Cohu, Inc.

Good day and thank you for standing by. Welcome to the CoHue Inc. 3rd Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Jones, Chief Financial Officer, please go ahead.

Good afternoon and welcome to our conference call to discuss CoHUE's third quarter 2022 results and fourth quarter 2022 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. 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, October 27, 2022, 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, CoHUE's President and CEO. Luis?

Luis Muller Hi, everyone. Good afternoon and thanks for joining us. CoHUE reported another great quarter with revenue of $206.7 million in non-GAAP EPS at 74 cents, exceeding the midpoint of guidance. Non-GAAP gross margin of 47.5% continues to progress toward our three-year target financial model and benefited from strong recurring business and sale of differentiated products in the quarter. Free cash flow was approximately 16.7% of revenue in the third quarter, delivering strong cash generation in line with the model. Estimated test cell utilization came down two points quarter over quarter to about 82%, reflecting known ongoing softness in mobility and consumer and markets, but also moderating conditions in the automotive and the industrial markets. Cohue's significant recurring business has produced a three-year compound annual growth rate of 6.5% and represented approximately 42% of third quarter revenue at 54% non-GAAP gross margin. In the last four quarters, recurring was $336 million, or 41% of sales, delivering a profitable and resilient revenue stream through industry cycles. Our recurring revenue is primarily made up of test contactors and device application kits that are mainly IC design driven and benefit from the introduction of new semiconductor products by our customers. The balance, or approximately 43% of our recurring over the last 12 months, comes from service revenue across 280 customers' manufacturing facilities in 31 countries. Our service business unit manages a large volume of transactions through a cloud-based automated order management system, handling over 1 million parts shipments per year. and provides onsite and remote assisted support to COHU's 23,700 equipment install base. This is not part of our customer's capital budget, but a necessary operating investment to ensure continued semiconductor production. And as such, we have many customers engage in support contracts with an annual renewal rate of more than 87% in the first half of 2022. Moving on to our DI Core data analytics software initiative. We added another customer in the third quarter. This one is a leading European supplier of optoelectronics semiconductors. We expect DI Core to help fuel continued growth of Cohue's recurring business in the coming years, delivering greater equipment output and uptime for the install base. data analytics could represent a $15 to $25 million profitable revenue stream for Cohue in a few years. And we remain committed to broadening the penetration of the DICore software offering, expanding functionality with predictive maintenance, contactor analytics, and more. Switching over to Cohue's systems business, it represented 58% of third-quarter revenue at 43% non-gap gross margins. System revenue distribution in the quarter was well-balanced across end markets, notably stronger in the automotive and industrial segments. Automotive ADAS and EV applications continue to be the primary driver, with many customers adopting GoHue's T-Core technology for at-temperature tests. During the quarter, we had design wins testing high-end processors used in server farms, capturing new orders and system acceptance with large U.S. headquartered customers. Cohu's differentiated thermal technology was a determining factor to securing these new businesses as we continue to demonstrate the greater TAS yield advantage of our T-Core technology. We're also winning new business for TAS and inspection of non-good dye silicon carbide power devices. This is a growing opportunity across many customers, integrating Cohue's automation equipment with our proprietary high-power contactors. We have systems shipping to a major U.S. silicon carbide manufacturer in the fourth quarter, and we expect soon to have customer acceptance with strong volume forecast over the next two years. Also, in the third quarter, Cohue introduced a new integrated test, automation, and inspection solution for high signal-to-noise ratio MEMS devices. essentially precision sensors. We anticipate this product gaining market traction with applications across automotive, mobility, and industrial robotics. As stated earlier, gross margin is steadily expanding with the transition of contactor manufacturing to our Philippines operation, ongoing progress to mitigate component shortages and lower costs, and development of differentiated products for test and inspection of silicon carbide MEMS, ADAS, and other advanced semiconductors. Cohuse prospects remain strong and aligned to secular growth applications. In the third quarter, we repurchased about 638,000 shares at an average price of $27.74, reaffirming our belief in Cohuse growth initiatives. We're executing well against our strategic plans, are positioned to remain profitable during periods of market uncertainty, and we continue to make very good progress revamping our product portfolio with differentiated tasks and inspection solutions. Let me now turn it over to Jeff to share details on third quarter results and provide our fourth quarter guidance. Jeff?