COHU - NASDAQ

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.

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.

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

Hello, can you hear me?

Yes, we can hear you now.

Thanks, Luis.

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

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?

Yeah, it certainly does feel like a trough that, as Luis said, we don’t have a lot of clarity on the first half of next year. So we’re just kind of playing that week by week here. As you referenced, Brian, I would just go back to 2021 with much higher revenue, but gross margins were in the 40% range. And so over that time, we’ve made a lot of improvements in reducing costs, primarily in the handler products as well as the contactor products. We’ve had some price increases to cover some of the inflationary costs that we’ve incurred, but again, we’ve done a lot to reduce product costs, improve manufacturing efficiencies, productivity, things of that nature. So now, as I stated in my remarks, revenue down approximately 20% year-over-year, and we’re holding a 47% gross margin, which was essentially the same as last year. So margin has been very resilient, as you know, recurring revenue carries a higher gross margin. And as Luis stated, that’s less susceptible to the volatility of the cycle. And so that’s obviously helpful as that becomes a higher percentage of our total revenue. And that’s why it’s really a key part of our strategy as well to grow the recurring revenue.

Okay. Great. Thank you.

Our next question comes from the line of Krish Sankar with TD Cowen.

Okay. Great. Thank you.

Our next question comes from a line of Christian Schwab with Craig-Hallum Capital.

[Operator Instructions] Our next question comes from the line of Craig Ellis with B. Riley Securities.

That’s really helpful, Luis. The next question I wanted to get into is related to the EQT deal. So, you might have mentioned it, Jeff, but given that this is a $20 million trailing 1-year revenue company, is it fair to think that you’ve baked in about $5 million into guidance? And the more longer-term question is, can you just walk us through some of the integration steps with this business and how long would it be before you could look for another tech in like this to further bolster recurring?

Well, I think we’re ready to go. We’re looking for the next opportunity right now. So we’re ready. If there was another opportunity out there, I think we could capitalize on that pretty quickly. With respect to the revenue outlook, they’re not immune to the downturn either. So it’s not a full run rate or $5 million that you mentioned, it’s a number that’s lower than that. And then – sorry, I think I’m missing one of your questions there.

I was just asking about some of the steps on integration of EQT announcement [ph]. What’s involved there?

Sure. Okay. And then the last one is just a little cleanup item. Jeff, the deck usually has on the slide that shows the recurring and systems mix and some of the other stats, the gross margin for the two different businesses. I didn’t see that this time. Can you just hit us with recurring and systems gross margin?

Sure. Yeah, no problem. Recurring gross margin in the quarter was 55% and systems was 39%.

All right. And that systems number, I think, is down a little bit from the prior quarter. What was that?

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