Cohu (COHU) Q2 2019 Earnings Call Transcript
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Cohu (NASDAQ: COHU)
Q2 2019 Earnings Call
Aug 05, 2019, 4:30 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good afternoon, ladies and gentlemen, and welcome to the Cohu, Incorporated second-quarter 2019 financial results conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Jones, chief financial officer.
You may begin.
Jeff Jones -- Chief Financial Officer
Thank you, and good afternoon, and welcome to our conference call to discuss Cohu's second-quarter results and third-quarter outlook. I'm joined today by our president and CEO, Luis Müller. If you need a copy of our earnings release, you may access it from our website, cohu.com, or by contacting Cohu investor relations. There's also a slide presentation in conjunction with today's call that may be accessed through the webcast link on Cohu's website and is also posted as a PDF in the Investor Relations section.
Replays of this call will be available via the same page after the call concludes. Between now and our next earnings call, we'll be participating in the Jefferies semiconductor hardware summit in Chicago on Tuesday, August 27. Please contact us if you would like to request a meeting with the company at this event. 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.
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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 Securities and Exchange Commission, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, August 5, 2019. 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 Müller, Cohu's president and CEO.
Luis Muller -- President and Chief Executive Officer
Good afternoon. Today, I plan on discussing second-quarter dynamics at Cohu and sharing our perspective on the current business environment. Jeff will then cover detailed financial results and Q3 guidance. Our internal measure of depth cellularization, which started improving in late first quarter, supporting an initial recovery in the mobility market, dropped 3 points in May and June to 77% at the end of the quarter. Second-quarter orders were 42% systems and 58% recurring, with the mix continuing to indicate soft business conditions in the near term. Second-quarter sales of $150 million were at the low end of guidance due to the impact of export restrictions to Huawei on our customers and continued softness in mobility.
Although our direct business with HiSilicon, a Huawei-affiliated company, is less than 2% of annual sales, some of our U.S. customers that are part of the Huawei supply chain abruptly lowered their forecasts after mid-May when the export restrictions were imposed. In parallel, Huawei announced a sharp reduction in smartphone unit sales forecast for the second half of this year. It isn't clear whether this is a direct consequence of the export restrictions or more of a reflection of lower GDP growth in the region and globally.
The compounded effect was a late-quarter reduction in RF and flat panel display driver tester sales, with some business pivoting to subcontractors in China and other customers pushing out the forecast through later quarters. Mobility was still our largest segment, comprising 29% of system orders. We received and shipped a volume order for thermal handlers testing mobile processors, also third handlers and testers for RF devices. Still, in mobility, we recently qualified and sold multiple units of a next-generation vision inspection platform, featuring extended process integration capabilities that include infrared and microscale defect detection. Although the automotive semiconductor market remains weak, we continue to benefit from the sale of thermal handlers and testers for the production of power management ICs. While our customers' forecasts are muted in the near term, the fundamentals remain strong for increasing vehicle electrification, growth in automotive ADAS, industrial automation and moreover, the deployment of 5G communications that will have a significant positive impact on these markets.
On this last point, the highlight of the second quarter was the initial shipment of a complete solution for testing next-generation RF devices used in a global satellite network. Cohu is delivering the value of cross-functional expertise for complex applications that supports customers' needs for rapid volume ramps. We forecast some business in the second half of this year and ramping volume in 2020, not only in satellites, but also with the higher volume units for the ground infrastructure. Our testers are deployed in volume for 4G RF power amplifiers and being utilized for initial production of 5G devices coming out in new mobile products. Customers who require a test solution optimized for high-performance RF see the value in Cohu's unique differentiation that enables them to upgrade our large installed base of RF testers to 5G requirements while integrating our high-performance contactors to ensure signal fidelity across the device interface.
Cohu is well-positioned to maintain leadership in our power amplifier test. We see early production sales this year and expect 5G volume to grow substantially as it transitions from infrastructure build to the production ramp of mobile products starting in the second half of 2020. Our PCB test business continues to see strong demand from customers in China, supporting server, network equipment and telecommunications applications and soft conditions across automotive and industrial customers mainly in Europe. We made good progress integrating the recently acquired Xcerra, reaching an agreement with the local works council to downsize and consolidate the handler operation with the Cohu business in Germany, completing the transfer of our handler manufacturing through our Malaysia factory and on track to finalize the transition of contactors and device kits to our Philippines operation this quarter. In all, delivering $17 million of annualized run-rate cost synergies in the second quarter and on track to exit this year at approximately $40 million. In light of the soft market environment for semiconductor volume manufacturing, we're taking additional actions to reduce expenses and improve profitability while maintaining critical investments that would drive growth in our test contactor and equipment businesses.
With that, I remain optimistic about our future that we're well-positioned to capitalize on the 5G opportunity as it transitions from early device-characterization infrastructure build to high-volume products. Additionally, we will continue to enjoy strong business in automotive and industrial markets when our customers resume their growth. Now I'd like to turn it over to Jeff to review our second-quarter results and provide third-quarter guidance.
Jeff Jones -- Chief Financial Officer
OK. Thanks, Luis. I'll start by reviewing our Q2 results, which delivered revenue at the low end of our guidance but with non-GAAP profitability higher than anticipated, supporting the strength of our financial model, including the realization of acquisition-related cost synergies. We'll also review our progress in accelerating our planned synergies from the acquisition of Xcerra and comment on our business model for 2020 and beyond, which includes estimated non-GAAP EPS amounts at different revenue levels.
Finally, I'll provide our third-quarter guidance. Please also note that my comments that follow, I'll refer to non-GAAP figures. For GAAP to non-GAAP reconciliations and disclosures, see the accompanying earnings release and investor presentation. For Q2, the GAAP to non-GAAP adjustments include approximately $3.7 million of stock-based compensation expense. GAAP to non-GAAP adjustments, primarily driven by the Xcerra acquisition, include $10 million of purchased intangible amortization expense, $1.3 million of property plant and equipment step-up costs and $7.3 million of restructuring costs.
The Q2 net cash impact of these items is approximately $2 million, related primarily to employee severance. Q2 revenue of $150 million was at the low end of our range and impacted by the export restrictions to Huawei on our customers and continued softness in mobility. One customer in data center, cloud and AI accounted for 12% of sales in Q2. No other customer accounted for 10% or more of sales in the quarter. In Q2, we generated gross margin of 41.3%, which is 130 basis points higher than guidance due to a better-than-expected contribution from recurring revenue. Operating expenses came in lower than forecast as a result of tight control on labor costs and discretionary spending. During the quarter, we realized approximately $4.3 million of acquisition cost synergies, which is in line with the forecast.
In the second quarter, we generated non-GAAP operating income of $8.9 million or approximately 6% of sales. After interest expense, foreign currency loss of about $500,000 and the tax provision, Cohu had non-GAAP EPS of $0.02. Adjusted EBITDA in the quarter was $11.8 million or 7.9% of sales. As I stated on a prior earnings call, the effective tax rate is not meaningful at pre-tax levels near breakeven. As a reminder, most of Cohu's operations and related profits are generated and taxed outside of the U.S. Additionally, when the U.S.
operation generates a loss, as it did in Q2, there's no tax benefit to offset the foreign tax expense because of our deferred tax asset valuation allowance. As a result, in Q2, we recorded tax expense on foreign profits without any benefit from the U.S. loss, resulting in a high and not meaningful effective tax rate. Now turning to cost synergies and our business model. As announced on our Q1 earnings call, we've taken action that results in pulling forward approximately $20 million of cost synergies into 2019, ahead of the original target of three to five years.
The result is that by the end of this calendar year, we expect to deliver $40 million in annual run rate cost synergies that will favorably impact the business model going into 2020. The annual cost synergy split is approximately $20 million in cost of goods sold and $20 million in operating expense savings. Our business model is inclusive of the impact of the $40 million cost synergies that we expect to achieve when exiting this calendar year and provides anticipated profitability, including estimated non-GAAP EPS at various revenue levels. As a point of reference, the pro forma 2018 revenue for Cohu, combined with Xcerra, was approximately $778 million or about $194 million per quarter. The business model shows opportunity for strong profit and cash generation at this level once all synergy savings are in place. Our long-term capital allocation strategy continues to be use excess cash to pay down the debt of $356 million and de-lever the company, subject to business conditions and a cash required to achieve the synergies and support an eventual business ramp. For the balance of 2019, we're projecting cash payments of approximately $13 million in order to achieve the targeted synergies. During Q2, Cohu used approximately $9.5 million of cash from operations, and our cash balance was approximately $144 million at the end of the quarter. Cohu's board of directors approved a quarterly cash dividend of $0.06 per share payable on October '18, 2019 to shareholders of record on August 23, 2019. For third-quarter 2019 guidance, we're expecting sales to be approximately $143 million.
Revenue distribution is expected to be 92% semiconductor test and expect -- and inspection and 8% PCB test. Gross margin is expected to be approximately 41%. Operating expenses are expected to be approximately $51 million. Cost synergies of approximately $7 million or about $28 million on an annualized basis are included in the Q3 guidance.
We're also taking measures in addition to the acquisition cost synergies to further reduce operating expenses with a forecasted Q3 benefit of approximately $1 million. We expect adjusted EBITDA in the third quarter to be approximately 8%. We're projecting the Q3 non-GAAP tax provision to be similar in total to the Q2 non-GAAP amount. For modeling purposes, we expect a normalized effective tax rate of approximately 22% on revenue of $170 million or more and profits in line with the business model. The diluted share count for Q3 is expected to be approximately 41.7 million shares. And that concludes our prepared remarks, and now we'll open the call to questions.
Questions & Answers:
Operator
[Operator instructions] Your first question comes from the line of Brian Chin from Stifel. Your line is now open.
Brian Chin -- Stifel Financial Corp. -- Analyst
Hi. Good afternoon. Thanks for letting us ask a few questions. Maybe my first question, just to focus a little bit -- honing on the near term a little bit and your Q3 outlook. You're guiding sales down a little bit sequential.
Kind of curious, looking at your order trends by end markets, the system bookings, they were not strong overall in Q2, but I think the mobility orders maybe were a little bit better than I would have thought, maybe data center, IOT a little bit softer. So just curious, maybe from a market perspective, where are you seeing more weakness quarter to quarter into the third quarter in terms of your revenue outlook?
Luis Muller -- President and Chief Executive Officer
Hi, Brian. This is Luis. Just one point here on the slide that talks about Q2 end markets, that is system-only orders. As we have mentioned in the past, we do have a strong recurring business on data center, cloud and AI.
So from a system's perspective, you're right, maybe a little weaker than you would expect. But it is still a strong recurring business for us. On a quarter-to-quarter basis, mobility is the one that we expected to have taken off stronger. And for various reasons, I think that we talked here during the call, Huawei, in particular, we created sort of a drop quarter on quarter. Automotive continues to be a soft -- the automotive market continues to be soft and so does the industrial, pretty much also weigh negatively on the third-quarter guidance.
Brian Chin -- Stifel Financial Corp. -- Analyst
OK. Thanks for the color, Luis. Maybe perhaps Jeff here, but talking about seasonality and sort of when you expect to be fully in your cost model, yes, this year is more fluid than most probably. But if we think about normal, if you want to call that weaker seasonality, which tends to kind of hit late in the calendar year into early next year, do you have a first any way of calibrating what the impact of this could be on your business as we move into the December and March quarters? And secondly, in terms of where you think your EPS and EBITDA breakeven levels from a revenue standpoint might be starting in the March quarter.
Jeff Jones -- Chief Financial Officer
Brian, your last part of that, starting in March of next year, is that what you're asking?
Brian Chin -- Stifel Financial Corp. -- Analyst
Yes. Jeff, when you have the full realization of the cost synergies, like at what revenue level do you think you breakeven on an EPS basis and also from an EBITDA basis?
Jeff Jones -- Chief Financial Officer
Right. So let me just -- I'll just start with that. At breakeven, once all synergies are included in the P&L, would be down about $125 million at that revenue level, with gross margin in a 42%, 43% -- about 42% range. Now with the other question with regards to seasonality and how that's impacting perhaps Q3 and Q4, I mean, that's tough to say, right? We've given guidance for Q3. We see that at about $143 million.
You're right, the Q4 would tend to be a little weaker, Q1 as well until we get past Chinese New Year. So I mean, at this point, we're expecting that to hold as it has in the past.
Luis Muller -- President and Chief Executive Officer
Yes. This is a very difficult year to talk about seasonality, especially with so much changing on a macro level and impacting the semiconductor supply chain.
Brian Chin -- Stifel Financial Corp. -- Analyst
Yes. No, that's fair. Maybe one last question, just to walk this out a little bit further. I was curious, if we think about the test contactor market as sort of a $650 million, $700 million-ish market yet growing, can you remind us how large the RF portion of the market is today, perhaps how large it could be several years from now, especially as the millimeter-wave era is ushered in? And then maybe, Luis, even if you want to stand out a little bit broader because you did talk about sort of these full test cell solutions, and maybe that's sort of a, obviously, a larger dollar opportunity for you, so maybe if you want to expand upon that more. Thanks.
Luis Muller -- President and Chief Executive Officer
Sure, sure. Yes, Brian. So the bundle actually, both the RF and the precision analog, which is kind of the high-performance signal part of the contact to market, is on or about $90 million to $100 million a year. To broaden up a little bit, since you asked, we have had a record quarter for sale of a high-performance RF contact during Q1.
I announced that a quarter ago. And that was mostly for engineering lab characterization on new IC products. Now we have had follow-on orders for that in Q2 for initial device production and one more customer that we got design in for characterization. But all in all, we expect volume sales for RF contactors to really take off with when 5G takes off in mobile devices, which is really not projected until second half of 2020. Now outside of the RF market, we also gained some really good traction with the Kita pins, Kita being the pin business we acquired in Japan beginning of 2017, so the implementation of Kita pins in our contactors.
And as I mentioned before, we try to track is what's the attachment rate of our contactors and our installed base of handlers. A little bit more difficult now in a down-cycle market because, obviously, there are fewer equipment getting out the door. But we're estimating we're at about a 33% -- approximately a 33% attachment rate of contactors through our handlers. And with that, the opportunity is to get it up to about 100%, which does create approximately $175 million incremental revenue opportunity that we want to capture over the next five years.
Brian Chin -- Stifel Financial Corp. -- Analyst
All right. Thank you.
Operator
Thank you. Next question comes from the line of Tom Diffely from D.A. Davidson. Your line is now open.
Tom Diffely -- D.A. Davidson -- Analyst
Yes, good afternoon. First question is on the additional cost-cutting measures you've taken post last quarter when you announced you were going to pull in all $40 million to this year. Is that just discretionary spending over the next couple of quarters that you've slowed down? Or are there additions to that $40 million that that would entail?
Jeff Jones -- Chief Financial Officer
No, it's aside from the $40 million, Tom. It has to do with labor, particularly sort of delaying replacement of particular positions, as well as the discretionary spending that you mentioned, things like travel and so forth.
Tom Diffely -- D.A. Davidson -- Analyst
OK. And so I guess big picture though, you view those more as delayed spending then as opposed to long-term spending cuts that would create a new model?
Jeff Jones -- Chief Financial Officer
Yes. At this point, they're not in the model. They're not long term. They are temporary until business conditions improve.
Tom Diffely -- D.A. Davidson -- Analyst
OK. That makes sense. All right. And then I'm looking at your two bigger markets, automotive and handsets, so mobility. If you look at your crystal ball, which of those do you think is poised to recover quicker? Or is there any kind of difference you can point to between the two end markets as far as relative strength?
Luis Muller -- President and Chief Executive Officer
Well, that -- hi, Tom. This is Luis. That's a tough crystal ball question to answer. We both know here that auto is weaker right now.
And it is our largest business, right? I mean Cohu's exposure to a combination of auto and industrial markets, and that should be the largest segments for Cohu historically, predominantly for handler sales, right? And automotive is down about 30% year over year right now, and this comes with the decline in vehicle sales at the largest -- in the larger markets, right? That will be the U.S., Europe and China. Now in the midst of all of this, and as I mentioned in the prepared remarks here, we do see steel activity for power management semiconductors that really aligns more so with electrification of vehicles. We are also -- have seen progress for thermal handlers testing ADAS, automated driver assist processors. And these are processors that dissipate energy during a test.
So overall, we're pretty well-aligned on the electrification in ADAS, but we need volume of automotives growing so that it compounds on top of the greater adoption of semiconductors, like I said, electrification in ADAS, in particular. On the mobile side, I really think much of the mobile is going to be tied and right now, waiting for 5G deployment. 5G is deploying right now for telecom networks. So it's essentially the starting part of the infrastructure build. Most of the semiconductors in this today are digital with some RF or high-end digital, which is not exactly where Cohu testers are aligned to.
And then down the road will come the majority of the mobility or smartphones, if you will, that's going to drive a large content of RF power amplifiers. We believe that's going to happen starting in the second half of 2020 based on all the predictions and forecasts we've seen from our customers. Now naturally, there will be some early volumes ahead of that. But really, volume was going to start second half of 2020 and will go on for a few years before it surpasses smartphones with 4G, 4G capability. Now you put it all together, and we just say which market comes first? I don't know.
I think the 5G has a more well-defined path right now than the automotive, but that could change quickly.
Tom Diffely -- D.A. Davidson -- Analyst
OK. All right. That makes sense. Maybe switching gears, it's been six months now since the acquisition has been finalized.
Just wondering if you've got any success stories on the contactor business you can talk to, perhaps even for future growth.
Luis Muller -- President and Chief Executive Officer
Yes, we have quite a few actually, Tom. We had -- we have both a lot of traction getting the Kita pins that I was answering in the prior question. The Kita pins in our contactors, these are in our digital mixed-signal contactors that has been gaining quite a bit of volume. We had really a great quarter in Q1, deploying, it was sort of a record quarter for millimeter wave, a contactor called the xWave, for high-end RF applications.
As I said before, this is -- this was early launch of the product, characterization labs. Now it's going through the work and expecting to see volume toward the end of the year, beginning of next year, as 5G starts rolling out. And one of the big highlights of the second quarter was winning an application where we are selling the tester of the contactor, and then we were able to pull in the handler as well for this satellite network. And right there, you can see the tester and the contactor are really sort of the pair that solves the signal fidelity, all the way to the device under test. And we're seeing more and more of those cases, particularly with 5G, early stages of 5G right now.
Like I said, it's not really volume production, but early stages of 5G. The contactor and the tester are critical to ensuring signal performance.
Tom Diffely -- D.A. Davidson -- Analyst
OK. So it sounds like you're still comfortable with the potential growth in contactors over the next few years?
Luis Muller -- President and Chief Executive Officer
Yes.
Tom Diffely -- D.A. Davidson -- Analyst
OK. And then finally, you talked about how Huawei or HiSilicon was less than 2% of your business. But do you have a number for us that describes through your customers, as a customer of Huawei, what your indirect exposure is to the Huawei silicon for silicon?
Luis Muller -- President and Chief Executive Officer
We have more of the direct exposure than the indirect exposure. So we have less than 2% of our business as direct sales to Huawei or its affiliated companies, right? But as you pointed out, and nevertheless, we do have several of our tester customers in the mobility market that supply to Huawei. It's hard to triangulate what the exposure is on the indirect side, right? And this is really impacting not only the RF power amplifier business for us, but also the display driver customers because from one side, you can talk about the export restrictions, on the other side, you talk about, most importantly, I think, is the decline in forecast, Huawei's forecast in smartphone sales in the second half of the year. And the net-net of this is that we're seeing a push-out in both RF and display driver ICs.
And frankly, we quantified it to the tune of about $5 million in the second quarter.
Tom Diffely -- D.A. Davidson -- Analyst
OK, great. Thanks for your time today.
Luis Muller -- President and Chief Executive Officer
Thank you.
Operator
Thank you. The next question comes from the line of Craig Ellis from B. Riley FBR. You may now ask your question.
Craig Ellis -- B. Riley FBR -- Analyst
Yes, thanks for taking the question. Just a follow-up on a couple of items. Luis, nice to see some successes with contactor attached and getting Kita pins into Cohu's solutions. My question, for the opportunity to drive higher attach rates, that $175 million opportunity, from what you can see today, how much of that gap do you think you could close in 2020 and 2021? What's the slope of the trajectory that it looks like we're on here?
Luis Muller -- President and Chief Executive Officer
We're looking at -- hi, Craig. We're looking at a sort of a mid-teen growth rate. That's our plan right now, a mid-teen growth rate in the contactor business over the next few years.
Craig Ellis -- B. Riley FBR -- Analyst
And so that includes both your share gain and just the natural sales that would come out of the recurring part of the business?
Luis Muller -- President and Chief Executive Officer
That's right. That's right.
Craig Ellis -- B. Riley FBR -- Analyst
OK. And then I wanted to go back to one of the wins that you had talked about. You talked about RF tests for a global satellite network, and it sounded like that was pretty material. Can you scope what the financial opportunity for that win would be for next year?
Luis Muller -- President and Chief Executive Officer
Yes. Well, first of all, we started shipping that in late Q2. So it was not really a Q2 material for that matter. And the expectation is this could generate, call it, in the order of $15 million or so next year.
Craig Ellis -- B. Riley FBR -- Analyst
I'm sorry, one-five?
Luis Muller -- President and Chief Executive Officer
One-five, correct.
Craig Ellis -- B. Riley FBR -- Analyst
Yes. Great. Thank you. And then just a couple more items.
We've obviously seen a number of things change geopolitically just within the last week. Just so we all understand how the company is approaching guidance, given the abrupt change in tariff tone, if you will, since late last week, how does the company incorporate that into guidance? And what does that mean for the guidance that we see today for the third quarter?
Jeff Jones -- Chief Financial Officer
Yes, Craig, Jeff here. So our visibility isn't fantastic. It doesn't go out more than about three months. And so we base it on -- we base our forecast, as we always do, on backlog, when scheduled to ship and then in the near term, the orders that we expect to book and bill in the quarter, based on immediate feedback from the customer.
And so we do have a lot of noise within the geopolitical landscape, as you noted. However, our approach is similar. Just try to get as close to the customer as possible, get the best information, the most recent information. Customers, as you know, have shortened lead times.
They wait until the last minute to ensure that they have demand for the equipment. So that's how we have approached it. And certainly, the numbers have been impacted from it, $143 million is lower than I think any of us would have expected two or three quarters ago. So it's definitely impacted, and that's really the process we go through, is to stay as close to the customer as possible.
Craig Ellis -- B. Riley FBR -- Analyst
OK. Thanks for that. And then my last question is a follow-up on something that I think Tom touched on. So in the end market splits, the split shows 23% automotive and 29% mobility. And there's no question that there's a year-on-year unit growth headwind in both of those businesses.
But underneath that, in both cases, and I think, as you mentioned, well, Luis, there are some technology transitions or secular drivers that are favorable. The question is, in areas like automotive, where there's work that has stronger growth in things like ADAS or EV, can you distinguish in your order book when a customer is ordering for that type of application versus more of a legacy application? And if so, is it possible to aggregate how significant the businesses are across those two end markets right now that are related to secular drivers, whether it be 5G or ADAS and EV?
Luis Muller -- President and Chief Executive Officer
Yes, we actually can segregate. We have seen, over the last six months, when automotive has been weak, that the majority -- yes, I guess I could say the majority of the orders have been EV-related or power management ICs for EV or for potentially hybrid, but certainly, power management ICs and not in as much ADAS over the last six months as more of a forecast that ADAS is coming up alive in the coming quarters. And so we see a lot of activity both from an evaluation of new devices in our handlers, as well as forecasting that are more ADAS-related here for, like I said, for the balance of this year. So yes, we can see them both.
Craig Ellis -- B. Riley FBR -- Analyst
OK. That's helpful. And then perhaps last for me. You had mentioned 5G a number of times.
As we look at the early part of this next air interface transition, and if we were to compare it to 4G and 3G at Cohu, from what you can see now, how significant could 5G be vis–à–vis those two other air interface transitions that we've been through?
Luis Muller -- President and Chief Executive Officer
So let me -- I'll talk about the 5G. But remember, the 5G exposure for us come in the form of the Xcerra acquisition, more so than sort of former Cohu exposure to 3G, 4G, right? I mean 5G today, for us, is really aligned with testing of RF power amplifiers, which are the Xcerra testers. And this is where those products, the Xcerra testers that we acquired, are sort of the leader in this approximately $60 million segment of the ATE market, OK? These RF amplifiers are really used in greater quantities in smartphones and, to a lesser degree, in the network infrastructure, which is where 5G cycle is today, really working on networks, right? So we don't really have testers that are suited for network ICs, which require greater digital, smaller RF test content. On the other hand, we do have the largest installed base today, and we believe the most economical solution for testing focused RF semiconductors that are using these will be deployed in these new 5G phones. So when these things come out, I mean, they're still in low volume.
We do know that some of these phones, from published teardowns, that they're using devices that have run or the 5G amplifiers have been tested on our testers. And these initial 5G phones are still sort of in that sub-6 gigahertz frequency, with a road map of developing millimeter frequencies over the next few quarters, actually coming out soon. Now put it all together, in terms of significance, we do believe that the market size, the $60 million market that we're talking about for RFPAs, RFR amplifiers, is bound to grow about 40% to 50% when 5G phones are produced in volume, which, again, won't happen this year, but it should start ramping on the second half of next year and then into 2021 and so on, right? It would take a couple of years for that volume to surpass 4G smartphones out there. But the opportunity is there, and I think it's going to drive not only the tester sales, but it's going to drive quite a bit of contactor sales, in this case, more of an attachment rate to testers than to handlers per se.
Craig Ellis -- B. Riley FBR -- Analyst
That's real helpful. Thanks, Luis.
Operator
Thank you. The next question, coming from the line of David Duley from Steelhead Securities. Your line is now open.
David Duley -- Steelhead Securities -- Analyst
Yes. Just one clarification. I think, Luis, you mentioned the size of the Huawei impact or the estimated size of the impact in the quarter just reported. Could you repeat that again?
Luis Muller -- President and Chief Executive Officer
Hi. Yes, Dave. I mentioned that we triangulated both the direct and indirect, and the indirect being the harder one to triangulate here, impact of Huawei on our Q2 sales to have been about $5 million, so about a $5 million decline in what we would otherwise have expected in Q2.
David Duley -- Steelhead Securities -- Analyst
OK. And in your presentation, you have all these different revenue levels and the metrics for your business at each different revenue level. And you also mentioned, I think, the 2018 quarterly run rate was like $195 million a quarter or so. Is there any reason to think that you can't get back to that level of revenue when the markets recover? Has there been any share losses or anything that might impact the business getting back to those quarterly run rates?
Luis Muller -- President and Chief Executive Officer
No, there hasn't been any customer changes over the last six, nine months other than some traction that we gained on the contactor front, as I mentioned, the RF contactor, the xWave, where we had a record quarter in Q1, the integration of Kita pins in our contactors for digital mixed-signal applications. But from an equipment side, really hasn't been no change in the market.
David Duley -- Steelhead Securities -- Analyst
OK. And I think that there was a couple of programs that you initially expected to be strong in the second half of this calendar year. And I think one or two of them were pushed into next year. Could you just give us an update about those programs and what you expect now?
Luis Muller -- President and Chief Executive Officer
Sure. Yes. Starting with the positive one actually was the satellite communication business that I just mentioned. That was a program that we've been working on since the acquisition, and it's finally starting to bear fruits here, which the initial shipment in late second quarter into third quarter.
The other two programs had to do, one, with 5G, RF for 5G, which we've really got pushed out since the mid-May, the new export restrictions on Huawei in mid-May. That actually changed the dynamics a little bit. And the third one was penetration in the flat panel display market, which we'll be doing. Actually, this is one of the -- from an execution perspective, we're doing really well, but a decline in forecast for smartphones in the second half of the year is really impacting demand.
And as such, the projection that we would see increasing revenues here starting in the third quarter, that also got pushed out.
David Duley -- Steelhead Securities -- Analyst
And on the flat panel display you're referring to, you've picked up further customers, they're just not buying.
Luis Muller -- President and Chief Executive Officer
Right. That's right.
David Duley -- Steelhead Securities -- Analyst
OK. Thank you. That was all my questions.
Luis Muller -- President and Chief Executive Officer
All right. Thanks, David.
Operator
Thank you. I am showing no further questions at this time. I would now like to turn the conference back to our speakers.
Jeff Jones -- Chief Financial Officer
OK. Thank you for joining us on today's call, and we look forward to speaking with you soon.
Operator
[Operator signoff]
Duration: 45 minutes
Call participants:
Jeff Jones -- Chief Financial Officer
Luis Muller -- President and Chief Executive Officer
Brian Chin -- Stifel Financial Corp. -- Analyst
Luis Mller -- President and Chief Executive Officer
Tom Diffely -- D.A. Davidson -- Analyst
Craig Ellis -- B. Riley FBR -- Analyst
David Duley -- Steelhead Securities -- Analyst
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