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Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0 and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0 and a member of our team will be happy to help you. Ladies and gentlemen, good morning, and welcome to the Teradyne Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. As a reminder, today's call is being recorded. I would now like to turn the call over to Amy McAndrews, VP of Corporate Relations for Teradyne. 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, Gregory S. Smith; our CFO, Michelle L. Turner. Today we will discuss details of our performance for the second quarter of 2026 and our outlook for the third quarter. The press release containing our second 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 31, 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 technology-focused investor conferences hosted by Goldman Sachs and Citi. Our quiet period will begin at the close of business on September 11, 2026. Following Greg and Michelle's comments this morning, we will open up the call for questions. This call is scheduled for one hour. Gregory?
Good morning. For the second quarter in a row, we delivered record revenue and once again AI was the driver. Total company revenue topped $1.3 billion, up over 100% year-over-year with non-GAAP EPS of $2.47, up over 300% year-over-year. All three of our business groups, Semi Test, Product Test and Robotics, grew year-over-year on AI demand across all parts of the business. At more than 60%, AI-driven revenue is the key proof point that our wafer-to-AI data center strategy is delivering results. There are many superlatives that we could use to describe this quarter's results. Michelle is going to walk you through the details. I would like to use my time today to set context for what we believe is a multiyear growth phase for our entire business driven by the continued AI build-out. Certainly, this is clearest in compute — across CPUs, accelerators, networking, and in memory for HBM and DDR. However, data centers are now also the primary growth drivers for flash memory, hard disk drives, power, board test, high-speed interconnect, and robotics. The long timeline of data center investment plans has given our SoC and memory customers the confidence to aggressively invest in wafer fabrication equipment for new process technologies and additional wafer capacity. For years, semiconductor capital investment grew slowly. ATE grew even more slowly within it. That is changing. Two factors are now tailwinds for the ATE TAM. The first is overall semiconductor capital investment, particularly wafer fab equipment, WFE, which has begun accelerating. More WFE means more wafers; new equipment generations enable denser process nodes. More wafers and higher density together mean more transistors to test in SoC and more bits to test in memory. WFE CapEx is now forecasted to approach $250 billion, with 5% to 10% annual growth in 300-millimeter wafer production and 15% to 20% CAGR in total production over the midterm. Total non-memory transistor production is a reasonable first-order predictor of the SoC TAM. Every transistor must be tested and a given process node yields roughly the same transistor count per wafer regardless of device type. Memory bit production is the analogous predictor for the memory TAM, also forecast to grow at a 15% to 20% CAGR over the midterm. Neither of these predicts the ATE TAM precisely in any given year but both signal direction. Transistor and bit growth rates have inflected upward and are expected to hold a steeper slope through the end of the decade. The second factor is advanced packaging. Wafer transistor counts do not vary with die size, but the required test volume scales with acceptable quality level for the devices being tested. As accelerators, CPUs, and networking devices pack in more chiplets, memories and eventually CPO, a single latent defect has a greater impact on final device yield, raising test intensity per die in multichip packages. Both package volume and dies per package are forecast to keep rising through the end of the decade, providing a sustained tailwind to the compute TAM. The result: after more than a decade of semiconductor capital equipment outgrowing the test TAM, the trend reversed in 2024 and test is now outpacing fab equipment. With WFE long-term forecasts becoming clearer, we are increasingly confident in long-term ATE growth. As WFE CapEx approaches $200 billion by the end of the decade, we see a path for overall ATE TAM to reach or exceed $20 billion. In addition to being in a growing market, we are confident that we will be able to gain share over the midterm. With the ramp of merchant GPU and the initial dual platform qualification in our second major hyperscaler, we are positioned to gain share in the core compute segment. Our leadership position in HBM and DRAM maximizes our exposure to DRAM-driven growth. And segments where we have history — memory, mobile, industrial and automotive — are positioned for growth driven by cloud edge and physical AI, whether it is in cars, robots, phones or wearables. Before I hand off to Michelle, I would like to share a few demand highlights and their impact to share gains. First, in memory, demand has increased from strength in HBM and DRAM and a resurgence in NAND final test. The 2026 memory TAM is likely to be more than 40% larger than in 2025 with notable growth from the first half of 2026 to the second half. A highlight in memory is the growth in HBM-based die test. Our Magnum testers have logic test capabilities that provide attractive swing-tool advantage for memory makers. Now on to compute. In Q1, we received our first order from a merchant GPU customer, which was delivered in the second quarter. Also in Q3, we completed correlation at a second hyperscaler, increasing our confidence in our 2027 market share growth. As we discussed last quarter, our expectation is that our compute business would be concentrated in the first half. We have multiple programs across networking and that build-out capacity in the first half is now being utilized. The next surge for these customers is expected to be in the first half of 2027. Since dual vendor strategies are emerging at the largest compute customers, I would like to give you a bit more color about how we think this will play out. These customers recognize the importance of derisking their supply chain. We see this as an important share driver over the next few years. The dual vendor qualification process generally runs through four phases. The first, an opportunity to compete. Second, developing a working solution. Third, correlation. And then finally, a production ramp. If successful, it takes nine to 12 months from the start to the ramp. After the initial dual-sourced part ramps, we enter a fast-follower phase where we have a compute customer where the total number of network connections is growing fast, the timing of transitions from cable to backplane and from pluggable to NPO and CPO is in constant flux. Our belief is that there is robust growth in all of these technologies. This drove our acquisition of Quantifi Photonics, the development of the Photon 100 solution for optical connections, and our MultiLane Test Products joint venture for copper connections. We are working with multiple ecosystem partners to develop leading-edge solutions from silicon photonics wafers to full data center racks. We expect CPO alone will be a $300 million to $700 million market by 2028. Our IST business grew revenue 2.5x quarter-over-quarter on strength in HDD fueled by AI. We expect continued growth of our IST business in the second half. With the strong forecast for greater than 20% annual exabyte growth and our design wins, we are confident this business will grow over the midterm as well. The data center build-out will drive growth for our Product Test and Robotics groups through the end of the decade as well. The logic chain is straightforward. More data center construction drives more rack shipments per year, which is driving growth at contract manufacturers and original design manufacturers. This, combined with the rapid advancement of data center architectures, creates a significant opportunity for Teradyne to provide solutions well matched to the volume, quality, and flexibility data center applications require. This is best reflected in the total available market for automation and tests among contract manufacturers and ODMs. We believe that there is currently a multibillion-dollar market for assembly, automation, test and burn-in equipment, and we expect mid-double-digit growth rates through the end of the decade. By addressing these applications with enhanced production board test, optical test, backplane test and robotic-assisted test and assembly, Teradyne is uniquely positioned to follow the value chain from wafer to data center. Our wafer-to-data-center strategy is working. Our optimism around 2026, 2027 and through the midterm has grown. We are leaning further into investments to capture opportunities across the value chain, both organically and inorganically. And we are investing in next-generation products across our entire portfolio. As we win business, we build out customer teams for major hyperscalers and semiconductor suppliers. The fact that we are leaning into these investments now is a sign of our confidence in the sustainability of this market growth. We expect 2027 to be another year of healthy growth for Teradyne consistent with the transistor and bit growth dynamics I described earlier. It is clear to us that increases in WFE spend will be a primary driver to ATE TAM growth and this sets the approach for how we will be updating our target earnings model, which we will share in our Q4 earnings call. With that, I will turn the call over to Michelle.
Thanks, Gregory. Let me build on that with the detailed results for the quarter starting with total company performance. Both revenue and non-GAAP EPS came in above the high end of our guidance range as strong AI-driven demand continued across all parts of our portfolio. Sequentially, total company sales were up 4% from last quarter's previous record. For the first half of 2026, we delivered $2.6 billion in revenue and $5.02 in non-GAAP EPS, up close to 100% and 275% year-over-year, respectively, driven by all things AI. Building on that, let's take a deeper look at revenue starting with Semi Test. Our Semi Test team once again cleared the $1 billion high-water mark established last quarter with revenue up $11 million from Q1 and 128% from Q2 2025. The revenue breakdown within Semi Test was SoC of $843 million, memory at $212 million, and IST at $67 million. As expected, compute order timing was more than offset by another record memory quarter, and IST grew over 150% quarter-over-quarter. Within SoC, compute remains the largest portion of our SoC product revenue at 70%. Compute revenue grew nearly 600% year-over-year on strong AI-related demand. In the quarter, as Gregory mentioned, we completed correlation with the second AI hyperscaler customer, and we shipped the previously announced merchant GPU order. This further diversifies our compute portfolio, creating a foundation for future market share gains over the midterm. Auto and industrial continued to strengthen over last year, driven by power management demand increases for AI data center build-outs. Mobile grew seasonally quarter-over-quarter double digits, so it remains below historical levels in a muted part of the overall SoC portfolio. Now turning to memory. Our memory business delivered another strong quarter at $212 million in revenue. This is another record quarter, up from the previous one set in Q4 2025. This represents our third consecutive quarter of revenue over $200 million driven by robust HBM and DRAM test solutions demand and a resurgence in NAND. Demand signals remain strong as memory manufacturers are planning capacity additions further out in time, driving our book-to-bill ratio in the quarter over two. Finally, turning to IST. Revenue in the quarter was $67 million, up 94% from the prior year, driven by AI-related HDD storage demand from all three major suppliers in this space. Now on to Product Test Group. Revenue was $107 million, up 26% year-over-year and 33% quarter-over-quarter. The group experienced broad-based growth across all end markets from production board test, to optical test, to defense and aerospace to scale-up networking at our newest portfolio addition, the MultiLane Test Products JV, also known as MLTP. Last quarter, we announced our new production board test platform, which is focused on enabling earlier detection of defects that are impacting the build-out of AI data centers. The initial customer traction is strong with units already shipping in the second quarter and continued growth expected in the second half. Similarly, momentum is building in MLTP as the need for high-speed IO in data center interconnect test solutions is increasing. Both Omnyx and MLTP are examples of our wafer-to-AI data center strategy in action; both solutions focus on solving our customers' most critical pain points along the value chain. As a result, we anticipate their continued growth in the second half of the year. Robotics revenue was $100 million, up 33% year-over-year and 9% quarter-over-quarter. Electronics manufacturing and semiconductor revenue increased by 50% from Q1 and is now the largest end market segment in this group which includes AI data centers. Our U.S. sales increased to 32% of the robotics sales. Aligned with this, our U.S.-based manufacturing center is on track for opening later this year. Now moving down the P&L. Strong earnings results continued in the second quarter, driven by robust AI-driven volume and favorable product mix. Gross margins for the quarter were 59.8%, up 250 basis points year-over-year driven by strong Semi Test volume and product mix. Sequentially, gross margins were down 110 basis points driven in part by one-time benefits in Q1. OpEx increased as expected, driven by more R&D and go-to-market investment for 2027 growth, plus higher variable compensation on stronger results. Finally, non-GAAP operating income was $448 million with an operating margin of 33.7%. Now moving to capital allocation. Our first priority for capital continues to be reinvesting into the business, aligned with the growth opportunities we see along the wafer-to-AI data center value chain. That means continued R&D investment in innovation and next-gen technologies as well as continued investments in COGS and CapEx aligned with scaling our operations and supporting our current and future customers with demo assets. Beyond that, our capital allocation strategy remains consistent: maintain cash reserves to run the business and keep dry powder available for accretive M&A. We ended the quarter with cash and investments of $517 million, up over 30% from last quarter. We had free cash flow of $351 million. For the first half of 2026, free cash flow was $579 million, up 150% from the prior year period. Working capital, predominantly inventory investment, increased in support of future sales. As discussed last earnings call, capital expenditures increased to $26 million from last quarter driven by continued investments in innovation and operations scaling. We paid $20 million in dividends in the quarter, and our share buybacks were $69 million. Now looking ahead to our third quarter guidance. For the quarter, we expect revenue in the range of $1.2 billion to $1.3 billion and non-GAAP EPS of $1.85 to $2.15. Gross margins are expected to be in the range of 58% to 59% reflective of product mix and new product launches. Operating expenses are expected to run at approximately 29% to 30% of third quarter sales, driven by continued investments in R&D and go-to-market. The non-GAAP operating profit rate is expected to be between 28% and 30%. Based on current customer order visibility, we are updating our first-half weighted revenue to 50% to 52% of annual revenue. The outlook for the second half has strengthened, and we have narrowed the range from three months ago with increased visibility and continued robust demand signals from our customers. The range also takes into account revenue timing across quarters or years. To aid in your modeling, we expect growth in the second half compared to the first half in memory, auto and industrial, IST, Product Test and Robotics groups. We expect this growth will be offset by softness in mobile and order timing in compute. We anticipate a resurgence in growth in 2027 driven by overall ATE TAM expansion and market share gains. Aligned with the strength in demand signals, we expect OpEx in Q4 to be comparable to Q3 guidance, positioning us for further growth in 2027. In closing, once again, our team delivered exceptional financial results, meeting our customers' increasing AI demand needs through strong execution and a maniacal focus on customer satisfaction. We remain confident in achieving our target earnings model at an accelerated pace and look forward to providing an update in our Q4 earnings call. I will close by thanking our Teradyne team for their execution and discipline this quarter, delivering for both our customers and shareholders. With that, we will open the call for questions. Operator?
分析師問答
We will now be taking questions from Teradyne's research analysts. Our first question today comes from Timothy Arcuri with UBS. Your line is now open.
Thanks a lot. Gregory, in correlating the test TAM to the WFE TAM, typically it has been about 8%. If I look at your TAM slide, it looks like the upper end of the range is like $16 billion to $17 billion for next year. Some of us, like me, think that WFE is going to be $200 billion, so it seems like that number holds next year. When I look out to 2028, some of us think WFE can be $250 billion. That is like $20 billion, which is quite a bit higher than even the upper end of what this slide shows. My question is: is 8% the right number? What are the puts and takes on that?
Yes, Tim, first of all, I want to thank you. The investor meetings that you helped mediate for us recently really gave us a ton of insight in terms of how people were thinking about our market and our model. We have been going back and doing some homework on this. The thing you are bringing up in terms of that 8% is a really interesting trajectory. If you look back to 2023, it was down near 4% of the total CapEx spent on test equipment. By 2025, that had gone up to 7%. For the first five months of 2026, it is 8% of total semiconductor CapEx spent on test equipment. So it is a rocket trajectory. As I said in my prepared remarks, there are reasons why we think that is happening connected to advanced packaging. Right now, we are not sure whether it is going to settle, but we think it will settle somewhere in the 7% to 9% range; it is not going to continue to go up from there. So I think we are considering it could settle down in the 7% to 8% range, but it could go up to 9%.
Got it. Okay, great. Thank you. And then from your slide, it looks like you think the range of like $12 billion to $14 billion is pretty similar to the new TAM range that another competitor put out last night because they do not include burn-in in their TAM. If I use those TAM numbers and I use your loading for the back half, it basically implies that Q4 is basically flat quarter-on-quarter. I get your test share for this year is up just a touch, but it is still basically flat, in the 37% range. So my question is: when do all these new calls start to add to share gains? We talked about these calls and what is the right long-term share to use — is 40% your aspirational share? Is 42% the right number? When will these start to show up in share gain? Thanks.
Taking that bit by bit, I think the numbers that competitor put out for the total TAM both SoC and for memory are in the right ZIP code. We were surprised when they had not brought it up last quarter because it seemed like the writing was on the wall that the TAM was increasing strongly. Their commentary was that they believed they would continue to gain share in SoC and lose a bit of share in memory. I agree with their commentary about memory. In terms of SoC, it is probably going to be pretty flat, maybe a slight incremental gain for us year-on-year. We are gaining share in most segments, but the part of the market that is growing most strongly is where we are starting with the lowest share. The important thing for us in 2026 is that our share in the compute segment is stabilizing and starting to inflect upward. You will start to see some effect of share change in 2027, but it will be gradual. It is a socket-by-socket thing, and we are riding a big upward wave.
We will take our next question from Mehdi Hosseini with SIG. Your line is now open.
Yes. Thanks for taking my question. Two from my end. Gregory, when I look at the way you are laying out the company's strategy, especially how you illustrated it in your slide, it seems like you are looking at test as holistic, starting from wafer and going all the way to the rack and data center. To what extent are you still focused on consolidating test insertion, especially before we get to complete package? Are you facing challenges? Or is that lower priority and you are more focused on the holistic approach you laid out in your slide?
As you look at this wafer-to-data-center journey, the through line is that Teradyne is a company that tests things and our robotics help build things. At just about every step of that process, we are a participant in an ecosystem. When we build test equipment, it is put into test cells with material handling equipment from a number of different suppliers. The same is true at every step. We are mindful that our customers appreciate what the open ecosystem has delivered. The best example of ecosystem development is in silicon photonics. It is early days where there are individual partnerships against initial customer ramps, but ultimately that will turn into the same open ecosystem where each test company works with material handling providers and vice versa. There is some potential pull-through or customer value from getting more of their tests from the same supplier. Leveraging work from wafer sort to final test to system test to burn-in into onboard test and beyond provides some value. But our customers are adept at choosing the best solution at each stage, so we have to compete for everything we pursue.
Yes. I am not sure there is a very concise answer — it's an evolving supply chain with some disruption as to how it will all come together. To be determined. Does that summarize your answer?
I think the supply disruption is on the mind of everybody in this space. We are all only as strong as the weakest link in the whole supply chain and our customers feel the same way. That is one of the key things underpinning the drive toward a dual vendor strategy in the compute space. They are working to qualify multiple test suppliers because they want assurance they can get the capacity they need when they need it. It is not just a matter of how big any one test supplier can get, but the need to have different suppliers to do each step in the chain.
I do not want to monopolize your time, but if I may ask my second question, which has to do with robotics. This is the part of the business that is not getting as much headline attention, but it is part of AI and one of the verticals. Has there been any update to the strategy? You have been expanding capacity in the U.S. to capture some opportunities there. How should we think about the trajectory of AI recovery, especially as it fits into your longer-term model?
We believe robotics is positioned to grow in proportion with the rest of the company over the midterm. The important drivers are physical AI applications. Our fastest-growing segment in robotics is electronics manufacturing and semiconductors, which is part of the AI theme. The data center build-out and the desire to de-risk that build-out is pushing automation of assembly and test processes with significant budget behind it. We think robotics will follow the same growth path as the parts connected to the data center build-up.
Thank you. Our next question comes from C.J. Muse with Cantor. Your line is now open.
Yes, good morning. Thank you for taking the question. First question on memory: you talked about growth half-on-half. Could you speak to any changes in the drivers there, whether you are seeing an uplift in NAND and V-NAND versus HBM? And perhaps more importantly, how are you thinking about memory into 2027? Should we expect lumpiness in the first half or will that strength continue in the first half?
Coming into the year we expected HBM to be significantly stronger — 2024 was a big year for HBM, 2025 had some digestion, but long-term capacity add plans for HBM suggested 2026 would be very strong. What surprised us was how strong the DDR business is; that is coupled to resurgence in CPU-oriented applications and edge AI uses that employ LPDDR. DDR is stronger now than we thought in January. In January we anticipated strengthening in NAND but had not yet heard it from memory customers; we were waiting to hear that they would need more NAND capacity because of a gap between data center demand and memory capacity planning. We are now seeing the beginning of that inflection and are receiving pull from customers for more NAND capacity. Looking into 2027, I do not expect particular lumpiness in memory. Capacity additions are being planned and wafers are being planned for output; customers are making test capacity add plans into 2027 now.
Perfect. As a follow-up, if you could speak to gross margin in the guide and what is driving the roughly 130-basis-point headwind. You mentioned new products — how much is from new products, how much is mix shift? Any help on the trajectory into December and 2027 would be helpful. Thank you.
Hi, good morning, C.J., it is Michelle. Let me start with some context, especially for those new to Teradyne. Overall gross margins tend to be variable quarter to quarter: over the last five years you will see about a 400-basis-point swing quarter-on-quarter. When you look at annualized gross margins, we tend to be tighter, within about 200 basis points. Part of what you are seeing from first half to second half is just normal quarter-to-quarter variability. We also had some non-recurring, favorable impacts in the first half that are not repeating. Going from Q2 to Q3 in the guide at 58% to 59%, part of that is product mix: coming off high Semi Test and Compute volumes as we start to ramp other parts of the portfolio. We will have more auto and industrial in the second half, more IST, more robotics, product test and memory. All of that together gets us to a full-year gross margin range just shy of our target earnings model, around 59%. So there is a product mix element, new product introduction, and some pricing elements. Memory will continue to be a strain from an overall margin perspective and we expect that to continue in 2027.
Thank you. We will take our next question from Vivek Arya with Bank of America Securities. Your line is now open.
Thanks for taking my questions. Gregory, I want to dig into how tight the correlation is between WFE and your growth prospects. This year your sales are roughly growing twice as fast as WFE growth — why is that? And if I carry that argument into 2027, if WFE does not equal that growth, what scenarios would make you grow faster or slower than that base?
The correlation is strong over three- to five-year periods, but not at a quarter level. When we drew the charts, we saw a possible year lag between a significant increase in WFE and when it echoes in ATE. So it is not a great year-by-year predictor, but over time it guides us. The WFE data helped us determine whether 2026 was an unusually strong but non-sustainable market. It gave confidence that this time the WFE lean is real and will drag things up. Could you repeat the second part of your question? I want to make sure I get it right.
Sure. For 2027, expectations are for WFE growth to be mid-teens year-on-year. Under what scenarios would ATE TAM or Teradyne grow faster or slower than that base?
We are outpacing WFE growth in 2026, so if you use WFE spend as a straight projection, it would underpredict ATE for this year. Looking to 2027, WFE is catching up a bit. The percentage of semicap that is test equipment has gone from 7% to 8% in early 2026; next year it could revert to 6% or 7%. I expect an increased TAM in 2027, but we are still evaluating whether that percentage will stay flat or how far it will go down.
I guess my question is why would it go down?
It relates to time lag. This is correlation, not precise causation. People buy fab equipment about a year before wafers come out of the factory. Once wafers are produced, our lead times are roughly 16 weeks to revenue for test equipment — about three quarters from fab equipment revenue to test equipment revenue. There is also unpredictability about required test intensity on a part-by-part basis. Yield issues or quality issues can create significant overbuying in ATE in some years, while efficiency gains can reduce test time in others. So it is an over-time guide, not a tight link for any specific period.
For my follow-up: curious to understand your position on CPU testing. That has become a new area of growth. Historically, Teradyne has been more exposed to ARM than x86. How do you see that developing? If ARM CPUs take share, does that help Teradyne also take share in that market?
We are seeing increased strength in CPU business. We benefit more as server CPU share shifts toward ARM, which gives us a greater share gain opportunity. We are also working to gain share in the x86 space. If the market shifts more toward ARM, that positions Teradyne for greater share gain in compute.
Thank you. Our next question comes from Krish Sankar with TD Cowen. Your line is now open.
Hi, thanks for taking my question. I have two. First, on the CPU side: you are more exposed to the ARM ecosystem, but it seems like test intensity of a CPU is only 25% better than for GPU. Is it fair to assume that merchant GPU opportunities are larger even with one customer than trying to get more on the CPU test side?
The accelerator market has the highest test intensity, and your one-to-four ratio for test intensity is reasonable. The key is the ratio of accelerators to CPUs. As the number of CPUs increases, that becomes more important. There are bottleneck resources through the supply chain — substrates for CoWoS, HBM supply, advanced node fab capacity. Our customers try to optimize utilization of scarce resources. Test suppliers are positioned to test all wafers that get fabricated. The share between accelerators, merchant GPU, and CPU are all opportunities where we can gain share, and we are not overly hung up on whether CPUs or GPUs grow faster because most test seconds are at the wafer level and the same number of wafers will be produced.
Got it. Very helpful. My follow-up is on silicon photonics testing. Correct me if I am wrong: the view is that a competitor is strong in insertion one and you are stronger in insertion two — is that correct? Also, some in the industry believe insertion two can be skipped if you have a known-good die and a good die-to-die fit. Thoughts?
Anecdote: we were talking with a customer and discovered 15 minutes into the conversation that we and the customer had different definitions of insertion two. It is so early in production that it's a mistake to draw broad conclusions. Getting a known-good die at insertion one does not help as much in terms of the optical engine quality that you need for CPO. Production steps between insertion one and insertion two include bonding the electronic IC to the photonics IC wafer and applying the lens assembly on top of the photonics, which is critical to the optical path. Many loss and polarization tests cannot be done until that lens assembly is applied. The real question is how much testing needs to happen at the wafer level post-bonding and how much can be deferred until after singulation. You still need to validate the quality of the device at insertion one.
We will go next to Jim Schneider with Goldman Sachs. Your line is now open.
Good morning. Thanks for taking my question. Following up on prior comments: you talked about the CPO TAM alone being $300 million to $700 million by 2028, which is a wide range. How would you think about what the size could be or is likely to be next year, if material? And maybe talk about the certainty level you have in your overall networking business growing strong double digits over the next three years on a compounding basis?
The wide range is honest: market sources differ widely on the number of CPO ports to be produced. It comes down to how quickly initial higher-volume ramps of CPO for scale-out succeed in 2027. If that goes well, 2028 trends toward $700 million; if not, it will be closer to $300 million. Next year we are probably nearer the low side of that $300 million — a low-end path would be around $200 million. I don't think as much upside next year as in 2028. Networking overall is an area where we have confidence. We expect transistor growth at 15% to 20% over the midterm and believe networking TAM will grow proportionally. It is not just CPO: copper connections are moving from cable to backplane, pluggables are growing and will transition to NPO and CPO. Our strategy is to benefit from growth in all those segments, which is why we did Quantifi Photonics, the MLTP JV, and developed Photon 100. Behind this is networking silicon, switch silicon, and Teradyne has a strong position expected to grow over the midterm independent of the physical layer.
That is very helpful, Greg. Thank you. Quick clarification for Michelle: relative to prior commentary on gross margins or variability, you do not see anything in 2027 — customer mix or product mix, etc. — that would drive a material headwind to gross margins year-over-year?
No, it will be pretty consistent in terms of annual ranges. It will come down to product mix. Compute will be heavy within the year along with the rest of the portfolio growing. We are not anticipating fundamental changes in gross margin.
Thank you. Our next question comes from Shane Brett with Morgan Stanley. Your line is now open.
Thank you for letting me ask a question. My first question is on memory. If I assume your memory test revenue growth half-on-half, we get to full-year growth north of 70%. Slide 6 of your presentation deck shows the memory test TAM growing at approximately half the rate of memory brick growth. Two-part question: how should I think about memory test growing 2x bit growth this year? And how relevant is test growing at half the run rate of bits given the test intensity of HBM and extremely low NAND for the last few years?
I may need to take that offline; you are interpreting a lot from that chart. The chart shows big growth trajectory and ATE TAM history; we were not trying to project memory ATE TAM specifically. Principles: in memory there is a correlation between bit growth and ATE but it's not a fixed factor. In memory testing, the part of the market that tests every bit is served by lower-priced, less differentiated equipment than final testing. So one part of the market follows bit growth and another follows technology shifts — HBM3 to HBM4, DDR5 to DDR6, next-generation flash. Memory has two flywheels: bit growth and technology change. It is also a very efficient test market. Right now, SoC TAM is about five times the size of the memory TAM even though memory revenues have caught up due to ASP changes. Our view is the memory TAM is positioned for similar growth rates over the midterm as the SoC TAM.
Understood. Thank you. For my follow-up: you talked about auto being better half-on-half. Can you talk about the path back to prior peak? How much of prior peak was China-driven? There is an element of China localization risk, but also some tailwinds you are seeing from the Infineon strategic partnership announced in January 2025. Thanks.
I think 2027 is likely to be up to or exceed prior peaks in that space; we have not finished all that work but that is my view. There is some China localization. Our China power mix between prior peak and now is above the same; we have local competition but also players we are doing well with. In power, the Infineon deal helps most in wide-bandgap discrete test — a smaller but robustly growing segment. The technologies and people in that group position us to build a leadership position in testing wide-bandgap discretes.
Got it. Thank you very much.
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