Good day and thank you for standing by. Welcome to Cohu Incorporated Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in listen only mode. After the presentation, there will be a question and answer Please be advised that today's conference may be recorded. I'd now like to hand the call over to your host today, Jeff Jones, Chief Financial Officer, please go ahead.
Good morning, and welcome to our conference call to discuss Cohu's 2nd quarter 2021 results and Q3 2021 outlook. I'm joined today by our President and CEO, Luis Muller. If you need a copy of our earnings release, you may access it from our website 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'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 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, July 29, 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?
Good morning, everyone, and thanks for joining us. Today, I'll review the highlights of our 2nd quarter results, discuss the industry's supply chain situation and describe Cohu's introduction of a new data analytics product that improves customers' test cell productivity. 2nd quarter revenue was a record $244,800,000 and grew 70% year over year, Exceeding the midpoint of our guidance to the stronger than anticipated contactor and overall recurring revenues. With solid results year to date and strong forecast, Cohu is also on track for record full year revenue and profitability in 2021. We are benefiting from the ongoing 5 gs technology ramp in mobility, selling RF testers and turret handlers, Also robust automotive demand for our tri temperature handlers and contactors, mainly for testing battery management systems and ADAS devices.
Our contactor revenue increased 33% year over year With significant design wins, we're testing new products from customers in the mobility and automotive segments. We made good progress improving contactor operational efficiencies and expanding manufacturing in sourcing in the Philippines, All leading to 2 70 basis points gross margin improvement quarter over quarter in the contactor business That is key to our mid term strategic plan. Overall gross margin in the 2nd quarter was in line with guidance, reflecting a sharp increase in handler sales and higher supply chain costs as discussed when we provided Q2 guidance. We have been working to pass on these cost increases to our customers and have substantially completed the process that will take effect over the next few quarters. Estimated test sale utilization is 87%, which is down 1 point sequentially from the end of March.
Utilization remained notably strong with automotive segment customers, Primarily U. S. And European Integrated Device Manufacturers and down slightly at OSATs in Asia. In the Q2, recurring revenue was again 35% of total And 50% non GAAP gross margin with the balance being systems revenue broken down by end market segments and in aggregate 39% non GAAP gross margin. As expected, automotive was strongest and captured 18% of total revenue, With mobility staying robust at 14% total revenue, the consumer segment gained more strength than anticipated due to a significant economic rebound in the U.
S. And China. In the Q2, we completed the sale of Cohu's PCB test business for approximately $125,000,000 gross cash proceeds. This business came with the Xcerra acquisition in 2018. It was a well run profitable business, but not a strategic fit for Cohu's growth plans and running below corporate gross margins.
We feel this transaction was good for all parties, providing the PCB test business better leverage as part of Swedish Micronic and allowing Cohu to monetize a non core business and accelerate debt repayment. In the second quarter, We continue to capture new customers with the Neon inspection system that is quickly becoming the go to solution to ensure defect free wafer level chip scale packages used predominantly by leading mobile manufacturers. We're extremely happy with the success of the Neon platform and the fast adoption of our new vision systems introduced mid last year. We also had a design win and repeat order in early Q3 for an RF test cell solution to a Korean customer. This is an opportunity we have been developing since late last year that finally qualified and got into mainstream production for a leading mobile device manufacturer.
This has been part of our plan to deploy complete test cells with handler, Contactor and tester for RF front end IC applications. We also had very strong contribution in the quarter Q2 was clearly a strong automotive quarter with significant contribution from our handler businesses. Cohu is the leader in tri temperature handling for the automotive industry, in great part because of temperature accuracy doing test that has become key to ensure quality of new generation battery management systems and ADAS Processors. Testing ADAS Processors is a perfect storm of thermal challenges, combining variable power dissipation with extreme temperature conditions and multi site test parallelism. This is a challenge we can solve today By combining our T Core Thermal Technology and the Matrix Handler, we will continue to evolve our solutions as ADAS gains volume penetration And mid market vehicles and the technology grows with greater computing power.
We're also happy to see our automotive tester sales growing in the quarter, essentially doubling their revenue contribution to our tester business quarter over quarter. Switching topics to the supply chain, The industry is experiencing a unique dynamic. Customers are driving hard to increase semiconductor production. And at the same time, these are some of the gating items to produce the very equipment required to increase capacity. Shortages are not limited to semiconductors.
We're having constraints from motors, sensors, Bearings and other suppliers that are key to manufacturer equipment, particularly handlers. Additionally, some Asian suppliers We're forced to reduce operations and even shut down for a few days as governments are trying to curb rising COVID-nineteen cases in certain countries. We will continue to provide guidance that takes a balanced view on risks and upside, but it has become increasingly difficult Moving on to my last topic. In line with the Cohu strategy, we're launching a new family of products. This time focused on software data analytics to address our customers' Industry 4.0 initiatives in factory automation objectives.
Cohu's data intelligence or DI core for short is a suite of software solutions that provide real time and productivity. The equipment data is analyzed and displayed in real time using a web based graphical user Interface accessible remotely on a laptop or other mobile device. Customers can monitor Critical equipment parameters such as yield, OEE, throughput and other equipment states to ensure optimal test cell performance. The I CORE software also interfaces with customers' manufacturing execution systems for remote equipment control, Recipe and Lot Management, a central database for management of equipment data enables publishing of reports, dashboards and Pareto charts to help managers make decisions. As the need for data analytics grows, we plan to continue To improve efficiency and productivity.
Today, we're starting to sell the foundation license. We expect next year to start offering subscription products that add on to this base capability. As we help our customers extend the value of their tools, we hope to tap into our large installed base of over 23,000 systems, offering subscription software services that deliver measurable productivity gains to our customers. Now looking ahead, We're encouraged by design wins with our NEON inspection platform, gains in RF and automotive test, Revenue and margin expansion in our contactor business. At the same time, we're working through a period of Supply chain disruption and cost increases that will unfortunately wait negatively on the Q3.
We're trying to be cautious, But set realistic targets for Q3 and we will avoid getting ourselves too far into 4th quarter details this time around. Let me turn it over to Jeff to share 2nd quarter results and provide specifics of our Q3 guidance. Jeff?
Thanks, Luis. Before I walk through the Q2 results and Q3 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 presentation, which are located on the Investor page of our website. On June 24, Cohu completed the sale of the PCB test Business for approximately $125,000,000 Net proceeds after deal costs and taxes enabled a debt repayment of $100,000,000 during the 1st week of Q3. I'll talk more about the debt repayment when I touch on the balance sheet and the Q3 guidance.
Moving forward, capital allocation will continue to be focused on debt reduction and opportunities for expansion of our served markets and technology portfolio. Now turning to the financial results. Cohu again delivered strong revenue and profitability in the quarter. Q2 revenue was $244,800,000 and approximately $3,000,000 higher than the midpoint of our guidance range. Q2 revenue was 9% higher sequentially and set a new record for Cohu.
In Q2, no customer accounted for 10% or more of In the Q2, Cohu's gross margin was 42.7% and in line with our guidance. Operating expenses were $52,800,000 and lower than guidance as we continue to optimize our expense structure. 2nd quarter non GAAP operating income was 21.2 percent of revenue and adjusted EBITDA was 22.6%. Return on invested capital in the 2nd quarter was approximately 60% and well above our target model objective to make With ROIC of 30% or higher. Cohu's non GAAP effective tax rate for Q2 was approximately 12% And lower than guidance, primarily due to lower withholding tax on future repatriation of foreign profits, combined with higher U.
S. Income offset by NOLs and tax credits. Non GAAP EPS for the Q2 was $0.89 bringing our 6 month year to date non GAAP EPS to $1.79 already well above our prior year results and illustrates the earnings leverage in the business model. Now turning to the business model. The midterm financial targets remain unchanged after the sale of the PCB test business.
The business model remains a 3 to 5 year target as we execute our strategy to gain market share and grow our tester and contactor businesses. In the near term, We remain focused on consistently achieving the gross margin targets and significantly reducing interest expense as we further repay our debt over the coming quarters. Moving to the balance sheet. The proceeds from the sale of the PCB test business drove the higher cash balance at the end of Q2. As I mentioned, we made a significant debt repayment in early Q3, which reduces the Q2 cash and debt balances by $100,000,000 each.
The Q2 balance sheet reflects a net cash position with increased resources for additional debt reduction and investment in opportunities to expand our served markets and technology portfolio in line with our growth strategy. Cohu generated cash flow from operations of $29,500,000 and free cash flow of $26,700,000 Now moving to our Q3 outlook. Just as a reminder, our Q3 guidance excludes the PCB test business, However, as Luis described, we are experiencing some material shortages and COVID related constraints at several of our suppliers. Because of these supply chain constraints, we are forecasting approximately $14,000,000 of originally scheduled Q3 revenue related to handler shipments will be delayed to Q4. As a result, we're guiding Q3 sales to be between $220,000,000 to $235,000,000 Consistent with prior quarters, the guidance range is a balance of potential risks And upside associated with supply chain uncertainty, book and bill revenue and customer acceptance, which is required for revenue.
As we've previously discussed, we are experiencing a sharp increase in handler sales combined with a moderation of tester sales from the record level achieved in Q1 of this year and higher supply chain costs. For Q3, we are forecasting gross margin to be approximately 42% mainly due to product mix. Similar to Q2, system revenue for Q3 is projected to be approximately 65% of total sales compared to approximately 55% of total sales in our target model. The increase in handler production has created volume benefits from greater leverage of fixed manufacturing and operating costs contributing to 20% plus non GAAP operating income projected for the 1st 9 months of fiscal year 2021. Additionally, we remain on track to grow tester and contactor businesses that are in line with our target financial model.
Operating expenses are projected to be between $51,000,000 to $52,000,000 Given the $100,000,000 debt repayment made in the 1st week of Q3, 3, we're projecting Q3 interest expense to be approximately $1,100,000 Additionally, the $100,000,000 repayment will generate A Q3 non cash charge for debt extinguishment of approximately $1,700,000 similar to the charge taken in Q1 of this year for a similar We expect Q3 adjusted EBITDA at the midpoint of guidance to be approximately 21%. The Q3 forecast non GAAP tax rate is approximately 18% at the midpoint of guidance. As previously stated, Most of Cohu's profits are generated offshore and subject to statutory rates in various foreign jurisdictions. Income taxes on profits generated in the U. S.
Are mitigated by net operating loss carry forwards and tax credits. The diluted share count for Q3 is expected to be approximately 49 As a result, we will not provide directional guidance on Q4 revenue, but continue to expect a return to normal seasonality in the business. In spite of the short term supply chain challenges we face, 2021 is tracking to be a record revenue and profit year for Cohu, And we remain optimistic about our growth prospects and opportunities to achieve our midterm financial targets. That concludes our prepared remarks. And now we'll open the call to questions.
Our first question comes from Brian Chin with Stifel.
Hi, there. Good morning. Thanks for taking a few questions from us. Maybe Jeff, sorry, can you first quantify again What the revenue impact was that shifted in the 4Q due to the supply chain challenges? I missed that.
That was $14,000,000 of handler shipments that moved from Q3 into Q4.
$14,000,000 Okay, got it. Yes, it's a pretty hefty number. Maybe in terms of this push and pull of global supply chain that is certainly having a rippling effect On the business, in terms of that gross margin impact, as you try to remediate some of these issues, Is there kind of a way to quantify what that is in 3Q? And maybe also outline some of the actions you're taking there, understanding that some of The end drivers are out of your control?
Yes. So we're seeing increases as we've Greg, on some specific items, not completely across the board, but some specific items. And it It varies by configuration, by handler. So it's Something we've taken action on, as you described and as Louise talked about. And so we're going to see some moderation of those increased costs in Q3 And that will continue to be offset in Q4 and then well into Q1 and beyond.
So It's hard to quantify at the moment in terms of the gross margin impact, but the pricing increase that will Go into effect in Q3, should benefit by about 25 basis points in the quarter and then continue to offset Increased costs in future quarters.
Okay. Maybe approaching this also from a mix standpoint moving in the second half, I think some of the one of the larger assembly test subcons that talk about a lot of strength in there Our front end packaging and assembly part of their business into 3Q. I was kind of curious what visibility do you have maybe terms of a bigger pickup in your RF driven ATE business, which I'd imagine could have some favorable mix shift implications for gross margins.
Hi, Brian. This is Luis. I think I understand who you're talking about. And in fact, they were one of our large OSATs in Q2, and yes, we are benefiting from the same growth in the RF, but also Not only RF, but also PMIC, our management ICs. It's hard to tell exactly timing, but From some other customers' initial forecast, it looks like there could be another pickup towards the end of the year or Q1 of next year As it relates to more 5 gs deployment into 2022.
Okay.
Got it. I guess maybe one other sort of way of thinking about this. 1 of the larger ATE players also talked about really extended lead times for their platforms You used to test automotive and industrial devices. So even though you're sort of spacing out maybe the scheduling on some handlers, is this kind of almost Maybe more of a matching up of sort of the timing against some of the other key components of a test cell. Is there any kind of other way to think about
Not sure that is at play here so much, Brian. I mean, there is a As we explained, we do have some supply chain constraints. Our handler lead times, for example, are at about 19 weeks Now which is give or take at the same place it was a quarter ago, we thought we would have been reducing it by now, but the supply chain constraints have Continue to hold lead times where they are. I don't really think that there is much of gaming of putting Elements of the test sell at the same time. I think at this time, we view everybody is operating at about the same level of lead times.
Okay. I'll hop back in the queue. Thanks.
Thank you.
Our next question comes from Tom Diffely with D. A. Davidson. Yes, good morning.
Maybe jumping on the utilization rates or the test utilization rates, You talked about 87%, still a very healthy level. Wondering if you could parse out kind of the relative health of testers versus the handlers. And you talked about the handler lead times in 19 weeks. What is your test or lead time right now?
Hi, Tom. This is Luis again. We don't Parcel because when we measure test cell utilization, it's literally what the word says. We're measuring the test cell. So we're not It's hard to have a handler utilized without a tester and vice versa.
So that number really applies to the test cell as an aggregate. The second portion of your question, test or lead times right now are approximately 10 weeks.
Okay. All right. And I guess moving over to the contracted business, previously you talked about, I guess before you started to really ramp up, there were $75,000,000 to $100,000,000 opportunity to get attach rates up on your installed base. Where are you after the progress you talked about today, where are you along those lines?
So the contactor business continues to Grow year on year. In fact, I think as I spoke here in the prepared remarks, the contracted revenue is up 33% year on year on the Q2. We had some gains, but also market improvement, Particularly in the automotive, thinking in terms of attachment rate, which I always caution is a little dangerous because the denominator Is handler sales, which is really strong right now. Attachment rate is at approximately 22% as of second quarter.
Okay. All right, great. And finally, obviously, some nice traction on the inspection side. Who is your main competitor on that Business and how do you win? What is the selling point for your product?
So the inspection business, Which is about $170,000,000 to $190,000,000 This is I'm talking package inspection now. The main supplier is KLA. And we view that we gain Around 3 points to 4 points of share last year in the space generated about $40,000,000 of revenue in 2020. I think we're on track to generate about $70,000,000 of revenue this year. So obviously, it's a more robust market in 20 21, but I also think we're picking up some market share points.
And it is for us, it is in particular Around wafer level chip scale package, so mostly mobility applications, some consumer, but mostly mobility applications. We have Some really interesting vision technology. You may recall a year or so ago, we introduced Infrared imaging capability for production, so basically high speed infrared imaging for production, so you can detect subsurface defects. And that has become kind of the standard for the leading mobile manufacturers to ensure To ensure quality and their demand of their suppliers to do so as well. That's essentially the benefit we have At the moment on the vision inspection space.
Okay. Thank you.
Our next question comes from Toshiya Hari with Goldman Sachs.
Hi, good morning. Thanks for taking my questions. Jeff, I realize you're not going to give specific guidance for Q4, but I was hoping if you guys could Remind us what normal seasonality is for Q4 and if This might be a little bit too simplistic, but given the push in handlers, the $14,000,000 from Q3 to Q4, if we should think of Q4 as being typical seasonality plus that And then I've got a quick follow-up.
The past seasonality into Q4 has ranged anywhere from low single digit up to the 12%, 13%. I think I would sort of put a midpoint or expectation of about 10% seasonality, And that would be including the $14,000,000 that rolled into Q4. So I wouldn't make any special adjustments for that.
Got it. So it's typical seasonality including the push?
Yes.
Okay, got it. And then as my follow-up, just wanted to go back to the gross margin Question. So for Q3, you're guiding margins down a little bit on a sequential basis. Obviously, the PCB test part of the business is out. You seem to be making very good progress in improving margins in the contactor I don't know what you're guiding handler revenue on an absolute basis, but given the push, I guess That push standalone should be accretive to overall gross margins.
So again, I'm just trying to understand the puts and takes for gross margins in Q3 and how we should think about Q4
Yes. I mean, Q4 let me start with Q3. So Q3, we're still seeing a handler dominated revenue product mix in Q3. So even with the push out of the $14,000,000 handlers are still the dominant percentage Of the revenue. And so that's really what continues to drive the product mix.
You're correct, a little bit of benefit from not having a PCB test On gross margin, but that's roughly about a 25% 25 basis point improvement. So it's really continues to be handler driven. So Q4, still too much uncertainty to really reliably provide any guidance on what the margin looks like. But I would say the mix is probably Going to be predominantly similar to what we're seeing in Q3. So there's going to be some challenging Q4.
Got it. And sorry, if I could squeeze one more in, one for Luis. The data intelligence systems business, It seems really, really interesting. Can you speak to sort of the potential financial impact to the model when you think about Adoption of this by your customers over the next, call it, couple of years. And curious if this was embedded in your long term Financial model when you put it out.
Thank you.
Hi, Toshiya. Yes, it was all Part of the plan, we have been working on this for a little while. So the way to think about it is, look, we have an opportunity here that they will develop Really over time. And it could touch a number of our systems. And once you now Pair out PCB test out of the equation.
We have a little over 23,000 systems in the field. It starts now with us selling what we're calling the foundation licenses and these are perpetual licenses. And it's at the moment targeted at a couple of handlers that we have in the automotive space. These are we're talking about $5,000 $7,000 per license, right? And we have an adoption already at a Tier 1 Automotive IDM, so we're starting that deployment.
And the intention is that over the next 3 years that we're going to Starting with next year actually that we're going to start selling subscription licenses to additional features On top of the foundation, for example, predictive maintenance capability and device tracking, some other things that will come on top of it. Think of it in the order of $1,000 per seat of the foundation license of a subscription based Product. So we're not talking about a lot of dollars this year. And yes, it is for sure embedded in our model. Jeff, if you have anything to add on that?
Yes. I mean, maybe a little more color on the numbers here. So modeling about $1,000,000 in 2021, It's a bit of a slow roll as Luis was just describing. So too soon to predict next year. We We model significant growth, but of course, it's coming off a low base this year.
So really sort of expecting low single digit millions over the next 18 months, but as we gain customer traction.
And it is similar to our Last series of investments outside of the original core of Coheed Business, which is we have a large installed base, How can we deliver more value to our customers and at the same time monetize more out of the installed base of equipment that we have today?
Great. Thank you for the details.
Welcome.
Our next question comes from Craig Ellis with B. Riley.
Yes. Thanks for taking the questions, guys. I'll just start with a follow-up question on Data Intelligence. Can you just talk about where you think you've got the greatest differentiation with that capability? I would expect that A number of your customers are running something like that.
So what will differentiate Cohu? And Louise, you've been very vocal in the past about being interested in M and A. You've used it to scale up the company. Do you feel like you have all the capability internally to take the data intelligence suite with all of its subscription options to full maturity or could this be an area where tuck in M and A or even something larger would enhance the model?
Hi, Craig. Yes, good question on the differentiation. We you'd be surprised Because in reality, our customers do a lot of what we call preventive maintenance. You essentially plan for A period of time, just like a vehicle in the past a few years back, you would plan for every many months to go in and do an oil change or whatever it is, just old analogy here. Predictive maintenance, Which is, I think, one of the primary value propositions here for particularly for handlers relates to Using all the sensor capability inside the handler to measure a series of Events, interact them over time and predetermine when you should take action.
So essentially reducing the unscheduled downtime of the equipment. We had some of our customers quantify for us The value of 1% unscheduled downtime and the value of that recovery. And it's actually staggering How much that costs to our customers. So that is one of the key value propositions here. We know the equipment very well.
We know At what point certain thresholds would trigger a downtime and we have the sensing capability already in the equipment. So An eventual downtime, an unscheduled downtime before it happens. There are other pieces to the puzzle too, but that's the simplest one to explain And explain the value. As far as internal capability to develop it, much of this has to do with data and understanding the equipment which we do have, Software capability, we have plenty of software engineers in the company. But for sure, some of the more advanced ideas Around use of deep learning algorithms to optimize some other functions on the test sale, We may have to acquire that capability over time.
Not everything we have in house, but for the moment for the foundation license and what we have Plan for 2021, we do have the internal capabilities to develop further out ideas. Yes. We'll have to acquire the capability.
That's helpful. And then the second question that I have also for you. In the past, you've at times commented on the mix of the ADAS and EV business within auto. Can you just characterize what you're seeing there now and the evolution of that mix As we look out to calendar 2022 and what that could mean for Cohu?
Yes, we're about at the same mix right now on that, which is approximately 20% to 30 of our handler revenue in the quarter is ADAS and EV related. Strongest for EV in reality, battery management systems Task on our handlers is really hot business right now. We expect that to continue to ramp Into 2022, but we don't have necessarily a forecast of what that mix will be. Similarly, ADAS is Picking up momentum. We have a series of customers right now evaluating our T Core active thermal technology embedded in our Leading tri temp handler, which is the matrix for automotive semiconductor test.
And We understand there are production intercepts here in the second half of the year that depend on that capability. So we see also the ADAS ramping. But Truthfully said, we don't have a forecast of how much EV and ADAS will represent of our total automotive business in 2022.
That I imagine with all the pull ins we've seen with global auto OEMs and EV plans that, that would likely be And potentially up significantly this after?
Yes, absolutely. The expectation is EV and A Desk will continue to take A bigger share of our automotive sales into next year, absolutely.
Okay.
And then Jeff, I don't want to ignore you, And I'll turn to gross margins. I think the near term has been pretty well vetted at this point. But the question is, as we look at the target model And current revenues, the target model would say that gross margins should be about 47.5% at these revenue levels. And you've talked about the fact that you've got One of the issues at play is just the mix between contactors and really the recurring business versus The systems business. The question is, if we were to bend out that 550 basis point gap between where we are And implied levels of the target model, how do we bridge that gap?
What are the 3 or 4 factors that take us from 42% to 47.5% at
Yes. Okay. Hey, Craig. So first of all, it is overall Mix of business. Handlers Q3 forecast represent around 70% of the revenue.
The model is 50% for handlers. 2nd of all would be systems versus recurring. Because within that handler Revenue percentage I just quoted, most of that increase over the model is systems revenue. And so that drives the overall blend of systems versus recurring higher on the systems side. And that gross margin is lower than recurring.
So that's the second aspect of the lower gross margin. The 3rd aspect would be improvement in the contactor gross margin. And so we've been working on moving Outside purchased materials contactors from suppliers in the U. S. And in Europe into our factories in Asia, primarily the Philippines, and we're seeing improved utilization productivity.
And so Margin of the contactor business is improving, Louise stated quarter over quarter improvement of about 2 70 basis points. But that needs to Continue. So we're closing in on about 40% contactors. We need to get to about 45%. That's within our reach within 2022.
So I'd say those are the main factors that bridge us from where we are today in gross margin to the model.
Okay. And just to clarify that point, Jeff, I heard earlier that there is some supply chain cost that's in gross margin. Would you throw that in as worth 100 basis points Plus or minus or is it just relative to the other factors that you mentioned, not that significant, maybe less than a 50 basis point variable?
I would say 50 to 100 basis points is probably a good estimate on a blended revenue. But The other points that I mentioned are really the main drivers.
Yes, the bigger structural issues. Got it, guys. Thanks so much for the help.
Thank you. Thanks, Greg.
Our next question comes from David Duley with Steelhead Securities.
Thanks for taking my question. Just a clarification on your revenue guidance Compared to the 2nd quarter revenue that you just reported, so if we want to compare those numbers, The $244,800,000 that you just reported versus your guidance, then you're missing you're subtracting $13,000,000 from the printed circuit board business that isn't there anymore sequentially. And then you also mentioned another what was the $13,000,000 Stuff supply constraints?
It was $14,000,000 Dave, dollars 14,000,000 a handbook of it. Yes.
So on an apples to apples basis, the guidance does not reflect $13,000,000 of printed circuit board revenue and $14,000,000 Of supply constraint pushes?
Correct.
Okay. So it's like a total of 27,000,000
Correct.
Okay. And could you just in the current in the June quarter, could you break out as far as the systems business goes, The relative mix between handlers and testers, I think you gave a number, but I just wanted to make sure I had it right.
So in Q2, the revenue breaks down Handler revenue 60 percent, tester revenue 21 percent, contactor 13 and PCB test 6.
Ann, as far as the contactor business goes, I think you had a growth goal 15% on an annual basis. As far as your guidance in Q, what do you think the annual growth rate We'll be in this current calendar year for contactors.
Yes. We're modeling internally 20% CAGR for the Contact your business and we're hitting that year
over year. Yes, year over year, just a couple of data points for 1st half of the year, right, we had about well, I don't have it blended, but Q1 of this year, We had a 30% growth year over year in contactors in Q2. We had a 33% year over year growth. So blended at about, I 31%, 32% so far. Okay.
And
would you expect this percentage, I guess you just mentioned 13% for contractors. That percentage will be going up over time? Yes.
Yes, absolutely. Two things will happen. The handler revenue should moderate back to a normalized level and Continue to grow the tester and contactor businesses.
I think that percentage you meant the Percentage of contact or contribution to revenue, right?
Yes.
Yes, absolutely. Yes.
And then I guess finally, if you could just kind of You guys have a lot of experience in this industry. What is your view on the sustainability of results As far as your tester, your equipment business going forward, obviously, WFE continues to climb every year and I think your larger competitor just increased the size of the SOC test market. So I'm kind of wondering what your views are on sustainability and Multi year upturn here.
Yes. Look, Dave, all indications right now Is that this is going to be a long cycle. I mean we have a pretty robust automotive market With EVs and ADAS, I think we have a pretty robust mobility market still with 5 gs, Computing with AI and crypto, but as we always said, there will be some seasonality To the industry, if we look we look back here over the last 10 years actually and Jeff already spoke to the 4th quarter seasonality, right? Typically, 1st quarter can be up or down a little bit relative to 4th quarter, But on average, flat. 2nd quarter is typically up around 10%, 15%, 20% sometimes.
3rd quarter then typically comes down a smidge, like low single digit percentage. And 4th quarter, Jeff already said, kind of Around the 10% drop, that's the typical seasonality. So I think the seasonality is going to stay there, But the industry cycle, the underlying current is pretty robust. We also look at our own revenue over the last 10 years and What we see here on average is about a mid teens percentage growth year on year every quarter. That's sort of the average on a year on year basis.
And we think that's going to continue Because of these elements I just described in the industry.
Okay. And that's all the questions for me. Thank you.
Thanks, Dave.
Our next question comes from Krish Sankar with Cowen and Company.
Hi. This is Steven calling on behalf of Krish. Thanks so much for taking my questions. The first one, if I could, on product lead times. I think earlier, I think you already mentioned that the tester lead times were about 10 weeks, which is down from 12 weeks last quarter.
I was wondering if you could also fill in in terms of handlers and contractors what the lead times were Anything to change in quarter?
Yes, sure, Stephen. You're correct on the testers. The handlers, I did mention It's about 19 weeks right now, 19 weeks lead time. I think last quarter was 18 weeks. We were hoping to be Further down, but as Jeff described, the supply chain constraints capped at about the same level.
Contactors, we made an improvement. We're down to about 5 weeks Lead time, in greater part with the improved operational efficiencies and increasing in sourcing in our Philippines factory. And spares have remained pretty stable on an about 6 weeks lead time.
Okay, perfect. And then one question on, I guess, the revenue mix going forward and says that you enjoyed the September quarter. So in particular, automotive, in your presentation, automotive was like 18% of sales and mobility was 14 And each of those, well, I think, automotive was up sequentially in terms of mix and mobility was down quite noticeably Sequentially, I'm just curious like for the September quarter, any thoughts on some of the seasonality that you mentioned earlier Come into play in terms of what the contributions might be in September? Or is there any customer specific purchasing behaviors that It might cause volatility downwards for those 2 end markets.
Yes. Relative to end markets, the best way that we have to look at it is looking at the order mix by end market in Q2, Which mostly generates the Q3 revenue. And it looks to be about consistent with the Q2 revenue segmentation we provided on the deck. So I would expect Q3 revenue to have a very, very similar percentage distribution, at least across the top four End markets here, automotive, mobility, consumer and industrial. If anything, maybe industrial will pick up a couple of points, But the rest seems very consistent Q2 to Q3.
Got it. And just maybe one last product related question. In terms of your handlers for the automotive market, I believe it might be mainly a pick in place Handlers, if I'm not mistaken, do you see an opportunity to move some of your automotive customers to maybe higher margin And there's like the gravity tool, gravity product line or is gravity more for industrial customers? Thank you.
Yes. Gravity is more for industrial customers, Stephen. On the automotive side, I think the Primary pivot that could create an opportunity here is the sort of the developments around ADAS Processor test, which embeds requirements for active thermal management of Powered dissipative devices. I'm talking here devices that will dissipate 10 watts and above during test on a single site and you're testing them multi site. That probably creates the greater opportunity for some changes, new technologies and Frankly, very complex technologies on the handler side.
Perfect. Thank you so much, and nice job in navigating the challenging environment.
Thank you.
Our next question comes from Christian Schwab with Craig Hallum.
Great. Thanks. I just have a quick follow-up on the decision to not give 2 quarters of Guidance, like you've done the past few quarters, should we take that as a reflection of potentially less Visibility and predictability of the business? Or is that really more in response to all of the supply Challenges that you're facing and you just want to get a better handle at all the moving parts of that
As a
reason why you guys decided this quarter not to do that?
Hey, Christian. Yes, it's the latter. There's just too much supplier uncertainty related to the material shortages and Potential labor constraints due to COVID issues. So that's what that's the reason.
Great. That was the only clarity I needed. Thanks, guys. Great quarter.
Thank you.
Our next question comes from Adam Malik with Citigroup.
Thank you for taking my questions. And I have one for Louis. Louis, can you talk about where we are In terms of the adoption of millimeter wave on your mobility RF testers and handler side?
Sure. The way we look at the and let me start in this place, right? What is driving the 5 gs volume today is the technology device technology around what's called Frequency band 1, which is not millimeter wave, right? It's the sort of the sub-six gigahertz. That's what's driving the volume today And we think still ramping next year.
Devices now on frequency band 2, particularly for us, we believe we start Seeing greater volume in the second half of twenty twenty two and into 2020 3. And this is both for testers as well as it is for contactors. We have Well, contactors and interface products, meaning probe heads as well, not just contactors, but also probe heads or Essentially probe cards for millimeter wave. We should see some revenue this year on that, but really expect the volume Should be second half of twenty twenty two and into 2023.
Great. And then one for Jeff, Super exciting announcement of the data intelligence product. And in terms of the gross margin profile for this product, is it Do you assume it's above corporate average?
No. I think the software products, it is a higher gross margin. So it's going to be Upward into that high 80s, 90% range.
Got it. Thank you.
Our next question comes from Charles Hsieh with Needham.
Hi. Thank you for taking my question. So Louis and Jeff, I think if I look at your 3 now it's the 3 major business segments. Compared to your talking model, your Testers and handlers on quarterly run rate basis, you guys are actually getting quite close. For a while, The contactor side is a little bit lagging behind, but you do expect a higher growth rate.
So I heard some of your comments Early, I believe your contactor quarterly revenue is probably in the low 30s $1,000,000 in Q2. You're guiding a lot closer, I mean, compared to the previous quarters. I wonder if you can comment Where you see the momentum of the contactor business is going from here? And I have a follow-up.
Hi, Charles. Yes, you're right on your statements. And The biggest momentum or the biggest growth opportunity for us in contactors is in the automotive space. We have We estimate that we have about 26% penetration into the automotive space contactors, and That's the area we expect to see the biggest growth rate. And then second, following that, and about half Of the automotive growth, which should come from the mobility segment.
Got it. Got it. So maybe a follow-up on the contactor gross margin. Definitely, I heard you there's a very strong uptick in terms of Quarter over quarter margin expansion for contactors. Can you kind of let us No.
Going forward, what is your expectation? Because as we did expect that Relative to your handler business, certainly, this as a consumer consumable business, Your margin may still have room to expand in this side of the business. I wonder whether that is your view From today, if you look at it. Thank you.
Yes, Charles. It is absolutely. As I mentioned, we're making Really good improvements on the manufacturing side, so reducing the cost of those contactors. So by the end of the year, I believe we'll be Approaching or at that 40% mark. And then in 2022, continuing to make strides To hit a mid-forty percent gross margin late next year.
Thank you.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Jeff Jones Closing remarks.
I'd like to thank everybody for attending this morning's call. Before I sign off, I just would like to let everybody know that we'll be attending Five conferences coming up in August September. We'll be attending in August, we'll be attending B. Riley, August 19, Needham Conference on August 24 Rosenblatt Securities, August 25 Jefferies, September 1 and Citi, September 13. Hope to talk to you at any one of those conferences or at any other time during the quarter.
Thank you again and have a nice day.
This concludes today's conference call. Thank you for participating. You may now disconnect.