Cohu Inc Q2 FY2020 Earnings Call

Thank you for standing by, and welcome to the Cohu Incorporated Second Quarter 2020 Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised today’s conference is being recorded. I'd now like to hand the conference over to your speaker today, Mr. Jeff Jones. Thank you. Please go ahead, sir.

Thank you and good morning and welcome to our conference call to discuss Cohu's second quarter results and third 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 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, 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, July 30, 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?

Thanks, Jeff. Hello everyone and thanks for joining us. Today, I'll discuss some of our accomplishments in the second quarter and provide our perspective for the rest of the year. Jeff will later discuss financial results and provide guidance for the third quarter. Sales in the second quarter were approximately $144 million and a little better than the midpoint of guidance with our manufacturing facilities back to full operation after the COVID-19 disruption that started in mid-March. Thanks to our operations team, we incurred lower outsourcing costs than originally anticipated and delivered higher gross margin and profitability in Q2. Orders were split 52% recurring and 48% systems and mobility once again represented close to one-third of our system bookings. We saw strong RF tester demand for connectivity in the second quarter with one of our major customers committing their flagship 5G RF Front-End ICs to our platform. We captured a new opportunity testing transceivers, further expanding our product penetration in the RF segment. There was also increased demand for IoT connectivity, testing devices using Bluetooth, Zigbee, and newer Wi-Fi 6 technologies. Cohu's RF instruments delivered leading throughput and performance with ultimately low cost of test for next-generation RF semiconductor devices. This is a segment we have traditionally been strong in and we are releasing our third-generation solution at the perfect time to catch a wave of growth driven by 5G, Wi-Fi 6, and RF IoT. Other customers are using our systems for testing low-noise amplifiers, RF switches, and filters. We made very good progress supporting production ramps of several OSATs in Taiwan, testing devices for smartphones launching in the coming months. In the non-RF segment, we had several design wins at major Asia fabless companies testing a variety of mobility applications, including display drivers, power management, baseband connectivity, and others. At the same time, our handler business captured multiple design wins in the quarter. We got an order from a leading European sensor manufacturer for handling wafer-level chip scale MEMS devices deployed in smartphones and vehicles. This is the first application of our WLCSP handling solution for sensor testing. Our strip handler was selected by two semiconductor manufacturers for testing high-performance analog and sensors used in automotive and industrial applications. Cohu's vision inspection system has been gaining a lot of traction and attention from various customers, who've had design wins in the second quarter in multiple qualifications starting in the third quarter. Our Neon inspection platform lowers the over-rejection rate for wafer-level chip scale packages, effectively increasing yield and maximizing value to our customers. This system delivers leading throughput and flexibility to inspect all package sides with best-in-class accuracy and adds true infrared vision to see below the surface. It really takes inspection quality to the next level and customers are starting to recognize the significance of protecting their brand value with our Neon inspection platform. In other news, we identified an application for Cohu’s active thermal technology testing high-performance memory. The sale consists of engineering lab thermal handlers for a U.S.-headquartered customer. Cohu equipment continues to be used for medical applications where quality is obviously of prime importance. Although volumes are not as high as in other segments, this is an area where Cohu excels and our team is proud to contribute to the fight against COVID-19. On the contactor front, we know attachment rates will fluctuate quarter-over-quarter. In Q2, it was at 44% with increasing alignment of contactor to handler sales and several of the design wins previously mentioned. Looking back at order distribution by market segment, mobility represented 15% of total and about one-third of systems. Second-quarter orders for PCB DAS systems were at record highs and 10% of total, driven by expansion in telecommunications, computing, and network infrastructure. For the remaining segments, system orders accounted for 23% of total. Despite lower semiconductor computing, recurring business remained healthy in the second quarter. Turning to the third quarter, our guidance reflects expected strong RF and PCB tester shipments, and a new customer attraction for handlers and inspection equipment. We continue to forecast a disproportionately stronger mobility segment through the end of this year with a slow recovery in automotive, initially driven by improved vehicle sales in China and likely accelerating globally into 2021. With average test cell utilization at 78% at the end of June, stronger at mobility customers and weaker in the automotive segment, we expect sales to remain relatively flat within plus or minus 5% quarter-over-quarter through the end of this year. More importantly, we're actively working on multiple cross-selling opportunities that combine our testers, handlers, and contactors. This differentiation is becoming important in RF test where high-frequency signal fidelity to the semiconductor device is increasingly difficult. I hope to share more details in the next couple of quarters as we demonstrate our value proposition to various customers. Now, I'd like to turn it over to Jeff to review our second-quarter results and provide third-quarter guidance.

Thanks, Luis. Cohu executed well during Q2. Sales were higher than the midpoint of our guidance. Gross margin was also higher than our guidance. Operating expenses were lower than forecast due to tight control of spending, and Q2 non-GAAP profitability was our highest since Q4 of 2018. Now, before I walk through the balance of the Q2 results and the Q3 guidance, let me talk about our GAAP to non-GAAP adjustments. Please note that in 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 Q2, the GAAP to non-GAAP adjustments include approximately $3.4 million of stock-based compensation expense; intangible amortization expense was approximately $9.5 million; and restructuring costs, primarily driven by the Xcerra acquisition, were approximately $700,000. Now turning to Q2 results. Revenue was $144.1 million and $1.6 million higher than the midpoint of guidance. In Q2, no customer accounted for 10% or more of sales. In the second quarter, Cohu's gross margin was 42.5% and higher than our guidance from better-than-anticipated utilization of our Asia factories. The Q2 gross margin is in line with our business model. Operating expenses were $47.9 million and $1 million lower than forecast. Temporary cost reductions remain in effect. Second quarter non-GAAP operating income was 9.3% of sales, and adjusted EBITDA was 11.3%. The Cohu's non-GAAP effective tax rate for Q2 was 23.2% lower than guidance, primarily as a result of tax benefits derived from operating losses generated in Germany. Non-GAAP EPS for the second quarter was $0.17. Now turning to the business model. As of the end of fiscal 2019, we completed the actions required to achieve the $40 million of acquisition cost synergies. As we announced at the end of March, we implemented temporary salary reductions, which took effect at the beginning of April and further reduced operating expenses by approximately $3 million per quarter, adding about $0.05 of EPS to our model. The actions we've taken to reduce costs further support positive cash flow during periods of low market demand and allow for continued investment in strategic products while retaining the ability to quickly ramp up production in an upcycle. Now moving to the balance sheet, our cash balance at the end of Q2 was approximately $164 million. Combining recent cost reduction and cash-preservation actions, we've lowered EBITDA breakeven revenue to approximately $110 million per quarter, and cash required to run the business has been reduced to approximately $80 million. Cash used in operations during Q2 was $4.5 million, and CapEx for the second quarter was $6.4 million, driven mainly by purchases of equipment to increase contactor manufacturing capacity in the Philippines and Japan, as well as capital additions necessary to consolidate our German test handler operations into one facility. Now, moving to the third quarter, our third-quarter sales forecast has improved since the directional guidance we provided during the first week of May. For Q3, we're guiding sales to be between $134 million to $146 million. The low end of the revenue range accounts for potential supply chain disruptions due to COVID-19, as well as potential risks associated with book-and-bill sales and customer acceptance, which is required for revenue. Gross margin for Q3 is expected to be between 41% to 44%, and assumes no operating constraints on our Asia factories as a result of COVID-19. Operating expenses are projected to be approximately $48 million or essentially flat quarter-over-quarter. We expect Q3 adjusted EBITDA at the midpoint of guidance to be approximately 11%. The Q3 forecasted non-GAAP tax rate is approximately 25% at the midpoint of guidance. For modeling purposes, we expect a normalized effective tax rate of approximately 22% on revenue of $170 million or more and profits in line with the business model. The diluted share count for Q3 is expected to be approximately 42.4 million shares. And although the market outlook remains volatile and uncertain, our current projection for fourth-quarter revenue is to be approximately flat with the midpoint of Q3 guidance. That concludes our prepared remarks, and now we'll open the call to questions.

Operator Instructions. And your first question comes from the line of Quinn Bolton from Needham & Company. Your line is now open.

Hey, guys. Congratulations on the results and outlook. I guess, I just wanted to come back to the sort of second half outlook. I think last quarter you had expected a sort of slower third quarter on slowing RF test and an improvement in the fourth quarter. Now, it kind of feels like Q3 is better, but maybe Q4 is tempered a little bit. Do you just think that some of the revenue you thought you would – previously, you've seen in the fourth quarter has been pulled into the third quarter, or how should we think about sort of the change in dynamics between the third quarter and the fourth quarter compared to what you thought a quarter ago?

Quinn, this is Luis. In reality, what we've seen is the mobility customers coming in a little faster than we originally anticipated in the third quarter, and that's what we're seeing here. We have limited visibility out to the fourth quarter. So we don't think this is a pull-in from the fourth quarter to the third quarter, and that's why we say fourth quarter could still be flat to slightly down. It's difficult to say, but we're viewing it approximately the same at this time. We'll obviously know more as this quarter progresses. But at this point, it's not necessarily a pull-in. It's more of an earlier Q3 ramp than we had expected when we're out in May.

Great. And then a follow-up question. Just – I know the automotive business has been slow. But that’s an important segment for you. Your best guess today when do you think you start to see perhaps better demand conditions from the automotive customers?

We're very encouraged actually by seeing the earnings release here over the last week from many of our customers in the automotive space. So we see them have turned the corner; they're guiding – many of them are actually guiding up quarter-on-quarter. So that's very encouraging. It's a matter now of watching that test cell utilization. As I said, on average, we're at about 78% today. It's obviously stronger at the mobility customers and a bit weaker more in the lower 70s at the automotive customers. So we're watching that test utilization and seeing as it creeps up that it will be the turning point. It's difficult to say whether we're talking late Q4, mid Q1. It's really hard to say and pinpoint that exactly, Quinn. But we do see our customers moving up on the automotive space, so we're encouraged by it. We just don't know the exact timing.

Great. And last question. If I heard you right, Luis, I think you said the contactor attach rate was 44% in the June quarter, if that's right. I think it's jumped up almost 10% quarter-over-quarter. Did I hear you correctly? And if I did, what do you attribute that higher attach rate to? Is it just some of the programs you’ve been working on now for a couple of years have started to go into production, or is there a mix shift going on that's driving that higher attach rate? Just any more color you could provide would be helpful. Thank you.

Sure. You are correct. It did jump up to 44% in the quarter. There are a couple of reasons for that. One is we did indeed see some traction, particularly with the new design wins on the handler side; we were able to bundle the contactor as part of the product proposal to the customers. So that actually drove an increase in attachment rate. At the same time, I do have to caution that number will fluctuate a bit quarter-over-quarter depending on handler sales and which customers are driving the handler sales in that particular quarter. So I wouldn't be surprised to see that number jump up and down a little bit on a quarter-to-quarter basis. I think you may have to take this number over a longer period of time and see the moving average.

Understood. Thank you.

You're welcome.

And your next question comes from the line of Krish Sankar from Cowen & Company. Your line is now open.

Hi. Thanks for taking my question. This is Steve calling on behalf of Krish. Luis, could you elaborate on the current strength in mobility? I would like to dive deeper into the demand for 5G products. With the increased complexity of the signaling for 5G compared to 4G, including MIMO, antenna package type modules, and testing of ultra-wide band signals, can you provide further insights into the current 5G opportunity that is on the rise? Since we are still in the first year of 5G, how does this year's ramp compare to the initial rollout of 4G, particularly considering the advancements in technology and complexity? Additionally, how much of the observed strength is attributed solely to the demand pull-ins that you mentioned earlier?

Hi. Yes, it’s a bit of a challenge for me to do that comparison on the tester side because when 4G ramped, we didn't own tester assets, semiconductor tester assets, right? We're predominantly supplying handlers at that point in time. But to your point on the tester side, we're still in the early stages of 5G obviously. You're looking at less than 15% of all cell phones, smartphones coming out this year having embedded 5G technology. What I think is interesting, and I don't know how it compares to 4G, is that with 5G, the frequencies are jumping up significantly. And so with that is the complexity of signal fidelity all the way to device under test. It does create a good opportunity for us to combine our testers, our contactors, and to some degree our handlers, and offering an integrated solution to customers that accelerates their time to volume production. So you don't have to rely on the customer or their expertise to bring together pieces of equipment to perform one function which is test. We bring to the table a complete ready-to-go solution. And we're seeing many of our customers appreciate the value of the integration as well as the value of the test applications team for these highly complex, high-frequency RF devices. I think that opportunity is going to continue to open up new doors for Cohu in the coming quarters. I hope to talk to you more in the coming quarters about the cross-selling and the full test cell.

That's very helpful. As a follow-up, I have a question regarding the gross margin profile in relation to the end-market mix. Once automotive begins to recover in the coming quarters, what would be the overall impact of increased automotive sales on margins? Would it result in a richer mix compared to your guidance for Q3?

Hey, Steve, this is Jeff. The automotive, it's primarily handlers that would benefit from increase in the automotive business. And those handlers are tri-temp, a little more sophisticated, complicated if you will. And along with that comes a higher gross margin. So they're in line with the corporate gross margins. I guess I would direct you to the business model then to compare the gross margins at the various revenue levels. So once automotive comes online, expect margins to be compliant with the business model.

Great. Thank you. And nice jump in the quarter.

Thank you.

Your next question comes from the line of Brian Chin from Stifel. Your line is now open.

Hi there. Good morning. Nice execution in the quarter. And thanks for letting us ask a few questions. Maybe the first question here. You talked about a number of design wins in the quarter. I do want to key on the memory wind in particular. The broad memory SAM is not something Cohu has historically targeted. But can you talk about why this engagement is more suited to your technology and whether this could translate into high-volume production shipments down the road?

Hi, Brian. Moving on to high-performance memory, these are typically stacked memory layers integrated with a logic controller. Testing these devices has shown to be similar to testing an application processor in a smartphone, given the comparable geometries, complexities, and touchdown pitch. More importantly, these devices consume power and generate heat during the testing process. To maintain yield and quality, we require an advanced active thermal control solution, which aligns well with our platform. However, this initial sale is focused on lab engineering use. We anticipate that it could generate around $3 million to $4 million annually over the next few years, but it is still limited to lab engineering applications, and we have not discussed anything related to volume manufacturing or testing at this time.

Okay. Fair enough. So this could be just a situation where, like, if you're looking at HPM 3 and more dies per stack, that probably would be something that would even increase sort of the thermal dissipation kind of requirements, etc. Maybe switching gears to 5G, which is clearly a positive influence for the company. Manufacturing companies that reported yesterday, expectations for 5G smartphone shipments are maybe back into sort of the 200 million, 250 million range. Granted it's too early to probably call or say that the broader smartphone market has stabilized yet. But let's say it does next year and the 5G adoption curve remains steep, how fast might you expect the RF semi-test TAM to grow next year?

Yes. That's a very interesting question there, Brian. I got to look at two things. One is sort of outside reference; Gartner has some projections for 5G. I don't have it in front of me right now, but it has some projections for 5G RF segment going in a double-digit rate. I look at just the rollout of 5G this year and the projected unit cell phones that could have 5G technologies next year, and probably also more so the increasing content of RFICs in those phones and the increasing frequencies, as higher frequency bands get adopted for millimeter wave. So I think we're looking at something to the tune of 20-plus percent growth rate for RFIC test. And that's talking in unit volumes. I think you have to compound that a little bit with increasing ASP of the testers and the instruments that go in it.

Okay. That's helpful. Maybe one more quick hit here. Just in terms of the RF content growth in 5G phones, one is that the key rationale why Cohu you may be seeing more relative strength into the back end of the calendar year than some of the broader test suppliers? And then, kind of, not quite related to that, but the PCB test sounds like it's been strong. Can you just remind us what that margin structure is relative to the broader business?

PCB test is about 40% gross margin; very consistent business.

Yes. To address the first part of your question, you're correct regarding the semi-test. Our semi-test business, aside from handlers and thermal subsystems, does not involve testing high-end digital devices, so we are not currently testing application processes. Consequently, we expect to see developments later in the cycle as we focus on RF and power management ICs, as well as flat panel display drivers, which are still a smaller segment but expected to grow. Regarding PCB test, it is not related to mobility or smartphones; instead, our PCB test business is linked more to computing, telecommunications, and network infrastructure—basically involving larger PCBs compared to the flexible PCBs found in smartphones.

Okay, great. Thank you.

Your next question comes from the line of Sidney Ho from Deutsche Bank. Your line is now open.

Hi. This is Jeffrey Rand on for Sidney. On the auto side of your business, how much of your recovery in this business is tied to more cars being sold versus increased electronics in cars?

Yes. It's really a combination of both, right, because the increasing IC content in vehicles, in essence, will drive an increased demand for test equipment. But at the same time, it can be compounded if you have an increased unit vehicle sales. I think at this point, where a lot more focused actually is on the technology shift, where we're seeing an increased content of high-end microcontrollers and microprocessors in vehicles for ADAS. We're seeing also an increased number of sensors that actually feed the information to these ADAS devices. And we're seeing an increase in battery management systems for electrification. So since we can't drive the industry or consumer spending, what we can do is align our investments to the technology shift so that when automotive is back in full swing, and we are likely to see that next year, that we're aligned to the technologies that are actually driving the growth for sort of the new ICs that will require different handling equipment than the last generation wave of growth in the semiconductor for autos.

Great. And just as a follow-up. On the inventory front, are you seeing any indication that there's an inventory build by your customers, or are the orders being driven by true end demand?

No, we don't see any inventory buildup at our customers. In fact, the checks we have conducted indicate that everyone seems to be operating with lean inventories, and I believe this is actually driven by end demand.

Your next question comes from the line of David Duley from Steelhead Securities. Your line is now open.

Thanks for taking my questions. I was wondering if you could comment a little bit further on the display driver business. I think as you put the two companies together, Xcerra had won some business in that area. And I was just wondering if it had ramped up or what you can talk about in that area? That's my first question.

Okay. Hi, Dave. Yes, Xcerra has effectively designed an architecture to enter the display driver market. They secured a design win with a customer in Taiwan. We have been collaborating closely with that customer and expanding that architecture. To be honest, that market segment hasn't experienced significant growth since we acquired Xcerra, but we did see increased sales in 2019 and 2020, although still lower than we had hoped. Meanwhile, we are putting more effort into securing additional design wins. We have made good progress with customers in both Taiwan and Korea. Therefore, we expect to continue implementing our flat panel display driver strategy from a few years ago, and as the market evolves, particularly with the anticipated ramp-up of OLEDs next year, we fully expect to see this business continue to grow for us.

Could you discuss whether you anticipate an increase in the attach rate with the rollout of 5G and the market opportunities that may arise beyond what was experienced with 4G?

Our contactor attachment rate has been higher in the automotive sector compared to the mobile sector. With 5G, I see a significant opportunity to increase the attachment rate, particularly for testers in the mobile space. As frequencies increase from 3 or 4 gigahertz to 6 gigahertz with FR1 in 5G, and then up to 8.5 gigahertz for WiFi 6, and further to 24 gigahertz and beyond for millimeter wave, the complexity of maintaining signal fidelity to the device under test also increases. This creates more opportunities for us to offer a complete solution that controls the entire signal path to the device under test. Yes, 5G presents a greater opportunity to boost attachment rates of contactors in the mobility market, an area where we haven't been as strong, while we have excelled in the automotive market. As for the size of the opportunity, I don’t have a specific figure at the moment, but we are definitely considering tens of millions of dollars in potential business within the mobile sector.

Could you remind us of the additional total addressable market for 5G compared to 4G? I'm interested in the incremental figure you mentioned previously.

Yeah. It was about $120 million of incremental revenue opportunity with 5G. This is specifically talking about testers. I'm not talking about handlers or contactors now. So we view that the 5G RF space would grow by about $120 million in a span of two to three years, this being year one right now, 2020. That applies to all RF front-end ICs meaning power amplifiers, low noise amplifiers, filters, switches, antenna tuners, sort of that space basically the whole signal chain.

Okay. Final thing for me, Jeff. Historically, I think you've given us a breakout of systems revenue amongst five or six or seven categories. Could you give us those numbers for the June quarter?

What we do is report by quarters, and that's included in the investor relations deck. To share the details, systems make up 48% of the total orders as Luis mentioned. Breaking down the systems segment, 15% comes from mobility, 10% from PCB manufacturing, 9% from consumer, 5% from automotive, 4% from industrial medical, 3% from computing and network, and 2% from IoT, IoV, and optoelectronics. This adds up to the 48% of system orders.

Okay. Thank you.

Your next question comes from the line of Tom Diffely from D.A. Davidson. Your line is now open.

Yeah. Good morning. I guess first question, just on the breakdown of orders you just gave. Are you surprised that computing networking isn't a little stronger right now since there's a lot of effort going on from a capacity point of view?

Hi Tom, it's Luis. I mean, yes or no, there have been strong system orders in computing in the first half of the year. I think there's some digestion on installation right now. But computing network represents a substantial portion of our recurring business. And that has remained fairly strong. So if you think in terms of total here we're looking at a couple of percentage point changes in total business in the computing network, because of the fluctuation in systems. So it's pretty common for our customers to go through spurts of ramp and then digestion for a quarter or sometimes two quarters and then another spur of ramp, so not too concerned about it.

Okay. Great. And then Jeff, some questions on the operating expenses. Are the temporary cost reduction measures? Are those time-based for a couple of quarters, or are those going to remain in place while revenues are at current levels, or how do you look at that going forward?

Hey, Tom, yes. They are still in effect as I mentioned. The main focus is on improving business conditions, especially in terms of orders. We expect these temporary cost reductions to last until the first quarter of next year; however, we might reverse them sooner depending on business conditions.

Okay. That's helpful. Is there anything that you've learned or been able to adopt during, kind of the stay-at-home environment we’re in that will impact or reduce cost structures going forward?

Yeah. Certainly Tom, I think that certain areas that have been high-cost areas are travel. I think we're going to look at that a little bit differently. Some of these investor conferences that are done virtually work out pretty well. I believe travel across the board is significant spend, and that's an area that we're going to look at a little bit differently moving forward. I think there were a few others that we'll take a look at as well, but that's one that really sticks out.

Okay. Great. And then I guess, just a final question here. Luis, when you look at the contactor business and some of the share gains there, which end market are driving that today? And what are the biggest opportunities from an end-market point of view for that segment?

So if I look in total revenue, the contactor revenue is probably going to grow fastest in the coming quarters on tri-temp handling test applications in automotive and industrial. That is just a sheer current attachment rates with tri-temp handlers and the likely resurgence of the automotive market, nothing necessarily driven by actions on our side. Secondly, and I think that's the one that we spend more energy on, is where can we get a design win? Where can we increase contactor attachment to our products? The energy is going today is both in the RF space because of the 5G higher frequencies, as I described before in a prior question, as well as in computing. In computing simply because of our large presence with thermal technology and handlers in the computing space, we would like to bring in new solutions and new technologies to that segment as well. So those would be more of the actions that we're going to take. But if you will the revenue is likely to outpace everything else because of an eventual comeback here in the automotive market.

Okay. I appreciate the color. Thanks for your time this morning.

Thank you, Tom.

Our next question comes from the line of Craig Ellis from B. Riley. Your line is now open.

Yeah, thanks for taking the questions, and congratulations on the company execution, guys. Jeff, I wanted to just go back to some of your comments regarding the third quarter. I missed what you said about gross margins. Can you repeat that for us please?

We gave a range of 41% to 44%.

Okay. And so the midpoint would be down, I believe quarter-on-quarter. And just given the linearity of the Asian manufacturing increase through the second quarter, why wouldn't we see with the full quarter's benefit of that a flattish gross margin quarter-on-quarter?

Actually, Craig, the midpoint is 42.5% and the midpoint revenue is $140 million. So margin's up a bit quarter-over-quarter.

Okay, got it.

And so that does take into consideration full operations in Asia.

Okay, all right. Thank you. And then a longer-term question, Luis. The business is building a nice space here with better than previously expected RF in the near-term and potential for flattish sales in the calendar fourth quarter. If we were to look out to the third quarter of 2021 from where we are today, can you just rank the incremental growth drivers in the business from largest to smallest? What are the top three or four things that are going to drive year-on-year growth? And any color on magnitude would be real helpful just to understand the longer-term outlook that the company may be seeing? Thank you.

Okay. Hi, Craig. I think there's a pause on ranking the drivers. The top two would be a resurgence in demand for test handlers and associated test contactors, particularly because the automotive sector has been significantly affected recently. It was improving in the first quarter but then faced a setback due to the COVID-19 pandemic and the shutdown of auto factories globally. As the automotive sector rebounds, the technological shift toward ADAS and electrification will significantly boost handler and contactor sales. Conversely, 5G will also be a critical driver, leading to an increased demand for testers and higher average selling prices for high-frequency semiconductor RF device testing. We're focusing on solutions that enhance signal fidelity to the device under test. It’s tough to decide which will lead, but these two elements are crucial. The challenge with RF testing and contactors requires more effort from us, while the automotive recovery seems more natural given our position in the market. Overall, this will boost sales for both handlers and testers, as well as contactors. While there are additional initiatives on the tester side to enhance our competitive edge, I won’t share specific competitive information right now. We also have new products in development, including the Neon inspection platform, which should broaden our base. However, the automotive sector and RF testing are the two most significant contributors in terms of numbers.

That's helpful. Thanks very much, guys.

Thank you, Craig.

Your next question comes from the line of Christian Schwab from Craig-Hallum. Your line is now open.

Great, thanks. I just have a quick follow-up to the previous question. If the automotive market does normalize and come back and 5G adoption continues to accelerate as far as smartphone percentage of shipments, then is it fair to assume that we should probably at some point be operating in the business model of $170 million to $190 million a quarter next year potentially for a meaningful portion of it depending upon automotive sales?

Yeah. Christian, this is Jeff. Yeah, I think you're absolutely right. Hard to say exactly which quarter that is but it's $170 million to $190 million, I think is a reasonable expectation.

Excellent. No other questions. Congrats on a good quarter.

Thanks, Christian.

Operator Instructions. And there are no further questions at this time. Please continue.

Okay. I just want to say thank you for joining today's call, and have a nice day.

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