Q2 2021 Cohu Inc Earnings Call

July 29, 2021

[music].

Good day and thank you for standing by welcome to co. He was incorporated second quarter 2021 financial results Conference.

Carl.

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Zero.

I'd now like to hand, the call over to your host today, Jeff Jones, Chief Financial Officer. Please go ahead.

Good morning, and welcome to our conference call to discuss <unk> second quarter 2020.

21 results in third quarter 2021 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> com or by contacting <unk> Investor Relations. There is also a slide presentation in conjunction with today's call that may be accessed.

On co his website in the Investor Relations section replay.

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 <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 the forward looking statements section of the slide presentation and earnings release as well as co. He was filings with the SEC, including the most recently filed form 10-K on form 10-Q.

Our comments speak only as of today.

July 29, 2021, and Cohiba 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 the highlights of our second quarter results discuss the industry's supply chain situation.

And describe co Hughes introduction of a new data.

Data analytics product that improves customers' test cell productivity.

Second quarter revenue was a record $244.8 million and grew 70% year over year exceeding the midpoint of our guidance due to stronger than anticipated contactor and overall recurring revenues.

<unk> with solid results year to date and strong forecast Cohea is also on track for record full year revenue and profitability in 2021.

We are benefiting from the ongoing 5 G technology ramp in mobility, selling RF testers and third handlers also robust automotive demand.

And for our Tri temperature handler and contactor is.

Mainly for testing battery management systems and aid as devices.

Our contactor revenue increased 33% year over year with significant design wins for testing new products from customers in the mobility and automotive.

Segments.

We made good progress improving contactor operational efficiencies and expanding manufacturing in sourcing in the Philippines, all leading to 270 basis points gross margin improvement quarter over quarter in the contactor business that is key to our midterm strategic.

Plan.

Overall gross margin in the second quarter was in line with guidance, reflecting sharp increase in handler sales and higher supply chain costs as discussed when we provided Q2 guidance.

We have been working to pass on these cost increases to our customers and have substantially.

<unk> completed the process that will take effect over the next few quarters.

Estimated test cell utilization is 87%, which is down 1 point sequentially from the end of March.

Utilization remains notably strong with automotive segment customers, primarily U S and.

With European integrated device manufacturers and down slightly at OS apps in Asia.

In the second quarter recurrent revenue was again, 35% of total.

50% non-GAAP gross margin with the balance beam systems revenue broken down by and.

European segments and in aggregate, 39% non-GAAP gross margin.

As expected automotive was strongest and captured 18% of total revenue with mobility staying robust at 14% total revenue.

The consumer segment gained more strength than anticipated.

And Martin virtuous significant economic rebound in the U S and China.

In the second quarter, we completed the sale of co Hughes PCB test business for approximately $125 million gross cash proceeds.

This business came with the <unk> acquisition in 2018.

It was a well run profitable businesses, but non a strategic fit for <unk> growth plans and running below corporate gross margins.

We feel this transaction was good for all parties, providing the PCB test business better leverage as part of Swedish my chronic and allowing co huge and monetize on.

<unk> core business and accelerate debt repayment.

In the second quarter, we continued to capture new customers with the neon inspection system that is quickly becoming the go to solution to ensure defect free wafer level chip scale packages used predominantly.

By leading mobile manufacturers.

We're extremely happy with the success of the neon platform in the fast adoption of our new vision systems introduced mid last year.

We also had a design win and repeat order in early Q3 from RF test cell solutions to a Korean.

On non customer.

This was on opportunity we have been developing since late last year that finally qualified and got into mainstream production for a leading mobile device manufacturers.

This has been part of our plan to deploy complete test cells with handler contactor and tester for.

For RF front end IC applications.

We also had very strong contribution in the quarter from our customers supporting the deployment of our low orbit satellite network as well as increased sales for testing Wifi and Bluetooth RF devices.

Q2 was clearly a strong automotive quarter.

Income.

With significant contribution from our handler businesses.

He was the leader in Tri temperature handling for the automotive industry in great part because of temperature accuracy doing test that has become key to ensure quality of new generation battery management systems and Adas.

S processors cash.

<unk> Adas processors is a perfect storm with thermal challenges combining variable power dissipation who've extreme temperature conditions and multi site test parallelism.

This is a challenge we can solve today by combining our T core thermal technology and.

And the matrix handler we.

We will continue to evolve our solutions is 8 as gains volume penetration in mid market vehicles, and the technology grows with greater computing power.

We're also happy to see our automotive tester sales growing in the quarter essentially doubling their revenue contribution to.

Our tester business quarter over quarter.

Switching topics to the supply chain the industry is experiencing a unique dynamic.

Customers are driving hard to increased semiconductor production and at the same time. These are some of the gating items to produce the very equipment required.

Please capacity.

Shortages are not limited to semiconductors, we're having constrains from motors sensors bearings and other suppliers that are key to manufacturer of equipment, particularly handlers. Additionally.

Additionally, some Asian suppliers were forced to reduce operations and even shut down.

Down for a few days as governments are trying to curb rising COVID-19 cases in certain countries.

We will continue to provide guidance that takes a balanced view on risks and upside, but it has become increasingly difficult to predict the true impact of these supply chain disruptions.

Jeff will.

Playing in more detail, how we're assessing these risks in the third quarter guidance.

Moving onto my last topic in.

In line with the <unk> strategy, we're launching a new family of products. This time focused on software and data analytics to address our customers' industry 4 <unk>.

Initiatives in factory automation objectives.

<unk> data intelligence or <unk> for short.

As a suite of software solutions that provide real time equipment monitoring and process control to improve overall equipment efficiency, our OE and.

And productivity.

The equipment data is analyzed and displayed in real time, using a web based graphical user interface accessible remotely on a laptop or other mobile device.

Customers can monitor critical equipment parameters such as yield.

<unk> input and other equipment states to ensure optimal pest self performance.

<unk> core software also interfaces with customers manufacturing execution systems for remote equipment control recipe and lot management.

A central database for management of equipment.

Through data enables publishing of reports dashboards and greater charts to help managers make decisions as.

As the need for data analytics grows we plan to continue expanding <unk> core offerings to help improve quality and yield.

We're essentially enabling our customers to upgrade.

Great the large installed base of <unk> equipment to improve efficiency and productivity.

Today, we're starting to sell the foundation license.

We expect next year to start offering subscription products that add onto this base capability.

As we help our customers extend the value of their tools, we hope.

And that being to our large installed base of over 23000 systems offering subscription software services that deliver measurable productivity gains to our customers.

Now looking ahead, we are encouraged by design wins with our neon inspection platform.

Gains in RF.

RF and automotive test.

Revenue and margin expansion in our contactor business.

At the same time, we are working through a period of supply chain disruption and cost increases, though unfortunately weight negatively on the third quarter.

We're trying to be cautious, but set realistic targets for third quarter.

Turning to avoid getting ourselves too far into fourth quarter details this time around.

Let me turn it over to Jeff to share second quarter results and provide specifics of our third quarter guidance.

Jeff.

Thanks, Luis before I walk through the Q2 results and Q3 guidance. Please note that my comments.

Rents 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 investor page of our website on.

On June 24th <unk> completed the sale of the PCB.

The test business for approximately $125 million net.

Net proceeds after deal costs and taxes enabled a debt repayment of $100 million during the first week of Q3.

I'll talk more about the debt repayment when I touch on the balance sheet and the Q3 guidance.

Moving forward capital allocation will continue.

Focused on debt reduction and opportunities for expansion of our served markets and technology portfolio.

Now turning to the financial results.

<unk> again delivered strong revenue and profitability in the quarter Q2 revenue was $244.8 million and approximately $3 million higher than the mid.

Point of our guidance range.

Q2 revenue was 9% higher sequentially and set a new record for Cogeco, Inc.

In Q2, no customer accounted for 10% or more of sales.

In the second quarter <unk> gross margin was 42, 7% and in line with our guidance.

Operating expense.

<unk> were $52.8 million in lower than guidance as we continue to optimize our expense structure.

Second quarter non-GAAP operating income was 21, 2% of revenue and adjusted EBITDA was 22, 6%.

Return on invested capital in the second quarter was approximately 60%.

And well above our target model objective to make investments with ROIC of 30% or higher.

<unk> non-GAAP effective tax rate for Q2 was approximately 12% and lower than guidance, primarily due to lower withholding tax on future repatriation of.

Foreign profits combined with higher U S income offset by Nols and tax credits.

Non-GAAP EPS for the second quarter was 89.

Bringing our 6 month year to date, non-GAAP EPS to $1.79.

Already well above our prior year results and illustrates.

The earnings leverage in the business model.

Now turning to the business model.

The midterm financial targets remain unchanged after the sale of the PCB test business.

The business model remains at 3 to 5 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 targets and significantly reducing interest expense as we further repay our debt over the coming quarters.

Moving to the balance sheet.

The proceeds from the sale of the PCB test business drove the higher cash balance.

At the end of Q2.

As I mentioned, we made a significant debt repayment in early Q3, which reduces the Q2 cash and debt balances by $100 million each.

The Q2 balance sheet reflects a net cash position with increased resources for additional debt reduction and investment in opportunities.

Expand our served markets and technology portfolio in line with our growth strategy.

The growth on accounts receivable reflects the sequential increase in shipments quarter over quarter.

And despite the increase in accounts receivable kosha generated cash flow from operations of $29.5 million and.

Free cash flow of $26.7 million.

Now moving to our Q3 outlook.

Just as a reminder, our Q3 guidance excludes the PCB test business, which was generating revenue of approximately $13 million per quarter gross margin of about 37%.

And incurring operating expenses of approximately $2.3.

$3 million per quarter.

Entering Q3, our order backlog and utilization of equipment at our customers test facilities remains strong however.

However, as Luis described we are experiencing some material shortages and COVID-19 related constraints at several of our suppliers.

Because of these supply chain constraints.

We are forecasting approximately $14 million of originally scheduled Q3 revenue related to handler shipments will be delayed to Q4.

As a result, we're guiding Q3 sales to be between $220 million to $235 million.

Consistent with prior quarters the guidance range.

As a balance of potential risks and upside associated with supply chain uncertainty book and Bill revenue and customer acceptance, which is required for revenue.

As we've previously discussed we are experiencing a sharp increase in handler sales combined with a moderation of tester sales from the record level achieved.

<unk> in Q1 of this year.

And higher supply chain costs.

For Q3, we are forecasting gross margin to be approximately 42%, mainly due to product mix.

Similar to Q2 system revenue for Q3 is projected to be approximately 65% of total sales compared to approximate.

Approximately 55% of total sales and our target model.

The increase in handler production has created volume benefits from greater leverage of fixed manufacturing and operating costs contributing to 20% plus non-GAAP operating income projected for the first 9 months of fiscal year 2021.

Additionally, we remain on track to grow tester and contact your businesses that are in line with our target financial model.

Operating expenses are projected to be between $51 million to $52 million give.

Given the $100 million debt repayment made in the first week of Q3, we are projecting Q3 interest expense to be.

Approximately $1.1 million.

Additionally, the $100 million repayment will generate a Q3 non cash charge for debt extinguishment of approximately $1.7 million similar to the charge taken in Q1 of this year for a similar accelerated debt repayment.

We expect Q3.

<unk> adjusted EBITDA at the midpoint of guidance to be approximately 21%.

The Q3 forecast non-GAAP tax rate is approximately 18% at the midpoint of guidance as previously stated.

Most of <unk> profits are generated offshore and subject to statutory rates in various foreign jurisdictions.

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

The diluted share count for Q3 is expected to be approximately $49.6 million shares.

Our visibility to reliably project revenue beyond Q3 has been temporarily impaired.

Apply chain disruptions we've described.

As a result.

We will not provide directional guidance on Q4 revenue, but continue to expect to return to normal seasonality in the business. In spite of the short term supply chain challenges. We face 2021 is tracking to be a record revenue and profit year for <unk>.

By the strength, we remain optimistic about our growth prospects and opportunities to achieve our mid term financial targets.

That concludes our prepared remarks, and now we'll open the call to questions.

If you'd like to ask a question at this time. Please press. The Star then the number 1 key on your Touchtone telephone.

On to withdraw your question press the pound key.

Our first question comes from Brian Chin with Stifel.

Hi, there good morning, Thanks for taking a few questions from US maybe Jeff sorry can you first.

Quantify again what.

What's the revenue impact.

Both the shift in the <unk>.

The supply chain challenges I missed that.

That was $14 million of handler shipments that moved from Q3 into Q4.

14, Okay got it got it.

Yes.

Pretty hefty number maybe in terms of.

Yes.

Pushing pool of global supply chains that certainly having a rippling effect on the business.

In terms of that gross margin impact as you try to remediate. Some of these issues is there any kind of a way to quantify what that is and <unk> and maybe also outlined some of the actions.

Youre taking there.

Impact of what some of the debt and drivers who are out of your control.

Yes, so we're seeing increases as we've described on some.

Some specific items not completely across the board based on specific items and it's.

No.

Understand areas by configuration Bye bye handler so.

Okay.

We've taken action on as you describe it as Luis talked about.

So we're going to see some moderation of those increased costs in Q3 and that will continue to.

<unk>.

The Q4, and then well into Q1 and beyond so.

Yes, it's hard to quantify at the moment in terms of the gross margin impact but.

The pricing increase that will go into effect in Q3.

Should benefit by about 25 basis points from.

And then continue to offset increased costs in future quarters.

Okay.

Maybe approaching this also from a mix standpoint, moving in the second half.

I think some of the.

1 of the larger assembly test sub cons to talk about a lot of strength in their RFP.

On the court and packet.

Packaging and assembly part of their business into <unk>.

Curious what visibility do you have maybe in terms of a bigger pickup on your RF driven business.

Which I would imagine it could have some favorable mix shift implications for gross margins.

Hi, Brian This is luis.

RF front.

I think I understand who you are talking about and in fact, they were 1 of our large.

Oh sets in Q2.

And yes, we are benefiting from the same growth in the RF, but also not only RF, but also <unk> power management Ics.

Sure.

Yes, it's hard to tell exactly timing, but from some other customers.

Initial forecast it looks like there could be another pickup towards the end of the year or Q1 of next year.

As it relates to more fiber deployment into 2022.

Okay got.

I guess, maybe 1 other sort of way of thinking about this.

1 of the larger players also talked about really extended lead times for their platforms use the test automotive and industrial devices, so even though youre sort of spacing out maybe the scheduling on some handlers.

Is this kind of almost maybe.

Got it more of a matching up of sort of the timing against some of the other key components of the test cell.

Is there any kind of other way to think about.

I'm not sure that debt is at play here so much Brian I mean, there is.

As we explained we do have some supply.

Chain constrains, our handler lead times for example.

We're at about 19 weeks now which is.

Give or take at the same place it was a quarter ago. We thought we would have been reducing it by now but the supply chain constraints have continued to hold lead times, where they are I don't really think that there is.

Maybe.

Much of gaming of putting elements of the test cell at the same time I think at this time, we we.

We view everybody is operating on about the same same level lead times.

Okay, Okay, I'll hop back in the queue. Thanks.

Thank you.

Our <unk>.

Jim comes from Tom <unk> with D. A davidson.

Yes, good morning.

Maybe jumping on the utilization rates of the test cell utilization rates, you talked about 87% still very healthy level wondering if you could parse out kind of the relative health of textures versus the handlers and you talked about the handler.

Lead times on 19 weeks, what is your chest or lead time right now.

Hi, Tom.

Luis again, we don't parse out because when we measure test cell utilization, it's literally what the word says we're measuring the test cell. So we're not.

It's hard to have a handler utilize without a tester and vice versa. So.

That number really applies to the test cell.

As in aggregate to the second portion of your question test or lead times right now are approximately 10 weeks.

Okay.

Alright.

And then I guess moving over to the contactor business.

Previously you talked about I guess before you started to really ramp up at <unk> $75 million to $100 million of opportunity to get attach rates up on your installed base, where after the progress you talked about today, where are you along those lines.

So the contactor business continues to.

Grow year on year in <unk>.

I think as.

As I spoke here on the prepared remarks.

Contact the revenue is up.

33% year on year on the second quarter, we had some gains.

But also market improvement, particularly in the automotive.

Thinking in terms of attachment rate, which always caution is a little dangerous because the denominator is handler sales, which is really strong right now attachment rate is at approximately 22%.

As of second quarter Okay.

Alright, great.

Finally, we see some.

Traction on the inspection side, who is your main competitor on that business and.

How do you win.

The selling point for your product.

So the inspection business.

Is about $170 million to $100 million $190 million. This is I'm.

Im talking package inspection, though.

The main supplier is KLA.

And we view that we gain around 3 to 4 points of share last year and the space generated about $40 million of revenue in 2020.

Yes.

I think we are on track should generate about $70 million of revenue this year. So.

Obviously, it's a more robust market in 2021, but I also think we're picking up some market share points and it is for US it is in particular.

Around wafer level chip scale package so mostly.

Mobility applications, some consumer, but mostly mobility applications we have.

Some really interesting.

<unk> technology.

You may recall, a year or so ago, we introduced.

Infrared imaging capability for production, so basically high speed infrared.

<unk> for production. So you can detect sub surface defect.

The debt that has become.

Kind of the standard for the leading mobile manufacturers to ensure transfer quality and they are demanding of their suppliers to do so as well.

That's essentially the benefit.

We have.

At the moment on the vision inspection space.

Okay. Thank you.

Our next question comes from Toshi Hari with Goldman Sachs.

Hi, good morning, Thanks for taking my questions.

Jeff I realize.

Imaging, how can we give specific guidance for Q4, but I was hoping if you guys could.

Mind us what normal seasonality.

Seasonality is for for Q4.

Yes.

This might be a little bit too simplistic, but given the push and handlers the $14 million from Q3 to Q4, if we.

<unk> of Q4 as being typical seasonality plus net 14, and then I've got a quick follow up.

Yeah, Hey, good morning tertiary.

The debt the past seasonality into Q4 has has range anywhere from low single digit up to it.

The 12% 13%.

I think I would sort of put a mid point of our expectation of about 10%.

Seasonality.

And that would be including the $14 million debt.

Rolled into Q4.

So.

I wouldn't I wouldn't make any special.

Adjustments for that.

Got it so it's typical seasonality, including the push yes.

Yes, Okay got it and then as my follow up just wanted to go.

Go back to the gross margin question so for Q3.

Youre guiding margins down a little bit on a sequential basis.

Obviously.

PCB test.

The businesses out.

You seem to be making very good progress in improving margins in the contactor business.

On.

I don't know what you are guiding where you're guiding handler revenue on an absolute basis, but given the push I guess that pushed standalone. So it should be accretive.

<unk>.

The overall gross margin so again I'm just trying to understand the puts and takes.

For gross margins in Q3 on how we should think about Q4 gross margins as well.

Thank you.

Yes.

Q4, let me start with Q3, so Q3, we're still seeing a handler dominated revenue.

Revenue product mix in Q3, so even with the push out of the $14 million handlers are still still the dominant.

Percentage of the revenue and so that's really that's really what continues to drive the product mix.

Youre correct, a little bit of benefit from not having the PCB.

PCB test on gross margin, but thats roughly about a 25% 20.

25 basis point improvement. So it's really continues to be handler driven.

So Q4 still too much uncertainty to really reliably provide any guidance on on what the margin looks like but I would say the mix is probably.

Be predominantly similar to what we're seeing in Q3, so there's going to be some some challenge in Q4.

Got it and sorry, if I could squeeze 1 more on.

1 for Luis.

The data intelligence system business.

Seems really really interesting.

Okay.

Can you speak to sort of the potential financial impact to the model when you think about.

Adoption of the spire customers over the next call. It couple of a couple of years and I'm curious if this was embedded in your long term financial model. When you when you put it up thank you.

Saying this year.

Yes. It was it was all part of the plan we have been working on this for a little while so the way to think about it is.

Look we have on opportunity here.

We'll develop really over time any it could touch on a number of of our systems.

Once you know payer out PCB test side of the equation, we have a little over 23000 systems in the field.

It starts now with us selling what we call on the foundation licenses. These are perpetual licenses.

At the moment targeted at a couple or handlers that we have.

In the automotive space.

We're talking about $5.7000 per license right.

We have we have on adoption already at a tier 1 automotive IDM. So we're starting to net deployment.

And the intention is debt over the over the next 3 years that we're going to starting with next year actually.

Debt, we're going to start selling.

Subscription licenses to.

Additional features on top of the Foundation for example, predictive maintenance capability and.

Device tracking some other things that will come on top of it think of it on the order of $1000 per proceed.

Of the foundation license of a subscription based product. So we're not talking about a lot of dollars this year.

And yes. It is for sure embedded in our model, Jeff If you have anything to add on that yes, I mean, maybe a little more color on the numbers here, so modeling about $1 million in 2021.

It's a bit of a slow roll as Luis was just describing so too soon to predict next year.

Oh, Yeah, we're model significant growth, but of course, it's coming off a low base this year.

So really sort of expecting low single digit millions.

Over the next 18 months.

But as we gain cuts.

On fraction.

And it is similar to our.

Last series of investments outside of the original core of <unk> business, which is we have a large installed base how can we deliver more value to our customers and at the same time monetize more out of.

The installed base of equipment.

That we have today.

Great. Thank you for the details.

Okay.

Our next question comes from Craig Ellis with B Riley.

Yes, thanks for taking the questions guys I'll just start with a follow up question on data intelligence.

Can you just talk about.

Where do you think you've got the greatest differentiation with that capability I would expect that a number of your customers are running something like that so.

So what will differentiate co Q and Luis you've been very vocal in the past about being interested in M&A.

M&A you use debt to scale up the company.

Like you have all the capability internally to take the data intelligence suite with all of its subscription options.

On to default maturity or could this be an area, where tuck in M&A or even something larger.

Enhance the model.

Hi, Craig.

Good question and the differentiation.

You'd be surprised because in reality, our customers do a lot of what we call.

Preventive maintenance you essentially plan for a period of time.

Just just like a vehicle in the past few years back you had planned for every so many months to go in and Lou on oil change or whatever it is.

Old analogy here.

Predictive maintenance.

I think 1 of the primary value propositions here, particularly for handlers relates to.

Using all the sensor capability inside the handler to measure a series of events.

On track them overtime and predetermine, when you should take action, so essentially reducing the unscheduled downtime of equipment.

<unk>.

We had some some of our customers quantify for us the value of 1% unscheduled downtime in the value of that recovery.

And it's actually staggering how much how much debt costs to our customers. So that is that is 1 of the key value propositions here, we know the equipment very well.

We know.

At what point certain thresholds would trigger a downtime and we have the sensing capability already in the equipment. So it's making use of an old idea we had to monitor those parameters.

And flag and eventual downtime on unscheduled downtime before.

Before it happens.

There are other pieces to the puzzle true, but thats the simplest once you explain it.

And explain the value as far as as far as the internal capability to develop it.

Much of this has to do with data and understanding the equipment, which we do have software capability, we have plenty of Sop.

Software engineers in the company.

For sure some of the more advanced ideas around.

Use of use of deep learning algorithms to optimize from some other functions on the test cell.

We may have to acquire that capability over time that not everything we have in house, but for the moment for the.

And on license and what we have planned for 2021.

We do have the internal capability to develop.

Further out ideas, yes, we will have to.

We all have to acquire the capability.

That's helpful and then.

The second question that I have also for you.

In the past you've at times comment.

<unk> Foundation on the mix of the pay downs and EV business within auto.

Can you just characterize what youre seeing there now and and.

The evolution of that mix.

As we look out to calendar 'twenty 2.

And what that could mean for COVID-19.

Yes, we're about at the same mix right now on debt.

Which is approximately 20% to 30% of our handler revenue in the quarter is Adas and EV related.

Strongest for EV and reality battery management systems.

Test on our.

Handlers is really hot business right now we expect we expect debt to continue to ramp into 2022, but we don't have necessarily a forecast of what that mix will be similarly, a das is picking up momentum we have a series of customer.

Right now evaluating our key core active thermal technology embedded in our <unk>.

Leading Triton handler, which is the matrix.

For automotive semiconductor test.

We understand there.

Production intercepts here in the second half of the year that depend on.

Customers' ability so we see also the aaas ramping but.

<unk> said, we don't we don't have a forecast of how much <unk> were representative.

Our total automotive business in 2022.

But I imagine with all the Poland, we've seen Brett.

With global Auto Oems and DB plans.

That would likely be.

Potentially up significantly on soccer.

Yes, yes, absolutely the expectation is <unk> will continue to take a bigger share of our automotive sales.

Into next year absolutely.

Okay, and then Jeff I don't want to ignore you.

And I'll turn to gross margin so I think the near.

That has been pretty well vetted at this point, but the question is.

As we look at the target model and current revenues the target model would say that gross margins should be about 47, 5% at these revenue levels and you've talked about the fact that you've got the.

1 of the issues at play is just the mix between contractors and.

Term and really the recurring business versus the systems business. The question is if we were to pan out.

That 550 basis point gap between where we are and implied levels with the target model. How do we bridge that gap what are the 3 or 4 factors that take us from 42 to 47.

On a half at these revenue levels.

Okay, Hey, Craig.

So first of all it is overall mix of business handlers Q3 forecast that will represent around 70% of the revenue the model is 50% for handlers.

Second of all would be systems versus recurring because.

Within that handler revenue percentage that I just quoted.

Most of that increase over the model is systems revenue.

So that drives the overall blend of systems versus.

Recurring higher on the systems side.

And that gross margin is lower than recurring so that's the second aspect of the lower gross margin.

The third aspect would be.

The improvement in the contact our gross margin and so we've been working.

On moving.

Syed purchased.

Materials contactor is from.

From suppliers in the U S and in Europe into our factories in Asia, primarily the Philippines, and we are seeing improved utilization productivity and so margin on the contactor business is improving Luis stated quarter over quarter improvement of about 200.

Al the basis points.

But that needs to continue so we're closing in on about 40% contractors, we need to get to about 45%.

That's within our reach within 2022, so I'd say those are the main factors that bridges from where we are today.

Gross margin to the model.

7 day, and just to clarify that point, Jeff I heard earlier that there is some.

Supply chain cost Thats in gross margin.

Would you throw that in as we're at the 100 basis points, plus or minus or is it just relative to the other factors that you mentioned not that significant maybe less than a 50 basis point bearing.

I would say 50 to 100 basis points is probably a good estimate on a blended revenue.

But the other point that I mentioned.

The main drivers.

Yes, the bigger structural issues got it guys. Thanks, so much for the help thank you. Thanks Craig.

Okay question comes from David Duley with Steelhead Securities.

Thanks for taking my question just a clarification on your revenue guidance compared.

Compared to the.

Second quarter revenue that you just reported.

If we want to compare those numbers the $2.44.8.

Our next ported versus your guidance then.

We're missing you are subtracting $13 million from the printed circuit board business that isn't there any more sequentially and then you also mentioned another what was the $13 million of.

Stuffs supply constraints.

14 million.

Dave $45 million of handling, yes, so on an apples to apples basis.

The guidance does not reflect $13 million of printed circuit board revenue and $14 million of supply constraint pushes.

Correct.

Okay. So it's like a total of $27 million.

Correct.

Okay.

And.

Could you just in the current in the June quarter could you break out as far as the systems business goes the relative mix between handlers and testers I think you gave a number but I just wanted to make sure I had it right.

So in Q.

Q2, the revenue breaks down.

Handler revenue, 60% tester revenue 21%.

Contact our <unk> and PCB test 6.

Okay.

And.

As far as the contactor business goes I think <unk> had a growth goal.

Approximately 15% on an annual basis as far as your guidance in Q, what what do you think the annual growth rate will be in in this current calendar year for contactless.

Yes.

We're modeling internally, 20% CAGR.

CAGR for the contact.

All of your business and we're hitting that.

I think over a year, yes year over year, just a couple of data points for the first half of the year right we had about.

Well I don't have a blended but Q1 <unk>.

Q1 of this year, we had a 30% growth year over year on context in Q2, we had a 33%.

Contact year over year growth so blended at about I don't know 31, 32% so far.

Okay.

And.

Would you expect this percentage.

I guess, just mentioned, 13% for contractors that percentage will be going up over time.

Yes.

Yes, yes, absolutely I have 2 things will happen the handler revenue should moderate back to a normalized level and then.

Continue to grow the tester and contact businesses.

Okay, I think that percentage you meant the percentage of contact of contribution to revenue, yes, yes. Okay.

Okay.

Yes.

I guess.

Finally, if you could just kind of.

You guys have a lot of experience in this industry.

What is your view on the sustainability of results as far as your tests are your equipment business going forward, obviously ws the continuous decline every year.

I think your larger competitor just increase the size of the Soc test market.

I'm kind of wondering what your views are on on sustainability.

Multiyear upturn here.

Yes.

Look they've all indications right now is that this is going to be a long cycle I mean, we have.

We have a pretty robust automotive market with with <unk>.

<unk> and <unk>.

I think we have a pretty robust mobility markets deal with <unk>.

Computing with AI and crypto.

But as we always said there will be there'll.

Be some seasonality to the industry. If we look we look back year over the last 10 years actually in <unk>.

Jeff already spoke to the fourth quarter seasonality right.

On typically typically first quarter.

It can be upward down a little bit relative to fourth quarter, but but on.

On average flat second quarter is typically up.

Around 10%, 15%, 20% sometimes.

Third quarter, then tip.

Typically comes down a smidge like low single digit percentage in fourth quarter, Jeff already said kind of.

Around the 10% drop thats the typical seasonality. So I think the seasonality is going to stay there.

But the industry cycle. The underlying current is pretty robust. We also look at our own revenue over the last 10 years.

What we see here on average is about a mid.

Teens.

Percentage growth year on year every quarter, that's sort of the average.

On a year on year basis, and we think thats going to continue because because of these elements I just described on the industry.

Okay.

Uh Huh, that's all the questions from me. Thank you.

Thanks, Dave.

Our next question comes from Krishna Shankar with Cowen <unk> Company.

Hi, This is Steven calling on behalf of Krish. Thanks, So much for taking my question.

The first 1 if I could on <unk>.

And times I think earlier.

You already mentioned that debt testers.

Lead times are about 10 weeks, which is down from.

12 weeks last quarter I was wondering if you could also.

On.

So in terms of handlers and contractors.

There will be time for exiting the June quarter.

Yes, sure Steven you are correct on the testers.

The handlers I did mentioned its about 19 weeks right now.

19 weeks lead time.

I think last quarter was 18 weeks, we were hoping to be.

Further down, but as Jeff described the supply chain constrains.

Capped at about the same level contactor is we made an improvement we're down to about 5 weeks lead time.

And granted part with the improved operational efficiencies and increasing in sourcing in our Philippines factory.

And spares have remained pretty stable.

On in about 6 weeks lead time.

Okay perfect.

And then.

1 question on I guess.

<unk> revenue mix.

Going forward until September.

September quarter in.

Particularly automotive.

In your presentation automotive was 18%.

Sales in mobility was 14 and.

Average flow on a monthly up sequentially in terms of the mix in mobility was down.

Noticeably sequentially I'm, just curious like for the September quarter.

It's on some.

That seasonality that you mentioned earlier.

Come into play in terms of what the contribution might be in September or is there any.

Each customer specific purchasing behaviors debt.

May cause volatility.

Downwards for those 2 end markets.

Yes relative to end markets. The best way that we have to look at it is looking at.

Order mix by end market in Q2, which mostly generates.

The Q3 revenue and it looks to be about consistent with the Q2 revenue segmentation. We provided on the deck. So I would expect Q3 revenue.

To have a very very similar percentage distribution at least across the top 4.

End markets here automotive mobility.

<unk> consumer and industrial.

Anything maybe industrial will pick up a couple of points.

But the rest things very consistent Q2 to Q3.

Got it and just maybe 1 lifestyle product related questions.

In terms of your.

Handlers for the automotive.

<unk> I believe.

It might be mainly at the can place handlers, if I'm mistaken.

Do you seen on retained to move some of your automotive customers Terry maybe higher margin handlers legacy grabbed equal rapidly gravity product line or is grabbing more for industrial customers. Thank you.

Yes gravity is more for industrial customers Stephen.

On the automotive side I think the.

Primary pivot that could create an opportunity here is.

Sort of the developments around das processor test, which embed.

Beds.

Requirements for active thermal management of powered the Sippet of devices I'm talking here devices that will dissipate 10 watts and above.

<unk> test on a single site and Youre testing their multi site.

That probably creates the greatest opportunity for some changes.

New technologies, and frankly very complex technologies on the handler side.

Alright, thank you so much and nice job in navigating the challenging environment.

Thank you.

Our next question comes from Christian Schwab with Craig Hallum.

<unk>.

Great. Thanks, I just have a quick follow up on.

The decision to not give 2 quarters of guidance.

<unk> done the past few quarters should we take them.

Reflection of.

Potentially less visibility and predictability of the business.

Is that really.

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