Teradyne, Inc. (TER) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed outlook. Strong AI-related revenue and optimistic guidance for 2026 are positives, but current results are weak with high expenses impacting free cash flow. Q&A highlights growth potential in compute and memory but also uncertainties in mobile and robotics. The lack of clear guidance and specifics in some areas adds to the neutral sentiment. Given these factors, the stock is likely to remain stable in the short term, leading to a neutral prediction.

Key Financial Performance

Sequential Revenue Growth 18% increase in Q3 2025, driven by AI demand in semiconductor tests.

Non-GAAP EPS 49% increase in Q3 2025, attributed to AI demand in semiconductor tests.

Memory Test Sales $128 million in Q3 2025, more than doubled from Q2 but down 15% year-over-year, driven by AI applications.

Semi Test Revenue $606 million in Q3 2025, with SoC revenue at $440 million (up 11% sequentially and 12% year-over-year). Memory revenue was $128 million (up 110% sequentially but down 15% year-over-year).

Integrated Systems Division Revenue $38 million in Q3 2025, up 9% sequentially and 46% year-over-year, driven by strength in SLT shipments.

Product Test Revenue $88 million in Q3 2025, up 4% sequentially and 10% year-over-year, driven by growth in defense and aerospace.

Robotics Revenue $75 million in Q3 2025, flat quarter-on-quarter and down year-over-year, with UR contributing $62 million and MiR contributing $13 million.

Non-GAAP Gross Margin 58.5% in Q3 2025, above guidance range due to favorable mix.

Non-GAAP Operating Expenses $293 million in Q3 2025, up sequentially and year-over-year due to higher R&D, sales, and marketing investments tied to AI.

Free Cash Flow $2 million in Q3 2025, impacted by net working capital increases tied to accounts receivable and inventory.

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Operating Highlights

UltraFLEXplus system: Architected for high-performance processors and networking devices, enabling fast test development times and high-efficiency volume production. AI devices' complexity increases its value.

Magnum 7H product: Differentiated in HBM performance test, covering HBM3E, HBM4, and providing upgrade headroom for HBM4E and HBM5. Supports HBM singulated stack performance test.

AI-driven semiconductor test demand: AI demand in semiconductor tests drove 18% sequential revenue growth in Q3. AI-related demand for compute, networking, and memory expected to be the primary growth engine in Q4.

Memory test market: Q3 memory test sales doubled from Q2 to $128 million, driven by AI applications. 75% of memory revenue from DRAM, 25% from flash for cloud SSD.

R&D investments: Focused on AI-related opportunities, yielding new capabilities for compute tests. Investments in applications, sales, support, and manufacturing capacity for AI expansion.

Operational resilience: Strengthened supply chain, multiple factories in various geographies, and a variable business model to handle growth and volatility.

AI and verticalization: AI and verticalization identified as primary growth drivers for 2026. Investments in differentiated solutions for AI to drive growth.

Robotics strategy: Focus on AI-driven work cell applications and leveraging AI features for AMRs. Service revenue from installed base increased to 14% of sales in Q3.

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Risk or Challenges

AI-driven semiconductor test demand: The demand for AI-driven semiconductor tests is growing rapidly, but the market is highly concentrated and dynamic. The timing of projects can significantly impact quarterly results, creating potential revenue volatility.

Robotics market weakness: Persistent weakness in the core indirect distribution channel for robotics, coupled with slow growth from the Q1 2025 trough, poses challenges for the robotics segment.

Memory market challenges: The total memory TAM for 2025 is expected to decline by low double digits, with flash memory being the weakest segment. This could impact revenue sustainability despite growth in AI-driven memory applications.

Supply chain and production capacity: Accelerated demand for AI-related projects in Q4 has led to supply chain and production capacity challenges, requiring expedited supply chain measures and increased factory capacity.

Economic uncertainties in mobile and auto industrial markets: Conditions in mobile and auto industrial markets remain weak, with uncertain timing and intensity of recovery, potentially impacting revenue from these segments.

Operational expenses and R&D investments: Increased R&D and go-to-market investments for AI opportunities are driving higher operational expenses, which may pressure margins in the short term.

Customer inventory exhaustion: Higher utilization and fewer system upgrades in the deployed fleet of testers suggest customers are exhausting their inventory of underutilized systems, potentially impacting future sales.

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Guidance & Outlook

AI-driven semiconductor test demand: AI is driving exceptionally strong semiconductor test demand in the second half of 2025, with significant growth expected in 2026. Investments in AI-related R&D and production capacity are being accelerated to meet this demand.

Q4 2025 Revenue Guidance: Sales are expected to be between $920 million and $1 billion, driven by AI-related demand for compute, networking, and memory.

Q4 2025 Gross Margins: Gross margins are estimated at 57% to 58%, including some one-time supply costs to meet accelerated demand.

Q4 2025 Non-GAAP EPS: Non-GAAP EPS is expected to range between $1.20 and $1.46.

2026 Growth Expectations: 2026 is expected to show solid growth compared to 2025, driven by AI, verticalization, and electrification trends. AI-related investments are anticipated to drive significant revenue growth.

Memory Market Outlook: Despite a projected low double-digit decline in the total memory TAM for 2025, Teradyne expects memory revenue to sustain at 2024 levels, driven by AI applications in HBM, DRAM, and flash for SSDs.

Robotics Segment Outlook: Robotics revenue is growing slowly, with AI-related products representing 8% of sales in Q3 2025. The company is focusing on AI-driven work cell applications and value-added services for its installed base.

Long-term AI Market Trends: Massive investments in AI data centers are expected to drive demand for UltraFLEXplus systems, HBM, DRAM, and flash for SSD applications. AI-related power ICs and system-level tests are also expected to grow significantly.

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Shareholder Return Plan

Dividends Paid: $19 million in dividends were paid in Q3 2025.

Share Buybacks: $246 million worth of shares were repurchased in Q3 2025.

Total Shareholder Returns: Through the end of Q3 2025, $575 million was returned to shareholders via dividends and buybacks, approximately 2.5x the free cash flow.

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Key Q&A

Q:What is driving the $150 million upside in Q4 revenue?

A:The upside is primarily driven by compute and memory, with compute contributing about 2/3 and memory about 1/3. HBM is strongly represented in the memory segment.

Q:How is the company viewing the future of high-performance compute and test intensity?

A:The company is optimistic about the growth in test intensity due to larger die sizes, increased performance requirements, and the adoption of chiplet-based designs. These factors, along with the need for high reliability in data centers, are expected to drive test intensity growth in the compute segment.

Q:What is the company's perspective on wafer-level test and burn-in?

A:The company views SLT as critical for ensuring latent defects are minimized in data centers. They also see new technologies like CoWoP requiring extensive system tests and burn-in, viewing this as a contiguous market between burn-in and SLT.

Q:How does the company view its 2028 EPS target in light of recent design wins?

A:The company believes it is well-positioned to achieve its long-term EPS target of $7 to $9.50, with a heavier dependence on data center-driven segments like compute, networking, memory, and power.

Q:What is the composition of growth in Semi Test for Q4?

A:The growth is approximately 2/3 from compute and networking and 1/3 from memory.

Q:What is the expected revenue shaping for next year, particularly in memory?

A:The company expects demand to accelerate, with a shift in seasonality driven by compute projects rather than mobile launches. Revenue is expected to be up relative to 2025.

Q:What is the company's relationship with VIP customers and merchant GPUs?

A:The VIP customer base is concentrated, with most tester demand driven by two customers. In the merchant GPU space, the specifier, not the foundry, decides on the test platform, and the company is focusing its efforts on the specifier.

Q:What is the outlook for HDD and System Test growth?

A:The company expects HDD capacity expansion to have a greater effect in 2026, with no significant growth in the IST Group in Q4.

Q:What is the outlook for SoC test in the first half of next year?

A:The company expects robust demand going into 2026 but cautions against assuming a straight-line growth from Q4 levels due to lumpiness and timing uncertainties.

Q:What is the outlook for NAND growth in memory?

A:NAND is at a very low point, and its growth will depend on mobile industry demand and SSD capacity required for AI data centers. The company is optimistic about stronger NAND growth in 2026.

Q:What is the outlook for mobile SoC next year?

A:The company is uncertain about the magnitude of growth but expects test intensity per part to be higher due to new technologies like N2 and WMCM. The key factor will be an inflection in handset sales.

Q:What is the expected OpEx leverage for 2026?

A:The company aims for 50% of revenue growth to flow into OpEx growth, ensuring operational leverage.

Q:What is driving the growth in AI-related revenue?

A:AI-driven revenue, including compute and memory, has significantly exceeded expectations, with 50% of Q3 and 60% of Q4 revenue attributed to AI-related segments.

Q:What is the company's share position in the memory market?

A:The company has high share in final test segments but lower share in wafer sort. Growth in 2026 is expected to come from both revenue growth and SAM expansion in wafer sort.

Q:What are the gross margin drivers for Q4?

A:Gross margin is impacted by factory expansion and onetime supply chain costs, offsetting volume leverage.

Q:What is the outlook for Industrial Robotics in Q4?

A:The company expects seasonal uplift but remains cautious due to the high-turns nature of the business and demand variability.

Q:What is the status of HBM singulated die test adoption?

A:Currently, only one major manufacturer is adopting singulated stack testing for high volumes. Broader adoption will depend on downstream yield improvements.

Q:What is the updated composition of the SoC TAM?

A:The company has not provided an updated TAM but notes that the high-performance compute market is dynamic and will significantly impact the overall TAM.

Q:Review of Unclear Management Responses

A:Management avoided providing specific updates on the SoC TAM, citing the dynamic nature of the market. They also did not provide a clear outlook on the magnitude of mobile SoC growth next year, stating uncertainty about handset sales inflection. Additionally, they did not specify the exact share gains in the memory market for 2026, focusing instead on revenue growth and SAM expansion.

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Earnings Word Cloud

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