Q2 2023 Cohu Inc Earnings Call
Good day, and thank you for standing by.
Welcome to <unk> second quarter 2023 financial results Conference call.
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I would now like to hand, the conference over to your Speaker today, Jeff Jones, Senior Vice President and Chief Financial Officer.
Please go ahead.
And welcome to our conference call to discuss <unk> second quarter, 2023 results and third quarter 2023 outlook I'm.
I'm joined today by our President and CEO Luis Mueller.
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 replays of this call will be available via the same page after the call concludes.
Now to the Safe Harbor during today's call, we will make forward looking statements, reflecting managements current expectations concerning <unk> future business.
These statements are based on current information that we have assessed but which by its nature is subject to rapid and even abrupt changes.
We encourage you to review the forward looking statements section of the slide presentation and the 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 August 3rd 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 morning, and thanks for joining us.
Q2, non-GAAP gross margin of 47, 8% increased 130 basis points year over year and is better than our target financial model at this revenue level.
Our recurring business achieved a three year compound annual growth rate of 7% through Q2.
And it is the key driver of course use new baseline profitability through industry cycles.
As communicated last quarter.
We're expanding our infrastructure in the Philippines to support growth in our interface business at.
At the end of second quarter, we were approximately 60% through construction of a new 92000 square foot facility will become operational in the first half of 'twenty 'twenty four.
We also continue working to expand the local supply chain to increase flexibility and quickly ramp production in support of customers' needs.
In the second quarter, we received a first Gi core software order from a European IDM for monitoring performance of co Hughes third handlers.
Although we're in early stages, we estimate the business potential at approximately $1 $3 million a year in future software subscription sales at this customer.
We had several design wins of our interface products, both contractors and probe cards.
Driven by our products RF performance and final test.
Switching over to <unk> systems business.
It contributed 52% of second quarter revenue at approximately 41% gross margin.
As expected automotive and industrial continue to be <unk> main market segments with combined system revenue of 31% of the Q2 total.
Other markets remained below historical levels with mobility, particularly weak this year.
When market conditions soften as it is currently the case with focus on expanding our product portfolio and winning new customer applications positioning the company to deliver revenue growth in the midterm.
Aligned to this approach there was an important win in the second quarter at a leading all set in Korea.
This business is for outsource testing from a European semiconductor manufacturer. This.
This is a high value target, we have been working with to expand use of <unk> X platform in analog IC test.
Finally, we had a couple of distinct design wins for the handler group during the second quarter.
We broke in at a large Taiwanese foundry customer with a thermal handler for Hyperscale and device test and this was a first for <unk> and creates an opportunity to serve a much broader customer base and high performance computing, including those developing their own processes.
Then there was a handler design win in the high power semiconductor market.
Adding another customer to a new expansion in this segment.
All of these are great product validation and give us confidence for 2020 for revenue growth.
But despite improving demand for thermal handlers for high performance computing.
We saw a reduction in customers' utilization this past June driven by soft conditions affecting all other market segments.
Estimated desktop utilization is down four points quarter over quarter, ending Q2 at approximately 73%.
Several customers pause system orders originally plan in the second half of June delaying capacity expansion to the latter part of the year and into 2024.
Continue mobility weakness and recent order delays in automotive and industrial segments have extended this downturn into Q3, resulting in a lower revenue guidance.
However.
And order forecast is projected to grow sequentially again in the third quarter.
In the near term, we will continue to tightly control expenses, while focusing on winning new customer applications.
We'll continue executing our strategy to grow recurring business.
To use a dime on accident, your automotive and industrial customers.
At your inspection and metrology portfolio and increased subscriptions to our emerging software business.
I want to stress that we are committed to expanding <unk> recurring business that is key to profitability through industry cycles.
Let me now turn this presentation over to Jeff for further details on our second quarter results.
And third quarter guidance.
Jeff Thanks, Luis before I walk through the Q2 results and Q3 guidance. Please note that my comments that follow I'll refer to non-GAAP figures and.
Information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures are included in the accompanying earnings release and Investor presentation, which are located on the investor page of our website.
Turning to the Q2 financial results call you delivered strong profitability on revenue of $168 9 million, which is slightly higher than the midpoint of our guidance range.
During the second quarter two customers in the automotive market each accounted for more than 10% of sales.
Q2 gross margin was strong at 47, 8% about 80 basis points higher than guidance driven by co use resilient recurring business and differentiated products.
Operating expenses for Q2 were approximately $1 million lower than guidance at $58 million second quarter non-GAAP operating income was 17, 7% of revenue and.
And adjusted EBITDA was 19, 7%.
The non-GAAP effective tax rate for Q2 was approximately 27%.
Higher than guidance due to the projected concentration of annual pre tax income and higher tax rate jurisdictions.
non-GAAP EPS for the second quarter was 48.
In summary, Q2 gross margin and adjusted EBITDA were strong.
<unk> in the midterm financial targets at this level of revenue.
Moving to the balance sheet cash flow from operations in Q2 was strong at $53 million in cash and investments grew to $372 million at the end of the quarter that.
Debt repayment in the second quarter totaled $1 5 million and we ended Q2 with net cash per share of approximately $7.
<unk> shares repurchased in Q2 totaled $2 7 million.
Capex in the quarter was $3 1 million with approximately $2 million related to construction of the new Philippines facility to support long term growth prospects and our interface business.
Total capex for 2023, including the new building is expected to remain at approximately $20 million.
And overall <unk> balance sheet maintains a strong position to support debt reduction this year.
Share repurchase program and investment opportunities to expand our served markets and technology portfolio in line with our growth strategy.
Now moving to our Q3 outlook.
We're guiding Q3 revenue to be approximately $150 million, reflecting the recent weakness across our end markets and lower test cell utilization at customers' production facilities.
Q3 gross margin is forecasted to be approximately 46%.
Better than the financial target model at this level of revenue due in part to co. He is differentiated products and our stable high margin recurring business, which adds resilience to profitability and provides consistent cash flow through industry cycles.
Operating expenses for Q3 are projected to decrease quarter over quarter to approximately $50 million as we continued to exercise tight control over opex, while navigating through the trough of this cycle.
We are projecting Q3 interest expense to be approximately $1 million and offset by interest income of approximately $2 million.
We expect Q3, adjusted EBITDA to be approximately 15%.
And the Q3 forecasted non-GAAP tax rate is approximately 26%.
The diluted share count for Q3 is expected to be approximately $48 4 million shares.
And while we're not guiding full year the expectation is that we're passing the trough of this industry cycle.
And this is supported by the current order forecast that is projected to grow sequentially in the third quarter.
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 star one on your Touchtone telephone.
Draw. Your question. Please press star one again.
Our first question comes from the line of Brian Chin with Stifel.
Hi, there can you hear me.
Yes.
Great Oh, I'm, sorry, I got cut off there.
Hi, good morning, Thanks for letting us ask a few questions maybe to start off with.
Luis what I guess in the past 60 days or 45 days can you be more descriptive on sort of what changed in terms of deliveries it.
It sounds like it's mainly towards sort of auto industrial and Todd and maybe what the utilization change, which seems to be I guess, mainly driven by IBM and given the assets already we're kind of operating at lower levels. So can you maybe descriptive about kind of what you've seen there.
And then reconcile that with sort of the.
I guess the positive sequential order.
The trend that youre seeing because that seems to be kind of counterintuitive relative to the sequential revenue guide down.
And also what that means in terms of sort of duration.
This sort of pause in business too.
Sure.
Okay.
There are several questions there Brian but.
What we did see was actually predominantly in the auto and industrial space and as you know those <unk>.
Generally the same customers for us.
They basically hit the pause button on on orders in in June and started pushing some things out to.
Later in the year talking about.
Restarting to ramp again latter part of this year beginning of next year and this is to the tune of about $30 million.
They've got pushed down down the line here by about six months.
Concurrently with that and as I commented in the prepared remarks here.
Notice that we ended up with a lot of handlers. We've got about 100 handlers right now that are.
Awaiting testers to be installed.
Probably most of it through the third quarter.
And with that utilization came down.
About four points at the end of June to 73%.
That's just sort of at the level. We saw at the end of June I think as these handlers start receiving castro's getting installed in the third quarter that utilization is likely to start climbing again.
So.
Concurrent with that we're seeing also in.
And order forecast that starts picking up in the third quarter.
Which leads us to believe basically that we're passing the.
We're passing the trough of the cycle.
Okay, and then maybe.
I would add on that again, the order increase youre seeing.
Our book to Bill above one for the entire business or maybe it's specific statements. So maybe on a segment basis.
Are you seeing this trend in auto industrial, but how about also wireless and some of these markets have been soft.
Sure.
It's predominantly auto industrial Brian we continue to see the same softness in the mobility space that we have been talking about I don't necessarily see that changing of course here in the third quarter. So it's more of the auto and industrial.
That's the segment that had orders pushed out and a softness at the end of the second quarter and Thats. The same thats. The same segment that seems to be turning around the corner here.
Third quarter from an order perspective.
Okay got it got it and it would be.
Lastly, I think I heard in the prepared remarks, maybe a comment about confidence on calendar 'twenty for growth I guess, what are some of the components of that in terms of market.
And recovery as well as maybe any initiatives you have line of sight to in terms of.
Sam expansion market share gain et cetera, and any of the product areas.
Yes, so from a starting from a market standpoint.
The some of the orders that we're talking about in the third quarter actually four deliveries already planned in Q1 of next year.
At least a couple of these are.
Fair fairly sizable actually in and given an indication that there is a turn starting to the tides come in about.
One of them in particular is in the industrial space more specific and the other one is in the automotive.
From an Ethernet.
What we can't control standpoint.
We have we.
We have three three main activities on tests or design wins that we are in the final innings.
Of the game here in the second half of this year, we expect to convert those customers to our Diamond next tester platform.
We start getting orders.
Probably late this year early next year, I mean, it's really going to depend on the.
Timing of the ramp up their particular devices that we're getting the system qualified for but that's.
That's what we have more of a line of sight from an equipment standpoint.
Okay, great. Thank you.
Our next question comes from the line of Craig Ellis with B Riley.
Yes, thanks for taking the question Louise I'll start maybe picking up on some of Brian's question, but asked a little bit differently. So.
We look at the mix of order activity.
And this is no surprise, it's been playing out I think year to date mobility has been very weak given all the pressure on smartphone sales consumers pretty low compute slow, but there was some very positive commentary on hyperscale activity.
Uh huh.
How would those dynamics.
Expect to normalize so if we had a more normal demand environment mixture when would the business starting to see order improvement.
And what would be some of the early indicators that the customers are moving back to more normal.
Utilization levels Senate equipment order rates for <unk>.
Sure.
Well.
As I said, we do expect third quarter.
Orders to improve relative to Q2, right. So I'm not going to say that's necessarily at normal levels.
But we do expect a turning of the quarter on bookings already.
At this quarter.
From a normalization level.
Our automotive is going to start picking up automotive and industrial are going to start picking up to normal levels in Q1 of next year.
Ability quite frankly, I don't know.
<unk>.
We keep waiting for the signs of improvement I think I've seen a couple of our customers put out earnings release here in the last 24 48 hours that are a little bit more encouraging we haven't really seen ourselves yet that forecast that demand forecast, so I'm going to hold my perhaps should that computing.
Computing as you said I mean computing on a sequential basis Q2 orders were already.
About 30% higher than first quarter. So it is lost MAU numbers in computing is a smaller segment for us, but nevertheless, the data center Hyperscale.
<unk> is starting to get some momentum.
Honestly I think.
A return to normality requires both automotive and industrial.
First and foremost.
And not just orders, but shipments, which I think it recovers in the first half sorry in the first quarter of next year.
And then I'll return with mobility.
Which is.
Yet at this point.
Something that is a little hard to pin down we expect late this year early next year.
At what magnitude question Mark I don't know the answer to that question on the mobility side.
Yes.
That's helpful. Thank you and then.
Turning to our comments that you made on the Philippines manufacturing expansion and that facility's ability to go live next year can you just provide some more color on what that means for the company its ability.
To meet upside demand.
What.
Expansion will mean from a cost standpoint, and therefore.
Our gross margin standpoint from what most of our already quite strong in the business.
Yes, I'll start on the first half and the first half of your question, let Jeff step and you talk about the gross margin impact.
That new facility is going to give us an opportunity to increase output on the interface business by about 50% so you'd add.
Ads.
It adds about $65 million of.
The incremental revenue opportunity out of that factory.
And with respect to gross margin so that.
Increase in volume helped us leverage better some of the manufacturing.
Fixed costs that we have that business at the moment is running roughly in the 44% to 45% gross margin in the model, we have them closer to $47 48%.
Which is which is achievable as we.
Continue to put all the pieces together here.
And add capacity and continued to leverage those costs.
That's helpful and then if I could just sneak in one more going back into the queue guys.
Luis I was hoping you and and maybe Jeff since this is.
Longer term question dealing with just growing the business, but also.
Focusing back on the mid term target.
She mentioned.
Ed.
We've got the seeds of current visible and order activity.
Get that.
For the first time in years, it's growing at a double digit double digit rate the semiconductor industry part of it is growing at a double digit rate.
Uhm I happened to be in Asia. This week actually making this call from an.
For Kennedy to visit five of our customers in the space.
<unk>.
Pretty much all of them.
Doubling their footprint in test Assembly and test and I saw it got to see actually some of the factors being built that are coming up into production first and second half of next year. The opinion the customer <unk> <unk> <unk> <unk>. So.
The opportunity in the automotive industrial markets is just tremendous and I think that ramp.
Is happening next year.
Probably for the foreseeable few years as Warren electric and a desk capable vehicles come come to market.
The the computing space, we see we see the advent of a I M E. I T. As in data Center processors, we you're seeing a little bit of that preamp there'll be a smaller market for us.
And over the long haul that is gonna drive a significant number of edge computing and communication chips that will also benefit the business, but in a different sort of in a different dynamic than the automotive and industrial so.
If you look if you look at all that put together.
<unk> business is pretty solid was solid grow forehead, the interface business Similarly, particularly because of the market you are more of an industrial market.
We're working pretty hard to broaden the penetration of our interface business into high performance digital task physically more computing.
At the same time, we're working really hard to broaden the penetration of our <unk> business into analogue power semiconductor test again more leveraged Schwartz automotive and industrial applications. You said you just wanted the customers that I mentioned earlier on an earlier call. We have some line of sight business wins.
For the second half of the year, and then sort of enjoy enjoy the whatever that customers demand, it's gonna be in 2024 and beyond so I'm.
Really confident on that the revenue grow fastback.
Obviously, we're really confident on the gross margin aspect, because we're basically there or better than model with him at the moment.
So you know the way I see it as.
Passing through the trough of the industry cycle, delivering 48 cents a V. P S and the second floor and looking ahead for growing with the market and a few design wins on the on.
On the test your site and the interface side, which is what we're focusing on.
Thanks.
Our next question comes from the line of <unk>.
T D Cowan.
Hi, Thanks for taking my question <unk>, you mentioned that the September quarter weaknesses auto industrial, but some of your <unk> pretty strong I'm just curious.
<unk> your customer exposure for your auto handle.
Can you give an update on what's happening on the other hand, the mortgage deal for you and then at a follow up.
So maybe let let me step in on that crash.
You know, it's hard for you to pick an auto customer or industrial customer that we're not selling handlers chew. So that's <unk>.
I can't be specific to us, but one interesting observation I dunno, if she picked it up on.
On an answer that I gave a minute ago. We have about 100 handlers that are waiting on test food deliveries to to get installed.
So I I think that's one element of the speed bump here, we gotta get these.
<unk>, which are not from <unk> in this case actually it's from from some of our customers competitors.
To hit the production floor. So we can put these handlers into production in.
Frankly, I think that that has been one of the elements that caused the your order paws because these customers can't take more handlers until they can get delivery of the assessors.
Got it got it that's really helpful. So the.
Handle the mortgage shed is still pretty robust.
Yes, <unk> absolutely robust it's very solid.
Got it and then just like just another question.
Is the orders of growing in September is it fair to zoom of December revenue should be sequentially better than September no longer soon but if you look into next year.
Are the main puts and takes on gross margins till the fact that if you have more mobility test equipment.
<unk> gross margins then auto Handless is it as simple as that or the other you know.
Does that does have an influence krish the more a T business, we have yes next.
Improves a bit so so definitely that is a benefit as we've talked before.
R handler business gross margins have expanded quite nicely over the last four to six quarters.
But yeah definitely with a with a girl from the tester business, yes, the overall mix improves in the margin.
Would expand as well.
And then just a question of verification on December revenue does it <unk>, but the order book growing in September gives you comfort on December revenue.
Well the way we see it now is Luis had said sequential increase and orders Q3 versus Q too.
Think that translates into a sequential increase in revenue, but it. It is early for us to turn down a number.
Not a.
Substantial increase but it would we at this point think it is incremental but again difficult to pin down a number.
As a reminder, that is star one one to ask a question.
Our next question comes from Charles She Needham and company.
Hi, Thank you for letting me ask maybe maybe just one question <unk> <unk> what is the current visibility into the <unk> last thing to kill three yeah into the into two four given <unk> today.
Charles We don't we don't try to forecast the socialization. So it's always a <unk>.
<unk>.
Mirror matrix, it's what we measure.
But when we dug in a little bit more to understand what are the reasons on that is we recognize we ended up heavy.
It was actually 99 handlers are close to 100 handlers that we're sitting.
Uhm sitting waiting for test delivery. So here it becomes more of a question of those.
Those testers really get delivered and we do count systems that are waiting to be installed actually it's part of utilization metrics. So.
So if we do get those those testers deliver on the third quarter and notwithstanding anything else happening in the market I would expect that sterilization to climb again third quarter, but like I said, we don't we don't typically try to forecast desautels issue.
Thank you Louis <unk> provide a little bit color on your design Wayne with a hyperscaler boundary cause I talk to you a test or something more geared towards analog intensive applications Hyperscaler My my my assumptions.
<unk> <unk> <unk> <unk>.
I'll be patient so almost.
I almost feel like I guess would have been been passed that kind of market data habits design. Wang can you correct any of the thoughts any other things like that wrong.
And what color on this discipline yeah. Thank you yeah. It's Charles everything you said is correct, except the very beginning this this was a handler design with not a tester.
From us.
Thank you.
That concludes today's question and answer session I'd like to turn the call back to check Jones for closing remarks.
Thank you and before we sign off I'd, just like to mention that will be attending three investor conferences during the third quarter and they are the need them virtual conference on Tuesday August 22nd.
Jeffrey Conference in Chicago on Tuesday August 29th.
And cities Global Tech Conference in New York on Friday September 8th So if you plan to attend one or more of these conferences would like to meet with us.
Please reach out to your respective analyst or conference contact.
To schedule a meeting.
Thank you for joining today's call and we look forward to speaking with you soon.
Have a nice day.
This concludes today's conference call.
Thank you for participating you may now disconnect.
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