Teradyne, Inc. (TER) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, my name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Third Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Andy Blanchard, you may begin your conference.

Thank you, Simon. 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 CFO, Sanjay Mehta. Following our opening remarks, we’ll provide details of our performance for 2019 third quarter along with our outlook for the fourth quarter of 2019. The press release containing our third quarter results was issued last evening. We’re providing slides on the Investor page of the website that may be helpful to you when following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne’s results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor 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’ll make reference to the non-GAAP financial measures. We posted additional information concerning these non-GAAP financial measures including reconciliation to the most directly comparable GAAP financial measure were available on the Investor page of our website. Also, between now and our next earnings call, Teradyne, will be participating in investor conferences hosted by Baird, Cowen, Credit Suisse and UBS. 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 fourth quarter. Sanjay will then offer more details on our quarterly results, along with our guidance for the fourth quarter. We’ll then answer your questions. And this call is scheduled for one hour. Mark?

Thanks, Andy. Good morning, everyone, and thanks for joining us. In my prepared remarks, I’ll cover three topics, highlights from the third quarter at the Company and business unit level; how our recent agreement to purchase autonomous mobile robot maker, AutoGuide, fits into our Industrial Automation strategy; and how we’re looking at next year and beyond. Sanjay will then provide the financial details of the quarter; our view of the 5G test opportunity; and our guidance for the fourth quarter. We delivered results above our third quarter guidance on continued strength across all of our test businesses. Our MiR mobile robot business also performed well in the quarter. However, sales at Universal Robots were roughly flat year-on-year, as the impact of softening manufacturing activity in Europe and U.S. were a strong headwind. Overall, our year-to-date revenue is up 4% from 2018 and non-GAAP EPS is up 13%. For the fourth quarter, we expect strong test demand to continue, combined with single-digit growth in IA on a year-over-year basis. At the business unit level, Semi Test SOC Test demand for digital, broadband and RF devices related to 5G infrastructure remained very strong. That infrastructure demand combined with strength in handset-related test is driving our estimate of the SOC market size for 2019 up to a $3 billion to $3.2 billion range, compared to last year’s $3 billion level and above our earlier estimate of $2.6 billion to $3 billion. Geographically, China’s SOC Test market will be up $300 million year-on-year, while the rest of the world’s market will likely be down. This reflects strong tooling for 5G infrastructure and handsets as the combination of device complexity and base station unit growth are fueling demand. On the product front, in early September, we introduced an extension of our flagship UltraFLEX product, the UltraFLEXplus. The plus extends our performance for an emerging class of AI and big data devices that require a new test architecture to efficiently and comprehensively test the rapidly growing complexity of these devices. Multi-core chip architectures are driving billions of transistors per die, which operate in parallel to process the vast data streams associated with machine learning and 5G networks. This is yet another example of the complexity growth we have been describing that drives up test seconds and drives our markets. The UltraFLEXplus puts in play an architecture with the headroom to test this complexity growth for the next decade. At the same time, it maintains software compatibility to leverage the accumulated flex family software experience of over 10,000 trained customer test engineers. Systems are now in use at multiple customers and we recognized our first revenue from product in Q3. In Memory Test, demand remained strong in Q3, driven by both flash package and DRAM wafer test. Although the Memory Test market will likely be down about 40% this year to around $600 million, our market share will be up from about 29% last year to the low 40% level this year. Building on our strong foundation in flash package test, our Magnum product family now covers the entire Memory Test market, wafer and package test for both flash and DRAM. LitePoint and the System Test group sales were about flat with the second quarter and up 23% and 48% respectively from the third quarter of 2018. Advanced connectivity standards and early 5G-related buying powered LitePoint’s results, while in System Test, our storage test products were the standout, as revenues more than doubled compared to a year ago quarter on terabyte class HDD demand and system level test shipments. Shifting to our Industrial Automation segment. Universal Robots sales were flat with the third quarter of 2018 as demand in our largest geographic markets, Europe and North America and our largest end-market, automotive supply chain, remained weak. Conversely, this was balanced by strong demand in China and Japan with year-over-year growth in the quarter running 30% and 44%, respectively. MiR on the other hand continued to grow at a healthy clip, posting year-over-year sales gains of 47% in the quarter. We believe the lower year-to-date growth at UR is a short-term phenomenon, consistent with the slowing of industrial activity in Europe and North America. While our automation solutions are not immune to the decline in industrial output, we are faring better than the market in general. We also see opportunity to expand our market coverage in the U.S. and Europe to offset these headwinds and we’ll be investing to support underserved verticals and geographies in these regions. In addition, we continue to expand our product offerings. In September, we introduced the UR16e, which opens up new applications by extending the payload capacity of the product line. We also shipped our first industrial bin picking application in the quarter, utilizing a UR robot, 3D vision and Energid’s unique path planning software to ease deployment and open new applications at new customers. UR also passed the 200-product threshold of UR+ certified plug and play peripherals, expanding the range of applications and reducing deployment time for our cobot customers. MiR has also introduced a similar plug and play strategy for peripherals called MirGo. Both programs are consistent with our strategy of making automation safe, low-risk and easy to deploy by shop level technicians with short ROI. With the announcement earlier this week of our plan to acquire AutoGuide, a maker of autonomous mobile robots for industrial and warehouse material handling, we are expanding our capabilities to include high payload pallet and material moving. The global market for manually driven forklifts is prime for automation, as technological advancements have enabled cost effective autonomous solutions. AutoGuide’s products use many of the same sensing, guidance, software and drive technologies as MiR to provide autonomous operation to higher payload tugging and pallet moving applications. Additionally AG’s unique modular architecture offers customers greater flexibilities in either a dedicated forklift or tugger with reduced costs and safer operation. Like our other IA investments, AutoGuide is a small but differentiated and fast-growing player in a nascent market. We expect full-year sales to more than double to over $10 million this year. Furthermore, there are natural synergies and engineering, marketing and distribution with MiR, and we expect our broad lineup of low and now high-payload autonomous material handling robots to be attractive to global customers. Finally, as you can see from our guidance, we expect to finish 2019 on a very strong note. As we’ve described in the past, our visibility in the test business is a quarter or so; and in Industrial Automation, less than a quarter. While we expect volatility in our markets, we also expect overall trend line growth consistent with our mid-term growth planned in earnings model. Teradyne’s cost structure and business plans are architected with this volatility and growth in mind. In Semi Test, SOC Test has seen another strong year, despite an overall soft semiconductor device market. As I noted at the outset, this year’s strength in China for testing smartphone handset and base station devices has more than offset the decline elsewhere in the world in automotive, linear and MCU test. As we look to 2020, with the aggressive 5G base station ramp, will the aggressive 5G base station continue or will there be a pause for digesting, will 2020 phones adopt 5G millimeter wave in meaningful volumes, will the health of the memory business improve, will the automotive and industrial markets stabilize and recover or further contract? All of these questions have implications for our 2020 business levels and all are hard to predict. And frankly, we don’t spend too much energy on trying to predict this as it doesn’t really affect our plans. Our strategy and plans are based on the fundamental belief that the pervasiveness and complexity of semiconductors will continue to grow on a trend line and continue to drive growth in our test business. Similarly, we believe the inflection point, we’ve reached in Industrial Automation where new, powerful yet cost effective technologies like LiDAR, 3D vision, AI and others have opened new markets, will drive opportunity and growth for decades to come. We strengthened our competitive position in our test and IA businesses with a steady flow of new products through the year, and AutoGuide adds another exciting and technically differentiated building block to our stable of advanced automation tools. We don’t know what 2020 will bring in terms of test and IA demand, but we are confident that our product lineup, financial position, and growth strategy positions us well for the long-term success. With that, I’ll turn things over to Sanjay for financial details.

Thanks, Mark. And good morning, everyone. Today, I’ll review the third quarter results and performance of each business, comment on the full-year results at the midpoint of our Q4 guidance, provide some insight on how we’re looking at mobility as a long-term driver of the test business, and then provide additional detail on the AutoGuide acquisition. Lastly, I’ll offer some early financial information for modeling 2020. Now, to our results for the third quarter. Third quarter revenue of $582 million was above the high end of the guidance, due to strengthen our Semi Test business -- sorry, due to a strength in our test businesses, partially offset by lower Industrial Automation revenues. We had one customer greater than 10% of sales in the quarter. Gross margin of 59% was driven by favorable product mix in Semi Test. Non-GAAP operating margin of 28% and non-GAAP EPS of $0.77 were above the high end of the Q3 guidance, driven by slightly higher revenues with improved product mix and lower spending relative to the third quarter plan. You’ll see our non-GAAP operating expenses were $185 million, down $5 million from the second quarter due to seasonally lower spending in Industrial Automation and lower project spending in Semi Test, slightly offset by higher variable compensation accruals on higher profits. Turning to the individual businesses. Semi Test revenue of $398 million grew 6% over Q2. Notably, Memory Test revenue of $72 million grew 23% over the prior quarter, driven by flash final and DRAM wafer test demand. As I’ve met investors over the last several months, one of the common questions asked revolves around the surprising strength in the handset test demand in an environment where volumes are down year-over-year and the transition to 5G is in its infancy stage. I see two primary drivers of this trend. First, devices at each tier of the phone are getting more complex. Typically leading technology gets introduced at the premium tier or devices greater than $600. Innovations such as lower process nodes for power and performance increase compute capability, more camera sensors and increased memory requirements on the device are a few examples of higher complexity. This complexity enters at the premium tier and then in one to two years key technologies water fall down to high tier devices. This water fall down of technology continues from high to mid-tier devices and mid to low-tier devices. Hence, a continuous increase of device complexity drives the need for more test time per device. Second, in the smartphone market, historically people who purchase a low, mid or high-tier smartphone, typically upgrade at some point to the next tier up. These two drivers increase the test TAM. So, while the mobility market is not without volatility, we do expect it to be a multiyear positive driver of our Semi Test business. Moving on to System Test. The group continued to deliver strong results in Q3 with revenue of $73 million. Within the System Test group, defense and aerospace grew sequentially on increased defense-related buying. Production board test grew quarter-over-quarter and was slightly ahead of plan. As Mark noted, on a year-over-year basis, we delivered 48% growth in System Test in the third quarter, while storage test more than doubling, benefiting from growth in terabyte drives and cloud storage. Defense and aerospace grew 30% year-over-year, as we are seeing continued growth in long-term projects within many branches of the military. For the full-year, System Test is on track to grow over 25% from last year’s $216 million of revenue. At LitePoint, we saw continued momentum with sales of $42 million on the strength of new Wi-Fi standards and early buying the 5G development test. For the full-year LitePoint will grow about 10% from $132 million last year. In Industrial Automation, sales were $69 million, down 8% from Q2 and up 4% year-over-year. Within IA, UR was $58 million of revenue, a decline from Q2 and about flat year-over-year. MiR revenue of $10 million was slightly down quarter-over-quarter, and up 47% year-over-year. As Mark noted, we view the slower growth in IA so far this year primarily as a result of a slowdown in global industrial investments, especially in Europe and North America, and not a long-term market attractor. However, we also recognize we have to continue to improve our organizational capability in order to fully capture the opportunity ahead of us. We will continue to invest to strengthen those capabilities. Turning to the acquisition of AutoGuide. The upfront purchase price was $58 million with an earnout of up to an incremental $107 million if certain revenue and profit targets are achieved through 2022. We expect the transaction to close later this quarter, post regulatory approvals. AutoGuide is on track to achieve revenue of over $10 million on a standalone basis in 2019, up from $4 million in 2018. We expect AutoGuide to grow over 100% in 2020. Their sales today are primarily in North America with the plan to broaden their distribution to serve global customers. We expect them to incur a small loss this year and be slightly positive on an EBITDA basis in 2020. Relative to share buybacks, we forecast this acquisition will be about neutral in EPS in 2021 and will be accretive on an EPS basis in 2022. AutoGuide will operate as a standalone business within the Industrial Automation reporting segment. Partnership between UR, MiR, Energid and now AutoGuide, coupled with our central core competencies will enable them to efficiently and effectively scale their business taking advantage of technologies, processes, external relationships, and experts across all of Teradyne’s businesses. As stated in prior calls, our Industrial Automation acquisition strategy is to acquire growth companies, with leading technologies serving nascent markets that have short ROIs and make the workplace safer and more productive. AutoGuide is another example of Teradyne executing on this strategy. AutoGuide has a modular, purpose-built architecture for their autonomous mobile robots along with intuitive user and fleet management software. We believe this approach differentiates them from the competition enabling flexible, scalable solutions with compelling economics to be efficiently implemented at customer’s location. We’ve provided a slide in the earnings deck, which summarizes the transaction along with the schedule of the earnouts, so you have a sense of the revenue growth required to reach the performance targets. Additional AutoGuide details are included in the deck supplemental information. Back at the Company level, our operating model continues to deliver strong results. We generated $162 million in free cash flow in the third quarter, and we ended the quarter with $1,040 million in cash and marketable securities. We repurchased $122 million of shares in the third quarter. This brings the year-to-date share repurchase total to $369 million at an average purchase price of $41.93. We paid $15 million in dividends in the quarter. For the full-year, we expect to repurchase $500 million of our shares. As usual, we’ll update our capital allocation plan for next year in the January earnings call. Turning to our guidance for the fourth quarter. Revenue is expected to be $590 million to $630 million, and a non-GAAP EPS range of $0.73 to $0.84 on a 174 million diluted shares. Q4 growth will come from both, our test and Industrial Automation businesses. Historically, our Semi Test business has been seasonably lower in Q4, but this year, continued strength in 5G infrastructure and memory will drive growth. The guidance excludes the amortization of acquired intangibles and non-cash convertible debt interest. Fourth quarter gross margin should run approximately 58% and OpEx should run from 31% to 33% of revenue. The operating profit of our fourth quarter guidance is forecasted to be 25% to 27% of revenue. A quick comment on diluted shares. There is a GAAP requirement to measure and disclose EPS with the most dilutive calculation. We have applied this concept to the non-GAAP EPS with respect to the treatment of our convertible debt. Diluted shares are higher in both Q4 guidance and Q3 results versus Q2 at current share price levels. It’s more dilutive from an EPS perspective to assume the convertible debt has converted and include the associated shares than to include the interest expense related to the debt and not include the shares. Shifting to taxes. Our non-GAAP full-year tax rate is expected to be 16.5%. We expect the tax rate to be 16% in 2020. Related to modeling 2020, as in past years, you should expect Q1 Industrial Automation sales to be seasonally down versus fourth quarter. From a full-year perspective, at the midpoint of our Q4 guidance, we expect sales to grow 7% and non-GAAP EPS 16% from last year. From a longer-term perspective, this is the sixth consecutive year of non-GAAP earnings per share growth with CAGR of 17%. Over this period, we averaged a non-GAAP operating profit of 23%. In summary, we are delivering very strong results across all of our test businesses. In particular, Semi Test over the past three quarters has enjoyed a wave of 5G infrastructure investments that will continue in Q4. However, we expect the global 5G rollout to drive lumpy test demand. As Mark described, we don’t have much visibility into 2020 test demand but our operating model has been tuned to handle any potential volatility. The Industrial Automation portfolio is well-positioned to get back to consistent levels of growth when global industrial spending recovers and will be further bolstered by AutoGuide’s rapid growth. We’re continuing to take actions necessary to drive incremental demand and investing to strengthen our position. With that, I’ll turn things back to Andy.

Thanks, Sanjay. Simon, we’d now like to take some questions. And as a reminder, please limit yourself to one question and a follow-up.

[Operator Instructions] And your first question comes from the line of Vivek Arya with Bank of America. Your line is open.

Thank you for taking my question, and congratulations on the strong results. Mark, I’m curious, number of semiconductor companies had suffered this year because of pull-ins from China last year. I’m curious how sensitive is your 2020 outlook if China demand normalizes versus what we are seeing, right now? I understand that the visibility at this time is low. But, do you have some sense of what the utilization is of the testers bought by your Chinese customers, so far this year?

Yes. So, a couple of comments. Utilization of the existing installed fleet of testers is very high. And as we described in Q4, we have still continued shipments and strength into China. So, the pull for demand through Q4 is strong and unabated. I also mentioned in my remarks that China is the one geography this year that’s up for test where the rest of the world is down. So, the key question is what’s normal? And, I think, there’s been a heavy, heavy investment for infrastructure -- 5G infrastructure test tooling this year. And it wouldn’t -- and we’ve been surprised as well by how long it’s continued. The view going into next year is that there should be a little bit of a pause in some of the rate that they’re adding capacity but that the long-term trend line is still intact, and that could pick up again in the back half of the year. But frankly, the forecasts that we’ve been looking at throughout this year, as you can see from our results, have been somewhat weak and the actuality has been stronger. So, it’s really hard to predict at the moment.

And as a follow-up, I think in the past you outlined I believe around the $300 million to $400 million opportunity, if all smartphones get converted to 5G. And I think from what TSMC said, they expect 5G penetration to be about mid-teens, next year. So, does the math work in a linear way? So, let’s say, mid-teens smartphones are converted, then does it mean, it’s like a mid-teens part of the $300 million to $400 million TAM, and do you have some similar math for from a base station perspective also?

Yes. So, that’s a good question. The $300 million to $400 million increment is based on 5G in general. And what we’ve said in the past is that somewhere around 2021, 2022, when the majority of smartphones crossover with 5G millimeter wave capability, we would see that kind of bump. Much of what we may see next year in smartphones for 5G is sub-6G, which has an impact but not as much as millimeter wave. However, the infrastructure demand this year has been so strong that what I would suggest is that of that $300 million to $400 million, we’re probably this year seeing $200 million or so of that bump from 5G. Now, the infrastructure piece comes first. That will likely wane a little bit as we go through the next few years as the capacity gets built up to run out a lot of base stations, and then the phone thing will kick in. It’ll kick in a little bit next year for sub-6G and then in subsequent years to a greater extent with millimeter wave, is how to think about it.

Your next question comes from the line of Timothy Arcuri with UBS. Go ahead. Your line is open.

Thanks a lot. Mark, I just wanted to follow up on what you just said. So, we began the year, for the SOC TAM was about 2.5 for this year, and then we went to 2.8, and now we’re at 3.1. And if 5G is adding maybe $200 million to that $600 million increment, where is the other $400 million coming from?

Well, there’s strength in, I would say, general computing and sort of AI type big digital applications out there. I think, there’s also strength in handsets in general, not 5G related but just 4 G, the complexity of the processors, the extra sort of MIMO and RF side of the 4G phones this year has driven a lot of test demand as well. So, it’s sort of all on the digital side. And I’d say, phones -- 4G phones are the principal other half of the equation.

And then, I guess, I had a question in Industrial Automation. So, with respect to UR, I mean, obviously the business is suffering from some industry trends. But, we’ve also heard about some price competition, there is a lot of offerings now coming at a lower price. I think, Techman is now partnered with OMRON. So, how do you think about that in the context of you went out and spent a decent amount of money for a company that’s not really going to be accretive to earnings for a couple of years? So, there seems to be a lot of sort of investor concerns. I get a lot more questions about this that people are getting a bit concerned that there is some deterioration happening in your core business. Can you sort of talk about that and what your longer term strategy is? And also, whether you think that this changes your view of this being a $1 billion business by 2022 or something like that?

Yes. Hi, it’s Sanjay here. I’ll comment on the UR pricing competition first. I think, first of all, UR margins actually ticked up this quarter slightly. When we look at our win-loss and evaluate the competition, pricing is obviously out there from other competitors that’s much lower. However, we haven’t lost significant business on that front. So, I think, we have a quality product offering, it’s recognized well by the customer base, and it’s being priced appropriately. And so, I think, from a UR standpoint, yes, we are planning that competition eventually will get the quality levels up and we’ll have to deal with a little bit of pricing. But, currently, that’s not necessarily the case where we’re losing business from a price perspective. From a long-term perspective on AutoGuide, I think, in both, Mark’s and my prepared remarks, I think, you need to consider this as a complemental or complement set of offerings in our portfolio of higher payload, of which there’ll be some potential product go-to-market synergies with MiR and entire portfolio. That coupled with the scale of Teradyne in the core competencies, we believe very strongly in completing out the portfolio of Industrial Automation. And this is just another example.

And I would also, just on the specific, comment around Techman and OMRON. We’ve talked about them as -- it’s an interesting product, but it’s really not a price deflator, and even in its home turf of Japan, that’s our strongest growing region this year with UR. So, I think, the thought that somehow price competition or competition in general is causing the growth sort of slowing in UR is really not how we see it. It’s more the macroeconomic effects.

Your next question comes from the line of CJ Muse with Evercore. Go ahead. Your line is open.

Yes. Good morning. Thank you for taking the question. I guess, first question regarding gross margins and mix as we move from September to December. I think, in your prepared remarks, you talked about overall System Test growing about 25% for the calendar year, which would imply storage test I believe roughly flat, and that’s your lower margin business. So, curious what’s driving the sequential decline in gross margins? Historically, it’s been more mobile based, but curious if there is other drivers within your core SOC business that’s contributing to that?

Yes. It’s Sanjay here. So, I think, Q3 gross margins had favorable product mix, specifically tied to the Semi Test business. We get to -- the same Semi Test business has a little bit of mix change and that’s driving kind of the margin percentage down a tad, so 59% to 58% roughly. But, it’s kind of in our plan and as expected.

I guess, just curious, I mean, does that mean we’re seeing a pickup in mobility or there are other drivers within SOC that have similar margins to mobility?

Overall, the mix is as we planned. We are seeing continued strength in mobility. That is a key driver. It’s not anything more than that.

And I guess, as the follow-up, share of north of 40% in memory is pretty incredible. And so, I guess, can you kind of walk through how you’re thinking about 2020, particularly as we move to UFS 3 standards and the requirements for higher NAND test, as well as the move to DDR5 and your competitive positioning there?

Yes. So, those two trends are great. We love it. That helps our product line. But, I would say that it’s likely that the low 40% share position we will have in 2019 is a bit inflated because of the DRAM portion of test buying this year is quite low. NAND has been better than DRAM, and DRAM is sort of the new space we’re entering, our share there is still relatively small. So, if we think about 2020, if the market this year is $600 million, we’ve talked about trend line market of $700 million for memory, if we think about the trend line going -- market going back, it’s likely to be on the DRAM side and our share next year could come down into the high 30s. But, given the products and the trends that you cited, if we think about another couple of years out, we should be routinely operating in that sort of mid-40% range is our view.

Your next question comes from the line of Brian Chin with Stifel. Go ahead. Your line is open.

Hi. Good morning. Thanks for letting us ask few questions. Congratulations on the nice current results. I guess, my first question would be on sort of the UR and Industrial Automation business. And sorry, if I missed this. But, what is the current expected growth rate for UR and for IA as a whole in 2019? Also, can you flush out some of the underserved verticals in regions you expect to invest more heavily in, as it relates UR? And also, just curious kind of where you think margins on the IA business will come in at, this year?

Yes. So, I think, from an Industrial Automation perspective, you should expect us to be in the teens for 2019.

Operating margin target of growth.

Growth. And so -- yes. So, expected to be in the teens. And then, from -- and that’s a full-year 2019 over 2018, on an as reported basis. Pro forma, you think that it’s a little bit lower, as we acquired MiR in April, maybe around 9%-10% on a pro forma basis. And then, from an investment perspective, I think, should think about different verticals and consumer electronics and the like.

Yes. And I think, geographically, as we look at United States as an example, we’ve had some areas of the North America and the U.S. that we’ve been a little light in our distribution network. So, we’re going to fill that out. And on the verticals front, we do see that electronics remains strong. It’s not like we haven’t invested in electronics, but we haven’t leaned into it disproportionately. And I think that’s one area where we will have more concentration, looking forward.

Okay. That’s helpful. Got it. So, it sounds like with IA maybe in 4Q some seasonality, maybe not quite the seasonal bump maybe you’ve seen in kind of recent years. And then, maybe switching gears to the acquisition in terms of AutoGuide, just curious will you go to market differently with those autonomous vehicles, perhaps more of a direct sale than some of the extensive distribution integration partners, you’ve leveraged for UR and Mir? And I guess -- and I would imagine that if that was the case, then that might speed up the sort of the timeframe you’ve talked about from accretion standpoint?

Yes. So, that’s exactly right. It’s the classic customer or the big opportunities for AutoGuide tend to be larger enterprises and the direct sales approach there will be the predominant approach, not that we won’t have channel partners, we do and will expand that. But in the early going here, that will be the majority of the story versus MiR and UR, which come at it from the other way or today 90-plus-percent is through the channel, and we’re just developing a few enterprise direct sales accounts.

Your next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is open.

Mark, I wanted to follow up on the Memory Test business. The improvement in market share this year, it’s the low 40% range. How much of that is due to mix shift within the TAM, DRAM being lower and NAND being better, and how much of that is due to real share gains at the expense of your competitor? And kind of related to that, given Memory Test has been sort of the bread and butter for your competitor, have you seen any price retaliation from them?

So, I would say very little pricing activity that would be abnormal in this environment. And what I said earlier about DRAM is kind of weak this year. So, if you normalize out DRAM, maybe the way to think about it is our 42%-43% share would be more like 37%-38%. And so, that’s probably more our natural share position at this point. And we’re basically picking up business at existing memory manufacturers. So, there’s some real share gains happening at the traditional suppliers that you might think of for memory. And then there’s emerging players in China, which are kind of a jump ball that we’re competing with. And our share in China is above our kind of average share globally. So, those two pieces are what combine to sort of put us at that natural 37%-38% point.

Got it. And I assume, most of the activity in China in memory so far has been on the NAND side as opposed to DRAM?

Well, there’s activity in both. I don’t think I would break it down too much. But, both areas, we see activity.

Okay. And then, as a quick follow-up on analog test. Can you remind us how big that sub-segment is within Semi Test today? I know it’s a business that’s been in sort of correction mode for the past few, if not several quarters. But, how big was that in Q3? And is it fair to say that you’re pretty close to the bottom, or could there be further downside, given some of your customers’ commentary overnight?

Yes. I think, when we say analog, in the purest sense, linear analog is a market that traditionally is sort of in the $300 million to $400 million range. And this year, it’s probably at the low end of that. Then, there is another segment that’s related to the discussions going on in the sort of general linear analog area related to automotive and MCU and logic. That’s a market that probably oscillates between $300 million to $500 million and is also down at the low end of its range this year, probably even a little bit below $300 million. And we had a couple of strong years of automotive, bleeding up into the -- coming into this year. This year, it’s obviously down quite a bit in automotive. And if past trends sort of hold, it’ll stay down for another nine months to a year perhaps before we start to see that recover.

Your next question comes from the line of John Pitzer with Credit Suisse. Your line is open. John Pitzer with Credit Suisse, go ahead. Your line is open.

Okay. Let’s move on, please.

Certainly. Your next question comes from the line of Krish Sankar with Cowen and Company. Go ahead. Your line is open.

Yes. Hi. Thanks for taking my question. I had a couple of them. Mark, I think, I asked this last time too. Is there a way to quantify how much of your sales in SOC Test or SOC Test plus Wireless Test is coming from 5G? Then, I had a follow-up.

From 5G, I don’t think we have that broken down well for you. So, no, I can’t do that for you on the fly here. I’m not sure that’s something we’re going to be able to break out too easily. But, I can’t do it off the top of my head. Sorry.

Got you. No worries. And then, I have a question on the Industrial Automation and your strategy. It looks like UR growth is slowing. I understand, there are external factors like macro and competition. But, over the last couple of years, you’ve acquired MiR and now AutoGuide. Does it make sense to go down more downstream to a defensive software or a optics vision-based technology acquisition than a robotics hardware asset that has a potential to be commoditized down the road?

Yes. I think, there is a view that the hardware is a commodity and the software is where all the money is going to be. And I would just reiterate that the differentiation we have in hardware has been incredibly strong and powerful throughout the 4.5 years we’ve owned UR and continues to be. And then, on the second point around software, isn’t that sort of the pot of gold at the end of the rainbow? I think, there is something to that over time that more and more value can be captured through software, not at the expense of hardware, however. I don’t believe it’s that. But, I do think it’s another market that will grow in conjunction with the hardware. So, it’s something we’re looking at. We do have a good platform to develop some capability around that. But, I wouldn’t disabuse hardware for the sake of software. I think, they’re both attractive and interesting.

Your next question comes from the line of Richard Eastman with Baird. Go ahead. Your line is open.

Just around the IA business and particularly UR. You made reference to Asia -- Asia Pac strength, both in China and Japan. Is there a different mix of end-markets there, or have you added some distribution, or what would you attribute that strength to because, again, some of the verticals certainly have slowed there in Industrial Automation as well. But, curious as to where that strength comes from. And then, maybe just a second question, similar thoughts. We’ve now introduced this bin picking product. We had some enterprise agreements in the backlog there. As we move forward with UR, I’m not sure if you referenced this, but would you expect UR to maybe drop a little bit further here in the fourth quarter and in the first quarter seasonally it does that, but when do we start to inflect towards core growth at UR? I mean, middle of next year or what would your best guess be there?

So, maybe on that last point first. I think, UR is going to grow in fourth quarter over third because typically fourth quarter is a big bump for us. It probably won’t -- it will be single digits compared to year-over-year fourth quarter, but it will likely be up a little bit. We’re doing this in light of the fact that if you look at the macroeconomic indicators of industrial output in the U.S. and Europe, they’re significantly weak and down. If you look at the traditional suppliers of industrial automation for example, whether it’s Japanese machine tool sales or some of the specific companies that have announced recent trends, you’ll see that they are down anywhere from 10% to 30% year-over-year, where we’re roughly low single-digit growth. So, I think we’re going to have that kind of a headroom over the traditional cyclical industrial automation market where we will oscillate with 10, 15-point gap on top of those guys. So, the real question is when will the industrial manufacturing sector in North America and Europe return to an expansive mode. And that one, I think, it’s hard for us to call. We think that we can grow next year, even in light of the current economic conditions we see in Industrial Automation. So, we think it’ll be a growth year next year. But, is it going to be single digits or back into that 30 to 40 range? It’s a little tough for us to call that right now. On Japan specifically, it’s interesting in Japan. Japan is a country that really sees the value of automation, they’ve got a demographic issue that requires it for them to stay productive. And we’re seeing that our product is able to win a disproportionate amount of collaborative robots business there, despite the fact, as somebody mentioned earlier, OMRON’s home turf is there. They’ve decided to tap demand there, but the Universal Robots product in cobot is winning. So, that’s all very encouraging to us. And if you look at the PMI and other indicators in Japan, they’re actually not quite down as much as they are elsewhere in the world. And in China, it’s a similar, believe it or not, demographic concern. There is an issue of finding staff to do a lot of this manual labor. That has resulted in companies in China continuing to invest, even though there is a lot of economic uncertainty and in some industries downturn there. We have automotive suppliers in China and elsewhere. Even though the automotive industry is down, they’ve got -- and they’re letting go people, in some cases closing factories, there is still steady Eddie adding collaborative robots at a good clip, because they see the long-term trend line. So, all of that to me is positive. I think, we’re learning, we’re not immune. The ROI for collaborative robots is fantastic, whether it’s an economic upturn or downturn. So, we’d like to believe we can fight through the downturn and still get growth, and we are. But, it’s kind of single-digit and I expect we’ll always going to ride above the curve here, throughout these cycles.

Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.

Thanks for taking my question. I wanted to clarify one thing. You said the 5G infrastructure added about $200 million to the TAM this year, and next year, there will be a pause on infrastructure side but maybe some pickup on the handset side. But the real next big opportunity is until the millimeter wave, which is a couple of years away. I know it’s early, but are you implying that the 5G-related incremental revenue for next year will kind of be flat? I guess, that’s net of the any decline in 4G.

Yes. It’s Sanjay here. I think that -- yes, we believe it’s roughly a couple of hundred million. I believe we said in the past that we believe all-in-all, 5G will have about a $300 million to $400 million TAM uplift to the market. And so, right now, we’re trying to calibrate, as Mark said earlier, utilization of testers is high, but we’re trying to calibrate the build out that is getting ready for the infrastructure rollout of sub-6 in 2020, and have the customers created the capacity to handle the throughput required in 2020. So, we’re kind of trying to triangulate that and we’ll provide an update of our best estimate in Q1. I think from a 5G handset perspective, I think, you should think about sub-6 is going to increase in 2020, and then, also millimeter wave, first infrastructure and then handsets in the following years. And so there will be this wave of adoption, first started with 5G infrastructure and 5G handsets for sub-6 and then going to millimeter wave, infrastructure, more in 2021 and then handsets 2021, 2022 is the way we see it now.

As a follow-up, if you look back at the 4G opportunities, which I believe started early this decade, maybe still growing right now. If you look at the shape of that TAM, how it grew over time for you guys, as well as how long it took for the opportunity to plateau and eventually start falling off. How do you think the shape of the 5G over the next -- the cycle, how is it going to be different than 4G?

So, I think, I want to break that into two different test markets. There’s the LitePoint business we have that saw tremendous spike when 4G rolled out, of handsets shifting over to 4G, which happened quite rapidly. And LitePoint is fueled by those standards shifts. And so, when you think of LitePoint’s business, that market grew to like $1 billion in size, LitePoint’s business grew upwards of $100 million. It was a huge boom and then a bust. 5G for LitePoint I think is going to go slower because there is more -- under the 5G umbrella, there’s more sub-standards, and it’s a slower rollout. In Semi Test, I think, it’s a different issue. Semi Test has been benefiting less from sort of the standards change to 4G than the complexity growth associated with the standard, its evolution and all of the sort of other features in phones. So, we’ve had a decade almost now of strong mobility Semi Test demand. Some of that you can attribute to the 4G standard, much more of it you attribute to the complexity growth in the phone and other -- perhaps correlated but other areas, like the apps processor, the AI getting built in, the image sensors, et-cetera. So, when we look at the 5G world for Semi Test, there is a there is a difference. One subtle difference, but I think the net result is going to be the same. The subtle difference is the 5G millimeter wave step-in is a much bigger technological impact than the 4G LTE step for Semi Test. The silicon to go at millimeter wave frequencies is going to be more test intensive and require higher test intensity for Semi Test. So, that’s the balloon. And it will be metered out over years. The complexity growth is a constant. So, that one I think continues. And so you’ve got a little bit more of a bump on top of it with millimeter wave being more complex. So, looking forward, marginally more test intensive than looking backwards is how I think about it.

Great. Last question for me. A couple of years ago, your SOC Test share was in the mid 50s, it dropped off last year and maybe coming back a little bit this year. I guess, next year probably should be up as well because of better end-market customer mix and whatnot. But, what would it take for you guys to get share back to the 50% level?

Well, I think, overall, we’ve got to get a kind of rollout of millimeter wave. So, that’s a key part. That drives a lot of the RF test intensity that we’re solid and good at. And the memory story has to play out as it’s playing out are sort of two key elements of that. And then, less important, but also in there is picking up a little more what we would look at as Edge AI type test business. We have to get more devices in automotive and in consumer products that are digitally intensive and executing these inference algorithms that have been developed in the cloud. We’re strong there. That growth is sort of the third leg of the stool that gets us there.

Your next question comes from the line of David Duley with Steelhead. Your line is open.

Yes. Thanks for taking my questions. A couple things on 5G handsets. Could you take a stab at how much more test time is involved in a 5G handset versus a 4G handset? I realize there is more RF and power management content and more complexity in some of the parts. But, if you could take a stab at estimating how much more test time intensity there is with the handset with 5G versus 4G, that’d be great? And the second question is, have you seen an acceleration in customers’ plans to roll out 5G phones next year?

So, on the second point -- actually, I’ll leave that -- on the second point, yes, there’s an acceleration of 5G rollout in general, that’s happened this year. So, if you went back to the beginning of the year and said what’s the pace of 5G rollout today? It’s quite accelerated in both base stations and in handsets. However, the difference -- a significant point in all that is that most of the acceleration is in sub-6G. It’s the base stations and the handsets that are really starting to roll fast are in Asia, where sub-6G is rolling out ahead of the rest of the world. Now, next year, we’ll probably get a little bit of broadening of that. That’s what’s expected, and I would expect that too. But, the infrastructure in the United States and Europe really isn’t going to be in place to take advantage of a lot of that. So, that’s going to be a bit of our anchor. But, thank God, Asia is running because it’s been great for us. Now, the test time question, there’s two different ways, I’m not sure which question you’re asking. There is the testing of handsets that LitePoint does in a 5G phone, and then there’s the testing of the all the silicon that rolls into the 5G phone. Which one are you…?

I was referring to all of the silicon in the phone.

Okay. So, on the silicon side, that one’s a tough one to call right now, because people are still developing early, early test cases for the 5G silicon. Now, the 5G specific silicon tends to be -- there’s transceivers, there’s antennas and there is a modem. And all of those are in early pilot phase production, all of them have today much higher test times, which if you extrapolate it will come up with stupid numbers for test markets. And we expect they will get optimized, as always, over the next year as they to go to production. So, I think, in the end, we’re going to see small, maybe handful, 10% plus or minus kind of test time increases when people finally sort through all this. But, that’s sort of a rough number we use.

I think, I’d just add one quick point on the 5G acceleration. I think, on the millimeter wave, we’re seeing a lot of engineering efforts and testers to support that endeavor. So, the handsets, as I said earlier, would come out, we believe would ramp in up a year plus. We are seeing an uptick in the engineering efforts on 5G millimeter wave.

Okay, great. Thank you.

Okay. And operator, we have time to sneak in just one final question, please.

Certainly. Your next question comes from the line of Tom Diffely with D.A. Davidson. Your line is open.

I was hoping you could add a little bit more on the automotive market. I know, it’s down quite a bit this year. But, what is your long-term view there? And do you view it more as a capacity play or is it the technology drivers as well?

Yes. It’s primarily a technology driver. The automotive unit volume in the world’s not going to move much over the next decade probably or at least for the next five years. But, the complexity growth of the silicon in automotive is what’s important. And much of that relates to more autonomous driving, driver assistance technologies flowing into the cars. And from the design point of view, a lot of tooling was put in place for that last year. This year, I think, because unit volumes are down in such that the manufacturers are kind of holding off, but I expect, like I said before, that will return to growth late next year. And that trend line for automotive elect test -- let’s say, automotive test should be above the trend line of the rest of the industry in terms of growth. So, we look at that it’s going to grow probably greater than 10% on average, whereas the rest of the test market we’ve modeled in that sort of 4% to 5% range.

Great, very helpful. I appreciate it.

Great. Thanks, everyone. And we look forward to talking with you in the days and weeks ahead. Bye, bye.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.