Ladies and gentlemen, thank you for standing by and welcome to the Cohu Incorporated First Quarter 2020 Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded. I would now like to hand today’s conference to Jeff Jones, Chief Financial Officer. Please go ahead, sir.

Good afternoon and welcome to our conference call to discuss Cohu’s first quarter results and second quarter 2020 outlook. I’m joined today by our President and CEO, Luis Muller. If you need a copy of our earnings release, you may access it from our website, 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. A replay 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, 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, May 5, 2020 and Cohu assumes no obligation to update these statements for developments occurring after this call. Finally, during the call, we will discuss certain non-GAAP financial measures. Please refer to our earnings release and slide presentation for reconciliations to the most comparable GAAP measures. Now I’d like to turn the call over to Luis Muller, Cohu’s President and CEO. Luis?

Hello, everyone and thanks for joining us. Today, I’ll describe how Cohu is responding to the COVID-19 pandemic, discuss some of our accomplishments in the first quarter. Then I’ll provide some perspectives on Q2 and what we expect for the rest of the year. Jeff will later discuss financial results and provide guidance for the second quarter. First and foremost, Cohu is committed to the health and well-being of our partners, including our employees, customers and vendors. And as such, we have implemented a strict set of policies at our global sites to safeguard our partners. The COVID-19 pandemic has had some impact to our supply chain in Southeast Asia and to our operations in Malaysia and the Philippines. Sales in the first quarter were approximately $139 million and about $6.5 million lower than expected due to the movement control restrictions imposed during the second half of March, in these countries where most of our products are manufactured. Despite these challenges, I’m proud of how we have pulled together globally to ensure business continuity during this unprecedented set of events. Now on to more details on our business results. Q1 marked the second consecutive quarter of record bookings, mostly driven by mobility customers accelerating the adoption of 5G test solutions for RF front-end devices. First quarter orders for our test – semi tester business was up 70% year-over-year, validating our strategy for high performance measurement instruments at an affordable cost. We’re being recognized for enabling our customers to successfully deploy 5G test capability in volume production, while optimizing their cost model. At the same time, our handler business is benefiting from our broad product line with high volume, turret and pick-and-place system sales, both for RF as well as mobile processor tests, where Cohu’s proprietary thermal technology is a key…

Okay. Thanks, Luis. As noted earlier, our priorities are the safety and well-being of our employees, customers and suppliers as we work through this challenging and uncertain environment. While we cannot predict how long this pandemic will last. We entered Q2 with a strong backlog and cash positions and improved financial flexibility as a result of previously completing the $40 million cost synergies from the Xcerra acquisition, further reducing operating expenses by approximately $3 million per quarter through temporary salary reductions, limiting capital expenditures to critical and strategic projects and suspending our cash dividend which preserves approximately $2.5 million per quarter to further strengthen the balance sheet. Before I walk through the Q1 results and the Q2 guidance, let me talk about our GAAP to non-GAAP adjustments. Please 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 Q1, the GAAP to non-GAAP adjustments include approximately $3.6 million of stock-based compensation expense. The GAAP to non-GAAP adjustments, primarily driven by the Xcerra acquisition, include $9.5 million of purchased intangible amortization expense and $2.1 million of restructuring costs. The Q1 2020 net cash impact of the Xcerra acquisition related restructuring was approximately $1.4 million due to employee severance. The Q1 GAAP to non-GAAP adjustments also include a $3.9 million impairment charge related to in-process R&D assets from the Xcerra acquisition. This is a non-cash charge caused by COVID-19 induced delays in our customers’ adoption of products currently in development. Now turning to Q1 results, revenue was $138.9 million and approximately $7 million lower than the midpoint of guidance due to COVID-19 related government restrictions in mid-March in countries where we manufacture most of our products. In Q1, two customers each accounted for more than…

Thank you. [Operator Instructions] Our first question is going to come from the line of Craig Ellis with B. Riley.

Yeah, thanks for taking the question and guys congratulations on executing in a tough environment. Jeff, I might have missed it, but at the midpoint of guidance, what’s the degree of allowance that you have for the COVID impact of the business? Clearly in the deck, you’re showing that there’s meaningful manufacturing impact through the quarter that lessens the quarter. But can you just quantify what that nets out to on the top line?

Yeah. The Q2, are you speaking about the Q2 forecast, Craig?

Q2, yeah thank you.

For Q2, you know we’re expecting that the factories in the Philippines and Malaysia ultimately get back to sort of normal operations by the end of the quarter. So as you can see on – part of the IR deck that we’ve published that by the end of the quarter we expect to be you know, back up to full production. So you know it’s – there’s really no sort of provision, if you will, like we did in Q1. So we created the Q2 forecast based on the assumptions that the constraints in the factories will essentially be lifted.

Okay. And then just to better understand the endpoints of the range, and it’s common for companies to widen the range out, so no surprise there. But what would differentiate the performance of the business at the low end of the range versus, say, the high end of the range for 2Q, Jeff?

You know there’s a certain degree of book-and-bill orders in the quarter, and so those are you know, typically carry a higher risk. Of course, you know, that’s sort of a quarter-over-quarter instance. In this particular quarter, there’s still uncertainty in the supply chain. So, in addition to book-and-bill for the quarter, there is continued uncertainty with our – some of our key suppliers.

Okay. So just turn to order variability and then supply side issues which we’ve been seeing. I’ll take my last question before I hop back into the queue. Maybe a little bit further out than that, I think I heard you conveyed that the third calendar quarter sales could be down 5% to 10%. From the visibility that you have now to that quarter, what would account for the decrease? And is there anything that you see in the business and with the backlog that you have that would be driving sequential growth quarter-on-quarter for 3Q?

Craig, so as we mentioned, you know, we had strong orders in Q1 and Q2 – excuse me, Q4 and Q1 that led to a healthy backlog as we enter Q2. But what we’re seeing is, we’re seeing some customer push out some shipments, and so that’s having a sort of a muting of the revenue, if you will, in Q2 and as well as into Q3. So there’s still quite a bit of uncertainty, not only in the Q2 forecast and therefore the wide range, but you know, also as we move further out, there’s definitely more volatility and uncertainty there.

And is that movement occurring in particular verticals, Jeff, like auto or perhaps industrial, outside of medical? Or is that just across the board with all your verticals?

That’s –

Yeah. Hi, Craig, this is Luis –

Hey, Luis –

Hi. It’s – a lot of this is auto as I said in my prepared remarks. Auto is actually going to be down this year significantly relative to the original expectations. But as I also said, we do expect that the mobile segment, customers will take a pause and gauge – try to gauge the COVID-19 impact on consumer demand before they move forward again. So, I think that’s going to compound a little bit on the – towards the third quarter.

Yeah, that certainly makes sense from all the things that we’re seeing, Luis. Guys, thanks so much for the help and congratulations on the good first quarter execution.

Thank you, Craig.

Thanks, Craig.

Thank you. And our next question will come from the line of Krish Sankar with Cowen and Company.

Yeah, hi. Thanks for taking the question. I had a couple of them. Luis or Jeff, I’m kind of a little confused. So you are guiding to Q3, and I understand it’s an uncertain environment. Your breakeven is getting lowered, and yet you’re suspending the guidance. I’m just trying to figure out what are the puts and takes on the Q3 comfort level for the revenue? And at what point would the guide – would the dividend come back?

Well, I’ll talk to the Q3 forecast. So yeah, obviously, there’s a lot of uncertainty related to that, Krish. And as we just talked about with Craig, you know there we’ve seen customers pushing orders out. And you know, it’s our best view at the moment, right, understanding the – sort of the constraints that we see and where we expect the factories to be as well as current view of the orders in Q2 and then how backlog feathers throughout the Q3 and Q4 time frames.

Krish, let me take the dividend part of the question here. The reality is, you know, I can’t provide any date or assurance at this point about when the future dividend – about future dividend payments, right. Ultimately, and it’s going to be reassessment in decision by our board as to what to do long-term. Clearly, here in the current environment, we believe – we believed it’s just a – in the best interest of our shareholders to prioritize our cash towards paying down debt and also for product – future product development and for making other strategic investments. So that’s the status as of today.

Got it. All right, Luis and then a final question from my end. You kind of broke out mobility roughly a third of your orders. Is there a way to pass it on further and say how much of your bookings or revenue is coming from 5G?

I mean, I could, not that I have it handy to answer it to you right now. I can tell you it’s the – you know more than half of it was 5G related, because a lot of it was associated with RFIC test, and we had a really strong demand for our testers going into that. We also had a very strong demand for turret handlers that go along for RFIC test. But conversely on the side, there is also thermal subsystems and handlers, pick-and-place handlers going into mobile processor tests and I can’t quite decide – define if those were 5G or not. But I can tell you more than half of the orders would have been 5G related.

Got it. Thanks, Luis. Thanks, Jeff.

Thanks, Krish.

Thank you.

Thank you. And our next question will come from the line of Brian Chin with Stifel.

Hi. Hi – excuse me, hi, good afternoon. I’m glad to hear you all seem to be doing well, and thank you for letting us ask a few questions. Maybe first just you know going – for a moment going back to the reference booking strengths in Q1. I guess, how much of that order strength has a 3Q or second half shipment date associated with it which you know, gives you some level of visibility you know, perhaps in Q3 as you’re discussing right now? And you’re also just saying kind of the timing on those orders were, to some degree, influenced by sort of your production constraints in terms of the timing and perhaps even magnitude.

In terms of the orders and the percent that applies to future quarters, you know, that was probably closer to 60% – 50% to 60% of the order book where 80% typically would be over the next three months, Brian. And we’re seeing that increase to – I think closer to 50% is the range.

Got it, okay. That’s helpful. And just quickly in terms of just shipment linearity or dislinearity in a typical Q2 versus you know what’s not a typical Q2 for you this year. I’m just curious I’m sure it’s reflected somewhat in your guidance, but how back-end skewed might shipments be this quarter relative to what might be normal?

Yeah. That’s a good question, and we are more back-end of the quarter skewed this time around, and we are because of supply chain constraints. As you can look at the supply chain in internal operation constraints and you can look in the IR deck here, we talked about estimated manufacturing output from our Asia factories in Q2, and it’s ramping up from April to June. So as you can imagine, we have more revenue towards the end of the quarter than we have in the beginning of the quarter as we manage through the reopening process basically in these countries where most of our manufacturing – most of our products are manufactured.

Okay. And you know, it seems like given your – you know where you think production will be relative to where it was in the month of June so that reflects a little bit of outsourcing. But also, I guess sort of the trajectory you see in places like Malaysia where they seem to have sort of mid-month “reopening dates.”

Yeah. Malaysia has already reopened, Brian. And they had restrictions from the middle of March through the end of April, actually two different levels of restrictions. And then as of last week, they announced they’re reopening. Now and nevertheless, even though we have a reopening, we have to have the supply chain catch up to our demand and feed our factory. So with that in mind, we did model a still sub-100%, in fact, about – 85% output out of our Asia factories in May and then normalizing to 95%-plus in June, and a lot of this is now based on supply chain catching up with backlog of our orders to our – from our suppliers.

Okay, thank you. Maybe one question on sort of recurring revenue. Could you help us quantify the impact on recurring revenue in 2Q and perhaps 3Q since you’ve extended sort of some visibility there? If more of your direct semi customers, particularly in the automotive markets, idle production as they look to realign with their end customers’ vehicle plant shutdowns. If you can kind of give us a sense of what that maybe that revenue impact that you’re contemplating is.

So our recurring revenue from just a couple of quarters ago, from Q3 of 2019 were down about $14 million or $15 million per quarter. That’s about you know, 15% to 20% decline from Q3. When we look at Q2, we’re seeing the same level of recurring revenue. And Q3, for now, is a similar view.

Just to be clear, you’re saying that a few or several quarters ago, you’re already kind of down $14 million to $15 million on a run-rate basis on the recurring revenue, and you’re kind of seeing that sort of still stable 2Q and perhaps in the 3Q this year?

Yes, that’s right.

Okay.

All right.

Thanks. Appreciate it.

And our next question will come from the line of Tom Diffely with D.A. Davidson.

Yes. Good afternoon. I guess first talking about the 5G pause that you’re seeing starting to form here. Is that impacted more by the timing of the release of 5G phones? Or is it the projected volume of 5G phones that’s the driver behind that pause?

Hi, Tom, this is Luis. What we see is that our customers have gone through a ramp in the first quarter, and everything was actually going pretty well for greater than original projections for 5G phones in 2020. You know, frankly I think in general terms that we’re heading towards a 250 million units of 5G phones in the year. COVID-19 did you know change that trajectory a bit, and I think our customers are trying to take a pulse on end-market demand before continuing the ramp. So I would expect that action will cause you know maybe a three months potentially a six months delay before the business continues on with additional capacity for 5G-enabled phones. So therefore, more towards the end of the year, I think is – fourth quarter timeframe is where that should pick up the line and continue the ramp.

Okay. So you, in a sense, see your networking computer stuff strong today, mobility 5G coming back end of the year and auto industrial coming back sometime next year?

That’s right, that’s right. Yeah. And there are some medical application related sales happening now that are accelerating, but as I made the comment, you know medical is still a small portion of the total industrial and medical segment, if you will, and frankly, probably not enough to offset a decrease in industrial segment.

Okay. And then a question on the suspended dividend. It seems like with your cash balance and your need for cash, you know you had a couple of years’ worth of you know extra cash. So I’m curious what was in the decision to suspend the dividend versus just kind of tightened down in other areas?

Well, Tom, we – as I mentioned, we’re being conservative and proactively on the cash management side. We have taken several steps to reduce operating expenses, as I outlined in the call. And we felt like, in addition to that, it would be the right thing to do to put more attention on cash preservation and particularly prioritization of cash for debt repayment and for – you know for maintaining product developments that are necessary for mid-term growth for the company. So that – those are the reasons behind taking the action.

Okay. And then if you look at your tools in the field today, do you have a sense of what the utilization rates are today versus where they were, say, a quarter ago?

It’s really – I don’t think it’s – the current utilization metric is relevant, because we had certain customers, particularly in the month of April, that were constrained, operational constrained from government-imposed restrictions, particularly in Malaysia, also in the Philippines. And so those customers weren’t able to staff the production floor to output what they needed. So I don’t think that utilization right now for the month of April would have been a good representation of reality. We’re looking forward to more of a May, June utilization metric to see where the industry really stands. So I don’t really – you know I think we have to wait a little bit here to get the pulse on that.

Okay, that makes sense. And finally, you know despite all the shutdowns and slowdowns, have you been able to make any progress on the contactor business and share gains?

We’re still working much on what we have described a quarter ago, which is focusing on gaining some share in the computing and network segment for contactors. But quite honestly, this last quarter has been quite a bit of a tension, not only from us, but also even our customers in that segment on getting operations back in line and support to end-market demand. So even our customer, in reality, has put a bit of a pause since the middle of March and through most of April on qualification of new products. I think life is, in general, starting to resume now on that front in the month of May for new contactor qualifications.

Okay. That makes sense. I appreciate your time today.

Thanks, Tom.

[technical difficulty] Christian, your line is open.

Oh, great. Sorry, I did not hear you say that. I just have one quick question. Most of them have been asked. I’m just trying to figure out if you could give us the negative impact of movement control in supply chain on your guidance you know for the June quarter, given record backlog, understanding that automotive was there you know. But you know how good could it have been, you know even in this challenging environment, if there was no movement control supply chain issues?

Well that would be the top end of our range, Christian. That would be the $155 million –

Okay.

The $130 million reflects you know if issues come to fruition in supply chain.

Okay, perfect. I don’t have any other questions. Thanks.

Thank you. [Operator Instructions] And our next question comes from Sidney Ho with Deutsche Bank.

Hi. This is Jeff Rand on for Sidney. Do you have any visibility into inventory levels on your customers? And are you anticipating that some of the demand in the first half will be used to build buffer inventory at your customers?

I missed a little bit of the first part of your question. But as far as the demand, I think the reality is many of our customers are still catching up to their end-market demand. We have several customers that were impacted, both in China in February, as well as in Malaysia, in the Philippines, late March and into April. So if anything, our customers have been really hard-pressed to get equipment deliveries so they can catch up to their deliveries. You’ve probably heard some of those earnings release in the last couple of weeks where major semiconductor manufacturers talked about being able to hit 90%, 95% of their demand on time, which means, they were 5%, 10% behind on schedule in certain cases. So I don’t think at this time it’s been sort of a buffering, but more so playing catch up.

Great, thank you. And as a follow-up, when you look at your outlook for Q3 right now, is all of the pressure you’re seeing coming from the demand side, and you assume that supply chain issues have been mostly worked out by then?

Yes. I think that’s a fair statement, Jeff. Actually the expectations are that you know with respect to the factories that were sort of back to 100% by the end of the quarter and similarly with the supply chain by the end of the quarter.

Great, thank you.

At this time, I have no further questions in the queue.

Okay. Just like to say thank you for joining today’s call, and we look forward to speaking with you soon.

Thank you. Once again, we’d like to thank you for participating in today’s Cohu Incorporated first quarter 2020 financial results conference call. You may now disconnect.