Cohu Inc (COHU) Q4 2020 Earnings Call Transcript

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Cohu Inc (COHU -1.20%)
Q4 2020 Earnings Call
Feb 11, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Cohu Incorporated Fourth Quarter and Fiscal Year 2020 Financial Results Conference Call. [Operator Instructions]

I'd now like to hand the conference over to your host today, Mr. Jeff Jones, Chief Financial Officer.

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

Good morning, and welcome to our conference call to discuss Cohu's fourth quarter 2020 results and first quarter 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's also a slide presentation in conjunction with today's call that may be accessed on Cohu's website in the Investor Relations section. Replays of this call will be available via the same page after the call concludes.

Now to the safe harbor. During today's call, we will make forward-looking statements reflecting management's current expectations concerning Cohu's future business. These statements are based on current information that we have assessed, but which by its nature is subject to rapid and even abrupt changes. We encourage you to review the forward-looking statements section of the slide presentation and the earnings release as well as Cohu's filings with the SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, February 11, 2021 and Cohu assumes no obligation to update these statements for developments occurring after this call.

Finally, during this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings release and slide presentation for reconciliations to the most comparable GAAP measures.

Now, I'd like to turn the call over to Luis Muller, Cohu's President, and CEO. Luis?

Luis A. Muller -- Chief Executive Officer, Board Member

Thanks, Jeff. Good early morning everyone and thanks for joining us. Today, I'll discuss some of the dynamics from fourth quarter, explain what's driving our growth, talk about our expectations for first half 2021, and why we believe Cohu is uniquely positioned now to capitalize on the strong semiconductor market. Record fourth quarter revenue of $202.4 million was up 34% sequentially and exceeded our updated guidance with business conditions continuing to improve throughout the quarter.

Despite COVID-19 challenges, we executed on our fifth consecutive year of revenue growth, a 5-year CAGR of 18.7%. Cohu ended last year on a high note with all-time record orders and strong momentum that has carried into first quarter 2021. Our operations team and supply chain partners are executing on an unprecedented business ramp to meet customer needs. Fourth quarter orders were split 29% recurring and 71% systems, reflecting the sharp increase in tester and handler systems orders.

Interface business orders increased 30% quarter-over-quarter, but given such strong system demand, the contactor attachment rates for handler sales was 19%. Orders improved sequentially across all semiconductor markets with automotive increasing nearly 200% quarter-over-quarter. Estimated test cell utilization increased 5 points quarter-over-quarter to 86% at the end of December, and explains some of the dynamics driving strong business momentum.

Mobility continues to be a significant segment for Cohu as we enable the introduction of next-generation 5G smartphones deployed by all major U.S., Korean, and Chinese manufacturers. Our Interface Group had a key design win at a leading foundry in Taiwan and OSAT in Korea for testing millimeter wave RF devices. We're not only excited by demonstrating our capabilities in high frequency, but also for the success of our new probe head solution against well-established competitors in wafer test. The new cRacer interface platform will be used initially in pre-production in product qualifications. We expect volume orders starting late this year or early next.

Our ATE business experienced a steep ramp driven by the new RedDragon instrumentation suite for testing RF front-end ICs and Wi-Fi 6 devices. Along with RF, we had good traction in display driver, power management and application processor test for smartphones, which marks an expansion of our addressable market. Tester orders doubled year-over-year, demonstrating the success of our new product portfolio and complementary value that the 2018 Xcerra acquisition brought to Cohu.

Moving onto vision inspection. Our Neon platform continued to capture new customers and applications in the fourth quarter. We estimate that we gained 3 to 4 points share last year, positioned Cohu as the second largest supplier of automated optical inspection systems for the back-end semiconductor market. We've entered 2021 with significant momentum in this segment and are optimistic about business prospects as we continue to expand our portfolio solutions with greater vision accuracy, speed, and the deployment of artificial intelligence to improve inspection yield. Our sales teams have been incredibly busy securing key design wins in China and Taiwan with our testers, handlers, inspection equipment and contactors, further expanding our market penetration in the Mobility segment. Kudos to our sales team and the great efforts of engineering in developing new capabilities in our products.

Turning to the Automotive segment. Orders tripled quarter-over-quarter as semiconductor companies ramped to catch up to auto demand, marking a significant shift in business toward power electronics, battery management and ADAS processors. It comes as no surprise that this new wave of growth in automotive coincides with all major auto manufacturers announcing the introduction of electric vehicles, a new driver assist technologies. We estimate that about 20% of our automotive handler orders were for testing semiconductors for EVs. Driver assist, or ADAS is also particularly interesting as it marks the confluence of extreme temperature testing with active thermal control, making a perfect storm of complex thermal management requirements. We like these challenging technical problems that ultimately impact yield, offering us an opportunity to address customer needs with our proprietary thermal technology.

Approximately 5% of our automotive handler orders were for testing ADAS processors and our forecast as increasing in first half of 2021 as this technology starts to ramp in volume production. Orders in the Industrial and Consumer segments also improved quarter-over-quarter. Our gravity and pick and place handler businesses are once again ramping in support of testing high power electronics used in industrial and medical applications. We have ongoing handler qualifications for testing gaming processors, where we can optimize yield by actively managing thermal dissipation along with testers for display driver and power management ICs.

In the Computing segment, orders practically doubled quarter-over-quarter. And in IoT, IoV, and Optoelectronics, orders were up substantially, driven mainly by our success in testing new RF devices. Now looking ahead, we are encouraged by momentum across all Cohu's main market segments and by customer interest in our new products and integrated test cell solutions. We will be guiding first quarter revenue and profitability up and expect second quarter to be sequentially stronger. We're motivated to accelerate time to yield and productivity for our customers, being diligent about new product investments and incredibly focused on improving margin and profitability.

So why is Cohu doing so well and why is our outlook so positive? We have made substantial improvements to our product portfolio over the past two years that have positioned the company for continued growth over the mid-term. The 5G deployment is accelerating and analysts are now projecting greater than double year-over-year volume penetration of this technology in 2021. Test complexity is also increasing, leading to higher system ASPs and greater test intensity.

Additionally, smartphone units are projected to grow again this year, further compounding the opportunity for selling RF, display driver and power management IC testers, handlers, and contactors. But the Cohu story is not limited to 5G. As mentioned earlier, we're capturing new customer opportunities in RF transceivers, Wi-Fi 6, general IoT, and even application processor test with some of these being new additions to our addressable market. Last year, we saw new U.S. export restrictions to Huawei. I believe everyone understands that smartphone demand is increasing. There has been a redistribution of business that translates into incremental orders for Cohu products from customers where we have greater share in new opportunities, particularly in China.

There are significant positive trends in the Automotive segment, starting with many auto companies suggesting a complete transition to EV technology in the coming decade, and significant government mandates to go carbon-neutral in China, Europe, and the U.S. Another exciting trend is the rapid adoption of ADAS technologies in vehicles, which expands the use of processors, sensors, microcontrollers, displays and RF ICs. We believe our sales growth to the Automotive segment will benefit about equally from IC content growth in a projected vehicle SAR in the mid-teens this year.

With the successful integration of Xcerra now behind us, we held an Analyst and Investor Conference early December describing a new target financial model in the path to 14% revenue CAGR to $940 million and 23% operating income over the mid-term. This comes from enabling testing of new high growth technologies in RF, battery management and ADAS processors, in gaining traction in automated optical inspection.

Now, I'd like to turn it over to Jeff to provide details on fourth quarter results and share first quarter guidance.

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

Thanks, Luis. Before I walk through the Q4 results and Q1 guidance, please note that my comments that follow all refer to non-GAAP figures. Information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures are included in the accompanying earnings release and investor presentation which are located on the Investor page of our website.

Now turning to the financial results. Q4 revenue was $202.4 million and $4.9 million higher than the mid-point of our updated guidance range provided on December 1st. Fiscal year 2020 revenue was $636 million, growing 9% over 2019, and with nearly 19% CAGR over the last five years. In Q4 and fiscal year 2020, no customer accounted for 10% or more of sales. In the fourth quarter, Cohu's gross margin was 45%.Operating expenses were $51.7 million and lower than guidance as we continue to optimize our expense structure. COVID-19-driven temporary cost reductions were lifted at the beginning of November.

Fourth quarter non-GAAP operating income was 19.4% of revenue and adjusted EBITDA was 20.9%. Return on invested capital was approximately 54% in the fourth quarter and approximately 26% for the full fiscal year 2020. The Q4 results exceeded our new target model objective to make investments with ROIC of 30% or higher. Cohu's non-GAAP effective tax rate for Q4 was approximately 11% and lower than guidance primarily as a result of losses generated in Europe, combined with U.S. income offset by NOLs. Non-GAAP EPS for the fourth quarter was $0.73 and $1.19 for the full year 2020.

Now turning to the business model. We recently introduced a new mid-term target financial model that delivers higher profitability at all revenue points. Our new target model achieved $3.60 of annual EPS on revenue of $940 million versus $3 of EPS in our previous model. This represents a 20% increase in profitability at target revenue. On a quarterly basis, the new model reflects an increase in EPS of $0.10 growing to $0.15 at target revenue of $235 million.

Gross margin expands with higher revenue and operating expenses are reduced from the previous model, but sufficient to support product development and other business investments. The combined effect is an improvement in operating leverage with about 45% of incremental revenue falling through to operating income. We've added free cash flow targets at each level of quarterly revenue. Capex requirements are relatively modest and are modeled at $20 million per year.

Now moving to the balance sheet. Our cash balance at the end of Q4 was approximately $170 million and supports our operational needs of approximately $80 million plus debt service and funding the inventory and receivables associated with the steep production ramp we're currently experiencing. During Q4, Cohu reduced debt by approximately $20 million and deleveraging continues to be a capital allocation priority. Cash flow from operations during Q4 was $22.3 million and capex for the fourth quarter was $5.1 million, driven mainly by purchases of equipment to increase contactor manufacturing capacity.

The first quarter revenue forecast improved significantly since the directional guidance we provided in early December. For Q1 we're guiding sales to be between $212 million to $232 million. The low end of the revenue range consider some supply chain uncertainty caused by COVID-19 and potential risks associated with book and bill and customer acceptance, which is required for revenue. Gross margin in Q1 is expected to be between 45% to 46%. In Q1, operating expenses are projected to be between $53 million to $54 million. We expect Q1 adjusted EBITDA at the midpoint of guidance to be approximately 23%.

The Q1 forecast non-GAAP tax rate is approximately 22% at the midpoint of guidance. Most of Cohu's profits are generated offshore and subject to statutory tax rates in various foreign jurisdictions. Income taxes on profits generated in the U.S. are mitigated by net operating loss carry forwards. The diluted share count for Q1 is expected to be approximately 43.7 million shares. With increasing backlog and strong order forecast across various markets, we have improved visibility into the second quarter and are now projecting revenue to be up 5% to 10% from the midpoint of Q1 guidance. As order momentum and design wins continue in the first quarter, this is shaping up to be a strong year for Cohu and we remain optimistic about our mid-term prospects enabling testing of new high growth technologies in RF, battery management and ADAS processors along with gains in automated optical inspection.

That concludes our prepared remarks, and now we'll open the call to questions.

Questions and Answers:

Operator

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

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Hi, there. Good morning. Congratulations on the strong results and appreciate you letting us ask a few questions. Maybe the first question I had was a lot of interesting things to pick through here, but from a demand perspective, it's been maybe three years, Luis, since you've seen this much strength from the automotive market. I think, based on your commentary about EVs, ADAS, all of the other things we can read about anecdotally, the TAM is going to potentially be higher this year or certainly in the following years, and clearly your stand now is also much higher than it was three years ago. So I guess maybe on some sort of a quantitative measurement, can you give us a sense of sort of how much larger the auto market just this year right might be versus three years ago, and also what your revenue level might be kind of period-to-period and I am not saying that's sort of an endpoint, but just kind of if you could give us a sense of that comparison.

Luis A. Muller -- Chief Executive Officer, Board Member

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

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Okay. That's helpful. Appreciate that. A couple of other questions. The -- from a supply and maybe timing of your deliveries this year, there is obviously again a lot of aggregates about current shortages of wafers, extend semi lead times for markets like auto, and while that's not readily apparent I think in your strong first half work, has this dynamic caused any noticeable changes or delays in your shipment schedule? And also, what kind what's kind of the present status of your lead times for things like test handlers or test equipment, and how are you managing through any challenges?

Luis A. Muller -- Chief Executive Officer, Board Member

No, we haven't had any delays caused by supply chain or the, like you said, the shortage of semiconductors that you read on the news that hasn't impacted our goals. To lead times, they have extended. I mean, there are multiple ways of looking at lead time. We tend to look at it as a -- what is the lead time that is 75th percentile of our product shipments. There is always custom and more difficult configurations that take longer. But looking at the 75th percentile, our handler lead times right now are about 14.5 weeks, testers approximately 12 weeks, contactors are running at about 6 weeks. So that's about where we're hovering right now on the lead times.

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

That sounds like within reasonable ranges maybe higher, if not, but other equipment out there, it sounds like it's had more stretch lead times a lot more than you. Maybe the last here for Jeff. In terms of the first quarter outlook and the revenue range, the gross margin seemed a little lower than what the target model suggests. The opex, as a percent of sales, also has been offset seems lower as well and so it kind of neutralizes probably within in the range of your EPS that you've talked about at those revenue ranges, but you can kind of just talk through the dynamics that are causing gross margins to be within that range and opex to be within that range?

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

Yeah, Brian, that's an accurate observation. Gross margin is down a bit in Q1, but offset by the reduction in operating expenses to maintain that target profitability. So what we're seeing really is it's a product mix. Part of the story is product mix. Seeing a steep increase in systems, orders and revenue and this is mainly handlers -- testers, but handlers that have a gross margin lower than corporate target. Just to give you a sort of a -- quite a reference here, total systems revenue expected to be about 67% in Q1. The normal ratio or percentage for system revenue is about 55% so it's up significantly.

Now recurring, as we know, just by its nature, it's not going to spike up or down quarter-over-quarter. And so, recurring revenue will increase, but it will increase over time as a result of the increased shipments. The second piece of the story is we continue to work on the contactor manufacturing transition and really continue to work toward bringing costs down and bringing that gross margin in line with expectations. So I'd say, first order magnitude is mix, and then secondarily, we continue to work on the contactor margin.

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Okay, great. Appreciate all the color.

Operator

Our next question comes from Charles Shi with Needham & Company.

Charles Shi -- Needham & Company -- Analyst

Hey, thank you for taking my question. If I hear you correctly, I think you provided early look for second quarter about 5% to 10% up from first quarter. Maybe this is a little bit of far -- further ahead. I wonder what's your outlook for the second half this year? If I look at your historical performance, looks like the third quarter tend to be slightly -- was seasonally sequentially down by maybe mid single-digit to up low-teens. Is that kind of seasonality we should be expecting this year or since this year is such a strong recovery year that may change? Any color would be great.

Luis A. Muller -- Chief Executive Officer, Board Member

Hi, Charles, this is Luis. Yeah, thanks for the question. We don't have that much visibility yet into the second half of the year. As you can see from our lead times, what we're booking now in the first quarter is shipping late second quarter. So we'll gain more visibility here in the next three months. We know there is an incredible strong dynamics in the automotive market still and the same in mobility and obviously there should be a second sort of ramp toward mid-year in mobility for cellphone launches in the second half of the year, but we don't know exactly how that's going to shape for Q3 or Q4 at this time.

Charles Shi -- Needham & Company -- Analyst

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

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

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

Charles Shi -- Needham & Company -- Analyst

Got it, got it. Maybe my next question is a little bit about your capital allocation. We know you want to prioritize debt repayment and potentially looking for M&A opportunities, but with your business in 2021 going back to the '17 or '18 level on a pro forma basis, are you -- what's your thought about resuming or returning to the dividend program any thoughts on that?

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

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

Charles Shi -- Needham & Company -- Analyst

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

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

Thanks, Charles.

Operator

Our next question comes from Krish Sankar with Cowen & Company.

Krish Sankar -- Cowen & Company -- Analyst

Yeah, hi. Thanks for taking my question and congrats on the good results. I just feel that Jeff or Luis, a lot of strength in autos is coming from the handler side. Do you think you have any shot in making inroads and testers or do you think there are much bigger players out there it will be difficult?

Luis A. Muller -- Chief Executive Officer, Board Member

Hi, Krish, this is Luis. I mean, that's a very good question. Yes, we would like to make inroads with the tester. There are limitations in our current capability to do that today. We do have some tester business on the auto side. It's non-existent by the way, but you're correct, it's much stronger on the handler business. It's also strong on the contactor business that has greater exposure to the auto side sort of that tri-temp thermally challenging test conditions. But, yeah, I hope that in the future, we'll be able to have more dialogue about the tester business into the auto, but not so much at this time, Krish.

Krish Sankar -- Cowen & Company -- Analyst

Got it, got it. No worries. And then, Luis, I think I asked this question in the past, is there a way to figure out offshore mobility orders of sales, how much is coming from 5G?

Luis A. Muller -- Chief Executive Officer, Board Member

Yeah, sure. From the tester side, we looked at it this way, there is about half of our tester business may be related to RF ICs, and in 2020, we estimated about a half of that was 5G-related. On the handler side, it's a little bit more difficult, because we know we're testing RF ICs or handling RF ICs or small P mix going into mobility applications, but we don't have that final use knowledge whether it is necessarily a 5G or 4G in all cases. We do have a measurable handler business and mobility as well, but I can't quite parse that out for 5G. So it's easier for me to say on the tester side.

Krish Sankar -- Cowen & Company -- Analyst

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

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

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

Krish Sankar -- Cowen & Company -- Analyst

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

Operator

Our next question comes from David Duley with Steelhead Securities.

David Duley -- Steelhead Securities -- Analyst

Yes, congratulations on nice results. A couple of questions here. Could you help us understand, I guess, for calendar 2020, what the size of the handler market was and perhaps, I guess, what your market share might be?

Luis A. Muller -- Chief Executive Officer, Board Member

Hi, Dave. This is Luis. That's a tough one, Dave. There was a lot of -- really a lot of variables this last year with COVID-19. So we don't have a good handle on the market size for last year. The external market data that we typically acquire comes out in early Q2. So that will give us more of a look back. I think we have more of an estimated view for 2021 than we actually do for to just completed 2020. But to point to your other question, our handler market share has typically hovered at about 50%, maybe low 50%.

David Duley -- Steelhead Securities -- Analyst

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

Luis A. Muller -- Chief Executive Officer, Board Member

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

David Duley -- Steelhead Securities -- Analyst

Okay. Change topics a little bit. You have a new model. I think you mentioned $3.60 is comparable to $3 in the previous model at the same level of revenue. You went through some dynamics about the difference between $3 and $3.60. Could you just review what the increases were to move you from $3 to $3.60 on the target model?

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

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

David Duley -- Steelhead Securities -- Analyst

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

Luis A. Muller -- Chief Executive Officer, Board Member

Yeah. Dave, the news on that is it's quite interesting. What we see from our customers is typically or let's say in the past when they place volume orders, there is a chance to stagger them over multiple weeks, multiple months. Right now the demand from a customer side is for multi-unit orders were ship fairly quickly and not spread them out. So that there's clearly a lot of pressure on the operations side to satisfy the ramp, satisfy customer need dates, and not much wiggle room from our customers on pushing out shipments. As I said before, the lead times are a little longer on our handlers, but they're not outrageous. And we're trying and working really hard to keep you that way because that's what our customers really need at the moment. There's pressure on and not much, I believe not much inventory or wiggle room in the supply chain to do it any differently, but ship as soon as possible.

David Duley -- Steelhead Securities -- Analyst

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

Luis A. Muller -- Chief Executive Officer, Board Member

No, I don't think we have talked specifically about capacity in the past, but we have had mechanisms in place to expand capacity with outside suppliers, contract manufacturers and we're -- we have triggered that and we're executing that capacity expansion. So it's -- as you know, our tester business is largely outsourced to a very large contract manufacturer Jabil which has been doing an outstanding job at supporting a ramp. And then we have sort of a hybrid outsourced, in-sourced model for handler manufacturing, where we outsource sub-assemblies and do final integration in test in house. We have had mechanisms and actually have used it in the past as well of doing some final integration and test at supplies, not in-house. So we have some flexibility there and we are executing that flexibility again this time during this ramp. So I think we're all set to support the business needs.

David Duley -- Steelhead Securities -- Analyst

Thank you very much.

Luis A. Muller -- Chief Executive Officer, Board Member

You are welcome.

Operator

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

Carlin Lynch -- B. Riley FBR -- Analyst

Hey, guys, this is Carlin Lynch on for Craig. Most of my questions have been asked. So I'll just kind of jump in here with a few kind of clarifications. Jeff, you mentioned that the second quarter should be up 5% to 10% off of obviously strong a first quarter guidance. Do you have any color based on what you're seeing in your backlog around mix? I know that was kind of a ding to gross margins in the first quarter. But based on some of my math the target model should have gross margins back up around 48% at that second quarter revenue level, is the mix that you're seeing on that revenue going to impact gross margins like it did in first quarter or should we see kind of some of that return to normalcy?

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

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

Carlin Lynch -- B. Riley FBR -- Analyst

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

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

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

Carlin Lynch -- B. Riley FBR -- Analyst

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

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

Thank you.

Operator

Our next question comes from Sidney Ho with Deutsche Bank.

Sidney Ho -- Deutsche Bank -- Analyst

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

Luis A. Muller -- Chief Executive Officer, Board Member

Hi, Sidney, this is Luis. Yeah, that's a good question. We have -- I think we still have opportunity for growth in the automotive market to be honest with you, I mean not all segments or all businesses in the automotive side are up to pre-COVID status yet. Although I have to say others are stronger. I think there are also opportunities still in display driver IC. That haven't really resumed yet to potential levels. I mean, the business -- our business has been getting into the display driver IC. So it's hard to say what we were pre-COVID versus now. But I think from an opportunity size perspective, I think there's room for improvement there to pre-COVID levels. Computing has been reasonably strong and well through the COVID crisis, but I think there are opportunities in graphics -- graphic processor, gaming that could get stronger from where we stand today. And certainly in our overall contactor business, I think there's some dynamics there that that could also be stronger than we are today and very much we're focused on driving and making that happen at the moment.

Sidney Ho -- Deutsche Bank -- Analyst

Okay, that's helpful. Maybe just a follow up to that. I think you talked earlier that the shortages that other companies have seen didn't really -- haven't really impacted you guys. But was order lead time stretching out a little bit. How do you feel comfortable that these orders are not panic orders and they're not real, but not double ordering from same customers that are driving -- seeing some of the shortages, and what are the procedures that you have in place to make sure that doesn't check?

Luis A. Muller -- Chief Executive Officer, Board Member

Yeah. That's a very good question. We have had the same observation, have had deep conversations with customers about the demand profile and knowing that this is not double booking or over booking from a mechanism -- and we're comfortable with the answers we're getting from a mechanism perspective. We have extended our terms and conditions and quotes. So cancellations -- all of the cancellation terms have been stretched out so that we have greater coverage in any eventuality. So we're pretty comfortable, like I said, from what we got directly from customers. We have been talking to customers senior management about this, and comfortable with the modifications we've made to our quoted terms and customers continue to come in and place orders.

Sidney Ho -- Deutsche Bank -- Analyst

Okay. Maybe one last question for me. Switching to the product side, you get -- in your prepared remarks you mentioned the cRacer test contactors for millimeter wave. You talk about expectations of orders coming later this year, early next year. Can you maybe describe the capability of this product versus your prior generation? And how do you expect the adoption of this product over the next one to two years in terms of the revenue growth opportunity and maybe the curve -- the shape of the curve of the adoption? Thanks.

Luis A. Muller -- Chief Executive Officer, Board Member

Yeah. So cRacer is more of a continuation. It's a new technology, but it's a continuation of what we used to call the xWave business. The xWave business was a solution originally designed by the Xcerra Group prior to us acquiring Xcerra for high frequency test and could be radar applications, sort of the beginnings of millimeter wave, if you will, RF IC test. xWave has been very well deployed and used in these applications, and particularly in lab scenarios. But as you move into volume production, there are some limitations on the cRacer, particularly for millimeter wave. So we expanded that with a new technology which we call the cRacer platform here. It's really tailored for up to 50 gigahertz, potentially more as we continued to evolve the product, but up to 50 gigahertz signal frequencies. It has the compliance requirements, the multi-site capability requirements. So it's been well accepted.

And we have, as I mentioned in the prepared remark, we have had a design when at a foundry in Taiwan, which is not typical. We don't typically do business with foundries, but this is actually not really a contactor, it's a probe head, and then an OSAT in Korea, which is a final test application. Now the shape of the ramp to that question, it will depend again on the size of millimeter wave business overall into 2022. So it's a little hard to pinpoint the size. But I'll give you a very wide range. The way we look at it, it could be somewhere between $5 million and $25 million of business in 2022. But ultimately, I think it depends on our customers and our customers -- and customer success with deploying millimeter wave.

Sidney Ho -- Deutsche Bank -- Analyst

Thank you.

Luis A. Muller -- Chief Executive Officer, Board Member

Welcome.

Operator

Our next question comes from Christian Schwab with Craig-Hallum.

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

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

Luis A. Muller -- Chief Executive Officer, Board Member

Hi, Christian, it's Luis. As I mentioned earlier, it's really hard to have crystal clear visibility in the second half. We already moved from giving one quarter guidance to give one quarter guidance and second, two quarters out directional indication and I think that's as best as we have visibility and can comment. We know this is going to be a strong year just the way we are right now. We know the underlining currents around automotive and particularly EV and ADAS are pretty strong. We also know the underlining current around 5G deployment, where people expect more than double the units of smartphones with 5G this year and the increase in test intensity. Hopefully also starting to see more of a ramp in millimeter waves toward the latter part of the year. So we know those underlying currents are strong. To be able to pinpoint the exact shape of the second half over the first half, it's not something we're comfortable guessing right now. There's not enough data point to put a projection yet in place. Sorry about that, but not yet, Christian.

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

No, that's extremely fair answer. My last question for you guys is in my viewpoint there seems to be a very strategic shift in value in the semiconductor industry coming to the back-end from the front-end, driven by trends, like we've talked about 5G, electric vehicles, but a lot of all that stuff is as you know requires advanced packaging, which increases complexity, which increases test times, etc. So I'm curious as we get to kind of post Moore's Law, if you will, a lot of the type of chips that in applications that you're dealing with, we're just stacking more and more chips, right. Those are chips that we're doing no tricks in, typically. And so it just seems like it doesn't matter whether it's yourselves or whether it's cooling or whether it's form factor everybody seems to be benefiting from this trend in my viewpoint. Would you agree with that?

Luis A. Muller -- Chief Executive Officer, Board Member

Yeah, yes, I would agree with that. I mean, there's some new technologies coming out in electrification, as you know, silicon carbide has a lot of promise and the way you handle and test those are a little bit different than what it was on additional packages or even MOSFETs. And the same could be said about processes for ADAS, power dissipation during test, the requirement for being hermetically sealed for automotive applications, sensor fusion into modules. So, yeah, there is a variety of package or packaging technology trends that are impacting the way you handle and test the silicon or some -- yeah, the silicon, the device itself. I agree with you.

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

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

Luis A. Muller -- Chief Executive Officer, Board Member

Thank you.

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

Thanks, Christian.

Luis A. Muller -- Chief Executive Officer, Board Member

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

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Yeah. Good morning. Thanks for the question. Maybe first, Luis, just a general market question for you. When you look at the shortages of chips in the marketplace today, do you think that's mainly a wafer production issue or is it a packaging issue? And if it is the former, does that create a natural governor on your business that could extend this cycle?

Luis A. Muller -- Chief Executive Officer, Board Member

Good question, Tom. I have a view on it. I don't have a 2020 vision on this, but to my understanding, it is -- or particularly to the larger nodes, not the leading edge nodes, it is a shortage of semi -- of wafers on the front-end. So it's a wafer shortage. That's my view. And I have the same impression you do, which is it creates a natural dampening effect that spreads out the business over multiple quarters. So that's how I view it. Again, it's not a 2020 vision into the details of the supply chain up to the foundry, but that's my understanding as well.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

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

Luis A. Muller -- Chief Executive Officer, Board Member

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

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay. That was it today. Thank you.

Luis A. Muller -- Chief Executive Officer, Board Member

All right. Thanks.

Operator

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

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

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

Luis A. Muller -- Chief Executive Officer, Board Member

Yeah. For this year-- that's a good question, Brian. I mean I have what we modeled for the next three years on average. We looked at, for example, ATE, the tester side, mobility growing on average 18% over the next three years and I think that's still kind of valid for this year coming up from a strong second half of last year. Then -- so just -- I'm just going to pick on some of the primary ones. If I look at automotive and that's essentially handler automotive, we have modeled that to be about 21% over the next three years, but truth be said we expect it to be stronger on the first year on the onset now in 2021 coming off of a week 2020. I don't have at my fingertips here a projection for handler automotive in 2021, but I wouldn't be surprised if we're talking kind of 30%, 35%. Mobility, handler mobility I think it's still going to be sort of that 7% rate. It was a decent second half of last year and I think it's sort of at 7%. And then for the contactor business, in aggregate, we're modeling at 20% growth and I think that's also a fair number to use for 2021.

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Okay. That's very helpful. Thanks again.

Luis A. Muller -- Chief Executive Officer, Board Member

Welcome.

Operator

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

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

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

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Jeffrey D. Jones -- Vice President, Finance and Chief Financial Officer

Luis A. Muller -- Chief Executive Officer, Board Member

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Charles Shi -- Needham & Company -- Analyst

Krish Sankar -- Cowen & Company -- Analyst

David Duley -- Steelhead Securities -- Analyst

Carlin Lynch -- B. Riley FBR -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Christian Schwab -- Craig-Hallum Capital Group LLC -- Analyst

Tom Diffely -- D.A. Davidson & Co. -- Analyst

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