Cohu, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Kohu Incorporated's third quarter 2020 financial results call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. As a reminder, this conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jeff Jones, Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning, and welcome to our conference call to discuss Cohue's third quarter results and fourth quarter 2020 outlook. I'm joined today by our President and CEO, Luis Mueller. 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. It'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, October 29th, 2020, and COHU 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, Co-U's President and CEO. Luis?

Luis Muller Thanks, Jeff. Good early morning, everyone, and thanks for joining us. Today I'll discuss some of the dynamics from third quarter, what is driving your expected business improvement into next quarter, summarize how Cohue is improving its infrastructure and adapting to the pandemic, and highlight our alignment with momentum growth markets for 2021. Revenue in the third quarter was $150.6 million, exceeding our updated guidance, with business conditions continuing to improve throughout the quarter. As orders strengthened, we were able to accelerate some recurring shipments in support of customers' production ramps. Our operations team and supply chain partners did a great job meeting customer needs in the third quarter and even more so going into the fourth quarter as we'll soon discuss. Third quarter orders were split 40% recurring and 60% systems with a sharp increase in demand for our testers and handlers and another sequential record booking quarter for PCB test equipment. Overall, Estimated test cell utilization increased three points, quarter over quarter, to 81% at the end of September. Mobility continues to be a very strong segment for Koyu, particularly for RF tests of devices going into next-generation 5G smartphones. In third quarter, we launched a suite of RF test instrumentation addressing 5G, Wi-Fi 6, and ultra-wideband requirements. We're seeing strong and wide customer adoption for these products and are successfully managing an accelerated production ramp. I couldn't be more proud of our engineering, operations, applications, and service teams for delivering such a successful product introduction. There is much more to do in fourth quarter and into 2021, but so far this has been a great testament of value creation from our October 2018 acquisition of Xera. Steel and mobility. We're also managing a fast production ramp for handlers used in testing application processors and RFICs and growing customer traction for the new NEON package inspection platform. 5G deployment is still in the early stages with estimated 16% penetration in smartphone units. Industry analysts expect that this market will continue to expand in 2021 and beyond likely reaching peak demand in 2023 or 2024. There are other applications in automotive, industrial, and IoT that are not yet considered in this forecast and should extend the technology beyond this time horizon. Test complexity is also increasing, leading to higher ASP systems and greater test intensity. The net result is very positive for Cohus RF testers, handlers, and our Lio line of contactors. In third quarter, we also saw new U.S. export restrictions to Huawei. I believe everyone understands that the smartphone demand remains unchanged, but the business redistribution is translating into incremental orders for Kohu products from customers where we have greater share. Finally, there were new U.S. export restrictions on China military end-use applications and end-users. We have conducted reasonable due diligence on our customers customer base, and don't believe this rule will impact Cohue at this time. In third quarter, we started seeing a recovery in volume orders from automotive and industrial semiconductor customers. This ramp is happening sooner than anticipated and led to a near three-fold increase quarter over quarter in automotive system bookings and two-fold increase in the industrial segment. Despite all the excitement, the combining segments were still about half the order rate from 2018 and should have more room for improvement in the near future. Utilization across automotive semiconductor customers is picking up, and so are orders in the first few weeks of fourth quarter. It is no surprise that automotive demand is coming back stronger for testing ADAS and power management semiconductors, as well as sensors that include new optoelectronic devices. In the consumer segment, we're seeing initial deployments of media and micro LEDs in new large panel TVs driving the forecast for incremental task capacity. Also new, more powerful gaming GPUs are set to benefit from co-used thermal handlers that optimize yield for actively managing thermal dissipation during tasks. The computing segment is going through transition. New edge devices, and supplier diversification are creating new business opportunities for thermal handlers and subsystems. As I mentioned in an earlier call, we have been working to deliver time to yield value to several customers through better integration of our test cell elements, tester, handler, and contactor. In third quarter, we captured a design win for RF test where a major OSAT recognized the value of buying a complete test cell from Kohu that accelerates time to achieving target production yields and overall equipment efficiency, or OEE. We are working with other customers across different markets to demonstrate similar capability. I hope to describe new application wins in coming quarters. On the contactor front, with a sharp increase in system orders, our contactor attachment rate is now at 29%. As I previously explained, this number will fluctuate up and down quarter over quarter. In light of rapidly improving business conditions, strong cash generation, and our forecast during third quarter, we took action to reduce outstanding principal under a Term Loan B debt associated with the financing of the XERA acquisition by $17.3 million. Now, looking at the impact of the COVID-19 pandemic to our business, This has been an incredibly challenging year for our employees, customers, suppliers, and communities. We're committed to ensuring the safety of all stakeholders, to protecting our livelihood, and doing the best we can for our communities. COHU has increased supply chain resilience and implemented policies to safeguard our employees, ensure business continuity, and support our customers. Because of the pandemic, COHU has reduced travel and other expenses, And we're now finding new ways to support customers. Among these, we're implementing virtual reality-assisted technologies to bring experts to the field without leaving their homes. We're excited to pilot new technologies like this to enhance customer support and expect long-lasting benefit from such solutions, including lower operating expenses when the pandemic crisis subsides. Now, looking ahead, We're encouraged by momentum across Cohue's main market segments and by customer interest for our new products. We'll be guiding fourth quarter revenue and profitability up and are forecasting this strength to continue into 2021. Cohue is poised to grow next year with accelerating 5G deployments compounded by a projected increase in smartphone units, growing ADAS and electrification on anticipated expanding automotive unit sales, new opportunities in computing with edge processing, AI, and next-generation GPUs, and expected recovery in the industrial segment with improving global GDP. All in all, Cohuse is improving its operations and service infrastructure to meet the evolving pandemic-driven challenges, lowering operating expenses, and aligning products with momentum markets that will deliver revenue growth. Before we continue with financial results, I'd like to announce a senior management change And thank Pascal Rondet for his outstanding leadership of Cohue's global customer group over the past two years as we integrated Xera. Pascal will be scaling down his time commitment starting in first quarter next year and will eventually transition from Cohue at the end of first quarter 2022. Looking forward, I'm pleased to announce that Chris Borson, who is currently the Senior Vice President and General Manager of our past handler group, will assume Pascal's role around mid-February next year. Chris is a highly respected industry veteran with strong multicultural and business experiences, and it's held in high regard not only by customers, but all cohue. In conjunction with this transition, our three handler business units will report directly to me. Now I'd like to turn it over to Jeff to provide details on third quarter results and share fourth quarter guidance.