall memory market. So that's roughly the split. And then HBM we think is -- yes, we think that number is about $500 million. It's going to work upwards, but we think that number is above $500 million out of the $1.25 billion. .

So in terms of competitive position, the share patterns that have existed for a few years are persisting. We have very high share in flash final test, we have strong share position in DRAM final test and we have a lower share position in both flat wafer sort and DRAM wafer sort.

So what's happening in the memory market? Like last year, there was a lot of technology-driven buys that were pushing final test purchases. This year, the spark is coming back to the memory market, and that is driving the need for more capacity, and that is driving wafer sort purchases. .

So there's no customer losses, but we are expecting to see our share come down a little bit this year as those wafer start capacity buys go in. Now the subtext underneath that is, HBM is a wafer-level technology, so all of the tests for HBM falls into that wafer sort space. And in HBM, last year, we had about 50% of the test TAM for HBM.

This year, we're expecting that, that is going to come down modestly in terms of share. Our revenue is going to be up significantly, but the market is 5x bigger. So our share is probably going to float down a little bit as people begin to tool up next generation for the volume expansion in HBM. .

At the same time, we think that our opportunities for share gain in terms of new test insertions for HBM are quite good. And so we're projecting that we're going to be penetrating new customers and new test steps for that this year. .

Great. And then as my follow-up on the VIP side, we've all seen quite a few announcements from the Googles, the Amazons, the Metas of the world in terms of what they're working on. I'm curious when those announcements kind of translate into revenue for you guys. I know it takes time for those projects to ramp.

But I think you have pretty good visibility as a test provider, you're probably pulled into those projects early.

So is it a '25 dynamic, is it '26? And how should we think about that contribution as some of those projects ramp?.

Well, from a vertically integrated producer perspective, it really kind of started back in like 2022, 2023. In 2024, like right now, there are hundreds of testers that are being used to test VIP source parts for us. And probably a similar number from our competitor. So it has happened.

The thing that hasn't happened because of the -- the low utilization driven by the mobile slowdown, that hasn't translated into as much new tester purchases as we would have expected in a stronger market. .

But we have multiple VIP sockets that are loading more than 50 testers each, and we have a pipeline of new design starts that we are plan of record for that will stretch out all the way into 2026. So this is real. It's happening now, but the impact on our financial results has been muted by the low utilization because of the mobile downturn. .

Next question comes from the line of C.J. Muse with Cantor Fitzgerald. .

Yes. I guess first question, Greg, in your prepared remarks, you talked about cautiousness on the second half, though seeing better upside opportunity than downside risk. So I was hoping to dig deeper into that. If you could share what would be the end markets that could be upward [indiscernible] as we progress through the year. .

So we have limited visibility, so just bear in mind that I'm going into the realm of speculation here. The things that could drive a higher second half is the leading edge of some sort of a recovery in mobile. Right now, we have a pretty low baseline baked into our plan. So essentially any capacity shortfalls would immediately turn into business. .

And then the other is, we've seen such a dramatic strengthening in the Compute segment with very short lead times in Q1. So that's what really drove our increased outlook for Q2. So we didn't see it coming. We had hints that it was coming. We thought it would be further out and smaller. It has come in bigger and faster than we expected.

If that trend were to continue, then we'd see continued strengthening in the compute space, and that's another thing that could drive a second half up. .

The other way to think about that is we don't really think that industrial and automotive is going to significantly strengthen in the year. That's more of a 2025 thing. .

Very helpful. As a follow-up, you talked briefly on Edge AI. And so I was curious to hear your thoughts on how you see that play out in the smartphone arena. It sounds like this is a year where everyone is trying to see what sticks and what use cases and then maybe next year is the year.

Would love to hear whether you agree with that assessment? When you think the earliest we could see increased content to support Edge AI and smartphones? And how you see that playing out and impact Teradyne's test business?.

Yes. So that's a great question. We've been having very rich discussions internally about this to try and figure out when you consider a smartphone to be AI-enabled. And we're thinking about it in terms of the complexity of the processor that goes into the phone. There have been neural processing units and AI features in phones for years.

But now, the AI opportunity, the edge AI opportunity is driving things towards pushing the amount of silicon area used for AI up towards like 50% or 1/3 of the silicon area going into that. .

So those types of processors are just starting to hit the market now at the premium tier. And I think we've got about a year of people trying to figure out what kind of customer features will actually be compelling using that. And right now, there aren't that many of them.

I think that, that's what's going to happen during the rest of 2024, that there's some premium smartphones and some people that are trying to innovate the things to do with them.

I think the processer generation that's really going to start having enough power to do LLM stuff on a phone is probably the stuff that would ramp towards the end of 2025, and it would become much more mainstream in the generation of silicon coming out in '26. .

Next question comes from the line of Samik Chatterjee with JPMorgan Chase. .

Maybe just to stick with the mobile ecosystem a bit. Any sort of change in your thinking about the primary smartphone customer there? I know you've said previously, it's less than 10% is what your expectation for this year is.

Just checking in terms of how much of the sort of change in 2Q or sort of thinking about the back half, any changes in how you think about the cadence of purchases from the primary customer or any change in your overall taking for the year for that customer. .

I hope I caught all of your question. If I didn't, then please correct me. We don't comment about specific customers. I will share that we don't expect that our historically largest customer will be a 10% customer this year.

I'll also share that we think that there is more of -- that we've gotten sort of the bottom dialed into our plan, that there's definitely more upside to downside in terms of the plan associated with mobile in general. .

Got it. And you got that question. So for my follow-up, if I can ask on robotics.

Can you give us some sense of how you're thinking about first half versus second half there? And what's the -- right now, any updated thinking on profitability for the year for the business? How do you track in 1Q and sort of how you're thinking about the full year for robotics. .

So I'll start off with sort of a qualitative answer in terms of the drivers, but then I'll pass it off to Sanjay to give you more of the precise split first half, second half and the profitability. So what's going on right now is we have a plan for the year that's going to be essentially sequentially growing quarter by quarter.

And the reason that the plan is laid out that way is because there are new growth drivers that are coming online throughout the year. There are drivers that are in place from last year in Q1, that's specifically the UR20 and UR30, the heavy payload cobots. .

In Q1, we had the announcement of the MiR1200 pallet jack. That's going to start really impacting revenue in the back half, primarily in the fourth quarter, but we're already taking orders. We're building backlog for that product. We also announced the collaboration with NVIDIA. That's going to really drive business through our OEM solution channel.

So we're going to be providing the platform tools to that channel, so that they can create stuff that goes to market. So that's stuff that will also be back half loaded. .

The other thing that's driving through the year is we are continuing to build our OEM channel and our large accounts channel. So those are things that we started. We started OEMs back in '22, we started large accounts in '23, and they have a significant amount of gestation time before they deliver revenue.

We're right at the point where OEMs are starting to really click. We talked about the 58% year-on-year increase in that space. I'm expecting to see growth above the aggregate growth for large accounts in 2024. So that's going to be a growth driver through the end of the year. .

So with that, I'll pass it off to Sanjay to give you sort of the precise breakdowns. .

So roughly the first half of the year -- well, first, as Greg noted, we expect to grow sequentially in Q2, and we expect to grow throughout the year for the reasons Greg just noted. But in the first half, we have 42%-ish plus or minus, and then 58% in the back half of the year. We do expect to be profitable this year.

I would say, over the year, and I would say that, that would be single-digit profitability. I will comment, I think you asked about Q1. We were not profitable just given the seasonality of the quarter. That should give you the context, I think that you asked. .

Next question comes from the line of Krish Sankar with TD Cohen. .

I had a couple of them. First one, on the memory side, how much of your memory revenues were from HBM in the March quarter. And I think Sanjay, you mentioned HBM revenues could grow 5x this year.

I'm kind of curious, are you over-indexed to 1 customer, because my understanding is of the 3 HBM customers, 1 of them in sources, and within other 2, can you just talk a little bit about your share position there? Then I have a follow-up. .

I'll take the first one on the memory in the quarter. Yes. So I want to say roughly about 45% of the memory revenue that we had was tied in the first quarter to HBM. .

Yes. So Krish, one quick comment. The 5x comment about HBM was referring to the market size for HBM memory. So last year was about $100 million of TAM for HBM. This year, we think it's about $500 million worth of TAM for HBM. Our revenue is not going to go up by a factor of 5. It's going to go up. It's going to go up significantly.

But we're not going to be able to hold sort of the 50-ish percent share of HBM that we had last year. .

Are we over indexed to one customer? Well, the entire world is significantly over-indexed to one supplier in HBM. And that certainly has been driving our results to a great degree, both last year and will continue to drive our results this year. The other suppliers that are coming online. One of them is primarily internally based for test.

We don't have any of that baked into our plan, although we think that they would be better off using our equipment, we haven't convinced them of that yet. And the other supplier in this space is a great customer of ours, although our share there is lower than our share in the leader in this space right now.

So that's another reason that we expect to dilute our share a little bit this year. .

The other point that I'll make is I was saying that we like our chances in terms of getting into new insertions for HBM memory this year. I think that, that's an important point. And we are hopeful that, that's going to be delivering significantly higher revenue for us through the midterm. .

Very helpful, very helpful. And then just a quick follow-up. You spoke about your revenue trajectory for the year. You said September should be similar to June and then growth in 4Q. I was just curious because that seems to be against normal seasonality.

So what's the deviation this year?.

Yes. Interesting question. I'd say that I remember several years back when we talked about we were going into a downturn and that downturn was 4 to 6 quarters, and the downturn has gone a lot longer in the way of mobility.

And as Greg noted, we believe that our forecast considers mobility at a point where we feel comfortable that it's going to be achieved.

And so I think as things pick back up, the historical seasonality, I put it in the context of some segments are going to be recovering and we have some new segments that are -- or some segments that are growing fairly well. So I think the seasonality comment with regards to the test perspective, or test portfolio of businesses we have.

It's a little bit off this year. .

This is Greg. Just one additional bit of color. If you think about the seasonality pattern that we developed really for a decade, 2010 through 2021, that seasonality, if you looked at all of our segments with the exception of mobile, there wasn't a really marked seasonality. Like those automotive, compute, industrial, they kind of chugged along.

The seasonality was really driven by the mobile TAM, and that was driven by consumer buying behavior, right, that you needed to have things for the holiday season and for Lunar New Year. All of that inventory needed to be built up.

And so there was a concentration of capacity that would go in, in Q2 and Q3, with mobile not driving right now, the seasonality is very, very muted. So I would expect to see that the seasonality will return once the mobile market is stronger, but I don't think you can use normal patterns to predict the way things will look in '24. .

Next question comes from the line of Joe Moore with Morgan Stanley. .

I wonder if you could talk to the smartphone issues that you just mentioned. Away from your biggest customer, you sort of saw the smartphone suppliers reduce balance sheet inventory by 15, 20 days in Q4. And they talked about doing that again in Q1.

So I would expect you to have low visibility, but shouldn't you get some recovery as they stop depleting that much inventory? Is there any kind of nuance in terms of how much of that inventory has been tested already in die bank, things like that. But shouldn't we have some optimism that this is going to get better. .

Well, I think we certainly have optimism that it can get better. And that's basically because we've dialed in the bottom. And the way we do this is we typically will look at tester utilization numbers. And frankly, those numbers are all over the map. Some indicators show that capacity is tightening.

Other indicators are showing that it's relatively -- utilization is tightening. Others show that it's relatively flat. Our qualitative checks, when we are talking to people in the ecosystem, they are telling us that capacity -- that utilization is getting tighter and it's forecast to go up from there. .

So the thing that, that hasn't done is it hasn't turned into firm forecast for additional business. And there is a fair amount of -- I think the lack of visibility that we see, it runs all the way through the supply chain that people are wondering what's going to happen.

People are wondering how well handset sales will recover? And I think it's really going to come down to the way that the holiday season demand is shaping up. That's the thing that's going to be the lever that either turns on some additional spot buys or we'll have people waiting until 2025. .

Thank you. Next question comes from the line of Brian Chin with Stifel. .

Just to clarify, maybe firstly, was the third quarter pull-in, was that for AI, for compute, or for memory, or for both? And just to be clear, your share of the $200 million memory TAM increase, should we think about that being closer to, say, 40% if the emphasis is on wafer sort. And kind of sorry one more part to this.

But I didn't catch this earlier, but if HBM demand is biased to a single customer, do you expect memory sales to be lumpy this year kind of from a quarterly perspective?.

Yes, I'll take the kind of the Q3 to Q2. It was, I'd say, mainly in compute and some ADAS that was accelerated and -- just looking up something. .

Yes. So in terms of the TAM increase, we moved the TAM up by $200 million. And I think -- I think your guess of $40 million is a bit low. I think we'll be up a bit more than -- we'll get a larger chunk of that up than that, probably in line with our historical share level, kind of 35% to 40% of that TAM increase should probably go to us.

In terms of lumpy sales, no, I think actually the memory business is driving -- we have deliveries that will be stretching out through the year. And I think the demand is relatively steady and potentially increasing. So I think on a quarterly basis, we don't expect a lot of memory variation. .

Okay. That's helpful. And then switching gears to robotics. It seems like your omnichannel and new product focus is driving a lot of this improved momentum in that business.

But can you also just touch on the broader environment you're seeing in robotics, and where, if any, you see sort of macro like headwinds or tailwinds? And last part of that, what vertical or application was that customer that placed the record MiR order? And did that include any of the MiR1200s?.

Okay. So in terms of the macro environment, it's pretty weak. I mean it was weak throughout 2023, and we don't see a significant improvement right now in terms of the end market conditions. If you look at PMIs, some regions are clicking up slightly, but we haven't really seen that turned into like a hot market.

Having said that, we're in a part of the robotics market that is very, very low penetration.

And so we are not -- we have seen our business results vary with the macro conditions, and we think that, that is indicative of the -- that was one of the things that drove us to go and make the changes in terms of adding new products and driving channel development, because we think we're 5% of the way into something that could be huge. .

And if that's the case, then we should be somewhat immune to these cycles. But we've been looking at like industrial robot competitors and their results this quarter have been pretty meager. Like especially if you look at their incoming order rates, which is more comparable, they have long lead times. We have short lead times.

So it's better for us to compare their orders to our orders. We feel like we are doing far better than they are in these end market conditions. But we're really focused on kind of controlling our own destiny by finding the things that need support even when the end market is [indiscernible]. .

One thing that I'll say is looking at other sort of industrial analyst notes and talking to people in that space, they are expecting improved strength like they think that things are going to get better, not worse.

So I'm optimistic that we're going to have some macro tailwinds in addition to the plan that we baked, that's kind of counting on things staying around where they are. .

Next question comes from the line of Gus Richard with Northland Capital. .

Congratulations on the results. On the Industrial Automation, you've got a partnership with NVIDIA on AI. And sort of one on the limiters to penetration is the lack of a VAR channel, having to have to work with people to implement this stuff.

Does multimodal AI or AI in general sort of simplify the implementation? Can you simplify the programming and implementation of robotics with that infusion of AI?.

Yes. So for sure, the great thing about AI, there are two primary benefits to AI. One is that it's far easier to design a solution that is able to deal with variation, whether it's part variation or location variation or other uncertainties that exist in normal manufacturing environments, the solutions end up being far more resilient.

So that means that more people would be willing to adopt them. .

People don't want to put fragile things into production and AI will help make things more robust. The simplicity of developing things is definitely a huge benefit of AI. So the demonstration that we did at GTC was a pretty sophisticated visual inspection application.

And because we were leveraging a really powerful AI stack from NVIDIA, we were able to put that together in less than 2 weeks. It was a very fast turnaround to be able to build that solution.

And we expect that both customers and customers and especially solution providers are going to be able to leverage that and create solutions to categories of problems that will help drive growth. .

Got it. And then on the semi test side, you've got sort of -- it's going to be a while before we get to 2 nanometers, yields at 3. I don't think we're that great. And the AI accelerators are reticle limited. How are you seeing the expansion of use of chiplets sort of beyond AI accelerators and servers and FPGAs.

Is that beginning to broaden out?.

Not really. Well, one thing is that most of the advanced packaging capacity in the world has been consumed by the people who are doing cloud AI, high-performance computing. So there's more demand than there is supply for it. So I think that's limiting it to the markets that are willing to pay the most for the ability to do it.

I think that it's possible that chiplet technology will migrate out of high-performance computing potentially -- I mean it could potentially migrate into some mobile applications. I think that's going to be a relatively slow process because the price points are very, very different. .

And then I think for industrial and automotive AI applications, it's likely to be a long time before you see chiplet technology in there because of the reliability and temperature range questions. It's a much more challenging environment to try and put packages. But that's kind of my view.

I think that there are people that have a more aggressive view in terms of where chiplets will go. .

We have time for one last question. The next question comes from the line of Steve Barger with KeyBanc Capital Markets. .

I'll be quick. Greg, you said share gain opportunities in HBM are good.

Is that primarily due to you having capacity to support a fast-growing addressable market, or is there something unique in your current or future testers that will make you a supplier of choice for some variations of HBM?.

I think it's definitely the latter. So we believe we have a differentiated solution, both in terms of ability to support data rates out through HBM 4 and also in terms of being able to use same platform across multiple insertions.

So we think that we have an ability to deliver more cost-effective performance test of HBM, and we believe that we're going to make some progress there. .

Understood. And for the large account channel in robotics, you said there's a gestation time before revenue.

Was this largest ever MiR order a function of work prior done to the pivot? Or did it come after? And then to your point about being more immune to cycles, is that just because large accounts are more likely to invest through cycles and are less swayed by near-term conditions?.

Yes. So let me take the large account question first. And I need to apologize to Brian because I didn't answer his question before. So the largest order that we've ever gotten from MiR, it came from an automotive customer. And it is also our historically largest customer for MiR. By no coincidence, it's also a significantly large customer for UR.

So we have been selling them robots for a long time.

The one thing that has happened since we established our large account effort is that we've been applying many of the strategic account management techniques that we've been using for decades in semiconductor test towards addressing those accounts and really organizing ourselves around the way that those large accounts acquire new equipment and also how to take care of the equipment that they have.

So I think it's certainly an account that predated that effort, but I think our ability to serve that account has improved with this effort. .

And then just about being more immune to cycles, is that because large accounts will invest through cycles? And so that pivot will make you less cyclical yourself?.

I think actually, the large accounts may be the segment that has -- that will continue to be sensitive to end market conditions, because large accounts will work off of budgets. And if they don't provide budgets for automation, then those purchases won't happen.

The thing that we're really trying to do is make sure that we are adding enough new opportunities to drive growth even if end market conditions are weak. .

So a key part of this is being able to find and serve customers that have these problems. We have 95% of this market that is as yet unserved. So there is plenty of opportunity.

And the key thing that we're trying to do is to pick our shots, pick the specific industry verticals and the specific applications that are likely to be driving growth independent of the aggregate macro conditions. .

Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Traci Tsuchiguchi for closing comments. .

Great. Thank you all for joining us this morning for our first quarter earnings call. We look forward to being in touch with you all through the course of the quarter. Thank you. Good day. .

This concludes today's teleconference. You may disconnect your lines at this time..