Q3 2020 Cohu Inc Earnings Call

[music].

At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

As a reminder, this conference is being recorded if you require any further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today, Jeff Jones, Chief Financial Officer. Please go ahead Sir.

Thank you and good morning, and welcome to our conference call to discuss Coherus third quarter results and fourth quarter 2020 outlook.

I'm joined today by our President and CEO Luis Mueller you.

You need a copy of our earnings release, you may access it from our website that cool you dot com or by contacting Cohu Investor Relations. Its also a slide presentation in conjunction with todays call that may be accessed on Cohus website 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, we will make forward looking statements, reflecting managements current expectations concerning Ko Hughes future business.

These statements are based on current information that we have assessed the which by its nature is subject to rapid and even abrupt changes. We encourage you to review the forward looking statement section of the slide presentation and the earnings release.

As well as co use filings with the FCC, including the most recently filed form 10-K and form 10-Q.

Our comments speak only as of today October 29, 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 and slide presentation for reconciliations to the most comparable GAAP measures now.

Now I'd like to turn the call over to the least Mueller co. use president and CEO Luis.

Thanks, Jeff Good early morning, everyone and thanks for joining us.

Today I'll discuss some of the dynamics from third quarter, what is driving your expected.

Business improvement each in next quarter.

Summarize how cohu is improving its infrastructure and adapting to the pandemic and highlight our alignment with momentum growth markets for 2021.

Revenue in the third quarter was 150.6 million exceeding our updated guidance with business conditions continuing to improve throughout the quarter.

Image.

We're seeing strong in wide customer adoption for these products in our successfully managing and accelerated production ramp.

I couldn't be more proud of our engineering operations applications and service teams for delivering such a successful product introduction.

There is much more to do in fourth quarter and into 2021, but so far this has been a great Testament of value creation from our October 2018 acquisition of et cetera.

Still in mobility.

We're also managing a fast production ramp for handlers used in testing application processors, and RF crises and growing customer traction for the new neon package inspection platform.

Fiveg deployment is still in the early stages with estimated 16% penetration in smartphone units industry.

Industry analysts expect that this market will continue to expand in 2021 and beyond.

Likely reaching peak demand in 2023 or 2024, there are other applications in automotive industrial and Aiotv that are not yet consider in this forecast and should extend the technology beyond this time horizon.

Test complexity is also increasing leading to higher EPS ERP systems in greater test intensity. The net result is very positive for co Hughes RF testers handlers and our lead line of Contactors.

In third quarter, we also saw new us export restrictions drew flowing I believe everyone understands that the smartphone demand demand remains unchanged, but the business redistribution is translating into incremental orders for cohu products from customers, where we have greater share final.

Managing thermal dissipation during test the.

The computing segment is going through transition.

New edge devices and supplier diversification are creating new business opportunities for a thermal handlers and subsystems.

As I mentioned in an earlier call we have been working to deliver a time to yield value to several customers through better integration of our test cell elements faster handler and contactor.

And third quarter, we captured design wins for RF test, where a major OS at customer recognize the value of buying a complete tasks self from cohere that accelerates time to achieving target production yields and overall equipment efficiency or <unk>.

We are working with other customers across different markets should demonstrate similar capability I hope to describe new application wins in coming quarters.

On the contact the front.

With a sharp increase in system orders are contact or attachment rate is now at 29% as a previously explain this number will fluctuate up and down quarter over quarter.

In light of rapidly improving business conditions strong cash generation in our forecast during third quarter, we took action to reduce outstanding principal under a term be term long bead that associated with the financing of the <unk> acquisition by $17 $3 million.

Now looking at the impact of the COVID-19 pandemic sure business. This has been an incredibly challenging year for our employees customers suppliers and communities.

We're committed to ensuring the safety of all stakeholders to protecting our livelihood and doing the best we can for our communities.

Go you has increased supply chain resilience and implemented policies to safeguard our employees ensure business continuity and support our customers.

Because of the pandemic.

<unk> has reduced travel and other expenses and we're now finding new ways to support customers. Among DS, we're implementing virtual reality assisted technologies to bring experts should the field without leaving their homes.

We're excited you pilot new technologies like this to enhance customer support and expect long lasting benefit from us from such solutions, including lower operating expenses when the pandemic crisis subsides.

Now looking ahead were encouraged by momentum across cohesive main market segments and by customer interest for a new products.

We will be guiding fourth quarter revenue and profitability up in our forecast in this strength to continue into 2021.

Call you is poised to grow next year with accelerating <unk> deployments compounded by a projected increase in smartphone units growing a desk and electrification unanticipated expanding automotive unit sales.

New opportunities in computing with edge processing, AI and next generation Gpus and expected recovery in the industrial segment with improving global GDP.

All in all go he was improving its operations in service infrastructure to meet the to meet the evolving pandemic driven challenges lowering operating expenses and aligning products with momentum markets deliver revenue growth.

Before we continue with financial results electro announced with senior management change and thank Pascal run day for his outstanding leadership of could use global customer group over the past two years as we integrated et cetera.

<unk> will be scaling down in his time commitment starting in first quarter next year eventually transitioned from call you at the end of first quarter 2022 looking.

Looking forward I'm pleased to announce that Chris Boston. We is currently the senior Vice President and general manager of our <unk>.

Handler group.

I assume Pascal is ROE around mid February next year, Chris is a highly respected industry veteran with strong multicultural business experiences and is held in high regard not only by customers, but I'll call you.

In conjunction with this transition are three handler business units will report directly to me now.

Now I'd like to turn it over to Jeff to provide details on the third quarter results and share for for guidance.

Thanks Luis.

Account you delivered strong results in Q3 sales were higher than our revised guidance as of August 31.

Gross margin exceeded our business model.

Rating expenses were in line with forecast.

And Q3, non-GAAP profitability was higher than our business model.

Before I walk through the balance of the Q3 results in the queue for guidance.

Let me talk about our gap to non-GAAP adjustments. Please note that my comments that follow all refer to non-GAAP figures.

For gap to non-GAAP reconciliations and disclosures.

See the accompanying earnings release, an investor presentation for Q3, the gap to non-GAAP adjustments include approximately three $3 million of stock based compensation expense intangible amortization expense was approximately nine 8 million.

The gain on sale of German facility was approximately $4.5 million and restructuring costs for approximately $3 million.

The Q3 2020 net cash impact of restructuring was approximately 400000 due to severance and facility closure.

The Q3 gap to non-GAAP adjustments also include a seven 3 million impairment charge related to in process R&D assets from the <unk> acquisition. This as a non-cash charge caused by COVID-19, driven delay and our customers expected adoption of products currently in development.

Now turning to Q3 results revenue was 156 million and four 6 million higher than our updated guidance as provided on August 31.

In Q3, no customer accounted for 10% or more of sales.

And the third quarter Coheres gross margin was 44% and in line with the high end of our guidance.

The Q3 gross margin is approximately 100 basis points higher than our business model.

Operating expenses were $48.3 million and in line with guidance.

Temporary cost reductions remained in effect throughout the quarter.

Third quarter non-GAAP operating income was 11.9% of sales and adjusted EBITDA was 13.5%.

Go use non-GAAP effective tax rate for Q3 was approximately 16% and lower than guidance, primarily as a result of tax benefits derived from operating losses generated in Europe.

Non-GAAP EPS for the third quarter was 27.

Now turning to the business model as we've previously discussed.

The actions required to achieve that $40 million of acquisition cost synergies.

We're completed as of the end of fiscal 2019 at.

At the end of March 2020, we implemented temporary salary reductions, which took effect at the beginning of April and further reduced operating expenses by approximately $3 million per quarter.

Adding about five cents of EPS to our model.

Given the improvement in business conditions co you is lifting the cost reductions in reinstating full base salaries and board of directors cash retainer compensation.

As of the beginning of November.

And I'll talk more about these when I cover the queue for 2020 guidance.

Now moving to the balance sheet, our cash balance at the end of Q3 was approximately 171 million and supports our operational needs of approximately 80 million that service and funding the inventory and receivables associated with the steep production ramp we are currently at.

Experiencing.

During Q3, <unk> reduced that by approximately 17 million deal.

Deleveraging continues to be a capital allocation priority.

Cash flow from operations. During Q3 was 14.7 million and Capex for the third quarter was five 6 million driven mainly by purchases of equipment to increase contact or manufacturing capacity in the Philippines, and Japan as well as capital additions necessary to consolidate our German test handler.

<unk> into one facility.

The fourth quarter sales forecast has improved significantly since the directional guidance. We provided during the last week of July.

For Q forward guiding sales to be between $176 million to 192 million.

The low end of the revenue range consider some supply chain uncertainty caused by COVID-19, and potential risks associated with book and Bill sales and customer acceptance, which is required for revenue.

Gross margin for Q4 is expected to be between 44, and 45% and in line with our business model.

Q for operating expenses are projected to be approximately 51 million Q.

Q for will include two months of reinstated base salary costs, plus higher variable expenses, such as sales commissions, resulting from the sequential increase in revenue.

Other expenses, such as travel and marketing costs remain at reduced levels and Q4 and the foreseeable future as co. You has a depth adapted well to this new business environment with more remote interaction with customers and between our operations.

Look into quarters beyond queue for which will include the full impact of salary reinstatement. We expect operating expenses to be approximately 52 million on quarterly revenue of approximately $180 million.

We expect Q4 adjusted EBITDA at the mid point of guidance to be approximately 18%.

The queue for forecast non-GAAP tax rate is approximately 22% at the midpoint of guidance. As a reminder, most of <unk> profits are generated offshore and subject of statutory tax rates and various foreign jurisdictions.

Income taxes on profits generated in the U S are mitigated by net operating loss carryforwards.

The diluted share count for Q4 is expected to be approximately 42 7 million shares.

With increasing backlog and strong order for.

Order forecast across various markets.

Our current projection for first quarter revenue of 2021 is to be approximately flat to up 5% from the mid point of queue for guidance.

That concludes our prepared remarks, and now we will open the call for questions.

Ladies and gentlemen, if you have a question at this time.

And the number one key on your telephone and you'd like to remove yourself from the queue. Please press the pound key.

Okay first question concern, Brian Shameless equal your line is open.

Hi, good morning, and congratulations on the pick up in the business and also thanks for writers ask a few questions.

Okay. The first question.

Coming off low levels, but.

Just a more to pick up an auto industrial certainly sounds stairway substantial I, usually think of service oriented fails, leading recovery and utilization an office assistant orders, but maybe can you talk about the underlying drivers you're seeing your view on sustainability and then the closest.

And your Q1 sort of outlook as well.

Are you building backlog here.

<unk>.

Yeah right.

Brian sorry.

As we described in the comments, yes orders are increasing.

Book to Bill Q3.

Was above one expect the same for Q4. So yes. We are building backlog you mentioned the automotive coming off of.

Of low order rates and that's absolutely true so.

So we believe we still have a ways to go there to get back to a normal run right.

We think we're about $25 million to $30 million per quarter and orders lower than are normalized right.

Got it and.

Just have a question about the.

No dobie side of the business, but.

Terms of the customer strength is a pretty broad across customers and geography.

Hi, Brian stories, Yeah. It is it is it is brought on customer bills and geographic as well as I mentioned it is particularly strong for RF Ics, but we also seen.

Strong pool for our thermal handlers for application processes and.

Also an increase forecasts here on the flat panel display drive some of it associated with mobility, our management icy as well related to mobility.

Okay, great and in terms of.

Orange cash part of the business, which has been strong this year.

I think the cast Louise you've commented.

Asia Cam there, perhaps growing sort of maybe 20 percentage per.

Adam over the next couple of years or so.

Last night, Samsung talked about the potential for the industry shifting over 500 million Saatchi sounds.

Next year say 202 50 million. This year, that's one of the higher numbers I've heard and that's last night I'm curious.

How would you say the Rs camrose relative to that sort of a number.

Yes, so we thank thee RF, Tim and.

By that I don't mean, just in phones, but connectivity in general so some of it Jacob taken for granted solve your some of it as an automotive or Iot that that Tim is growing to about a $400 million.

Market size or addressable market size for code you in the next in the next two to three years.

Okay.

And one last quick one miniature Josh.

The revenue level, you're guiding for four Q against the target model might suggest.

Ever heard of 30 to 45 cents an earnings.

You had mentioned that.

I'm very cost measures are coming back sounds maybe opex is still going to be lower though than the target model. So can you kind of perhaps quantify so.

The benefit you're getting some sort of via reduce travel and other sorts of cut some expenses right now is I guess, it's just.

If you guys are <unk> opex.

Subtracted against sort of where you would normally be it goes revenue levels.

Yeah, that's that's a good way to look at it Brian again.

As I mentioned in my remarks, I think the the way to look at it is at a at a revenue quarterly revenue rate of 180.

Think about $52 million and operating expenses, then with every 10 million change in revenue are Opex, we'll move by $1 million. So as revenue goes up to 190, we'd expect opex to be at $53 million.

That's helpful. Thank you.

Thank you and our next question comes from Chris send car with Cohen and company.

Mine is open.

Yes, hi, Thanks for taking my question and congrats on the great with some some guidance.

Lewis I had a couple of the first one is.

Is it a bit too.

Segment, all fuel mobility orders of sales how.

How much a for this coming comply G and if you can also give the kind of granularity over the last couple of quarters. So he can see the trend of how <unk>, good increasing or Oh, it's trending for you folks.

Yes, Hi, Chris I won't have all the details handy here, but I can tell you. This the.

Third quarter, RF test or orders.

There were almost entirely <unk> related if not really entirely five G related.

The the handler orders and will be inch mobility are a little bit more difficult to to call. Because we are testing an application processor, which is a digital device when our handlers in it's it's really a difficult call to say, whether it's going on a.

On a five G or traditional forgy phone ultimately because we don't know which phone maybe supplier may be using the processor. Similarly with the display drivers or the power management Ics. We don't we don't have that visibility down to specific cellphone model.

That it's you so the RF, it's easier to call because we know the device.

But on the other ones, it's hard to know how he gets integrated.

Fair enough smooth and then.

Along the same path you know when you look at the at a few customers not the old side, but I actually have the other front and margin make it seemed like going to like roughly five of them put them to use some one in Japan.

How would you characterize your market shows.

Amongst almost five and customers.

The whole set with you Sir just talking about.

Not the whole side Snuggles I was talking about like the <unk> was a while ago Qualcomm rados of the wound.

Oh I see.

So we have we have had traditionally the.

Largest share of the power amplifier market in that that continues to be the keys, we have more recently gained share into.

Other RF front end, Ics, particularly antenna tuners and.

Low noise amplifiers and switches so.

I would say, we give or take 60% plus share on the power amplifiers I can't tell you exactly the share in the other elements, but it's on the rise it's increasing.

Got it got it and then the final question either to lose his jet.

Although it seems to be kind of one of the company more but I suppose some things up your.

System all of those it's still pretty low kind of curious when you'd expect it to get back to like you know some of your early 20th 19 level. So the prior ones.

Yeah, that's a very good question do Chris.

Yeah.

It's hard to make those kind of predictions, but we do we did expect coming into.

Last quarter that the market would be in a recovery by the end of the fourth quarter beginning of first quarter of 2021 and that possibly hit full sort of being a full swing in the second half of 21 or 22.

Where we stand today is things have turn on.

Faster than we had anticipated at the end of the third quarter and continue to hear at the beginning of fourth quarter. So.

I will be a bit more bullish this time and say that we think we're going to be we're going to be back in normal business environment for automotive.

Sometime in 2021, I can't I can't precisely say, when but but it'll be a bit more bullish from from where we stand today.

Terrific. Thanks lose things you have congrats on the goodness.

Chris Thank you.

Thank you and our next question comes from Craig Alice with Steve Riley.

Your line is okay yeah.

Thanks for taking that question guys and congratulations on the real robust execution.

Totally getting to be reinstating normalised salaries for the team.

Give them, what you're doing with your execution I wanted to start following up with a comment that you just made regarding Christmas questions. So.

My understanding is that <unk> has a very strong position and evie power and Aaas related applications. So when we're thinking about the businesses capability on a go forward basis relative to its order intensity and either 18 or 19.

Expect for something.

Four four order intensity intensity via actually be higher given how strong your position is and these to check hiller growth areas.

Hi, Craig Yes. This is Louise.

Yes, I think I think that's the direction, we we expect the market you go in.

Ultimately to grow so.

Christmas Prior point, we think we will be back to that.

Should have quarterly rate sometime in 2021, we see the trajectory are ready.

From where we stand today.

But beyond that the.

Electrification of the drive chain in the adoption of Ada seems to be accelerating. So we think automotive has the potential to go beyond where we were.

A couple of years ago, I don't know if that that then translates into 2022 or exactly the timeframe.

But one thing is certain the the ramping automotive now is.

And we see on every order coming through now is very heavily center around.

Battery management systems testing better management devices.

Or high end Microcontrollers or you could call it microprocessors that our power. It dissipated therefore for a desk applications and also sensors that that we believe are also related to ajs applications and vehicles. So yes that those are the those are the segments of the automotive market that are that are.

Coming back stronger in.

I think we will continue to propel growth here for the next several years.

That's great very helpful. And then check just a clarification on gross margin in the quarter, the 44% great to see the the leverage were there any one timers.

That number.

And if not any implications for how we think about.

Gross margins versus the target model going forward.

Yeah, Hey, Craig.

No no one timers and.

In Q3, 44% gross margin.

As a matter of fact, I would say probably had some costs. If some one time costs that could have waited down the gross margin a bit.

But.

Looking forward and modeling gross margin the business model and the gross margin line is still largely accurate. So I would follow the gross margin is a different revenue levels and the current and the current model. It's the operating expenses that need an update on the guidance and that's where I came in with the.

$52 million on about $180 million, and then changing fluctuating roughly about 10% of the change in sales.

Got it Okay and then.

Very helpful to get some of the color regarding.

Visibility into calendar 21 so.

So Luis as you look at calendar 21 can you just characterize where your visibility is is relatively stronger where you're more confident in and given how robust.

Were exiting the year versus normal seasonality what are the implications for.

Calendar <unk> 21 seasonality from from our exit velocity and calendar 20th.

Okay, So, let's take those pieces and Craig so the.

The strength that we see going into 2021.

Is I think it's very much.

Align with we'll be talking about here for fourth quarter.

<unk> mobility <unk> deployment is going to continue into 2021 and beyond.

I think it was Bryan Bryan Chin, who even made the comment about unit sales cellphone unit sales, which are finally projected to grow next year.

In addition to.

The further deployment of five G technologies. So I think you would compound. The two were looking we're very optimistic for the mobility market, particularly Rfc's RFC test.

Uhm.

We we also have.

A lot of optimism about auto as we just described here and talked about the <unk> and <unk> and sensors, that's another big area of driving growth in.

Potentially here turning on faster as we see then we had originally anticipated and another one of those.

Sort of big trends to.

That will continue to go for for the next several years.

Seasonality becomes a tougher question to answer.

Simply because we have.

Normal times in semiconductor industries, usually anything short of normal and we have two two megatrends happening at the same time, which is this <unk> technology deployment and then all of these.

<unk> deployment in automotive so so it gets hard to talk about seasonality when you have to.

Two big segments for semiconductors ramping at the same time.

I don't have a clear view yet on seasonality for next year, Craig Craig and I'm going to have to defer that by another quarter, and then comment a little bit more for next year.

That's totally understandable debates and appreciate the color that you provided just regarding the points you made around multiple mega trend to play.

In your experience from with the last time.

You've seen dining.

Dynamics this favorable for Coca we should look back at history, what would be a comparable point for Ya.

HM Okay.

So if I look back in history.

A more recent history I know, we had a very strong automotive market a few years ago.

2017, 2018, automotive was was particularly strong with.

With.

Tighter emissions control in the U S Europe and China.

But that was I think that was the singular major driver there if I go back a few more years we had.

Went to see was 2014, if I'm not mistaken.

It was the point in time in which.

Application processors.

Power dissipation during test cross the threshold that.

Open up the window for us to sell our active thermal control technology. The same that we're using for mobility sorry for.

For laptops and at the time computers.

Servers and that technology found its way into application processor smartphone market. So that was that was a big one too.

I don't recall in this recent history of having two two big things happening at the same time I guess it would have to look look a little deeper here, but.

But I don't recall, two big things happening at the same time so yeah.

Yeah, I think that's my answer their Craig.

That's helpful guys, Thanks, and I'll hop back in the queue.

Thank you and our next question comes from Sydney, how with Deutsche Bank.

Your line is now okay.

Great. Thanks for taking my question that congrats on the strong quartering Guy.

My first question is on the R. S test module, the new product that you guys have to announce maybe can you put some context around this particular product in terms of revenue opportunity to get that bring and what's the attach rate that you're seeing what your installed base and how quickly can do you think that can that can be ramped up.

Well, we don't Hi, Sydney this as long as we don't really break out <unk>.

Revenue Bye bye product line.

But.

I think let's see if I can answer some some of your questions here.

As I mentioned earlier, we are looking at a.

RF addressable market. So there is not everything RF, we can do to.

Today, and RF addressable market for code you that is growing to about $400 million in the next two to three years.

We do have a very strong sure today and power amplifiers and.

This $400 million extends beyond power amplifiers into things that we are penetrating now.

As I mentioned earlier.

I think over time yeah.

The opportunities there to grow this too close to $200 million in RF revenue.

<unk>, if we execute successfully and all of our plans.

That doesn't answer what we have today, but I really don't want to getting too particular product line revenue today.

Okay.

Desk chair, maybe on my follow up question as in the past you talked about.

Just sell utilization at 80% is in line when you when you start seeing system sales take up and obviously you he saw pretty good pick up here.

What is the overall surly utilization I think you mentioned, 81% can you talk about which and market do you expect to see system sales starts accelerating RBC mobility is one but.

I'll also try to think about whether there is some sort of seasonality you'd think about these these utilization.

Yeah, Yeah, and you're right I agree with you it is.

The businesses, particularly strong for an 81% utilization right now and that's that's what gives us more optimism about 2021.

The utilization is now particularly strong.

Four applications in mobility.

We see it particularly strong it all set.

I think there is more room for improvement of utilization for customers and automotive like I said, we are seeing a sharp increase in a motive orders but.

With that said the utilization there.

On average it's still below 80%.

And I think I think what's what's happening now is we're seeing technology being.

Being major pivot points.

Driving the business. In addition to utilization five <unk> deployment aid as these are all new technologies that.

Almost like notwithstanding utilization you need new type of capital in order to test. These devices. So you got a compounded.

In fact here on top of the general utilization discussions that we have.

Okay, maybe maybe a one last question for me for your comment on first quarter revenue being flat, 5% can.

Can you talk about what areas you are expecting to improve or maybe there are areas that have declined to get to that kind of neutral.

I know you just answer a previous question well seasonality, but that.

They may or may not exist, but.

Trying to figure out if you are still in do you think this is both seasonality and are you still in kind of catch up mode and some of the areas.

Yes, Sydney I would say you are correct will probably in catch up mode still in in particular in automotive and industrial we saw pick up where scene.

Bit of an increase in utilization and automotive and industrial but we do have a ways to go to get back to sort of a normalized run right in.

In those segments. So I absolutely agree with the fact that still still in catch up mode for auto and industrial.

Okay. Thank you.

Thank you and our next question comes from.

<unk>.

<unk>.

Yeah Security's your line is open.

Yeah. Thanks for taking my question.

You made a comment earlier in your prepared remarks, I think about five G. RF tough times do you have an idea about how much more test intensive or handling intensive the auto parts are that you're talking about.

Hi, David Lewis.

Yes, I do I do have some.

Specific examples that.

That are tabulated in terms of what it was in the prior generation device what it is in this generation device.

Generally speaking some of these stuff generally speaking the test times are going up in.

There are obvious.

Desire for from customers too.

So to bring him back down and that's why you introduce new products, new capabilities and and test program techniques.

But but yeah.

Been specific on numbers.

The.

The desk desk time intensity, I guess to to call. It that way for increasing test times is generally going up in our house.

Can you take a stab is it going up by 20% or 50% or or what.

From your experience what have you seen thus far.

Have seen the opinion devices, obviously, but I've seen things from.

We've been able to bring it down to parody too there's 30, 35% increases that I've seen on on different test programs.

Okay and as far as the guidance for the December quarter, it's up like roughly call at $35 million, which segments all the contributing to that nice incremental growth of $35 million in the December quarter.

But it's going to be mobility.

<unk> RF test.

As well as a pickup in automotive and industrial.

Okay, Uhm could you help us understand as far as the automotive segment.

How much of a.

I think it was dragging on a quarterly basis by 25 or $30 million and I'm just kind of curious in your December quarter guidance how.

How how how much of an improvement you've made.

Basically not dragging by 30 million a quarter anymore, but I'm kind of trying to figure out how how close you are to getting back to normal run rates.

Yes, Dave I'll tell Ya, we did that same calculation and we think that now after Q3.

We are about $25 million to $30 million.

Way from a normalized run right.

<unk> today.

So.

You kind of hit it on the head there that's the gap that we see currently.

And we see improvement in that segment.

That is Louie said.

Think we can close that gap sometime in 2021.

That's that's the incremental opportunity from where we are now Dave.

From the September quarter revenue level.

Yes.

Okay. So I guess the update as you think you can get this all the entire 25 or $30 million on a quarterly basis back by sometime in mid 2021, and before you were saying you orcher when you could achieve getting back to that run right.

Yeah, just one quick correction here, we're looking at the September quarter.

Booking level, when we talked about an incremental 25 $30 million so.

Obviously, we didn't talk about bookings, but as a number but.

That September booking translates into fourth quarter revenue.

Okay.

Question for me.

Yes, I think you mentioned thermal handlers.

Traditionally a thought those have gone into the to the Apu segment of the market, but it sounded like I thought I heard you talk about other parts or other markets for your thermal handlers could you just elaborate a little bit.

Sure Yeah.

First of all what I'm referencing thermal handlers here I am talking about the the ones with active thermal control technology, which are for the Apu's Gpus like you described but I'm also including.

And that terminology now the the cold cryogenic.

Test handlers, which are using automotive.

That's what I mean by thermal handlers with that said I have to admit those two things are now converging automotive with a dash.

With a dash business picking up we're seeing the same actor thermal control technology on cryogenic handlers for automotive applications. So it's pretty much the the processor market. If you will is meeting the automotive market.

Okay. Thank you.

Sure. Thanks.

Thank you and our next question comes from Christian swap with Craig how long you're ready to open.

Yeah, congratulations on the great quarter and great outlook.

Outside I'm, just wondering as we as we move into.

Other <unk> applications, where you may may have opportunity outside.

Power amplifiers and I'm just wondering if you could talk about if you have any meaningful opportunity.

For millimetre wave RF front ends.

If you have an opportunity and.

As we rollout more <unk>.

Pico cells small cells and micro sells for the active RF devices that will go into.

<unk> infrastructure.

And should accelerate and 21 versus 20 or you're well positioned in either one of those areas.

Yes, and some others others, we still have two.

To deliver the product and and get the share get get the socket.

But yes I mean.

This RF.

Or suite of products instruments that we delivered here in the third quarter.

They're not just for.

<unk> going into smartphones I mean, we have.

Good capability on Wi Fi six an ultra wideband.

Many of these are used outside of the phone on stations.

Fixed patients so.

The answer is really mix, because it's yes, but there's more there's more that we need to do is to.

Okay, Okay great.

Most of all my other questions have been answered thank you.

Okay. Thanks, Thanks fishing.

Thank you and our next question comes from Comcast relocate it.

Davidson.

Your line is open.

Great. Thank you and good morning, So one more question on the <unk>. So how much of your business is driven by just the the full so order versus you know the dust people being a a customer of the handler. The contactor I guess, another words, which of those segments inside of the <unk>.

Over Underpenetrated for Ya.

So Christian without being on the numbers, we have the majority of our business in our after today.

Is still selling the tests are in the handler a separate pieces in some cases they come together.

But.

In many cases, you're not actually were selling testers and handlers completely separate.

We have been promoting and in the third quarter, we did get.

And RF customer to recognize the value of.

Bringing a complete solution.

Two production from us.

As it really simplifies the integration to the customer and essentially the time to get to production yield.

That really matters, particularly in the mobile space you have you have a device lifecycle.

That is probably measured in a couple of years and you have a significant ramp in front of you and and Steve stiff competition. So.

Get into that production yields fast.

Is incredibly important.

So we got we got finally.

Sort of an <unk> customer to recognize that value in peikar complete cell, we're working on that same proposition.

Not only narew, but a few other segments with different customers and I hope to be able to bring that to the table here in future quarters, but but like complete again.

The majority of the sale today are on.

Separate individual pieces pass through here handler contactor and not as a complete sell.

Okay, and I guess going along with that and then it sounds like there is an opportunity to you'll get the contractors into these like from that already have a testament already have a hamburger then so that's a nice car.

Contact a growth Avenue for Ya going forward.

Yes, we have we have quantified that opportunity we think there is a.

There is a chance here of adding something on the order of $30 million to $40 million of incremental revenue next year bye.

Selling more of the complete package and then with that selling something that we don't sell yet to a customer or another customer based upon.

Okay, Great and Jeff when you look at the the guidance for 18% EBIT.

200 basis points above your model it sounds like from your comments earlier that maybe it's not truly turner basis points above what the model should be maybe it's only 100 basis points or so that's the part of the model that might get adjusted upwards.

Yes, that's right that's right Tom.

And we're working on a refresh of the model now it should have it out before the end of the year.

Okay, Great. That's looking forward to it thanks for your time thank.

Thank you.

Thank you and once again, ladies and gentlemen that scar wanted to ask a question. Our next question comes from Crosby, What do you need them and carry your line is open.

Thank you for taking my question I apologize my line was dropped on.

If if my question has already been answered I really apologize on my first question is.

Really going back to the gross margin.

You guys kind of Guy did the fourth quarter gross margin pretty much in line with you a long term model.

Meacham model, and which is not so much off of off site from the third quarter understand there is no one time item in the third quarter, but.

If I think about the higher revenue base, you would get a better coffins absorption may.

That indicated that there is some product mixture going on there for the fourth quarter, probably you're relatively lower margin.

Product back in the hands dinners, those will get greater grow with a fourth quarter, probably driven by some of the things you mentioned the surge demand after auto off on the auto customers.

Yeah, you're right you're right Charles Thank you hear around the head at Q3.

There was some different mixed in what we had forecasted.

Some of that mix related to recurring revenue that Luis indicated that we delivered.

C a bit of a drop quarter over quarter and the recurring revenue, but obviously, a big pickup and the systems and as you mentioned.

With more of the handler systems that will.

Bring down the margin a bid on a blended basis, so you've hit it right on the head.

Okay, great. Thanks, So maybe the next thing is really all about.

Iowa tests to sign up the business I think my I walk my.

One one person the other person already asked.

You used to have a 100% year over year growth for the next couple of years, obviously with strong upside in the third quarter, and possibly fourth quarter and calm for plenty plenty, one will be a little bit difficult.

<unk> expecting sort of 20% growth into next year for the passenger side.

So.

I don't know that we actually mentioned a particular growth number for our test and should next year.

Nevertheless.

Yes, we do expect continued growth in RF testing 2021 for two reasons.

We're still out to see probably a doubling of.

Deployment of <unk> technology and phones next year.

In addition to forecast market forecast now is is four also smartphone unit Grove next year. So.

So I think the compounded effect of that is unexpected growth in RF test for deployment.

I also mentioned that we are.

Continuing to introduce new products and go after other elements of the RF front end I see.

As we get those design wins.

That's going to increment our revenue.

Each of this market segment that I said.

Growing to about 400 million addressable market segment to about $400 million over the next two to three years.

Got it got it. Thanks. So next question really about automotive side of the business. So.

We were a little bit surprised to see like the pull forward of automotive recovery, you're seeing today, because we were sort of.

Expecting that unit grow so automotive semi should proceed.

Equipment Ah recovery, so why the earlier than expected recovery now and are are there. Some technology upgrade components. There. For example, maybe you are targeting some of the new applications or there are some technology refresh cycle going off here maybe.

Some of the bedrooms Thermo management handlers subsystems are needed to copy and know each step up waiting for that really dot.

Unit getting recovered.

Yeah. Your question already has the answer Charles It's you are correct to be honest with you. So we a bit surprised we were expecting the automotive recovery to happen mid to late queue for even early Q1 of next year. So it has come in sooner than we expected ourselves.

At the same time you are also correct that much of this has to do with technology pivot too.

As I mentioned in to an earlier question where the.

Processor marketed sexually hitting the automotive market.

And we have a demand here for thermo deceptive testing thermal or managing temperature control thermo dissipated devices. So we're.

We're finding we're finding applications now we're we're selling acted thermal control technology on our tried camp cryogenic handlers.

And that is that is that is the technology change in the automotive market. They don't they don't have that installed base capacity to today.

So there is there is definitely a technology component here happening in automotive because as I said earlier I'm not sure. If you were in the color dropped out utilization automotive is still below 80% and yet we're seeing we're seeing a ramp but they are for new products. So it is a technology shift.

Great great. Thanks for the color maybe my last question I want your leading logic IBM customer I know you don't really have a 10% customer for a couple of quarters.

That particular customer apparently.

Is moving.

From a T E based testing into some up the modular task team and with that they are in house test modular pastors, how do you see that twin day's coming along and how do you see the impact on your business.

So.

Talking about that customer we continue to see the business, there robust and pretty much.

Staying at the same level quarter over quarter through the end of this year.

I don't know exactly what's going to happen next year, but but there is there is no no weakening of business in that account.

That market segment.

At the same time, we're seeing some track.

Traction and interest from other customers, particularly for microprocessors and Gpus and network processes four hour Act with thermal control technology. So the computing segment may actually open up some new opportunities for us in 2021, but it's a little too early to to talk and quantify.

By them.

Got it got it. Thank you. Thank you very much congrats on the nicer results.

Thanks Charles.

Thank you and at this time I'm not showing any further questions I'd now like to turn the call back to your speakers for any further remarks.

Thank you and before we sign off I would like to let you know that to kill you will be hosting a virtual analysts an investor conference on December 2nd.

Conference will provide you with an opportunity to gain more in depth knowledge about <unk> products markets.

And our strategy for differentiation and growth I hope you can join us.

In addition to the co you conference will be participating in a number of virtual investor conferences. During Q4 and would welcome meeting with you. The conferences are the Stifel Midwest growth Conference on November 11th and 12th the da Davidson Investor Conference on December 15th and the <unk>.

Daniel CEO summit on December 16th.

So thank you for joining today's call and we look forward to meeting with you at an upcoming conference.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may I'll disconnect everyone, how 'bout that.

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