Teradyne (TER) Q4 and Full Year 2025 Earnings Call Transcript

Date: February 3, 2026 | Source: Company IR (investors.teradyne.com) — earnings call prepared remarks

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Amy McAndrews (VP, Corporate 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 Michelle Turner. Following our opening remarks, we'll provide details of our performance for the fourth quarter and full year of 2025, our outlook for the first quarter of 2026 and our new target earnings model. The press release containing our fourth quarter results was issued last evening. We are providing slides as well as a copy of this earnings script on the Teradyne investor website that may be helpful in following the discussion. 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. Looking ahead, between now and our next earnings call, Teradyne expects to participate in technology or industrial focused investor conferences hosted by Citi, Susquehanna, Morgan Stanley and Cantor. Following Greg and Michelle's comments this morning, we'll open up the call for questions. Greg?

Gregory Smith (CEO, Teradyne): Thanks Amy and thank you all for joining us today. I'll start off by summarizing our fourth quarter and full year 2025 results and provide some context for our initial view of 2026 and our new target earnings model. Teradyne had a strong fourth quarter with 41% sequential revenue growth and more than 100% non-GAAP earnings growth. Both revenue and EPS were above our high guidance as trends we noted previously continued through the end of the year. Semiconductor Test, Product Test, and Robotics all delivered double-digit sequential growth.

A striking trend was the increase in AI-driven revenue in the second half of 2025. This is obvious in compute and memory, however the rapid build-out of cloud and edge AI is also driving demand for power management, SLT, HDD, ICT and optical test. This aligns with the themes of AI, Verticalization and Electrification that we have highlighted in prior calls. When you roll it up, AI demand drove 40 to 50% of our revenue in Q3. In Q4, AI drove more than 60% of our revenue. Looking forward to Q1 of 2026, we expect that upwards of 70% of our revenue will be driven by AI applications.

Michelle will go into a lot more detail about the quarterly results and trends. I'd like to give you a little full-year color for each of Teradyne's businesses. Starting first with the Product Test Group, overall we grew revenue 8% in 2025, driven by strength in Defense and Aerospace. We have successfully integrated Quantifi Photonics into this group, including training the sales team for Litepoint and Production Board Test on the Quantifi product line. We expect all of our business lines in this Group to grow in 2026. Turning now to Robotics. In 2025, we saw three consecutive quarters of growth starting in Q2. Our strategy has been to focus the organization on the segments, customers and technologies with the highest growth potential.

For all of 2025, the Semiconductor Test Group delivered 19% year-on-year growth. SoC test revenue grew 23% year-over-year, driven mainly by networking and VIP compute. Memory test revenue was up slightly in a roughly flat memory test market on continued share gains in HBM and DRAM final test. With strong VIP revenue, we believe that we maintained about 50% market share in the VIP Compute market in 2025. This entire segment remains very concentrated with only a few players driving significant ATE purchases, which contributed to revenue lumpiness in 2025.

Our full-year financial results reflect a successful pivot to AI-driven demand in high-performance computing. Back in 2020 and 2021, our business was dominated by mobile. Now in 2025, Compute is the largest component of our revenue and grew 90% year-over-year. Using round numbers, in 2023, only about 10% of our SoC product revenue was in Compute, 50% was in Auto/Industrial and 40% was in Mobile. Now in 2025, nearly 50% was in Compute, and Auto/Industrial and Mobile were roughly balanced at a quarter each — this balance derisks our target earnings model.

The SoC TAM reached record levels in 2025, nearly 60% larger than 2024. Looking forward, we expect that TAM to grow robustly over the midterm driven by continued data center build-out and the growth of Edge AI. At a segment level, we expect Compute to continue to grow significantly from a high base, driven by AI. We expect to see a moderate recovery in Automotive/Industrial but we are uncertain about the Mobile TAM. All in all, we believe that we are positioned to gain share in the single digits in SoC test in a significantly larger market.

Now, shifting gears to memory. In 2025, while the overall Memory TAM was down about 4% from 2024, we were able to gain a little share. The bright spot in the memory test market was AI Compute demand for both HBM and DRAM. In 2025, DRAM and HBM comprised nearly 90% of the memory TAM. Overall, we expect a resurgent memory market in 2026, with low double-digit TAM growth over 2025 driven by continued strength in HBM and DRAM, and we expect to continue our incremental share gains.

Our IST business delivered over 50% growth from 2024 to 2025. Historically IST has had very high segment and customer concentration. In 2025, this began to change. We won a new customer in mobile SLT in 2024 and that ramped strongly in 2025. Also in 2025, we entered compute SLT and won business from two customers in that segment. Finally, in late 2025, we received orders from a new customer in HDD, which will be ramping in 2026. All of this is setting us up for continued strong revenue growth from IST in 2026 and beyond.

In looking at the future, we had to answer two questions. The first is whether the markets we are in are poised for growth. In our mind, the answer to that is unequivocally true. Right now, the prime mover of the market is AI Data Center. Our product lines cover this market from beginning to end — from testing compute devices to complete server trays all the way to robot-assisted operations in AI data centers. Looking beyond the AI Data Center, segments of the market where Teradyne has high share are poised for recovery: Auto/Industrial with long-term growth tied to the transition to Edge AI, EVs and 800V data center power; Mobile positioned for steep complexity increases as the compute power required to run inferences on LLMs is crammed into phones; and Physical AI already expanding the applications of advanced robotics.

The second question is whether Teradyne is positioned to gain share in the markets where we play. Again, I think the evidence from 2025 is clear — we are. We have gained share in HBM and DRAM, we have maintained high share in networking, we have ramped significant new VIP sockets, we have a leadership position in silicon photonics device test and we are in play for a share of merchant GPU. We have won new segments and customers in our IST group in both storage test and System Level Test of compute devices. In alignment with our strategy to go from wafer to data center, last Thursday Teradyne announced an agreement with MultiLane to form a joint venture. MultiLane is a global leader in High-Speed IO and Data Center Interconnect test solutions. This joint venture will be called MultiLane Test Products and is being formed to serve the growing AI Data Center demand. Upon the close of this transaction, which we expect in the first half of this year, we will be the majority owner of the JV.

This new target earnings model is reflective of our conviction in the growth potential of the ATE TAM driven by all things AI, even at today's unprecedented levels. Moving from a date-driven earnings model to an evergreen one reflects this conviction while also recognizing a lack of precision in terms of which year this comes to fruition. Turning to Capital Allocation, our strategy remains consistent to maintain cash reserves that enable us to run the business and have dry powder for M&A. From 2015-2025, we've returned over $5.4 billion to shareholders through share repurchases and dividends, which is roughly 100% of free cash flow.

So summing up, exiting 2025 we are encouraged by the strength of the business. Our overall company revenues grew 13% year-over-year and our SoC and Memory combined grew 17% year-over-year, helping to achieve a 23% increase in our EPS to $3.96. We enter 2026 feeling good about the year ahead. With that, I'll turn the call over to Michelle.

Michelle Turner (CFO, Teradyne): Thank you, Greg, and good morning, everyone. I'm excited to be here as Teradyne's CFO. Let me walk you through our fourth quarter and full year 2025 results and our outlook for the first quarter of 2026. Fourth quarter revenue was $1.083 billion, up 41% sequentially and up 44% year over year. Semiconductor Test delivered $883 million in the quarter, up 46% sequentially and up 56% year over year. Product Test delivered $110 million, up 25% sequentially and up 20% year over year. Robotics delivered $89 million, up 19% sequentially and up 39% year over year.

Non-GAAP gross margin for the fourth quarter was 57.2%, down sequentially due to one-time supply costs to meet accelerated demand. Non-GAAP operating expenses were $332 million, or 31% of revenue. Non-GAAP operating income was $314 million, up 123% sequentially, translating to a 29% non-GAAP operating margin. GAAP operating margin was 27.1%. GAAP net income was $257.2 million, or $1.63 per diluted share. Non-GAAP net income was $283 million, or $1.80 per diluted share.

For the full year 2025, revenue was $3.19 billion, up 13% from 2024. Non-GAAP EPS was $3.96, up 23% from 2024. Cash and investments remain strong, and we continue to return cash to shareholders. Now let me walk you through our outlook for the first quarter of 2026. We expect first quarter revenue of $1.15 billion to $1.25 billion. Non-GAAP gross margin is expected to be approximately 60%, and non-GAAP operating expenses of approximately $355 million, or 30% of revenue. We expect a non-GAAP operating margin of approximately 30% at the midpoint. Our Q1 GAAP and non-GAAP tax rate is expected to be 14.5%. We expect GAAP net income per diluted share of $1.82 to $2.19, and non-GAAP net income per diluted share of $1.89 to $2.25. This concludes our prepared remarks. Operator, we're ready to open the call for questions.