Cohu, Inc. (COHU) Q4 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Cohu Incorporated Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host today. Mr. Jeff Jones, Chief Financial Officer. Please go ahead sir.

Good morning, and welcome to our conference call to discuss Cohu's fourth quarter results and first quarter 2020 outlook. I'm joined today by our President and CEO, Luis Müller. If you need a copy of our earnings release, you may access it from our Web site at cohu.com, or by contacting Cohu Investor Relations. There is also a slide presentation in conjunction with today's call that may be accessed on Cohu Web site 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, but which by its nature is subject to rapid and even abrupt changes. We encourage you to review the forward-looking statements section of the slide presentation and the earnings release, as well as Cohu's filings with the SEC, including the most recently filed form 10-K and form 10-Q. Our comments speak only as of today, February 13, 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, I'd like to turn the call over to Luis Müller, Cohu's President and CEO. Luis? Luis Müller: Hi, good morning. I'd like to take a moment to reflect on last year's performance, discuss fourth quarter market dynamics, and look at our business prospects for 2020. I will then pass it back to Jeff to comment on financial results and first quarter guidance. In 2019, Cohu delivered the fourth consecutive year of increase revenue with a four-year compounded annual growth rate of 21%. We accelerated the integration of Xcerra, amid a challenging market environment making substantial progress towards our financial target model in delivering $40 million of annual run rate cost synergies five quarters after that acquisition, and ahead of schedule. We also made critical investments in new testing instrumentation development, consolidation of handler, and contactor product portfolio that will enable revenue grow supporting our customer's roadmap and projected capacity expansion in 2020. Turning to fourth quarter, orders were split 51% systems and 49% recurring with overall sequential dollar increase across all market segments. Estimated tester utilization gain three points quarter-over-quarter to 80%. The mobility segment was 30% of total system orders and benefited from 5G-driven business in late Q4 for turret handlers, and testers for RF flat panel display drivers in part of management semiconductors, along with thermal handlers for mobile processor test of next-generation smartphones launching later this year. The smartphone market struggled in 2019, but the 5G adoption, which is still in its early stages, will be a key driver for tester sales in 2020. We're modeling 5G-driven tester shipments through third quarter 2020, as customers build capacity, and thereafter attention shifts to millimeter wave for 2021 new product introductions when 5G penetration is expected to accelerate. The computing segment remains strong at 22% of total system orders, driven by datacenter applications that utilize our high-end thermal and automation equipment. We also made inroads qualifying and supplying interface products for a high-end digital device test application. We expect this initial business to represent about $5 million in 2020, and potentially growing as we compete for additional sockets and increase our manufacturing capacity during the year. We saw a late December uptick in automotive that expanded to 13% of total system orders and a 50% dollar increase quarter-over-quarter. Our leading applications in automotive are for testing high-end ADAS processors and battery management systems for electric and hybrid/electric vehicles that are forecasted to drive a steady rise in electronic content as more low-carbon emission vehicles come to market. According to the National Automobile Dealers Association, sales of lightweight hybrid and electric vehicles in the U.S. represented less than 5% of total in 2019. Although many analysts project the seasonally-adjusted annual rate of growth to be flat in 2020, semiconductor sales and automotive are projected to grow at greater than 7% annually for the next five years. All other segments, consumer, industrial, IoT and optoelectronics, and PCB test grew quarter-over-quarter and represented the 35% balance of system orders. We expect the industrial segment to steadily improve in 2020. Overall, this should be a growth year with a return to historical seasonality. We have been tracking contactor sales of our handlers, and although we don't have a long history, and much of the data is represented of a 2019 market downturn, the average attachment rate is currently at 34%. We expect this to grow through 2020. Although given the higher volatility in system sales as compared to contactors, it is possible this number will fluctuate some assistance shipments ramp in future quarters. The consolidation of contactor manufacturing has taken a little longer than anticipated, and we're still ramping capability and capacity, addressing some inefficiencies that negatively weighted on gross margin in the fourth quarter. As we look to the coming year, we started 2020 with a higher backlog, strong customer traction and improved order momentum primarily driven by mobility and a late fourth quarter uptick in automotive. At the same time, the start of the New Year presents some challenges and we're closely monitoring the impact of the novel coronavirus to our supply chain and customers. Fortunately, all of our employees are safe, and our factories in Malaysia, the Philippines and Japan are fully operational. While China represented approximately 20% of Cohu sales in 2019, we're guiding first quarter to a slightly wider revenue range in net of approximately $10 million attributed to the impact of the coronavirus in our new ERP launch in Q1. Regarding the coronavirus, we have relatively few suppliers in China, but the disruption to their business is impacting our ability to ship some systems on schedule. We're also closely working with our customers to ensure continued support to their operations and order deliveries. Our midterm strategy remains focused on growing top line revenue and profitability, aligning investments in support of the 5G transition in mobility, growth in automotive with autonomous driving and electrification, expansion in the industrial segment, and increasing contact or attachment rates or system sales. I'm optimistic about Cohu's business prospects in 2020 as we focus on cross-selling opportunities with our broad product line of test and inspection equipment, and test contactors. Now, I'd like to turn it back to Jeff to review a fourth quarter results and provide first quarter guidance.

Thanks, Luis. Let me begin by reviewing our Q4 results with revenue near the high-end of guidance, resulting in fiscal year 2019 sales of $583 million and the fourth consecutive year of sales growth. Cohu delivered approximately $14 million of cash from operations during the fourth quarter, and our cash balance increased approximately $10 million sequentially to $256 million. Please also 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 Q4, the GAAP to non-GAAP adjustments include approximately $3.3 million of stock-based compensation expense, and a $1.2 million reduction of a tax related indemnification receivable in connection with the Ismeca acquisition in fiscal 2013. GAAP to non-GAAP adjustments primarily driven by the Xcerra acquisition include $9.6 million of purchased intangible amortization expense and $5.2 million of restructuring costs. The Q4 2019 net cash impact of Xcerra acquisition related restructuring was approximately $3.5 million primarily due to employee severance. Q4 revenue was $142 million one customer in the computing segment accounted for 11% of sales in the quarter, and 11% of sales for fiscal year 2019. No other customer accounted for 10% of more sales during the fourth quarter or the full fiscal year 2019. In Q4, Cohu's gross margin was 39.9%, which is lower than guidance due to capacity transition and manufacturing inefficiencies driving higher costs in our contactors business. Operating expenses came in approximately 700,000 higher than forecast due mainly to sales commissions and a year-end through up for various outside services. During the quarter, we realized approximately $9.4 million of acquisition cost synergies, which is in line with the forecast, and we exited 2019 at the annual cost synergy run rate target of $40 million. Fourth quarter non-GAAP operating income was approximately 4% of sales and adjusted EBITDA was 6% After interest expense and a foreign currency loss of 1.3 million, Q4 non-GAAP pre-tax was approximately 100,000 consistent with prior quarters Cohu generated a loss in the U.S. during Q4 and profit from operations outside the U.S. The tax provision is not reduced by U.S. losses due to our deferred tax asset valuation allowance. And as a result, the Q4 non-GAAP tax provision was approximately 700,000 resulting in a net EPS loss of $0.01. Now turning to cost synergies and our business model, as announced on prior earnings calls, we've taken actions that resulted in pulling forward approximately $20 million of cost synergies into 2019 ahead of the original target of three to five years. We exited fiscal year 2019, having achieved the $40 million annual run rate cost synergies, which are split approximately $18 million in cost of goods sold, and $22 million in operating expense. As previously noted, our cash balance increased approximately $10 million quarter-over-quarter to $156 million. Our long-term capital allocation strategy continues to be use excess cash to pay down the debt of $360 million and deliver the company subject to cash required to support the production or app driven by 5G-related demand and the recent uptick in automotive business. Cohu's Board of Directors approved a quarterly cash dividend of $0.06 per share payable on April 09, 2020 to shareholders of record on February 25, 2020. Now for first quarter 2020 guidance, we're expecting sales to be $140 million to $152 million. This revenue guidance has been reduced by approximately $10 million as a result of the coronavirus and the potential impact from an ERP system implementation occurring in Q1. Approximately half of the $10 million is related to system revenue that will likely be realized in the second quarter. And together with the improved order forecasting Q1 is expected to result in a 10% to 15% revenue increase in Q2 compared to the Q1 midpoint. The remaining $5 million removed from Q1 revenue guidance represents recurring revenue which by its nature will not be realized in the future. Q1 revenue distribution is forecasted to be 93% semiconductor test and inspection and 7% PCB test. On average, about 20% of our sales are to customers in China. Cohu's suppliers in China represent less than 5% of our material spending. And we have taken steps to maintain continuity of material supply by redirecting orders as necessary to suppliers and factories outside of China. To enable future expansion and optimization Cohu was aligning its ERP systems on Oracle Cloud. The first phase of the project incorporates approximately 50% of Cohu's businesses and will go live this month. The balance of the businesses will implement the system and phases over the next 12 months. Any potential revenue impact from the system implementation has been considered in our Q1 guidance. Gross margin is expected to be between 42% and 43% and inline with our financial model. Operating expenses are expected to be approximately $53 million or about $1 million higher than target financial model due to onetime ERP system implementation cost and some increased R&D expenses in support of 5G driven customer activities. For modeling purposes please note that due to the increasing demand and improving business conditions, Cohu has eliminated the temporary cost actions enabled over the last few quarters which were above and beyond the acquisition cost synergies but necessary due to weak business conditions. Beginning in Q1, our OpEx should be measured against the financial model depending on the revenue level. We expect Q1 adjusted EBITDA at the midpoint of guidance to be approximately 9%. Similar to previous quarters, the tax provision rate will be abnormally high not meaningful for Q1. For modeling purposes, we expect a normalized effective tax rate of approximately 22% on revenue of $170 million or more in profits in line with the business model. Diluted share count for Q1 is expected to be approximately 41.7 million shares. That concludes our prepared remarks. And we will open the call to questions.

[Operator Instructions] Your first question comes from the line of Brian Chin with Stifel.

Hi, good morning. Thanks for letting us on to ask a couple of questions. Maybe let me start with the sort of the descriptive revenue outlook that you provided in terms of the impacts you are contemplating from the coronavirus or seeing directly, I guess, and also sort of how that flows into the following quarter. So, in terms of the $10 million reduction in the midpoint relative to the overlay of the coronavirus, half of that it sounds like it is something it is timing-oriented, the $5 million portion. Is that exclusively tied to constraints you are seeing in your supply chain, which you know just kind of small, or is that more tied to delays from customers in terms of being able to receive your product? Luis Müller: Hi, Brian, this is Luis. That half is really based on the constraints in our supply chain.

Okay. Luis Müller: It remains really exclusively constraints on our supply chain.

Got it. Do you have other workarounds in terms of secondary suppliers you can bring up in case some of the shutdown periods persist in China?

Yes. As you can imagine we have been enacting those and continue to work with suppliers in China, which by and large has started coming back online again this week -- beginning of this week, but they have had in essence an extended lunar New Year shutdown sort of forced in certain regions in China as you can read on the news, and that has created a little bit of ripple effect here, and we see some of that ripple pushing about $5 million of revenue out of Q1 into Q2 at this point.

Got it. And in terms of the other -- the balance of that the other $5 million more towards recurring oriented sales which don't necessarily kind of -- not necessarily timing oriented, but was that subject to maybe a just the extended shutdown to maybe lower utilization rates? Luis Müller: That's precisely right, Brian, I mean but the contactors as an example, if you are not -- you have a shutdown and you are not testing, you are certainly not wearing those components as you are not wearing the systems, and so, spares recurring contactor sales for certain regions in China have not really materialized at the same rate for the last few weeks, and we expect that that is also going to be an effect, but not effect that we can recover. I think that is essentially gone.

Okay, got it. And in terms of gross margins and maybe the expense commentary as well, I see you see gross margins back up to the 42%-43% level in Q1 kind of back in line with your target model. Can you be a bit more descriptive on what the contactor inefficiencies were, and why you think this has resolved into Q2 and beyond?

Yes, sure, Brian. The main impact in the contactor business is transition of production out of the U.S. into our factory in the Philippines. So, at this point, we have accomplished closing and consolidating contactor facilities in Penang, in California, transitioning work to the East Coast to Japan, as well as the Philippines, and so, now this last piece of it is really transitioning more of the production that has been historically based in the U.S., over to the Philippines, and so we stumbled a bit in the quarter on doing that, we anticipate that'll take probably another couple of quarters really to come up to the target again. Luis Müller: And just to add on to that a little bit more, Brian, this is production that we have had outsourced in the U.S. not in-house operations that we wanted to in-source in the Philippines, as Jeff mentioned. So that's going to take a couple quarters, I think to get to the level we want.

Okay, I understood and I guess maybe one last thing in terms of just funding a little bit on the test contactor business, yes, it's interesting metric on the attach rate that you provide 34% level. I guess if you want to give a say a run rate, you expect attach rate, you expect to exit the year, but maybe you could kind of equate that to what sort of growth rate you still think even kind of given the start in the year, what growth rate you think is sort of suitable for that business this year, or kind of either from a midterm standpoint? Luis Müller: Yes, we've been targeting mid-teens, so kind of on about 15% growth rate for the contactor business.

Okay, thank you.

Your next question comes from the line of Sidney Ho with Deutsche Bank.

Great. Thank you for taking my questions. My first question is in your prepared remarks you talked about you expect typical seasonality coming back in 2020 and in the past that means first quarter and fourth quarter have been weaker, second quarter, third quarter being stronger. And I appreciate you talk about the layout to Q2 revenue expectation for this year. But assuming if we're using 2Q as the baseline, given the change in business mix, what is the magnitude of growth in 3Q, and maybe a weakness in 4Q, would you consider as normal seasonality? Luis Müller: Hi, Sidney, this is Luis. Yes, we don't have tremendous visibility right now into the third quarter and needless to say to the fourth quarter. Nevertheless, we do see as described on the prepared remarks is 5G being a major driver of growth in the mobile semiconductor space, right we're just starting to drive tests or handler contactor demand for mobile processors, RFICs, power management, display drivers. And we're seeing that ramp starting this quarter in Q1 but also having orders for shipments already in Q2 and given the forecast for Q1, understanding how that is going to drive some of the Q2 revenue. Obviously there's an error, a wider error band right now into that Q2 expectation than Q1 but still driving some of the demand into Q2. At the same time, if you look at other markets in the automotive, we do projected flat but semi content growing as I said about 7%, mainly driven by ADAS electrification and so a steady improvement in automotive throughout the year. We also expect industrial to stabilize and start improving later this year, computing to remain strong although for us, that is a lot of it is recurring business, it's a lot more stable. So how does that all model coming together is that we do expect a stronger second and third quarter, we talked about the projection here for second quarter being up relative to first quarter. Now, we don't have that degree of granularity today to the third quarter to say how it's going to compare to second quarter. But we do expect a typical pullback in the fourth quarter that that would be, I think the mobility guys will pull back and start qualifying solutions for 2021 model smartphones, so the ramp for 2021. I expect those orders then to start coming again in Q1 or 2021, sometimes you come in late Q4 of this year, but all in all, we do expect the typical seasonality coming back. What does that mean for Q4? I don't have a number to give you today, unfortunately, Sidney just a pull back from Q3 that is really all we sense at the moment.

Okay, that's fair. Maybe drilling into the mobility side a little bit, clearly the 5G ramp has been pulling in, then that benefits your recurring revenue business. But does that also pull into revenue from your new RF tester, one that you talk about last quarter? And maybe just to level set if you look at your total business and not just the system sales? What is your revenue exposure to the smartphone market today? And how do you expect that to change over time? Luis Müller: So, our exposure into mobility and our system exposure into mobility should be more careful today is 30% in the fourth quarter, so 30% of our system orders fourth quarter were into the mobility market and mobility market is by and large smartphones, right. Now, if you look historically go back in time here a little bit. We had a much stronger alignment with automotive and industrial markets that was 45%. So part of the strength in mobility is driven by the ramp in 5G and part of it has to do frankly with the weakness in automotive and industrial through 2019. So, if you look at 5G, maybe I'll digress a little bit more into that, 5G for us driving smartphones, it really cuts across many device segments, right? We tend to think so much about RF, but in reality, it also drives or it is driving right now, some of our thermal subsystems and also active thermal control handlers for mobile processor tests. It is driving testers for display driver technology, it's driving testers and handlers for power management, and then obviously the RF space for us on the tester side and in RF, particularly power amplifier where we are the leader in a market that is still relatively small, give or take $60 million in size, but we expect to see that market grow substantially into the tune of 40%, 50% here with the 5G volume ramp and not only this year, but in the coming years, as it goes from sub-six gig to a little bit higher for Wi-Fi 6 applications and eventually millimeter wave. So we expect that that business plus the whole ecosystem of RF frontend IC to be about a $200 million market opportunity for us in the coming years.

Great, maybe if I can squeeze in one more and I go away. When you think it may be a little longer-term here, but when you think about the revenue ramp related to 5G over the next few years, other tester companies has talked about the opportunity being fairly flat year-over-year as they ramp-down one opportunity is offset by ramp-up of another opportunity, say infrastructure for handsets or maybe sub-fixed versus millimeter wave. How do you think your profile is going to look like over the next few years? Luis Müller: I think it's actually going to be a growth actually a growth profile. To be clear, we don't, we don't have a strong presence in RF infrastructure. We don't really sell testers into RF infrastructure test. We don't participate in transceiver test. We don't participate in baseband test, except for the handler side. So maybe those segments will see more of a one to one swap. Nevertheless, we do participate in RF front-end IC test that's our predominant space, and we see a very large increase in front-end IC content in smartphones, as well as an increase in the tester ASPs with the higher complexities associated with much higher frequencies of tester. So that segment is definitely growing.

Great, thank you very much.

Your next question comes from the line of Tom Diffely with D.A. Davidson.

Yes. Good morning. There's one more question on the attach rate on the contactors. You said it was 34%, where was it a year-ago? Luis Müller: It was in the low 30s, Tom, I don't have the number in front of me, but it was started with a three. I don't know if it was 31% or something in that order of magnitude.

Okay, it's not too far off here mid-teens growth projection. Luis Müller: That's right.

Okay. And then, Jeff, just your comments on the ERP system, is there actually revenue that you've noticed that has been impacted by that, or is that just a conservative outlook just in case something slips through the cracks?

Right, Tom. Yes, it's more the latter. There's nothing that would tell us that we're in any danger of having anything slip, but just I guess more of a conservative approach to the guidance, yes.

All right, it makes sense. All right and then obviously you talked about the order of 5G being nice orders in the quarter, type of 5G starting to ramp now. What's the timing on the automotive business that started to tick-up late in the quarter?

So the late quarter orders we got in automotive are shipping in Q1 and actually some of it into the beginning of Q2, we're not, we don't expect to see a sharp increase in automotive business although it will be welcome if that happen. Right now we're simply modeling a steady improvement quarter-on-quarter here in automotive before sort of a seasonal pullback in Q4.

Okay. And then maybe just digging on that a little bit more, historically, the auto industrial markets were quite strong for you. Do you think you get back to that point when their combined approach 40% of your business or something changed in the makeup of your business that long-term that maybe just smaller percentage?

That's a good question. Yes, automotive and industrial, as I said before has even on a pro forma basis with Xcerra now looking back at 2018 it was 45% of system sales. Now what happened last year was there was a drop across all markets, but automotive in particular dropped significantly. We averaged I think 20%, 27% of system sales last year into automotive and industrial combined, which was really a 60% dollar reduction year-over-year from 2018 to 2019, on system orders. So this is a dramatic drop. But in the midst of that, there was no market share loss. I mean, it's a defined number of customers, and we're still doing the same business with them just at much lower rate. So, to answer your question, we think automotive will get to some degree of normality by end of this year and then be back to full recovery in 2021. Does that mean it will be back to 45% of system sales? Frankly, I think not. I think it's going to be less than 45% of system sales, because the growth in mobility over the next few years is likely to keep mobility higher than it has historically been and therefore, since it all has to add up to 100%. Therefore, I expect automotive to even though you may return to normality and then full swing in 2021 just could be less than 45% of total system.

All right, that makes sense. Maybe look at one other way. Utilization rates, you said they are around 80% is quite a bit lower or is it different for industrial auto right now?

No, I was looking at that same data last night. And in fact, auto is a bit sort of bipolar at this point, we have some really strong customers or some customers are really strong utilization at the moment. And some others that are still fairly weak, say on an average basis, it would, it's still the automotive is below 80 by percent, but some of the auto customers are actually well above 80%, and that's where we're seeing the bull coming from.

Okay. Great, and then finally, Jeff, when you look at the model going forward, sounds like starting in the second quarter, you'll be tracking the target model with the different metrics?

Yes, Tom, that's our expectation.

Okay, great. That's it from me. Thank you.

Your next question comes from the line of David Duley with Steelhead Securities.

Yes, thanks for taking my questions. Now, you mentioned I think the impact of 5G on your business, I think the main impact that you mentioned was that the RF segments going to go from $60 million to $70 million too, I guess over $200 million in a few years. Is that really the only impact in total from 5G or will it hit other segments, contactors for instance, I'm assuming that this is the test number. Luis Müller: Yes. Hi, Dave, this is Luis. Yes, that is the test number and that's the one that people tend to latch more on. And it's an interesting discussion because it is where the technology pivot point is. Nevertheless and I think as I made a quick comment before, the 5G transition in smartphones is coming along with obviously next generation mobile processors which is driving thermal subsystem orders and some of those thermal or active thermal control handlers that we sell for mobile processor test that is happening, we have some of those orders in the backlog, we have forecast for additional ones in first quarter. It also drives an increase in power management IC test, it does drive inspection. So to some degree, it's actually a substantial driver of our turret business, our turret handler business that is seeing the majority of the uptick associated with mobility at this time. On the contactor front, we have both high-end interfaces like the X-wave contactor for high frequency test. We have low-impedance products like something called SeaDragon and we have traditional [indiscernible] for power management IC application. So we're very focused on increasing the attachment rate in mobility as well as our contactor portfolio.

Okay. And from the overall industry, I think it's people are zeroing in and I think 7% or 8% kind of non-memory growth for 2020. Since you guys don't play in the memory market, is this a good benchmark for what your overall systems or overall revenue can do in 2020? I'm assuming if the market grows 7% or 8%, will you grow faster or at that same rate or maybe just comment upon, if that's the industry forecast, how your revenue might unfold during the year? Luis Müller: So Dave, the way we see these markets is we expect the handler market to grow about 10% to 15% this year. We're expecting the contactor market to grow at about 6% this year. The SOC, it's interesting to talk about the SOC test market, but to some degree, it isn't for us. It's about a $3 billion market, I think projections for 2020. But reality we said, we don't serve the entirety of that market. We claim we can serve about 50% of it, but in fact, where we're really competitive, it's still a smaller fraction of that $3 billion and that fraction is the one that is growing. It's as I answer a previous question, is the RF front-end IC that's seeing growth. It is the increasing penetration in flat panel display driver IC, which we are modeling substantial double-digit growth this year in flat panel display drivers IC. So our expectation is to outgrow sort of that single digit rate that you're quoting before.

Okay. And then one of the bigger stats in Taiwan has fairly significantly increased its CapEx on testing, it is doing more turnkey solutions. I'm not sure how big, how much exposure you have there, but do you view that as an increasing of the overall market for tests or they just taking business from some other sources, some other customer or doing it themselves? I'm just wondering if moving to elevated levels of CapEx and some of these larger stats is going to help you or hurt you or how it might impact you? Luis Müller: The increase in CapEx or stats, I think is very much aligned with what you see, when we talk about mobility. Let's be honest here, who are the major suppliers and where are they getting their semiconductors from, right. And those companies are essentially fabulous semiconductor companies. And I guess I should say a little bit more than that. It's not just fabulous; they are back-end less semiconductor companies, right. So the utilization rate across our customer base is much higher today at the OSATs than they are at the IDMs and that is obviously related to mobile market expansion, mobile market growth here in early 2020 driving test CapEx into the OSATs. The vast majority of our tester sales are into the OSATs today. The majority of our thermal handlers are obviously into the IDMs, that's automotive. And then, we have a lot of current sales into the OSATs and we have been working really hard to increase our pick-and-place sales into the OSATs, and also focusing more on the contact or attachment rate into the mobile applications. Past years, we focused much of our contact or penetration into automotive, which we had a strong foothold on handlers. And now post Xcerra acquisition in understanding where mobile coming from this year being the key driver, much of the context, our focus has shifted towards OSATs mobile customers in attachment to handlers that go into the OSATs and testers.

Final question from me, if you could just help us out and let us know, or give us a $1 number for contact or sales for the year, so we have a base to work forward on that segment. Luis Müller: For 2019, it was roughly about $100 million and close to $110 million.

Excellent, thank you.

Your next question comes from the line of Christian Schwab with Craig-Hallum Capital.

Great. Sorry, I got dropped. I just have a quick question on the tax rate. What is the assumed tax rate or dollar amount and your guidance for Q1? Luis Müller: Yes, it's tough to provide an effective tax rate that makes any sense in Q1 on lower levels of pre-tax. But if I were to guide you to a specific amount, I would probably say somewhere a little bit north of a $1 million, maybe a $1.3 million range.

Okay, perfect. And so that I think I caught the tail-end of another one of the analyst questions regarding, Q2 guidance and so for at the high-end of revenue guidance for Q1 and the high-end of our growth expectations for Q2, then we could see revenue at the $170 million range plus or minus, is I think you said, "yes," I just want to confirm that, you would expect to be operating in your stated slide business model at that point. So making potentially roughly $0.30 a share in Q2, is that correct? Luis Müller: That's right. We'd be at the model but Christian, just to make sure we're aligned on the numbers at the midpoint for Q1 is about 146. And then, what we talked about is seeing a person potential 10% to 15% increase in revenue in Q2.

Well, I understand that. I just wanted to make sure that, if you operate at the high-end of your expectations for Q1 and the high-end of the growth expectations you laid out for Q2, then if you did, you hit a $170 million in revenue, that's the company would be operating at that target model. I just wanted confirmation of that, and the answer is yes. I understand where the mid points are, but fabulous, that is the only questions that I had. Thank you. Luis Müller: Okay. Thank you, Christian.

The next question comes from the line of Craig Ellis with B. Riley FBR.

Yes, thanks for taking the questions and thanks for all the details. I just wanted to follow-up on a few earlier questions. Luis, it was very helpful to get your take on some of the growth drivers for this year handlers, contactors SOC test, flat panel display drivers. My question is this, as we look beyond calendar '20, which is very unique given things that are going on with the supply chain. And as we look to calendar '21, are the growth rates that you're talking about, growth rates that you would think would be sustainable in the next year? Or is there in any one of those areas potential for acceleration or something unusual happening this year, so that on a longer term basis, you would think that growth rates would be lower than what we would look at the for sure? Luis Müller: Yes, Craig. Hi, Craig, this is Luis. Yes, it's very difficult to predict 2021 at this stage of the game, but given the current levels in the automotive and industrial, current level of spending for automotive industrial semiconductor test and inspection, I certainly would expect that to come back to normality, and as I mentioned before, you know that business was down about 60% in dollars spent for systems, I'm not talking recurring, systems only from '18 to '19. So, it does have plenty of room to go to return to normality, and unless we're positively surprised, we're not modeling it to be back to normality this year. I mean we are expecting to be back sort of around Q4 when it's seasonally down, but that spending in 2021. So, I think that will be a big driver of growth into 2021. In addition to the fact that, you know, we talked about 5G and it's exciting, but reality is the 5G penetration in smartphones this year, it's still a small fraction of the total smartphone built in a year. We're talking here, I think on the order of teens, mid-teens penetration into the smartphone market this year for 5G devices. So, that also has plenty of room to accelerate in 2021, and it's all dependent on customer adoption, and the actual value delivered to your customers, and frankly, I suppose how it's going to be marketed. So, to successfully, you know, get the younger generation out there to drive towards new cellphones, smartphones. So, as that rolls out into 2021 to a greater penetration, as millimeter wave starts rolling out, I do firmly believe that 2021 will be accelerating from 2020, because of those reasons, and obviously, notwithstanding any other global catastrophe.

That makes sense. And then, following up on some further commentary in this one, it's a little bit more projects. So Jeff, in the near term, we've got higher mobility mix than history. Auto is slower maybe next year. That starts to collaborate versus historic trends, but are there any gross margin implications from some of the mixed dynamics. I understand that the business gets back into the target model in 2Q, but anything going on bigger picture as we see a shift versus historic margins and something that may start to revert back towards going to next year?

I think you touched on mobility and perhaps RF test. And while the testers do have a higher gross margin than our other equipment, we're also seeing a growth in the turret handlers as a result of mobility and that has somewhat of a lower gross margin. So I think between the two that sort of blends and continues to put us within this financial model rain. So I don't see any unique swings or dynamics that would really sort of change our view on gross margins at the different revenue levels.

Okay. And then, just on the ERP system. What are some of the near to intermediate term OpEx implications there? Is the conversion something that adds to OpEx that would later produce OpEx or how do we think about the gives and takes as you move to Oracle Cloud?

Yes, we've been working on this project now for over a year, and so, we've modeled out the expenses within the financial model. So let's take it into consideration. As I said, we've got about another year to go as we implement the system completely across the company. We initiated this, so that we could enable future expansion, scale a lot more efficiently, and so, we do expect that over time, we're going to see some cost optimization. At this point time, it's a little difficult to be specific about it. But certainly, we're going to assess that as we get closer to the completion of the implementation.

That's helpful, and guys congratulations on getting the business back into my script note. Thank you.

Thanks, Craig. Luis Müller: Thanks, Craig.

At this time, I'm showing no further question. I would now like to turn the conference back over to Mr. Jones.

Okay, thank you. I'd like to thank everybody for joining today's call and hope you have a nice day. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may now disconnect.