Teradyne (NASDAQ:TER) Exceeds Q1 Expectations, Stock Soars By Stock Story

Semiconductor testing company Teradyne (NASDAQ:) reported Q1 CY2024 results beating Wall Street analysts’ expectations, with revenue down 2.9% year on year to $599.8 million. On top of that, next quarter’s revenue guidance ($695 million at the midpoint) was surprisingly good and 7.8% above what analysts were expecting. It made a non-GAAP profit of $0.51 per share, down from its profit of $0.55 per share in the same quarter last year.

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Teradyne (TER) Q1 CY2024 Highlights:

• Revenue: $599.8 million vs analyst estimates of $570.4 million (5.2% beat)
• EPS (non-GAAP): $0.51 vs analyst estimates of $0.33 (55.5% beat)
• Revenue Guidance for Q2 CY2024 is $695 million at the midpoint, above analyst estimates of $644.8 million
• Gross Margin (GAAP): 56.6%, down from 57.7% in the same quarter last year
• Inventory Days Outstanding: 110, up from 97 in the previous quarter
• Free Cash Flow was -$36.74 million, down from $204.4 million in the previous quarter
• Market Capitalization: $15.4 billion

Sporting most major chip manufacturers as its customers, Teradyne (NASDAQ:TER) is a US-based supplier of automated test equipment for semiconductors as well as other technologies and devices.

Semiconductor ManufacturingThe semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers, and data storage. The need for technologies like artificial intelligence, 5G networks, and smart cars is also creating the next wave of growth for the industry. Keeping up with this dynamism requires new tools that can design, fabricate, and test chips at ever smaller sizes and more complex architectures, creating a dire need for semiconductor capital manufacturing equipment.

Sales GrowthTeradyne’s revenue has been declining over the last three years, dropping by 4.8% on average per year. This quarter, its revenue declined from $617.5 million in the same quarter last year to $599.8 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Even though Teradyne surpassed analysts’ revenue estimates, this was a slow quarter for the company as its revenue dropped 2.9% year on year. This could mean that the current downcycle is deepening.

Teradyne looks like it’s on the cusp of a rebound, as it’s guiding to 1.5% year-on-year revenue growth for the next quarter. Analysts seem to agree as consesus estimates call for 10.8% growth over the next 12 months.

Product Demand & Outstanding InventoryDays Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand.
In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power.
Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Teradyne’s DIO came in at 110, which is 33 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than we’ve seen in the past.

Key Takeaways from Teradyne’s Q1 Results
We were impressed by how significantly Teradyne blew past analysts’ revenue and EPS expectations this quarter. We were also glad next quarter’s revenue and EPS guidance was higher than Wall Street’s estimates.

This quarter’s strength was driven by the company’s Semiconductor Test segment, which posted revenues of $412 million vs estimates of $377 million. Teradyne also saw better-than-expected demand in memory, networking, and computing solutions given the momentum in AI applications. It expects to see this tailwind throughout the first half of the year.

For the back half of the year, Teradyne expects Robotics to contribute meaningfully to growth through new products, applications, and distribution channels.

Despite all the positives, we note the company’s inventory levels materially increased while its operating margin shrunk. The inventory rise could be related to Teradyne stocking up ahead of demand, but it’s tough to know for sure until the company hosts its earnings call.

Overall, this quarter’s results still seemed fairly positive and shareholders should feel optimistic. The stock is up 7.9% after reporting and currently trades at $108.61 per share.