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spk01: Hello, and welcome to the CoHUE, Inc. Fourth Quarter 2023 Financial Results Conference 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 1 on your telephone. You will then hear an automated message advising that your hand has been raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Chief Financial Officer Jeff Jones.
spk05: Good afternoon and welcome to our conference call to discuss CoHUE's fourth quarter 2023 results and first quarter 2024 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, February 15, 2024, 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?
spk06: Luis Muller Hi and good afternoon. Fourth quarter results were in line or better than guidance with non-GAAP gross margin of 48.5% and EPS of 23 cents. Fiscal 2023 non-GAAP gross margin set a new CoHUE record at approximately 48%. and adjusted EBITDA was approximately 18% of revenue. Despite softening market conditions, Kohio was able to deliver strong profitability and full-year non-GAAP EPS of $1.62 per share. 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. Late last quarter, we completed construction and transferred all contactor manufacturing to a new 92,000 square foot facility in the Philippines. We held an opening event with customers on January 17th, and the facility is already ramping manufacturing of test contactors to make Q1 deliveries. The goal is to improve efficiency and quality, lower cost and lead time of interface products, positioning the company to quickly respond to demand and to capitalize on the next wave of growth. A significant aspect of our strategy continues to be to expand Cohue's recurring business, which delivered revenue of $310 million over the last 12 months with a three-year compound growth rate of 5%. Part of this is growing our software revenue. And at the end of last year, we introduced a new solution under Cohue's DI Core analytics platform, our AI inspection software. We are pleased to receive initial orders from two customers for this new AI vision capability that delivers higher first pass inspection yield. However, estimated test cell utilization dropped another two points to 71% at the end of fourth quarter. The sequential decline was entirely with IDM customers, while OSAT's utilization held flat quarter over quarter. Similar to recent announcements from our automotive and industrial semiconductor device customers, Cohue is experiencing softer demand for test and inspection systems in these markets. Utilization across other market segments also remained low at the end of Q4, with computing at 68%, consumer at 69%, and mobile at 76%. We know well the semiconductor cycles and the importance of staying focused on new product development and customer qualifications between upcycles to position the company for the recovery and ramp. We recently introduced MicroSense, which is a new MEMS tester for high signal to noise ratio microphones. In other words, precision microphones. And we received initial orders from a major US manufacturer for lab and production tests starting in the second half of this year. Our Diamond X tester inhalers We're also qualified for several new customers in China supporting local automotive and display driver IC manufacturing. We're also pursuing stronger strategic alignment with computing customers, particularly hyperscalers expanding data center infrastructure. Our proprietary thermal technology is key to testing future large data center processors, also ADAS and other intelligent devices as AI migrate to the edge applications. There is a clear trend to higher power dissipation during test, which lends itself well to co-use T-core thermal subsystems. Similarly, our DiamondX is a cost-effective versatile mixed signal tester that is being considered by several customers for the intelligent edge. DiamondX is an excellent solution for microcontrollers and digital devices at the edge node, offering low to mid-range digital device test capabilities at a very affordable cost. As AI grows in mobile devices, so will RF with the continuation of 5G deployment. We're very excited about the proliferation of new AI-capable products like next-generation smartphones, VR goggles, and other types of devices. These are an excellent fit for testing on DiamondX and for customers pursuing a broad portfolio of devices for agile applications. Although near-term demand is likely to remain subdued, our major customers have been forecasting a semiconductor recovery for the second half of 2024. With lead times now back to normal, Kohu is well-positioned to quickly respond to customers' needs as test cell utilization improves through the second half of this year and into 2025. We will continue executing our strategy to grow recurring business, broaden the use of Diamond Axe into automotive and industrial and data center customers, and to our inspection and metrology portfolio, and increase subscriptions to our emerging software business. We're pretty excited about what lays ahead with market forecasts indicating secular growth in semiconductors for automotive, industrial, and mobile applications, and the new opportunities being created for AI at the edge node. Let me now turn it over to Jeff to provide further details on fourth quarter results and first quarter 24 guidance. Jeff?
spk05: Thanks, Luis. Before I walk through the Q4 results and Q1 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 Q4 financial results, COHU delivered strong profitability on revenue of $137.2 million which is above the midpoint of our guidance. Full year 2023 revenue was $636.3 million. Recurring revenue, which is largely consumable driven and more stable than systems revenue, represented 54% of total revenue in Q4 and 49% of full year 2023 revenue. During the fourth quarter, one customer in the automotive market accounted for more than 10% of sales. And for full year 2023, One customer in the automotive market accounted for more than 10% of sales. Q4 gross margin was strong at 48.5%, about 250 basis points higher than guidance, driven by lower than forecasted manufacturing costs, and co-used resilient recurring business and differentiated products. Full year 2023 gross margin was 47.9%, which is 70 basis points higher year over year and sets a new annual record for COHU. Operating expenses for Q4 were in line with guidance at 50 million. Fourth quarter non-GAAP operating income was 12.2% of revenue and adjusted EBITDA was 13%. Full year operating income was 16.2% and adjusted EBITDA for 2023 was 17.9 percent. FX loss in Q4 was 2.9 million, driven mainly by the U.S. dollar weakening against the euro and Swiss franc and a one-time currency exposure that will not repeat in future quarters. The non-GAAP effective tax rate for Q4 was approximately 30 percent and higher than guidance due to discrete tax items and true ups flowing through the Q4 tax provision. The non-GAAP effective tax rate for the full year 2023 was approximately 26%. Non-GAAP EPS for the fourth quarter was 23 cents, and full year 2023 EPS was $1.62. In summary, Q4 and full year 2023 gross margin and adjusted EBITDA were strong, exceeding the midterm financial targets at this level of revenue. Moving to the balance sheet, cash and investments decreased by $52 million during Q4 to $336 million because we used cash of approximately $43 million to acquire EQT and approximately $13 million to repurchase 390,000 shares of CoU common stock. Debt repayment in the fourth quarter totaled $1 million and we ended Q4 with net cash of $6.17 per share. CapEx in Q4 was $3.9 million with approximately $2 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, was approximately $16 million. Overall, Cohue continues to maintain 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. Last week, we repaid the Term Loan B outstanding balance of $29.3 million. The Term Loan B was scheduled to mature in October of 2025, And the accelerated payment will increase net interest income by approximately $200,000 per quarter at current interest rates. Now moving to our Q1 outlook, we're guiding Q1 revenue to be in the range of $107 million plus or minus $6 million, reflecting continued weakness across end markets and low test cell utilization at customers' production facilities. Q1 gross margin is forecasted to be approximately 45%, better than the financial target model at this level of revenue, due in part to CoHue's differentiated products and our stable high margin recurring business, which adds resilience to profitability and provides consistent cash flow through the industry cycles. Operating expenses for Q1 are projected to increase $1 million quarter over quarter to approximately $51 million Due to the annual reset of payroll taxes and other labor benefits, we continue to exercise tight control over operating expenses. And in light of subdued customer demand for the first half of 2024, we've taken action to reduce operating expenses without sacrificing critical new product investments while navigating through the trough of this cycle. As a result, We're modeling operating expenses to average approximately $48.5 million per quarter in Q2 through Q4. We're projecting Q1 interest expense to be approximately $700,000 and offset by interest income of approximately $2 million at current interest rates. We expect Q1 adjusted EBITDA to be approximately 2%. The Q1 and full-year 2024 forecasted non-GAAP tax rate is approximately 23%. The diluted share count for Q1 is expected to be approximately 47.9 million shares. And that concludes our prepared remarks, and now we'll open the call to questions.
spk01: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. One moment, please. And our first question comes from the line of Craig Ellis with B. Reilly Securities.
spk03: Hi there. This is Ethan Wydell calling in for Craig Ellis. Thanks for taking my question. To start, I was wondering, as you look into the back half of the year, what gives and takes are you seeing? It sounds like equipment spend may be back half-weighted. And also, how do you see the relative performance between systems recurring? Thanks.
spk06: Hi, Ethan. This is Luis. At this point, we're relying on the information we're getting from our customers that are generally expecting a recovery towards the back half of the year. And this is predominantly automotive and industrial customers' recovery. If you look at the mobile market, We've seen largely a correction already on the inventories in the mobile space, particularly in the Android, and have seen some start of order pattern already, again, into the mobile device market. So, you know, you put the two things together, and the expectation here is, again, a recovery pattern on the second half of the year. I don't know, Jeff, if you can add some of the distribution of revenue.
spk05: Yeah, so based on that trajectory, systems revenue would come in somewhere around probably 45% with recurring revenue being 55%, somewhere in that ratio.
spk03: Thank you. That's helpful. And then we seem to be seeing some green shoots in the Android ecosystem, as mentioned. Can you speak to any read-throughs there for utilization or demand for mobile?
spk06: Utilization level in mobile is, hang on a second, I think it's about 76% across a collection of mobile customers. So that's not only Android, but all of them.
spk03: Okay, gotcha. Thank you.
spk01: Thank you.
spk02: One moment, please, for our next question. And our next question comes from the line of Brian Chin with Stifel.
spk04: Hi. Thank you. Thanks for taking our questions. Maybe first question, as you kind of monitor, again, sort of your customer indications in the back half of the year for some recovery, particular utilization threshold that you'll be monitoring in terms of improvement at a crossover point to maybe, you know, solidify that view that the pickup will occur towards second half?
spk06: Yeah, if that was a question there, Brian, yes, we will be monitoring utilization across. I think it was a comment in here. Utilization is down a couple points to 71% at the end of Q4. It was actually pretty stable at that 71% throughout Q4. So we had three months in the fourth quarter. Quite honestly, January, which I can speak to here in the call, was also 71%. So we've got four months in a row now at 71%. We've got a monitor debt utilization increase. It is pockets of strength and pockets of weakness in it. I mentioned mobile a second ago at about 76%. Consumer is at 69%. Computing at 68%. And auto industrial, despite coming down two points quarter over quarter, ended Q4 at 81%. As we always say, Utilization of about 80% is when you see capacity buys. And we got to see, you know, across markets, not only 80%, but more of a trend up towards that 80%. So climbing from 71 to 80% mark. And the rate of climb also will determine how fast we get to that turning point, right? So we've seen in the past, you know, in the order of 200 to 400 basis points quarter over quarter.
spk04: improvement utilization that that's reasonably what you expect on a typical recovery okay got it and then in relation to that sort of service systems uh question earlier um and where you see service revenue analysis system revenue going in q1 um does that does that feel like a pretty good floor in terms of the service revenue and then on the equipment side i'd imagine you know given the protracted downturn in areas beyond automotive and industrial, it's probably hard to fathom system revenue going down more in those markets. And do you also feel that automotive and industrial is pretty much at a floor, even on that system side revenue in Q1? And kind of any thoughts on sequential in the Q2?
spk06: Yeah. I mean, if you look at systems revenue, as we talked here about in total systems revenue came in in the quarter at about 46% of total, right? But if you start looking at Q1, for example, not Q2 yet, but if you start looking at Q1, order pattern in Q4, which dictates a little bit of what's happening in Q1 by market segment, we should see reasonable stability in the automotive market, sort of automotive and industrial combined. We should see a reasonable stability quarter over quarter across those two markets. What is down significantly, at least from an order pattern in fourth quarter, is the consumer market that came down quite a bit, driving sort of that typical seasonality. Obviously, we're in a down cycle, but you've got to layer out the seasonality on top of that, and that's typical of the consumer market order patterns in the fourth quarter, and that really hurts going into Q1. As we go into second quarter, it's a little early to call, but I would say, you know, more of the same, pretty much more of the same that we're seeing today or that we saw through fourth quarter orders.
spk04: Thank God. Maybe the last thing to close out on gross margins, yeah, definitely much higher than I expect given where the 1Q revenue is going. It sounds like maybe you flushed through some of that higher cost inventory. You had the intake, you know, in periods of tighter supply. Is the other factor here to think about is sort of that mix of higher service relative to system?
spk05: That's really the main driver, Brian, is the mix between the recurring and the system revenue. And so in Q1, it's more skewed towards the recurring revenue than Q4 was. Closer to, let's call it about 60% recurring, 40% systems. And so that's very helpful on the margin side. Now, you know, at this point, we reach, in the systems revenue, you reach a point where, you know, the margin's degrading because of the fixed cost infrastructure for, you know, primarily handler systems. So that's a bit of a drag, which is why the quarter-over-quarter gross margin is It is coming down a couple hundred basis points, but it is supported by the recurring revenue.
spk04: Okay, great. Thank you.
spk01: Thank you. And as a reminder, to ask a question, please press star 1-1 on your telephone. And our next question comes from the line of Robert Mertens with TD Cowan.
spk00: Hi, this is Robert Mertens for Krish. Thank you for taking my questions. I guess just the first one in terms of looking at the puts and takes of the utilization rates, you were good about sort of providing those throughout the year on a quarterly basis, and then this quarter sort of where each subsegment has come in. Is there any sort of forecasting that you're doing in terms of the categories, you know, Mobile is one that picks up more in the second half of the year. If you're starting to see auto and industrial declining a little bit, since that's the highest utilization among your sub-segments, just sort of any color there would be helpful. Thanks.
spk06: Hi, Robert. We don't typically forecast utilization. We forecast markets and customers, but not utilization. But if I take our forecast by markets and by segments, I would say there's probably a little bit more to give on the downside in the auto and industrial segment and a little bit more to gain and pick up here sequentially in the mobile segment. I think we're starting to see a little bit of signs of life in the mobile market and at the same time a lot of caution by our large auto and industrial semiconductor customers. You can probably attest yourself from their recent earnings release. So that's supposedly going to dictate the pattern also in utilization once we finish the quarter.
spk02: Great. Thank you. That's helpful.
spk01: Thank you. And I'm showing no further questions at this time. So with that, I'll hand the call back over to Chief Financial Officer Jeff Jones for any closing remarks.
spk05: Yes, I just want to say thank you to everybody for joining today's call, and we look forward to speaking with you soon. Take care.
spk01: Thank you. And thank you all for participating. This concludes today's program. You may now disconnect.
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