Cohu, Inc. (NASDAQ:COHU) Q3 2023 Earnings Call Transcript

Cohu, Inc. (NASDAQ:COHU) Q3 2023 Earnings Call Transcript November 2, 2023

Cohu, Inc. beats earnings expectations. Reported EPS is $0.35, expectations were $0.31.

Operator: Good day, and thank you for standing by. Welcome to Cohu’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. [Operator Instructions] 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.

Jeffrey Jones: Good afternoon, and welcome to our conference call to discuss Cohu’s third quarter 2023 results and fourth quarter 2023 outlook. I’m joined today by our President and CEO, Luis Müller. 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’s also a slide presentation in conjunction with today’s call that may be 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, November 2, 2023, 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 Müller, Cohu’s President and CEO.

Luis?

Luis Müller: Good afternoon. Third quarter gross margin and profitability were again strong driven by higher than forecasted margin on testers and Cohu’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 2, we announced the acquisition of Equiptest 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 3-months revenue to our fourth quarter guidance, and it is forecasted to be accretive to Q4 adjusted EBITDA. In support of plans to grow Cohu’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 3-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 Cohu personnel to support the large active installed base of over 24,600 systems across 108 customers. In the third quarter, we landed 3 new applications for test contactors at Cohu’s Tier 1 customers, with an estimated potential $6.5 million revenue stream per year. We also received orders from 2 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 Cohu’s equipment installed base. Switching over to Cohu’s systems business, it contributed 49% of third quarter revenue, decreasing 2 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 1 point sequentially. The utilization in the consumer segment was 2 points up, and mobility increased by 1 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 2-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 up-cycle 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?

Jeffrey Jones: 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 Cohu’s resilient recurring business and differentiated products.

Operating expenses for Q3, where 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 $0.35. 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 and 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.

Cohu 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, Cohu 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 lower test cell utilization at customer’s production facilities.

Q4 gross margin is forecasted to be approximately 46%, better than the financial target model at this level of revenue. Gross margin for full year 2023 is forecasted to be approximately 47% and in line with 2022 results, despite approximately 20% lower year-over-year revenue. The strong gross margin performance is 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. 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 Cohu’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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Charles Shi with Needham & Company. Charles, your line is now open.

Charles Shi: Hello, can you hear me?

Operator: Yes, we can hear you now.

Charles Shi: Yeah, good afternoon, Luis 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 this 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.

Luis Müller: 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 – sorry, 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 of 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 that in absolute dollar terms, we saw an increase in orders on the third quarter.

Nevertheless, as you know, Cohu’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.

Charles Shi: Thanks. Maybe a follow-up question. I think you made a commentary on test cell utilization versus your projected revenue levels. Obviously, utilization seems to be flattening out, I mean, overall from Q3 to Q4, but the revenue is down a bit, right, given some of the puts and takes you just mentioned. But can you kind of help us to understand, is there any correlation between what kind of test cell utilization usually would indicate what kind of revenue level or such correlation doesn’t exist? Thanks.

Luis Müller: 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 and use 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 of points up and down. But as you pointed out, at the end of Q3, utilization was flat quarter-over-quarter from the end of Q2.

Charles Shi: Thanks, Luis.

Operator: Our next question comes from the line of Brian Chin with Stifel.

Brian Chin: Yeah. Hi, Brian Chin at Stiefel. 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 maybe 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?