Cohu Inc. Q1 2023 Earnings Call
[music].
Good day and thank you for standing by welcome to today's conference call to discuss <unk> first quarter financial results and second quarter outlook.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one one on your telephone.
You will then hear an automated message advising your hand just raised.
To withdraw your question. Please press star one one again.
Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your host today, Jeff Jones CFO . Please go ahead.
Geneva and welcome to our conference call to discuss <unk> first quarter 2023 results in second quarter 2023 outlook I'm joined today by our President and CEO Luis Mueller.
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.
He plays 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 management's 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 earnings release 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 may.
For 2023, and <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 use president and CEO Luis.
Good afternoon, and thanks for joining us.
I'll first discuss some of our thoughts and growing <unk> business aligning investments to key global trends.
Jeff will then review first quarter financial results and second quarter guidance before we open up for questions at the end.
We are pleased with first quarter profitability that reflects our focus on continuing improvements in operational performance.
In our recurring business that delivered $334 million revenue over the last 12 months.
<unk> recurring business provide stable revenue through industry cycles, allowing the company to deliver profitable results and cash flow to invest in new technologies and.
And products to generate growth three market upturns.
First quarter non-GAAP gross margin of 48, 2% incur.
<unk> increased 210 basis points year over year, and it's better than our target financial model at this revenue level.
<unk> recurring business contributed 43% of first quarter revenue at approximately 53% gross margin and recurring revenue grew at a three year CAGR of six 4% through Q1 2023.
Service is a key component of core he is recurring reading a sticky business as demonstrated by our greater than 87% annual renewal rate on service contracts.
So part of recurring co use test interface business has landed a series of new opportunities in the first quarter, helping expand our contactor penetration across automotive and industrial semiconductor customers.
We manufacture at approximately 81% of our contractors in Asia in the first quarter as we continue to transfer new designs each of our Philippines factory and work to establish the local supply chain.
With this we closed on a target to produce approximately 80% of contractors in Asia.
And going forward, we're planning for long term growth of the interface business and in support of those plans. We broke ground in January on the construction of a new 92000 square foot facility in the Philippines adjacent to our current factory.
The plan is to start production of this new site early next year and be fully operational by mid 2024.
We also continue working to expand the local supply chain to increase flexibility and quickly ramp production and support our customers' needs.
Also part of recurring our software business is developing additional analytic capabilities for predictive maintenance we.
We see a trend across many semiconductor customers to implement factory automation in our Dci core sorcery is key to enabling higher productivity of <unk> large installed base of handlers.
Switching over to <unk> systems business. It contributed 57% of first quarter revenue at approximately 45% gross margin, which is a 250 basis points improvement year over year as we continue to focus on selling differentiated products and work to offset cost pressures from me.
Inflation and supply chain constraints.
Now estimated test cell utilization was 77% at the end of Q1 down two points quarter over quarter.
Comedy on this utilization across market segments.
Automotive and industrial was sequentially down a couple of points in Q1, but remain the strongest segments for.
Mobility increased the points.
<unk> was up two points sequentially in.
And consumer remained flat.
First quarter systems revenue was notably stronger in automotive and industrial end markets that remain more resilient through this industry cycle.
And <unk> continues to benefit from automotive market direction to electric Drivetrains, along with the technology shift Tomorrow economist vehicles.
We are aligning our tester handler and interface product investments to gain greater participation of our customers' future capital expenditures in these markets.
In the first quarter, we received a multi unit $5 million order for Silicon carbide device test automation and inspection.
<unk> offers automation desk interface envision inspection for these high power devices, ensuring known good die traceability from wafer to device and tape supporting later integration and power modules.
We are discussing applicability of this product the N Y 32 W. We've our seagate or interface that other customers manufacturing wide band gap power dies.
Mobility revenue grew a few percentage points sequentially as we continue to make inroads into new applications and also benefited from two months revenue from the recently acquired MCT business.
Core to our strategy is the development of products that support test and inspection at wafer and die level that we expect to accelerate in the coming years.
Aligned to the expansion of AI and high performance computing as well as increasing Mems sensor technology.
Moving on <unk> is committed to responsible business practices and we recently published our 2022 sustainability report, which you can read in detail in our website at www Dot <unk> Dot com.
We made progress in use of electricity derived from renewable sources that increased to 26% last year.
The increase in recycling.
Maintain our stellar safety and ethics record and continued progress in employee gender and ethnic diversity, along with details about scope, one and chew greenhouse gas emissions.
Now discussing our view for the balance of this year.
We expect demand for the second half of 2023 to remain challenged by a weak economic outlook. There continues to put pressure on our semiconductor market recovery.
Spite these macroeconomic headwinds, we remain well positioned to deliver strong profitability and cash flows that allow for investments in new technologies and products.
We are focused on aligning our resources to major trends in industrial automation autonomous vehicles increased processing and sensing power.
The focus now is in growing the business and ensuring our product roadmaps are aligned to the secular growth market opportunities.
Let me now turn this presentation over to Jeff for further details on first quarter results and second quarter 2023 guidance Jeff.
Thanks Luis.
Before I walk through the Q1 results and Q2 guidance. Please note that my comments that follow I'll refer to non-GAAP figures information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures are included in the accompanying earnings release and Investor presentation, which are located on the Investor page.
Our web site.
Now turning to the Q1 financial results <unk> delivered strong profitability on revenue of $179 4 million, which is in line with the midpoint of our guidance range.
During the first quarter two customers in the automotive market each accounted for more than 10% of sales.
Q1 gross margin was strong at 48, 2% about 70 basis points higher than guidance driven by co. He was resilient recurring business and differentiated products.
Headwinds from cost increases for IC components used on our tester products had a minor impact on our Q1 gross margin of approximately 29 basis points.
We expect similar minor impacts to gross margin in future quarters as we work through the remaining inventory purchased in prior quarters at higher than normal costs.
Operating expenses for Q1 were in line with guidance at $52 3 million.
First quarter non-GAAP operating income was 19, 1% of revenue and adjusted EBITDA was 21, 1%.
The non-GAAP effective tax rate for Q1 was approximately 23% and higher than guidance due to projected concentration of annual pretax income and higher tax rate jurisdictions.
non-GAAP EPS for the first quarter was 56 cents.
In summary, Q1 gross margin and adjusted EBITDA were strong exceeding the midterm financial targets at this level of revenue.
Moving to the balance sheet cash and investments ended Q1 at $324 million.
Debt repayment totaled $35 3 million and we ended Q1 with a net cash position of approximately $280 million.
<unk> shares repurchased in Q1 totaled $3 5 million.
C T acquisition for $27 million in cash closed on January 30th.
Capex in Q1 was $5 1 million with approximately $2 million related to construction of the new Philippines facility mentioned by Louise to support long term growth prospects and our interface business.
Philippines building will drive another $7 million of Capex through the remainder of 2023.
Total capex for 2023, including the new building is expected to remain at approximately $20 million.
Cash flow from operations in Q1 was $17 million.
Overall co use balance sheet maintains a strong position to support debt reduction share repurchase program and investment opportunities to expand our served markets and technology portfolio in line with our growth strategy.
Now moving to our Q2 outlook, we're guiding Q2 revenue to be between $161 million and $173 million.
Q2, gross margin is forecasted to be approximately 47% better than the financial target model at this level of revenue.
With a three year compound annual growth rate of six 4% <unk> high margin and stable recurring business as resilience to profitability and provides consistent cash flows through the industry cycles.
Operating expenses for Q2 are projected to be approximately $52 million essentially flat quarter over quarter.
We're projecting Q2 interest expense to be approximately $1 million and offset by interest income of approximately $2 million.
We expect Q2 adjusted EBITDA at the midpoint of guidance to be approximately 18%.
Q2 forecasted non-GAAP tax rate is approximately 24% at the midpoint of guidance.
The diluted share count for Q2 is expected to be approximately $48 2 million shares.
That concludes our prepared remarks, and now we'll open the call to questions.
As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone and wait for your name to be announced.
Draw. Your question. Please press star one one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Craig Ellis with B Riley Securities.
But Craig Ellis I was wondering if you could provide any additional color on the back half of the year and specifically as we're looking towards the September quarter do you see sales.
Coming down on seasonality are growing at a lower base. Thank you.
Hi.
Yes, it's a good question, but I don't think anything has changed in our view since what we described about a quarter ago. So.
No there's really no change for the second half of the year. It's still the same St perspective, we talked about three months ago.
Okay. Thanks for that.
Our next question comes from the line of David Duley with Steelhead Securities.
Okay.
Hello, Thanks for taking my question.
I was wondering if you could elaborate a little bit more on the silicon carbide.
Opportunity that you talk or win that you talked about.
And I think you talked about a win on the previous conference call as well.
This new customer.
Or is it more business with current customers.
Hi, Dave.
It is more with the current that we have described a quarter ago a quarter ago, we talked about the design win the qualification might.
Might've been also the acceptance of the first couple of tools and now now it's more of the description of.
And initial volume ramp on the business.
Okay.
I think you mentioned it.
Yeah.
Inspection and handling and.
Your.
Basically trying to fare.
Figure out which are the known good die.
Is this a opt.
Opportunity, where you could expand your footprint of equipment to the customer with with other solutions or or would the opportunity here to take this solution that you sold to the initial customer to other customers.
Yes, it's more of the latter Dave we were.
What we're selling here is a piece of equipment and does.
It does the electrical task.
I'm sorry, it does the automation for the electrical test it provides the interface as well the contactor for.
Very high voltage and current test and it does.
<unk> inspection and sorting through it so that you have known good die is on the output side. So we're pretty much providing all we can.
<unk> provides.
For the for this types of applications and the opportunity forward is taking the same.
Two other customers in the market that do silicon carbide and looking to.
<unk> improved the quality of their known good die before doing the stacking into modules.
Sure.
Okay and then.
Switching topics you mentioned, how youre expanding capacity for test contactor.
Philippines.
Could you just elaborate a little bit more on where you've seen recent wins in.
And that business I think initially you had a lot of automotive wins I'm just curious if you've picked up.
Customers in other markets or is it continued to be.
In that initial market.
<unk>.
<unk>.
What is your success rate as far as attach rate goes at this point.
Yes, so couple of things going on first.
First of all the automotive market continues to grow.
Automotive revenue was up year over year I don't have it handy here, specifically automotive for contact centers, but our automotive business at large is up like 43% year over year in Q1.
And with that we are obviously manufacturing more and more context in automotive, where we get the greatest exposure. Additionally, we have.
We actually have won a serious of probe had opportunities in the first quarter design wins for probe pads two of those are in automotive and a third one is it's actually not it's Cindy.
More on the communications.
Segment of the market.
So we're basically now at a point that.
We need more manufacturing capacity, we need more space, we need more tools.
We need more suppliers and so we are.
Pushing pushing pushing to increase the output out of our Philippines operation.
But also pushing to increase the output and capability of our suppliers in the region.
That's what we need to go after now so we can we can enable further wins and business ramps.
Could you just remind us I don't see.
The number in the slides.
How big was the contactor business in calendar 2022.
You've talked about how it had a CAGR of about 6%.
Even though this is a super difficult year do you think that business grows for you in 'twenty three.
Hey, Dave last year that business.
Was about $130 million for coherent and yes, we do anticipate that growth this year and the target is ultimately to be 20% of the revenue target of $1 billion, so up to $200 million and so we anticipate that that business is still.
Grow.
<unk>.
So high single digit.
Right.
And just as a follow on I'm, sorry does the capacity you're putting in place in the Philippines now the new building and everything does it cover does it gets you to the $200 million annual run rate.
Yes between between the internal capacity in the supply chain.
That we're trying to develop in the region, yes. It does.
Thank you.
Okay.
Our next question comes from the line of Christian Schwab with Craig Hallum.
Hey, guys. This is Tyler on behalf of Christian Thanks for letting me ask a couple of questions.
So first I guess, maybe at gross margins.
Above model right now and I guess as we look into the back half of the year I was wondering.
Recurring revenue by definition should kind of remain at strong levels and if the second half as the same view as before we should see some directional improvement, although maybe modest should.
Should we expect the gross margins should.
Trend down a little bit from the 47% we got in Q2 or how should I think about them in the back half.
Yeah, Hey, Tyler it's Jeff.
I think the Street's got us in a pretty good spot for not only the revenue piece of it in the back half, but also gross margin.
Somewhere in the high 46 to low 47 sites call. It maybe an average of 47.
We're pretty comfortable in that range.
Alright Thats perfect.
And then I guess second question talked about automotive and industrial strength, continuing but in the quarter. If I heard you right Youre test utilization and auto and industrial was down a little bit.
The rest of the markets are up a little bit any any color or comment there is that just quarter to quarter fluctuations or anything to call out.
Yes, it was not totally it was not specific to automotive or industrial we said the peso utilization was down to 77%, we said auto and industrial combined was down a couple of points, but as you can see even in our revenue profile right. The.
Q1 revenue profiling industrial is down three points relative to Q4 last year.
Automotive is about the same it's up a point.
But I.
I think its normal fluctuation at this at this moment, we're liking Morris to see computing.
Computing being up a couple of points mobility up a point.
It's not an indicative of.
Of a market upturn in those segments, it's more of an indicative of stability right and hopefully here.
A bit of an improvement as we get into the second half.
Alright, Thats perfect clarification I appreciate that that's all for us thanks, guys.
Okay.
Our next question comes from Krish Shankar with Cowen.
Hi, This is Rob Mertens on for Chris Thanks for taking my questions.
Maybe just coming back to the automotive exposure that you have.
Just a little bit more color between the handler side and test products.
How those are playing out in the market.
And then also maybe if you just had a gauge on Haile.
Some of the main competitors are already sort of market share dynamics that are at play.
That business.
Sure. We don't have exact numbers to break it down for you by product I can tell you. We do have is and you can see from the data set here the highest exposure market exposure, we have in our presentation for the Q1 results.
Is in automotive, we have 22% of market exposure into automotive.
If you go down by products and just kind of tell you qualitatively.
Our handlers are.
Mostly our handlers in our contact centers.
Our exposure to automotive, we actually have a significant.
Leadership position in both handlers in context on the tester side.
We have room now to between 25% to 30% of our test to revenue is in our automotive obviously, we have the desire to add a lot more to our tester business in automotive and industrial when we're working on it.
But at this moment.
Further behind a teradyne and advantest in.
HPE automotive market.
Great. Thank you that's helpful and then just real quick.
How does the current lead times.
Hi.
Progress throughout the quarter I think last.
Quarter, you had mentioned maybe handlers for around 24 weeks testers maybe.
<unk> have that.
Is that sort of the same whereas that lead time has been brought in this quarter.
So lead times are generally the same handlers or maybe a couple of weeks shorter two weeks shorter than shorter lead times than we were a quarter ago. So were talking on the order of about 22 weeks for handlers, but task force contractors.
All about the same well, we got a little faster in context as well.
That improved it sort of the band narrowed down closer to a six weeks lead time.
But no dramatic change quarter on quarter on the lead time.
Great. Thank you that's all I had.
Our next question comes from the line of Quinn Bolton with Needham.
Hey, guys. This is Trevor on for Quinn, Thanks for letting me ask some questions.
To start.
When looking at the backlog for the second half has there been any shifts or cancellation.
Of that backlog within the quarter and can you speak about your visibility into the second half.
Yes to answer the first part of that.
No no cancellations shifts in the backlog.
Typically our visibility out six months and further it's not clear.
Same situation now so.
Good.
Visibility obviously too.
Q2 and decent.
Beyond that it's.
It's still foggy.
Yes, it's not different than it was.
One quarter ago through July .
And now maybe current through September same same kind of view, we have we have a pretty decent.
Backlog into Q3 already and orders booking now for Q3 shipments.
Like Jeff said anything beyond that it obviously much less of a backlog so far into fourth quarter of the year.
So that's going to become more of a reality as we approach the end of this quarter beginning next quarter.
Alright, Thank you and I believe you stated that mobility and PC was up in the quarter do you expect this trend to continue into the second half and any insight on these inventory levels would be helpful.
Yes, it's a fantastic question I don't think necessarily.
A big improvement in mobility over the next quarter.
I would expect mobility to have more of a traction more traction more market traction towards the end of the year.
Computing, Yes, I do I do think computing is going to be.
One of them on a positive trend, particularly cloud on the second half of this year.
Awesome, good to hear and one more if I may.
Are you having more conversations recently with silicon carbide customers than you may have expected two quarters ago. When you first mentioned this opportunity.
And are you able to quantify as a percentage of revenue what silicon carbide could be in 'twenty three.
Yes. So the first question certainly ask from the second as well, but when we talk about silicon carbide revenue. We think this is going to be something on the order of two 3% of our total revenue on an annual basis.
Awesome. Thanks, guys.
As a reminder to ask a question. Please press star one one.
Our next question comes from Brian Chin with Stifel.
Hi, there. Thanks, thanks for letting us ask ask a question.
Maybe Luis just to provide a little bit more commentary and I know theres been some questions here about <unk>.
Sustainability, our visibility into the second half.
I know that pattern typically.
In a steady state year might be something like.
Higher revenues towards the mid part of the year <unk>, and then usually seasonally softer sort of at the beginning and end of the year something like that.
In terms of.
As you try to read.
Your order book and sort of.
Other indications on the end markets, particularly for Q4 are you.
Whats sort of the main ingredient here is sustainability.
Also in industrial because I know you had earlier last call talked about moderation.
Parts of this year and that or is it maybe looking to see if there'll be some pickup in businesses that have been pretty pretty depressed right coming into the year, which includes mobility consumer.
Kind of how else would you maybe sort of characterize how youre thinking about second half.
So Brian I would feel a lot more comfortable talking about fourth quarter a quarter from now as you can appreciate because we just based on our equipment lead time right.
Have very good visibility a quarter out fairly decent two quarters out and then and then it drops off from there.
But.
My Best guess right now is at the end of the year.
Would be running about flat to potentially up sequentially from Q3.
And why do I say that I think the automotive and industrial already moderated.
And now the real question is at what point computing and mobility starts recovering as I mentioned, a second ago I think computing, particularly cloud comes in first.
Well ability becomes the real big question mobility is extremely depressed right now it's sort of at the bottom of the barrel.
That is generally an indicative that a quarter or two from now it will be picking up and we're picking up some steam.
Now does that mean Q4 does that mean Q1 next year.
A little difficult to answer right now would appreciate one more quarter to have to have more clarity on the answer to that so I think.
This year, we may not see your typical seasonal pattern. It may be one of those atypical years again and where.
As I said, we usually see or you said, usually we see Q4 and Q1 is a seasonally low on this cycle, we probably going to see one of those two quarters is a seasonally high.
Then going up from there.
Each one of them exactly I don't know at the moment.
Okay that's interesting.
This can be wrong, you can correct me, but in the past that sometimes thought of of 80, sometimes bleeding.
Test handlers by say a quarter or maybe maybe a little bit more and obviously one of your peers seem pretty strong auto industrial business into their third quarter.
This year at least and so that relationship is playing a part in this a little bit.
Yes, yes, I think yes, absolutely it is and Thats playing a part into all of that we're doing right now.
Being able to you too.
Run a business that.
Very healthily profitable and delivering the cash flows that we need to invest in new products. The question becomes is.
Some of these markets that are pretty depressed when do they start turning up right and I think I think we're going to start some movement in the second half of the year. The question is what's the magnitude of it. So we could we could very well exit year accelerating.
Question, Mark revenue or orders right.
Yeah, Okay, and then one last question maybe for both Jeff and you Luis but.
Going back to sort of the statements on expanding capacity strategic expansion capacity in the Philippines.
I guess one it made good.
Gross margin improvements in that business I think it's probably towards the mid to upper <unk> at this point.
How should that continue to trend as you saw.
To that next year at some point.
Start to build that footprint.
And then eventually produce out of it how should gross margins in that segment trends and also yes.
Going back to the comments you made about some wins that youre seeing in that business is that.
Is that sort of early indications of the type of filling that youll be able to do out of that facility.
Once it's ready.
So I guess I'll take the first part of it on the gross margin and you are right that business is operating right around mid forties, and we've modeled them to be in the high <unk> and so adding another two to 300 basis points from where they currently are today, we think we can do that through.
I mean, obviously expanding the operation.
Increasing productivity and cost efficiencies.
And so the second part of your question right.
What I'm, what I mentioned earlier.
It was Dave's question.
Is the design wins that we had in Q1 in that business. They were actually all probe heads.
And at this moment probe heads are not something we're doing in the Philippines. So we.
We're transferring all of our contacts or the bulk of our contactor manufacturing to the Philippines. In fact, we already did were over 80% manufacturing there now.
These these probe heads are.
Are essentially products that are designed and steel manufacturer in the U S or in Europe , depending if it's a power application or more.
More of a high signal speed or RF application, we will need to find a path to get those to the Philippines as well, but that's not where we are so the design wins at the moment, our U S European based product manufacturing.
Okay, great. Thank you.
Yeah.
That concludes today's question and answer session I would like to turn the call back to Jeff Jones for closing remarks.
Thank you Liz and before we sign off I'd like to mention that we'll be attending a number of investor conferences in person.
During the second quarter.
I'm going to list them here, It's B Riley conference in Los Angeles on Thursday May 25th TD Cowen Conference in New York City on Wednesday May 31.
Stifel Conference in Boston on Tuesday June six.
Baird Conference in New York City.
<unk> and the CEO summit in San Francisco on Wednesday July 12.
So if you plan to attend one or more of these conferences.
I'd like to meet with you and so.
So please reach out to your respective analysts or conference contact to schedule a meeting.
Again, thank you for today's call and look forward to speaking with you soon.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.