Cohu, Inc. (NASDAQ:COHU) Q2 2023 Earnings Call Transcript

Cohu, Inc. (NASDAQ:COHU) Q2 2023 Earnings Call Transcript August 3, 2023

Cohu, Inc. beats earnings expectations. Reported EPS is $0.48, expectations were $0.43.

Operator: Good day and thank you for standing by. Welcome to Cohu’s Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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 speaker today, Jeff Jones, Senior Vice President and Chief Financial Officer. Please go ahead.

Jeff Jones: Morning and welcome to our conference call to discuss Cohu’s second quarter 2023 results and third quarter 2023 outlook. I’m 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 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 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, August 03, 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 Muller, Cohu’s President and CEO. Luis?

Luis Muller: Good morning and thanks for joining us. Second quarter gross margin and – profit was strong, driven by Cohu’s resilient recurring business model. Q2 non-GAAP gross margin of 47.8% increased 130 basis points year-over-year and is better than our target financial model at this revenue level. Cohu’s recurring business contributed 48% of second quarter revenue at approximately 55% gross margin. Our recurring business achieved a three year compound annual growth rate of 7% to 2%, and it is the key driver of Cohu’s new baseline profitability through industry cycles. As communicated last quarter, we’re expanding our infrastructure in the Philippines to support growth in our interface business. At the end of second quarter, we were approximately 60% through construction of a new 92,000 square foot facility that will become operational in the first half of 2024.

We’ll also continue working in the local supply chain to increase flexibility and quickly ramp production in support of customers’ needs. In the second quarter, we received a first DI-Core software order from a European IBM for monitoring performance of Cohu’s third handlers. Although in early stages, we estimate the business potential at approximately $1.3 million a year in future software subscription sales at this customer. We had several design wins of our interface products, both contactors and probe cards, mostly driven by our products RF performance and final test. Switching over to Cohu’s systems business, it contributed 52% of second quarter revenue at approximately 41% gross margin. As expected, automotive and industrial continue to be Cohu’s main market segments with combined system – 31% of the Q2 total.

Other markets remain below historical levels with mobility particularly weak this year. When market conditions soften as it is currently the case, we focused on expanding our product portfolio and winning new customer applications, positioning the company to deliver revenue growth in the mid-term. Aligned to this approach, there was an important ATE win in the second quarter at a leading OSAT in Korea. This business is for outsource testing from a European semiconductor manufacturer. This is a high value target we have been working with to expand use of Cohu’s Diamondx platform in analog IC tests. Finally, we had a couple of distinct design wins for the handler group during the second quarter. We broke in at a large Taiwanese foundry customer with a thermal handler for hyper scaling device test.

And this test – for Cohu and creates an opportunity to serve a much broader customer base in high performance computing, including those developing their own processors. Then there was a handler design win in the high power semiconductor market, adding another customer to a new expansion in this segment. All of these are great product validations and give us confidence for 2024 revenue growth. But despite improving demand for a thermal handlers for high performance computing, power reduction in customers utilization this past June, driven by soft conditions affecting all other market segments. Estimated test cell utilization is down 4 points quarter-over-quarter, ending Q2 at approximately 73%. Several customers paused system orders originally planned in the second half of June, delaying capacity expansion to the latter part of the year ending into 2024.

Continue mobility weakness and recent order in automotive and industrial segments have extended this downturn into Q3, resulting in a lower revenue guidance. However, current order forecast is projected to grow sequentially again in the third quarter. In the near term, we’ll continue to tightly control expenses while focusing on winning new customer applications. We’ll continue executing a 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. I want to stress that we’re committed to expanding Cohu’s recurring business that is key to profitability through industry cycles. Let me now turn this presentation over to Jeff for further details on second quarter results and third quarter guidance.

Jeff?

Jeff Jones: 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 strong profitability on revenue of $168.9 million, which is slightly higher than the midpoint of our guidance range. During the second quarter, two customers in the automotive market each accounted for more than 10% of sales. Q2 gross margin was strong at 47.8%, about 80 basis points higher than guidance, driven by Cohu’s resilient recurring business and differentiated products.

Operating expenses for Q2 were approximately $1 million lower than guidance at $50.8 million. Second quarter non-GAAP operating income was 17.7% of revenue, and adjusted EBITDA was 19.7%. The non-GAAP effective tax rate for Q2 was approximately 27%, higher than guidance due to the projected concentration of annual pre-tax income in higher tax rate jurisdictions. Non-GAAP EPS for the second quarter was $0.48. In summary, Q2 gross margin and adjusted EBITDA were strong exceeding the midterm financial targets at this level of revenue. Moving to the balance sheet. Cash flow from operations in Q2 was strong at $53 million and cash and investments grew to $372 million at the end of the quarter. Debt repayment in the second quarter totaled $1.5 million, and we ended Q2 with net cash per share of approximately $7.

Cohu’s shares repurchased in Q2 totaled 2.7 million and CapEx in the quarter was $3.1 [ph] 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, is expected to remain at approximately $20 million. And overall Cohu’s balance sheet maintains a strong position to support debt reduction, the share repurchase program and investment opportunities to expand our served markets and technology portfolio in line with our growth strategy. Now moving to our Q3 outlook. We’re guiding Q3 revenue to be approximately $150 million, reflecting the recent weakness across our end markets and lower test cell utilization at customers production facilities.

Q3 gross margin is forecasted to be approximately 46% better than the financial target model at this level of revenue due in 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 Q3 are projected to decrease quarter-over-quarter to approximately $50 million as we continue to exercise tight control over OpEx while navigating through the trough of this cycle. We’re projecting Q3 interest expense to be approximately $1 million and offset by interest income of approximately $2 million. We expect Q3 adjusted EBITDA to be approximately 15%, and the Q3 forecasted non-GAAP tax rate is approximately 26%.The diluted share count for Q3 is expected to be approximately 48.4 million shares.

And while we’re not guiding full year, the expectation is that we’re passing the trough of this industry cycle – by the current order forecast that is projected to grow sequentially in the third quarter. 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 with Stifel.

Brian Chin: Hi, there. Can you hear me?

Luis Muller: Yes.

Brian Chin: Okay, great. Sorry, I got cut off there. Good morning. Thanks for letting us ask a few questions. Maybe to start off with Luis, what – I guess, in the past 60 days or 45 days, what – can you be more descriptive on sort of what changed in terms of deliveries? It sounds like it’s mainly towards sort of auto industrial and tied in maybe with the yield change, which seems to be, I guess, mainly driven by IBM give [indiscernible] already were kind of operating at lower levels. So can you maybe be descriptive about kind of what you’ve seen there? And then reconcile that with sort of the – I guess the positive sequential order trend that you’re seeing, because that seems to be kind of counterintuitive relative to the sequential revenue guide down. And also what that means in terms of sort of duration that you expect this sort of pause in business to occur?

Luis Muller: Okay. Well, there are – several questions there, Brian. But what we did see was actually predominantly in the auto and industrial space, and, as you know, those tend to be generally the same customers for us. They basically hit the pause button on orders in June and started pushing some things out to later in the year about restarting the ramp again, latter part of this year, beginning of next year, and this is to the tune of about $30 million that they got pushed down – down the line here by about six months. Concurrently with that, and as I commented in the prepared remarks here, we noticed that we end up with a lot of handlers. I mean, we’ve got about a hundred handlers right now that are awaiting testers to be installed, most of it through the third quarter.

And with that utilization came down about four points at the end of June to 73%, that’s just sort of the level we saw at the end of June. I think, as these handlers start receiving testers getting installed in the third quarter that utilization is likely to start climbing again. So, concurrently that we’re seeing also an order forecast that starts picking up in the third quarter, which leads us to believe basically that we’re passing the trough of the cycle.

Brian Chin: Okay. And maybe to hone in on that, again, the order increase you’re seeing, and I don’t know if it’s a book-to-bill above one for the entire business or maybe a specific segment. So maybe on a segment basis, are you seeing this trend in auto industrial, but – how about also wireless in some of these markets that have been soft?

Luis Muller: It’s is predominantly auto and, Brian, we continue to see the same softness in the mobility space that we have been talking about. I don’t necessarily see that changing course here in the third quarter. So it’s more of the auto and industrial and that – that’s the segment that had orders pushed out in a softness at the end of the second quarter. And that’s the same segment that seems to be turning around the corner here in the third quarter from an order perspective.

Brian Chin: Okay. Got it. Got it. Lastly, I think, I heard in the prepared remarks maybe a comment about confidence on calendar 2024 growth. I guess, what are some of the components of that in terms of market and recovery as well as maybe any initiatives you have line of sight to in terms of SAM expansion, market share gain, et cetera, in any of the product areas?

Luis Muller: Yes. So from a – starting from a market standpoint the – some of the orders that we’re talking about in the third – for deliveries already planned in Q1 of next year and at least a couple of these are fairly sizable actually in given an indication that there is a turn – turn of the tides coming above. One of them in particular is in the industrial space more specific and the other one is in the automotive. From an internal – what we can control standpoint, we have three main activities on tester design wins that we are in the final innings of the game here in the second half of this year. We expect to convert those customers to our Diamondx tester platform and start getting orders probably late this year, early next year. I mean, it’s really going to depend on the timing of the ramp of their particular devices that we’re getting the system qualified for, but that’s what we align aside from our equipment standpoint.

Brian Chin: Okay. Great, thank you.

Operator: Our next question comes from the line of Craig Ellis with B. Riley.

Craig Ellis: Yes, thanks for taking the question. Luis, I’ll start maybe picking up on some of Brian’s questions, but ask a little bit differently. So as we look at the mix of order activity, and this is no surprise, it’s been playing out, I think, year-to-date, Mobility has been very weak given all the pressure on smartphone sales. Consumer is pretty low. Compute is slow. But there was some very positive commentary on hyper scale activity. How would those dynamics expect to normalize if we had a more normal demand environment next year? When would the business start to see order improvement? And what would be some of the early indicators that customers are moving back to more normal utilization levels and equipment order rates for Cohu?