COHU INC (COHU) Q4 2018 Earnings Conference Call Transcript

COHU INC (NASDAQ: COHU)Q4 2018 Earnings Conference CallMarch 12, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Cohu's Incorporated Fourth Quarter 2018 Financial Results Conference. At this time, all participants are in a listen-only mode. (Operator Instructions) Later we will have a question-and-answer session. And as a reminder, this conference is being recorded.

Now it's my pleasure to turn the call to Rich Yerganian, Vice President of IR.

Richard Yerganian -- Vice President of Investor Relations

Thank you, Carmen. Good afternoon, and welcome to our conference call to discuss Cohu's fourth quarter and fiscal year 2018 results and first quarter outlook for 2019. I'm joined today by our President and CEO, Luis Muller; and our Vice President of Finance and CFO, Jeff Jones. If you need a copy of our earnings release, you may access it from our website at www.cohu.com, or by contacting Cohu Investor Relations. There is also a slide presentation accompanying today's call that may be accessed through the webcast link on Cohu's website and is also posted as a PDF 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 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, 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 Securities and Exchange Commission, including the most recently filed Form 10-K, Form 10-Q and registration statement on Form S-4. Our comments speak only as of today, March 12, 2019, and Cohu assumes no obligation to update these statements as a result of developments occurring after this call. Finally, during the call today, we will also 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 -- President and Chief Executive Officer

Thanks, Rich. Good afternoon, and thanks for joining us. On today's call, I will provide commentary on the fourth quarter and fiscal year 2018 results. I'll also discuss the current business environment, provide an update on the integration of Xcerra and share our thoughts on the industry prospects for 2019.

Cohu's fourth quarter sales of $170.6 million were within guidance for the first reported period reflecting the combination of Cohu and Xcerra following the close of the acquisition on October 1st, 2018. Non-GAAP earnings per share of $0.24 was better-than-expected and reflects the strength of the business model. Although the mobility market has weakened since early last fall, there was one positive exception in the fourth quarter, as a customer drove volume demand for our testers, handlers and contactors to support production plans for a new device launch in 2019.

Holding up relatively well, where the automotive and data center, cloud and AI semiconductor markets, we had a particularly strong quarter for analog IC test with customers driving demand for our testers, gravity handlers and power analog contactors. While not all customers serving this market continue to see a strong demand into the New Year, several are maintaining a bullish outlook. We also had several design wins in the quarter. Our tri-temperature pick-and-place handlers were qualified at three new customers and we capture a new win in the European automotive semiconductor market with our turret inspection platform.

We continue to see demand for our testers used in engineering for 5G applications, which are expected to ramp in high volume later this year. We also had multiple design wins with the xWave contactor at a leading mobility customer testing 5G antenna modules, power amplifiers and transceivers. Several early adopters of this contactor have begun ramping volume manufacturing for automotive radar applications. Despite weaker market conditions Cohu still delivered growth year-over-year, including the contribution from Xcerra, annual sales reached $451.8 million and non-GAAP earnings per share of $1.49.

We are not immune to the same market weakness affecting many semiconductor and semiconductor equipment companies. This includes the impact of continued softness in the mobility and IoT markets that started last fall and persist into the beginning of this year. Uncertainty around the US and China trade disputes slower global GDP growth and consequently demand from customers, particularly in China. Today, even automotive and industrial markets are feeling the impact from soft demand for semiconductors. What is difficult to pinpoint is the exact contribution of each of these various factors are having on the industry and how long they will persist, including any seasonal influences. Aside from continued strength in Cloud, AI and Data Center-related businesses, we're only now emerging from what is typically the seasonally weak period for the industry. At this point, we have not seen any significant change in tone or sentiment from our customers. There are some bright spots, but overall customers see market weakness continuing into Q2, while expecting a return to growth as we approach the middle of the year, resulting in a stronger second half. This view is consistent with several customer-specific projects we have been working on, that are expected to ramp in high volume later this year. Our latest data point from the December survey showed equipment utilization at approximately 81%, which is down three points quarter-over-quarter. This is consistent with what we could expect given the current market conditions.

As for the integration of Xcerra, we announced the plan in late November to rationalize our global handler and contactor manufacturing operations resulting in the closing of facilities in Penang, Malaysia and Fontana, California by the end of this year. These facility closings are expected to eliminate about 280 positions and reduce costs by approximately an $8 million annual run rate by the end of 2019. We have also communicated to customers, plans to consolidate certain handler product lines, that are expected to lead you additional reductions in operating expenses and improvements to gross margin in the second half of 2019. More recently, we have agreed to an early termination with all our distributor for Xcerra products in China and Taiwan, effectively going direct in these regions starting tomorrow, March 13th, instead of the previously announced date in September 2019. This is expected to help accelerate profitability of business generated in these regions and increased visibility into new business opportunities. You may recall, we committed to $20 million of annual run rate cost synergies within the first two years of the acquisition and these actions put us about a year ahead of schedule.

Turning to 2019, we forecast the non-memory market for semiconductor test and inspection to contract approximately 10% to 15% year-over-year. We estimate the non-memory handler market, our largest segment should be about $600 million to $650 million in 2019, and the SoC tester market likely to be in the range of $2.1 billion to $2.3 billion. We also expect the inspection market should decline approximately 10%, and model the contact during PCB test markets should be about flat year-over-year with 5G infrastructure and other millimeter-wave applications offsetting some decline in traditional product segments. All of these estimates assume our customer's expectation of a mid-year recovery takes shape.

Our work on 5G solutions is starting to turning to a meaningful business. Our PCB test is leading the way with new high accuracy methods to test the quality of back-drills, a critical concern for high frequency signal transmission. Our millimeter-wave contactors continue to win new opportunities, while existing customers are starting to ramp in volume production. There is optimism that investments in 5G-related infrastructure will accelerate into the second half of the year. And if so, that should also translate into initial volume orders for testers and handlers. Overall, we expect the semiconductor market will continue to grow over the mid-term not only due to 5G, but also from the continued expansion of semiconductor content in automobiles and industrial equipment, the proliferation of sensors, in IoT and IoV applications, the adoption of Industry 4.0, and the general growth in data creation storage and processing.

Now, I'd like to turn it over to Jeff to review our fourth quarter results and provide first quarter guidance.

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

Okay. Thanks, Luis. Let me begin by reviewing Cohu's fourth quarter financial results, which demonstrate the strength of our business model, as we generated non-GAAP operating margin of $11.3 million, and adjusted EBITDA margin of $13.7 million on sales of $170.6 million. Cohu delivered approximately $2 million of cash from operations during the fourth quarter. Our cash balance decreased sequentially by $6 million to approximately $165 million at the end of the quarter, due primarily the cash expenses related to synergy savings.

For Q4, the GAAP to non-GAAP adjustments include approximately $4.6 million of stock-based compensation expense, 900,000 due to the reduction of an indemnification receivable in connection with the Ismeca acquisition in 2013. GAAP to non-GAAP adjustments primarily driven by the Xcerra acquisition include $14.1 million of purchased intangible amortization expense, $16 million of inventory and property, plant and equipment step-up costs, 13 -- excuse me, $38.2 million of restructuring costs related to product and the life inventory and employee severance charges and approximately $4.6 million of acquisition costs. For Q4 2018, the net cash impact of these items is approximately $8 million related to employee severance and $4.6 million for acquisition costs. My comments that follow including our Q1 2019 guidance are all based on Cohu's non-GAAP results, which exclude the impact of these items. For fiscal year 2018, the company achieved record sales of $451.8 million, including one quarter of Xcerra sales. For the full fiscal year, we generated non-GAAP operating margin of 14.1% and adjusted EBITDA margins of 16.5%. Cohu delivered approximately $34 million of cash from operations during the year and our cash balance increased $9.4 million.

As I mentioned, sales for the quarter were $170.6 million, no one customer accounted for 10% or more of sales in the quarter, or for the full year 2018. Q4 gross margin was 44.5%, and higher than our guidance of 43%, due primarily to favorable product mix. Operating expenses for the fourth quarter of 2018 were $56.6 million, approximately $2 million lower than guidance due to lower labor costs in response to soft business conditions. Our non-GAAP effective tax rate for Q4 was 33%, including a $1.5 million accrual for withholding taxes related to anticipated future cash repatriation.

From a synergy perspective, the integration of Xcerra is happening on an accelerated pace. We expect to achieve our target of $20 million in annual run rate cost synergies within the first year, essentially 12 months ahead of schedule. The $20 million in total reflects approximately $6 million from cost of goods sold and approximately $14 million in operating expense savings. The main factor in accelerating the timing of the synergies was a factory consolidation within our handler and interface product operations. Another factor is the earlier than initially anticipated termination of the third-party distribution agreement for Taiwan and China.

Our mid-term target within the next three to five years is to double the initial first year synergies by another $20 million for a total of $40 million through additional facility consolidations and manufacturing optimization.

Revenue from our recurring business, which includes sales of our test contactors, as well as equipment service and spares represented 46% of total revenue for the fourth quarter. The recurring revenue is composed of three main sources: interface products, which is mainly test contactors and pins; service revenue for our installed base of capital equipment; and spares that also support the installed base.

Over the next few years, we expect the test contactor portion of the recurring revenue stream to grow significantly through cross-selling efforts and the adoption of our market-leading millimeter-wave test contactor for 5G and automotive radar applications. Contactor sales were approximately $31 million in Q4, which represents an annual sales rate of approximately $125 million. Based on our handler market position and our current attach rate for contactor sales, we believe we have an opportunity to grow this business to near $300 million over the next three years to five years.

Turning to Cohu's balance sheet as of December 29, 2018. The overall increase in the assets and liabilities compared to prior periods is of course a result of the Xcerra acquisition. At the end of 2018, we had approximately $165 million in total cash and investments. Accounts receivable DSO was at 79 and inventory days was 106. Gross debt at the end of 2018, including the term loan B and the bank debt assumed in the Kita deal total $359 million, or $194 million net of cash. During Q4 2018, debt repayment totaled approximately $1.3 million and interest expense was about $4.6 million. Fixed asset additions in Q4 were approximately $2.5 million and depreciation was $4.7 million. Deferred profit at the end of December was $6.9 million, up $5 million from the third quarter. The related deferred revenue at the end of Q4 was $10.4 million, up $6.8 million sequentially.

Our long-term cash strategy continues to be maintaining $125 million of cash on the balance sheet to support operations, capital expenditures and the dividend. We intend that cash generated in excess of $125 million will be used to pay down the debt and delever the company. Given current business conditions and upcoming cash requirements to achieve cost synergies, we plan to make the minimum debt repayment during Q1, which approximates $1.3 million. Cohu's Board of Directors previously approved a quarterly cash dividend of $0.06 per share payable on April 12, 2019, to shareholders of record on February 26, 2019.

And now for the first quarter 2019 guidance, we're expecting sales to be approximately $145 million. Revenue distribution is expected to be 92% semiconductor test and inspection, and 8% PCB test. Gross margin in Q1 is expected to be approximately 40%. Operating expenses are expected to be approximately $54 million, which includes realizing total cost synergies to date of approximately $2.5 million, or $10 million on an annualized basis. The effective tax rates for periods which are slightly above or below breakeven is not meaningful. For Q1, we expect the tax provision to be nominal to zero. For the full year 2019, we're estimating an effective tax rate of approximately 22%. The diluted share count for Q1 is expected to be approximately 41.5 million shares. Over the mid-term, we're targeting gross margins of 48%, an EBITDA of 22% on quarterly sales of approximately $235 million. Profitability targets include the benefit of annual cost synergies totaling $40 million, that I discussed previously.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question is from Brian Chin with Stifel. Your line is now open.

Brian Chin -- Stifel Nicolaus -- Analyst

Hi, good afternoon. Thanks for letting us ask a few questions. And thank you for the -- sort of the comprehensive slide deck that's definitely appreciated and great to hear from you guys again. Maybe first question, just curious, in terms of the sequential sales decline in Q1, is it fair to think this is more attributable to the industrial and auto markets? And I say that, going back to your comments, wireless sort of weakened 3Q last year and those markets maybe have seemed to -- have kind of accelerated to the downside more recently. So number one is that sort of a fair -- a way to characterize that. And also I know you provided some qualitative commentary on the potential for some sales pickup in second half. But in terms of Q2, which we're almost into now, can we infer that current order trends maybe suggest kind of a flattish 2Q relative to 1Q?

Luis A. Muller -- President and Chief Executive Officer

Hey, Brian, this is Luis. So to your first part of the question, yeah, you're correct in your assumption. As I stated, the mobility IoT markets were weak in the fourth quarter, but industrial, automotive, actually, AI data centers too are held relatively well. But going into 2019, and in the first quarter, we have seen softening also in the automotive and industrial markets. So your assumption about the markets were correct going into 2019. And for the second part of the question, as I stated as well, we do see our customers having about the same sentiment for the first half of the year as they are now in the stage of the game. Needless to say, this industry has some seasonality Q1, Q4 tend to be weaker points in the cycle. But by and large, we think any significant improvement would happen in the second half of the year, and this is more based on the projects that we currently have with customers for new device launches and the timing of those volume ramps.

Brian Chin -- Stifel Nicolaus -- Analyst

Okay. Yeah, that's helpful. Maybe I have just two other questions. First, in terms of the financial model is roughly $150 million kind of the right accounting breakeven level for the company? And I'm just curious if there's any temporary cost reduction measures that you're taking or planning kind of beyond sort of the permit reduction as you've already communicated just given the recent pullback in the business?

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

Hey, Brian, it's Jeff. The breakeven is close to the $140 million mark. And some of the cost reduction actions that we've taken, we pulled the few levers in terms of reducing travel, some discretionary spending, if you will, but really haven't -- taken a significant amount of permanent reductions at the moment. So as we move forward, we're going to capitalize on additional cost synergies. With today's structure, I would say, break even is in that $140 million, $145 range. But in the future, that will be declining as we, as we reduce our OpEx and improved gross margin.

Brian Chin -- Stifel Nicolaus -- Analyst

Okay. Got it. Maybe then one last question, perhaps back for Luis. I'm just looking beyond sort of the current cyclical weakness, just in the test contactor business, you kind of reiterate that starting from $120 million maybe $125 million annual run rate going to $300 million over the next, let's say, three years to five years, and that's a pretty robust growth rate even over that horizon. So I'm kind of curious, I think, the narrative support in that growth is pretty well understood and straightforward in terms of your large installed base. But I was hoping maybe you could -- Luis, you could provide a couple of insights into the key factors that will influence the rate of customer adoption in that business and kind of which markets or device types you see as most ripe for the picking?

Luis A. Muller -- President and Chief Executive Officer

Okay. Brian, let me just correct a few things here. We are at about $125 million run rate annual on the contractor. And we have said that, if we can get to the sort of the 100% attachment rate on our handlers, it would take that business up to $300 million. Now with that said, we are also modeling, about a 10% CAGR in the business today. So, if you think about you're not going to get to $300 million in this three-year to five-year horizon, just to correct that statement. As far as where do we see the attachment right, we see -- some of the greatest opportunities are actually in the automotive and industrial applications, with our large fleet of handler installed base as well as in the sort of the millimeter-wave applications, whether it's high frequency RF or radar device test, where we do have very unique solutions and in good opportunities in conjunction with our testers.

Brian Chin -- Stifel Nicolaus -- Analyst

Okay. Great. Thank you so much.

Operator

Thank you. Our next question comes from Tom Diffely with D.A. Davidson. Your line is now open.

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

Yes, good afternoon. First, just a clarification on the last question. Did you say the 10% CAGR was your expected growth on the contactor business, or that's the market growth?

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

Yeah, that's our expected growth, Tom.

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

Okay. Right. That helps. And then maybe one more clarification. Earlier in the script, you talked about a 10% to 15% decline. Was that for both the tester business and the handler business, the non-memory portion?

Luis A. Muller -- President and Chief Executive Officer

The 10% to 15% decline was for the aggregate. The total addressable market that we serve, handlers, testers, test contactors all in aggregate essentially semiconductor test in inspection as well.

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

Okay. I was just kind of curious if there was any meaningful difference between the main two segments, are those tests or handlers weaker than one another?

Luis A. Muller -- President and Chief Executive Officer

Small difference is nothing are sharing. There are some small differences in our modeling of the handler and the tester market, but like I said, very small. We do model the contactor market to stay about flat year-on-year. And that's essentially some of the new applications, particularly millimeter-wave and 5G offset and sort of standard products.

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

Okay. And then kind of stepping back and just looking at your utilization rate of 81%. Yeah, it sounds fairly healthy for a back-end-related company. So is your thought that you don't have a lot of excess tools in the field and as soon as end market unit growth returns and you'll pretty quickly get a return to growth?

Luis A. Muller -- President and Chief Executive Officer

Yes, Tom. That's how we feel as well. The 81%, albeit down from the third quarter, is still significantly better than we have seen on past soft market conditions. So yes, we do expect that on a market upturn, we wouldn't see much of a delay between our customers going up and we've seen our business pick up.

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

Okay, great. And then finally, Jeff, when you look at the reduction in the expenses, it sounds like there's already about a $10 million run rate that's reflected in the OpEx guidance. When does -- what's the timing of the other $10 million or so this year? Is it more second half weighted?

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

Well, we're at about a $10 million run rate now, right? So by the time we exit 2019, we'll be on a $20 million run rate. Of course, that $2.5 will pick up in the second half of the year. So I'm expecting, in Q4 that we're likely going to be somewhere in that $4 million to $5 million a quarter range based on what -- in terms of the actions that will kick-in and be realized over the next two quarters to three quarters.

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

Okay. And then how much would that be offset by variable increases in expenses just based on a stronger second half of the year?

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

Well, yeah, so it all depends, right on where the revenue goes. So again, I can give you where we are today, right, and OpEx hovering around 37% at the model, which has significantly higher revenue. We're modeling OpEx at 28%. And then in terms of OpEx spending, if you will, the mid-term model includes all impact of the synergies, total synergies. And so from where we are in Q1 of about $54 million in operating expense, we're estimating an increase of about $10 million in OpEx in order to achieve that increased to $235 million of quarterly sales from where we are in Q1.

Luis A. Muller -- President and Chief Executive Officer

Let me just add one more thing here, Tom. We are here effectively eliminating now one of the biggest variable components on cost of sales, which is commission-related to former Xcerra product sales in China and Taiwan. So those -- that component of variable OpEx goes away.

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

Okay, OK. So it looks like if you -- over the next $90 million of growth, there's about $10 million of incremental expenses. So 10% increase rate. Okay. Well, thank you very much.

Luis A. Muller -- President and Chief Executive Officer

All right. Thanks, Tom.

Operator

Thank you. And our next question is from David Duley with Steelhead Securities. Please go ahead. Your line is open.

David Duley -- Steelhead Securities -- Analyst

Yeah. Just a couple of clarification questions. With you, I guess, eliminating the agreement of distribution early in China and Taiwan, is there any negative or positive revenue impact from that particular change?

Luis A. Muller -- President and Chief Executive Officer

There's really no impact other than we are now having increased visibility into our customers' plans and more direct contact into aligning our development roadmap to their needs, something that I view as, honestly, as a positive, probably even over the short-term as a positive. But no, there is absolutely, no negative revenue impact that we can pinpoint right now.

David Duley -- Steelhead Securities -- Analyst

Okay. And then gross margins were much better in the current quarter than your guidance. And then you're taking a fairly significant decline in the current quarter. Could you just talk about the mix of business and why gross margins were better in this current quarter and why they, perhaps are going down sequentially in the upcoming quarter?

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

Dave, so as I mentioned, it was mix-related, really, in Q4 when we achieved 44.5%, we had guided to 43%. We had more recurring revenue than we had forecasted. And then the mix of the products we had a little bit higher revenue than anticipated on the tester side. And as you know, that margin is a little -- it's higher than some of our other systems. And as we look at Q1, that mix goes back to more of a maybe what we would consider to be a standard mix. And of course, with overall revenue down, we lose some leverage on the fixed costs on the manufacturing side.

David Duley -- Steelhead Securities -- Analyst

Okay. And then, I guess, one final clarification. I'm really confused because I thought. Jeff, you mentioned that getting the incremental revenue in the test contactor business would take three years to five years. But then, Luis, I thought, you just mentioned that it would -- wasn't that time frame. So, if you could just help us understand, on this particular point, picking up the incremental, I guess, $175 million that you've been talking about the timing of that and how it should unfold over the next couple of years?

Luis A. Muller -- President and Chief Executive Officer

Dave, this is Luis. We don't have a timeline laid out for picking up $175 million. We did say is we have a $300 million opportunity on 100% attachment rate on our handlers. And we are modeling a 10% CAGR, at least for this year, we'll see what it -- how we can develop that for subsequent years. But at least for this year we're modeling a 10% CAGR. So I guess, you can see, it's not going to get to $300 million in three years, but it should eventually trend toward getting there.

David Duley -- Steelhead Securities -- Analyst

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

Operator

Thank you. And our next question is from Steven Marascia with Capitol Securities. Your line is now open.

Steven Marascia -- Capitol Securities -- Analyst

Good afternoon, Luis and Jeff.

Luis A. Muller -- President and Chief Executive Officer

Hello.

Steven Marascia -- Capitol Securities -- Analyst

Two questions. You talked about first quarter debt reduction of about $1.3 million. Have you stated a target for the balance of 2019, or for 2019, at all?

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

No, no, we haven't, Steve. What I did was reiterated our longer-term position on cash, targeting to maintain about $125 million for operations and a balance used to delever. And again, though with soft business conditions that we're in, with some cash requirements in order to achieve some of the upcoming cost synergies, we have decided in Q1 to pay the minimum amounts as we did in Q4.

Steven Marascia -- Capitol Securities -- Analyst

Okay. A second question, more of a general -- generalized question, that is if -- in terms of development of the five key market here in the US and there are talks that the administration wants to keep away from participating in the build-out of the 5G market. Have you guys talked to any of your customers about how that might affect them and potentially their revenue streams toward you?

Luis A. Muller -- President and Chief Executive Officer

Well, Steve, in the end, the 5G is, and frankly anything in the semiconductor industry is a global -- has a global reach. So certainly, any delay in the US market will have a negative impact if it delays getting to 5G. But nevertheless, our customers are selling products globally. So, I don't see 5G in totality, being delayed. I actually -- much of the contrary, I think 5G is being accelerated.

Steven Marascia -- Capitol Securities -- Analyst

Okay. Thank you very much.

Luis A. Muller -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from Craig Ellis with B. Riley FBR. Your line is now open.

Peter Peng -- B. Riley FBR -- Analyst

Hi, this is actually, Peter Peng calling in for Craig Ellis. And thanks for taking my question. On the fourth quarter, these sales, it seems a little bit lower versus expectation. Was there any end-markets that weakened relative to your expectations?

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

No, no, Peter, I would say that we were within the guidance that we gave. You're right, it was slightly below the midpoint. But every time that we examine forecasted revenue, we always have some upside and risks. And so I wouldn't pin it on any particular segment or industry.

Peter Peng -- B. Riley FBR -- Analyst

Got it. Okay. And then on the transition to the direct customer model, should we be expecting some kind of upward OpEx pressure in the second half, just given the transition?

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

Over the last quarter, we've been building up our application engineers in Taiwan and China, as we prepare for this transition. While we are still paying commission to the distributor, we'll be non-GAAP-ing out some of those sort of redundant non-productive costs, if you will. As we transition away and the commission goes away, then we will have the head count in place, servicing our customers. So, I wouldn't anticipate any future, any pressure in the second half as a result of that.

Luis A. Muller -- President and Chief Executive Officer

In fact, as it entirely goes away, there should be a net cost synergy once we're completely transitioned out. We're obviously direct as effective tomorrow, but when we're completely transitioned that -- they will contribute to the cost synergy values.

Peter Peng -- B. Riley FBR -- Analyst

And then on the tax rate is low 20s still the tax rate assumptions kind of going forward?

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

Yeah, as we see right now for the full year, Peter, the low 20s. I did make a comment about Q1, in particular, and really any quarter where you're around breakeven, a little above, little below the rate really sort of goes out the window. It becomes not meaningful at such low levels of profitability or breakeven. But in general for the year, the view is still in the low 20s.

Peter Peng -- B. Riley FBR -- Analyst

Okay. Got it. And one final question from me is, you talked about the industry growth and contactor being 10% versus interface flat. Maybe just give some expectations on your handler and tester?

Luis A. Muller -- President and Chief Executive Officer

So, that's a good question. I mean, like I said, we see the overall semi test and inspection going down 10%, 15% year-on-year, so the market contracting. As you know, we do have a target to continue to gain market share. Now, I can't tell you exactly how those are going to balance out, but certainly market share gain does require qualification of products. There's a time for those things to happen. So in aggregate, I would say, this would be a contraction year, I think, our market share gains and our growth and contactors are not likely to offset a 10% to 15% contraction in the overall test and inspection market.

Peter Peng -- B. Riley FBR -- Analyst

Great. Thank you guys.

Luis A. Muller -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And our next question comes from Quinn Bolton with Needham & Company. Your line is now open.

Quinn Bolton -- Needham & Company -- Analyst

Hi, guys. Thanks for taking my question. I might have missed it, so I apologize. But could you give, for the March quarter, a sense of the equipment versus the recurring revenue, how those two businesses trend into the March quarter?

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

Hey, Quinn, it's Jeff here. No, we didn't -- we tend to give a look back on that. But it's been fairly consistent. It's been anywhere from -- I would say, low 40s to high 40s. So I think 45%, 46% is a good proxy.

Quinn Bolton -- Needham & Company -- Analyst

So I guess, if that's the case, and it holds flat, then recurring revenue drops about the same percentages as equipment, which I guess, I would have thought that recurring revenue stream would have been much flatter during periods of equipment volatility. So can you guys address is it, what is it that's making the recurring business down as much as equipment kind of in that forward look?

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

Yeah, Quinn. The percentage I gave was historical, right. So you make a good point in the reduced revenue levels. That recurring piece of the business has less fluctuation. And so that's going to be higher in periods similar to Q1, that's going to be in the high 40 range. So it's going to be at the high end of that range that I gave you.

Luis A. Muller -- President and Chief Executive Officer

It's fair. We haven't modeled it this way, but it's -- we'll talk about it once we close the quarter. I wouldn't be surprised if it doesn't completely flip relative to fourth quarter, meaning low 50% recurring in the mid-40% system. So sort of complete 180 degree.

Quinn Bolton -- Needham & Company -- Analyst

So it should see less volatility then the equipment business, it sounds like. Okay. Yeah, I just wanted to make sure.

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

Absolutely.

Quinn Bolton -- Needham & Company -- Analyst

Great. The other question I had is, you make this transition from a disti to a direct model in China and Taiwan. I assumed the disti, historically, was responsible for demand generation is that right?

Luis A. Muller -- President and Chief Executive Officer

That's right.

Quinn Bolton -- Needham & Company -- Analyst

And so you bring that in-house and you talked about building out the application engineer support. What happens to sort of the customer list? I mean, I would think the disti, potentially, is pretty protective of its channel and its contact. I mean, are they obligated to kind of hand over kind of those customer lists, or is part of your building out the application engineers is kind of also building out that sales channel yourself and having to kind of go out and find those customers?

Luis A. Muller -- President and Chief Executive Officer

So, two pieces, the last relevant one, first. Yes, they're obligated to transfer all the information on the customers lists. But that's the less relevant part. The more relevant part is Xcerra had already built a test applications engineering team in Taiwan and in China. I want to say started about a year-and-a-half, maybe a little more than a year-and-a-half ago. When they first, actually had an attempt of separation with that distributor and eventually came back together and agreed to put a customer applications team in place in both countries. And that was actually by customer demand to deal directly with Xcerra at the time. So fast forward to today, we do have direct contact with the customers. So we know who the customers are. We know the people. We talk to them on a regular basis. We do projects together with them on a regular basis. And then, we augment those projects with the distributor resources who then are responsible for actually managing the commercial. So switching to tomorrow, where we go direct officially, all in terms of purposes, we know exactly who to deal with, and we already set up as a vendor at the customers' -- the final customers' supply chain infrastructure. So not really much of a transition from that regard.

Quinn Bolton -- Needham & Company -- Analyst

And so you just kind of going direct across the entire business. You're kind of completing that process rather than making it switch entirely?

Luis A. Muller -- President and Chief Executive Officer

What really had to do Quinn, is we had to hire and train additional test applications engineers to augment the infrastructure we have. We had to hire additional service engineers to augment the infrastructure that Cohu brought to the table here in those two countries, where Cohu was already direct. So it's not really a start of an organization. It's more of an increase in the headcount of an organization that was relying on the distributor to fill in the gap.

Quinn Bolton -- Needham & Company -- Analyst

Great. Thank you.

Operator

Thank you. (Operator Instructions) And we have a follow up from Tom Diffely with D.A. Davidson. Please go ahead.

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

Yes. Thank you for the follow-up. Just one more question on the early termination of Spirox. Did they hold the inventory, or is there any kind of inventory build you need to do with your own facilities, going forward?

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

Yeah, we're working through that, Tom. They do have more or less demonstration equipment that we are going through and determining, which pieces of equipment that we will require and essentially purchase back from them. So we're going through that process right now.

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

Okay. And then finally, what about service and spares? Do they have a meaningful component in service and spares of the business, or was it mainly new equipment?

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

Yeah, mainly new equipment.

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

Okay, thank you.

Operator

Thank you. And sir, I'm not showing any further questions in the queue. I would like to turn the call back to Richard Yerganian for his final comments.

Richard Yerganian -- Vice President of Investor Relations

Thank you very much for everyone joining us on the call this afternoon and evening and all have a good night. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.

Duration: 46 minutes

Call participants:

Richard Yerganian -- Vice President of Investor Relations

Luis A. Muller -- President and Chief Executive Officer

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

Brian Chin -- Stifel Nicolaus -- Analyst

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

David Duley -- Steelhead Securities -- Analyst

Steven Marascia -- Capitol Securities -- Analyst

Peter Peng -- B. Riley FBR -- Analyst

Quinn Bolton -- Needham & Company -- Analyst

More COHU analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than CohuWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Cohu wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.