Teradyne, Inc. (TER) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you standing by, and welcome to the Q4 2020 Teradyne, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Andy Blanchard, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Sharon. Good morning everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined for our discussion this morning by Teradyne's CEO, Mark Jagiela; and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2020's fourth quarter and full-year along with our outlook for the first quarter of 2021. The press release [containing our] results was issued last evening. We're providing slides on the Investor page of the website that may be helpful to you in following the discussion. Replay of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in the earnings release, as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make reference to non-GAAP financial measures. We’ve 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 our website. Looking ahead between now and our next earnings call, Teradyne would be participating in technology or industrial focused Investor Conferences hosted by Goldman Sachs, Citi, and Susquehanna. 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 new year. Sanjay will then offer more details on our quarterly results, along with our guidance for the first quarter. We’ll then answer your questions. And this call is scheduled for one hour. Mark?

Good morning and thanks for joining us. In our call today, I’ll summarize our Q4 and 2020 full-year highlights and provide some initial comments on our outlook for 2021. Sanjay will then provide the financial details, Q1 outlook, and review our updated earnings model and capital allocation plans. Fourth quarter capped off an amazing year for Teradyne with sales up 16% from the fourth quarter of 2019, and non-GAAP earnings per share up 25%. That brought our full-year sales to just over 3.1 billion, up 36% and non-GAAP EPS to $4.62, up 62% versus 2019. These annual results, driven by strength in all of our test businesses, more than made up for a soft industrial automation market that was impacted by COVID. For the full-year, our SemiTest business was especially strong driven by investments in smartphone related test capacity, our expansion into the compute sector of SOC with our new UltraFLEXplus product, and the ramp of our Magnum EPIC product for DRAM test. In smartphones, global unit shipments contracted in 2020, but the growth in chipset complexity continued driving tester demand higher. Each subsystem on the phone, cellular power management, conductivity, display, cameras, and application processing has its own cycle. And in 2020 both the processor and the cellular areas took big steps up in complexity. We use transistor count as a proxy for complexity and the leading phone applications processors now exceed 10 billion transistors, growing double-digits each generation. In 2020, we also saw the beginning of meaningful 5G silicon content, which necessitated a build-out of new tester capacity. Together these lifted the mobility test market in 2020, roughly $200 million to about 1.7 billion. This continuous refresh of smartphone silicon should be a tailwind for the semiconductor test business for the foreseeable future. In 2020, we also ramped our UltraFLEXplus product in the compute portion of the SOC market. Recall, this has historically been a $500 million to $600 million market, where we've had relatively low share. With the emergence of more players and applications in the processor market, including hyper scalars and AI, we expect this sector to outgrow the general market. The plus, brings a powerful value proposition in managing the unique complexity, power dynamics, yield learning, and time to market requirements of this segment. For 2020, we estimate the SOC market was in the range of $3.4 billion to $3.5 billion, up from about $3.3 billion in 2019. We estimate our SOC test market share moved up 15 points to about 54%. However, our internal view of share smooths out year-on-year swings due to the unique timing of investment cycles of both our and our competitors’ customers. By that measure, we estimate our normalized 2020 SOC share at about 50%. Another notable growth segment of our SemiTest business in 2020 was memory. In this call, a year ago, we noted a significant design win for Magnum EPIC product and LPDDR5 portion of the DRAM market. This new entry into DRAM test ramped through the year and combined with healthy growth in our [traditional band business], drove a 41% increase in memory sales from 2019. We estimate the market was about $900 million in 2020, up from $600 million in 2019, and our normalized 2020 memory share at about 42%. Beyond SemiTest, our System Test Group also had a great year delivering 43% growth, with the storage test business more than doubling from 2019. This is the second consecutive year of hyper growth and storage test driven by steady test intensity growth of terabyte HDD drives and similar growth in the system level test of complex semiconductor devices. In our wireless test business at light point sales grew by 10% from 2019 with solid demand from both our conductivity and cellular end markets. WiFi 6, ultra-wideband test, and increased investments in 5G related handset tests all contributed. The performance of our test businesses more than offset the weaker results in our industrial automation business, which contracted 6% for the year. The global slowdown in manufacturing activity led to a 12% decline in sales at our Universal Robots unit. MiR on the other hand grew 1% as makers of ultraviolet disinfecting products recognize the value of an easier to deploy fully autonomous mobile robot. On a pro forma basis, auto guide also grew for the year. While the environment in IAA was weaker than expected, the business troughed in the second quarter of 2020 and has improved dramatically in the second half, including record sales at UR in the fourth quarter. Collectively, the businesses returned to year-over-year growth in Q4 with UR growing 6% year-over-year and 41% sequential growth. With tests showing continued strength and industrial automation returning to growth we are set up for another exciting year in 2021. Specifically, we are expecting a strong start to the year across all our businesses with Q1 showing greater than 6% growth at the midpoint, compared to Q1 of 2020. As you know, full-year visibility is always a challenge as evidenced by our missing the strength of the test market and the decline of the IAA market and our forecast just one-year ago. That said, let me describe how we see things today. And of course we'll keep you updated in future calls. I will preface my remarks with a note that the well publicized surge in the forecasted semiconductor CapEx in 2021 is a very bullish sign. However, the impact on test is likely to be felt in 2020 and beyond as fab capacity built this year will drive additional testers in future years aligned to fab commissioning and ramping volumes and yields. In SOC test, the dynamics that made 2020 such a strong year continue into 2021. In addition, we have strengthening demand in the long dormant automotive test market with orders for our Eagle test product lines surging. Smartphone shipments are expected to grow in 2021 after contracting about 10% in 2020 and 5G content should increase. On the other hand, the SOC test market in China will likely be down in 2021 due to the expanded and full-year effects of trade restrictions that were widened in 2020. Also, as always, tester demand from our largest customer will remain opaque until sometime in Q2. Additionally, the global economic impact of COVID and its impact on electronics demand after a surge in 2020, it's hard to forecast with the arguments for both positive and negative effects. Taking all of that into account, we have a bit wider range in our SOC market size estimate for 2021 at 3.3 billion to 3.8 billion, up slightly from 2020 at the midpoint. In memory tests, the transition to LPDDR-5 and DDR5 should gain momentum in 2021 and beyond. After growing about 50% in 2020, we view the memory market to be in the $800 billion to $1 billion range in 2021, about even with 2020 at the midpoint. In storage tests, the underlying demand drivers of increased density and HDD, and increased complexity and semi devices driving system level tests remain in place. However, visibility is limited and annual shipments can be very lumpy. After more than tripling over the last three years, we expect 2021 sales to be in a band of plus or minus 20% from the 2020 level. For the rest of our test businesses, we expect growth in the 5% to 10% range in 2021. In Industrial Automation, 2021 is starting off on a strong footing. Barring any additional COVID-related manufacturing sector shutdowns, we expect to deliver the highest ever first quarter sales in each of our automation businesses and we are well-positioned to grow in excess of 30% for the year. 2020s results reflect well on Teradyne’s strategy, execution, and efficiency. Our test businesses show the successful results of R&D bets made in years past and enable us to increase those bets for the future. Our Industrial Automation investments continue undeterred by short-term impacts of COVID, and we are well-positioned to capitalize on a world emerging to invest even more in automation to improve resilience and productivity. Equally significant, 2020 showed the resilience of Teradyne employees, our global suppliers, and our operating model. In the face of unimaginable challenges across communities worldwide, the team dealt with health, safety, and operation obstacles daily, met R&D milestones, executed steep new product ramps, and delivered record shipments of SOC, memory, and storage text products to meet our customer’s needs. We get all this while exercising the cost and schedule discipline expected to Teradyne. This is truly extraordinary, and I'm very grateful to be part of such a powerful team. As we move into 2021, the outlook appears bright across all our markets. As Sanjay will detail, we are returning to our share repurchase program and have an active M&A pipeline. As 2020 taught us, no matter what comes our way in the short-term, I am confident our global team and market strategy will deliver exciting long-term returns for our customers, investors, and employees. Sanjay will now take you through the financial and modeling details. Sanjay?

Thank you, Mark. Good morning, everyone. Today I'll cover the financial highlights of Q4 and review the financial details of 2020. Looking forward, I'll provide our Q1 outlook. An update to our mid-term earnings model and our capital allocation plans. Now to Q4, revenues were $759 million, which were $19 million above the high-end of the guidance range. We delivered a non-GAAP operating profit of 30% and EPS of $1.10. SemiTest revenue of $524 million was driven by SOC and memory test demand enabling 5G handsets and higher speed flash and DRAM devices. System Test Group had revenue of $104 million down quarter-over-quarter driven by lower storage test shipments. Industrial Automation or IA, revenue of $92 million had a seasonal increase over Q3 and delivered year-over-year growth for the first time in 2020. LitePoint revenue of $40 million was approximately flat with Q3, and down year-over-year with a decline in trailing edge conductivity products, partially offset by new sales of new conductivity technology like WiFi 6 and emerging UWB technology. Non-GAAP gross margins were 59% on plan and quarter-over-quarter due to product mix. You'll see our non-GAAP operating expenses were up 14 million to $224 million from the third quarter, due to increased test spending to support design wins, higher payroll, due to four extra days in the quarter, and ongoing IA investments. We generated $222 million in free cash in the fourth quarter. The tax rate, excluding discrete items for the quarter was 13% on a GAAP basis and 14.5% on a non-GAAP basis. For the full-year it is 14.75% on a GAAP basis, and 15.25% on a non-GAAP basis. We ended the year with cash and marketable securities of $1.55 billion. Turning to the full-year results of 2020, Teradyne revenues of $3.12 billion grew $826 million, or 36% year-over-year. $845 million of the growth was from our test portfolio, while IA contracted $18 million, due to the pandemic related slowdown. We had one customer that accounted for more than 10% of our revenue in 2020, which we'll disclose in our 10-K filing. Gross margins for the year were 57%, and operating profit was 30%, which is up from 25% in 2019. Non-GAAP EPS was $4.62, an increase of 62% over 2019. We generated $684 million in free cash in 2020. Breaking down the components of 2020 revenues, as outlined by Mark, SOC test revenues grew $595 million or 46% on strength and mobility, market driven by increase by device complexity and new standards like 5G along with growth in computing. In memory, revenues were $383 million, up 41%. While LPDDR related DRAM revenues were a significant contributor to our results, we also continue to see strong NAND test demand through the year. In system test, sales grew for the fourth year running. Revenue of $410 million grew $122 million or 43% year-over-year, primarily on growth and storage test for both hard disk drive and system level test. Storage test sales were $242 million, up from $115 million in 2019. We also saw annual growth in our defense and aerospace components of STG. At LitePoint sales grew for the fourth consecutive year to $173 million, 10% above 2019. In 2020, IA revenue was $280 million, a decline of 6% from 2019 on an as reported basis, or 9% on a pro forma basis. As Mark noted, the COVID related driven slowdown in manufacturing impacted Universal Robots, reducing revenue to $219 million, down 12% year-over-year. After troughing in Q2, UR grew in the second half 2020 versus the first half of the year. In Q4, revenue grew 6% year-over-year, giving confidence heading into 2021. MiR grew slightly year-over-year, with annual sales of $45 million and AutoGuide full-year sales grew on a pro forma basis. Now to our outlook for Q1. Sales are expected to be between $720 million and $780 million. Non-GAAP EPS range of $0.95 to $1.11 on 179 million diluted shares. The first quarter guidance excludes amortization of acquired intangibles, and the non-cash imputed interest on convertible debt. First quarter gross margins are estimated at 58% to 59%. First quarter OpEx running at 29% to 31% of first quarter sales is about flat with Q4 at the midpoint of guidance. The non-GAAP operating profit rate at the midpoint of our first quarter guidance is 29%. Regarding our OpEx plans for 2021, we expect our OpEx to grow 8% to 10% from 2020’s $840 million. Approximately two points of the spend will be in the back half of the year related to travel, which we expect to resume to pre-COVID levels along with trade shows. In our test portfolio, we plan to increase our spending in engineering, sales and marketing, primarily in SemiTests. In IA, we’ll continue to invest to reinforce our competitive product and ecosystem position across the sector. Also in IA, go-to-market investments will be made to support expected revenue growth. Turning to capital expenditures. In 2020, our CapEx was $185 million. This was used primarily for customer demonstration equipment, operations, engineering, and initial spending on new facilities to replace leased ones in locations where we plan to grow over the next several years. We'll continue to invest in these new facilities in 2021. So, CapEx is expected to be similar to 2020. Recall, we're buying land and developing it to eliminate lease costs and enable a more efficient spend profile over the mid-to-long term. 2021 GAAP tax rate is estimated at 15.5%, and our non-GAAP tax rate is estimated at 16% based on current tax laws. Moving to our mid-term earnings model. As you've seen with 2020, our non-GAAP of $4.62, we've exceeded our 2022 earnings model two years early on the strength of our test businesses. We continue to have confidence in the long-term growth outlook for test and we expect IA to return to high growth as the global industrial economy improves. When building our midterm model, given our year-on-year demand swings, we've seen both in [test and IA], we use the average of 2019 and 2020 revenues as the baseline for our growth projections. From that baseline, we expect test revenue to grow 4% to 8% compounded and IA revenues to grow 20% to 35% through 2024. In test, we expect that growth will be driven by steady increase in device complexity across our businesses, along with the high-single-digit semiconductor unit growth trend line, In IA, market penetration of cobots and autonomous mobile robots and forklifts remains low, while the range of applications they economically serve continues to expand, resulting in an attractive long-term growth opportunity for Teradyne. We expect this will drive 2024 company revenue to $3.9 billion and non-GAAP EPS to $6 at the mid-point of our estimates. Gross margin is modeled at 58% to 59%, OpEx as a percentage of sales will decline to 28% to 29%, and non-GAAP operating margin will improve to 30% to 31%. The model assumes the current tax laws are in place. Shifting to capital allocation. We’ll continue to balance a strong cash position to support our operating investments and potential M&A with direct shareholder returns through dividends and share repurchases. We are raising our minimum cash levels from 1 billion to 1.25 billion, with the $250 million increase tied to the increased valuations of potential acquisitions. Recall, we held $500 million for M&A and $500 million for severe economic downturn. We will also be increasing our cash balance in 2021 through 2023 to service our convertible bond, which comes due in December 2023. To date, $51 million of that bond has been redeemed early, with payment planned in Q1, with the remaining face value of $409 million. Regarding share repurchases, in 2020, we bought back 1.5 million shares for $88 million at an average price of $58.32. Recall, we suspended our share repurchase program in April due to COVID-related uncertainty. We are replacing our prior approved program with a new share repurchase authorization of $2 billion with no fixed end date. We plan a minimum of $600 million of repurchases in 2021. As in the past, the plan has both programmatic and opportunistic components. In summary, 2020 inflicted incredible human and economic hardship on the society across [the globe] and we’re respectful of the widespread pain and loss. When the pandemic hit, I noted our priorities were the safety of our employees, supporting our customers, continued execution, and achieving our financial objectives. The Teradyne community responded with a collaborative and supportive spirit, incredible energy, ingenuity, and purpose, which delivered on all three of these priorities. I'm incredibly proud and thankful to be part of this team. We enter 2021 in the strongest position in our history. The work in 2020 has made us more resilient and prepared us for the strong market demand that we currently see in both test and IA. While our visibility for the full-year is limited. We're confident in the underlying market fundamentals, our competitive diversified portfolio, and our team which will enable long-term growth prospects for the markets we serve. Collectively, we're excited to turn our new financial model into reality. With that, I'll turn things back to Andy.

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

[Operator Instructions] First question comes from Krish Sankar with Cowen.

Hi, thanks for taking my question. Mark, I have two of them. First one, thanks for the color on calendar 2021. I'm just kind of curious if you could [peel] the SOC test market a little more to say, how much do you think mobility will be and how much do you think auto test would be this year on SOC? And then I have a follow up.

Yeah. So, good question. Certainly auto is going to be up sequentially in 2020. We've talked about that market being at a normalized, let's say maybe more of a peak run rate in the $400 million to $500 million range, it's been sort of 200 million last year. So, this year that should be up at least 150 million, maybe 200 million. It's really right now a bit of a rush for capacity. And we don't know exactly when the demand profile of orders are going to taper off here. So, it could go higher if this persists. So that's the color on auto. In mobility, I think it's harder for us to see that at the moment because of the significant impact of our largest customer on both us in the market, which doesn't really become solidified until April-ish of the year. So, we're looking at it, sort of, flat plus or minus $100 million in mobility.

Got it, got it. That’s very helpful Mark. And then just as a follow up on the IA side, you mentioned [30% plus] growth, should we assume a big driver of that is going to be UR? In other words, UR should be higher than 30% or do you think UR is going to be in-line with Industrial Automation growth?

Yeah, I think – that's a good question. I think all other groups are going to be better than 30. And some of them like AutoGuide are small, so I think they'll pull up the average, be ahead of UR and MiR UR should be about the same for the year.

Got it. Thank you very much, Mark.

Okay.

Next question comes from Mehdi Hosseini with SIG.

Yes. Thanks for taking my question. Just want to go back to your SOC commentary. I'm a little bit surprised with your, kind of flattish outlook. And I say that because millimeter wave is expected to account for a larger mix of 5G phones, and I believe last year was just the early investment. So, why isn't the increased penetration of millimeter wave phone not giving you that incremental confidence? And I have a follow up.

Yeah, I think that's certainly a balloon for the year Mehdi. You know, maybe we're going to double the number of millimeter wave enabled phones in 2021, but yes, last year, if you recall, there was also a significant step up in the hundreds of millions of units of millimeter wave enabled phones were brought to market last year. So, if you add another 200 million to 300 million additional millimeter wave enabled units this year, and let's say that brings the global total to 600 million units out of 1.4 billion, you're essentially adding about as much capacity maybe a little bit more, because there'll be more than let's say last year, added 250, this year might add 350 million units. So yes, there will be a little bit of growth in additional millimeter wave test capacity. But last year was a pretty big year too.

Got it. And then looking at the mid-term model 2024, what are the key underlying assumption for market share, especially as you try to capitalize on the synergies between semi and a system test? And in that context, are you accounting for any incremental share shift in the GPU end market?

Yeah, hi, Mehdi, it's Sanjay. Yeah, so in the earnings model, we see obviously growth in the market. As Mark alluded to, you know, more players are coming into the compute space that we can address. And with that, we feel that with the UltraFLEXplus solution we're very well-positioned, and we are projecting share growth. When we think about from a memory perspective, you know if you go back, let's say 10 years, you know, we've been on this steady increase of memory share growth, where as we continue to execute, we see continued share growth on that perspective as well. So, really growth in market size, as well as continued share growth are our drivers.

That includes the synergy between different sectors or segments?

You want to expand on that question?

Yes. Just going back to the question, I see opportunities between your semi and the system test, especially as the system level test diversifies. And I'm just wondering if that's baked into your 2024 model?

Yeah. Okay. Thanks for the clarification. Yes, it is. You know, with device complexity we're going 5 nanometer and then to 3 nanometer. I think both system level test, as well as ATE test take that into account.

Got it. Thank you so much for detail.

Next question comes from Toshiya Hari with Goldman Sachs.

Good morning. Thanks so much for taking the question. Mark, I wanted to ask about your largest customer, I appreciate, you know, things will remain pretty fuzzy or opaque, as you said, until sort of the April-ish timeframe, but can you sort of walk us through the potential range of outcomes you're thinking internally? And obviously you've got units, you've got, you know transistor density as it relates to the new chip. Also curious if there are efforts on the notebooks out of their business, in-sourcing CPUs, could have an impact on your business as well? And then I've got a quick follow up. Thank you.

Okay, you know, I always am a bit reluctant to be too specific on any one customer. So, I'm going to speak more to the segment, a bit, which I'll bundle compute and mobility together here. So, last year was incredibly strong in both our traditional mobility market because of the complexity growth of phones, which we alluded to, and the fact that we did enter compute as a new segment. So, we ended up with additional revenues in compute last year that, you know, north of $50 million for the first year in that market. So, as we think about this year, the issue of smartphone unit growth and complexity growth of the apps processor, the camera systems and such in the phones is part of the equation, and we have a reasonably good read on that. On the compute side, there's a lot of moving parts there. And there's a lot – since it's a new market for us and a new market for some of our customers that has the bigger range of potential outcomes for the year. You know, so that's the one we're triangulating on. That could be up significantly over last year. It could be up modestly over last year, but at this point, we really can't be too specific.

Got it. Thank you for the color. And then as a quick follow up, on industrial automation, I wanted to ask about, you know, the profit margin profile of the business, you know, where does it stand today, I guess as of 2020? You guys have done a great job in improving gross margin at UR and the other businesses that you've acquired over the past couple of years, and at the same time, you've been aggressively spending from an OpEx perspective. So, in your 2024 model, what sort of margin profile for IA is embedded in your numbers? Thank you.

Yeah, hi it’s Sanjay. So, IA as a whole this year was roughly just a bit better than breakeven. Obviously, with the COVID impact on multiple businesses, and the contraction in UR, you know, we're just above breakeven, but you know, fundamentally, we continue to invest in the portfolio, the ecosystem, the go to market for product and differentiation, ease of implementation. And so you should expect that to continue over the mid-term and, you know we're focused on driving the revenue growth and the investments. And so, with that we expect the margin profile to be roughly consistent with the current profile, as we – as AutoGuide is relatively new to the organization, just over a year. We expect that to, you know improve with our, you know our Teradyne supply chain, as well as other quality processes we step in.

Thank you.

Just one thing, I’m going to add on to that commentary around the industrial automation business to remind people that what we focus on right now during the high growth phase of that business is sales growth and gross margin. And the bottom line, as Sanjay mentioned, if we're at breakeven, we're happy as long as we can sort of adhere to or exceed the Rule of 40. And through the mid-term, we think we expect to be close to that kind of up top line growth rates. And what we bring down to the bottom line will, kind of depend on the size of the growth, what we see ahead of us. And if we're growing at 50% and breakeven, we're happy as [indiscernible] and if the growth rates come down below 20%, we'll start dropping more and more down to the bottom line.

Thank you.

Next question comes from Joe Moore with Morgan Stanley.

Great, thank you. Following on the last question, can you just characterize the tone of business for the Universal Robotics business? And I guess in the context of, you know, it feels like a lot of the business activity in the last 12 months is business continuity and supply chain disruption. Maybe that's negative for new technologies in manufacturing. At the same time, I would think social distancing and stuff like that is an opportunity for you to just kind of characterize those puts intakes and just, you know what that tells you about what the trends may look like over the course of this year?

Yeah, sure. It's Sanjay here. So, you know, in the short run we actually saw a contraction as evidenced by, you know, how our revenues were. However, I think your comments hit home with regards to plant and warehouse decision makers seeking to build resilience into their supply chains. And we view that over the mid-term as a tailwind. We are seeing, we are seeing the market obviously come back with Universal Robots. We've talked in our prepared remarks about the automotive and electronics industry, and then we're also seeing strength in a couple of other verticals.

Okay, thank you.

Next question comes from C.J. Muse with Evercore.

Yeah, hi, thanks for taking the question. I wanted to follow up on Mehdi’s question regarding your 2024 model. So, if I look at your implied SemiTest revenues versus 2020 actual, you're up about 250 million to 350 million, which seems conservative, particularly when you reflect on, you know, what you're doing with system level test, new UltraFLEXplus. So, can you, I guess walk through, you know, what assumptions you're making in terms of market share for both SOC and memory implied in that number? And, you know, where you might, you know, point to as areas that might be conservative?

Yeah, I think that, you know, as I articulated from – I'll touch on memory first, you know, our share right now, [is in the] low 40s, you know, we see that – we could see that growing to the mid-40s in the plan, and then from an SOC perspective, Mark talked about our normalized share level of about 50%. And we see that increasing over the mid-term.

But within the implied model, are you assuming the 50% or the 60%, that Mark spoke about back in July as to, you know, what a goal could look like?

So, yeah, I think what we've been saying C.J. is that we can get about a point to a point and a half a share growth a year. So, by 2024, as I mentioned, I think our normalized share is somewhere around 50, we should be up around 55, 56 by then in SOC. And in memory, share moves a little chunkier, because there's only a few players there. So, on the memory side, you know we could be in the mid-to-upper mid-40s by then, I would say, is one way to think about it. But the other piece of color in terms of aggressive versus conservative that I'd add here is, the recent investment profile of the front-end with CapEx moving up into the $70 billion range is something we haven't modeled into our mid-term plan. We've assumed that incremental fab capacity across the mid-term would be sort of consistent with the rate that it's been added for the prior four years. So, if $70 billion plus of investment in [WFE] is the new normal for the next four years, that's certainly going to drive more tests than we model.

Very helpful. As my follow up, can you speak to what we should be thinking about for SOC test gross margins here in 2021 versus 2020? Trying to get a sense of what uplift might look like, particularly from Eagle test?

I mean, gross margins, we – you should expect are relatively consistent with how we've guided Q1 in our long-term model.

Okay, thank you.

Next question comes from Brian Chin with Stifel.

Hi there. Good morning. Thanks for letting us ask a few questions. Maybe the first question that comes up is our industrial automation. Automotive has historically been a key portion of sales here and I was curious, do you expect or even need the auto portion of your sales to grow 30% year-over-year, given sort of the increasing breadth of market adoption that you might be seeing?

Yeah, I think that, you know with an emerging market, there's still a lot of footprint to cover. So, we expect that to continue in the automotive vertical, as well as electronics and industrials, as well as other verticals.

Okay. Yeah, I was just sort of trying to gauge whether you're seeing a lot of adoption outside of auto, and you know, in terms of visibility, you're starting the year with pretty good visibility. Is Auto kind of starting from a similar point, or is it kind of a little bit more than the [whole of the start of] the year, and you're going to expect a bigger snapback later in the year?

Yeah, we're seeing also – we're seeing market drivers and verticals, adoption, and education, R&D, pharma, as well as Life Sciences, but from a starting point, obviously, we have a very strong incumbent installed base over the years that we've built in the auto vertical.

And I’d just add to that, that certainly automotive was one of the most hard hit aspects of URs business. You know, automotive has been running in the high 30s, 40% of the business coming into 2020 that contracted dramatically because of COVID, down, you know, to the point that it was in the low-20s. And I would say it's certainly at this point, although back and growing it hasn't come back yet to where it should be in our portfolio. As issues around the semiconductor supply chain and other things have sort of crimped some of the ambitions of car companies to ramp volumes here, there's a little bit to go still. But our footprint over time since we acquired UR has been reducing in the automotive segment, not so much because automotive is not growing, of course, but it's just that our expansion into the other areas that Sanjay mentioned has been and we expect over time, that automotive component will continue to decline as a percentage of our sales.

Great, yeah, I was sort of getting maybe at that and then in the 2024 model, [indiscernible] four years out, but can you give us sort of a rough sense of how much of the [IA sales might be AMR] or mobile vehicle driven? I think the split, roughly is kind of 80% UR, 20% mobile at the moment, could that be sort of like a two-thirds one-third in that timeframe?

Yeah, I think that obviously, UR we've had for a little bit longer. And it is a larger percentage, but I think you're spot on that the AMR portion will grow with AutoGuide and MiR as a percentage of revenue.

Okay, great. Thanks so much.

Next question comes from Atif Malik with Citi.

Hi. Thanks for taking my questions and good job on results in guide. Mark, the first one, following up on the last question AutoGuide, how is the adoption going at larger enterprises and warehouse customers? And then I have a follow up.

Yes. Good question. So, to be frank with you, we had a good year. We grew, you know, 50-ish percent in the year, but we didn't hit our target. And part of this is extended evaluations that the larger accounts that you're referencing, and it's been very difficult in a small business like AutoGuide’s case in a COVID area to acquire new customers and get the pilot production validation work done in the same timeframe that we could have gotten it done in a non-COVID world. So, we've seen some extension of those [eval], but we're in the some of the boutique name brands for [evals] that you would hope we are in both the industrial manufacturing side, as well as the e-commerce side and logistics side of life. So, we're hoping that this year is going to be the big breakout year. It's the kind of business that should at least be doubling, if not more, once these big accounts latch, but we did – if any place sort of had a big impact from COVID last year, it was AutoGuide because of the whole, you know, new customer acquisition is the whole game there at this point.

Great. And then as a follow up, you mentioned the China SOC test to be down this year, which makes sense given the restriction from last year, but some of the front-end peers have talked about maybe flattish China investments on the front-end and back-end is different. Can you just walk us through the components on where China investments are down and why you aren't benefiting on some of the mature technologies and nodes?

Yeah. So, if you look at China, I think you need to separate memory and SOC, because it's quite different. On the memory side, there will be growth in China this year in test as well. And we – or we expect that at least. And so that's a healthy growing mid-term profile, I'd say for China. On SOC, it's really a little bit more difficult to see growth occurring this year. Because the impact of the trade restrictions on Huawei and HiSilicon are tremendous in terms of their buying power in the market historically. What they buy in both silicon and then test capacity for that silicon has been severely hampered. And then further restrictions on other companies like SMIC and such are much smaller factors, but are headwinds against growth. So, I think SOC is likely to contract, memory is going to grow, but net-net, you know, it's not going to be hugely down, but it'll probably be done a little bit on the test side of life.

Thanks.

Next question comes from Vivek Arya with Bank of America.

Thanks for taking my question. I have two, one on operating leverage, and the second on M&A. On operating leverage, Sanjay, I believe you mentioned OpEx growth of 8% to 10% this year, do you think there is a potential to still drive leverage with that kind of growth? And then when I look at your 2024 model, you're keeping operating margins at, you know about 30%, 31%, kind of where you are already, even though sales are expected to grow and Mark had outlined a number of interesting growth drivers. So, I was hoping you could talk to operating leverage this year, and then what would be the drivers as you look at your 2024 model?

Okay, sure. Yeah, so obviously, it's another – it's an investment year and I think, in my prepared remarks, I noted that we're getting back to travel and trade shows, which is a key point. You know, you really, if you look at it in two portfolios, we've – for the year, we're going to have leverage in the test business where the growth in OpEx as a percentage will be lower, but the growth in the IA space [with the] OpEx growth is higher. And so, the leverage, you know, from a – like we're growing in the IA space, but we will see, we should see a degree of leverage in the short-term in the test business. When you cascade that out to 2024, obviously with the revenues that we're predicting in IA, you know, I think Mark described it well, if we're growing at 50%, and have a forecast to continue to grow, we'll continue to drive the investment, but as the growth starts to go down, let's say below the Rule of 40 then we'll start to drop more to the bottom line. That's how we're thinking about it.

But when I look at that 2024 model, right there, you know, you're forecasting overall sales to grow at 6% CAGR, you know, from the 2020 level, so that is below the 16% CAGR you have been at, and you're saying operating margins are going to stay pretty much flattish versus, I'm just puzzled as to, you know, if you're saying sales are not really going to grow as much as they have grown in the last three, four years, and operating margins are not going to expand from here, is that model very conservative or what needs to be done to either grow faster or drive more operating leverage?

Yeah, I think that we’ll, and that's why in my prepared remarks [I comment], we looked at the model, not just off of a point of 2020, but off of an average of 2019 and 2020, just given the significant balloon in 2020 tied to the mobility space, and then the contraction in IA. And when you look at it from an average of 2019 and 2020, we believe in that growth, overall growth of the 4% to 8%, and then we are during that period going to be growing out the investments in the IA portfolio.

And I would just say, if you go back to what we said, if you look at that pie chart of the mix, when we get up to 2024, IA should be a bigger mix of our revenues and tests. So, test will continue to grow and will have a very high drop through, it'll be very efficient and if that's all you're looking at, yes, bottom line, profitability should increase, but on the IA side it's more likely that we'll be growing more rapidly, and we'll be pulling up gross margins for the enterprise with the IA business. But on the bottom line, you know, we're being a bit conservative on how much we plan to drop through there, because we want to keep investing for more and more growth. So, it kind of just depends on what's the investment profile in IA and we've modeled in, you know we're not going to optimize for profit in the mid-term there, we're optimizing for growth.

Understand. And Mark, just a follow up to that, you mentioned the prospects for some additional M&A, I presume it's in the IA side of the business, but I was hoping you would talk to that, do you – are you contemplating kind of smaller tuck-in, you know, technology type transactions? Are you thinking about something that could be bigger and could require the use of stock? Just how we should think about what the M&A pipeline is and how it could impact this baseline model that you have set for us? Thank you.

Yeah. So, most of what we have in our pipeline is consistent with the kind of things we've been investing in and acquiring in the past five years to six years. Industrial automation, modestly sized investments, let's say relative to our market cap. However, we have expanded our aperture a bit to look in the test space, and areas that are correlated to test, which bring with it potentially some larger, M&A things. It's always governed by the same rich internal rate of return metrics that we always use on these things. So, whatever we do is going to be something that's more attractive to our investors than buying back our stock or, you know, that those kind of – our internal weighted cost of capital. So, that's about all I think I can say about that.

Alright. Thank you.

Next question comes from Timothy Arcuri with UBS.

Thanks. I had a couple. So for OpEx this year, you're saying it's going to grow about 8% to 10%. So at the mid-point, you're going to grow OpEx about $76 million, I'm wondering, Sanjay, if you can tell us how much of that's going to come in IA? And I guess, you know, another way of asking that is, sort of what sort of op margin do you think you can do this year in IA? I mean, you're basically breakeven last year, can you get to high single digits this year? And is 10 to 15 still the long-term target for that business? I know that Mark’s commenting that if growth slows, you can sort of crank back on OpEx and you can drop more, but just wondering if you can comment there? And then I have a follow up.

Sure, yeah, I think you hit it spot on. I think when you take out the travel and the trade shows, you know a majority of the spend will come in OpEx from – on a year-over-year basis. And from a profit perspective, you know, we're assuming growth, and we expect to improve, you know, back to our original growth plans, like if you think about 2020 as the anomaly and you look at the jump off point of 2019, we were about a 10%, you know, profit level with our growth. We should be in that similar level going forward in 2021.

Okay, got it. So, you think you can get to 10% op margin this year?

Yeah, plus or minus, but yeah.

Okay. Okay, great. And then I guess, a question for you, Mark. So when you were going to your top customer, you presented a couple scenarios. I know, it's very tough to predict, but the scenarios you presented didn't include that revenue from that customers down, you know, I get that the compute piece is going to be up, but they're also not going to shrink this year. And in the past, that's been sort of a harbinger of a potential decline in the number of testers they buy, unless they're willing to live with a much larger die size, which may or may not be the case. So, I'm just kind of wondering, you know, I'm not asking for any specifics on that customer, I'm just sort of wondering if you can look back in the past and draw on your past experience and say, well, yeah, in the past, when that happens, that is sort of a harbinger of, you know, the potential that it could be down because you didn't present that as a down or as a possible, you know, outcome this year. Thanks.

Yeah, I think it's a possible outcome. But let me go back to what I was outlining in my remarks. When you look at the phone, there's various elements of the phone in terms of technology, apps processors, the modem, the cameras, the memory, those areas of the phone refresh and take leaps of complexity in different cadences. And in 2020, the apps processor and 5G, basically – the app processor had a big jump in complexity, and 5G proliferated throughout all the phones. So, as you look at 2021, the need for incremental 5G capacity, whereas in 2020, several, let's say 100 million units worth of phones needed 5G capacity. This year, it'll be less because the incremental unit growth there is one factor in incremental 5G capacity, plus complexity growth of the 5G modem itself. So, 5G is big in 2020, not as big in 2021. That leaves what's happening with the cameras, what's happening with power management, what's happening with the screen resolution, other things could be balloons that pull it back up, but I do think you do have that. 5G has happened for that one area of our mobility customer base.

Yeah, agreed. Okay. Thank you.

And operator, we have time for just one more question please.

Okay. The last question comes from John Pitzer with Credit Suisse.

Hey, Andy, thanks for sneaking me in and congratulations, guys. Mark, my first question is just on the whole China dynamic, you're clearly guiding if for them to be down this year. I'm kind of curious if there is a date on between U.S. China relations is that a zero sum game, an exercise in market shift or do you think it would be accretive? And I guess more importantly, we're now seeing the U.S. government kind of incentivize domestic production of Semi’s. I'm just kind of curious as to whether or not you could benefit that from that either indirectly, as some of your customers build capacity domestically or directly as we think about your long term tax rate? And then I've got a quick follow up.

Okay. So, you know, China, if for some reason, the restrictions on China ease and more indigenous Chinese makers start to grow again. I think it's neutral. You know, as business shifted out of China in 2020, it was pretty much neutral to us. There was – the customers that picked up the manufacturing of, let's say, applications, processors, or modems that would have been done by indigenous Chinese suppliers, or Teradyne customers and advanced test customers in a proportion that isn't that different than it was in China. So it ebbs and flows back and forth. I wouldn't say there's a big ramification. On the U.S. domestic supply question, you know, I think it's going to take a long time, and many, many years of a steadfast set of incentives from the government for that to mature to something significant to our business. You know, if we stick it that in the U.S. for seven, eight years, and really build up an infrastructure to manufacture semiconductors, domestically, I think it could have a bit of a positive impact. But I think it's small, I don't think because semiconductors might be manufactured in the U.S. All of a sudden, there's a propensity that they're going to buy more Teradyne equipment. It's at the margin, but nothing I would bake in as a trend line to count on.

That's helpful. Then just as my follow up going back to the 2024 model, your explanation is to kind of how you're getting to the op profit targets you're getting to, it makes a ton of sense. I'm just kind of curious, to the extent that the top line proves to be conservative, how should we think about incremental operating margins above, sort of the high-end of the target model or maybe another way of thinking about it as IA gets scale, you know, where do we think the longer-term op margin of the business can go?

Yeah, I think that if the test business, if what drives the incremental revenue of the test businesses come to fruition, I think you'll see, you know, higher drop through if – and again, just to repeat myself, if we're growing and we see continued growth, and we're going to continue to invest in IA that dropped through, maybe lower, but let's say it comes, let's say the revenues grow significantly over the first couple of years, and then at the end, they start to – the growth starts to tail down. You may see a little bit more leverage, but it's really, you know, we have to see how the market unfolds in IA, but you know, over the short-term, we are planning a significant investment.

Helpful guys. Thank you.

Alright folks, that wraps us up for today. Look forward to talking to you in the days ahead and those that are still in the queue, I'll get back to you straight away. Thanks so much.

This concludes today's conference call. You may now disconnect.