M&A Announcement

May 13, 2015

Good morning. My name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teradyne Acquisition of Universal Robots Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Mr. Andrew Blanchard, Vice President of Investor Relations. Sir, you may begin your conference. Thank you, Zetania. Good morning, everyone, and welcome to our conference call to discuss the announcement of a definitive agreement for the acquisition of Universal Robots, also known as UR by Teradyne. I'm joined today by our Chief Executive Officer, Mark Jagiela and our Chief Financial Officer, Greg Beecher. The press release describing the transaction was issued at 7 am this morning, East Coast Time and 1 pm in Denmark. This call is simultaneously webcast at teradigm. Com and replays will be available on the site about 24 hours after the call ends. The matters that we discuss today will include forward looking statements regarding the proposed acquisition of Universal Robots, the expected timetable for completing the transaction, Teradyne's financial results and Universal Robots' future business prospects and market conditions. Such statements are made based on current assumptions and expectations of management and are neither promises nor guarantees. There can be no assurances that these forward looking statements will be achieved. Important factors that could cause actual results to differ materially from those presently expected include conditions affecting the markets in which UR operates market acceptance of UR's new products competition from larger and more established companies in UR markets the protection of UR's intellectual property, the retention of key employees, the need for regulatory approval of the transaction, Teradyne's ability to successfully grow Universal Robots' business and other events, factors and risks disclosed in filings with the SEC, including but not limited to Teradyne's Annual Report on Form 10 ks for the fiscal year ended December 31, 2014 and 10 Q for the quarter ended April 5, 2015. 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. Now on to the substance of the call. First, Mark will review the strategic merits of the acquisition and then Greg will review the financial details of the transaction. Note that this will be a 30 minute call and will only entertain questions related to the acquisition. Mark? Good morning, everyone and thank you for joining us on short notice. I'm very pleased to announce that we have signed an agreement to purchase Universal Robots, the world's leading supplier of collaborative robots based in Odense, Denmark. Today, I'm going to outline for you the strategic rationale behind the investment and describe the fit with Teradyne. Greg will then take you through more details on the numbers. Collaborative robots, sometimes referred to as cobots, are a fast growing and emerging segment of the automation market. Compared with traditional industrial robots, they are small, low cost, easy to set up and program and can safely work side by side with people in a production setting. Having universal robots as a part of Teradyne gives us 3 clear benefits. First, this is an exciting emerging market undergoing rapid expansion and should show growth for decades to come. 2nd, Universal Robots is the leader and innovator in this space. And 3rd, there's a clear application of Universal Robots products to automate manufacturing steps at our system test and LitePoint customers. Let me give you more detail on each of these points. Cobots enable an entirely new class of automation for manufacturing. These safe, simple and smart robots incorporate new technologies that make them low cost, small, dexterous, easy to program, easy to deploy and easy to redeploy. Innovative safety features allow them to work in conjunction with humans without the need for costly protection mechanisms like fencing and caging. This inherent safety combined with relatively low investment and swift time to deploy make for a fast customer return on investment and an expansive set of manufacturing applications. This market is new, developing rapidly and has been growing at about 50% annual rate to an estimated $100,000,000 this year. Universal Robots has led the way in developing collaborative robots and is the premier company in this field. They have been growing at over 50% annually and continue to widen their customer base around the globe. They are the clear leader having sold more cobots than any other supplier and have been profitable for several years while funding revenue growth of 4x from 2011 through 2014. They offer products right in the sweet spot of what manufacturing customers need to get a quick return on investment. Using a growing network of over 100 integrators worldwide, they've developed a broad set of applications in industries including automotive, food processing, machining, plastics and metallurgy, pharmaceuticals and countless more. Tasks ranging from machine tending, human scale assembly operations, packaging, polishing, quality inspection and others are enabled by UR's smart simple cobots. The key feature of UR's cobots that has enabled their rapid growth is their unique intuitive user interface. This interface allows operators with no programming experience to teach the robot manufacturing tasks. This lowers the deployment time, lowers the development cost and importantly then reduces the ongoing cost to redeploy the cobot for new tasks. This in turn has opened up the use of cobots not only to large manufacturers, but also hundreds of thousands of small to medium sized enterprises around the world. As a blue ocean, the growth prospects are exciting as UR's product innovations continue to reduce the customer payback time. Now turning to the Teradyne connection. We see the opportunity to bring Universal's cobot innovations to our electronic manufacturing customers. Initially, this will be assisting in the automation of testing at our system test and light point customers, where unlike the semiconductor world, material handling for test is still a repetitive manual process. The flexibility and adaptability of cobots allows for cost effective automation in an environment that has traditionally been hampered by the need to handle non standard form factors and frequent product changeovers. Expanding beyond test, there are many adjacent manufacturing operations at these customers that will also benefit from the Universal Robots Cobot advantage. This is one example where Caradyne's scale and global footprint will accelerate UR's growth. Finally, we've mentioned many times that we take a patient disciplined approach to M and A. We always endeavor to find the right mix of investments including capital return to shareholders to maximize growth and maximize your investment in Teradyne. Over a year ago, we set our sights on the field of automation as we saw that our LitePoint and System Test customers inefficient and manually repetitive production tasks. And after a long diligence process, we found the ideal company, Universal Robots to exploit this potential. Of course, we are making this investment while maintaining the share repurchase and dividend plans described in our recent earnings call. We look forward to welcoming Universal Robots, their employees and their customers to the Teradyne family. Let me now turn it over to Greg. Thanks, Mark. Let me highlight the key financial aspects of the Universal Robots acquisition. We reached agreement this morning to acquire UR for $285,000,000 net of their cash plus an earn out of up to $65,000,000 if certain performance targets are achieved. UR is on track to achieve 2015 revenue between $60,000,000 $65,000,000 up from about $39,000,000 in 2014. They've been profitable for several years and are expected to be immediately accretive and add an estimated $0.05 to $0.07 of non GAAP EPS in 2016. The acquisition is expected to close in the 2nd quarter subject to German regulatory approval and customary closing conditions. Universal Robots will be run as a separate business unit of Teradyne led by its very strong management team. The $65,000,000 earn out includes cumulative revenue targets that equate to over a 50% annualized growth rate, which should run to the end of 20172018. It also has a shorter term EBITDA component that runs to the end of 2015. I should add that we fully vetted Universal Robots against buying back even more stock and we're confident that UR will offer superior returns to a buyback. In addition, this is a very prudent use of our foreign trapped cash that could not be used otherwise without incurring significant additional tax. We've studied the cobot space for over a year, including the competitive landscape, the expected growth rates and the fit with Teradyne to drive revenue synergies. UR has shipped over 4,000 cobots more than all other cobot competitors combined. Their product line has been designed to be a simple platform in 3 sizes that can be universally adapted to a broad range of applications. UARS cobots not only offer superior safety and repeatability, but they truly are in a cost by themselves in ease of deployment. Their time to deploy can be measured in hours, which is critical for ever changing production mix and lines. In short, UR offers the fastest ROIs, which is why so many small and medium enterprises have adopted their cobots. We're already seeing interest from our customers to use cobots for machine tending, which is a positive early indicator of UR's strong fit at Teradyne. In closing, as you can tell, we're very excited to welcome Universal Robots into the Teradyne family. We'll provide more details on UR including the impacts to our model in our July earnings conference call. Now let me turn it back to Andy. Thanks, Greg. Operator, we're now ready to take a few calls. Our first question comes from the line of Farhan Ahmad with Credit Suisse. Thanks for taking the question. My first question is, what gives you the confidence that this is not going to be another LitePoint story where we saw very high competition and margin compression over time. And also if you could talk a little bit about the customer concentration in the UR and is it like few customers that make up a lot of the revenue? That will be very helpful. Yes. I'll start with this. This is very different than a light point, particularly with the latter point you mentioned in terms of customer concentration. There is no significant customer here. It's a very diverse set of customers across many different industries, which is very different than LitePoint where we had one customer that was more than 50% of the business. So there is no customer concentration. It's not even an industry concentration with Universal Robots. Got it. And if you could just quickly provide like how is the onshore versus offshore cash and cash generation for UR? Well, we're going to use offshore cash obviously. And after the use of this cash and all our capital return initiatives, if you roll forward to the end of the year, we're probably going to be about just under $1,000,000,000 in total cash, because obviously this will be a good year for generating cash. But we're obviously deploying cash both in capital return and with this very strategic acquisition. Got it. Thank you. That's the line. Next question? Your next question comes from the line of C. J. Muse with Evercore ISI. I guess first question is regarding margins. So curious how this business fits relative to your corporate average and whether there are any opportunities either bring manufacturing to your partner, I believe Flextronics and or other opportunities to drive improvement there? C. J, you are all fit nicely with our operating model. Their gross margins are low 50s. That's similar to what we put out for our model. We have no plans whatsoever to move any of their manufacturing. Their manufacturing is very efficient. They assemble robots in a number of hours and they have a very effective supply chain as well. So we don't see this as a cost synergy opportunity. What we see this as a revenue synergy opportunity because many of our customers are looking at this space now. And as Mark mentioned, around testers, there's a lot of manual activity that can be done with a cobot. And then once you get beyond feeding or tending a tester, there's many opportunities along the manufacturing lines at our customers. That's helpful. And I guess in terms of targeted end markets and those revenue synergies, is it more along the lines of system test and LifePoint and less in SoC? Or are there opportunities as well in SoC? And if I could sneak in the last question, are the founders of the company staying? Thank you. So the application is really around system test and LitePoint. But I would add, it's not just test. Test is the immediate application, but in the assembly lines where the products are made, there are many other assembly and handling steps that would be applicable to these products. In terms of semiconductor test, material handling in semiconductor test is a very mature, high speed operation that's geared around some very specific form factors like a wafer size or a certain package type. So there's really no applicability that we see in the semiconductor manufacturing space. It's really the electronics manufacturing space where we see the revenue synergies. And regarding the The founders will be staying on board CJ and there's a significant earn out component up to $65,000,000 There's a key founder that's staying and our CEO is staying. So the management team is fully intact and they're going to run this business and we're going to help them where we can. Excellent. Thank you. Your next question comes from the line of Mehdi Hosse with SIG. Yes. Thanks for taking my question. It's good to hear that you're tapping into the foreign cash. But I'm a little bit kind of confused with the multiple you're paying. If I just were to grow revenue at a 60%, 70% growth rate, you're still paying 5 to 6 times that revenue. And I want to hear from you the rationale or how should we think about these kind of multiples that you're paying? What's the reason behind it? And I have a follow-up. Okay. Mehdi, this is Greg. If you look at this space, they are the leader. But if you said, well, what's analogous? You might look at say a Cognex and you'd see that this multiple in 2016 will look like a Cognex type multiple and this business is growing much faster than Cognex has been very successful and is a much larger company. So we think the valuation stacks up very well against any measure you look at it whether it's comps It's hard to find comps, we accept that given the growth rate as well as discounted cash flows or what it looks like against combined back stock and so forth. So would you expect the TAM growth to remain unchanged for the next several years and the company For a number of years, we expect TAM growth to remain very healthy. I should add that the earn out targets that the management team has signed up for have revenue growth of 50% or more. And those earn outs go 2.5 years and 3.5 years. So the management team has signed up for that and that's what's happened in the past. Obviously, there'll be periods where it's the growth is going to vary. But no matter how you look at this space and we've studied for a long time, there's enormous opportunity to deploy cobots in countless applications. Got it. And then one follow-up question on the competitive landscape. What is it about the company that gives you that competitive advantage If you're not going to see competition from a lower cost region, what is it that enables the company to do so? So there's 2 things here that are important I think. From the product point of view, what Universal Robots has done if it's innovative is truly in their user interface. So the time it takes and the skill level it takes to put 1 of these robots in production is dramatically lower than any competitor. It's a very intuitive interface to train the robot to do manufacturing tasks. If you look at And you're the software driven user interface? It is a software driven user interface combined with a tactile way to teach the robot certain steps. So software combined with actually showing the product what it needs to do is how it is programmed. So that's sort of the key issue. The other thing that sets them apart because they are so far ahead in this technology, they've been able to sign up and train over 100 global distributors and integrators who take their robot arm and then apply it to specific industries and applications. So that train, that inertia is rolling and they continue to sign up annually a large number of new distributors and integrators to keep that snowball going. That's not a trivial thing to do and they are far out in the lead in that regard. Got it. Thank you. Your next question comes from the line of Jim Carbello with Goldman Sachs. Give me the chance to ask a question. First question, it seems like we're talking about $100,000,000 market or so, dollars 40 ish million in revenue. So it seems like about $40,000,000 in current revenue share. Could you give me some idea of how fragmented the market share is below where you guys are now? Yes. I think first of all, Jim, the market itself being so small and rapidly developing, there aren't a lot of independent studies around that. So $100,000,000 is our collective estimate as to the market size. I think and that's the market in 2015. So if you looked at other suppliers that even the definition of of what a cobot is, is a little bit squishy. But you'll find some of the larger traditional robotic industrial robots companies fielding products in this space, they tend to be more application specific at maybe heavy industry or in industries where taking months to install and deploy to do a specific repetitive tasks over a course of a year or 2 would also sort of be part of the space. So it's fragmented that way. The other fragmentation within the sort of $40,000,000 of revenue that Universal Robots has, as Greg mentioned, there are customers there's really no customer that rises above $1,000,000 and most of them are in the somewhat in the sort of several tens to 100 of 1,000 of dollars. It's really been targeted at the small to medium sized manufacturing enterprises around the globe in terms of the opportunity to date. And what Teradyne can do is bring some of the larger scale electronics customers to this market and develop it for the product. Very helpful perspective. Thank you. It's pretty clear that the opportunity and the accretion on a standalone basis are very interesting. Is there any way to quantify in addition to that how much incremental opportunity could be generated at LitePoint? Obviously, the wireless test business has become extremely competitive. You guys have been pretty open about that. It seems like given the level that it's at, there's not a lot of downside left in that business. There's only potential upside. But this seems to potentially give you a competitive advantage of competing in that space by being able to offer something your competitors can't. Is any way to quantify that at all? Jim, the way we're thinking about it once day 1 of the closing is around LitePoint and system test. There's many opportunities to engage with our large customers whether the contract manufacturers or otherwise to bring cobots to bear. We don't think necessarily that will directly help selling more LitePoint testers or selling more in circuit testers or hard disk drive testers. It obviously can't hurt, but we think of it more as an opportunity to accelerate UR in electronic assemblers before there's other competitors showing up over time as this market size continues to grow. Right. So sort of using your footprint in those markets to accelerate the cobot opportunity into those markets? Exactly. That makes a lot of sense. I really appreciate it. Good luck. Congratulations. Thank you. Your next question comes from the line of Jairam Nathan with Sidoti. Hi. Thanks for taking my question. I was wondering, is there a service revenue component to Universal Robots? And how big of that of an opportunity could that be as the units in operation goes higher? No. In truth, there really isn't. And just to clarify, the integrators are with the end users in so many different applications. Your head would spin if we took you through them. So the integrators might have a service revenue stream of some sort, but universal robots generally would not get service revenue. They're very much focused simply on getting the cobots deployed through many integrators and many different applications in fields. And with respect to going like longer term, is there an opportunity to kind of do a combined product or something? Or is that out of the realm? No, I think there's absolutely that opportunity. That's not the biggest opportunity, but more of an integrated combo product is something that could very well happen. But I do think that as we think about the electronics manufacturers, there'll be a whole plethora of steps along the manufacturing line that integrators working together with Teradyne will develop solutions using these cobots. And the key thing about electronic manufacturing, rather than dedicate a tester and an arm to a task or dedicate a assembly operation to an arm. What's important here is that there's always these product changeovers and there's always form factor changeovers. So being able to redeploy the robot is a real key difference here. It's not a single cast product. It's like a very easy to retrain operator in a factory who can for several weeks be doing one task and then be repurposed for another. And that kind of goes against the dedicated combo product. There will be limited market for that, but that's not the big market. Okay. Thank you for the color. And operator, we're going to have time for just one more question. Your final question comes from the line of Patrick Ho with Stifel Nicolaus. Thank you very much. In your comments, you talked about the expansion into the electronics manufacturing space with these cobots. I guess in the traditional markets that they're already in, you mentioned like automotive, food and agriculture or pharma. Which of those markets do you see continued growth in those existing markets? No, I think the exciting thing is all of those markets are at the tip of the iceberg in terms of penetration. So we see all of those markets growing and they have growth potential for quite some time. And there's still some markets that are fairly unpenetrated, electronics being one of them. That's why we were excited to see what we could bring to the party here. So I think there's a long, long way to go in terms of how these products can help in manufacturing in all kinds of industries. Customer reaction. For their existing customer base, you talked about the ease of use and the easier interface and redeployment. I guess, how does redeployment work for these customers in terms of, I guess, instead of buying new cobots, if you're redeploying does that potentially I guess hurt longer term sales if you're able to redeploy this throughout their manufacturing process? No, it doesn't hurt sales. What happens is they're more likely to buy from UR than anybody else. So they get the initial sale because there's so many changes in production mix. There's often changeover. And if you can buy a product that you know you can retrain quickly, you're going to buy it. If it takes expensive months of programming to convert it to a different application, you're probably never going to get the initial sale. So what it really does is it opens up an entirely new market. And this is what UR has done. When you think about cobots, often companies talk about robots that are safe. UR has taken it to a different place, safe as well as very easy to train and redeploy. Great. Thank you. Great. Thank you everyone for joining us today. As you can see, we're very excited about having you all join the TeraDyne team and we look forward to describing the tremendous growth opportunity CoBot's offers after the acquisition closes. Take care. Thank you. Thank you. Thank you for your participation. This concludes today's Teradyne acquisition of Funeral Virtual Robots conference call. You may now disconnect.