Cohu Inc
NASDAQ:COHU

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Cohu Inc
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Earnings Call Analysis

Q3-2023 Analysis
Cohu Inc

Steady Margins in Weaker Revenue Climate

Despite a forecasted 20% year-over-year reduction in revenue, gross margins remain resilient at 46% for Q4 and 47% for the full year, on par with 2022. The solid margin performance is attributed to differentiated products and a consistent, high-margin recurring business. Operating expenses for Q4 are expected to climb by $1 million due to the acquisition of EQT, totalling roughly $50 million, but overall expense control remains stringent. The downturn in automotive and industrial markets leads to fewer system demands, reducing systems revenue and hence, margin, which now stands at 39%, down by 200 basis points. Meanwhile, customer engagements are up, but new product development and customer interactions are prioritized, reflecting commitment to long-term growth strategy amidst the sluggish demand environment.

Introduction to Cohu's Third Quarter 2023 Results

Cohu's third quarter 2023 earnings call took place recently, revealing some key information that investors should consider. Led by CFO Jeff Jones and CEO Luis Muller, the Cohu team provided both a retrospective look at Q3 and forward-looking insights into Q4 and beyond.

Resilience Through Recurring Business

A highlight of the Q3 results was the robust gross margin and profitability, which CEO Luis Muller attributed to unexpected gains in tester margins and the strength of Cohu's recurring business. Cohu’s non-GAAP gross margin of 47.1% benefits from its focus on product differentiation, cost reduction, and the significant contribution of recurring revenue, which constituted 51% of total revenue for the quarter.

Strategic Acquisitions and Expansions

Cohu announced the acquisition of Equiptest Engineering (EQT) to broaden its test interface products and enhance its recurring revenue, which has proven to be a buffer in turbulent market conditions. EQT brings approximately $20 million in trailing 12-month revenue and is expected to be accretive to Q4 adjusted EBITDA. Additionally, Cohu is constructing a new facility in the Philippines to sustain the growth of its interface business, reinforcing its strategy to grow recurring revenue, which has seen a 6% compound growth rate over three years.

Performance Amid Market Weakness

CFO Jeff Jones took stock of Q3's financial results, which saw Cohu slightly surpassing revenue guidance at $150.8 million and automotive market customers contributing significantly. The healthy gross margin of 47.1% and non-GAAP operating income of 14.7% of revenue reflect Cohu's resilience amidst end-market weakness. Q3 also saw an effective tax rate of about 28%, and non-GAAP EPS was $0.35. The company maintains a stout balance sheet, with cash and investments totaling $388 million by the end of Q3.

Q4 Guidance and Future Outlook

Looking into Q4, Cohu guides revenue in the range of $136 million, plus or minus $6 million, anticipating continued softness across markets and lower utilization at customer production facilities. Q4's gross margin is projected at about 46%, which is an impressive figure considering a roughly 20% decrease in year-over-year revenue. Adjusted EBITDA expectation for Q4 is around 12%, with a non-GAAP tax rate of about 26% and an anticipated diluted share count of approximately 48.1 million shares.

Market Dynamics and Capital Allocation

Cohu's leadership pointed out the cautious spending by customers due to various macroeconomic factors such as geopolitical conflicts and high-interest rates. Although forecasted growth in semiconductor markets remains optimistic, caution persists for near-term revenue projections. Despite this, Cohu maintains focus on customer design wins and new product qualifications to drive organic growth when market conditions improve. The Q4 interest expense is expected to be approximately $1 million, offset by interest income of about $2 million.

Analyst Q&A Insights

In the Q&A session, analysts probed into Q4 guidance and test cell utilization rates across end markets. The mobility segment showed modest improvement, while automotive and industrial experienced declines. Management emphasized its indexation toward automotive and industrial analog semiconductor customers and acknowledged the recent announcements of several large analog semiconductor customers that guide downward for the next quarter. While some positive trends were observed, such as OSAT utilization picking up and incremental expectations on the mobility front, Cohu conveyed caution regarding projections for Q1 of the following year, suggesting that they expect it to be the bottom of this cycle.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

from 0
Operator

Good day, and thank you for standing by. Welcome to Cohu's Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your host today, Jeff Jones, Chief Financial Officer.

J
Jeffrey Jones
executive

Good afternoon, and welcome to our conference call to discuss Cohu's third quarter 2023 results and fourth quarter 2023 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, November 2, 2023, 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?

L
Luis MĂĽller
executive

Good afternoon. Third quarter gross margin and profitability were again strong driven by higher than forecasted margin on testers and Cohu's resilient recurring business. Q3 non-GAAP gross margin of 47.1% continues to benefit from our focus on product differentiation, reducing cost, and the greater contribution of recurring that was 51% of Q3 total revenue.On October 2, we announced the acquisition of Equiptest Engineering, which we refer to as EQT, with the goal to expand our test interface products and recurring revenue that continues to deliver resilient profitability through industry cycles. EQT's trailing 12-months revenue was approximately $20 million, selling primarily semiconductor test contactors to Tier 1 IDM and OSAT customers. The rationale for the acquisition is to broaden our product portfolio in mid- to high-power test contactors, better serving our automotive and industrial semiconductor customers.EQT also enhances our complex machining capability and manufacturing expertise, expands engineering capacity and customer presence in Southeast Asia. This acquired business will contribute 3-months revenue to our fourth quarter guidance, and it is forecasted to be accretive to Q4 adjusted EBITDA.In support of plans to grow Cohu's interface business, we're constructing a new 92,000 square foot facility in the Philippines that is approximately 85% complete and targeted to be operational in the first half of 2024. As we have been communicating, it remains our strategy to expand recurring revenue, which was $322 million over the last 12 months, with a 3-year compound growth rate of 6% through Q3. The service portion of this revenue has delivered a year-to-date renewal rate of approximately 92% in 2023, with customers increasingly relying on Cohu personnel to support the large active installed base of over 24,600 systems across 108 customers.In the third quarter, we landed 3 new applications for test contactors at Cohu's Tier 1 customers, with an estimated potential $6.5 million revenue stream per year. We also received orders from 2 new customers for DI-Core to monitor equipment performance, and a first order for AI inspection, that is a new module in our software suite that provides artificial intelligence services to increase vision yield.We continue to make progress with DI-Core, adding new capabilities, and expanding the software-as-a-growth service model for the company. This is due at the beginning of a long journey to grow software services, but one we view as a very attractive business, as test and inspection complexity requirements increase along with Cohu's equipment installed base.Switching over to Cohu's systems business, it contributed 49% of third quarter revenue, decreasing 2 points quarter-over-quarter in reflecting weak demand across all markets. Estimated test cell utilization remained flat quarter-over-quarter at 73%, with automotive and industrial down 1 point sequentially. Utilization in the consumer segment was 2 points up, and mobility increased by 1 point. All small changes, but more indicative of the inventory digestion coming to an end, particularly in the smartphone market. The computing segment showed a 2-point sequential utilization decline, following what has been a small increase in demand to test AI-related GPUs in prior quarters.At the macroeconomic level, with the ongoing Russia-Ukraine conflict and now the Hamas-Israel conflict, and while the economy adapts to a higher interest rate environment in continuing trade restrictions with China, it is not surprising that customers are taking a more cautious approach on capital spending. It is too soon to forecast market dynamics and revenue for 2024, but perhaps safer to remain cautious on near-term revenue projections and assume this market downturn will last longer than we originally expected and into the first half of next year.We're modeling incremental growth in the second half of 2024, in line with our customers' recent forecasts. We remain optimistic on the long-term prospects for the technology industry and, in particular, semiconductor test markets. And as usual, the longer it takes for a recovery inflection, the steeper the up-cycle ramp will be. However, in the near-term, we will continue to look for ways to lower quarterly expenses, while focusing on customer design wins and qualification of new products to deliver organic growth when market conditions improve.We will continue executing our strategy to grow recurring business, broaden the use of Diamondx into automotive and industrial customers, add to our inspection and metrology portfolio, and increase subscriptions to our emerging software business.Let me now turn it over to Jeff to provide further details on third quarter results and fourth quarter guidance. Jeff?

J
Jeffrey Jones
executive

Thanks, Luis. Before I walk through the Q3 results and Q4 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 Q3 financial results, Cohu delivered strong profitability on revenue of $150.8 million, which is slightly higher than our guidance. During the third quarter, two customers in the automotive market each accounted for more than 10% of sales. Q3 gross margin was strong at 47.1%, about 110 basis points higher than guidance, driven by Cohu's resilient recurring business and differentiated products.Operating expenses for Q3, where approximately $1 million lower than guidance at $49 million. Third quarter, non-GAAP operating income was 14.7% of revenue, and adjusted EBITDA was 16.5%. The non-GAAP effective tax rate for Q3 was approximately 28% and higher than guidance due to the projected concentration of annual pre-tax income in higher tax rate jurisdictions and capitalized R&D. Non-GAAP EPS for the second quarter was $0.35. In summary, Q3 gross margin and adjusted EBITDA were strong, exceeding the mid-term financial targets at this level of revenue.Moving to the balance sheet, cash flow from operations in Q3 was $29 million, and cash and investments grew to $388 million at the end of Q3. Debt repayment in the third quarter totaled $1 million, and we ended Q3 with net cash of $7.20 per share. Cohu shares repurchased in Q3 totaled 4.7 million, and CapEx in Q3 was $4 million, with approximately $3 million related to construction of the new Philippines facility to support long-term growth prospects in our interface business.Total CapEx for 2023, including the new building, is expected to remain at approximately $20 million. Overall, Cohu maintains a strong balance sheet to support debt reduction, the share repurchase program, and investment opportunities like EQT to expand our served markets and technology portfolio in line with our growth strategy. The acquisition of EQT occurred in early Q4 and utilized approximately $48 million of cash.Now moving to our Q4 outlook, we're guiding Q4 revenue to be in the range of $136 million, plus or minus $6 million, reflecting continued weakness across end markets, and lower test cell utilization at customer's production facilities. Q4 gross margin is forecasted to be approximately 46%, better than the financial target model at this level of revenue.Gross margin for full year 2023 is forecasted to be approximately 47% and in line with 2022 results, despite approximately 20% lower year-over-year revenue. The strong gross margin performance is due in large part to Cohu's differentiated products and our stable high margin recurring business, which adds resilience to profitability and provides consistent cash flow through industry cycles.Operating expenses for Q4 are projected to increase $1 million quarter-over-quarter to approximately $50 million due to the addition of EQT. The balance of Cohu's expenses are flat quarter-over-quarter. We continue to exercise tight control over operating expenses and look for opportunities to lower spending going into next year without sacrificing critical new product investments and maintaining profitability, while navigating through the trough of this cycle.We're projecting Q4 interest expense to be approximately $1 million and offset by interest income of approximately $2 million. We expect Q4 adjusted EBITDA to be approximately 12%. The Q4 forecasted non-GAAP tax rate is approximately 26%. The diluted share count for Q4 is expected to be approximately 48.1 million shares.That concludes our prepared remarks. And now, we'll open the call to questions.

Operator

[Operator Instructions] Our first question comes from the line of Charles Shi with Needham & Company.

Y
Yu Shi
analyst

Hello, can you hear me?

Operator

Yes, we can hear you now.

Y
Yu Shi
analyst

I just want to start with the first question on the Q4 guide. I thought about a quarter ago you were expecting maybe a flattish environment into Q4, but this seems like it's weakened a little bit. Can you kind of walk us through what the puts and takes in terms of the Q4, and if any early indication about Q1 next year? That would be great.

L
Luis MĂĽller
executive

Charles, this is Luis. Yes, in Q4, in terms of puts and takes, we actually saw continued caution buy from our automotive and industrial customers -- sorry, in the third quarter going into Q4. At the same time, we see some of these customers starting to push out some of the deliveries and some of the orders into 2024. As I said in my prepared remarks, auto and industrial came down, utilization came down about a point in the quarter. And I wouldn't be surprised if that doesn't decline another point or a couple of points in the fourth quarter.At the same time, we saw a little bit of an opposite trend on the mobility side, where utilization has improved a point quarter-over-quarter. In fact, mobility was the only segment across the board that in absolute dollar terms, we saw an increase in orders on the third quarter. Nevertheless, as you know, Cohu's business is much more indexed towards automotive and industrial analog semiconductor customers. So what we're seeing here is, what you're seeing from our customer's announcement as you had a few of the large analog semiconductor customers guiding next quarter down. We're seeing the same behavior.And quite honestly, at this time, we're not going to be calling out specificity to first quarter next year. I think we're going to go quarter-on-quarter here as we see this thing evolve and looking for another improvement, or significant improvement in mobility, or another improvement turn on the automotive and industrial markets.

Y
Yu Shi
analyst

Maybe a follow-up question. I think you made a commentary -- you made a comment on test cell utilization versus your projected revenue levels. Obviously, utilization seems to be flattening out, I mean, overall from Q3 to Q4, but the revenue is down a bit, right, given some of the puts and takes you just mentioned. But can you kind of help us to understand, is there any correlation between -- what kind of test cell utilization usually would indicate what kind of revenue level or such correlation doesn't exist?

L
Luis MĂĽller
executive

We tend to see capacity additions, when utilizations are above 80%, at or above 80%. And below that, they tend to be more technology-driven or customers winning a new device application and use socket to their end customers. So again, capacity adds on the capital equipment side, 80% and above, otherwise more technology driven.On the recurring side, it typically goes point for point, utilization drops a point, you could see recurring drop a point. So recurring is a lot more stable as we see utilization fluctuating just a couple of points up and down. But as you pointed out, at the end of Q3, utilization was flat quarter-over-quarter from the end of Q2.

Operator

Our next question comes from the line of Brian Chin with Stifel.

B
Brian Chin
analyst

Brian Chin at Stifel. Maybe start off with maybe financial model. Maybe this is for you, Jeff. Compared to prior periods, when revenue was around sort of this 140-ish plus or minus level. I think your guidance suggests gross and operating margins maybe 400 to 600 basis points higher, this down cycle. I guess, firstly, does this feel like trough revenue? And, secondly, can you discuss the key changes in the model trough-to-trough that allow the company to better protect profitability in challenging market conditions?

J
Jeffrey Jones
executive

Yeash, it certainly does feel like a trough that, as Luis said, we don't have a lot of clarity on the first half of next year. So we're just kind of playing that week by week here. As you referenced, Brian, I would just go back to 2021 with much higher revenue, but gross margins were in the 40% range. And so over that time, we've made a lot of improvements in reducing costs, primarily in the handler products as well as the contactor products. We've had some price increases to cover some of the inflationary costs that we've incurred, but again, we've done a lot to reduce product costs, improve manufacturing efficiencies, productivity, things of that nature.So now, as I stated in my remarks, revenue down approximately 20% year-over-year, and we're holding a 47% gross margin, which was essentially the same as last year. So margin has been very resilient, as you know, recurring revenue carries a higher gross margin. And as Luis stated, that's less susceptible to the volatility of the cycle. And so that's obviously helpful as that becomes a higher percentage of our total revenue. And that's why it's really a key part of our strategy as well to grow the recurring revenue.

B
Brian Chin
analyst

All right. Great. And then maybe for, Luis, a follow-up. It's the 4Q revenues decline, sort of equal parts, auto and industrial. And in the past, you've talked about the composition of your auto revenues being kind of equally distributed across EV, ADAS, and traditional auto. Based on the incremental softness you're seeing, can you distinguish which of those buckets are more impacted or resilient? Does that give you any optimism regarding either duration or magnitude of the slowdown in those markets?

L
Luis MĂĽller
executive

Yes, so I can start from the back here. The distribution across ADAS and EV and everything else auto, it still stays about the same. I think we're about one-third, currently about one-third on each one of those segments. As far as the drop quarter-over-quarter, we saw really a 6-point drop on the revenue associated with automotive, and a 4-point drop on revenue associated with industrial markets. So in reality you look at this proportion looking at the revenue size, it's more auto-related than actually industrial related quarter-over-quarter Q2 to Q3.I think the other question is confidence on a go forward basis. Generally speaking, we see many of our auto and industrial customers, they tend to be the same customers by the way, investing significant CapEx in facility constructions this year. And we've been told, the plan is and continues to be to tool up those facilities, because across the board the forecast for semiconductor growth in the automotive market is for a 16% CAGR through 2026, if I'm not mistaken, and industrial is 9%. So the forecast continues to be that both automotive and industrial are the highest growing semiconductor segments to bat on. But the expectation is, facility constructions come in a line, tooling up with those facilities start at some point next year.The hundred million question here is, do we start seeing those orders in Q2 or do we start seeing them already at the late part of Q1? That's still an open question.

Operator

Our next question comes from the line of Krish Sankar with TD Cowen.

R
Robert Mertens
analyst

This is Bob Mertens on for Krish. My first one is just in terms of the test utilization. I know you gave some color on the individual market segments and how those progress through the quarter? But just sort of looking ahead into the December quarter, just trying to think of how you would expect each end market to progress? Is it sort of across the board with the utilization probably dipping down? Or is there any segment that's been holding up a bit better?

L
Luis MĂĽller
executive

We don't typically forecast utilization, Bob, but I'll give you my sort of qualitative perspective here. We've seen the – something I haven't mentioned in the prepared remarks, we've seen OSAT utilization picking up 3 points quarter-over-quarter from Q2 to Q3, and IDMs down 1 point. And I think that correlates well with also by market, with automotive and industrial down 1 point, and mobility up 1 point, and consumer up 2 points. I would venture to say that based on current order forecast that the mobility and consumer market will continue to trend up by the end of Q4, and that automotive and industrial may continue to trend down by the end of Q4.How does that kind of shape out from approximately 73% utilization we are today? I don't know. I think there are two competing forces here: one is the automotive and industrial market pausing for a quarter or two; and the other one is the mobility and the consumer is starting to pick up some momentum as we start to see inventory levels flush out in those two segments.

R
Robert Mertens
analyst

Got it. That's helpful. And then just quickly on the acquisition in terms of the revenue profile, I just wanted to make sure I heard you right. Did you say that was the business that's more geared towards the industrial and automotive markets in terms of that $20 million trailing 12-months revenue profile?

L
Luis MĂĽller
executive

That is correct. Yes, EQT had a trailing 12-months revenue of approximately $20 million. It's all recurring. And it was more tailored towards the automotive and industrial market. They were doing a good job serving a few Tier 1 IDM customers and OSATs in Southeast Asia. And for us, it really adds to our portfolio, particularly in the mid-to-high power test contactor segment. So think about more in terms of EV and power management in the vehicle or in an auto -- or an and industrial application.

Operator

Our next question comes from a line of Christian Schwab with Craig-Hallum Capital.

C
Christian Schwab
analyst

Great. Most of them have been answered. I just have one. In the last quarter, we talked about $30 million worth of handler orders that were going to be pushed out that you thought were going to be accepted, obviously, from your guidance that's not happening. So could you give us an update of what you think is going on there, please?

L
Luis MĂĽller
executive

Well, we do have – we had about 100 systems that were sitting waiting on testers to be integrated. That number has come down substantially now. So what we see today is really a weaker demand of the automotive and industrial market going into the fourth quarter. That's kind of restating what I said before, but that's pretty much the status.

C
Christian Schwab
analyst

Okay. So that we've kind of satisfied all of that it appears, okay. So as we begin --

L
Luis MĂĽller
executive

Christian, just to clarify it's never zero, right? But that number has come back to a normalized level that we typically see on a quarter-over-quarter as we wait on testers and I'm assuming some cases testers are waiting on handlers as well.

Operator

[Operator Instructions] Our next question comes from the line of Craig Ellis with B. Riley Securities.

C
Craig Ellis
analyst

Luis and Jeff, I wanted to follow-up on some of the inquiry just about the demand environment, but do it in a different way and maybe in a way that shed some light on the business a little bit longer term even though I think this ability slow, so it's hard to draw the arc of what next year's revenues would look like. So what I wanted to do, Luis, to see if you could just give us a characterization of how customer engagements are going for you across your different businesses. Are they pointing to things that leave you confident that there's increased share of wallet, SAM expansion and success for some of your newer more emerging product drivers or in this environment are you finding that some of those avenues are closing down just help us understand what the customer engagement activity looks like, please?

L
Luis MĂĽller
executive

Yes, Craig, the funny thing is when markets are down, is when the customer engagements usually go up and the demand on engineering goes up. We have had an e-mail exchange just before this call about a customer that had done an acquisition into a space that they were not participating in. And now, talking about qualification of one of our product lines to satisfy this new set of products that they're bringing to market, that's one example.We have a few engagements on the Diamondx tester platform for particularly the analog PMIC space. But as I commented not too long ago, actually, it's very interesting to go through these qualifications and hear the great performance, and how much faster your test time is relative to the current incumbent and how wonderful it is. But it's a little sad to hear, let's get back and when we have incremental capacity needs, we'll start buying the tester. Well, that happens to be not now, not this quarter. So we do have quite a few engagements on the Diamondx analog PMIC side.As you can imagine, less fewer engagements on the handler side, just simply because of our very dominant market share on the handler space. We are already serving all the large customers. We have quite a bit of activity on the contactor side. They tend to be a longer list of smaller wins versus the typical capital equipment, where you really count the engagements on one hand and they could win, $10 million, $15 million, $20 million.So, to sum up, a lot of activity, engineering is extremely busy and that's usually the case in a down market environment. And that's why, as Jeff pointed out, we'll continue to look for ways to lower OpEx on the downturn, but we also don't want to cut back from those critical new product developments and customer engagements. Those are very important to be in the right place at the right time, when the market turns up and the demand picks up again.

C
Craig Ellis
analyst

That's really helpful, Luis. The next question I wanted to get into is related to the EQT deal. So you might have mentioned it, Jeff, but given that this is a $20 million trailing 1-year revenue company, is it fair to think that you've baked in about $5 million into guidance? And the more longer-term question is, can you just walk us through some of the integration steps with this business and how long would it be before you could look for another tech in like this to further bolster recurring?

J
Jeffrey Jones
executive

Well, I think we're ready to go. We're looking for the next opportunity right now. So we're ready. If there was another opportunity out there, I think we could capitalize on that pretty quickly. With respect to the revenue outlook, they're not immune to the downturn either. So it's not a full run rate or $5 million that you mentioned, it's a number that's lower than that. And then – sorry, I think I'm missing one of your questions there.

C
Craig Ellis
analyst

I was just asking about some of the steps on integration of EQT announcement. What's involved there?

J
Jeffrey Jones
executive

Yes, the approach on EQT is to really sort of maintain their operations sort of as is for the foreseeable future. And we think we have opportunities more on the front end. We also think we have some opportunities perhaps to move some of our qualifications, new products into their manufacturing operation and gain some efficiencies through their operating technology. So that's opposed to the typical – we're going to gain X million dollars of cost synergies. We're thinking more on the sort of operations technology as well as something on the revenue front.

L
Luis MĂĽller
executive

Yes, I was just going to add on the revenue front, they do have a few products that are interesting to our customer base, so we're starting the dialogue to get qualifications going on some of the EQT product lines.

C
Craig Ellis
analyst

And how long would that call process take? Is that a quarter or two? Luis, is that longer or shorter?

L
Luis MĂĽller
executive

Realistically speaking, Craig, I would give it three quarters.

C
Craig Ellis
analyst

Got it.

L
Luis MĂĽller
executive

I think a quarter two. A quarter two is when somebody is on an expedite mode and on a ramp mode and they want to get something done quickly. I think right now customers are taking their time until they're pressed for time. So I'm going to say three quarters.

C
Craig Ellis
analyst

Sure. Okay. And then the last one is just a little cleanup item. Jeff, the deck usually has on the slide that shows the recurring and systems mix and some of the other stats, the gross margin for the two different businesses. I didn't see that this time. Can you just hit us with recurring and systems gross margin?

J
Jeffrey Jones
executive

Sure. Yes, no problem. Recurring gross margin in the quarter was 55% and systems was 39%.

C
Craig Ellis
analyst

All right. And that systems number, I think, is down a little bit from the prior quarter. What was that?

J
Jeffrey Jones
executive

It's down 200 basis points. Yes, just a matter of mix.

L
Luis MĂĽller
executive

Lower back factory utilization as well, right? I mean, we got a – although, we are largely outsourced manufacturing, we still have factories in Malaysia, Philippines, and Japan. And so, with lower systems revenue, there's less absorption of overhead on the system side.

Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Jeff Jones for closing remarks.

J
Jeffrey Jones
executive

I'd just like to say thank you to everybody for joining today's call, and we look forward to speaking with you soon. Thanks, and have a nice day.

L
Luis MĂĽller
executive

Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.