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spk09: Good day and thank you for standing by. Welcome to COU's third quarter 2023 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Jeff Jones, Chief Financial Officer.
spk01: Good afternoon and welcome to our conference call to discuss CoHUE's third quarter 2023 results and fourth quarter 2023 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 CoHUE's filings with the SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, November 2nd, 2023, and CoHUE 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?
spk04: Luis Muller Good afternoon. Third quarter gross margin and profitability were again strong driven by higher than forecasted margin on pastors and CoHUE's resilient recurring business. Q3 non-GAAP gross margin of 47.1% continues to benefit from our focus on product differentiation, reducing cost, and the greater contribution of recurring that was 51% of Q3 total revenue. On October 2nd, we announced the acquisition of Equipped Test Engineering, which we refer to as EQT, with the goal to expand our test interface products and recurring revenue that continues to deliver resilient profitability through industry cycles. EQT's trailing 12 months revenue was approximately $20 million, selling primarily semiconductor test contactors to Tier 1 IDM and OSAT customers. The rationale for the acquisition is to broaden our product portfolio in mid- to high-power test contactors, better serving our automotive and industrial semiconductor customers. EQT also enhances our complex machining capability and manufacturing expertise, expands engineering capacity, and customer presence in Southeast Asia. This acquired business will contribute three months' revenue to our fourth quarter guidance, and it is forecasted to be accretive to Q4 adjusted EBITDA. In support of plans to grow CodeHue's interface business, we're constructing a new 92,000-square-foot facility in the Philippines. that is approximately 85% complete and targeted to be operational in the first half of 2024. As we have been communicating, it remains our strategy to expand recurring revenue, which was $322 million over the last 12 months with a three-year compound growth rate of 6% through Q3. The service portion of this revenue has delivered a year-to-date renewal rate of approximately 92% in 2023 with customers increasingly relying on Cohue personnel to support the large active install base of over 24,600 systems across 108 customers. In the third quarter, we landed three new applications for test contactors at Cohue's Tier 1 customers, with an estimated potential $6.5 million revenue stream per year. We also received orders from two new customers for DI Core to monitor equipment performance and a first order for AI inspection that is a new module in our software suite that provides artificial intelligence services to increase vision yield. We continue to make progress with DI Core, adding new capabilities and expanding the software as a growth service model for the company. This is due at the beginning of a long journey to grow software services. but one we view as a very attractive business as test and inspection complexity requirements increase along with Cohuse equipment install base. Switching over to Cohuse systems business, it contributed 49% of third quarter revenue, decreasing two points quarter over quarter in reflecting weak demand across all markets. Estimated test cell utilization remained flat quarter over quarter at 73%, with automotive and industrial down one point sequentially, utilization in the consumer segment was two points up, and mobility increased by one point. All small changes, but more indicative of the inventory digestion coming to an end, particularly in the smartphone market. The computing segment showed a two-point sequential utilization decline, following what has been a small increase in demand to test AI-related GPUs in prior quarters. At the macroeconomic level, with the ongoing Russia-Ukraine conflict and now the Hamas-Israel conflict, and while the economy adapts to a higher interest rate environment in continuing trade restrictions with China, it is not surprising that customers are taking a more cautious approach on capital spending. It is too soon to forecast market dynamics and revenue for 2024, but perhaps safer to remain cautious on near-term revenue projections and assume this market downturn will last longer than we originally expected and into the first half of next year. We're modeling incremental growth in the second half of 2024 in line with our customers' recent forecasts. We remain optimistic on the long-term prospects for the technology industry and in particular semiconductor test markets, and as usual, The longer it takes for a recovery inflection, the steeper the upcycle ramp will be. However, in the near term, we will continue to look for ways to lower quarterly expenses while focusing on customer design wins and qualification of new products to deliver organic growth when market conditions improve. We will continue executing our strategy to grow recurring business, broaden the use of DiamondX into automotive and industrial customers, add to our inspection and metrology portfolio, and increase subscriptions to our emerging software business. Let me now turn it over to Jeff to provide further details on third quarter results and fourth quarter guidance. Jeff?
spk01: Thanks, Luis. Before I walk through the Q3 results and Q4 guidance, please note that my comments that follow all refer to non-GAAP figures. Information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures, are included in the accompanying earnings release and investor presentation, which are located on the investor page of our website. Now, turning to the Q3 financial results, COHU delivered strong profitability on revenue of $150.8 million, which is slightly higher than our guidance. During the third quarter, two customers in the automotive market each accounted for more than 10% of sales. Q3 gross margin was strong at 47.1%, about 110 basis points higher than guidance, driven by Cohue's resilient recurring business and differentiated products. Operating expenses for Q3 were approximately $1 million lower than guidance at $49 million. Third quarter, non-GAAP operating income was 14.7% of revenue and adjusted EBITDA was 16.5%. The non-GAAP effective tax rate for Q3 was approximately 28% and higher than guidance due to the projected concentration of annual pre-tax income in higher tax rate jurisdictions and capitalized R&D. Non-GAAP EPS for the second quarter was 35 cents. In summary, Q3 gross margin and adjusted EBITDA were strong, exceeding the mid-term financial targets at this level of revenue. Moving to the balance sheet, cash flow from operations in Q3 was $29 million, and cash in investments grew to $388 million at the end of Q3. Debt repayment in the third quarter totaled $1 million, and we ended Q3 with net cash of $7.20 per share. Cohue shares repurchased in Q3 totaled 4.7 million, and CapEx in Q3 was 4 million, with approximately 3 million related to construction of the new Philippines facility to support long-term growth prospects in our interface business. Total CapEx for 2023, including the new building, is expected to remain at approximately 20 million. Overall, Cohue maintains a strong balance sheet to support debt reduction, the share repurchase program, and investment opportunities like EQT to expand our served markets and technology portfolio in line with our growth strategy. The acquisition of EQT occurred in early Q4 and utilized approximately $48 million of cash. Now moving to our Q4 outlook. We're guiding Q4 revenue to be in the range of $136 million, plus or minus $6 million, reflecting continued weakness across end markets and low test cell utilization at customers' production facilities. Q4 gross margin is forecasted to be approximately 46 percent, better than the financial target model at this level of revenue. Gross margin for full year 2023 is forecasted to be approximately 47 percent and in line with 2022 results, despite approximately 20 percent lower year-over-year revenue. The strong gross margin performance is due in large part to CoHUE's differentiated products and our stable high margin recurring business, which adds resilience to profitability and provides consistent cash flow through industry cycles. Operating expenses for Q4 are projected to increase $1 million quarter over quarter to approximately $50 million due to the addition of EQT. The balance of CoHUE's expenses are flat quarter over quarter. We continue to exercise tight control over operating expenses and look for opportunities to lower spending going into next year without sacrificing critical new product investments and maintaining profitability while navigating through the trough of this cycle. We're projecting Q4 interest expense to be approximately $1 million and offset by interest income of approximately $2 million. We expect Q4 adjusted EBITDA to be approximately 12%, The Q4 forecasted non-GAAP tax rate is approximately 26%. The diluted share count for Q4 is expected to be approximately 48.1 million shares. That concludes our prepared remarks, and now we'll open the call to questions.
spk09: As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.
spk02: Our first question comes from the line of Charles Shi with Needham & Company.
spk10: Charles, your line is now open. Hello, can you hear me?
spk09: Yes, we can hear you now.
spk06: Hey, good afternoon, Louis and Jeff. Thanks. I just want to start with the first question on the Q4 guide. I thought about a quarter ago you were expecting maybe a flattish environment into Q4, but it seems like it's weakened a little bit. Can you kind of walk us through what the puts and takes in terms of the Q4? And if any early indication about Q1 next year, that would be great. Thanks.
spk04: Hi, Charles. This is Luis. Yes, in Q4, in terms of puts and takes, we actually saw continued caution buying from our automotive and industrial customers in the third quarter going into Q4. At the same time, we see some of these customers starting to push out some of the deliveries and some of the orders into 2024. As I said in my prepared remarks, Auto and industrial came down, utilization came down about a point in the quarter. And I wouldn't be surprised if that doesn't decline another point or a couple points in the fourth quarter. At the same time, we saw a little bit of an opposite trend on the mobility side, where utilization has improved a point quarter over quarter. In fact, mobility was the only segment across the board than in absolute dollar terms. We saw an increase in orders on the third quarter. Nevertheless, as you know, CoHue's business is much more indexed towards automotive and industrial analog semiconductor customers. So what we're seeing here is what you're seeing from our customer's announcement as you had a few of the large analog semiconductor customers guiding next quarter down. we're seeing the same behavior. And quite honestly, at this time, we're not going to be calling out specificity to first quarter next year. I think we're going to go quarter on quarter here as we see this thing evolve and looking for another improvement or significant improvement in mobility or another improvement turn on the automotive and industrial markets. Thanks.
spk06: Maybe a follow-up question. I think you made a commentary. You made a comment on Tesla utilization versus your projected revenue levels. Obviously, utilization seems to be flattening out overall from Q3 to Q4, but the revenue is down a bit, right, given some of the post-tax you just mentioned. But can you kind of help us understand, is there any correlation between What kind of Tesla utilization usually would indicate what kind of revenue level or such correlation doesn't exist? Thanks.
spk04: We tend to see capacity additions when utilizations are above 80%, at or above 80%. And below that, they tend to be more technology-driven or customers winning a new device application, a new socket to their end customers. So again, capacity adds on the capital equipment side, 80% and above, otherwise more technology driven. On the recurring side, it typically goes point for point. Utilization drops a point. You could see recurring drop a point. So recurring is a lot more stable as we see utilization fluctuating just a couple points up and down. But as you pointed out, at the end of Q3 utilization was flat over quarter over quarter from the end of Q2.
spk10: Thanks, Alois.
spk09: Our next question comes from the line of Brian Chin with Stifel.
spk05: Hi, Brian Chin at Stifel. Thanks for letting us ask a few questions. Maybe start off with maybe financial model. Maybe this is for you, Jeff. Compared to prior periods when revenue was around sort of this 140-ish plus or minus level, I think your guidance suggests gross and operating margins may be 400 to 600 basis points higher this down cycle. I guess, firstly, does this feel like trough revenue? And secondly, can you discuss the key changes in the model trough to trough that allow the company to better protect profitability in challenging market conditions?
spk01: Yeah, it certainly does feel like a trough, but as Luis said, we don't have a lot of clarity on the first half of next year. So we're just kind of playing that week by week here. As you referenced, Brian, we just go back to 2021 with much higher revenue, but gross margins were in the 40% range. And so over that time, we've done We've made a lot of improvements in reducing costs, primarily in the handler products as well as the contactor products. We've had some price increases to cover some of the inflationary costs that we've incurred. But again, we've done a lot to reduce product costs, improve manufacturing efficiencies, productivity, things of that nature. So now, as I stated in my remarks, revenue down approximately 20% year over year, and we're holding a 47% gross margin, which was essentially the same as last year. So margin's been very resilient. As you know, recurring revenue carries a higher gross margin, and as Luis stated, that's less susceptible to the volatility of the cycle. And so that's obviously helpful as that becomes a higher percentage of our total revenue. And that's why it's really a key part of our strategy as well to grow, to grow the recurring revenue.
spk05: All right, great. Thanks for the color. And then maybe for Luis, for a follow up. Is the 4Q revenue decline sort of equal parts, auto and industrial? And in the past, You've talked about the composition of your auto revenue as being kind of equally distributed across EV, ADAS, and traditional auto. Based on the incremental softness you're seeing, can you distinguish which of those buckets are more impacted or resilient? And does that give you any optimism regarding either duration or magnitude of slowdown in those markets?
spk04: Yeah. So you start from the back here. The distribution across... ADAS and EV and everything else, auto, it still stays about the same. I think we're about a third, currently about a third on each one of those segments. As far as the drop quarter over quarter, we saw really a six points drop on the revenue associated with automotive and a four point drop on revenue associated with industrial markets. So, you know, in reality, you look at this proportion, looking at the revenue size, it's more auto-related than actually industrial-related quarter over quarter, Q2 to Q3. You know, as far as, you know, I think the other question is confidence on a go-forward basis. Generally speaking, we see many of our auto and industrial customers, they tend to be the same customers, by the way, investing significant capex in facility constructions this year. And we've been told the plan is and continues to be to tool up those facilities because across the board, the forecast for semiconductor growth in the automotive market is for a 16% CAGR through 2026, if I'm not mistaken. And industrial is 9%. So, you know, the forecast continues to be that both automotive and industrial are the highest-growing semiconductor segments to bat on, but the expectation is, you know, facility constructions coming in line, tooling up of those facilities start at some point next year. The question really, you know, the $100 million questions here is, you know, do we start seeing those orders in Q2, or do we start seeing them already at the late part of Q1? That's still an open question.
spk10: Okay, great. Thank you.
spk02: Our next question comes from a line of Krish Sankar with PD Cowan.
spk08: Hi, this is Bob Mertens on for Krish. Thanks for taking my questions. My first one is just in terms of The test utilization, I know you gave some color on the individual market segments and how those progress through the quarter, but just sort of looking ahead into the December quarter, just trying to think of how you would expect each end market to progress. Is it sort of across the board with the utilization probably dipping down, or is there any segment that's been holding up a bit better?
spk04: So we don't typically forecast utilization, Bob, but I'll give you my sort of qualitative perspective here. We've seen something I haven't mentioned in the prepared remarks. We've seen OSAP utilization picking up three points quarter over quarter from Q2 to Q3, and IDMs down one point. And I think that correlates well with also by market with automotive and industrial down a point, and mobility up one and consumer up two points. I would venture to say that based on current order forecast, that the mobility and consumer market will continue to trend up by the end of Q4, and that automotive and industrial may continue to trend down by the end of Q4. How does that kind of shape out from the approximately 73% utilization we are today? I don't know. I think there are two competing forces here. One is the automotive and industrial market pausing for a quarter or two. And the other one is the mobility and the consumer is starting to pick up some momentum as we start to see inventory levels flush out in those two segments.
spk08: Got it. That's helpful. And then just quickly on The acquisition, in terms of the revenue profile, I just wanted to make sure I heard you right. Did you say that was the business that's more geared towards the industrial and automotive markets in terms of that $20 million trailing 12-month revenue profile?
spk04: That is correct. The EQT had a trailing 12-month revenue of approximately $20 million. It's all recurring, and it was more tailored towards the automotive and industrial market. They were doing a good job serving a few Tier 1 IDM customers and OSAPs in Southeast Asia. And for us, it really adds to our portfolio, particularly in the mid- to high-power test contactor segment. So think about more in terms of EV and power management in the vehicle or in an auto or industrial application. Okay.
spk10: Great. Thank you.
spk09: Our next question comes from a line of Christian Schwab with Craig Hallam Capital.
spk07: Hey, great. Thanks for taking my question. Most of them have been answered. I just have one. Last quarter, we talked about $30 million worth of handler orders that were going to be pushed out. that you thought were going to be accepted, you know, obviously from your guidance that's not happening. So can you give us an update of what you think is going on there, please?
spk04: Well, we do have, we had about 100 systems that we're sitting waiting on FASTERS to be integrated. That number has come down substantially now. So what we see today is really a weaker demand of the automotive and industrial market going into the fourth quarter. That's kind of restating what I said before, but that's pretty much the status.
spk07: Okay. So we've kind of satisfied all of that, it appears. Okay. So as we begin...
spk04: Christian, just to clarify, it's never zero, right? But that number has come back to a normalized level that we typically see on a quarter-over-quarter as we wait on testers, and I'm assuming in some cases testers are waiting on handlers as well.
spk07: Okay, okay. That was my only question. Thank you. You're welcome.
spk09: As a reminder, that is star 1-1 to ask a question. Our next question comes from the line of Craig Ellis with B Reilly Securities.
spk03: Yeah, thanks for taking the question. Luis and Jeff, I wanted to follow up on some of the inquiry just about the demand environment, but do it in a different way and maybe in a way that sheds some light on the business a little bit longer term, even though I think visibility is low, so it's hard to draw the arc of what next year's revenues would look like. So what I wanted to do, Luis, is see if you could just give us a characterization of how customer engagements are going for you across your different businesses. Are they pointing to things that leave you confident that there's increased share of wallet, SAM expansion, and success for some of your newer, more emerging product drivers? Or in this environment, are you finding that some of those avenues are closing down? Just help us understand what the customer engagement activity looks like, please.
spk04: Yeah, Craig, the funny thing is when markets are down is when the customer engagements usually go up and the demand on engineering goes up. You know, we have... had an email exchange just before this call about a customer that had done an acquisition into a space that they were not participating in. And now, you know, talking about qualification of one of our product lines to satisfy this new set of products that they're bringing to market. That's one example. We have a few engagements on the DiamondX tester platform for particularly the analog PMIC space. But as I commented not too long ago, actually, it's very interesting to go through these qualifications and hear the great performance and how much faster your test time is relative to the current incumbent and how wonderful it is. But it's a little sad to hear, you know, let's get back and when we have incremental capacity needs, we'll start buying the tester. Well, that happens to be not now, not this quarter. So we do have quite a few engagements on the DiamondX analog PMIC side. As you can imagine, fewer engagements on the handler side just simply because of our very dominant market share on the handler space. We are already serving all the large customers. We have quite a bit of activity on the contactor side. They tend to be a longer list of smaller wins versus the typical capital equipment where you really count the engagements on one hand and they could mean, you know, 10, 15, 20 million dollars. So, to sum up, a lot of activity engineering is extremely busy and that's usually the case in a down market environment. And that's why, as Jeff pointed out, we will continue to look for ways to lower op-backs on the downturn, but we also don't want to cut back from those critical new product developments and customer engagements. Those are very important to be in the right place at the right time when the market turns up and the demand picks up again.
spk03: That's really helpful, Luis. The next question I wanted to get into is related to the EQT deal. You might have mentioned it, Jeff, but given that this is a 20 million trailing one-year revenue company is it fair to think that you've baked in about five million into guidance and and the more longer term question is can you just walk us through some of the integration steps with this business and how long would it be before you could look for another tuck-in like this to further bolster recurring well i think we're ready to go we're looking for the next opportunity right now so
spk01: We're ready. If there was another opportunity out there, I think we could capitalize on that pretty quickly. With respect to the revenue outlook, they're not immune to the downturn either, so it's not a full run rate or 5 million that you mentioned. It's a number that's lower than that. And then, sorry, I think I'm missing one of your questions there.
spk03: Oh, I was just talking about some of the steps on integration of EQT. Yeah. Yeah.
spk01: The approach the approach on EQT is to really sort of maintain their their operations, sort of as is for the foreseeable future. And we think we have opportunities more on the front end. We also think we have some opportunities perhaps to move some of our qualifications, new products into their manufacturing operation and gain some efficiencies through their operating technology. So that's opposed to the typical, you know, we're going to gain, you know, X million dollars of cost synergies. We're thinking more on the sort of operations technology as well as something on the on the revenue front.
spk04: Yeah, I was just gonna add on the revenue front with they do have a few products that are interesting to our customer base. So we're starting the dialogue to get qualifications going on some of the ETT product lines.
spk03: And how long would that call process take? Is that a quarter to Luis or is it longer or shorter?
spk04: Realistically speaking, Craig, I would give it three quarters. I think a quarter-two is when somebody is on an expedite mode and on a ramp mode and they want to get something done quickly. I think right now customers are taking their time until they're pressed for time. So I'm going to say three-quarters.
spk03: Sure. Okay. And then the last one is just a little cleanup item. Jeff, the deck usually has on the slide that shows the recurring and system's mix and some of the other stats, the gross margin for the two different businesses. I didn't see that this time. Can you just hit us with recurring and systems gross margin?
spk01: Sure. Yeah, no problem. Recurring gross margin in the quarter was 55% and systems was 39%.
spk03: All right. And that systems number, I think, is down a little bit from the prior quarter. What was that?
spk01: It's down 200 basis points. Yeah, just a matter of mix.
spk04: And lower factory utilization as well, right? I mean, although we're largely outsourced manufacturing, we still have factories in Malaysia, Philippines, and Japan. And so with lower systems revenue, there's less absorption of overhead on the system side.
spk03: Yep, makes sense. Thanks, guys. Thank you.
spk09: That concludes today's question and answer session. I'd like to turn the call back to Jeff Jones for closing remarks.
spk01: I'd just like to say thank you to everybody for joining today's call and we look forward to speaking with you soon. Thanks and have a nice day.
spk04: Thank you.
spk09: This concludes today's conference call. Thank you for participating. You may now disconnect.
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