Q4 2023 Cohu Inc Earnings Call
Participants
Jeff Jones; SVP of Finance and CFO; Cohu, Inc.
Luis Müller; CEO and President; Cohu, Inc.
Ethan Widell; Analyst; B. Riley Securities
Brian Chin; Analyst; Stifel Nicolaus and Company, Incorporated
Robert Mertens; Analyst; TD Cowen
Presentation
Operator
Hello, and welcome to the Cohu, Inc. Q4 2023 financial results conference call. At this time, all participants are in a listen only After the speaker presentation, there will be a question-and-answer session. (Operator Instructions) Once again, please be advised that today's conference is being recorded and it is now my pleasure to introduce Chief Financial Officer, Jeff Jones.
Jeff Jones
Good afternoon, and welcome to our conference call to discuss Cohu's fourth Quarter 2023 results and first quarter 2024 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 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 15th, 2024, 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?
Luis Müller
Hi, and good afternoon. Fourth-quarter results were in line or better than guidance, with non-GAAP gross margin of 48.5% and EPS of $0.23. Fiscal 2023 non-GAAP gross margins set a new cohort record at approximately 48% and adjusted EBITDA was approximately 18% of revenue. Despite softening market conditions, Cohu was able to deliver strong profitability and full year non-GAAP EPS of $1.62 per share.
On October second, we announced the acquisition of equip test engineering, which we refer to as EQT. with the goal to expand our test interface products and recurring revenue that continues to deliver resilient profitability through industry cycles. Late last quarter, we completed construction and transferred all contactor manufacturing to a new 92,000 square foot facility in the Philippines. We held an opening event with customers on January 17th, and the facility is already ramping manufacturing of test contactors to make Q1 deliveries. The goal is to improve efficiency and quality, lower cost and lead time of interface products, positioning the Company to quickly respond to demand and to capitalize on the next wave of growth.
A significant aspect of our strategy continues to be to expand Cohu's recurring business, which delivered revenue of $310 million over the last 12 months with a three-year compound growth rate of 5%. Part of this is growing our software revenue. And at the end of last year, we introduced a new solution under code used the iCore analytics platform, RAI. inspection software, and we are pleased to receive initial orders from two customers for this new AI vision capability that delivers higher first pass inspection yield.
However, estimated test cell utilization dropped another two points to 71% at the end of Q4. The sequential decline was entirely with IDM customers. Wireless assets utilization held flat quarter over quarter. Similar to recent announcements from our automotive and industrial semiconductor device customers call you is experiencing softer demand for test and inspection systems in these markets.
Utilization across other market segments also remained low at the end of Q4, with computing at 68%, consumer at 69% and mobile at 76%. We know well the semiconductor cycles and the importance of staying focused on new product development and customer qualifications between upcycles to position the Company for the recovery and rates. We recently introduced Micrus sense which is a new memory tester for high signal-to-noise ratio microphones. In other words, precision microphone. And we received initial orders from a major U.S. manufacturer for lab and production test starting in the second half of this year. Our diamond X tester in handlers were also qualified for several new customers in China supporting local automotive in display driver IC manufacturing.
We are also pursuing stronger and strategic alignment with computing customers, particularly hyperscalers, expanding data center infrastructure. Our proprietary thermal technology is key testing future large data center processors, also a DAS and other intelligent devices as a I migrate to the edge applications. There is a clear trend to higher power dissipation during test, which lends itself well to cool use T core thermal subsystems Similarly, our Dionex is a cost-effective, versatile mixed signal tester that is being considered by several customers for the intelligent edge.
Diamond AX is an excellent solution for microcontrollers and digital devices at the edge node offering low to mid-range digital device test capabilities are a very affordable cost as a high growth in mobile devices. So we'll RF with the continuation of 5G deployments. We're very excited about the proliferation of new AI capable products like next-generation smartphones, VR goggles and other types of devices. These are an excellent fit for Tessera and Dionex and for customers pursuing a broad portfolio of devices for edge applications.
Although near term demand is likely to remain subdued, our major customers have been forecasting a semiconductor recovery for the second half of 2024 with lead times now back to normal, Cohu is well positioned to quickly respond to customers' needs as test cell utilization improves through the second half of this year and into 2025. We will continue executing our strategy to grow recurring business, broaden the use of Diamond action to automotive and industrial and data center customers and to our inspection and metrology portfolio and increased subscriptions to our emerging software business.
We're pretty excited about what lays ahead with market forecasts, indicating secular growth in semiconductors for automotive, industrial and mobile applications and the new opportunities being created for AI at the edge node. Let me now turn it over to Jeff to provide further details on quarter results and first quarter '24 guidance.
Yes.
Jeff Jones
Thanks, Luis. Before I walk through the Q4 results and Q1 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 Q4 financial results. Cohu delivered strong profitability on revenue of $137.2 million, which is above the midpoint of our guidance. Full year 2023, revenue was $636.3 million. Recurring revenue, which is largely consumable driven and more stable than systems revenue represented 54% of total revenue in Q4 and 49% of full year 2023 revenue. During the fourth quarter, one customer in the automotive market accounted for more than 10% of sales. And for full year 2023, one customer in the automotive market accounted for more than 10% of sales. Q4 gross margin was strong at 48.5%, about 250 basis points higher than guidance, driven by lower than forecasted manufacturing costs and coal use, resilient recurring business and differentiated products. Full year 2023 gross margin was 47.9%, which is 70 basis points higher year over year and sets a new annual record for Cohu. Operating expenses for Q4 were in line with guidance at $50 million. Fourth quarter non-GAAP operating income was 12.2% of revenue and adjusted EBITDA was 13%. Full year operating income was 16.2%, and adjusted EBITDA for 2023 was 17.9%. Fx loss in Q4 was $2.9 million, driven mainly by the U.S. dollar weakening against the euro and Swiss franc and a onetime currency exposure that will not repeat in future quarters.
The non-GAAP effective tax rate for Q4 was approximately 30% and higher than guidance due to discrete tax items and true ups flowing through the Q4 tax provision.
Non-gaap effective tax rate for the full year 2023 was approximately 26% and non-GAAP EPS for the fourth quarter was $0.23 and full year 2023 EPS was $1.62.
In summary, Q4 and full year 2023 gross margin and adjusted EBITDA were strong, exceeding the midterm financial targets at this level of revenue.
Moving to the balance sheet, cash and investments decreased by $52 million during Q4 to $336 million because we used cash of approximately $43 million to acquire EQT and approximately $13 million to repurchase 390,000 shares of common stock debt repayment in the fourth quarter totaled $1 million, and we ended Q4 with net cash of $6.17 per share. Capex in Q4 was $3.9 million with approximately $2 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, was approximately $16 million. Overall, Cohu continues to maintain a strong balance sheet to support debt reduction, share repurchase program and investment opportunities like EQT to expand our served markets and technology portfolio in line with our growth strategy. Last week, we repaid the term loan B outstanding balance of $29.3 million. The term loan B was scheduled to mature in October of 2025, and the accelerated payment will increase net interest income by approximately 200,000 per quarter at current interest rates.
Now moving to our Q1 outlook. We're guiding Q1 revenue to be in the range of $107 million plus or minus $6 million, reflecting continued weakness across end markets and low test cell utilization at customers' production facilities. Q1 gross margin is forecasted to be approximately 45% better than the financial target model at this level of revenue due in part to coal use differentiated products in our stable high margin recurring business, which adds resilience to profitability and provides consistent cash flow through the industry cycles.
Operating expenses for Q1 are projected to increase $1 million quarter over quarter to approximately $51 million due to the annual reset of payroll taxes and other labor benefits. We continue to exercise tight control over operating expenses and in light of subdued customer demand for the first half of 2024, we've taken action to reduce operating expenses without sacrificing critical new product investments while navigating through the trough of this cycle.
As a result, we're modeling operating expenses to average approximately $48.5 million per quarter in Q2 through Q4, we're projecting Q1 interest expense to be approximately 700,000 and offset by interest income of approximately $2 million. At current interest rates, we expect Q1 adjusted EBITDA to be approximately 2% for Q1 and full year 2024 forecasted non-GAAP tax rate is approximately 23%. The diluted share count for Q1 is expected to be approximately 47.9 million shares and that concludes our prepared remarks, and now we'll open the call to questions.
Question and Answer Session
Operator
(Operator Instructions) Ethan Widell, B. Riley Securities.
Ethan Widell
Hi there. This is Ethan Lightower calling in for Craig Ellis. Thanks for taking my questions. Starting, I was wondering, as you look into the back half of the year, what gives and takes. Are you seeing it sounds like equipment spend may be back half-weighted and also how do you see the relative performance between systems and recurring? Thanks.
Luis Müller
Hi, this is Luis, at this point, we rely on the information we're getting from our customers that are generally expecting a recovery towards the back half of the year. And this is predominantly automotive and industrial customers are recovering. If you look at the mobile market, we've seen largely a correction already in the inventories in the mobile space, particularly in the Android.
And we have seen some some start of order pattern already again into the into the mobile mobile device market. So you put the two things together and the expectation here is, again, a recovery pattern on the second half of the year. I know, Jeff, you can add some on the depreciation of revenue.
Jeff Jones
Yes. So based on that trajectory, systems revenue would come in somewhere around probably 45% with recurring revenue being 55%, somewhere somewhere in that ratio.
Ethan Widell
Okay. Thank you. That's helpful. And then on we seem to be seeing some green shoots in the Android ecosystem, as mentioned up. Can you speak to any read-throughs there for utilization or demand for mobile utilization level in mobile is going to second?
Luis Müller
I think it's about 70%, 76% across the board across a collection of mobile customers. So that's not only Android, but all of them.
Jeff Jones
Okay, got it. Thank you.
Operator
Brian Chin, Stifel.
Brian Chin
What's the Thank you. Thanks for taking my questions on maybe first question. Yes, as you said, you kind of monitor against sort of your customer indications on the back half of the year for some recovery, there are particular utilization threshold that you'll be monitoring in terms of improvement and a crossover point to maybe on it will solidify that view that the pickup will occur and towards second half?
Luis Müller
Yes. If that was a question there, Brian? Yes, we will be monitoring utilization across some because I commented here, utilization is down a couple of points to 71% at the end of Q4, and it was actually pretty stable at that 71% throughout Q4. So we had three months and a fourth in the fourth quarter, quite honestly, January, which are I can speak to here in the call was also 71%. So we've got four quarters, four months in a row now at 71%. We've got to monitor data utilization increase. It is pockets of strength and pockets of weakness in it. I mentioned mobile a second ago at about 76% consumer, is it 69% computing at 68 and auto industrial, despite coming down two points quarter over quarter ended Q4 at 81%.
As we always say, utilization of about 80% is when you see capacity buys and we got to see across markets, not not only a 80%, but more of a trend up towards that 80%. So climbing from 71% to 80% mark and the rate of climb also will determine how fast we get to that to that turning point, right. So we've seen in the past on the order of 2 to 400 basis points quarter-over-quarter improvement in utilization. That's reasonably what you expect on a typical recovery, but.
Brian Chin
Okay, got it. And then in relation to that sort of service systems question earlier on where you see service revenue analysis system revenue going in Q1 on, does that feel like a pretty good floor in terms of the service revenue?
Luis Müller
And then on the equipment side, I'd imagine given the protracted downturn in areas beyond automotive and industrial, it's probably hard to fathom system revenue going down more in those markets. And you also feel that automotive and industrial is pretty much at a floor even on that system side revenue in Q1 and kind of any thoughts on.
Yes, sequential and then into Q2. Yes. I mean, if you look at them, if you look at systems revenues, as we've talked here about total systems revenue came in in the quarter at about 46% of total, right. But if you start looking at the start looking at Q1, for example, not Q2 yet. We're still looking at Q1 our order pattern in Q4, which dictates a little bit of what's happened in Q1 by market segment. We should see reasonable stability in the automotive market sort of automotive and industrial combined should see a reasonable stability quarter over quarter across those two markets. What is down significantly at least from an order pattern in Q4 is the consumer market that came down came down quite a bit on driving sort of that typical typical seasonality. Obviously, we're in a down cycle, but you've got to layer out the seasonality on top of that. And that's typically the consumer market order patterns in the fourth quarter. And that really hurts going into Q1 as we go into second quarter, it's a little early to call, but I would say more of the same pretty much more of the same that we're seeing today or that we saw through fourth quarter orders, it got maybe by slashing the closedown and gross margins on it, definitely much higher than I expect, given where the 1Q revenue is going.
Brian Chin
Sounds like maybe you're you've flushed through some of that higher-cost inventory. You had the intake in periods of tighter supply of is the other factor here to think about it sort of that mix of higher service relative to system.
Jeff Jones
And that's that's really the main driver, Brian, is the mix between the recurring and the system revenue and and so ink in Q1 it's more skewed towards the recurring revenue than Q4 was closer to call it about 60% recurring, 40% systems. And so that's that's very helpful. On the margin side now at this point, we reach in the systems revenue, you reach a point where the margins degrading because of the fixed cost infrastructure for primarily handler systems. So that's a bit of a drag, which which is why the quarter-over-quarter gross margin is is coming down a couple of hundred basis points, but it is supported by the recurring revenue.
Brian Chin
Okay, great. Thank you.
Operator
(Operator Instructions) Robert Mertens, TD Cowen.
Robert Mertens
Hi, this is Robert Mertens on for Krish. Thank you for taking my questions. I guess just the first one in terms of looking at the puts and takes of the utilization rates, you are good about sort of providing this throughout the year on a quarterly basis and then this quarter, sort of where each subsegment has come in.
Is there any sort of forecasting that you're doing in terms of the categories, maybe mobile is one that picks up more in the second half of the year. If you're starting to see some motto and industrial, it declined a little bit since that's the highest utilization among your subsegments. Just sort of any color there would be helpful. Thanks.
Luis Müller
Hi, Robert. We don't typically forecast utilization and we for forecast markets and customers, but not utilization. But if I take it for, I think our forecast by markets and by segments, I would say, and there's probably a little bit more to give on the downside in the auto and industrial segment and a little bit more to gain in pickup here sequentially in the mobile segment. I think we're starting to see a little bit of signs of life in the mobile market. And at the same time, a lot of caution by our large auto and industrial semiconductor customers, he can probably attest yourself from their recent earnings release. So that's the that's supposedly going to dictate the pattern also in utilization once we've finished Warner.
Robert Mertens
Great. Thanks. That's helpful.
Operator
I'm showing no further questions at this time. So with that, I'll hand the call back over to Chief Financial Officer, Jeff Jones, for any closing remarks.
Jeff Jones
Yes, I just want to say thank you to everybody for joining today's call, and we look forward to speaking with you soon picker.
Operator
Thank you, and thank you all for participating. This concludes today's program. You may now disconnect.
