Earnings Call: Q1 2019

Apr 24, 2019

Good day, ladies and gentlemen, and welcome to the Teradyne Q1 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Andy Blanchard, Vice President of Corporate Communications. Sir, you may begin. Thank you, Dan. 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 CFO, Greg Beecher. Following our opening remarks, we'll provide details of our performance for 20 nineteen's Q1 with our outlook for the Q2 of 2019 as well. The press release containing our Q1 results was issued last evening. We're providing slides on the Investor page of the website that may be helpful to you in following this discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statement contained in the earnings release as well as our most recent SEC filings. Additionally, those forward looking statements are made as of today, and we take no obligation to update them as a result of developments occurring after this call. During today's call, we'll make reference to non GAAP financial measures. We'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, BofA, Bernstein, Cowen, Stifel and UBS. Now let's get on to the rest of the agenda. 1st, Mark will comment on our recent results and the market conditions as we enter the Q2. Greg will then offer more details on our quarterly results along with our guidance for the Q2. We'll then answer your questions and this call is scheduled for 1 hour. Mark? Hello everyone and thanks for joining us this morning. My prepared remarks will provide a summary of our recent results, describe current conditions in the markets we serve and provide an update on how we're looking at the full year. Greg will then take you through more details on the quarter. Our first quarter sales of $494,000,000 and non GAAP profits of $0.54 per share came in ahead of our January guidance. This was due to a few strong pockets of notable demand. First, image sensor tester sales were the highest on record as the proliferation of cameras and smartphones, automotive, industrial and security applications continues to expand rapidly. 2nd, semiconductor test capacity for devices used in 5 gs base stations and related infrastructure began to ramp. This was primarily for high performance digital infrastructure processors and represents the very early phase of what is expected to be a multiyear ramp of capacity for a variety of 5 gs technologies. And 3rd, in industrial automation, we saw the beginning of some large deployments of UR cobots at enterprise level accounts in automated assembly applications. Elsewhere in semi test, aside from our one large account, demand for mobile device testing remains high and trending ahead of 2018 levels. At our large account, we expect another downtick in demand this year, but overall in line with our annual guidance. Demand for RF test capacity for legacy standards is low, but interest in RF test capacity for next generation ultra wideband, WiFi and 5 gs standards is growing and should expand throughout the year. In analog test, after a record 2018 for our Eagle product line, shipments for the automotive, industrial and consumer markets cooled in the quarter and came in about as expected. We expanded our footprint in the high powered discrete and module tests with the acquisition of LEMSYS early in the quarter, which strengthens our position in the electrification trends of vehicles, solar, wind and industrial applications. In the memory test side of the market, our sales were strong and level with the Q4 at $48,000,000 Demand was well distributed across flash package test and flash and DRAM wafer test and we expect a slight uptick in Q2 driven by high speed protocol test of flash devices. In wireless test at LitePoint, sales were down sequentially, but up 29% compared with Q1 of 2018 as we're seeing early step ups in buying for ultra wideband, WiFi 6 and 5 gs. In system test, sales were up both sequentially and year on year. The sequential increase was due primarily to growth in our hard disk drive test demand as test times for high capacity drives continue to expand with density. In industrial automation, sales grew 35% from Q1 2018 driven by both UR robot growth of 16% in the quarter and the addition of MiR and Energid. Three points are noteworthy of these results. 1st, as noted earlier, we are beginning to see a mix of larger deployments of UR cobots. As we described in past calls, we've been increasing our sales investment at enterprise level accounts and it's encouraging to see early results of this investment paying off. Following a 6 to 9 month period of evaluation, 2 of these large customers are now moving forward with deployments at a rate of dozens per month that should extend through the rest of the year. 1 of these customers is concentrated in China and the other is geographically distributed. 2nd, the arsenal of certified products in our UR plus program continues to grow and uniquely reduces the applications development time. We began the UR plus program in 2016 and by the end of 2017 had about 60 solutions available. 1 year later, it was over 130 solutions and by the end of this year, we expect over 200. These products range from cameras to grippers to welders and screwdrivers and much more. A key part of our strategy is to push the competitive boundaries on price and hardware performance. Our UR plus playbook is very clear, provide a software and hardware platform to allow the development of a broad range of peripherals that are easy to deploy, reliable and have a short ROI. In doing so, we are able to leverage talent of over 400 Global UR plus partners to address more of the market than we could alone. This provides our customers with a range of solutions that gives them the flexibility to meet their immediate requirements and have the flexibility to redeploy our cobots to handle other tasks they may encounter. This is a significant distinction between UR and other emerging cobot competitors large and small. 3rd, a year ago, MiR joined Teradyne and we're delighted with the results. After growing 163% last year, we are planning to about double again this year. Earlier this month, we introduced 2 significant new products to fuel this growth. One is a 1,000 kilogram payload pallet ready mobile robot and the other is an AI enabled camera that feeds into our fleet management software to provide better navigation. Think of it as a Waze type augmented information system for mobile cobots where cameras monitor congestion points in a factory and use machine learning to classify and inform our fleet wide navigation engine. This advanced warning system provides for increased navigation efficiency and safety. Shifting to our outlook. The market conditions we're seeing in both our Test and IA businesses are essentially unchanged from what we saw at the start of the year. In Semi Test, our full year outlook for the SOC market remains in the $2,300,000,000 to $2,700,000,000 range, down about 17% from the midpoint of last year. In memory, given the well reported slowdown across the market, we are reducing our full year market estimate by about $50,000,000 to $600,000,000 to $700,000,000 down about 30% at the midpoint from 2018. Offsetting this, we expect LitePoint in our system test markets to be up about 10% from last year based on early stage adoption of new wireless standards and a continuation of system test trends seen in Q1. In industrial automation, we continue to see some of the same headwinds that began to emerge last summer in China and in the automotive supply chain in general. Balancing those headwinds is an internal data showing accelerating monthly growth in IA shipments through March. For the full year, we're keeping our IA growth projection at the 35% to 40% and the longer term rate at 30% to 40%. Summing things up, in test, the demand drivers of unit growth and device complexity remain in place across all of our test markets. For example, we're beginning to see 5 gs related test demand in both semi test and at LitePoint. Recall when 5 gs millimeter wave is adopted in mainstream handsets, we expect the test related test buying to represent about $300,000,000 to $400,000,000 of the semi test TAM and about We will be ramping to those levels over the next 3 years or so as deployments of 5 gs rollout globally. So despite year to year volatility, we remain very optimistic about the systemic sector growth in test. In IA, we've got a great product lineup that's well aligned to global demographic, quality and economic trends, which we expect to drive high growth for years to come. Our next generation intelligent automation capabilities are reshaping the nature of industrial activity worldwide. We are investing in these software rich technology driven building blocks of the future because we believe we are very early in the transition from centralized, complex and costly automation usable by only a small percentage of global manufacturers toward a distributed easy to implement low cost automation that's available to nearly all industrial companies regardless of their size or automation proficiency. In closing, I'll note that as previously announced Sanjay Mehta will join Teradyne as our next CFO effective tomorrow. Sanjay brings a wealth of experience in finance, the semiconductor industry and China operations to Teradyne. At the same time, Greg has served 18 years as Teradyne's CFO and has been instrumental to our evolution as a company. This will be Greg's last earnings call, so I'll turn it over to him for details and final thoughts. Thanks, Mark, and good morning, everyone. I'll provide some key highlights, cover UR's market advantage and longer term outlook, then I'll move to the Q1 results and Q2 outlook. First though, our first quarter sales of 4 $94,000,000 and non GAAP EPS of $0.54 came in slightly above the top end of our guidance and EPS was 20% above our year ago start. The EPS year over year improvement was principally due to favorable product mix and share buybacks, offset somewhat by higher industrial automation OpEx, including having MiR and Energid in our 2019 Q1 results. Our Q2 guidance for sales of $520,000,000 to $550,000,000 with non GAAP EPS of $0.56 to $0.65 shows sequential 8% revenue and 12% non GAAP EPS growth at the midpoint. That has us tracking to similar first half sales with non GAAP EPS up about 10% compared with a year ago. While there are pockets of Semi Test buying in support of 5 gs infrastructure and image sensor for handsets and security as Mark noted, annual semiconductor units are forecasted to be well under the 10% plus growth rate of the prior 2 years. So we're conservatively planning for a flat to slightly softer second half in semi test, albeit with considerable uncertainty. 2nd half growth in Industrial Automation should fill the gap so that the first and second halves should be pretty symmetrical from a revenue and EPS perspective. Semi test volatility has been the norm for many years, so we long ago structured our operations for these swings in demand. For example, in the current decade, our non GAAP operating profit rate has averaged 23% over the last 9 years and swung from a high of 28% in 2010 to a low of 18% in 2013. In the last 3 years with industrial automation in the fold, we've averaged a 24% non GAAP operating profit rate and $420,000,000 in annual free cash flow. As a result, we don't need to spend resources on judging where we are in a particular cycle, rather we keep our focus on our midterm growth plan. As outlined last quarter, we set our sights on reaching $3.50 to $4 in EPS by 2022, which requires test sales growth of 3% to 5% off of 2018 and industrial automation growth of 30% to 40% off 2018. We're confident in both of these assumptions and are executing our plans accordingly despite the bumpy ride. Turning to the Industrial Automation highlights. We had 1st quarter sales of $66,000,000 or 35% growth over the Q1 of a year ago, but down sequentially due to normal seasonality as distributors often buy a bit more in the 4th quarter to max out on available discounts. This typically does not affect 2nd quarter sales buying as 4th quarter buying is burned off by mid first quarter. So although there were cyclical headwinds across global industrial markets, we see strong sector growth looking ahead. Universal Robots had a 60% gross margin this quarter, up from 51% in 2015, principally due to synergies from Tardan, which I'll touch on later. At UR, we continue to see very high interest from SMEs for existing applications such as machine tending and packaging, but we're also encouraged by the large order sizes that Mark noted. This wave of demand is driven by high operator turnover rates along with ongoing pressure on labor costs. Another way that we expect is bin picking, which has been referred to as the Holy Grail for manufacturers. Later this year, we plan to release a bin picking solution that combines UR's easy to train model with Energet's path planning and motion control software allowing for precise part placement after the PIK. More on this in future calls. Turning now to MIRROR, which continues to be a standout performer After the very successful launch of the MiR 500 last year, MiR has just delivered an encore with its new MiR 1,000 kilo product introduced this month. These 2 heavier payload products can do much of the transport work of a traditional forklift, but more safely and at a lower cost. They self navigate and learn their environment, can be called or dispatched from a smartphone, tablet or fully automated through an ERP system. And they work seamlessly with their sister AMRs in a fleet. MIRROR is targeting about $60,000,000 of sales in 2019, up from $31,000,000 for the full standalone year in 2018. Mark noted the key highlights of tests, so I'll note a few things that may help you in your full year modeling. In semi test, 2019 will likely be a year of digestion with sales declining 5% to 10%. Highlighting the strength of our operating model, we expect to still deliver 20% plus operating margins. For the other test businesses at LitePoint and System Test combined, we expect annual revenue to grow 10% or more with profit growth of 20% plus from last year. Before I get to the financial details of the quarter, let me address some frequently asked questions on the cobot market size and Universal Robots market advantage. First, UR has just scratched the surface of the opportunity for cobots. We believe the industry has cumulatively sold about 60,000 cobots to date against an estimated opportunity of a few million given today's cobot capabilities. New capabilities like bin picking expand the market by 50% or more and there's a nice pipeline of new solutions planned that will continue to drive the TAM higher in the years ahead. So the next question is why isn't it easy for competitors to gain traction in this growing market too? First, as you might expect, the traditional robot companies seem to be focused on their large installed base customers who value compatibility with their high payload complex robots. It's a very big challenge to leverage their platforms designed for automation experts into an easy to use or flexible cobot designed for shop floor level skill sets. UR on the other hand encapsulates that complexity and designs our cobots specifically for easy training and flexibility. That's a hard thing to do. Further, traditional robot companies distribution doesn't easily reach to SMEs and does not include an open ecosystem, which for us attracts many third party developers and new applications. New entrants or cobot startups face some of the same design challenges in getting the product right and safety, repeatability, ease of use as well as building effective global distribution and partner ecosystem networks to meet the broad scope of customer applications. We're not confused that a potential market this big will attract competition though. There are dozens of competitors today and more will likely enter. And their capabilities will improve over time. The point is today they're not there yet, yet the path to commercial success in industrial markets is a difficult one and significantly we're not standing still. So in line with the strategy Mark described, our UR focus remains on expanding our competitive modes and product flexibility, distribution to SMEs and large accounts and attracting even more third party developers to our open platform. There will no doubt be waves of adoption over the next several years, including large companies deploying automation beyond individual plant manager investments as workforce demographics, quality requirements and cost pressures will be relentless forces driving more widespread cobot deployment. Regarding margins, our pricing remains very attractive for our customer ROI calculations even against lower price competitors. Safety, repeatability, accuracy and reliability required to support industrial operations 20 fourseven remains a major competitive mode, especially for the newer entrants. We also have significant cost advantages from volume buying and innovative production techniques. For example, since we acquired UR in 2015, we've taken down the build time from 10 days to a day and a half. This includes using our cobots in numerous assembly and calibration tasks. These production advantages and material cost savings have brought our UR gross margins up to 60%, about 9 points higher than when we acquired UR in 2015. An additional benefit of the shorter manufacturing cycle time is its significant production space freed up allowing us to operate with our current footprint through 2023. We also continue to build competitive moats with new software features, developing a vibrant ecosystem of UR plus accessories, advancing our distribution excellent with SMEs and large accounts and application breadth and expertise. Now moving to the details of the Q1. Our sales were $494,000,000 the non GAAP operating profit rate was 22% and non GAAP EPS was $0.54 We had no 10% customer in the quarter and gross margins were 58%. You'll see our non GAAP operating expenses were 179,000,000 dollars up $4,000,000 from the 4th quarter, but less than the forecast primarily due to push outs of semi test NRE expenses. Comparing our Q1 OpEx of $179,000,000 versus the year ago period, it's up by $14,000,000 primarily due to the addition of MiR and further distribution and product development investments at UR. Semi Test sales were $341,000,000 in the first quarter with SoC making up $293,000,000 and memory test sales of $48,000,000 in the quarter. Semi test service revenue totaled $78,000,000 in the quarter. In Industrial Automation, sales were $66,000,000 a new first quarter record. Regionally, IA's first quarter sales broke down 44% in Europe, 28% North America, 23% in Asia and 5% Rest of World. System test sales were $58,000,000 and wireless test sales were $29,000,000 in the Q1. Let me move to a few GAAP items. First, we had a tax benefit of $15,000,000 in the quarter due to a $26,000,000 release tax reserves based upon the successful completion of an IRS examination. We also adopted the new lease accounting standard, which added $51,000,000 to our assets and a similar amount to our liabilities. This applies to operating leases greater than a year, which were previously disclosed in our footnotes. Regarding capital allocation, our balanced approach for 2019 includes $500,000,000 targeted for buybacks, about $63,000,000 for dividends and of course maintaining dry powder for selective industrial automation M and A. Cash and marketable securities declined in the quarter by $208,000,000 to $997,000,000 driven by that balanced capital allocation strategy, which included $156,000,000 of share repurchases, $35,000,000 for earn out payments tied to Universal Robots and MiR and $60,000,000 of dividend payments. Turning now to the guidance for the 2nd quarter. Sales are expected to be between $520,000,000 $550,000,000 and the non GAAP EPS range is $0.56 to $0.65 on 173,000,000 diluted shares. Q2 guidance excludes the amortization of acquired intangibles and the non cash convertible debt interest. The 2nd quarter gross margin should run at 58%, about flat with the Q1 and total OpEx should run from 34% to 36%. The operating profit rate at the midpoint of our 2nd quarter guidance is about 23%. Let me quickly cover OpEx plans for 2019, which are essentially unchanged from our January call. We expect full year test business OpEx spending to be about flat year over year apart from normal variable compensation changes. In industrial automation, we expect to grow quarterly OpEx to the mid to high 40s towards the end of the year, up from about $33,000,000 in the Q4 of 2018. Notwithstanding our planned industrial automation investments, we expect this segment to achieve mid teens operating profit rates for the full year. Shifting to taxes, our full year tax rate is expected to be about 16%, unchanged from our January estimate. So now for my parting remarks. After 75 mostly enjoyable conference calls, I can safely say that Teradyne is the strongest it's been in my tenure. Teradyne has test businesses expected to grow 3% to 5% annually on a trend line with strong gross and operating margins and the leading cobot arm and autonomous mobile robot platforms, which we expect to grow at a 30% to 40% rate annually through 2022. Teradyne generates significant free cash flow, has a strong balance sheet and has the capacity and capability to successfully make more industrial automation chess moves. Teradata will no doubt continue to be admired as both a leader in test equipment and one of the few companies who has successfully added a new growth platform with next generation automation. With that, I'll turn the call back to Andy and shortly the rings over to Sanjay. Thanks, Greg. Daniel, we'd now like to take some questions. Thank Our first question comes from Mehdi Hosseini with SIG. Your line is now open. Yes, thanks for taking my question. First one has to do with the 5 gs. Mark, can you help us understand whether the specific opportunities like market segment, you referenced base station, but I want to better understand a specific content exposure that you have there and I have a follow-up. Sure. So as you can imagine right now infrastructure is starting to roll out for 5 gs and 5 gs is a collection of technology, some of it sub-six gs, some of it's millimeter wave. But predominantly at the moment, it's China deployment of sub-six gs infrastructure base stations. And inside those base stations typically there is a digital rich network processing chips that B test and that's been predominantly what's driving this year's strong growth in that segment for semi test. In conjunction with that, in the 5 gs world, there's going to be more small cells, more small base stations. So there's also infrastructure around the RF content on the towers. That drives a little bit of RF demand as well. But the big, big segment that really propels both semi test and LitePoint is when handsets and mainstream handsets adopt 5 gs millimeter wave. That's still a couple of years away. But what I referred to earlier today is more of this infrastructure. Got it. And one follow-up for Greg and we surely miss you in the next conference calls and please feel free to join us if you have a spare time. But the days of inventory is almost a near 2 year high. Can you help us understand what's driving this? It's been going up on a sequential basis for almost 8 quarters. Was it inventory you said, Mehdi? Days of inventory. Oh, days of inventory. Okay. We are investing more inventory in our industrial automation businesses, giving the high growth. That inventory is on our balance sheet. In many of our other businesses, the inventory is off the balance sheet because it's a ship from our contract manufacturer, so you don't see it. So I would expect that inventory would probably continue to increase a bit over time as those businesses grow and it remains on our balance sheet. Could this be an overhang or impact your future free cash flows? No, I don't think so. No, I think if anything, it helps our future free cash flows because it will be a source of cash when we liquidate it. But we do need to have inventory for these short cycle times, industrial automation customers, the model has been 4 days, 3 days, 5 days. So we ship very quickly, and we expect the demand to increase 2nd and third quarter quite considerably. So is there a target of days of inventory that we could use to better model cash from operation and free cash flows? We could try to do that offline. The tricky thing is there's different businesses who have inventory in the balance sheet and others don't. And sometimes new products are on our balance sheet and other times they're not. So it's a hodgepodge. We tend to look at inventory on and off the balance sheet. Now you can't see that. You're only looking at inventory on the balance sheet. So you kind of have part of the puzzle. But maybe offline, Andy and I can try to do that with you. Got you. Thank you and best of luck again. Thank you. Thank you. And our next question comes from Vivek Arya with Bank of America Merrill Lynch. Your line is now open. Thanks for taking my question and good luck to Greg on his next adventure. First question on UR or actually on IA overall. For it to grow 35% to 40% this year implies a very steep ramp in the back half. I'm estimating over 50% half over half ramp versus being what's been more like 20 5% to 30% growth in the second versus first half. So I'm curious how's your visibility into that second half? What are the risks and opportunities to hit your target growth this year? Okay. I think we outlined some of this last quarter that we do expect MiR to grow at about 100 percent. So that obviously gives MiR is much smaller than universal robots, but that gives us a lift. And for us to hit the 35% to 40 percent higher end of that 30%, 40% range we outlined, U. P. S. Robots, we're looking at growing around 28%. So nothing's really changed there. So the things that we are focused on is we see we could be at the early stages of some larger enterprises doing deployment that would affect both near and universal robots. We see there's demographic trends in our favor. We see there's a new product, MiR1000. So there's a number of items that we think will help us as the year unfolds. But we think the target we have is very credible and we're often racing. Got it. Thanks. And as a follow-up on 5 gs, what specifically about 5 gs creates the demand for additional testers? Like if you look at the 4 gs transition, was that ramp like? And let's assume next year only 5% of the smartphone market transitions to 5 gs. What does that imply? Just conceptually, I know it's early to guide next year, but what does that imply conceptually for the benefit to you from a test perspective? Okay. So we've said that 5 gs when it's fully up and deploying globally, which is probably around 2021 or 2022 will add somewhere around $400,000,000 to $500,000,000 of buying to the market our markets, test markets. Teradyne's roughly 50% share in those segments, let's say. So we would expect when it's up and peaking, that's the benefit we would see. But this penetration of the cell phones of millimeter wave is the key, the largest single portion of that $400,000,000 to $500,000,000 bump. That's not likely to start to be meaningful until 2021 beyond. So next year's 5 gs millimeter wave handset test, additional revenue is handful tens of 1,000,000 of dollars of impact probably out of that total. Got it. Thank you. Thank you. And our next question comes from Brian Chin with Stifel. Your line is now open. Hi, good morning. Thanks for letting us ask a few questions. And of course, best wishes to you, Greg. Thanks very much. Sure. First, just to confirm, did you say monthly UR sales in China has been picking up through March? And also should Q1 represent the trough then in terms of year over year growth momentum for UR? When do you expect larger cobot deployments to really hit their stride in terms of shipments? And what does your current pipeline look like in terms of these larger scale enterprises? And sorry for all the questions bunched up. Okay. Let me give you a few data points on that. So we coming into 2019, we expected that Q1's growth would be about where it turned out for UR, 16% or so. We saw throughout the quarter January, February, March, the month over month growth rate compared to 2018 accelerate, started at about 4% and ended March at about 20%. That's globally. One piece of encouraging news is that China has returned to growth in that mix. The second half of last year, China was pretty flat. But as I mentioned, one of these large enterprise deployments started late in the quarter in Q1 in China. We expect that to run through the rest of the year. And there's other larger enterprise businesses in the mix in China that we expect to also mature. So it's the conviction is sort of based around the plan we had. We're kind of on the plan and the trend lines we see in China. If there's anything that's still, I would say somewhat soft, it's automotive related cobot deployments. The global automotive market is down a bit and we ship probably somewhere, I would say somewhere in the automotive supply chain 30 some percent of our cobot sales are somehow related to automotive. So that has been been impacted us in U. S. And Europe and in China a bit, but we expect that to slowly unwind as we get toward the back half of the year as well. Okay. Thanks. That's really helpful. Maybe second switching over to semis. In the past as you have in the past, I was wondering if you could take a stab maybe at the expected distribution of semi test revenue first half versus second half, understanding that individual test markets are likely to vary quite a bit? Yes. I think as Greg said in his remarks, the semi test itself in the second half will probably be similar to where it was in the first, perhaps down a bit. But our system test business on the other hand and LitePoint business has been growing. So if you look at test in the aggregate, the second half of the year is probably a wash, maybe slightly up, could be slightly up at the first half. But as always, these test markets have been especially semi test, very volatile and difficult to predict. We do not focus a lot of our marketing energy on trying to predict quarterly or even annual market sizes because it doesn't affect our operational strategy. So it's more less a science and more judgment at this point. I think the key thing is the semi test decline, which might be $50,000,000 or $60,000,000 or some number like that, we think would be offset with industrial automation growth. That was what I was trying to say in my prepared remarks. The first half, second half will look similar. Okay. Next question, please. Thank you. Our next question comes from Toshiya Hari with Goldman Sachs. Your line is now open. Hey, good morning and thanks for taking the question. Mark, you guys maintained your 2019 SoC TAM number, dollars 2,500,000,000 at the midpoint. I just wanted to confirm what the puts and takes were within. I think you called out image sensors and 5 gs infrastructure on the positive side. It sounded like mobility or mobile hasn't changed all that much since 3 months ago and then maybe analog a little bit weaker. So if you can talk about the pluses and minuses there, that will be helpful. And then related to that, can you remind us why you expect your business to be down about 10 percentage points less than the market? Thank you. Yes. So again, things in the semi test SOC market really haven't changed much. I would say that on the mobility side, it strengthened a bit. A lot of that benefit is coming to Teradyne, fortunately. So that's one reason why the declines we expect in the market were a bit performing a bit better than that. The automotive market in particular, I would say if there's a pocket that's softened more than we might have thought at the beginning of the year, it would be automotive. But that's been offset as you mentioned by things like image sensor and 5 gs infrastructure. The other thing about 2018 compared to 2019, the market size, there was we in the last conference call described some one off events that occurred in 2018 that sort of drove the market to an unsustainable high. There were some large semiconductor companies that shifted from foundry A to foundry B that required a one time retooling of test capacity at foundry B that doesn't it's not an annuity that then continues on next year. Turns out that wasn't that segment that shifted wasn't a place we had a high concentration in. So that change affects our competitor more than us. Got it. And then as a quick follow-up on the UR side of the business. I mean, it was encouraging to learn about some of the growth you're seeing from the large enterprises. But the 2 customers you mentioned, Mark, specifically, what sort of applications are the cobots used for at those two customers? And I guess the implications for profitability for UR as demand from large enterprises continue to grow. Is it dilutive to gross margins? Is it pretty much the same? Any color there would be helpful. Thank you. This is Greg. I'll take that. The profitability should be the same with these large customers. And in terms of these are both lighting companies, which is an interesting vertical. And there's 4 different applications that our cobots will be doing. And there are standard applications we do at other locations. And they're having these companies are having difficulty with turnover as well as rising labor costs. So they've strategically made the decision that they need to automate to have a better cost structure and responsiveness. And one thing we have talked about over a period of time is that there's ways of adoption that will not be smooth. So it's encouraging. We're starting to see some very early signs of some large enterprise deployments. So this is something we had a keen eye towards. The other thing we've talked about is bin picking, which we expect to have some deployments later this year that may be more of a volume next year story too. So there are some waves from some of these new adoptions in addition to more ecosystem accessories into new verticals as well. Thanks, Greg. Good luck. Thank you. Thank you. Our next question comes from Jonathon Pitzer with Credit Suisse. Your line is now open. Hi. This is Ada calling in for Jon. Thanks for taking my question. You saw excellent gross margins in the quarter despite it being a lower revenue quarter. Can you maybe go over some of the puts and takes around gross margin through the remainder of the year? Our gross margins over the last several years, as you might have noticed, have moved up 2, 3 points. We've done a very good job overall in our supply line group, with material costs down and getting, second sources where necessary. So that effort continues. And then with customers, they're getting advantages through the architectural advantages versus lowering the price of a product. So I think the last year or 2, we've done much better across the company in creating and capturing value at the gross margin line. So I think gross margins are going to operate at this higher level. Last year, we were at about 58%. This year, we'll probably be at 58% this year as well. Great. Thank you so much. And can you maybe just provide some additional color on the trends you're seeing in automotive and industrial on the test side of the business? Yes. So I think that for trends, obviously, the aggregate volume of test capacity is down this year. In terms of what's going on in looking forward, there's a lot of activity around chip design for more autonomous driving and the electrification of vehicles. And so there's a lot of activity around new instrumentation and new test methodologies for these emerging technologies. And that extends all the way up into the sort of heavier power electronic side of the automobile. So IGBT, silicon carbide, those kind of technologies are also coming online. So there's a lot of design activity, a lot of design and activity, but the aggregate volumes down. And with many of the major automotive manufacturers planning to produce EV vehicles starting with next year's model year. There'll be quite a few introductions. We expect the automotive market for test will return to growth next year. Okay. Thank you so much. Thank you. Our next question comes from C. J. Muse with Your line is now open. J. Muse:] Yes, good morning. And let me echo the thoughts, Greg. Congrats on all your time at Teradyne and I wish you the best of luck as you move on to a professional ping pong player. I think that's a great move for you. Thank you, C. J. J. Rice:] You're welcome. First question on OpEx, implied midpoint of the guide is roughly $187,000,000 yet I believe you guided for full year OpEx flat. So trying to understand how we should model OpEx off of that elevated Q2 level into the second half of the year? Got it, CJ. What we've said and maybe it wasn't clear enough is that test will be flat other than the test OpEx can move around based upon variable compensation changes. If it's a high sales or high profit year, there's more OpEx. But what drives our OpEx up is in industrial automation, we continue to invest in those high growth businesses. We talked about getting OpEx up to the mid to upper 40s by the end of the year. So that is where the OpEx growth will be in 2019. Now in any one quarter, I should add, sometimes you can also have an NRE from Semi Test that can increase it, but then it goes away the next quarter. But stepping back, it's similar to last year. Our growth is industrial automation and test is flat other than variable comp. So just to follow-up on that. So despite implied top line guide of I think flat to down 2% based on your first half, second half commentary year over year, you're assuming variable comp will move higher because that's associated with IA? No, variable comp for the year will be lower, but we are investing in industrial automation, but MiR and Universal Robots and Energid and this bin picking solution. So there is more OpEx going into those three businesses and that is the increase that we're going to have this year and it was similar to the increase we had last year and the year if you go further back, which is Universal Robots. I would say for about 5 years in a row now, give or take a handful of 1,000,000, test OpEx has been flat, but it's moved around with variable comp. But we've been growing industrial automation. So that's the story and we're very disciplined in test and we have the infrastructure that can scale. We generally don't need to add new locations or new engineering projects, generally speaking. Excellent. And I guess as my follow-up, on the UR side, it's a business that grew 14% year over year and I think you said growing 28% for the full year. Can you kind of walk through what rank order the key drivers of that uplift would be? Is it bin picking? Is it enterprise scale business? Other? How should we think about the moving parts that get that run rate up exiting the year? Okay. Well, UR grew on the quarter basis, Q1 over Q1 grew about 16%, but why will it grow more going forward? Let me try to explain that. 1st, some of the cyclical headwinds we don't think persist indefinitely that we're seeing in auto, for example. 2, we see larger enterprises. This is a wave we talked about many times at some point larger enterprises will be forced to adopt cobots versus individual plant managers making small purchases. So we're starting to see a handful of accounts doing enterprise purchases and those orders will start shipping later in the year, they haven't shipped yet. Bin picking will start shipping later in the year, will be a bigger driver next year. Demographics is a big issue around the world. There aren't enough workers, inflation, quality, that's also driving it. And then we have this ecosystem that keeps on finding new verticals to use an arm to solve a problem. Now we can't forecast all those, but we see each quarter there's new applications coming from our ecosystem developers. Very helpful. Thank you. Thank you. And our next question comes from Krish Sankar with Cowen and Company. Your line is now open. Yes. Hi. Thanks for taking my question. I had 2 of them. First one is on the LitePoint side. Would you say that Wi Fi 6, the protocol change from Wi Fi 5 to Wi Fi 6 is a bigger opportunity than 5 gs for LitePoint or is it vice versa? And along the same path, there are already 3 well entrenched competitors on the 5 gs side. So do you think there's still room for a 4th player like LightPoint to get in and gain some share in 5 gs? Then I had a follow-up. Okay. Good questions. So first of all, WiFi 6 is a modest test intensity evolution of the WiFi standard. 5 gs, especially 5 gs millimeter wave is dramatically more test intensive. So 5 gs will by far be more impactful to LitePoint than WiFi 6. WiFi 6 is beginning to happen now, so it will be sooner. But the big payoff is still 5 gs. And then with respect to the competitive environment, it's been the case there's been 4 principal competitors in this market for a decade. LitePoint's true value proposition is production test, efficient, focused production test equipment, not R and D. The other providers tend to focus more on R and D and then try to fit their products into the production environment. So I do think that same differentiation that LitePoint had that's given them a 70% share of Wi Fi test, they're now poised to increase their market penetration in cellular test in the 5 gs era. And it will be through that same mechanism, whereas the lab equipment that's out there today for development is coming from the other principal providers. As we get close to production, all the major chipset companies in the 5 gs space have adopted LitePoint as one of their potential and qualified production rollout providers. Again, when does that happen? Probably it's 2021 is the main stream, 5 gs millimeter wave penetration in the handsets. Got it. Got it. Thanks, Mark. That's very helpful. And then as a follow-up on the automation side, these enterprise customer wins you got on cobots, are they typically sole sourced? In other words, now that you won them, is this a good like locked and loaded business for you for the next few years? And also, is there any cross selling opportunity at the enterprise between MIR and Cobots? And also congrats to Greg on a great career at Teradyne. Thank you. Okay. I'll take that one. Thank you very much. We believe we will be the sole source for a number of years or at least for this round of deployment and we expect to stay in there thereafter because it's more of an enterprise deployment. And in one of these situations, they did look at a lower cost indigenous company and concluded they were not reliable enough. But obviously we have to deliver and perform, but that looks good on these key wins. What was the E6 Cross selling between the U. S. There's a little bit more of that being discussed. I think in the future, you might see trade shows where they might periodically be in the same trade shows. You might see an arm on a mobile robot a bit more. So there are some opportunities. But at the moment, we don't want to combine the businesses in any formal way. MiR is operating with an earn out, so we don't want to do anything that could disrupt that earn out and keep their focus away from achieving the maximum sales. So I think longer term, there might be greater opportunities in that regard. And I just want to add one comment, a general comment about the cobot market. I think people there's been a perception that the hardware around cobots as a commodity and the differentiation over time is going to be software centric. But in fact, what we're seeing today is that building a reliable industrial 20 fourseven cobot to work in a high mix torque moving mass around environment is very difficult. In fact, companies are failing because of the hardware. We've talked in the past about rethink having an issue there, but some of our competitors have been binned out of these larger deployments because they have shown reliability problems after a couple of months of stress test. So that it turns out reliable hardware is a still a significant differentiation for UR and for the foreseeable future, we see that will be equally important in these large deployments as compared to some of the other benefits we've talked more about like UR Plus and the ease of use. Yes. Thanks Mark. Thanks Greg. Thank you. And our next question comes from Sidney Ho with Deutsche Bank. Your line is now open. Thanks. I'll ask my congratulations to your retirement, Greg, and you'll be missed. Thank you, Sidney. Yes. So my first question is on the wireless. You talked about expecting a downtick from your largest customer. Historically, is there still time for an upside surprise if they were to meet the same product launch window in September? And kind of related to that, would that customer no longer buying modems from Intel and now working with other suppliers, will that be a net positive for you in the long term? And do you expect that a one time benefit because of that change in supplier? So at this point in the year, there could be a little bit of upside, but it's not likely. I think that's the case on that subject. The advertised shift in buying dynamics in recent weeks is certainly potentially a benefit. We do not certain pockets or certain suppliers, we've not had a historical position at in terms of test, but the way the winds are starting to blow now that should accrue as an incremental benefit to Teradyne. Okay. That's helpful. Maybe moving on to storage test, other than part that's related to longer test times that you guys alluded to, are you starting to see some unit demand recovery in that area as well? And if I recall correctly, about a year and a year and a half ago, this business had a quarter that revenue doubled quarter over quarter. Can you remind us what that was related to? And is that something that will repeat in the future? Sydney, the business has been lumpy. There are 2 customers. We do cloud 3.5 inches magnetic and we do a system level test for a semiconductor company. So one or the other typically is buying and they buy in lumps and consolidated purchases and that can move us way up or below the $65,000,000 a year revenue model that we said we established to hit model profit. More recently, the business looks much stronger. The hard disk drive customers coming back, buying in reasonable volumes. And then there's opportunities for the other customer as well. So I think for the next year or 2, that business looks like it has tailwinds. Okay, great. Let me if I can squeeze in one, how much do you expect the Lemsys acquisition to a semi test revenue in Q2? Yes. Lemsys is a small revenue company at this point. There's more of a longer term play here. So revenues for the year, last year LEMSYS revenues were below $10,000,000 So it's a smaller company, but there's a longer term upside. All right. Thank you. Thank you. Our next question comes from Timothy Arcuri with UBS. Your line is now open. Well, Greg, I recall you were when you were named as CFO. So I guess that makes us both pretty old, but I just wanted to say that you've done a great job. So first thing. Thank you very much, Tim. Great. And then I wanted to ask you about industrial automation. How much of the revenue today is in China in aggregate? And how much do you think will be in China, say like a year from now? We're looking that up. It's historically been just over 10%. But long term, we expect it to be an increasing percentage of universal robot sales long term. I think last year, maybe 12% or something like that. Yes, it was just under 15% last year, 12%, 13%, yes. So 12% to 13%, but long term, it could certainly be 20%. Okay. And then with respect to no one's really asked about your largest customer on the semi test side. And there's a big obviously, there are big probably the biggest factor in your outlook as you look into next year. So now the time has gone on a bit, have you had any more information that would lead you to conclude whether there's something structural that's going on there or whether it's just cyclical and that once all that test capacity is basically digested this year and if units are a bit better next year that you could see a snap back in that business back to where it used to be? Thanks. Yes. I think there's so many moving parts in that area that it's very hard to forecast. I would expect that as the phones start to move into the 5 gs world, that's going to be a balloon. But there's other offsetting issues around unit volumes and other things that are hard for us to predict. I do think utilization is very high. New features are in the pipeline beyond 5 gs and that this year I would expect should be a minimum that we get to. But in terms of any kind of quantification going forward, we're really not in a position yet to know. Okay, thanks. Okay. And operator, we have time to squeeze in just one more, please. Thank you. And our final question comes from Richard Eastman with Baird. Your line is now open. Yes. Thank you. And congrats again to Greg, great career at Teradyne. Thank you very much. Just my first question is just around there's a commentary in the press release and I think it was Greg you referenced it as well. But you talked about the favorable mix and the lower operating expense. And I'm curious the favorable mix doesn't really show up in the gross margin. I mean, I think you had guided towards a 58% gross margin for the quarter. Is what is the mix there, benefits that you referenced? Does it show up in the operating expense? No. The mix, I think in my comments was comparing Q1 of last year with Q1 of this year. Okay. Not to the guide. Okay. Correct. So I think that's where we got off base with you. And the improvement year over year is about 3 points. Okay. And then just around UR, just a couple of things in here. 1, at the revenue run rate that it delivered in the Q1, what was the op profit margin in the Q1 for UR or just IA in general? And then also around bin picking the application that you're speaking to later this year and into next year, is that bin picking application in kind of targeted at the industrial SME market? Or is it targeted at the warehouse fulfillment center level? Okay. We don't normally break this up, but UR was this is usually lower UR's lowest profitable quarter, but it was about 12%. We expect it to improve as the year unfolds. But in terms of the industrial bin picking application, we're not thinking about it as a e commerce type thing picking up different objects from trays or bins. We're thinking about it picking up the identical jumbled up pile of items in the bin that traditionally are used, puts it on a conveyor belt or puts it in a machine for some processing. So it's an industrial application and the key thing is to pick it up at the right pose to make it easy to develop the program, which we have this autopilot technology that makes it very easy to develop the program and then to place it at the right post, so you don't have to put it down again and pick it up and that waste time and therefore you won't be able to do as many applications. So we think we've got something that is a step function change, but it will be in beta shortly and then hopefully with some customers later in the year. And these 2 enterprise agreements, the direct sale agreements, could you just tell us to the lighting companies, but what was the competitive advantage relative to I think you referenced an indigenous cobot manufacturer, but what was the competitive advantage to pick UR? It was similar to what Mark said. The incumbent comments often might have lower capital costs, but the product isn't ready for 20 fourseven operations. And it is a variety of things that go wrong. Sometimes the product stops, sometimes it doesn't repeat to the same location, sometimes it doesn't have the right safety features. So, they're not really ready for 20 fourseven industrial, safe, high repeatability, easy to program applications. We know they're coming, but they're not quite there yet is what we're trying to describe. Yes. So it was hardware. It was hardware oriented. Okay. Yes. We are out of time. Thanks for joining us today. This concludes the call, and it also concludes Greg's CFO career. So Greg, hang in there, buddy. All right. Thank you. Thank you all. Bye bye. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.