Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to be co COO incorporated fourth quarter in fiscal year 2019 financial results Conference call.
Time, all participants are in English only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference call is being recorded.
I would now like they turn the conference over to your hosts today Mr., Jeff Jones, Chief Financial Officer. Please go ahead.
Good morning, and welcome to our conference call to discuss cookies fourth quarter results and first quarter 2020 outlook I'm joined today by our president and CEO Luis meal or.
If you need a copy of our earnings release, you may access it from our website at <unk> co your dot com or by contacting Cohill Investor Relations. It's also a slide presentation in conjunction with today's call that may be accessed on coal use web site in the Investor Relations section.
Replays of this call will be available via the same page after the call concludes.
Now to the Safe Harbor.
During today's call will make forward looking statements, reflecting management's current expectations concerning co Hughes future business.
These statements are based on current information that we have assessed the which by its nature subject to rapid and even abrupt changes.
Encourage you to review the forward looking statements section of the slide presentation in the earnings release as well as Cohus filings with the FCC, including the most recently filed form 10-K and form 10-Q.
Our comments speak only as of today February 13 2020.
And Cohu assumes no obligation to update these statements for developments occurring after this call.
Finally during this call.
We will discuss certain non-GAAP financial measures.
Please refer to our earnings release in slide presentation for reconciliations to the most comparable GAAP measures.
Now I'd like to turn the call over to Luis Mueller Co. use president and CEO Louise.
Hi, Good morning, I'd love to take a moment you reflect on last year's performance.
Discuss fourth quarter market dynamics and look at our business prospects for 2020.
Then.
Pass it back to John to Jeff to comment on financial results and first quarter guidance.
In 2019 I of course, you deliver the fourth consecutive year of increase revenue, we for four year compounded annual growth rate of 21%.
We accelerated the integration of Xcerra amid a challenging market environment.
Making substantial progress towards our financial target model and delivering 40 million of annual run rate cost synergies five quarters after that acquisition and ahead of schedule.
We also made critical investments in new in new desk instrumentation development.
Consolidation of handler and contact or product portfolio, there wasn't able to revenue growth supporting our customers roadmap and projected capacity expansion in 2020.
Turning to fourth quarter.
Orders were split 51% systems, and 49% recurring Weve overall sequential dollar increase across all market segments.
Estimate it does sell utilization gained three points quarter over quarter to 80%.
The mobility segment was 30% of total system orders and benefited from Fiveg driven business in late Q4 for third handlers and testers for RF flat panel display drivers in part management semiconductors.
Along with thermal handlers for mobile processor death of next generation smartphones launching later this year.
The smartphone market struggled in 2019, but to Fiveg adoption, which is still in its early stages will be a key driver for tester sales in 2020.
We are modeling five D driven tester shipments through third quarter 2020, as customers build capacity and thereafter attention shifts to millimeter wave for 2021, new product introductions, when fiveg penetration is expected to accelerate.
The computing segment remained strong at 22% of total system orders driven by datacenter applications that utilize or high end thermal and automation equipment.
We also made inroads qualifying and supply interface products for our high end digital device desktop application.
We expect this initial business to represent about $5 million in 2020 and potentially growing as we compete for additional sockets and increase our manufacturing capacity during the year.
We saw a late December uptick in automotive that expanded to 13% of total system orders and a 50% dollar increase quarter over quarter.
Our leading applications in automotive are for desking high and eight das processors and battery management systems for electric and hybrid electric vehicles that are forecasted to drive is steady rise in electronic content as more carbon emission low carbon emission vehicles come to market.
According to the National Automobile dealers Association sales of lightweight hybrid and electric vehicles in the U.S. represented less than 5% of total in 2019.
Although many analysts project the seasonal the seasonally adjusted annual rate of growth should be flat in 2020.
Semiconductor sales in automotive have projected should grow at greater than 7% annually for the next five years.
All other segments consumer industrial aisle T.N. optoelectronics in PCB test grew quarter over quarter, and we presented the 35% balance the system orders.
We expect the industrial segment, you steadily improving 2020.
Overall, this should be a growth year with a return to historical seasonality.
We have been tracking contactor sales with our handlers and although we don't have a long history and much of the data is representative of a 2019 market downturn. The average attachment rate is currently at 34%.
We expect this to grow through 2020.
Although given the higher volatility in system sales as compared to Contactors. It is possible. This number will fluctuate some a system shipments ramp in future quarters.
The consolidation of contact your manufacturing has taken a little longer than anticipated and we're still ramping capability and capacity addressing some inefficiencies that negatively weighted on gross margin in the fourth quarter.
As we look to the coming year, we started 2020, who have a higher backlog strong customer traction and improved order momentum, primarily driven by mobility and a late fourth quarter uptick in automotive.
At the same time.
This started a new year present, some challenges and we're closely monitoring the impact of the novel Corona buyers jure supply chain and customers.
Fortunately all of our employees are safe.
And our factories in Malaysia, the Philippines in Japan are fully operational.
While China represented approximately 20% of course, you sales in 2019.
Regarding first quarter, two a slightly wider revenue range and net of approximately 10 million attributed to the impact of the Corona fires and our new ERP lounge in Q1.
Regarding the Corona virus, we have a relatively few suppliers in China, but the disruption should their business is impacting our ability to ship some systems on schedule.
We're also closely working with our customers to ensure continued support their operations in order to deliveries.
Our midterm strategy remains focused on growing topline revenue and profitability.
Aligning investments in support of the Fiveg transition and mobility.
Rofin automotive with autonomous driving and electrification expansion in the industrial segment and increasing contactor attachment rate your system sales.
I'm optimistic about go his business prospects in 2020.
As we focus on cross selling opportunities with our broad product line of test and inspection equipment and task Contactors.
Now I'd like to turn it back to Jeff to review, a fourth quarter results and provide first <unk> guidance.
Thanks, Louise let me begin by reviewing our Q4 results with revenue near the high end of guidance, resulting in fiscal year 2019 sales of 583 million and the fourth consecutive year of sales growth.
Oh, you delivered approximately 14 million of cash from operations during the fourth quarter and our cash balance increased approximately 10 million sequentially to 156 million.
Please also note that my comments that follow I'll refer to non-GAAP figures for GAAP to non-GAAP reconciliations and disclosures see the accompanying earnings release and Investor presentation.
For Q4, the GAAP to non-GAAP adjustments include approximately 3.3 million of stock based compensation expense and a 1.2 million reduction of a tax related indemnification receivable in connection with the as Mac acquisition in fiscal 2013.
GAAP to non-GAAP adjustments, primarily driven by the Xcerra acquisition include 9.6 million.
Purchased intangible amortization expense and 5.2 million of restructuring costs.
The Q4 2019 net cash impact of Xcerra acquisition related restructuring was approximately 3.5 million primarily due to employee severance.
Q4 revenue was 142 million and one customer in the computing segment accounted for 11% of sales in the quarter and 11% of sales for fiscal year 2019.
No other customer accounted for 10% or more sales during the fourth quarter or the full fiscal year 2019.
In Q4 go use gross margin was 39.9%, which is lower than guidance due to capacity transition and manufacturing inefficiencies driving higher costs in our contactor business.
Operating expenses came in approximately 700000 higher than a forecast due mainly to sales commissions.
And a yearend true up for various outside services.
During the quarter, we realized approximately 9.4 million of acquisition cost synergies, which is in line with the forecast and we exited 2019 at the annual cost synergy run rate target of 40 million.
Fourth quarter non-GAAP operating income was approximately 4% of sales and adjusted EBITDA was 6%.
After interest expense and a foreign currency loss of 1.3 million Q4, non-GAAP pre tax was approximately 100000.
Consistent with prior quarters. So you generated a loss in the U.S. during Q4 and profit from operations outside the U.S.
The tax provision.
There's not reduced by U.S. losses, due to our deferred tax asset valuation allowance and as a result, the Q4 non-GAAP tax provision was approximately 700000, resulting in a net EPS loss of one cents.
Now turning to cost synergies and our business model as announced on prior earnings calls we've taken actions that resulted in pulling forward approximately 20 million of cost synergies into 2019.
Under the original target a three to five years.
We exited fiscal year 2019, having achieved the 40 million annual run rate cost synergies, which are split approximately 18 million in cost of goods sold and 22 million and operating expense.
As previously noted our cash balance increased approximately 10 million quarter over quarter to 156 million.
Our long term capital allocation strategy continues to be use excess cash to pay down the debt of 360 million and de lever the company subject to cash required to support the production ramp driven by Fiveg related demand and the recent uptick in automotive business.
So use board of directors approved a quarterly cash dividend of six cents per share payable on April 920, 20 to shareholders of record on February 25 2020.
Now for first quarter 2020 guidance, we're expecting sales to be 140 million to 152 million.
This revenue guidance has been reduced by approximately 10 million as a result at the current a virus and the potential impact from an ERP system implementation occurring in Q1.
Approximately half of the 10 millions related the system revenue that will likely be realized in the second quarter and together with the improved order forecast in Q1 is expected to result in a 10% to 15% revenue increase in Q2 compared to the Q1 midpoint.
The remaining 5 million removed from Q1 revenue guidance represents recurring revenue, which by its nature will not be realized in the future.
Q1 revenue distribution is forecasted to be 93% semiconductor test and inspection and 7% PCB test.
On average about 20% of our sales are to customers in China.
So you suppliers in China represent less than 5% of our material spending and we've taken steps to maintain continuity of material supply by redirecting orders as necessary to suppliers and factories outside of China.
And to enable future expansion and optimization Cohu is aligning its ERP systems on Oracle cloud. The first phase of the project incorporates approximately 50% of co Hughes businesses and we'll go live this month.
The balance of the businesses will implement the system in phases over the next 12 months.
Any potential revenue impact from the system implementation has been considered in our Q1 guidance.
Gross margin is expected to be between 42, and 43% and inline with our financial model.
Operating expenses are expected to be approximately 53 million or about 1 million higher than target financial model due to onetime ERP system implementation costs and some increased R&D expenses in support of Fiveg driven customer activities.
For modeling purposes. Please note that due to the increasing customer demand and improving business conditions go you as eliminated the temporary cost actions enabled over the last few quarters, which were above and beyond the acquisition cost synergies, but necessary due to weak business conditions.
Beginning in Q1, our opex should be measured against the financial model, depending on the revenue level.
We expect Q1 adjusted EBITDA at the midpoint of guidance to be approximately 9%.
Similar to previous quarters, the tax provision rate will be abnormally high not meaningful for Q1 for modeling purposes, we expect a normalized effective tax rate of approximately 22% on revenue of 170 million or more in profits in line with the business model.
A diluted share count for Q1 is expected to be approximately 41.7 million shares.
That concludes our prepared remarks, and we'll open the call to questions.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or do you wish to remove yourself from the Q. Please press the pound key.
Your first question comes from the line of Brian Chin with Stifel.
Hi, good morning, Thanks for letting us on ask a couple of questions.
Maybe let me start with the sort of the descriptive revenue outlook that you provided in terms of the impacts are contemplating from the krona virus or seeing directly I guess.
And also sort of how that flows into the following quarter. So in terms of the that the 10 million reduction in the mid point.
Relative to.
Overlaying the current of ours half of that it sounds like it is something is timing oriented.
The 5 million portion.
Is that exclusively tied to constraints, you're seeing in your supply chain, which you noticed kind of small or is that more tied to delays from customers in terms of being able to receive the product.
Hi, Brian this is with.
That half is really based on the constraints on our supply chain.
Okay payment really exclusively constraints on our supply chain.
Got it go do you have.
You know.
Other workarounds in terms of secondary suppliers can bring up in case, you know some of the shutdown periods persist in China.
Yeah as you can imagine we have been an acting goes in she knew to work with suppliers in China, which by and large have started coming back online again. This week beginning of this week.
They have had.
In essence, an expanded.
Lunar new year shutdown.
Sort of forced in certain regions in China as you as you can read on the news and.
That has created a little bit of a ripple effect here and we see we see some of that ripple.
Pushing about $5 million or revenue out of Q1 inch acute you at this point.
Got it and in terms of the other the balance of that the other 5 million more towards recurring oriented.
Sales, which right now don't necessarily a kind of <unk> not necessarily timing oriented, but how is that was that subjective maybe.
You know just the extended shutdowns and maybe lower utilization rates.
The other tests for the right that's precisely the right I mean.
Take care of Contactors as an example is you're not if you. If you have a shutdown and you're not testing is certainly not wearing those components. As you are not wary and the systems and so spares recurring contact your sales for certain regions in China.
Have not really materialize at the same rate for the last the last few weeks and we expect that also going to be an effect, but not an effect that we can recover I think that that essentially gone.
Okay got it.
And in terms of.
Gross margins and maybe the expense commentary as well.
I see you see gross margin the backup to the 40% to 43% and level in Q1 kind of back in line with Whats your target model I can you be a bit more descriptive on what the contactor inefficiencies, where and why you think this is resolved into Q1 and beyond.
Yes sure Brian.
The main the main impact in the contactor business as a transition of production out of the U.S.
Into our factory in the Philippines, So to this point weve accomplished closing and consolidating.
Contact or facilities in Penang in.
California.
Transitioning work to the east coast to Japan.
As well as the Philippines, and so now this last piece of it is really transitioning more of the production that has been historically based in the U.S.
Over to the Philippines, and so we stumbled a bit.
During the quarter.
On doing that we anticipate.
That'll take probably another couple of quarters really to come up to the to the to the to the target again and just to add onto that a little bit more Brian. This is this is production that we have had outsourced in the U.S. not in house operations that we want to chew in source.
In the Philippines, as Jeff mentioned, so thats going to take a couple of quarters I think too.
You got to the level we won.
Right, Okay, I understood and I guess.
Maybe one one last thing in terms of just the fanning out for bid on the test contactor business.
Interesting metric on the attach rate that you provide 34% level.
I guess, where if you want to give a say it.
A run rate you expect that air attach rate you expect to exit the year at that maybe you could kind of equate that to what sort of growth rate you still think even kind of given the starting the year work where growth rate. You think is sort of suitable for that business this year or kind of even from a mid term standpoint.
Yeah, we've been targeting mid mid teens, so kind of 50 owning about 15% growth rate for the contactor business.
Okay.
Okay. That's it thank you.
Your next question comes from the line of State Me Ho with Deutsche Bank.
Great. Thank you for taking my question.
My first question that in your prepared remarks, you talked about you expect typical seasonality coming back in 2020 and in the past that means that first quarter in fourth quarter being weaker second quarter after quarter being stronger.
And I appreciate you talked about a lay out the Q2 revenue expectation for this year.
But assuming we using twoq you as the baseline given the changing business mix, what does the magnitude of growth in Threeq, you and maybe a weakness in 14 would you consider as normal seasonality.
Hi, Sydney. This is Louise yes, we don't have tremendous visibility right now into the third quarter and needless to say through the fourth quarter. Nevertheless, we do see.
As described on the prepared remark is fiveg being a major driver of growth in the mobile semiconductor space right.
Which are starting to drive tester handler contact with demand for mobile processors, RF I see spar management display drivers and we're seeing that ramp.
Starting this quarter in Q1.
But also having having orders for shipments already in Q2 and given the forecast for Q1 understanding how that is going to drive some of the Q2 revenue obviously, there's a there's an error on a wider error band right now into that Q2 expectation, then Q1, but still driving.
Some of the manage acute issue.
At the same time.
If you look at other markets in the automotive, we do project, a flat SAR, but semi content growing as I said about 7%, mainly driven by a das electrification and soy steady improvement in automotive.
Throughout the year, we also expect industrial to stabilize and start improving later this year computing to remain strong although for us that is a lot of it is recurring business. It's a lot more stable. So how does that all model coming together is that we do expect a stronger second and third quarter.
And we've talked about the projection here for second quarter being up relative to first quarter.
No. We don't have that degree of granularity today should the third quarter to say, how it's going to compare to second quarter.
But.
We do expect a typical pull back in the fourth quarter that that would be I think the mobility guys will pull back in sparked a qualifying solutions for 2021.
Model smartphones. So the ramp for 2021 expect those orders then should start coming again in Q1 or 2021, sometimes you come in late Q4 of this year.
But all in all.
We do expect a typical seasonality coming back what does that mean for Q4 I don't have a number to give you today. Unfortunately Sidney just just the pullback from Q3, that's really all we sense at the moment.
Okay, that's fair.
Gentlemen, utility mobility side, a little bit finally to fiveg demand has been pulling it.
Then that benefit your recurring revenue business, but does that also pull into revenue from your new RF test to when did you talk the last quarter and maybe just to level set if you look at your total business and not just the system sales what is your revenue exposure to the smartphone market today and how do you expect that to change hopefully.
So we are exposure into mobile and our system exposure inch mobility should be more careful today is is 30% in the fourth quarter. So 30% of our system orders fourth quarter, we're into the mobility market in mobility market is.
By and large smartphones right.
Now if you look historically you go back in time here, a little bit we had a much stronger.
Alignment with automotive and industrial markets that was 45%. So part of the strength in mobility is driven by the ramp in Fiveg and part of it has to do frankly with the weakness in.
Automotive and industrial.
Through 2019.
So if you look at if you look at Fiveg, maybe ill digress, a little bit more into that.
Fiveg for us driving smartphones, it really cuts across many device segments right. We we tend to think so much about RF, but in reality. It also drives or it is driving your right now some of our thermal subsystems and also active thermal control handlers for mobile processor test.
It is driving.
Passers for display driver technology is driving testers in handlers for power management.
And then obviously the Drs space for us.
On a tester side in the RF, particularly power amplifier, where we are the leader in a market that is still relatively small give or take $60 million in size.
But we expect to see that market grow substantially to the tune of 40, 50% year with the with the Fiveg.
Volume ramp and not only this year, but in the coming years, you know as he goes from sub six gig too.
A little bit higher for Wi Fi six applications and eventually mean millimeter wave. So we expect that that business.
Plus the whole ecosystem of RF front end I see it should be about a $200 million market opportunity for us in the coming years.
Great Navy, if I can squeeze in one more and I'll go away.
When you think it maybe a little longer term here, but when you think about that revenue ramp relate to fiveg over the next few years. Other tests are companies has talked about the obviously being fairly flat year over year as rammed down a one off it shouldn't be is offset by rent outflow been adopted trinity's say infrastructure and said well maybe stuff. Thanks first is known me.
The way how do you think youre profile, it's going to look like over next few years.
I I think it's actually going to view.
Of growth actually a growth profile.
It should be clear, we don't we don't have a strong presence in RF infrastructure, we don't really sell testers into RF infrastructure test.
We don't participate in.
In transceiver test, we don't participate in base, Ben test, except for the handler side.
So maybe maybe those segments, we'll see more of a one to one swap.
Nevertheless, we do participate in RF front end I see test that that's our predominant space and we see very large increases in.
Front end dicey content in smartphones as well as an increase in the Destler Sps with the the higher complexities associated with much higher frequencies of test so.
Segment is definitely growing.
Great. Thank you very much.
Your next question comes from the line of Tom Diffely, what can D.A. Davidson.
Yes. Good morning, there's one more question on the attach rate.
Doctors, you said was 34% where was it a year ago.
It wasn't the low Thirtys, Tom I don't have the number in front of me, but it was a.
Started with a three I don't know if was 31% or something that order magnitude.
Okay, so too far off your mid teens growth projection.
That's right.
Okay.
And then Jeff just your comments on the ERP system is you're actually revenue that you've noticed that has been impacted by that or is that just a conservative outlook just in case something slips through the cracks.
All right Tom Yeah, it's more of the latter there's there's nothing that would tell us that were in any danger of the have anything slip but.
You know just just I guess more of a conservative approach.
To the guidance yes.
Got it makes sense I, then I'll see you talked about the out of Fiveg is being nice orders in the quarter tougher fiveg is starting to ramp now.
What's the timing on the automotive business, that's started to pick up late in the quarter.
So the the late quarter orders, we got in automotive are shipping in Q1 and actually some of it into the beginning of Q2.
We're not we're not seeing we don't expect to see a sharp increase in automotive business, although it will be welcome if that happened.
Right now, we're simply modeling a steady improvement quarter on quarter here in automotive before a.
Before sort of a seasonally seasonal pullback in Q4.
Okay, and then maybe just sticking on that a little bit more historically.
The auto industrial markets were quite strong for you.
Do you think you get back to that point when there.
Combined approached 40% year business or something changed in the makeup of your business that long term that maybe it's a smaller percentage.
Hi, that's a good question.
Yeah, automotive and industrial as I said before has.
Even on a pro forma basis with et cetera, now looking back at 2018, it was 45% of system sales.
Now what happened last years was you know there was a drop across all markets, but automotive in particular.
Drops significantly we we averaged.
I think 20.
27% of system sales last year into automotive and industrial combine.
Which was really a 60% dollar reduction year over year from 2018 2019 on system orders was a dramatic drop but in the midst would that there was no market share loss I mean, it's a defined number of customers and we're still doing the same business with them just at much lower rate.
To to answer your question, we think we think automotive will get too.
Some degree of normality by ended this year and then.
Be back to full recovery in 2021.
Does that mean, it will be back to 45% of system sales frankly, I think not I think it's going to be less than 45% system sales because the growth in mobility over the next few years.
Is likely to keep mobility higher than it has historically been and therefore, you know since it all has to add up to 100%, therefore, I expect automotive too.
Even though even though we may return to normality and then full swing in 2021 just to be less than 45.
Personal total system.
Okay that makes sense, but maybe look at one the other way utilization rates you said there around 80% is quite a bit lower or is it different for industrial outerwear, though.
No I was looking at that same data last night and in fact auto is is a.
A bit sort of bipolar at this point, we have some really strong customers or some customers are really strong utilization at the moment and some others that are still fairly weak.
Let's see on an average basis it would it still the automotive is below 80, but percent, but but some of the auto customers actually well above 80% and that's what we're seeing the pool coming from.
Okay, Great finally, Jeff when you look at the model going forward sounds like started in the second quarter, you'll be tracking the target model, what's the different metrics.
Yes, yes, Tom that's our expectation.
Okay, Great. That's it for me thank you.
Your next question comes from the line that David belief with Steelhead Securities.
Yep. Thanks for taking my questions. No you mentioned I think the impact of Fiveg. All your business I think the main impact that you mentioned was that the RF segment is going to go from $60 million to $70 million to I guess over $200 million.
In a few years, it's not really the only impact in total from five to your wallet.
Other segments.
Some contractors for instance, I'm assuming this is the test number.
Yes, Hi, Dave This Louise yes that is the test number and that's the the one that people hsinchu jelacic more on and it's an interesting discussion because it is where the technology pivot point is.
Nevertheless, and I think as I made a quick comment before.
The.
The Fiveg transition in smartphones is is coming along with obviously next generation mobile processors, which is driving thermal sub system orders and in some of those thermal or active thermal control handlers that we sell for mobile processor test.
That is happening we have some of those orders in the backlog would have forecast versus for as for additional ones in first quarter.
It also drives an increase in power management IC test.
Any drug it does drive inspection so choose to some degree it's actually.
Substantial driver of our current business, our turret handler business that is seen.
The majority of the uptick.
Associated with mobility at this time.
On the contact or front, we have.
Both high end interfaces like the next wave contactor for high frequency test.
We have low impedance products like something called Seadragon, and we have traditional bogo conveys candidly for base for bar management I see application. So we were.
Very focused on increasing the attachment rate in mobility, as well with our contact or portfolio.
Okay.
From.
Overall industry no ticket.
People are zeroing in I think seven or 8% kind of non memory growth for 2022.
Since you guys still playing the memory market is this a good benchmark for what your overall systems or overall revenue can do and Twentytwenty I'm assuming.
The market grow seven or 8% when you go faster or I thought same rate or maybe just comment upon if that's the industry forecast how your revenue might unfold during the year.
So Dave the way we see these markets is.
Thanks, we expect the handler market should grow about 10% to 15% this year.
We're expecting the contactor market to grow at about 6% this year.
Yes, we'll see it's interesting to talk about the vessels C test market, but just some degree it isn't for us.
It's about a 3 billion dollar market I think projections for 2020, but reality be said, we don't serve the entire radio that market.
We we claim we can serve about 50% of it.
But in fact, where we are really competitive it's fuels smaller fraction of that 3 billion.
And that fraction is the one that is growing it says I answer a previous question is the RF front end I see that seeing growth.
It is the.
Increasing penetration in flat panel display driver IC, which we're modeling.
On a substantial double digit growth this year in flat panel display drivers I see.
So.
Our expectation is true is to outgrow.
Sort of that single digit rate through you're quoting before.
Okay.
And then.
One of the Big Osats and Taiwan his has.
It's fairly significantly increased its capex on testing is doing more turnkey solutions.
Hi, I'm not sure how big how much exposure you have there, but do you do you view.
That is an increasing the overall market for test or are they just taking business from some but some other sources or some other customer or doing it themselves.
I'm just wondering if you.
Moving to.
Elevated levels of Capex from some of these large osats is going to help you are hurt you or how it might impact.
The increase in in Capex that Osats I think it's very much aligned with what do you see.
When we talk about mobility, no, let's let's be honest here, who are the major.
Suppliers, and where are they getting their semiconductor strong right and those companies are essentially fabulous semiconductor companies and I guess I should say a little bit more than that as much establish the are backend less semiconductor companies right.
So the utilization rate across our customer base is much higher today at the Toolsets then they are at the idea labs and that that is obviously related to mobile market expansion.
Mobile market growth here in early 2020, driving test capex into deal size.
The vast majority of our testers sales are in should yield sense today.
The.
The majority of our thermal handlers are obviously into the Idmc thats automotive.
And then we have a lot of current sales into the oil sands and we have been working really hard to increase or pick and place sales into the process.
And also focusing more on the contactor attachment rate into the mobile applications. You know past years, we focused much of our contact or penetration into automotive, which we had a strong foothold on handlers.
And now post et cetera acquisition in understanding where mobile coming from this year being the key driver.
Much of the context of focus has shifted towards.
Most adds mobile customers in attachment to handlers that go into the offsets and testers.
Final question for me.
You could just help us out and let us know.
Or Gibbs <unk> dollar number for contactor sales for the year. So we'd have a base to to work forward on on that segment.
For us for 2019, it was roughly a 100 and close to $210 million.
Excellent. Thank you.
Your next question comes from the line of Christian Schwab with Craig Hallum Gallium capital.
Hey, great sorry, I got dropped I just have a quick question on the tax rate what is the assumed tax rate or dollar amount in your guidance for Q1.
Yeah, you know, it's tough to provide an effective tax rate that makes any sense in Q1.
Lower levels of pre tax, but if I were to guide you to a specific amount I would probably say somewhere a little bit north of $1 million, maybe a million three range.
Okay, perfect and so that I think I caught the tail end of a another one of the analyst questions.
Regarding Q2 guidance so for at the high end of revenue guidance for Q1 in the high end of our growth expectations for Q2.
Then we could see revenue at the $170 million range plus or minus.
It is I think you said, yes, I just want to confirm that you would expect to be operating you know in your stated slide business model at that point, So making me know potentially roughly 30 cents a share in Q2 is that correct.
That's right we'd be at the model, but but Chris and just make sure. We're aligned on the numbers at midpoint for Q1 is about 146, and then what we talked about is seen a potential 10% to 15% increase in revenue in Q2.
All right I understand I understand that I just wanted to make sure that you know if you operated at the high end of your expectations for Q1 in the high end of the growth expectations. You laid out for Q2 that if you did hit a 170 million in revenue that you. The company would be operate at that target model I just wanted confirmation.
Of that and in the answer is yes, I understand where the midpoints our.
Fabulous that is the only questions that I had thank you.
Thank you Christian.
Your next question comes from the line of Craig Ellis with B. Riley FBR.
Yeah, Thanks for taking the questions and thanks for all the details Wells Fargo.
Just one follow up on a few earlier questions.
Well, we see it was very helpful to get your take on some of the growth drivers for this year handlers contactors.
Let's just see test flat panel display drivers my question. It does make sense, we look beyond our calendar 20, which.
It is very unique given things that are going on with the supply chain.
And as we look to calendar 21 or are the growth rates that you're talking about.
Growth rates that you would think would be sustainable into next year or is there.
In any one of those areas potential for acceleration for something unusual happening. This year. So they've done a longer term basis, you would think that growth rates would be lower than what we've looked at.
Yes, Great Hey, Craig this Louise.
Yes, it's.
It's a very difficult you predict 2021 at this stage of the game, but given the current levels in the automotive and industrial current levels spending for automotive industrial semiconductor test and inspection I certainly would expect.
That you come back to normality and as I mentioned before that that business was down.
About 60% in dollar spent for systems I'm not talking recurring systems only from 18 to 19. So it does have plenty of room to go to return to normality in.
Unless were positively surprised were not.
Modeling it should be back to normality. This year I mean, we're expecting should be back sort of around Q4, when it's a seasonally down.
But back spending 2021, so I think that will be a big driver of.
Growth into 2021. In addition to the fact that we talk about Fiveg and it's exciting but reality is.
The fiveg penetration in smartphones. This year, it's still a small fraction of the total smartphone built into year. We're talking here I think on the order teens mid teens penetration into the smartphone market this year for Fiveg devices.
So that also has plenty of room to accelerating 2021, it's all dependent on customer adoption and the actual value delivered to customers and frankly I suppose how it's going to be marketed so just successfully get the younger generation out there too should drive towards a new cell phones smartphones.
So as that rolls out into 2021 to a greater penetration as millimeter wave starts rolling out.
I do.
Firmly believe that 2021 will be accelerating from 2020 because of those reasons and obviously you know notwithstanding any other.
Global catastrophe.
That makes sense and then following up on some further commentary in the swing, it's a little bit more for job search app in the near term, we've got higher mobility mix and then history auto was slower maybe next year.
That does that starts to calibrate versus historic trends, but are there any gross margin implications from some of the mixed dynamics I understand that the business gets back into the target model onto Q, but anything going on.
Bigger picture as we see a shift versus historic margins in something that may start to revert back torchmark next year.
I think.
You touched on mobility, and perhaps RF test.
And while the testers do have a higher gross margin than our other equipment.
We're also seeing a growth and the the turret handlers as a result of mobility and and that has somewhat of a lower gross margin. So I think between the two that sort of blends and continues to put us within this.
Financial model range so.
I don't see any unique.
Swings or dynamics that would really sort of change our view on.
Gross margins out the different revenue levels.
Okay, and then just on the ERP system.
What are some of the some of the near to intermediate term opex implications there.
Is the is the conversion something that adds to opex that would later reduce opex or how do we think about the gives and takes as you move to Oracle cloud.
Yeah, we've been working on this project now for over a year and so we've modeled out the expenses within the financial model. So that's taken into consideration as I said, we've got about another year to go as we implement the system completely across the company.
We initiated this so that we could enable future expansion scale a lot more efficiently.
And so we do expect that over time, we're going to see some cost optimization at this point in time, it's a little difficult to be specific about it but certainly we're going to assess that as we get closer to the completion of the implementation.
That's helpful. When guys congratulations on getting the business backend in my script. Thank you.
Thanks, Greg Greg.
At this time I'm showing no further questions I would now like to turn the conference back over to Mr. Jones.
Okay. Thank you.
Two thank everybody for joining today's call and and hope you have a nice day. Thank you very much.
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