Teradyne Inc (TER)

• Teradyne is gaining significant share in the High Bandwidth Memory (HBM) test market, with significant second half business from a major HBM supplier after being qualified in mid-2024, and expects to add additional suppliers in 2025, driving revenue growth. -
• The company has pivoted successfully towards compute VIPs (Vertically Integrated Players), achieving a 50% share in compute VIPs this year, up from much lower share in traditional compute, positioning itself strongly in the growing compute market. -
• Teradyne's Robotics business is poised for growth, with new high payload robots, upcoming products to double their served market, and an OEM solutions channel growing 50% year-over-year, setting up for 20% to 25% growth once market conditions improve. -

• Operating Expenses at New Highs: Teradyne's operating expenses (OpEx) in Q1 are at new highs, while revenues are 37% below the prior peak, raising concerns about the company's ability to achieve operating leverage in 2025. -
• Internal Debate Over Robotics Business: The company is debating whether they are the right owner of the Robotics business, indicating possible underperformance or strategic misalignment in this segment, which could impact overall growth. -
• Limited Growth in Mobile Processor Complexity: Teradyne does not expect significant complexity increases in next-generation mobile processors, potentially limiting growth opportunities in this market segment. Additionally, there is uncertainty due to shifts in modem suppliers rather than increased modem integration. -

1. 2025 Revenue Growth Outlook
   Q: Is 20–25% sales growth realistic for 2025?
   A: Teradyne believes they are positioned to achieve growth in line with their midterm model, expecting a 20–25% sales increase in 2025. They anticipate improvements across mobility, automotive, industrial, and compute segments, and plan to provide a detailed outlook in January. Management feels confident about staying on track towards their 2026 plan. - - -

2. Compute TAM Expansion and AI Demand
   Q: What's driving TAM expansion in compute and AI markets?
   A: The TAM expansion is driven by significantly stronger business in AI compute and HBM memory, along with better visibility into demand served by Chinese tester companies. Teradyne expects the compute TAM to become even hotter in 2025, fueled by AI market growth and increased adoption by vertically integrated producers (VIPs). - -

3. Operating Expenses and Leverage
   Q: Why is OpEx rising, and will you show operating leverage in 2025?
   A: Teradyne plans to increase OpEx by low teens in 2025, focusing on investments in Semiconductor Test to align with market shifts toward AI, HBM, and VIPs. They aim to demonstrate operating leverage next year, expecting revenue growth to outpace OpEx growth. These investments are viewed as necessary and cyclical, not structural, to capture future growth opportunities. - - -

4. Mobile Test TAM Outlook
   Q: How do you see the mobile test TAM evolving?
   A: Teradyne expects the mobile test TAM floor to be closer to $1 billion rather than the current $800 million once excess capacity is absorbed, likely in 2025. Upside beyond that depends on the adoption of AI-enabled smartphones, which could increase device complexity and shorten the refresh cycle if consumers find value in new features. -

5. Robotics Business Growth Prospects
   Q: What needs to happen for Robotics to grow 20–30%?
   A: Teradyne acknowledges that better end-market conditions are needed to achieve 20–30% growth in Robotics. They have addressed internal issues like distribution by adding high-payload robots, introducing new products, and establishing an OEM channel, positioning themselves to outgrow traditional suppliers by 15–20 percentage points annually in a normal market. - - -

6. Utilization of Existing Testers
   Q: How has tester utilization changed recently?
   A: Over 100 testers have been repurposed from mobile to other markets like compute, with over 200 expected by year-end. This has led to a meaningful uptick in utilization, with less idle capacity now than a quarter ago, and further improvements anticipated by the end of the year. - -

7. HBM Market Share Opportunities
   Q: What's Teradyne's opportunity in HBM stack die and wafer sort?
   A: After being qualified by a major HBM supplier mid-year, Teradyne has significant second-half business in stack-die performance test. They are engaged with an additional HBM supplier, potentially driving revenue in 2025. In wafer sort, their share is expected to remain stable, but they anticipate gaining share in stack-die testing. -

8. Industrial Test TAM Revision Due to China
   Q: Why was the industrial test TAM revised higher?
   A: The revision stems from better visibility into the size of the TAM in China, which is being served by indigenous suppliers. It's not a strengthening of the TAM but an improved understanding of the market dynamics within China. -

9. System Level Test (SLT) Opportunities
   Q: What are the SLT opportunities in compute for Teradyne?
   A: Teradyne sees SLT becoming a critical part of the test strategy for processors in smartphones and has added compute customers to this area. They expect SLT revenue to grow more meaningfully in 2025, driven by increased device complexity and adoption by hyperscalers deploying their own silicon. - -

Quarterly guidance for Q4 2024:

• Sales: $710 million to $760 million - (raised from $680 million to $740 million - )
• Gross Margins: 59.5% to 60.5% - (raised from 58.5% to 59.5% - )
• Operating Expenses (OpEx): 36.5% to 38.5% of sales - (lowered from 38% to 40% of sales - )
• Non-GAAP Operating Profit Rate: 23% at midpoint - (raised from 20% at midpoint - )
• Non-GAAP EPS: $0.80 to $0.97 on 164 million diluted shares - (raised from $0.66 to $0.86 on 164 million diluted shares - )
• GAAP EPS: $0.73 to $0.91 - (raised from $0.62 to $0.82 - )