Cohu, Inc. (NASDAQ:COHU) Q4 2023 Earnings Call Transcript February 15, 2024
Cohu, Inc. beats earnings expectations. Reported EPS is $0.23, expectations were $0.22. COHU isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and welcome to Cohu Inc. Fourth Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. It is now my pleasure to introduce Chief Financial Officer, Jeff Jones.
Jeffrey 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 15, 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 Cohu 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 2, we announced the acquisition of Equiptest 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 17 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 twelve 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 Cohu's DI-Core analytics platform, our AI inspection software. We were 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 2 points to 71% at the end of fourth quarter. The sequential decline was entirely with IDM customers, while OSAT's utilization held flat quarter-over-quarter. Similar to recent announcements from our automotive and industrial semiconductor device customers, Cohu is experiencing softer demand for tests and inspection systems in these markets.
MicroSense:
A robotic arm placing a semiconductor chip on a test contactor.
Diamondx: There is a clear trend to higher power dissipation during test, which lends itself well to Cohu's T-Core thermal subsystems. Similarly, our Diamondx is a cost effective, versatile mixed signal tester that is being considered by several customers for the intelligent Edge. Diamondx is an excellent solution for microcontrollers and digital devices at the Edge node, offering low-to-midrange digital device test capabilities at a very affordable cost. As AI grows in mobile devices, so will RF with the continuation of 5G deployment. 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 testing of Diamondx and for customers pursuing a broad portfolio of devices for Edge applications.
Inspection: 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 fourth quarter results and first quarter '24 guidance. Jeff?
Metrology: 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 fourth quarter results and first quarter '24 guidance. Jeff?
Jeffrey 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 Cohu's 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 one-time 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. The non-GAAP effective tax rate for the full year 2023 was approximately 26%. 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 mid-term 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 Cohu 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, the 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. 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. Regarding 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 Cohu's differentiated products and 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 continued 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%. The 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.
