Earnings Call: Q3 2016

Oct 27, 2016

Good morning. My name is Ginger, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Quarter 3 2016 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. Andy Blanchard, Vice President of Investor Relations, you may begin your conference. Thank you, Ginger. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Jagiela and our Chief Financial Officer, Greg Beecher. Following our opening remarks, we'll provide details of our performance for the Q3 of 2016 and our outlook for the Q4 of this year. The press release containing our Q3 results was issued last evening. We're providing slides on the Investor page of the website that may be helpful to you in following the discussion. Those slides can be downloaded now or you can follow along live. 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 their earnings release as well as our most recent SEC filings. Additionally, those forward looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make reference to non GAAP financial measures. We've posted additional information concerning these non GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure were available on the Investor page of the website. Also between now and our next earnings call, Teradyne will be participating in investor conferences hosted by Baird, UBS, Credit Suisse and Bank of 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. Greg 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, I'll cover 3 main points in my prepared remarks: a summary of 2016 an early look at 2017, including an update on the long term growth drivers of our business and a brief update on our capital allocation plans. Strong bookings in our Q3 led to shipments above guidance and an increase to our 4th quarter production plans. At the midpoint of our Q4 guidance, we will exceed $1,700,000,000 in annual sales of Teradyne and grow non GAAP earnings per share to $1.40 up from $1.27 last year. As we move through 2016, we've seen a continuous strengthening of our semiconductor test outlook. We now see the 2016 SoC market at the high end of our $2,200,000,000 to $2,400,000,000 range. In Teradyne's case, a pickup in microcontroller and automotive analog test demand in the Q3 helped drive our semi test bookings up 18% over the Q3 of 2015. This is an encouraging sign as microcontroller and automotive analog test have been weaker than normal for 5 quarters. While the mobile device market will continue to dominate, we expect it will be supplemented by increasing demand in transportation, automotive in particular. For example, over the next few years, millimeter wave radar will move from a niche option on high end cars to widespread availability across all automotive market segments. Similarly, the connected car and autonomous driving will accelerate the use of cameras, physical sensors, data processors, wireless communication and support ICs. Complexity growth in mobility devices continues to drive test time increases that have more than offset slowing unit growth. The consumer benefits of lower power, higher performance and smaller form factor that come with the most advanced lithography nodes and advanced packaging drive increased test intensity to both weed out defects and tune the performance of these devices. This increase in test time combined with a plateau in parallelism is buoying the test market. In memory test, flash continues to be the largest part of our business, but we also saw a nice improvement in DRAM test orders in the quarter as well. Buying patterns in memory can be lumpy, but we expect the market will be about $400,000,000 this year and our share should grow to about 33%. The move to higher speed flash is well underway and we expect the combination of SSD and mobile applications will drive the flash market for the foreseeable future. We are well positioned in this market with our high speed Magnum architecture, so we expect this to be a continued source of share gains for us in the future. Year to date through the Q3, our semi test sales were up 10% over the same period last year, a trend we expect to continue through the Q4. Universal Robots had another strong quarter with sales up 46% from last year's Q3. Through the 1st 9 months of the year, UR sales on a standalone basis are up 67%, and we are tracking to exceed our 50% growth target for the full year. We continue to invest in this business as we see a significant potential for long term growth. To achieve this, we've increased our quarterly operating expense at UR over 70% in 2016 compared with 2015. We've added talent globally throughout the UR organization as we put in place the foundation to support this growth. We've opened new regional offices in Japan, Taiwan and South Korea to support a growing base of distributors and end users. We continue to expand our base of active distribution partners as well as our average revenue per distributor. While many of these investments will pay dividends next year and beyond, early indicators of the effectiveness of the strategy are positive. The combination of growing global wage rates, our cobot ease of deployment and use, expanding applications, a short payback period and low penetration combined to create a market that has enormous potential. Growth is driven by expanding the awareness of UR's cobots combined with expanding the distribution capacity to execute the application specific work to deploy our cobot. While manufacturing remains the main opportunity, it's noteworthy that a range of applications for cobots continues to expand. For example, in the healthcare arena, UR cobots are currently being used for inpatient rehabilitation, assisting with repetitive function movements, as well as a variety of research applications including an innovative laparoscopic surgery project. Our system test business also had a strong quarter with order growth in each of the component groups, Defense and Aerospace, Production Board Test and Storage Test. System Test continues to do a nice job on covering new applications for our technology and creating attractive products to serve those needs. The big step up in orders, our highest quarterly level in over 4 years, was driven by orders for a new product which we will introduce in 2017 as well as orders from defense and aerospace customers. As we noted in our July call, the wireless production test market is in a lull as transitions to new Wi Fi and cellular technologies are at a low point in the cycle. We expect this to persist through 2017 and have resized and refocused our wireless group on these emerging technologies that will drive the next wave of test investment. These include 5 gs cellular millimeter wave technologies as well as Wi Fi standards like 802.11ax and AD. Ax should be the first new technology to drive retooling starting in 20 18 as it brings improved spectral efficiency to WiFi in the existing 2.45 gigahertz bands. Ax brings frequency division multiplexing and higher order quadrature amplitude modulation to the world of Wi Fi, driving up complexity and therefore test intensity. Our Lifepoint wireless test group returned to profitability in the Q3 and should finish the year with about $100,000,000 in sales. At this point, we expect 2017 to be at about a similar level. Turning to 2017 and beyond. As we outlined last call, our $2 EPS target for 2020 is primarily based on 2 things. 1st, an ATE market growing at an average 1% rate combined with 1% market share gains. And second, Universal Robots continuing to hit its 50% annual growth target. Even with a weak wireless test market, we are running at the EPS growth trend line in 2016. Given the even odd year patterns in SoC tests, at this point, we see 2017 as significantly up from the comparable 2015 period. At the midpoint of our $2,100,000,000 to $2,500,000,000 SoC market size range, this would represent about an 11 percent market growth from 2015. In memory, we expect the market to be back in the $450,000,000 to $500,000,000 range. We'll have better visibility on 2017 Semi Test market in our January call. At distribution network and in maintaining our product leadership. On the capital allocation front, we continue to look for a balance between direct shareholder returns via dividends and share repurchases as well as growth focused M and A. Since the start of 2015, we've paid $87,000,000 in dividends and bought back $385,000,000 of stock and acquired Universal Robots. We ended the 3rd quarter with over $1,200,000,000 of cash with about $800,000,000 of that outside the U. S. We'll be working through the details of our 2017 capital allocation plans over the next couple of months and we'll review our plans with you in our January earnings call. Regarding M and A, while we continuously monitor the semi cap and test space, the area most interesting us at this point is industrial automation. The convergence of enabling technologies with global demographic and economic trends makes this area very interesting and potentially rewarding from a long term value creation perspective. Naturally, we remain disciplined in our consideration. So to sum it up, we had a good Q3 from a sales and profit standpoint with a shallower order trough than we have seen in recent years, which will allow a strong finish to the year. We expect to finish the year with sales over $1,700,000,000 and a product lineup and operating model well positioned for 2017. Now I'll turn it over to Greg. Thanks, Mark, and good morning, everyone. I'll start with a quick summary of 2016 as you can now see our 4th quarter's guidance. I will also provide additional details on the growth drivers that Mark discussed along with the 3rd quarter results and 4th quarter guidance. So starting with the 2016 summary, this year is firming up to be our 7th straight year with strong financial performance. In fact, both the top line and non GAAP EPS are projected to be up over last year despite the headwinds in our wireless test business. Factoring in our Q4 guidance at the midpoint, sales are tracking to be up 5% over last year, while non GAAP EPS is expected to be up 10%. For the full year, the projected non GAAP EPS of 1.4 dollars is a positive step towards our mid term $2 target outlined last quarter. The expected 2016 earnings improvement over 2015 is attributable to Semi Test, lower taxes and a lower average share count. Not surprisingly, 2 of the 3 semi test and share count along with Universal Robots are the 3 key drivers to our $2 mid term non GAAP EPS plan. So seeing progress this year after hovering around $1.25 a share the last few years is encouraging. On our 2 key growth drivers, 1st in semi test, it's a familiar story. Tight alignment to the healthier test segments with very selective share gains coupled with increased device complexity, which is driving up test intensity. 2nd, at Universal Robots, it's maintaining clear market leadership in the fast growing cobot space where various third party research firms have this market growing from about $100,000,000 last year to anywhere from $1,000,000,000 to $3,000,000,000 in 2020. These very high growth cobot projections are based on the increasing costs and demographics of a shrinking labor pool and the drive for higher product quality. UR cobots today already provide a very fast payback often in 6 months or less and are very well positioned for the expected multiyear expansion. Let me take a moment now to summarize the 3 key 2016 takeaways that best illustrate the Teradyne of today and tomorrow. First, we've long since proven to be very good stewards in test markets that others often struggle in. This stems from having our product roadmap headlights far out in front of current demand. We're very selective in the markets we serve, which yields more efficient R and D spending on clearly differentiated products. We're able to consistently field products in the healthier market segments with the right feature set, industry leading software and support, which drives our long term share gains. 2nd is the successful expansion of the Universal Robots top line with the strengthening of its distribution pipeline and ecosystem. For the 1st 9 months of 2016 in the Teradyne fold, Universal Robots sales have grown 67% over the comparable standalone 9 month period last year. We see multiple years of 50% or greater UR sales growth ahead with our sizable product lead and a growing distribution lead. And third is our strong balance sheet coupled with our capital return programs. These three pillars, strong and steady financial performance in our semi test business, high growth in the industrial automation cobot segment and an attractive capital return strategy, all while maintaining healthy performance in system test and wireless test and a strong balance sheet are the pillars of Teradyne today and tomorrow. Let me now go a bit deeper. First with Universal Robots, we expect over $90,000,000 in cobot sales this year with a seasonally strong Q4. Competitively, we compete mainly against manual labor and costly and inflexible automation. While there are other cobots in the marketplace, at this point, the market is essentially a greenfield. Shifting from market forces to the universal robot architecture, UR cobots remain unique in their ease of programming and flexibility, highly repeatable accuracy, attractive cost and redundant safety systems. They fit very well with the demands of small and medium enterprises which need easy programming, high flexibility and fast ROIs. Recall that traditional industrial robot was designed for large scale operations such as assembling an automobile, where a vehicle platform may last several years. Hence, the need for easy programming, flexibility or working alongside factory workers without caging wasn't necessary. UR's human scale cobots are focused on smaller scale operations, assisting or working side by side with workers. Users can manually move arm or use the simple teach pendant and just click to remember the waypoint and they've programmed it. In short, Universal Robots has encapsulated all the underlying software complexity so that the user does not need any specialized programming skills. This ease of use fundamentally shifts the economics of automation. Our first market product lead is being further amplified by a growing ecosystem lead. As the clear market leader, 3rd party developers have a strong incentive to create new peripherals on the UR platform. To ease the integration of peripherals, we've opened up our platform for partners to embed their unique solutions into our easy programming environment via software APIs. As a result, partners often demonstrate their solutions at trade shows using a UR cobot, which drives greater awareness and demand. For example, at the Automatica trade show in Munich this past June, over 15 companies use UR cobots to showcase their products. As Mark noted, we're also expanded our direct sales force to generate opportunities for our distributors and are growing our regional technical teams to assist them and their customers at the local level. So we have a growing ecosystem of 3rd party developers who know they are aligned with the right partner, both in terms of our product lead and our strategy to keep the cobot universal. This provides our growing global distribution network with the best cobot product and a wide range of peripherals to solve almost any customer automation challenge. Shifting now to Semi Test. If we take a quick step back, the ATE industry has long since consolidated to essentially 2 players, Teradigm with about 47% market share and AvanTEST with about 40%. As described in the past, moving share is difficult and comes in small increments as test or platform decisions are not made on a technology node, but rather by device type, and it's costly for customers to shift given the programming investments they've made. That is why we remain keenly focused on selecting the right long term device segments and avoiding some segments that are shrinking. For example, years ago, we chose the mobile market over PCs. We also invested in software tools that accelerate our customers' time from tape out to product launch. Without these tools, alternative is to provide scores of free application engineers that shield the customer from complex, harder to use software. The point is that we've made many trade offs versus chasing everything and covering multiple and sometimes overlapping bets, which only serve to dilute performance. Our selected investments have held both our gross margins and OpEx investment levels so that our Semi Test business has operated with gross margins in the mid-fifty percent range and with operating profits about 5 points above the industry model of 15%. And while we have added some OpEx back several years ago after very sharp cuts in semi tests, those additions were needed to ensure we stay on our shared gain trajectory rather than risk sliding back. We are proud to yet again this year maintain the lowest OpEx percentage is in ATE. Going forward, if we look at company OpEx more closely, you'll see our spending excluding Universal Robots will be down in 2016 from 2015 and we expect a flat to slightly declining test OpEx in 2017 as well. I'll provide details when I review the Q3 results. In memory test, the trend is the higher speeds and that plays into our Magnum product strength with our high frequency instrumentation and very low cost architecture. We've secured over 50% of the flash final test market and expect to benefit from the anticipated NAND growth from the fab build outs underway. Shifting to system test group, this year is on track to operate at model profit or better while funding some new growth initiatives in storage tests, more on that in subsequent calls. As expected, LitePoint completed its 2nd restructuring this year and is sharpening its focus in a soft wireless test production market that will likely extend into next year. We expect an improving demand environment in 2018 with 2 new WiFi standards expected to go mainstream. Now a reminder on our capital allocation plans. We plan to buy back a minimum of $100,000,000 and up to $200,000,000 of our shares this year while returning about $50,000,000 in dividends to shareholders. We will announce our capital return plans for 2017 in the January call consistent with our past practice. As Mark noted, our M and A strategy continues to be targeted at industrial automation given the favorable long term trends and our expanding distribution reach. We think of this as going down the A or automation path in ATE. However, I should stress that we do not need to fill any holes nor are we compelled whatsoever to do another transaction. We are, however, compelled to carefully look and give shareholders the best risk adjusted return. Moving to the details of the Q3. Our sales were $410,000,000 dollars non GAAP gross margins were 56%, operating profit rate 19% and non GAAP EPS was $0.33 We had 1 10% customer in the quarter. Our non GAAP operating expenses were $150,000,000 down $8,000,000 from the 2nd quarter due to lower variable compensation accruals on decreased profit level and lower wireless test spending. Total company OpEx in the Q3 of this year at $150,000,000 is down $2,000,000 from the year ago Q3 as higher spending at UR was offset by reductions in our test businesses. We expect our full year 2016 OpEx excluding Universal Robots to be down while UR's full year OpEx will grow year on year to the $40,000,000 to $42,000,000 range. At the company level, as noted earlier, our initial progress on our midterm plan to reach $2 and non GAAP earnings is very promising. On capital returns, we paid $12,000,000 in dividends and used $28,000,000 to buy back 1,400,000 shares at an average price of 20.6 $6 in the Q3. This leaves us with $115,000,000 remaining under our $500,000,000 stock repurchase authorization. Our cash and marketable securities totaled $1,254,000,000 up $148,000,000 from the end of the second quarter. We have $428,000,000 in the U. S. And the balance is offshore. About 85% of our annual cash generation this year will be offshore. Looking ahead, we plan to keep aggregates planning flat to slightly down in our test businesses, which includes funding annual salary wage increases with productivity gains and to increase universal robot spending, particularly in distribution to stay in the 50% or greater growth trajectory. The top and bottom lines of our model for 2017 remain unchanged at about $390,000,000 in quarterly to hit the 15% industry operating profit rate. Further investments to accelerate UR growth are being balanced in part by spending reductions in our test businesses and continued strong gross margins. At model revenue, we now expect gross margins at 54% and OpEx at 39%. I should add that this model saw us with a sales level to hit 15% operating profit rather than using higher past average sales. For example, we have operated at about a 20% operating profit rate over the last 5 years and our long term plan has us reaching a 22% operating profit rate. Moving now to the segment level details. Semi Test bookings were $250,000,000 with demand principally driven by mobility. SoC test orders were $221,000,000 and memory test orders were 29,000,000 dollars Memory test orders were flash driven, semi test service orders were $39,000,000 of the total. Semi test sales were $322,000,000 in the quarter with SoC making up $290,000,000 and memory test the balance. Semi Test service revenue totaled $58,000,000 in the quarter. Moving to System Test. Orders were $76,000,000 in the quarter and sales were $37,000,000 A portion of these orders carry longer than normal lead times and therefore won't all translate to shipments in the Q4. Shifting to wireless tests, we booked $29,000,000 and sales were $28,000,000 in the 3rd quarter. At Universal Robots, orders in the 3rd quarter were $24,000,000 and sales were $24,000,000 Sales for the 4th quarter are expected to be between $330,000,000 $360,000,000 with a non GAAP EPS range is $0.18 to $0.25 on 203,000,000 diluted shares. Q4 guidance excludes the amortization of acquired intangibles. The 4th quarter gross margin should run about 56%, roughly flat with the 3rd quarter and total OpEx should run from 40% to 44%. The operating profit rate at the midpoint of our 4th quarter guidance is about 14%. Shifting to taxes, our full year tax rate is expected to be about 14%, lower than recent prior years due to higher offshore profits where we have favorable tax rates. Please note that we expect our tax rate to step up to 18% for 2017. Our free cash flow this year to date totals $342,000,000 After a very strong Q3 driven by strong AR collections, we expect negative free cash flow of $45,000,000 in the 4th quarter as our DSO returns to a more normalized level. And similar to the prior Q4, we will be pipelining some inventory to maintain attractive lead times entering 2017. Over the last 3 years, our average free cash flow has averaged $270,000,000 In summary, we had a very strong quarter from bookings, revenue and profit perspective and expect to deliver both revenue and non GAAP earnings growth for the full year 2016. We are executing well on our $2 midterm EPS plan with Semi Test and Universal Robots growth driving the top line and bottom line expansion along with steady financial discipline and managing the share count. With that, I'll turn the call back to Andy. Thanks, Greg. Ginger, we'd now like to take questions. And as a reminder, please limit yourself to one question and Your first question comes from Timothy Arcuri from Cowen and Company. Thanks a lot. I guess I had 2. So I just wanted to confirm some of the numbers. So you had talked about the memory TAM being up next year. It sounds like it's going to go from 400 to 450 to say 500. But can you confirm what you think that the SOC TAM does next year? Yes. Well, look, what I said is that we've got a pretty wide range right now, 2.1 to 2.5. So at the midpoint, 2.3. We've certainly seen stronger performance in the market in the recent few months than we had expected even 3 months ago. So we're perhaps a little optimistic, but that's the range. Okay. And then I guess just more of a bigger picture question on wireless test. And I guess the question is certainly it sounds like it did eke out a profit in the Q3, but can you just go through the rationale in terms of why you even want to stay in that business, if we have to wait another year or maybe 5 or 6 more quarters until things really start to pick back up again? Why not basically restructure the business and sell it and then take that money and reallocate that into industrial automation as you had said? Thanks. Tim, this is Greg. The first thing you do when a business gets in trouble, which we've had experience with, whether it was storage testing them some of them years ago or semi test back in 2,009 is you have to remodel it to get it healthy again, so that you can grow from health. And until you do that, you really don't have any good options. So that's the key thing we're focused on at this point, getting it healthy and it did turn a profit this quarter and there are some encouraging design and momentum we have, but the meaningful business is 2 years out. So we're happy that we're repositioning the company on better footing after a very strong history, but obviously the market has gone south on us. But we think the next couple of years or 2 years out, we can have better performance. And to your point about automation, we have dry powder, we have the capacity. So LitePoint isn't stopping us from making another move. It's more what are the opportunities, what's the risk adjusted return and all those discussions and analysis take time. We don't move fast when we see something. We need to really make sure we understand the space, the fit, the culture and that's a robust process. Got it. Thank you, Greg. Your next question is from Jagadish Iyer from SunTrust Redstone. Yes. Thanks for taking my question. So big picture question on this Universal Robots. So given that your investment is ongoing, how should we think about it at least for the next 2 or 3 years in terms of the profitability for this UR business? Even though there is going to be a sizable unit growth, how should we think about profitability? And then I have a follow-up. Okay. We've tried to outline this in the past, but what we did this year is we essentially intentionally are taking down their run rate profit of 15% from last year to something 10% range or 10% or a little bit better. We are putting in much more distribution, muscle power, working with an ecosystem. The reason we are doing all that is, we know there is other cobot makers coming to the place. We are far ahead on the product. We want to get far ahead on the distribution and third party ecosystem providers so that when someone else comes along, we are clearly the proven low risk solution. So what does that mean for next year? Well, as we continue to grow significantly, we're going to grow the spending to make sure we don't curtail the possible sales growth market share because once you get into these accounts, they often deploy another stage in manufacturing. So you really want to get in and then you can grow much greater once you are in an account. With that said, we would expect the profit rate next year to move from around a 10% range towards a 15% range. Okay, fair enough. Just another question on memory, given that the NAND is moving more towards 3 d and you also have testing of the SSD, why isn't that memory market not growing substantially than the 400,000,000 to 450,000,000 dollars that you guys have outlined? Thank you. Yes. Well, we said $450,000,000 to $500,000,000 for next year. So coming off of this year at $400,000,000 that will be a significant step up, but kind of flat with where it's been looking backwards for several years. And the thing that is driving the test demand is more on the order of the high speed interfaces going into NAND chips, more so than the vertical structures of NAND devices. So that technological shift in NAND really doesn't have a large impact on tests, but moving to UFS, PCIe, those kind of high speed interfaces does. So that's what will drive the increases next year, we think. Now the bit growth in NAND has kind of been consistent year over year. So it's really this technological shift to higher speed interfaces. Thank you. Your next question is from Faran Ahmad from Credit Suisse. Hi, thanks for taking my question. I had a question on your system sets. You had a very strong quarter in terms of bookings and you referenced that there are some products that you'd be revenuing next year. The question I had was, can you talk about what this new product is or is this something that is incremental to your market or is it something that is replacing our older product? Yes. It's okay. We're not really in a position to announce the product, but it is incremental. It's a new application for our storage test automation product. And we've started out here in conjunction with a couple of key accounts working on a new application. And like you mentioned, the revenue and shipments of that will be early next year, probably a little bit in Q1 and more in Q2. And somewhere around that point, we will introduce the product. And if I could just quickly add, the storage test platform is very versatile, as you probably can see by now. It has significant automation and it's asynchronous to slots. So it is a vessel that can be used for multiple applications. So I think there's an ongoing story as to that product and that technology moving to some other markets over time. Got it. And could you just remind me what your expectation of systems test market is for next year, just given that you will have this new product as well? We tend to just say system test will probably be at model profits, which is about $65,000,000 revenue. Storage test. I was doing storage test. Is that system test? I'm sorry. I was doing storage test. So storage test is going to be at model $65,000,000 and then this year about $189,000,000 So we're probably going to be similar to that level. We expect to be at modest profit in those businesses, so I think you put 15% in. Got it. So you don't you won't have growth next year just because I mean I would have thought like you have a new product that should have helped you grow the revenue from this year to next. Can you just explain like what's moving and what's stopping your revenues from growing in the systems test next year? Right. Well, I'm going to go to storage test. I think you're asking about storage test. I mean systems No, I'm asking about system test. I mean, storage test, you clearly have like this product increasing, but what are the other moving pieces in the systems test that are stopping your revenues in system test from growing substantially just given the growth in the storage test? Okay. There's a slowdown in 3.5 inches test volume. That's in storage test. So this new application can offset some slowdown. But then when you go to Mil Arrow, Mil Arrow should be growing. The budget sequestered stopped. There's much more flight testing programs. So we see growth in MilAero. Production board test, we see some slight growth there as well. There's a whole set of applications that are high panel count that we have 2 test heads. A very efficient architecture that we can do the throughput much better. So we see growth in both Russian ore tests, low growth and in Milaero. And I'd just add to that that we've been it's been difficult to predict the storage test demand over the years if you've followed that. So right now, it looks as though the hard disk drive market will for test capacity will be a bit weak. But and therefore we're being conservative, but it turns on a dime that market. So it's hard to tell. Same thing with SSD. SSD is another thing that's hard still to calibrate in terms of size, but we're being pretty conservative at this point. Got it. Thank you. That's all I had. Your next question is from Krish Sankar from Bank of America. Hi, thanks for taking my question. I have 2 of them. First one, the strength you saw in bookings in Q3, was that more related to pull ins from Q4? Or in other words, historically, your Q4 bookings have grown sequentially. Should that be relatively more muted this time around? And then I had a follow-up. No, that wasn't related to Poland's. That was a new application where there's some engineering that needs to get completed for the application. So Well, Krish, Greg, you're referring to it in system test. That's what I thought. But Krish, are you referring to the total company? Yes, overall, Yes. I think no, there's no pull ins from Q4. Semiconductor test as an example, it's really the strengthening of microcontroller test and analog automotive test that has driven that. And none of that we saw as an acceleration. So the one thing about the 4th quarter bookings, if you look at us historically, 4th quarter tends to have been a low point. However, last year, we had quite a large surge as a couple of large customers shifted orders a little bit earlier out of Q1 into Q4. So comparing this year's Q4 bookings with last year, we have that phenomena to take into account. That may happen again. It may not happen again. It's really just a matter of a few weeks' worth of timing that can shift the bookings in the Q4 around that sort of year end mark. Got it. Got it. And then then thanks for the color on 2017 SoC. It looks like at the midpoint, the SoC market might be down 4%. I know you guys are not giving guidance for Teradyne for 2017, but historically your SoC revenues have tracked the industry directionally. So is it fair to assume 2017 associate revenues for Teradyne would also be down year over year given the industry is down, although a modest 4%? Well, remember that part of our story here, both historically and looking forward, is to pick up market share. So, one point of share gain is probably reasonable to think about next year for us in SoC. And we also see that the memory market will rebound a bit next year. So I think you've got to factor those into the math as well. Got it. Thanks folks. Your next question is from Toshiya Hari from Goldman Sachs. Great. Good morning, guys. My first question is regarding your long term model in semi test. You seem to be assuming an average market growth rate of 1% and to your point earlier about a percentage point of annual share gains. On your market growth rate of roughly 1%, just given what we've seen so far in 2016 and what you're guiding SoC to in 2017, do you think that 1% number could potentially be a little bit more on the conservative side? And on your annual share gains of 1% point, obviously, you've done a great job in the past picking up share at the expense of your nearest competitor. But going forward, where do you see the incremental opportunity from an end market perspective? Well, so both of those. So yes, we have the recent couple of years have been pretty strong indicators of a return to a bit of market growth. But I think we are still sticking to that 1% number for a while here because after a decade plus of a negative CAGR, we don't want to get too exuberant until we have a few more data points in. It's certainly encouraging what's happened this year and the strengthening prognosis for next year. So those are all positive signs. But overall, I think we stay with our model at this point of about a 1% average CAGR and there will be a lot of noise around that. As you see this sort of 11% growth, 2017 compared to 2015. That's certainly well above that line. And but I think it's too early to say we're going to move that up. On the share gains, the share gains come about in 2 ways. One way is that we are positioned in segments with customers that tend to grow faster than the market because they're in as Greg was talking about in his script, the sort of sweet spot of growth around mobility, automotive and such. So part of our share gain story just comes from riding the rising tide of being in the more attractive markets. Same thing on NAND in the memory space where tend to be a little more concentrated in NAND flash that's growing more than DRAM and we tend to benefit from that even without accounts, let's say, trading hands. And then on top of that, there are some competitive shootouts that occur every year where we selectively go after places we think we have clear differentiation and that without any sort of pricing more on functionality, we can make a difference and swing a little bit more our way. That's what we've been doing. And when we look forward, it looks like that's still very attractive and optimistic around how we can continue to gain share. Great. And then as my follow-up, I had a question on Universal Robots as well. It seems like you're tracking to beat your 50% growth rate this year with year to date growth around 70% if I recall correctly. What's been the upside surprise here? And what are your preliminary thoughts going into 2017? And kind of related to that, when you talk about M A in automation, is the focus on hardware or software or I suppose distribution capability? Thank you. I'll start with this, maybe Mark can fill in as well. First, there really isn't a surprise on our end at 67% growth. We did say 50% or greater, and we have 3rd party research firms that have this market, in $1,000,000,000 range in 2020. So we see explosive growth for years to come. We're much more focused on trying to figure out by region what is it that needs to be done for particular regions to get more of a velocity through that region. Sometimes it's more technical people, sometimes it's distributors velocity, sometimes it's leads. There's a whole set of factors that we are working in. We have some regions that are growing higher than 67%. So there's a lot of hands on to try to figure out how to get it growing as fast as it possibly can because we have a huge lead and it's a very fast payback and it's very easy to deploy. So it's a very unique opportunity that we have. And then on the question around M and A, the things you cited, yes, yes, yes. So software, some additional hardware capability and distribution, Those are all three areas that we're actively looking at as a way to accelerate, not just accelerate UR, but catch another wave of inflection that in the market around what's going in around industrial automation. This trend for cobots will pull coattails will pull other kinds of technologies into factories as well and those will we think have similar growth rates. And so yes, we're looking around all of those areas. Thank you so much. Your next question is from Tim Diffely from D. A. Davidson. Yes, good morning. So I guess getting back to the wireless business, I think you mentioned that it became profitable during the quarter. At $100,000,000 next year, do you expect that profitability for the full year? Tim, if it's about $100,000,000 it will be close to breakeven. Maybe it's a very small profit, but at $100,000,000 I'd say it's breakeven to 2%, 3% profit or very low. Okay. And at this point, do you think the risk is to the upside or downside for that revenue number? I actually feel pretty good about that revenue number. I think it's cautious. So I suppose in theory there could be a little bit of upside, but we didn't see much of that this year. So I'll stick with the number that 97, 100 is a very good number for next year. Okay. And then following up on the semi bookings in general, have you seen a shift? I know you mentioned that a lot of bookings happened very late in the year or early in the following year. But have you seen a shift over the last several years of pulling the bookings in, in general and then peaking revenues a quarter before they used to as well? Yes, I don't think in general, I mean, there's no general case here. It's kind of very specific around mobility and phones. And last year was a little bit of an anomaly after 4 years of a pattern where orders started to accelerate in Q1 and shipments peaked either in late Q2 or early Q3. Last year, the orders came in, in Q4, late Q4 and began to come in and the shipments started to ramp a bit earlier too in late Q1. So that was very specific to last year, very specific to phones. And this year, if we look forward, that possibly could occur again. In total, there's not a big issue here whether the orders come in the last couple of weeks of this year or 1st couple of weeks of next year. We see that there's some variability there, but nothing significant to what's going on. The other segments that are growing, and in our case, microcontrollers, we saw ordered in the Q3 higher than we've seen for microcontrollers since early 2014, same thing with automotive. So those I think are more an indication of that's not a cyclical business typically and it's driven by new model years coming along that are going to take a step function in automotive safety is one thing driving it, where the millimeter radar and other things like that will start ramping next year and become a driver for test. So that's going to be a long, long multi year tooling exercise in automotive. You won't see the same peaking and sort of quarter to quarter fluctuations, I don't think. Okay, great. Thank you. Your next question is from Edlain Mok from Needham and Company. Hi, thanks for taking my question. So first on UR, just to be clear, your revenue actually declined sequentially on the Q3. I was just wondering if I wish you read anything into that. And in terms of kind of the growth, it sounds like you guys you might be while you're targeting 50% plus growth, you might be a little bit limited by ability to reach out for greater distribution network and stuff like that. Would you quantify your business like that? And do you think that's where you mostly put your effort in right now and is it in partnership and distribution networks? I'll start with that one. Yes, a lot of our effort is going into the distribution network and that includes making sure we have the best distributors, they have the right technical resources, sales resources, follow-up and close deals and implement them timely. It's also opening up new regions, sales people to help get leads to the distributors. So a lot of actions are underway. To get back to where you started, any quarter to quarter change in sales, I would just caution you not to read too much into it. Is a whole set of confusing factors that can move sales higher or lower. Summer is mundane as European vacations are pretty heavy in the Q3. So that makes the comparison to the Q2 a bit tough. And then we have timing of different products when they enter the market. So there's a whole set of things that make comparisons difficult. With that said, we feel comfortable 50% or greater for this year and next year with some oddball changes quarter to quarter where it's going to be below 50% or above 50%. Okay. That's helpful. And then, go back to the AT space. I think you highlighted both the SOC market and as well as kind of auto related market that drove the strong booking this quarter. I was wondering, was that did that kind of strengthen booking? Was that surprising for you guys in terms of how fast it happened? And then kind of tying that to your outlook in 2017, is that what kind of gives you the confidence of this pretty strong outlook for 2017 kind of largely flattish or maybe just down modestly from this year on the down year? Yes. So the strength of microcontroller and automotive orders in the Q3 were more than we expected. And we have seen 5 quarters of below trend line buying in that segment. So we knew it had to return. It just so happened that it came back in Q3 and it was a bit of a surprise. So that's a factor in our optimism around next year's market, but that's not it alone. We've also seen strong indications around mobility as well for next year, which is our biggest segment. So in general, I would say that as we went through Q3, the optimism and the orders both moved higher than we had originally expected. Your next question is from Mehdi Hosseini from SIG. Yes, it's actually Mehdi Hosseini. Thanks for taking my question. I have a couple of follow ups. And the first one is for Mark. We saw this earlier this morning another consolidation among the larger customer base. And I want to see how you have factored in the continuing consolidation among your customers into the incremental $0.35 of earning that you expect Semi Test bring in from 2015 to 2020? And I have a follow-up. Yes, it's a good question. And first of all, we expect consolidation in the customer our customer base will continue. Now you might think, well, if that's happening, there must be some manufacturing efficiencies that can be gained that might depress the test market. But in fact, much of the test industry has already been efficiently consolidated through the outsourcing trends of the past decade. Many of these customers utilize subcontract manufacturers in Asia in facilities that are already where multiple customers have consolidated test capacity. So we don't have not historically and don't expect there to be much of an impact to the test market as a result of the consolidations. Great. And then a follow-up along the lines of efficiency in the system, I've seen 3 consecutive quarters of decline in your backlog, but you're executing really well and maybe this decline in backlog has more to do with industrial the industrial shorter lead times. In that context, maybe this is more for Greg, how you're planning to manage your working capital since the lead time or a backlog is no longer going to be indicative of what the business trend is going to be 2, 3 quarters out? We've actually been managing in that scenario for quite some time. In semi test, our largest business, we often get the official purchase order 4 to 6 weeks before the tests are shipped. Now we're working with customers collaboratively prior. So we're building inventory based upon the signals they are giving us. So we have been at that for a while. If I go to Universal Robots, which is a very quick fulfillment, super quick, there is only 3 products. There isn't a whole lot of different configurations or instruments where you can get stuck. So that is a very low obsolescence risk and those products last for a very long time. So we're comfortable in this environment. And over the years, periodically, we've improved our supply line responsiveness. We've taken days weeks out and worked with our supply chain to do that. So we think we've we're responsive and we don't see any inventory risk. And our charges compared to others sort of fit with other equipment companies. You were not having a low side. So I think all told, we're doing okay against the new environment. Great. And just a quick follow-up. Should I assume or is this conservative enough to assume the free cash flow margins are going to average like 15% given how efficient you are with working capital? I suppose, I mean, our history has been a bit above that, but you could use 15%. That would be a slight decline. Okay. But the minimum is 15% and anything any more efficiency coming in is all upside? Yes. Okay. Thank you. Okay. Very good. Your next question is from C. J. Muse from Evercore. J. Muse:] Yes. Good morning. Thank you for taking my question. I guess first question, I think Auto SoC test peaked around $400,000,000 back in 2014. It sounds like we're in the low 300s, I think, this year. A, is that correct? And B, how do you think about growth in that segment into 2017? Yes. So, CJ, this is Mark. This year, we think automotive is probably just south of 400 when the year is done. And if last year as an example, 15, it might have been closer to 300 and then the year before that 400. So as we look forward, we expect it's going to probably follow that trend line we're talking about off of that 400 base going forward. It will be 400 growing at a couple of percent a year. Okay, very helpful. And then second question on gross margins. As you look at the guide for Q4, is that uplift principally Eagle Test mix? And then looking to 2017 and the new target model, can you walk through what's driving that uplift? It's simply better mix, principally in Semi Test. Okay. And then for 2017, same thing? Yes. Yes. Okay. Our margins, I think you know, CJ, move around based upon mix. Whether our large customer is buying in volume or depending upon the various segment, our margins can move around. But we tend to have this pattern that's continuing that in the even years, we're at about 54%. In the odd years, we do a bit better. So I guess the interpretation is the change to your target model is an improving mix for you led by auto and catalog parts over time? Yes. And we've been beating the model for so long. We just said we should move the gross margins up so it's more consistent with where we've been. And we also are likely to put a bit more OpEx or considerable OpEx behind Universal Robots. So that's the way to fund it with better gross margins that we know we can get. Makes sense. Thank you. Okay. And operator, we have time for just one more question, please. Okay. Your final question is from Stephen Chen from UBS. Hey guys, good morning. Thanks for taking my question. I just wanted to follow-up on beating your UR growth target spend. Can you maybe give us some more color on pipeline or quoting activity that you see that gives you confidence in the growth rate? Yes. It's a churns business. So there's the process typically is lead generation, qualification, close and then some application work to deploy the robot into the factory. All of that can occur within a handful of week period in the quarter. So we track weekly. We're looking at metrics around all of those items to see if we're tracking toward our target and close rate, qualification rate and sort of those kind of things. So as we go into Q4, if you look at the history, Q4 is always a big quarter for UR and all the indications we have right now is that will be true again this year and that's how we're running it. And I'd just add that we don't have any significant distributors whatsoever. I think our largest distributor is just under 5%. So there's so many different buying locations in different countries and different applications, so it's very dispersed. But each regional person has a pipeline to their distributors that they put a probability on and all that math ends up being the forecast. Okay, folks. Thanks so much for joining us. And for those remaining in the queue, I'll reach out to you here after this call. Thanks so much. Thank you. Thanks. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.