Cohu - Earnings Call - Q4 2020

Transcript

Speaker 0

Good morning, and welcome to our conference call to discuss Cohu's fourth quarter twenty twenty results and first quarter twenty twenty one 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, 02/11/2021, 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 Mueller, Cohu's President and CEO. Luis?

Speaker 1

Thanks, Jeff. Good early morning, everyone, and thanks for joining us. Today, I'll discuss some of the dynamics from fourth quarter, explain what's driving our growth, talk about our expectations for first half twenty twenty one and why we believe Cohu is uniquely positioned now to capitalize on a strong semiconductor market. Record fourth quarter revenue of $202,400,000 was up 34% sequentially and exceeded our updated guidance with business conditions continuing to improve throughout the quarter. Despite COVID-nineteen challenges, we executed on our fifth consecutive year of revenue growth, a five year CAGR of 18.7%.

Cohu ended last year on a high note with all time record orders and strong momentum that has carried into first quarter twenty twenty one. Our operations team and supply chain partners are executing on an unprecedented business ramp to meet customer needs. Fourth quarter orders were split 29% recurring and 71% systems, reflecting the sharp increase in tester and handler systems orders. Interface business orders increased 30% quarter over quarter. But given such strong system demand, the contactor attachment rate to handler sales was 19%.

Orders improved sequentially across all semiconductor markets, with automotive increasing nearly 200% quarter over quarter. Estimated test cell utilization increased five points quarter over quarter to 86% at the December and explains some of the dynamics driving strong business momentum. Mobility continues to be a significant segment for Cohu as we enable the introduction of next generation five gs smartphones deployed by all major U. S, Korean and Chinese manufacturers. Our Interface Group had a key design win at a leading foundry in Taiwan and OSAT in Korea for testing millimeter wave RF devices.

We're not only excited by demonstrating capabilities in high frequency, but also for the success of our new probe head solution against well established competitors in wafer test. The new Sea Racer interface platform will be used initially preproduction in product qualifications. We expect volume orders starting late this year or early next. Our ATE business experienced a steep ramp driven by the new Red Dragon instrumentation suite for testing RF front end ICs and Wi Fi six devices. Along with RF, we had good traction in display driver, power management and application processor test for smartphones, which marks an expansion of our addressable market.

Tester orders doubled year over year, demonstrating the success of our new product portfolio and complementary value that the twenty eighteen Xcerra acquisition brought to Cohu. Moving on to vision inspection. Our platform continued to capture new customers and applications in the fourth quarter. We estimate that we gained three points to four points share last year, positioning Cohu as the second largest supplier of automated optical inspection systems for the back end semiconductor market. We've entered 2021 with significant momentum in this segment and are optimistic about business prospects as we continue to expand our portfolio solutions with greater vision accuracy, speed and the deployment of artificial intelligence to improve inspection yield.

Our sales teams have been incredibly busy securing key design wins in China and Taiwan with our testers, handlers, inspection equipment and contactors, further expanding our market penetration in the mobility segment. Kudos to our sales team and the great efforts of engineering in developing new capabilities in our products. Turning to the automotive segment. Orders tripled quarter over quarter as semiconductor companies ramped to catch up to auto demand, marking a significant shift in business toward power electronics, battery management and processors. It comes as no surprise that this new wave of growth in automotive coincides with all major auto manufacturers announcing the introduction of electric vehicles and new driver assist technologies.

Estimate that about 20% of our automotive handler orders were for testing semiconductors for EVs. Driver Assist or ADAS is also particularly interesting as it marks the confluence of extreme temperature testing with active thermal control, making

Speaker 2

it

Speaker 1

a perfect storm of complex thermal management requirements. We like these challenging technical problems that ultimately impact yield, offering us an opportunity to address customer needs with our proprietary thermal technology. Approximately 5% of our automotive handler orders were for testing ADAS processors, and our forecast is increasing in 2021 as this technology starts to ramp in volume production. Orders in the industrial and consumer segments also improved quarter over quarter. Our gravity and pick and place handler businesses are once again ramping in support of testing high power electronics used in industrial and medical applications.

We have ongoing handler qualifications for testing gaming processors, where we can optimize yield by actively managing thermal dissipation, along with testers for display driver and power management ICs. In the computing segment, orders practically doubled quarter over quarter. And in IoT, IOV and optoelectronics, orders were up substantially, driven mainly by our success in testing new RF devices. Now looking ahead, we're encouraged by momentum across all Cohu's main market segments customer interest in our new products and integrated test cell solutions. We will be guiding first quarter revenue and profitability up and expect second quarter to be sequentially stronger.

We're motivated to accelerate time to yield and productivity for our customers, being diligent about new product investments and incredibly focused on improving margin and profitability. So why is Cohu doing so well and why is our outlook positive? We have made substantial improvements to our product portfolio over the past two years that have positioned the company for continued growth over the midterm. The five gs deployment is accelerating and analysts are now projecting greater than double year over year volume penetration of this technology in 2021. Test complexity is also increasing, leading to higher system ASPs and greater test intensity.

Additionally, smartphone units are projected to grow again this year, further compounding the opportunity for selling RF, display driver and power management IC testers, handlers and contactors. But the Cohu story is not limited to five gs. As mentioned earlier, we're capturing new customer opportunities in RF transceivers, Wi Fi six, general IoT and even application process for tests with some of these being new additions to our addressable market. Last year, we saw new U. S.

Export restrictions to Huawei. I believe everyone understands that smartphone demand is increasing, and there has redistribution of business that translates into incremental orders for Cohu products from customers where we have greater share and new opportunities, particularly in China. There are significant positive trends in the automotive segment, starting with many auto companies suggesting a complete transition to EV technology in the coming decade and significant government mandates to go carbon neutral in China, Europe and The U. S. Another exciting trend is the rapid adoption of ADAS technologies in vehicles, which expands the use of processors, sensors, microcontrollers, displays and our FICs.

We believe our sales growth to the automotive segment will benefit about equally from IC content growth and a projected vehicle SAAR in the mid teens this year. With the successful integration of Xcerra now behind us, we held an analyst and investor conference early December describing a new target financial model in the path to 14% revenue CAGR to $940,000,000 and 23% operating income over the midterm. This comes from enabling testing of new high growth technologies in RF, battery management and ADAS processors and gaining traction in automated optical inspection. Now I'd like to turn it over to Jeff to provide details on fourth quarter results and share first quarter guidance.

Speaker 0

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, are located on the Investor page of our website. Now turning to the financial results. Q4 revenue was $202,400,000 and $4,900,000 higher than the midpoint of our updated guidance range provided on December 1.

Fiscal year twenty twenty revenue was $636,000,000 growing 9% over 2019 and with nearly 19% CAGR over the last five years. In Q4 and fiscal year twenty twenty, no customer accounted for 10% or more of sales. In the fourth quarter Cohu's gross margin was 45%. Operating expenses were $51,700,000 and lower than guidance as we continue to optimize our expense structure. COVID-nineteen driven temporary cost reductions were lifted at the November.

Fourth quarter non GAAP operating income was 19.4 percent of revenue and adjusted EBITDA was 20.9%. Return on invested capital was approximately 54% in the fourth quarter and approximately 26% for the full fiscal year 2020. The Q4 results exceeded our new target model objective to make investments with ROIC of 30% or higher. Cohu's non GAAP effective tax rate for Q4 was approximately 11% and lower than guidance primarily as a result of losses generated in Europe combined with U. S.

Income offset by NOLs. Non GAAP EPS for the fourth quarter was $0.73 and $1.19 for the full year 2020. Now turning to the business model, we recently introduced a new mid term target financial model that delivers higher profitability at all revenue points. Our new target model achieved $3.6 of annual EPS on revenue of $940,000,000 versus $3 of EPS in our previous model. This represents a 20% increase in profitability at target revenue.

On a quarterly basis, the new model reflects an increase in EPS of $0.10 growing to $0.15 at target revenue of $235,000,000 Gross margin expands with higher revenue and operating expenses are reduced from the previous model, but sufficient to support product development and other business investments. The combined effect is an improvement in operating leverage with about 45% of incremental revenue falling through to operating income. We've added free cash flow targets at each level of quarterly revenue. CapEx requirements are relatively modest and are modeled at $20,000,000 per year. Now moving to the balance sheet, our cash balance at the end of Q4 was approximately $170,000,000 and supports our operational needs of approximately 80,000,000 plus debt service and funding the inventory and receivables associated with the steep production ramp we're currently experiencing.

During Q4, Cohu reduced debt by approximately $20,000,000 and deleveraging continues to be a capital allocation priority. Cash flow from operations during Q4 was $22,300,000 and CapEx for the fourth quarter was $5,100,000 driven mainly by purchases of equipment to increase contactor manufacturing capacity. The first quarter revenue forecast improved significantly since the directional guidance we provided in early December. For Q1, we're guiding sales to be between $212,000,000 to $232,000,000 The low end of the revenue range considers some supply chain uncertainty caused by COVID-nineteen and potential risks associated with book and bill and customer acceptance, which is required for revenue. Gross margin in Q1 is expected to be between 45% to 46%.

In Q1 operating expenses are projected to be between 53,000,000 to 54,000,000 We expect Q1 adjusted EBITDA at the midpoint of guidance to be approximately 23%. The Q1 forecast non GAAP tax rate is approximately 22% at the midpoint of guidance. Most of Cohu's 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 carry forwards. The diluted share count for Q1 is expected to be approximately 43,700,000.0 shares. With increasing backlog and strong order forecast across various markets, we have improved visibility into the second quarter and are now projecting revenue to be up 5% to 10% from the midpoint of Q1 guidance. As order momentum and design wins continue in the first quarter, this is shaping up to be a strong year for Cohu and we remain optimistic about our mid term prospects enabling testing of new high growth technologies in RF, battery management and ADAS processors along with gains in automated optical inspection. That concludes our prepared remarks.

And now we'll open the call to questions.

Speaker 3

Our first question comes from the line of Brian Chin with Stifel.

Speaker 4

Hi, there. Good morning. Congratulations on the strong results and appreciate you letting us ask a few questions. Maybe the first question I had was a lot of interesting things to pick through here. But from a demand perspective, it's been maybe three years, Luis, since you've seen this much strength from the automotive market.

I think based on your commentary about EVs, ADAS, a lot of other things we can read about anecdotally, the TAM is going to potentially be higher this year or certainly in the following years. And clearly, sand now is also much higher than it was three years ago. So I guess, maybe on some sort of a quantitative measurement, can you give us a sense of sort of how much larger the auto market just this year, right, might be versus three years ago and or sort of your revenue level might be kind of period to period? And I'm not saying that that's sort of an endpoint, but just kind of if you could give us a sense of that comparison.

Speaker 1

Hi, Brian. Yes, thanks for asking and joining us. So if you look back three years ago, I think you're referencing then 2017 or even going into 2018, which was a good year for the automotive market. It's hard to point an exact number here, but what I'm what we're thinking is that the automotive market is going to be about maybe low teens to high teens, maybe up to 18% larger in the semiconductor side for us or for the capital equipment side this year relative to what it was at the last strong cycle.

Speaker 4

Okay. Yes, that's helpful. Appreciate that. A couple of other questions. The from a supply and maybe timing of your deliveries this year, there's obviously, again, lot of anecdotes about current shortages of wafers, extended semi lead times for markets like auto.

And while that's not readily apparent, I think, in your strong first half outlook, has this dynamic caused any noticeable changes or delays in your shipment schedule? And also, what's kind of the present status of your lead times for things like test handlers or test equipment? And how are you managing through any challenges?

Speaker 1

No, we haven't had any delays caused by supply chain or the like you said, the shortage of semiconductors that you read on the news that hasn't impacted our builds. To lead times, they have extended. I mean, are multiple ways of looking at lead time. We tend to look at it as a what is the lead time at a seventy fifth percentile of our product shipments. There is always custom and more difficult configurations that take longer.

But looking at the seventy fifth percentile, our handler lead times right now are about 14.5. Testers, approximately twelve weeks. Contactors are running at about six weeks. So that's about what we're hovering right now on lead times.

Speaker 4

Okay. Yes. It sounds like within reasonable ranges, maybe high, but other equipment out there sounds like it's had more stretched lead times, a lot more than you. Maybe one last question here for Jeff. In terms of the first quarter outlook and the revenue range, the gross margin seemed a little bit lower than what the target model suggests.

The OpEx as a percent of sales also as an offset seems lower as well. And so it kind of neutralizes probably within the range of your EPS that you've talked about at those revenue ranges. But if you could kind of just talk to the dynamics that are causing gross margins to be within that range and OpEx to be within that range?

Speaker 0

Yes, Brian, that's an accurate observation. Gross margin is down a bit in Q1, but offset by the reduction in operating expenses to maintain that target profitability. So what we're seeing really is the product mix part of the story is product mix. Seeing a steep increase in systems orders and revenue, and this is mainly handlers testers, but handlers that have a gross margin lower than corporate target. Just to give you a sort of a point of reference here, total systems revenue expected to be about 67% in Q1.

The normal ratio or percentage for system revenue is about 55%. So it's up significantly. Now recurring, as we know, just by its nature, it's not going to spike up or down quarter over quarter. And so recurring revenue will increase, but it will increase over time as a result of shipments. The second piece of the story is we continue to work on the contactor manufacturing transition and really continue to work towards bringing costs down and bringing that gross margin in line with expectations.

So I'd say first order of magnitude is mix and then secondarily, we continue to work on the contactor margin.

Speaker 4

Okay, great. I appreciate all the color.

Speaker 3

Our next question comes from Charles Shee with Needham and Company.

Speaker 5

Hey, thank you for taking my question. If I hear you correctly, I think you provided early look for second quarter about 5% to 10% up from first quarter. Maybe this is a little bit far further ahead. I wonder what's your outlook for the second half this year? If I look at your historical performance, it looks like the third quarter tend to be slightly or seasonally sequentially down by maybe mid single digit to up to low teens.

Is that kind of seasonality we should be expecting this year? Or since this year is such a strong recovery year that may change? Any color would be great.

Speaker 1

Charles, this is Luis. Yes, thanks for the question. We don't have that much visibility yet into the second half of the year. As you can see from our lead times, what we're booking now in the first quarter is shipping late second quarter. So we'll gain more visibility here in the next three months.

We know there is an incredible strong dynamic in the automotive market still and the same in mobility. And obviously, there should be a second sort of ramp towards midyear in mobility for cell phone launches in the second half of the year, but we don't know exactly how that's going to shape for Q3 or Q4 at this time.

Speaker 5

Got it. Maybe my next question, really a little bit follow-up to Brian's question on gross margin, some of the dynamics. Jeff, you provided first order, second order dynamics factors there related to any of the supply chain constraints. You did say you don't really see any of the ship shortages impacting your shipment, but I wonder given such a surging demand, whether you are incurring a little bit higher cost expedition fees or something like that? And whether those more of the one time nature items would go away gradually later into this year?

Speaker 0

Hey, Charles. No, that's not the case, not to this point and not forecasted for Q1 either. Operations and supply chain done a very good job so far working with suppliers, prepping suppliers, scheduling materials. And we've been able to do that without expedite fees and things of that nature. So from an operational standpoint, costs are pretty much in line with expectations.

It really comes back to mix and then continuing to improve contactor margin.

Speaker 5

Got it, got it. Maybe my next question is a little bit about your capital allocation. We know you want to prioritize debt repayment and potentially looking for M and A opportunities. But with your business in 2021, going back to the 2017 or 2018 level on a pro form a basis, are you what's your thought about resuming or returning to the dividend program? Any thoughts on that?

Speaker 0

That will be ultimately up to the Board of Directors for their assessment and decision on that. We as a management team are clearly focused on generating as much free cash flow as possible and reducing our leverage.

Speaker 5

Got it. Thank you. Thank you for answering my questions. I'll go back to the queue. Thanks.

Speaker 1

Thanks, Charles.

Speaker 3

Our next question comes from Chris Sankar with Cowen and Company.

Speaker 2

Yes. Hi, thanks for taking my question and congrats on the good results. I had a few of them. Jeff or Louis, a lot of your strength in autos is coming from the handler side. Do you think you have any shot in making inroads in testers?

Or do you think there are much bigger players out there that will be difficult?

Speaker 1

Krish. This is Luis. I mean, that's a very good question. Yes, we would like to make inroads with the tester. There are limitations in our current capability to do that today.

We do have some tester business on the auto side. It's nonexistent, by the way. But you're correct, it's much stronger on the handler business. It's also strong on the contactor business that has greater exposure to the auto side, sort of that tri temp thermally challenging test conditions. But yes, I hope that in the future, we'll be able to have more dialogue about tester business into the auto, but not so much at this time, Frisch.

Speaker 2

Got it. Got it. No worries. And then, Lewis, I think I asked this question in the past. Is there a way to figure out of your mobility orders or sales, how much is coming from five gs?

Speaker 1

Yes, sure. From the tester side, we looked at it this way. There's about half of our tester business may be related to RFICs. And in 2020, we estimated about half of that was five gs related. On the handler side, it's a little bit more difficult because we know we're testing our FICs or handling our FICs or small PMICs going into mobility applications, but we don't have that final use knowledge, whether it is necessarily a five gs or four gs in all cases.

We do have a measurable handler business in mobility as well, but I can't quite parse that out for five gs. So it's easier for me to say on the tester side.

Speaker 2

Fair enough. That's good color. And then just the last question. If I remember if I heard it right, I think Jeff mentioned recurring revenue should grow in Q1. I'm just kind of curious, I thought that when you have the seasonality in Q1 utilization rates might dip down in Q1 or you're not seeing that happen or is it because demand is strong?

Why would recurring revenues be up in Q1?

Speaker 0

No, actually, Krish, let me clarify. Recurring revenue is pretty much flat quarter over quarter. It's the systems revenue that is up significantly quarter over quarter. And I think that corresponds to your second point about the utilization driving more system revenue.

Speaker 2

Got it. Got it. All right. Thank you very much. Thanks a lot.

Speaker 3

Our next question comes from David Dooley with Steelhead Securities.

Speaker 6

Yes. Congratulations on nice results. A couple of questions here. Could you help us understand, I guess, for calendar twenty twenty, what the size of the handler market was and perhaps a guess at what your market share might be?

Speaker 1

Dave. This is Luis. That's a tough one, Dave. There was a lot of there are really a lot of variables this last year with COVID-nineteen. So we don't have a good handle on the market size for last year.

The external market data that we typically acquire comes out in early Q2. So that will give us more of a look back. I think we have more of an estimate and view for 2021 than we actually do for the just completed 2020. But to point to your other question, our handler market share has typically hovered at about 50%, maybe 50% low 50%.

Speaker 6

And would you guess that it was up this calendar 2020 or flat or down? Just directionally, what would be your best guess?

Speaker 1

So my best guess right now, Dave, is it did go up in the fourth quarter. I mean, I monitor we all monitor what's going on a bit with our competitors, particularly now during this ramp. And I think our operations team is doing a truly amazing job at supporting customer requirements and keeping lead times in check even though they have extended, but still keeping them in check. And we know for a fact we're getting business that could otherwise have been our competitors' business. So I would venture to say we're picking up some points right now since the fourth quarter and now into the first quarter.

Speaker 6

Okay. Change topics a little bit. You have a new model. I think you mentioned $3.6 is comparable to $3 in the previous model at the same level of revenue. You went through some dynamics about the difference between $3 and $3.6 Could you just review what the increases were to move you from three to three sixty on the target model?

Speaker 0

Yes, David. Two dynamics. One is gross margin moved incrementally and that's driven by two things, obviously, the increase in revenue and better leverage of fixed costs for manufacturing and then mix in terms of higher growth from tester and contactor revenue. I would say the second item, which is the operating expenses, drove more of the new profitability or increased profitability. So it's reducing operating expenses, taking steps necessary to reduce that cost while we continue to invest in new product development and other business opportunities.

So it really was continued tight management of the operating expenses that drove higher profitability.

Speaker 6

Okay. And final question for me is we all read about these automotive chip shortages and a lot of automotive production lines have been shut down as they're waiting for chips. How exactly has that impacted your business? And what are your customers saying to you about this topic? Are just what just kind of curious as to what your customers are saying and what your perspective is on these chip shortages?

Speaker 1

Yes, Dave. The news on that is it's quite interesting. What we see from our customers is typically or let's say in the past, when they place volume orders, there is a chance to stagger them over multiple weeks, multiple months. Right now, the demand from a customer side is for multiunit orders to ship fairly quickly and not spread them out. So there is clearly a lot of pressure on the operations side to satisfy the ramp, satisfy customer need dates and not much wiggle room from our customers on pushing out shipments.

As I said before, the lead times are a little longer on our handlers, but they're not outrageous. And we're trying and working really hard to keep it that way because that's what our customers really need at the moment. There's pressure on and not much I believe not much inventory or wiggle room in the supply chain to do it any differently, but to ship as soon as possible.

Speaker 6

Okay. And then have you mentioned what you think your quarterly capacity is now? And can you flex upward to meet demand if the second half does happen to be stronger than the first half?

Speaker 1

No, I don't think we have talked specifically about capacity in the past. But we have had mechanisms in place to expand capacity with outside suppliers, contract manufacturers. And we're we have triggered that and we're executing that capacity expansion. So it's as you know, our tester business is largely outsourced to a very large contract manufacturer, Jabil, which has been doing an outstanding job at supporting our ramp. And then we have sort of a hybrid outsourced, in sourced model for handler manufacturing, where we outsource subassemblies and do final integration and test in house.

We have had mechanisms and actually have used it in the past as well of doing some final integration and test at suppliers, not in house. So we have some flexibility there, and we are executing that flexibility again this time during this ramp. So I think we're all set to support the business needs.

Speaker 4

Thank you very much. You're welcome.

Speaker 3

Our next question comes from Craig Ellis with B. Riley.

Speaker 7

Hey, guys. This is Carlin Lynch on for Craig. Most of my questions have been asked, I'll just kind of jump in here with a few kind of clarifications. Jeff, you mentioned that the second quarter should be up 5% to 10% off of obviously a strong first quarter guidance. Do you have any color based on what you're seeing in your backlog around mix?

I know that was kind of a ding to gross margins in the first quarter. But based on some of my math, the target model should have gross margins back up around 48% at that second quarter revenue level. Is the mix that you're seeing on that revenue going to impact gross margins like it did in first quarter? Or should we see kind of some of that return to normalcy?

Speaker 0

Hey, Carlin. Yes, as best as we can see at the moment, we're still a little bit out sized on the systems revenue. And handlers just have had incredibly steep ramp in demand. So I think we're going to be dealing with this mix situation in Q2 as well. But then on the operating expense side, we'll also maintain lower costs so that we are hitting or very close to the target profitability at that level of revenue.

Speaker 7

Got it. And then, you kind of just touched on my second question, but I wanted to clarify. With operating expenses kind of staying low where they are right now through 2Q, would we expect that to kind of have to step up in the back half of the year just to continue to support growth initiatives? Or is this something that if the adverse mix holds through year end, we can kind of hold operating expenses at these levels?

Speaker 0

Yes. That's the current expectation is to try to hold the operating expenses at this level for as long as we can or at least until we can improve or expand that gross margin. So that's the approach, Carlin, is to be able to offset the profitability loss in the gross margin with a reduction in the operating expenses.

Speaker 7

Got it. Okay. That's it for me. Thanks, guys.

Speaker 0

Thank you.

Speaker 3

Our next question comes from Sidney Ho with Deutsche Bank.

Speaker 8

Great. Thanks and congrats on the very strong results and guide. My first question is on the order strength that you're seeing across the board in the past few months. Do you think there are still areas that are still below the pre COVID levels and that you might see some sort of pent up demand in the next one to two quarters?

Speaker 1

Sidney. This is Luis. Yes, that's a good question. We have I think we still have opportunity for growth in the automotive market, to be honest with you. I mean, not all segments or all businesses in the automotive side are up to pre COVID status yet, although I have to say others are stronger.

I think there are also opportunities still in display driver IC that haven't really resumed yet to potential levels. I mean, the business our business has been getting into the display driver IC. So it's hard to say what we were pre COVID versus now. But I think from an opportunity size perspective, I think there is room for improvement there to pre COVID levels. Computing has reasonably strong and well through the COVID crisis.

But I think there are opportunities in graphics, graphic processor gaming that could get stronger from where we stand today. And certainly, in our overall contactor business, I think there's some dynamics there that could also be stronger than we are today and very much we're focused on driving and making that happen at the moment.

Speaker 8

Okay. That's helpful. Maybe just a follow-up to that. I think you talked about earlier that the shortages that other companies have seen didn't really haven't really impacted you guys. But with order lead time stretching out a little bit, how do you feel comfortable that these orders are not panic orders and maybe not real, but not double ordering from same customers that are driving seeing some of the shortages?

And what are the first procedures that you have in place to make sure that that check?

Speaker 1

Yes, that's a very good question. We have had the same observation, have had deep conversations with customers about the demand profile and knowing that this is not double booking or overbooking. From a mechanism and we're comfortable with the answers we're getting. From a mechanism perspective, we have extended our terms and conditions and quotes. So cancellations all of the cancellation terms have been stretched out so that we have greater coverage in any eventuality.

So we're pretty comfortable, like I said, from what we got directly from customers. We have been talking to customer senior management about this and comfortable with the modifications we've made to our quoted terms, and customers continue to come in and place orders.

Speaker 8

Okay. Maybe one last question for me. Maybe switching to the product side. In your prepared remarks, you mentioned the SeaRacer test contactors for millimeter wave. You talk about expectations of orders coming later this year, early next year.

Can you maybe describe the capability of this product versus your prior generation? And how do you expect the adoption of this product over the next one to two years in terms of the revenue growth opportunity and maybe the curve, the shape of the curve of the adoption? Thanks.

Speaker 1

Yes. So SeaRacer is more of a continuation. It's a new technology, but it's a continuation of what we used to call the XWave business. The XWave business was a solution originally designed by the Xcerra Group prior to us acquiring Xcerra for high frequency test and could be radar applications, of the beginnings of millimeter wave, if you will, our FIC test. XWave has been very well deployed and used in these applications and particularly in lab scenarios.

But as you move into volume production, there are some limitations on the SeaRacer, particularly for millimeter wave. So we expanded that with a new technology, which we call the SeaRacer platform here. It's really tailored for up to 50 gigahertz, potentially more as we continue to evolve the product, but up to 50 gigahertz signal frequencies. It has the compliance requirements, the multi site capability requirements. So it's been well accepted.

And we have as I mentioned in the prepared remarks, we have had a design win at a foundry in Taiwan, which is not typical. We don't typically do business with foundries, but this is actually not really a contactor, it's a probe head. And then an OSAT in Korea, which is a final test application. Now the shape of the ramp to that question, it will depend again on the size of millimeter wave business overall into 2022. So it's a little hard to pinpoint the size, but I'll give you a very wide range.

The way we look at it, it could be somewhere between 5,000,000 and $25,000,000 of business in 2022. But ultimately, I think it depends on our customers' our customers' and customers' success with deploying millimeter wave.

Speaker 8

Thank you.

Speaker 4

You're welcome.

Speaker 3

Our next question comes from Christian Schwab with Craig Hallum.

Speaker 9

Hey, congratulations on very strong results and outlook. I have two questions. Number one, given the record backlog and slightly extended lead times that you have, what is your thoughts on the second half of the calendar year versus the first half?

Speaker 1

Christian, it's Luis. As I mentioned earlier, it's really hard to have crystal clear visibility in the second half. We already moved from giving one quarter guidance to give one quarter guidance in second two quarters out directional indication. And I think that's as best as we have visibility and can comment. We know this is going to be a strong year just the way we are right now.

We know the underlying currents around automotive and particularly EV and ADAS are pretty strong. We also know the underlying current around five gs deployment, where people expect more than double the units of smartphones with five gs this year and the increase in test intensity, hopefully also starting to see more of a ramp in millimeter wave towards the latter part of the year. So we know those underlying currents are strong. To be able to pinpoint the exact shape of the second half over the first half, it's not something we're comfortable guessing right now. There's not enough data point to put a projection yet in place.

Sorry about that, but not yet, Christian.

Speaker 9

No, that's extremely fair answer. My last question for you guys is, in my viewpoint, there seems to be a very strategic shift in value in the semiconductor industry coming to the back end from the front end, driven by trends like you've talked about five gs, electric vehicles. But a lot of all that stuff, as you know, requires advanced packaging, increases complexity, which increases test times, etcetera. So I'm curious, as we get kind of post Moore's Law, if you will, a lot of the type of chips that in applications that you're dealing with, we're just stacking more and more chips, right? Those are chips that we're doing node shrinks in typically.

And so it just seems like it doesn't matter whether it's yourselves or whether it's Kulik or whether it's FormFactor, everybody seems to be benefiting from this trend in my viewpoint. Would you agree with that?

Speaker 1

Yes. Yes, I would agree with that. I mean there is some new technologies coming out in electrification, as you know. Silicon carbide is has a lot of promise and the way you handle and test those are a little bit different than what it was in traditional packages or even MOSFETs. The same could be said about processes for ADAS, power dissipation during test, the requirement for being hermetically sealed for automotive applications, sensor fusion in module.

So yes, there's a variety of package or packaging technology trends that are impacting the way you handle and test the silicon or some yes, the silicon, the device itself. I agree with you.

Speaker 9

Great. I don't have any other questions. Thanks, guys.

Speaker 1

Thank you. Thanks Christian.

Speaker 3

Our next question comes from Tom Diffely with D. A. Davidson.

Speaker 10

Yes, good morning. Thanks for the question. Maybe first, Luis, just a general market question for you. When you look at the shortages of chips in the marketplace today, do you think that's mainly a wafer production issue? Or is it a packaging issue?

And if it is the former, does that create a natural governor on your business that could extend this cycle?

Speaker 1

Good question, Tom. I have a view on it. I don't have a 2020 vision on this. But to my understanding, it is or particularly to the larger nodes, the leading edge nodes, it is a shortage of wafers on the front end. So it's a wafer shortage.

That's my view. And I have the same impression you do, which is it creates a natural dampening effect that spreads out the business over multiple quarters. So that's how I view it. Again, it's not a twenty twenty vision into the details of the supply chain up to the foundry, but that's my understanding as well.

Speaker 10

Okay. So when you look at those markets where you see that happening, how long do you think it takes to add capacity in those more mature markets on the wafer side?

Speaker 1

That I don't have a good answer for you, Tom. I don't know. I truly don't know.

Speaker 10

That was it today. Thank you.

Speaker 1

All right. Thanks.

Speaker 6

We have

Speaker 3

a follow-up question from the line of Brian Chin with Stifel.

Speaker 4

Hi, there again. Just a quick follow-up for me. Luis, you did a nice job breaking down your served addressable markets across product lines in last year's investor meeting. And so I was just curious on the aggregate level, can you provide a rough range of what you expect maybe the growth in your served addressable markets could be this year?

Speaker 1

Yes. For this year, that's a good question, Brian. I mean I have what we model for the next three years on average. We looked at, for example, ATE, the tester side, mobility growing on average 18% over the next three years. And I think that's still kind of valid for this year coming up from a strong second half of last year.

Then so just I'm just going to pick on some of the primary ones. If I look at automotive, and that's essentially handler automotive, we have modeled that to be about 21% over the next three years. But truth be said, we expect it to be stronger on the first year and the onset now in 2021 coming off of a weak 2020. I don't have at my fingertips here a projection for Handler Automotive in 2021, but I wouldn't be surprised if we're talking kind of 30%, 35%. Mobility handler mobility, I think it's still going to be sort of that 7% rate.

It was a decent second half of last year, and I think it's sort of at 7%. And then for the contactor business, in aggregate, we're modeling a 20% growth, and I think that's also a fair number to use for 2021.

Speaker 4

Yes, that's very helpful. Thanks again.

Speaker 1

Welcome.

Speaker 3

Not showing any further questions in queue at this time. I'd like to turn the call back to Jeff Jones for closing remarks.

Speaker 0

Thank you. I'd just like to say thank you to everybody for joining today's call, and we'll talk to you very soon. Have a good day.

Speaker 3

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.