Q4 2023 Cohu Inc Earnings Call
Operator: Hello and welcome to the Cohu Inc. 4th Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
Hello, and welcome to the coach Inc. Fourth quarter 2023 financial results Conference call. At this time, all participants are in a listen only mode.
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand has been raised.
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Jeffrey D. Jones: To ask your question, please press star 1 1 again, be advised that today's conference is being, It is now my pleasure to introduce Chief Financial Officer Jeff Jones. Good afternoon, and welcome to our conference call to discuss Cohu's fourth quarter 2023 results and first quarter 2024 outlook. I'm joined today by our president and CEO, Luis Mller.
It is now my pleasure to introduce <unk>, Chief Financial Officer, Jeff Jones.
Good afternoon, and welcome to our conference call to discuss co Hughes fourth quarter 2023 results and first quarter 2024 outlook I'm joined today by our President and CEO Luis Mueller.
Jeffrey D. Jones: If you need a copy of our earnings release, you may access it from our website at Cohu.com or by contacting Cohu Investor Relations. There is also a slide presentation in conjunction with today's call that may be accessed on Cohu's website in the investor relations section. Replays of this call will be available on the same page after the call concludes. Now, to the safe harbor.
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.
Jeffrey D. Jones: During today's call, we will make forward-looking statements reflecting management's current expectations concerning Cohu's 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 statement section of the slide presentation and the earnings release, as well as Cohu's filings with the SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, February 15, 2024, and Cohu 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 Mller, Cohu's president and CEO. Hi, and good afternoon.
Now to the Safe Harbor during today's call, we will make forward looking statements, reflecting management's 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.
Comment speak only as of today February 15, 2024, 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.
Hi, and good afternoon.
Luis A. Mller: Fourth quarter results were in line or better than guidance, with a non-GAAP gross margin of 48.5% and EPS of 23 cents. Fiscal 2023 non-GAAP gross margins set a new Cohu record at approximately 48%, and adjusted EBITDA was approximately 18% of revenue. Despite softening market conditions, Cohu was able to deliver strong profitability and full-year non-gap EPS of $1.62 per share. On October 2, we announced the acquisition of EquipTest Engineering, which we refer to as EQT, with the goal to expand our test interface products and recurring revenue that continues to deliver resilient profitability through the industry cycle. Late last quarter, we completed construction and transferred all contactor manufacturing to a new 92,000 square foot facility in the Philippines.
Fourth quarter results were inline or better than guidance with non-GAAP gross margin of 48, 5% and EPS a 23.
Fiscal 2023, non-GAAP gross margins set a new co. He record at approximately 48% and adjusted EBITDA was approximately 18% of revenue.
Despite softening market conditions go he was able to deliver strong profitability and full year non-GAAP EPS of $1 62 per share.
On October 2nd we announced the acquisition of a quick test engineering.
We refer to as EQT with the goal to expand our test interface products and recurring revenue that continues to deliver a resilient profitability through industry cycles.
Late last quarter, we completed construction and transferred all contact through manufacturing to a new 92000 square foot facility in the Philippines.
Luis A. Mller: We held an opening event with customers on January 17th, and the facility is already ramping manufacturing of test contactors to make Q1 delivery. The goal is to improve efficiency and quality, lower cost and lead time of interface products, positioning the company to quickly respond to demand and capitalize on the next wave of growth. A significant aspect of our strategy continues to be to expand Cohu's recurring business, which delivered revenue of $310 million over the last 12 months with a three-year compound growth rate of 5%. Part of this is growing our software revenue. And at the end of last year, we introduced a new solution under Cohu's DI Core analytics platform, our AI inspection software. We are pleased to receive initial orders from two customers for this new AI vision capability that delivers higher first pass inspection yield. However, Estimated test cell utilization dropped another two points to 71% at the end of the fourth quarter. The sequential decline was entirely with IDM customers, while Losat's utilization held flat quarter over.
We have an opening event with customers on January 17th and the facility is already ramping manufacturing of test contactor is to make Q1 deliveries.
The goal is to improve efficiency and quality lower cost and lead time of interface products.
<unk> in the company to quickly respond to demand and to capitalize on the next wave of growth.
A significant aspect of our strategy continues to be to expand co. He is recurring business.
Which delivered revenue of $310 million over the last 12 months with a three year compound growth rate of 5%.
Part of this is growing our software revenue in.
And at the end of last year, we introduced the new solution on their co Hughes <unk> core analytics platform, our AI inspection software.
We are pleased to receive initial orders from two customers for this new AI vision capability that delivers higher first pass inspection yield.
However.
Estimated test cell utilization dropped another two points to 71% at the end of fourth quarter.
The sequential decline was entirely with IDM customers bylaw sets utilization held flat quarter over quarter.
Luis A. Mller: Similar to recent announcements from our automotive and industrial semiconductor device customers, Cohu is experiencing softer demand for tasks and inspection systems in these markets. Utilization across other market segments also remains low at the end of Q4, with computing at 68%, consumer at 69%, and mobile at 76%. We know well the semiconductor cycles and the importance of staying focused on new product development and customer qualifications between up cycles to position the company for recovery and rent. We recently introduced microSIM, which is a new MEMS tester for high signal-to-noise ratio microphones, in other words, precision microphones.
Similar to recent announcements from our automotive and industrial semiconductor device customers.
<unk> is experiencing softer demand for test and inspection systems in these markets.
Utilization across other market segments also remain low at the end of Q4 with computing at 68% consumer at 69%.
In mobile at 76%.
We know well the semiconductor cycles and the importance of staying focused on new product development.
And customer qualifications between up cycles to position the company for the recovery and ramp.
We recently introduced micro sense.
Which is a new Mems tester for high signal to noise ratio microphones in other words precision microphones.
Luis A. Mller: And we received initial orders from a major U.S. manufacturer for lab and production tasks starting in the second half of this year. Our Diamond X Tester inhalers have also been qualified for several new customers in China, supporting local automotive and display driver IC manufacturing. We're also pursuing stronger strategic alignment with computing customers, particularly hyperscalers expanding their data center infrastructure. Our proprietary thermal technology is key to testing future large data center processes, also ADAS and other intelligent devices as AI migrates to the Edge application. There is a clear trend toward higher power dissipation during tests, which lends itself well to Cohu's T-Core thermosubstantial. Similarly, our Diamond X is a cost-effective, versatile mixed-signal tester that is being considered by several customers. For the intelligent, Diamond X is an excellent solution for microcontrollers and digital devices at the edge node, offering low to mid-range digital device test capabilities at a very affordable cost.
And we received initial orders from a major U S manufacturer for lab and production test starting in the second half of this year.
Our diamond Ax faster Inhalers were also qualified for several new customers in China, supporting local automotive and display driver IC manufacturing.
We're also pursuing stronger strategic alignment with computing customers, particularly hyperscale or is expanding data center infrastructure.
Our proprietary thermal technology is key to testing future large datacenter processors.
Also a das and other intelligent devices as AI migrate to the edge applications.
There is a clear trend to higher power dissipation during test, which lends itself well to co use T core thermal subsystems.
Similarly, our diamond acts as a cost effective personal mixed signal tester that is being considered by several customers for the intelligent edge.
Daimon acts as an excellent solution for Microcontrollers and digital devices at the edge node offering low to mid range digital device task capabilities are a very affordable cost.
Luis A. Mller: As AI grows in mobile devices, so will RF with the continuation of 5G deployment. We're very excited about the proliferation of new AI-capable products like next-generation smartphones, VR goggles, and other types of devices.
As <unk> grows and mobile devices, so will our F with the continuation of fiber deployment.
We're very excited about the proliferation of new AI capable products like next generation smartphones.
<unk> and other types of devices.
Luis A. Mller: These are an excellent fit for testing on Diamond X and for customers pursuing a broad portfolio of devices for edge applications, although near-term demand is likely to remain subdued. Our major customers have been forecasting a semiconductor recovery for the second half of 2025. With lead times now back to normal, Cohu is well positioned to quickly respond to customers' needs as test cell utilization improves through the second half of this year and into 2025. We will continue executing our strategy to grow recurring business, broaden the use of Diamond Action to automotive and industrial and data center customers, and to our inspection and metrology, and increase subscriptions to our emerging software business. We're pretty excited about what lies ahead with market forecasts indicating secular growth in semiconductors for automotive, industrial, and mobile applications, and the new opportunities being created for AI at the edge. Let me now turn it over to Jeff to provide further details on fourth quarter results and first quarter 24 guidance.
These are an excellent fit for cassian diamond acts and for customers pursuing a broad portfolio of devices for edge applications.
Although near term demand is likely to remain subdued.
Our major customers have been forecasting a semiconductor recovery for the second half of 2024.
With lead times now back to normal <unk> is well positioned to quickly respond to customers needs as test cell utilization improves through the second half of this year and into 2025.
We will continue executing our strategy to grow recurring business.
Broadened the use of diamond Accenture, automotive and industrial and data center customers.
And two our inspection and metrology portfolio and increased subscriptions to our emerging software business.
We're pretty excited about what lays ahead with market forecast, indicating secular growth in semiconductors for automotive industrial and mobile applications and the new opportunities being created for AI at the edge node.
Let me now turn it over to Jeff to provide further details on fourth quarter results and first quarter 'twenty four guidance Jeff.
Jeffrey D. Jones: Thanks, Luis. Before I walk through the Q4 results and Q1 guidance, please note that my comments that follow all refer to non-GAAP figures. Information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures, are included in the accompanying earnings release and investor presentation, which are located on the investor page of our website. Now turning to the Q4 financial results, Cohu delivered strong profitability on revenue of $137.2 million, which is above the midpoint of our guidance. Full year 2023 revenue was $636.3 million. Recurring revenue, which is largely consumable-driven and more stable than systems revenue, represented 54% of total revenue in Q4 and 49% of full year 2023 revenue. During the fourth quarter, one customer in the automotive market accounted for more than 10% of sales, and for the full year 2023.
Thanks, Louise before I walk through the Q4 results and Q1 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.
<unk>, which are located on the investor page of our website.
Now turning to the Q4 financial results <unk> delivered strong profitability on revenue of $137 2 million, which is above the midpoint of our guidance.
Full year 2023 revenue was $636 3 million.
Recurring revenue, which is largely consumable driven and more stable than systems revenue represented 54% of total revenue in Q4, and 49% of full year 2023 revenue.
During the fourth quarter, one customer in the automotive market accounted for more than 10% of sales.
And for full year 2023.
One customer in the automotive market accounted for more than 10% of sales.
Jeffrey D. Jones: Q4 gross margin was strong at 48.5%, about 250 basis points higher than guidance, driven by lower than forecasted manufacturing costs and Cohu's resilient recurring business and differentiated products. Full year 2023 gross margin was 47.9%, which is 70 basis points higher year over year and sets a new annual record for Cohu. Operating expenses for Q4 were in line with guidance at $50 million. Fourth quarter non-GAAP operating income was 12.2% of revenue, and adjusted EBITDA was 13%. Full year operating income was 16.2%, and adjusted EBITDA for 2023 was 17.9%. FX loss in Q4 was $2.9 million, driven mainly by the U.S. dollar weakening against the euro and Swiss franc and a one-time currency exposure that will not repeat in future quarters. The non-GAAP effective tax rate for Q4 was approximately 30% and higher than guidance due to discrete tax items and true-ups flowing through the Q4 tax provision. The non-GAAP effective tax rate for the full year 2023 was approximately 26%.
Q4 gross margin was strong at 48, 5% about 250 basis points higher than guidance, driven by lower than forecasted manufacturing costs and co use resilient recurring business and differentiated products.
Full year 2023, gross margin was 47, 9%, which is 70 basis points higher year over year and sets a new annual record for <unk>.
Operating expenses for Q4 were in line with guidance at $50 million.
Fourth quarter non-GAAP operating income was 12, 2% of revenue and adjusted EBITDA was 13% full year operating income was 16, 2% and adjusted EBITDA for 2023 was 17, 9%.
FX loss in Q4 was $2 9 million driven mainly by the U S dollar weakening against the Euro and Swiss franc, and a onetime currency exposure that will not repeat in future quarters.
The non-GAAP effective tax rate for Q4 was approximately 30% and higher than guidance due to discrete tax items and true ups flowing through the Q4 tax provision.
The non-GAAP effective tax rate for the full year 2023 was approximately 26%.
Jeffrey D. Jones: Non-GAAP EPS for the fourth quarter was $0.23, and full year 2023 EPS was $1.62. In summary, Q4 and full year 2023 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 decreased by $52 million during Q4 to $336 million because we used cash of approximately $43 million to acquire EQT and approximately $13 million to repurchase 390,000 shares of Cohu Common Stock. Debt repayment in the fourth quarter totaled $1 million, and we ended Q4 with net cash of $6.17 per share. CapEx in Q4 was $3.9 million, with approximately $2 million related to the construction of the new Philippines facility to support long-term growth prospects in our interface business. Total CapEx for 2023, including the new building, was approximately $16 million. Overall, Cohu continues to maintain 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. Last week, we repaid the outstanding balance of $29.3 million on Term Loan B.
non-GAAP EPS for the fourth quarter was 23.
And full year 2023, EPS was $1 62.
In summary, Q4, and full year 2023, 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 decreased by 52 million during Q4 to $336 million, because we used cash of approximately $43 million to acquire EQT and approximately $13 million to repurchase 390000 shares of <unk> common stock.
Debt repayment in the fourth quarter totaled $1 million and we ended Q4 with net cash of $6 17 per share.
Capex in Q4 was $3 9 million with approximately $2 million related to construction of the new Philippines facility to support long term growth prospects in our interface business.
Total capex for 2023, including the new building was approximately $16 million.
Overall <unk> continues to maintain a strong balance sheet to support debt reduction share repurchase program and investment opportunities like EQT to expand our served markets and technology portfolio in line with our growth strategy.
Last week, we repaid the term loan b outstanding balance of $29 3 million.
Jeffrey D. Jones: The term Loan B was scheduled to mature in October of 2025, and the accelerated payment will increase net interest income by approximately $200,000 per quarter at current interest rates. Now, moving to our Q1 outlook. Regarding Q1 revenue, the company expects it to be in the range of $107 million, plus or minus $6 million, reflecting continued weakness across end markets and low test cell utilization at customers' production facilities. Q1 gross margin is forecasted to be approximately 45% better than the financial target model at this level of revenue, due in part to Cohu's differentiated products and our stable, high-margin recurring business, which adds resilience to Operating expenses for Q1 are projected to increase $1 million quarter over quarter to approximately $51 million due to the annual reset of payroll taxes and other labor benefits.
The term loan B was scheduled to mature in October of 2025, and the accelerated payment will increase net interest income by approximately 200000 per quarter at current interest rates.
Now moving to our Q1 outlook regarding Q1 revenue to be in the range of 107 million plus or minus $6 million, reflecting continued weakness across end markets and low test cell utilization at customers' production facilities.
Q1, gross margin is forecasted to be approximately 45% better than the financial target model at this level of revenue due in part to <unk> differentiated products and our stable high margin recurring business, which adds resilience to profitability and provides consistent cash flow through the industry cycles.
Operating expenses for Q1 are projected to increase $1 million quarter over quarter to approximately $51 million.
Due to the annual reset of payroll taxes and other labor benefits, we continue to exercise tight control over operating expenses and in light of subdued customer demand for the first half of 'twenty 'twenty four.
Jeffrey D. Jones: We continue to exercise tight control over operating expenses, and in light of subdued customer demand for the first half of 2024, we've taken action to reduce operating expenses without sacrificing critical new product investment while navigating through the trough of this cycle. As a result, we're modeling operating expenses to average approximately $48.5 million per quarter in Q2 through Q4. We're projecting Q1 interest expense to be approximately $700,000 and offset by interest income of approximately $2 million at the current interest rate. We expect Q1 adjusted EBITDA to be approximately 2%. The Q1 and full year 2024 forecasted non-gap tax rate is approximately 23%.
<unk> taken action to reduce operating expenses without sacrificing critical new product investments, while navigating through the trough of this cycle. As a result, we're modeling operating expenses to average approximately $48 5 million per quarter in Q2 through Q4.
We're projecting Q1 interest expense to be approximately 700000, and offset by interest income of approximately $2 million at current interest rates.
We expect Q1, adjusted EBITDA to be approximately 2%.
The Q1 and full year 2024, our forecasted non-GAAP tax rate is approximately 23%.
Operator: The diluted share count for Q1 is expected to be approximately 47.9 million shares. And that concludes our prepared remarks, and now we'll open the call to questions. Thank you. As a reminder, to ask a question, please press star 1-1 on your television and wait for your name to be announced.
The diluted share count for Q1 is expected to be approximately 47 9 million shares.
And that concludes our prepared remarks, and now we'll open the call to questions.
Thank you.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question, Chris One star one again.
Operator: To withdraw your question, press star 1 1 again, and more. And our first question comes from the line of Craig Allen. Be Riley Secured.
One moment please.
And our first question comes from the line of Craig Ellis with B Riley Securities.
Luis A. Mller: Hi, this is Ethan Wydell calling in for Craig Ellis. Thanks for taking my question. To start, I was wondering, as you look into the back half of the year, what gives and takes are you seeing? It sounds like equipment spend may be back half-weighted. And also, how do you see the relative performance between systems recurring? Thanks.
Hi, there this is heath and Vidal, calling in for Craig Ellis. Thanks for taking my questions start I was wondering as you look into the back half of the year. What gives and takes are you, saying it sounds like equipment spend may be back half weighted and also how do you see the relative performance between systems recurring thanks.
Hi, This is luis.
Luis A. Mller: You know, at this point, we're relying on the information we're getting from our customers, who are generally expecting a recovery towards the back half of the year, and this is predominantly an automotive and industrial recovery. If you look at the mobile market, we've seen a largely correction already in the inventories in the mobile space, particularly in Android, and we have seen some sort of order pattern already, again, in the mobile device market. So, you know, you put the two things together, and the expectation here is, again, a recovery pattern in the second half of the year. I don't know, Jeff, if you can add some on the distribution of revenue. Yeah, so based on that trajectory, systems revenue would come in somewhere around 45%, with recurring revenue being 55%, somewhere in that ratio.
At this point, we rely on the information we're getting from our customers that are generally expecting a recovery.
Towards the back half of the year and this is predominantly automotive and industrial customers recovery.
If you look at the mobile market.
We've seen largely a correction already on the inventories in the mobile space, particularly in the Android and have seen some some start of order pattern already again into the answer the mobile mobile device market. So you put the two things together and do you.
Dictation here is again recovery pattern on the second half of the year.
Jessica if you can add some of the distribution of revenue.
So based on that trajectory.
Systems revenue would come in somewhere around probably 45% with recurring revenue being 55% somewhere somewhere in that ratio.
Luis A. Mller: Thank you, that's helpful. And then we seem to be seeing some green shoots in the Android ecosystem, as mentioned. Can you speak to any readthroughs there for utilization or demand for mobile? Um, utilization level in mobile is, hang on a second. I think it's about 76% across a selection of mobile customers. So that's not only Android, but all of them.
Thank you that's helpful and then on.
We.
Seem to be seeing some green shoots in the Android ecosystem as I just mentioned.
Can you speak to any read throughs, there for utilization or demand for mobile.
Utilization level in mobile.
Is hang on a second I think it's about 70, 76% across the across our collection of mobile customers. So that's not only Android, but all of them.
Luis A. Mller: Okay, gotcha. Thank you. Thank you. One moment, please, for our next question... And our next question comes from the line of Brian Chin. Thanks for taking our questions. Yeah, maybe first question.
Okay got it thank you.
Thank you one moment please for our next question.
And our next question comes from the line of Brian Chin with Stifel.
Okay.
Hi, Thank you thanks for taking my questions.
Luis A. Mller: Yeah, as you kind of monitor, again, sort of your customer indications in the back half of the year for some recovery, a particular utilization threshold, but you'll be monitoring in terms of improvement and a crossover point to maybe, you know, solidify that view that the pickup will occur towards the second half. Yeah, if that was a question there, Brian, yes, we will be monitoring utilization across. I think there was a comment in here. Utilization was down a couple points to 71% at the end of Q4. It was actually pretty stable at that 71% throughout Q4, so we had three months in the fourth quarter. Quite honestly, January, which...
Maybe first question, yes, as you think you can kind of monitor.
Again sort of your customer indications and the back half of the year for some recovery.
Particular utilization threshold that youll be monitoring in terms of improvement in a crossover point maybe.
Solidify that view that the packet broker towards.
Towards second half.
Yes, if that was the question there Brian Yes, we will be monitoring utilization across.
Because I commented here utilization is down a couple of points to 71% at the end of Q4.
It was actually pretty stable at that 71% throughout Q4. So we had three months in the fourth in the fourth quarter quite honestly January which.
Luis A. Mller: I can speak to you here on the call. It was also 71%. So we've got four quarters, four months in a row now at 71%. We've got a monitor data utilization increase. It is, you know, pockets of strength and pockets of weakness in it.
I can speak to here on the call was also 71%. So we've got four quarters four months in a row now.
At 71%, we've got a monitor debit utilization increase it is.
Pockets of strength and pockets of weakness and as I mentioned mobile a second ago it at about 76% <unk>.
Luis A. Mller: I mentioned mobile a second ago at about 76%. Consumer is at 69%, Computing at 68%, and Otto Industrial, despite coming down two points quarter over quarter, ended Q4 at 81%. As we always say, utilization of about 80% is when you see capacity buys, and we've got to see, you know, across markets, not only 80%, but more of a trend up towards that 80%, so climbing from 71 to the 80% mark. And the rate of climb will also determine how fast we get to that turning point, right? So we've seen in the past, on the order of 200 to 400 basis points, quarter over quarter improvement utilization, that's reasonably what you expect on a typical recovery. Okay.
Consumer.
<unk> is at 69% computing at 68.
And auto industrial despite coming down two points quarter over quarter and that Q4 at 81%.
As we always say utilization of about 80% is when you see capacity buys and.
We got to see across markets.
Not only a 80%, but more of a trend up towards that 80% climbing from 71% to 280% Mark and the rate of climb also will determine how fast we get your debt to that turning point right. So we've seen in the past.
On the order of two to 400 basis points quarter over quarter improvement utilization that's reasonably.
What you expect on a typical recovery.
Luis A. Mller: And then in relation to that sort of service systems question earlier, and where you see service revenue and also system revenue going in Q1, does that feel like a pretty good floor in terms of service revenue, and then on the equipment side, I'd imagine, you know, given the protracted downturn in areas beyond automotive and industrial, it's probably hard to fathom system revenue going down more in those markets, and you also feel that automotive and industrial are pretty much at Yeah, I mean, if you look at, if you look at system revenue, as we've talked here about... The total systems revenue came in for the quarter at about, what, 46% of total, right? But if you start looking at Q1, for example, not Q2 yet, but if you start looking at Q1. Order pattern in Q4, which dictates a little bit of what's happening in Q1 by market segment. You know, we should see reasonable stability in the automotive market, sort of like the automotive and industrial combined.
Okay got it.
And then in relation to that sort of service systems Quest.
Question earlier.
Or do you see service revenue analysis system revenue going into Q1.
Does that does that feel like a pretty good floor in terms of the service revenue and then on the equipment side I would imagine given the track.
<unk> down.
Downturn in areas beyond automotive and industrial its probably hard to fathom system revenue going down more in those markets and you also feel that automotive and industrial it was pretty much at a floor even on that system side revenue in Q1 and kind of any thoughts on sequential in Q2.
Yeah, I mean, if you look at.
If you look at systems revenue as we've talked here about.
In total systems revenue came in in the quarter.
46% of total right.
If you start looking at if you start looking at Q1 for example, not Q2, yet we are still looking at Q1.
Order pattern in Q4, which dictates a little bit of what's happened in Q1 by market segment, we should see reasonable stability in the automotive market.
Automotive and industrial combined should see a reasonable stability quarter over quarter across those two markets.
Luis A. Mller: We should see reasonable stability quarter over quarter across those two markets. What is down significantly, at least from an order pattern in the fourth quarter, is the consumer market that came down quite a bit, driving, you know, sort of that typical seasonality. Obviously, we're in a down cycle, but you got to layer on the seasonality on top of that, and that's typical of the consumer market order patterns in the fourth quarter. And that really hurts going into Q1.
What is down.
Down significantly at least from an order pattern in fourth quarter as the consumer market that came down came down quite a bit.
Driving sort of that typical seasonality, obviously, we're in a down cycle, but you got to layer out the seasonality on top of that and Thats typical of the consumer market.
Order patterns in the fourth quarter and that really hurts going into Q1 as we go into second quarter. It's a little early to call, but I would say more at the same pretty much more of the same that we're seeing today or that we saw through fourth quarter orders.
Luis A. Mller: As we go into the second quarter, it's a little early to call, but I would say, you know, more of the same, pretty much the same that we're seeing today or that we saw through fourth quarter orders. Hey guys, maybe the last thing to close out on gross margins, it's definitely much higher than I expect given where the 1Q revenue is going. It sounds like maybe you've flushed through some of that higher-cost inventory; you had the intake, you know, in periods of tighter supply.
Okay got it and maybe one last thing the closeout and gross margins, yes, definitely much higher than I would expect given where the <unk> revenue is going it sounds like maybe you've flushed through some of that higher cost inventory you had.
Intake and periods of tighter supply.
Luis A. Mller: Is the other factor here to think about is sort of that mix of higher service revenue. That's really the main driver, Brian, is the mix between the recurring and the system revenue, and so in Q1... It's more skewed towards the recurring revenue than Q4 was. Closer to, let's call it about 60% recurring, 40% systems. And so that's, that's very helpful on the margin side. Now, you know, at this point, we reach in the system's revenue, you reach a point where, you know, the margins are degrading because of the fixed costs, the infrastructure, and primarily the handler systems.
Is the other factor here to think about it sort of that mix of higher service relative to the system.
And that's really the main driver Bryan is the mix between the recurring and the system revenue and and so.
In Q1.
It's more skewed towards the recurring revenue than Q4 was.
Closer to call it about 60% recurring 40% systems.
And so that's that's very helpful on the margin side now.
At this point we reach.
And the systems revenue you reach a point where the.
The margins degrading because of the fixed cost infrastructure.
Sure.
Luis A. Mller: So that's a bit of a drag, which is why the quarter over quarter gross margin is coming down a couple hundred basis points, but it is supported by recurring revenue. Okay, great. Thank you. Thank you. And as a reminder, to ask a question, please press star 1-1 on your television. And our next question comes from the line of Robert Merritt and P.D. Cowley.
Merrily handler systems, so that's a bit of a drag.
<unk>.
Which is why the quarter over quarter gross margin is.
Is coming down a couple hundred basis points.
It is supported by the recurring revenue.
Okay, great. Thank you.
Thank you.
As a reminder to ask a question. Please press star one one on your telephone.
Yes.
And our next question comes from the line of Robert Mertens with Gd Cowen.
Operator: Hi, this is Robert Mertens for CRISH. Thank you for taking my questions. I guess just the first one, in terms of looking at the puts and takes of the utilization rates, you were good about sort of providing those throughout the year on a quarterly basis, and then this quarter, sort of where each subsegment has come in. Is there any sort of forecasting that you're doing in terms of the categories? Maybe mobile is one that picks up more in the second half of the year, or if you're starting to see auto and industrial. Thank you. Hi Robert. We don't typically forecast utilization. We forecast markets and customers but not utilization.
Hi, This is Robert Mertens on for Chris. Thank you for taking my questions. I guess, just the first one in terms of looking at the puts and takes.
The utilization rates are good about sort of providing those throughout the year on a quarterly basis and then this quarter.
Where each sub segment has come in is there any sort of forecasting that youre doing in terms of.
Categories, maybe mobile is one that picks up more in the second half of the year, if youre starting to see.
Auto and industrial.
Declining a little bit since that's the highest utilization among your sub segments, just sort of any color there would be helpful. Thanks.
Hi, Robert we don't typically forecast utilization.
We report forecast markets and customers, but not utilization.
But if I take.
Luis A. Mller: But if I take our forecast by markets and by segments, I would say there's probably a little bit more to give on the downside in the auto and industrial segments and a little bit more to gain and pick up here sequentially in the mobile segment. I think we're starting to see a little bit of signs of life in the mobile market and, at the same time, a lot of caution by our large auto and industrial semiconductor customers. You can probably attest to that from their recent earnings release.
I think our forecast by markets and by segment I would say.
There is probably a little bit more to give on the downside and the auto and industrial segment and a little bit more to gain and pick up here sequentially in the mobile segment.
I think we're starting to see a little bit of signs of life in the mobile market and at the same time.
A lot of caution.
Our large auto and industrial semiconductor customers can probably attest yourself from their recent earnings release, So thats the.
Luis A. Mller: So that's the... That's supposedly going to, you know, dictate the pattern also in utilization once we finish the quarter. 2012 University of Georgia College of Agricultural and Environmental Sciences UGA Extension Office of Communications and Creative Services, Great, thank you. That's helpful. Thank you. I'm showing no further questions at this time. And with that, I'll hand the call back over to Chief Financial Officer Jeff Jones for any closing remarks. Yes, I just want to say thank you to everybody for joining today's call, and we look forward to speaking with you soon. Take care. Thank you. And thank you all for participating. This is today's program. You may now disconnect. Thanks for watching!
That's supposedly going to dictate.
Dictate the pattern also in utilization once we finished the quarter.
Great. Thank you that's helpful.
Thank you.
And Im showing no further questions at this time, so with that I'll hand, the call back over to Chief Financial Officer, Jeff Jones for any closing remarks.
Yes, I just want to say, thank you to everybody for joining today's call and we look forward to speaking with you soon.
Take care.
Thank you.
Thank you all for participating. This concludes today's program you may now disconnect.
Yeah.
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Okay.
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