Cohu, Inc. (NASDAQ:COHU) Q1 2024 Earnings Call Transcript

Cohu, Inc. (NASDAQ:COHU) Q1 2024 Earnings Call Transcript May 2, 2024

Cohu, Inc. misses on earnings expectations. Reported EPS is $-0.3105 EPS, expectations were $-0.01. COHU isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to Cohu’s First Quarter 2024 Financial Results Conference Call. [Operator Instructions] 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.

Jeff Jones: Good afternoon and welcome to our conference call to discuss Cohu’s first quarter 2024 results and second quarter outlook. I am joined today by our President and CEO, Luis Muller. If you need a copy of our earnings release, you may access it from our website at cohu.com or by contacting Cohu Investor Relations. There is also a slide presentation in conjunction with today’s call that maybe accessed on Cohu’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 Cohu’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 statements 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, May 2, 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, Cohu’s President and CEO. Luis?

Luis Muller: Good afternoon. First quarter results were in line or better than guidance with non-GAAP gross margin of 46% and EPS of $0.01 as we navigate through the eye of the storm in this semiconductor cycle. We estimated test cell utilization at the end of first quarter, up 1 point to 72%. We expect business conditions to remain more or less at this level for another quarter or two before we start seeing improvement. Test cell utilization at IDMs was down 1 point to 74% with computing, industrial and automotive demand down sequentially. OSAT utilization improved slightly to 70%, although still well below the trigger threshold for capacity buys at approximately 80%. There are a couple of bright spots in the quarter. A leading U.S. fabless semiconductor manufacturer has selected our Sense+ system with MicroSense for testing their next-generation, high-fidelity microphones.

This MicroSense microphone tester is Cohu’s latest product in our MEMS solution portfolio. And when combined with the Sense+ automation platform, delivers state-of-the-art testing of up to 96 devices in parallel. According to industry analysts, the MEMS microphone sensor market is projected to grow 14.5% annually over the next 7 years, reaching an estimated revenue of $6.2 billion. We estimate a buy rate of approximately 1% for integrated test in vision inspection systems, making this an attractive market opportunity over the mid-term. In the optoelectronics market, we saw increased demand for our testers, handlers and interface products for automotive LED production from a European customer. A leading automotive ADAS customer has selected Cohu’s high-performance RF contactors for testing automotive radar sensors.

Finally, we completed the qualification of Diamondx for final test of display driver ICs at a large customer in Korea, opening the door for the next stage of revenue growth in this important market that we started developing a few years ago. This has been the fundamental strategy for a tester business to add a market segment in which Cohu can differentiate and diversify revenue. As the industry moves through its cycle, it remains critical to Cohu’s strategy to leverage our profitable recurring business, which provides for a more stable revenue stream of mostly consumable products. Recurring was approximately 66% of revenue in the first quarter, serving an installed base of about 24,700 systems worldwide. Cohu’s recurring business delivered revenue of $304 million over the last 12 months with a 3-year compound growth rate of 2.7%.

Finally, we published our 2023 Sustainability Report with improvements in many areas. Renewable source energy usage increased to 32%. We completed construction of a new modern facility in the Philippines with rainwater harvesting system and are investing solar energy installations at our factories in Malaysia and the Philippines. Cohu has also recently committed to engage with the science-based targets initiative, or SBTI, with the goal to develop near-term science-based emissions reduction targets. As the industry grows through this cycle, we remain focused on managing cash flow while continuing to execute critical new product developments and customer design win initiatives to enable growth when customers resume test capacity buys. Let me now turn it over to Jeff to provide further details on first quarter results and second quarter 2024 guidance.

Jeff?

Jeff Jones: Thanks, Luis. Before I walk through the Q1 results and Q2 guidance, please note that my comments that follow, I’ll 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 Q1 financial results. Cohu delivered revenue and profitability above the midpoint of our guidance. Q1 revenue was $107.6 million. Recurring revenue, which is largely consumable-driven and more stable than systems revenue, represented 66% of total revenue in Q1. During the first quarter, one customer in the automotive market accounted for more than 10% of sales.

Q1 gross margin was 46%, about 100 basis points higher than guidance driven by better-than-forecasted margins on Cohu’s resilient recurring business. Operating expenses for Q1 were lower than guidance at $50.2 million driven by lower labor and labor-related costs. First quarter non-GAAP operating income was approximately breakeven and adjusted EBITDA was 2.6%. Interest income, net of interest expense, loss on extinguishment of debt and a foreign currency loss of approximately $0.5 million was $1.6 million. Q1 pretax income consists of foreign profits combined with a loss in the U.S. The Q1 tax provision reflects tax on foreign profits, but no tax benefit from the U.S. loss, due to our valuation allowance against deferred tax assets. Additionally, the non-GAAP tax provision in Q1 of $300,000 is net of a one-time 2.7 million credit for the reversal of reserves for uncertain tax positions in foreign jurisdictions.

Non-GAAP EPS for the first quarter was $0.01. Moving to the balance sheet. Cash and investments decreased by $64 million during Q1 to $271 million due to variable comp and payroll taxes totaling approximately $20 million plus $29 million used to pay off the remaining term loan B balance and approximately $11 million to repurchase 334,000 shares of Cohu common stock. CapEx in Q1 was $3.3 million with approximately $2 million related to our factories in the Philippines and Malaysia, supporting operations for our interface and automation businesses. Overall, Cohu continues to maintain a strong balance sheet 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 Q2 outlook. We’re guiding Q2 revenue to be in the range of $105 million, plus or minus $6 million, reflecting continued weakness across end markets and low test cell utilization at customers’ production facilities. Q2 gross margin is forecasted to be approximately 45%, better than the financial target model at this level of revenue due in large part to Cohu’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 factories infrastructure costs. Operating expenses for Q2 are projected to decrease about $1.5 million quarter-over-quarter to approximately $48.5 million due primarily to a reduction in force in optimizations as we completed certain product developments.

As I noted during our last earnings call, 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 are now modeling operating expenses to average approximately $48 million per quarter in the second half of this year. We’re projecting Q2 interest income net of interest expense and foreign currency impacts to be approximately $2 million at current interest rates. We expect Q2 adjusted EBITDA to be approximately 2%. The Q2 non-GAAP tax provision is expected to be approximately $1.6 million because of tax on foreign profits without benefit from the U.S. loss. Additionally, the $2.7 million credit recorded in Q1 is not expected to repeat in Q2.

Until the markets recover, we expect a similar tax provision profile as we navigate through this cycle. The basic share count for Q2 is expected to be approximately 47 million shares. That concludes our prepared remarks. And now we’ll open the call to questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Brian Chin, Stifel.

Brian Chin: Hi, there. Good afternoon. Thanks. I wanted to ask a few questions. Maybe to start with, I’d say that the recurring revenue was even maybe a little bit more, even down less than I might have anticipated sequentially, given that I think a lot of industrial automotive semi-related companies seem to have curtailed production quite a bit. But again, your revenue Q-on-Q actually did not decline by that much. Do you feel that now that maybe some of your customers’ utilization rates are starting to stabilize? Do you think that revenue has also stabilized in sort of Q1, Q2, that’s sort of the trend you are seeing in it? And even if you don’t have full visibility on the system business, do you have more confidence that the recurring revenue will improve in the second half?

Luis Muller: Hi, Brian, this is Luis. Yes, the way we see it right now with stabilizing utilization and recurring seems to be stable as well. And obviously, the expectation and what we have seen in the past is when utilization starts to increase, so does recurring, both from a usage of the equipment and therefore, increase the spares, typically, customers end up cannibalizing unutilized equipment for spares and then eventually there is a quick turnaround on that when the utilization picks up as well as device kits and contactors. So at this moment, if utilization is stable, so is recurring and would expect it to return to an increase, particularly when utilization starts to rise again.

Brian Chin: Got it. And I guess sort of branching out a bit in terms of going back to your comment about maybe revenues kind of stay at this level, another quarter or two. Is there something after this sort of retrenchment period here in first half in terms of system business, which sort of now is kind of across every end market, right, at this point. When you talk to your customers, what does give you more degrees of optimism in terms of some pickup at some point in the second half?

Luis Muller: There are two things. One is we have – not everybody turns at the same point, right? It’s never been that way. But we are seeing some customers starting to claim a correction is over in the inventories – in their inventory line. So particularly in IoT, we’ve seen that happening and seeing a little bit of traction so much so that actually, our mobile segment revenue was up sequentially from Q4 to Q1. We still have other customers that are at the bottom, but they’re basically claiming stability now. So stability indicates that the next step is improvement. So we’re starting to see sort of the turn of the tide a little bit. As I commented in my prepared remarks here, right at the beginning, actually, I called it navigating through the eye of the storm, and I really mean it in the sense of we’re now at that point of the headwinds have stopped and we see a few customers starting to see a little bit of tailwind.

So we’d expect that in a couple of quarters, we’ll be having more customers with tailwind, utilization starting to pick up. And eventually, capacity buys. Now obviously, capacity buys require utilization of existing capacity installed to pick up to a level where you need to buy new equipment. Like I said, not all customers will be on the same phase and in the same quarter. That probably will straddle over a couple of quarters. But it gives us confidence that we’re heading towards better wins ahead here. I don’t know if it’s a quarter or two quarters away from now when things start to pick up again.

Brian Chin: Okay. Maybe just one quick question, actually it’s for Jeff. Just obviously, very high gross margins here at trough. I noticed you also raised the target model gross margin to 50%. Anything that goes into that in terms of composition of revenue mix at $1 billion? Or what considerations kind of go went into that increase?

Jeff Jones: Historical results really went into that decision to increase. We’ve sort of maintaining the same mix of product at that billion dollars of revenue with roughly 40% automation and 30% test, 20%, interface, 10% for inspection metrology. So that doesn’t change. It’s just we’ve seen better cost profiles, lower cost profiles, better margins. So that gave us the confidence based on what we’ve achieved here over the last, call it, eight quarters to set the target to 50.

Brian Chin: Okay, great. Thank you.

Operator: Thank you. Our next question will come from the line of Ross Cole with Needham.

Ross Cole: Hi, thank you for taking my call. I’ll ask this question on behalf of Charles Shi. So first of all, can you provide some color on what you see on the mobile side of the end market, which drives your tester business? Are you more incrementally positive or cautious here?

Luis Muller: Hi, Ross, yes, we are incrementally more positive on mobile. I’m not calling this really broad market recovery yet. But what we’ve seen in particularly IoT devices, so talking about RF in the mobile space, we’ve seen a little bit of an improvement in orders in the fourth quarter revenue in the first quarter. As I mentioned before on the prior call, the prior question, sorry. The mobile segment is the only segment of our market that we saw an increased revenue quarter-over-quarter. Now that’s more particularly focus on the Android segment and some – as we understand customer. Our customers opportunity for sales in China and Korea not yet a broad-based recovery, so I think mobile will be incrementally better going forward. But realistically, I think a full-blown recovery is more of a late this year to 2025 story.

Ross Cole: Great. Thank you. And if I can ask a second question a little more broadly on what are the ordering or quoting activities like right now, especially relative to 3 months ago? Are you starting to see some green shoots?

Luis Muller: The activity is still very much focused on new technologies, new applications, our customers win of a particular socket that drives some demand. No, I can’t say that there is much of a broad-based capacity addition at this point, Ross. It’s – we have we have qualifications. We have design wins as a reference here on the call, we had a design win for a MEMS microphone application. It’s a new product, customer selected. We already shipped a first system here going into their lab, and we have a production system shipping in the summertime. We had a design win completed of a qualification of our tester with the new instrument for display driver, I see final test, which we call P2. So, the second insertion of test, this is the same customer that has selected us for P1 last year and drove a $20 million of revenue in 2023, so we now got qualified for P2.