# How Teradyne makes money

CXProWealth Business Lens · Teradyne (TER) · Q3 FY2026

Read from the 10-Q for the period 2026-06-29 to 2026-09-27, filed 2026-10-30 with the SEC (accession 0001193125-26-441091): https://www.sec.gov/Archives/edgar/data/97210/000119312526441091/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $1.3B (+69.8% on the year)
- Operating income: $402.0M (operating margin 30.8%)
- Net income: $342.4M (net margin 26.2%)
- Gross margin: 59.1%
- Free cash flow: $227.3M (17.4% of revenue)
- Cash conversion (operating cash flow / net income): 0.92x
- Capital expenditure: 6.6% of revenue

## Where the money goes (Q3 FY2026)

- Product → Total revenues: $1.2B
- Service → Total revenues: $141.8M
- Total revenues → Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below): $534.7M
- Total revenues → Gross profit: $771.3M
- Gross profit → Total operating expenses: $369.3M
- Total operating expenses → Selling and administrative: $199.0M
- Total operating expenses → Engineering and development: $163.1M
- Total operating expenses → Acquired intangible assets amortization: $5.3M
- Total operating expenses → Restructuring and other: $2.0M
- Gross profit → Income from operations: $402.0M
- Income from operations → Interest expense: $868.0K
- Income from operations → Other (income) expense, net: $150.0K
- Income from operations → Income before income taxes and equity in net earnings of affiliate: $401.0M
- Interest income → Income before income taxes and equity in net earnings of affiliate: $3.3M
- Income before income taxes and equity in net earnings of affiliate → Income tax provision: $59.8M
- Income before income taxes and equity in net earnings of affiliate → Income before equity in net earnings of affiliate: $344.5M
- Income before equity in net earnings of affiliate → Consolidated net income: $344.5M
- Equity in net earnings of affiliate → Consolidated net income: $3.3M
- Consolidated net income → Less: Net income attributable to noncontrolling interests: $5.3M
- Consolidated net income → Net income attributable to Teradyne: $342.4M

## Where the revenue comes from

### Products and services (CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS)

| Member | Value | Share |
|---|---:|---:|
| Product | $1.2B | 89.1% |
| Service | $141.8M | 10.9% |

The members sum to total revenue.

### Segments (Schedule of Segment Information (Detail))

| Member | Value | Share |
|---|---:|---:|
| Semiconductor Test | $1.1B | 82.1% |
| Product Test | $138.1M | 10.6% |
| Robotics | $95.8M | 7.3% |

The members sum to total revenue.

### Regions (Disaggregated Revenue by Primary Geographical Market, Major Product Line and Timing of Revenue Recognition (Detail))

| Member | Value | Share |
|---|---:|---:|
| Asia Pacific | $1.1B | 85.6% |
| Americas | $123.2M | 9.4% |
| Europe, Middle East and Africa | $64.5M | 4.9% |

The members sum to total revenue.

### BusinessAcquisition (Disaggregated Revenue by Primary Geographical Market, Major Product Line and Timing of Revenue Recognition (Detail))

| Member | Value | Share |
|---|---:|---:|
| System on-a-Chip | $676.5M | 51.8% |
| Memory | $300.8M | 23.0% |
| IST | $94.7M | 7.3% |

The members do not sum to total revenue.

### TimingOfTransferOfGoodOrService (Disaggregated Revenue by Primary Geographical Market, Major Product Line and Timing of Revenue Recognition (Detail))

| Member | Value | Share |
|---|---:|---:|
| Point in Time | $1.2B | 91.4% |
| Over Time | $112.0M | 8.6% |

The members sum to total revenue.

### ConsolidationItems (Schedule of Segment Information (Detail))

| Member | Value | Share |
|---|---:|---:|
| Operating Segments | $1.3B | 100.0% |
| Corporate And Eliminations | $0 | 0.0% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Total revenues | $1.3B | 100% |
|   Product | $1.2B | 89.1% |
|   Service | $141.8M | 10.9% |
| Total cost of revenues (exclusive of acquired intangible assets amortization shown separately below) | $534.7M | 40.9% |
|   Product | $485.1M | 37.1% |
|   Service | $49.6M | 3.8% |
| **Gross profit** | $771.3M | 59.1% |
| Selling and administrative | $199.0M | 15.2% |
| Engineering and development | $163.1M | 12.5% |
| Acquired intangible assets amortization | $5.3M | 0.4% |
| Restructuring and other | $2.0M | 0.2% |
| **Total operating expenses** | $369.3M | 28.3% |
| **Income from operations** | $402.0M | 30.8% |
| Interest income | ($3.3M) | 0.3% |
| Interest expense | $868.0K | 0.1% |
| Other (income) expense, net | (-$150.0K) | 0.0% |
| **Income before income taxes and equity in net earnings of affiliate** | $404.3M | 31.0% |
| Income tax provision | $59.8M | 4.6% |
| **Income before equity in net earnings of affiliate** | $344.5M | 26.4% |
| Equity in net earnings of affiliate | $3.3M | 0.3% |
| **Consolidated net income** | $347.7M | 26.6% |
| Less: Net income attributable to noncontrolling interests | $5.3M | 0.4% |
| **Net income attributable to Teradyne** | $342.4M | 26.2% |
| Basic | $2 | 0.0% |
| Diluted | $2 | 0.0% |
| Weighted average common shares—basic | 156,262,000 |  |
| Weighted average common shares—diluted | 157,502,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2008 | $1.1B | -$380.7M | -$394.2M | $163.9M | $87.2M | $76.7M |
| FY2009 | $777.4M | -$124.9M | -$133.8M | $121.9M | $41.3M | $80.6M |
| FY2010 | $1.6B | $414.9M | $384.8M | $566.3M | $76.0M | $490.2M |
| FY2011 | $1.4B | $231.5M | $369.9M | $274.9M | $86.1M | $188.8M |
| FY2012 | $1.7B | $287.4M | $217.0M | $402.9M | $119.1M | $283.9M |
| FY2013 | $1.4B | $190.7M | $164.9M | $268.7M | $106.7M | $162.0M |
| FY2014 | $1.6B | $96.4M | $81.3M | $492.1M | $169.0M | $323.1M |
| FY2015 | $1.6B | $243.0M | $206.5M | $423.1M | $89.9M | $333.2M |
| FY2016 | $1.8B | -$63.0M | -$43.4M | $455.2M | $85.3M | $369.9M |
| FY2017 | $2.1B | $525.3M | $257.7M | $626.5M | $105.4M | $521.1M |
| FY2018 | $2.1B | $473.8M | $451.8M | $476.9M | $114.4M | $362.5M |
| FY2019 | $2.3B | $553.7M | $467.5M | $578.8M | $134.6M | $444.1M |
| FY2020 | $3.1B | $928.4M | $784.1M | $868.9M | $185.0M | $684.0M |
| FY2021 | $3.7B | $1.2B | $1.0B | $1.1B | $132.5M | $965.9M |
| FY2022 | $3.2B | $831.9M | $715.5M | $577.9M | $163.2M | $414.7M |
| FY2023 | $2.7B | $501.1M | $448.8M | $585.2M | $159.6M | $425.6M |
| FY2024 | $2.8B | $593.8M | $542.4M | $672.2M | $198.1M | $474.1M |
| FY2025 | $3.2B | $650.1M | $554.0M | $674.4M | $224.0M | $450.4M |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +13.1% (year before +5.4%): accelerating
- Operating income: +9.5% (year before +18.5%): slowing
- Net income: +2.2% (year before +20.9%): slowing
- Free cash flow: -5.0% (year before +11.4%): slowing

## Key insights

### Over half of gross profit now reaches operating income

Operating expenses rose 21.5% while revenue rose 69.8%, so 52.1% of gross profit reached operating income, against 32.3% a year earlier.

Gross profit was $771.3M against $449.3M a year earlier, and total operating expenses were $369.3M against $304.0M. Operating income rose 176.6% to $402.0M from $145.3M. Gross margin barely moved, 59.06% against 58.4%, so almost all of the gain came below the gross profit line: operating margin reached 30.78%, up 11.89 points. _(from the filing)_
Engineering and development rose 30.7% to $163.1M and selling and administrative rose 17.6% to $199.0M, both far slower than revenue. Engineering fell to 12.5% of revenue from 16.2%, and selling and administrative to 15.2% from 22.0%. The filing attributes both increases to "strategic investments in Semiconductor Test and from higher variable compensation across all segments." _(from the filing)_
This is operating leverage in a test-equipment business. The engineering and sales base is largely set before the orders arrive, so when volume jumps most of the extra gross profit falls through to operating income. The same arithmetic runs in reverse in a downturn, which is why operating margin, not gross margin, carries the cycle. _(analysis)_
Below the operating line the gain widened a little. Net income attributable to Teradyne rose 186.4% to $342.4M, helped by an effective tax rate of 14.8% against 15.8% a year earlier and a $3.3M contribution from the Technoprobe stake against a $5.2M loss. Diluted earnings per share were $2.17, against $0.75. _(from the filing)_

### One quarter earned 62% of fiscal 2025's operating income

Third-quarter operating income of $402.0M equals 61.8% of the $650.1M earned in all of fiscal 2025, on revenue equal to 40.9% of that year's.

Revenue of $1.31B in the quarter compares with $3.19B for fiscal 2025 as a whole, 40.9%. Operating income of $402.0M compares with $650.1M for that full year, 61.8%, and net income of $342.4M with $554.0M, also 61.8%. Profit ran ahead of revenue because the quarter's operating margin of 30.8% was far above fiscal 2025's 20.4%. _(from the filing)_
The last cycle gives a yardstick. At the fiscal 2021 peak Teradyne earned operating income of $1,200.7M on revenue of $3.70B, an operating margin of 32.4%. At the fiscal 2023 trough revenue was $2.68B and operating margin 18.7%. This quarter's 30.8% sits close to the 2021 peak margin, and the first quarter of 2026, at 36.9%, was above it. _(from the filing)_
The annual history shows how fast this business moves between those levels: revenue went from the fiscal 2021 peak to the fiscal 2023 trough in two years. A quarter at this scale says where the cycle stands now, not how long it lasts. _(analysis)_

### Operating margin stepped down each quarter at level revenue

Revenue held between $1.28B and $1.33B this year, but operating margin went from 36.9% to 32.9% to 30.8% as spending grew.

Revenue was $1.28B in the first quarter, $1.33B in the second and $1.31B in the third. Operating income went from $473.0M to $437.8M to $402.0M, so the third quarter earned 85.0% of the first quarter's operating income on slightly more revenue. Gross margin eased far less: 60.9%, then 59.8%, then 59.1%. _(from the filing)_
Management says it is "committed to reinvesting in the business, particularly in research and development." Engineering and development spending was $163.1M in the quarter, 30.7% higher than a year earlier, and the filing attributes the rise to "strategic investments in Semiconductor Test" and higher variable compensation. _(from the filing)_
So far the slide reads as chosen spending rather than lost pricing, because gross margin has moved much less than operating margin. That reading would weaken if gross margin kept easing, or if revenue fell while the expense base stayed at its new level. _(analysis)_

### Cash trails profit as the upswing absorbs working capital

Free cash flow of $227.3M was 66.4% of net income of $342.4M, while the filing shows receivables, inventory and supplier prepayments rising with orders.

Operating cash flow was $313.6M, 0.92 times net income. Capital spending was $86.3M against $46.7M a year earlier, and absorbed 27.5% of operating cash flow against 95.2% a year earlier. Free cash flow was $227.3M, 17.4% of revenue, against an operating margin of 30.8%. A year earlier free cash flow was $2.36M, 2.0% of that quarter's net income. _(from the filing)_
Cash conversion swings from quarter to quarter. Operating cash flow was 66.5% of net income in the first quarter of 2026 and 125.3% in the second. Over the nine months the filing says cash went into higher accounts receivable, prepayments and other assets, and inventories, partly offset by higher accounts payable and other liabilities. _(from the filing)_
In a model that relies on contract manufacturers, suppliers are paid and often prepaid before customers settle, so cash lags profit while orders climb and can run ahead of it when growth settles. With capital spending modest beside operating cash flow, the gap is mostly working capital, not new factories. _(analysis)_

### Competitive edge

- **Gross margin barely moves between peak and trough** Gross margin was 59.6% at the fiscal 2021 peak, held close to that level through the fiscal 2023 trough, and is 59.06% this quarter.
- **Compute and memory testers carry the AI build-out** System-on-a-chip test at $676.5M and memory test at $300.8M were 51.8% and 23.0% of revenue, the lines the filing ties to AI demand.
- **Service revenue grows steadily beneath the hardware swings** Service revenue of $141.8M rose 3.4% while products rose 84.2%, and its costs were 35.0% of revenue against 41.7% for products.

### What to watch

- **A few customers in Asia set most demand** Customer sites in Asia Pacific took $1,118.3M, 85.6% of revenue, and the filing says a limited number of customers buy most test equipment.
- **Supplier commitments could turn into charges in a slowdown** Teradyne prepays suppliers and gives some minimum purchase guarantees, and the filing says it re-evaluates them for charges as demand decreases.
- **Trade controls already limit where Teradyne competes** The filing says compliance with export controls and sanctions has limited its ability to compete in certain regions, and future rules could bring material costs.

## Investor view

**AI chip testing lifted Teradyne's operating margin to 30.8% as costs grew far slower than sales**

### How it makes money

Teradyne sells automated test equipment, the machines chipmakers and their supply partners use to check that each device works before it ships. Semiconductor Test brought in $1,072.0M of the quarter's $1.31B in revenue, 82.1% of the total. Product Test, which tests circuit boards, wireless devices, optical links and defense systems, added $138.1M (10.6%). Robotics, collaborative arms and autonomous mobile robots, added $95.8M (7.3%). _(from the filing)_
Inside Semiconductor Test, system-on-a-chip testers are the largest line at $676.5M, 51.8% of company revenue, followed by memory test at $300.8M (23.0%) and IST, the storage and system-level test line, at $94.7M (7.25%). The filing ties the quarter to sustained demand in AI "applications across compute, memory and storage markets." _(from the filing)_
Revenue is mostly hardware sold once. Products were $1,164.2M, 89.1% of revenue, and 91.4% of revenue was recognized at a point in time rather than over a contract. Services, which cover maintenance, extended warranties, training and application support, were $141.8M, 10.9%. Customer sites in Asia Pacific accounted for $1,118.3M, 85.6% of revenue, against $123.2M in the Americas and $64.5M in Europe, the Middle East and Africa. _(from the filing)_
Buyers are few. The filing states that the market for its test products "is concentrated with a limited number of significant customers accounting for a substantial portion of the purchases of test equipment," and that a few customers drive demand both through direct purchases and through sales to their supply partners. _(from the filing)_
The economics rest on a high gross margin. Gross profit was $771.3M, 59.06% of revenue. Cost of products was $485.1M against $1,164.2M of product revenue, 41.7%, and cost of services was $49.6M against $141.8M of service revenue, 35.0%. Engineering and development took $163.1M, 12.5% of revenue, and selling and administrative $199.0M, 15.2%. _(from the filing)_

### What shifted

Revenue rose 69.8% to $1.31B from $769.2M a year earlier, and most of the increase came from Semiconductor Test, which the filing attributes to "higher sales in memory and compute related to artificial intelligence applications." Products grew 84.2% while services grew 3.4%, so products rose to 89.1% of revenue, up 6.97 points. _(from the filing)_
Costs grew far slower than sales. Total operating expenses rose 21.5% against revenue growth of 69.8%, falling to 28.3% of revenue, down 11.24 points. Operating income rose 176.6% to $402.0M and operating margin reached 30.78%, up 11.89 points. The company says the rise in both selling and engineering spending came from "strategic investments in Semiconductor Test and from higher variable compensation across all segments." _(from the filing)_
Gross margin moved much less: 59.06%, up 0.65 points, which the filing puts down to "higher sales and product mix." Below the operating line, the effective tax rate was 14.8% (a $59.8M provision on $404.3M of pre-tax income), the Technoprobe stake contributed $3.3M against a $5.2M loss a year earlier, and $5.3M of profit went to the minority partner in the MultiLane joint venture. Diluted earnings per share were $2.17, against $0.75. _(from the filing)_
Within the year, margin has stepped down while revenue held level. Revenue was $1.28B in the first quarter, $1.33B in the second and $1.31B in the third. Operating income went from $473.0M to $437.8M to $402.0M, an operating margin of 36.9%, then 32.9%, then 30.8%, and gross margin eased from 60.9% to 59.8% to 59.1%. Management says it is "committed to reinvesting in the business, particularly in research and development." _(from the filing)_
Cash caught up with profit. Free cash flow was $227.3M, 17.4% of revenue, against $2.36M in the same quarter a year earlier, when operating cash flow was $49.1M. Operating cash flow of $313.6M was 0.92 times net income; over the nine months, receivables, inventories and prepayments to contract manufacturers grew with the order book. Capital spending was $86.3M, 6.61% of revenue, against $46.7M a year earlier. _(from the filing)_

### Risks in the filing

Customer concentration. The company says sales of its test products "will continue to be concentrated with a limited number of significant customers for the foreseeable future," so the buying decisions of a few customers, and of their supply partners, set much of its demand. _(from the filing)_
Trade regulation. Teradyne is subject to tariffs, trade sanctions, embargoes, import-export controls and technology transfer restrictions. The filing says compliance "has limited our ability to compete in certain regions," that its compliance program may not catch every violation, and that future changes in law or government policy "could lead to material costs." _(from the filing)_
Supply commitments. To secure components, Teradyne gives some vendors minimum purchase guarantees and holds purchase commitments for components and materials. The filing says that as market demand decreases it re-evaluates these guarantees and determines what charges, if any, to record, which ties the supply chain it built for this upswing to the next slowdown. _(from the filing)_
Conditions on the tax rate. Part of the company's low tax rate comes from a Singapore tax holiday that requires it to meet "certain headcount and spending requirements," and the filing notes it would raise its tax provision if it judged its deferred tax assets unlikely to be realized. The quarterly report also states that the risk factors in its latest annual report remain applicable. _(from the filing)_
The numbers already show two of these risks at work. Revenue sits almost entirely with customer sites in Asia, and the product lines tied to AI compute and memory carry most of the growth, which is what customer concentration looks like in practice. The supply-side exposure is visible too: supplier prepayments and inventory grew through the year to keep pace with orders, the same balances the purchase-commitment risk refers to. _(analysis)_

## Founder view: mechanisms

### Fixed engineering, cyclical volume

A tester platform takes years of engineering before the first unit ships, and that spending does not fall when orders do. Once the platform exists, each additional system mostly costs materials and assembly. So gross margin stays roughly level through the cycle while operating margin swings with volume: in a strong year the fixed engineering and sales base is spread over many more systems, and in a weak year it is not. _(analysis)_

### Chip complexity sets test demand

In effect Teradyne sells test capacity. The more transistors, memory layers and high-speed links a chip carries, the longer and costlier it is to test, and the more testers a customer needs for the same number of units. AI accelerators and high-bandwidth memory are among the most complex devices in volume production, so test demand can rise faster than chip unit counts. _(analysis)_

### Outsourced build, prepaid supply

Teradyne designs its systems and relies on contract manufacturers and suppliers to build much of them, prepaying to secure capacity. That keeps fixed assets light, but in an upswing cash goes out to suppliers and into receivables before it comes back from customers, so profit runs ahead of cash until growth settles. _(analysis)_

### Installed base as a service floor

Every tester sold needs maintenance, spare parts, software support and often an extended warranty. That service revenue follows the installed base rather than new orders, so it moves little through the cycle and carries a lower cost ratio than new hardware. It is a floor under the business rather than its engine. _(analysis)_

## Member research

Signed-in members read, on the page: what Teradyne's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Teradyne 10-Q for the period to 2026-09-27: https://www.sec.gov/Archives/edgar/data/97210/000119312526441091/ (2026-10-30)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02