Teradyne (TER) Q3 2025 Earnings Call Transcript

Date: October 29, 2025 | Source: Company IR (investors.teradyne.com) — earnings call prepared remarks

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Amy McAndrews (VP, Investor Relations): Thank you, operator. Good morning everyone and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO Greg Smith, and our CFO Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for the third quarter of 2025 and our outlook for the fourth quarter of 2025. The press release containing our third quarter results was issued last evening. The slides as well as a copy of this earnings script are on the investor page of the Teradyne website. The matters that we discuss today will include forward-looking statements that involve risks that could cause Teradyne's results to differ materially from management's current expectations. During today's call, we will refer to non-GAAP financial measures. Following Greg and Sanjay's comments this morning, we'll open up the call for questions. Greg?

Gregory Smith (CEO, Teradyne): Thanks Amy. Good morning everyone and thanks for joining us. Today I'll discuss our third quarter results, talk a bit about what is driving the business in Q4 and provide a general update on conditions across our businesses. Sanjay will then provide more detail on our third quarter results and fourth quarter guidance.

As you saw in the earnings release, we grew sequential revenue 18% and non-GAAP EPS by 49% in the third quarter. This growth was driven by AI demand in semiconductor test. Our other test businesses delivered on plan in the quarter. In Robotics, we continue a slow crawl up from our Q1'25 revenue trough in a challenging environment. The huge investments in Cloud AI build-out drove our Q3 performance to the high end of our guidance range as our customers ramped production of a wide range of AI accelerator, networking, memory and power devices.

An example of this AI strength is in Compute, where our view of the second half of 2025 revenue is more than 50% higher than our expectations just 3 months ago. Some of this increase comes from us responding to customer pull-in requests and some is demand increases. As design, process and packaging technologies for AI compute rapidly advance, we expect that our growth will continue. Our UltraFLEXplus system has been architected from the ground up for high performance processors and networking devices which have demanding power, pin-count and test data requirements. As AI devices become more complex, the UltraFLEX+ architectural advantages become more valuable to potential customers.

In memory, our Q3 memory test sales more than doubled from Q2 to $128M, with the majority of those shipments supporting AI applications. In Q3, 75% of our memory revenue was driven by DRAM, nearly all of it from final test of DRAM and HBM performance test. 25% of revenue was from flash, mainly for cloud SSD, another segment being driven by AI data centers. Our Magnum7H product is differentiated in HBM performance test because it is a multi-generational product. It can cover the test needs of HBM3E and HBM4, and it provides upgrade headroom for HBM4E and HBM5. The Magnum 7H also supports HBM singulated stack performance test. In Q2, we won a design-in for this insertion and in Q3 we began volume shipments. At this point, Teradyne participates in all major test insertions for HBM: memory die wafer sort, post-stack wafer test and singulated stack test.

Our results in memory test this year are especially satisfying in light of the composition and size of the Memory TAM in 2025. Our best guess is that the total Memory TAM is down low double digits, and the weakest part of this market is FLASH, our traditionally strongest segment. Despite this, we expect our memory revenue will sustain at 2024 levels.

AI driven applications for Power ICs were a bright spot in the Auto/Industrial market segment. The Eagle Test platform has a leading position in the test of high performance power conversion devices for data center applications. Volumes of these devices are forecast to grow over 50% between now and 2027. We expect the demand for VIP compute and networking to continue to grow significantly, and we have been investing in R&D, applications, sales, support and manufacturing capacity for this expansion. We are making good progress on new design-in opportunities and are cautiously optimistic about our potential success, but I would like to make it clear that our Q3 results and our Q4 guidance do not include any revenue from these types of new opportunities.

Looking beyond AI in Semi Test, current conditions in mobile and Auto/Industrial remain somewhat weak. In our Integrated Systems Test division, our Q3 shipments were above plan as SLT customers accelerated deliveries for mobile processors and compute applications. We also saw increases in orders for both HDD and SLT systems. Recall, lead times are generally measured in quarters for this business, so most of that order strength will translate into revenue in 2026 or beyond.

In Robotics, we are growing slowly from our trough quarter in Q1'25. We continue to see persistent weakness in our core indirect distribution channel as we expand our large customer and OEM channels. An important element of our robotics strategy is to establish UR cobots as the preferred platform for AI driven workcell applications and to deliver superior performance for our AMRs by leveraging AI features. In the third quarter, over 8% of robotics sales were for AI related products, up from 6% in Q2. Another element of our robotics strategy is to deliver value-added service to our installed base of over 100,000 robots. Service represented 14% of sales in Q3, up from 12% in Q2.

Looking at Q4, we expect AI related demand for compute, networking and memory to be the primary engine of our growth, which reflects both industry trends and the result of our investments to align with those trends. At the company level, 2026 looks stronger today than it did six months ago and all indications suggest solid growth from 2025. The real story in 2026 is AI and the investments that we have made to develop differentiated solutions in that space will drive our growth plan.

Before I hand the call over to Sanjay, I would like to say a few words about the CFO transition that we announced last night. Michelle Turner will be our Chief Financial Officer effective November 3, 2025. She brings 30 years of financial and strategic leadership experience in the technology and manufacturing sectors. I'm excited to welcome Michelle to the Teradyne team. Sanjay has been Teradyne's CFO since 2019 and he has offered to stay on as an executive advisor to operations as we expand capacity in 2026. I want to thank Sanjay for his excellent leadership and contributions over the past six years. With that, I'll turn the call over to Sanjay.

Sanjay Mehta (CFO, Teradyne): Thank you, Greg. Good morning, everyone. Today I'll cover the financial summary of Q3 and provide our Q4 outlook. We delivered Q3 revenue of $769 million, up 18% from Q2 and up 4% from the same period last year. In our Semiconductor Test segment, revenue was $606 million, up 30% sequentially. Within Semi Test, SoC grew 33% sequentially, and memory test revenue more than doubled sequentially to $128 million, driven by AI demand for HBM and DRAM final test as Greg described. System-on-a-Chip revenue was driven by compute and networking. Product Test revenue was $88 million, up 4% sequentially. Robotics revenue was $75 million, down 4% sequentially as the slow recovery from the Q1 trough continued.

Turning to our P&L details, our Q3 GAAP and non-GAAP gross margin was 60.6%. Non-GAAP operating expenses were $288 million, or 37.5% of revenue. GAAP operating margin was 17.6% and non-GAAP operating margin was 20.5%. GAAP net income was $119.6 million, or $0.75 per diluted share, and non-GAAP net income was $135.9 million, or $0.85 per diluted share. Our balance sheet remains strong.

Now turning to our outlook for Q4. As we move through the second half of 2025, we saw projects accelerate into Q3 and are now seeing projects accelerate into Q4. These projects are AI driven. In Q3, we were able to meet early ramp demands. In Q4, we are seeing demand ramp significantly. We continue to expedite our supply chain and we are accelerating production capacity growth at factories in multiple geographies to meet the demand. Q4 sales are expected to be between $920 million and $1 billion. Fourth quarter gross margins are estimated at 57% to 58%. This includes some one-time supply costs in the quarter to meet accelerated demand. Q4 non-GAAP operating profit rate at the midpoint of our fourth quarter guidance is 25.5%. The Q4 GAAP and non-GAAP tax rate is expected to be 14.5%. Q4 non-GAAP EPS is expected to be in the range of $1.20 to $1.46 on 157 million diluted shares. GAAP EPS is expected to be in the range of $1.12 to $1.39.

Summing up Q3 results and Q4 guidance, AI is growing across the economy, driving exceptionally strong semiconductor test demand in the second half of 2025. This is evident in our Q3 sales, profit performance and our outlook for Q4. The acceleration of test demand in Q4 reflects customers' drive to pull AI projects in from Q1. We're optimistic about the AI related market in 2026 but we also know shipments can be lumpy. Our operational resilience is significantly stronger as we have derisked our supply chain and started the journey of multiple factories in multiple geographies to enable the significant growth rooted in AI. With that, I'll turn the call back to the operator to open the line up for questions.

Gregory Smith (CEO, Teradyne): I'd like to offer a quick final thought. AI is having a profound and positive impact on Teradyne's business. AI is the dominant driver of our business for the foreseeable future and we'll continue to align ourselves to the outsized opportunities it offers. We've made great strides in 2025 and while progress is never entirely linear, we're more excited than ever about our prospects for continued profitable growth in the years ahead. Thank you for joining us today and I look forward to updating you on our progress in January.