Earnings Call: Q3 2017

Oct 26, 2017

Good morning. My name is Zitania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Paradigm Q3 2017 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. Thank you. Mr. Andrew Blanchard, you may begin your conference. Thank you, Zitania. Good morning, everyone, and welcome to our discussion of TeraD's most recent financial results. I'm joined this morning by our CEO, Mark Jagiela and our CFO, Greg Beecher. Following our opening remarks, we'll provide details of our performance for 20 seventeen's Q3 and our outlook for the Q4. The press release containing our Q3 results was issued last evening, and we're providing slides on the Investor page of the website that may be helpful to you in following the discussion. A 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 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 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 America. 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 Q4. Craig will then offer more details on our quarterly financial results along with our guidance for the Q4. We'll then answer your questions and this call is scheduled for 1 hour. Mark? Good morning, everyone, and thanks for joining us today. In my prepared remarks, I'll cover 4 topics: our 2017 highlights, key trends which we expect to drive long term growth in our test businesses, an update on Universal Robots expansion and strategy, and an early view on how we're thinking about 2018. Greg will then provide additional color along with the financial details. As you saw in the release, our sales and earnings for the Q3 were above our guidance and our Q4 outlook is substantially above our earlier view. This performance is a result of a very healthy semiconductor test market, especially in memory test. Seasonally, our 3rd quarter semiconductor test orders were at the highest level since Q3 of 2000. Additionally, Universal Robots continued to show strong growth with sales up 70% from the same quarter of last year, well above our 50% baseline rate. Through 9 months, we've generated over $1,650,000,000 in sales and non GAAP earnings of $1.88 per share. For the full year, at the midpoint of our Q4 guidance, we expect sales of above $2,000,000,000 and non GAAP earnings of around $2.22 per share. This puts us well ahead of our $2 per share EPS goal that we originally targeted for 2020. 2017 will be the 2nd consecutive year of growth in the SoC test market with an estimated $2,600,000,000 market size, up 8% from last year. We expect Teradyne's SoC test sales to grow above that rate at about 20% and our market share will increase several points from 2016 51%. In memory test, we expect the 2017 market to be about $650,000,000 up roughly 55% from last year. Q3 memory test orders of $65,000,000 were at record levels and our full year memory test sales will grow about 20% to about $180,000,000 Our memory share will fall back a few points as some of the segments we do not yet serve are growing faster than the overall market in 2017. Combining memory and SoC tests for the 1st 9 months, our sales are up about 23% from last year to $1,300,000,000 while the combined market has grown about 15%, clearly a strong year of market growth and an even stronger year for Teradyne growth. At Universal Robots, 3rd quarter sales were about 70% above the same period last year with all regions above our 50% growth baseline. Through the 1st 9 months, we've grown 77%, a rate that will likely moderate a bit in Q4. For the full year, we expect UR to grow about 65%. In addition to top line growth, we are also showing improved gross margins as the benefits of cost down and selective price increases are making an impact. In system test, year to date revenues of $112,000,000 are down 20% from revenues in the same 2016 period, mainly due to a fall off in storage test demand. However, we expect to recognize revenue in Q4 for a new application of our storage test product that will bring the group to about flat top line performance with 2016. This new product test chips in a simulated system level environment to capture elusive failures that are hard to detect on traditional ATE. The initial application is in complex high volume mobility focused semiconductors. At LitePoint, sales in the quarter were up 11% from Q3 last year and up nearly 20% for the 1st 9 months off a weak 2016 market environment. This growth has been the result of modestly expanding demand in the connectivity space. New connectivity standards like 802.11ax WiFi are not expected to drive meaningful new demand until 2019. In cellular, 5 gs is in the early preproduction stage and not yet driving volume. However, we are seeing growth in LTE narrowband IoT space. For the full year, we expect LitePoint to grow at about a 10% to 15% rate from last year. As we first noted in 2014, after many years of trending down, the semiconductor test equipment market inflected and has been growing since 2015. In 2016, we modeled the SoC test market to grow at about a 1% CAGR on a trend line basis from the average of the 20 fourteen-fifteen market sizes of approximately $2,200,000,000 Through 2017, the actual SoC market growth has been about 8% from that level. In light of these trends, we will update our model and targets in the January call. While recent signs are encouraging, we expect volatility to be a part of the test markets in the future as they have been in the past. The key point is even with volatility, the market is on a growth trajectory and the demand drivers we identified earlier remain in place. These include the diminishing impact of parallel test, increasing device complexity and increasing quality demands of semiconductor customers. In memory, volume increases, higher bit density of 3 d NAND and the proliferation of high speed interfaces that are now commonplace for smartphone and SSD applications has driven growth in the memory test market this year. For Teradyne, we've been successfully growing share in the NAND package test segment with our Magnum family of testers due to the discontinuity created by the emergence high speed flash interfaces. At Universal Robots, our strategy remains unchanged. Beginning in 2016, to accelerate growth, we aggressively increased our quarterly OpEx investments by about $5,000,000 per quarter to or nearly 70% up from the prior year. We follow that up by increasing 2017 spending by a similar amount. Those investments have enabled UR's growth rate to increase from 57% on a standalone basis in 2015 to the mid-60s for the full year 2017. We've also improved gross margins along the way. In the same way, in 2018, we'll continue this pattern of investment at UR to deliver further growth. Greg will outline specifics of those investments, but one I'd like to highlight is the UR Plus Open Architecture Partner Program. Building out our ecosystem of partners that provide the hardware and software peripherals for specific end market applications is essential to drive our growth. UR plus provides partners with the ability to adapt their products to natively operate on our UR platform through an API that links them to our ease of use software paradigm. The customers get both applications breadth and a seamless ease of use experience, allowing faster, simpler cobot deployments. At UR, we provide the universal cobot and a universal software platform that enables an ecosystem of innovators to provide plug and play add ons that customize our products for specific end applications. UR plus continues to enable an expanding breadth of applications. For example, next month at the Fabtech trade show in Chicago, there will be a demonstration of a U VAR plus gas metal arc welding package. The product is for high mix, low volume applications that can be deployed in existing manual welding booths. No floor plan changes or special facility changes are needed. This reduces the cost and improves repeatability for metal fabrication shops. From a programming perspective, the operator has only to identify the start and stop points for the welder and the cobot does the rest. A very different application is a small U. S. Eyeglass maker that is using a UR plus partner gripper with our UR5 cobot to manufacture frames. The ability to change tasks quickly gives this customer the flexibility to compete with much larger players. The common thread between these applications is the tight software integration allowing fast programming and short implementation cycles. As we look ahead, we expect UR growth to remain at a 50% plus clip for the foreseeable future. We continue to explore additional opportunities both organic and cellular and A to further accelerate UR's growth. We expect labor availability, cost and product quality requirements will continue to drive demand for UR's unique human scale collaborative automation solutions. As is typical this time of year, visibility into our customers' demand for next year is limited. That being said, our preliminary estimates for an SoC test equipment market of about $2,300,000,000 to $2,700,000,000 In memory test, we forecast the market to be between $700,000,000 $800,000,000 We expect the key end demand drivers to be memory, the mobile market, automotive and the industrial markets. While the next year is difficult to forecast, we are confident that expanding complexity, short semiconductor life cycles and increasing use of semiconductors across all segments of the economy will drive long term growth. This combined with the continued market share gains provide positive momentum for Teradyne's Semiconductor Test Business. At System Test and Lightpoint, we expect similar market conditions next year as we saw in 2017. Wireless test growth will likely begin to turn up in 2019, followed by more significant buying in 2020 as 802.11ax and early 5 gs cellular buying picks up. In summary, for the full year 2017, we expect revenue of over $2,000,000,000 and to exceed our $2 EPS target, well ahead of our 2020 plan. While it's difficult to accurately forecast the size of the semiconductor test market in 2018, we're confident of the long term drivers powering that market. Combining the strong test business with the continued 50% plus growth at Universal Robots positions us well for the road ahead. With that, I'll turn it over to Greg for the financial details. Thanks, Mark, and good morning, everyone. I'll start with a quick summary of 2017 as the finish line is in sight. I'll also add some commentary on the trends and actions that are driving our growth along with our 3rd quarter results and 4th quarter guidance. Starting with the 2017 financial summary, both our top line and non GAAP EPS are projected to be up quite nicely over last year. Factoring in our 4th quarter guidance at the midpoint, sales are tracking to be up 19% over last year, while non GAAP EPS is expected to be up 47%. For the full year, the projected non GAAP EPS of $2.22 is 3 years ahead of our midterm $2 target outlined last year. This favorable pull in is principally due to a stronger semi test market along with ongoing share gains. We're also getting solid earnings lift and high growth from Universal Robots while managing our average share count. We'll update our model in 2018 capital return plans on our next investor conference call in January after we complete our midterm planning. As Mark noted, we remain driven by rising complexity and unit growth rather than new nodes. Semiconductors are at the heart of today's connected world and ubiquitous in many products or services that we use in our daily lives. This central role fuels a constant flow of new designs, shrinks and packaging advancements. These changes bring added complexity, which often leads to longer test times and initial yield degradation, both of which trigger added test capacity. The added complexity also drives the need for more robust test coverage to find the harder to detect faults earlier and in certain cases to fine tune the electrical characteristics to hit optimal performance. At a more granular level, ATE customers also have high switchover costs from one platform to another as they develop proficiency and tools around the tester programming and debugging environments. This necessitates significant product advantages to move market share. Consequently, targeting the right segments and winning customers remains critical so that share gains come largely from a rising tide in the waters we're in versus trying to get every point of share gain from battling incumbent. We also aren't directly driven as the front end is by new nodes. Nonetheless, these performance advancements and shrinks add complexity, bit growth and often unit growth as well, so eventually we get our share. We'll remain volatile simply due to the nature of being a derivative to a very large market with small inflections having a pronounced impact on us. Our volatility on a quarterly basis is tied to predictable consumer cycles, principally tied to new mobility launches in the fall along with back to school and holiday electronics buying. Our volatility on an annual basis is somewhat more opaque, but it's largely tied to the jump in device performance. Compared to our past, we're far less volatile than in the prior decade due to a more efficient supply chain, shorter device life cycles and a broader portfolio. The key actions in Semi Test remain keeping a sharp focus on selective segment and customer targeting, while maintaining strong gross margins and lean OpEx. In the near term, we expect growth in China, memory and the continuation of the past demand trends. This disciplined approach has allowed us to maintain an average non GAAP PBIT rate of 22% at the company level since the start of this decade. By comparison, this is 23 points of non GAAP PBIT above the prior decade when we gave profits and more back in downturns. We're also pleased to report that we're on track to gain about 2 points of APE share this year to about 50%, which would make this the 6th straight year of semi test share gains. Shifting now to our high growth automation business, Universal Robots, the trends are clearly very favorable. There are several third party reports that have the cobot market at $1,000,000,000 or more in 2020, which fits with our assessment. In short, there are tens of thousands of tedious and highly repetitive human scale tasks that would benefit from UR safe, low cost and easy to program cobots. We expect that it will become increasingly critical to automate these repetitive tedious tasks to maintain high quality and cost competitiveness. In addition, we see some cobot subsidies being offered in China to ensure that their local companies take advantage of cobots. Shifting now to the key actions to stay ahead and continue to grow at 50% or more. First, it's about building a greater awareness of what is possible today with cobots. Many potential buyers still do not understand how easy it is to automate repetitive tasks without fencing or redesigning the work cell. Much of our business is from plant managers at large companies who buy locally without corporate involvement or small and medium sized enterprises that move quickly from awareness to sale. We do expect an inflection with larger buying in the future versus a small ordering of about 2 cobots on average today as larger companies which tend to move cautiously to new technology embrace the power of UR cobots. To accelerate this inflection, we're sponsoring many more trade shows, advertising programs, web educational content, co funded distributor, cobot sales resources and so on. This awareness campaign will continue as it's a very big task with many possible cobot end uses. We expect these end uses will expand over time as easier to use accessories address when more tasks are developed on the UR platform. Critically important though is how we plan on staying ahead as we expect new competitors will join the Cobalt field. 1st is strengthening our sales channel of distributors and integrators both in increasing their sales velocity and getting the best channel partners aligned to our platform. Through more U. S. Sales and tech support along with advanced training programs, we're growing the product sales velocity this year by about 50% for partners that were on board with us last year. We're also filling up a global map with strategic partners for spots we're not adequately covering. Next is to get an apps ecosystem of turnkey solutions on our platform so that we lower the implementation costs and risk. This allows us to have many 3rd party developed plug and play solutions that can be accessed from our UR plus portal. We are not of anyone else with this type of 3rd party ecosystem backing them. 3rd is, of course, to invest in R and D to make our cobots even easier to program with for example adding new wizards that shortcut programming even further. Lastly, we'll continue to leverage Teradyne's strengths to improve UR's overall performance. Shifting to system test group, our mill arrow group is driven by avionic upgrades such as faster bus interfaces for advanced radar and advanced sensors, while production board test is driven by automotive, industrial and server PCB demand. In Milaero and production board test, we're growing sales at about 3% this year and tracking to model profitability. Our 3rd leg in the system test group, source test is tied to sporadic HDD and SSD demand and the new system level test application, which Mark outlined, is latching in the market now. We expect to be solidly profitable starting in the Q4. In wireless test, LitePoint will remain in a low before tooling for 802.11ax and further out in time the sizable 5 gs production cycle start. Our actions have been to resize the business last year and stay focused on new growth. So far this year, we're running at model profit percentages and getting good traction on the longer term opportunities. Now a reminder on our capital allocation plans. We're buying a minimum of $200,000,000 of our shares this year, while returning about $56,000,000 in dividends to shareholders. So far this year, we've spent $152,000,000 to acquire 4,600,000 shares at an average price of 32.66 dollars Since 2015, we've bought back 27,100,000 shares in aggregate at an average price of $22.06 totaling 598,000,000 dollars Our cash and marketable securities totaled $1,848,000,000 up $228,000,000 from the end of the second quarter due to strong profits and strong accounts receivable collections in the quarter. We have $742,000,000 in the U. S. And the balance is offshore. About 80% of our annual cash generation will be offshore this year. Moving to the details of the Q3, our sales were 503,000,000 dollars Gross margins of 59% was our highest quarterly rate in 4 years driven by favorable product mix. A clear bright spot in gross margin is the improvement of Universal Robots margin to 58% from 54% in the Q3 last year. Company non GAAP operating profit rate was 26% and non GAAP EPS was $0.54 We had 1 10% customer in the quarter. You'll see our non GAAP operating expenses were $163,000,000 down $10,000,000 from the 2nd quarter due to lower comparable compensation accruals and decreased profit levels. Total company OpEx in the Q3 of this year at $163,000,000 is up $13,000,000 from the year ago 3rd quarter due to higher variable compensation accruals on higher profits and higher spending at Universal Robots. We expect our full year 2017 OpEx excluding Universal Robots and normal changes in variable compensation to be essentially flat while UR's full year OpEx will grow year on year to about 64,000,000 dollars from $43,000,000 in 2016. Looking ahead, we plan to keep aggregate spending flat in our test businesses, except of course for variable compensation, which will move with our profitability and growth. OpEx at UR will step up in the Q1 and grow in the second half as well. We've included a slide that shows all of our OpEx changes are due to Universal Robots growth or swings in variable compensation. Now moving to the segment level detail. Semi Test bookings were 295,000,000 with broad based strength in memory, microcontrollers, analog, image sensor and mobility. SoC test orders were 2 $30,000,000 and memory test orders were $65,000,000 a quarterly record driven by flash applications. Semi test service orders were $43,000,000 of the total. Semi test sales were $397,000,000 in the 3rd quarter with SoC making up $350,000,000 and memory test the balance. Semi test service revenue totaled $70,000,000 in the quarter. Moving to systems test, orders were $42,000,000 in the quarter and sales were $35,000,000 Shifting to wireless test, we booked $33,000,000 and sales were $31,000,000 in the Q3. At Universal Robots, orders in the Q3 were $40,000,000 and sales were also 40,000,000 dollars Regionally, UR's 3rd quarter sales broke down 43% in Europe, 26% Asia, 23% North America and 8% rest of world. Sales for the Q4 are expected to be between $420,000,000 $450,000,000 and the non GAAP EPS range is $0.31 to $0.37 and $199,000,000 diluted shares. Q4 guidance excludes the amortization of acquired intangibles. The 4th quarter gross margin should run about 55%, down from a very strong Q3 due to product mix and total OpEx should run from 35% to 38%. The operating profit rate at the midpoint of our 4th quarter guidance is about 18%. Shifting to taxes, our full year tax rate is expected to be about 17.25 percent, up 75 basis points from a July estimate due to strength at NextTest, our memory business, which is a U. S. Business that carries a higher tax rate. Please note that we expect our tax rate to step up to 19% for 2018. On a quick housekeeping note, we'd be advised that we expect no material changes from the pending living recognition changes required under ASC 606, which takes effect from January of 2018. Our free cash flow year to date totaled $406,000,000 driven by strong profits. In summary, we're on track to hit our $2 non GAAP EPS plan 3 years early, regaining share in ATE for the 6th straight year, growing Universal Robots above 50% again this year and we're maintaining steady financial discipline and returning capital. With that, I'll turn the call back to Andy. Thanks, Greg. Zitania would 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 Jagadish Iyer of Summit Redstone. Yes. Thanks for taking my question. Two questions. First, I was just wondering why is there a resurgence in memory test? Is there an inflection in testing that you can bring into light? And how should we think about DRAM and NAND split here? And I have a follow-up. Yes. So memory test really took off this year. It surprised us. If we go back to this time last year, we were estimating that the memory test market would be roughly $500,000,000 It's going to be perhaps $650 ish. It's really driven not by a technology change per se. The bit density growth is one thing that drives memory test demand, the unit volume and then changes in device interface speeds, obsolete older equipment. So we do see obsolescence going on in flash and DRAM tests because of the higher speed interfaces. And then outside of that, most of it is just bit growth and unit growth. There's also a lot of construction going on of fabs for memory expansion in China. Those have actually not yet affected the memory test demand. Those are still to come online or probably be a late 2018 or 2019 heavy test equipment tooling cycle. So as we look out over the horizon, provided the bit demand remains robust, which it looks like it will, we should have several good years for memory demand, memory test demand. That's great. Then as a follow-up, while you continue to invest in UR, when can we see an inflection in the operating margins going forward? You have seen some uptick in the gross margins, but realistically how should we think about the operating margin as we look at say over the next 12 to 24 months? Thank you. Hi, Jagadish, this is Greg. This year, for example, we expect to be meet our 15% operating profit target or be slightly above it. So it's happening this year. We think long term we'll get to 20% and the long term isn't 3 years away. So it could be sooner than what we earlier were modeling. The gross margins have improved nicely and we're growing sales at a very high rate. So I would expect the 20% operating margin will become more in sight as we get further into the next year or 2. Next question please. Your next question comes from the line of Krish Sankar of Bank of America. Yes. Hi. Thanks for taking my question. I had 2 of them. First one, Mike or Greg, this year out of $2,600,000,000 in SoC test market, mobility was probably $1,000,000,000 or $1,200,000,000 GPU $100,000,000 and auto test looks like $400,000,000 Can you give us a similar composition for what you think SoC looks like in 2018? Yes. For 2018, again, it's a little bit of reading tea leaves at this point, but I do not expect that mix to change much. The automotive and mobility spaces that came on strong this year should continue to be strong next year memory again should be strong next year. So not a lot of change in the mix. Got it. Got it. And then a follow-up on the robots business. Some of your competitors have higher payloads, while you guys still have just 3 SKUs of UR. Do you plan on developing a higher payload for the cobot business? Thank you. No, we have no plans for a higher payload cobot. Our cobots are designed for human scale, very flexible task without redesigning itself. So we don't see the higher payloads as a market that fits what we're trying to do. Your next question comes from the line of Atif Malik of Citigroup. Hi, thanks for taking my question and congratulations on strong results and guide. Mark, if I look at the comments out of your peer in Japan, they're talking about the 3,000,000,000 dollars test market for next year. You guys are a little bit below that, dollars 2,300,000,000 to $2,700,000,000 and you're generally more conservative. What takes us to the high end of the SoC test market next year? We then have a follow-up. First of all, yes. First of all, the peer advant tests forecast for the market sizes exclude service, and our sizes include service. So actually they're at $3,000,000,000 excluding service and $800,000,000 for memory and I believe $2,200,000,000 for SOC. In the service business, you have to add another $500,000,000 to $600,000,000 to that, to their numbers. So in truth, we're pretty close to each other. And for us, this year, dollars 2,600,000,000 market is the tail of the tape isn't complete here. We could end up with a slightly higher market than 2.6 by the end of the year. But as we run into next year, the visibility we have at least through the early part of next year shows continued strong demand. We could easily be outside of the north end of the range we're talking about now as we were last year. This time last year for the SOC market, we said 2.1 to 2.5 coming into 2.6. So the message I really want to give is it's very difficult for us to create a precise forecast at this point in the year. We look at a lot of top down factors. Very few customers give us forecast because they're unable to forecast. So we're looking at what we see in the pipeline around complexity trends for the devices that are coming out of design and into production to try to estimate next year's demand. Got it. Thank you. Very helpful. And then Greg, on the gross margins, you guys made improvement this year. Can you just talk a little bit more about what drove the margins higher this year? You mentioned product mix. And as Mark commented, you're looking at a similar mix next year. How should we think about gross margins broadly for next year? Yes. This was a very strong year for us gross margins. SoC was very strong. LitePoint was stronger than we expected. On the flip side of the ledger, we had less storage test business, which pulls margins down. And when you turn that around, we expect next year more storage test business. So that would be one thing by itself that would move the margins a bit down. And there's probably a healthy amount of memory business coming our way next year too and some of that might have lower margins as well. So margins are always a bit difficult to forecast. The good news is we've been able to get material costs down year after year and make significant improvements at Universal Robots, for example. So we have a stronger starting spot, but we do see a couple of headwinds with storage tests and some memory business. But apart from that, those are the only 2 things I can think of that could have a quantifiable impact. Your next question comes from the line of Richard Eastman of Robert W. Baird. Yes. Good morning. Just two quick questions on the Semi Test business. Mark, when you look into the Q4 here, we've had 2 years in 2015 2016 where we've had this pull forward of orders into the queue given one of the big mobility customers plans for new products. As we move here into this Q4, does that order trend on the mobility side for semi test? Does it look more like 2013 2014 where we have more of a normalized kind of order pattern? Or is there still this expectation that we'll see the big mobility vendors chip vendors pull and make sure they get their test orders in the queue earlier? Yes, that's always for the last several years been a big question. And it's really hard to call because the order window is about between these 13, 14, 15, 16, 17, it's a 8 week window that can move depending on their internal planning cycles and their order release timing. So the timing isn't clear. It could be late Q4. It could be early Q1. I think the ship off schedule independent of when the orders book will be similar, meaning Q2, Q3 kind of concentration as it's been in the prior years. Okay. And then just a question on the semi test. The orders here in the Q3, I presume were kind of on the Ultraflex M side or Magnum test side given that you referenced memory. Does that impact the gross margin that's in backlog on the semi test side? A little bit. Our memory test gross margins are a bit below the average in semi test. It's maybe 4 to 5 points of swing there. But given the relative size of memory at $65,000,000 let's say to the total, it's not overly impactful. And the Q4 gross margins we've got it down because of storage test and memory. I should add that both of those businesses generally have lower OpEx, but the lower OpEx comes with lower gross margins, so they all have good PBIT. Okay. And can I just sneak a question in on UR? Could you just maybe speak a little bit to the 400 basis points of gross margin improvement year over year? Is that coming from price? Is it component cost down, supply chain stuff? Just trying to understand maybe how do you get that kind of gross margin improvement year over year? Most of it is from price. We announced a price increase early in the year, which has now rippled through all the orders we're shipping now. We've done material cost down too. That's a smaller part of the improvement. The good news is material cost down continues next year and next year. So we do expect our supply line group from Teradyne should be able to help Universal Robots continue to lower material costs and get the best commercial terms and strategic sourcing in place. So that will continue. So we're very pleased with the performance overall in the Universal Robots gross margin. And in truth, it's largely software is what we're delivering with some very reliable mechanical components. So we do see over time that there should be some opportunities to keep the margins quite healthy. Understand. Great. Thank you. Your next Your next question comes from the line of Patrick Ho of Stifel. Hi, this is Brian Chien calling in for Patrick. Thanks for letting me ask a few questions. First question, just going back to the Semi Test business and the SoC business in particular. Can you just characterize the utilization environment right now at your customers from a seasonal perspective now versus what you typically expect and how that again sets you up maybe for your typical seasonality in the business into early next year? Yes. This is always a strong utilization period after having installed a lot of equipment in the summer period. Right now, new product electronic products are peaking in production. So utilization is very high. It is compared to prior periods, it is running roughly close to where it's been in prior periods a little bit stronger Q4 to Q4 of prior periods. Now that doesn't necessarily we've not found that to be a prognosticator of what's coming next year, but that is where we are right now. Okay. That's helpful. And switching over to the UR business, just curious, what is your installed base now for cobots? Curious how much of that's still in Europe on a relative percent basis? And sort of if you think those metrics from an installed base perspective, where that could be exiting next year? And the second part of that is just, if you take a different tact on your margin growth in the business, Is it possible here that given the strength in the semi best side of the business that you're even under investing in UR and you could even pump up investments even more and push out maybe some of the margin targets, just to continue you got to set yourself up for a really strong trajectory in that business moving forward? Right. That's a good point. And we do expect to invest more in OpEx growth in next year. Obviously, as we continue to grow by 50%, the sales growth is higher on a bigger number. So the OpEx is going to probably go up more than $20,000,000 which we've increased over the last two quarters. But we'll put a finer pencil to that as we get towards the end of the year. So we see many opportunities to fan out universal robots in different regions, distributors, ecosystem partners. So there's no shortage of opportunities. In terms of where the cobots are, the mix that we described in the prepared remarks has been fairly consistent. Europe is about 43%. It moves around a little bit. Asia is 26%. North America is 23%. That's this past quarter, 8% is Rest of World. And all the regions are growing at a very high rate. Long term, we would expect China to be very significant. But today, there's many applications in these higher cost countries that are being deployed. And I mentioned in my remarks that in China, you have some subsidies from government entities, which could accelerate the cobots faster in China as those policymakers see the advantage of bringing cobots to their workforce. Great. Thank you. Next, we have Toshiya Hari of Goldman Sachs. Yes. Good morning and thanks for taking my questions. My first one is in semi test. Mark, you guys have talked about strength in the automotive and industrial end markets for, I think, several quarters now. I think historically, these end markets, whether it be digital or analog, would be on for several quarters and then off for several quarters and kind of back on again. But I think at this time, it seems like the cycle is extended in a positive way. What did you see in these end markets, I guess this Q3 and what are your expectations going forward? Yes, you're correct. Typically, the pattern you mentioned has been true and this one has extended longer. 3rd quarter was strong again. What's happening in 4th quarter looks to be pretty good. I think there's several things that are new in the dynamic here. One is that the electrification of the automobile is something that although in the past it has been a slow bleed, it's starting to become an avalanche of electronics moving toward model years, let's say, 1 to 3 years away from now. Whether that's hybrid vehicles, EV or traditional vehicles with ADAS, all of that is fueling a lot of new designs and new complexity. I mean the complexity of the semiconductors we're talking about next generation in automotive are much higher than prior generation. So you have this double effect for test where it's a high test intensity environment to start with, plus a step up in complexity and ubiquity has really changed that sort of fits and starts dynamic, I think. So we're pretty positive on the next few years for automotive electronics. Great. And then I have a follow-up on memory test. Can you remind us what percentage of the TAM you guys actively address today within memory test? And I know you have new initiatives in place to potentially expand your SAM, but where could that percentage number be in 12 to 24 months? Thank you. Yes. So the primary segment that we serve is flash final test and we think we have a pretty high share of that segment. It's roughly a $200,000,000 portion of that, let's say, 6 $50,000,000 TAM this year for memory tests. So the concentration we have now is there. We are moving the Magnum product line now into more wafer applications, which is closer to a $350,000,000 new market opportunity for us that we should start seeing next year as an adder. Your next question comes from the line of Mehdi Hosseini of SIG. Yes, thank you. I want to go back to your brief information M and A. And given the prospect of changes in taxation, would that accelerate the M and A strategy? Or does it have no impact? And would you prefer using any change in taxation to strengthen capital return program? Mehdi, I don't see that any possible tax changes would cause us to do any different in our M and A approach. So much of our M and A approach is, is it the right fit? Does it accelerate Universal Robots growth? What's the differentiation? Obviously, what's the financial return? And if there's any sort of tax play, that's more of a bonus thing that we think about, but we don't put that into or put that on as something that should drive us in a direction. It's much more the fit and the advantage you can give us. Okay. And then you mentioned new TAM opportunity for wafer application, wafer tests. Is that driven by increased adoption of wafer level packaging? Or is there any other driver that you can help us understand? Are you referring to memory wafer test? Yes. You mentioned that you're looking at the additional 350,000,000 TAM. Yes. And I'm just trying to figure out what the driver for that is. Well, that segment of wafer test for memory is for many years been a relatively large segment. We in introducing the Magnum chose to focus on flash final test because that is where the interface speed discontinuity first presented itself and gave us the opportunity to take market share. Now that we're established there, we've been able to take some of the architectural benefits of Magnum and see places in the pre existing wafer test market, but we can exploit that technology. So I wouldn't say something is changing. It's that now we're in a position to take that platform into a pre existing large wafer sort market. Got it. And if I may just ask one clarification to your comment about the demand trend. In Q1 is when you typically have a strong backlog. This year, your backlog had a historical high of almost $870,000,000 Given the demand trend that you highlighted, the strength in the underlying trend for each business unit, should we assume that you can, at a minimum, hit similar backlog level by early next year? No, I don't think you should assume that. It gets back to the discussion we had a bit earlier because the timing of the orders being in late Q4 versus early Q1 is one factor here. But sometimes the orders even shift in from Q1 to Q2, it's not a one lump order that typically drives the summer demand. There's an initial baseline order that gets placed and then follow on incremental orders as the true demand for let's say the summer peak starts to unfold. So those orders run from anywhere late Q4 all the way through let's say, May and they're spread across that period. So it's hard to say that you snap a line at backlog at the end of Q1 or at the end of Q4 and make any meaningful judgments from that. Your next question comes from C. J. Muse of Evercore. J. Muse:] Yes, good morning. Thank you for taking my question. I guess first question, when I look at your sizing of the SoC market for 2017, your expected revenues in semi test and what you talked about in memory, it looks like your market share is up about 600 bps around 57%. So the first question is, is that the right math and is that the kind of market share that you would expect to retain in SoC into 2018? Well, yes, I think first of all, the actual market share gains for 2017 will depend on our shipments in Q4 and the market size. We've said 2.6, it could be 2.65, it could be 2.7 when everything is done. But we will likely be up in share anywhere from 2 to 6 points, let's say, in SoC. Next year, I think what we'll end up doing is it will be a year of consolidating that share. Our plan typically is to try to pick off 1 to 2 points a year and be on that pace. We've done much better this year. And so I think for next year as we looking at it now, we're going to try to maintain the share position. We're going to exit this year with and look for on the SoC side more market momentum. In the case of memory, we're going to see both market momentum and an expected share gain there to allow for growth. Very helpful. And as a follow-up question, as you think about gross margins specifically for your SoC business, obviously, it's very early predicting what the market size will be next year. But if I take kind of the midpoint, it's down roughly 5% year on year. As you think about kind of the mix shift going into next year, how should we think about and again, I know it's early, how should we think about gross margins for the SoC business year over year? I think the SoC margins will be generally similar. It's possible they're down 0.5 point or so. We had a few credits that will reverse, meaning some inventory that was previously reserved that we sold. So that comes in and out of the sun profit. So we could have some charges we're not anticipating, retrofits or E and O, but we can't really forecast those. So there may be a little bit of movement there. But if you just said the product itself ignoring the credits or the Opso type charges, I would think SOC would largely be similar. We get material costs down each year, but there's a little bit of price erosion each year. They tend to stay in some equilibrium over time. And I think the one thing that we can point out is that storage test and memory, so certainly storage test will be much bigger next year and that will have a downward impact. Other side of ledger, we have Universal Robots, which has improved their margin throughout the year. So there's a bunch of things in the mix. As we get to January, we'll have a better analytical sense as to what the guide for the year. I guess I was trying to get a read on how you're thinking about higher margin auto, industrial as opposed to lower margin, all things being equal, digital. Do you have an early read on that year over year? Not really. Like I said, I think the mix next year isn't too different from this year in terms of those segments. Okay, very helpful. Thank you. Your next question comes from the line of Edwin Mok of Needham. Great. Thanks for taking my question. First question, just I guess stick with semi test. I think some of your customers and other foundries talk about high performance computing potentially become a big driver longer term. How do you see that driving the test market? Do you think that could become an incremental big driver for test market? Well, any high complexity digital device is a driver. And so to the extent more, let's say, AI deep learning applications require specialized complex array processing type digital, that will be a balloon, absolutely. But are you seeing that right now? Or do you is that something more long term? Well, I think it's no, not right now. There's a lot of discussion and let's buzz around that type of application. But even if you look at places like GPUs, which are those kind of processors, it's somewhere in the $100,000,000 to $200,000,000 test market per year. So it's relatively small, anywhere from 5% to 10% of the market. Okay, great. That's helpful. And then just jumping on the UR, I think you guys talk about investing in OpEx and has been growing OpEx in the last few years as you kind of broaden out your base of your distribution, right? I'm just curious, as you look into 2018, do you see needs to further invest in R and D, especially in software? It like that's almost likely to be the next step for you guys to kind of increase counter capability of your robot. Is that where we should expect increased spending in 2018? And is there a way you can kind of think about how you spend on your OpEx or how you increase your OpEx in your going to 'eighteen between OpEx in R and D and SG and A? Yes. I would expect in 2018, we're going to increase both the distribution and marketing similar to how we've done in prior years, but more higher dollars because again last 2 years was 2020. Our plan to grow 50% or greater from our ending 2017 is considerably higher sales growth in dollars. So we're going to need more OpEx to field all of those distribution initiatives and programs. In terms of R and D, that specifically, we are going to continue to up R and D. We see a number of opportunities to make the cobot extend into other spaces that it's not in today. And this gets back to a little bit of the question earlier, would we go to a different cobot size? Frankly, we see so many opportunities with our 3 cobots that the challenge for us is getting as many people that are talented on board working in the right direction. That's the bigger challenge versus there's any shortage of attractive opportunities. Your next question comes from the line of Weston Twigg of KeyBanc Capital Markets. Hi, thanks for taking my question. First, at the risk of beating a dead horse a little bit, on the SoC market outlook for next year, you have it down just a little to midpoint. I'm wondering if you could be more specific on what has you a little bit concerned, which segment has you a little bit concerned about the market maybe being a bit lower next year? I don't think it's any particular segment. It's maybe just a lot of experience over many years in the industry that the visibility at this point being low, I would be reticent to feel too aggressive. I think come January, we'll be able to have a better view of that. But maybe I'll just chalk it up to some sage conservatism at this point. Okay. That makes sense. The other question I had was on the Universal Robot side. Wondering if you could update us on what you think your current market share is? And also just why the Q3 revenue really didn't grow much sequentially? Was there anything that prevented a little bit faster growth quarterly or sequential quarterly growth? So on the second point, the sequential quarterly compares are really tough. In UR's case, Q3 tends to be a slow quarter because of vacations in Europe. Q4 tends to be a big quarter in the past because of people trying to meet year end goals. I think I mentioned that this year's Q4 year over year compared will probably be closer to the 50% growth number, meaning the year for us will finish at about 60% mid-60s. That's because we've changed our incentive programs to try to smooth out the end of year rush to buy that we've seen in prior years. So sequential ordering in UR is not something that's very meaningful, I would say. Year over year comparisons are better. Okay. And market share? So market share is a tough one because there's no reliable third party reports on this. And there's a growing population of cobots. If you go out and Google cobots every quarter, you'll see a few more and a few more out there. None of them are competitive with us in terms of the situations that we're selling into. So it's still a pretty greenfield environment. But we said in the past, roughly 60% share based on reports that at this point are over a year old on the market size estimate. I don't believe we've lost any share, but I think it's going to be hard for us to be too precise on that until we get some reliable third party reporting. All right. Thank you. And Zitania, we have time for just one more question, please. Your final question comes from the line of Faran Ahmad of Credit Suisse. Hi, thanks for taking my question. Can you just talk about how you are forecasting the SoC test market for next year? If I think about the semi revenue growth, this has been strongest this year since 2010 and almost tracking at about 10% excluding memory. Can you just give us a sense of how you are going about forecasting the SoC test market and what kind of semi growth are you assuming for next year? So the things that drive our market, certainly unit growth is important for us. That generally correlates to semi revenue growth, not always, but unit growth is important, complexity growth is important. So at this stage, what we're looking at is hard to forecast next year's unit growth, so we're looking at complexity growth. We're looking at devices at our major customers that are in preproduction that will grow that will ramp next year, trying to get a sense of do we see the same trends and jumps of complexity, which will mean test intensity and test time. What do we see happening with parallel tests next year's amount of parallel test kind of gets set early now through Q1 because the programs are in development. So we look at trends around complexity, parallel test, test time and the thing that we don't have a good read on right now is what is unit growth kind of look like. Well, I'll just add inside the company there isn't the enormous amount of time trying to analytically answer that those questions because they're really not answerable. There's so many uncertainties and we're much more focused on are we executing against our market share goals, our gross margin goals and so forth. And we know every time we speak to you guys we need to talk about the market. But it's not something that we put enormous energy in because it's something that's it's not very knowable. Got it. But can you just give us a sense of what kind of unit growth are you assuming in the forecast? Is it a deceleration from this year or similar at the high end maybe and maybe a deceleration at the low end? I think at the high end, it would be similar unit growth to this year. The low end would obviously be a significant fallback. But again, as Greg said, there's not a lot of analytics that go into the ranges I'm giving you. Got it. And then in terms of your margins, this year has been pretty phenomenal. The operating margins have been above 25%. And can you just maybe talk about at a high level, do you think these margins are sustainable and we can grow from here as your revenue grows? Or do you should we expect somewhat of a moderation next year? I think so much of it is tied to this prior conversation, where exactly is the market size next year or any point in time. What we feel good about is the long term trends, but calling any 12 month window is more difficult for us with precision. But that's what really drives our profitability because there's such good drop through in higher sales in semi test. We don't need to add manufacturing people, we don't need to add engineers or sales people. So that's the biggest swing factor in our P and L is the market size. The things that we can control, obviously, getting more market share, we've been doing that, improving Universal Robots, we've been doing that and then improving our other system test and lifeline businesses, we're doing that as well. But the wild card in all this is what is the semi test market, that's the biggest single thing to our profitability. Thank you. That's all I have. Okay. And operator, we're going to close this up. Thanks everybody for joining us and for those in the queue, I'll get back to you immediately after this call ends. This concludes today's conference call. You may now disconnect.