Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Q1 2016 earnings conference call. [Operator Instructions] Thank you. Mr. Blanchard, you may begin your conference.

Thank you, Amy. 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 our Chief Financial Officer, Greg Beecher. Following our opening remarks, we will provide details of our performance for the first quarter of 2016 and our outlook for the second quarter of this year. The press release containing our first-quarter results was issued last evening. We are providing slides on investor page of the website that may be helpful to you in following the discussion. Those slides can be downloaded now, or you can follow along live. Replays of this call will be available after the call 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 statement 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 will make reference to non-GAAP financial measures. We’ve posted additional information concerning those non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures, where available, on the investor page of our website. Also, between now and our next earnings call, Teradyne will be participating in investor conferences hosted by Cowan, Craig-Hallum, Credit Suisse, and Stifel Nicolaus. Now let’s get on with the rest of the agenda. First, Mark will comment on our recent results and the market conditions as we enter the second quarter. Greg will then offer more details on our quarterly financial results, along with our guidance for the second quarter. We’ll then answer your questions, and this call is scheduled for one hour. Mark?

Thanks, Andy, and good morning everyone. In my prepared remarks today, I’ll cover three main topics. The highlights of our first quarter, the outlook for the remainder of 2016, and some thoughts on our longer-term direction at Teradyne in the context of industry trends we are observing. First, we are off to a very good start in 2016, with our highest Q1 sales since the first quarter of 2001. Sales were up over $100 million, or 37%, when compared to the Q1 average of the last three years, driven by strength in semiconductor test and the added contribution of Universal Robots. Higher revenue also drove our highest Q1 earnings since 2011. As we discussed last call, strong orders in semi-test in the fourth quarter of 2015 have resulted in a more level loaded tooling cycle for this year’s capacity expansion in mobility test. As a result, when compared to recent periods, we expect to see less revenue volatility in the first three quarters of the year. As a result of the fourth-quarter pull-ins, total Company orders for the first quarter softened 25% from Q4. However, if we look at the six-month Q4/Q1 period, orders were up about $90 million, or 11%, from the comparable period in 2014 and 2015. Furthermore, first-half revenue at the midpoint of our guidance will be up about $100 million, or 12%, from the first halves of 2014 and 2015. So I will again emphasize that what we are seeing in our order patterns is a welcome shift to a more orderly, more efficient, and less lumpy shipment stream. In semiconductor test, mobile products continue to power SOC demand. On the one hand, while the slowing growth of semiconductor units is a bit of a headwind in the current environment, other underlying drivers of test demand…

Thanks, Mark, and good morning everyone. I will start with some brief comments on the start to the year, our 2016 key goals, and then I’ll cover the first-quarter results and second-quarter outlook. 2016 is off on very solid footing, with first-quarter sales of $431 million, up 26% from the first quarter of a year ago and up 34% from the first quarter of two years ago. Our expanded semi-test market share position, coupled with rising mobility tester demand, and the more recent addition of Universal Robots in the fast-growing cobot space, have us well positioned for growth in 2016. We have worked very hard to position ourselves for growth, after two sequential years of sales over $1.6 billion. The addition of Universal Robots, continued market share gains in our core businesses, and a greater shift in our competition programs to performance-based pay with an emphasis on growth are all part of the equation going forward. Having built a solid profitable core, we’ve upped the focus on EPS growth through top line growth. As we’ve outlined in prior calls, we expect a greater leap forward in mobility performance and complexity this year, following the every-other-year pattern of incremental complexity changes in odd years and step function changes in the even years. This tick-tock pattern of complexity jumps, along with advanced packaging changes, is driving up 2016 tester demand. The demand increases has us investing material supply and modestly investing capital to expand our test and calibration fixtures, to increase our maximum UltraFLEX shipment capacity by upwards of about 20% over prior peak levels. Our systems test group is also off to a good start, with all three businesses, storage test, defense and aero, and production board test are operating at model profits or better in the first quarter. Last year,…

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

[Operator Instructions] Your first question comes from Krish Sankar.

Yes. Hi. Thanks for taking my question. I had two quick ones. One is on the associate test market. You guys are maintaining the Ultra. How much of the $2.1 billion to $2.5 billion is mobility? And is it fair to assume to 10% plus in growth rate this year bakes in some of the on the pull-in of the autos you saw in 4Q? And I also had a follow-up.

Yes, so the pull-ins that we saw in the fourth quarter in bookings certainly ship off in this fiscal year. So part of what’s driving the market growth this year is a consequence of those order pull-ins. In terms of what percentage of the total SOC space is represented by mobility, roughly speaking, $1 billion or so of that market is tied to mobility devices.

Got it, that’s very helpful. And then as a follow-up, based on your current Universal Robots infrastructure in Denmark, how much revenues can it handle before you need to add more CapEx to it?

The facility, and the line, we could go easily four or five years before we need to think about another facility. I should add that the assembly times are rather quick, in terms of labor hours. It’s a very lean model with the way it’s been set up. So we’re very comfortable that facility can scale for years to come.

Got it. Thank you.

Your next question is from Tim Arcuri.

Thanks. I had two. I guess the first obvious question is, we been talking about the on-off pattern now for a while. So is there any reason why this would change, looking at the next year? This year is clearly an on year, but is there any reason why next year wouldn’t be an off year? It seems like maybe Apple is not shrinking this year, so maybe there’s some effect where a lack of a shrink this year could make next year a bit better, if that dynamic were to shrink next year? But I’m just wondering if you…

Yes, it’s a good question. And one of the things, if you recall, we saw last year, in 2015, even though it was a traditionally off year, was a lot of complexity growth in devices that buoyed up, certainly, Teradyne’s business. And being heavily concentrated in mobility, that was a welcome change. So as we look into 2017, there’s a couple things going on. The complexity growth appears to be on track to run at a higher rate than in a normal odd year. And there’s a shift to new lithography nodes that we haven’t seen this year. So going to 10 nanometer, as an example, will bring with it some yield learning that will increase test intensity for a while at that node. So there’s a couple things like that, that are coming in semi-test for 2017, that are promising. Outside of semi-test, as we think about LitePoint, we think that 802.11ad will begin showing up in some of the consumer products, and that will also drive some tooling due to technology that we haven’t seen for a couple of years in LitePoint’s business.

Great, thanks for that. And then I guess a question for Greg. Greg, the gross margin guidance is pretty low, given the revenue. It looks a lot like 2014, frankly. But the mix, it doesn’t look that much like 2014, because then you had a lot of digital test. So I guess I’m just wondering what’s going on to drag down gross margin in June?

Tim, the mix this year, and to date, is actually quite similar with the prior two even years, 2014 and 2012, where we were about 50% those two years. And this is the year where you have the large concentrated buyer, and that’s happened every even year. So it’s actually quite consistent with what we would have expected. Now, we have some other businesses in our mix of portfolio that are down, such as LitePoint, so we’re losing a little bit of otherwise margin contribution there. But principally, it’s the semi-test mix of customers, and their relative size, that’s driving the percentage back to the same number it was in the prior even years.

Got it. Okay. Thanks so much.

Your next question is from Mehdi Hosseini.

Yes, thank you. It’s actually Mehdi Hosseini. Just as a follow-up to the previous question, isn’t that a little bit premature to even think about 2017? And some of the maybe disappointed with booking has to do with a constant traded mix of customers with semi-test. And it got pulled in, and that’s just a reflection of the increased concentration among your customers, especially on the SOC side?

Look, I think if you want to drop the markers down just between January 1 and March 30, you will see that phenomenon. But if you look at the total buying for this tooling cycle that started in Q4, and put the two together, we’re certainly running ahead of the last period’s tooling cycle. So that’s the way I think about it is, it just so happened we got to an earlier start on the order rate, something we’ve been working with our customers to encourage for quite some time, to get a more orderly shipment stream. So I think it’s a positive effect this year, that we started sooner and have been able to deploy. So if we look at the first two quarters of shipments, again, we’re up over prior periods by over 10%. So it’s all – similar to what we predicted.

Let me rephrase the question. In the previous call, you talked about building $100 million to $200 million of inventory for one customer. Was that a turn business that helped you with upside to the revenues, and adversely also impacted your booking that would be shipping in the later quarters?

Mehdi, around fourth quarter each year, we’ve – particularly approaching the even years, we build up the inventory pipeline. So there was nothing different going into this cycle than in prior cycles. And I did say earlier, on the gross margin, there’s a concentrated large customer and they get better pricing. And again, we’re ahead of where we’ve been in prior years for the first half. So the second half, too early to really talk about. We don’t really have a good picture of that. But the first half, very good start, and it’s been playing out the way we expected. The only real soft spot in the portfolio was LitePoint. Apart from that, the other – the businesses are all doing well.

Got it. And then one – and then the second question, with your Universal Robot, I understand the growth opportunity, and – but maybe I joined the call late. I quite didn’t understand why revenues were down in the first quarter?

Each first quarter, Mehdi, UR’s sales, the last three years, consistently dropped in the first quarter. They have a very strong fourth quarter. In fact, each year, first quarter is the low quarter and it builds sequentially, and then there’s a very strong fourth quarter. Now, there’s a whole set of reasons why fourth quarter is – for purchases can be strong, including end of budget money or other sales programs drive that last product or two over the finish line. So it’s following the same pattern as the past. And typically the fourth quarter, just to give you another reference point, the fourth-quarter sales tend to be more than 2 times what the first quarter was, in the last three years. So the first quarter was what we were expecting. It’s tracking to the 50% or better sales growth line. We would expect the other quarters to do the same. And then for the full year, we would expect to be 50% or greater. But again, it’s going to build throughout the year and have a strong fourth quarter, is our expectation.

And since this is a turn business, we don’t really see it in booking? You build and ship…

Correct. You’re absolutely right, Mehdi. We have very little visibility.

Got you. Thanks so much.

Your next question is from Steven Chin.

Yes, thanks. Just question on the March quarterly orders for standout technology. Do you think there were any semi-test orders for standout technology in the March quarter? And do you still think you may see test equipment orders from Teradyne for further standout technology at some point this year again?

So rather than speak specifically to one technology, I’d say that for advanced packaging applications, Q1 certainly saw significant orders, and we expect that to continue in Q2. Again, there’s a cycle that goes on across – and this year, it will be three quarters. So Q4, Q1, and Q2 will have a significant amount of orders related to advanced packaging.

Okay. Thanks, Mark. And then just a follow-up question on semi-test equipment sales to customers in China. We’re hearing about a lot of the front-end equipment suppliers having pretty good shipment visibility to customers in China. Do you think there needs to be more back-end test investments made in China to support this eventual front-end fab build-out that’s going on in China? Thanks.

Yes, that will absolutely occur. It will occur much closer to production ramp. You’ll see, in other words, the lag between front end and back end. On the other hand, there are some significantly large semiconductor companies in China already that have been driving a reasonably good amount of tester capacity. It just tends to be off the China shore, in Taiwan and other places. So eventually, the combination of local fabs growing, and I would say an attempt to repatriate some of the capacity that’s offshore for test, it’s probably a good year and a half to two years before it starts to register, but it will register and show up on the radar as a big, concentrated buying center. And about that time frame is my estimate.

Okay. Thanks, Mark, for sharing.

Your next question is from Farhan Ahmad.

Thanks for taking my question. My first questions regarding a comment you made earlier on the call that your Q1 to Q3 should be more stable revenue levels. And I just wanted to understand, like do you have any visibility to the third quarter? Given that your revenues have normally declined somewhere between 1% to 15%, quarter on quarter? Does your commentary imply that this year, the sequential decline in September quarter would be a lot lower?

No. It doesn’t necessarily imply that. Although we do have some visibility into third quarter, it isn’t perfect. And I think the way I would tend to think about it is, we’ve had $100 million increment in the first half of this year, in terms of revenue. The second half of the year, at this point, in our view, is not going to be significantly different from other second halves. So really, it’s just, again, this front loading of more capacity. So the year is up, and it’s spread out over two quarters and the orders are spread out over three quarters.

Got it. And then second question, just longer-term. How do you see the margins in the business? If I compare your margins from, say, 2010 or 2012, even at the similar revenue level, it seems like your margins are down a bit. So given that semi-test is so consolidated, like why shouldn’t margins be higher in this business?

Yes, when you look at margins in some of those periods, like 2010 in 2012 – let’s take 2012. 2012, you had a very strong year of LitePoint, with extraordinary performance. LitePoint grew from $130 million of revenue in 2011 to $289 million in 2012. So when a business grows that fast, the gross margins are super-attractive. So we had that in 2012, so that wasn’t a semi-test issue – story. When you go back to 2010, we actually had fewer businesses. In 2010, we didn’t have Universal Robots, and Universal Robots is consistent with the Company model. But as you get more sales with the new business, you’re also bringing their fixed manufacturing costs along, verses if those additional sales were for semi, they drop through more profit. If you look at our margins over a longer period of time, you generally see, in the even years, we’re 54%, in the odd years, we do better. There’s nothing that I’ve seen that would cause us to deviate from about this range that we’ve been experiencing. We have ongoing programs to introduce new instruments that are more competitive, and we have material cost-down programs going on at the same time. So I think we’ve got a track record, over a number of years, of taking action so we can stay within this range of healthy gross margins in the 53%, 54%, 55% range, with some fluctuation based upon mix.

Got it. Thank you. That’s all I have.

Your next question is from Patrick Ho.

Thank you very much. Mark, you mentioned that you saw a pickup in J750 sales. Was this related to an industry pickup in the Chinese low-end midrange smartphone market? And what kind of device specifically did you see this pickup in?

Yes, so I wouldn’t specifically attribute it to China low-end smartphones. The J750 is – serves such a wide set of markets that it really was a general pickup across a lot of different spaces. Certainly part of it is mobility, but automotive is another piece of that, some consumer IoT-type applications would be another. So it’s a broad spectrum.

Great, that’s helpful. And maybe just going to the UR business for a second, you mentioned that you’re now starting to see, I guess, some of the traction related to both your systems test and the wireless test type of applications. How much do you see that contributing to revenues for 2016 as a whole?

Yes. That’s hard to prognosticate. I’d say it’s going to be a minor piece of the 2016 revenue. We’re just starting installations now, so – and then those will go into some sort of evaluation period. So this year, not consequential. In out years, it will increase. But as we’ve said before, even over four or five years, the piece of revenue synergies we get from Teradyne customers, and the total UR business, will be relatively small, less than 10% of their business.

Great. Thank you.

Your next question is from Weston Twigg.

Hi. Yes, just a couple of quick questions. First, just wondering if you could help us understand your growth expectations in the SSD test segment? And did you say that you still expect systems test to be down year over year, this year?

Yes. Systems test, we didn’t speak about the full year, but systems test, particularly storage test, had a very good year last year. We expect that to be down this year, but still operating at model profits. So that would be down. Production board tests, flattish, maybe a tiny bit of growth. And mil-aer, a little bit of growth. So the total isn’t going to change much, but likely down a bit due to storage test, with healthy profits. Was there a second question, Wes?

I was wondering if you could give us a little color on SSD traction? And then I did have a second question, which was on your expectation for wireless test to market share?

SSD testing, we have an automated asynchronous test platform. So it has significant benefits versus a manual an oven batch platform. We’re speaking to a number of customers about transitioning to a more automated asynchronous test strategy. It’s quite early to figure out how they will shake out. There’s certainly interest. Some of these customers have internal solutions that probably won’t scale well, but it’s what they have and are familiar with now. So I think we need probably another couple of quarters to figure out where these things shake out. But we do see we have a product that probably can help them as they move up in volume in SSD.

Okay. And wireless test market share expectation?

Wireless test market share? This is – it’s going to be hard to figure that out. We’ve been gaining a little bit each year. This is going to be more a year of, who’s buying? It’s going to be in the low end of the range that Mark mentioned earlier. And it’s really, who’s situated with whoever is buying? So I think this is really, if you found the right watering holes, you are going to do well. My guess is we’ll be flattish, but it’s early to really be specific. Some of our accounts that we’re strong may be buying less than they were in the past, so they may have a low year and then come back next year. So in market share, probably is not going to be great for us this year, but if it could be looked at over a trend line, there’s a good story to be told.

Great. Thank you

Your next question is from David Duley.

Yes. Thanks for taking my question. Just a couple questions. First of all, if you could just help us, where do you think you finished off 2015, as far as SOC market share? And where do you think it will finish 2016, given the dynamics going on in the mobility sector.

Yes. So the official-official third-party results aren’t in yet, but our view of SOC share last year is in the sort of 50% range. And for this year, we’re looking for that to be roughly up 1 point.

Okay. And given you have 50% – let’s just say a range, 50% to 55% share of the SOC test market. How does Teradyne get to $2 in earnings? It seems like you’ve already got most – maybe you can gain more market share, but what are the key levers that the Company needs to achieve to get to $2 in earnings?

Yes. There’s a couple of ways to get there, but the most direct path is further share gains and some market stabilization in semi-test. My estimates would be that would probably be the single biggest piece, SOC and the market stabilizing. Two is, Universal Robots is another big piece. Then there’s a third bucket. It’s all the other businesses and share buybacks. Those three things can get us to $2

Okay, and just to frame that, I think I understand how the robot business will help you get to $2, right? With the growth that you expect, it might add $0.05 or $0.10 of earnings every year. But what conditions do you need in the SOC test market to get to a $2 number? Because it seems like you have an on year this year, right, mobility spending is strong. So I guess, what needs to change in the SOC test market for you to get to $2?

Yes. I’m not saying the SOC market, we could get there by itself. We need UR and these other actions. But the SOC market, we certainly can, if we stay in our trend line of picking up 1 point or 2 a share a year. And the market has shown some healthier signs, despite all the confusion that’s out there are sometimes, there’s much more complexity and slowing parallel tests. So what we really need? We need a market that probably is flat to 2% growth, and we need 1 point of share gain a year. If we had those two things, with UR and these other actions, we get to $2.

Okay. Thank you very much.

Yes.

Your next question is from Sidney Ho.

Hi. Thanks for taking my question. I just want to follow up on the gross margin side of the questions earlier. So obviously, you didn’t get a big uplift in gross margin in Q2. How should we think about gross margin in the second half, when revenue is typically lower. And finally, is gross margin below the operating model in the even years the right way of thinking about it?

I think that’s probably a fair way to think about it. In the second half of the year, I think what you’d expect is, when volumes typically come down, the gross margin percent shouldn’t come down as much as it would otherwise, because the mix in the first half of the year is working against us. That mix probably will not be as strong in the second or latter part of the year. So I think gross margins in the second half of the year will hold up better than you might otherwise expect, based upon the volume drop.

Okay, that’s fair. Second question, I’m hoping that you guys can give us some help in terms of modeling second-quarter orders. Clearly, if you add up the last two quarters, you’re up more than 10% year over year. So to get to the midpoint of your SOC market forecast, let’s just say you’re in line with the market. Does that mean second-quarter orders should be up 10% year over year, and hence up 40% to 50% sequentially? Is that the right way thinking about it? Or there is some other offset?

As you know, we don’t guide quarters. What I would say, though, is that for the year to play out as we’ve described it earlier in the call, with the second half being similar to prior-year second halves, then the second-quarter bookings would be to be up over first. But that’s about as far as I’ll go with it.

All right. Thanks.

I’ll quickly add, our customers have wide ranges now, this early in the year. So it really depends upon where they end up in their plans, and therefore what ripples back to us. So there’s still some pretty wide ranges as to what can occur.

There are no further questioned at this time, sir.

Great. That’s the end of the call. Thank you for joining us. We look forward to talking to you down the road.

Thank you.

Thank you.

Thank you for participating in today’s teleconference. At this time, you may all disconnect.