Cohu, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the KOHU Incorporated's third quarter 2019 financial results conference call. At this time, all participants are in 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 touchtone telephone. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Jones, Chief Financial Officer. Please go ahead.

Good morning, and welcome to our conference call to discuss Cohue's third quarter results and fourth quarter outlook. I'm joined today by our President and CEO, Luis Muller. Luis and I are calling from our operations in Germany, and we appreciate you accommodating this early morning call. 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 on Cohue's website 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, will be participating in the eighth annual New York City Summit on Tuesday, December 17th, and the Needham Growth Conference, also in New York City, on January 14th. Please contact us if you would like to request a meeting with the company at these events. And now to the safe harbor. During today's call, we'll 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 co-use 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, November 4, 2019. and Kohu assumes no obligation to update these statements for developments occurring after this call. Finally, during this call, we'll 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, Kohu's president and CEO. Luis?

Good morning. Today I'm going to touch on highlights for the third quarter, briefly describe a couple of opportunities for next year, and then pass it back to Jeff to comment on the financial results and fourth quarter guidance. Cohue delivered stronger than expected non-GAAP profitability on sales of $143.5 million, despite continued softness in the automotive and industrial segments, which are historically our largest served markets. Lower analog IC demand is expected to remain a near-term headwind to handler sales, particularly gravity systems, while automotive ADAS is forecasted to strengthen, benefiting our pick-and-place business. As a reminder, most of our handler business are for automotive and industrial applications, where Kohu is the leader in tri-temperature testing, with a large install base of equipment that provides long-term recurring revenues. In mobility, 5G applications are driving an increase in utilization of RF testers and third handlers, which is recently trending above the overall average of approximately 77%. Third quarter orders were 44% system and 56% recurring, validating our strategy to build a solid foundation of recurring business that helps offset capital equipment cyclicality. We also captured a key design win at a leading U.S. mobile semiconductor manufacturer, adding an approximately $10 million a year customer and broadening our leadership in RF tests. Third-quarter orders continue to strengthen in mobility, cloud, data center, and AI, where we have greater ATE exposure and growing contactor sales to RF and power management IC tests, and a large thermal handler install base for microprocessors. These segments are expected to gain momentum in 2020 with 5G power amplifiers, antenna tuners, switches, and filters tested on our equipment, supporting the initial ramp of next generation smartphones coming to market next year. We believe that we're seeing the beginning of a new growth cycle driven by 5G communications, enabling higher data rates and capacity with enhanced mobile broadband, Massive machine-type communications on narrowband Internet of Things and mission-critical applications on ultra-reliable, low-latency communications. Our products are gaining traction in sub-6 GHz 5G production and demonstrating differentiated value for Wi-Fi 6 and millimeter wave applications. We estimate that the addressable market for our RF testers will grow from about 60 to approximately $170 million in the next three years, and we expect to remain the leader in this space, supplying both U.S. and China-based customers. In fact, China was a growing region for our tester sales this last quarter, countering some initial fears from the trade war. We're also optimistic about the prospects of selling complete solutions consisting of testers and handlers combined with contactors, for semiconductor tests across different applications. We recently ramped a complete solution supporting a global satellite communication project that is forecasted to grow next year. Adding to that are opportunities in the approximately 200 million flat panel display driver IC test segment where we continue to make inroads in Taiwan, China, and now also Korea. It's too early to speak with certainty about next year, but We expect 5G to enter the next phase of expansion, with initial volume smartphone production and a return to some level of normality in the automotive market, leading to semi-test growth year on year. We will continue to carefully manage the P&L, maximizing profitability, but also ensuring the proper investments to drive mid-term growth, particularly on testers and contactors that have much to gain from cross-selling with our larger handler business. It's been one year since the acquisition of Xera, and I'm happy to report being on track for $40 million annual run rate cost synergies by the end of this quarter. The main synergy objectives are being achieved ahead of schedule, having substantially restructured our German operations, closed a factory in Fontana, California in the third quarter, and on track to close our Penang, Malaysia factory by the end of this quarter. More importantly, We're now integrated and actively pursuing cross-selling customer opportunities, such as the RF satellite communications that have the potential to add differentiated value to our customers. Now I'd like to turn it over to Jeff to review our third quarter results and provide fourth quarter guidance.