Teradyne, Inc. Common Stock 2026 Q3 Earnings Call

Please go ahead. Thank you, operator.

Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I am joined this morning by our CEO, Greg Smith, and our CFO, Michelle Turner. Following our opening remarks, we will provide details of our performance for the third quarter of 2026 and our outlook for the fourth quarter. The press release containing our third quarter results was issued last evening. We are providing slides as well as a copy of these prepared remarks on the Teradyne investor website that may be helpful in following the discussion. Replays of this call will be available via the same page after the call ends. 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. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation.

We encourage you to review the safe harbor statement contained in the slides accompanying this presentation, as well as the risk factors described in our annual report on Form 10-K for the fiscal year ended December 31st, 2025, on file with the SEC. Additionally, these forward-looking statements are made only as of today. During today's call, we will refer to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures, where available, on our investor website. Looking ahead between now and our next earnings call, Teradyne expects to participate in a technology-focused investor conference hosted by UBS. Our quiet period will begin at the close of business on December 18th, 2026. Following Greg and Michelle's comments this morning, we will open up the call for questions. This call is scheduled for one hour.

Greg? Thanks, Amy. Good morning.

AI was the driver again this quarter. Total company revenue topped $1.3 billion, up 70% year-over-year and consistent quarter-over-quarter with non-GAAP EPS of $2.29, up over 150% year-over-year. All three of our business groups, Semi Test, Product Test, and Robotics, grew versus the prior year, highlighting AI demand across all parts of the business. AI-driven revenue represents more than 60% of total revenue, a key proof point that our wafer to data center strategy is delivering results. From wafers to modules, to trays, to racks, and into full data centers, Teradyne equipment is used to build and test the high-performance computing that underpins the growth of agentic AI. We have previously discussed our long-term perspective on the AI transformation of the semiconductor industry and global economy.

The first wave started back in 2024 with the build-out of general purpose data centers, which were used for both model training and inference. In 2026, we are in the early stages of the second wave, where data centers are optimized to serve these models, to support agentic AI and inference on a global scale. The third wave is physical and edge AI. While there are already compelling examples of physical and edge AI in automotive, robotics, and wearables, the full impact of AI on these segments is still to come. The strength of these waves gives us great confidence in our midterm growth plans. Let's start with Semi Test. The demand for compute is far greater than supply, and the semiconductor industry is seeing dramatic expansion in capacity to meet this burgeoning demand. The portion of semi CapEx associated with test is increasing as well.

From 6.4% in 2025 to 8.1% for the first 8 months of 2026. With forecasts for semiconductor CapEx being revised upward for 2027, 2028, and beyond, we believe that the conditions are right for prolonged expansion of the ATE TAM. CPUs and AI accelerators are key drivers of the expansion. Through our accelerated investments, Teradyne is positioned for continued growth in both the overall ATE market and share gains driven by customers adopting dual-vendor strategies. Dual vendor provides greater assurance of getting capacity when needed, minimizes the risk of supply chain disruptions, and ensures that the test capability arrives in time for new device technologies. Dual vendor programs progress through several phases over multiple quarters, including initial qualification, fast follower, and mature dual sourcing. We have multiple customers at different stages of this process.

Our first hyperscaler customer is in the mature phase, and we expect our next major ramp in the middle of 2027. Our merchant GPU customer is in the fast follower phase with multiple devices in development, and we expect to see additional revenue in 2027. Our second hyperscaler customer has passed qualification and is now in fast follower with an expectation of capacity buys in the second half of 2027. We also have a third hyperscaler in initial qualification. Networking devices, both copper and optical, are growing proportionally with compute. The majority of this TAM is in switches. However, retimers and DSPs are driving significant business. The majority of the networking market is currently copper and optical pluggables. Over the next few years, we believe the NPO and CPO markets will grow strongly from a small base.

We are working with leaders in this segment on solutions across all test insertions, and it is clear that there are many different approaches and technologies being tried by different customers. As a result, the types of tests and the handling and alignment techniques are in flux. The key to our strategy here is to develop strong open ecosystem partnerships for instrumentation, handling, and alignment. We have spoken before about our partnerships with Technoprobe and ficonTEC, and we have just announced a partnership with FormFactor to address optical tests amongst other opportunities. Our open, non-exclusive ecosystem of probing, handling, and interface partners allows us to validate complete test cell solutions before they reach our customers' floors, giving them more interoperability, full control over their supply chains, and lead times. This provides a faster path to high-volume production.

The pace of innovation in compute and networking has accelerated, and we have been investing in R&D to ensure that our product roadmap is aligned with those needs. We have discussed before that there is no current ATE solution for the most complex next-generation AI and data center devices that are coming to market in 2027. The trio of new UltraFLEXplus instruments that we just introduced address that need. The first is the UltraPin5000-EM. The EM stands for extended memory. This instrument has up to 80 times deeper memories than our current instrument for intensive device characterization work. The second instrument is the UltraVS64-HP. The HP stands for high power. This instrument enables testing accelerators that consume up to 15,000 amps. Finally, the UltraPort-PCIe6. This is the industry's first ATE solution for PCIe Gen 6.

We also introduced the Iris 100, a solution for optical test of micro LED and VCSEL emitters. This instrument serves both mobile applications and optical networking. To assure data center reliability and uptime, customers are increasingly turning to system-level test and burn-in. In the third quarter, we introduced new burn-in capabilities for the Titan HP platform, which enables full system test coverage across burn-in temperature ranges. As AI moves out of the data center and into cars, robots, and wearables as part of the third wave of AI, mobile processors and microcontrollers are adding neural processing units and other AI features. To address that coming market, in the third quarter, we launched the UltraFLEXplus S, a small footprint system that covers both engineering and production insertion for edge AI devices. Moving on now to memory. Memory manufacturers are bringing on more capacity for HBM, DDR, LPDDR, and flash memories.

More capacity means more wafers, more wafers means more bits and more units, which means more to test in memory. In the past two quarters, it has become clear that the constraints on memory supply are so severe that AI accelerators are turning to lower stack heights of HBM memory to get a larger number of stacks out of the same volume of DRAM wafers. This will tend to increase the TAM for HBM performance test, an area where we have higher share. The HBM, DDR, LPDDR, and GDDR markets are moving quickly from generation to generation with higher data rates and new encoding approaches. To support these new technologies, in the third quarter, we introduced the Magnum E2, our next-generation DRAM tester with the signal integrity and throughput needed to keep pace with our memory customers.

Linear and power segments, which were previously driven mainly by automotive and industrial verticals, are adding capacity to deliver data center power distribution and regulation components. Our product revenue in the automotive and industrial space has grown from less than $400 million in 2025 to over $600 million in 2026. This trend will accelerate with new 800-volt standards and new technologies like IVR. The demand for AI-accelerated compute goes beyond the semiconductor market. The need for nearline storage and data centers has accelerated the annual exabyte growth for HDD to over 20% in 2026. Since the test time for HDD is more closely related to the capacity than the unit volume, this, as well as adding a third major customer, is driving expansion of our HDD test revenue.