Teradyne Inc (TER) Q4 2018 Earnings Conference Call Transcript
First in Semi Test, the expansion and memory wafer level test delivered nearly $40 million of new business in 2018. In associate test, we're seeing high demand for 5G millimeter wave test capability from leading customers for development and early pre-production volumes. Shipping this year, we expect these 5G engineering testers will position us quite nicely for this subsequent volume production starting in late 2020 and 2021.
As Mark provided our ATE market size estimates for 2019, I will just simply add that in the mid term, we see numerous positive transfer tests with 5G millimeter wave, autonomous vehicles, AI devices, augmented reality, Big Data. While we ride these positive inflections, we expect the market will remain somewhat volatile as many factors affect annual tester buying. These include chip complexity, unit growth, yields, customer specific test strategies, utilization levels and so on. I will remind you that this volatility is not new and we built our operating model to flex up and down with market demand swings and still deliver solid financial performance.
The other quick reminder in Semi Test is that annual buying shifts at individual customers can favor us or our principal competitor. In 2018, the shifts significantly favored our primary competitor. So for the first year, after six consecutive years, we didn't gain share this year, however, our long term plans remain to get back on that share gain trendline.
In Industrial Automation, MiR had expected 2018 breakout year with stand-alone sales of $41 million (ph) as more industrial companies take advantage of our next generation automation to move both piece parts and heavy pallets. We're also seeing some early hospital applications moving medicine and supplies from stock rooms to nursing stations throughout the hospital. This is an entirely new vertical with the potential to grow nicely, given the increasing cost pressures on hospitals.
On the new product front, the MiR 500 was added to the product line up, and in the fourth quarter was autonomously moving pallets at multiple customers with greater safety and lower cost than the traditional forklift transport method. We expect that MiR will deliver upwards of 100% growth in 2019.
Through 2018, Universal Robots grew at 56% cumulative rate from 2015 full year sales of $61 million. But for 2018 alone, growth slowed. We saw a sharp drop off in China during the second half along with some softness in Europe principally tied to the automotive sector. On the competitive front, we extended our cobot lead with the e-series, which enables faster training, higher safety, more compute power and a sense of touch. We also broadened our application reach, now fielding over a 130 certified third-party plug and play accessories in our UR+ program. We will continue to expand this number as we strengthen the technical and commercial support for the hundreds of independent developers in the program around the world. We're launching a number of new initiatives in 2019 to accelerate our lead generation and expand our direct customer touch which should yield in the second half of the year.
We also expect multiple ways of adoption ahead with larger companies gravitating to cobots. We also expect new enabling technology such as low cost 3D vision and pathfinding to expand the cobot served market into more complex pick-and-place tasks. New applications using AI for training and fast adaptability and manipulating objects should also expand the range of cobot applications. In addition, we expect steady forces such as labor shortages, higher quality requirements, cost pressures, including inflation effects will continue to stimulate wider UR adoption.
Shifting now to System Test, which includes our defense and aero, production board test and storage test businesses. Sales grew 12% to $216 million over the '17 levels, and the segment operated above-model profitability. We expect strong performance again in 2019 as defense and aero continue to benefit from new program buying and the ongoing upgrade of legacy defense systems.
In production board tests, we pioneered high throughput inline panel testing and that's now becoming more mainstream. In storage test, both our semiconductor and 3.5 inch hard disk drive, customer are forecasting healthy 2019 demand.
Turning now to Wireless Test demand at LitePoint. The Group grew sales 18% and operated above model profitability in 2018. Over the mid-term, we expect continued healthy growth in Wireless Test with 5G cellular providing the biggest added lift.
Now to the fourth quarter wrap up. At the Company level, our sales were $520 million. The non-GAAP operating profit rate was 26% and non-GAAP EPS was $0.63. We had no 10% customer in the fourth quarter and one for the full year. Non-GAAP gross margins were 60% in the quarter with favorable product mix. You'll see our non-GAAP operating expenses were down $2 million to $175 million compared to the third quarter due to lower variable compensation accruals and a one time $3 million (ph) credit, partially offset by IA hiring, principally from bringing on more than 20 very talented people from Rethink Robotics.
The tax rate was 16% for the year. On a GAAP basis, we also benefited from more favorable tax treatment for repatriated cash than we had expected. We bought back 7.8 million shares for $261 million at an average price of $33.51 in the quarter and we end the year with cash and marketable security balances of $1.2 billion. We increased the IA earnout accrual balances $71 million, an increase in the quarter of $10 million based principally on strong MiR performance.
Shifting now to our mid-term earnings model. Factoring in both recent history and our latest outlook, we've updated earnings target of $3.50 to $4 of non-GAAP EPS to slip out a year into 2022 rather than 2021. We've provided an updated slide in our investor deck, but at the high level, we've pulled back on UR's growth rate and has set the IA mid-term growth rate to 30% to 40% going out through 2022. We've also reflected an 8% lower share account due to a lower buyback price in 2018 and we're also adding another year of buybacks by going out a year.
So keep in mind that some of the numbers change as we're adding a year but the takeaway should be that we're confident that our test businesses have secular growth and strong profitability and our high growth IA businesses should be approaching $1 billion by 2022 with 20% or better EBIT(ph).
Shifting now to capital allocation. We're talking to buyback 500 million of our stock in 2019. As in the past, there's a programmatic and an opportunistic component to the plan. At the same time, we have a very active IA M&A funnel, which is why we maintain dry powder on our balance sheet.
Let me quickly talk about OpEx, and that's an area that we are strategically growing in our Industrial Automation businesses to expand our competitive modes to remain the leader and capture the highest amount of the available profit pool. We plan to grow IA OpEx from $33 million exiting the fourth quarter to about $15 million a quarter in the second half of 2019. Similar to last year, we plan to operate the IA business around 15% EBIT for the year. In test, we plan to keep OpEx approximate flat in 2019 apart from normal changes in variable compensation.
Shifting to our outlook for the first quarter. Sales are expected to be between $460 million and $490 million. The non-GAAP EPS ranges $0.39 to $0.47 and 177 million diluted shares. The first quarter guidance excludes the amortization of acquired intangibles and the noncash imputed interest on the convertible debt. First quarter gross margins are estimated at 58%, down two points from the fourth quarter due to product mix. The first quarter OpEx, running at 38% to 40% of first quarter sales is up about $10 million from the fourth quarter due to further IA distribution and product development investments, principally Universal Robots and some onetime Semi Tests NRV expenses. The non-GAAP operating profit rate at the midpoint of the first quarter guidance is about 19%. Our tax rate for 2019 is estimated at about 16%.
Looking a bit closer at 2019, we expect gross margins to be in the range of 57% to 8%. Non-GAAP interest income excluding the noncash imputed interest from the convert is expected to be about $3 million a quarter, factoring in interest income and our cash balances partially offset by the 1.25% annual coupon on the convertible debt and we earmarked a $90 million to $110 million for CapEx.
So we start 2019 with a portfolio of healthy test businesses and a much stronger Industrial Automation portfolio. We will remain disciplined in capital allocation and in our fixed costs and our mature test businesses, we're also aggressively scaling Universal robots and MiR, given a long term high growth rates. Remember, that we long ago led the automation of the testing of integrated circuits. Now we're helping to relieve humans of the most tedious and repetitive task with safe and easy to train cobots. From where we sit, the future of Teradyne looks quite bright.
With that, I'll turn the call back to Andy.
Andrew J. Blanchard -- Vice President of Investor Relations
Thanks, Greg, Tiffany, now we'd like to take some questions. And as a reminder, please limit yourself to one question and a follow-up.
Questions and Answers:
Operator
(Operator Instructions) Your first question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Your line is open.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Thanks for taking my question and congratulations and best wishes to Greg on his retirement. For my first question, IA has been a very strong growth driver for you, but over the last year, we have seen some downshifting of growth assumption. I understand the China aspect, but I believe you mentioned China is only about 15% of sales, if I recall. So what are the trends outside of China that are driving the demand? So that's the near term question.
And longer term, is IA growth is in the mid 30's right now. How do you plan to organically maintain this exact growth rate over the next three years? Thank you.
Mark E. Jagiela -- Chief Executive Officer and President
Okay. I'll start with that. The other place that we mentioned that there's some near term softness is in auto. The auto sector in Tier 1 have hit some headwinds, and that's principally in Europe. But what we're -- what we're doing and what we can control is, we see, for example, enabling technologies that can open up new markets that haven't been served very well. And the best example I can quickly give you is with the Energid path planning and low cost vision modules, combined that with our arm, you can do more sophisticated pick-and-place applications all the way into a bin, emptying a bin out and then taking some part and moving it to the next step in the production line. There are many tedious tasks in manufacturing where people do that, and it's not really suited for person, it's mind-numbing, and it's a -- it's more of a robotic type tasks.
So we expect on that front to have a bin picking solution toward the end of this year through beta, so I think that we'll probably start to ramp in 2020. So that's not in '19, that's in 2020, but that's illustrative of how we can with enabling technology open up another market.
Another quick example I'll give you is MiR, our mobile robot, which is going at 100% and that takes a little bit of -- and obviously helps us with the IA growth rate considerably, but MiR has opportunities to get into hospitals. And there's many hospitals in certain countries -- in Asian countries that may be built and they're going to perhaps heavily automate those hospitals. So we see there might be other verticals that these next generation technologies can work quite nicely because they are so easy to use, you don't need to be an engineer. So there's many new verticals, we have a lot of developers opening up other applications that we might not have thought about.
So we're also shifting a bit more resource into North America. So if China is soft, there might be a little bit more activity elsewhere that's making up for some of the softness. So we see some opportunities in North America in the near term, and North America grew very nicely last year. So we're going to continue to put the foot to the metal there.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Thanks. And for my follow-up, I think you mentioned for this year, the addressable market could be down 15%, 20%, I believe, is the number and sort of in line with the front end. But is that the experience from prior cycles, because when I look at last year, Semi Test business was below, what we saw on the front end WFE side. So what is the visibility in the addressable opportunity this year? Thank you.
Gregory R. Beecher -- Chief Financial Officer
Yeah, this is for again Semi Test. So the visibility is not great, again, from a bottoms-up point of view, we have customers who talk about their plans, but they change as they did last year on the upside, they can change dramatically to the year. But it's not really modeling prior downturns as much as looking at the bottoms-up activity levels in design and test time trends and what customers are telling us that kind of give us that range.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Thanks very much.
Operator
Your next question comes from the line of Timothy Arcuri with UBS. Your line is open.
Timothy Arcuri -- UBS -- Analyst
Hi, guys. Thank you. I had two. Greg, the SOC TAM assumption that you gave, what does that assume for your largest customer? How much of a snap back are you assuming in that TAM? Are you assuming that there's not much snap back this year and it's more of a next year thing? Thank you.
Mark E. Jagiela -- Chief Executive Officer and President
Yeah, so our largest customer -- this is Mark. Our largest customer in 2017 was roughly in the low 20s as a percentage of our overall revenue. 2018 largest customer is going to be in the low teens and we expect this year to be the same. So we think there's not a big snap back, it's about the same year-over-year for that customer.
Timothy Arcuri -- UBS -- Analyst
Got it. Great. Thank you. And then Greg, I guess just a question on IA OpEx. So with a slower longer term growth rate, how do you think about how to gear down OpEx. Seems like there's not that much of a change this year but sort of what would it take for you to materially slow down IA OpEx as the growth over the longer term continues to slow? Thank you.
Gregory R. Beecher -- Chief Financial Officer
Well, that's a good question Tim. The way we're running our Industrial Automation, particularly Universal Robots, less so MiR, because MIR is high growth, at least for the next couple of years is, we're starting with a plan and we're putting a target of 15% operating profit with the understanding if the sales grow lower than, let's say, 28% or some number like that, then they have to meter the OpEx and not bring it all on board. So we're going to adjust OpEx -- as you know, OpEx can get in front of the sales. So if we get in front of the sales too much in the early half, we're going to have to hold back much more aggressive in the second half. So this will probably be the first year where there will be a bit more pressure to prioritize if we find that we're not -- UR hitting 28%, and I think we're going to hit 28% or that neighborhood. So we're metering it is the answer in short.
Timothy Arcuri -- UBS -- Analyst
Great. Thank you so much.
Operator
Your next question comes from the line of John Pitzer with Credit Suisse. Your line is open.
John Pitzer -- Credit Suisse -- Analyst
Yeah, good morning guys. Thanks for letting me ask the question. Congratulations on a solid results in the difficult environment. Mark, related to your prepared comment that do you think your Semi Test business will do better than the overall market. To Tim's point, if you're not expecting a large snap back from the big customer, I guess, what are the puts and takes, how much much better than the overall market do you think you can do? And I guess, I understand your comments about market share gains, but you also made a comment about secular buying patterns favoring you. Maybe you can elaborate on that as well as you answer the question? Thank you.
Mark E. Jagiela -- Chief Executive Officer and President
Yeah, so there's a couple things there. So last year, there were several events I would say that benefited as Greg mentioned our competitors that didn't benefit us that we think will revert more to the mean in this year. So although our largest customers sort of flat year-over-year. For example, in 2018, there were some of our competitors' customers that made a shift in foundries and that required a one time tooling bump at the new foundry for test equipment for that supplier. So that's a one time effect that will revert back to the norm this year, as an example.
There's -- the other example is, the RF and 5G products that are starting to build momentum, tend to favor us, that's a sector where we have high share, quite a bit above the norm, and as that grows in proportion to the overall market, we will benefit disproportionately. So that's two examples.
John Pitzer -- Credit Suisse -- Analyst
Well, Mark, if you add it all up, if the markets overall down 15 to 20, how much better do you think you can do?
Gregory R. Beecher -- Chief Financial Officer
You know, it's probably a range, but we're not going to be immune to be down probably. But we could be in, let's say somewhere in the five to low teens down.
John Pitzer -- Credit Suisse -- Analyst
Perfect. And then, maybe, as my follow-up, just on the IA resetting of the growth rate in the mid-term. I'm just kind of curious, to what extent is that just a reflection of the macro uncertainty today versus other factors? Is it just as went through '18, the prior growth rate just didn't seem doable or is this really a reaction to the macro and if it's not just a reaction to the macro, what are the puts and takes that are kind of having you bring down that growth rate a little bit?
Mark E. Jagiela -- Chief Executive Officer and President
John, I would say the single biggest thing is sort of the here and now, meaning the fourth quarter growth rate over fourth quarter of a quarter ago was -- at UR was 28%. Now the prior quarter was 46%, quarter before that was 45% and for the year is 38%. So we just want to be a bit more cautious and we don't want to be on the side of defending a high growth rate, we'd rather be on the side of a very credible growth rate with possibly upside. That's how we thought about it. We don't want to be resetting the model every year, we'd like to reset it now and this model can stand the test of time, we hope.
Gregory R. Beecher -- Chief Financial Officer
(Multiple Speakers) from a bottoms-up perspective, the opportunity you see today longer term is no different than six months ago?
Mark E. Jagiela -- Chief Executive Officer and President
Absolutely, the opportunity is incredibly large. We have no doubt. It'll be a $1 billion business. It's the question of what year it -- I think we've talked about in the past. Large companies tend to be slow in adopting but at some point they're going to be forced to adopt to be competitive. If there's more jobs and higher cost regions, the way they can do that is with automation. If it's inflation, you need automation. So there is so many factors. There's demographics, worker shortages. So all the ingredients are there. It's just the adoption rate.
What is the adoption rate? There's always ways of adoption. And as we bring new enabling technology that opens up other solutions, I think you're going to see other people jump on board.
John Pitzer -- Credit Suisse -- Analyst
Perfect. Thanks guys.
Operator
Your next question comes from the line of Mehdi Hosseini with SIG. Your line is open.
Mehdi Hosseini -- SIG -- Analyst
Yes. Thanks for taking my question. But before I ask my question, I wish Greg the best and hopefully he changes his mind and stays on Board.
Gregory R. Beecher -- Chief Financial Officer
Thank you, Mehdi.
Mehdi Hosseini -- SIG -- Analyst
Thank you. Over the past five, six years, your calendar year revenues were more weighted toward the first half, second half revenues will be down low teen compared to the first half. Last year was an anomaly, and in that context, my first question is, how do you see the revenue progression throughout the year? Would '19 be similar to the trends prior '18 or would it have its own unique trend?
Mark E. Jagiela -- Chief Executive Officer and President
I think that, part of the issue with '18 was, we didn't get the big second quarter bump we typically got from the mobility tooling, because of the large customer effect. And as Industrial Automation becomes a larger portion of our business, they tend to be bumping up in the fourth quarter. So over time, we're going to see, I think, more of a shift toward the second half of the year because of IA.
And one other point, even in this last most recent quarter LitePoint, had a very strong second half of the year. So IA, less lumpiness in mobility, I think will kind of start to balance out the full year more. It was a little bit of a trend toward a fourth quarter bump.
Mehdi Hosseini -- SIG -- Analyst
So how would it look like this year? Should second half be down less -- less or --
Gregory R. Beecher -- Chief Financial Officer
it's hard to be certain but if we had to say the contour, it would probably look more like '18, then '17, is how we think about it.
Mehdi Hosseini -- SIG -- Analyst
Okay, great. Thank you. And just -- Mark, going back to IA. We've all been going through the learning curve as you see industrial auto out there weak, but you're still able to grow the business now granted at a lower growth rate. So can you just maybe help us understand how this growth rate, the secular nature of it is defying the overall industrial auto that is very weak out there. And I look at industrial laser is very weak but what is it with IA that still enables you to grow. What -- and in that context, is it the replacement or what is it that hasn't really felt a meaningful slowdown, now granted slower growth rate?
Mark E. Jagiela -- Chief Executive Officer and President
Right. So at first of all, I just contrast, there's traditional Industrial Automation that is tightly, tightly, tied to macroeconomic effects. The segment we're in which is emerging and still all quite small and growing rapidly, although not immune from it, because we've talked about automotive and China has such a vast ROI opportunity set ahead of it, that it's really not going to be subject to the strong macroeconomic effects. So for example, you know, we're talking about $260 million of IA revenue last year for cobots, both mobile and fixed. When we look at the bottoms-up analytics of how many opportunities there are out there in small, medium, and large enterprises to achieve automation using our products with ROIs well under 18 months, and in most cases under a year, we're talking about 10s of billions of dollars of opportunities today with the capabilities of today's cobot.
When you add some of the new capabilities that Greg alluded to around vision, the ability to pick pieces out of bins without human interaction, that doubles. So we see this opportunity set of $100 billion of which 260ish has been tapped. That's what gives us the confidence and that's the overarching sort of poll for the product that will not be immune to macroeconomic effects, but will over the long term certainly run the growth rate well above the mean.
Mehdi Hosseini -- SIG -- Analyst
Got it. Thank you.
Operator
Your next question comes from the line of CJ Muse with Evercore. Your line is open.
C. J. Muse -- Evercore -- Analyst
Yeah, good morning, and I guess let me echo the thoughts, Greg, definitely will miss you, and thanks for everything. I guess, first question on the IA side. I just want to confirm, in terms of the growth rate of 35%, 40% for calendar '19 that is off of pro forma of $269 million, not what you recognize in $261 million.
And as the -- the second part of the question, how should I think about the linearity of the business first half versus second half? I would assume, the growth rate year-on-year would be slower first half given the uncertainty we're seeing out of China?
Gregory R. Beecher -- Chief Financial Officer
Hi, CJ, it's Greg. Thank you for your nice comment. It's $261 million. So it is the actual not the proforma just to clarify that first point.
C. J. Muse -- Evercore -- Analyst
Okay.
Gregory R. Beecher -- Chief Financial Officer
Okay. And then the growth rate does pick up in the second quarter. And similar to last year, second and third are kind of similar. And that's our estimate. In fourth quarter, we have our strongest quarter, so that will pick up for the year.
C. J. Muse -- Evercore -- Analyst
Okay, great. And then, I get -- if you think about overall business trends, you put up a very stellar gross margin in the December quarter. Were there any one time sort of issues to think about there or how should we think about the trajectory for gross margins into calendar '19?
Gregory R. Beecher -- Chief Financial Officer