Teradyne, Inc. (TER) Earnings

Management highlights

### Core Strategic Context - Management confirmed Teradyne is in a multi-year growth phase driven by ongoing global AI data center build-out, with AI-driven revenue now exceeding 60% of total revenue. The company's wafer-to-AI data center strategy is delivering strong results across all business segments. - Two core tailwinds are driving the automatic test equipment (ATE) total available market (TAM): accelerating wafer fab equipment (WFE) capital expenditure (forecast to approach $250 billion by the end of the decade), driving 15% to 20% CAGR in total transistor and memory bit production; and rising test intensity for advanced multi-chip packaging, as higher defect costs from chiplet-based designs increase required testing per device. After a decade of WFE outgrowing the ATE TAM, this trend reversed in 2024, and ATE is now outpacing WFE growth. Management forecasts the overall ATE TAM will reach or exceed $20 billion by the end of the decade. ### Market Position and Share Gains - Teradyne is positioned to gain midterm market share: it has leadership in HBM and DRAM testing, high existing share in growing flash memory, mobile, industrial, and automotive segments, and new dual-vendor qualification opportunities at large compute customers, driven by hyperscalers' supply chain de-risking efforts. The dual-vendor qualification process takes 9 to 12 months from initiation to production ramp, with share growing incrementally to ~30% during the fast-follower phase before reaching mature dual-vendor status. Teradyne currently has one customer in mature dual-vendor operations, one in fast-follower, and one in pre-ramp qualification. ### Key Segment Operational Highlights - **Memory**: 2026 memory ATE TAM is expected to be more than 40% larger than 2025, with stronger growth in the second half of 2026 compared to the first. HBM dye test demand is growing rapidly, and Teradyne's Magnum testers deliver competitive advantages for memory makers. DDR demand has been stronger than forecast earlier in the year, and NAND test demand has recently inflected upward. - **Compute and Networking**: Teradyne shipped its first merchant GPU order in Q2 2026 and completed correlation for a second AI hyperscaler customer, laying the foundation for 2027 share growth. The next large order surge from these customers is expected in H1 2027. Growing demand for large AI accelerator clusters is driving robust growth in networking connectivity testing across copper and optical technologies. Teradyne expects the co-packaged optics (CPO) test market alone will reach $300 million to $700 million by 2028, and has positioned itself via the acquisition of Quantify Photonics, development of the Photon 100 optical test solution, and the MLTP joint venture for copper connections. - **Product Test and Robotics**: The multibillion-dollar market for assembly, automation, and test equipment for AI data center contract manufacturers and ODMs is expected to grow at mid-double-digit rates through the end of the decade. New products like the Omnics production board test platform have already seen strong initial customer traction in Q2 2026. Robotics growth is aligned with overall company growth, with electronics manufacturing for AI data centers as the fastest growing end-market; a new U.S. robotics manufacturing center is on track to open in late 2026. ### Capital Allocation - The company's top priority is reinvestment in organic and inorganic growth opportunities across the wafer-to-data center value chain, including increased R&D for next-generation products and expanded customer teams for large hyperscaler and semiconductor customers. Excess capital is retained for M&A opportunities, and the company continues to return capital to shareholders via dividends and share buybacks. At quarter-end, Teradyne held $517 million in cash and investments, generated $378 million in Q2 free cash flow, paid $20 million in dividends, and repurchased $69 million in shares.

Guidance

- Third quarter 2026 guidance calls for total revenue in the range of $1.2 billion to $1.3 billion, with non-GAAP EPS between $1.85 and $2.15. Gross margins are expected to be 58% to 59%, and operating expenses are projected to be 29% to 30% of revenue, resulting in a non-GAAP operating margin of 28% to 30%. - Management updated the 2026 annual revenue split to 50% to 52% in the first half, from a prior wider range. The second half 2026 outlook has strengthened on continued robust demand, with growth expected year-over-year and quarter-over-quarter in memory, auto/industrial, IST, product test, and robotics, partially offset by seasonal softness in mobile and timing-related lulls in compute order deliveries. - Q4 2026 operating expenses are expected to be comparable to Q3 guidance, positioning the company for accelerated growth in 2027. - Management expects 2027 will be another year of healthy overall growth, aligned with the 15% to 20% midterm transistor and bit growth trajectory, driven by ATE TAM expansion and ongoing market share gains. - Teradyne will publish an updated long-term target earnings model at its Q4 2026 earnings call.

Segment performance

Total company revenue for Q2 2026 was $1.3 billion, up over 100% year-over-year and up 4% quarter-over-quarter. Non-GAAP EPS was $2.47, up over 300% year-over-year. Non-GAAP operating income was $448 million, with an operating margin of 33.7% and a gross margin of 59.8%. 1. **Semiconductor Test (Semi-test)**: Total revenue was $1.122 billion, up 128% year-over-year and $11 million quarter-over-quarter. It contributes 86.3% of total company revenue. The segment breakdown is: - SOC: $843 million (64.8% of total revenue), with compute making up 70% of SOC revenue. Compute SOC revenue grew nearly 600% year-over-year, driven by AI hyperscaler and merchant GPU demand. Auto and industrial SOC strengthened year-over-year, while mobile grew 10%+ quarter-over-quarter but remains below historical levels. - Memory: $212 million (16.3% of total revenue), a new record, up quarter-over-quarter. This is the third consecutive quarter of over $200 million in revenue, driven by strong demand for HBM and DRAM test solutions and a resurgence in NAND test. The segment's book-to-bill ratio was over 2. - IST: $67 million (5.2% of total revenue), up 94% year-over-year and over 150% quarter-over-quarter, driven by AI-related HDD storage demand. 2. **Product Test Group**: Revenue was $107 million (8.2% of total revenue), up 26% year-over-year and 33% quarter-over-quarter. It saw broad-based growth across production board tests, optical tests, defense/aerospace, and high-speed interconnect testing at the multi-lane test products joint venture (MLTP). 3. **Robotics**: Revenue was $100 million (7.7% of total revenue), up 33% year-over-year and 9% quarter-over-quarter. Electronics manufacturing and semiconductor-focused revenue (driven by AI data center build-out) increased 50% quarter-over-quarter and is now the robotics segment's largest end-market. U.S. sales account for 32% of total robotics revenue.

Risks & headwinds

- CPO market growth and adoption timelines remain uncertain, leading to a wide range of projected 2028 TAM for CPO testing. The timing of technology transitions (cable to backplane, pluggable to XPO/CPO) is in constant flux, creating uncertainty for networking test revenue timing. - The correlation between WFE growth and ATE TAM growth is not tight on an annual or quarterly basis, due to a 1-year lag between WFE investment and volume wafer production, which can lead to unexpected deviations from projected growth in any single year. - Supply chain disruption risk remains a top industry concern, underpinning the push for dual-vendor qualification at major compute customers; all players remain exposed to weaknesses across the supply chain. - Teradyne must compete for every customer contract at each stage of the production chain, as customers select the best-of-breed solution for each test step, even as customers value cross-stage supplier alignment. Share gains in the fast-growing compute segment are incremental over multiple years as qualification progresses.

Analyst Q&A

• Q: Analyst asks if the 8% of semi-CAPEX allocated to test is the correct long-term ratio, when the ATE TAM is projected to hit $20 billion by 2028 as WFE reaches $250 billion. When will current dual-vendor qualifications add to share gains, and what is the long-term aspirational market share? /

  A: The share of semi-CAPEX going to test increased from 4% in 2023 to 7% in 2025, and hit 8% in the first five months of 2026. Management expects this ratio will settle between 7% and 9%, with a central tendency around 7% to 8%. Teradyne is gaining share across most market segments, but the fastest growing segment (core compute) is where the company starts with the lowest current share, so overall share gains will be incremental year-over-year. Management agrees with Advantest's updated TAM projections, and expects slight incremental SOC share gains for Teradyne this year.

• Q: What is the update on the robotics business strategy, and what is its growth trajectory tied to AI data center build-out? /

  A: Management expects robotics will grow in line with the rest of Teradyne's business over the midterm. The fastest growing robotics end-market is electronics manufacturing and semiconductor assembly/test for AI data centers, driven in part by reshoring trends that are increasing automation investment. This positions robotics to follow the same strong growth trajectory as other data center-connected Teradyne segments.

• Q: Why is Teradyne growing twice as fast as WFE in 2026, and what would make Teradyne grow faster or slower than WFE in 2027 if WFE grows 30%? /

  A: The correlation between WFE and ATE growth is strong over 3-5 year periods, but not tight at the quarterly or annual level, due to a roughly 1-year lag between WFE purchases and volume wafer production. In 2026, the ATE share of semi-CAPEX rose to 8% from 7% in 2025; it is possible this share will revert to ~7% in 2027 as WFE investment catches up, leading to ATE TAM growth that is slower than WFE growth in 2027 even as overall ATE TAM still expands. The time lag and differences in investment timing mean the relationship does not hold year-to-year, only over the longer term.

• Q: What is the CPO test TAM size in 2027, and how confident is management in strong double-digit long-term networking growth? /

  A: The 2028 CPO TAM range of $300 million to $700 million reflects uncertainty around how quickly high-volume CPO ramps will succeed in 2027; successful ramps would push 2028 TAM to the high end of the range. In 2027, CPO test revenue is expected to be towards the low end of the range, likely around $100 million to $200 million. Management is highly confident in strong midterm networking growth aligned with 15% to 20% transistor growth, as growth occurs across all networking technologies (copper, pluggable, NPO, XPO, CPO), and Teradyne is positioned to capture share across all of these segments, in addition to its strong existing position in switching silicon test.

• Q: Can optical testing be completed entirely at insertion one, eliminating the need for insertion two testing after bonding? /

  A: It is still very early in the maturation of silicon photonics production, and industry definitions of test insertions are not yet standardized. While testing at insertion one identifies known good dies, critical optical performance tests (for loss and polarization, for example) cannot be completed until after lens assembly and bonding, because the lens is a core part of the optical path. Some testing can be deferred after singulation, but not all required validation can be completed at insertion one, so post-bonding wafer-level testing remains necessary.