Earnings Call: Q1 2018

Apr 25, 2018

Good morning. My name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Q1 2018 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. I would now like to turn the call over to your host, Mr. Andrew Blanchard. Sir, please go ahead. Thank you, Zetania. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results and the details of our acquisition of MiR, the leader in autonomous mobile industrial robots. I'm joined by our CEO, Mark Jagiela and our Chief Financial Officer, Greg Beecher. The press release containing our Q1 results was issued last evening and the issue the release describing the purchase of Miya was issued earlier this morning. We're providing slides on the Investor page of the website that may be helpful to you 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 non GAAP financial measures. We have posted additional information concerning these non GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure, 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 Cowen, Bernstein, BofA, Baird, Stifel and Credit Suisse. We'll also be meeting with investors in Munich at the Automatica trade show in June and at Semicon West in early July. Now let's get on with the rest of the agenda. First, Mark will comment on our recent results, market conditions and the acquisition of MiR. Greg will then offer more details on our quarterly financial results and the acquisition followed by our guidance for the Q2. We'll then answer your questions and this call is scheduled for 1 hour. Mark? Good morning and thanks for joining us a bit earlier than usual this morning. In my remarks, I'll cover 3 main topics: our Q1 results, our latest view of this year's Semi Test market and our industrial automation investments, including the purchase of MiR, which was announced in a press release earlier this morning. Our Q1 financial results were at the high end of our guidance as conditions in most end markets other than mobility remained quite strong. In semi test, our memory test shipments reached a level of $73,000,000 a new record. Flash demand continued to grow driven by the increasing adoption and increasing densities of high performance NAND devices for mobile and data storage applications. We also saw record shipments into the DRAM WaferSort segment. In analog test, our Eagle product line shipments soared in the quarter on demand from industrial and automotive end markets. The one soft spot in semi test and it was especially soft was mobility test where the expected demand did not materialize and the full year outlook declined. More on that in a few moments. Universal robots in the quarter was on target with sales up 34% from last year's atypically high Q1. UR remains on track to increase sales of 50% or more for the full year. Sales growth at UR comes from both increasing our penetration of existing markets and establishing beachheads in new markets. For example, in automotive assembly, which we've served for many years, a new application uses UR cobots to vacuum the inside of cars on the production line before their interiors are installed. A new example is in the entirely new market of banking. UR cobots are now operating bank note sorting and counting machines, eliminating adult task for human operators while improving accuracy and security. In line with our strategy to reinforce our competitive moats and to be the industry standard for collaborative robots, we continue to build out UR's global infrastructure in the quarter. We opened a new repair center Shanghai and our 3rd China sales office in Beijing. We opened our 5th office in the U. S. And Boston and added new offices in Italy and Turkey. We've also expanded our online training facility, UR Academy, to include Korean and Japanese language offerings, so we are now offering efficient online UR training courses in 7 languages. Turning to the full year outlook in semi test, the biggest component of that market is mobility test. In that segment, with the data we have today, we now expect substantially lower demand for new test capacity this year than we anticipated in our January call. This leads us to lower our 2018 estimate for the SoC market to the $2,200,000,000 to $2,400,000,000 range, at the midpoint down $300,000,000 from the midpoint of our January outlook. Due to our high share in this segment, much of this reduction in the market will hit Teradyne this year. I should point out that this is not a result of any loss of business to competitors and we do not believe it's a long term broad based change in the mobility market. Rather, it is an isolated reset of specific 2018 customer plans. Our Q2 guidance reflects this revised outlook and we now expect first half sales to be about even with second half sales. Year to year volatility in the semi test market is nothing new and we expect this to continue both up and down in the coming years. In fact, 2 sequential up years in 2016 2017 is more the exception than the rule this decade. Because these market turns are hard to predict, we've tuned our business model to deliver strong results independent of these annual swings. And as Greg will describe, our 2021 earnings model remains intact and anticipates this kind of yearly volatility. Despite this year's mobility slowdown, the long term semiconductor test story remains bright. The underlying complexity growth in mobility remains, especially with the emerging 5 gs technologies. In addition, continued bit and performance growth in memories is a positive trend. And the development of ADAS and IVI systems in automotive will be additional drivers of test complexity and capacity. As an example, the memory test market is in a particularly strong investment phase. This year's market outlook seems to be strengthening further with the market size now estimated to be in the $800,000,000 to $900,000,000 range, up $100,000,000 at the midpoint from our January estimate. Our entry into the wafer test portion of the market is on track and we expect wafer test to make up over 30% of our memory test shipments in 2018. Additionally, the increase in complex real time processing of a myriad of sensor data in autonomous vehicles also drives complexity in test growth. A multitude of specialized processors fits between raw sensor data and the decision making engine of modern autos. This growing proliferation also bodes well for test. Shifting to this morning's announcement of our purchase of MiR, I'll outline the strategic rationale behind this investment and describe the fit with Teradyne. Greg will then take you through the financial details. MiR's collaborative autonomous mobile robots are used in industrial settings to move material between work stations or to and from storage locations. For comparison, traditional automated guided vehicles about a $1,000,000,000 market today require special fixed infrastructure such as embedded floor guides, tracks or other permanent references to navigate, thereby confining themselves to fixed navigation patterns. By contrast, MiR's AMRs require no fixed infrastructure to navigate, are safe, flexible and are easy to dispatch and train. Using a suite of intelligent sensor technologies, including LiDAR, it can map the environment and autonomously navigate while dynamically and safely avoiding obstacles. This enables customers to incrementally automate and has great flexibility by easily adapting to changing workflows and changing factory layouts with no infrastructure change. MiR's story has many similarities to the UR cobot story and having MiR as part of Teradyne gives us 3 clear benefits. First, this is a rapidly growing emerging market where we expect high growth for the foreseeable future. 2nd, MIR is a market leader in this space. And 3rd, there are clear opportunities to leverage the success of universal robots to MIR's business. Let me provide more detail on each of these points. Regarding the market, collaborative AMRs are part of the rapidly growing 5 $1,000,000,000 mobile robot market. While market data is imprecise, we estimate that the emerging industrial AMR segment that MiR serves to be under $50,000,000 in 2017, but growing at a rate of 50% to 100% for the foreseeable future. 2nd, MiR is the leader in industrial collaborative robots. Last year's sales of $12,000,000 were about triple the prior year and we expect 2018 sales to more than double again. That growth is driven by the unique capabilities of Mirror's products. In addition to their autonomous nature, Mirror's robots are easily trained and dispatched using just a tablet or mobile phone. After mapping their own environment, after just a few finger motions to identify the start and stop locations on your factory floor, you're ready to go. And as your mere fleet grows, our fleet management software integrates the operation of your factories robots making overall control easy. Finally, Teradyne can leverage both our expertise with Universal Robots and our global capabilities to drive growth at MiR. The rapid expansion of an increasingly shared global distribution channel, improved supply chain management and continued innovation through increased R and D investments enable rapid growth and market leadership. With ASPs similar to UR, the fast customer ROI value proposition is the same and with similar gross margins, MiR is a nice fit into our Teradyne operating model. The addition of MIRROR to our earlier acquisition of Universal Robots continues our investment in next generation intelligent automation capabilities, which are reshaping the nature of industry activity worldwide. We are investing in the software rich technology driven building blocks of the future because we believe we're very early in the transition from centralized, complex and costly automation usable by only a small percentage of global manufacturers to a world of distributed, easy to implement, low cost automation that's available to nearly all industrial companies regardless of their size or automation proficiency. In addition to UR and MiR, our portfolio also includes Innergex, an advanced motion control software company that we acquired in February. Energid's technology enables and simplifies the programming of complex robotic motions used in a wide variety of end markets ranging from heavy industry to healthcare, utilizing both traditional robots and increasingly collaborative robots. This technology extends beyond controlling individual robot motions to orchestrating groups of robots to perform coordinated tasks. We welcome MiR and Energid, their employees and their customers to the Teradyne family. Let me now turn it over to Greg. Thanks, Mark, and good morning, everyone. I'll provide some brief comments on 2018, cover the financial aspects of our recent industrial automation M and A moves, then cover the Q1 results and Q2 outlook. As you can see, 2018 has opened with 1st quarter sales of 487,000,000 dollars and non GAAP EPS of $0.45 followed with softer second quarter guidance than expected. I'd like to first flush out the short term picture both in terms of our updated 2018 SoC test market estimate and the Universal Robots Q1 sales comparisons. Starting off the Semi Test. As Mark noted, we now estimate the 2018 SoC test market to run between 2.2 $2,000,000,000 $2,400,000,000 down about 12% at the midpoint from our prior estimate. What appeared earlier this year to be a delay in mobility demand may now shape up as more of an off year with recent reports of lower complexity growth for a significant portion of the smartphone market and a near term focus on lower cost. This pause in complexity growth is reminiscent of the tick tock pattern we had a few years back, where every other year the degree of performance jumps as measured by transistor count growth oscillated quite significantly, which in turn moved our semi test sales up or down about $200,000,000 a year. While we can't be certain, we may be witnessing this prior pattern reemerge at least in the short term. I should also add that last year, our initial SoC test market size range was 2,200,000,000 to 2,500,000,000 and the market ended the year at 2,700,000,000. As we have previously noted in our quarterly calls, tooling cycles will continue to experience quarterly and annual volatility. While these annual ebbs and flows of market size will continue, they don't have any strategic implications for us as we've long ago sized and modeled our operations for this volatility. Since the start of this decade, we've had 3 years where the SoC test market was just above 2,600,000,000 dollars 3 years when it was below $2,400,000,000 with a trough of $1,900,000,000 Despite these swings, our non GAAP operating profit rate at the total company level has averaged 22% on an annual basis over this 8 year period. The point being is that we're finally tuned for these SoC test market swings. Moving now to Universal Robots. Recall that we announced a price increase in the Q1 a year ago to take effect in the Q2. This caused 1st quarter sales to spike up 117% over the year ago Q1 period. We are on the other side now where the comparison works against us as the 2018 Q1 sales are up 34% from a year ago. Correspondingly, we expect our 2nd quarter sales growth to be much stronger than the Q2 of a year ago and to remain on the 50% or greater annual growth trajectory this year after growing sequentially 58%, 62% and 72% over the last 3 years. Now that I've addressed the 2 short term concerns, I'll round out the 2018 picture and our key annual goals. Overall, in 2018, we expect to continue to take the strategic actions necessary to make solid progress against our midterm 3.50 dollars to $4 non GAAP EPS plan. The single largest contributor from the $2.34 achieved in 2017 is Universal Robots sales growth of 45% to 50% a year over the next 4 years. This year Universal Robots is ramping up their investments in distribution and development from about $16,000,000 a quarter at the end of 2017 to about $30,000,000 a quarter by the end of 2018. On the distribution front, we'll start to call in some large accounts and OEMs directly this year with very tight coordination with our channel partners. We're also upping our lead generation programs with digital and print media to get the word out as there are still many manufacturers who aren't aware of what is possible today with UR cobots. On the product development front, even though we have a market lead in ease of use and flexibility, we're making our cobots even easier to train as lower setup costs will open up more customer applications and widen the competitive mode. On this same theme, we recently acquired Energid, the leader in motion control and path planning. In addition to their ongoing business, Energid's advanced software algorithms will also open up more advanced user applications for our cobots. Lastly, we're strategically rounding out our UR plus ecosystem So there are many actions underway to expand our lead in automating repetitive and tedious tasks that are unattractive for humans. The 2nd major EPS growth component is Semi Test, where it's more about continued strong profit drop through on further share gains and the continuation of low secular trend line growth. These plans follow our proven playbook, careful targeting where we can differentiate so that we preserve our healthy gross margins and also recognizing that switchover costs are high. So rightly does price by itself move share. I'll call out one key area for growth, which is memory test. To date, our share is principally concentrated in flash final tests with a shift to high speed interfaces plays to our Magnum's architectural strengths. This year we're on track for another new sales record. We expect to significantly exceed our prior 2017 record of $187,000,000 given the strong demand in final tests and with our entry into wafer level tests. We're on track to have 6 consecutive years of sales growth in memory tests, gaining about 12 points of market share since 2012. Now moving on to the system test businesses. Defense and Aerospace, Production Board Test and Storage Test are all expected to operate at model profitability for the year. Shifting quickly to wireless test, the 2018 goal is to operate in the black while securely positioning ourselves for the next Wi Fi buying wave and the larger 5 gs waves further out in time. In Wi Fi, we're maintaining our market lead and on the 5 gs cellular front, we're making good progress with leading chipset players so that when the production buying occurs, we'll squarely be in the mix. Our 2018 goals also include a balanced capital allocation strategy of healthy capital returns through buybacks and dividends and highly selective M and A. Starting with the strategic highlights, we acquired Mir this morning, the global leader in industrial mobile autonomous robots. I'll highlight the key financial aspects in dollars using the current exchange rates. The purchase price is approximately $148,000,000 net of cash acquired plus an earn out of up to $124,000,000 if certain performance targets are achieved. MIRROR is on track to achieve 2018 revenue of about $30,000,000 on a standalone basis, up from about $12,000,000 in 2017. In the Q1 of this year, before joining Teradyne, they had sales of $5,000,000 Miura's regional sales distribution for the Q1, which is not included with our results, was 45% Europe, 24% North American, 30% Asia and 1% Rest of World. They are profitable and are expected to be immediately accretive to our non GAAP EPS. Their gross margins are similar to Teradyne's margins. Miro will run as a separate business unit led by its very strong management team. The $124,000,000 earn out includes 3 cumulative revenue targets with profitability floors. We provide a schedule with these earn outs and you can see that the growth rates to earn the 1st dollar of the earn outs are well in excess of 50%. We're confident that adding MiR to our portfolio will offer superior returns to an even larger stock buyback. MiR in many respects is a younger sibling to Universal Robots, sharing many of the same unique attributes around ease of use and flexibility, attractive price points and a market lead. It differs in that it's earlier in its lifecycle and it's on wheels. We also can offer MiR a host of larger company capabilities similar to what we've been able to bring to Universal Robots around supply line sourcing, our global footprint and strong balance sheet. We expect to grow mere 50% or greater with the emphasis on the greater with 100% growth near end for the 1st 3 months of 2018, Merit's sales were $5,000,000 up more than 3 fold from 1 point $5,000,000 in the 1st 3 months of 2017. We also acquired Energir for $25,000,000 plus up to an additional $16,500,000 in contingent bonuses. Energir is expected to achieve about $6,000,000 in revenue for calendar year 2018 on a standalone basis. We've also provided a slide at Energir with further details. Energir will run as a standalone business by their experienced management team. We've updated our mid term model for the inclusion of MiR and Energid. You'll see that our 2021 industrial automation revenue model is now estimated at 30% of the total Teradyne revenue versus the Universal Robots only contribution target of 27% of the total. For reporting purposes, MiR and Energous results will be included in our Industrial Automation segment. Our cash and market security balances stand at 1 point $5,888,000,000 down $316,000,000 from the 4th quarter. The two drivers to this cash usage were our balanced capital allocation strategy and operating uses. On the former, we returned $152,000,000 of capital, principally through $134,000,000 in share repurchases. We paid $18,000,000 in dividends and we acquired Enjid, a leader in robotics motion control for $25,000,000 On the operating cash outflows, we pay our annual compensation programs out in the Q1 along with certain tax payments and our receivable DSO grew to 77 days in part to the overwhelming majority of our shipments being back end loaded and the new revenue recognition standard which scores certain revenue streams a bit earlier. Recall we plan to buy back at least 750,000,000 of our stock this year and return approximately 70,000,000 in dividends. Moving to the details of the Q1, our sales were 487,000,000 profit rate was 22% and the non GAAP EPS was $0.45 We had 1 10% customer in the quarter and gross margins were 55%. You'll see our non GAAP operating expenses were $165,000,000 up $5,000,000 from the 4th quarter, primarily due to an expansion of UR's distribution programs. Comparing our Q1 OpEx of $165,000,000 versus the year ago period, it's up by $4,000,000 for similar reasons. Semi test sales were $373,000,000 in the Q1 with SoC making up $300,000,000 and memory tests, the balance at $73,000,000 a new record for memory tests. Semi test service revenue totaled $65,000,000 in the quarter. At UR sales were $49,000,000 a first a new first quarter record. Regionally UR's 1st quarter sales broke down 44% in Europe, 28% North America, 23% in Asia and 5% Rest of World. System test sales were $43,000,000 and wireless test sales were $23,000,000 in the Q1. Turning now to the guidance for the 2nd quarter, sales are expected to be between $490,000,000 $520,000,000 The non GAAP EPS range is $0.45 to $0.52 on 196,000,000 diluted shares. Q2 guidance excludes the amortization of acquired intangibles, restructuring and other and the non cash convertible debt interest. The 2nd quarter gross margin should run at 57%, up 2 points from the Q1 due to product mix and total OpEx should run from 34% to 36%. The operating profit rate at the midpoint of our 2nd quarter guidance is about 22%. Let me quickly cover OpEx for 2018. We expect full year test business OpEx spending to be essentially flat year over year apart from normal changes in variable compensation, which is tied to profitability levels. In industrial automation, we'll invest aggressively to get further ahead and would expect quarterly OpEx to approach $35,000,000 towards the end of the year, up from $16,000,000 in the Q4 of 2017. This includes the addition of MIR, Energid and the increased investments across our 3 robotics business units to capture more of the long term growth. Notwithstanding our planned industrial automation investments, we expect Aseptic to achieve mid teens operating profit rates for the full year. Shifting now to taxes, our full year tax rate is expected to be about 16%, up one point from a January estimate. We start 2018 with some very exciting industrial automation additions, MiR, the leader in industrial mobile autonomous robots and Energid, a leader in robot motion control. We're also investing aggressively in Universal Robots to further our lead and stay on our 45% to 50% mid term growth plan. Our test businesses and aggregate have consistently generate solid profitability and free cash flow since 2010 and can readily navigate the ebbs and flows of the market size swings. We also returning significant capital to shareholders with our $750,000,000 dividend or buyback, excuse me, this year and the ongoing dividend program. With that, I'll turn the call back to Andy. Thanks, Greg. Zetanya, we'd now like to take some questions. And as a reminder, please limit yourself to one question and a follow-up. Your first question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Thank you for taking my question. If I heard you correctly, I think for 2018, you're suggesting roughly $2,000,000,000 plusminus in terms of the top line outlook. Is it fair to say a lot of the delta versus consensus expectations has been captured in Q2 or should we anticipate any other trends in your mobility business in the second half? I think that if you look at what we said, meaning that the first half of this year and the second half of this year are roughly going to be fifty-fifty in our annual revenue that you can do the math there and get close to what you just cited. We don't expect any further weakness in mobility. I think this is a pretty isolated case and the rest of the year in most all other segments should be strong. Thanks. And as a follow-up, as your business mix continues to shift more towards robotics, how should we think about just the overall growth contribution from robotics, right, with these new acquisitions that you have made? They seem to be obviously of a smaller base, but growing faster than the UR business. So growth outlook there as well as what it means in terms of operating profitability levels? In terms of the Industrial Automation segment, we've actually updated our model slide that's in the deck. Previously, we just had universal robots and we had 45% to 50% growth through 2021. Now we've upped that to 50% to 55% growth with these other new additions. Mirror is certainly growing at a higher rate as it's earlier in its lifecycle. So we see the industrial automation business in 2021 getting to $900,000,000 to $1,000,000,000 So it should be a significant part of Teradyne's business. The profitability rate last year was 19%. This year, we're making aggressive investments. So the profit rate could be a little bit less. It may still end up close to 2019, but over time, we would expect the profit rate to move up into the low to mid-20s. Okay. Thank you. Your next question comes from Atif Malik with Citigroup. Thank you for taking my question. In your prepared remarks, you commented mobile is lower complexity growth this year. Application processor opportunity is a complex function of optimization of die size through shrink and increasing transistor count. As you look at ramp down of 10 nanometer this year and ramp up of 7 nanometer and then 7 nanometer plus 5 nanometer next couple of years. Do you expect complexity for your test business to return for mobility testing? Then I have a follow-up. Yes. So I do think that what we see in the aggressive move to finer geometries and the transistor counts will keep propelling complexity and mobility and test time. So everything we see from today would say that that general trend is intact. And as we said in our prepared remarks, for most of this decade, what we had seen customers doing is have a fairly aggressive year of complexity growth followed by a more modest year of complexity growth. 2017 was a bit of an exception to that rule. And by all measures, as far as we can see, we may be just reverting back to that trend. Okay. And then, Greg, I don't know if I heard a number for the wireless test market this year. In January, you were expecting that market to be flat year over year. And does this change your plans to potentially divest this business? We don't have plans to divest the business, the wireless test business. Let me get to that one first. The market in wireless test is likely to be a little bit smaller this year, slightly smaller. Some of the ax introductions have slipped out in time, the new wireless standard. But wireless tests will be profitable and it's all about positioning for the buying waves that occur now next year for ax and longer term 2020 for 5 gs. Thank you. Your next question comes from Toshiya Hari with Goldman Sachs. Great. Thank you so much. My first question is on the semi test business. Mark, you talked about lowering your SoC test TAM by $300,000,000 I just wanted to confirm that that was all mobile and your view on analog test and MCUs and so on and so forth haven't changed over the past 3 months? That's correct. All of that is mobility and the other segments are quite strong. Okay. And sticking to Semi Test, you talked about share gains on the wafer test side and memory. Can you give us an idea of where market share is today, where you see that going over the next couple of years? And curious, have you seen any kind of retaliation from your nearest competitor given that it's a pretty important business for them? Yes. So right now, we're in the mid-20s to 27%, 28% market share coming out of last year. And as we open up the wafer test portion of the market, our target by 2021 in our midterm plan is to get close to 40% share roughly. In terms of retaliation, we've been very careful on how we've gone after market share gains, both in SoC and in memory, so that we don't precipitate that kind of retaliatory move. The current environment in memory test being in a very high growth phase and investment phase has kind of given a rising tide to lift all boats, let's say, despite some of the share gains that we're achieving here. So I don't see anything happening that's silliness in the environment of the memory market. But we are making good progress on wafer test this year and our target is 40%. Okay. And then I had a quick follow-up on MiR. Congrats on the acquisition by the way. I was just curious, if you can talk a little bit the competitive landscape there. I know on the UR side, you've talked about having 60% plus market share. Curious what the positioning there is for MiR and how you're different from both the hardware and software perspective relative to your peers? That would be great. So much. I'll take a crack at that. MiR is even a little bit murkier than universal robots. There is less third party data out there. But what we can our research has indicated that MiR is the leader in the industrial segment of mobile robots. And they probably it's hard to put a number on the market share, but it's their number one and it's the number we can't be precise with, but we don't see a close second at the moment. So we have an early lead, but it's very early. And what MiR has done, similar to what Universe Robots did, it's the right price point. It's very easy to use and navigate and it maps its own environment. So you don't need to be an engineer to deploy it. And we have a whole bevy of distributors signed up, trained out in the field, uploading these cobots. So it does have a lot of the universal robots, 1st mover advantage, the 1st mover with a reliable product. So that's how I'd ask you to try to think about it. We hope to get more market data over time, but it's sketchy at this stage. Thank you. Your next question comes from Mehdi Hosseini with Susquehanna International Group. Thank you. Just a follow-up to the acquisition, Mir. It seems to me that you're paying about 5x forward looking sales, and I'm giving you a very generous assumption with the forward looking sales, which is and the 5 times seems to be at a much higher valuation premium compared to when you acquired or announced acquisition of Cobalt. And I want to follow-up with you, what's the rationale for paying a premium? And also, whether you can use the existing infrastructure in terms of manufacturing and your channel to scale EMEA. I think Greg mentioned that the longer term operating margin could be adversely impacted. And is that really driven by the changes that you need to make to the infrastructure to be able to scale MiR? So the question has to do with the premium applied and how you're going to be able to scale that. Okay. Mehdi, maybe something was lost in translation. I'll get to the operating margin thing last, but there's no issue there. But starting with the premium, we did the traditional valuation analyses with the football chart, looked at it multiple ways. And the multiple is somewhat similar to Universal Robots, but they're growing at a much higher rate than what Universal Robots was growing at, significantly higher. So it's earlier, growth rates are higher. If you look at Universal Robots as a case study, what it's done to Teradyne's value versus what we paid for it, that's been a spectacular return. We expect MIR will do the same thing as well. And I think it's hard sometimes with valuation models when businesses are growing more than 50% a year, it's hard sometimes to get traditional valuation metrics and see how they fit because there aren't many businesses that grow at these super high rates. And they grow into these valuations very quickly and then they are substantially higher than what we paid for them, which is what happens with Universal Robots. The next thing on the operating margins, there's no deterioration in operating margins. The model we put out, we have the same operating profit rate in the future of 25 percent to 27 percent with higher sales given the addition of MiR and Energous. So I apologize if something got lost in communication. I think the only thing that's happening is in the near term, we're investing aggressively in MiR and Energid and they won't have the same profit rate as Universal Robots because they're earlier, they don't have the same scale, but over time they will and they'll contribute spectacularly to our model, which will have about 30% coming from industrial automation with very good margins and profit rate. In terms of the channels, each business has earn outs and earn outs in these private companies are a key element that we use to bridge the valuation gap because the sellers think it's worth a lot more than what we paid upfront. But for us to bridge that valuation gap because there's always uncertainty with super high growth rates as we use these earn outs. It's worked very well with Universal Robots. We've done the same thing with Mirror. So I think that's another thing that maybe can get you comfortable with the evaluation. When you see the earn outs that MIRROR signed up for, they've signed up for earn outs that in 2018, the earn out starts over 100% of sales growth and tops out at 158%. But there's a chart that gives you the different earn out periods and you can see it's substantially higher growth. The last thing I'll put this in about earn outs is, we have to support these companies, which we have done in the past and help them achieve these earn outs. It's in our mutual interest. So if there's synergies that can help both companies working together, then they'll find them and we'll encourage that. But I think the greater synergies will come from Teradyne helping Mirror like we did with Universal Robots. We got much better pricing for some of the parts for Universal Robots. We've got better supply arrangements, buffer supply, upside supply, better quality. And then our HR team was able to hire people faster around the world, our real estate folks that open up offices quicker. So as a whole, our engineering team could help them with project management and getting better discipline in place. So there's a set of larger company capabilities that these small companies don't have and that's another nice thing that Teradyne can bring, but we don't force a lot of these things on the company. It's a collaborative process where they pull and we help them. I hope that answers the three questions. Actually, it was one question, 3 parts. May I ask one follow-up, quick follow-up on SoC test? Thank you, quick. Yes. Yes. Okay. Back in January, you revised SoC upward, now we're going backward. Isn't the problem nothing to do with the off year, on year? I thought we took that off the table. Maybe perhaps the problem has to do with just the end market and until 5 gs is ready to go, the SoC test market is going to be adversely impacted and the growth rate are not going to be as much as we thought it will be? Yes, I don't see it that way. The market unit growth in smartphones has not it kind of plateaued 3 or 4 years ago. So what's been propelling the complexity growth since then isn't new wireless standards and such. It's more compute power behind more features in the phone. Now 5 gs will certainly kick in another round of bandwidth growth in the phones, which is additive on top of what we've seen the past few years. So the lack of new wireless standards for the past 3 or 4 years, I don't think has impacted the semi test market. It certainly impacted LitePoint. But I think 5 gs will be additive and the feature growth and the complexity growth of the applications processors, power management ICs and such around that will continue to grow on average. Can we have our next question please? Thanks so much. Your next question comes from Timothy Arcuri with UBS. Thank you very much. So I have to say, I'm a bit confused on 2 fronts. First of all, on the SoC weakness, it seems like something else is happening because if you assume that most of the wireless test business is with your big customer, that would leave based upon what was in the K last year that would leave maybe $375,000,000 to $400,000,000 for that customer for your semi test business. And you're cutting about $300,000,000 from the SoC TAM. So that's about 75% to 80% of that customer's test revenue. So I guess like that's a much bigger number than you'd think given what's going on in the supply chain. So are there other customers cutting as well, number 1? And second part of that question is, does that come back in 2019? And then I had another point that I'm also confused on. Thanks. So one point is that $300,000,000 is not although a lot of it, most of it is Teradyne, it's not all Teradyne. So that's one piece of the math. And then the average buying that occurs the concentration of buying that occurs in our mobility segment has a lot of variability in a year to year. And if you do the math coming off of 2017, at least, the numbers that you cited are slightly higher in terms of if you were to take the full $300,000,000 out of Teradyne, you would still end up with a higher number than the bottom number that you suggested. So the fact that it's not 300 for us, it's less and we're coming off a high 17, I think neutralizes your math. And longer term, I'll go back to say that I think we've seen a pattern this decade of aggressive complexity growth followed by something more moderate. This doesn't look much different than that. So and we know what is in development in terms of lithography nodes and such. So I don't think this is a reset or a change to the trend line. It's more of a version back to what we've seen for most of this decade. Okay. Then I guess the second point is just on the model. So you guys just are spending 124 to acquire MiR and you're spending another $25,000,000 So you're spending like $175,000,000 to acquire these 2 companies and possibly $300,000,000 if that earnout comes through. You did drop another $150,000,000 to the op model in revenue for 2021, but the EPS number didn't change and it's still the range. I mean, maybe this is all within the EPS range, but it sort of is a bit of an odd message that you'd be spending up to $300,000,000 to buy 2 companies and you wouldn't change your 2021 earnings model? Thanks. Yes, Tim. We looked at that and we thought about changing it, but we just put instead addition of Miura Energia that helps accelerate midterm EPS target. We thought that was simpler that perhaps we could pull it in with these moves. But we could have changed it a bit, but we just opted not to. But it should improve it. There's no doubt. There's no message we're trying to send to you that we didn't improve it, but we just chose to go about a different way. Okay, guys. Thanks. Your next question comes from C. J. Muse with Evercore. J. Muse:] Good morning. Thank you for taking my question. I guess a follow-up question on the mobility side. And so as you think about 2018, would love to hear your thoughts in terms of the pullback in spending. Was it primarily isolated to the AP arena only or did you also see a fall off in image sensor power management etcetera? And then I guess more importantly as you look to 2019 and you think about the world transitioning or continuing to transition 10 to 7 and 7 to 7 plus and adopting EUV. And I know it's extraordinarily early today, but how are you thinking about a pickup in SoC into next year? Yes. So I think around the components that make up the mobility space, the predominant issue this year is AP related. Interestingly, things like image sensors that you mentioned, PIMIC in fact are stronger this year. So that's slightly offsetting some of the weakness in AP. So it's not broad based mobility. It's a pretty focused issue. And as again, we look forward into next year with some of the aggressive designs and aggressive lithography nodes moving forward, people are doing this to get more complexity. They're not doing it to get lower cost. And we expect therefore this trend will come back and we will see decent complexity growth in the future. It's just a very difficult thing. It's been true for decades that in any given short year, the predictability of the SOC market is very difficult. So we tend to look at the longer term trend lines. This certainly surprised us, but it's not outside the bounds of what's normal in the SoC test market. That's helpful. And as my follow-up, as you think about the inclusion of these 2 acquisitions into your industrial automation bucket, what kind of growth should we expect for that business here in calendar 2018? And what would the linearity look like through the year? The MiR acquisition, we expect will grow from last year it was $12,000,000 but obviously it's not in our numbers. It was $5,000,000 in the Q1. We think for the calendar year it will be about $30,000,000 So $30,000,000 minus $5,000,000 is what you put in for the last three quarters skewed towards the Q4. So you've got about $25,000,000 in our numbers. Energet will be small, maybe $1,000,000 of which maybe $5,000,000 is in our period going forward. But MiR is the high grower. Energet is more of a company that has capability that can help us sell more cobots for long term. And just to be clear, those revenues are embedded in your first half, second half similar revenues? Yes, it's in that because they're not it's not that large in the grand scheme of things. It's not going to move that conclusion that the first half and second half are about similar because you're adding under 30,000,000 dollars certainly under 30,000,000 in the second half because you got a second quarter too. Okay. Thank you. Your next question comes from the line of Faran Ahmad with Credit Suisse. Hi. Thanks for taking My first question is related to the margins. Historically, whenever you have a lower mix of mobility, in general, what I have noticed is that your margins on the gross margin tend to be a little bit higher. I'm just a little bit surprised that we're getting it around 55% this year versus more like 57%, 58% that we see in your low mobility years. So just wanted to understand that piece a little bit better. Yes. Well, there were mobility shipments in the Q1. So that perhaps explains that, but there won't be as many shipments in the second quarter as a percent of the mix and that's why the second quarter moves up to 57%. But you are correct if there's heavy mobility buying because there's large volumes, there's better pricing. Got it. And then, as we think about 2019, you mentioned that the pattern of TikTok might be applicable to smartphones. But I'm just wondering that given that we aren't having a big change at TSMC in terms of 7 nanometer to 7 nanometer plus next year, running in this year, which is going from 10 nanometer to 7 nanometer, which is same lithography node. So basically for 3 years, we are at the same lithography node. So why should we expect that there should be a dramatic increase in complexity next year? I do think next year you will see a much larger proportion of 7 nanometer utilization and that's what will drive that change. Got it. Just one clarification, can you just talk about if the change in mobility was pretty much driven by one customer or if it was coming from dollars and margins? I think all I will say on that is it was primarily driven by AP and it's pretty concentrated. Got it. Thank you. That's all I had. Your next question comes from the line of Edwin Mok with Needham. Great. Thanks for taking my question. First on semi test. So tests are typically pretty reusable with weakness in mobility. Do you see any customers start to kind of reuse some of that capacity for other test space and that might have an impact on your demand on also mobility or mobile SoC? No. I mean, it turns out that the capacity utilization for the current fleet of mobility testers is quite high and it's being added to. So it's not like there's nothing happening in mobility. It's just down quite a bit, the capacity adds. So it's highly utilized. Additional systems are being put in place this year, just fewer than we had expected. Okay, great. Thanks for clarifying that. And then on MIR, I guess I have 2 part question. First is, you said the market is around $50,000,000 right? Does that I remember, I I remember, I think Amazon bought a company around 5 years ago and they paid you, what, dollars 700,000,000 for that. And my understanding at that point in time, they would hog more market much bigger than $50,000,000 So I'm just trying to understand if that include the warehousing part, which I think what Amazon is using for? And then longer term, do you see that frankly, do you see Amazon as would actually become a competitor for that business long term? So, first of all, the market that we are describing for Mir is not the warehouse logistics market that would be something like Amazon Robotics would serve. It's industrial manufacturing applications primarily. There's also some applications in the healthcare segment for the mobile platform, but it's not logistics and sort of big warehousing markets. On the other hand, the market is quite new and early because the sweet spot of this market is for the guy who needs to incrementally automate material movement in his factory. They're not required to build a new factory or retool the layout of the factory. They can incrementally go in and change the way they move materially around through automation. So I think it's a very different market. It's very similar to what we saw with UR. UR wasn't going after the large established robotics applications. It was more the small to medium sized enterprises. In the case of Mir, it's probably more medium to large sized enterprises because those tend to move more material around in their factories. Okay. But you think there's opportunity for you to go after the warehousing market longer term? I think rather than warehousing, it'll be more, let's say, distribution centers for companies that may need to aggregate and disaggregate shipments to their local stores or suppliers. So rather than, let's say, an Amazon or a DHL or those kind of areas, it might be more a regional distribution center for a consumer goods product or for a food service product that would use the product. Okay. Actually, that's very helpful. Thank you. Appreciate it. Your next question comes from Patrick Ho with Stifel. Hi. This is Brian Chin on for Patrick. Thanks for letting us ask a few questions. First, in 2008, the memory market is poised to be roughly double where it was pre-twenty 17. Do you view this, the current market size, as sustainable, I. E. A higher new norm? Or is it still prone to cyclicality? And can you also clarify what SoC market size is embedded in your 2021 target model and whether this has changed any since your January call? And I had one follow-up on the acquisition. Okay. So on the memory market size, yes, there's been a significant increase in the memory market these past few years. I do expect it to remain volatile. So I don't think we're at a new plateau that's going to sit up at this $800,000,000 to $1,000,000,000 level without sort of a dip. But I do think that there's on average, if we look forward, let's say for the next 5 years in memory, it will certainly operate above that sort of $500,000,000 level that operated at earlier in the decade. It may be operating on an average closer to the $700,000,000 to $800,000,000 But that doesn't mean there couldn't be a year in there where it drops back to $100,000,000 That's been the nature of the memory market forever and I would expect we'll see that again. And then in terms of what's embedded in our market size. In the 2021 model, we have in the range for ATE market size, to 3.3 to 3.5. The SoC is 2.7 at the low end, 2.9 at the high end. By comparison, 2017, the SoC test market was 2.7%. So there's at the low end, there's no growth from 2017 or very low growth from 2017 if you go out to the high end 2.9. Okay, great. And then for my follow-up on the MIR acquisition. Can you maybe one describe any existing integrated work flows at customers with the UR robots? And then also how overlapping are the existing distribution channels between UR and MiR? So there are some applications today where the UR cobot is mounted on the MiR mobile robot. It is by far the exception, not the rule. And there's opportunities to expand that where you need to have a mobile platform dispatched to a location and perhaps be able to use the cobot to load or offload material onto the mobile robot. But there's usually much different conveyor belts or even humans at the various loading and unloading stations to do that. So I don't think that's going to be a huge trend, but it will be a growing sub segment of the market. In terms of the distribution overlap, today there is a significant Venn diagram overlap between the distributors for UR and MiR. So and there's a lot of synergies in the selling story because the value proposition is very similar. So we do see common customers for sure. I would say that in general though, MIRROR's customers tend to skew toward medium to larger enterprises as and universal robots is a little more small to medium. Okay, great. That's very helpful. Thank you. And operator, we have time for just one more question, please. Your final question comes from David Duley with Steelhead. Yes. Thanks for taking my question. I guess the first question I have is, you mentioned in the memory market being an $800,000,000 or $900,000,000 market size now. Could you help me understand what part of the market is wafer level versus final test? I'm trying to figure out how much your SAM increased by moving into wafer level test? It's roughly if you look at the market, it's fifty-fifty between NAND final test, DRAM final test and then the wafer test of those two parts is fifty-fifty. Okay. So this is essentially adding half of the market to your serve available market by moving into the wafer test? Correct. Correct. So if you've roughly said each market this year is $200,000,000 we've been very, very strong in NAND final test and have a high share there. We're opening up another $400,000,000 market with the move to wafer test. And will that be mainly in NAND or DRAM? It will be in terms of what we participate in, I think it will mainly be in NAND flash or wafer test. There is some business we're getting in DRAM wafer test, but I think the bigger piece of that will be NAND. Okay. Final thing for me is, could you just help me understand what the size of the APU market was in 2017 and in 2018? I guess it's a follow on to an early question because it seems like the cut in that segment is pretty big. Yes. I don't know that we have it broken down by APU. We have the mobility in total. Perhaps offline, Andy can speak to you maybe figure that one out. Yes, the mobility market came from about $1,000,000,000 You were saying APs. Yes, I know we don't break out APs specifically, but the mobility in total was about $1,000,000,000 and this year we think it's going to be down at $300,000,000 or so lower than that. Yes, I think just I've got some numbers in front of me, roughly for mobility from $1,000,000,000 to $750,000,000 So obviously in that AP is a big piece of it, but that's mobility. All right. Thank you. All right, folks. We're out of time. Thanks for joining us a little bit earlier today. I look forward to talking to you in the days weeks ahead. And for those in the queue, I'll get back to you this morning. Thanks so much.