Teradyne Inc (TER) Q1 2019 Earnings Call Transcript

In the memory test side of the market, our sales were strong and level with the fourth quarter at $48 million. 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 tested LitePoint, sales were down sequentially, but up 29% compared with Q1 of 2018, as we're seeing early step ups in buying for ultrawideband, WiFi6 and 5G. 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 '18, driven by both UR Robots growth of 16% in the quarter and the addition of MiR and Energid. Three points are noteworthy of these results. First, 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 six to nine-month period of evaluation, two 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. One of these customers is concentrated in China and the other is geographically distributed.

Second, the arsenal of certified products in our UR+ program continues to grow and uniquely reduces the applications development time. We began the UR+ program in 2016 and by the end of 2017, had about 60 solutions available. One 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 boundary to price and hardware performance. Our UR+ playbook is very clear, provide a software and hardware platform to allow the development of a broad range of peripherals, that are easier to deploy, reliable and have a short ROI.

In doing so, we are able to leverage the talent of over 400 global UR+ 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.

Third, a year ago, MiR joined Teradyne and we're delighted with the results. After growing a 163% last year, we are planning to about double again this year. Earlier this month, we introduced two 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 waste 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. And Semi-Test, our full year outlook for the SOC market remains in the $2.3 billion to $2.7 billion 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 million to $600 million to $700 million, down about 30% at the midpoint from 2018. Offsetting this, we expect LitePoint and 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 a 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 5G related test demand in both Semi-Test and at LitePoint. Recall, when 5G-millimeter wave is adopted in mainstream handsets, we expect a test related test buying to represent about $300 million $400 million of the Semi-Test TAM and about (Technical Difficulty). We will ramping to those levels of the next three years or so as deployments of 5G roll-out 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 the 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.

Gregory R. Beecher -- Chief Financial Officer

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 first quarter results and second quarter outlook. First though, our first quarter sales of $494 million 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 first quarter results.

Our second quarter guidance for sales of $520 million to $550 million, 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 a striking 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 and support of 5G 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 two years. So we're conservatively planning for a flat to slightly softer second half in Semi-Test, albeit with considerable uncertainty.

Second 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 in 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 nine years and swung from a high of 28% in 2010 to a low of 18% in 2013. In the last three years, with Industrial Automation in the fold, we've averaged a 24% non-GAAP operating profit rate and $420 million (ph) 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 mid-term growth plans.

As outlined last quarter, we set our sight on reaching $3.50 to $4 dollars in EPS by 2022, which requires test sales growth of 3% to 5% off of 2018 and Industrial Automation growth of 30% to 40% of 2018. We're confident in both of these assumptions and are executing our plans accordingly, despite the bumpy ride.

Turning to Industrial Automation highlights. We had first quarter sales of $66 million or 35% growth over the first quarter of a year ago, but down sequentially due to normal seasonality as this trip is often by a bit more in the fourth quarter to max out on available discounts.