Cohu, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Kohu, Inc. Second Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Jones, Chief of Financial Officer. You may begin.

Thank you, and good afternoon, and welcome to our conference call to discuss Cohue's second quarter results and third quarter outlook. 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, cohue.com, or by contacting CoHUE Investor Relations. There's also a slide presentation in conjunction with today's call that may be accessed through the webcast link on CoHUE's website and is also posted as a PDF in the Investor Relations section. Replays of this call will be available via the same page after the call concludes. Between now and our next earnings call, we'll be participating in the Jefferies Semiconductor Hardware Summit in Chicago on Tuesday, August 27th. Please contact us if you would like to request a meeting with the company at this event. Now to the safe harbor. During today's call, we will make forward-looking statements reflecting management's current expectations concerning Cohue'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 CoHUE's filings with the Securities and Exchange Commission, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, August 5th, 2019, and CoHUE 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 Muller, CoHUE's president and CEO.

Luis Muller Good afternoon. Today I plan on discussing second quarter dynamics at CoHUE and sharing our perspective on the current business environment. Jeff will then cover detailed financial results and Q3 guidance. Our internal measure of test cell utilization, which started improving in late first quarter, supporting an initial recovery in the mobility market, dropped three points in May and June to 77% at the end of the quarter. Second quarter orders were 42% systems and 58% recurring, with the mix continuing to indicate soft business conditions in the near term. Second quarter sales of $150 million were at the low end of guidance due to the impact of export restrictions to Huawei on our customers and continued softness and mobility. Although our direct business with HiSilicon, a Huawei affiliated company, is less than 2% of annual sales, some of our U.S. customers that are part of the Huawei supply chain abruptly lowered their forecasts after mid-May when the export restrictions were imposed. In parallel, Huawei announced a sharp reduction in smartphone unit sales forecast for the second half of this year. It isn't clear whether this is a direct consequence of the export restrictions or more of a reflection of lower GDP growth in the region and globally. The compounded effect was a late quarter reduction in RF and flat panel display driver tester sales. with some business pivoting to subcontractors in China and other customers pushing out the forecast to later quarters. Mobility was still our largest segment, comprising 29% of system orders. We received and shipped a volume order for thermal handlers testing mobile processors, also third handlers and testers for RF devices. Still, in mobility, We recently qualified and sold multiple units of a next-generation vision inspection platform featuring extended process integration capabilities that include infrared and microscale defect detection. Although the automotive semiconductor market remains weak, we continue to benefit from the sale of thermal handlers and testers for the production of power management ICs. While our customers' forecasts are muted in the near term, The fundamentals remain strong for increasing vehicle electrification, growth in automotive ADAS, industrial automation, and moreover, the deployment of 5G communications that will have a significant positive impact on these markets. On this last point, the highlight of the second quarter was the initial shipment of a complete solution for testing next generation RF devices used in a global satellite network. Kohu is delivering the value of cross-functional expertise for complex applications that supports customers' needs for rapid volume ramps. We forecast some business in the second half of this year and ramping volume in 2020, not only in satellites, but also with the higher volume units for the ground infrastructure. Our testers are deployed in volume for 4G RF power amplifiers, and being utilized for initial production of 5G devices coming out in new mobile products. Customers who require a test solution optimized for high-performance RF see the value in Cohu's unique differentiation that enables them to upgrade our large install bays of RF testers to 5G requirements while integrating our high-performance contactors to ensure signal fidelity across the device interface. Kohyu is well positioned to maintain leadership in RF power amplifier test. We see early production sales this year and expect 5G volume to grow substantially as it transitions from infrastructure build to the production ramp of mobile products starting in the second half of 2020. Our PCB test business continues to see strong demand from customers in China, supporting server network equipment and telecommunications applications. and Soft Conditions across automotive and industrial customers, mainly in Europe. We made good progress integrating recently acquired Xera, reaching an agreement with the local Works Council to downsize and consolidate the handler operation with the Kohu business in Germany, completing the transfer of our handler manufacturing to our Malaysia factory, and on track to finalize the transition of contactors and device kits to our Philippines operation this quarter. In all, delivering 17 million of annualized run rate cost synergies in the second quarter and on track to exit this year at approximately 40 million. In light of the soft market environment for semiconductor volume manufacturing, we're taking additional actions to reduce expenses and improve profitability while maintaining critical investments that will drive growth in our test contactor and equipment businesses. With that, I remain optimistic about our future that were well positioned to capitalize on the 5G opportunity as it transitions from early device characterization and infrastructure build to high volume products. Additionally, we will continue to enjoy strong business in automotive and industrial markets when our customers resume their growth. Now, I'd like to turn it over to Jeff to review our second quarter results and provide third quarter guidance.