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Cohu's (COHU) CEO Luis M

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Cohu, Inc. (NASDAQ:COHU) Q1 2018 Earnings Conference Call May 8, 2018 8:30 AM ET

Executives

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Jeff Jones - CFO

Luis Müller - CEO

Analysts

Edwin Mok - Needham & Company, LLC

Patrick Ho - Stifel Nicolaus

David Duley - Steelhead Securities

Peter Peng - B. Riley and Company

Tom Diffely - D.A. Davidson

Operator

Greetings, and welcome to the Cohu Incorporated first quarter 2018 financial results and Xcerra acquisition conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Jeff Jones, VP of Finance, and the CFO. Please proceed sir.

Jeff Jones

Good morning, and welcome, to our discussion of Cohu’s most recent financial results and the announcement late last night that Cohu has reached an agreement to acquire Xcerra. I’m joined today by our President and CEO, Luis Müller.

Following our opening remarks, we’ll provide details of our performance for the first quarter 2018 as well as our outlook for second quarter 2018, and then we will discuss the proposed acquisition of Xcerra in greater detail. If you need a copy of our earnings release, you may obtain one from our website, cohu.com, or by contacting Cohu Investor Relations. There is also a slide presentation that we will be using in conjunction with today's call that maybe accessed through this webcast link on Cohu’s website, and is also posted as a PDF in the investor relations section.

Before we begin, you should all be aware that during the course of this conference call, we will make forward-looking statements reflecting management’s current expectations concerning the company’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.

Forward-looking statements include our comments regarding the Xcerra transaction, financing and expected benefits, opportunities with the European automotive customer, progress on our new thermal contactor, sales progress on PANTHER and [indiscernible], first half 2018 growth, future results, including Q2 guidance, our effective tax rate, and any other comments we make about the company’s future in response to your questions.

We encourage you to review the forward-looking statements section of the earnings release, the Xcerra acquisition release, as well as Cohu’s filings with the Securities and Exchange Commission, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, May 8, 2018, and Cohu assumes no obligation to update these statements as a result of developments occurring after this call.

Further, our comments and responses to any questions will not make reference to any specific customers, as we are precluded from disclosing such information by our nondisclosure agreements. Finally, during the call today, we will also discuss certain non-GAAP financial measures. Please refer to our earnings release and the webcast presentation for reconciliation to the most comparable GAAP measures.

Now, I’ll turn it over to Luis.

Luis Müller

Thanks, Jeff, and good morning, everyone. We have two topics for today's call. We begin with a review of Cohu’s first quarter 2018 results and guidance for the second quarter and then discuss the announcement last night of Cohu’s definitive agreement to acquire Xcerra to create a global leader in backend semiconductor equipment. As Jeff mentioned, there is a slide presentation that I will be reviewing as part of today's call that is included within the webcast, or can be accessed as a PDF on our website.

Starting with the first quarter, sales were up 17% year-over-year to $95.2 million, and exceeded our increased guidance due to the accelerated ramp of thermal sub-systems for mobile processor test. Non-GAAP EPS was $0.36. We captured two new large customers in the first quarter; one in the European automotive market that selected the MATRiX tri-temperature pick-and-place handler, combined with our multi-beam test contactors, and is a multiyear opportunity for Cohu; and a large Korean customer in the mobility market that qualified the Eclipse XTA platform. This new handler enables interface to factory robots and incorporates diagnostics and process monitoring capabilities in support of industry 4.0 standards.

During the quarter we had strong recurring sales particularly in the computing market, and increase in demand for our test contactors and spring probes as we continued to capture synergies and cross-selling opportunities with Cohu handlers. We had five key design wins in the quarter, and made very good progress with a new thermal contactor solution that becomes an active part of the system thermal control loop eliminating the need for lengthy temperature calibrations.

Our contactors also captured new applications at graphics, microcontroller and analog power customers. Additionally, first quarter sales included revenue from the PANTHER platform and growing interest in our Aquilae vision inspection module.

Looking more specifically at first-quarter orders by device segment, processors were 33% of system orders. We received a multiunit order for burn-in test platform upgrades, and capacity expansion at a leading customer and the thermal subsystem order for mobile processor test. Our power management and discrete was 18% of system orders, mostly for turret handlers testing devices used in the automotive and industrial markets.

We had a key design win in the quarter at a European customer with our larger 32 position turret handler. The continued global demand for plug-in hybrid and fully electric cars is a major driver for this device segment. Small-signal discrete was 13% and mostly for turret handlers and some gravity systems. Mixed signal and RF was 11% of system orders, with customers utilizing various [indiscernible], some on gravity, others turret.

This segment has been affected by the slowdown in the smartphone market, while offset by growth in IoT related devices. Sensors represented 10% of system orders, contributing to increase in demand for our gravity handlers coupled with magnetic MEMS stimulus modules. These devices are used in automotive end-markets, where we offer competitive solutions for certain MEMS device tests.

LED was 8% of system orders driven mainly by capacity expansion from a leading European customer, supplied devices for the automotive market, and another customer in [indiscernible] testing devices for the mobility market. Digital and mixed signal was 7% of system orders reflecting growth in demand for our handlers testing semiconductors used in the industrial market, while automotive digital applications were down in the quarter.

Overall industry conditions remain robust, and we project first half 2018 growth of approximately 11% relative to the same period last year. This is an improvement over prior sales projections reflecting our strong order momentum and outlook.

With that, I’ll turn it over to Jeff for details on the Q1 financials and guidance for the second quarter, before we switch topics to the acquisition of Xcerra.

Jeff Jones

Thanks Luis. Cohu’s Q1 generally exceeded our revised expectations, as we generated non-GAAP adjusted EBITDA of 15% on sales of $95.2 million. Cohu’s first-quarter results were stronger across each business unit including our contactor business, which represented approximately 11% of first-quarter sales.

For Q1, the GAAP to non-GAAP adjustments include approximately $1.7 million of stock-based compensation expense, $1.1 million of purchased intangible amortization expense, $296,000 of acquisition costs related to Xcerra, and a credit of $147,000 to adjust the earn-out valuation from the Kita acquisition. My comments that follow including the Q2 guidance are all based on Cohu’s non-GAAP results, which exclude the impact of these items.

Sales for the quarter were $95.2 million, and above our revised guidance of approximately $93 million as announced on March 21st. One customer in the automotive market represented approximately 12% of sales. No other customer exceeded 10% of sales in the first quarter.

Q1 gross margin was 42.4% and below our increased guidance, primarily due to a shift in product mix during the last two weeks of March. Operating expenses for the first quarter of 2018 were $27.5 million and below our updated guidance of $28.3 million due to product development materials and outside services forecasted for late Q1, which have now moved into Q2. Q1 operating expenses included a foreign currency loss of approximately $1.6 million.

The non-GAAP effective tax rate for Q1 was 20% and higher than our annual forecast mainly due to the accrual of foreign withholding taxes in the event we repatriate funds to the US. As I mentioned before, our tax rate continues to benefit from profit generated outside the US in countries with lower statutory income tax rates and in certain countries where Cohu has income tax holidays. Furthermore, the new tax rates will also benefit the company from profits generated in the US that are taxable along with those which do not currently incur a tax provision because of our valuation allowance. As a result of these factors, we are expecting our effective tax rate to be approximately 17% for Q2 and 18% for the full year 2018.

Accounts receivable increased sequentially by $14.1 million and DSO also increased by six days to 81. Inventory was flat sequentially with inventory days decreasing by 12 to a 108. Accounts payable days increased by 2 days to 71 days. Overall, the cash conversion cycle improved by four days to 119 days.

Fixed asset additions in Q1 were approximately $1.1 million and depreciation was $1.4 million. Cash declined quarter-over-quarter by a $15.6 million as a result of an increase in working capital of $11.2 million and the typical cash payments that are specific to Q1, including variable compensation and income taxes on RSU vesting. Additionally we made a $1.5 million earn-out payment in Q1 related to the Kita acquisition.

Deferred profit at the end of March was $3 million. That is down from $6.6 million at the end of the fourth quarter. The related deferred revenue at the end of Q1 was $5.9 million, down $4.6 million sequentially.

Cohu’s Board of Directors approved a quarterly cash dividend of $0.06 per share, payable on July 27, 2018, to shareholders of record on June 15, 2018.

And now moving to our guidance for Q2. We expect Q2 sales to be approximately $99 million, which reflects an increase of approximately 11% in revenue during the first six months of 2018 compared to the same period last year. Gross margin in Q2 is expected to be approximately 41.5%, and operating expenses for the second quarter are expected to be approximately $24.5 million.

I will now turn it back to Luis to discuss the exciting news today regarding our acquisition of Xcerra.

Luis Müller

Thanks Jeff. So today is a very exciting day for Cohu. Earlier this morning, Cohu and Xcerra announced the signing of a definitive agreement unanimously approved by both companies’ board of directors, under which Cohu will acquire all outstanding Xcerra shares in a cash and stock transaction.

Upon close, this transaction is expected to be immediately accretive and generate significant long-term shareholder value, as well as be beneficial for customers and employees. This transaction is a powerful combination of two complementary companies that will accelerate our strategy to diversify our product offerings, and strengthen our position as a global leader in backend semiconductor equipment. The depth and breadth of the combined product portfolios, engineering and product development resources, as well as global customer support will enable us to deliver comprehensive semiconductor backend solutions that better meets the future needs of our customers.

This acquisition meets our previously stated acquisition criteria, enabling Cohu expand into profitable and complementary markets, and delivering margins in line with our midterm financial model. This day has been a long time coming. Xcerra’s CEO, Dave Tacelli, and I first met over three years ago and have kept in touch over time. Through our discussions it became clear that the potential of our two companies combined could surpass what each of us could do individually.

Now I will walk through the details of the transaction and its strategic rationale. For those following along with the slides we posted on our website, please turn to Slide 3, I will start with the strategic rationale combining Cohu and Xcerra made sense for a number of reasons. The transaction brings together complementary products in core test and inspection handlers, test contactors and expands our product portfolio into semiconductor and PCB test equipment.

The combination broadens our existing footprint in key high-growth areas, particularly in the secular growth markets of automotive, industrial, IoT and mobility. The combined company will serve a total addressable market of about $5 billion with a highly diversified customer base. On the next page, the combined company has increased scale, revenues of approximately $800 million and a strong margin profile. The product portfolio is highly complementary and diversified across backend semiconductor and printed circuit board manufacturing.

Now turning to Slide 5, joining forces with Xcerra is highly aligned with our strategy. Our test and inspection handler and consumable businesses are complementary and combining them drives scale, enhance customer relevance along with the ability to increase investments over the longer-term in more fundamental technologies.

Xcerra also expands our business into adjacent markets such as automated test equipment and PCB manufacturing.

Turning to page 6, with our core test and inspection handlers the combined company brings together broader application coverage across the various semiconductor device segments. Both companies are well established across key end-market applications, particularly focused in automotive, industrial, IoT and mobility.

Now on page 7, the test contactor business is a key strategic objective of Cohu and this acquisition will provide new cross-selling opportunities with handlers, and accelerate knowledge development to better address customer challenges. Test contactors is a $720 million fragmented space, growing with semiconductor unit volume and challenge to resolve tough requirements in signal integrity, thermal management and performance interacting both with the automated test equipment and the handler. We see opportunities to address these requirements and accelerate the pace of innovation in new solutions to customers.

Onto page 8, the transaction expands our product portfolio adding leading capabilities for certain segments of semiconductor test. Xcerra gained significant momentum in SoC test over the past 18 months, while outgrowing the competition and the market with cost-effective solutions in RF, RFPA, power management and digital applications on Diamondx and new market penetration in flat panel display drivers.

Now turning to page 9, both Cohu and Xcerra are focused on the attractive and growing automotive, industrial, IoT and mobility end markets. With the acquisition of Xcerra, we strengthen our position in both automotive and industrial semiconductor applications.

If you turn to the next page, you will see that these markets are growing more rapidly than the overall semiconductor industry. The proliferation of IoT applications has positively impacted our business across multiple segments. On page 11, the acquisition of Xcerra diversifies Cohu’s revenue base and increases our addressable market to approximately $5 billion across handlers, contactors, inspection and automated test equipment strengthening our ability to capitalize on secular growth opportunities in the automotive, IoT, industrial and mobility.

The combination creates a global leader in backend semiconductor equipment with combined company revenue of approximately $800 million, and we see opportunities for future growth by providing customers with a complete portfolio of solutions for semiconductor manufacturing.

I will now hand it over to Jeff for more details on the financial aspects of the transaction.

Jeff Jones

Thanks Luis. So now please turn to page 12 of the presentation. The combined company without synergies on a pro forma basis would have had approximately $800 million in revenues, 44% non-GAAP gross margin and 16% non-GAAP EBITDA margin over the last 12 months. As Luis highlighted earlier, we expect more than $20 million of annual run rate cost synergies, excluding approximately $7 million of stock-based compensation within the first 24 months after closing the transaction.

Over the midterm, we are targeting higher margins for the combination due to synergies in COGS, operating expenses and new product innovation. That scale of the combined company drives down the relative SG&A expense to revenue percentage and the transaction is expected to be immediately accretive to non-GAAP earnings per share at closing.

Now turning to page 13, the total transaction consideration is approximately $796 million, consisting of approximately 65% cash and 35% Cohu stock. Xcerra shareholders will own approximately 30% of the combined company, and will receive $9 in cash for each share of Xcerra common stock, and 0.2109 shares of Cohu stock for each share of Xcerra common stock.

The cash consideration will be funded by a combination of cash from the combined companies’ balance sheet, and a new senior secured term loan B, the details of which are on the next slide. The transaction is subject to approval by Cohu and Xcerra shareholders and customary regulatory approvals. The transaction is also subject to customary closing conditions and is expected to close in the second half of 2018.

The next page includes a financing summary for the transaction, and we will borrow $350 million under a senior secured term loan B facility that will be available at the time of close. Considering the most recently reported cash balances for both companies, post closing Cohu will have $362 million of outstanding debt, pro forma cash of approximately $132 million, net debt of approximately $230 million and a total leverage ratio of 2.7x last 12 months pro forma EBITDA.

Now with that we will open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Edwin Mok with Needham & Company. Please proceed with your question.

Edwin Mok

Great. Thanks for taking my question. Congrats for getting the deal and also a good quarter. Let me start with the quarter, just to get some color on the quarter, so it sounds like you guys have some acceleration of mobile, saw system demand on the first quarter, is that continuing into the second quarter? That is the first part. And then, [indiscernible] start focusing on the two wins that you guys talked about, the Korean customer and also the European auto customer. In the first quarter you guys get qualified and get decent revenue on that, how – do we expect continued business from these customer – from the Korean customer? And then for the European customer, when do we expect revenue to come from that customer?

Luis Müller

Hi, Edwin. This is Luis. Nice to speak to you again today. So, let us start with the thermal subsystems. We had orders for multi-quarter delivery of thermal subsystems and happen to have an accelerated delivery of a first one at the end of the first quarter. So that was the upside on to our revised guidance. And certainly additional systems will be delivered here in the second quarter. They are part of the guidance.

As for the two customers that you mentioned, we do – on the Korean customer side; we do expect to be shipping systems throughout this year and receiving orders also throughout this year. That is going to be an ongoing business not only in 2018 but onwards from there as well. For the other customer, the automotive customer that business is secured from an agreement perspective. They want the business, but actual revenue recognition system shipments are in the future. It hasn't happened at this point.

Edwin Mok

Then, we don't have visibility in terms of when that will happen…?

Luis Müller

Not exactly. I mean it will be demand based. It will be that customer’s demand based that will drive that, and I don't have clear visibility into that right now.

Edwin Mok

Okay, good. Thanks for the color on that. And then, sorry if I missed it, Jeff, what was the gross margin guidance for the second quarter, and how do you kind of think about gross margin beyond just the near-term?

Jeff Jones

The guidance for Q2 Edwin was 41.5%. We continue to think about gross margin in terms of our model. At the different revenue levels, we will work through 42% at $400 million or $100 million per quarter up to 45% gross margin with annual revenue of $500 million, or $125 million per quarter. So that hasn't changed.

Edwin Mok

So it is just based [indiscernible]. Okay, great. And then, on the Xcerra deal, I guess I have two questions, first is, the synergies of $20 million seems to be low given you guys have combined [indiscernible] of over $200 million, right. Just curious, how does that break down between cost of OpEx and cost of goods sold, and what drives $20 million versus a bigger or a smaller number?

Jeff Jones

Well, that again is our initial estimate at the number. It is over the first 24 months. And the breakdown of that is approximately a third in COGS and two thirds in operating expense as best as we can see at this point.

Edwin Mok

I see. So this is the first shot on that, okay. That is great. And then, last question I have just on current regulatory approval, do you expect to have to go for every regions or is there any way you can speed up the regulatory approval of that and specifically on the [indiscernible] space, with the combined company, how much share do you guys have in the market, and is that going to be a concern for regulatory?

Jeff Jones

So, on the regulatory question Edwin. We work to whittle it down to a couple of countries so that we are not having to apply to a number of different countries. So, I think we are generally focused on US and Europe.

Luis Müller

And as far as handlers go, Edwin, we have really over time focused on different applications, different parallels in the past. So by and large the products are complementary across the application specific spectrum.

Edwin Mok

Okay, great. That is all I have. Thank you. I appreciate it.

Jeff Jones

Thank you Edwin.

Operator

Thank you. Our next question comes from Patrick Ho with Stifel. Please proceed with your question.

Patrick Ho

Thank you very much and congratulations as well on the deal. Maybe first off with the deal itself, given that you mentioned Luis that you have been talking for some time with Xcerra, can you just give us kind of like the, I guess, the updated version of when you reinitiated talks and it seems like things kind of came about pretty quickly considering they were coming off their failed attempt to be acquired by a Chinese entity, how did that get started again on your end in terms of getting this deal done this time around?

Luis Müller

Well, it is – hi, Patrick. It is basically what you just described. Once their transaction with Hubei broke apart and it was made public, we reassessed the situation and I contacted Dave again, and we were reengaged in dialogs.

Patrick Ho

Great. And Jeff, maybe as a follow-up question in terms of some of the new targeted model metrics you have for the combined company, given that both of you have somewhat different manufacturing strategies, Xcerra has traditionally on their test business used the contract manufacturer, [indiscernible], and you guys have shifted a lot over to Asia, how do you look at that rationalization, and is that the potential area where you could get additional cost synergies versus the 20 million you have highlighted today?

Jeff Jones

I think, Patrick, the testers and handlers are different types of equipment manufactured in different ways. So I think at the moment we are looking at their manufacturing model for testers, which is outsourced as something that we won't be modifying, at least not initially. But on the handler side of things, we have a good operation in Morocco that we continue to transition product to and so we will be looking to leverage the fixed costs in that operation and drive further gross margin gains by adding Xcerra volume to that operation.

Patrick Ho

Great. Thank you very much.

Operator

Thank you. Our next question comes from David Duley with Steelhead Securities. Please proceed with your question.

David Duley

Hi, yes. Thanks for taking my questions. Just first a clarification, I think you raised your guidance for the first half revenue growth to 11%, I think it was 9% before, is that the right increase and what was the upside driven by?

Jeff Jones

Dave, this is Jeff. We had said over the last couple of quarters that we expected a 10% increase in the first half of ’18 over ’17. And so, we were about 11% currently. And as we talked about the markets across the board continue to be – it continued to be strong. So, still seeing good strength in automotive and mobility we talked about, with the increase in revenue in Q1. So I think it continues to be a broad based demand. And it is at 11% growth versus the 10% that we had highlighted previously.

Luis Müller

I would also add industrial market to automotive, mobility, industrial has been doing well as well.

David Duley

And I guess many companies in the food chain have been impacted by slower mobility handset sales from Apple, and I was just wondering how that might have impacted you guys during the quarter?

Luis Müller

Yes, hi Dave. We have seen some, but honestly not to the degree that I can read out from some of the other companies. We continue to have actually a strong pool for thermal subsystems, which apply to digital process for test, and we continue to have a very strong demand for handlers that got used in power management ICs, and RFIC test, and also inspection.

It is a little challenging for us to know if those are going into a mobile application or some other general consumer connected device, call it IoT for now, or even automotive connected device, and so therefore IoT. So demand remains actually pretty strong for those two classes of products.

David Duley

Okay, and then on the Xcerra acquisition just a couple of questions there, how did you come up with the valuation, and how accretive do you expect it to be to your results currently? Anyway that you can help provide color there would be great. I realize it might be difficult question to answer?

Jeff Jones

Well, I will start with the first one, Dave. It is a combination. It is largely driven by negotiation, projected valuation. In this case, with Xcerra coming off of the Hubei deal, their valuation was capped for quite a while. And so, it is just a matter of discussion and negotiation between the teams, and then, of course, looking at total value how does that compare to market valuations, to really come up with the right number.

Luis Müller

And looking at the company current financials, current strength, recent gains in the SOC test market and future prospects.

Jeff Jones

Dave, yes, the second question, can you tell us what that was again?

David Duley

Yes, the amount of accretion that you expect from this deal, any sort of help that you can – you mentioned it is immediately accretive, I was just wondering if you could help us understand to what extent, or any other details around that?

Jeff Jones

I think at this point we are just going to – we are going to stay with our $20 million of synergies over the next 24 months. It is a little bit early for us right now. It is significant, but driven largely by those synergies.

David Duley

Okay, and then when you look at your handler product line, obviously there is going to be some overlap, do you have to do some elimination of product lines, or do you plan to support all the products going forward?

Luis Müller

Dave, as I mentioned before here, if you actually look into the details of the product lines, we have focused on application specifics that are different company to company. So, across the [parallels] spectrum, the test time spectrum, and therefore semiconductor device types, you see that the handlers are actually quite complementary and accelerates us being able to more fully support customers both in automotive, mobility, and industrial markets.

David Duley

Okay. And I'm not sure if you gave this to us. But as far as those rapidly growing segments that you showed in the slide presentation, what percentage of your revenue comes from each one of those buckets at this point, automotive, industrial, consumer mobility and IoT?

Luis Müller

Dave, if you reference page 9 of the acquisition slide deck, you see there sort of the Cohu distribution across auto and industrial market, mobility, consumer, computer, solid-state lighting, and into the right you see Xcerra and then the pro forma combination, where we become based on current numbers 45% auto and industrial, 35% mobility, 15% consumer and then computing solid-state, the balance and this was on a systems based revenue.

David Duley

Okay. I'm sorry. I did see that slide. I didn't pick up on that, but it is good that you have 45% auto and industrial exposure going forward. I think that is a market that everyone likes. Anyway, congratulations on everything and good luck.

Jeff Jones

Thanks Dave.

Luis Müller

Thanks Dave.

Operator

Thank you. Our next question comes from Craig Ellis with B. Riley and Company. Please proceed with your question.

Peter Peng

Hi, this is actually Peter Peng calling in for Craig Ellis, and thanks for taking that question.

Jeff Jones

Hi, Peter.

Luis Müller

Hi, Peter.

Peter Peng

Hi, congratulations on the deal and the quarterly execution, I just want to start off on second quarter guidance on the gross margins, are there any one-offs or kind of product mix at play there?

Luis Müller

Nothing significant Peter. Again I would say that when you look at the gross margin, we would expect it to be in line with our model, and we are right about in-line with our model, which is at 100 million. We will be at 42%. So, we are guiding 99 million, we are guiding the 41.5% gross margin. So, there is no significant one-offs or anything in the Q2 revenue.

Peter Peng

Great. And then just kind of – can you talk about the visibility into third quarter and then maybe on a half on half basis, how do you see that?

Jeff Jones

I think the best thing to say here is talking about the current quarter orders, which continue to be strong. Actually really strong and trending up as we go into the quarter. So that gives us confidence for the third quarter of this year, and I won’t speak much for the totality of the second half. To be honest, we have been quite focused on this transaction over the last few weeks here. So, I will just speak to the third quarter now.

Peter Peng

Okay, and switching to the deal, can you kind of talk about some of the potential revenue synergies just from the products?

Luis Müller

Yes. We haven’t really put in anything for cross-selling opportunities in our financial model, and we are only using the over 20 million as cost synergies at this time. But we will be exploring opportunities for cross-selling revenue synergies once the transaction closes, or by the time it closes.

Peter Peng

And then, in terms of cost synergies, is this a fairly backend loaded or is this kind of equally split across the first and second year?

Jeff Jones

Yes, Peter it is more of the latter. We kind of see it as a more linear progression as time goes on. So I think over the 24 months, I would expect about half of that in the first 12, and half in the second.

Peter Peng

And one more question before I hop back, can you talk about the debt cost for this?

Jeff Jones

Excuse me. I didn't catch that.

Peter Peng

The debt cost that they should – potential debt cost for…?

Jeff Jones

Yes. It is going to be – we expect it to be right around 4.8%, 4.9% in total. That is a LIBOR plus about 250 basis points.

Peter Peng

Great. Thank you guys. Congratulations.

Jeff Jones

Thank you.

Luis Müller

Thank you.

Operator

Thank you. Our next question comes from Tom Diffely with D.A. Davidson. Please proceed with your question.

Tom Diffely

Yes, good morning. Attractive acquisition here. So, first question on the midterm model that you put out, the 48% and the 22% EBITDA. Does that just require the synergies in the core business or is there a certain level of growth you need to achieve those targets?

Jeff Jones

It is – it is mainly driven by the synergies Tom. Modeling out future growth is hard to do in this business, and so we have really not been too aggressive on that end of it. So as we look forward trying to estimate what the cost synergies would do, that is what is driving the impact on gross margin, the growth in gross margin.

Tom Diffely

Okay, great. And then, I really liked the slide you had on page 7 on the contactor market, what would a similar slide look like for the handler business, as far as the other players and your percentage overall?

Luis Müller

We haven't done that analysis yet, Tom. We are waiting on the market reports from last year and our collective knowledge that we are running through right now of installed base of equipment to make adjustments to some large privately held companies. So don't have that information at this time.

Tom Diffely

Okay, and I guess just big picture, when you look at doing this acquisition today versus perhaps a year ago, when Xcerra was in a [go shop] mode during their acquisition, prior acquisition. What is the difference, is it simply that they gained share and the market has gotten stronger over the last year and so became a more attractive target for you?

Jeff Jones

Well, first of all they are a different company today than they were a year ago. They are stronger financially. They have gained share in SOC. They have very good customer prospects going forward, and that is – they are available right now. So that makes it actionable.

Tom Diffely

Okay. Thank you for your time.

Jeff Jones

Thanks Tom.

Luis Müller

Thanks Tom.

Operator

Thank you ladies and gentlemen. We have come to the end of the Q&A session, and I would like to turn the call back over to management for closing comments.

Luis Müller

Thank you for joining us today. We look forward to speaking to you at upcoming investor conferences we plan to attend, including the B. Riley, FBR and Cowen conferences later this month; at the Needham and Stifel conferences in June, and the CEO Summit in July, or when we report our second quarter 2018 results. Thanks again and have a great day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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Source : https://seekingalpha.com/article/4171617-cohus-cohu-ceo-luis-muller-q1-2018-results-earnings-call-transcript

Cohu's (COHU) CEO Luis Müller on Q1 2018 Results - Earnings Call Transcript
Cohu (COHU) Reports Agreement to Acquire Xcerra Corporation (XCRA) for Approx. $796M
Cohu to Acquire Xcerra Creating Global Leader in Back-end Semiconductor Equipment
Cohu to buy Xcerra for $796 million after blocked Chinese deal
Semiconductor testing co Cohu to buy Xcerra for $796 mn
Cohu to Present at Upcoming Investor Conferences
Cohu Reports First Quarter 2018 Results