Cohu, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Coho Incorporated's first quarter 2020 financial results conference call. At this time, all participant lines 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 1 on your telephone keypad. Please be advised, today's conference is being recorded. I would now like to hand today's conference to Jeff Jones, Chief Financial Officer. Please go ahead, sir.

Good afternoon, and welcome to our conference call to discuss Cohue's first quarter results and second 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, 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 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 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, May 5, 2020, and COHU assumes no obligation to update these statements for developments occurring after this call. Finally, during the 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?

Luis Muller Hello, everyone, and thanks for joining us. Today, I will describe how CoHUE is responding to the COVID-19 pandemic. discuss some of our accomplishments in the first quarter. Then I'll provide some perspectives on Q2 and what we expect for the rest of the year. Jeff will later discuss financial results and provide guidance for the second quarter. First and foremost, Cohio is committed to the health and well-being of our partners, including our employees, customers, and vendors. And as such, We have implemented a strict set of policies at our global sites to safeguard our partners. The COVID-19 pandemic has had some impact to our supply chain in Southeast Asia and to our operations in Malaysia and the Philippines. Sales in the first quarter were approximately 139 million and about 6.5 million lower than expected due to the movement control restrictions imposed during the second half of March in these countries where most of our products are manufactured. Despite these challenges, I'm proud of how we have pulled together globally to ensure business continuity during this unprecedented set of events. Now onto more details on our business results. Q1 marked the second consecutive quarter of record bookings, mostly driven by mobility customers accelerating the adoption of 5G test solutions for RF front-end devices. Thank you very much. Our handler business is benefiting from our broad product line with high-volume, thorough and pick-and-place system sales, both for RF as well as mobile processor tests where Cohus proprietary thermal technology is a key enabler. With book-to-bill close to 1.3 and backlog at record level, overall orders were split 52% systems and 48% recurring. and mobility represented one-third of our system bookings. Computing and network were also strong in the quarter, and although 14% of system orders, it represented the largest portion of our recurring revenue. As previously stated, we experienced an uptick in automotive semiconductor business in late fourth quarter that continued into the first half of Q1, closing the quarter at 14% of system orders. Our PCB test business has remained strong at 14% of orders and mostly driven by server and network equipment as well as telecommunications segments. Late into the first quarter, several of our customers started placing handler and contactor orders for testing semiconductor devices used in medical applications that include ventilators, respirators, pacemakers, and x-ray machines. We categorized these in the industrial and medical semiconductor segment that came in at 11% of system orders. Now turning to second quarter, we expect that supply chain and government-imposed operating constraints at Cohue factories will continue through mid-quarter, with manufacturing progressively increasing to normal output by end of June. Near-term product costs will be higher as we increase outsourcing to compensate for COVID-19 limited production output from our internal operations, particularly in the contractor business. Although this will impact our performance near term, we completed the manufacturing consolidation from the XR acquisition, reduced the cost structure of our products, and expect to see benefits in future quarter performance in line with our financial model. We forecast in-market demand to remain strong in computing and network, with data center growing in 2020 as enterprises add bandwidth and balance their networks to support higher traffic and new applications related to work from home. In mobility, 5G-driven semiconductor content should continue growing in phones, but we expect customers to take a pause to gauge the impact of COVID-19 pandemic on consumer spending. While medical applications are expected to be strong in Q2, these represent a small portion of total semi-spend in capital equipment and are not likely to compensate for a decline in industrial-driven segment demand. Automotive is experiencing the greatest negative impact following plant closures by all major auto manufacturers worldwide. We are unable to predict the rest of the year at this time, but expect computing and network applications to remain strong, some growth driven by new gaming consoles later this year, continued weakness in automotive for the balance of 2020, and a pickup in demand for 5G that should accelerate into 2021 as countries fight to control the communication backbone of the expanded digital economy. Well, we entered the second quarter with approximately $172 million in cash, and a strong backlog, the continuing impact of the COVID-19 pandemic on short-term semiconductor tests and inspection demand remains uncertain. As a result, we are proactively managing cash flow and took steps to reduce operating expenses and capital expenditures. We implemented a temporary 20% salary reduction to the CEO and 15% reduction to other executive officers. and proportionally lower reductions to all employees worldwide. Our board of directors is participating with a temporary 20% reduction to their cash compensation. The COHU board also authorized suspending our quarterly cash dividend. This will result in approximately $10 million of annualized cash savings, which we expect to utilize for deleveraging and strengthening our balance sheet. While there will be challenges ahead in the second half of this year, I'm very excited and confident about our future. Cohue is well positioned in mobility, computing, and network semiconductor and PCB test segments. While automotive and industrial are weak for now, we are the handler and contactor leader in these segments and should emerge strong again in an eventual 2021 market recovery. This is simply a delay in our path, and Although a crisis is always painful, it also creates an opportunity for the company to become leaner and faster. KOU has delivered a strong 21% compounded annual growth rate since 2015, and our strategy remains focused on outperforming the industry growth rate. Now I would like to turn it over to Jeff to review our first quarter results and provide second quarter guidance.