Good day, and thank you for joining us. Welcome to the Cohu, Inc. First Quarter 2021 Financial Results Conference Call. I would now like to turn the call over to Jeff Jones, Chief Financial Officer. Please proceed.

Welcome to our conference call to discuss Cohu's First Quarter 2021 Results and Second Quarter 2021 outlook. I'm joined today by our President and CEO, Luis Müller. If you need a copy of our earnings release, you may access it from our website at cohu.com or by contacting Cohu Investor Relations. There's also a slide presentation in conjunction with today's call that may be accessed on Cohu's website in the Investor Relations section. Replays of this call will be available via the same page after the call concludes. Now to the safe harbor. During today's call, we will make forward-looking statements reflecting management's current expectations concerning Cohu's future business. These statements are based on current information that we have assessed, 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, April 29, 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 Müller, Cohu's President and CEO. Luis?

Good morning, everyone, and thanks for joining us. Today, I'll review key points of our first quarter results, explain our new presentation format by market segment, provide highlights and summarize Cohu's progress in sustainability. Record first quarter revenue of $225.5 million was up 11.4% sequentially and exceeded the midpoint of our guidance due to strong traction for our contactor products. Cohu's interface business is growing faster than consolidated results, with contactor revenue up 14% quarter-over-quarter and benefiting from the ramp in the automotive and industrial segments. Non-GAAP gross margin of 45.6% and adjusted EBITDA of nearly 24% were records in both absolute dollar value and percentage of revenue. First quarter orders were also a record, driven by robust automotive segment demand that was up 51% quarter-over-quarter and strength across all major markets. Estimated test cell utilization increased 2 points sequentially to 88% at the end of March. The improved utilization was most notable with automotive semiconductor customers, primarily U.S. and European integrated device manufacturers increasing test capacity at their factories in Asia. The next larger quarter-over-quarter order increase came from industrial segment customers, ramping production to support growing consumer demand as economies start to reopen and in line with improving GDP forecast. Starting this quarter, we will discuss revenue by recurring systems. We will also break down systems revenue by end market drivers. Cohu's recurring business was 35% of consolidated revenue in the first quarter, delivering strong 48% non-GAAP gross margin. Recurring is driven by new semiconductor product designs that create opportunities to sell more contactors as well as growing system installed base that enables sales of application kits, services and spares supporting a fleet of approximately 28,000 handlers and testers globally. Our recurring business is benefiting from expanding contactor sales in the first quarter, particularly for power management applications where Cohu leads with cantilever technology that is better suited for high current and voltage semiconductor test. System business was 65% of consolidated revenue and stronger in the mobility segment that was 24% of total in the first quarter. Systems gross margin was approximately 44%. And as indicated in prior quarters, it lags recurring by a few hundred basis points. We continue to enjoy a leading position in testing RF front-end ICs, both with our ATE and handler platforms and growing presence in structural tests with Diamondx. The shift to design for test continues to gain momentum with greater semiconductor complexity. Originally, this was a focused solution for smaller process nodes, but now expanding more across semiconductor applications. We have validated that the Diamondx platform offers significant cost of test advantages for customers implementing structural test. Cohu's solutions span across RF devices, power management, transceivers, and other applications. This is an approximately $300 million market opportunity, and we recently captured greater than 50% share of structural tests at a major semiconductor manufacturer and plan to pursue similar opportunities at other customers. Automotive segment orders increased further in the first quarter, following a strong fourth quarter, with shipments scheduled over the next several months. First quarter automotive segment revenue was 12% and projected to increase in the second and third quarters of this year. With the steep ramp in handler demand, system lead times have stretched to an average 18 weeks. Costs are increasing due to labor shortages, logistic disruptions, and some commodity cost increases across the supply chain. We're challenged with controlling and minimizing the impact, eventually expecting to pass some of these to customers over time. Switching topics. Cohu recently published our second annual sustainability report. We're pleased to highlight that in 2020, revenue grew 9% year-over-year, while we reduced direct energy usage by 15% from 2019. We at Cohu are committed and proud to reduce direct energy consumption and further improve our corporate ESG programs. The highlights are included in the first quarter earnings presentation and the report details are available at cohu.com corporate sustainability page. Now looking ahead, we remain encouraged by market momentum and customer traction for Cohu products. Once again, we'll be guiding revenue up for next quarter and extending visibility into the second half of the year. Now I'd like to turn it over to Jeff to provide details on first quarter results, share second quarter guidance and our expectations for third quarter. Jeff?

Thanks, Luis. Before I walk through the Q1 results and Q2 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. In March, Cohu closed a common stock follow-on offering totaling approximately 5.7 million shares, raising net proceeds of approximately $223 million after deducting underwriting discounts and commissions and offering expenses. We raised the capital to repay outstanding principal on our term loan facility, thereby reducing interest expense and fund future growth initiatives. Prior to the end of Q1, we reduced our outstanding debt by $102 million. Moving forward, capital allocation will continue to be focused on debt reduction and opportunities for expansion of our served markets and technology portfolio. Now turning to the financial results. Q1 revenue was $225.5 million, $3.5 million higher than the midpoint of our guidance range. Q1 revenue was 11% higher than Q4 of last year and set a new record for Cohu. In Q1, no customer accounted for 10% or more of sales. In the first quarter, Cohu's gross margin was 45.6%. Operating expenses were $52.2 million and lower than guidance as we continue to optimize our expense structure. First quarter non-GAAP operating income was 22.5% of revenue, and adjusted EBITDA was 23.9%. Return on invested capital in the first quarter was approximately 60%, well above our target model objective to make investments with ROIC of 30% or higher. Cohu's non-GAAP effective tax rate for Q1 was approximately 12%, lower than guidance, primarily as a result of higher U.S. income, offset by NOLs and tax credits. Non-GAAP EPS for the first quarter was $0.89 and about $0.07 better than our target financial model. Now turning to the business model. The midterm financial targets remain unchanged as we expect the increase in the diluted share count from the follow-on to be offset by a reduction in interest expense as the Term Loan B is fully repaid over time and an adjustment of the effective tax rate to 18%, reflecting greater leverage from U.S. income, offset by NOLs and tax credits. We have met or exceeded the EPS targets over the last 2 quarters. However, the business model remains a 3- to 5-year target as we execute our strategy to gain market share and grow our tester and contactor businesses. In the near term, we remain focused on consistently achieving the gross margin targets and significantly reducing interest expense as we further repay our debt over the coming quarters. Now moving to the balance sheet. The capital raised in March has strengthened the balance sheet. We've added approximately $121 million to our Q1 cash balance after reducing our outstanding debt by approximately $102 million. The Q1 balance sheet reflects a net cash position with increased resources for additional debt reduction and investment in opportunities to expand served markets and technology portfolio in line with our growth strategy. The growth in accounts receivable reflects the sequential increase in shipments as our DSO has remained essentially flat quarter-over-quarter and is the primary reason cash flow from operations was near breakeven. Orders and utilization of equipment at our customers' test facilities remain strong. The second quarter revenue forecast is in line with the directional guidance we provided in early February. For Q2, we're guiding sales to be between $234 million to $250 million. The low end of the revenue range considers some supply chain uncertainty and potential risks associated with book and bill and customer acceptance, which is required for revenue. We're achieving the high end of our quarterly target revenue model sooner than the 3- to 5-year time horizon discussed during our December Analyst Day. The current growth is driven by a steep ramp in test handlers at lower than corporate average gross margins. We're forecasting Q2 gross margin to be between 42% to 43% due to the mix of system versus recurring revenue and the mix of system revenue between handlers and testers. System revenue for Q2 is projected to be approximately 67% of total sales compared to approximately 55% of sales in our target model. We're realizing volume benefits from greater leverage of fixed manufacturing and operating costs, contributing to 20% plus operating income, and we remain on track to grow tester and contactor businesses that are in line with our target financial model. Q2 operating expenses are projected to be between $53 million and $54 million. We're currently managing operating expenses lower than the target model to compensate for the gross margin forecast. The goal, as I previously mentioned, is to execute gross margin expansion through growth of higher-margin systems and recurring revenue, leading to the midterm business model and proportionately grow our investments on new products over time. We expect Q2 adjusted EBITDA at the midpoint of guidance to be approximately 22%. The Q2 forecast non-GAAP tax rate is approximately 18% at the midpoint of guidance. Most of Cohu's profits are generated offshore and subject to statutory tax rates in foreign jurisdictions. Income taxes on profits generated in the U.S. are mitigated by net operating loss carryforwards. The diluted share count for Q2 is expected to be approximately 49 million shares. With a record backlog entering Q2, high levels of equipment utilization and continued strong order forecast across various markets, we're projecting Q3 revenue to be approximately flat to up 5% over the midpoint of Q2 guidance. 2021 is shaping up to be another record year for Cohu, and we remain optimistic about our midterm prospects, enabling testing of new high-growth technologies in RF, battery management and ADAS processors and automotive, while growing contactor and recurring business, along with gains in automated optical inspection. That concludes our prepared remarks. And now we'll open the call to questions.

Our first question comes from Brian Chin with Stifel.

Congratulations on the results. My first question is for you, Jeff. Can you provide a breakdown of the temporary factors in Q2 that are leading to a decrease in gross margins, roughly 300 basis points at the midpoint quarter-on-quarter? I would like to know how much of this is due to product mix versus the higher input costs mentioned earlier. Additionally, are there impacts from handlers turret compared to pick-and-place that might also be affecting margins? Lastly, as we look towards Q3 and anticipate higher revenue levels, how much of these margin impacts do you expect to carry into Q3 and possibly the second half of the year?

Yes, you bet, Brian, and thank you. The Q2 gross margin is nearly all impacted by product mix. So it's the steep ramp and the steep increase in handler systems revenue that I referenced with gross margins that are below the corporate target. So we're seeing record handler system revenue, driven mainly by high automotive demand. So typically, or in our midterm model, we're seeing Q2 handler revenue that's about 50% higher than our midterm model. So it's really a steep, steep ramp in handler revenue for Q2. You asked about the configuration or the type of handler. Most of the automotive handler is pick-and-place, and that's what's driving this revenue. It's coming more from the pick-and-place technology. And so overall, it's just a very steep ramp. It exceeds the relationship and the sort of pro-rata numbers out of our business model. And so that is really all mix in Q2. We've seen some cost increase that's impacting Q2, but that's limited for now to about $0.5 million. So it's minimal in the big picture. Q3 gross margin view is preliminary. And actually, a little premature at this point in time. I will say that the mix of revenue is similar to or it's looking to be similar to Q2. But to really peg a gross margin for Q3 is a little premature at this time. The underlying business itself is tracking to the business model. And so the gross margin is going to recover over the midterm, but it's really a cause in this sort of accelerated ramp in handler revenue.

That makes sense that the handler business is significantly contributing to the upswing you're observing on the system side. I'm also interested to hear your thoughts on the strong growth in testing that has been evident since last year. Do you believe that by the end of this year, you could start to see an improvement in terms of its contribution to revenue?

Yes, that is the plan. We are experiencing growth year-over-year in the tester business and the contactor business. We feel confident about our position in these areas and the prospects for growth.

Got it. Maybe expanding on the demand environment, many of your customers in the auto and industrial markets are reporting low inventory and sustained demand trends now and into the second half and beyond. It appears that this is reflected in your initial outlook for the third quarter. I'm curious as to how this is playing out in the second half. Typically, there's a bit of a slowdown heading into Q4 in the test space in general, but do you think this time it might defy that trend based on the current setup?

Brian, this is Luis. It's a bit premature to discuss the fourth quarter. However, demand is clearly quite strong. As we've noted, we provided some guidance for what to expect in the third quarter. The demand environment continues to be robust, not just in the automotive sector but also in the mobility space. Mobility, in fact, was our largest revenue segment in the first quarter by a significant margin.

And our next question comes from the line of David Duley with Steelhead.

I was wondering, when you look at the size of the SOC market, what would be your expectation for this current year? And do you think you're going to grow your test business at a more rapid clip than the overall test market?

Our test business has achieved a year-over-year revenue growth of 144%, which is a significant increase. I anticipate that on an annual basis, we will exceed the expected market growth. From what I've gathered, it seems the SOC market is projected to approach $4 billion this year.

And where do you think it comes from? Is it because your customers are spending more than others, or have you actually gained new clients and successes? If you have had any successes, in what areas do you see that happening?

It's been primarily in the RF market for us, David. I mean, twofold, yes, we picked up some wins, that is for sure. But I would say by and large, the RF market is outgrowing the overall SOC test market. We all know there is a 5G deployment in full swing today in the market. I think we're looking at the latest estimates that I've seen on about 500 million cell phones that are 5G capable; that's the forecast for this year. So we're in a big, big full swing in the RF space. And that is the area that Cohu's tester business is strongest with RF front-end ICs. So we're really enjoying this market growth that we expect will be here for the next 2 to 3 years still.

And final question for me is, you've seen this huge increase in wafer fab equipment spending. I think it's going to be up like 30% this year to greater than $75 billion. How do you see that translating into the back end into the test and handler markets? And do you think that increased levels of wafer fab equipment spending is going to prolong the cycle for the back end?

Yes, absolutely. I think that's the final kicker here on the market. We have these super big trends in automotive and mobility and computing. But right behind it is this sort of technology race here between Intel, TSMC, Samsung, and I guess, I'd say, some others too. Incredible spending on the front-end equipment side and that's going to translate into growth to the back end, I think, for several years to come. I mean, we see it right now that lead times are stretching. We talked about our lead times, but I also noticed that assembly equipment lead times are stretching close to a year now. So all in all, I think we're looking at this mega investment on the front end to generate substantial capacity additions in the back end. And as we know from past cycles, this means the back end is going to enjoy a long period of growth here to support test, I think, also assembly for all this silicon production.

And our next question comes from the line of Craig Ellis with B. Riley Securities.

Appreciate the incremental color on this call on things like gross margins for the different businesses. So I wanted to follow-up on the former question just by approaching it a slightly different way, Luis. So if we look at dynamics in the RF world and in connectivity, in the last 24 hours, we've seen a leading Tier 1 smartphone OEM absolutely blowout numbers, a leading baseband and APU provider out of Taiwan blowout first quarter and second quarter guidance. And so the question is, as you look at order dynamics for 5G test cell coming into you, to what extent are you seeing strength driven really by smartphones versus things like ultra-wideband, which are highly correlated to smartphones, but other things as well, and then Wi-Fi 6, where there's a material consumer push away from smartphones? Just any color on how that business could break down and the momentum that you've seen over the last 3 months with orders would be helpful.

I don't have a specific breakdown between 5G smartphones and other RF applications in industrial or automotive sectors right now. However, I can tell you that we are gaining momentum in RF IoT and ultra-wideband applications. Qualitatively, the mobile sector still represents the largest portion of the RF market for us, potentially at a ratio of 2:1 or 3:1 compared to everything else. That said, you are right; other areas outside of mobile are gaining traction, especially with the recovery in the industrial market, which is contributing to growth in various RF applications beyond mobile.

That's helpful. The second question pertains to the automotive business. One insight from your presentation is the progress in electric vehicles and advanced driver-assistance systems. Luis, this question is more focused on the long term. Given the current mix of electric vehicles and advanced driver-assistance systems, and if you could provide a quantification of that, how do you envision it evolving not only over the next year but also over the next two years, considering the emphasis automakers are placing on both areas and the current production capabilities?

In the first quarter, EV and ADAS constituted approximately 35% to 40% of our automotive handler orders, a notable increase from around 25% in the fourth quarter. The emphasis remains mostly on EVs, though our ADAS business doubled from the fourth to the first quarter based on orders, not revenue. We are observing a continued increase in ADAS, with forecasts for second and third quarter deliveries showing growing momentum. The overall data on electrification indicates that electric vehicles and hybrids have been experiencing significant growth since late last year, with optimistic forecasts for the future. However, we acknowledge that there is still a considerable journey ahead. Regarding 5G, we estimated a penetration of about 15% to 16% in smartphones at the end of last year, with an even longer path on the automotive side. The transition in automotive generally takes longer compared to product and buying cycles in mobility. We remain very optimistic about both the mobility and automotive markets for next year and beyond.

That's helpful. 5G is on a trajectory that spans multiple years. EV and ADAS are expected to grow steadily through the end of the decade, which is an interesting aspect of your business. Jeff, I don't want to overlook you. My first question is about debt repayment. It's great to see the $102 million, which is slightly higher than what the company announced in late March. How should we approach the ability to pay down debt in the second and third quarters? Additionally, how much do you want to expedite your collections to facilitate quicker debt reduction?

Yes. As I mentioned earlier, our top priority for cash and capital allocation remains debt reduction. We plan to make significant quarterly debt repayments, keeping our cash flow projections in mind. Collections from customers are a crucial part of this, but we also have substantial, justified payments to suppliers to consider. The timing of these payments is important. However, the focus will remain on making meaningful debt repayments. You may have noticed that our business model anticipates the interest expense to mitigate some of the dilution from the share increase. We will remain committed to significant debt reduction while also maintaining some reserve funds on the balance sheet for investment opportunities to further expand our market reach and enhance our technology portfolio.

Okay. And I'm looking at my decoder ring, and it says that meaningful could be something between $75 million to $100 million a quarter. Is that right? Or is that north or south of what you think meaningful could translate to?

Meaningful, probably, I think more in the $20 million to $40 million a quarter in sort of in that range, Craig.

Okay. And then just finally, on OpEx, you're running the business well below target, and that's to compensate for gross margins, which were all below target. The question is, given your experience at turning tactical OpEx overachievement to structural, to what extent are some of the gains that you're seeing potentially structural in nature versus more temporal?

Well, I think it's a good observation, Craig. And I think we have significant changes that are more structural and we're actually going through a restructuring right now. I've talked about it in the past, but we're going through a restructuring in Germany. And so that is part of the lower OpEx, at least for this year. And for the time being, as we continue to work on expanding gross margin, we're going to manage OpEx down. So I hear what you're saying; some of the costs will be coming back; things like travel will eventually come back. But many of the actions that we're taking today and have taken over the last few quarters will end up being structural and reductions in cost on more of a permanent nature.

Let me add a bit to that. Travel costs will return, but not to the same extent as before. We have implemented virtual assistants, goggles, and infrastructure for our service organization, which we view as a lasting solution rather than a temporary measure due to COVID-19 travel restrictions. Therefore, while travel and expenses will resume, we anticipate that they will be lower moving forward.

And our next question comes from the line of Krish Sankar with Cowen & Company.

I had a couple of questions. One is, what is your revenue capacity today?

Our revenue capacity is being scaled to match demand. We have a tester business that is mostly outsourced to Jabil, a major contract manufacturer. We believe there is significant room for growth here. Regarding our handler operations, we use a hybrid outsourced model, where we outsource subassemblies but handle final integration and testing in-house. This process is quick, typically taking about one to two weeks. We are also utilizing external suppliers for simple system integration. The main constraint lies in the in-house manufacturing of the contractor side, which requires us to build the necessary infrastructure. However, our recurring business demonstrates a steady growth trend that we are able to manage, and we can continue to expand our capacity by working with outside contract manufacturers.

I understand. This is the question. The reason I ask is that while the supply chain has extended lead times to the past six months, there is tightness with wafers and substrates. I'm trying to determine if this situation has improved your visibility due to your customers, or if there are still no constraints affecting your customers' contributions.

Yes. Our constraint is timing, Krish. So sure, our lead times have stretched. I think the last call, I mentioned that we're about 14.5 weeks lead time. I'm saying now we're about 18 weeks lead time. So it has stretched. It's not necessarily because of capacity constraints. It's more about timing to reach a higher output level. You can't flip a coin and get there a week or 2 later. So as orders continue to increase here, we are ramping, and we continue to ramp our manufacturing capacity, but it does take 1 quarter to 4 months to get to the new level.

Got it. And then the final question is on your mobility side, how much of your RF test business do you think is coming from millimeter-wave? And it seems like it hasn't taken off a whole lot, but it has huge potential. I'm kind of curious if that ever comes back in a bigger way, is that better? Or is it neutral for Cohu?

Millimeter-wave mobility is currently a very small part of our business, Krish. To be realistic, millimeter-wave isn’t even a significant portion of the $225 million. We anticipate that millimeter-wave will become more meaningful starting next year. While we do have some revenue from it this year, I expect it will be substantial next year, though that is somewhat speculative based on customer feedback.

And our next question comes from the line of Tom Diffely with D.A. Davidson.

One more supply chain question. A lot of companies are talking about the fact that the freight costs are the biggest issue they have today. I'm curious, when you talked about the impact in your quarter, was that freight driven? Or is that actual material costs going up?

Yes, we've experienced the same situation, Tom. Freight costs have increased, and we've implemented strategies over the past few quarters to plan ahead and adjust our shipping methods, opting for sea shipments instead of air to reduce those expenses. We've definitely noticed this trend over the last few quarters, particularly since the onset of COVID. However, I believe we've managed these challenges fairly well. Regarding material costs, we are currently in discussions with our suppliers, and while it is challenging to keep material costs from significantly affecting our Q2 forecast, it remains a concern as we move forward.

Okay. Great. And then as a follow-up, Jeff, when you look at the freight costs, is there any sign of that abating? Or is it still kind of a black box?

I don't see any significant signs of abatement here. But again, we've been able to do a good job to manage, as I said, try to move as much as we can to sea versus there.

Okay. Great. And then, Jeff, when you look at the target model, given the margin differences between systems and recurring, is there a certain assumption in your target models at the different levels for that mix?

Yes. Yes, absolutely. And that's why I was saying in Q2, the handler revenue is significantly exceeding the planned mix, which there are benefits to that as well, right? It's a lot of volume that runs through our Melaka manufacturing, better leverage of fixed costs since it's definitely contributing to higher operating income, 20% plus operating income. So we're seeing benefits. It's just a sort of misalignment of mix, if you will, for at least Q2. And as I said, over the near term, as contactors and tester business continues to grow, we expect it to come back in line with the business model.

Okay. And then, I guess, when you look at the model today, if you hit the high end of the revenue target today versus a year or two down the road, how does that impact the performance, do you think?

Well, again, we're maintaining lower operating expenses. And so that will be certainly a benefit to the model. I think if we have to assume that we have this type of product mix or something close to it, then we'll have pressure on gross margins. But I think that would mostly be offset by a reduction in operating expenses.

And our next question comes from Christian Schwab with Craig-Hallum Capital.

Great quarter. And thanks for offering up two quarters of revenue visibility. I just have one quick question or maybe a clarity question. On the record orders that you have, can you give us a rough estimate of how much of that might be from mobility currently? And how much of that is automotive? And with lead times extending to 18 weeks and discussions about delivering products in a timely manner for acceptance, how long does that visibility extend? Do we have 3, 4 quarters of visibility in certain markets? Any clarity there would be helpful.

Christian, this is Luis. So the order strength on the first quarter was more heavily weighted towards automotive, as you can imagine, because we are talking about the automotive handler revenue in the second quarter. So to give you some numbers here, automotive system orders were 24% of total in the first quarter. So it kind of flipped with mobility. Mobility came in strong, though. It came in still at a strong 15% of orders. And then following that is industrial, who has been picking up momentum here and then the other markets. So as far as delivery visibility, as you can imagine, with 18 weeks lead time, we're looking here at decent visibility into the third quarter from a revenue base. But we also do have some visibility to forecast into the second quarter, which, again, as Jeff already expressed, indicates that this is going to be a very strong year for Cohu, and in fact, most likely a record, an all-time record year. But it's too early for us to start calling fourth quarter, if you want the full year.

Great. Before I sign off, I'd like to let everybody know that we'll be attending a number of virtual conferences in June, including Cowen, Craig Hallum, Stifel, and CEO Summit. We hope to have meetings with you at any or all of these conferences. And I'd like to thank you for joining today's call, and I hope that you have a good day. Thank you.

Bye, bye.