Q4 2020 Cohu Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the <unk> incorporated fourth quarter and fiscal year 2020 financial results Conference call.
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I'd now like to hand, the conference over to your host today, Mr. Jeff Jones, Chief Financial Officer.
Good morning, and welcome to our conference call to discuss co. He was fourth quarter 2020 results in first quarter 'twenty 'twenty, one outlook I'm joined today by our President and CEO Luis Mueller.
If you need a copy of our earnings release, you may access it from our website at <unk> dot com or by contacting <unk> Investor Relations. There's also a slide presentation in conjunction with today's call that may be accessed on coheres website in the Investor Relations section replays of this call will be available via the same page after the call concludes.
<unk>.
Now to the Safe Harbor.
During today's call, we will make forward looking statements, reflecting managements current expectations concerning <unk> future business. These statements are based on current information that we have assessed but which by its nature is subject to rapid and even abrupt changes.
We encourage you to review of the forward looking statements section of the slide presentation and the earnings release as well as co. He was filings with the S. E C, including the most recently filed form 10-K and form 10-Q, our comments speak only as of today.
The Bureau of 11, 'twenty 'twenty, one and co <unk> 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 I'd like to turn the call over to Luis Mueller co. He was president and CEO Luis.
Thanks, Jeff Good early morning, everyone and thanks for joining us.
Today, I will discuss some of the dynamics from fourth quarter explain whats driving your growth talk about our expectations for first half 'twenty 'twenty, one and why we believe co Hughes uniquely positioned now to capitalize on the strong semiconductor market.
Record fourth quarter revenue of 200, and coupon of $4 million was up 34% sequentially and exceeded our updated guidance with business conditions continuing to improve throughout the quarter.
Despite COVID-19 challenges, we executed on our fifth consecutive year of revenue growth a five year CAGR of 18.7%.
Go you ended last year on a high note with all time record orders and strong momentum that has carried into first quarter 'twenty 'twenty one.
Our operations team and supply chain partners are executing on an unprecedented business ramp to meet customer needs.
Fourth quarter orders were split, 29% recurring and 71% systems, reflecting the sharp increase in tester and handler systems orders.
Interface business orders increased 30% quarter over quarter, but given such strong system. The man the contactor attachment rate true handler sales was 19%.
Orders improved sequentially across all of semiconductor markets, we've automotive increasing nearly 200 per cent quarter over quarter.
Estimate of test cell utilization increased five points quarter over quarter to 86% at the end of December and explain some of the dynamics driving strong business momentum.
[noise] mobility continues to be of significant segment for <unk> as.
As we enable the introduction of next generation five G smartphones deployed by all major U S Korean and Chinese manufacturers.
Our interface group had a key design win at a leading foundry in Taiwan in those setting Korea for tests, the millimeter wave RF devices.
We're not only excited by demonstrating our capabilities in high frequency, but also for the success of our new probe had solution against well established competitors in wafer test.
The new C racer interface platform will be used initially in preproduction and protocols occasions, we expect volume orders starting late this year or early next.
Our ATM business experienced the steep ramp driven by the new rat Dragon the instrumentation suite for testing RF front end a season Wi Fi six devices.
Along with our F. We had good traction in display driver bar of management and application processor test for smartphones, which marks an expansion of our addressable market.
Tester orders doubled year over year, demonstrating the success of our new product portfolio and complementary value that the 2018 ex air acquisition brought Chico Hugh.
Moving onto vision inspection.
Our knee on platform continued to capture new customers and applications in the fourth quarter.
We estimate that we gained three to four point share last year position <unk> as the second largest supplier of automated optical inspection systems for the backend semiconductor market.
We've entered 'twenty 'twenty, one with significant momentum in the segment and are optimistic about business prospects as we continue to expand our portfolio of solutions with greater vision accuracy speed and the deployment of artificial intelligence to improve inspection yield.
Our sales teams have been incredibly busy securing key design wins in China, and Taiwan, with our testers handlers inspection equipment and contactor.
Further expanding our market of penetration in the mobility segment.
Kudos to our sales team and the great efforts of engineering in developing new capabilities in our products.
Turning to the automotive segment orders tripled quarter over quarter of semiconductor companies ramp to catch up to auto demand, marking a significant shift in business toward power electronics battery management and Adas processors.
It comes as no surprise that this new wave of growth in automotive coincides with all major auto manufacturers announcing the introduction of electric vehicles and new driver assist technologies we.
We estimate that about 20% of our automotive handler orders were for testing semiconductors for Evs.
Driver assist or a das is also particularly interesting as it marks the confluence of extreme temperature testing with active thermal control, making a perfect storm of complex thermal management requirements. We like these challenging technical problems that ultimately impact yield.
Operating as an opportunity to address customer needs with our proprietary thermal technology.
Approximately 5% over automotive handler orders were for testing Adas processors.
In our forecast is increasing in first half of 'twenty 'twenty one as this technology starts to ramp in volume production.
Orders in the industrial and consumer segments also improved quarter over quarter, our gravity and pick and place handler businesses are once again ramping in support of testing high power electronics used in industrial and medical applications.
We have ongoing handler qualifications for testing gaming processors, where we can optimize yield by actively managing thermal dissipation.
Along with testers for display driver and power management Ics.
In the computing segment orders practically doubled quarter over quarter.
And in Iot I O V and Opto electronics orders were up substantially driven mainly by our success in testing new RF devices.
Now looking ahead, we're encouraged by momentum across all coheres main market segments and by customer interest in our new products and integrated test cell solutions.
We will be guiding first quarter revenue and profitability up and expect second quarter to be sequentially stronger.
We're motivated to accelerate time to yield and productivity for our customers being diligent about new product investments and incredibly focused on improving margin and profitability.
So why schools, you're doing so well and why is our outlook so positive.
We have made substantial improvements to our product portfolio for the past two years that have positioned the company for continued growth over the midterm.
The five G deployment is accelerating and analysts are now projecting greater than double year over year volume penetration of this technology in 'twenty and 'twenty one.
Task complexity is also increasing leading to higher system, esp's and greater test intensity.
Additionally, smartphone units are projected to grow again this year further compounding the opportunity for selling our F display driver and foreign management, IC testers handlers and contractors.
But the core of <unk> story is not limited to five G. As mentioned earlier, we're capturing new customer opportunities in the RF Transceivers Wi Fi six general Iot and even application processor tests with some of these being new additions to our addressable market.
Last year, we saw new U S export restrictions to Huawei I believe everyone understands that smartphone demand is increasing and there has been a redistribution of business that translates into incremental orders for <unk> products from customers, where we have greater share of new opportunities, particularly in China.
There are significant positive trends in the automotive segment, starting with many of our company is suggesting a complete transition to EV technology in the coming decade insignificant government mandates to go carbon neutral in China, Europe and the U S.
Another exciting trend is the rapid adoption of Adas technologies in vehicles, which expands the use of processors censors Microcontrollers. This plays in our EF Ics.
We believe our sales growth to the automotive segment will benefit.
The bulk equally from IC content growth in of projected vehicles Saar in the mid teens this year.
With the successful integration of ex Sarah now behind US, we held an analyst and Investor Conference early December describing of new target financial model and the path to 14% revenue CAGR of two $940 million and 23% operating income over the midterm.
This comes from enabling testing of new high growth technologies in RF battery management, and Adas processors in gaining traction in automated optical inspection.
Now I'd like to turn it over to Jeff to provide details on fourth quarter results and share first quarter guidance.
Thanks, Luis before I walk through the Q4 results and Q1 guidance. Please note that my comments that follow I'll refer to non-GAAP figures information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures are included in the accompanying earnings release and Investor presentation, which are located on the.
The investor page of our website.
Now turning to the financial results Q4 revenue was 202.4 million and $4 9 million higher than the midpoint of our updated guidance range provided on December 1st fiscal year 'twenty 'twenty revenue was 636 million growing 9% over 2019 and with nearly 19.
Percent CAGR over the last five years.
In Q4 and fiscal year, 'twenty 'twenty, no customer accounted for 10 per cent or more of sales.
In the fourth quarter co. He was gross margin was 45%.
Operating expenses were $51.7 million and lower than guidance as we continue to optimize our expense structure.
COVID-19, driven temporary cost reductions were lifted at the beginning of November.
The fourth quarter non-GAAP operating income was $19 four per cent of revenue and adjusted EBITDA was 20.9%.
Return on invested capital was approximately 54 per cent in the fourth quarter and approximately 26% for the full fiscal year 2020.
The Q4 results exceeded our new target model objective to make investments with our Oh, I see of 30% or higher.
The co Hughes non-GAAP effective tax rate for Q4 was approximately 11% and lower than guidance, primarily as a result of losses generated in Europe combined with U S income offset by Nols non.
Non-GAAP EPS for the fourth quarter was 73 cents and $1 19 for the full year 'twenty 'twenty.
Now turning to the business model, we recently introduced a new midterm target financial model that delivers higher profitability at all revenue points.
Our new target model achieved $3.60 of annual EPS on revenue of $940 million versus $3 of EPS and our previous model. This represents a 20% increase in profitability at target revenue.
On a quarterly basis, the new model reflects an increase in EPS of 10 cents growing to 15 cents of target revenue of $235 million.
Gross margin expands with higher revenue and operating expenses are reduced from the previous model, but sufficient to support product development and other business investments.
The combined effect is an improvement in operating leverage with about 45 per cent of incremental revenue falling through to operating income.
We've added free cash flow targets at each level of quarterly revenue Capex requirements are relatively modest and are modelled at $20 million per year.
Now moving to the balance sheet, our cash balance at the end of Q4 was approximately $170 million and supports our operational needs of approximately $80 million plus debt service and funding the inventory and receivables associated with the steep production ramp we're currently experiencing.
During Q4 co here reduced debt by approximately $20 million and deleveraging continues to be of capital allocation priority.
Cash flow from operations. During Q4 was $22 3 million in Capex for the fourth quarter was $5 1 million driven mainly by purchases of equipment to increase contactor manufacturing capacity.
The first quarter revenue forecast improved significantly since the directional guidance. We provided in early December for Q1, we're guiding sales to be between 212 million to $232 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 and customer acceptance, which is required for revenue.
Gross margin in Q1 is expected to be between 45% of 46%.
Q1, operating expenses are projected to be between $53 million to $54 million.
We expect Q1 adjusted EBITDA at the midpoint of guidance to be approximately 23%.
The Q1 forecast non-GAAP tax rate is approximately 22% at the midpoint of guidance. Most of co use profits are generated offshore and subject to statutory tax rates in various foreign jurisdictions.
Income taxes on profits generated in the U S are mitigated by net operating loss carryforwards.
The diluted share count for Q1 is expected to be approximately 43.7 million shares.
With increasing backlog and strong order forecast across various markets. We have improved visibility into the second quarter and are now projecting revenue to be up 5% to 10% from the midpoint of Q1 guidance.
As order momentum in design wins continue into first quarter. This is shaping up to be a strong year for co Hugh and we remain optimistic about our midterm prospects, enabling testing of new high growth technologies, and our F battery management, and Adas processors, along with gains and automated optical inspection.
<unk>.
That concludes our prepared remarks.
And now we'll open the call to questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press Star then the number one key on your Touchtone telephone.
Withdraw your question press the pound key.
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Our first question comes from the line of Brian Chin with Stifel.
Yeah.
Hi, there good morning, congratulations on the strong results and I. Appreciate you laying of Thats got a few questions.
Maybe the first question I had was you know a lot of interesting things the victory here, but.
But the man perspective, it's been maybe three years Luis since you've seen this much strength from the automotive market I think based on your commentary about E vs. Eight at.
All of the other things we can read about anecdotally if the cash.
Hamish Yep, it's going on.
Potentially be higher this year or certainly in the following years and clearly your sand now is also much higher than it was three years ago I guess.
Maybe on some sort of a quality of quantitative measurement can you give us a sense of sort of.
How much larger the auto market just this year right might be versus three years ago, and all of our sort of your revenue level might be you know.
Kind of period, the period and I'm, not saying that that's sort of an end point, but just kind of if you could give us a sense of that comparison.
Yeah.
Hi, Brian.
Yeah, Thanks for asking and joining us. So if you look back three years ago, I think youre referencing the end 2000 and 2017.
Or even go on each of 2018, which was a good year for the automotive market.
You know, it's hard to hard to point pointing in the exact number here, but what I'm. What we're what we're thinking is that the automotive market is going to be about.
About maybe low teens to high teens, maybe up to 18% larger in the semiconductor side for us or for the capital equipment side. This year relative to what it was at the last.
Strong cycle.
Okay, Yes, that's helpful free.
The share that.
A couple of other questions the.
From a.
Supply and maybe timing of of your deliveries this year.
There's again a lot of bag, that's about current shortages of wafers extended lead times for markets like auto.
And while that's not readily apparent I think in your strong first half outlook has this dynamic caused any noticeable changes or delays in your shipment schedule on and also.
Whats kind of of the present status of your lead times for things like test handlers are of test equipment and how are you managing through any challenges.
No we haven't had any delays caused by supply chain or the.
Like I said the shortage of semiconductors that you read on the news that hasn't impacted our builds.
Chu lead times, they have extended I mean, there are multiple ways of looking at lead time, we tend to look at it is the what is the lead time that is 75th percentile of our of our product shipments.
Theres always you know custom in more difficult configurations that take longer but looking at the 75th percentile of our Halo lead times right now are about 14 and a half weeks.
The testers.
Suddenly 12 weeks.
The cost actors are running at about six weeks.
So that's the that's about where we're hovering right now on lead times.
Yes, it sounds like you know what.
With women.
Reasonable range is maybe high on it.
Yeah on the other equipment out there sounds like its had more stretch lead times.
Lot more than you.
One last question here for Jeff.
In terms of the first quarter outlook.
On the revenue range, the gross margin seem a little bit.
The other than what the target model suggests the opex as a percentage of sales also is.
As an offset seems lower as well so it kind of neutralized, there's probably within the range of your EPS.
Talked about it at those revenue ranges, but you can kind of just talk to that.
The next set of causing gross margins the day within that range of the Opex per day within that range.
Yeah, Brian that that's an accurate observation of the gross margins down a bit in Q1, but offset by the reduction in operating expenses to to maintain that target profitability. So what we're seeing really is the product mix of part of the stories product mix.
C N of steep increase in systems orders and revenue on this is mainly handlers testers, but handlers that have of gross margin lower than corporate target.
Just to give you sort of a.
Part of of reference here total systems revenue expected to be about 67% in Q1.
You know the normal ratio on a percentage for system revenue was about 55%. So it's up significantly.
Net recurring.
As we know just by its nature of its not going to spike up or down quarter over quarter.
And so of recurring revenue will increase but it will increase over time as a result of the increased shipments the.
The second piece of the story is we continue to work on the contactor manufacturing transition and really continue to.
Work towards bringing costs down and bringing that gross margin in line with expectations. So I'd say first order of magnitude is mix and then secondarily, we continue to work on the contactor margin.
Okay, Great I appreciate all the color.
Yeah.
Our next question comes from Charles <unk> with Needham <unk> Company.
Thank you for taking my question.
If I hear you correctly I think you provided the early look for second quarter of about 5% to 10% up from first quarter might be this is a little bit of fall off where the had I wonder.
What's the outlook for the second half this year.
I look at your historical performance looks like on the third quarter tend to be slightly was seasonally sequentially down by.
Maybe mid single digit to opt to low teens.
Is that on.
Is that kind of seasonality, we should be expecting this year or things of that he has such a strong.
Recovery year that may change any kind of it would be great.
Hi, Charles this is Luis.
Thanks for the question, we don't have that much visibility, you're adding to the second half of the year as you can see from our lead times.
What we're booking now in the first quarter is shipping late second quarter. So we will gain more visibility here in the next three months. We know there is an incredible.
Strong dynamic in the automotive markets view and the same in mobility and obviously there should be a second.
Sort of ramp towards mid year in mobility for us cell phone launches in the second half of the year, but we don't know exactly how that's going to shape for Q3 of Q4 at this time.
No.
Got it guys. Thanks on maybe my next question really on a little bit follow up to Brian's question on gross margin and some of the dynamics on.
GAAP you provided the first one of your second order dynamics, there I wonder.
Whether there is any third order.
The factors there related to any of the supply chain constraints on the cost.
Strength, you did say you don't really see annual per ship.
Chip shortages impacting your shipment I wonder given such on surging demand, whether you are incurring a little bit higher.
Higher costs ex.
Pat.
Ex predation vs or something like that.
And the weather those.
More of the long term nature onetime in nature items would go away gradually.
This year.
Hey, Charles.
No no that's not the case night not to this point and not forecasted for Q1, either operations and supply chain has done a very good job. So far working with suppliers prepping suppliers scheduling of materials and we've been able to do that without ex expedite fees and things of that nature. So.
From an operational standpoint, the costs are pretty much inline with expectations. It really comes back to our mix and then continuing to improve contact your margin.
Got it got it.
My next question's on little bit about capital allocation, we now.
Want to prioritize debt repayment and the potentially looking for M&A opportunities with the old business.
In 'twenty 'twenty, one going back to the 17th 18th level on a pro forma basis our U.
What's your thought about resuming or returning to the dividend program any any thoughts on that.
That'll be ultimately up to the board of directors.
The for their assessment at the end decision on that we as the management team is clearly focused on generating as much free cash flow as possible and reducing reducing our leverage.
Got it.
Thank you. Thank you for answering my questions I'll go back to the queue. Thanks.
Thanks Charles.
Our next question comes from Chris <unk> with Cowen and company.
Yeah, Hi, Thanks for the Great question and congrats on the good results I have a feel of them.
Therefore, the Lewis and a lot of the strength in autos is coming from the handler side do you think of any shot and making inroads and testers of do you think that a much bigger players out there will be difficult.
Hi, Chris This is Luis I mean, thats a very good question.
Yes, we would like to make inroads of the tests are there are limitations in our current capability to do that today, we do have some tester business on the auto side, it's not non existent by the way, but you are correct. It's much stronger on the handler business. It's also strong on the contactor business that has.
The greater exposure to the auto side, you know sort of debt Tri temp.
Thermally challenging test conditions, but.
But yeah, I hope I hope debt.
And in the future, we'll be able to have more of dialogue about the tester business into the auto but not so much at this time on attrition.
Got it got it no worries and then Luis.
Question on the past instead of weighted to figure it out.
All three of the mobility orders of scenes, how much is coming from five G.
Yeah sure from the.
From the from the tester side, we looked at it.
We looked at it this way theres about about half of our tester business may be related to RF Ics and in 2020, we estimated about a half of debt was five G related.
On the handler side, it's a little bit more difficult because we know we're testing RF Ics are handling RF Ics or small P mix going into mobility applications, but we don't have that debt final use knowledge, whether it is necessarily of five <unk> in all cases.
We do have a measurable handler business and in mobility as well.
But I can't I can't quite parse that out for five G. So it's easier for me to say on the tester side.
Okay Fair enough that's good color on and then the last question.
If the roomba, if the hooded right I think Jeff mentioned recurring revenue should grow in Q1, I'm just kind of curious I thought that you know when you have.
On the seasonality in Q1 utilization rates might dip down in Q1, you are not seeing that happen or is it because demand is strong why would recurring revenue is the up in Q1.
No I know actually Krish, let me clarify.
Recurring revenue is pretty much flat quarter over quarter. It's the systems revenue that is up significantly quarter over quarter and I think that corresponds to your second point about the utilization driving more system revenue.
Got it got it alright, thank you very much Bangalore.
Our next question comes from David Duley with Steelhead Securities.
Yes, congratulations on nice results a couple of questions here.
Could you help us understand I guess for calendar 2020, what the size of the handler market was perhaps a guess of what your market share might be.
Hi, Dave This is Luis that's a tough one day, if there was a lot of really a lot of variables. This last year with COVID-19. So we don't have a good handle on the market size for last year, the external market data that we typically acquire it comes out in.
Early Q2, so that will give us more of a look back.
I think we have more of an estimate in view for 2021, then we actually do for the just completed 2020.
But two two points of your other question or.
Our handler market share has typically hovered at about 50, maybe 50 low 50%.
Would you guys said it was up.
Calendar 2020 are flat or down just directionally, what would be your best guess.
So my best guess right now Dave is that it did go up in the fourth quarter.
Monitor we all monitor what's going on a bit with our competitors, particularly now during this ramp in I think our operations team is doing the truly amazing job it.
Supporting customer requirements and keeping lead times in.
In check even though they have extended but the steel keeping them in check and we know for a fact, we're getting we're getting business that could otherwise have been our competitors' business. So I would venture to say we.
We're picking up some some points right now since the fourth quarter in and now each of the first quarter.
Okay.
Opex a little bit you have a new model I think you mentioned $3 60.
It's comparable to $3 on the previous model at the same level of revenue.
He went through some dynamics about the difference between three and 360 could you just review what the increases were to moving from three to $3 60 on the target model.
Yeah, David two dynamics one is.
Gross margin moved incrementally and.
That's driven.
Driven by two things, obviously, the increase in revenue and better leverage of fixed costs for manufacturing and then mix in terms of higher growth from test during contactor revenue.
I would say the second item, which is the operating expenses drove more of the new profitability of increased profitability. So it's.
It's reducing the operating expenses.
Taking steps necessary to.
To reduce that cost while we continue to.
Invest in new product development and other business opportunities. So it really was continued.
Tight management of the operating expenses that drove higher profitability.
Okay.
Question for me.
We all read about these automotive chip shortages and you know a lot of automotive production lines have been shut down instead of waiting for chips.
How exactly has that impacted your business.
And what are your customers, saying to you about.
This topic.
R R.
Just.
Kind of curious as to what your customers are saying and what your perspective is on the chip shortages.
Yes.
On the.
The the news on debt, it's quite interesting what we see from our customers is.
Typically or let's say in the past when they place volume orders.
There is a chance to stagger them over multiple weeks multiple months right now of the demand from our customer side is for.
Multi unit orders to ship fairly quickly and not spread them out. So there is there is clearly a lot of pressure on the operations side.
To satisfy the ramp satisfied customer need dates and not much wiggle room from our customers on a per.
Pushing out shipments as I said before the lead times.
Or a little longer on our handlers, but theyre not theyre not outrageous.
Try and working really hard to keep it that way because that's that's that's what our customers really need at the moment.
There is pressure on and not much.
I believe not much inventory of wiggle room in the supply chain.
To do it any differently.
Much of ship as soon as possible.
Okay.
Deb you mentioned.
Your quarterly capacity is now and.
Okay.
Flex upward to meet demand in the second half of it does happen to be stronger than the first half.
No I don't think we have talked specifically about capacity in the past.
But we have we have had mechanisms in place to expand capacity with outside suppliers contract manufacturers and we are where we have triggered that and we're executing that debt capacity expansion. So it's as you know our tester business is largely outsource.
Yeah.
Two a very large contract manufacturer jabil.
Which has been doing an outstanding job at supporting a ramp.
And then we have.
Sort of of hybrid outsourced in source model for handler manufacturing, where we outsource sub assemblies.
And two final integration and test in house, we have had mechanisms and actually have used it in the past as well of doing some final integration and test at suppliers not in house.
So we have some flexibility there and we are we are executing debt flexibility again. This time during this ramp so I think I think we're all set.
True to support the business needs.
Thank you very much.
Youre welcome.
Our next question comes from Craig Ellis with B Riley.
Hey, guys. This is carlin Lynch on for Craig.
One of my questions have been asked so I'll just kind of jumped in here with the few kind of clarifications.
Jeff you mentioned that the second quarter should be up 5% to 10% off of.
Obviously, a strong first quarter guidance.
Do you have any color based on what Youre seeing in your backlog.
Around mix I know that was kind of a day to gross margins in the first quarter, but you know based on some of my math the target model should have gross margins back up around 48% at that second quarter revenue level.
Is the mix that you're seeing on that revenue.
Going to impact gross margins like it did in first quarter or should we see kind of some of that return to normalcy.
Hey, Caroline.
Yes, as best as we can see at the moment, we're still a little bit outsized on the systems revenue and handlers just have had.
Incredibly steep ramp in demand. So I think we're going to be dealing with this mix.
Situation in Q2 as well.
Then on.
On the operating expense side, we will also maintain lower costs. So that we are hitting our very close to the to the target profitability at that level of revenue.
Got it and then you kind of just touched on my second question, but I wanted to clarify.
With operating expenses kind of staying low where they are right now through <unk> would we expect that to kind of half the step up in the back half of the year just to continue to support growth initiatives or is this something that if the adverse mix holds through year end.
We can kind of hold operating expenses at these levels.
Yes, that's the current expectation is to try to hold the operating expenses.
At this level for as long as we can or at least until we can improve or expand net gross margin.
So thats the approach Garland is too.
To be able to offset the profitability loss in the gross margin where the reduction in the operating expenses.
Got it okay.
That's it for me thanks, guys. Thank you.
Our next question comes from Sidney Ho with Deutsche Bank.
Great. Thanks, and congrats on the very strong results and guidance.
My first question is on the all the strength that you're seeing across the board of the past few months.
We think there are still areas that there is still below the pre COVID-19 levels and debt you might see some sort of pent up demand in the next one to two quarters.
Hi, Sidney this is luis.
Yeah.
That's a good question we have.
We still have opportunity for.
Growth.
In the automotive market to be honest with you I mean, not not all segments are all businesses in the automotive side.
Our up to pre Covid status yet.
Although I have to say others are stronger.
I think there are also opportunity of steel in display driver IC.
That haven't really resumed yet.
Two potential levels I mean, the business our business has been getting inch of the display driver IC IC. So it's hard to say, what we were pre COVID-19 versus now, but I think from on opportunities size perspective.
There is room for improvement there to pre COVID-19 levels.
Computing has been.
Reasonably strong and well through through.
Through the Covid crisis.
But I think there are opportunities in.
Graphics graphic processor gaming.
That could get stronger from where we stand today.
And certainly in our overall contactor business I think there's some dynamics there that that could also be stronger than we are today and very much were focused on driving and making that happen at the moment.
Yeah.
Okay. That's helpful. Maybe just a follow up to that I think the.
You talked about early of debt.
The shortages that debt.
The other companies have seen didn't really.
And then really impacting you guys.
But with all of the lead times stretching out a little bit how do you feel comfortable debt. These orders are not panic orders and maybe not a real but not double ordering something from the same customer instead of driving.
<unk> seen some of the shortages and one of the procedures that you have in place to make sure that debt debt.
And check.
Yeah. That's a very good question, we have we have had the.
The same observation have had deep conversations with customers about the demand profile and knowing that this is not double booking or overbooking.
From a mechanism and we're comfortable with the answers we're getting from a mechanism perspective, we have <unk>.
The extended.
On our terms and conditions on quotes so cancellations.
All of the cancellation terms have been stretched out so that we have greater coverage in any eventuality. So we're pretty comfortable like I said from what we got directly from customers. We have been talking to customers senior management about this.
On.
Comfortable with the modifications we've made.
Two of our quota of terms and customers continue to come in and place orders.
Okay, maybe one last question for me, maybe switching to the product site.
Get eat any of the.
Prepared remarks, you mentioned the fee rates of test contactor, so of millimeter wave.
You talk about expectations of orders coming later this share early next year can you maybe describe the capability of this product versus your prior generation and how do you expect the adoption of this product over the next one day two years in terms of the revenue growth opportunity and maybe the curve the shoe.
With the curve.
Of the adoption.
Mhm.
So the <unk> racer is more of a continuation of new technology, but it's the continuation of what we used to call. The ex wave business. The actually the business was a solution <unk>.
Originally designed by the ex Sarah group prior to US acquiring ex series for high frequency test and could be <unk>.
Radar applications sort of the beginnings of millimeter wave if you will.
Our <unk> test.
Ex wave has been very well deployed and used in these applications and particularly in lab scenarios.
But as you're moving to volume production. There are some limitations on the sea rays of particular for millimeter wave. So we expanded that with the new technology, which we call. The the C racer platform here, it's really tailor for up to 50 gigahertz potentially more if as we continue to evolve the <unk>.
But up to 50 50 gigahertz signal of frequencies.
It has the compliance requirements the multi site capability requirements. So it's been well accepted.
And we have.
As I mentioned on the prepared remarks, we have had of a design win at a foundry in Taiwan, which is not typical we don't typically do business with foundries, but this is actually not really of contactor, it's a probe head.
And then on <unk> in Korea, which is a final test application now of the shape of shape of the ramp to that question.
It will depend again on the size of millimeter wave business overall into 2022, so it's a little hard to pinpoint the size, but I'll give you a very wide range. The way we look at it it could be somewhere between five and $25 million of business in 2022, but ultimate.
I think it depends on our customers and our customers and customer success.
With deploying millimeter wave.
Thank you.
Welcome.
Our next question comes from Christian Schwab with Craig Hallum.
Hey, congratulations on the very strong results and outlook of two questions number one given the record backlog.
Slightly extended lead times that you have what is your thoughts on the second half of the calendar year versus the first half.
Hi, Christian it's Luis.
As I mentioned earlier, it's really hard to have crystal clear visibility in the second half we already.
Moving from giving one quarter guidance, you give one quarter guidance in <unk>.
Second two quarters out directional indication and I think thats as best as we have visibility and can comment. We know we know this is going to be a strong year. Just the way. We are right now we know the underlying current around automotive and particularly easy and a das of pretty strong. We also know the underlying current around.
The fiber deployment, where people would expect more than double of the the units of smartphones with <unk> this year and the increasing test intensity.
Hopefully also starting to see more of a ramp in millimeter wave towards the latter part of the year. So we know those underlying currents are strong.
To be able to pinpoint the exact shape of the second half over the first half of its not something where we're comfortable guessing right now theres not enough data point to to put on to put a projection yet in place sorry about that but not yet the Christian.
Yes.
That's extremely fair answer.
Last question for you guys is.
In my viewpoint, there seems to be.
A very strategic shift in value in the semiconductor industry coming to the backend.
Some of the front end driven by trends like you've talked about electric.
The electric vehicles, but a lot of all of that stuff as you know requires advanced packaging, which increases complexity, which increases test types.
It's cetera, So I am curious.
So as we get to.
Kind of post Moore's law of if you will a lot of the type of chipset and the applications that you're dealing with.
Just stacking more and more chips right.
Those are of chipset, we're doing node shrinks and typically and so is it seems like it doesn't matter whether it's yourselves.
Or whether it's cooler or whether it's form factor everybody seems to be benefiting from this trend in my viewpoint would you agree with that.
Yes, yes, I would agree with that I mean, there is a there is some new.
Technologists coming out and in electrification as you know silicon carbide is.
A lot of promise and <unk>.
The way you handle and test those are a little bit different than what it was in additional packages or even MOSFET.
The same could be said about.
Processes for Ada Es.
<unk>.
Power dissipation during test the the requirement for being him hermetically sealed for automotive applications sensor fusion and inch of modules. So yes, there is a variety of pack.
Packaged or packaging technology trends that that are impacting the way you handle and test the silicon or the.
The silicon the device itself I agree with you.
Greg I don't have any other questions. Thanks, guys.
Thank you thanks Krishna.
Our next question comes from Tom <unk> with D. A Davidson.
Yes. Good morning. Thanks for the question, maybe first Luis just the general market question for you. When you look at the shortages of chips in the marketplace. Today do you think thats mainly of wafer production issue or is it of packaging issue and if it is the former does that create a natural governor on your business that could extend the cycle.
Good question, Tom I have a view on it I don't have I don't have a 2020 vision on this but to my understanding it is.
Or particularly to the larger nodes not the leading edge nodes. It is a shortage of semi.
Of wafers on the front end so it's a wafer shortage. That's my view and I have the same impression you do which is it creates a natural dampening effect that spreads out the business over multiple quarters. So that's how I view. It again, it's not of 2020 vision each of the details of the supply chain up to the <unk>.
Andrew, but that's my understanding as well.
Okay. So when you look at those markets, where you see that happening.
How long do you think it takes to add capacity of those more mature markets on the wafer side.
Dan I don't have a good answer for you Tom I don't know I truly don't know.
Okay that was it today. Thank you.
Alright. Thanks.
The follow up question from the line of Brian Chin with Stifel.
Hi, there again, just a quick follow up for me Luis If you did the nice job breaking down your sort of addressable markets across product lines and last year's Investor meeting.
And so I was just curious on the aggregate level can you provide a rough range of what you expect maybe the growth in your of served addressable markets could be this year.
Yeah for this year.
That's a good question, Brian I mean, I have I have what we model for the next three years on average.
We looked at.
We looked at for example, ETE the tester side.
Mobility growing on average 18% over the next three years.
And I think that's that's still kind of valid for for this year coming up from a strong second half of last year.
And then so just I'm just going to pick on some of the some of the primary ones.
If I look at out of motive.
And Thats essentially handler automotive, we have modeled that should be.
21%.
Over the next three years, but the truth be said, we expect it to be stronger on the first year on the onset now in 2021 coming off of coming off of a weak <unk>.
<unk> 'twenty.
I don't have I don't have of at my fingertips here a projection for handler automotive in 2021, but I wouldn't be surprised if we're talking.
And of 30% 35%.
Mobility handler mobility, I think it's still going to be sort of debt, 7% rate. It was it was a decent second half of last year and I think of sort of at 7% and then for the contactor business in aggregate, we're modeling of 20% growth and I think Thats also a fair number to use for 'twenty 'twenty one.
Okay. Yeah, that's very helpful. Thanks again.
Awesome.
I'm not showing any further questions in queue at this time I would like to turn the call back to Jeff Jones for closing remarks.
Thank you I'd just like to say, thank you to everybody for joining today's call.
We'll talk to you very soon have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Good day.
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