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spk00: Good day and thank you for standing by. Welcome to CoHUE's second quarter 2024 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'll 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 Jeff Jones, Chief Financial Officer. Please go ahead.
spk13: Good afternoon and welcome to our conference call to discuss CoHUE's second quarter 2024 results and third quarter outlook. I'm joined today by our President and CEO, Louise 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, July 31st, 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 Mueller, COEU's president and CEO. Luis?
spk02: Good afternoon. Second quarter results were in line with guidance, with non-GAAP gross margin of approximately 45%, as we continue to navigate the trough of this semiconductor cycle. Revenue of nearly $105 million was split 66% recurring in the balanced systems. Systems revenue increased sequentially in consumer optoelectronic and computing markets, although offset by declines in automotive, industrial, and mobile. Despite soft market conditions, we continue to execute well on new product developments and deliver on design wins to expand customer and addressable markets. The most notable validation of our strategy was a recent customer benchmark award of an estimated $100 million business over five years for test automation and inspection systems. This award includes Krypton, our new inspection metrology platform targeting larger semiconductor devices. We also had a second customer select Krypton last quarter for an aerospace application. Combined with Cohue's AI inspection, which is part of our DI Core software suite, Krypton is delivering higher yield and productivity while enabling our customers' push for automating back-end manufacturing. Putting this into perspective, Cohue's inspection metrology revenue was about $70 million during the prior upcycle and primarily driven by mobile semiconductor inspections. We're targeting to grow this business to $100 million over the midterm, expanding applications to other market segments where we can add value to our customers. We also had a good quarter in our tester business and placed our DiamondX tester at two subcontractors in Taiwan. We received the first order for a DiamondX mixed signal configuration from a leading test subcontractor in Chengli, Taiwan, And another Taiwanese OSAT selected DiamondX to test RFIOT devices from a leading IC Fabless company. We're tracking to plan to expand the DiamondX customer footprint, positioning the tester as a cost-effective, broad application platform that enables customers to efficiently test our roadmap products in the coming decades. In support of this growth strategy, we announced in June the opening of a new engineering design center in Penang for development of test instrumentation. While sub-seasonal test utilization in the automotive market is impacting near-term revenue for both systems and interface products, we are pleased to have landed a major silicon carbide customer for our new Seastrider power probe card. Seastrider utilizes Cohue's horizontal MEMS technology to enable improved performance and durability for testing power semiconductors, such as silicon carbide. The product enables high current carrying capacity, and with a multi-site pressure technology, enables high voltage test at temperature. This is Cohue's newest offering in probe car technology, designed to meet the expanding needs of power semiconductor testing. Our goal since the acquisition of XERA almost six years ago has been to drive interface revenue penetration to 50% or more of co-used systems. Last quarter results placed us at a two-year average penetration of 44%, or about nine points higher than when we started this journey. In this soft market environment, we're applying the same playbook of past cycles and have been diligent in lowering expenses effectively delivering a strong gross margin while preserving critical R&D investments. Estimated test serialization has improved now for the second quarter in a row to 74%, a two-point sequential increase over the first quarter. Although we expect broad capacity orders to be triggered around 80% test serialization, it has been encouraging to see the quarter over quarter improvements, particularly in computing, that is up three points sequentially to 70%, and mobile that's up two points to 69% utilization. The positive news comes tampered by automotive utilization down one point quarter over quarter to 77% at the end of June. Our data indicates that Cohue's largest customers in the analog semiconductor market are starting to see improved test cell utilization, likely at a pace that will put the industry in a recovery mode in the first half of 2025. In the meantime, we're carefully managing expenses to optimize cash flows, but now more than ever focused on design wins and execution of innovative product developments. Let me now turn it over to Jeff to provide further details on second quarter results and third quarter guidance. Jeff?
spk13: Thanks, Luis. Before I walk through the Q2 results and Q3 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 Q2 financial results, COHU delivered revenue and profitability in line with our guidance. Q2 revenue was $104.7 million. Recurring revenue, which is largely consumable-driven and more stable than systems revenue, represented 66% of total revenue in Q2. During the second quarter, no customer accounted for more than 10% of sales. Q2 gross margin was 45.1%, in line with guidance and driven by COHU's resilient recurring business. Operating expenses for Q2 were $46.9 million and lower than guidance by approximately $1.6 million, driven by lower labor and labor-related costs. Second quarter non-GAAP operating income was approximately breakeven and adjusted EBITDA was 3.8%. Interest income, net of interest expense, and a foreign currency loss of approximately $400,000 was $1.8 million. Q2 pretax income consists of foreign profits combined with a loss in the U.S. The Q2 tax provision of $2.7 million reflects tax expense on foreign profits, but no tax benefit from the U.S. loss due to our valuation allowance against deferred tax assets. Non-GAAP EPS for the second quarter was a $0.01 loss. Now moving to the balance sheet, we generated positive cash flow from operations in Q2 of 1.1 million despite trough revenues. Overall cash and investments decreased by 9 million during Q2 to 262 million due mainly to 8 million used to repurchase 267,000 shares of KOU common stock. CapEx in Q2 was 2 million with approximately 1 million related to our factories in the Philippines and Malaysia. supporting operations for our interface and automation businesses. Overall, CoHUE's balance sheet remains strong to support investment opportunities to expand our served markets and technology portfolio in line with our growth strategy and return capital to shareholders through our share repurchase program. Now moving to our Q3 outlook. We're guiding Q3 revenue to be in the range of $95 million plus or minus $5 million. reflecting continued weakness across end markets, and although test cell utilization at customers' production facilities increased quarter over quarter, it remains below the historical threshold for customers to add more test capacity. Q3 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 industry cycles. We expect gross margin to increase again when our revenue recovers with a broader semiconductor device market recovery and with better absorption of our factory's infrastructure costs. Operating expenses for Q3 are projected to decrease about a million dollars quarter over quarter to approximately 46 million due primarily to a reduction in labor and optimizations as we completed certain product developments. As I noted on prior earnings calls, we have 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 now modeling operating expenses to average approximately $46 million per quarter in the second half of this year. We're projecting Q3 interest income net of interest expense and foreign currency impacts to be approximately 1.8 million at current interest rates. We expect Q3 adjusted EBITDA to be approximately 1 percent. The Q3 non-GAAP tax provision is expected to be approximately 1.8 million because of tax on foreign profits without benefit from the U.S. loss. Until markets recover, we expect a similar tax provision profile as we navigate through this cycle. The basic share count for Q3 is expected to be approximately 47 million shares. That concludes our remarks, and now we'll open the call to questions.
spk00: As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question will come from the line of Brian Chin with Stifel.
spk04: Hi there. Good afternoon. Thanks for letting us ask a few questions. I guess, can you first just provide a little color on the revenue outlook in 3Q by equipment versus recurring?
spk03: and also across key markets like mobility and industrial automotive.
spk13: Hey Brian, I'll provide the recurring versus system. So in Q3 we're expecting recurring to be about 68% of the revenue, 32% for systems.
spk02: Yeah, I think you can look at the presentation, Brian. We have the revenue The system's revenue distribution by markets where it came out stronger in the mobile as a percentage of total, followed by at 9%, automotive 7%, industrial and consumer 5%, computing 4%.
spk04: Thank you. Also, do you expect a similar composition in Q3 for those markets?
spk02: No. When you look forward, we saw sort of strengthening demand in the computing and mobile markets and continued weakness in automotive. So I think what you see going forward is maybe computing will climb up the ladder and get closer to the mobile segment. Okay.
spk04: There's a couple more. For me, do you anticipate test cell utilization trending higher into year end? And after operating at lower utilization for many quarters, if not years, I'd imagine there's been some retirement or maybe cannibalization of some of your installed base as a precursor to that maybe shipment pickup that you anticipate in first half of next year. Are you seeing test handler kit or spares revenues start to tick up? And do you have any visibility into sort of the four key revenue trends?
spk02: Yeah, so multiple questions there. As far as utilization go, we don't forecast utilization, Brian. We don't really have a model for that. But sitting at 74% and considering that end of the year is typically the seasonally lower quarter for demand, I would venture to say that utilization would be flattish to perhaps up a point or two by the end of the year. So that's on the utilization front. It really depends on the puts and takes between improvements in mobile and computing and where automotive goes from here. I forgot what the other elements of your question were, but I think you talked about sort of how that impacts cannibalization of equipment. And we're certainly seeing that cannibalization happen right now at our customers, which has negatively impacted sale of spare parts. Quite honestly, it has even negatively impacted sale of... interface products where certain customers are sub-optimizing the utilization of the equipment that they have simply because they don't have that need in as much to run production and they're trying to conserve expenses. We expect that the first real signs we'll see will be a surge in spares demand before we see a demand increase in equipment. We have not seen that in the second quarter.
spk04: Got it. And I guess sort of maybe just to clarify that part of my multiple part question there. ATE companies, you know, they've pointed to something like double-digit declines in the auto industrial and even the mobility test markets this year. How much do you see the test handler market X memory down this year in relation to ATEs? And I ask that also because these equipment run rates, you know, look like maintenance or even really sub-maintenance levels. And so, I mean, when was the last year that handler market maybe was this low, maybe 2018? And what was the trend in the market, you know, the following year? I imagine it was a pretty decent bounce back.
spk02: Yeah, I don't have a specific year over year. Maybe Jeff does, but I don't have it on my fingertips here for the handler market. But I think it is... think about this again in a second. I think, yeah, it's definitely a double-digit sort of in the teens decline, perhaps even 20% decline year over year in 24. It's lasting, it's actually lasting fairly long now if you think about the quarter over quarter sequence since kind of the middle of last year into where we are today. So, if you look at past cycles, it's not uncommon to see revenue sort of go up 40, 50, even 60% on a year-over-year basis when you have a prolonged drought like we are having right now in the test and the test handler space. But with that said, don't have a prediction for you right now for 2025 other than the general discussion with customers is positive. particularly in computing and mobile in the near term, some indicatives of industrial market recovery as well in the beginning of 25, and then I think the wild card here is where's the turn of the corner on the automotive market. Okay, that's helpful.
spk03: Thanks, Luis. Thanks, Jeff.
spk00: Our next question will come from the line of Ross Cole with Needham & Company.
spk11: Hi, thank you for taking my question on behalf of Charles. So you had mentioned with Krypton you have two new customers, and previously I know you had mentioned that Krypton had been qualified. So are these the separate customers from the qualification you had previously mentioned, or is it the same?
spk02: Hi, Ross. We issued a press release here at the end of June about a qualification at a major automotive customer in Europe. Now we're talking about two. One of these two is the one that was part of that press release, but we also had a second customer qualify Krypton at the very end of June, also a European customer, coincidentally, both European customers. So we have two customers qualified, one in the automotive space, one for an aerospace application for starters, and like I said, one of these were part of the press release we did in the middle of June.
spk11: Great. Thank you for clarifying. And then if I can ask a second question as well, it sounds like you still expect auto and industrial weakness to continue a little longer. So you're seeing the mobile PC recovery first. And were you expecting that to start taking the recovery mode to start taking place around the first half 25? It sounded like you said.
spk02: Computing and mobile, we're going to see the turn this year already. I mean, we're seeing the demand and the revenue expectation here in the fourth quarter. I think the unfortunate counter to that is the automotive continues to be weak, and so you kind of have to net out the weakness in automotive with the improving demand in mobile and computing for the fourth quarter of this year.
spk03: All right, great. Thank you.
spk00: As a reminder, to ask a question, that is star 11. Our next question will come from the line of David Dooley with Steelhead Securities.
spk12: Good afternoon. A couple questions from me. I guess you talked about a silicon carbide probe card win, which I think is kind of a new piece of business. I was wondering if you might elaborate a little bit more on why you won the business and you know, what the opportunities are in probe cards for power and silicon carbide for you guys.
spk02: Hi, Dave. Yeah, great question. And you're correct. This is a power probe card is a completely new product line for us. We have been supplying power contactors for the industry, including silicon carbide, actually. This has been a successful business for us, a differentiated business, and customers have asked us to basically bring what we're doing in known good dye, singulated dye test into a probe card environment, sort of a probe environment. So we've done exactly what the customers have asked, and the first customer has qualified the product, placed an initial PO, And we have two other customers right behind it in qualification mode. So we're pretty excited to bring a new solution here that we believe, for customers' feedback, that's quite differentiated, because it allows you to do multi-site testing of devices that have very high currents, very high voltages.
spk12: You know, could you help us understand what the size of this opportunity is, either for the market or what might be for you guys?
spk02: Yeah, yeah, yeah. I recall you asked that question, too. Sorry about that. Yeah. We're looking at this particular customer that we broke in. We see their spending being about $7 million a year. So let's see how much of that we can get. Okay.
spk12: And then... Changing topics to the Diamond X wins, I think you mentioned a mixed signal win and another win in IoT, I guess. Yeah. You know, maybe help us understand, again, the same question is, you know, how big of an opportunity do you think the expansion of your Diamond X platform is in total, either in the TAM or the opportunities for you guys? I appreciate all the details.
spk02: Yeah, this one I'm going to have to be a little bit more vague on the opportunity size. Frankly, it's not that we have that much precision in this one. But there's a Diamond X mixed signal configuration at a sort of leading OSAT in Taiwan. The tester selection was largely driven by a fabulous company into that OSAT. We tend to target things that are sort of $5 million chunks of business. Whether this will be that or not, it's a little difficult for us to pinpoint it at this time. And then the other one was an RF IoT device application also at an OSAT in Taiwan and driven by a Taiwanese fabless RF company. Also, same story here. We target $5 million chunks. As you know, the RF market is not in its best shape at this moment, so I think we're looking at that as an opportunity for a $5 million bite into next year.
spk10: Okay. Thank you very much.
spk01: You're welcome.
spk00: Our next question will come from the line of Mayur Papuri with B. Reilly.
spk07: Hi, I'm calling in for Craig. My question is just like, how can we look at the kind of shape of the eventual recovery and what are some leading indicators that we can take a look at to see when that recovery is starting to pick up?
spk02: Yeah, hi. You know, it's a good question. And realistically, you've got to look at it market by market, right? Not every market goes in tandem. It's not one monolithic process. semiconductor or end market driver. So we're seeing the, obviously have seen for several quarters now, just not that much of a benefit for Cohue, but we've seen the AI data center GPU market rise and concurrent with that, the DRAM or HBM application. That has been going on for a few quarters now. Reminder, Cohue doesn't participate in memory today. We're now starting to see sort of the computing server market started to show signs of recovery. Along with that, we're seeing some green shoots in the mobile market. As I said before, we'll see some of that revenue materialize in the fourth quarter. What comes behind that is likely to be industrial based on conversations we're seeing with customers today, and that is probably a Q1 2025 story. And I think the big question mark still for us included is, At what point does automotive start to recover? And that's very important for Kohu because Kohu's largest market segment is automotive. So automotive was the last to come down in this cycle and will naturally be the last to come back up. Question mark, is it first quarter, second quarter next year? Exactly when that will happen is what we're trying to understand. So a recovery has started. But it's going to go through phases, market segment by market segment, probably over the next year.
spk03: Thank you so much.
spk00: That concludes today's question and answer session. I'd like to turn the call back to Jeff Jones for closing remarks.
spk13: Thank you. And before we sign off, I'd like to mention that we'll be participating and some conferences over the next few months, and they are the Needham Virtual Conference on August 21st, the Jefferies Conference in Chicago on August 27th, the Evacor Conference also in Chicago on August 28th, and the Citi Conference in New York City on September 6th. So if you're interested in meeting with us at any of those conferences, please let me know or reach out to the respective research analysts to schedule a meeting. So thank you for joining today's call and we look forward to speaking with you soon.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect. you Thank you. Thank you. Thank you. you Good day and thank you for standing by. Welcome to CoHUE's second quarter 2024 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'll 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 Jeff Jones, Chief Financial Officer. Please go ahead.
spk13: Good afternoon and welcome to our conference call to discuss CoHUE's second quarter 2024 results and third quarter outlook. I'm joined today by our President and CEO, Louise 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, July 31st, 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 Mueller, COEU's President and CEO. Luis?
spk02: Good afternoon. Second quarter results were in line with guidance, with non-GAAP gross margin of approximately 45%, as we continue to navigate the trough of this semiconductor cycle. Revenue of nearly $105 million was split 66% recurring in the balanced systems. Systems revenue increased sequentially in consumer optoelectronic and computing markets, although offset by declines in automotive, industrial, and mobile. Despite soft market conditions, we continue to execute well on new product developments and deliver on design wins to expand customer and addressable markets. The most notable validation of our strategy was a recent customer benchmark award of an estimated $100 million business over five years for test automation and inspection systems. This award includes Krypton, our new inspection metrology platform targeting larger semiconductor devices. We also had a second customer select Krypton last quarter for an aerospace application. Combined with Cohue's AI inspection, which is part of our DI core software suite, Krypton is delivering higher yield and productivity while enabling our customers' push for automating backend manufacturing. Putting this into perspective, Cohue's inspection metrology revenue was about $70 million during the prior upcycle and primarily driven by mobile semiconductor inspection. We're targeting to grow this business to $100 million over the midterm, expanding applications to other market segments where we can add value to our customers. We also had a good quarter in our tester business and placed our DiamondX tester at two subcontractors in Taiwan. We received the first order for a DiamondX mixed signal configuration from a leading test subcontractor in Chengli, Taiwan, And another Taiwanese OSAT selected DiamondX to test RFIOT devices from a leading IC Fabless company. We're tracking to plan to expand the DiamondX customer footprint, positioning the tester as a cost-effective, broad application platform that enables customers to efficiently test our roadmap products in the coming decades. In support of this growth strategy, we announced in June the opening of a new engineering design center in Penang for development of test instrumentation. While sub-seasonal test utilization in the automotive market is impacting near-term revenue for both systems and interface products, we are pleased to have landed a major silicon carbide customer for our new Seastrider power probe card. Seastrider utilizes Cohue's horizontal MEMS technology to enable improved performance and durability for testing power semiconductors such as silicon carbide. The product enables high current carrying capacity and with a multi-site pressure technology enables high voltage test at temperature. This is Cohue's newest offering in probe car technology designed to meet the expanding needs of power semiconductor testing. Our goal since the acquisition of XERA almost six years ago has been to drive interface revenue penetration to 50% or more of co-used systems. Last quarter results placed us at a two-year average penetration of 44%, or about nine points higher than when we started this journey. In this soft market environment, we're applying the same playbook of past cycles and have been diligent in lowering expenses effectively delivering a strong gross margin while preserving critical R&D investments. Estimated test serialization has improved now for the second quarter in a row to 74%, a two-point sequential increase over the first quarter. Although we expect broad capacity orders to be triggered around 80% test serialization, it has been encouraging to see the quarter-over-quarter improvements, particularly in computing, that is up three points sequentially to 70%, and mobile that's up two points to 69% utilization. The positive news comes tampered by automotive utilization down one point quarter over quarter to 77% at the end of June. Our data indicates that Cohue's largest customers in the analog semiconductor market are starting to see improved test cell utilization, likely at a pace that will put the industry in a recovery mode in the first half of 2025. In the meantime, we're carefully managing expenses to optimize cash flows, but now more than ever focused on design wins and execution of innovative product developments. Let me now turn it over to Jeff to provide further details on second quarter results and third quarter guidance. Jeff?
spk13: Thanks, Luis. Before I walk through the Q2 results and Q3 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 Q2 financial results, COHU delivered revenue and profitability in line with our guidance. Q2 revenue was $104.7 million. Recurring revenue, which is largely consumable-driven and more stable than systems revenue, represented 66% of total revenue in Q2. During the second quarter, no customer accounted for more than 10% of sales. Q2 gross margin was 45.1%, in line with guidance and driven by COHU's resilient recurring business. Operating expenses for Q2 were $46.9 million and lower than guidance by approximately $1.6 million, driven by lower labor and labor-related costs. Second quarter non-GAAP operating income was approximately breakeven and adjusted EBITDA was 3.8%. Interest income, net of interest expense, and a foreign currency loss of approximately $400,000 was $1.8 million. Q2 pretax income consists of foreign profits combined with a loss in the U.S. The Q2 tax provision of $2.7 million reflects tax expense on foreign profits, but no tax benefit from the U.S. loss due to our valuation allowance against deferred tax assets. Non-GAAP EPS for the second quarter was a one cent loss. Now moving to the balance sheet, we generated positive cash flow from operations in Q2 of 1.1 million despite trough revenues. Overall cash and investments decreased by 9 million during Q2 to 262 million due mainly to 8 million used to repurchase 267,000 shares of KOU common stock. CapEx in Q2 was 2 million with approximately 1 million related to our factories in the Philippines and Malaysia. supporting operations for our interface and automation businesses. Overall, CoHUE's balance sheet remains strong to support investment opportunities to expand our served markets and technology portfolio in line with our growth strategy and return capital to shareholders through our share repurchase program. Now moving to our Q3 outlook. We're guiding Q3 revenue to be in the range of $95 million plus or minus $5 million. Reflecting continued weakness across end markets, and although test cell utilization at customers' production facilities increased quarter over quarter, it remains below the historical threshold for customers to add more test capacity. Q3 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 industry cycles. We expect gross margin to increase again when our revenue recovers with a broader semiconductor device market recovery and with better absorption of our factory's infrastructure costs. Operating expenses for Q3 are projected to decrease about $1 million quarter over quarter to approximately $46 million due primarily to a reduction in labor and optimizations as we completed certain product developments. As I noted on prior earnings calls, we have 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 now modeling operating expenses to average approximately $46 million per quarter in the second half of this year. We're projecting Q3 interest income net of interest expense and foreign currency impacts to be approximately 1.8 million at current interest rates. We expect Q3 adjusted EBITDA to be approximately 1 percent. The Q3 non-GAAP tax provision is expected to be approximately 1.8 million because of tax on foreign profits without benefit from the U.S. loss. Until markets recover, we expect a similar tax provision profile as we navigate through this cycle. The basic share count for Q3 is expected to be approximately 47 million shares. That concludes our remarks, and now we'll open the call to questions.
spk00: As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question will come from the line of Brian Chin with Stifel.
spk04: Hi there. Good afternoon. Thanks for letting us ask a few questions. I guess, can you first just provide a little color on the revenue outlook in 3Q by equipment versus recurring?
spk03: and also across key markets like mobility and industrial automotive.
spk13: Hey, Brian, I'll provide the recurring versus system. So in Q3, we're expecting recurring to be about 68% of the revenue, 32% for systems.
spk02: Yeah, I think you can look at the presentation, Brian. We have the revenue The systems revenue distribution by markets, where it came out stronger in the mobile as a percentage of total, followed by at 9%, automotive 7%, industrial, consumer 5%, computing 4%.
spk04: Thank you. Also, do you expect a similar composition in Q3 for those markets?
spk02: No, when you look forward, we saw sort of strengthening demand in the computing and mobile markets and continued weakness in automotive. So I think what you see going forward is maybe computing will climb up the ladder and get closer to the mobile segment. Okay.
spk04: There's a couple more. For me, do you anticipate test cell utilization trending higher into year end? And after operating at lower utilization for many quarters, if not years, I'd imagine there's been some retirement or maybe cannibalization of some of your installed base as a precursor to that maybe shipment pickup that you anticipate in first half of next year. Are you seeing test handler kit or spares revenues start to tick up? And do you have any visibility into sort of the 4T revenue trend?
spk02: Yeah, so multiple questions there. As far as utilization go, we don't forecast utilization, Brian. We don't really have a model for that. But sitting at 74% and considering that end of the year is typically the seasonally lower quarter for demand, I would venture to say that utilization would be flattish to perhaps up a point or two by the end of the year. So that's on the utilization front. It really depends on the puts and takes between improvements in mobile and computing and where automotive goes from here. I forgot what the other elements of your question were, but I think you talked about sort of how that impacts cannibalization of equipment. And we're certainly seeing that cannibalization happen right now at our customers, which has negatively impacted sale of spare parts. Quite honestly, it has even negatively impacted sale of... interface products where certain customers are sub-optimizing the utilization of the equipment that they have simply because they don't have that need in as much to run production and they're trying to conserve expenses. We expect that the first real signs we'll see will be a surge in spares demand before we see a demand increase in equipment. We have not seen that in the second quarter.
spk04: Got it. And I guess sort of maybe just to clarify that part of my multiple part question there. ATE companies, you know, they've pointed to something like double-digit declines in the auto industrial and even the mobility test markets this year. How much do you see the test handler market X memory down this year in relation to ATEs? And I ask that also because these equipment run rates, you know, look like maintenance or even really sub-maintenance levels. And so, I mean, when was the last year that handler market maybe was this low, maybe 2018? And what was the trend in the market, you know, the following year? I imagine it was a pretty decent bounce back.
spk02: Yeah, I don't have a specific year over year. Maybe Jeff does, but I don't have it on my fingertips here for the handler market. But I think it is... think about this in a second. I think, yeah, it's definitely a double-digit sort of in the teens decline, perhaps even 20% decline year over year in 24. It's lasting, it's actually lasting fairly long now if you think about the quarter over quarter sequence since kind of the middle of last year into where we are today. So, if you look at past cycles, it's not uncommon to see revenue sort of go up 40, 50, even 60% on a year-over-year basis when you have a prolonged drought like we are having right now in the test handler space. But with that said, I don't have a prediction for you right now for 2025 other than the general discussion with customers is positive. particularly in computing and mobile in the near term, some indicatives of industrial market recovery as well in the beginning of 2025. And then I think the wild card here is where's the turn of the corner on the automotive market. Okay. That's helpful.
spk03: Thanks, Luis. Thanks, Jeff.
spk00: Our next question will come from the line of Ross Cole with Needham & Company.
spk11: Hi, thank you for taking my question on behalf of Charles. So you had mentioned with Krypton you have two new customers, and previously I know you had mentioned that Krypton had been qualified. So are these the separate customers from the qualification you had previously mentioned, or is it the same?
spk02: Hi, Ross. We issued a press release here at the end of June about a qualification at a major automotive customer in Europe. Now we're talking about two. One of these two is the one that was part of that press release, but we also had a second customer qualify Krypton at the very end of June, also a European customer, coincidentally, both European customers. So we have two customers qualified, one in the automotive space, one for an aerospace application for starters, and like I said, one of these were part of the press release we did in the middle of June.
spk11: Great. Thank you for clarifying. And then if I can ask a second question as well, it sounds like you still expect auto and industrial weakness to continue a little longer. So you're seeing the mobile PC recovery first. And were you expecting that to start taking the recovery mode to start taking place around the first half 25? It sounded like you said.
spk02: Computing and mobile, we're going to see the turn this year already. I mean, we're seeing the demand and the revenue expectation here in the fourth quarter. I think the unfortunate counter to that is the automotive continues to be weak, and so you kind of have to net out the weakness in automotive with the improving demand in mobile and computing for the fourth quarter of this year.
spk03: All right, great. Thank you.
spk00: As a reminder, to ask a question, that is star 11. Our next question will come from the line of David Dooley with Steelhead Securities.
spk12: Good afternoon. A couple questions from me. I guess you talked about a silicon carbide probe card win, which I think is kind of a new piece of business. I was wondering if you might elaborate a little bit more on why you won the business and you know, what the opportunities are in probe cards for power and silicon carbide for you guys.
spk02: Hi, Dave. Yeah, great question. And you're correct. This is a power probe card is a completely new product line for us. We have been supplying power contactors for the industry, including silicon carbide, actually. This has been a successful business for us, a differentiated business, and customers have asked us to basically bring what we're doing in known good dye, singulated dye test into a probe card environment, sort of a probe environment. So we've done exactly what the customers have asked, and the first customer has qualified the product, placed an initial PO, And we have two other customers right behind it in qualification mode. So we're pretty excited to bring a new solution here that we believe, for customers' feedback, that's quite differentiated, because it allows you to do multi-site testing of devices that have very high currents, very high voltages.
spk12: You know, could you help us understand what the size of this opportunity is, either for the market or what might be for you guys?
spk02: Yeah, yeah, yeah. I recall you asked that question, too. Sorry about that. Yeah. Now, we're looking at this particular customer that we broke in. We see their spending being about $7 million a year. So let's see how much of that we can get. Okay.
spk12: And then... Changing topics to the DiamondX wins, I think you mentioned a mixed signal win and another win in IoT, I guess. Yeah. You know, maybe help us understand, again, the same question is, you know, how big of an opportunity do you think the expansion of your DiamondX platform is in total, either in the TAM or the opportunities for you guys? I appreciate all the details.
spk02: Yeah, this one I'm going to have to be a little bit more vague on the opportunity size. Frankly, it's not that we have that much precision in this one. But there's a Diamond X mixed signal configuration at a sort of leading OSAT in Taiwan. The tester selection was largely driven by a fabulous company into that OSAT. We tend to target things that are sort of $5 million chunks of business. Whether this will be that or not, it's a little difficult for us to pinpoint it at this time. And then the other one was an RF IoT device application also at an OSAT in Taiwan and driven by a Taiwanese fabless RF company. Also, same story here. We target $5 million chunks. As you know, the RF market is not in its best shape at this moment, so I think we're looking at that as an opportunity for a $5 million bite into next year.
spk10: Okay. Thank you very much.
spk01: You're welcome.
spk00: Our next question will come from the line of Mayur Papuri with B. Reilly.
spk07: Hi, I'm calling in for Craig. My question is just like, how can we look at the kind of shape of the eventual recovery and what are some leading indicators that we can take a look at to see when that recovery is starting to pick up?
spk02: Yeah, hi. You know, it's a good question. And realistically, you've got to look at it market by market, right? Not every market goes in tandem. It's not one monolithic process. semiconductor or end market driver. So we're seeing the, obviously have seen for several quarters now, just not that much of a benefit for Cohue, but we've seen the AI data center GPU market rise and concurrent with that, the DRAM or HBM application. That has been going on for a few quarters now. Reminder, Cohue doesn't participate in memory today. We're now starting to see sort of the computing server market started to show signs of recovery. Along with that, we're seeing some green shoots in the mobile market. As I said before, we'll see some of that revenue materialize in the fourth quarter. What comes behind that is likely to be industrial based on conversations we're seeing with customers today, and that is probably a Q1 2025 story. And I think the big question mark still for us included is, At what point does automotive start to recover? And that's very important for Kohu because Kohu's largest market segment is automotive. So automotive was the last to come down in this cycle and will naturally be the last to come back up. Question mark, is it first quarter, second quarter next year? Exactly when that will happen is what we're trying to understand. So a recovery has started. But it's going to go through phases market segment by market segment probably over the next year.
spk03: Thank you so much.
spk00: That concludes today's question and answer session. I'd like to turn the call back to Jeff Jones for closing remarks.
spk13: Thank you. And before we sign off, I'd like to mention that we'll be participating and some conferences over the next few months, and they are the Needham Virtual Conference on August 21st, the Jefferies Conference in Chicago on August 27th, the Evacor Conference also in Chicago on August 28th, and the Citi Conference in New York City on September 6th. So if you're interested in meeting with us at any of those conferences, please let me know or reach out to the respective research analyst to schedule a meeting. So thank you for joining today's call and we look forward to speaking with you soon.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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