Earnings Call: Q2 2016

Jul 28, 2016

Good morning. My name is Tia, and I will be the conference operator today. At this time, I would like to welcome everyone to the Teradyne Q2 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. At this time, I would like to turn the conference over to Mr. Andrew Blanchard. Sir, please begin. Thank you, Thea. 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, David Beecher. Following our opening remarks, we'll provide details of our performance for the Q2 of 20 16 and our outlook for the Q3 of this year. Press release containing our Q2 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, where you can follow along live. Replays of this call will be available via the same page after the call is over. 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 posted additional information concerning these non GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measure, where available on the Investor page of our website. Also between now and our next earnings call, Teradyne will be participating in investor conferences hosted by Needham and Company, Citi and Deutsche Bank. 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 Q3. Greg will then offer more details on our financial results along with our guidance for the Q3. We'll then answer your questions and this call is scheduled for 1 hour. Mark? Thanks, Andy and good morning everyone. Today, I'll cover 3 main topics: the highlights of our second quarter as well as our second half outlook our reassessment of the near term LitePoint wireless test market and a closer look at the developments at Universal Robots. Greg will then provide additional details, including an update on capital returns and the path to our $2 per share EPS target. Building on the momentum from Q1, continued strength in semiconductor tests led to another strong quarter in sales and earnings. Teradyne's 2nd quarter revenues of $532,000,000 were at the highest level in 4 years and when combined with Q1, our revenue total of $963,000,000 in the first half was at the highest level in 15 years. Complexity growth in mobile devices continues to drive test time increases that have more than offset slowing unit growth. We are also seeing an increasing number of test seconds devoted not just to weeding out defects, but directed at trimming and optimizing the device to improve performance. In these cases, the tester permanently programs into the device tweaks that enhance accuracy, lower power consumption or tune the part to better meet specifications. This is becoming an economical way for manufacturers to get higher yields from increasingly finicky lithography nodes. In 2016, despite the weak analog and microcontroller test demand, we see the SoC test market in the $2,200,000,000 to $2,400,000,000 range or up about 10%, $200,000,000 from 2015 at the midpoint. We expect to capture about half of that market growth and much of that has already been realized in the first half of the year. If you recall, the SoC tooling ramp for 2016 shifted about 1 month earlier than normal resulting in a revenue profile that is more first half concentrated. As a result, first half semiconductor test shipments are running about $100,000,000 ahead of the first half of last year. In memory test, strength in flash test demand has been more than offset by weak DRAM capacity needs. For the year, we expect the memory test market to be in the $400,000,000 range, down about 20% from 2015, while our share is projected to be up to about 30%. The bright spot in memory test continues to be in the area of higher speed flash interfaces such as universal flash storage or UFS. Higher bandwidth requirements for both SSD and mobile applications have resulted in the growth of new interface standards like UFS, which in turn have driven the need for new testers to handle both the bit growth and replace obsolete testers in the field. UFS and similar technologies are at the very early stage of adoption and production will continue to ramp over the next few years as data speed increases complement density increases. Our Magnum tester has successfully captured early production at 4 of the 5 manufacturers of this new class of leading memory technology, leading to our largest quarterly orders for the Magnum product line. This same Magnum architecture has now proven leadership in all variants of flash testing as well as DRAM wafer probe. Our system test business continues to perform well. Although group sales will likely be down about $20,000,000 on lumpy storage test business, group profits should be up for the year. Universal Robots had a very strong second quarter and we are on track to meet or exceed our 50% growth target for the year, delivering $90,000,000 to $100,000,000 of revenue for the full year. In fact, through the 1st 6 months of 2016, revenue is running over 80% ahead of the same period last year. 2nd quarter revenue of just over $25,000,000 was more than double the same period a year ago. We continue to invest in distribution, channel partnerships and R and D to maintain a high rate of growth. Our unique combination of deployment ease, safety and low cost continues to resonate across a broad variety of industries and applications. Growth is dependent on increasing velocity through our distribution channels We plan We plan to stay ahead of the curve in development of these channels to maintain our market lead. I'll come back to one aspect of facilitating this growth at the conclusion of my remarks. At LitePoint, we've been confronted by a further deterioration of the near term outlook for the wireless production test market. A combination of slowing handset growth and a slowdown of new technology adoption are 2 universal factors causing this decline. This combination of factors lowers our anticipated market size from $400,000,000 to $200,000,000 for 20 16 2017. Consequently, LitePoint revenue will be likely down proportionally resulting in the goodwill and intangible asset impairment charge this quarter. Having enjoyed the surge in revenue and profits in 2012 shortly after our acquisition, we've since seen slowing demand. Although we've gained share all along the way, the market shrinks from about $1,200,000,000 in 2012 to a projected size of about $200,000,000 in 2016 is obviously too large to offset. Up until 2016 profitability both on the ride up and down has been above model. So we've had good execution on product development, share gains and profitability, but we misread the rate of both unit growth and technology change. We will be restructuring the group for continued profitability going forward in the smaller near term market and continue to focus on leadership for the next technology inflection. The next technology inflections in wireless will be millimeter wave, WiFi and 5 gs cellular. Both will require significant retooling of existing equipment and should produce another surge in the test market. This cycle will likely start in the 2018 period and run with intensity for 3 to 4 years. In the meantime, smaller technology changes due to 802.11ax, IoT and the increased use of MIMO technologies will provide some stimulus, but the market will likely be in the $200,000,000 to $300,000,000 range up until 2018 when 802.11 AD millimeter wave WiFi should begin to ramp. Finally, returning to Universal Robots. One of the key features of our cobot products has been that has propelled the market expansion is the ease with which an automation solution can be implemented, much easier than a traditional industrial robot. The first component of ease translates to less time to program or more accurately train the cobot as complex programming languages have been replaced with tablet based icon driven instruction as well as hands on direction of the cobot's arm. People with no programming experience have often been able to train the robot in this fashion in less than an hour. The second component of ease is the inherent safety of the cobot that removes the need for a costly and restrictive enclosure. These ease of deployment features combined with low cost results in a fast payback time and opens up automation not only to large enterprises, but also small to medium sized enterprises that typically don't have in house automation expertise. In June of this year, we introduced a new platform approach called Universal Robots Plus, which extends our ease of use advantages to 3rd party partners. These partners supply add on products to our universal cobod that tailors it to the specific customer application. This includes peripheral products like grippers, actuators, optical guidance, measurement systems and other enhancements. Through Universal Robots Plus, this 3rd party ecosystem can take advantage of software API links that bring their products directly into the same easy to use environment that our cobot enjoys. This further reduces the users' time to solution and time to a positive ROI while enhancing our competitive advantage. So in summary, our semi test, system test and universal robots businesses are performing very well. Complexity increases in semi devices are driving growth in our semi test market. System test is a steady profit contributor and robust growth in excess of 50% continues at UR. UR. While the dramatic fall of the wireless test market is disappointing, we are restructuring our LitePoint business to focus on the next technology waves in connectivity and cellular. Now I'll turn it over to Greg. Thanks, Mark, and good morning, everyone. I'll start with some brief comments on the year, then I'll update you on the path to our mid term $2 EPS plan, then I'll cover the 2nd quarter results and Q3 outlook. First, though, let me explain the $338,000,000 non cash goodwill and intangible asset impairment charge recorded in our Wireless Test segment, which consists of LitePoint acquired in 2011 along with our much smaller ZTECH acquisition in 2013. This year, the wireless test market is expected to be down about 50% from last year. There are multiple wireless test market headwinds, including a low in the adoption of new wireless standards, slower smartphone growth rates and most significantly for us, our large customer who has oscillated between 51% 73% of our annual wireless test sales is expected to buy substantially less test equipment as a result of numerous operational efficiencies. So at this point, it's probably safe to assume a contracted wireless test market until 2018 when 2 new Wi Fi standards should make their way into volume production. This sharp wireless market size reduction along with our wireless headcount action in the second quarter triggered the impairment review under GAAP, which resulted in the revaluation or write down of our wireless segment goodwill and intangible assets. I should add that we've had other businesses that have faced tough market conditions such as storage test in 2013 and semi test back in 2,009, which were both fully renovated back to health and growth. We plan to do the same for our wireless business, which has had a track record of solid execution. So notwithstanding the wireless test segment, which will deliver sales about $90,000,000 to $100,000,000 lower than 2,005, we're on track to grow both sales and non GAAP EPS for the total company this year. At the midway point, first half total company sales of $963,000,000 are up 13% from the 1st 6 months of 2015. And on the bottom line, non GAAP EPS totals $0.86 up 23% from the first half of twenty fifteen. Universal Robots and Semi Test are driving the top line growth. Starting off with Universal Robots. First half sales were $42,000,000 versus $4,000,000 last year in the first half as we acquired UR in June of last year. On the more important standalone comparison, first half sales are up 82% from the prior first year first half sales of $23,000,000 We expect UR to be over $90,000,000 in sales this year with an operating profit rate of about 10% as we've upped the investment level for distribution to extend our leadership position. Next year, we'd expect UR to be at approximately 15% operating profit on sequential sales growth of 50% or greater. Our total company model of needing about $390,000,000 in quarterly sales to hit a 15% operating profit remains intact this year despite the added UR OpEx investments. We're also leveraging our supply line resources to lower our cobot material costs. These material cost savings should be a hedge against inevitable competition so that the cobot gross margins remain in the low 50% range. To date, we haven't seen any meaningful competition as the market for cobot automation is so broad and growing so fast. UR cobots are performing a very long list of dull, dirty and dangerous jobs around the clock. These include machine tending, assembly, pick and place, polishing, gluing, medical processing, food handling, inspection, packaging, welding, materials testing, painting, well, you get the idea. Our first to market product lead is now being amplified by a growing ecosystem lead as well. We are growing our distribution pipeline in both quality and vertical coverage across regions so that as competition increases in the future, our distribution partners will be more experienced, more capable and armed with more proven and lower risk solutions for customers than our competitors' partners. Finally, in terms of Industry 4.0, UR will continue to put control back in the hands of the operator on the floor so that flexible manufacturing can be achieved at lower cost, whether for small and medium enterprises or large companies. Shifting now to Semi Test. We're catching the expected mobility buying wave with increasing complexity driving test intensity up. Despite projected semiconductor unit growth of around 3%, the test market is growing in 2016. Each year, apps processors have more transistors, RF chips have more bands and devices of all types continue to grow in complexity. This complexity drives higher test times, which in the past was masked by improvements in tester productivity. As we've noted before, we see the impact of these productivity improvements for complex mobility devices on the tester market diminishing. In addition, as Mark noted, testers are increasingly used as dynamically tuned devices for optimum performance. These trends a recipe for solid test demand despite slower semiconductor unit growth. We see these positive trends moving to long term buy rate trend line in the SoC tester market. In memory test, the trend to higher speeds plays into our Magnum sweet spot with our high frequency, low cost architecture. We have over 50% of the flash final test market and are well positioned to benefit from the anticipated NAND growth from the fab investments being made this year. Regarding the market environment, as we have noted before, share is very sticky with about half of our past gains coming from being aligned to growing segments versus head to head competitive battles. Therefore, we will continue to be selective in the segments we target in Semi Test. Shifting to System Test Group. Overall, we operate at model profit or better in the first half. While storage tests will be down from last year on a full year basis, we expect it to deliver model profitability for the year. Defense and aero is expected to resume growth this year as the multiyear sequestrations have ended and production board test is gaining traction with our dual head high throughput solutions, particularly in the growing automotive electronics segment. I'll now comment on the $2 non GAAP EPS midterm plan. If you recall, our 2015 non GAAP EPS was 1.27 dollars So starting from that point, we'll need to grow earnings at about 10% annually to achieve $2 in 20.20 or sooner. This EPS growth should come from 3 main contributors: Semi Test, Industrial Automation and Capital Return. In semi test, while we have historically done well, gaining share very selectively, market contraction has offset some of these gains yielding very little growth. Going forward, we expect the trends noted earlier to result in a 0% to 2% trend line market growth over the midterm assuming a 3% to 5% unit growth. We'll still see some even year odd year swings in market size, but these swings are moderating with complexity advancing more steadily. This combined with annual continued share gains of about a point should contribute about $0.35 of the EPS growth in our $2 EPS plan. Much of our SME test growth will be offshore and taxed at our low Singapore tax rate. At Universal Robots, we expect the cobot market and UR continue to grow at 50% plus annually over the midterm, similar to what we have seen over the last several years. Rising labor costs, high turnover and a shortage of workers in places like China combined with a fast ROI should drive ongoing UR growth and contribute about $0.30 towards EPS growth. This growth will be taxed at about 22% as the IP is in Denmark. There is also significant upside to this estimate given the 3rd party report that peg the cobat market size at $3,000,000,000 plus by 2020. If I conservatively assume a market half this size, dollars 1,500,000,000 and our Sumar share drops from 60% to 40%, that's about $600,000,000 in sales for Teradyne, far above what we've included in the $2 EPS plan. The remaining $0.08 should come from our continued return of capital through share buybacks funded by a strong annual free cash flow and some incremental growth in our other test businesses. Shifting back to the company level, we paid $12,000,000 of dividends and used $29,000,000 to buy back 1,500,000 shares at an average price of $19.78 in the 2nd quarter. This leaves us with $143,000,000 remaining under our $500,000,000 stock repurchase authorization. Our cash and marketable securities totaled 1 point $1,000,000,000 up $131,000,000 from the end of the Q1. We have $438,000,000 in the U. S. And the balance is offshore. I should quickly point out that an increase in portion of our annual cash generation will be offshore. This year, it's expected to be about 80%. We'll continue to report this increasing foreign mix as it factors into capital allocation. Now a reminder on our 2016 capital allocation plans, we plan to buy back a minimum of 100,000,000 up to 200,000,000 of our shares while returning about $50,000,000 in dividends to shareholders. As to our M and A strategy, several years ago, we concluded that we could secure long term growth with far less volatility in certain high growth white spaces such as collaborative robots, while also returning significant capital. That is a shift we executed on in 2015. As the leader in automated testing equipment or ATE, we went down the A or automation path as we didn't see any attractive T or test companies available and many of our electronics customers were asking for help in automation. This customer pull and the broad applications for cobots in many different industries is what attracted us to the market leader, universal robots. Moving now to the details of the Q2. Our sales were $532,000,000 gross margins were 53%, the non GAAP operating profit rate was 23% and non GAAP EPS was $0.55 We had 1 10% customer in the quarter. You'll see our non GAAP operating expenses were $158,000,000 up $5,000,000 from the Q1 due to higher variable compensation accruals on increased profit levels and the continued expansion of UR's distribution programs. Total OpEx in the Q2 was up from the year ago Q2, dollars 5,000,000 in total, which consists of the inclusion of Universal Robots OpEx now running at $11,000,000 a quarter, net of cost reductions in our test businesses. We expect our full year OpEx excluding Universal Robots to be down and UR's full OpEx will grow year on year to the $40,000,000 to $40,000,000 range. We plan to keep spending flat to slightly trending down in our test businesses in the aggregate and to increase universal robot spending, particularly in distribution to fan out our coverage and stay on the 50% or greater growth trajectory. Moving to the segment level detail. Semi Test bookings were 391,000,000 with demand principally driven by mobility, SoC test orders were $3,000,000 to $38,000,000 and memory test orders were 53,000,000 dollars Memory test orders were flash driven, semi test service orders were $73,000,000 of the total. Semi test sales were $435,000,000 in the 2nd quarter with SoC making up $394,000,000 and memory test the balance. Semitest service revenue totaled $57,000,000 in the quarter. Moving to system tests, orders were $30,000,000 in the quarter and sales were $49,000,000 Shifting to wireless tests, we booked $23,000,000 and shipped $22,000,000 in the 2nd quarter. As previously outlined, a significant decrease in buying from our large customer and slowing smartphone growth rates created a difficult demand environment. At UR, orders in the 2nd quarter were $26,000,000 and sales were $25,000,000 Sales for the 3rd quarter are expected to be between $375,000,000 $405,000,000 and the non GAAP EPS range is $0.23 to $0.30 on 204,000,000 diluted shares. Q3 guidance excludes the amortization of acquired intangibles. The 3rd quarter gross margin should run about 55%, up from the Q2 due to improved mix and total OpEx should run from 38% to 40%. The operating profit rate at the midpoint of our 3rd quarter guidance is about 16%. Shifting to taxes, our full year tax rate is expected to be about 13%, down from prior guidance of 17% due to a higher mix of offshore profits where we have favorable tax rates. At the midway point of the year, sales and non GAAP earnings are up from the first half of both last year and the last even year 2014, driven by our alignment to the high growth segments in SoC Test and the addition of Universal Robots. Combined with solid performance from our memory test and system test groups, we expect growth this year despite the headwinds facing our wireless test business. We remain committed to our balanced capital allocation strategy of both returning capital to owners as well as prosecuting our M and A pipeline very selectively with an emphasis on automation and remain on a path to $2 of annual EPS by 20.20 or earlier. Thank you. Turn the call back over to Andy. Thanks, Greg. And Theo would now like to take some questions. And as a reminder, please limit yourself to one question and a follow-up. The first question will come from Toshiya Hari with Goldman Sachs. Hi, good morning. My first question is on UR. You talked about operating margins potentially improving from 10% this year to I think you said 15% in 2017. Is that primarily a function of OpEx as a percentage of sales coming down from 2016? Or is it more a function of potential gross margin expansion or both? This is Greg. It's a function of OpEx growing slower next year than what it grew this year. We grew OpEx quite significantly this year purposely to get further ahead in distribution and have a stronger ecosystem, we don't need to continue with that same aggressive step up next year. We would expect gross margins to be about the same next year. We've got some actions to lower material costs, but we're going to assume for now that, that will offset any competition we see. And we see the sales growth very high. So the higher sales growth will and modest OpEx increases next year will end us should end us close to the 15% target. And you might recall, when we bought Universal Robots, they were running at about 15%. But again, this year, we want to get further ahead in distribution. Okay, great. And then my follow-up is on semi test. I realize predicting 2017 at point is difficult, if not impossible. But what are your thoughts on the on off or odd even dynamic going in 2017? Are there any fundamental or structural changes that could potentially allow 2017 to be an on year? Yes, I'll take that one. So you're right, it's very difficult to call 2017 this far away. It's sometimes difficult even in the year. But there are a few things worth noting, I think. On the memory side, this year is quite a bit lower than it's been running in the past several years. There's a lot of tooling going on around R and D and pilot production for these high speed interface nonvolatile memories. And it could be that if widespread adoption in mobile devices happens next year that the memory market would not only snap back to a $500,000,000 level, but could be a $600,000,000 level. So that depends on close end decisions in mobility device makers and in terms of rate of adoption, which we wouldn't see yet. But that's something that's certainly more probable than it's been in any of the past 5 years. On the SoC side, what Greg mentioned about complexity growth is true. We're seeing that the test time increases due to both complexity and something I alluded to, which is more of this sort of performance tuning algorithms that are being run on the tester will moderate some of the even odd swings we've seen in prior years. I think there may still be a bit of that, but it could very well be less steep than we've seen in the past. Very helpful. Thank you so much. The next question will come from Timothy Arcuri with Cowen and Company. Hi, good morning. This is Karl Ackerman on for Timothy. If I may, I'd like to address the wireless test business. When I think about the short term disruptions in the wireless test space versus the long term opportunity, how do you guys frame that up in your mind? Obviously, you talked about the issues that are driving the market this year and even next year. But with that in mind, do you think about the long term reward to live with some of the short term volatility in that market, particularly as it seems this business is now losing money and remains highly competitive? Yes. So what we said earlier around the near term outlook, which is the rest of this year even extending into next year is that the rate of technology change in cellular and in connectivity looks to be quite low. However, millimeter wave technology, 28 gig up through 70 some odd gigahertz, opening up that band for both backhaul and mobile device applications is the next tooling wave. Now it's a bit of a judgment as to when that will start. We're currently thinking that's 2018 for Wi Fi and more like 2020 for cellular. And that will result in another round of tooling surge in the market. So if you recall, I mentioned that back in 20 12, the tooling surge peaked at a $1,200,000,000 market for cellular and Wi Fi combined, down to 200 now, huge volatility, huge swing. The next phase of this, we don't believe we'll get back to that 1.2 level, there's because that 1.2 level was a combination of both technology and unit growth. But it could very well get the market back up in the $600,000,000 $700,000,000 range for that wave across that several year horizon. So that's how we're thinking about it. We still have very strong products, gross margin differentiation, but just a very anemic environment. So we'll be focusing on that next technology wave. Got it. And if I may just ask one follow-up. Looking at your guidance for the Q3, it looks like margins imply they tick higher by about 200 basis points. Is that all related to wireless test because I think your margins have fallen seasonally, 7 of the last 10 times Q2 to 3Q? Or are there other things impacting the mix there as we look into Q3? No, it's not really wireless test. Wireless test is down $100,000,000 for the year. So they're not a meaningful contributor to the top line or affecting margins quarter to quarter to quarter. What really is happening is we've talked about our large customer, the concentrated buyer and a lot of those tests are shipped earlier in the year and obviously for a large customer, the pricing is different than for other customers. And that those systems were pulled in and shipped larger through the Q2. So now we're going back to a more normal mix. Understood. Thank you. The next question will come from C. J. Muse with Evercore. Good morning. Thank you for taking my question. I guess first question, I think Greg, I'm not sure if I heard you correctly, but did you say that you expected revenues to grow year on year here in calendar 2016? And I guess as part of that, how should we be thinking about the contribution from LitePoint? Yes. We expect revenues to grow year on year, but LitePoint will be down anywhere 100,000,000 neighborhood. So it's down considerably. Their market cut in half from 400,000,000 to 200,000,000. So this is the opposite of what we saw a couple of years ago and this can happen when you have a very large customer with 50% plus concentration, you can get swung around quite severely. So in the short term, we're going to remodel, renovate LitePoint and prioritize where we place our bets. So like we have with other businesses, we'll get this one back on health and focus towards growth opportunities and that's what we need to do as an operator of wireless test. Great. And I guess a second question, in terms of your gross margin guide, roughly up 200 bps Q on Q, you alluded to mix shift there. Is there also savings from the write down of LitePoint or is this really more moving away from mobility into microcontroller, core analog, etcetera? It's simply mix in semi test is the piece because our large concentrated buyer has taken most of their testers earlier in the year, Q1, Q2. So now we're back to normal mix. If you guys looked at our mix sometimes back in time, we used to talk about 54%, 56%, we bounce back and forth whether we had an even or an odd year because even year we had the large concentrate of buying. That got thrown off last year with the leases. But generally speaking, we have a very large concentrated buyer that pulls the margins down. When they're not buying a particular quarter, we get back to a more normalized margin. I mean, I guess the question is, are there savings that can accrue to the gross margin line, gross profit line, as you are looking to, I guess, reduce the footprint of LitePoint? There could, but I wouldn't expect those to be significant, C. J. I mean, LitePoint has very strong gross margins even with all these headwinds. They have excellent product differentiation, but the market headwinds are so strong. So it's I mean, there might be a little bit, but the margins are very healthy. So I think the opportunities in LifePoint are more in OpEx. Okay, makes sense. Thank you. The next question will come from Krish Sankar with BoA ML. Hi, I had two quick questions. One is, can you characterize the NAND solid state drive test opportunity you see over the next couple of years? And would that flow through both your, I think, your storage test and your memory test business? And then I had a follow-up. Yes. So the extent that applications for NAND or non volatile memories grow, it universally helps our memory test business and that's an area of strength for us in flash, especially these new high speed flash interfaces. As it relates to the SSD itself, the unit, that one's a nascent market still. It's been roughly 20%, 25% of our storage test business the past few years. And we are hopeful that that would at some point here start to move north, but at least for the most recent, let's say, 2 to 3 year period, it's been steady at about that level. And so the real question will be as more enterprise applications of SSDs grow, which tend to have higher capacities, higher test times, longer test times, will we see the market start to turn there? But right now, it's, I'd say, still a pretty small piece of market and piece of our business. Got it. Got it. And then I think I missed the earlier comment. Did you guys say in calendar 2017 your SoC test revenues would grow or the SoC test market would grow? I forgot. I'm sorry, I didn't catch that comment. We didn't talk about 2017. We didn't give numbers. I think the question was that was asked was do we expect 2016 to be up from 15. And we said, yes, 2016 should be up from 15 even with the wireless headwinds, wireless being down $100,000,000 So what about do you have any view? On 2017? Yes, on 2017 given that the usual odd year, but looks like there are some positives in terms of test time and like advanced packaging. Right. I'll let Mark take that. He took a crack at that early one. Yes. What I said earlier was in memory, there's definitely some upside next year. And I mentioned that going back to $500,000,000 market is looks pretty good and could be as high as $600,000,000 depending on the rate of adoption and mobility of some of these new flash technologies. And in SOC, we certainly see moderation in the even odd year cycle because of complexity growth giving us more test time, less parallelism as well as this performance tuning aspect of the tester. So I gave a range of the market, 2.1 to 2.5 kind of. But beyond that, it's just too early to narrow it. Got it. Very helpful. Thank you, guys. The next question will come from Edwin Mok with Needham. Hi. Thanks for taking my question. So first question, on the prepared remarks, you mentioned something about the analog and microcontroller market is down this year. Can you give us some color around that and where you guys stand with your product? Yes. So both of those markets are relatively weak compared to prior periods like this. And our market share and our product position there is very strong. So it turns out we are disproportionately impacted if those are soft market and we disproportionately benefit when they strengthen. So the issues, there was some significant tooling last year in power linear. We had a very strong year there. So I think this year in that aspect, there's been some digestion. In MCU, it's really just low growth. The end pull through demand for MCUs seems to just be at the moment flat lined. There is some expectation that applications in IoT would propel growth of MCUs and MCUs with embedded RF. And that's something we bet on. It's something we've got a good product position for, but it's not a market that's truly taken off yet. So last year, big year in Power, this year down. MCU is kind of flat year over year, but running below the trend line. Okay. That's helpful. And then on UO, I think you guys said that you expect your revenue to be somewhere around $90,000,000 to $100,000,000 this year. If I did the math on the first half of the year, that and I picked the midpoint of that, that's like a 6% growth in the second half and the first half. That seems pretty slow given the loss you I think you guys 60% from first half to second half. And can you give us some color why there is a deceleration of growth? Am I reading too much into that number? Yes. I'll take the part of that. It's the Universal Robots Cobot 3 was introduced kind of mid year last year. So we're comparing against the 6 month period in 2015 and there was a very small amount of UR3 Cobalt sales. So a new market was opened up, this tabletop UR3 market. Now that market, we had sales in the second half of twenty fifteen. So I think the growth in the second half of the year relative to the year ago period. But for the year, we would expect to be 50% plus growth. And I think another we did in the first half of the year about $42,000,000 of sales in UR. And so to get to $90,000,000 we're talking about 48 in the second and to get to 100, we'd be talking 58. And at this point, that looks very doable. And there's certainly given the growth we saw from Q1 to Q2, there's certainly upside to that as well. But at the moment, that's how we're modeling the second half. Okay, great. Thank you. The next question will come from Farhan Ahmad with Credit Suisse. Hi, thanks for taking my question. My first question is just regarding your long term model. Thanks for providing details around the $2 target. Now if I look back at your revenue and EPS in 20.10, you already have like $2 of EPS back in 2010. And since then, your revenue has grown basically low single digit from 2010, but the OpEx has gone up by like 40% to 50%. So as and if I look at like every even year to even year, your operating margins are declining. So if I think in that context, like why you're not more focused on cutting your OpEx and using that to drive earnings growth? And it doesn't seem to me like the strategy that you have going forward is very dramatically different from what you had for last 5 years, which is acquiring companies outside of semi test and driving growth through that. So if you could just talk about like why is the operating model not expected to be like higher profitability just from like why is the OpEx so high relative to your revenues right now? And why shouldn't the operating margins be higher? Okay. Good question. Let me take that one. Our operating margins are non GAAP operating profit. The last 3 to 5 years has averaged 19% to 21%. This year, we'll be close to that. Now you mentioned 2010. 2010, our operating profit was 28%. Now keep in mind, 2010 was the year after many companies did very severe cutting in 2,009 and it was questionable what the world would look like down the road. So we cut very deep in 2,009 and therefore, in truth, 2010 had a lot of makeup revenue and also a very low cost structure that we had. But back in 'ten, we also lowered engineering quite a bit. We lowered a whole bunch of other costs. And frankly, we were operating at very healthy profits in 2011, 21%, 2012, 23%. But we have to also factor in what is our major competitor doing. Our major competitor at the same time was operating with very, very, very low profits. So we had to put some defenses or put more money back in R and D so that we can continue our leadership. So there's a real kind of challenge that as much as we'd want to get profits mid-20s or something like that, we can't do that at the risk of opening up various accounts. So part of our efficiencies, while they're very good compared to peers, we're always looking to improve them further, but sometimes we're constrained by what the other guy is doing, how much he's investing in R and D, how many people, apps people he has at various accounts. So I hope that helps answer your question. The other thing I think different going forward is we talked about the market had been declining for a long time period. We see that changing. So we're going to continue on our same playbook that has gained share, but that share gain didn't necessarily help us because the market declined. Thank God we got it. But had we not gotten it, it would have been a terrible story. But for us to grow earnings, so we finally have a market that's not declining and it's plus neutral to 2% or somewhere around there, that's a big change for us year after year after year. And one other thing I would add is, as Greg mentioned, we have turned the corner on OpEx in our core businesses. If you look at this year, our core businesses OpEx will be down. UR, the new opportunity with high growth is up. But across the next several years, we do expect OpEx improvement in our core businesses. That is part of the equation here. Got it. Thank you. And then one question related to the wireless test. Why are you so sure that there's no AX80 in 2017? Is there any chance that you may just get earlier to the next year? We're not entirely certain, but we want to be cautious with this community because if it comes earlier, great. But we don't think our guess is it will not be large volume production buying. If there is, that will be good news, but we just want to be cautious. Got it. Thank you. That's all I have. The next question will come from Weston Twigg with Pacific Crest Securities. Hi. Yes, thanks for taking my question. I was wondering if you could just remind us what your memory exposure is between NAND and DRAM. And then more specifically, just wondering with the big ramp in 3 d NAND this year and next year and the potential for very high bit growth next year, why maybe you're not a little bit more bullish on the memory test market? So we're heavily concentrated in flash versus DRAM. I think on a revenue breakdown, we're probably it's eightytwenty this year toward nonvolatile. So that's the first part. 2nd part is next year could be a big year. So I mentioned it could go from $400,000,000 this year to $600,000,000 next year. That's a on a percentage basis, a pretty big jump over $15,000,000 and on a normalized $500,000,000 basis, a 20% bump. That's a rough bogey, but what would drive that? It would be a majority of cell phones adopting these high speed interfaces. In my view, the bit rate growth is certainly one thing, but we've been in a high bit rate growth environment in NAND for many, many years and that's yielded the stasis of about a $500,000,000 memory market. The interface change is the real interesting technology shift here. And that the adoption of that's the wildcard for next year. If it doesn't happen next year, it will be the year after. So it's coming. I just it's hard to call next year. Okay. That's really helpful. And then the other question I had was in wireless test. And I know you're talking about the market coming down quite a bit, but how can you be so confident that you haven't simply lost some market share? I think you said that you're fairly confident that you've continued to gain market share in wireless test. We have good relationships at the major buyers and we see who's getting what. And what really has happened this year, I mean mathematically this year, we will lose market share because our large customer where we have high market share is buying a lot less. So mathematically, this will probably be the only year we lose market share. But that's because we're in with 1 customer very tightly and all the factors that we talked about earlier, including operational efficiencies are playing out in that account in this year. Okay, got it. Thank you. The next question will come from Patrick Ho with Stifel Nicolaus. Thank you very much. Mark, in terms of the increasing capital intensity trends that you're seeing on the mobility side of semi test, I kind of understand it from the complexity of the devices and the higher test times. How do you see that, I guess, thesis or trend migrating to other devices, whether it's analog microcontrollers? Is that still some time away when they reach that kind of inflection point with complexity for them requires increase in testers? Yes, it is, frankly. The things that drive the complexity growth tends to be centered on large digital content devices and their peripheral devices. And lower lithography nodes enable that and also create this larger, let's say, process variance equation that has to be solved with this other trend I mentioned, which is more extensive trimming and optimizing the part it test for performance. So all of that gets concentrated around the lithography node migration and growth of transistor count. In analog and in MCUs, really there hasn't been as quick a migration to lower lithography nodes and more transistor counts. So it's a slower trend line there. And then maybe as a follow-up to that question, at some point, you'll reach that kind of balance once again on the mobility side where your enhanced tester performances will meet some of the complex tester capabilities. What kind of runway do you see right now in terms of this change that you are seeing where the tester buys may increase? Is this kind of a 2 to 3 year phenomenon? Or is this something that can last a little bit longer? Yes. I don't think this is an issue of the tester will catch up. It's really will the question is how long will the transistor growth continue in these devices because the transistor growth and the lower lithography note migration are the 2 key factors. So certainly over the next how far we have visibility on that at best 18 months out. We have roadmap information that suggests it could go another 3 to 4 years beyond that. But frankly, after that, nobody our customers don't have a lot of clarity there. So I would say pretty good certainty over the next couple of years, reasonable, maybe 3 to 4 and after that, we're really speculating. Great. That's really helpful. Thank you. The next question is from Stephen Chen with UBS. Good morning. This is Neil on for Stephen. My first question is about the $2 in EPS target. You said about $0.35 of this will come from semi test. Can you give us an idea of how much of this will be SoC and how much will be upside from memory? The majority is SoC test. The SoC test is a larger market. We have higher share there. So that's where we see the significant majority of it coming from. All right. And if I could have a follow-up related to future M and A. After the Google write down in the wireless segment, does this change your approach to future M and A at all? Off? As I mentioned in some of my comments a couple of years ago, we did shift our M and A focus to the A in automated tests. We saw automation as a better place for us to get new growth because there are markets such as collaborative robots where there's very broad applications and there's many different industries. So it's basically the opposite test where you had a 50% plus customer. So and we didn't see a competitive landscape at this point. It's sort of a new white space. So we are looking much more towards automation because we see automation can work next to our testers, whether it's at wireless tests, storage tests, our print circuit board, but then automation and expo tester is a small part of the automation market. So we like that factor too. All right. Thanks. The next question will come from Atif Malik with Citigroup. Hi, thanks for taking my questions. The first question, understand the concentration with the customer on the wireless test side. So even if the units are up year over year, next year and the standard is difficult to call, even if the units are up next year, you would expect the wireless test opportunity to be down next year? No, it's hard to be precise. But if you it depends our units up, who gets those units. There's a lot of factors, what's going on with test time, what can be further done with operational efficiencies. So it's less clear. But we, at this point, just want to signal that we would expect probably a flat market with this year, next year. We may be surprised. There may be upside because units are up with a new product and that would be wonderful. But at this moment, we'd just rather be cautious in terms of what we have high confidence in, in the next 24 months. Okay. And then as a follow-up, can you help us quantify the opportunity to advance packaging side, integrate fan outs, claim these new packages? If you just look at if you kind of zoom in on that opportunity, what kind of growth are you expecting this year over last year? And then what should we be thinking about the adoption of these packages year over year for next year? Yes. So there's a variety of advanced package types. But in general, that change or that shift is a relatively small component of what we see driving the business. It does inflate the tester demand for a small class of devices by maybe 10% because of complexity issues with that package as well as some efficiency of parallelism with that package. But it's still we're talking about 10% -ish of the market. So even as it proliferates into other types of devices and other manufacturers, I don't think that's going to be a key driver whether it happens quickly or slowly to our business. The main, main key driver is this complexity, growth, the reduction of the impact of parallelism and this performance tuning aspect of the devices. Okay. Operator, we'll take our next question please. Yes, sir. The next question will come from Sidney Ho with Deutsche Bank. Thanks for taking my questions. Related to the SOC test for this is for next quarter, how much conservatism do you think you have built into the guidance? Because if I look at your past 5 years, on average, your orders in the previous quarter in 2Q translates to about 100% of revenue in the following quarter. Is there something unique this quarter that is different or is there a seasonality factor that we should consider? Well, yes, the key seasonality or issue this year is that everything has been shifted by about a month. And because our revenue swings can be 2x from the trough to the peak, it has a significant impact at the quarter boundaries. So a little bit of what traditionally would have been Q3 orders and shipments moved into 2nd quarter orders and shipments this year than in the past several years. Okay, that's helpful. Going back to the LitePoint side of things, you talked about LitePoint had pro form a in the past, you talked about LitePoint had pro form a operating margin similar to corporate average, but obviously at a much lower revenue level today, margins have to be lower and probably a loss. What can you do to get your margin back to your target on a pro form a basis? Is it just growing your revenue into it or is there some OpEx reduction that's left to be done? Historically, LitePoint has had higher gross margins than the company's average. I think at LitePoint more is a software business with hardware, but heavy software content. So they have very good gross margins, always have. Where gross margins have been under pressure a little bit is cellular, but when you put the whole thing back together, the gross margins are strong at LitePoint. Where we see the opportunity to get the operating margin back to health, now by the way, the operating margin after the OpEx has been above our 15% target ever since we bought LitePoint. So historically, it's done well. So what we now need to do is look at our OpEx and make some priorities changes in terms of what programs, what technologies, what accounts, what are we going to pursue because it strategically fits our strength and what do we not do. So we've got an exercise underway to figure out how we reposition wireless test or LitePoint back to health and growth. Great. Maybe just to clarify. So in your Q3 guidance, which you imply down roughly $5,000,000 to $6,000,000 Should we expect a more step down of OpEx from the LitePoint business going forward? Or is that the right revenue of the OpEx base to drive growth from here? We will be trimming LitePoint expense going forward. When it hits the numbers, it would probably hit the numbers in the Q4, but we would look to trim those expenses so we can have a healthier business. Okay, great. Thanks so much. And operator, we have time to just sneak in one more quick one if you could, please. Yes, sir. The final question is a follow-up from C. J. Muse with Evercore. Thank you. Just a quick question. How should we be thinking about tax rate going into calendar 2017 2018? That's a good question because it's getting pretty tricky, the tax rate. We have a mix of businesses that have very different tax rates. And you can see what can happen in a year like this year where LifePoint of U. S. Business is down, Semi Test is doing quite well. Universal Robots is growing. That all pulls our rate down. So one, it's sort of a good news, bad news. Our tax rate has gone down considerably to about 13% this year. We are doing work to figure out what is it long term when you normalize the businesses. But our rate probably will be closer to 19%, 20% on a long term basis, perhaps less than what we thought earlier because we're finding more and more of our profits are offshore. And in long term, you're referring to 2017 or that's further out? I'm referring to 2017 to 2020 CJ. And 2017, I could be a little surprised if it's possible it looks like this year, but I think LitePoint will be healthier next year and that's U. S. Income. Got you. Great. Thanks so much. Okay. Thank you, everyone. This concludes today's call and we appreciate your interest in Teradyne and look forward to to you down the road. Thank you. Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.