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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. At that time, if you wish to ask a question, please press star 1 on your telephone keypad. 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'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 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, Terranen 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'll open up the call for questions. This call is scheduled for one hour. Greg?

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 and quarter-over-quarter, highlighting the 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, and Michelle is going to walk you through the details. I'd like to use my time today to set context for what we believe is a multi-year 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, and ATE grew even more slowly within it. That's changing. Two factors are now tailwinds for the ATE TAM. The first is overall semi-cap investment, particularly wafer fab equipment, WFE, which has begun accelerating. More WFE means more wafers and new equipment generations enable denser process nodes. More wafers in 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 by the end of the decade, driving 5% to 10% annual growth in 300-millimeter wafer production and 15% to 20% CAGR in total transistor 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% TAGR 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 don't 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 multi-chip 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 semi-cap 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're increasingly confident in long-term ATE growth. As WFE CapEx approaches $250 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 historically had high share, like flash memory, mobile, industrial, and automotive, are positioned for growth driven by cloud, edge, and physical AI, whether it's in cars, robots, phones, or wearables. Before I hand off to Michelle, I'd 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 the NAND final test. The 2026 memory TAM is likely to be more than 40% larger than 2025, with notable growth from the first half of 2026 to the second half. A highlight in memory is the growth in HBM-based dye test. Our Magnum testers have logic test capabilities that provide attractive swing tool advantages for memory makers. Now on to compute. In the first quarter, we received our first order for 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 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 hyperscalers that build up capacity in the first half that 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'd like to give you a bit more color about how we think this will play out. These customers recognize the importance of de-risking 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 additional parts are converted and ramped. Ultimately, the account reaches a mature dual vendor stage where either platform is used for initial part release. It can take a few years to get from fast follower to mature dual vendor. During the fast follower phase, we expect market share to grow incrementally from zero up to about 30%. Right now, we have one compute customer in the mature dual vendor phase, one in fast follower, and one in qualification prior to ramp. I'd also like to add a little color around networking. Frontier models require ever larger accelerator clusters. This is driving extreme growth in networking for scale out, scale across, and scale up applications. While the total number of network connections is growing fast, the timing of transitions from cable to backplane and from pluggable to XPO and CPO is in constant flux. Our belief is that there is robust growth in all of these technologies. This drove our acquisition of Quantify Photonics, the development of the Photon 100 solution for optical connections, and our multi-lane test products JV 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 to $700 million market by 2028. Our IST business grew revenue two and a half times quarter over quarter on strength in HDD fueled by AI. We expect continued growth of our IST business in the second half. Given 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 required. This is best reflected in the total available market for automation and test 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 tests, optical tests, backplane tests, 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 and 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's 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'll turn the call over to Michelle.

Thanks, Greg. 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 are up 4% from last quarter's previous record. For the first half of 2026, we delivered $2.6 billion in revenue and $5.02 of 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 Semitest team once again cleared the $1 billion high watermark established last quarter with revenue up $11 million from first quarter and 128% from Q2 2025. The revenue breakdown within Semitest 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 growing 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 In the quarter, as Greg mentioned, we have completed correlation with a 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 continue 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, though it remains below historical levels and 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 in-markets from production board tests to optical tests to defense and aerospace to scale-up networking at our newest portfolio addition, the multi-lane test products JV, also known as MLTP. Last quarter, we announced our new production board test platform, Omnics, 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 I.O. and data center interconnect test solutions is increasing. Both Omnics 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 in-market segment in this group, which includes AI data centers. Our U.S. sales increased to 32% of the robotics overall sales. Aligned with us, our US-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% of 250 basis points year-over-year driven by strong semi-test volume and product mix, while sequentially gross margins were down 110 basis points driven in part by one-time benefits in the first quarter. 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 back into the business, aligned with the growth opportunities we see along the Wayford AI data center value chain. That means continued R&D investment in innovation and next-gen technologies, as well as continued investments in cost-of-goods sold 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 creative 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 $378 million in the quarter. 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 $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're updating our first half weighted revenue to 50% to 52% of annual revenue. The outlook for the second half has strengthened and we've narrowed the range from three months ago with increased visibility and continued robust demand signals from our customers. The range also takes into account the timing of orders that could impact revenue timing across quarters or years. To aid in your modeling, we expect growth in second half in comparison to 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 this strength in demand signal, we expect OpEx in Q4 to be comparable to Q3 guidance, positioning us for further growth in 2027. So 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'll close by thanking our Teradyne team for their execution and discipline this quarter, delivering for both our customers and shareholders. With that, we'll open the call for questions. Operator?

We will now be taking questions from Teradyne's research analysts. At this time, if you wish to ask a question, please press Star 1 on your telephone keypad. You may remove yourself from the queue by pressing Star 2. In the interest of time, we ask that you please limit yourself to one question and one quick follow-up. Our first question today comes from Timothy Arcuri with UBS. Your line is now open.

Thanks a lot. Greg, in correlating the test TAM to the WSU TAM, typically it's been about 8%. And if I look at your TAM slide, it looks like the upper end of the range is like $16 to $17 billion for next year, when some of us like me think that WSU is going to be $200 billion. So it seems like that number holds next year. And when I look out to 2028, I mean, you know, some of us think WSU is going to be $250. So that's like, you know, $20 billion, which is quite a bit higher than even the upper end of what this So I guess the question is, like, is 8%, like, in your mind when you think about it, is 8% the right number, and what are the puts and takes on that?

Yeah, so, 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. And so we've been going back and doing some homework on this. The thing that you're bringing up in terms of that 8% is a really interesting trajectory, that if you look back to 2023, it was down near 4% of the total capex spent on test equipment. And by 2025, that had gone up to 7%. The first five months of 2026, It's 8% of total semi-CAPEX has been on test equipment. So it's kind of this rocket trajectory. As I said in my prepared remarks, there are some reasons why we think that is happening connected to advanced packaging. But right now, we're not sure whether it's going to settle. We think it's going to settle somewhere in the 7% to 9% range, but it's not going to continue to go up from there. So I think we're kind of... Thinking it could settle down in the 7% to 8%, but it could go up to 9%.

Okay, great. Thank you. And then from your slide, it looks like you think The range of like 12 to 14, it's pretty similar to the new TAM range that Advantest put out last night because they don't include Vernon in their TAM. If I use those TAM numbers and I use your loading for the back half, it basically implies that CQ4 is basically flat, Q on Q. I get your test share for this year is up just a touch, but it's still basically flat, sort of in the 37% range. So the question is, when do all these new quals start to add to share gains? You know, you talked about these quals, and, like, what's the right long-term share to use? Like, is 40% your sort of aspirational share? Is, you know, 42% the right number? And, like, when will these start to show up in share gain? Thanks.

So sort of taking that bit by bit, I think that the numbers that Admin Test put out for the total TAM, both SOC and for memory, are kind of in the right zip code. We were surprised when they hadn't brought it up last quarter because it seemed like the writing was on the wall that the TAM was increasing pretty strongly. The other commentary that they had was that they believed that they were going to continue to gain share in SOC and that they were going to lose a bit of share in memory. I have to say I agree with their commentary about memory, but I think in terms of SOC, it's probably going to be pretty flat, maybe a slight incremental gain for us year on year. So I would say that we are gaining share in most of the segments of the market, but the part of the market that is growing most strongly is the part of the market where we're starting with the lowest share. The important thing for us in 2021 Okay, great. Thank you.

Thank you. We'll take our next question from Mehdi Hosini with SIG. Your line is now open.

Mehdi Hosini Yes, thanks for taking my question, and two from my end. Greg, when I'm looking at the way you are laying out companies' strategy, especially how you illustrated in your slide, it seems like you're looking at the case as holistic, starting and all the way to the Rackham Data Center. And what I wanted to ask you is, to what extent are you still focused on consolidating the test insertion, especially before we get to the complete package? Are you facing challenges or is that lower priority and you're more focused on a holistic approach that you've laid out in your slide?

So I think as you look at this wafer to data center journey, there's a through line of Teradyne is a company that tests things and our robotics help build things. And just about at every step of that process, We are a participant in an ecosystem. So when we are building test equipment, it's being put into test cells with material handling equipment that come from a number of different suppliers. The same thing is true at every step. And so we're trying to be are very mindful that our customers appreciate what that open ecosystem has delivered. So the best example of that ecosystem developing is really in the whole silicon photonics space, that it's early days where there's individual partnerships sort of against the initial customer ramps, but ultimately that's going to turn into the same open ecosystem where all of the, like each test company works with all of the suppliers of material handling and vice versa. I don't know if that answered your question. I do think that there is some potential pull through or customer value that customers can get by getting more of their test from the same supplier. So in terms of leveraging the work that's done from wafer sort to final test to system test to burn-in into the board test and beyond, there is some advantage to being able to leverage things across those boundaries. But our customers are quite adept at choosing the best solution at each stage. So we have to really compete. for everything that we're getting. Did I get what you were talking about?

Yes, I'm not sure if there's a very concise answer. Is it evolving supply chain with some disruption as to how it's all going to come together is to be determined. Does that summarize your answer?

So I think... The supply disruption is definitely on the mind of everybody in this space. We're all only as strong as the weakest link in our whole supply chain, and our customers feel the same way. And that's one of the key things that's underpinning the drive towards a dual vendor strategy from players in the compute space. So they are working to qualify multiple test suppliers because they want to be sure that they're going to be able to get the capacity that they need when they need that capacity. And it's not just a matter of how big any one test supplier can get. It's also that they need to have the assurance of different suppliers to be able to do each step in the chain.

Got it. And I don't want to monopolize your time, but if I may ask my second question, which has to do with robotics. This is the part of business that is not getting as much headline, but it is part of the AI, is one of the verticals. Has there been any update to the strategy? I know you have been expanding capacity in the U.S. to capture some of the opportunities there, but how should we think about the trajectory of AI recovery, especially as it fits into your longer-term model?

So robotics, we believe that robotics is positioned to essentially grow in proportion with the rest of the company over this midterm. And the important stuff that's going to drive that growth are physical AI applications. Our fastest growing segment in robotics is really electronics manufacturing and semiconductors. And that's, you know, like as Michelle says, that's part of the all things AI. That, you know, the data center build out and the desire to reshore a lot of the data center build out is pushing automation of the assembly process and the test process with a fair amount of budget behind it. So we think that that robotics is going to basically follow the same kind of growth path as all of the chunks that are connected to data center buildup.

Thank you.

Thank you. Our next question comes from CJ Muse with Cantor. Your line is now open.

Yeah, good morning. Thank you for taking the question. I guess first question on memory, you talked about growth half on half. I'm curious if you could speak to any changes in the drivers there, whether you're seeing an uplift in NAND and D5 versus HPM. And then perhaps more importantly, how are you thinking about memory into 27? And should we expect lumpiness in the first half or will that strength continue in the first half?

So this year, I think the Coming into the year, we expected that HBM was going to be significantly stronger. If you remember, 2024 was a big, big year for HBM. 2025, there was a little bit of digestion, but it was clear from the long-term capacity ad plans for HBM that 26 was going to be very strong. The thing that surprised us a little bit was just how strong the DPR business is. And I think that is, to a certain extent, coupled to the resurgence in, like, CPU-oriented applications, so agentic AI. There's also, like, some of the... like SOCAMs use LPDDRs that are driving that market harder than we would have expected. So the DDR market is stronger now than we thought it would be in January. In January, we were talking a little bit about that we, anticipated that we would see a strengthening in NAND, but we didn't hear that from our memory customers yet. We were waiting to hear that they were going to need more capacity in NAND because there was a gap between what data center demand was and what memory capacity planning was providing. What's different now is we actually have seen the beginning of that inflection and are actually getting pull from our customers for more man capacity. Looking into 2027, I don't think we are looking at particular lumpiness in memory. I think that that's going to be... The capacity ads are, you know, there's significant WFE investment increase in memory. There are fabs that are coming online. There are wafers that are being planned for output. And they are all making their test capacity ad plans out into 2027 now.

Perfect. And I guess as a follow-up, if you could speak to gross margin and the guide and what's driving kind of the 130-bits headwind. You talked about kind of new products, but would be curious, you know, how much is from new products, how much is just kind of a mixed ship. And then any help into thinking the trajectory into December and 27 will be very helpful. Thank you.

Hi, good morning, CJ. It's Michelle. So I'll start, and then Greg, feel free to add any additional callers. So just taking a step back, let me share some context, especially for some that are new to the Charityne story. So overall gross margins within our business tends to be variable quarter to quarter. So if you look at past, like, the last five years, you'll see about 400 basis points swing when you look quarter on quarter. However, when you look at kind of the annualized gross margin amounts, we tend to be pretty tight, within about 200 basis points. So part of what you're seeing first half to second half is just kind of the normal quarter-on-quarter variability that we experience. But we also did have some non-recurring, non-operational impacts that were favorable in the first half that aren't repeating. So as you look at going from Q2 to Q3 in the guide at 58% to 59%, part of that is product mix, so coming off the high volumes that we had in semi-test and compute as we're starting to ramp the other parts of our portfolio. So just going back to our opening remarks, we are going to have more auto and industrial in the second half. More IST, more robotics, as well as more product tests along with memory. And so all of that netted together gets us to a full year gross margin range, which is just shy of our target earnings model, so right around the 59%. So there's going to be a product mix element. There's going to be the new product introductions. And there are going to continue to be some pricing elements as well, as we know and you guys know as well. Thank you. Thank you. We'll take our next question from Vivek Arya with Bank of America Securities. Your line is now open.

Thanks for taking my questions. Greg, I just wanted to dig into how tight this correlation is between WFE and your growth prospects. When I look at the current year, your sales are roughly growing twice as fast as WFE growth this year. So I'm curious as to why that is. And then if I were to carry that argument into 27, if WFE does indeed grow 30%, what scenarios would make you grow faster or slower than that pace?

So the correlation is, I would say that the correlation is strong over kind of three to five year periods. that it's not at all correlated when you're down to a quarter level. And when you look at the annual data, when we sort of drew out the charts ourselves, we saw that there can be like a year lag between significant increase in WFE and when it echoes in the impact in the ATE space. So it's There's a time lag in the correlation as well. That's why we're saying it's not a great year-by-year predictor, but the thing that it does is it gives us confidence that we're trying to figure out whether 2026 was an unusually strong, non-sustainable market. And when we were looking at the WFE data, it certainly gave us confidence that we were looking at something that was different than what we've seen in prior cycles, that there's this very heavy lean into WFE investment, and that's going to drag things up. So that's the correlation part. Could you repeat the second part of your question? I want to make sure that I get it right.

Sure. So if we look at 2027 and the expectations are for WFE growth to be, you know, say 30% plus year on year, under what scenarios, you know, would ATETAM or TerraDyn for that matter over or undergrow that growth rate?

So I think right now we have, like we're, outpacing WFE growth in 26. So if you draw the line and sort of use the WFE spend to project what the 2026 TAM should be, it should be smaller than that model would predict. Looking ahead to 2027, I think that WFE is essentially catching up a bit. And the way you sort of think about that in the statistics is that the percentage of semi-cap that is test equipment has gone from 7% and so far in 2026 it's at 8%. It's possible that next year that could revert down to 7% or so. So I would expect that we're going to see a – increased CAM in 2027, but we're still trying to work out kind of whether that percentage is going to stay flat or how far it will go down.

I guess my question is to why. Why would it go down?

Oh, it's the time lag. The thing is, this is correlation, not causation. Well, there is causation, but there's a time lag. So when people buy fab equipment, The money changes hands about a year before the wafers start coming out of the factory because they have to go into front-end facilities that are being built and commissioned and piloted. Once those wafers are coming out, there's about a, you know, our lead times are in the 16-weekish range. So, you know, it's three-quarters on from when the revenue for the factory Thank you. Thank you. and so forth. So you can have situations where, due to yield issues or quality issues, there's significant over-buying in ATE, or you can have other cases where there's higher efficiency test time reductions. So you're not going to see a tight, tight link between this in any particular period, but it's more of an over-time guidance.

And for my follow-up, Greg, I'm curious to understand Thank you. Yeah, so

We certainly are seeing increased strength in CPU business. definitely benefit more. Like, as the share mix of server CPU shifts towards ARM, that gives us a greater share gain opportunity right now. But we are, you know, working hard to try to gain share in the x86 space as well. But, you know, I think it's a fair assumption that if that market twists more towards ARM, that positions Teradyne for greater share gain in the compute space.

Thank you. Thank you. Our next question comes from Krish Sankar with P.D. Cowan. Your line is now open.

Hi, thanks for taking my question. I have two of them. To the first one, I just want to follow up on the CPU side. I understand you're more exposed to the ARM ecosystem, but it seems like the test intensity of a CPU is only 25% better for GPUs. So is it fair to assume that The merchant GP opportunities are larger even as one customer than trying to get more on the CPU test side?

Well, it's a great question, Krish. The accelerator market is definitely the one that has the highest test intensity. And I think your 1 to 4 ratio is probably not far off. I think that's a reasonable assumption. The key thing is the ratio of accelerators to CPUs. So as the number of CPUs increases, that becomes more important. One of the ways that we're looking at this is there are a number of bottlenecked resources through the supply chain, the supply of substrates for cowlitz, the supply of HBM memories, and basic advanced node fab capacity. And the Our customers are trying to optimize the utilization of what allocation they get of those scarce resources. The test suppliers, Teradyne and our competitors, are positioned to, like, no matter what, all of the wafers that get fabbed are going to need to get tested, and the share between VIP accelerators, merchant GPU, and CPU, all of those are places where we are positioned to gain share. And so we are not overly hung up about whether CPUs grow faster than GPUs, because at the end of the day, most of the test seconds are at the wafer level, and the same number of wafers are going to be produced.

Got it, got it. Very helpful, Greg. And then as a quick follow-up, I had a question on the silicon photonics testing. Correct me if I'm wrong, but I think the general view is that advantage is strong in insertion one and you're more strong in insertion two. A, is that correct? Part B of the question is there is some view in the industry that insertion two can be skipped if you have known good dye and you're going to dye for it. Any thoughts on that would be helpful?

Sure. So, I want to tell you a funny anecdote. We were having a conversation with a customer in this space and We were a good 15 minutes into the conversation before we discovered that we and the customer had an entirely different definition of what insertion two was. So, like, there's certainly a pilot customer in this space that is ramping, and there's a certain definition of the different test insertions for that customer. But it's so early in the maturation of that production process that I think it's a mistake to draw broad conclusions. But directly to your question, getting a known good dye at insertion one and many more. bonding the electronics IC to the photonics IC wafer and then applying the lens. There's a polymer lens that gets applied on top of the photonics to make the connection to where the FAU will connect to the device. and the types of optical testing that you can do at insertion one are limited because the lens assembly is a critical part of the optical path. So many of the loss and polarization tests that you need to do can't be done until you have the completed wafer. The real question on our mind is how much of that testing needs to happen at the wafer level post-bonding and how much of it can be deferred to do once those optical engines are singulated. But you can't do everything that you need to do to validate the quality of the device at insertion one.

Thanks a lot, Greg. Very helpful.

Thank you. We'll go next to Jim Schneider with Goldman Sachs. Your line is now open.

Good morning. Thanks for taking my question. Maybe following up on your prior comments and last question, Greg, you talked about the sort of CPO TAM alone being $300 million to $700 million, I believe, in 2028. Obviously, that's a very wide range. I'm sort of curious. How you would think about maybe what the size could be or is likely to be next year, if at all, or if material? And maybe talk about the sort of certainty level you have in your overall networking business growing sort of, you know, strong double digits over the next three years on a compounding basis, or at least every year. Thank you.

Okay. So the wide range, the 300 to 700 in 2028, that's our attempt to be as honest as we can be. We really are looking at a number of different market sources in terms of the number of CPO ports that are going to be produced, and they're all over the map. And so it really comes down to how quickly the initial higher volume ramps of CPO, primarily for scale out, achieve success over the 2027 timeframe. That's what's going to drive that 2028 TAM towards the, you know, if that goes well, then it will drive it towards the 700. If it doesn't, it will still be closer to the 300 timeframe. Next year, I think we're probably, like, probably aiming towards more of the low side of that 300. So if you draw a line from the 100 to the 300 next year, kind of the low end would be in the $200 million range. I don't think there is as much upside next year as there is upside in 2028. Now, your last question was around networking, and networking in general is an area where we have a lot of confidence of... We're talking about transistors growing at 15 to 20% over this midterm. We feel pretty strongly that the networking TAM is going to be growing proportionate to that. It's not just CPO. It's Copper Connections going from cable to backplane. Plugables are still growing and will transition, you know, not just to CPO. There's NPO and XPO stages along that path. And so Teradyne's strategy is really to make sure that we're positioned to benefit from the growth in all of those segments. So that's why we did Quantify. That's why we did the MLTPJV. and it's why we are in the market with the Photon 100 because we think that CPO is the technology of the future but there is so much growth in just basic networking that we really want to make sure that we're covering all the modes. The other thing that I'll say is behind all of that is the networking silicon, the switch silicon. And Teradyne has a terrific position in that market that we think will grow over the midterm independent of the physical layer.

That's very helpful, Colerick. Greg, thank you. And then maybe just a quick clarification for Michelle. Relative to your prior commentary on gross margins or variability, I just want to make sure that you don't see anything in 2027, whether that be customer mix or product mix, et cetera, that would drive a material headwind to gross margins on a year-over-year basis.

No, it's going to be consistent, as we talked about, in terms of the ranges annually. And it'll really come down to, Jim, the things that we noted. It'll come down to product mix, where compute's going to be heavy within the year, along with the rest of the portfolio growing. So we're not anticipating any fundamental changes in gross margin.

Thank you.

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. So if I assume your memory test revenue grows half on half, we get to a full year growth in order of 70%. Slide six of your presentation deck shows the memory test time growing at approximately half of the rate of memory brick growth. Two-part question here, but one is, how should I think about memory test growing 2x bit growth this year? But also, how relevant is test growing at half the run rate of bits given the test intensity of HBM and just extremely low NAND the last few years? Thank you.

I think I'm going to need to... take that question offline. You're interpreting a lot of information from that chart that I'm not sure we were intending to communicate. So the chart shows sort of the bit growth trajectory and the ATE TAM history. We weren't trying to project the memory ATE TAM. But I guess To answer the principles behind what you're saying, in memory, there is a correlation between bit growth and ATE, but it's not as like there's a gain. There's a factor involved in that because the In memory tests, the part of the market where you test every bit is served by much lower priced, less differentiated equipment. then the final test part of the market. So there's a big chunk of the market that follows bit growth. There's also a part of the market that follows technology shifts, the HBM3 to HBM4, DDR5 to DDR6, and then next generations of flash technology. So memory has sort of two flywheels. One is bit growth and the other is technology change. but it is also a very efficient test market where just in terms of the overall size, right now the SOC TAM is 5X the size of the memory TAM, even though the memory revenues have caught up because of ASP changes. So there's a lot of things going on. Our take is that the memory TAM is likely positioned for similar growth rates over the midterm that the SOC TAM is.

Understood. Thank you. And for my follow-up, so you talked about auto-industrial being better half-on-half. Can you talk a little bit about what the path back to prior peak would look like? I'd also appreciate if you could talk about how much of prior peak was China-driven, if there's sort of an element of China localization risk, but also some of the tailwinds you're seeing just on the back of the Infineon strategic partnership back in January of 2025. Thank you.

I think it's likely 27 is going to be up to or exceeding prior peaks in that space. We haven't done all of the work, but that's my gut feeling around that. There's some China localization. I would say that our China power mix and many, many more. In the power market overall, the part of that market where the Infineon deal that we did is most helpful is in wideband gap discrete tests. So that's a smaller chunk of that market, but one that is expected to grow robustly over this period of time. And I would say that the technologies and the people that we have in that group is positioning us to establish a real leadership position in the testing of wideband gap discreets.

Got it. Thank you very much.

Thank you. At this time, we've reached our allotted time for questions. This will conclude today's Paradigm Second Quarter 2026 Earnings Call and Webcast. You may now disconnect your line at this time and have a wonderful day.