Teradyne, Inc. (NASDAQ:TER) is a leading global supplier of automation equipment for test and industrial applications. What is most interesting about this company is its aggressive push into industrial automation. Many investors scratch their head about the wisdom of doing so, but management offers compelling reasons.
In this article, we will systematically examine the company’s industrial automation business, strategy and risks to help readers arrive at a more informed position to assess the risk and rewards of owning the stock. For a broader discussion of the company including its core test business, financials, and valuation, please refer to my recently published article.
Note: This article is for educational purposes only and does not constitute financial or investment advice. Please do your own due diligence and consider your unique financial needs and constraints before buying any stock.
Business Overview
After three acquisitions, Teradyne, Inc. has become the leading provider of collaborative robots, or “cobots,” with around 45% market share, as well as the second-largest player in autonomous mobile robots, or “AMRs,” with roughly 8% market share. TER’s automation business has been growing around 40% a year from 2015 through 2021, driven by low market penetration of robots, a secular shortage of labor, diminishing returns of offshoring, and fast payback of investments for cobots and AMRs.
Industrial automation is expected to be a growth driver for the company. However, industrial automation is only around 10% of total revenue currently. If successful, the company’s diversification into industrial automation should offset the cyclicality of its test business while accelerating the company’s overall revenue growth.
Business Units
Teradyne’s Industrial Automation segment is made up of three business units: Universal Robots, Mobile Industrial Robots, and AutoGuide.
Universal Robots is a leading supplier of collaborative robots, known for being low-cost, easy-to-deploy, and simple-to-program. These robots work alongside production workers to improve quality, increase efficiency, and decrease costs. Universal Robots offers a variety of models, including the UR3, UR5, UR10, and UR16, which can be fitted with task-specific grippers or end effectors. The robots are easily integrated into existing production environments and are differentiated by their easy programming, flexibility, safe operations, and short payback period.
In 2018, Universal Robots introduced its e-Series models, which include technology advances for faster application development, greater precision, and improved safety. Universal Robots has cumulatively sold over 60,000 collaborative robots in diverse production environments and applications.
Mobile Industrial Robots (MIR) is a leading supplier of autonomous mobile robots (AMRS), which are low-cost, easy-to-deploy, and simple-to-program. These robots increase efficiency and decrease costs in manufacturing and warehouse environments. MiR offers seven collaborative autonomous mobile robot models, each with different payload carrying capacity. All models are easily integrated into existing production environments and are differentiated by their easy programming, ease of use, reliable autonomous navigation, and short payback period. Cumulatively, MiR has sold over 6,000 collaborative autonomous mobile robots in diverse production and warehouse environments and applications.
AutoGuide is a maker of high payload AMRs, an emerging and fast-growing segment of the global forklift market. AutoGuide’s AMRs are used for material transport of payloads up to 4,500 kg in manufacturing, warehouse and logistics applications. These products complement MiR’s lower payload products.
Competitive Advantage
Teradyne differentiates itself from its competitors by emphasizing ease of use, channel partnerships, and the UR+ ecosystem in its Universal Robots (UR) division. The company has designed its cobots to be easily trained and repurposed by shop floor operators, with an average setup time of half a day and an out-of-box experience that allows an untrained operator to program the first simple task in less than an hour.
Additionally, Teradyne has focused on expanding its distribution channel partners and growing the ecosystem of UR+ peripheral supplier partners in order to reach the lower volume segment of the market. The UR+ online showroom provides customers with turnkey accessories and software that are necessary to customize a UR robot application and are tested and approved to integrate seamlessly with UR robots. This has led to increased awareness and broadening of the application and customer base.
Half of Teradyne’s UR customers are small and medium-sized businesses, and from larger companies, much of Teradyne’s business is derived from client managers who buy locally without corporate involvement. On average, customers tend to order about two cobots. In the future, Teradyne expects an inflection with larger sized customers as they begin to embrace the power of collaborative robots. Teradyne is well positioned to maintain and capture market share as the market expands beyond its core small and medium-size customer base.
Cobots vs. Traditional Robots
Collaborative robots offer several advantages over traditional industrial robots. One major advantage is their cost-competitiveness, making them an attractive option for small and medium enterprises. Cobots are smaller in size and require less installation and programming costs, which can lead to lower overall costs for manufacturers. Additionally, cobots have a shorter payback period, with some manufacturers seeing a return on investment within just 34 days.
Another key advantage of cobots is their increased flexibility for programming, allowing manufacturers to quickly adapt to changes in demand and carry out a variety of tasks with the same robot. Cobots also provide a higher level of safety due to their ability to sense their environment and prevent potential conflicts with human workers.
However, cobots do have limitations, including a lower payload capacity and slower operating speed compared to traditional industrial robots. Despite these limitations, the growing demand for cost-effective and flexible automation solutions is expected to drive the adoption of cobots in the manufacturing industry.
Risks
Growth may not material as expected: 3Q22 was a disappointing quarter for TER’s Industrial Automation segment, which decelerated both quarter-over-quarter and year-over-year. Even after adjusting for the impact of currency exchange rates, the company’s 3Q revenue did not meet forecasts. The company attributes this to slowing manufacturing activity, which aligns with recent purchasing managers index data showing contractions in most developed economies, excluding Japan.
In the 3Q22 earnings call, management noted the following:
In Industrial Automation, slowing industrial growth worldwide and a pronounced slowdown in European manufacturing are additional anchors. So we’re keeping a balanced view of next year, and we should have a better view of the full year in January. Looking longer term, the case for growth in both Test and IA remains intact and compelling.
Competition is intense: Research firm ABI Research has published a report ranking the top 12 collaborative robot vendors in the industry, with Universal Robots coming out on top and Taiwanese provider Techman coming in second, and Korea-based Doosan in third. ABI Research also noted that several young companies are developing new and disruptive technology that could challenge the dominant players in the cobot market in the future. Companies like Productive Robotics and Automata are developing affordable and flexible cobots, while Franka Emika and Aubo Robotics are also beginning to compete with established players like Universal Robots.
Cyber Security: Cyber security present a growing concern for collaborative robots, as they may store and handle large amounts of sensitive information, increasing the risk of data breaches and hacking attacks. A compromise in the security of a collaborative robot could lead to the production of faulty components, resulting in potential losses for the manufacturer. Additionally, the speed limitations of collaborative robots may impede market growth.
Conclusion
Teradyne, Inc.’s Q3 2022 earnings report raised concerns regarding the performance of the company’s industrial automation division. Despite being expected to offset the cyclicality of its test business, the division underperformed expectations, with revenue decelerating both quarter-over-quarter and year-over-year. This data point does not align with the thesis of strong secular growth drivers in the market.
Given the current labor shortages and the relatively short payback period of collaborative robots, it raises questions as to why sales did not accelerate instead. Furthermore, the collaborative robotics industry is relatively young and increasingly competitive, with Asian competitors potentially having an advantage in their home markets. In order for Teradyne, Inc.’s industrial automation division to regain investor confidence, it will be crucial for it to provide more evidence supporting its bullish thesis.
Be the first to comment