Cohu Q3 2024 Earnings Call Transcript

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October 31, 2024

There are 8 speakers on the call.

Operator

Welcome to Cohu's Third Quarter 20 24 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. Please advise that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Jeff Jones, Chief Financial Officer. Please go ahead.

Speaker 1

Good afternoon, and welcome to our conference call to discuss Cohu's Q3 2024 results and Q4 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.

Speaker 1

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 ks and Form 10 Q. Our comments speak only as of today, October 31, 2024, and Cohu assumes no obligation to update these statements for developments occurring after this call.

Speaker 1

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, Cohu's President and CEO. Luis?

Speaker 2

Hello, and welcome to our quarterly earnings call. 3rd quarter non GAAP gross margin was strong at approximately 47%. Gross margin benefited from initial revenue of some new products and lower manufacturing costs. Jeff will get into more details on these later. Revenue of $95,300,000 was split 67% recurring in the balanced systems, continuing to demonstrate the resilience of our business model during a market downturn.

Speaker 2

Systems revenue increased sequentially in Automotive and Mobile segments, although offset by declines in Computing, Consumer and Industrial. The Mobile segment was strongest in 3rd quarter at 12% of consolidated revenue. Mobile also posted 13% year over year revenue growth defining a turning point in a segment that was first into this market downturn. We had a significant test cell design win last quarter at a top 5 automotive semiconductor manufacturer. With this win, Cohu is delivering a combined tester, handler and interface solution for testing power management devices.

Speaker 2

We're excited to see traction with our Diamond X in the mixed signal market and expect to have additional good news in the coming quarters as more customers are evaluating our platform. While market conditions remain soft across our primary segments in automotive and industrial, we're busy realigning our investments to outsized growth opportunities. We made good progress recently entering the memory and silicon carbide power semiconductor markets. Earlier today, we announced a customer order for our Neon inspection metrology platform configured for high bandwidth memory, also known as HBM. The HBM market is estimated to be approximately $23,000,000,000 today and projected to grow about 22% a year through the end of this decade.

Speaker 2

We're pleased to have received an initial order from 1 of the world's leading semiconductor memory manufacturers, marking a big strategic win with substantial growth opportunities in the next couple of years. We believe the industry is purchasing approximately $100,000,000 of inspection metrology equipment for this HBM manufacturing process step today and expanding at a fast pace to keep up with AI data center demand. Neon offers a highly efficient vision system, enabling full 6 sided optical inspection and measurement of micro pillars, along with vision optimization powered by Cohu's AI inspection technology. We're expecting follow on orders in early 2025 to support a production ramp in the second half of next year. We also announced today that a leading European customer has selected Cohu for high speed handling and inspection of silicon carbide dies.

Speaker 2

We have been providing inspection metrology systems to silicon carbide manufacturing now for over a year, but this solution extends our offering into burn in test at the die level. Oyu's product configuration will significantly improve yield and productivity, eliminating more than 40% losses through burn in of tested good only dies. We'll also be supplying a high power test interface for 2.5 kilo volts test per die, satisfying stringent automotive 0 defect requirements. The silicon carbide market is poised to grow at 25% CAGR through 2029 and we're pleased to be an enabler of the next generation of devices coming to market in 2025. Now turning to our DI Core software platform, several customers have expressed interest in our data analytics software that is demonstrating yield and productivity gains.

Speaker 2

While we have validations running at multiple customers, in Q3, a key Cohu customer placed orders to expand use of our AI inspection software. This subscription based software solution optimizes inspection yield through a convolutional neural network machine. In other words, it uses deep learning models to process vision data. We're excited to expand Cohu's recurring business with machine learning analytics. Although this is still a small part of our total revenue, the level of customer engagement and interest in our solutions is exceeding our expectations.

Speaker 2

Putting this a bit in context, we estimate that the semiconductor back end manufacturing is spending about $600,000,000 in data analytics for process control, data visualization, connectivity and predictive applications. These investments are focused on positioning our products to growth applications, while also enabling our customers to expand use of factory automation and support on and near shoring semiconductor manufacturing. We're committing resources to making this a growth vector in our strategy, expanding our recurring revenue with subscription software aligned with our customers push for what is known as Industry 4.0. I'm expecting to see some very exciting years ahead of Cohu as we enter the memory market, expanding silicon carbide applications, including burn in and stress test, and very importantly, build on our analytics platform. Let me now turn it over to Jeff to provide further details on last quarter results and next quarter guidance.

Speaker 2

Jeff?

Speaker 1

Thanks, Luis. Before I walk through the Q3 results and Q4 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 Q3 financial results. Revenue for the quarter was $95,300,000 and in line with guidance.

Speaker 1

Recurring revenue, which is largely consumable driven and more stable than systems revenue, represented 67% of total revenue in Q3. During the Q3, one customer in the automotive market accounted for more than 10% of sales. Q3 gross margin was strong at 47.1% and higher than guidance benefiting from some new products, the one time utilization of previously reserved inventory as well as lower manufacturing costs in our interface or contactor business. Operating expenses for Q3 were 45,200,000 dollars and lower than guidance by approximately $1,600,000 driven by lower labor costs due to replacement and new higher delays as well as higher vacation utilization than forecasted. 3rd quarter non GAAP operating income was approximately breakeven and adjusted EBITDA was 2.3%.

Speaker 1

Interest income net of interest expense and a foreign currency loss of approximately 1,600,000 dollars was $900,000 The foreign currency loss was driven by typical balance sheet exposure to foreign currencies in conjunction with the devaluation of the U. S. Dollar in Q3 after the Federal Reserve's rate cut announcement. Q3 pre tax income consists of foreign profits combined with a loss in the U. S.

Speaker 1

The Q3 tax provision of $4,400,000 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 Q3 was an $0.08 loss. Moving to the balance sheet.

Speaker 1

Overall, cash and investments increased by $7,000,000 during Q3 to $269,000,000 due mainly to positive cash flow from operations of $17,000,000 less $8,000,000 used to repurchase 315,000 shares of Cohu common stock and capital expenditures of $2,000,000 related to our factories in the Philippines and Germany supporting operations for our interface and automation businesses. Overall Cohu's balance sheet remains strong supporting investment opportunities to expand our served markets and technology portfolio in line with our growth strategy and returning capital to shareholders through our share repurchase program. Now moving to our Q4 outlook. We're guiding Q4 revenue to be in the range of $95,000,000 plus or minus $7,000,000 essentially flat to Q3 as we bounce along the bottom of this cyclical trough. The initial order forecast for Q4 reflects a book to bill ratio over 1 and our current view of Q1 revenue is approximately 10% higher than Q4.

Speaker 1

4th quarter gross margin is forecasted to be approximately 44%, lower than Q3 but higher 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. We expect gross margin to increase again when our revenue recovers with the broader semiconductor device market and with better absorption of our factories infrastructure. Operating expenses for Q4 are projected to increase about $1,000,000 quarter over quarter to approximately $46,000,000 due to an increase of labor costs as a result of the U. S. Dollar weakening in Q3 against many foreign currencies.

Speaker 1

As I noted on prior calls, we've taken action throughout 2024 to reduce operating expenses without sacrificing critical new product investments while navigating through the trough of the cycle. Our main focus has been on structural changes generating permanent cost reduction and leading to projected 2025 operating expenses to be relatively flat compared to 2024, while supporting a recovery in business and higher revenue. We're projecting Q4 interest income, net of interest expense and foreign currency impacts to be approximately $1,800,000 at current interest rates. The Q4 non GAAP tax provision is expected to be approximately $3,100,000 because of tax on foreign profits without benefit from the U. S.

Speaker 1

Loss. Until the markets recover, we expect a similar tax provision profile as we navigate through the cycle. The basic share count for Q4 is expected to be approximately 46,500,000 shares. And that concludes our prepared remarks. And now we'll open the call to questions.

Operator

Our first question comes from the line of Craig Ellis with B. Riley.

Speaker 3

Thanks for taking the question and guys congratulations on the new products that are coming to market. Luis, I wanted to start just by following up on your comments on mobile. I think you might have remarked that the business in its strength is at or near a turn. Did I hear that right? And was it just up in 3Q because of some of the strength we see seasonally at that time?

Speaker 3

Or do you really think it's hit a bottom and we should be moving up sequentially from here?

Speaker 2

Hi, Craig. Yes, I did make the comment that mobile revenue was up year on year by 13%. But if I wanted to expand on that, I can tell you that also bookings in the Q3 were up sequentially across all market segments, which I didn't say in my prepared remarks, but that is also the case. And they're also up year on year across all segments except for consumer. So yes, we have seen an improvement in mobile revenue quarter on quarter, year on year, but we also haven't seen an improvement in orders across automotive, industrial, computing, mobile, so basically across the board quarter on quarter and year on year as well.

Speaker 2

So we're a little bit more optimistic now as we head into 2025.

Speaker 3

Good to hear. And then I wanted to focus on neon and die level burn in tests. So in the deck and in your comments, I believe you frame them as respective $150,000,000 opportunities. What's a reasonable way to look at revenue potential for those respective products next year, Louise? And how long does it take to realize or build up to the market sizings that you identified the $150,000,000

Speaker 2

Yes. We don't first of all, Craig, the market sizing obviously is going to be split between us and other suppliers that are currently, in one particular case, currently in it, right? So if you look at HBM inspection today, for example, it's largely supported by a company in Korea called Hanmi. I think they're sort of they're the largest supplier in this space today. So we're just getting into this.

Speaker 2

We got our first order. We were supposed to be delivering the product here in the coming months and then expecting subsequent orders in the beginning of the year and we're told intercepting a production ramp that should start in the summertime. So how fast is we're going to eat into this $100,000,000 Well, we'll see. I mean, I think there are really 3 or 4 major manufacturers out there of this technology. And at this point, we are working with 1 of them, sort of a beachhead entrance.

Speaker 2

On the silicon carbide side, burn in, this is an opportunity to actually resolve a major problem in burning of silicon carbides, which is going in with a wafer that is already at a low yield from the start and then you're wasting process time burning in non good devices. So we have now a solution with some partners for doing burning in at the die level. We have the leading supplier in the space, embrace in driving us to get this product to their production ASAP. So I think we are at the bottleneck at the moment and we're starting to dialogue with other customers about the opportunity to basically to lower their cost of burn in process past of silicon carbide devices. So I don't have a trajectory exactly to tell you of how much of the $150,000,000 we're going to get, how fast that's going to happen.

Speaker 2

We just broke into those both of those segments. On the HBM side, not only we will be talking to the other suppliers, but we're also starting to explore what else can we do in HBM. Are there more upstream inspection opportunities that we could intercept in the HBM market? So we'll see. We'll tell you more about this story as it evolves in 2025.

Speaker 3

Okay. Thanks for that color, Luis. And then Jeff, if I could, I think I heard your remark that orders were tracking up around 10% for the Q1. Does that give you confidence that we can see revenues rise sequentially? And if revenues were to rise similarly, how would that compare to how you regard normal seasonality in 1Q?

Speaker 1

Yes, I think at this point, we're out of the normal seasonality. So I wouldn't put any weight into the seasonality there, Craig. My comment was that orders are over 1 or forecast would be over 1 in Q4 and so that we're anticipating or projecting that revenue in Q1 will be 10% higher than Q4. So again, we haven't really seen normal seasonality here going on close to 2 years. And so I'm not anticipating that that starts back up in Q1.

Speaker 3

Got it. Guys, thanks for the help. I'll get back in the queue.

Speaker 1

You bet. Thanks, Craig.

Operator

Our next question comes from Christian Schwab with Craig Hallum.

Speaker 4

Hey, great guys. So a couple of questions. First on the high bandwidth memory, do you know if this is the high bandwidth memory 3e or if this is high bandwidth memory 4 that you will be expecting?

Speaker 2

No. I personally, I don't have that information to share right now, Christian.

Speaker 4

Okay. And then as it relates to the wafer level burn in, gas for silicon carbide, how does that how does your product compare to the other company is doing that as far as ASP and how many wafers you could test in parallel?

Speaker 2

So this is actually a dye singulated dye burn in, not really a wafer. So it's a little bit different, right? You don't have a direct comparison. So you have we have a couple of 100 dies in a carrier, in a burn in slot, but there are multiple of those. So, yes, not a straight one to one comparison to wafer level.

Speaker 2

The difference here is you have known because you're testing the wafer, the silicon carbide wafer before the burn in. So you have known good dies to that step in the process going into the burn in versus a known section of the wafer that is already bad going into the burn in. That's your advantage there. Okay.

Speaker 4

So do you think that would be complementary product then?

Speaker 2

Complimentary to what, to wafer burn in, you mean?

Speaker 4

Yes.

Speaker 2

No, no. It's displacement off.

Speaker 4

Yes. So it's an alternative solution to that?

Speaker 2

That's correct.

Speaker 4

And then does the customer who's looking at it that or working at that, do they think that a lower cost, faster throughput solution or are they doing wafer level burn in on the wafer? Or is this an additional step to that they're adding in order to not put it in a module and throw it away?

Speaker 2

No, no, it's pretty much it's the same question you asked before. This is a replacement of existing wafer burning process with a dye burning process. It's just a much lower cost, more efficient way of doing it because you're not burning in known bad devices that are stuck altogether in a monolithic wafer.

Speaker 4

Okay. Great. That just putting that together to make sure I completely understood that. And congrats on sequential growth in Q1, which would to the earlier question kind of seems countercyclical. So we truly should be bouncing along the bottom here, as you said, with waiting for end market demand to kind of increase plus potentially some of the new products kicking in as we go throughout 2025.

Speaker 4

Did I hear what you were trying to say?

Speaker 2

Yes, yes, you're correct. We just to add to the question that came before from Craig Allen's, we are seeing demand improvement. Our system well, I think a comment I made on the prepared remark, right, recurring, for example, recurring bookings were up 8% quarter on quarter. And then system bookings were up across all market segments quarter on quarter and across all market segments except for consumer year over year as well. So, we are seeing sort of the start of an improvement across the board.

Speaker 2

Now, albeit part of this is related to the new products and some market share gains. Indeed, it's not just purely market. It's a combination of both embedded in there. But it's good news to see a schedule in front of you that has black numbers and positive signs in front of it showing both bookings quarter over quarter and year over year improvements.

Speaker 4

And I'm sorry, Jeff, I don't have your company file in front of me. But can you remind me how many quarters it's been since you felt confident in essence to give directional guidance for 2 quarters in a row instead of just one? To me, I think it's been over a year in my head, but if you know that offhand, that'd be great.

Speaker 1

Yes, Christian, it has been over a year. I don't have it right in front of me either, but it's definitely been over a year.

Speaker 4

Okay, great. Congrats on that. No other questions. Thank you.

Speaker 1

Thank you.

Operator

Our next question comes from Ross Cole with Needham.

Speaker 5

Hi. Thank you for taking my question. I was wondering if you could provide some updated directional color on the different business segments going into 25? I remember you had thought mobile and computing would have been a strong spot and it's great to see that mobile did well this quarter. I just want to see your feeling going into next year.

Speaker 2

Well, I think if I guess I'll speak in terms of orders again. I said all segments were up quarter over quarter and year over year in terms of bookings. So that is perhaps the best indication, at least into the early part of next year, right. I can't I'm not going to speak to the entirety of next year. But if I look at a quarter over quarter, year over year, the strongest booking segments change sequential change or annual change have been in mobile for a year over year.

Speaker 2

Automotive has been the strongest on a quarter over quarter and 2nd strongest on a year over year. And then industrial came out pretty strong on a quarter over quarter as well. So that's sort of the pattern that we see here is more across mobile, auto and industrial. And it varies a little bit whether you're talking quarter over quarter, year over year, but those three segments are sort of leading the improvement, the sequential improvements.

Speaker 4

Great. Thank you. Appreciate the color.

Operator

Our next question comes from Robert Mertens with TD Cowen.

Speaker 6

Hi. I'm on for Chris Shankar. Congrats on the design wins during the quarter. I guess my first question is just around your automotive business. It looks like it did much better in the quarter than previously expected, but the utilization in the space is actually down compared to the June quarter.

Speaker 6

Is this discrepancy largely just due to that 1 greater than 10% customer in the quarter? Or are you starting to see an actual quarter over quarter improvement in the automotive business? Just any color into next quarter and next year would be helpful.

Speaker 2

Yes, I can comment that, look, the automotive, I don't know if it has to do with that 10%, actually, I would have to dig into the numbers a little bit here. But the automotive segment has had an improvement quarter over quarter and year over year in bookings and then also an improvement quarter over quarter in revenue. Now you also got to take it a little bit of a grain of salt. I mean, you're starting from a fairly depressed market environment. So it's not terribly difficult to see an improvement.

Speaker 2

I think more so the year over year is kind of encouraging. Looking at the numbers, I can see the automotive segment going essentially through a bathtub curve, where it started to go down Q2 and then Q3 last year, seems to have hit a bottom here on the Q2 of this year and climbing its way back up starting in the Q3. And I'm looking at this from a again, from a booking perspective at the moment, so more indicative of what's ahead. I think we have a few customers that have turned on a few orders in the quarter. I can think of one in particular that has been perhaps driving demand earlier relative to others, but that's always the case.

Speaker 2

There's always somebody first and others that come later. But that's what we're seeing on the automotive space today.

Speaker 6

Got it. Thank you. That's helpful. And then

Speaker 3

just a quick

Speaker 6

question on the die level burn in. I think on your slides, the revenue opportunity listed at around $50,000,000 annually. Is that maybe what your win with the customer could ramp to or is that just for the overall market?

Speaker 2

We think this is for the market at large, not one customer, but what the market could absorb as it starts to migrate from a wafer level to a dial level burn in.

Speaker 6

Okay. Thank you. That's all for me.

Operator

Our next question comes from Brian Chin with Stifel.

Speaker 7

Hi, thank you. This is Dennis on for Brian. So my first question is about this HBM opportunity. Could you maybe discuss a little bit like the steps or the parts of the process that you've won? And are you by chance competing at all with a company like Camtek or Onto?

Speaker 7

And perhaps also discuss the kind of revenue significance and the timing for revenue for these products?

Speaker 2

Hi, Dennis. Yes, good questions. No, we're not competing with Onto or Camtek. They are doing inspection at the wafer at the wafer level pre singulation to my understanding. This is what we've got here initially is the stacked die inspection metrology.

Speaker 2

So you already get your multilayer HBM dies stacked on top of each other and sort of the final product inspection metrology. That's what we're doing. Sorry, you want to comment on the second part of the question?

Speaker 1

There was revenue and there was timing effects to it, which I think we addressed already just in terms of the revenues too soon to tell, but we'll provide updates as we have them.

Speaker 7

All right, great. And then for my follow-up, so you'd also announced a win with the leading, I think, multinational analog and embedded semi customer. How has that engagement progressed and kind of what is the timeframe for seeing revenue with this customer? And then maybe you can talk about the revenue contribution as well. And then is it just testers or is it handlers and contactors as well?

Speaker 7

Could you tell us a little bit more about that?

Speaker 2

Sure. This is part of a press release we put out in July actually at Semicon. So it's a little dated now, but it was indeed part of Q3, a Q3 event. We have been talking about positioning our Diamond X tester more into the mixed signal market. A lot of it is analog, but there's some digital, some RF content.

Speaker 2

And in July, we announced that we won a selection at a top 5 semiconductor automotive manufacturer. And kind of coincidentally here, this win was not just the Diamond X, but also handlers and contactors. So we essentially are selling them a complete test sell. We will see initial revenue, although it's still at early stage, so small numbers, but initial revenue here in the Q4. And there's a continuation of that going into next year.

Speaker 2

We are touching on several product groups with these guys and working our way up on test application development, so they can move products onto our Diamond X Tester. In conjunction with that announcement we did in July, we announced a new instrument that goes along with the Diamond X called the VI-one hundred, essentially a voltage current instrument that is used in analog applications. And anyhow, this is sort of a key instrument enabler for our positioning into the mixed signal market. There are a few other things that we did. There's some other platform enhancements that we did in conjunction with the VIE-one hundred, some refresh and other instrument capabilities, so that we round up the Diamond X as a very cost effective test platform for general mix signal customers, typically those supplying auto industrial markets, also power applications for data centers.

Speaker 2

That's a lot of great detail. I appreciate it. Thank you.

Operator

Sure. That concludes today's question and answer session. I'd like to turn the call back to Jeff Jones for closing remarks.

Speaker 1

Thank you. And before we sign off, I'd like to mention that we'll be participating in a few investor conferences over the next 3 months. First one is Stifel Midwest Conference in Chicago on November 7, followed by the New York Summit Conference in New York City on December 17. And then we'll be attending virtually the Needham Growth Conference on January 9 of next year. If you're interested in meeting with us at any of these conferences, please let me know or reach out to the respective research analysts to schedule a meeting.

Speaker 1

That's it. And I'd like to thank you for joining today's call. And we look forward to speaking with you soon.

Operator

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

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