Q1 2021 Cohu Inc Earnings Call
Good day, and thank you for standing by and welcome to the <unk>, Inc. First quarter 2021 Finance results conference call at the time, all participants are in a listen only mode. After the speaker's presentation and there will be a question and answer session to ask a question. During the session you will need of press star one on your telephone please be advised for today.
Conference is being recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker today.
Jeff Jones, Chief Financial Officer. Please go ahead.
And welcome to our conference call to discuss.
<unk> first quarter, 2020, one results and second quarter 2021 outlook on.
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 <unk> website, and 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 co Hughes 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 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 April 29, 2021, and co you 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 use president and CEO Luis.
Good morning, everyone and thanks for joining us.
Today, I'll review key points of our first quarter results.
Explain our new presentation format by market segment provide highlights and summarize <unk> progress and sustainability.
Record first quarter revenue of $225.5 million was up 11, 4% sequentially and exceeded midpoint of our guidance due to strong traction for our contact for products.
Co Hughes interface business is growing faster than consolidated results.
With contactor revenue up 14% quarter over quarter and benefiting from the ramp in the automotive and industrial segments.
Non-GAAP gross margin of 45, 6% and adjusted EBITDA of nearly 24% were records in both absolute dollar value and percentage of revenue.
First quarter orders were also a record driven by robust automotive segment demand, there was up 51% quarter over quarter and strength across all major markets.
Estimated test cell utilization increased two points sequentially to 88% at the end of March the improved utilization was most notable with automotive semiconductor customers, primarily U S and European integrated device manufacturers, increasing desk capacity at there.
[noise] factories in Asia.
The next larger.
Quarter over quarter order increase came from industrial segment customers ramping production to support growing consumer demand as the economies start to reopen and in line with improving GDP forecast.
Starting this quarter, we will discuss revenue by recurring and systems. We will also breakdown systems revenue by end market drivers.
Co Hughes recurring business was 35% of consolidated revenue and the first quarter delivering strong 48% non-GAAP gross margin.
Recurring is driven by new semiconductor product designs that create opportunities to sell more contexts and.
As well as growing system installed base that enables sales of application kits services and spares supporting a fleet of approximately 28000 handlers and testers globally.
Our recurring business is benefiting from expanding contactor sales and the first quarter, particularly for power management of applications, where co. He leads with candidly for technology that is better suited for high current and voltage semiconductor test.
The systems business was 65% of consolidated revenue and stronger in the mobility segment, there was 24% of total and the first quarter.
Systems gross margin was approximately 44% and as indicated in prior quarters. It lags recurring but a few hundred basis points.
We continue to enjoy a leading position in testing RF front end Ics, both who've R. A T E and handler platforms and growing presence in structural tasked with dime on X.
The shift to design for test continues to gain momentum with greater semiconductor complexity.
Originally this was a focused solution for smaller process nodes, but now expanding more across semiconductor applications.
We have validated that the diamond Ax platform offers significant cost of tests advantages for customers implementing structural test.
Co Hughes solution spans across RF devices bar of management Transceivers and other applications.
This is and approximately 300 million dollar market opportunity and we recently captured greater than 50% share of structural task that of major semiconductor manufacturer and plan to pursue similar opportunities at other customers.
Automotive segment orders increased further in the first quarter following a strong fourth quarter with shipments scheduled over the next several months.
First quarter automotive segment revenue was 12% and projected to increase and the second and third quarters of this year.
With the steep ramp and handler the man system lead times have stretched two and average 18 weeks.
Costs are increasing due to labor shortages logistics disruptions and some commodity cost increases across the supply chain.
We're challenge with controlling and minimizing the impact eventually expecting to bass some of these two customers over time.
Switching topics coherently published our second annual sustainability report.
We're pleased to highlight that in 2020 revenue grew 9% year over year.
Why are we reduced direct energy usage by 15% from 2019.
We at <unk> are committed and proud to reduce direct energy consumption and further improve our corporate ESG programs.
The highlights are included in the first quarter earnings presentation and the report details are available at <unk> Dot com corporate sustainability page.
Now looking ahead, we remain encouraged by market momentum and customer traction for <unk> products.
Once again, we will be guiding revenue up for next quarter and extending visibility into second half of the year.
Now I'd like to turn it over to Jeff to provide details on first quarter results share second quarter guidance and our expectations for third quarter.
Jeff.
Thanks, Luis before I walk through the Q1 results and Q2 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 and the accompanying earnings release and Investor presentation, which are located on the <unk>.
Bester page of our website.
And March co you closed of common stock follow on offering totaling approximately $5 7 million shares raising net proceeds of approximately 223 million after deducting underwriting discounts and commissions and offering expenses, we raised the capital to repay outstanding principal on our term loan facility, thereby.
C and interest expense and fund future growth initiatives prior.
Prior to the end of Q1, we reduced our outstanding debt by $102 million moving forward capital allocation will continue to be focused on debt reduction and opportunities for expansion of our served markets and technology portfolio.
Now turning to the financial results Q1 revenue was $225 5 million $3 5 million higher than the midpoint of our guidance range.
Q1 revenue was 11% higher than Q4 of last year and set a new record for co Hugh.
And Q1, no customer accounted for 10 per cent or more of sales.
In the first quarter co Hughes gross margin was 45.6%.
Operating expenses were $52 2 million and lower than guidance as we continue to optimize our expense structure.
First quarter non-GAAP operating income was 22.5 per cent of revenue and adjusted EBITDA was 23.9% reach.
Return on invested capital and the first quarter was approximately 60% and well above our target model objective to make investments with our I C of 30% or higher.
<unk> non-GAAP effective tax rate for Q1 was approximately 12% lower than guidance, primarily as a result of higher U S income offset by Nols and tax credits.
Non-GAAP EPS for the first quarter was <unk> 89 cents and about seven cents better than our target financial model.
Now turning to the business model the.
The midterm financial targets remain unchanged as we expect the increase and the diluted share count from the follow on to be offset by a reduction in interest expense as the term loan b is fully repaid over time and and adjustment of the effective tax rate to 18%, reflecting greater leverage from U S income offset by Nols.
The <unk> and tax credits.
We have met or exceeded the EPS targets over the last two quarters. However, the business model remains of three to five year target as we execute our strategy to gain market share and grow our tester and contactor businesses.
In the near term, we remain focused on consistently achieving the gross margin to our targets and significantly reducing interest expense as we further repay our debt over the coming quarters.
Now moving to the balance sheet.
The capital raised in March has strengthened the balance sheet. We've added approximately 121 million to our Q1 cash balance after reducing our outstanding debt by approximately $102 million.
The Q1 balance sheet reflects a net cash position with increased resources for additional debt reduction and investment and opportunities to expand served markets and technology portfolio in line with our growth strategy.
The growth and accounts receivable reflects the sequential increase and shipments as our DSO has remained essentially flat quarter over quarter and is the primary reason cash flow from operations was near breakeven.
Orders and utilization of equipment at our customers test facilities remained strong.
The second quarter revenue forecast is in line with the directional guidance. We provided in early February for Q2 were guiding sales to be between 234 million of the $250 million.
The low end of the revenue range consider some supply chain uncertainty and potential risks associated with book and Bill and customer acceptance, which is required for revenue.
We're achieving the high end of our quarterly target revenue model sooner than the three to five year time horizon discussed during our December analyst day.
The current growth is driven by a steep ramp and test handlers at lower than corporate average gross margins.
For forecasting Q2 gross margin to be between 42% to 43% due to the mix of system versus recurring revenue and the mix of system revenue between handlers and testers system revenue for Q2 is projected to be approximately 67% of total sales compared to approximately 55.
Percent of sales and our target model.
We're realizing volume benefits from greater leverage of fixed manufacturing and operating costs contributing to 20% plus operating and income and we remain on track to grow tester and contact your businesses that are in line with our target financial model.
Q2 operating expenses are projected to be between 53, and and 54 million where.
We're currently managing operating expenses lower than the target model to compensate for the for the gross margin forecast.
And the goal as I previously mentioned as the execute gross margin expansion through growth of higher margin systems and recurring revenue leading to the midterm business model and proportionally grow our investments on new products over time.
We expect Q2 adjusted EBITDA at the midpoint of guidance to be approximately 22%.
The Q2 of forecast non-GAAP tax rate is approximately 18% at the midpoint of guidance most of co whose profits are generated offshore and subject to statutory tax rates and foreign jurisdictions.
Income taxes on profits generated in the U S are mitigated by net operating loss carryforwards.
The diluted share count for Q2 is expected to be approximately 49 million shares.
With the record backlog entering Q2 high levels of equipment utilization and continued strong order forecast across various markets. We're projecting Q3 revenue to be approximately flat to up 5% over the midpoint of Q2 guidance.
2021 is shaping up to be another record year for co Hugh and we remain optimistic about our midterm prospects, enabling testing of new high growth technologies, and RF battery management, and a das processors and automotive, while growing contactor and recurring business along with gains and automated optical inspection.
<unk>.
That concludes our prepared remarks, and now we'll open the call to questions.
Thank you.
If you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And any background noise, we ask that you. Please place your line on mute. Once your question has been stated.
The first question comes from the line of Brian Chin with Stifel. Your line is open. Please go ahead.
Hi, there good morning, congratulations on the results and thanks for letting us ask a few questions.
Maybe first question just this might be for you, Jeff but can you just give a breakdown of of the effects temporary effects in Q2 that are causing gross margins to be down and I guess, roughly 300 basis points at the midpoint Q on Q and how.
Much of that is product mix versus the higher input costs that were referenced also are there any impacts kind of within handlers.
Start versus our pick and place for example that may be impacting as well and also at this time when you look at three Q.
And the higher revenue level, how much of the margin impacts do you think you'll carry in the three Q and maybe second half.
Yeah, you bet, Brian and thank you.
The Q2 gross margin is nearly all.
Impacted by product mix, so it's the steep ramp and the steep increase and handler systems revenue that I that I referenced with gross margins that are below the corporate target. So we're seeing record handler system revenue driven mainly by high automotive demand.
And so typically or in our midterm model.
Where we're seeing Q2 handler revenue, that's about 50% higher than our midterm model. So it's really a steep steep ramp.
And handler of revenue for Q2, you asked about the configuration or the type of handler.
Most of the automotive handler is pick and place and that's what's driving this revenue is its coming more from the pick and place.
The technology.
And so so overall, it's just a very steep ramp and exceeds the relationship and the the sort of pro rata <unk>.
Numbers out of our business model.
And so that is really all mix in Q2, we've seen some cost increase that's impacting Q2, but that's limited for now to about half of million dollars. So it's minimal and the big picture.
Q3 gross margin view is is preliminary and actually the premature at this point and time I will say that the the mix of revenue is similar to where it's looking to be similar to Q2.
But to really peg a gross margin for Q3 is a little premature at this time.
And the underlying business itself.
And is tracking to the business model and so the the gross margin is going to recover over the midterm, but its really of caused and this sort.
Of the accelerated ramp and handler revenue.
Okay.
And that makes sense the yeah that makes sense of the handler businesses. There's a lot of the incremental upswing that you're saying on the system side.
And also curious, though if you see the.
And the growth and and tests had been very strong you know dating back to last year, you think by the end of the the the current year you could start to see that become more of a improve in terms of of the revenue contribution.
Yes that is the plan. It's you know we are growing we're definitely growing year over year, and the tester business and the contactor business and so we feel good about our position there and the growth prospects.
Got it.
Let me standing out just in terms of the demand.
The environment clearly many of your customers and the auto and industrial markets are reporting lean inventory and long duration demand trends.
And now and into and be on second half yeah. It looks like that's being somewhat reflected here and your third quarter initial view.
I'm just curious to what extent is that even sort of fanning out across the second half I mean, I think typically yeah, theres a little bit of of let off the gas pedal into Q4 and sort of the test space in general, but I mean do you think maybe that will sort of buck. The typical trend just based on the way things are set up.
Hi, Brian This is luis.
It's the literature early true also call fourth quarter.
But clearly.
The demand is the manned remains pretty strong and as indicated here. We gave we gave you guys some directional for.
What's up ahead here and the third quarter. So the demand the demand environment remains pretty strong and it's not just auto it's also and the mobility space. I mean, you can see that mobility was the largest revenue segment for us and the first quarter.
Bye bye quite a long shot ashwin.
Okay, alright, great. Thanks, so much.
Thank you and our next question comes from the line of Gulf of partly for scale head. Your line is open. Please go ahead.
Yes, thanks for taking my question.
I was wondering.
When you look at the size of the SLC market.
Would be your expectation for this current year and do you think youre going to grow your test business on them.
More rapid clip on the overall market.
Hi, David.
Yeah, I mean, frankly, if I just look at the current numbers year we.
Our test business has grown.
On a revenue basis year over year of 144% already.
Year over year and revenue. So that's a that's a substantial increase and and I expect I expect on an annual basis, yes, we're going to outgrow the <unk>.
Market the expected market growth.
Which you know I'm I'm actually now bagging and what I heard from others here that I think we're looking on and SLC market debt that will be approaching $4 billion. This year.
And.
Where do you think is it just because of your customers are spending at a greater clipped and other people's customers or have you actually picked up.
No.
It's a new wins and and if you are picking up any wins what areas do you do.
Do you see successes.
It's been primarily in the RF market for Us David.
I mean twofold, yes, we picked up some some wins that is for sure, but I would say and by and large the RF market is outgrowing. The overall S. O C test market you know, we all know there is a.
Five G deployment and full swing today and the market I think we're looking latest estimates that I've seen on and about $500 million.
El phones that are five G capable of that's the forecast for this year. So we're in a in a and a big big full swing and the RF space and that is that is the area debt co Hughes tester business is strongest with RF front end IC, So where we're really enjoying this market growth debt, we expect to be.
He will be here for the last for the next the for the next two to three years.
And final question for me is.
You know you've seen this huge increase in wafer fab equipment spending I think it's going to be up like 30%. This year, the greater than 75 billion.
How do you see that translating into the Bakken and to the tester and handler markets.
And do you think that day.
The increased levels of wafer fab equipment spending and it's going to prolong the cycle for the backend.
Yeah, absolutely I think thats the final kicker here on the market. We have we have these super big trends in automotive and mobility and computing, but you know.
Right behind it is this.
The sort of technology race here between Intel and TSMC and Samsung.
And I guess I'd say, some others too.
Incredible span the on the front end equipment side, and that's going to translate into growth to the back in I think for for several years to come I mean, we see it right now that lead times are stretching and of we talked about our lead times, but I also noticed debt assembly equipment lead times of stretching close to a year now.
So all in all I.
I think we're looking at this.
<unk> investment on the front and two to generate substantial capacity additions and the backend is and as we know from past cycles and this means the backend is going to enjoy a and.
A long period of growth here to support cash.
First I think cost of assembly.
For all of this silicon production.
Thank you.
Thank you and our next question comes from the line of Craig Ellis with B Riley Securities. Your line is open. Please go ahead.
Yeah. Thanks for taking the question guys and I appreciate the incremental color on this call on things like on.
Gross margins for the different businesses. So I wanted to follow up on the former question just by approaching it a slightly different weight Luis so.
And if we look at.
If we look at dynamics and the RF.
RF world, and and and connectivity and the last 24 hours, we've seen a leading tier one smartphone OEM absolute blowout numbers.
A leading.
Baseband and Apu provider out of Taiwan, blowout first quarter and second quarter guidance and.
And so the question is as you look at order dynamics for five Chi.
Test cell.
Oh.
Coming and to you to what extent are you seeing strength, driven really by smartphones versus things like ultra wide band, which are highly correlated to smartphones, but other things as well and then Wi Fi six we're there so a.
Our material consumer quotient away from smartphones, just any color on on how that business could break down and and the momentum that you've seen over the last three months with orders would be helpful.
Okay, Yeah, Hi, Craig I don't have I don't have a breakdown between.
Five G smartphones versus.
Versus other RF applications, and industrial or even automotive should give you here on the spot, but I know we've been.
Picking up momentum on our F Iot.
And ultra wideband applications.
But at the same time qualitatively I can tell you that the the mobile space is still is still is the largest piece of the RF market or the RF test market for us.
It may be sort of a ratio of two to one or three to one between mobile and everything else.
But with that said you are correct the everything else outside of mobile is picking up steam, particularly with the industrial market.
The recovery that we're and we're seeing right now.
We are seeing other RF applications outside of mobile growing as well.
That's helpful. And then the second question is it's flipping over to the automotive business and.
One of the things that debt, we saw on your remarks and the in the deck that was posted as the momentum that you have been EV and Adas and this question Luis just really longer term so.
From where we are today with EV.
E V and the any doubts and eat as mix and and if you can quantify what the idea is it would be really helpful.
How would you think that would evolve over not just for the next one year, but the next two years given the prioritization of automakers are giving to both of those platforms and current production and planned production.
So EV and Adas, we're probably in the order of 35, 35% to 40% of our handler orders.
Sorry of our automotive handler orders and the <unk>.
First quarter and debt that's the Klein from what we saw in the fourth quarter, which I think he was on the order of 25% I'm not mistaken.
It remains predominantly EV and that mix, although our a das business literally double from fourth quarter, two of first quarter and and al and speaking from an order base not revenue base.
And and we're seeing the a das continuing to ramp here and the forecast that we have for.
For second quarter deliveries third quarter deliveries are kind of picking up momentum on the Adas side, how do we see this unfolding.
Frankly, you'll look at the you look at the total data set here in.
And electrification electric vehicles for hybrids are.
I, just blew me and the they're absolutely blooming since since late late last year and all of the forecasts remain incredibly bullish but theres still a very very along the way ahead, when we talk about the <unk>.
<unk> and the fact that we probably ended last year about 15, 16% of five G penetration of smartphones and and have a long road ahead, it's even longer on the automotive side and as you all know that transition and automotive peaks generally speaking and longer than it does just the product life cycles.
Buying cycles than it does and mobility. So we are just incredibly bullish about both the mobility and the automotive market.
Ancient next year and beyond.
That's helpful and and I Bear Creek of.
Five Jason S curve, the Scott a multiyear trajectory to it.
E D and a das our our linear lines through the end of the decade, and it's one of the interesting things with your business and.
Check, but I don't want to ignore you. So the question on your and just start as it is with respect of debt pay downs for nice to see the 102 million, that's a little bit about what I think the company and announced in the market in the late March time frame, how should we think about the ability to pay down debt and to Q and three key and to what extent do you.
One of which celebrate.
Your collections to help enable.
Quick debt debt reduction.
Yeah, So Craig.
Like I said in my remarks, the priority for for cash and capital allocation continues to be debt reduction and so we expect to make meaningful quarterly debt repayments of course, keeping in mind and our cash flow projections and as you mentioned you know collections from customers is a significant piece of that but also.
So we're seeing some large.
And rightfully so our payments to suppliers, so the timing of those items really matter, but.
On the priority here is to continue to make meaningful debt repayment and I'm sure you noted that and the business model.
The expecting the interest expense to offset a portion of the share increase.
The dilution from the share increase though.
We will be focused and continue to make meaningful debt.
Debt reduction at the same time, we're going to keep.
Some dry powder on the balance sheet for investment opportunities too.
To continue to expand our served markets and increase our technology portfolio.
Oh, okay.
Thanks for that and I'm looking at my decoder ring and it says that meaningful could be something between 75 million for 100 million of quarter or is that right or for raw VSAT, north or south of the what you think meaningful could translate to.
The.
A meaningful probably think more on the $20 million to $40 million of quarter and sort of in that range Craig.
Okay, and then and and then just finally on Opex.
Youre running the business well below our target.
And the and that's to compensate for gross margins, which were all below target. The question is.
And now.
Given your experience at turning tactical Opex.
Over achievement touch structural.
To what extent are some of the gains that you're seeing potentially structural in nature versus March and poorer.
Well.
<unk>.
And it's a good observation, Craig and and I think we have significant change.
Changes that are more structure on when and where you're actually going through a restructuring right now and I've talked about it and the past, but we're.
We're going through a restructuring in Germany, and so that is part of the lower opex at least for this year.
And as for the time being as we continue to work on expanding gross margin, we're going to manage opex downside.
Here, where you're saying some of the costs will be coming back things like travel will eventually come back but many of the actions that we're taking today and have taken over the last few quarters.
We'll end up being structural and reductions and cost on more of a permanent nature and just add to that a little bit cost will come and travel will come back but not to the same degree that it was in the past we have we have ruled out.
Virtual assistant.
Goggles and infrastructure for our service organization that we.
We don't expect to be just the temporary.
Bridge because of COVID-19 travel restrictions. It is it is really a permanent solution.
So even though of travel will return expenses will return and we expect it should be lower on a forward basis.
That's helpful guys. Thank you I'll jump back in the queue.
Thank you and our next question comes from the line of Krish Shankar with Cowen and company. Your line is open. Please go ahead.
Hi, Thanks for the living room, and I had a couple of questions. One is one of the on the revenue capacity today.
Our revenue capacity.
Yes.
Look Chris reality is we've been scaling of our revenue.
Two the demand you know we have a task of their business that is.
Largely outsourced I think of as many of you know to Jabil, which is a 24 25 billion dollar contract manufacturing.
I think we're extremely far away from the ceiling there.
On our handler side.
And we have described in the past, we do a hybrid outsource model, meaning instead of outsourcing the Empire handler, we outsourced the sub assemblies.
So you have.
Some 15 20 large contract manufacturers that supply sub assemblies to US and then we do final integration and test in house.
That in house Phi and integration task is the.
Reasonably fast and you're talking about a week to two weeks and in house.
So we're again, we're leveraging the outside of infrastructure of supply chain contract manufacturers similar to Jabil and this case, but for sub assemblies. So we don't have much of a constraint there either we scale, where we're also bringing in outside suppliers to do some simple system integration the.
The the constraint is perhaps more on the contactor side, which we do in house manufacturing and.
And we have to build the infrastructure on the other hand.
And that's part of recurring the recurring business.
As more of a sort of a steady linear growth trend that we're just keeping up too so.
I can't see that we have of ceiling, because we keep moving debt ceiling by leveraging outside contract manufacturers.
Got it and got it.
The question and the reason I ask is because if you look at the supply chain.
Lightbourne the lead times of stretched out the past six months.
It was on substrates live and tighten and so I'm just trying to figure it out.
The increase your visibility because the customers the because you're not you don't have any constraints and the customers and then look to stretch the.
With the in terms of what the giving you.
Yeah, our constraint of Stymie Krish. So sure of our lead times have stretch I think the last call I mentioned that were about 14 and a half weeks lead time I'm, saying now were about 18 weeks lead time. So you have stretched it's not necessarily because of capacity constraints is more about the timing to reach a high.
Output level, you can't flip a coin and get there of.
A week or two later so as orders continue to increase here, we are ramping we continue to ramp our manufacturing capacity.
But it does it does take.
Our quarter two for months to get to the new to the new level.
Got it and then and then the final question is on the on mobile and probably all of them.
Much of trip out of it.
Do you think that's coming from and the meter beam.
And you know.
Seems like it hasn't taken off of whole log, but there's huge potential.
And then acuity that comes.
Comes back and the bigger B is that.
The there or is it neutral for Google.
I missed it a little bit how much of our auto business comes from what sorry.
How much of the mobility come from millimeter wave.
Oh of millimeter wave mobility.
It's a very small portion right now krish realistically speaking millimeter wave is not even representative.
Of the not even a representative number of the $225 million, we expect millimeter wave will be meaningful starting.
Probably next year they'll be.
There is revenue obviously this year, but I expect meaningful next year and even then it's a bit of a prediction here based on what customers are telling us.
Got it and got it thanks Luis.
Sure.
Thank you and our next question comes from the line of Tom default with D. A Davidson. Your line is open. Please go ahead.
Yeah. Good morning, Thanks for the question.
One more supply chain question. So a lot of companies are talking about the fact that the freight the freight costs are the biggest issue. They have today and I'm curious when he talked about the impact on your quarter was that trade driven or is that actual material cost going up.
Yes, we've seen we've seen the same thing Tom we've seen of freight costs go up and we've taken.
The actions.
Over the last few quarters too.
The planned further out and and change the nature of the shipment by shipping by sea as opposed to air to try to minimize those costs, but yes, we certainly we've seen it.
Over the last few quarters now actually since probably since the.
COVID-19 came about but the but.
And I think we've done a pretty good job to manage those.
In terms of material costs.
We're in discussions right now with suppliers and so it's a challenge to maintain and material costs.
Not impacting and a material way anyway, the Q2 forecast.
But it's certainly a challenge for us as we go forward.
Okay, and then Jeff when you look at the freight cost is there any sign of that abating or.
Is it still kind of the black box.
I don't see any significant signs of of abatement here.
And again, we've been able to do a good job to manage as I said try to move as much as we can to to see versus air.
Okay, Great and then as a follow up.
Yeah, Jeff and you look at the target model given the margin differences between systems and recurring is there of certain assumption in your target models at the different levels for that mix.
Oh, Yeah, Oh, yeah, absolutely and that's what I was saying in Q2, the handler revenue is significantly exceeding.
The and the planned mix.
Which you know there are benefits to that as well right. It's a lot of volume that run through our Melaka manufacturing and better leverage of fixed costs.
Definitely contributing to tie your higher operating income of 20% plus operating income. So so we're seeing benefits as just sort of the misalignment of mix. If you will force for at least Q2 and as I said over the near term as contactor and and tester business continues to grow we expect it to come back and.
Line with the business model.
Okay, and then I guess when you look at the model.
And today, if you hit the high end of the revenue target today versus the year or two down the road and how does that impact the performance do you think.
And the mix and the mix of it.
And I guess, how would the cost structure would be different a year from now versus today and so.
How would that impact the target model, if you hit the revenue levels today versus the year for that.
Well.
Again, we're going on.
Maintaining lower operating expenses and so that'll be the.
Certainly a benefit to the model I think.
If if we have to assume that we have this type of product mix or something close to it then will have pressure on gross margins, but you know.
And I think that would mostly be offset by a reduction in operating expenses.
Okay. Thanks for your time.
Thank you.
Thank you and again, ladies and gentlemen, if you have a question and at this time. Please press Star then one and our next question comes from the line of Christian Schwab with Craig Hallum Capital. Your line is open. Please go ahead.
Hey, guys great quarter and.
And thanks for.
The offering up two quarters of.
Revenue visibility I just had one quick question or maybe of clarity question on the record orders that you have can you give us a rough estimate of how much of that might be from mobility currently and how much of that is automotive and with lead times extending to 18 weeks and <unk>.
Discussions about.
Delivering.
Product and the timely manner for acceptance.
How long does that visibility extend and do we have.
Three four quarters of visibility and certain markets any clarity there would be helpful. Thanks.
Hi, Christian this is luis.
So the.
The order strength on the first quarter was.
More heavily weighted towards automotive as you can imagine because we are talking about the.
Automotive handler revenue on the second quarter.
So true.
Give you some numbers here.
Automotive system orders were.
And.
24% of total in the first quarter sort of kind of flipped with mobility.
Mobility came in strong, though it came in steel and a strong 15% of orders and then following that as the industrial who has been picking up momentum here and then the other markets.
So as far as as far as delivery visibility as you can imagine of 18 weeks lead time.
We're looking here at <unk>.
Decent visibility into the third quarter from a from a revenue base.
But we also do have some visibility and to forecast into the second quarter, which.
Again as Jeff already expressed.
Indicates that this is going to be a very strong year for code you and from in fact, most likely a record and all time record year.
But it's too early for us to start calling for quarter. If you want the full year.
No that's great color. Thanks, guys congratulations again.
Thanks, Chris Thank you.
Thank you and our next question comes from the line of Charles <unk> with Needham and company. Your line is open. Please go ahead.
Hi, This is the Charles on behalf of Quinn Bolton from Needham.
I have a few questions the first I want to add.
Ask you about the gross margin.
Look at the split between our systems. This is recurring if I can.
Keep your recurring revenue gross margin at the 48% just like last quarter.
It looks like your gross margin is going to be down 40 to 41 per sand on at this kind of revenue level. It looks to me the implies a massive shift the brown and the test.
Testers and handlers and.
And which I understand the <unk>.
The strength, but the.
Our U S a.
Jessica and you're seeing some sort of a pass through.
Volume reduction in Q2, maybe thats due to the seasonality back there, but I just wanted to ask and clarify a little bit about the mix shift within the systems.
Hey, Charles.
And I would say your observations are pretty accurate, except that we always have shifts and revenue between products and business units every quarter. So I wouldn't really read anything into a change in test of revenue quarter over quarter, but in fact, the math is as you described seeing some reduction and tests.
<unk> systems with higher margins being replaced and actually.
The increased.
With the handler revenue, which I mentioned is at record levels and far exceeding our our target model for handle the revenue so.
So that is the math.
But again I wouldn't read anything into.
Sort of quarter over quarter mix shifts.
Again, we're not of tracking.
Again, we're tracking well and growth and testers and contactor and.
We've had quarter over quarter of course growth but.
And year over year of growth as well significant.
On a definitely when the lead time is stretched out that growth.
Customers are probably up pulling whatever the thank at this point on so the.
And could MTS by some of the variability I understand.
On the other.
And just the just the falling up on the.
And the run rate.
For the handler business.
If on math is right.
Year round rate core handlers as promptly tracking above plenty of time three Hagen model.
And I'm talking modeling pie.
I know you released that hog and model not so long go on.
Are you seeing any structural factor that can stop for the higher handler revenue over the next few years or do you sort of expect.
Some of the.
The demand slightly reduction given the how strong this year is in 'twenty two of wallboard.
So just wanted to get the.
A little bit of a sense, what do you think about your handler business.
Yes, it's a good question Charles.
And obviously capitalizing on these.
Macro megatrends and anticipating that they will continue here.
Over the over the lease of the near term if not over the next two to three years.
So it's just premature I think to two to make a to conclude on whether or not we need to structurally change the.
The target model for for our handlers.
We need to give it a few more quarters and see how everything develops but that's a very good question.
Okay.
Maybe the lots of question.
So of contactor and attach rate for <unk>.
For first quarter 'twenty, one and I think last quarter, you said 90 was about 19%.
Just curious.
It went up Charles don't have a number and should give you here because as I mentioned in the quarter last quarter. This mathematics of looking on on a quarterly basis is queuing up things, but I will tell you. This much you know of revenue went up about 11% Q4 to Q1 on a consolidated.
Basis caught back the revenue went up 14% Q4 to Q1 so.
Contact of growth is outpacing.
<unk> consolidated growth right now.
Okay. Thank you.
Thank you and I'm showing no further questions at this time and I would like to turn the conference over to Mr. Jeff Jones for any further remarks.
Great before I sign off I'd like to let everybody know that we'll be attending a number of virtual conferences and June including the Cowan, Craig Hallum Stifel and CEO summit.
We hope to have meetings with you at any or all of these conferences and I'd.
Thank you for joining today's call and I hope that you have a good day. Thank you.
Bye.
And then.
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