Cohu - Earnings Call - Q3 2020
October 29, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to Cohu Incorporated Third Quarter twenty twenty Financial Results Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. As a reminder, this conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Jones, Chief Financial Officer.
Please go ahead, sir.
Speaker 1
Thank you, and good morning, and welcome to our conference call to discuss Cohu's third quarter results and fourth quarter twenty twenty outlook. I'm joined today by our President and CEO, Luis Mueller. 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 ks and Form 10 Q. Our comments speak only as of today, 10/29/2020, 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
Speaker 2
I'd
Speaker 1
like to turn the call over to Luis Mueller, Cohu's President and CEO. Luis?
Speaker 3
Thanks, Jeff. Good early morning, everyone, and thanks for joining us. Today, I'll discuss some of the dynamics from third quarter, what is driving our expected business improvement into next quarter, summarize how Cohu is improving its infrastructure and adapting to the pandemic and highlight our alignment with momentum growth markets for 2021. Revenue in the third quarter was $150,600,000 exceeding our updated guidance with business conditions continuing to improve throughout the quarter. As orders strengthened, we were able to accelerate some recurring shipments in support of customers' production ramps.
Our operations team and supply chain partners did a great job meeting customer needs in the third quarter and even more so going into the fourth quarter as we'll soon discuss. Third quarter orders were split 40% recurring and 60% systems, with a sharp increase in demand for our testers and handlers and another sequential record booking quarter for PCD test equipment. Overall, estimated test cell utilization increased three points quarter over quarter to 81% at the September. Mobility continues to be a very strong segment for Cohu, particularly for RF test of devices going into next generation five gs smartphones. In third quarter, we launched a suite of RF test instrumentation addressing five gs, Wi Fi six, and ultra wideband requirements.
We're seeing strong and wide customer adoption for these products and are successfully managing an accelerated production ramp. I couldn't be more proud of our engineering, operations, applications and service teams for delivering such a successful product introduction. There is much more to do in fourth quarter and into 2021, but so far this has been a great testament of value creation from our October 2018 acquisition of Xcerra. Still in mobility, we're also managing a fast production ramp for handlers used in testing application processors and RFICs, and growing customer traction for the new NEON package inspection platform. Five gs deployment is still in the early stages with estimated 16% penetration in smartphone units.
Industry analysts expect that this market will continue to expand in 2021 and beyond, likely reaching peak demand in 2023 or 2024. There are other applications in automotive, industrial, and IoT that are not yet considered in this forecast and should extend the technology beyond this time horizon. Test complexity is also increasing, leading to higher ASP systems and greater test intensity. The net result is very positive for Cohu's RF testers, handlers and our Liu line of contactors. In third quarter, we also saw new U.
S. Export restrictions to Huawei. I believe everyone understands that the smartphone demand remains unchanged. But the business redistribution is translating into incremental orders for Cohu products from customers where we have greater share. Finally, there were new U.
S. Export restrictions on China and military end use applications and end users. We have conducted reasonable due diligence on our customer base and don't believe this rule will impact Cohu at this time. In third quarter, we started seeing a recovery in volume orders from automotive and industrial semiconductor customers. This ramp is happening sooner than anticipated and led to a near threefold increase quarter over quarter in automotive system bookings and twofold increase in the industrial segment.
Despite all the excitement, the combining segments were still about half the order rate from 2018 and should have more room for improvement in the near future. Utilization across automotive semiconductor customers is picking up and so are orders in the first few weeks of fourth quarter. It is no surprise that automotive demand is coming back stronger for testing ADAS and power management semiconductors, as well as sensors that include new optoelectronic devices. In the consumer segment, we're seeing initial deployments of mini and micro LEDs in new large panel TVs driving the forecast for incremental task capacity. Also, more powerful gaming GPUs are set benefit from Cohu's thermal handlers that optimize yield for actively managing thermal dissipation during tests.
The computing segment is going through transition. New edge devices and supplier diversification are creating new business opportunities for thermal handlers and subsystems. As I mentioned in an earlier call, we have been working to deliver time to yield value to several customers through better integration of our test cell elements: tester, handler, and contactor. In third quarter, we captured a design win for RF test, where a major OSAT customer recognized the value of buying a complete test cell from Cohu that accelerates time to achieving target production yields in overall equipment efficiency, or OEE. We are working with other customers across different markets to demonstrate similar capability.
I hope to describe new application wins in coming quarters. On the contactor front, with a sharp increase in system orders, our contactor attachment rate is now at 29%. As I previously explained, this number will fluctuate up and down quarter over quarter. In light of rapidly improving business conditions, strong cash generation and our forecast during the third quarter, we took action to reduce outstanding principal under our Term Loan B debt associated with the financing of the Exterra acquisition by $17,300,000 Now looking at the impact of the COVID-nineteen pandemic to our business. This has been an incredibly challenging year for our employees, customers, suppliers and communities.
We're committed to ensuring the safety of all stakeholders to protecting our livelihood and doing the best we can for our communities. Cohu has increased supply chain resilience and implemented policies to safeguard our employees, ensure business continuity, and support our customers. Because of the pandemic, Cohu has reduced travel and other expenses, and we're now finding new ways to support customers. Among these, we're implementing virtual reality assisted technologies to bring experts to the field without leaving their homes. We're excited to pilot new technologies like this to enhance customer support and expect long lasting benefit from such solutions, including lower operating expenses when the pandemic crisis subsides.
Now looking ahead, we're encouraged by momentum across Cohu's main market segments and by customer interest for our new products. We'll be guiding fourth quarter revenue and profitability up and are forecasting this strength to continue into 2021. Cohu is poised to grow next year with accelerating five gs deployments compounded by a projected increase in smartphone units, growing ADAS and electrification on anticipated expanding automotive unit sales, new opportunities in computing with edge processing, AI and next generation GPUs, and expected recovery in the industrial segment with improving global GDP. All in all, Cohu is improving its operations and service infrastructure to meet the evolving pandemic driven challenges, lowering operating expenses and aligning products with momentum markets that will deliver revenue growth. Before we continue with financial results, I'd like to announce a senior management change and thank Pascal Ronde for his outstanding leadership of Cohu's global customer group over the past two years as we integrated Excerra.
Pascal will be scaling down his time commitment starting in first quarter of next year and will eventually transition from Cohu at the 2022. Looking forward, I'm pleased to announce that Chris Borson, who is currently the senior vice president and general manager of our Valtest Handler Group, will assume Pascal's role around mid February next year. Chris is a highly respected industry veteran with strong multicultural and business experiences, and it's held in high regard not only by customers but all Cohu. In conjunction with this transition, our three handler business units will report directly to me. Now I'd like to turn it over to Jeff to provide details on third quarter results and share fourth quarter guidance.
Speaker 1
Thanks, Luis. Ocohu delivered strong results in Q3. Sales were higher than our revised guidance as of August 31. Gross margin exceeded our business model. Operating expenses were in line with forecast.
And Q3 non GAAP profitability was higher than our business model. Before I walk through the balance of the Q3 results and the Q4 guidance, let me talk about our GAAP to non GAAP adjustments. Please note that my comments that follow all refer to non GAAP figures. For GAAP to non GAAP reconciliations and disclosures, see the accompanying earnings release and investor presentation. For Q3, the GAAP to non GAAP adjustments include approximately $3,300,000 of stock based compensation expense, intangible amortization expense was approximately $9,800,000 The gain on sale of our German facility was approximately $4,500,000 and restructuring costs were approximately 3,000,000 The Q3 twenty twenty net cash impact of restructuring was approximately $400,000 due to severance and facility closure.
The Q3 GAAP to non GAAP adjustments also include a 7,300,000.0 charge related to in process R and D assets from the Excerra acquisition. This is a non cash charge caused by COVID-nineteen driven delay in our customers' expected adoption of products currently in development. Now turning to Q3 results, revenue was $150,600,000 and $4,600,000 higher than our updated guidance as provided on August 31. In Q3, no customer accounted for 10% or more of sales. In the third quarter, Cohu's gross margin was 44% and in line with the high end of our guidance.
The Q3 gross margin is approximately 100 basis points higher than our business model. Operating expenses were $48,300,000 and in line with guidance. Temporary cost reductions remained in effect throughout the quarter. Third quarter non GAAP operating income was 11.9% of sales and adjusted EBITDA was 13.5%. Cohu's non GAAP effective tax rate for Q3 was approximately 16% and lower than guidance primarily as a result of tax benefits derived from operating losses generated in Europe.
Non GAAP EPS for the third quarter was $0.27 Now turning to the business model. As we've previously discussed, the actions required to achieve the $40,000,000 of acquisition cost synergies were completed as of the 2019. At the March 2020, we implemented temporary salary reductions, which took effect of April and further reduced operating expenses by approximately 3,000,000 per quarter, adding about 5¢ of EPS to our model. Given the improvement in business conditions, Cohu is lifting the cost reductions and reinstating full base salaries and board of directors cash retainer compensation as of the November 2020 guidance.
Speaker 4
Now moving to the balance sheet. Our cash balance at the '3 was approximately 171,000,000 and supports our operational needs of approximately $80,000,000 debt service
Speaker 1
and funding the inventory and receivables associated with the steep production ramp we are currently experiencing. During Q3, Cohu reduced debt by approximately $17,000,000 Deleveraging continues to be a capital allocation priority. Cash flow from operations during Q3 was $14,700,000 and CapEx for the third quarter was $5,600,000 driven mainly by purchases of equipment to increase contactor manufacturing capacity in The Philippines and Japan, as well as capital additions necessary to consolidate our German test handler operations into one facility. The fourth quarter sales forecast has improved significantly since the directional guidance we provided during the July. For Q4, we're guiding sales to be between $176,000,000 to $192,000,000 The low end of the revenue consider some pricing uncertainty caused by COVID-nineteen potential risks associated with book and bill sales and customer acceptance, which is required for revenue.
Gross margin for Q4 is expected to be between 4445% and in line with our business model. Q4 operating expenses are projected to be approximately $51,000,000 Q4 will include two months of reinstated base salary costs plus higher variable expenses such as sales commissions resulting from the sequential increase in revenue. Other expenses such as travel and marketing costs remain at reduced levels in q four and the foreseeable future as Cohu has adapted well to this new business environment with more remote interaction with customers and between our operations. Looking to quarters beyond Q4, which will include the full impact of salary reinstatement, we expect operating expenses to be approximately $52,000,000 on quarterly revenue of approximately $180,000,000 We expect Q4 adjusted EBITDA at the midpoint of guidance to be approximately 18%. The Q4 forecast non GAAP tax rate is approximately 22% at the midpoint of guidance.
As reminder, most use profits are generated offshore and subject to statutory tax rates in various foreign jurisdictions. Income taxes on profits generated in The U. S. Are mitigated by net operating loss carryforwards. The diluted share count for Q4 is expected to be approximately 2,700,000.0 shares.
With increasing backlog and strong order forecast across various markets, Our current projection for first quarter revenue of 2021 is approximately flat to up 5% from the
Speaker 4
midpoint of Q4 guidance.
Speaker 1
That concludes our prepared remarks.
Speaker 4
And now we'll open the call to questions.
Speaker 0
Our first question comes from Brian Chin with Stifel. Your line is open.
Speaker 4
Hi, good morning, and congratulations on the pickup in the business. And also thanks for letting us ask a few questions. Maybe first question, coming off low levels, but the system order pickup in auto industrial certainly sounds fairly substantial. I usually think of service oriented sales leading a recovery in utilization and also system orders. But maybe can you talk about the underlying drivers you're seeing, your view on sustainability?
And then inclusive of this and your Q1 sort of outlook as well, are you building backlog here beyond 4Q?
Speaker 1
Yes, Brian, sorry. As we described in the comments, yes, are increasing. Book to bill Q3 was above one. Expect the same for Q4. So yes, we are building backlog.
You mentioned the automotive coming off of low order rates and that's absolutely true. So we believe we still have a ways to go there to get back to a normal run rate. We think we're about 25,000,000 to $30,000,000 per quarter in orders lower than our normalized rate.
Speaker 4
Got it. And just I have a question about kind of the mobility side of the business. But in terms of the customer strength, is it pretty broad across customers and geography?
Speaker 3
Hi, Brian, it's Louise. Yes, it is broad customer base and geographic as well. As I mentioned it is particularly strong for RFICs but we've also seen a strong pull for our thermal handlers for application processors and also an increase forecast here on the flat panel display drive, some of it associated with mobility. Power management I see as well related to mobility.
Speaker 4
Great. And in terms of like the RF test part of the business, which has been strong this year, I think in the past, Luis, you've commented that you see the TAM there perhaps growing sort of maybe 20% -ish per annum over the next couple of years or so. I think last night, talked about the potential for the industry shipping over 500,000,005 gs phones next year, up from, say, dollars $20,250,000,000 this year. That's one of the higher numbers I've heard and that's last night. I'm curious, how would you think of sort of the RF TAM growth relative to that sort of a number?
Speaker 3
Yeah. So we think the RF TAM, by that I don't mean just in phones, but connectivity in general. So some of it, take a grain of salt here, some of it is in automotive or IOT. That that TAM is is growing to about a $400,000,000 market size or addressable market size for Cohu in the next in the next two to three.
Speaker 4
Okay. And one last quick one here for Jess. At the revenue level, you're guiding 4Q against the target just in the neighborhood of 30 to 45¢ in earnings. You did mention that that the the temporary cost measures are are coming back. So I think the OpEx is still going to be lower than the target model.
So can you kind of perhaps quantify sort of the benefit you're getting from sort of the reduced travel and other sorts of cuts in expenses right now? I guess it's just it's your guidance for 4Q OpEx subtracted against sort of where you would normally be at those revenue levels?
Speaker 1
Yes, that's a good way to look at it, Brian. Again, as I mentioned in my remarks, I think the way to look at it is quarterly revenue rate of 180, think about $52,000,000 in operating expenses. Then with every $10,000,000 change in revenue, our OpEx will move by $1,000,000 So as revenue goes up to 190,000,000 we'd expect OpEx to be at $53,000,000
Speaker 4
Okay. That's helpful. Thank you.
Speaker 0
Thank you. And our next question comes from Krish Sankar with Cowen and Company. Your line is open.
Speaker 4
Yeah. Hi. Thanks for taking my question, and congrats on the great results and guidance. Luis, I had a couple of them. First one is, is there a way to segment off your mobility orders or sales?
How much of it is coming from five g? And if you can also give that kind of granularity over the last couple of quarters so so we can see the trend of how five g is even increasing or how it's trending for you folks?
Speaker 3
Yeah. Hi, Krish. I I won't have all the details handy here, but I I can tell you this. The third quarter RF tester orders were almost entirely five g related, if not really entirely five g related, the the handler orders in mobile Intra Mobility are a little bit more difficult to to call because we are testing an application processor, which is a digital device, when our handler's in, really a difficult call to say whether it's going on a five g or a traditional four g phone ultimately because we don't know which phone maybe supplier may be using that processor. Similarly, with the display drivers or the power management ICs, we don't we don't have that visibility down to specific cell phone model that it's used.
So the RF is it's easier to call because we know the device. But on the other ones, it's it's hard to know how it gets integrated.
Speaker 5
Got it. Got it. Fair enough, Lewis. And then I mean, along the same path, you know, when I look at the RF, your customers, not the OSAT, but the actual the RF front end module makers, it seems like there are, like, roughly five of them, four in The US and one in Japan. How would you characterize your market share with amongst all those five end customers?
Speaker 3
The OSATs? With with the OSATs, you're talking about the share with?
Speaker 6
Not the OSATs. Not the OSATs. I was talking about, like,
Speaker 5
the Chorus, Kairos, Avargo, Qualcomm, Miradas of the world.
Speaker 3
Oh, I see. So we have we have had traditionally the largest share of the power amplifier market and that continues to be the case. We have more recently gained share into other RF front end ICs, particularly tuners and low noise amplifiers and switches. So I would say we, you know, give or take 60% plus share on the power amplifiers. I can't tell you exactly the share on the other elements, but but it's it's on the rise.
It's increasing.
Speaker 4
Got it. Got it.
Speaker 5
And then a final question, either for Luis or Jeff. You know, auto, it seems to be kind of on a recovery mode, but as a percentage of your system orders, it's still pretty low. I'm kind of curious when you would expect it to get back to like some of your early twenty nineteen levels or the prior ones?
Speaker 3
Yes, that's a very good question there, Krish. It's hard to make those kind of predictions, but we do we did expect coming into last quarter that the market would be in a recovery by the end of fourth quarter, 2021. And that possibly hit full sort of be in a full swing in the 2021 or 2022. Where we stand today is things have turned on faster than we had anticipated at the end of third quarter and continue to be here at the beginning of fourth quarter. So I'll be a bit more bullish this time and say that we think we're going to be back in normal business environment for automotive sometime in 2021.
I can't I can't precisely say when, but but I'll be a bit more bullish from from where we stand today.
Speaker 5
Terrific. Thanks, Luis. Thanks, Jeff. Congrats on the good results.
Speaker 1
Thanks, Krish. Thank you.
Speaker 0
Thank you. And our next question comes from Craig Ellis with B. Riley. Your line is open.
Speaker 7
Yes. Thanks for taking the question, guys, and congratulations on the real robust execution and totally getting to be reinstating normalized salaries for the team, given what you're, doing with your execution. I wanted to start following up with a comment that you just made regarding Krish's question. So, you know, my understanding is that, Cohu has a very strong position in EV power and ADAS related applications. So when we're thinking about the business' capability on a go forward basis relative to its order intensity in either 18 or 19, wouldn't we expect for something, for for order intensity intensity to actually be higher given how strong your position is in these two secular growth areas?
Speaker 3
Hi Craig. Yeah, this is Luis. Yes, I that's the direction we expect the market to go and ultimately to grow. So to Chris's prior point, we think we will be back to that quarterly rate sometime in 2021. We see the trajectory already from where we stand today.
But beyond that, the electrification of the drive chain and the adoption of ADA seems to be accelerating. We think automotive has the potential to go beyond where we were a couple of years ago. I don't know if that that then translates into 2022 or exactly the time frame. But one thing is certain, the the ramp in automotive now is and and we see in every order coming through now is is very heavily centered around battery management systems, testing battery management devices, or high end microcontrollers or you could call it microprocessors that are power dissipative therefore for ADAS applications and also sensors that we believe are also related to ADAS applications in vehicles. So yes, those are the segments of the automotive market that are coming back stronger and think we'll continue to propel growth here for the next several years now.
Speaker 7
That's great, very helpful. And then Jeff, just a clarification on gross margin in the quarter. The 44%, great to see the leverage. Were there any one timers in that number? And if not, any implications for how we think about gross margins versus the target model going forward?
Speaker 1
Yeah. Hey, Craig. No. No one timers in in q three, forty 4% gross margin. As matter of fact, I would say we probably had some costs, if some one time costs that could have weighted down the gross margin a bit.
But, looking forward, and modeling gross margin, the business model and the gross margin line is still largely accurate. So I would follow the gross margin at the different revenue levels in model. The It's the operating expenses that need an update on the guidance and that's where I came in with the $52,000,000 on about $180,000,000 and then changing or fluctuating roughly about 10% of the change in sales.
Speaker 7
Got it. Okay. And then, very helpful to get some of the color regarding, visibility into calendar '21. So, Luis, as you look at calendar '21, can you just characterize where your visibility is relatively stronger, where you're more confident? And given how robust we're exiting the year versus normal seasonality, what are the implications for calendar 2Q and 3Q twenty one seasonality from our exit velocity in calendar twenty?
Speaker 3
Okay. So let's take that those pieces then, Craig. So strength that we see going into 2021 is, I think, very much aligned with what we've been talking about here for fourth quarter. The mobility five g deployment is gonna continue into 2021 and beyond. I think it was Brian, Brian Chin, who even made the comment about unit sales, cell phone unit sales, which are finally projected to grow next year in addition to the further deployment of five g technologies.
So I think you compound the two, we're looking we're very optimistic for the mobility market, particularly RFICs. RFIC test. We also have a lot of optimism about auto as we just described here and talked about the EV and ADAS and sensors. That's another big area of driving growth and potentially here turning on faster as we see than we had originally anticipated. And another one of those sort of big trends that will continue to go for the next several years.
Seasonality becomes a tougher question to answer. You know, simply because we have normal times and semiconductor industry is usually anything short of normal and we have two megatrends happening at the same time, which is this five gs technology deployment and then all these ADAS, EV deployment in automotive. It gets hard to talk about seasonality when you have two big segments for semiconductors ramping at the same time. I don't have a clear view yet on seasonality for next year, Craig, and I'm going to have to defer that by another quarter and then comment a little bit more for next year.
Speaker 7
That's totally understandable, Luis, and and appreciate the color that you provided. Just regarding the points you made around multiple megatrends at play, in your experience, when was the last time you've seen dynamics this favorable for COHU as you look back at history? What would be a comparable point for you?
Speaker 3
Okay. So if I look back in history, a more recent history, know we had a very strong automotive market a few years ago, 2017, 2018. Automotive was particularly strong with tighter emissions control in The US, Europe, and China. But that was, I think that was the singular major driver there. If I go back a few more years, we had, I want to say it was 2014 if I'm not mistaken.
It was the point in time in which application processors, power dissipation during tests, crossed the threshold that opened up the window for us to sell our active thermal control technology, the same that we're using for mobility sorry, for laptops and at the time computers, servers, and that technology found its way into application processors, smartphone market. So that was a big one too. Don't recall in this recent history having two big things happening at the same time. I guess I would have to look a little deeper here. But I don't recall two big things happening at the same time.
Yeah, I think that's my answer there, Craig.
Speaker 4
That's helpful, Thanks. And I'll hop back in the queue.
Speaker 0
Thank you. And our next question comes from Sydney Ho with Deutsche Bank. Your line is now open.
Speaker 8
Great. Thanks for taking my question and congrats on the strong quarter and guys. Maybe my first question is on the RF test module, the new product that you guys have announced. Maybe can you put some context around this particular product in terms of revenue opportunity that that brings? And what's the attach rate that you're seeing with your installed base?
And how quickly do you think that can be ramped up?
Speaker 3
Well, we don't hi, Sydney. This is Luis. We don't really break out revenue by by product line. But I think, let's see if I can answer some of your questions here. As I mentioned earlier, we are looking at a RF addressable market.
There's not everything can do today. An RF addressable market for Cohu that is growing to about 400,000,000 in the next two to three years. We do have a very strong share today in power amplifiers and this $400,000,000 extends beyond power amplifiers into things that we are penetrating now, as I mentioned earlier. I think over time the opportunity is there to grow this to close to $200,000,000 in RF revenue for Cohu if we execute successfully on all of our plans. That doesn't answer what we have here today, but I really don't want to get into particular product lines today.
Speaker 8
Okay, that's fair. Maybe my follow-up question is in the past you talked about test cell utilization at 80% is aligned when you start seeing system sales pick up. Obviously you saw a pretty good pick up here. With the overall cell utilization that I think you mentioned is 81%, can you talk about which end markets you expect to see system sales start accelerating? Obviously mobility is one, but I'll also try to think about whether there is some sort of seasonality you think about utilization.
Speaker 3
Yeah, yeah. And you're right, I agree with you. The business is particularly strong for an 81% utilization right now, and that's what gives us more optimism about 2021. The utilization is now particularly strong for applications in mobility. We see it particularly strong at OSATs.
I think there is more room for improvement of utilization for customers in automotive. Like I said, we are seeing a sharp increase in automotive orders. But with that said, the utilization there on average is still below 80%.
Speaker 4
And I
Speaker 3
think what's happening now is we're seeing technology being major pivot points driving the business in addition to utilization. You know, five gs deployment, ADAS, these are all new technologies that almost like notwithstanding utilization, you need new type of capital in order to test these devices. So you got a compounded effect here on top of the general utilization discussions that we have.
Speaker 8
Okay, maybe one last question for me. For your comment on first quarter revenue being flat to up 5%. What areas you are expecting to improve or maybe there are areas that are declined to get to that kind of net growth? I know you just answered a previous question about seasonality that may or may not exist, but try to figure out if you are still in do you think this is above seasonality, and are you still in kind of catch up mode in some of the areas?
Speaker 1
Yeah. I would Sydney, I would say you're correct. We're probably in catch up mode still and and in particular in automotive and industrial. We saw a pickup. We're seeing bit of an increase in utilization in automotive and industrial.
But we do have a ways to go to get back to sort of a normalized run rate in those segments. Totally agree with the fact that still still in catch up mode for auto and industrial.
Speaker 8
Okay. Thank you.
Speaker 0
Thank you. Steel Securities, your line is open.
Speaker 2
Yes. Thanks for taking my question. You made a comment earlier in your prepared remarks, I think, about five gs RF test times. Do you have an idea about how much more test intensive or handling intensive the parts are that you're talking about?
Speaker 4
Hi David, it's Luis. Yeah,
Speaker 3
I do have some specific examples that
Speaker 4
are calculated in terms of what it was on a prior generation device, what it is on this generation device. Generally speaking, some of these theft generally speaking, the theft funds are going up, and there are obvious desire from from customers to sort of bring him back
Speaker 3
down, and that's that's why you introduce new products, new capabilities, and and and test program techniques. But yeah, you know, without being specific on numbers, test time intensity I guess, to call it that way, for increasing test times is generally going up in RF.
Speaker 2
Can you take a stab at it going up by 20% or 50%? Or what, from your experience, what have you seen thus far?
Speaker 3
I have seen, depending on the vices obviously, but I've seen things from we've been able to bring it down to parity to there is 30%, 35% increases that I've seen on different test programs.
Speaker 2
Okay. And as far as the guidance for the December, it's up like roughly, call it, dollars 35,000,000. Which segments will be contributing to that nice incremental growth of $35,000,000 in the December?
Speaker 1
It's going to be mobility, five g RF test, as well as a pickup in automotive and industrial.
Speaker 2
Okay. And could you help us understand as far as the automotive segment, you know, how much of a I think it was dragging on a quarterly basis by 25,000,000 or $30,000,000 And I'm just kind of curious, in your December quarter guidance, how much of an improvement you've made. It's obviously not dragging by $30,000,000 a quarter anymore, but I'm kind of trying to figure out how close you are to getting back to normal run rates.
Speaker 1
Yeah, Dave. I'll tell you, we did that same calculation. And we think that now after Q3, we are about 25 to 30,000,000 away from a normalized run rate today. So you kinda hit it on the head there. That's the gap that we see currently, and we see improvement in that segment, so that, as Luis said, I think we can close that gap sometime in 2021.
Speaker 3
Yeah, that's the incremental opportunity from where we are now, Dave.
Speaker 2
Yes, from the September revenue level?
Speaker 4
Yes.
Speaker 9
Okay.
Speaker 2
So I guess the update is you think you can get this the entire 25,000,000 or $30,000,000 on a quarterly basis back by sometime in mid-twenty twenty one. And before you were saying you weren't sure when you could achieve getting back to that run rate?
Speaker 3
Yes. Just one quick correction here, Dave. We were looking at the September booking level when we talked about an incremental $25 $30,000,000 So obviously we didn't talk about bookings as a number. But that September booking translates into fourth quarter revenue.
Speaker 2
Okay. Final question from me is I think you mentioned thermal handlers. Traditionally, thought those have gone into the APU segment of the market, but it sounded like I thought I heard you talk about other parts or other markets for your thermal handlers. Could you just elaborate a little bit?
Speaker 3
Sure, yeah. First of all, when I'm referencing thermal handlers here, I'm talking about the ones with active thermal control technology, are for the APUs, GPUs, you described. But I'm also including in that terminology now the cold cryogenic test handlers, which are used in automotive. That's what I mean by thermal handlers. With that said, I have to admit, those two things are now converging in automotive.
With ADAS business picking up, we're seeing now the same active thermal control technology on cryogenic handlers for automotive applications. So it's pretty much the processor market, if you will, is meeting the automotive market.
Speaker 2
Okay, thank you.
Speaker 1
Sure, thanks.
Speaker 0
Thank you. And our next question comes from Christian Schwab with Craig Hallum. Your line is open.
Speaker 6
Yes, congratulations on a great quarter and great outlook. On the RF side, I'm just wondering as we move into other five gs applications where you may have opportunity outside power amplifiers. I'm just wondering if you could talk about if you have any meaningful opportunity, you know, for millimeter wave RF front ends, if you have, an opportunity and, as as we roll out more, you know, pico cells, small cells, and micro cells for the active RF devices that will go into, five g infrastructure, and should accelerate in 21 versus 20. Are are
Speaker 4
you well positioned in either one of those areas? Yes. In some. Others others, we still have to to deliver the product and and and get the share, get get the socket.
Speaker 3
But, yes, you know, this this RF product or suite of
Speaker 4
product instruments that we delivered here in third quarter.
Speaker 3
They're not just for RFICs going into smartphones.
Speaker 4
I mean, we have
Speaker 3
good capability on WiFi six and ultra wideband. Many of these are used outside of
Speaker 5
the phone
Speaker 3
on stations, fixed stations. So the answer is really mixed because it's yes, but there's more that we need to do still.
Speaker 4
Okay. Okay.
Speaker 1
Great. Most of all my other questions have been answered. Thank you.
Speaker 3
Thanks. Thanks, Christian.
Speaker 0
Thank you. And our next question comes from Tom Diffely with D. A. Davidson. Your line is open.
Speaker 10
Great. Thank you and good morning. So one more question on the five gs RF cell. How much of your business is driven by just the full cell order versus the best pieces, the tester, the handler, the contactor? I guess in other words, which of those segments inside of the RF seller over or under penetrated for you?
Speaker 3
Christian, without being on the numbers, the majority of our business in RF today is still selling the tester and the handler as separate pieces. In some cases they come together, but in many cases here they're not actually. We're selling testers and handlers completely separate. We have been promoting and in the third quarter we did get an RF customer to recognize the value of bringing a complete solution to production from us as it really simplifies the integration to the customer and essentially the time to get to production yield. That really matters particularly in the mobile space.
You have a device lifecycle that is probably measured in a couple of years and you have a significant ramp in front of you stiff competition. Getting to that production yield fast is incredibly important. So we got finally sort of an OSAT customer to recognize that value and take our complete sell. We're working on that same proposition, not only in RF but a few other segments with different customers. And I hope to be able to bring that to the table here in future quarters.
Like to complete again, the majority of the sale today are on separate individual pieces, tester here, handler, contact and not as a complete sale.
Speaker 4
Okay. And then I guess going along with that then, it sounds like there's an opportunity to, you know, get the contactors into these sections that already have a
Speaker 1
test Have a handler then? So it's a nice
Speaker 4
contact to GRU family for you going forward. Yes. We have
Speaker 3
opportunity. We think there is a
Speaker 4
chance here of adding something in the order of 30,000,000 to $40,000,000 of incremental revenue next year by selling more of the
Speaker 3
complete package and then with that selling something that we don't sell yet to a customer or another customer, basically.
Speaker 10
Okay, great. And Jeff, when you look at the guidance, 18% EBITDA, about 200 basis points above your model, it sounds like from your comments earlier that maybe it's not truly 200 basis points above what the model should be. Maybe it's only 100 basis points or so. That's the part of the model that might get adjusted upwards?
Speaker 1
Yes, that's right. That's right, Tom. And we're working on a refresh of the model now. It should have it out before the end of the year.
Speaker 10
Okay, great. Looking forward to it. Thanks for your time.
Speaker 1
Thank you.
Speaker 0
Thank you. Our next question comes from Charles Phi with Needham and Co. Your line is open.
Speaker 9
Thank you for taking my question. I apologize if my line was dropped. And if my question has already been answered, I really apologize. My first question is really going back to the gross margin. You you guys kinda guided the fourth quarter, gross margin pretty much in line with your long term model, a midterm model, and which is not so much, of a upside from the third quarter.
I understand there is no onetime item in the third quarter, but, if I think about the higher revenue base, you would get a better cost absorption may, does that, indicate that there is some product mix shift going on there for the fourth quarter, probably your relatively lower margin line of product like in the handlers, those will get a greater growth for the fourth quarter, probably driven by some of the things you mentioned, the surge demand of the auto from the auto customers.
Speaker 1
Yes, you're right. You're right, Charles. Think you hit it right on the head. In Q3, there was some well, there's different mix than what we have forecasted. Some of that mix related to recurring revenue that Luis indicated that we delivered.
We see bit of a drop quarter over quarter in the recurring revenue, but obviously a big pickup in the systems. And as you mentioned, with more of the handler systems, that will bring down the margin a bit on a blended basis. So you've hit it right on the head.
Speaker 9
Okay, great. Thanks. So maybe the next thing is really about the RF tester side of the business. I think one person, other person already asked, you said a 20% year over year growth for next couple of years, but obviously with a strong upside in the third quarter and possibly fourth quarter, the comp for 2021 will be a little bit difficult. Are you still expecting, sort of 20% growth into next year for the RF tester side?
Speaker 3
So I don't know that we actually mentioned a particular growth number for RF test into next year. Nevertheless, yes, we do expect continued growth in RF testing 2021 for two reasons. We're still out to see probably a doubling of deployment of five g technology in phones next year. In addition to forecast, market forecast now is for also smartphone unit growth next year. So I think the compounded effect of that is an expected growth in RF tester deployment.
I also mentioned that we are continuing to introduce new products and go after other elements of the RF front end IC. As we get those design wins, I mean that's going to increment our revenue into this market segment that I said growing to about 400,000,000, addressable market segment to about 400,000,000 over the next two to three years.
Speaker 9
Got it. Got it. Thanks. So the next question really about automotive side of the business. So we were a little bit surprised to see like the pull forward of automotive recovery you are seeing today because we were sort of expecting that unit growth of automotive semis should proceed the equipment recovery.
So why the earlier than expected recovery now? And are there some technology upgrade components there? For example, maybe you are targeting some of the new applications or there are some technology refresh cycle going on here. Maybe some of the bedroom thermal management handlers, subsystems are needed to cut in now instead of waiting for the really the unit getting recovered?
Speaker 3
Yeah, your question already has the answer, Charles. You're correct. To be honest with you, so were we a bit surprised. We were expecting the automotive recovery to happen mid to late Q4 or even early Q1 of next year. So it has come in sooner than we expected ourselves.
At the same time, you're also correct that much of this has to do with technology pivot to, as I mentioned to an earlier question, where the processor market is actually hitting the automotive market. And we have a demand here for thermal dissipative testing, thermal or managing temperature control and thermal dissipative devices. So we're finding applications now where we're selling active thermal control technology on our TriTemp cryogenic handlers. And that is a technology change in the automotive market. They don't have that installed base capacity today.
So there is definitely a technology component here happening in automotive, Because as I said earlier, I'm not sure if you were on the call or dropped out, utilization in automotive is still below 80%. And yet, we are seeing a ramp. But they are for new products, so it is a technology shift.
Speaker 9
Great. Great. Thanks for the color. Maybe my last question. One of your leading logic IDM customer, I know you don't really have a 10% customer for a couple of quarters.
That particular customer apparently is moving from the ATE based testing into some of the modular testing and with their in house tester, modular testers, how do you see that trend is coming along and how do you see the impact on your business?
Speaker 3
So talking about that customer, we continue to see the business there robust and pretty much staying at the same level quarter over quarter through the end of this year. I don't know exactly what's going to happen next year, but there is no weakening of business on that account in that market segment. At the same time we're seeing some traction and interest from other customers, particularly for microprocessors and GPUs and network processors for our active thermal control technology. So the computing segment may actually open up some new opportunities for us in 2021, but it's a little too early to talk and quantify them.
Speaker 0
Questions. I'd now like to turn the call back to your speakers for any further remarks.
Speaker 1
Thank you. And before we sign off, I'd like to let you know that Cohu will be hosting a virtual analyst and investor conference on December 2. This conference will provide you with an opportunity to gain more in-depth knowledge about Cohu's products, markets and our strategy for differentiation and growth. Hope you can join us. In addition to the Cohu Conference, we'll be participating in a number of virtual investor conferences during Q4 and would welcome meeting with you.
The conferences are the Stifel Midwest Growth Conference on November, the D. A. Davidson Investor Conference on December 15, and the twelfth Annual CEO Summit on December 16. So thank you for joining today's call, and we look forward to meeting with you at an upcoming conference.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may all disconnect. Everyone, have a good day.