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Edited Transcript of COHU earnings conference call or presentation 27-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Cohu Inc Earnings Call

Poway May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Cohu Inc earnings conference call or presentation Thursday, April 27, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey D. Jones

Cohu, Inc. - CFO, VP of Finance and Secretary

* Luis A. Müller

Cohu, Inc. - CEO, President and Director

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Conference Call Participants

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* Arthur Su

Needham & Company, LLC, Research Division - Research Associate

* Brian Edward Chin

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* David Duley

* Peter Peng

B. Riley & Co., LLC, Research Division - Associate Analyst

* Steven F. Marascia

Capitol Securities Management, Inc. - Director of Research

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Presentation

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Operator [1]

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Greetings, and welcome to the Cohu Inc. 2017 First Quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Jones, Chief Financial Officer for Cohu. Thank you, Mr. Jones. You may begin.

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [2]

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Good afternoon, and welcome to our discussion of Cohu's most recent financial results. I'm joined today by our President and CEO, Luis Müller. Following our opening remarks, we'll provide details of our performance for the first quarter of 2017, as well as our outlook for the second quarter of this year. If you need a copy of our earnings release, you may obtain one from our website, cohu.com, or by contacting Cohu Investor Relations. Before we begin, you should all be aware that during the course of this conference call, we will make forward-looking statements reflecting management's current expectations concerning the company'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. Forward-looking statements include our comments regarding the company's expectations for industry conditions, future operations, financial results, market share gains, expansion into new markets and any comments we make about the company's future in response to your questions. Our comments speak only as of today, April 27, 2017, and the company assumes no obligation to update these comments. We encourage you to review the forward-looking statements section of 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. Cohu assumes no obligation to update these statements as a result of developments occurring after this call. Further, our comments and responses to any questions will not make reference to any specific customers as we are precluded from disclosing such information by our nondisclosure agreements. Now I'll turn it over to Luis.

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [3]

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Thanks Jeff, and good afternoon, everyone. Cohu had an excellent first quarter of 2017, with sales up 15% sequentially to $81.1 million and non-GAAP earnings per share of $0.35. Our Malaysia operation shipped over 90% of all Cohu handlers in Q1, which significantly contributed to improved gross margins. Measured desktop utilization across the installed base was 86%. Cohu's SEMI equipment orders were at an all-time high with strong demand for our turret and pick-and-place handlers as well as multiple contactor design wins, some of which will ship in the second half of this year. There was also robust demand for our just-acquired Kita spring probe product lines. This was another strong quarter in automotive, mobility and IoT markets, with systems accounting for 60% in the current 40% of total orders. Beginning today, we'll describe our business by semiconductor device segments that we believe better represent the dynamics of the industry. High-performance, Mixed Signal were 35% of system orders in the first quarter, mainly for automotive, industrial and consumer markets. Our Tri-Temperature Pick-and-Place Handlers are today the leader in the industry. We had strong demand from several customers, including follow-on business from a key 2016 design win, as this customer continues to proliferate the MATRiX handler to their Asia volume test operations. Analog RF and power discrete was 26% of system orders. Our RF business is particularly strong for turret handlers for test and inspection of amplifiers and saw filters. This segment has shown steady growth in the last year, mainly driven by the expansion of wireless connectivity in mobility and IoT markets. Power discrete covers transistors, diodes, precision and power resistors, that are mainly tested on turret and gravity handlers. Sensors, including micro- electromechanical systems or MEMS, and LED were 16% of system orders. Cohu MEMS test units can be used on any of our handler platforms but have traditionally been strongest combined with gravity systems due to package form factors used in automotive applications. We also had repeat orders from 2 Japanese customers for turret handlers and expect to expand our business with these customers in future quarters. LED business has been exclusively for turret handlers configured for test and inspection of high-power, light-emitting diodes used in automotive and mobile devices. Processors were 14% of system orders in the quarter as we see the beginning of a ramp that is expected to continue into the second quarter. A key mobile customer's recent market share gains will drive demand for pick-and-place handlers, especially the Eclipse, that actively manages device temperature during test. Computing system orders continue to be driven mainly by a large leading customer, but we're also making progress at a well-known graphics processor manufacturer that is evaluating an Eclipse handler. Power management was 7% of system orders, covering power amplifiers, voltage regulators and DC to DC converters. These devices are mainly tested on our turret handlers; however, we're in the process of developing a pick-and-place system that will expand our portfolio solutions. We have already received a repeat order, even though this new system is still in development and planned for launch late this year or early 2018. Other segments accounted for the 2% balance of system orders. Moving on to an update on 3 key product developments. Cohu's new wafer level CSP prober is nearing completion. We successfully finished the key evaluation in the first quarter and plan to ship multiple systems in the second quarter to support this customer's production planned for the second half of this year. The transfer of product manufacturing to our Malaysia operation is already underway to achieve target profitability early in this product's life cycle. We plan to ship the first system level test platform in the third quarter. In addition, we started the development of another handler platform to address requirements from a recently acquired leading Korean memory and mobile processer semiconductor customer. Moving on to contactors. Orders were up 16% quarter-on-quarter, inclusive of the recently acquired Kita operation. We had several design wins in the quarter at customers in the Philippines, Malaysia and China. We subdivide the contactor market in 3 segments. Digital and mixed signal had strong order activity, mainly driven by capacity additions in conjunction with the MATRiX handler. Kita's spring probe share in Cohu contactors grew to 21% in Q1 compared to an average of 3.5% last year, demonstrating the early potential for synergies and opportunities for future recurring revenue contribution, as these consumable pins are replaced upon usage and wear. In the Analog, Power, Sensors and LED markets, we shipped the first cCompact Kelvin contactor to a leading customer and successfully completed the cHybrid contactor evaluation at another key customer using our turret platform. This new contactor has outperformed the competitor's product life and yield performance and we establish ourselves as the volume supplier for new device applications. In the analog RF market, we introduced the new cDragon, medium-frequency contactor at the Bits Conference in March, received a repeat order from a lead customer and initiated evaluations at 3 new accounts that we expect to convert to sales in the next 3 to 6 months. For the second quarter, end-market dynamics and customer forecasts are strong and we expect another quarter of book-to-bill above 1. Cohu continues to capture new device test and inspection applications for our handlers and benefit from increasing semiconductor package integration. With strong Q1 orders and continued momentum in Q2, combined with improved gross margin, we're well positioned for meaningful sales and profit growth in 2017. Now I'll turn it over to Jeff for details on the financials and Q2 guidance.

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [4]

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Okay. Thanks Luis. Overall, results for the quarter were much better than forecasted, due in part to delivering over 90% of our handlers from Cohu's Malaysia manufacturing operation, benefiting gross margin. Q1 was Cohu's 13th consecutive quarter of non-GAAP profitability, generating 14% operating income and nearly 16% EBITDA. Strong order momentum in Q1 drove a 24% increase in backlog, which sets the stage for sequential increases in shipments and revenue in Q2 in second half of the year. The integration of Kita is on track and we remain very optimistic about contactor sale synergies. For Q1, the GAAP to non-GAAP adjustments include approximately $1.7 million of stock-based compensation expense, $1.1 million of purchased intangible amortization expense, $104,000 of restructuring costs, $187,000 of costs related to the acquisition of Kita and $347,000 of costs related to the step-up in valuation of inventory acquired. My comments are based on Cohu's non-GAAP results, which exclude the impact of these items. A reconciliation of non-GAAP measures to GAAP -- equivalent GAAP measures can be found in our earnings release, located on the investor information section of Cohu's website. Sales for the quarter were $81.1 million and higher than guidance, due to increasing demand for our pick-and-place handlers, particularly from customers in the automotive and mobility markets. One customer in the automotive market represented 20.1% of sales during the quarter. No other customer represented 10% or greater of Q1 sales. Q1 gross margin was 41.3%, significantly better than our forecast and our financial model at this level of sales. Gross margin benefited from better manufacturing cost leverage in Asia and favorable product mix. We also benefited from onetime cost of goods sold credits for inventory valuation and warranty cost, which contributed about 100 basis points to gross margin. We plan to increase our financial metrics at the midterm sales target of $400 million to better reflect the improved leverage in operations, launch of new handler systems and increase in sales of higher-margin test contactors. Operating expense was $22 million and in line with our forecast. The Q1 effective tax rate was 15% and lower than forecasted as all of the Q1 profit was generated outside the U.S. in countries with lower statutory income tax rates and certain countries in which Cohu has income tax incentives. We are projecting an effective tax rate for 2017 of about 20%. Accounts receivable increased sequentially on higher shipments of $4 million quarter-over-quarter and the addition of the Kita accounts receivable balance of $4 million. DSO increased by 5 days to 84. The inventory balance also increased sequentially, mainly in preparation for an expected increase in shipments in Q2 compared to Q1 of approximately $12 million. Inventory days was essentially flat at 99. Accounts payables days was also flat quarter-over-quarter at 68 and the overall cash conversion cycle increased by 6 days to 114. Fixed asset additions in Q1 were approximately $1.5 million and depreciation for the first quarter was $1.1 million. Deferred profit at the end of March was $4.8 million, down $2.1 million quarter-over-quarter. The related deferred revenue at the end of Q1 was $5.7 million, that's down $3.6 million sequentially. Cohu's directors approved quarterly cash dividend of $0.06 per share, payable on July 28, 2017, to shareholders of record on June 16, 2017. And now moving to our guidance for Q2. Shipments in Q2 are expected to be approximately $12 million higher than Q1, however, some revenue recognition will be deferred to Q3 as a result of shipping to new customers as well as shipping new handlers to existing customers, both of which require customer acceptance prior to recognizing revenue. As a result, we expect sales will be sequentially 6% higher at $86 million. Gross margin in Q2 is forecasted to be approximately 40%. Operating expenses for the second quarter are expected to be approximately $22 million, essentially flat quarter-over-quarter. Our projection for Q2 non-GAAP operating expense excludes approximately $300,000 of Kita inventory writeup cost, which will flow through cost of sales. Additionally, any changes to our initial estimates of the fair value of Kita assets, including intangible assets acquired, may result in different amortization amounts being recorded in the second quarter or future quarters. And before we conclude our prepared remarks, I want to mention that we will be hosting a Corporate Access Day with equipment demonstrations in conjunction with SEMICON West on July 13 at the Marriott in Santa Clara, California. Investors interested in attending the Corporate Access Day can contact Cohu Investor Relations for all the details. Additionally, we will be presenting at the B. Riley Conference in Los Angeles in May, the Stifel Conference in San Francisco in June and the CEO Summit in San Francisco in July. That concludes our prepared remarks. And now we'll take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Duley from Steelhead Securities.

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David Duley, [2]

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Just a couple of things. Since -- have you changed your expectations for the size of the handler market since the start of the year, given the results that were a bit better than expected?

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [3]

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Maybe we're towards the upper end of that expectation, Dave. I mean, we've talked before about the handler market likely going into $800 million to $825 million in 2017. I believe that's the number we gave you a quarter ago. And I would say, it's pushing towards the upper end of that range.

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David Duley, [4]

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Okay. And just commentary about seasonality for you guys. I think I've heard you say you thought you would see continued growth in shipments in the second half of the year, but maybe you could just talk about what the puts and takes are for seasonality that you might see this year.

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [5]

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Yes. I think we commented back in Q4 of last year actually was that we didn't see the typical seasonality pattern for 2017. We thought 2017 would be more of a stable, flattish year. Obviously, there will be some variations, but not to the extent that we have seen in the past in 2015 or '16. And at this point, I still hold to that. I think the degree of seasonality this year will be significantly lower than it was in the last couple of years.

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David Duley, [6]

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Okay. And then could you talk a little bit about the -- obviously, gross margins, I think, were better than expected. It's great to see that they've cracked the 40% level there. Did you hint that you were going to raise the target model? Did you mention what gross margins you might be able to target at $400 million now or any color there would be helpful?

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [7]

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Yes, you bet, Dave. And yes, we are updating the metrics on our financial model. As we talked about, we're realizing greater cost of benefits than we had originally projected from our high-volume manufacturing operation in Malaysia. So at the higher end of our financial model, let's say, in current range maybe about $90 million, we'd expect gross margin in this 40%-plus range, EBITDA 17%. And then when we look to the midterm target, which again is annual sales of $400 million, that gross margin as increasing 200 basis points to 42% with an EBITDA of 18%.

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Operator [8]

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And our next question comes from the line of Edwin Mok with Needham & Company.

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Arthur Su, Needham & Company, LLC, Research Division - Research Associate [9]

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This is actually Arthur on for Edwin. The first one is just a -- earlier this morning Teradyne talked about how auto is particularly strong for them in this quarter. You had mentioned auto was also strong for you too. Just wanted to get a sense as to what is driving the strength for you in auto and how sustainable we should think about it going into the rest of 2017?

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [10]

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Okay. In the -- so in the auto segment, not much has changed from what we mentioned a quarter ago actually. If you recall, we commented that particularly China was accelerating the implementation of some new, tougher emission standards. They were originally planned for 2020 and now pulled in. It's pretty well known that they have some of the worst air pollution in the world and they have to do something about it. So these are the so called National Six Standards that they have over there implemented. And that has been a significant drive of the auto segment for us. In addition to just general infotainment and the electrification, and we don't see any letting go at the moment from the auto industry this year.

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Arthur Su, Needham & Company, LLC, Research Division - Research Associate [11]

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Perfect. Thanks for confirming that. And then thanks for providing a little bit more color on the progress on your long-term growth drivers. With the wafer level prober, I think previously you talked about a revenue target of $10 million to $20 million in the second half of '17, and for your system-level test product I think the target was $5 million to $10 million. Are those still applicable or do you think there's an opportunity for them to go higher as you move to the end of the year?

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [12]

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At that this point, those are still applicable and you are correct on the numbers.

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Arthur Su, Needham & Company, LLC, Research Division - Research Associate [13]

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And then maybe just the last question. What's -- what are some of the puts and takes for gross margin coming in at 40% next quarter versus the strong gross margin this quarter?

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [14]

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Yes, Arthur, Q2 has a less favorable product mix when compared to Q1. And then as I mentioned in my remarks, it is about 100 basis points in Q1 due to what I call these onetime credits related to inventory and warranty. And so our Q2 guidance for 40% in line with our financial model. And as I talk to Dave, we're seeing increases at the higher end of those ranges, up to 42% at our midterm target.

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Operator [15]

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Our next question comes from the line of Patrick Ho from Stifel.

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Brian Edward Chin, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [16]

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Hi, this is Brian Chin on for Patrick. I'll only ask a few questions. First, just a congratulations, and to double back on gross margins, in a brisk market environment, which is ostensibly what we're in right now, can you talk about of how you are able to upshift to 90% manufacturing from Asia? And I guess, how much incremental could we expect to see in addition here throughout the rest of the year?

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [17]

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Well, so we're shifting manufacturing of the -- we've shifted the manufacturing of pick-and-place and gravity. So we essentially have completed that whole transition of manufacturing to Malaysia. Our target has been to get to this 90% of handlers shipping in the quarter, manufactured in Malaysia. So essentially accomplished what the original objective is. I would expect that in future quarters that we're going to continue to hover around that 90%, maybe 90%-plus mark in this, as you put it, brisk environment.

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Brian Edward Chin, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [18]

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Got it. I was making the -- going back to, I think, it was around 80% last quarter. It seems like a decent step up on improving revenues to get to that level. Maybe secondly, computing, I haven't noticed, at least from a quarter, recent standpoint, your big computing customer making above the 10% threshold. Typically, they are stronger kind of Q2, Q3 from a seasonality perspective. Is that the right way to think about that customer coming back in the fold maybe Q2, Q3 giving you a little bit better visibility and strength?

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [19]

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I don't tend to think of that customer having a seasonality pattern like the rest of the industry, as much. I think their customers' mainly driven by sort of technology, new node introductions and increased test coverage. Obviously, still dependent on end markets, consumers and deployment of server farms out there, no doubt. But I don't tend to see that customer particularly as a seasonal customer. Maybe you have found a seasonal pattern there. But I generally don't see it that way for that particular customer. So I don't know exactly what is to be reserved. I mean there could be a -- there could be an increase in the second of the year of that customer or not. I'm not 100% sure.

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Brian Edward Chin, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [20]

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Okay, fair enough. Maybe one last question. I think it was alluded to earlier, but a major tester company is talking about the increased test complexity, specifically for handset components leading to a very healthy capacity buying environment at the moment. Wouldn't this test complexity also benefit your thermal subsystem business? Isn't that maybe some relationship to your test handler business as well?

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [21]

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Yes. I think the increased test complexity really ends up translating into increased test times. And increased test times translate into additional capacity of systems in general. I mean it could be also be handlers. I mean we do sell handlers into mobile processer test, and yes it is always good when there is increased test complexity as it is when there is transition to smaller nodes, and generally speaking increased test coverage until silicon matures at the new node.

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Operator [22]

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Our next question comes from the line of Craig Ellis with B. Riley & Co.

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Peter Peng, B. Riley & Co., LLC, Research Division - Associate Analyst [23]

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This is Peter Peng calling in for Craig Ellis. The first question I have is on the deferred revenue of $12 million. Is this going to be rev rec over 2 quarters, 3 quarters or is this going to be mainly in Q3?

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [24]

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Well, so let me clarify, Peter. It's the $12 million that I referenced is an increase in shipments quarter-over-quarter, and not all of that gets deferred to a subsequent quarter. I'd say about $4 million of that increase will be deferred into -- we expect -- into Q3 revenue.

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Peter Peng, B. Riley & Co., LLC, Research Division - Associate Analyst [25]

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And then on the kind of the 6% Q-on-Q guide, what are some of the gives and takes in your end markets?

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [26]

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The sales growth, the activity continues to be pretty much in the same markets that have been in quarter 1. It's a -- we continue to be pretty strong in automotive. As I said, there was a ramp that we saw in Q1 and it continues into Q2 in the mobility market, and here I'm talking particularly mobile processors. And I would say the mobile RF SEG and the analogue RF in power sort of remains the same visibility for Q2 as it was in Q1, both in mobility as well as IoT applications. So not much of a change, more so, I would say, an ongoing ramp on the mobile processer side.

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Peter Peng, B. Riley & Co., LLC, Research Division - Associate Analyst [27]

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And then on the Kita acquisition, it seems like it is slightly tracking ahead of the $16 million annual run rate. Is this kind of sustainable for the year or are you going to see kind of a take down this quarter?

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [28]

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I don't see any take down this quarter, but it's hard to know what it's going to be for the full year, particularly as we -- I made a comment here during my prepared remarks as particularly as we start designing in Kita pins or their spring probes into our digital Mixed Signal contactor bodies, those probes over time are going to start seeing sort of replenishment revenue, replacement revenue, they are the blades that wear out over time, right. And it's a little tricky for us to model how that could influence revenue in future quarters. So I don't know, to be honest with you, other than certainly not letting go in quarter 2.

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Operator [29]

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Our next question comes from the line of Steve Marascia from Capital Securities.

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Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [30]

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Just a couple of quick questions I think you already touched on. Did you say that with revenues running at about $90 million, you expect about a 40% gross profit margin?

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [31]

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Yes, slightly over 40% plus, that's correct, Steve.

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Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [32]

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And next quarter revenues coming in are somewhere about $86 million, once you factor in or out all the different things that come in with sales recognition factors?

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [33]

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Yes, that's right.

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Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [34]

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Okay. And what about the run rate for your R&D and SG&A expenses going forward for the next -- for the rest of this year?

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [35]

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Yes. So as I guided, $22 million for Q2, that's flat to Q1 .

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Luis A. Müller, Cohu, Inc. - CEO, President and Director [36]

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That's OpEx.

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [37]

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That's OpEx, exactly. So our base run rate for operating expenses should be approximately $19.5 million per quarter. Then we've added Kita, so that adds another $1.3 million per quarter. And as we've talked in past quarters, we are currently implementing an ERP system at a couple of our major locations. And so we've had about $400,000 to $500,000 of project cost each quarter. So the base should be about $19.5 million plus the Kita. So talk about $21 million after we get past this ERP project.

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Steven F. Marascia, Capitol Securities Management, Inc. - Director of Research [38]

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Okay. So don't -- so should we expect any type of ramp up in that side of the equation, assuming your revenues keep growing towards $90 million or $100 million? Or do you guys pretty much see this as being predictable from these levels?

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [39]

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Oh yes, yes, it's very predictable. There's some variability to sales and SG&A as well as some in R&D as you can imagine a bit of commissions, a bit of travel. And then as customers continue to ramp, they will need additional engineering support. So there is some variable aspect to it, but it's a minor piece of the OpEx.

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Operator [40]

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Gentlemen, there are no further questions in queue. I'd like to hand the call back over to management for closing comments.

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Jeffrey D. Jones, Cohu, Inc. - CFO, VP of Finance and Secretary [41]

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All right. Thank you for joining us on today's call. We look forward to speaking with you at our Corporate Access Day in July or the investor conferences we will be attending over the next few months or when we report our second quarter results. Have a good day.

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Operator [42]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.