Good day, ladies and gentlemen and welcome to the Teradyne Q1 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Andy Blanchard, Vice President of Corporate Communications. Sir, you may begin.

Thank you, Dan. Good morning, everyone and welcome to our discussion of Teradyne’s most recent financial results. I am joined this morning by our CEO, Mark Jagiela and CFO, Greg Beecher. Following our opening remarks, we will provide details of our performance for 2019’s first quarter with our outlook for the second quarter of 2019 as well. The press release containing our first quarter results was issued last evening. We are providing slides on the investor page of the website that maybe helpful to you in following this 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 statement contained in our 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 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 page of the website. Also, between now and our next earnings call, Teradyne will be participating in investor conferences hosted by Baird, BofA, Bernstein, Cowen, Stifel and UBS. Now, let’s get on to 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 results along with our guidance for the second quarter. We will then answer your questions. And this call is scheduled for 1 hour. Mark?

Hello, everyone and thanks for joining us this morning. My prepared remarks will provide a summary of our recent results, describe current conditions in the markets we serve and provide an update on how we are looking at the full year. Greg will then take you through more details on the quarter. Our first quarter sales of $494 million and non-GAAP profits of $0.54 per share came in ahead of our January guidance. This was due to a few strong pockets of notable demand. First, image sensor tester sales were the highest on record as the proliferation of cameras and smartphones, automotive, industrial and security applications continues to expand rapidly. Second, semiconductor test capacity for devices used in 5G base stations and related infrastructure began to ramp. This was primarily for high-performance digital infrastructure processors and represents the very early phase of what is expected to be a multiyear ramp up capacity for a variety of 5G technologies. And third, in industrial automation, we saw the beginning of some large deployments of UR cobots at enterprise-level accounts in automated assembly applications. Elsewhere in semi test, aside from our one large account, demand for mobile device testing remains high and trending ahead of 2018 levels. At our large account, we expect another downtick in demand this year but overall in line with our annual guidance. Demand for RF test capacity for legacy standards is low, but interest in RF test capacity for next-generation ultra-wideband, WiFi and 5G standards is growing and should expand throughout the year. In analog test, after a record 2018 for our Eagle product line, shipments for the automotive, industrial and consumer markets cooled in the quarter and came in about as expected. We expanded our footprint in the high-powered discrete modular test with the acquisition of Lemsys…

Thanks, Mark and good morning everyone. I will provide some key highlights, cover UR’s market advantage and longer term outlook and then I will move to the first quarter results and second quarter outlook. First though, our first quarter sales of $494 million and non-GAAP EPS of $0.54 came in slightly above the top end of our guidance and EPS was 20% above our year ago start. The EPS year-over-year improvement was principally due to favorable product mix and share buybacks offset somewhat by higher industrial automation OpEx, including having MiR and Energid in our 2019 first quarter results. Our second quarter guidance for sales of $520 million to $550 million, with non-GAAP EPS of $0.56 to $0.65 shows sequential 8% revenue and 12% non-GAAP EPS growth at the midpoint, that has us striking to similar first half sales with non-GAAP EPS up about 10% compared with a year ago. While there are pockets of semi test buying in support of 5G infrastructure and image sensor for handsets and security as Mark noted, annual semiconductor units are forecasted to be well under the 10% plus growth rate of the prior 2 years. So we are conservatively planning for a flat to slightly softer second half in semi test albeit with considerable uncertainty. Second half growth in industrial automation should fill the gap so that the first and second halves should be pretty symmetrical from a revenue and EPS perspective. Semi test volatility has been the norm for many years, so we long ago structured our operations with these swings in demand. For example, in the current decade, our non-GAAP operating profit rate has averaged 23% over the last 9 years and swung from a high of 28% in 2010 to a low of 18% in 2013. In the last 3…

Thanks, Greg. Daniel, we would now like to take some questions.

Thank you. [Operator Instructions] Our first question comes from Mehdi Hosseini with SIG. Your line is now open.

Yes, thanks for taking my questions. First one has to do with the 5G, Mark can you help us understand what are the specific opportunities like market segment, you referenced base station, but I want a bit to understand a specific content exposure that you have there? And I have a follow-up.

Sure. So as you can imagine, right now, infrastructure is starting to rollout for 5G and 5G is a collection of technology, some of it is sub-6G, some of it is millimeter away. But predominantly at the moment, it’s China deployment of sub-6G infrastructure base stations. And inside those base stations, typically, there is a digital-rich network processing chips that we test and that’s been predominantly what’s driving this year’s strong growth in that segment for semi test. In conjunction with that, in the 5G world, there is going to be more small cells, more small base stations, so there is also infrastructure around the RF content on the towers. That drives a little bit of RF demand as well. But the big, big segment that really propels both semi test and LitePoint is when handsets and mainstream handsets adopt 5G millimeter wave. That’s still a couple of years away, but what I referred to earlier today is more this infrastructure.

Got it. And one follow-up for Greg and we surely miss you in the next conference calls and please feel free to join us if you have a spare time, but the days of inventory is almost a near 2-year high. Can you help us understand what’s driving this? It’s been going up on a sequential basis for almost eight quarters.

Was it inventory you said, Mehdi?

Days of inventory.

Days of inventory, okay. We are investing more inventory in our industrial automation businesses keeping the high growth. That inventory is on our balance sheet. In many of our other businesses, the inventory is off the balance sheet, because it’s the ship from our contract manufacturers, so you don’t see it. So, I would expect that inventory probably continued to increase a bit over time as those businesses grow and it remains on our balance sheet.

Could this be an overhang or impact your future free cash flows?

No, I don’t think so. No, I think, if anything it helps our future free cash flows because it will be a source of cash when we liquidate it, but we do need to have inventory for these short cycle times industrial automation customers. The model has been 4 days, 3 days, 5 days, so we ship very quickly and we expect the demand to increase second and third quarter quite considerably.

So is there a target of days of inventory that we could use to build a model, cash from operation and free cash flows?

We could try to do that offline. The tricky thing is there is different businesses who have inventory on the balance sheet and others don’t and sometimes new products are on the balance sheet and other times, they are not. So it’s a hodgepodge. We tend to look at inventory on and off the balance sheet. You can’t see that. You are only looking at inventory on the balance sheet, so you kind of have part of the puzzle. But maybe offline, Andy and I can try to do that with you.

Got it. Thank you and best of luck again.

Thank you.

Thank you. And our next question comes from Vivek Arya with Bank of America/Merrill Lynch. Your line is now open.

Thanks for taking my question and good luck to Greg on his next adventure. First question on UR or actually on IA overall, for it to grow 35% to 40% this year implies a very steep ramp in the back half. I am estimating over 50% half-over-half ramp versus what’s been more like 25% to 30% growth in the second versus first half. So I am curious how is your visibility into that second half, what are the risks and opportunities to hit your target growth this year?

Okay. I think we outlined some of this last quarter that we do expect MiR to grow at about 100%. So that obviously gives – MiR is much smaller than Universal Robots, but that gives us a lift. And for us to hit the 35% to 40% – higher end of that 30% to 40% range we outlined, Universal Robots, we are looking at growing around 28%. So nothing has really changed there. So, the things that we are focused on, is we see – we could be at the early stages of some larger enterprises doing deployment that would affect both MiR and Universal Robots. We see there is demographic trends in our favor. We see there is a new product, MiR1000. So there is a number of items that we think will help us as the year unfolds, but we think the target we had is very credible and we are often raising.

Got it. Thanks. And as a follow-up on 5G, what specifically about 5G creates the demand for additional testers, like if you look at the 4G transition, what was that ramp like? And let’s assume next year, only 5% of the smartphone market transitions to 5G, what does that imply just conceptually? I know it’s early to guide next year, but what does that imply conceptually for the benefit to you from a test perspective?

Okay. So we have said that 5G when it’s fully up and deploying globally, which is probably around 2021 or 2022, will add somewhere around $400 million to $500 million of buying to the market, our markets, test markets. Teradyne’s roughly 50% share in those segments, let’s say, so we would expect when it’s up and peaking, that’s the benefit we would see. But this penetration, the cell phones of millimeter wave is the key, the largest single portion of that $400 million to $500 million bump. That’s not likely to start to be meaningful until 2021 and beyond. So, next year’s 5G millimeter wave handset test additional revenue is handful tens of millions of dollars of impact probably out of that total.

Thank you.

Thank you. And our next question comes from Brian Chin with Stifel. Your line is now open.

Hi, good morning. Thanks for letting us ask a few questions and of course best wishes to you, Greg.

Thank you very much.

Sure. First, just to confirm, did you say monthly UR sales in China has been picking up through March? And also should Q1 represent the trough then in terms of year-over-year growth momentum for UR? When do you expect larger cobot deployments to really hit their stride in terms of shipments and what does your current pipeline look like in terms of these larger scale enterprises and sorry for all the questions bunched up?

Okay. Let me give you a few data points on that. So coming into 2019, we expected that Q1’s growth would be about where it turned out for UR, 16% or so. We saw throughout the quarter, January, February, March, month-over-month growth rate compared to ‘18 accelerate, started at about 4% and ended March at about 20%. That’s globally. One piece of encouraging news is that China has returned to growth in that mix. The second half of last year, China was pretty flat. But as I mentioned, one of these large enterprise deployments started late in the quarter, in Q1 in China. We expect that to run through the rest of the year. And there is other larger enterprise businesses in the mix in China that we expect to also mature. So the conviction is sort of based around the plan we had, we are kind of on the plan and the trend lines we see in China. If there is anything that’s still, I would say, somewhat soft, it’s automotive-related cobot deployments. The global automotive market is down a bit and we ship probably somewhere – I would say somewhere in the automotive supply chain, 30% some of our cobot sales are somehow related to automotive. So that has been – impacted us in U.S. and Europe and in China a bit, but we expect that to slowly unwind as we get toward the back half of the year as well.

Okay, that’s really helpful. Maybe second, switching over to semis, in the past, I was wondering if you could take a stab maybe at the expected distribution of semi test revenue first half versus second half understanding that individual test markets are likely to vary quite a bit?

Yes. I think as Greg said in his remarks, the semi test itself in the second half will probably be similar to where it was in the first perhaps down a bit. But our system test business, on the other hand and LitePoint business has been growing. So, if you look at test in the aggregate, the second half of the year is probably awash, maybe slightly up, could be slightly up from the first half. But as always, these test markets have been, especially Semi Test, very volatile and difficult to predict. We do not focus a lot of our marketing energy in trying to predict quarterly or even annual market sizes because it doesn’t affect our operational strategy. So, it’s more less a science and more judgment at this point.

I think the key thing is the Semi Test decline, which might be $50 million or $60 million or some number like that, we think, would be offset with Industrial Automation growth. That was what I was trying to say in my prepared remarks. And the second half will look similar.

Next question please.

Thank you. Our next question comes from Toshiya Hari with Goldman Sachs. Your line is now open.

Hi good morning and thanks for taking the question. Mark, you guys maintained your 2019 SOC TAM number, $2.5 billion at the midpoint. I just wanted to confirm what the puts and takes were within. I think you called out image sensors and 5G infrastructure on the positive side. It sounded like mobility or mobile hasn’t changed all that much since, 3 months ago and then maybe analog a little bit weaker. So, if you can talk about the pluses and minuses there, that would be helpful. And then related to that, can you remind us why you expect your business to be down about 10 percentage points less than the market? Thank you.

Yes. So again, things in the Semi Test SOC market really haven’t changed much. I would say that on the mobility side, it strengthened a bit. A lot of that benefit is coming to Teradyne, fortunately. So that’s one reason why the declines we expect in the market were a bit performing a bit better than that. The automotive market, in particular, I would say, if there’s a pocket, it softened more than we might have thought at the beginning of the year, it would be automotive. But that’s been offset, as you mentioned, by things like image sensor and 5G infrastructure. The other thing about 2018 compared to ‘19, the market size, there was we, in the last conference call, described some one-off events that occurred in 2018 that sort of drove the market to an unsustainable high. There were some large semiconductor companies that shifted from foundry A to foundry B that required a onetime retooling of test capacity of foundry B that doesn’t it’s not an annuity that then continues on next year. Turns out that wasn’t that segment has shifted, wasn’t a place we had a high concentration in, so that change affects our competitor more than us.

Got it. And another quick follow-up on the UR side of the business. It was encouraging to learn about some of the growth you’re seeing from the large enterprises. But the 2 customers you mentioned, Mark, specifically, what sort of applications are the cobots used for at those 2 customers and I guess the implications for profitability for UR as demand from large enterprises continue to grow? Is it dilutive to gross margins? Is it pretty much the same? Any color there would be helpful. Thank you.

It’s Greg. I’ll take that. The profitability should be the same with these large customers. And so, these are both lighting companies, which is an interesting vertical. And there’s 4 different applications that our cobots will be doing. And there are the standard applications we do at other locations. And they’re having these companies are having difficulty with turnover as well as rising labor costs. So, they’ve strategically made the decision that they need to automate to have a better cost structure and responsiveness. And one thing we have talked about over a period of time is that there’s ways of adoption that will not be smooth. So, it’s encouraging we’re starting to see some very early signs of some large enterprise deployments. So, this is something we’ve had a keen eye towards. The other thing we’ve talked about is bin picking, which, well, we expect to have some deployments later this year. That may be more of a volume next year story, too. So, there are some waves from some of these new adoptions in addition to more ecosystem accessories into new verticals as well.

Thanks Greg good luck.

Thank you.

Thank you. Our next question comes from John Pitzer with Crédit Suisse. Your line is now open.

Hi this is Ada calling in for John. You saw excellent gross margins in the quarter despite it being a lower revenue quarter. Can you maybe go over some of the puts and takes around gross margin through the remainder of the year?

Our gross margins over the last several years, as you might have noticed, have moved up 2, 3 points. We’ve done a very good job overall in our supply line group with material costs down and getting second sources where necessary. So that effort continues. And then with customers, they are getting advantages through the architectural advantages versus, versus lowering the price of a product. So, I think the last year or 2, we’ve done much better across the company in creating and capturing value at the gross margin line. So, I think gross margins are going to operate at this higher level. Last year, we were at about 58%. This year, we’ll probably be at 58% this year as well.

Great thank you so much. And can you maybe just provide some additional color on the trends you’re seeing in automotive and industrial in the test side of the business?

Yes. So, I think for trends, obviously, the aggregate volume of test capacity is down this year. In terms of what’s going on and looking forward, there’s a lot of activity around chip design for more autonomous driving and the electrification of vehicles. And so, there’s a lot of activity around new instrumentation and new test methodologies for this emerging technology. And that extends all the way up into the sort of heavier power electronic side of the automobile. So IGBT, silicon carbide, those kinds of technologies are also coming online. So, there’s a lot of design activity a lot of design and activity, but the aggregate volume is down. And with many of the major automotive manufacturers planning to produce EV vehicles starting with next year’s model year, there’ll be quite a few introductions, we expect the automotive market for test will return to growth next year.

Great thank you so much.

Thank you. Our next question comes from C.J. Muse with Evercore. Your line is now open.

Yes, good morning. And let me echo the thoughts, Greg. Congrats on all your time at Teradyne, and I wish you the best of luck as you move on to a professional ping-pong player. I think that’s a great move for you.

Thank you C.J.

You are welcome. First question on OpEx. You implied a midpoint of the guidance roughly $187 million, yet I believe you guided for full year OpEx flat. So, trying to understand how we should model OpEx off of that elevated Q2 going to the second half of the year.

Got it, C.J. What we’ve said, and maybe it wasn’t clear enough, is that Test will be flat, other than the Test OpEx can move around based upon variable compensation changes. If it’s a high sales or high profit year, there’s more OpEx. But what drives our OpEx up is in Industrial Automation, we continue to invest in those high-growth businesses. We talked about getting OpEx up to the mid-upper $40 million by the end of the year, so that is where the OpEx growth will be in 2019. Now in any one quarter, I should add, sometimes you can also have NROE from Semi Test that can increase it, but then it goes away the next quarter. But stepping back, it’s similar to last year. Our growth is Industrial Automation, and Test is flat other than variable comp.

So just a follow-up on that. So, despite implied top line guide of, I think, flat to down 2% based on your first half, second half commentary year-over-year, you’re assuming variable comp will move higher because that’s associated with IA.

No. Variable comp for the year will be lower, but we are investing in Industrial Automation, MiR and Universal Robots and Energid and this bin picking solution. So, there is more OpEx going into those 3 businesses, and that is the increase that we’re going to have this year. And it was similar to the increase we had last year and the year before if you go further back, which is Universal Robots. I would say for about 5 years in a row now, give or take a handful of million, Test OpEx has been flat, but it’s moved around with the variable comp. But we’ve been growing in Industrial Automation. So that’s the story. And we’re very disappointed in Test, and we have the infrastructure that can scale. We generally don’t need to add new locations or new engineering projects, generally speaking.

Excellent. And I guess as my follow-up, on the UR side, it’s a business that grew 14% year-over-year and I think you said growing 28% for the full year. Can you kind of walk through what rank order the key drivers of that uplift would be? Is it bin picking? Is it enterprise scale business? Other? How should we think about the moving parts that get that run rate up exiting the year?

Okay. Well, UR grew on a quarter basis, Q1 over Q1, grew about 16%. But why will it grow more going forward? Let me try to explain that. First, some of the cyclical headwinds we don’t think persist indefinitely that we’re seeing in auto, for example. Two, we see larger enterprises. This is the wave we talked about many times. At some point, larger enterprises will be forced to adopt cobots versus individual plant managers making small purchases. So, we’re starting to see a handful of accounts doing enterprise purchases, and those orders will start shipping later in the year. They haven’t shipped yet. Bin picking will start shipping later in the year, will be a bigger driver next year. Demographics is a big issue around the world. There aren’t enough workers. Inflation, quality, that’s also driving it. And then we have this ecosystem that keeps on finding new verticals to use an arm to solve a problem. Now we can’t forecast all those, but we see each quarter, there’s new applications coming from our ecosystem developers.

Very helpful. Thank you.

Thank you. And our next question comes from Krish Sankar with Cowen and Company. Your line is now open.

Yes, hi thanks for taking my question. I have two of them. First one is on the LitePoint side. Would you say that WiFi 6 the vertical change from WiFi 5 to WiFi 6 is a bigger opportunity than 5G for LitePoint? Or is it vice versa? And along the same path, there are already 3 well-entrenched competitors on the 5G side, so do you think there’s still room for a fourth player like LitePoint to get in and gain some share in 5G? And then I have a follow-up.

Okay. Good questions. So, first of all, WiFi 6 is a modest test intensity evolution of the WiFi standard. 5G, especially 5G millimeter wave, is dramatically more test intensive. So 5G will by far be more impactful to LitePoint than WiFi 6. WiFi 6 is beginning to happen now, so it’ll be sooner. But the big payoff is still 5G. And then with respect to the competitive environment, it’s been the case there’s been 4 principal competitors in this market for a decade. LitePoint’s true value proposition is production test, efficient, focused production test equipment, not R&D. The other providers tend to focus more on R&D and then try to fit their product into the production environment. So, I do think that same differentiation that LitePoint had that’s given them a 70% share of WiFi test, they’re now poised to increase their market penetration in cellular test in the 5G era. And it will be through that same mechanism whereas the lab equipment that’s out there today for development is coming from the other principal providers. As we get close to production, all the major chipset companies in the 5G space have adopted LitePoint as one of their potential and qualified production rollout providers. Again, when does that happen? Probably it’s 2021 is the mainstream 5G millimeter wave penetration into handsets.

Got it. Got it. That’s very helpful. And then as a follow-up on the automation side, these enterprise customer wins you got on cobots, are they typically sole sourced? In other words, now that you won them, is this a good like locked and loaded business for you for the next few years? And also, is there any cross-selling opportunity at the enterprise between MiR and cobots? And also, congrats to Greg on a great career at Teradyne. Thank you.

Okay. I’ll take that one. Thank you very much. We believe we will be the sole source for a number of years, or at least for this round of deployment, and we expect to stay in there thereafter for this is more of an enterprise deployment. And in one of these situations, they did look at a lower-cost indigenous company and concluded they were not reliable enough. But obviously, we have to deliver perform, but that looks good on these key wins. What was the...

Cross-selling between MiR and UR.

Oh, cross-selling. There is a little bit more of that being discussed. I think in the future, you might see trade shows where there they might they’re ramped up in the same trade shows. You might see an arm on a mobile robot a bit more. So, there are some opportunities. But at the moment, we don’t want to combine the businesses in any formal way. MiR is operating with an earnout, so we don’t want to do anything that could disrupt that earnout and keep their focus away from achieving the maximum sales. So, I think longer term, there might be greater opportunities in that regard.

And I just want to add one comment, a general comment about the cobot market. I think people there’s been a perception that the hardware around cobot is a commodity and the differentiation over time is going to be software-centric. But in fact, what we’re seeing today is building a reliable, industrial, 24/7 cobot to work in a high mixed torque moving mass around environment is very difficult. In fact, companies are failing because of the hardware. We’ve talked in the past about Rethink having an issue there. But some of our competitors have been binned out of these larger deployments because they have shown reliability problems after a couple of months of stress test. So that, it turns out, reliable hardware is still a significant differentiation for UR. And for the foreseeable future, we see that will be equally important in these large deployments as compared to some of the other benefits we’ve talked more about like UR+ and the ease of use.

Thanks Mark. Thanks Greg.

Thank you. And our next question comes from Sidney Ho with Deutsche Bank. Your line is now open.

Thanks, I’ll add my congratulations to your retirement Greg, and you’ll be missed.

Thank you, Sidney.

Yes, so, my first question is on the wireless. You talked about expecting a downtick from your largest customer. Historically, is there still a time for an upsized surprise if they were to meet the same product launch window in September? And kind of related to that, would that customer no longer buy modems from Intel and now working with other suppliers, would that be a net positive for you in the long term? And do you expect that a onetime benefit because of that change in supplier?

So, at this point in the year, there could be a little bit of upside, but it’s not likely. I think that’s the case on that subject. The advertised shift in buying dynamics in recent weeks is certainly, potentially a benefit. We do not certain pockets or certain suppliers, we’ve not had a historical position at in terms of test. But the way the wins are starting to blow now, that should accrue as an incremental benefit to Teradyne.

Okay. That’s helpful. Maybe moving on to sourced test, other than the part that’s related to longer test times, as you guys alluded to, are you starting to see some unit demand recovery in that area as well? And if I recall correctly, about 1 year and 1.5 years ago, this business had recorded that revenue doubled quarter-over-quarter. Can you remind us what that was related to? And is that something that will repeat in the future?

Sidney, the business has been lumpy. There are 2 customers we do cloud, 3.5-inch magnetic, and we do a system-level test for a semiconductor company. So, one or the other typically is buying, and they buy in lumps and consolidated purchases. And that can move us way up or below the $65 million a year revenue model that we said we established to hit model profit. More recently, the business looks much stronger. The hard disk drive customers coming back, buying in reasonable volumes. And then there’s opportunities for the other customers as well. So, I think for the next year or 2, that business looks like it has tailwinds.

Okay. Great. And maybe if I can squeeze in one, how much do you expect the Lemsys acquisition to contribute to Semi Test revenue in Q2?

Yes. Lemsys is a small revenue company at this point. There’s more of a longer-term play here. So, revenues for the year last year, Lemsys’ revenues were below $10 million. So, it’s a smaller company, but there’s a longer-term upside.

Right. Thank you.

Thank you. [Operator Instructions] Our next question comes from Timothy Arcuri with UBS. Your line is now open.

Well, Greg, I recall you were when you were named CFO, so I guess that makes us both pretty old, but I just wanted to say that you’ve done a great job. So, first thing.

Thank you very much Tim.

Great. And then I wanted to ask you about Industrial Automation. How much of the revenue today is in China in aggregate and how much do you think will be in China, let’s say, like a year from now?

We’re looking that up. It’s historically been just over 10%. But long term, we expect it to be in increasing percentage of Universal Robots sales long term. I think last year, maybe 12% or something like that?

Yes, it was just under 15% last year, 12%, 13%, yes.

Yes. So, 12% to 13%, but long term, it could certainly be 20%.

Okay. And then with respect to no one’s really asked about your largest customer on the Semi Test side. And there’s a big obviously, they’re a big probably the biggest factor in your outlook as you look into next year. So now the time has gone on a bit, have you had any more information that would lead you to conclude whether there’s something structural that’s going on there or whether it’s just cyclical and that once all that test capacity is basically digested this year and if units are a bit better next year that you could see a snapback and that this is back to what it used to be? Thanks.

Yes. I think there’s so many moving parts in that area that it’s very hard to forecast. I would expect that as the phones start to move into the 5G world, that’s going to be a balloon. But there’s other offsetting issues around unit volumes and other things that are hard for us to predict. I do think utilization is very high. New features are in the pipeline beyond 5G, and that this year, I would expect, should be a minimum that we get to. But in terms of any kind of quantification going forward, we’re really not in a position yet to know.

Okay, thanks.

Okay, operator we have time to squeeze in just one more please.

Thank you. And our final question comes from Richard Eastman with Baird. Your line is now open.

Yes, thank you. Congrats again to Greg. Great career at Teradyne. Just my first question is just around there’s a commentary in the press release and I think it was Greg, you actually referenced it as well. But you talked about the mix favorable, the favorable mix and the lower operating expense. And I’m curious, the favorable mix doesn’t really show up in the gross margin. I mean I think you had guided towards a 58% gross margin for the quarter. Is what is the mix there, benefit that you referenced? Does it show up in the operating expense?

No. The mix, I think, in my comments was comparing Q1 of last year with Q1 of this year.

Okay. Not to the guide, okay.

Correct. So, I think that’s where you got off based with and the improvement year-over-year is about 3 points.

Okay. And then just around UR, just a couple of things in UR. One, at the revenue run rate that had delivered in the first quarter, what was the op profit margin in the first quarter for UR or just IA in general? And then also around bin picking, the application that you’re speaking to later this year and into next year, is that bin picking application in kind of targeted at the industrial SME market or is it targeted at the warehouse fulfillment center level?

Okay. I’ll we don’t normally break this out, but UR was this is usually lower UR’s lowest profitable quarter, but it was about 12%. We expect it to improve as the year unfolds. But in terms of the industrial bin picking application, we’re not thinking about it as an e-commerce type thing, picking up different objects from trays or bins. We’re thinking about it picking up the identical jumbled up pile of items in the bin that traditionally are used puts it in a conveyor belt or puts it in a machine for some processing. So, it’s an industrial application. And the key thing is to pick it up at the right post, to make it easy to develop a program, which we have this auto pilot technology that makes it very easy to develop the program and to place it at the right post so you don’t have to put it down again and pick it up and that waste time, and therefore, you won’t be able to do as many applications. So, we think we’ve got something that is a step-function change but it will be in beta shortly and then hopefully with some customers later in the year.

And these two enterprise agreements, the direct sale agreements, could you just tell us to the lighting companies, but what was the competitive advantage relative to I think you referenced an indigenous cobot manufacturer, but what was the competitive advantage to pick UR?

It was somewhat what Mark said, the incumbents often might have lower capital costs, but the product isn’t ready for 24/7 operations. And there’s a variety of things that go wrong. Sometimes, the product stops. Sometimes, it doesn’t repeat to the same location. Sometimes, it doesn’t have the right safety features. So, they’re not really ready for 24/7 industrial, safe, high repeatability, easy-to-program applications. We know they’re coming, but they’re not quite there yet is what we’re trying to describe.

Yes. So, it is hardware oriented. Okay.

Yes.

Yes, we are out of time. Thanks for joining us today. This concludes the call, and it also concludes Greg’s CFO career. So, Greg, hang in there, buddy.

Thank you.

Thank you all. Bye-bye.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Everyone, have a wonderful day.