Brian Chin: Got it. I appreciate the comment. Maybe if I could just sneak one thing on Automation. Greg, you provide a growth rate for the OEM business through UR, 26% last year. Can you give us a sense of how large that is, the significance relative to UR sales? And also, is that margin profile similar or different relative to traditional channels?
Greg Smith: Let me take that in backwards order. So the margin in the OEM channel right now is the same or better than our traditional channels. So that is a potential operating margin improvement for that business. In terms of the portion of sales, if I’m recalling correctly, I think it was 16% of UR sales in 2022, but we probably should double check that number.
Operator: Our next questions come from the line of Toshiya Hari with Goldman Sachs.
Toshiya Hari: The weakness in SOC test this year, Greg, you mentioned it was pretty broad-based. I guess I’m a little surprised that Eagle Test, Auto and Industrial could be weak as well, just given how your customers sound as of today. Are you seeing weakness kick in, in the near term? Or are you embedding some sort of conservatism as you progress into the second half?
Greg Smith: Yes. We’re — I think it’s safe to say that we’re baking in conservatism into the 2023 plan for Automotive and Industrial. It’s been a very, very strong year for that in 2022, and it sustained very well through the whole year and into the first quarter. But we’ve definitely modeled declines in that market as well.
Toshiya Hari: Got it. And then as my follow-up, a high-level question for you, Greg. I know you’ve been with the company for a long time, you’ve partnered with Mark for a long time. From a top-down kind of strategy standpoint, how you manage the portfolio? How you think about capital allocation? Buybacks versus M&A? What do you intend to inherit? And what are some of the changes you might introduce going forward?
Greg Smith: Yes. So it’s an interesting question because I helped to bake this cake. The strategy that we have in terms of a capital allocation strategy that prioritizes M&A, share buybacks, dividends, nothing is going to change in terms of that strategy. The thing that’s happened is we’ve been on the sidelines since 2019 in terms of M&A, mainly because when we did our analysis of the valuations, it didn’t seem like we would be able to do something that was beneficial to our shareholders by using our capital in that way. It’s a different market now. And we assume that valuations are going to become more reasonable. And so you may see different outcomes across the next few years than you’ve seen in the past few years. That’s not a reflection of a change in strategy, it’s more of a change in the business conditions.
Operator: Our next questions come from the line of Vivek Arya with Bank of America.
Vivek Arya : Congratulations and best wishes to both Mark and Greg. For my first one, from what you have described about the different segments, it seems like full-year sales are in the ballpark of being down 10% to 15% year-on-year. I just wanted to make sure I’m in the ballpark. And if yes, I wanted to check how you expect your mobility sales to do this year versus last year.
Sanjay Mehta: It’s Sanjay, Vivek. Thanks for the question. Yes, we do expect full-year sales to be down. And really, as you can see with our first quarter guide and our comments throughout the call, visibility is really unclear in the second half. And that’s something we’ve learned from prior downturns, the depth and the duration of this downturn is questionable. So it’s really challenging to provide a full-year view. But I would give you the directional — yes, we agree. We expect it to be down. From a mobility perspective, again, in earlier questions, how do we view the TAM? We view the TAM in mobility to come down. And again, our revenues are expected to come down as well, as that market significantly, we believe, is softer, just given the inventory in the channel and demand coming down and volume.
Vivek Arya : Got it. And for my follow-up, I’m curious, for the 3-nanometer transition, do I absolutely need new testers? Or is it possible to just reuse existing tester capacity?
Greg Smith: Yes. Vivek, that’s an excellent question. So unlike the memory market or the Wireless Test market, where you need new equipment for new standards, and that drives replacements, in node transitions like 3-nanometer, for the most part, the installed capacity is perfectly capable of testing the new part. And so the tester demand is really driven by increased complexity. So if you are testing a part that takes longer to test, you’re going to need to add to your test capacity, test the part on both the stuff you already own and then the new testers that you buy. And so we look really carefully at how much of the industry is on a particular node because that drives basically the number of transistors that have to get tested. So it’s definitely — there’s a high degree of reuse in the SOC market as nodes transition.
Vivek Arya : Got it. So there is a scenario where, if 3-nanometer volumes are low enough, that they don’t really need to buy new testers in the back half, right?
Greg Smith: Yes. That’s certainly one scenario. It’s not our current best view, but things could certainly play out that way because of this balance of units versus complexity.
Operator: Our next questions come from the line of Krish Sankar with Cowen.
Krish Sankar: Mark, thanks for all your help, and welcome, Greg. Two quick questions. First one, Sanjay, you mentioned about gross margins in the back half of the year kind of going back up. Kind of curious, what gives you that comfort, especially given the fact that if auto does roll over, those are high-margin Eagle testers that get out of your profitability equation? So I’m just kind of curious on the second half gross margin. And then I have a follow-up.
Sanjay Mehta: Sure. Thanks for the question. So I think a couple of things are included in our plan. The first thing is we expect to gain some operational efficiencies, some tied to specific programs, I would say, mainly in our IA portfolio. There are also some price increases baked into our — that are rolling through in the second half, and some volume that is anticipated in the second half.
Krish Sankar: Got it. Very helpful. And then as a follow-up, maybe for Greg. Kind of curious, in the past, you folks have mentioned how — I understand you’re not impacted by some of these China export controls because it’s more of a front end. But the Chinese OSATs have been a big component of your China sales, and they might also see a slowdown if some of your front-end counterparts are seeing weakness. I’m kind of curious how to think about China on a go-forward basis, especially given the fact that through 2021 and the first half of 2022, Chinese OSATs seemed to have ordered a lot of equipment.
Greg Smith: Yes. So that’s — it’s a good question because most of the business that’s going through Chinese OSATs, it comes from 2 places. There are local Chinese fabless specifiers that are driving volume through that value chain. And then there’s also companies that are from other places that are utilizing those facilities. What we expect is that, if there are issues in terms of producing chips in China because of any sort of restrictions, the non-Chinese specifiers will move their supply chains. They still need to build their chips. They will move to other parts of the world, other facilities to do that. The indigenous Chinese sales, that could be affected by the new trade regulations that are in place. But I’d like to point out that, that’s not the majority of our revenue in China, and it’s not the majority of the business that — of the TAM in China. So our exposure there is limited to probably less than 5% of our total revenues.
