Q3 2021 Cohu Inc Earnings Call

October 28, 2021

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I'd now like to hand, the conference over to Jeff Jones CFO.

Thank you and good afternoon, and welcome to our conference call to discuss <unk> third quarter 2021 results in fourth quarter 2021 outlook.

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

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 is also a slide presentation in conjunction with today's call that may be accessed on <unk> website in the Investor Relations section.

Players 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.

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 SEC, including the most recently filed Form 10-K and Form 10-Q are.

<unk> speak only as of today October 28 2021.

<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 Hughes, President and CEO Luis.

Thank you, Jeff good afternoon, everyone and thanks for joining us.

Third quarter revenue was approximately 225 million and that was up 49% year over year on strong demand for test and inspection systems.

Earnings per share were in line of expectation at 70 cents and adjusted EBITDA of 21, 8% was up over 850 basis points year over year.

Underscoring the significant growth in both revenue and profitability.

<unk> remains on track for a record year with revenue forecast up approximately 40% in 2021.

We continue the deployment of our <unk> four data analytic software with follow on orders from key automotive customer design win in the second quarter as well as expansion into several new automotive segment customers in the third quarter.

As a reminder, <unk> data intelligence for <unk> core for sure is a suite of software solutions that provide real time equipment monitoring and process control to improve overall equipment efficiency or OA and productivity.

Customers can monitor critical equivalent parameters, such as yield OE throughput and other equipment state to ensure optimal desktop performance.

Yeah of course software also interfaces with customers manufacturing execution systems for remote equipment control recipe and lot management.

As the need for data analytics grows we plan to continue expanding <unk> core offerings to help improve quality and yield and to continue to increase value add differentiation of our systems.

We're essentially enabling our customers to upgrade the large installed base of <unk> equipment to improve efficiency and productivity.

We estimate the market for test data and analytics to be around $170 million.

With high customer interest, particularly in the automotive semiconductor segment should increase and optimize productivity.

Core soft yeah of course, a software solution.

Thus, a 90% plus gross margin product expansion for <unk>.

Now on the tester business, we are encouraged by the growth of our Diamond X Universal platform into power management display driver and RF applications.

<unk> offers today, a unique solution for test and inspection of high performance RF devices deployed in satellites and ground based transceivers.

Our testers deliver advanced microwave RF measurement performance with integrated solutions for device under test, ensuring accurate signal integrity and temperature control.

The global small satellite market is projected to grow at 20% CAGR through 2025, and <unk> is at the forefront of supporting well known customers on their endeavored to deploy low orbit satellites to create a global broadband communication network.

We've estimated test cell utilization of 87% at the end of September we are encouraged by the momentum and customers' forecast for our test inspection and metrology equipment and interface products entering 2022.

Mobility customers are forecasting and starting to drive demand for another wave of equipment for high frequency RF test encompassing capabilities for <unk> sub six gigahertz Wi Fi seven and even millimeter wave applications in the first half of 2022.

There is a global shortage of power management devices that are limiting electronics manufacturing.

<unk> is positioned to help customers address this growing demand.

And also support the expansion of high performance computing applications.

Our vision systems, particularly the new neon platform <unk>.

Continue to capture new customers and expand applicability beyond our original expectations driving co use inspection and metrology revenue to a projected $70 million in 2021.

The automotive market seems to have passed the initial recovery cycle post pandemic in 2020.

And now reaching a new normal demand level that is largely supporting growth in battery management systems for electric vehicles, and Adas processors and sensors.

<unk> is well positioned in automotive with a broad portfolio of thermal handlers and interface contactor is to address a variety of test requirements from automotive processors to high power management Ics.

We have also made significant progress in operations, increasing in sourcing and productivity at our Philippines contactor manufacturing facility, yielding a significant 410 basis points gross margin improvement from Q2 to Q3 in our contactor business.

As the contactor business grows and gains momentum in 2022. This is expected to be a significant contributor to our margin expansion towards the midterm target of 48%.

Additionally, we completed the implementation of price increases to our handler product lines that largely offset gross margin erosion as seen in the second and third quarters. Consequently, we are guiding fourth quarter margins up to 44% despite continuous trends in mix favoring handlers.

We expect mix to shift in first half of 2022 to our last handlers and more testers with concurrent growth of our contactor business in line with plans towards <unk> mid term targets.

Switching topics with.

The supply chain continues to be extremely tight and material shortages and logistic issues dominating the headlines.

<unk> has taken steps to get ahead on inventory and make sure. We can continue supporting customers capacity expansion plans and the introduction of new device technologies.

Our business model is working.

<unk> is delivering solid profitability and projecting a strong baseline EPS and cash flow during the typical seasonally low fourth quarter.

Equipment lead times remained largely unchanged from a quarter ago with handlers, averaging 18 weeks and testers about nine weeks contactor and spares about six weeks.

Looking ahead, we are encouraged by our design wins and product traction in key growing segments and we're equally optimistic about our gross margin improvements and order forecast in the fourth quarter.

With so much investment going each wafer fab equipment were enthused about the midterm growth for the semiconductor test and the need for greater inspection and metrology in support of new advanced packaging technologies.

Let me turn it over to Jeff to share third quarter results.

Specifics about our fourth quarter guidance and describe our board's authorization for a share repurchase program.

Jeff.

Thanks Luis.

Now before I walk through the Q3 results and Q4 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 investor page of.

Of our web site.

Now turning to the financial results <unk> again delivered strong revenue and profitability in the quarter Q3 revenue was $225 1 million, an increase of 49% compared to Q3 of 2020.

During the third quarter, two automotive segment customers each accounted for more than 10% of sales.

In the third quarter <unk> gross margin was 42, 3% and in line with our guidance.

Operating expenses were $49 5 million.

In lower than guidance due to some onetime credits and tight management of expenses.

Third quarter non-GAAP operating income was 22% of revenue and adjusted EBITDA was 21, 8%.

Return on invested capital in the third quarter was 51% well above our target ROIC of 30% or higher.

<unk> non-GAAP effective tax rate for Q3 was approximately 19%.

Higher than guidance, primarily due to lower income generated in the U S. Combined with higher income generated in Germany, which is subject to statutory tax rates higher than the U S.

Non-GAAP EPS for the second quarter was 70.

Bringing our nine month year to date, non-GAAP EPS to $2 48.

More than double our full year 2020 results and illustrates the earnings leverage in the business model.

Yes.

Now moving to the balance sheet.

The Q3 balance sheet reflects a net cash position with increased resources for accelerated debt reduction.

Investment in opportunities to expand our served markets and technology portfolio in line with our growth strategy.

And our newly authorized $70 million stock repurchase program to return capital to investors.

Set dilution from our equity plans and express confidence in <unk> future growth prospects and cash generation.

The ending cash balance for for the third quarter was $365 million, which is net of debt repayment totaling $101 million during the quarter.

The balance sheet reflects net cash of $245 million as total debt at the end of Q3 was reduced to approximately $120 million.

The term loan B outstanding balance at the end of Q3 was approximately $103 million.

And cash flow generation was solid again in Q3 with free cash flow at approximately 14% of revenue.

Now moving to our Q4 outlook.

Entering the typical seasonally low Q4.

<unk> business model is projected to deliver strong profitability on revenue between $182 million at $195 million.

Some customers have pushed new test capacity into 2022 due to shortage of wafers and lead frames impacting their semiconductor production.

We expect first quarter sales to be incrementally stronger based on current order momentum and assuming our customers successfully worked through their supply chain shortages.

Q4, gross margin is forecasted to be approximately 44% and as predicted.

Seeing a moderation of automotive test handlers, improving product mix and solid cost reductions in the manufacturing of contactor recurring.

Revenue for Q4 is projected to be approximately 41% of total sales and approaching the 45% midterm target.

Q4 operating expenses are projected to be approximately $51 million.

And we're projecting Q4 interest expense to be approximately 900000.

We anticipate Q4 debt repayment to be in the 1 million to $7 million range based on cash forecasts, including NAFTA anticipating potential share repurchases in Q4.

We expect Q4 adjusted EBITDA at the midpoint of guidance to be approximately 19%.

Q4, non non-GAAP tax rates approximately 14% at the midpoint of guidance.

The diluted share count for Q4 is expected to be approximately $49 5 million shares.

And 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 one key on your Touchtone telephone.

Draw your question press the pound key.

Our first question comes from Brian Chin with Stifel.

Yes.

Hi, there good afternoon nice results in a tough operating environment and thanks for letting us ask a few questions.

Maybe first just a quick one.

Jeffrey Louise how much of the <unk> decline is seasonality versus supply constraint, which you kind of reflected in that pushed to Q1 for some customers.

Yes, we know for sure it's not it's not.

Somewhat difficult to understand the full impact, but we know for sure is about $4 million that has been delayed out of Q4 into 2022.

Got it.

And I think you said incremental based on your backlog visibility.

Incremental sequential growth into Q1 can you put any sort of parameters around what youre seeing relative to backlog, thus far in terms of the nine tubes.

Chris.

Well, I mean, I'd kind of speak to that incremental comment first Brian.

When we look at Q1 right.

Currently we are seeing current or odor order momentum that is that is increasing so let's say that assuming that continues and customers successfully worked through the supply chain constraints.

Q1 could be 5% to 10% increase over Q4.

Got it.

Helpful.

And I guess maybe.

Perhaps even more importantly in terms of the mix and sort of the progress we're making on the gross margin front.

In terms of initiatives as well as sort of.

Yes, a more normalized next to some degree right maybe first can you.

Give us a sense of what mainly drove is driving about 170 basis points of sequential improvement in Q4, and then also kind of moving in the first half you allude tester demand potentially coming back handler business sort of normalizing lower.

The improvement on the contactor is there some price increases on the handlers a couple pieces I'm missing, but maybe think about how much of the gap you can if revenues Q1, I'm just throwing a number out if its $200 million in Q1 relative to what.

The target model would suggest I think something like a 46 or somewhere in that territory on the gross margin how much how much can you start to narrow that close that gap and first half okay. Alright, So theres a lot there Brian So let me do my best and you can remind me of some areas that maybe I don't touch on.

In terms of the expansion gross margin into Q4.

A couple of main areas here one is the in sourcing of more contactor manufacturing in the Philippines, we saw.

Some great success in Q3, and increasing the gross margin. So we see that continuing and we continue to add more.

More in sourcing if you will into the Philippines. So is going to increase our utilization and productivity lower the costs, we're going to continue to see higher contactor gross margins again targeting about 45% second half of the year for contactor gross margin. The other piece of it as I mentioned in my comments the moderation of the.

The auto.

Of the automotive handler revenue in so and overall more favorable mix of products now, we're not where we need to be in the.

And the target model, but we're getting closer to it and we're seeing a favorable impact price increase on handlers, not 100% effective yet as we worked through backlog and long term contracts with customers, but it has been effective to at least offset cost increases.

And then as we look into <unk>.

2022.

As you mentioned, we do see a mix that has higher test revenue.

Continuing to grow contactor revenue and the gross margin there.

So we're modeling internally that 2022 is going to be from a gross margin perspective would be in the mid 40% range I would say if youre looking specifically at Q1.

Projection there would be maybe about a 50 basis point or so improvement over Q4 on gross margin.

Okay, Great. That's really helpful. I'll hop back in the queue for other folks alright. Thanks, Thanks, Brian.

Our next question comes from Craig Ellis with B Riley Securities.

Hey, guys. Thanks for taking the question and nice to see the gross margins moving back up again.

I wanted to start just by.

Asking a clarification question on revenue I think three months ago, one of the messages was that there was $14 million.

Andler sales push from <unk> to <unk>, so as we look at the fourth quarter guidance and whats embedded.

When did.

Those revenues actually shipped in and is the $14 million included in the guidance that we're seeing today.

Yeah, just a correction on that Craig.

That 14 million caused by suppliers that we're under control movement orders, we knew that we wouldn't catch that up in Q3 and that would filter through Q4 as well thought we'd be cut up sometime end of year beginning of next year. So it was not a take out of <unk>.

Q2 and put in to.

Q3.

Alright.

It was out of Q3 and into future quarters, yet right do I have the periods wrung their job or no no no no that's correct I missed and mixed up the quarters.

But your point is you didnt expect to recapture it all in.

Great quarter, and it'd be recaptured <unk>, Okay got it got it okay. So so that's helpful.

Secondly.

Given everything that we've seen happening in automotive supply chain.

Centered around.

Covid issues with with Asia.

Manufacturing disruptions, Malaysia et cetera.

Pac did that have on the third quarter for the company in.

To what extent is that also.

Impacting guidance.

Excluding the $4 million that you mentioned earlier.

That may or may not be related to that revenue stream.

Well, let me take that one Craig.

Yes.

Youre right automotive customers have had some.

<unk> supply chain shortages and it's embedded in it is embedded as part of the numbers that Jeff quoted here to sort of a $4 million pushing out to next year as theyre having dashboard.

Disruptions right there.

Dominant driver of that actually.

Sure.

Yes, I mean, I think to the point of your question. That's about it I think that's that's the net of it.

Yes, and then I wanted to go back to gross margin. So it was great to see the increase in recurring gross margin in the quarter and it sounds like.

Hey, Jeff since that's based on utilization increases.

And yields in the Philippines, but thats a structural gain and so the question is from that 52% level is there further upside you can achieve on that as volumes rise through the year assure mixed normalize this and if so to what extent can can gross margins and recurring price from <unk>.

They are today.

Yes, I would I would talk first about the contactor gross margin as you know all of the contactor revenue is considered recurring and we're going to exit.

2021, with about a 40% gross margin and contactor is expecting that to be about 45% second half of next year. So that will have an impact on the overall recurring margin, but I think it's important to look at that element first and then of course on a higher base of revenue it'll be it'll increase that.

Overall gross margin, but but not to the same extent that the contactor gross margin will grow.

Got it okay.

Okay, and then lastly.

Looking at.

At.

The backlog in some of the color you're providing very helpful. Jeff to get the color on the first quarter, but but beyond the first quarter any sense for.

What the contour of the year would look like are you getting the sense from your customers that.

And so we've reached this.

More normalized level in automotive for example that.

We could be back to an environment, where we see more normal seasonality or are there other things that.

That might give us a different profile that youre starting to hear whether it be from your test customers are handler customers et cetera.

Yes, let me take on this one and just feel free to add we are it's a little too early to comment on the balance of the year Craig we are.

Rolling up the plan for next year right now.

He can comment better on each of the visibility we have in the first half of the year, because theres already a lot of dialogue with customers.

For production requirements in the first half and we do see a lot of dynamics around.

RF front end IC test coming up again, and thus the demand profile for a tester business improving.

Concurrently.

We see growth in the contactor business.

<unk> discussed that we are progressing quarter on quarter, both both in terms of revenue as well as improvements in gross margin.

On the handler side.

What I think it is happening is the the automotive segment has moderated down again.

The.

Sort of a recovery of demand in the first half of 2021 from from a very constrained very much constrained environment in 2020, and what we see today is a much stronger demand from automotive customers producing battery management systems, and Adas processors sensors.

And then a plethora of other devices true, but those those are taking the.

The headlines.

As far as seasonality I think we're back to seasonality we have been saying this I think for a couple of quarters now you expect seasonality to resume in the second half of this year and I think this is this is where we're at.

We are seeing a seasonally.

Lower fourth quarter is typical the difference is the company has a much much stronger business model now on a lower fourth quarter and we expect we expect next year to demonstrate the normal seasonality, which is a ramp towards a stronger second and third quarter.

Before the typical slowdown in fourth quarter next year again, but we don't have that totally rolled up yet you to.

To discuss.

So that first half is looking strong and the mix is shifting as we described.

Real helpful color Luis I'll jump back into the queue guys. Thank you.

Uh huh.

Our next question comes from Tom <unk> with D. A Davidson.

Yes. Good afternoon. Thanks for the question.

Was hoping to get a little bit from you on your view of the five Geordie RF tester market in terms of whether or not you think that the build out over the next couple of quarters will be similar to what we saw a year ago and then maybe beyond that where do you think we are in this multiyear build out of <unk>.

Hi, Tom Yes, Yes, I think I think you will actually we saw a.

Demand.

Ramp for task.

To support approximately if I'm not mistaken was approximately 250 million <unk>.

<unk> phones at the end of 2020.

Then.

That ramp do happen quite late in the year.

Probably because of <unk>.

Pandemic concerns in the first half of 2020.

And then.

We're looking at 2022 as another 250 million phones that are <unk> enabled.

So we expect in the buildup to be very strong again.

More importantly, I would say we have had some design wins in the last.

And the last year and a half that we expect to generate incremental dollars for us next year. So.

So yes, we're looking very optimistically for a strong.

Our front end IC ramp.

Okay great.

And then switching gears a bit here when you look at different regions throughout Asia, where you're exposed and maybe specifically the Philippines. What has been the impact of Covid over there recently and have you seen any labor shortages or labor impact.

No we haven't.

The Philippines, our Philippines factory.

Is running full capacity, we haven't had any bumps since.

I think it was first half or even each of the middle of last year when things were complicated in the Philippines.

Have many many suppliers in the Philippines is actually a fairly narrow supply chain for us so not a supply chain problem or factory like I said, it's fully operational and our customers in the Philippines are taking product. So right now totally transparent no issues out of the Philippines, Okay. That's great and then.

Finally on the decor.

Last quarter, you said it was a fairly small market for you today.

Do you think it becomes a meaningful piece of your business.

Yes, it's a very difficult to answer question, Tom we are.

We're essentially crawling into it.

Looking loss small numbers here, we're looking at close to $1 million of revenue this year.

Probably double to refer.

Really good maybe a little bit more than doubled that into next year. So we will continue to be a small revenue profile for the next couple of years for sure. Nevertheless.

It is a as I said on the prepared remark it is softer.

So it's essentially 90 plus percent gross margin product sale.

Revenue will increase as not only as we succeeded in demonstrating to customers, but succeeding in developing and delivering new capabilities.

Tend to move to a subscription model on the new capabilities next year.

And it will work, obviously augment the differentiation of our products and augment our recurring revenue stream, but I think from a topline perspective, it would still be.

Kind of single digit low to mid single digit for the next for the next two to three years okay.

Okay, great well. Thank you for your time today.

Thanks, Paul.

Our next question comes from David Duley with Steelhead Securities.

Good afternoon, and thanks for taking my questions. Just a couple of housekeeping questions. I guess could you help us understand what you think the size of the contactor market is in.

<unk> 2021 and then what you think the growth rate of the overall market is and then along that same topic maybe.

Tell us what your market share goals are currently for the next couple of years.

Okay.

The obviously the.

Market forecast information for 2021 is not out there yet but.

We're going to venture to say its around $8 million to $850 million.

For Cott.

Contactor market that we can address.

The market is growing.

Overall trend line looks like about a 7% CAGR from the loss projections that I have seen in the contactor the contactor space.

We've been looking at this as I said in prior quarters more as an attachment rate story, what is the attachment rate and cost taxes. Unfortunately as.

As we discussed in the past the attachment rate has been calculated on a quarter to quarter basis, which.

We tend to have quite a bit of.

Got a bit of volatility from the.

From the equipment sales.

So we took a look back and doing more of a weighted average.

It approximates, 229% attachment rate today and our goal over the mid term is to grow that to 50% that's our aspirational goal.

Okay, and then you mentioned that there was some ASP increases.

Some of your handler products.

Where are we on recognizing that benefit it usually takes some time.

You have to run through the current backlog usually before you.

And recognize the price increases maybe just help me help us understand.

How much of that has been captured already and how much it has to be captured.

Hey, Dave, Yes, Youre, absolutely right it rolls in really based on.

How much backlog is left in.

New orders come in for customers, So as I said.

It's been effective it was effective in Q3 essentially to offset costs.

We're going to see a small additional improvement in Q4 call. It 25 to 50 basis points and then as we enter into Q1 of next year.

More customers are subject to it so about 100 basis points from that point on.

Okay.

And then.

Sure.

Okay.

Just help us understand a little bit more I know other people have asked about this but my phone was kind of fading in and out so when we think about the gross margin progression next year.

From the Q4 level that you've guided to if these things happen like you said.

And let's just say the revenue environment is a normal seasonal environment. What would you expect the gross margin trajectory would be to the middle part to the end of the year can we hit 46 or 47% by year end or or what do you think.

Yes, Dave I mean, I would I.

Kind of phrase it as mid mid forties.

That to me means that a 46% is achievable.

<unk> target is 48, right and that's over.

About a three year time horizon.

47, I think might be a bit aggressive, but I think based on what we see out of the contactor business, reducing costs, they're growing revenue and expectations for testers.

I think I am comfortable with our mid forties.

6% being achievable in those strong.

Seasonally strong quarters.

Alright, thank you.

Thanks, Dave.

Our next question comes from Chris <unk> with Cowen.

Hi, This is Robert Mertens on behalf of Krish. Thanks for taking my question first could you provide some more clarity on the breakout of the automotive business is there any way to bifurcate between.

EV and Adas or sort of how the margins are overall.

Within the business line, and then I have a follow up.

Yes, let me take the first part of the question.

Let's let Jeff address the second on the gross margin so.

It's not an exact science, but we the way we we tally.

We're measuring about 30% of our.

Our automotive handler demand.

Should be in the third quarter should be associated with a combination of battery management and a desk not breaking them down in the vast majority of that by the way is battery management Adas is a small portion.

But in aggregate about 30% close to one third of our handlers.

So Robert on the <unk>.

So I don't want to go into too much detail about the specific units, but I would just say that we presented in the deck today that systems gross margin for the quarter was 37% recurring was 52% I think one more one more piece of data would be that overall, the overall margin for handlers.

Was was about 40%.

Great. Thank you Matt.

And then just a last one.

Endeavor.

Just in terms of your pricing.

<unk> typically have that under contract and sort of a step wise function or how should we think about the <unk>.

Price increases in going forward if costs continue to rise.

Well, we have gone to our customer our handler customers in.

We issued a essentially a price increase now.

Is that applicable to some customers because there's long term contracts and pricing is set for that period of time.

And other customers had already ordered and so we had a backlog of handlers, but once we.

Get through the backlog and new orders are placed.

100% across the handler orders, but it's a majority of them that.

New orders will be placed.

With that price increase and so that's why we see the offsetting impact.

The increase in costs.

Incremental with each quarter and as I said as we get into Q1, we're closer to the full effect of it perhaps a 100 basis points.

Packed in in the quarter.

Great. Thanks, that's all for me.

Uh huh.

Our next question comes from Christian Schwab with Craig Hallum.

Okay.

A lot of difference.

<unk>.

In particular at legacy nodes, adding capacity.

Where you historically have been very strong.

As we kind of think about kind of the multiyear layouts.

Wafers starts ramping more materially and all of these new Fabs when would you expect that to impact your results.

It sounds like.

And next year, you kind of.

We expect to return to normal seasonality.

Is any of that.

Capable of offsetting typical seasonality on a go forward basis or am I thinking about that wrong.

Hi, Christian I mean, that's.

It really is going to happen across time right. If you look.

You are talking trailing edge nodes, Texas instruments seems to be on the forefront of actually ramping.

Mailing edge node capacity.

Largely for automotive and industrial applications.

I think it's public knowledge, they have new assembly test sites coming online in 2022 beginning of 2022.

But many of the others are trailing debt and looking at capacity additions that would start influencing 2023, and even late part of 2023. So.

I think there is not a singular point in time, its going to spread out over time as to whether thats going to Buck the trend on seasonality.

It's a guess honestly I don't think so I don't think so because I think that seasonality is going to be driven really by end market demand and consumer demand more so than the capacity additions I think the capacity additions are more of a statement of confidence.

The end market demand is increasing that the semiconductor proliferation is increasing.

For example is talking to an executive couple of days ago.

About the semiconductor content in vehicles and what they used to supply when this individual got into the company and what they supply today and it's just it's just an incredible ramp of semi content in cars and I think theres, a theres a very strong belief.

Not wrong as you can all read that that is going to continue over the next few years. So so I think I think the trend is positive the seasonality is likely to be driven by end market demand and I don't think capacity will necessarily buck but.

That's just my opinion.

Great no other questions. Thanks, guys.

Thank you.

As a reminder that is star then one to ask a question.

Our next question comes from Charles <unk> with Needham <unk> Company.

Hi, Luis on Jeff.

Im asking questions on behalf of Quinn Bolton here.

So first off I wanted to start with <unk>.

That trend lining up test to revenue growth.

It looks to me.

The third quarter.

May have a little bit moderation in terms of the test revenue.

And is that kind of like a normal seasonality there.

Do you expect the second half tester revenue kind of lower than the first half given how strong the first half was.

Yes, I think Thats right that latter statement is corrected customers took a lot of equipment Q4 of 2020 through Q2 of this year and I think as we discussed on our.

Q2 call that.

Those customers essentially taken a pause and so we're seeing softer tester business in the second half of this year I think as Luis indicated conversations with customers are indicating that.

We're looking at a next next phase of a ramp here for RF test coming in the first half of next year.

Got it got it.

Maybe this might be pushing you a little bit harder.

Understanding the past Terry revenue trajectory going forward.

That's first half you expect tester demand to be strong mask is a stronger relative to the second half 'twenty, one was stronger than first half plenty of work.

I would say definitely relative to the second half of 'twenty one and.

And we will get into more details when we get there as it compares to first half of 'twenty one.

Yes.

No.

It's probably still a little bit early to really pinpoint.

The first top 22 number is like.

Maybe a little bit on gross margin you sort of mentioned Mips.

<unk> 40.

Gross margin for next year, maybe maybe something like 46, maybe maybe you meant reached 47.

How much of that you from what you see today it can be driven by a little bit favorable product mix, maybe you've got a little bit more <unk> next year, a little bit more contactor, which yields are steadily improving gross margin.

First half of this year to the fourth quarter.

Just wanted to understand the product mix side of the puts and takes in terms of that gross margin improvement into next year. Thank you.

Yes, Charles for sure the product mix as you described plays a role in expanding the gross margin.

And where.

The confidence that we're going to continue to grow the contactor revenue as well as increase that gross margin. That's a key point of our strategy not only for growing revenue, but also gross margin and profitability.

The other strategic point is growth of the tester business.

Those margins gross margins are.

Very good and so the strategy and approach is to grow that tester revenue and as we do that and maintaining handler.

Handler position and handler revenue.

We will see an improvement in product mix from a gross margin standpoint now.

Spoke earlier about the seasonally strong quarters for 2022 is talking about a $45 46% gross.

Gross margin again, we haven't.

Mapped out our 2022 annual plan, yet, but I would say based on what I've seen so far the confidence I have in the model that with growth in testers and contactor is.

I would expect in those strong quarters in 2022 to be similar as I say mid 40% 47 might be.

Kind of pushing the edge, but $45 46 is a little more comfortable with that for those strong quarters.

Got it got it maybe last question from me Lewis.

Lewis.

So you get.

Very good industrial level color as always I want I noticed you mentioned the cloud.

The power management, IC being lumped the top kind of shortage.

<unk> semiconductor components so far.

And it looks to me Wickford that power management IC investment in terms of new capacities.

Very strong next year can you just give us a overview how youll products.

Those two this part of the market what drives.

Driving testers handlers.

Or the contactor side. Thank you that's all for me.

Okay, Yeah, Charles let me start from the end.

We obviously do have contactor product lines for small power management Ics applications.

Going all the way up to high voltage high current applications or the whole gamut of <unk> devices and again by that I mean.

Small P mix that go into mobile phones to very large power devices I wouldn't call them P mix I'll call them power discrete actually then they go on industrial applications trains.

You name it.

On the contactor side.

Handlers very much the same we have small <unk>.

<unk> applications running on our turret handlers, and we have very large power management devices running.

On gravity feed handlers also enter it for non good dye foreign management applications and.

Looking here it also MOSFET silicon carbide when it comes to the tester business I would say we are much more narrow focus on small <unk> devices small power small applications.

Mobile in nature, not so much the high voltage high current.

Not silicon carbide for example, not MOSFET, but more so the small <unk> solutions on the tester side hopefully that covers it from all three product lines for you.

Yes. Thank you.

Our next question comes from Craig Ellis with B Riley Securities.

Yes, just two follow ups first just a lot of conversation today about.

Pricing action that's been taken on.

Handler side of the systems portfolio and its nice to see that but.

But the question is strategically have you thought about pricing action in other parts of the portfolio and censure.

Doing it and handlers why wouldn't you try and executed elsewhere as well.

Well Craig this is luis.

What we've done here is essentially re pass cost increases to our customers.

We're not going out to gouge customers and try to to obtain more money unless obviously, we have the product differentiation, we will price based on the value of the product.

And.

This year, what we've seen is essentially a cost increase on components that we use in our handler products be it.

Off the shelf components motors sensors.

Troll boards as well as some some manpower for.

Sub assemblies are at our contract manufacturers and we took those cost increases we rolled up and as soon as we had enough.

Understanding of the value of it.

We had a conversation we sat down and had a conversation of our customers.

Two to re pass that and we understand we're also not unique and doing doing that our competitors seem to be doing the exact same and even some lateral.

<unk> in the semiconductor space, but we're not.

We're not pushing.

I said unless we have the differentiation obviously, we're not we're not pushing for higher value, we're not pushing for price increases, where we don't see cost increases.

Okay and is the point there then.

Luis that you just haven't seen that much of a bom cost increase with testers or the broader market dynamics different and textures, so would not allow.

Allow you to make such a move even if you had a similar such cost increases.

Yes that is correct. We have we have not seen we have not seen that level of cost increase on the tester side.

Okay, and then lastly, because you mentioned that included in the press release, the $70 million share repurchase program I just wanted to give you an opportunity to talk about how you might.

Might go after that.

Whether it's in the fourth quarter or or in coming quarters and.

And how you how you plan to execute on that repurchase.

Craig we're going to we're going to start with the opportunistic buying here.

As early as next week.

Soon thereafter, we will put up a <unk> one plan in place with different pricing parameters.

And let the purchasing happened essentially.

Automatically if you will.

So that's sort of the mechanics of it.

The obvious obviously why we put it in place we truly believe the company is undervalued wanted to take some action on that very confident and cash flows moving forward also would like to say that this doesn't mean that we won't be doing acquisitions, we've sized it. So that we believe we can continue obviously.

Pay down debt make.

<unk> investments.

Acquisitions, and we believe with cash generation we.

We project that we can we can also return some capital to shareholders.

<unk> message to the market about how confident we are in the company.

Got it Jeff Louise Thank you very much thanks, Craig.

I'm showing no further questions in queue at this time I'd like to turn the call back to Jeff Jones for closing remarks.

Thank you before we sign off I'd, just like to say that we will be attending the following conferences the <unk>.

<unk> virtual conference on November 11th.

<unk> Hallum Virtual conference on November 16th CEO.

CEO summit, which will be held in person on December 8th in San Francisco and the da Davidson Virtual conference.

On December 15th.

I would like to attend any or all of these events. Please reach out to your respective banking and our conference contacts to arrange a meeting with Kogyo look forward to speaking with you. Soon thank you for joining today's meeting today's call and have a good day.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day, and thank you for standing by and welcome to the Cohiba incorporated third quarter 2021 financial results Conference call.

At this time all participant lines are in listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press Star then one on your telephone keypad.

Please be advised that today's conference maybe recorded.

You require operator assistance during the call. Please press Star then zero.

I'd now like to hand, the conference over to Jeff Jones.

CFO.

Thank you and good afternoon, and welcome to our conference call to discuss <unk> third quarter 2021 results in fourth quarter 2021 outlook.

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

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 in the Investor Relations section.

Players 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.

As well as <unk> filings with the SEC, including the most recently filed Form 10-K and Form 10-Q.

Our comments speak only as of today October 28 2021.

<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 Hughes, President and CEO Luis.

Thank you, Jeff good afternoon, everyone and thanks for joining us.

Third quarter revenue was approximately 225 million and that was up 49% year over year on strong demand for test and inspection systems.

Earnings per share were in line of expectation at 70 cents and adjusted EBITDA of 21, 8% was up over 850 basis points year over year underscoring the significant growth in both revenue and profitability.

<unk> remains on track for a record year with revenue forecast up approximately 40% in 2021.

We continue the deployment of our <unk> for data analytics software with follow on orders from key automotive customer design win in the second quarter as well as expansion into several new automotive segment customers in the third quarter.

As a reminder, co use data intelligence or <unk> for short is a suite of <unk>.

Software solutions that provide real time equipment monitoring and process control to improve overall equipment efficiency, our OE and productivity.

Customers can monitor critical equivalent parameters, such as yield OE throughput and other equipment state to ensure optimal desktop performance.

Core software also interfaces with customers manufacturing execution systems for remote equipment control recipe and lot management.

As the need for data analytics grows we plan to continue expanding the core offerings to help improve quality and yield and to continue to increase value add differentiation of our systems.

We're essentially enabling our customers to upgrade the large installed base of <unk> equipment to improve efficiency and productivity.

We estimate the market for test data and analytics to be around $170 million.

With high customer interest, particularly in the automotive semiconductor segment to increase and optimize productivity.

<unk> soft yeah of course, a software solution.

Thus, our 90% plus gross margin product expansion for <unk> here.

Now on the tester business, we are encouraged by the growth of our Diamond X Universal platform into power management display driver and RF applications.

<unk> offers today, a unique solution for test and inspection of high performance RF devices deployed in satellites and ground base Transceivers.

Our testers deliver advanced microwave RF measurement performance with integrated solutions for device under test, ensuring accurate signal integrity and temperature control.

The global small satellite market is projected to grow at 20% CAGR through 2025, and <unk> is at the forefront of supporting well known customers on there in beverage to deploy low orbit satellites to create a global broadband communication network.

There is a global shortage of power management devices that are limiting electronics manufacturing.

And of course, you is positioned to help customers address this growing demand.

And also support the expansion of high performance computing applications.

Our vision systems, particularly the new neon platform <unk>.

Continued to capture new customers and expand applicability beyond our original expectations driving co use inspection and metrology revenue to a projected $70 million in 2021.

The automotive market seems to have passed the initial recovery cycle post pandemic in 2020.

And now reaching a new normal demand level that is largely supporting growth in battery management systems for electric vehicles, and Adas processors and sensors.

<unk> is well positioned in automotive with a broad portfolio of thermal handlers and interfaced contactor is to address a variety of test requirements from automotive processors to high power management Ics.

As the contactor business grows and gains momentum in 2022. This is expected to be a significant contributor to our margin expansion towards our midterm target of 48%.

We expect mix to shift in first half of 2022 to our last handlers and more testers with concurrent growth of our contactor business in line with plans to our <unk> mid term targets.

Switching topics the.

The supply chain continues to be extremely tight and material shortages and logistic issues dominating the headlines.

<unk> has taken steps to get ahead on inventory and make sure. We can continue supporting customers capacity expansion plans and the introduction of new device technologies.

Our business model is working.

<unk> is delivering solid profitability and projecting a strong baseline EPS and cash flow during the typical seasonally low fourth quarter.

Equipment lead times remained largely unchanged from a quarter ago with handlers, averaging 18 weeks and testers about nine weeks contactor and spares about six weeks.

With so much investment going each of wafer fab equipment were enthused about the midterm growth for the semiconductor test and the need for greater inspection and metrology in support of new advanced packaging technologies.

Let me turn it over to Jeff to share third quarter results provide specifics about our fourth quarter guidance and describe our board's authorization for a share repurchase program.

Jeff.

Thanks Luis.

Our web site.

Now turning to the financial results <unk> again delivered strong revenue and profitability in the quarter Q3 revenue was $225 1 million, an increase of 49% compared to Q3 of 2020.

During the third quarter, two automotive segment customers each accounted for more than 10% of sales.

In the third quarter <unk> gross margin was 42, 3% and in line with our guidance.

Operating expenses were $49 5 million.

And lower than guidance due to some onetime credits and tight management of expenses.

Third quarter non-GAAP operating income was 22% of revenue and adjusted EBITDA was 21, 8%.

Return on invested capital in the third quarter was 51% well above our target ROIC of 30% or higher.

<unk> non-GAAP effective tax rate for Q3 was approximately 19%.

Higher than guidance, primarily due to lower income generated in the U S. Combined with higher income generated in Germany, which is subject to statutory tax rates higher than the U S.

Non-GAAP EPS for the second quarter was 70.

Bringing our nine months year to date, non-GAAP EPS to $2 48.

More than double our full year 2020 results and illustrates the earnings leverage in the business model.

Yes.

Now moving to the balance sheet.

The Q3 balance sheet reflects a net cash position with increased resources for accelerated debt reduction.

Investment in opportunities to expand our served markets and technology portfolio in line with our growth strategy.

And our newly authorized $70 million stock repurchase program to return capital to investors offset dilution from our equity plans and express confidence in <unk> future growth prospects and cash generation.

The ending cash balance for for the third quarter was $365 million, which is net of debt repayment totaling $101 million during the quarter.

The balance sheet reflects net cash of $245 million as total debt at the end of Q3 was reduced to approximately $120 million.

The term loan B outstanding balance at the end of Q3 was approximately $103 million.

And cash flow generation was solid again in Q3 with free cash flow at approximately 14% of revenue.

Sure.

Now moving to our Q4 outlook.

Entering the typical seasonally low Q4 <unk>.

<unk> business model is projected to deliver strong profitability on revenue between $182 million and $195 million.

Some customers have pushed new test capacity into 2022 due to shortage of wafers and lead frames impacting their semiconductor production.

We expect first quarter sales to be incrementally stronger based on current order momentum and assuming our customers successfully worked through their supply chain shortages.

Q4 gross margin is forecasted to be approximately 44% and as predicted we are seeing a moderation of automotive test handlers, improving product mix and solid cost reductions in the manufacturing of contactor Ricky.

Recurring revenue for Q4 is projected to be approximately 41% of total sales and approaching the 45% midterm target.

Q4 operating expenses are projected to be approximately $51 million and we're projecting Q4 interest expense to be approximately 900000.

We anticipate Q4 debt repayment to be in the 1 million to $7 million range based on cash forecasts, including the after anticipating potential share repurchases in Q4.

We expect Q4 adjusted EBITDA at the midpoint of guidance to be approximately 19%.

In the Q4, non non-GAAP tax rates approximately 14% at the midpoint of guidance.

The diluted share count for Q4 is expected to be approximately 49 5 million shares.

And 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 one key on your Touchtone telephone to withdraw your question press the pound key.

Our first question comes from Brian Chin with Stifel.

Yes.

Hi, there good afternoon nice results in a tough operating environment and thanks for letting us ask a few questions.

Maybe first just a quick one.

Jeffrey Louise how much of the <unk> decline is seasonality versus supply constraint, which you kind of reflect then that pushed to Q1 for some customers.

Yes, we know for sure it's not it's not.

Somewhat difficult to understand the full impact, but we know for sure is about $4 million that has been delayed out of Q4 into 2022.

Okay got it.

And I think you said incremental based on your backlog visibility.

Incremental sequential growth into Q1 can you put any sort of parameters around what youre seeing relative to backlog, thus far in terms of the 92.

Great.

Well I mean.

Speak to that incremental comment first Brian.

When we look at Q1 right.

Currently we are seeing current or odor order momentum that is that is increasing so let's say assuming that continues and customers successfully worked through the supply chain constraints.

Q1 could be 5% to 10% increase over Q4.

Got it.

Helpful.

And then I guess maybe.

Perhaps even more importantly in terms of the mix and sort of the progress youre, making on the gross margin front.

In terms of initiatives as well as sort of.

Yes, a more normalized next to some degree right maybe first can you.

Give us a sense of what mainly drove is driving about 170 basis points of sequential improvement in Q4, and then also kind of moving in the first half you allude to the tester demand potentially coming back handler.

Sort of normalizing lower.

Further improvement on the contactor is there are some price increases on the handlers a couple pieces I'm missing, but maybe think about how much of the gap you can if revenues Q1. This I missed around number out if its $200 million in Q1 relative to what.

So in terms of the expansion gross margin into Q4.

Couple of main areas here, one is the in sourcing of more contactor manufacturing in the Philippines.

We saw some great success in Q3 and increasing the gross margin. So we see that continuing and we continue to add more.

The other.

Of the automotive handler revenue in so and overall more favorable mix of products now, we're not where we need to be in the.

And the target model, but we're getting closer to it and we are seeing a favorable impact price increase on handlers, not 100% effective yet as we work through backlog and long term contracts with customers, but it has been effective to at least offset cost increases.

So as we look into <unk>.

2022.

As you mentioned, we do see a mix that has higher test revenue.

Continuing to grow contactor revenue and the gross margin there.

So we're modeling internally that 2022 is going to be from a gross margin perspective would be in the mid 40% range I would say if youre looking specifically at Q1.

Projection there would be maybe about a 50 basis point or so improvement over Q4 on gross margin.

Okay great.

Ill hop back in the queue for other folks alright. Thanks, Thanks, Brian.

Our next question comes from Craig Ellis with B Riley Securities.

Hey, guys. Thanks for taking the question and nice to see the gross margins moving back up again.

I wanted to start just by.

Asking a clarification question on revenue I think three months ago. One of the messages was that there was $14 million of handler sales stood at push from <unk> to <unk>. So as we look at the fourth quarter guidance and whats embedded.

One did did those revenues actually shipped in and is the $14 million included in the guidance that we're seeing today.

Yeah, just a correction on that Craig.

Q2 and put in.

Through Q3.

Alright.

It was out of Q3 and into future quarters, yet right do I have the period's running their shopper. Nonetheless, that's correct I missed and mixed up the quarters, yes, but your point is you didnt expect to recapture it all in.

This quarter.

Be recaptured <unk>, Okay got it got it okay. So so that's helpful.

Secondly, give.

Given everything that we've seen happening in the automotive supply chain.

Centered around.

Covid issues with.

With Asia.

Hi, Matt.

Manufacturing disruptions, Malaysia et cetera, what impact would that have on the third quarter for the company in.

To what extent is that also.

Impacting guidance.

Excluding the $4 million that you mentioned earlier.

That may or may not be related to that revenue stream.

Well, let me take that Craig.

Yes.

Youre right automotive customers have had some.

<unk> had supply chain shortages and it's embedded in its embedded as part of the numbers that Jeff quoted here, there's sort of a $4 million pushing out to next year as theyre, having dashboard there disruptions right there the predominant driver of that actually.

Yes, I mean, I think to the point of your question. That's about it I think that's that's the net of it.

And then I wanted to go back to gross margin. So it was great to see the increase in <unk>.

Recurring gross margin in the quarter and it sounds like.

Hey, Jeff since that's based on utilization increases and yields in the Philippines, but thats a structural gain and so the question is from that 52% bubble is there further upside you can achieve on that as volumes rise through the year assure mixed normally.

Is this and if so to what extent can can gross margins and recurring rise from where they are today.

Yes, I would I would.

Talk first about the contactor gross margin as you know all of the contactor revenue is considered recurring.

And we're going to exit.

2021, with about a 40% gross margin and contactor is expecting that to be about 45% second half of next year. So that'll have an impact on the overall recurring margin, but I think it's important to look at that element first and then of course on a higher base of revenue it'll it'll increase that.

Overall gross margin, but but not to the same extent that the contactor gross marginal growth.

Got it okay.

And then lastly.

Just looking at.

At the.

Backlog in some of the color you're providing very helpful. Jeff to get the color on the first quarter, but but beyond the first quarter any sense for.

What the contour of the year would look like are you getting the sense from your customers that.

And so we've reached this.

More normalized level in automotive for example that.

We could be back to an environment, where we see more normal seasonality or are there other things that.

Mike give us.

Different profile that youre, starting to hear whether it be from your test customers are handler customers et cetera.

Yes, let me take on this one and just feel free to add we are it's a little too early to comment on the balance of the year Craig we are.

Rolling up the plan for next year right now.

He can comment better on each of the visibility we have in the first half of the year because there is already a lot of dialogue with customers.

For production requirements in the first half and we do see a lot of dynamics around.

RF front end IC test.

Coming up again, and thus the demand profile for a tester business improving concurrently.

We see growth in the contactor business.

<unk> already discussed that we are progressing quarter on quarter, both both in terms of revenue as well as improvements in gross margin.

On the handler side.

What I think is happening is the the automotive segment has moderated down again.

Past the.

And then a plethora of other devices true, but those those are taking.

The headlines.

As far as seasonality I think we're back to seasonality we have been saying this I think for a couple of quarters now to expect seasonality to resume in the second half of this year and I think this is this is where we're at.

We are seeing a seasonally.

Before the typical slowdown in fourth quarter next year again, but we don't have that totally rolled up yet you.

To discuss.

So that first half is looking strong and the mix is shifting as we described.

Real helpful color Luis I'll jump back into the queue guys. Thank you.

Hmm.

Our next question comes from Tom <unk> with D. A Davidson.

Yes. Good afternoon. Thanks for the question.

Was hoping to get a little bit from you on your view of the five Geordie RF tester market in terms of whether or not you think that the build out over the next couple of quarters will be similar to what we saw a year ago and and then maybe beyond that where do you think we are in this multiyear build out of <unk>.

Hi, Tom Yes, Yes, I think I think you will actually we we saw.

Demand.

Ramp for task.

To support approximately if I am not mistaken it was approximately $250 million five.

<unk> phones at the end of 2020.

And then.

That ramp will happen quite late in the year.

Probably because of.

Pandemic concerns in the first half of 2020.

And then we.

We're looking at 2022 as another 250 million phones that are <unk> enabled.

So we expect them to build up to be very strong again.

More importantly, I would say we have had some design wins in the last.

And the last year and a half that we expect to generate incremental dollars for us next year. So yes, we're looking very optimistically for a strong.

RF front end IC ramp.

Okay great.

No we haven't.

The Philippines, our Philippines factory.

Is running full capacity, we haven't had any bumps since.

I think it was first half or even into the middle of last year when things were complicated in the Philippines.

We don't have many many suppliers in the Philippines is actually a fairly narrow supply chain for us so not a supply chain problem or factory like I said, it's fully operational.

And our customers in the Philippines are taking products. So right now totally transparent no issues out of the Philippines. Okay. That's great and then finally on the core I think.

Last quarter, you said it was a fairly small market for you today.

When do you think it becomes a meaningful piece of your business.

Yes, it's a very difficult to answer question, Tom we are.

We're essentially crawling into it.

Looking loss small numbers here, we're looking at close to $1 billion of revenue this year.

Probably a double or two if we're.

Really good maybe a little bit more than double that into next year. So we will continue to be a small revenue profile for the next couple of years for sure. Nevertheless.

It is a as I said on the prepared remark it is softer.

So it's essentially a 90 plus percent gross margin product sale.

Revenue will increase as not only as we succeed in demonstrating to customers, but succeeding in developing and delivering new capabilities.

Tend to move to a subscription model on the new capabilities next year.

And it will obviously augment the differentiation of our products and augment our recurring revenue stream, but I think from a top line perspective, it would still be.

Kind of single digit low to mid single digit for the next for the next two to three years, Okay, great well. Thank you for your time today.

Thanks, Paul.

Our next question comes from David Duley with Steelhead Securities.

Good afternoon, and thanks for taking my questions. Just a couple of housekeeping questions. I guess could you help us understand what you think the size of the contactor market is in <unk>.

2021, and then what you think the growth rate of the overall market is and then along that same topic maybe.

Tell us what your market share goals are currently for the next couple of years.

Okay. So.

Obviously the <unk>.

Market forecast information for 2021 is not out there yet but.

We're going to venture to say its around $8 million to $850 million.

For Cott.

Contactor market that we can address.

The market is growing.

Overall trend line looks like about a 7% CAGR from the last projections that I have seen in the contactor the contactor space.

We have been looking at this as I said in prior quarters more as an attachment rate story, what is the attachment rate and cost taxes. Unfortunately as.

As we discussed in the past the attachment rate has been calculated on a quarter to quarter basis, which.

We tend to have quite a bit of.

Quite a bit of volatility from the.

From the equipment sales.

So we took a look back and doing more of a weighted average.

It approximates, 229% attachment rate today and our goal over the mid term is to grow that to 50% that's our aspirational goal.

Okay, and then you mentioned that there was some ASP increases.

Some of your handler products, where are we on recognizing that benefit it usually takes some time.

You have to run through the current backlog usually before you can.

And recognize the price increases maybe just help me help us understand.

How much of that has been captured already and how much is to be captured.

Hey, Dave, Yes, Youre, absolutely right it rolls in really based on.

How much backlog is left in <unk>.

As new orders come in for customers, So as I said.

It's been effective it was effective in Q3 essentially to offset the costs.

We're going to see a small additional improvement in Q4 call. It 25 to 50 basis points and then as we enter into Q1 of next year.

More customers are subject to it so about 100 basis points from that point on.

Okay.

And then.

Sure.

Okay.

Just help us understand a little bit more I know other people have asked about this but my phone was kind of fading in and out so when we think about the gross margin progression next year.

From the Q4 level that you've guided to if these things happen like you said.

Yes, Dave I mean, I would phrase it as mid mid forties and that to me means that a 46% is achievable or.

Our mid term target is 48, right and Thats over then.

At a three year time horizon.

47, I think might be a bit aggressive, but I think based on what we see out of the contactor business, reducing costs, they're growing revenue and expectations for testers.

I think I am comfortable with us.

Yes.

6% being achievable in those strong.

Seasonally strong quarters.

Alright, thank you.

Thanks, Dave.

Our next question comes from Chris <unk> with Cowen.

Yeah.

EV and Adas or sort of how the margins are overall.

Within the business line.

And then I have a follow up.

Yeah.

Yes, let me take the first part of the question.

I'll, let the let Jeff address the second on the gross margin so.

It's not an exact science, but we the way we we tally.

We're measuring about 30% of our.

Our automotive handler demand.

Should be in the third quarter should be associated with a combination of battery management and a desk not breaking it down and the vast majority of that by the way is battery management Adas is a small portion.

But in aggregate about 30% close to one third of our handlers.

So Robert on the <unk>.

Was was about 40%.

Great. Thank you Matt.

Paul.

And just a last one before I hand it over.

Just in terms of your pricing.

Do you typically have that under contract and sort of the step wise function or how should we think about the recent price increases and going forward if cost continued to rise.

Well, we have gone to our customer our handler customers in.

So the issue to essentially a price increase now.

It's not applicable to some customers because there is there is long term contracts and pricing is set for that period of time.

And other customers.

<unk> already ordered and so we had a backlog of handlers, but once we.

Get through the backlog and new orders are placed.

100% across the handler orders, but it's a majority of them that.

New orders will be placed.

With that price increase and so that's why we see the offsetting impact I guess the increase in costs.

Incremental with each quarter and as I said as we get into Q1.

We're closer to the full effect of it perhaps a 100 basis points impact in the quarter.

Great. Thanks, that's all for me.

Yes.

Our next question comes from Christian Schwab with Craig Hallum.

Hey, guys. So most of my questions have been asked but just a quick one we have a lot of different fabs in particular legacy notes, adding capacity.

Where you historically have been very strong as.

As we kind of think about kind of the multiyear layout.

Wafers starts ramping in more materially at all of these new Fabs when would you expect that to impact your results.

It sounds like.

And next year, you kind of expect to return to normal seasonality.

Is any of that case.

Capable of offsetting typical seasonality on a go forward basis or am I thinking about that wrong.

Hi Christian.

It really is going to happen across time right. If you look.

You are talking trailing edge nodes, Texas instruments seems to be on the forefront of actually ramping.

Alien edge node capacity.

Largely for automotive and industrial applications.

I think it's public knowledge, they have new assembly test sites coming online in 2022 beginning of 2022.

But many of the others are trailing debt and looking at capacity additions that would start influencing 2023, and even late part of 2023. So.

I think there is not a singular point in time, its going to spread out over time as to whether thats going to Buck the trend on seasonality.

It's a gas honestly I don't think so I don't think so because I think that seasonality is going to be driven really by end market demand and consumer demand more so than the the capacity additions I think the capacity additions that are more of a statement of confidence.

The end market demand is increasing that the semiconductor proliferation is increasing.

For example, I was talking to an executive couple of days ago about the semiconductor content in vehicles and what they used to supply when this individual got into the company and what they supply today and it's just.

It's an incredible ramp of semi content in cars and I think there is a there's a very strong believer.

Not wrong as you can all read that that that is going to continue over the next few years. So so I think I think the trend is positive the seasonality is likely to be driven by end market demand and I don't think capacity will will necessarily buck.

Just my opinion.

Great.

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