Cohu, Inc.

Good morning, ladies and gentlemen, and welcome to the COHU, Inc.'s 4th Quarter and Fiscal Year 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 today, Mr. Jeff Jones, Chief Financial Officer. Please go ahead, sir.

Good morning, and welcome to our conference call to discuss Cohue's fourth quarter results and first quarter 2020 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 at 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. 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 SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, February 13, 2020. and Kohu 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, Kohu's president and CEO. Luis?

Luis Muller Hi, good morning. I'd like to take a moment to reflect on last year's performance, discuss fourth quarter market dynamics, and look at our business prospects for 2020. I'll then pass it back to Jeff to comment on financial results and first quarter guidance. In 2019, Cohue delivered the fourth consecutive year of increased revenue, with a four-year compounded annual growth rate of 21%. We accelerated the integration of XERA amid a challenging market environment, making substantial progress towards our financial target model and delivering $40 million of annual run rate cost synergies five quarters after that acquisition and ahead of schedule. We also made critical investments in new test instrumentation development, consolidation of handler and contactor product portfolio, that will enable revenue growth supporting our customer's roadmap and projected capacity expansion in 2020. Turning to fourth quarter, orders were split 51% systems and 49% recurring, with overall sequential dollar increase across all market segments. Estimated test cell utilization gained three points quarter over quarter to 80%. The mobility segment, was 30% of total system orders and benefited from 5G-driven business in late Q4 for third handlers and testers for RF flat panel display drivers and power management semiconductors, along with thermal handlers for mobile processor tests of next-generation smartphones launching later this year. The smartphone market struggled in 2019, but the 5G adoption, which is still in its early stages, will be a key driver for tester sales in 2020. We're modeling 5G-driven tester shipments through third quarter 2020 as customers build capacity and thereafter attention shifts to millimeter wave for 2021 new product introductions when 5G penetration is expected to accelerate. The computing segment remains strong at 22% of total system orders, driven by data center applications that utilize our high-end thermal and automation equipment. We also made inroads qualifying and supplying interface products for our high-end digital device test application. We expect this initial business to represent about $5 million in 2020 and potentially growing as we compete for additional sockets and increase our manufacturing capacity during the year. We saw a late December uptick in automotive that expanded to 13% of total system orders and a 50% dollar increase quarter over quarter. Our leading applications in automotive are for testing high-end ADAS processors and battery management systems for electric and hybrid electric vehicles that are forecasted to drive a steady rise in electronic content as more low carbon emission vehicles come to market. According to the National Automobile Dealers Association, sales of lightweight hybrid and electric vehicles in the U.S. represented less than 5% of total in 2019. Although many analysts project the seasonally adjusted annual rate of growth to be flat in 2020, semiconductor sales in automotive are projected to grow at greater than 7% annually for the next five years. All other segments, consumer, industrial, IOT and Optoelectronics, and PCB test grew quarter over quarter and represented the 35% balance of system orders. We expect the industrial segment to steadily improve in 2020. Overall, this should be a growth year with a return to historical seasonality. We have been tracking contractor sales with our handlers, and although we don't have a long history and much of the data is representative of a 2019 market downturn, The average attachment rate is currently at 34%. We expect this to grow through 2020, although given the higher volatility in system sales as compared to contactors, it is possible this number will fluctuate some system shipments ramp in future quarters. The consolidation of contactor manufacturing has taken a little longer than anticipated, and we are still ramping capability and capacity. addressing some inefficiencies that negatively weighted on gross margin in the fourth quarter. As we look to the coming year, we started 2020 with a higher backlog, strong customer traction, and improved order momentum, primarily driven by mobility and a late fourth quarter uptick in automotive. At the same time, the start of the new year presents some challenges, and we're closely monitoring the impact of the novel coronavirus to our supply chain and customers. Fortunately, all of our employees are safe, and our factories in Malaysia, the Philippines, and Japan are fully operational. While China represented approximately 20% of Koyu's sales in 2019, we're guiding first quarter to a slightly wider revenue range and net of approximately 10 million attributed to the impact of the coronavirus in our new ERP launch in Q1. Regarding the coronavirus, We have relatively few suppliers in China, but the disruption to their business is impacting our ability to ship some systems on schedule. We're also closely working with our customers to ensure continued support to their operations and order deliveries. Our mid-term strategy remains focused on growing top-line revenue and profitability, aligning investments in support of the 5G transition in mobility, growth in automotive with autonomous driving and electrification, Thanks, Luis. Let me begin by reviewing and