Teradyne Inc (TER) Q4 2018 Earnings Conference Call Transcript

In Memory Test, strong markets and new products resulted in our highest annual memory revenue in history. Our leading position in the Flash Final Test market, combined with the successful product introduction and expansion into the Wafer Test segment of the memory market, delivered over 46% sales growth for a total of over $270 million in Memory Test revenue for the year. It's not only big growth that's driving the market. The trend toward even higher speed interfaces in both flash and DRAM continues unabated. Combined these trends drive more test complexity, more test seconds and a higher rate of memory tester obsolescence.

In 2019, we plan to continue to expand our wafer test share position and we plan to introduce a high speed DRAM test version of our Magnum platform, giving us full coverage of the Memory Test market.

Looking at 2019 for Semi Test, there are conflicting indicators at play, making forecasting difficult. On the one hand, we have not seen any indication of a broad pullback in demand from customers and the increased complexity trends and new design activity remains very high. On the other hand, we've seen three very strong years of test demand with market growth rates well-above our modeled 2% to 4% CAGR. We've also seen a pullback in the front-end CapEx spending that began last year.

Taking these factors into account, in SOC Test we expect the market to be in the $2.3 billion to $2.7 billion range, and for Memory Test, we expect the market to be in the $650 million to $750 million range, both of these are down about 15% to 20% from 2018. While we also expect Teradyne Semi Test revenue to be down, we expect it to be down less than the market drop due to planned share gains in both Memory and SOC, as well as secular buying shifts balanced in our favor.

At LitePoint, Q4 sales were up 43% from last year's Q4 and up 18% for the full year. We are now entering the early stages of market growth driven by both new Wi-Fi standards and 5G. We're seeing early production test system buying for Wi-Fi 6, and we're having early success with our 5G millimeter wave-test products in the labs of leading silicon providers as they prepare for future production ramps. We expect continued market growth in 2019 driven mainly by water deployment of these new connectivity standards, but 5G production test growth becoming more meaningful in 2020 and 2021.

In our System Test Group, sales in the quarter were down from a year about a third from last year's fourth quarter due to a very tough compare in the storage test business. As you recall, we received customer acceptance and a recognized revenue for accumulated shipments of our new system level test product in that quarter last year. For the full year of 2018, the Group grew sales by 12% and operated above model profitability. We expect another strong year from the Group in 2019.

Shifting to Industrial Automation. 2018 was an important year for IA at Teradyne. We added mere to extend low cost, easy-to-train, safe collaborative robots to the mobile robot market. Secondly, we added Energid and their team of motion control software experts to extend the bounds of addressable markets for UR's innovative arms. These extensions will begin hitting the market in 2019. Third, our UR+ open API platform continue to expand from about 60 to over 130 certified plug-and-play partner applications. Fourth, we expanded our product reach with major new product introductions at both UR and MiR, substantially expanded our global organizational capabilities and delivered another year of mid to upper teens operating profits. From a starting point of $42 million in sales in 2015, I delivered over a $0.25 billion of sales in 2018. Although annual revenue of $261 million was up 54% from 2017, it was about $20 million below our target for the year.

Continued softness in China and in the automotive sector resulted in Universal Robots growth rate of 38% for the year and 28% in the fourth quarter compared to the year ago periods. We have not experienced any meaningful competitive headwinds but rather see economic slowdown and uncertainty weighing on UR growth.

On the other hand, MiR had both a fantastic quarter and year, growing close to 200% in the quarter compared to the year ago quarter and over -- 150% growth annually on a pro forma basis. As we did in 2018, this year, we will continue to increase investments in Teradyne high growth Industrial Automation businesses to widen and deepen the moats around our leading positions in fixed and mobile collaborative robots.

Given the 38% growth rate for UR in 2018 and the likelihood that softness in China and automotive will persist in 2019, we are modeling IA growth in 2019 at about 35% to 40%, and bringing our mid-term IA growth model down to a 30% to 40% range. This pushes out our $3.50 to $4 a share earnings target out about one year from 2021 to 2022. Greg will cover this in more detail.

On the capital allocation front, we'll continue to buy back shares in 2019 with a planned repurchase of at least $500 million in shares. While maintaining the dividend at the current level, we also continue to actively look at a wide range of M&A opportunities, primarily centered around Industrial Automation.

Before closing, I'd like to announce that after 18 years of transformative leadership as Teradyne's CFO, Greg Beecher is planning for his retirement, and Teledyne is planning for a smooth transition. Greg has a very flexible time frame and will continue on as CFO as we run a succession process that includes both internal and external candidates.

With that, I'll turn things over to Greg.

Gregory R. Beecher -- Chief Financial Officer

Thanks, Mark, and good morning everyone. I'll start with a quick highlights of 2018 and then offer some comments on 2019 including our capital allocation plans and also offer some perspective on our strategic position and the market trends at the business segment level and update you on the changes that we've made to our mid-term financial model, and then I'll close with the fourth quarter results and first quarter outlook.

On the 2018 financial highlights front, our $2.1 billion of sales and $2.37 in non-GAAP EPS was quite good. We grew EPS $0.03 cents over 2017 despite slightly lower sales and increase strategic investments in Industrial Automation, where we grew OpEx over $15 million. This included folding in two acquisitions and further scaling our sales, support and development resources across the automation businesses.

On the other side, the EPS ledger, we picked up a point of gross margin, shaved our tax rate two points and reduced our diluted shares by 5%. So the net is a slight gain in EPS in a much stronger Industrial Automation strategic position.

In 2018, we also achieved growth in all of our businesses except SOC Test, which experienced an off year due to lower mobility buying by a large customer. As expected, the highest annual growth was in our Industrial Automation segment, which includes Universal Robots, MiR, and Energid where sales grew 54% to reach $261 million. Universal Robots saw annual growth of 38%, reaching $234 million. As Mark noted, this was below earlier expectations with strong headwinds in China, and some slow down in Tier 1 automotive buying.

MiR, the industry leader in autonomous mobile robots grew full year sales over 150% to $31 million, up from $12 million in 2017. We recorded $24 million of those sales in our 2018 results as the MiR acquisition close partway through 2018. Memory Test was a stand up performer within Semi Tests with sales growth of 46% to $273 million for the year in an overall Memory Test market which exceeded about $950 million.

Gross margin for the full year was 58%, a new Company record. Favorable mix along with material cost reductions at UR drove this result. For example, our Industrial Automation gross margins expanded from 56% in 2017 to 59% in 2018. Teradyne supply line group continues to play a key role in both improving IA gross margins and our ability to scale up these fast growing businesses.