Teradyne [TER] Conference call transcript for 2022 q1
2022-04-27 12:52:11
Fiscal: 2022 q1
Operator: Good day, and thank you for standing by. Welcome to the Q1 2022 Teradyne, Inc. Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Andy Blanchard. Mr. Blanchard, the floor is yours.
Andrew Blanchard: Thank you, Chris. 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 2022's first quarter, along with our outlook for the second quarter of 2022. The press release containing our first quarter 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 statement contained in our earnings release as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make reference to non-GAAP financial measures. We've posted additional information concerning those non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure were available on the Investor page of the website. Looking ahead, between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Cowen, Luke Capital, Bank of America, Stifel and Bernstein. 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 quarter. Sanjay will then offer more details on our quarterly results, along with our guidance for the second quarter. We'll then answer your questions, and this call is scheduled for 1 hour. Mark?
Mark Jagiela: Hello, everyone, and thanks for joining us. Today, I'll summarize our Q1 results, review current market conditions, and provide an update on Q2 and the full year. Sanjay will then take you through the financial details, including our outlook for the second quarter. The first quarter played out as expected from a financial perspective. We delivered results toward the high end of guidance as we cleared a few more supply chain bottlenecks than expected. As outlined in January, we expect revenue growth throughout the year as we build toward 2023 and the transition to 3-nanometer. Consequently, we expect roughly 7% to 9% sequential quarter-over-quarter growth throughout the year. Since January, we've seen incremental strengthening of demand for Semi Test and wireless in the areas of automotive, memory, WiFi 6c and 7. On the other hand, for the first time in 2 years, supply chain challenges are materially impacting our Semi Test shipments. This is reflected in our wider-than-normal revenue guidance range in Q2. Sanjay will describe these details shortly. From a full year market perspective, we estimate the SOC market is trending to the high end of the $4.6 billion to $5 billion range we discussed in January. Strengthening automotive test demand is one element driving the market increase as both per car content and unit complexity are growing quickly. The accelerating move to electric vehicles is a key part of this increase with EVs growing at a 20% plus CAGR while the chip content of these vehicles is running more than 3x compared to gas-powered cars. This year, we are seeing particular strength emerging in high-end automotive ADAS processes. Complexity of these processes is approaching the level of high-end cellphone applications processors. Additionally, high-end ADAS processors have about a 3 to 4x longer test time due to the more stringent test requirements for devices used in automotive safety applications. Furthermore, there are usually multiple ADAS processors per vehicle, amplifying the unit demand. Combining the enhanced EV semiconductor content with these ADAS trends, we expect the automotive test market to outgrow the core test market for the receivable future. Another area of growth is in hyperscaler silicon development. While the material test revenue impact from these complex chips is in 2023 and beyond, both the complexity and pace of development is accelerating. This has been a focused investment area for us over the last 18 months, and we are pleased with our win work -- sorry, pleased with our win rate for these new opportunities. Shifting to the memory test market. Our market size estimate for the year remains at about $1 billion. But within that, we have seen the DRAM demand soften a bit, offset by an increase in flash demand. In System Test, defense and aerospace and production board test groups collectively grew over 30% from Q1 '21 on strong automotive board test demand and program buying in defense and aerospace. In Storage Test, sales were down 28% as expected versus 1Q of '21. Customer concentration here causes this lumpiness, but the long-term complexity and unit demand drivers remain in place. Our wireless test business at LitePoint remains very healthy with sales growing 26% year-over-year in Q1. Strong demand for emerging WiFi 6c and WiFi 7 standards is driving this growth and the outlook for the year. LifePoint's strategy delivers high throughput, easy-to-deploy test solutions for the full array of wireless standards. Our chipset test library approach to programming allows customers to shorten their time to market and achieve superior test economics for these emerging standards. Moving to Industrial Automation. Group revenues were up 29% from Q1 of last year. Demand in North America was particularly strong with 55% growth year-over-year. While we cleared some supply issues at UR rate in the quarter, IA shipments overall continue to be constrained by material shortages. Globally, the PMIs for the U.S. and Europe remain over 50, while in China, the PMI dipped below 50 in March. We are closely watching to confirm that China data point is a short-term COVID lockdown issue and anticipate recovery in 3Q and 4Q. Similarly, the conflict in Ukraine slowed EU demand in March and has the potential to impact the European industrial activity throughout the year. While we expect these constraints to continue in 2Q, we do expect IA growth rates to increase through the year as supply constraints ease, AutoGuide begins to ramp shipments and UR and MiR see increased growth on China and EU recovery. At UR, our OEM welding application continued on a tear with 1Q growth of over 100% compared to 1 year ago. The U.S. geography was also strong with over 50% year-over-year growth. Our UR+ program of plug-and-play applications for our cobots is passing in the 400-product milestone this quarter. Each of these applications leverages an independent third-party developers knowledge of a specific market vertical to solve a specific problem. This application is then certified by UR so our customers can deploy automation solutions quickly by spending less time on programming and integration work. The resulting network effect is a powerful differentiator for us, and we continue to invest to support this growing army of developers. At MiR, we are seeing two positive trends emerge as we grow the business. First, we are seeing a steady movement toward higher payload, higher ASP AMRs. In 2020, about 10% of our sales were above the 500-kilogram payload range. This moved to 22% in 2021. And in Q1, we saw over 30% of our sales in this class. This represents a broadening of AMR applications to a wider range of material handling tests and manufacturing and logistics. Second, we are seeing the trend toward both growing fleet sizes and increasing multifactory deployments at major customers. Within these environments, our fleet management software is an increasingly important product differentiator. These larger customers also have demand the uptime and support requirements, which also plays to our strength as MiR is leveraging Teradyne's global support and large account experience to meet these customers' needs in ways that smaller players can't. With one quarter of 2022 in the books, the year is unfolding roughly in line with our forecast. The incrementally stronger demand in test is being balanced by supply constraints. Longer term, I am encouraged by the continued strength in WFE investments, which fuels our growth; the progress from industry leaders on 3-nanometer technology; the growing opportunity for our human scale automation projects and the resilience of Teradyne's global team and our partners that are enabling us to muscle through some very tough supply and operational constraints. And before closing, I want to note an important milestone at Teradyne. Mike Bradley will retire from our Board of Directors in May. Mike's Teradyne career spans over 40 years, including 10 years as CEO, helping shape Teradyne's products, business model and culture. Mike has had an incredible impact on our company, our customers and shareholders, and I'm especially appreciative for the help he's given me along the way. Thanks, Mike. Sanjay will now take you through the financial details. Sanjay?
Sanjay Mehta: Thank you, Mark. Good morning, everyone. Today, I'll provide details on our Q1 results, offer additional color on the operating environment, including the supply line update and describe our Q2 outlook. Now to Q1. First quarter sales were $755 million, with non-GAAP EPS of $0.98. Non-GAAP gross margins were 60.2% and our non-GAAP operating expenses were $248 million, slightly below our guidance due to slower-than-planned hiring. Non-GAAP operating profit rate was 27.4%. We had no 10% customers in the quarter. The tax rate, excluding discrete items for the quarter was 16% on both a GAAP and non-GAAP basis. Please note, you should now use this for the full year tax rate as well. Looking at the results from a business unit perspective. Semi Test revenue of $482 million was down 9% from Q1 '21 as expected. SOC revenue was $387 million driven by strength in mobility and compute end markets. Memory revenue was $96 million, driven by flash final test and DRAM wafer sort. System Test group had revenue of $119 million, which was down 11% year-over-year, again, as expected. Storage Test sales, including HDD and system-level test solutions were $68 million in the quarter, down from $95 million in Q1 '21. Defense and aerospace and production board test grew year-on-year. At LitePoint, revenue of $52 million was up 26% from prior year due primarily to strong shipments of WiFi and UWB test systems. Looking at our test portfolio overall. The positive demand environment, Mark noted, reinforces the trend line growth built into our 2024 earnings model. In Semi Test, growing device complexity supported by no transitions and unit growth will provide a long-term tailwind to that business. At LifePoint and in System Test, similar increases in complexity continue to drive growth. A couple of examples. One, LitePoint revenue in 2021 was approximately double the 2017 level. Two, our Storage Test business. Revenue in Storage Test has more than quadrupled from 2017 to 2021. At LitePoint, we expect growth to continue to be driven by more complex wireless standards for connectivity, sophisticated location tracking and security technologies and cellular applications. In Storage Test, growing chip complexity combined with higher density, hard disk drives are driving long-term growth. Now to Industrial Automation. Industrial Automation revenue of $103 million was up 29% year-over-year. This was ahead of what we planned in our Q1 guidance as we were able to work through several supply line constraints in the quarter at UR. I'll also note that we expect IA revenue to follow the historical pattern and grow as we move through the year. UR sales were $85 million in Q1, up 30% and year-over-year with the highest growth in North America. MiR sales were $17 million, up 22% from Q1 '21. As Mark noted, higher payload products with higher ASPs contributed to that growth, and we expect this trend to continue. Overall demand at both UR and MiR remained strong as labor availability and rising costs make the financial case for our human scale automation compelling. But as noted, we are watching for the impacts of COVID events in China and the Russian-Ukraine war closely. From a financial perspective in IA, the group was breakeven on a non-GAAP operating basis in the first quarter. And for the full year, we expect to operate in the 5% to 15% range we discussed in past calls, with 2022 trending towards the low end of the range. Recall in 2021, IA delivered a 4% non-GAAP operating profit for the full year. As noted in the past, with market penetration for cobots and AMRs below 3% and high market growth, our strategy is to prioritize growth over obtaining model profits. Simply put, we are investing to capture these markets as we see significant growth beyond the midterm. Shifting to supply. While the demand environment is strong, supply issues are getting progressively worse. We continue to manage through a very challenging supply environment as we have for the past 2 years. Our supply management operations teams and partners have done an incredible job, including navigating through a multi-week plant shutdown at one of our major contract manufacturers in Q1. Fortunately, it was mid-quarter, and we had time to recover. Had the shutdown happened later in the quarter, the recovery could have shifted into the following quarter. It highlights the risk which will persist during the global COVID pandemic. In Q2, there is more demand to ship if we could align supply. Issues range from chip shortages to COVID-related delivery shutdowns. We're taking numerous actions to harden our supply chain, including expanding our production operations geographically, adding new geographically diverse suppliers, redesigning products to use available components and many other actions. However, even with these actions, we expect supply line constraints to remain an issue through at least the first half of 2023. Shifting to the balance sheet and cash flow. Our cash and marketable securities at the end of the quarter totaled $1.2 billion. We had $37 million in negative free cash flow in the quarter. Cash burn in the first quarter is typical for us as we pay variable compensation and profit sharing in the quarter. We spent $201 million and $18 million on buybacks and dividends, respectively, in Q1. As noted in January, we expect to purchase a minimum of $750 million -- sorry, $750 million of shares in 2022. Regarding debt. To date, $384 million of convertible bonds have early converted in Q1. We paid $21 million to bondholders in the quarter. Now to our outlook for Q2. As you've heard this morning, customer demand is strong in all parts of the business. Our guidance range is wider than normal as number of material shortages continues to expand. And while we've been successful to date in addressing these issues, the margin for error continues to narrow, and the guidance assumes we won't see extended shutdowns of our production facilities due to COVID. With that said, sales in Q2 are expected to be between $780 million and $870 million, with non-GAAP EPS in a range of $1 to $1.29 on 170 million diluted shares. The second quarter guidance excludes the amortization of acquired intangibles. Second quarter gross margins are estimated at 60% to 61%. OpEx is expected to run at 31% to 34% of second quarter sales. The non-GAAP operating profit rate at the midpoint of the second quarter guidance is 28%. Turning to the impact of inflation on our P&L. First, gross margins. We are seeing increased costs primarily in components and labor, both internally and at our partners. We're mitigating those increases through a variety of measures, including product pricing, operational efficiencies, multi-sourcing and seeing the benefit of our prior investments to reduce our bill of materials. Our gross margin performance in Q1 and outlook for Q2 reflects our success to date with these measures. But I remind you, this is a very dynamic environment. On the OpEx front, we have planned for increased costs tied to inflation and we still plan on growing OpEx 11% to 13% over 2021 as noted in January. Looking at our revenue profile for the year. The first half is shaping up a little bit better than expected with very tight supply. The second half is looking to be slightly up versus last year's second half, reasonably consistent with our expectations at the beginning of the year, even though test demand is incrementally higher. Supply issues may push some of that incremental demand into 2023. We expect third quarter revenues will grow high single digits from the Q2 level and Q4 will grow sequentially as well. Our current view is that the first half revenues will be 46% to 47% and second half revenues will be 53% to 54%. To sum up, demand across the company remains strong and growing supply constraints are moderating our shipments more than at any other time since the pandemic began. We're expanding our playbook to address these issues, but it's a very dynamic playing field and we're calling a lot of audibles along the way. Our global teams in go-to-market operations, engineering and support functions continue to execute and collaborate in a challenging and dynamic environment to meet customer demand and deliver shareholder value. The passion is enjoyable to observe. Well done, team. With that, I'll turn things back to Andy.
Andrew Blanchard: Thanks, Sanjay. Chris, we'd now like to take some questions. And as a reminder, please let me yourself to one question and a follow-up.
Operator: [Operator Instructions]. Our first question comes from C.J. Muse of Evercore.
Operator: Our next question comes from Mehdi Hosseini of SFG.
Operator: And next, we have Timothy Arcuri of UBS.
Operator: And next, we have Brian Chin of Stifel.
Operator: Our next question comes from Atif Malik of Citi.
Operator: And next, we have Vivek Arya of Bank of America.
Operator: And next, we have Krish Sankar of Cowen.
Operator: Up next, we have Toshiya Hari of Goldman Sachs.
Operator: And we have Joe Moore of Morgan Stanley.
Operator: And next, we have Sidney Ho of Deutsche Bank.
Operator: And I see no further questions in the queue. I will turn the conference back over to Mr. Blanchard. Sir, you may continue.
Andrew Blanchard: Well, for the first time in over 40 quarters, we're finished in early. Thanks, everybody, for joining us. Look forward to talking to you in the days and weeks ahead. Bye, bye. .
Operator: This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.
