Q4 2024 Cohu Inc Earnings Call
Good day and thank you for standing by. Welcome to COHU's fourth quarter 2024 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. To ask a question during this session, you'll need to press star-one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one again.
Please be advised that today's conference is being recorded.
Speaker Change: I would now like to turn the conference over to Jeff Jones, Chief Financial Officer.
Please go ahead.
Speaker Change: Good afternoon and welcome to our conference call to discuss COHU's fourth quarter 2024 results and first quarter 2025 outlook.
Speaker Change: I'm joined today by our President and CEO, Luis Muller. 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.
Speaker Change: There's also a slide presentation in conjunction with today's call that may be accessed on COHU's website in the Investor Relations section.
Speaker Change: Replays of this call will be available via the same page after the call concludes.
Speaker Change: Now to the safe harbor. During today's call, we will make forward-looking statements reflecting management's current expectations concerning CoHU's future business.
Speaker Change: These statements are based on current information that we have assessed, but which by its nature is subject to rapid and even abrupt changes.
Speaker Change: We encourage you to review the forward-looking statement section of the slide presentation and earnings release, as well as COHU's filings with the SEC, including the most recently filed Form 10-K and Form 10-Q.
Speaker Change: 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.
Speaker Change: Now I'd like to turn the call over to Luis Muller, COHU's President and CEO. Luis?
Hello, and welcome to your quarterly earnings call.
Speaker Change: Full year 2024 revenue was about 402 million dollars as Coheal's main market segments are crossing the chasm of a downturn.
Speaker Change: On the other hand, the full-year non-GACROS margin of 45% demonstrates the value of selling differentiated products and optimizing your manufacturing cost structure.
Speaker Change: Fourth quarter revenue was within guidance range, but gross margin was impacted by an inventory reserve charge of $2.1 million.
Jeff will get into more details on these later.
Speaker Change: Revenue for the quarter was split 62% recurring in the balanced systems.
Speaker Change: Systems revenue increased sequentially in computing, industrial, and consumer segments, although offset by declines in automotive and mobile, where customers are working through ongoing inventory correction.
Speaker Change: Estimated test serialization at the end of December increased one point quarter-over-quarter to 73 percent, driven by OSATs that improved two points to 76 percent, while IDMs closed the quarter at 70 percent.
Speaker Change: We see our traditional IDM customers at different stages in the cycle, and OSATs benefiting from the strength of fabulous customers aligned with data center and network infrastructure.
Speaker Change: As mentioned last quarter, COHU entered the memory and silicon carbide power semiconductor markets with orders for HBM inspection and dye level burn-in.
Speaker Change: We shipped our first HBM inspection system and received a repeat order early in first quarter that we expect to ship in the middle of this year.
Speaker Change: with the potential to deliver $7 million of revenue this year as we support HBM3 and a new HBM4 product ramp later in the year.
Speaker Change: We're working hard to align new COHU products to compute applications, mainly positioning the company to capitalize on the growth in the data center market and later opportunities with AI at the edge.
Speaker Change: Our interface product team had a design win for testing 800G switches used in next generation data centers and cloud computing.
Speaker Change: These are high-bandwidth devices that accelerate AI-ML workloads with stringent signal performance requirements and tests.
Speaker Change: We're excited to see our products gaining traction across various data center applications spanning memory, network infrastructure, and compute.
Turning to a softer platform.
Speaker Change: We are strong believers in the value AI will bring to semiconductor manufacturing, with opportunities to optimize yield and productivity.
Speaker Change: Just last month, the CFO of TSMC made a comment during a public interview that 1% productivity improvement has the potential to drive $1 billion of value for their business.
Putting this a bit in context
Speaker Change: We estimate that the potential total available market for data analytics for process control, data visualization, connectivity, and predictive applications in the back-end semiconductor manufacturing segment should be about $600 million.
which accounts for third-party and in-house developed solutions.
Speaker Change: We're pushing to establish Cohu as a main player in this area, focusing primarily on back-end manufacturing and our current customers' spending on the software stack.
Speaker Change: In the fourth quarter, we qualified COHU's DI core and received the first PO to optimize visual inspection yield for a U.S. headquarter semiconductor manufacturer with operations in Asia.
Speaker Change: Customers continue to subscribe to our softer solutions, adding to our critical recurring revenue stream in an area that we expect can generate substantial growth over time.
Speaker Change: In line with this strategy, last quarter we announced the definitive agreement and early this year confirmed closing the acquisition of Tigness, a provider of artificial intelligence process control and analytics-based monitoring software.
Speaker Change: We believe there is an opportunity to grow Cohu's software revenue at an annual rate of 50% or more over the next three years as the industry seeks solutions to optimize yield and productivity using AI-powered process control and data analytics solutions.
Speaker Change: As our core automotive, industrial, and mobile customers continue to navigate an inventory correction, we're committed to growing CoHU in 2025 with customer design wins and SAM expansion driven by new product investments targeting data center and edge AI applications.
Speaker Change: Let me now turn it over to Jeff for further details on last quarter results and next quarter guidance.
Jeff?
Jeff 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.
Jeff Jones: 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.
Jeff Jones: Now turning to the Q4 financial results. Revenue for the quarter was within guidance at $94.1 million.
Jeff Jones: Full year 2024 revenue was $401.8 million. Recurring revenue, which is largely consumable-driven and more stable than systems revenue, represented 62% of total revenue in Q4 and 65% of full year 2024 revenue.
Jeff Jones: During the fourth quarter, one customer in the automotive market accounted for more than 10% of sales.
Jeff Jones: However, no customer accounted for more than 10% of sales for the full year 2024.
Jeff Jones: Q4 gross margin was 41.8%, about 220 basis points lower than guidance due to a 2.1 million dollar charge to our inventory reserve for old, slow-moving, customer-specific inventory.
Jeff Jones: Excluding the impact of the inventory reserve, gross margin was in line with guidance.
Jeff Jones: Full year 2024 gross margin was resilient and higher than model at 45%.
Jeff Jones: Operating expenses for Q4 were lower than guidance at $45.3 million, driven by lower labor costs due to replacement and new hire delays, as well as higher vacation utilization than forecasted.
Fourth quarter non-GAAP operating loss was approximately six million.
Jeff Jones: Q4 interest income, net of interest expense, and a small foreign currency gain was $2.3 million.
Jeff Jones: Q4 pre-tax income consists of foreign profits combined with a loss in the U.S.
Jeff Jones: The Q4 tax provision of $3.4 million reflects tax expense on foreign profits, but no tax benefit from the U.S. loss due to our valuation allowance against deferred tax assets.
Jeff Jones: Non-GAAP EPS for the fourth quarter was a 15 cent loss. The 2.1 million dollar inventory charge accounts for approximately four cents of EPS.
Jeff Jones: Moving to the balance sheet, overall cash and investments decreased by $7 million during Q4 to $262 million due to $2 million used in operations, debt repayment of $2 million, and fourth quarter capex of approximately $3 million.
Jeff Jones: CapEx for full year 2024 was approximately $11 million, lower than prior years and primarily driven by facility improvements in the Philippines and Germany supporting operations for our interface and automation businesses.
You had zero share repurchase activity in Q4.
Jeff Jones: Through the end of Q3 in fiscal 2024, we had repurchased approximately 915,000 shares for $27 million, which exceeds our goal to offset share dilution from our equity compensation plan of approximately 500,000 shares per year.
Jeff Jones: Overall, COHU's balance sheet remains strong, supporting investment opportunities to expand our served markets and technology portfolio in line with our growth strategy.
and returning capital to shareholders through our share repurchase program.
Jeff Jones: Now moving to our Q1 outlook. Recent customer requests to delay Q1 shipments to later in 2025 have impacted our initial view of first-quarter revenue. As a result, we're guiding Q1 revenue to be approximately $97 million plus or minus $7 million.
Jeff Jones: First quarter gross margin is forecasted to be approximately 44%, benefiting from CoHU's differentiated products and our stable, high-margin recurring business, which adds resilience to profitability and provides consistent cash flow through industry cycles.
Jeff Jones: We expect gross margin to increase again when our revenue recovers with a broader semiconductor device market recovery and with better absorption of our factory's infrastructure costs.
Jeff Jones: Q1 operating expenses are forecasted to be approximately $49 million, about $4 million higher than Q4.
Jeff Jones: Nearly half of the quarter-over-quarter increase is due to the addition of Tignes, a provider of artificial intelligence process control and analytics based monitoring software.
Jeff Jones: The balance of the increase is due to higher labor costs quarter over quarter, including the implementation of a delayed merit increase across the employee base, and the typical reset of employer payroll taxes that are unique to Q1.
Jeff Jones: For the rest of 2025, operating expenses should be approximately $48 million per quarter when revenue is approximately $100 million.
Jeff Jones: As revenue grows to about $130 million, operating expenses are projected to increase to approximately $50 million per quarter.
Jeff Jones: We're projecting Q1 interest income, net of interest expense, and foreign currency impacts to be approximately $1.3 million at current interest rates.
Jeff Jones: The Q1 non-GAAP tax provision is expected to be approximately $3 million because of tax on foreign profits without benefit from the U.S. loss.
Jeff Jones: Until the markets recover, we expect a similar tax provision profile as we navigate through this cycle.
Jeff Jones: The basic share count for Q1 is expected to be approximately $46.6 million. And that concludes our prepared remarks, and now we'll open the call to questions.
Jeff Jones: As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.
Please stand by while we compile the Q&A roster.
Craig Ellis: Our first question comes from the line of Craig Ellis with B Reilly Securities.
Craig you may be on mute.
Craig Ellis: Yeah, thanks for taking the question and appreciate all the detail on.
Speaker Change: on the new businesses that are coming into the model. I wanted to start my question there. So, Jeff, you said that.
Speaker Change: Tingis, and I apologize if I pronounce it wrong, but you said that would be about $2 million of OPEX in the quarter. The question is, is there any revenue associated with that OPEX?
Speaker Change: and if not, when would we expect that business to be earnings per share break even as we think about its ability to grow with that 50% CAGR you outlined.
Yeah, so hey, Craig, it's Tigness.
Speaker Change: TAG NIS and last year's revenue was sub 1 million, likely to be the same this year. Are expecting healthy
Speaker Change: growth rates over the next few years, but at the moment, you know, probably right around a million or sub one million for 2025. So it's going to take a few years for it to get to the to the break-even point.
Speaker Change: Got it. And then, Luis, if I wanted to hone in on...
Luis Muller: the revenue impact this year of some of these incremental drivers, I think, in the deck we identified.
Luis Muller: that the high bandwidth memory opportunity could be around 7 million. If we look at software all in, Tignes and DI Core,
How big could that be?
Luis Muller: The silicon carbide market expansion, the single-chip burn-in capability that you've identified recently, how big could that be this year? How big are these new drivers as we think about 2025 and 2026?
Craig Ellis: So if I take 25 Craig, like I said HBM about seven, the silicon carbide about five, so you know telling after 12.
Jeff Jones: We think, as Jeff mentioned here, softer about one, 13. And then I think I gotta top it off with the Diamond Axe win at an automotive customer that we talked about in the last two quarters.
Jeff Jones: That is likely to be $10 to $15 million. So I think if you put it all together, we're looking at sort of $25, $30 million incremental this year from these new either SAM expansion or design wins.
Jeff Jones: and I would expect those to accelerate in 26, but I don't, I wouldn't have a number to give you at this time on that.
Jeff Jones: Yeah. And if we look at those together, Luis, and thanks for the color on that, if we look at them all in.
Is that a
mid-40s gross margin that we should be thinking about.
Jeff Jones: would it be higher than that? I think down the road in a couple of years, it would be higher with software growing, but how do we think about the gross margin on that incremental business this year?
Speaker Change: Hey Craig, I would say high 40s, the ultimately growing to 50 as software grows.
Speaker Change: Okay, nice. And then lastly, if I could, guys, as we look at utilization levels across some of the end markets,
Speaker Change: A&I is the closest to that somewhat magical 80% threshold at 75%. The question is, is A&I on its way up towards 80% or is it actually drifting lower just given...
Speaker Change: some of the comments we've heard from bigger U.S.-based analog companies over the last month.
Sorry, Craig, clarification here. What do you mean by A-N-I?
auto and industrial yeah
Thank you. Thank you. Yeah.
Speaker Change: In the meantime, while mobile is sitting at a lower level,
Speaker Change: There is some dynamic happening between Android and iOS that I think is going to drive some incremental business.
Speaker Change: I guess I'm not going to pick a side here to say it but in one of those in particular that that we expect you to see some leverage in the business for us starting in the middle of this year.
Got it. Thanks guys. I'll hop back in the queue.
Our next question comes from David Dooley with Steelhead Securities.
David Dooley: Yes, thanks for taking my questions. Could you just remind us, you just referred to the Diamond X win of $10 to $15 million in 2025. Could you just elaborate on the application again? And, you know,
David Dooley: how you won, what was the key parameter for you winning that business?
Speaker Change: Sure, Dave. Well, starting from the end here, the key parameter to winning that business is ultimately cost of test. It's being able to do.
their portfolio of devices which spans
Power semiconductor applications, microcontrollers
Speaker Change: and there is also a PNIC group that's separate from POWER.
Speaker Change: In the moment, we're addressing two of the three groups, hoping to be able to extend it to the third group. So it's sort of a cost of task differentiation. And I guess, like I said, two of the three groups is what we're addressing today.
Speaker Change: I think you've had, you know, a few years now of declining year-over-year revenue. When would you expect there to be some sort of turn, you know, either driven by new products or recovery in the end markets? You know, what's your best guess at this point for your recovery?
You know, Dave,
Speaker Change: Gas in the market is the toughest part of it all, as you understand. And people seem to always indicate that it's six months away is the turning point. So we're not at a position of...
Speaker Change: necessarily gas in the market nor sitting idle on it. So what we've been working on is to expand our penetration in segments that have at the moment higher growth.
Speaker Change: which would be particularly things associated with data centers that we haven't had a lot of exposure in the past. HBM is one example. We have other activities that hopefully we can talk through in the coming quarters this year.
Speaker Change: The software investment is perhaps more of a long-term play than necessarily a material 2025 investment, but we see
Speaker Change: We see many of the factories driving automation and optimization, whether it's yield or productivity, that could be benefited by.
Speaker Change: Predictability, which in essence becomes the use of AI models or machine learning models sometimes. They're different, but in both cases, software.
Speaker Change: both near-term opportunity for growth, but as well as long-term opportunity for growth.
Speaker Change: In the meantime, you know, the market is going to do what the market is going to do and the primary analog
Speaker Change: segment of the market, which is mostly automotive, industrial, continues to be depressed. There's still inventory digestion happening.
Speaker Change: We keep looking at our customers' reduction of inventory quarter over quarter and where are they relative to trend lines.
Speaker Change: So, it's very likely that at the current pace, we'll see another two quarters before our customers in that segment turn the corner from a general market perspective.
Speaker Change: Okay and then um as far as when you start to see recovery in the revenue line you gave us some nice numbers
Jeff Jones: Jeff about what we would expect for operating expenses going forward at higher revenue levels.
Jeff Jones: So when we're hovering around 100 million, gross margin will be somewhere in the...
44 to 45 percent range.
Jeff Jones: And as we migrate up to $130 million, we're expecting to be about 46.5% on gross margin.
Okay, thank you.
Speaker Change: Our next question comes from the line of Ross Cole with Needham.
Ross Cole: Thank you for taking my question. I was wondering if you could verify the different segment revenues for 2024 and then provide your latest assumptions on the segment revenues for 2025 and maybe rank order them if possible. Thank you.
Speaker Change: Ross, are you talking about all of 2024 and projecting all of 2025?
That would be great if possible, yes.
Speaker Change: Yeah, well, yeah, we don't have, we've got the historical data on 2024, just we don't have that perspective yet on 2025.
So
Let's see.
Speaker Change: We look at systems revenue by market so I'm going to give you those percentages for 2024 and we were 9%
was automotive.
for Consumer.
Three compute.
Speaker Change: Yeah, I think I think at the moment, as Luis said.
I know an industrial has probably the
Speaker Change: The most inventory to work through at the moment, but if we're looking at second half.
I believe that
Speaker Change: Indications or the projections at the moment would be that automotive and industrial begin a recovery followed by a mobile.
Speaker Change: Great, thank you. And if I could ask one more quick question. I remember previously you had shipped a couple tools for HBM and SICK wafer test. Could you confirm if you're planning on recognizing the revenue for these in the first quarter or if that's more of a second quarter opportunity?
Speaker Change: The HBM is a Q1 revenue recognition. First tool. Yeah, it's the first tool, one tool in Q1.
Speaker Change: High-level burn-in is the other one you referred to, which is further...
perhaps second half of 2025.
Great. Thank you so much. I appreciate the color.
Speaker Change: Our next question comes from the line of Robert Mertens with TD Cowan.
Speaker Change: Hi, this is Robert Mertens on for Chris Ancar. Thanks for taking my questions
Speaker Change: I guess first I believe you had mentioned earlier that some of the strong order flows in the September quarter sort of gave you confidence to look beyond that the December guide and into March expecting that quarter to be up sequentially maybe around 10% or so.
Speaker Change: There's some kind of parse out that commentary in the new low single digit guide. Is this new outlook primarily just because of some of those customer order push outs that you mentioned earlier on?
Speaker Change: On your prepared remarks, and if so, would would that be something you would expect to come back in the June quarter and have one follow up.
Speaker Change: Hey Robert, the answer to your first part is yes. It was due to a to a recent recent push out.
Speaker Change: of tools out of Q1, so we have the orders. It's the actual...
Speaker Change: shipment date that has been delayed. Now it's not necessarily Q2, it's
It's throughout 2025.
Speaker Change: That's about seven million dollars. So again, it's spread through the balance of the year
Okay, thank you. That's helpful.
Speaker Change: And then just another quick follow-on question. In terms of the new neon and dye-level burn and test opportunity with high bandwidth memory, congrats on securing another follow-on order.
with the growth in this emerging business.
Speaker Change: Will you be primarily driven just by scaling that success with this initial customer, or are you currently working on getting other tools?
Speaker Change: potentially full acceptances with other major memory suppliers or do they tend to go internally or have sort of incumbent suppliers themselves that would make it harder to gain business there?
Speaker Change: Yeah, Robert, it's kind of both. The numbers that I quoted to the first question in terms of what you expect for 2025...
We're essentially scaling with the first customer.
Speaker Change: to other customers that could benefit from what these tools can do. But none of that is accounted for in the numbers that I referenced on the first question today.
Okay, I got it. Thank you. It's very helpful.
Speaker Change: Our next question comes from the line of Brian Chin with Stiefel.
Speaker Change: Good afternoon, this is Dennis Piatchin and on for Brian. Thanks for letting us ask a few questions.
Speaker Change: In light of the ongoing inventory control in the industry and fabulization cuts that we've seen recently, how stable do you believe that the $60 million run rate is for your services and spares recurring revenue?
Speaker Change: It is stable. It's proven to be stable over the, you know, historically. You know, it's not immune to the downturn, and we can see that in the numbers, but it's...
Speaker Change: probably has about a third of the volatility of systems so
Speaker Change: The utilization of equipment in customer's facilities has remained pretty steady, so we would expect our recurring revenue to also remain fairly steady.
Speaker Change: Great. I think you were previously somewhat more positive on a mobile RF test. Has this changed? I think you'd mentioned a little bit earlier on this call that you think mobile will recover after industrial automotive. Did I understand that correctly?
Speaker Change: The general market could be after. There's some dynamics, as I mentioned earlier, between sort of Android, particularly in the Android market space, on certain customer share gain and transitions of devices that could be beneficial for us on the second half of the year or sort of starting the middle of the year, so to speak.
Speaker Change: but overall the mobile market is still projected to be sort of a low single-digit growth this year. I think more of the dynamics in between customers could be more interesting.
Speaker Change: Great and then as my last question, it looks like industrial saw a little bit of strength that the systems revenue might have finished at a
Speaker Change: at a high for 2024 in the fourth quarter. Can we expect industrial to stay at this level or will it kind of bounce around a little bit around this eight to nine million dollar mark?
Speaker Change: So industrial has the potential to actually come up ahead of automotive as we see it today, but you know we'll see how that plays out in the next few quarters.
Great, that's it for me. Thank you very much.
Speaker Change: Our next question comes from the line of Craig Ellis with B Riley.
Craig Ellis: Yeah, thanks for taking the follow-up question. Guys, I wanted to go back to the software business and just understand...
Speaker Change: how you plan to execute that in a little bit more detail. Can you focus on ...
Speaker Change: The selling motion that you plan to implement in that business is DI Corp and Antigone. Is that going to sell out?
Speaker Change: as a complement to new systems? Does it sell into the install base as an enhancement?
Speaker Change: to existing systems, is it both? Just help us understand a little bit more.
Speaker Change: How you plan to go to market and therefore how we can expect you're going to start to accrue sales and grow that high margin business. Thank you.
Yeah, good question, Craig. The...
The I-Corps that we do today...
It really has two branches, okay? It has a...
a Vision Inspection Branch.
on the software that
Speaker Change: that is using a neural network for vision technology. And that branch will stay, pretty much will stay as is.
for fault detection and predictability for equipment maintenance.
So the intention there is to leverage on thickness
Speaker Change: to products outside of the CoHU umbrella. So we would like to expand our DI core predictive maintenance capability to serve more than just CoHU products in the broader semiconductor backend space.
Speaker Change: So, that is an area that Tigness should be able to augment what we're currently doing with TI-Core and go much broader.
Speaker Change: Separately, Tigness itself, it has a solution that it's being used
Speaker Change: for front-end manufacturing that has nothing to do to co-occurrent markets. We don't we don't intend to shut that down. In fact, we intend to see Tigness continue to evolve there.
Speaker Change: and sort of back up what they're pursuing at the moment and provide the necessary infrastructure and resources that they need to be successful in more in the general process control market.
So to summarize
Speaker Change: Tigna's own growth factor is going to stay and we intend to back it up and at the same time we plan on leveraging Tigna's technology on our DI core PD ampoules for the back end so we can go broader and beyond Coahuillon equipment.
Speaker Change: I hope that was clear. Yep, that's helpful. Thank you, Luis.
Speaker Change: That concludes today's question and answer session. I'd like to turn the call back to Jeff Jones for closing remarks.
Jeff Jones: Well, thank you for joining today's call. We really appreciate your participation and we look forward to speaking with you soon. Have a good day.
Speaker Change: Do you have any questions? Is there a fl Damn, I'm late! Okay. Here is désc. Well then. See we'll be back. See you later. Do you have any comments? I do. Bye. Bye Bisque! Bueno. Well then. Pearson?
Jeff Jones: This concludes today's conference call. Thank you for participating. You may now disconnect.