Q3 2023 Cohu Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to <unk> third quarter 2023 financial results Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
I 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 would now like to hand, the conference over to your host today, Jeff Jones, Chief Financial Officer.
Good afternoon, and welcome to our conference call to discuss <unk> third quarter 2023 results in fourth quarter 2023 outlook.
I'm joined today by our President and CEO Luis Mueller.
A copy of our earnings release, you may access it from our website at <unk> dot com or by contacting <unk> Investor Relations.
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.
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 November 2nd 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.
Third quarter gross margin and profitability were again strong driven by higher than forecasted margin on casters and of course, he was resilient recurring business.
Q3, non-GAAP gross margin of 47, 1% continues to benefit from our focus on product differentiation, reducing cost and the greater contribution of recurring that was 51% of Q3 total revenue.
On October 2nd we announced the acquisition of equipped <unk> engineering, which we refer to as EQT with the goal to expand our tester interface products and recurring revenue that continues to deliver a resilient profitability through industry cycles.
Eqt's trailing 12 months revenue was approximately $20 million selling primarily semiconductor test contactor is two tier one idea and old customers.
The rationale for the acquisition is to broaden our product portfolio in mid to high power test contractors, better serving our automotive and industrial semiconductor customers.
EQT also enhances our complex machining capability and manufacturing expertise.
Expands engineering capacity and customer presence in southeast Asia.
This acquired business will contribute three months revenue to our fourth quarter guidance and it is forecast that should be accretive to Q4 adjusted EBITDA.
And support our plans to grow core user interface business, we're constructing a new 92000 square foot facility in the Philippines that is approximately 85% complete.
Targeted to be operational in the first half of 'twenty 'twenty four.
As we have been communicating it remains our strategy to expand our recurring revenue, which was $322 million over the last 12 months with a three year compound growth rate of 6% through Q3.
The surface portion of this revenue has delivered a year to date renewal rate of approximately 92% in 2023.
With customers increasingly relying on <unk> personnel to support the large active installed base of over 24600 systems across 108 customers.
In the third quarter, we landed three new applications for test contractors at <unk> tier one customers with an estimated potential six and a half million dollars revenue stream per year.
We also received orders from two new customers for D ichor to monitor equipment performance.
And our first order for AI inspection that is a new module in our software suite that provides artificial intelligence services to increase vision yield.
We continue to make progress with <unk>.
Adding new capabilities and expanding the software as a growth service model for the company.
This is due at the beginning of a long journey to grow software services, but one we view as a very attractive business staffs and inspection complexity requirements increase along with <unk> equipment installed base.
Switching over to go use systems business. It contributed 49% of third quarter revenue decreased <unk>, two points quarter over quarter, and reflecting weak demand across all markets.
Estimated peso utilization remained flat quarter over quarter at 73% with automotive and industrial down one point sequentially.
Utilization in the consumer segment was cheap.
A few points up in mobility increased by one point, all small changes, but more indicative of the inventory digestion coming through and then particularly in the smartphone market.
The computing segment showed a two point sequential utilization decline falling what has been a small increase in demand for test AI related gpus in prior quarters.
At the macroeconomic level with the ongoing Russia, Ukraine conflict and LD mass.
Israel conflict and wildly economy adapts to a higher interest rate interest rate environment, and continuing trade restrictions with China. It is not surprising that customers are taking a more cautious approach on capital spending it.
It is too soon to forecast market dynamics and revenue for 2024, but perhaps safer to remain cautious on near term revenue projections and assumed this market downturn will last longer than we originally expected in each of the first half of next year.
We're modeling incremental growth in the second half of 2024 in line with our customers' recent forecasts.
We remain optimistic on the long term prospects for the technology industry and in particular semiconductor test markets and as usual the longer it takes for a recovery inflection the steeper the upcycle ramp will be however.
However in the near term, we will continue to look for ways to lower quarterly expenses, while focusing on customer design wins and qualification of new products to deliver organic growth when market conditions improve.
We'll continue executing our strategy to grow recurring business broadened to use a diamond acts into automotive and industrial customers.
At your inspection and metrology portfolio and increased subscriptions to our emerging software business.
Now I'll turn it over to Jeff to provide further details on third quarter results and fourth quarter guidance.
Jeff.
Thanks, Luis 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.
Located on the Investor page of our website.
Now turning to the Q3 financial results <unk> delivered strong profitability on revenue of $158 million, which is slightly higher than our guidance.
During the third quarter two customers in the automotive market each accounted for more than 10% of sales.
Q3 gross margin was strong at 47, 1% about 110 basis points higher than guidance driven by co use resilient recurring business and differentiated products.
Operating expenses for Q3 were approximately $1 million lower than guidance at $49 million.
Third quarter non-GAAP operating income was 14, 7% of revenue and adjusted EBITDA was 16, 5%.
The non-GAAP effective tax rate for Q3 was approximately 28% and higher than guidance due to the projected concentration of annual pre tax income and higher tax rate jurisdictions and capitalized R&D.
non-GAAP EPS for the second quarter was 35 cents.
In summary, Q3 gross margin and adjusted EBITDA were strong exceeding the midterm financial targets at this level of revenue.
Moving to the balance sheet cash flow from operations in Q3 was $29 million in cash and investments grew to $388 million at the end of Q3 debt repayment in the third quarter totaled $1 million and we ended Q3 with net cash of $7 20 per share.
<unk> shares repurchased in Q3 totaled $4 7 million in Capex in Q3 was $4 million with approximately $3 million related to construction of the new Philippines facility to support long term growth prospects and our interface business.
Capex for 2023, including the new building is expected to remain at approximately $20 million.
Overall co who maintains a strong balance sheet to support debt reduction the share repurchase program and investment opportunities like EQT to expand our served markets and technology portfolio in line with our growth strategy.
The acquisition of EQT occurred in early Q4, and utilized approximately $48 million of cash.
Now moving to our Q4 outlook, we're guiding Q4 revenue to be in the range of $136 million, plus or minus $6 million, reflecting continued weakness across end markets and low test cell utilization at customers' production facilities.
Q4 gross margin is forecasted to be approximately 46%.
Other than the financial target model at this level of revenue.
Gross margin for full year 2023 is forecasted to be approximately 47% and in line with 2022 results. Despite approximately 20% lower year over year revenue.
The strong gross margin performance is due in large part to co Hughes 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 Q4 are projected to increase 1 million quarter over quarter to approximately $50 million due to the addition of EQT.
<unk> expenses are flat quarter over quarter.
We continue to exercise tight control over operating expenses and look for opportunities to lower spending going into next year without sacrificing critical new product investments and maintaining profitability, while navigating through the trough of this cycle.
We're projecting Q4 interest expense to be approximately $1 million and offset by interest income of approximately $2 million.
We expect Q4, adjusted EBITDA to be approximately 12% the.
The Q4 forecasted non-GAAP tax rate is approximately 26%.
The diluted share count for Q4 is expected to be approximately $48 1 million shares.
That concludes our prepared remarks, and now we'll open the call to questions.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Charles <unk> with Needham <unk> Company.
Charles Your line is now open.
Hello can you hear me, yes, we can hear you now.
Hi, good afternoon Luis NGF.
I just wanted to start with the first question on the queue.
Q4 guide.
About a quarter ago, you were expecting maybe flattish environment into Q4, but it seems like it's weakened a little bit and kind of walk us through what the puts and takes.
In terms of the Q4.
Any early indication about Q1 next year that'd be great. Thanks.
Hi, Charles this is Luis.
Yes, we in Q4 in terms of puts and takes we actually saw continued.
Caution by from our automotive and industrial customers, sorry in the third quarter going into Q4.
At the same time.
We see some of these customers are starting to push out some of the deliveries in some of the orders into 2024 as I said in my prepared remarks auto and industrial came down utilization came down about a point in the quarter.
I wouldn't be surprised if that doesn't.
Another point or a couple of points in the fourth quarter at.
At the same time, we saw a little bit of an opposite trend on the mobility side.
Where utilization has improved a point.
Quarter over quarter.
<unk> mobility was the only segment across the board then in absolute dollar terms, we saw an increase in orders on the third quarter.
Nevertheless, as you know <unk> business is much more indexed towards automotive and industrial analog semiconductor customers. So what we're seeing here is what youre seeing from our customers announcement as you had a few of the large analog semiconductor customers.
Guiding next quarter down we're seeing we're seeing the same behavior.
And quite honestly at this time, we're not going to be calling out.
Specificity to first quarter next year I think we're going to go we're going to go quarter on quarter here.
As we see this thing evolve and.
And looking for another improvement or significant improvement in mobility or other improvement turn on the automotive and industrial markets.
Thanks, maybe a follow up question I think you made a commentary.
You made a comment.
Untapped sorry utilization versus your.
Projected revenue levels.
Obviously utilization seems to be flattening out I mean overall.
From Q3 to Q4, but the revenues down a bit given some of the post take puts and takes so you just mentioned, but can you kind of help us understand how is there any correlation between what kind of tests or utilization, usually would indicate what kind of revenue level or such correlation doesn't exist.
We tend to see.
Past three additions when utilizations are above 80% at or above 80% and below that they tend to be more technology, driven or customers, winning a new device application or new socket to their end customers.
So again capacities capacity adds in the capital equipment side.
80% and above otherwise more technology driven on the recurring side.
It typically goes point for point.
Utilization dropped a point you could see recurrent drop a point or so.
Recurring is a lot more stable as we see utilization fluctuating just a couple of points up and down but as you pointed out at the end of Q3 utilization was flat over quarter over quarter from the end of Q2.
Thanks Louise.
Our next question comes from the line of Brian Chin with Stifel.
Yeah, Hi, Brian Chin at Stifel.
Thanks for letting me ask a few questions.
Maybe.
Let's start off with maybe financial model.
Maybe this is for you Jeff compared to prior periods. When revenue was around sort of this 100, fortyish plus or minus level.
I think your guidance suggest gross and operating margins, maybe 400 to 600 basis points higher.
<unk> cycle.
Firstly does this feel like trough revenue and secondly can you discuss the key changes in the model trough to trough that allow the company to better protect profitability in challenging market conditions.
Yes. It certainly does certainly does feel like a trough that as Louis said.
Don't have a lot of clarity on the first half of.
Of next year. So we're just kind of play in that.
Week by week here.
Yes, as you referenced Bryan we just go back to 2021.
With much.
Higher revenue, but gross margins were in the 40% range.
And so over that time, we've done.
A lot we've made a lot of improvements in reducing costs, primarily in the handler products as well as the contactor products.
We've had some price increases to cover some of the inflationary cost that we've incurred but again, we've done a lot to reduce product costs improve manufacturing efficiencies productivity things of that nature.
So now as I stated in my remarks revenue down approximately 20% year over year.
And we're holding a 47% gross margin which was essentially.
Essentially the same as last year so.
Margin has been very resilient as you know recurring revenue carries a higher gross margin and as Luis stated thats less susceptible to two.
The volatility of the cycle and.
And so that's obviously helpful as that becomes a higher percentage of our total revenue and Thats why its really a key part of our strategy as well to grow to grow the recurring revenue.
Alright, great. Thanks for the color and then maybe for Luis.
Follow up.
Is the <unk> revenue decline sort of equal parts auto and industrial and in the past you've talked about the composition of your auto revenue is being kind of equally distributed across EV Adas and traditional auto based on the incremental softness youre, saying can you distinguish which of those buckets are more impacted a resilient and does that give you any optimism.
Regarding other duration and magnitude of a slowdown in those markets.
Yes, so the start from the back here the distribution the distribution across.
Aid us in EV and everything else auto is it still stays about the same I think for about a third currently about a third on each one of those segments.
As far as the drop.
<unk> over quarter.
We saw we saw really a six.
Six point drop on the revenue associated with automotive and a four point drop on revenue associated with with industrial market. So.
In reality you look at this proportion of looking at the revenue size its more of a it's more more auto related than actually industrial related quarter over quarter Q2 to Q3.
As far as I think the other question is confidence on a go forward basis generally speaking.
We see many of our auto and industrial customers they tend to be the same customers by the way.
Investing significant capex in facility construction this year.
And we've been told the plan is and continues to be to tool up those facilities because.
Across the board the forecasts for semiconductor growth in the automotive market is for a 16% CAGR through 2020.
Six if I'm not mistaken and industrial is 9%. So certainly all of the forecast continues to be that both automotive and industrial are the highest growing semiconductor segments.
Japan on but the expectation is facility constructions coming online.
Totaling up with those facilities start at some point next year the question really.
The $100 million questions here as well.
Do we start seeing those orders in Q2 or do we start seeing them already at the late part of Q1 Thats still an open question.
Okay, great great. Thank you.
Our next question comes from the line of Krish Shankar with TD Cowen.
Okay.
Hi, This is Bob <unk> on for Chris.
Thanks for taking my questions. My first one is just in terms of the tests utilization I know you gave some color on the individual market segments and how those progress through the quarter, but just sort of looking ahead into the December quarter.
I'm just trying to think of how you would expect each end market to progress does that sort of across the board.
With the utilization probably dipping down or is there any segment.
That's been holding up a bit better.
So we don't typically forecast utilization Bob but.
Give you my sort of qualitative.
Perspective here, we have seen the.
Something I haven't mentioned in the prepared remarks, we've seen <unk> utilization picking up three points quarter over quarter from Q2 to Q3, and idms down one point and I think that correlates well with also by market with automotive and industrial down a point and mobility up one in consumer up two points.
I would venture to say that based on current order forecast.
<unk> mobility and consumer market will continue to trend up by the end of Q4 and that automotive and industrial may continue to trend down by the end of Q4, how that's kind of how does that kind of shape out from the 73% approximately 73% utilization we are today.
No I think there are two competing forces here, one is the automotive and industrial market pausing for a quarter or two and the other one is the mobility and consumer is starting to pick up some momentum as we start to see inventory levels flush out in those in that in those two segments.
Got it that's helpful and then just quickly on.
The acquisition.
In terms of the revenue profile I just wanted to make sure I heard you right did you say that was.
The business has been more geared towards the.
Industrial and automotive markets in terms of that $20 million.
Trailing 12 month revenue profile.
That is correct. The EQT EQT had a trailing 12 months revenue of approximately $20 million.
It's all recurring and it was more tailored towards the automotive and industrial market. They were doing a good job serving a few tier one IDM customers and OS apps in southeast Asia and for US It really adds to our portfolio, particularly in the mid to high power test contactor segments. So think.
About more in terms of EV and power management in a vehicle or in and out on our industrial application.
Okay, great. Thank you.
Yes.
Our next question comes from the line of Christian Schwab with Craig Hallum Capital.
Hey, great. Thanks for taking my question.
So the answer.
Answered I just have one last quarter, we talked about.
$30 million worth of handler orders that we're going to be pushed out.
That you thought were going to be accepted.
Obviously from your guidance.
The happening.
So can you give us an update of what you think is going on there. Please.
Well, we do have we.
We had about 100 systems that were sitting waiting on fasteners to be integrated that number has come down substantially now.
So what we see today is really a weaker demand in the automotive and industrial market going into going into the fourth quarter.
And we're kind of restating, what I said before but thats pretty much the status.
Okay.
So.
We've kind of satisfied all of that.
All of that in the period, Okay. So as we've been.
Okay.
Christian Christian just to clarify it's never zero right, but that number has come back to.
Our normalized level that we typically see on a quarter over quarter as we wait on fasteners and I'm, assuming some cases testers are waiting on handlers as well.
Okay. Okay.
Yes.
The only question.
Thank you.
Okay.
As a reminder, that is star one one to ask a question.
Our next question comes from the line of Craig Ellis with B Riley Securities.
Yes, thanks for taking the question.
Luis and Jeff I wanted to follow up on some of the inquiry just about.
The demand environment, but do it in a different way and maybe in a way that.
The shed some light on on the business a little bit longer term, even though I think visibility is slow so it's hard to drop the arc of what next year's revenues would look like so what I wanted to do that we used to see if you could just.
Give us a characterization of how customer engagements are growing for you across your different businesses.
Are they are they pointing the things that we view confidant that there's increased share of wallet Tam expansion.
Success for some of your newer more emerging product drivers who are.
In this environment are you finding that some of those avenues are closing down just help us understand what the customer engagement activity looks like please.
Yes.
The funny thing is when when markets are down is when the customer engagements usually go up and the demand on.
On engineering goes up.
We have.
<unk> had an email exchange just before this call about a customer that had done an acquisition into an into a space that they were not participating in and now talking about.
Qualification of one of our product lines to satisfy this new set of products that they're bringing to market. That's one example, we have a few engagements under diamondbacks tests or platform.
For particularly the analog P mix space, but.
As I commented.
Not too long ago actually it's very interesting to go through these qualifications and hear the.
Great performance and how much faster your test time is relative to the current incumbent and how wonderful it is but it's a little sad to hear.
Let's get back and when we have incremental capacity needs will start buying tester well that does that happens to be not now not this quarter. So we do have quite a few engagements under diamondbacks analogue <unk> side.
As you can imagine last fewer engagements on the handler side, just simply because of our <unk>.
Very dominant market share in the handler space, we we are already serving.
All of the large customers, we have quite a bit of activity on the contactor side they tend to be.
A longer list of smaller wins versus the typical capital equipment, where you really count the engagements on one hand, and they could mean 10 to $15 million to $20 million. So just sum up.
A lot of activity engineering is extremely busy and that's usually the case in a down market environment.
That's why.
As Jeff pointed out we will continue to look for ways to lower opex on a downturn, but we also don't want to cut back from those critical new product developments and customer engagements that those are very important to be in the right place at the right time when the market turns up in the demand picks up again.
That's really helpful Louise.
Next question I wanted to dig into is related to the EQT Gail So you might have mentioned it.
Pat.
Given that this is a 20.
$20 million trailing one year revenue company is it fair to think that you have baked in about $5 million into guidance and.
And the more longer term question is can you just walk us through some of the integration steps with this business and how long would it be before you could look for another tuck in like this to further bolster recurring.
Well I think we're ready to go we're looking for the next opportunity right now so.
We're we're ready.
There was another opportunity out there I think we could capitalize on that pretty quickly.
With respect to the revenue outlook, they're not immune to the downturn either so it's not a not a full run rate or $5 million that you mentioned to.
Its a number thats that's lower than that.
<unk>.
And then.
Sorry, I think I'm missing one of your one of your questions there.
Just wondering about some of the steps on integration of the Q2.
Yes.
We approach the approach on EQT is to really sort of maintain their operations sort of as is.
For the foreseeable future and we think we have opportunities more on the front end.
We also think we have some opportunities perhaps to move some of our qualifications new products into.
Into their manufacturing operation and gain some efficiencies.
Through there.
Their operating technology so.
Sure.
As opposed to the typical.
We're going to gain.
X million dollars of cost synergies, where we're thinking more on the sort of operations technology as well as.
Something on the on the revenue front, yes, I was just going to add on the revenue front, we do have.
A few products that are interesting to our customer base. So we're starting to dialogue to get qualifications going on some of the EQT product lines.
And how long with that call process to take us a quarter or two luis or is it longer shorter.
Realistically speaking.
Craig.
Give it three quarters.
I think a quarter or two a quarter two is when somebody is on an expedited mode in a ramp mode and they want to get something done quickly I think right now customers are.
Taking their time and till they're pressed for time, so I'm going to say three quarters.
Sure Okay.
And then the last one is just a little cleanup item.
That usually have Sean.
Slide that shows the recurring and systems mix in some of the other stats the gross margin for the two different businesses I didn't see it at this time can you just hit us with recurring in systems gross margin.
Sure no problem recurring gross margin in the quarter was 55% <unk> systems was 39%.
Alright, and Thats systems number I think is down a little bit from the prior quarter what was that.
It's down 200 basis points, yes, just a matter of mix and lower slower.
Factory utilization as well I mean, we get we got although we're largely outsourced manufacturing we still have.
Factories in Malaysia, Philippines, and Japan.
And so with less lower lower systems revenue, there's less absorption of overhead on the system side.
Yeah makes sense thanks, guys.
Thank you.
That concludes today's question and answer session I would like to turn the call back to Jeff Jones for closing remarks.
Yes.
I'd just like to say, thank you to everybody for joining today's call and we look forward to speaking with you soon.
Thanks and have a nice day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Yes.