Cohu, Inc. (NASDAQ:COHU) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Good day, and thank you for standing by. Welcome to Cohu's Fourth Quarter and Full Year 2022 Financial Results Conference Call. . I would now like to hand the conference over to your speaker today, Jeff Jones, Chief Financial Officer.

Jeffrey Jones: Good afternoon, and welcome to our conference call to discuss Cohu's fourth quarter 2022 results and first 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'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, February 16, 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 afternoon, and thanks for joining us. I'll go straight to the key points and let you ask questions at the end. Q4 was an outstanding quarter in terms of financial metrics, albeit typical seasonally slow revenue at year-end. Revenue of $191.1 million was about flat year-over-year with a strong non-GAAP EPS result. More importantly, we continue to make great progress managing costs, growing Cohu's recurring business and selling differentiated products. Fourth quarter non-GAAP gross margin of 48.8% is a Cohu record, reflects 470 basis points growth year-over-year, and it's better than our target financial model at this revenue level. Gross margin benefited from steady growth of Cohu's recurring revenue, where we achieved a 3-year compound annual growth rate of 5.2% through Q4 and represented approximately 45% of fourth quarter revenue with 55% non-GAAP gross margin.

In the last 4 quarters, recurring revenue was $338 million, delivering a very profitable and resilient revenue stream through industry cycles. Our recurring business is primarily made up of test interface hardware and device application kits that are IC design-driven and benefit from the introduction of new semiconductor products by our customers. Cohu's test interface annual revenue grew over 9% year-over-year, demonstrating the value differentiation of our solutions when integrated with our testers and handlers. We also established a strategic collaboration agreement in the fourth quarter with CHPT in Taiwan to deliver advanced probe card interface to customers. Under this new collaboration, we plan to accelerate the proliferation of products addressing 5G and advanced node technologies with cost-efficient interface solutions, leveraging the strength of both companies.

CHPT intends to contribute with PCB and MEMS probe technology, while Cohu intends to integrate core high-frequency RF and thermal management capabilities. The balance were approximately 45% of our recurring revenue over the last 12 months comes from service revenue generated from an installed base that just further expanded with the acquisition of MCT to over 24,100 actively supported systems at customer sites. Part of our service offer includes a DI-Core data analytics platform. We recently announced that a European IDM customer selected and started deployment of Cohu's predictive maintenance software. This is our first software subscription sale and a major accomplishment for us. This is part of a suite of data analytics products sold under the DI-Core brand to deliver improved productivity to our customers.

DI-Core is a key element of Cohu's midterm strategy to increase value services and grow software revenue to between $15 million and $25 million in a few years. Tempering these positives is test cell utilization that we now estimate down 3 points quarter-over-quarter to about 79%, reflecting known ongoing softness in mobility, consumer and computing end markets. Cohu's systems business was 55% of total fourth quarter revenue with 44% non-GAAP gross margin. System revenue distribution in the quarter was notably stronger in automotive and industrial end markets that we have been seeing remain more resilient through this down cycle. Turning to our Semi Test business. Annual revenue was about flat year-over-year, but with a significant diversification out of the mobility segment that was particularly weak in 2022.

Our analog and power management sales grew to about 32% of Semi Test business, mostly serving automotive and industrial end markets. Display driver grew from a single-digit percent of revenue in 2021 to approximately 16% of the total Semi Test revenue in 2022. We've had a remarkable year in pivoting revenue to new applications and customer design wins that help build a more sustainable path forward predominantly with the Diamondx platform. On the handler business, we had 5 customer design wins in the fourth quarter with our thermal handlers, 3 of which penetrated unserved production sites of existing customer names. We delivered 2 new systems for silicon carbide semiconductor test and inspection in the fourth quarter. We projected expansion into this customer's new back-end test operation and test subcontractors throughout 2023.

Now turning to our recently announced MCT acquisition. We're integrating the business within our test handler unit. MCT brings critical technologies that will help accelerate our product development roadmap to address growing opportunities in advanced packaging panel test. This acquisition also adds a couple of products to Cohu's portfolio and a small revenue stream with gross margins in line with our target financial model. It's a relatively simple business to integrate within Cohu with neutral EPS impact projected for this year and expect it to be accretive after realizing operating synergies. As demonstrated, we have made significant progress towards building a resilient business model that is well suited to weather the cyclicality of semiconductor capital equipment spending.

We're very well positioned to continue delivering strong profitability and cash flows quarter-over-quarter. The main focus now is on growth and ensuring our investments and product roadmaps are aligned to secular growth market opportunities. We're also driving hard to deliver wins on the Diamondx test platform, expand our inspection and metrology business and continued expansion of our interface products and DI-Core software. Let me now turn this presentation over to Jeff for additional details on fourth quarter results and first quarter 2023 guidance. Jeff?

Jeffrey Jones: Thanks, Luis. Before I walk through the Q4 results and Q1 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. Q4 revenue was $191.1 million and slightly higher than midpoint of our guidance range. Total revenue for full year 2022 was $812.8 million. During the fourth quarter, one customer in the automotive market accounted for more than 10% of sales.

For full year 2022, no customer accounted for more than 10% of sales. Gross margin in Q4 set a new record for Cohu at 48.8%, about 180 basis points higher than guidance driven by Cohu's recurring business and differentiated products. Headwinds from cost increases for IC components used on our tester products impacted our gross margin in Q4 by approximately 37 basis points. We expect these challenges to persist at reduced levels into mid-2023 as we increase sourcing directly with semiconductor manufacturers and component availability improves. Full year 2022 gross margin also set a new record for Cohu at 47.2%, which is a 360 basis point improvement year-over-year and tracking to our midterm target of 49%. The headwinds from cost increases for IC components impacted full year 2022 gross margin by approximately 100 basis points.

Operating expenses for Q4 were in line with guidance at $52.4 million. Full year 2022 operating expenses were approximately 25.6% of revenue and also tracking to our midterm target. Fourth quarter non-GAAP operating income was 21.4% of revenue, and adjusted EBITDA was 22.2%. Full year operating income was 21.6%, higher than 2021 by 110 basis points. And adjusted EBITDA for 2022 was 23.7%, higher than 2021 by 150 basis points. The non-GAAP effective tax rate for Q4 was approximately 16%, and lower than guidance due to a shift of projected annual pretax income from higher tax rate jurisdictions to lower tax rate jurisdictions. A non-GAAP effective tax rate for full year 2022 and was approximately 20%. Non-GAAP EPS for the fourth quarter was $0.70.

The full year 2022 EPS was $2.91. In summary, Q4 profitability was strong as gross margin and adjusted EBITDA continue to expand toward the midterm financial target. Now moving to the balance sheet. Q4 cash flow from operations was strong at $27.6 million. Net of share repurchases totaling $12.6 million, debt repayment of $1 million, capital additions of about $4 million and other changes in working capital. Cash and investments increased quarter-over-quarter by $17 million to $386 million at the end of Q4. 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 Q1 outlook.

We're guiding Q1 revenue to be between $173 million and $187 million. Q1 gross margin is forecasted to be approximately 47.5%, better than the financial target model and down 130 basis points quarter-over-quarter due to lower sales volume and mix. The IC cost component headwinds in the tester business I mentioned earlier will persist, and we're projecting the Q1 impact to be approximately 30 basis points. With a 3-year compound annual growth rate of 5.2%, Cohu's high-margin recurring business provides consistent cash flow through industry cycles. Operating expenses for Q1 are projected to be approximately $53 million, essentially flat quarter-over-quarter. We're projecting Q1 interest expense to be approximately $1 million and offset by interest income of approximately $1 million.

We expect Q1 adjusted EBITDA at the midpoint of guidance to be approximately 20%. The Q1 and full year 2023 forecasted non-GAAP tax rate is approximately 20% at the midpoint of guidance. A diluted share count for Q1 is expected to be approximately 48 million shares. And that concludes our prepared remarks. Now we'll open the call to questions.

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