Cohu Inc (COHU) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to Cohu's First Quarter 2022 Financial Results Conference Call. (Operator Instructions) Please be advised, today's conference may be recorded. (Operator Instructions)

I'd now like to hand the conference over to your host today, Mr. Jeff Jones, Senior Vice President and CFO.

Good afternoon, and welcome to our conference call to discuss Cohu's first quarter 2022 results and second quarter 2022 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'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, by 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, April 28, 2022 and Cohu assumes no obligation to update these statements for developments occurring after this call. Finally, during the 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?

Good afternoon, and thanks for joining us. First quarter revenue was approximately $198 million and non-GAAP EPS was $0.66, both exceeding expectations, driven by customer acquisitions and effective supply chain management. Cohu is benefiting from several key design wins in late 2021, with those customers starting to place volume orders this past quarter. This has been particularly beneficial for the tester business that booked incremental $45 million in design win orders in Q1, broadening our addressable market beyond RF front-end IC test. The success in new customer acquisition driven orders increased backlog to a new record and is putting Cohu on pace to achieve our mid-term targets of 25% non-GAAP operating income at $1 billion revenue.

Our supply chain team also did an effective job managing the ongoing challenges in controlling costs. Combined with progress of our contactor manufacturing in-sourcing, we're delivering better than anticipated gross margin and again, on pace to achieve our mid-term target of 49% non-GAAP gross margin. In all, Cohu is progressing well against our strategic plans. Semi Test is expanding applications in display driver IC, capturing business in Korea and Taiwan, gaining new sockets for testing power management in analog ICs as we continue to expand Instrumentation portfolio in our low-cost Diamondx platform. Our test interface business is gaining momentum in millimeter wave in delivering on the promise of expanding into the probe card market. Our services business, including spare parts, upgrades in data analytics software remain robust in continuing to develop a new frontier with DI-Core data analytics software that is now in use at several major automotive customers. We are also qualifying new customers on the Neon package and inspection system on our path to grow our number 2 position in this market.

Our test automation business is advancing with new products in the push to automate back-end operations. We got a key order for our next generation MEMS sensor test platform that brings test to a new level, enabling ultrasensitive sensors used in mobility and automotive applications. We have demonstrated the superior thermal performance of our T-Core thermal technology in the Eclipse handler, testing high performance computing processors in ultra large form factor devices. The push to automate back-end factories and improved productivity, also known as Industry 4.0 is creating new sales opportunities for Cohu to provide automation in data analytics solutions to customers. We're excited to be at the forefront of this factory automation revolution, leveraging our engineering competencies to promote value upgrades to our large installed base of equipment.

Moving to discuss ESG. In Q1, we published Cohu's 2021 sustainability report, which you can read in detail in our website at www.cohu.com. We are excited to communicate our progress on energy usage, addition of 2 operating sites with solar power generation and to continue our stellar, safety and ethics record. The report also promotes our progress on employee gender and racial diversity, details about Scope 1 and 2 greenhouse gas emissions and corporate ESG targets for 2022.

Switching topics. We are disheartened by the conflict in Ukraine. Although we have very limited exposure to customers and supply chain in that region, we have opted to join other global corporations in halting any business engagements with Russian companies, starting on March 1. We're also participating with employees in contributing to the relief efforts for Ukrainian refugees in Europe.

Finally, I want to comment on COVID disruptions and supply chain constraints that continue to impact many semiconductor and equipment companies. We're not immune to shortages, cost increases and regional lockdowns, but Cohu team has done an outstanding job, putting in place countermeasures, anticipating these challenges, requesting and receiving help from our suppliers, some of which are also our customers. These challenges are not new. They have been around since March 2020, and are probably going to continue. But I'm confident that our proactive approach in managing disruptions will continue to yield positive results. The fact is that, one company's challenge is also another's growth opportunity and we're working hard to capitalize on these disruptions to support and win new customers.

Let me now turn it over to Jeff to share first quarter results and provide specifics about our second quarter guidance. Jeff?

Thanks, Luis. Before I walk through the Q1results 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 financial results, Cohu again delivered strong revenue and profitability in the quarter. Q1 revenue was $197.8 million and at the higher end of our guidance range. During the first quarter, one automotive segment customer accounted for more than 10% of sales. Gross margin in Q1 was 46.1% and higher than guidance.

Quarter-over-quarter, our semi test business grew in part from recent design win orders as our automation revenue moderated, resulting in the first quarter revenue mix and gross margin closer to the mid-term target. Operating expenses for Q1 were lower than guidance at $50.9 million, as certain product development, travel and other costs have shifted from Q1 to Q2. First quarter non-GAAP operating income was 20.3% of revenue and adjusted EBITDA was 22.7%.

Return on invested capital in the first quarter was approximately 39%. The non-GAAP effective tax rate for Q1 was approximately 19% and higher than guidance, as a result of less benefit from the annual RSU vesting process and reduced credit against US tax for foreign taxes paid. Non-GAAP EPS for the first quarter was $0.66. In summary, Q1 profitability was strong and seasonally low revenue and is progressing to the mid-term target.

Now moving to the balance sheet. The Q1 cash balance was $359 million and total debt was reduced to $110 million. During the first quarter, we repaid approximately $9 million of debt and used $6.4 million to repurchase approximately 214,000 shares of common stock. Cumulative through Q1, Cohu has used $13.7 million to repurchase approximately 420,000 shares of common stock. Overall, Cohu's balance sheet is in 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 Q2 outlook. We're guiding Q2 revenue to be between 205 and $221 million. Entering Q2, our backlog is at a record level of $363 million and is scheduled to ship over multiple quarters as determined by customer requirements and material availability. As Luis mentioned, the supply chain remains challenging and to-date, Cohu has effectively navigated supply constraints to locate required material and control costs.

Strong order backlog and test cell utilization bodes well for sequential revenue growth in Q3. However, similar to last quarter, given the uncertainty with supply chain and semiconductor availability, we're hesitant to comment in further detail about future quarterly revenue at this time.

Q2 gross margin is forecasted to be approximately 46% favorable product mix and increased contactor insourced manufacturing is having a positive impact on gross margin.Q2 operating expenses are projected to be between 54 and $55 million, higher than Q1 due to increasing R&D investments to support greater customer traction for our products and increasing travel pushed from Q1 to Q2 to support our 2022 plans. We're projecting Q2 interest expense to be approximately $1 million and we expect Q2 adjusted EBITDA at the midpoint of guidance to be approximately 22%.

The Q2 forecast non-GAAP tax rate is approximately 20% at the midpoint of guidance. For year 2022, non-GAAP tax rate is also estimated to be approximately 20%, which is 200 basis points higher than our prior guidance, due to the annual impact of less tax benefit from the annual equity vesting and reduced credit against US tax for foreign taxes paid. The diluted share count for Q2 is expected to be approximately 49.6 million shares.

And that concludes our prepared remarks. And now, we'll open the call for questions.

(Operator Instructions) Our first question comes from Craig Ellis with B. Riley Securities.

Yes, congratulations on the nice execution, guys. I wanted to start with a clarification and then a question. The clarification is on system. So very robust gross margin improvement of 400 basis points. Jeff, can you just break out the sub components there? And to what extent are some of the things that were driving the improvement perpetuating into the second quarter or the second half of the year?

Well, Craig, one of the drivers there was mix. So we had more tester systems in the quarter. But also we're seeing manufacturing efficiencies out of our operations or foreign operations and so that contributed to the improvement in the systems gross margin as well.

And I think in prior quarters, you've talked about managing pricing within systems and did that have any impact in the quarter?

It has had incremental impact over the last few quarters as orders become subject to that price increase. We had to work through the backlog, we had to work through certain customer contracts. But as of the end of Q1, it's effectively been fully realized.

Got it. Helpful. Okay. And then the next question is for Luis. Luis, I wanted to go back to a comment you made in your prepared remarks around testers and the $45 million in design wins beyond RF IC test. Can you just talk a little bit more about that and to what extent do those design wins reflected in that increase in backlog to $363 million?

Yes. Craig, yes, if you recall, we have mentioned that in the fourth quarter we had sort of a single quarter with the largest number of design wins that, that I recall, at least in my history and those are starting to pan-out into volume orders now in the first quarter, beginning of this year. Yes. They are certainly a key component of that backlog increase for sure. But even if you take that out, you can see that we have had a pretty good first quarter bookings. That design win as I mentioned before, it cuts across different segments, Flat Panel Display, PMIC. We also had some design wins in Ultra-Wideband, Wi-Fi and RF IoT.

Got it. And if I could just sneak in one more before hopping back in the queue. Luis, I think you and Jeff were amongst the first to talk about a return to seasonality in the business. I know it's a really challenging macro environment out there, but can you just comment on the degree to which you're seeing that manifest in the order and engagement activity that you're getting from your customers, both on the system side and on the recurring side?

Yes, it's very much like we spoke a quarter ago. We expect a little bit of seasonality this year again. Nevertheless, if you look at post Xcerra acquisition, our seasonality has been muted a lot. I mean, it's been via amplified if you will. But it's still prevalent when you see typically a bit stronger second and third quarter, typically a little weaker first and fourth quarter. Nevertheless, much lower amplitude than in the past or some of the other companies that I've seen releasing earnings recently.

Our next question comes from Brian Chin with Stifel.

Let me first just talk about supply constraints. You did a really nice job delivering in this environment, where other test companies are seeing something like 6-month to 12-month lead times. I think last quarter, Jeff, you talked about a $8 million to $10 million revenue constraints. Your backlog clearly grew in the quarter. Has this constraint grown as well? And can you maybe place or quantify that?

Brian, no, that the constraint hasn't necessarily grown. But so what we're seeing as Luis mentioned and I mentioned as well, record backlog. And so the roll-out over the next few quarters is obviously gated by customers' ability to take more equipment, trying to match that up when they have lead frames and so forth. And then material availability on our side. So I would say, I wouldn't try to track that $8 million beyond Q1. Now it's sort of a new set of parameters that we're dealing with, and its customer requirements in our material availability.

Okay. Got you. No, actually, that makes sense. And then maybe back on the test business, again the $45 million of design win orders. I guess, roughly how many customers are represented in this? What's the timeframe against which you plan to deliver against this backlog? And also Luis, would you characterize this more as a penetration of existing SAM still? But maybe perhaps positioning yourselves for some SAM expansion at these customers?

Yes, I think that's a good characterization to some of them. Brian, we have -- I'm looking here, it's really a list of 7 customers. And indeed, we have bigger aspirational plans with these customers. So it is an entry point. It is a start, but it's actually a fairly decent start in terms of volume.

And I would say, in terms of the backlog and the way it rolls out, as we sit at the end of the quarter, we're seeing about 80% of it roll out over the next 2 quarters.

Okay, got it. That's very helpful. And maybe a last quick one. Last couple quarters since inception, you've repurchased sort of a ratable amount of your stock. At these levels, where is that? Why not an even more aggressive posturing in terms of the repurchase?

Brian, we put in a 10b5-1 plan. So that's been sort of gating our ability to go back into the market and buy additional shares on a daily basis. And I think that's really the main reason at the moment. So we're evaluating those plans and plan to put another 10b5-1 in place here soon. So we're reevaluating the metrics on that.

Our next question comes from Quinn Bolton with Needham and Company.

Congratulations on the nice execution and margins. I wanted to follow up on Craig's question on the test. It sounds like you guys are winning beyond your traditional strength in the RF front-end. And as you do that, I'm wondering, do you view this as sort of you're expanding the portion of the Test TAM that you're now able to capture? Do you think that Test TAM hasn't really changed? You're just executing better and grabbing a higher share of that available TAM.

Quinn, it's a bit of both, to be honest. We have previously communicated a portion of this as being our addressable market, but we're still working on developing the instrumentation to go at it. For example, in display driver IC, we did mentioned before that was part of what we define as addressable, but we're limited to what we could test and 2 new instruments would come online out of our roadmap development. But in other parts, I got to say, realistically, we have expanded a little bit our SAM, and I think we're going to talk more about in the near future, but we have expanded our SAM a bit.

Understood. And then maybe for Jeff. I know you're not giving guidance beyond the second quarter. But as you look at the backlog, can you give us some sense, what do you see as the relative mix between inspection handlers, test and contactors? As we come through the second and third quarter, does the mix stay relatively similar to Q1? Does it shift in favor of tests, given the strong test backlog that you mentioned?

Yes. I would say that it stays at a favorable mix level. Over the next couple of quarters, we would expect tester revenue to be strong. And so that bodes well for gross margin. But in addition to that, I don't want to leave this out. We've made headway and then we're seeing efficiencies in the manufacturing process and we continue to insource on contactor. So all of this together is supporting the gross margin. But to your question about mix, yes, I see a strong mix over the next couple of quarters.

Our next question comes from Christian Schwab with Craig-Hallum.

This is Tyler on behalf of Christian. First, just on the model, a little bit OpEx up in Q2 and there's some push-out of travel from Q1. So this $54 million to $55 million level and that's the kind of level we should expect to do the rest of the year or maybe that falls off a little bit? Any help thinking about that'd be great.

Yes. You bet, Tyler. I wouldn't model Q3 pretty comparable to Q2. So somewhere $54.5 million continued R&D investment. And then I would model for down just slightly, maybe $0.5 million.

Perfect. That's much appreciated color. And then given the stronger start here to '22 than expected and these design wins now ramping. I was wondering, any color or any comment on the mid-term target and the timeline you're expecting? I know, it's 3 years to 5years, it's kind of a broad range. Is that accelerating now after this quarter too? How do you think about the timing of your mid-term model?

I think we're going to stick to what we said here in the prepared remarks. So we are on pace to that plan. And as you stated, mid-term is a 3 year to 5 year horizon. So I think that's what we're sticking with for the moment.

Yes, I mean, I would add to that, that as we've said, within that strategy we are planning for higher growth rates in the tester business. And so I would say, we're executing well on that, Tyler.

(Operator Instructions) Our next question comes from Hans Chung with D.A. Davidson.

So I have couple of questions. First just, I know, I mean, it seems like you have done a great job in terms of choosing and weather through the supply chain constraints. But just kind of curious, like, is there any supply chain issues sort of somehow limited upside to the like second quarter outlook or would you kind of immune to the whole challenging industry?

I would say, it's a bit of a balance. I would say yes, we're working through availability on material on our side. But also gated by customer and their ability to receive and utilize equipment within a reasonable period of time. So did they have the wafers, the lead frames, et cetera, that they need in order to absorb more test equipment. So I would say, it's a real balance there between those 2 constraints.

Yes, I was going to say, it's not so much limiting, it's more of metering the quarter-on-quarter capacity additions by our customers.

Got it. Okay. And then next is regarding the automotive business. Just I know, we are kind of in a correction phase, given the last (inaudible). Just kind of curious like, how or when do you think that correction cycle in? And what would be that we can now explore for the inflection in the future?

Yes, I wouldn't quite characterize it the way you mentioned. I don't think there is a correction going on. What we have seen is more of a snapback in demand in late 2020, beginning of 2021, because of a very constrained environment due to COVID and factory shutdowns in the middle of 2020. Since then, it kind of returned to its normal growth path. I don't necessarily see a correction going or return to anything. It's more of a natural growth now, driven predominantly by ADAS devices, essentially processors and sensors for automotive applications and electrification, which continues to be pretty strong. So again, I don't view it the same way you do. There is no correction in place right now. I think there is just a past to snapback effect in early '21 and now more of a resume growth path.

I'm showing no further questions in queue at this time. I would like to turn the call back to Jeff Jones for closing remarks.

All right. Thank you very much. Before we sign off, I'd like to remind everyone that Cohu will be hosting a Virtual Investor and Analyst Day on Monday, May 16. This is an opportunity to hear details from our business unit general managers about our strategy to achieve the mid-term financial targets. So more information regarding this event is located on the Investor Relations page of our website.

And then lastly, I would like to mention that we'll be attending a number of investor conferences over the next few months. These include the B. Riley Conference on May 25, Craig-Hallum Virtual Conference on June 1, Cowen Conference on June 2, Baird Conference on June 6, Stifel Conference on June 7, Rosenblatt Virtual Conference on June 9 and the CEO Summit on July 13. So if you'd like to attend any of these events, please reach out to your respective banking and/or conference contacts to arrange a meeting with Cohu. We look forward to speaking with you soon.

Thank you for joining today's call and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.