Good day, and thank you for standing by. Welcome to Cohu's Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. 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.

Good afternoon, and welcome to our conference call to discuss Cohu's second quarter 2022 results and third quarter 2022 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, July 28, 2022, 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.

Good afternoon, and thanks for joining us. Cohu again reported outstanding results with revenue up 9.8% quarter-over-quarter to $217.2 million and non-GAAP EPS at $0.81, exceeding the midpoint of guidance. Importantly, gross margin of 46.5% continues to progress toward our three-year target financial model and benefited from growth in our semiconductor test business as well as increased in-sourcing of contactor manufacturing, now at 66% at the end of Q2. Estimated test sale utilization, unsurprisingly, came down three points quarter-over-quarter to about 84%, still indicating a healthy business environment, but in line with softness in mobility and consumer end markets. Earlier in the quarter, we announced that a leading US semiconductor manufacturer selected the Diamondx platform for testing devices for Internet of Things applications. The adoption of the Diamondx by new and existing customers is strong validation of Cohu's strategy to broaden the use of our test solutions in the large mixed signal market. We have doubled the Diamondx installed base in the last three years, expanding the market use in data storage, analog, power management, display driver, automotive, and RF IoT. In total, we believe there is a $1.5 billion addressable market opportunity for Cohu testers. Also in the second quarter, we have ramped tester shipments in support of the recent design wins in Korea, for testing display driver ICs and in Japan for automotive power IC tests. The team is hard at work to deliver additional wins over the next few quarters, mostly across automotive and industrial semiconductor customers as we continue to demonstrate the cost-effective value proposition of the air-cooled Diamondx. Now on Cohu's Interface business, we benefited from demand geared towards xEV and industrial power applications in Q2. Together with our handlers, we captured multiple system orders for a US-based customer scaling manufacturing of silicon carbide power devices. Our solution enables high current carrying capacity test and inspection of known good devices that are subsequently integrated into power modules. In the second quarter, we presented our C.razor Octosite probe card solution at TesconX and semiconductor wafer test conferences, showcasing the lower cost and higher performance value proposition of Cohu's probe card technology for millimeter wave in Pneck applications. Using similar technology, we delivered several ICON coaxial contactors last quarter for testing millimeter wave RF transceivers. These products are already in use and we plan to expand to new customers and ramp in-house manufacturing capacity in support of our strategy to grow an estimated $300 million probe card addressable market. Now switching to Inspection and Metrology. We qualified the Neon platform at two new customers in Q2 and launched six new customer evaluations to conclude over the next three quarters. One consists of Neon measuring small copper pillars on a BAW filter, an application that demonstrates Cohu's vision technology accuracy. We continue to expand our capabilities, improve the vision accuracy and implement deep learning algorithms to increase vision yield for our customers. This is an exciting area that will continue to grow as 2.5 and 3D packages gain more volume across end market applications and the need for higher quality escalates. Now switching to our Software services. We broadened the penetration of our DI-Core data analytics offering to two new customers, both in automotive semiconductor markets where there is pressure to quickly ramp capacity and scale-up manufacturing. As we expand the DI-Core customer base, the value we deliver with even a 1% increase in test sell uptime is becoming clear. It's not surprising that research and markets estimate the total available market for industrial analytics at $1.5 billion and expanding at a compound annual growth rate of approximately 21%. This is obviously a large industry, and our initial focus is to optimize Cohu's installed base of 23,000-plus systems. Our next milestone is to deliver incremental functionality in the second half of this year that predicts out of stratification equipment performance, contactor analytics, and more. Cohu's test automation business also had a strong quarter. With three design wins at new customer operations in China, we're positioned for growth as China expands in automotive and industrial markets. We booked multi-unit orders for a MEMS test platform that is still in development but gaining early traction for testing high signal-to-noise ratio sensors, essentially precision sensors. We also won a first order for testing CMOS image sensor devices used in automotive and continue to expand our high-performance thermal systems at two leading-edge US-based customers, manufacturing graphics and data center processors. While we continue to be challenged with longer lead times for components in the regional COVID lockdowns in China, our operations team, again, did an excellent job responding and ensuring customer deliveries in the second quarter. Overall, this is an interesting environment. On the one hand, we have seen a softening in consumer and mobility demand since early this year. On the other hand, we're extremely busy with new customer evaluations that we expect to convert to wins across various product businesses over the next few quarters. In parallel, automotive and industrial markets remain robust, and demand has been strong. At a macro level, there are serious concerns about the rising interest rates and persistent inflation in the US. For the next few quarters, you wouldn't be surprised to see auto, industrial, and data center remain strong while mobility and consumer soft. Fortunately, for Cohu, the breadth of our product line and technologies enable us to address multiple market segments and capitalize on opportunities as they arise. We're not forecasting 2023 yet, but based on early customer projections and increasing wafer manufacturing capacity, we anticipate another ramp sometime near the middle of next year, driven by high-end smartphone demand, continued growth of automotive ADAS and xEV, and strong industrial and data center demand. Regardless, we're very focused on continuing to grow the business, expanding the use of Diamondx, vision inspection systems, interface products, and data analytics, such that Cohu can achieve our $1 billion revenue target model and 49% non-GAAP gross margin. At the same time, the company's structure is substantially more efficient today after consolidating the Xcerra acquisition, and we can deliver a much more resilient business model through industry cycles. Let me now turn it over to Jeff to share second quarter results and provide specifics about our third quarter guidance.

Thanks, Luis. Before I walk through the Q2 results and Q3 guidance, please note that the comments that follow will refer to non-GAAP figures. Information about the non-GAAP financial measures, including GAAP to non-GAAP reconciliations and other disclosures are included in the accompanying earnings release and investor presentation, which are located on the Investor page of our website. Now turning to the financial results. Cohu again delivered strong revenue and profitability in the quarter. Q2 revenue was $217.2 million and at the higher end of our guidance range. During the second quarter, no customer accounted for more than 10% of sales. Gross margin in Q2 was 46.5%, about 50 basis points higher than guidance because of increasing in-sourced contactor manufacturing and higher recurring revenue. Due to supply chain constraints, we have recently incurred cost increases for IC components used in our tester products. These recent headwinds negatively impacted Cohu's Q2 gross margin by approximately 130 basis points. We expect these challenges to persist into mid-2023 and then reduce over time as we increase sourcing directly with semiconductor manufacturers and component availability improves. Turning to the contactor business. We've made significant progress over the last six months, transitioning manufacturing from outside suppliers to our factory in the Philippines, resulting in lower cost and a 300 basis point expansion of the contactor business gross margin, while continuing to increase contactor insourcing to reach our goal of 80% by the end of this year, and thereafter, with normal efficiency improvements, expect to achieve the contactor gross margin target of high 40% by mid-2023. Operating expenses for Q2 were lower than guidance and were $51.9 million, as certain product development and customer support costs have shifted from Q2 to Q3. Second quarter non-GAAP operating income was 22.6% of revenue, and adjusted EBITDA was very strong at 24.9%. The non-GAAP effective tax rate for Q2 was approximately 20% and in line with guidance. Non-GAAP EPS for the second quarter was $0.81. In summary, Q2 profitability was strong as gross margin and adjusted EBITDA continue to expand towards the three-year financial target. Moving to the balance sheet. Q2 cash flow from operations was strong at $44 million. Net of share repurchases totaling $14 million, debt repayment of approximately $16 million, capital additions of about $3 million, and other small changes in working capital, cash and investments grew by $9 million quarter-over-quarter to $368 million. Overall, Cohu's balance sheet maintains a strong position to support debt reduction, the share repurchase program, and investment opportunities to expand our served markets and technology portfolio in line with our growth strategy. Now moving to our Q3 outlook. We're guiding Q3 revenue to be between $198 million and $212 million. Entering Q3, our backlog is at $342 million and is scheduled to ship over multiple quarters as determined by customer requirements and material availability. Q3 gross margin is forecasted to be approximately 46.5%. The IC cost component headwinds in the tester business I mentioned earlier will persist in Q3. Operating expenses for Q3 are projected to be approximately $54 million, up to $1 million quarter-over-quarter as we increase investments to support customer activities, including product evaluations moved from Q2 to Q3. We're projecting Q3 interest expense to be approximately $1 million, and we expect Q3 adjusted EBITDA at the midpoint of guidance to be approximately 22%. Similar to Q2, the Q3 forecast non-GAAP tax rate is approximately 20% at the midpoint of guidance. The full year 2022 non-GAAP tax rate continues to be approximately 20%. The diluted share count for Q3 is expected to be approximately 48.7 million shares. That concludes our prepared remarks. And now we'll open the call to questions.

Thank you. Our first question is from Brian Chin with Stifel. Please proceed with your question.

Good Afternoon. Congratulations on the results, and thanks for allowing me to ask a few questions. Maybe, Luis, let me start with you. I think the past few or several calls, you've highlighted some of the market share wins you've had, certainly on the ATE side and maybe even some sales synergies kicking in as well. I'm curious, you've done that sort of in a robust market environment. It's kind of hard just to carve out mind share when people are pretty glitchy. But now that some of the delivery pressures in some areas of your customer base are relaxing, is this even a better time to drive application wins and share gains?

Hi, Brian. Honestly, yes, I think when you can get the customers to pay more attention, it helps to qualify new products or qualify existing products to new applications. I think I mentioned in the prepared remarks here, we do have several new evaluations across the tester business, the inspection and metrology business, and even the contactor business. We have several new evaluations starting over the course of the next few quarters. It's probably going to take in total about three quarters, or at least the next three quarters. I know we're going to be very busy evaluating products and negotiating some design wins. So yes, I hope for some good news ahead.

Got to talk to you early to sort of bracket figures here. But from a timing standpoint, if some of those go your way, what do you think the timing on some of those incremental contributions would be?

Brian, I think I'm going to reserve that for when they do happen, then we can start talking about it like we did in Q1, for example, when we talk about the DDIC and the power management wins. How much were they, so a way to materialize.

Yes, that's fair. And then maybe sort of backtracking, Jeff, to the comment about the strategic sourcing, locking up some supply on some critical chips, several quarters' worth, it sounds like probably prudent, but does that also maybe kind of be either – is that tied into your visibility in terms of confidence in shipments over the next several quarters, or does that even maybe give you a leg up or even some head-to-head situations given that you sort of have some key supply locked up?

I think it's a combination of both, certainly to some degree, driven by the backlog and the forecast, a certain degree driven by availability in the market. So yes, having that in hand certainly is more positive and could be viewed as an advantage to deliver faster, absolutely.

Okay. One last thing, Jeff, probably for you. But just thinking about auto industrial faring better than consumer mobility. What factor of any do you think this will play on gross margins in the back half in terms of mix?

I think that we're going to continue to see a pretty steady and strong gross margin through the second half of the year. We guided, as I just said, 46.5%. So flat quarter-over-quarter, Q2 to Q3. The changes that we've made and improvements that we made structurally and otherwise, over the last two to three quarters are really building a more resilient model. And so, I feel more comfortable that the gross margin is going to remain sort of in this range. Not completely regardless of mix, but the mix will have less of an impact on it.

Okay, great. Thank you.

One moment for our next question, please. Our next question comes from David Duley with Steelhead Securities. Please check your mute button, please.

I'm sorry, you're right. I was on mute. Good afternoon. Congratulations on nice results. Guys, I was wondering, Luis, I think you mentioned something about silicon carbide products, was that in relation to testing or maybe you could elaborate on the progress that you've made in the power management sector, as well as the silicon carbide sector with whatever product that you might be attacking the mod with.

Yes, I can do that. Hi, David. On the test side, we talked about it in Q1. If you recall, David, that we captured significant business, frankly, in Japan for testing power managed devices for automotive applications. This was in the ATE side. On the silicon carbide, which is the comment I made today, was more specific to automation and desk contactors and inspection of the silicon carbide dies. So that's business that's going on not only at one account that we had a design win for multiple orders, but a couple of other places where we already had qualified our products last year and are starting to see some repeat business.

Now do you expect some of these evaluation systems, I would imagine are attacking other power management customers, maybe talk about why you think you won business in power management test and why you think you can win further business going forward? And is there a potential for you to actually do silicon carbide test?

So, we've done a series of refresh on our instruments last year on the power management side. We have put more resources, more applications resources focused on power management opportunities. And yes, I do think their paths ahead here in the next several quarters to expand our tester business in it. When you switch to silicon carbide, there are multiple things that you do test in silicon carbide. I would say, we can't do it all today, David, we can do some. We can do some of it, but we can't do it all. And we'll see how that flushes out for us in the next year or so.

Okay. And then final question from me, and I'll get back. You mentioned something about CMOS image sensors. Was that a tester product or a tester win, or I'm sorry, I didn't quite share what you had said about that.

No, Dave, that was one of our test handlers. So CMOS image sensors in general are tested at wafer for consumer mobile applications, as you push now more camera capability in vehicles in ADAS, that is becoming a little bit more stringent. It's done at temperature. It's a hermetically sealed package, and we saw an opportunity to deploy the application in one of our handler platforms. And so this one specifically was on our handler platform.

Okay. Thank you.

Thank you. One moment for our next question, please. Our next question comes from Craig Ellis with B. Riley Securities. Please go ahead.

Thanks for taking the question. Nice job on the margin and earnings execution in the quarter, guys. Jeff, I didn't catch the point you made about the component issue in test and the specific gross margin impact from that. Can you repeat that, please?

Yes, sure. We actually started seeing increasing costs on semiconductors that we use in our tester products. We started seeing those in Q1. So a slight or smaller impact in Q1 than Q2 it grew. And so increased costs just based on global availability of semiconductors and having to pay more essentially through brokers, some distributors. It’s paying more for the same semiconductor. In Q2, it had an impact equivalent to about 130 basis points on gross margin. So, close to a few million dollars in the quarter.

And that was a headline gross margin impact or an impact at the segment level systems versus recurring?

At the Cohu consolidated level?

Okay. Yeah, I thought that's what you said, and it seemed like such a large impact that I was surprised. So you had some of that in the first quarter and increased in the second quarter. And from here, you said our expectations should be what at the margin versus the 130 basis points of tailwind costs?

Yeah. So in our Q3 forecast, there’s – it’s about the same impact in Q3. And then Q4, see it slowly going down in Q4 and working its way through in the first half of next year. Hopefully, with increased availability of semiconductors, and we're certainly working more closely with our customers to buy direct, that perhaps in the second half of the year, it’s an immaterial impact.

Yes. Customers, who are – or suppliers in this case.

Exactly, yeah.

Yeah. It would be nice to see that diminish. Luis, you had some interesting comments around views for kind of mid-next year with commentary around things like the momentum from ADAS and EVs on one hand, and then other things as well. Can you just talk about the optics that you're getting into those specific opportunities, whether it's either, a, the engagements that you have when you're out visiting customers or during your customer meetings, or b, if you actually have some orders as part of the current backlog that would stretch all the way out into, say, 2Q of next year?

Yes, Craig, it's not so much the backlog into Q2 of next year. And frankly, it's a little bit too soon to forecast 2023. But it has to do with some early customer projections. And in those projections, indications that we need to line up the supply chain, given the current environment, line up the supply chain to support their business projections for 2023. We're seeing that in the high-end smartphone business. We're also pretty encouraged with the discussions we're having particularly with automotive and industrial customers when the dialogue moves to availability of wafers and when their wafer capacity starts to ramp up in 2023, and how that means for task capacity and their expansion in the back-end area. Also very encouraged, frankly, by the design wins we had here late last year and early this year and the activity that I mentioned before to Brian that we have ahead on evaluations that are starting now. So you put it all together. We come to the conclusion, but obviously not yet a forecast, but a conclusion that we're probably going to see a positive tone starting at some point next year. We're guessing here that at some point is mid to late Q2, so call it the middle of next year.

Yes. Okay. Got it. And then, Jeff, maybe a question for you, and I know the company is not giving guidance in the fourth quarter or in the first quarter. But could you just help us with what your view is of the business' seasonality when it is operating in a more normal environment for those two quarters, especially since I think Cohu was one of the first companies to talk about the industry moving from a cyclical phase to a more seasonal phase? Thank you.

Yes, sure. Just some basic guidelines that we talked about before. Q2, Q3 tend to be stronger from a revenue aspect, while Q4 and Q1 tend to be weaker, based on end markets that are driving demand for our customer products and then back to us for test products. I think we see a similar pattern this year. We talked about softening in mobility and consumer, but I still think there's some seasonality here that we're going to deal with in Q4. The way that we're looking at it, we're looking at a revenue split between the first half and second half of this year to be around 51% in the first half and about 49% in the second half. So that should give you some indication of where Q4 falls out this year. With respect to seasonality, we've gone back over the last dozen years or so and trended that out, and that tends to be in the mid-to-high single-digit revenue changes for the seasonality. So hopefully, that gives you a good overview of that, Craig.

Yes. That's really helpful color. Jeff and Luis, thank you very much.

Thank you.

Thank you.

Our next question comes from Quinn Bolton with Needham & Company. Your line is open.

Hi, guys. Wanted to follow up on Craig's questions. First, a clarification, that mid-to-high single-digit seasonality. Was that the seasonality, Jeff, you're referring to that you typically see in the fourth quarter relative to the third quarter?

Yes, that's right.

Got it. Okay. Yes, I thought I just wanted to confirm. The next question, just trying to sort of interpret Luis, your comments about starting to see better strength in a number of applications for the middle of next year. Do you think the consumer smartphone mobility, computing weakness sort of mitigate typical seasonality that you would typically see in Q1 and Q2, and that you may see some of the revenue shifting more into the second half of next year? Or are you just sort of talking about some of these applications picking up in the middle of next year, but you would still see that more normal seasonal pattern of Q2 and Q3 being the stronger? And I guess, are I'm really asking more about Q2, sort of seeing normal seasonal patterns.

Yes, Quinn. I believe the timing on that will largely depend on the economic conditions, which makes it a bit challenging to determine precisely. Typically, I would say that the second and third quarters tend to perform well. Based on what Jeff mentioned, we expect around 51% of our revenue in the first half of this year and 49% in the latter half. I wouldn’t be surprised if that shifts next year. I’m not sure about the exact scale of that change yet, but it could resemble a mirror image as we move into 2023. However, I can't provide precise timing right now; it's somewhat speculative based on our customers' early requests and forecasts for product delivery, which will likely be adjusted over the next six months as we approach those timelines.

Got it. Makes Sense. And then, Jeff, just to follow up on the IC components where you're seeing higher costs here in the near term. Can you give us a sense, are these analog? Are they digital processors, programmable logic? Obviously, with the mobility and computing segments starting to weaken, it would appear that the foundry capacity becomes more available. And I'm wondering if you benefit from some of the potential capacity that comes online as mobility and compute demand weakens, or are these more kind of products manufactured on 200-millimeter wafers, where wafer supply is still pretty constrained.

Hi. Quinn, I'm going to step in on this, since I've been talking a lot with customers, asking for suppliers in this case. It's predominantly coming out of two areas. One being FPGAs. So that's a key area that's costing us money to source components right now. And the second one continues to be precision analog semiconductors that we use in our instrumentation. So we build our forecast. We go out to source components. We ask for help. But obviously, as we get some design wins in the tester business, as we talked about in Q1, and those ramped faster than we had anticipated, it put some more strain on our forecast and we got to go out and source more components, and that's been costing us money. We are working diligently with our customers, like I said, in this case, suppliers, to get directly into their supply chain, but that doesn't happen overnight. So in the meantime, we do what we need to do to support our customers, support our design wins. As Jeff said, it cost us 130 basis points in margin in Q2 already. So that's unfortunate. But I think as we resolve this and normalize our supply chain over time, directly from our customers, we'll be able to recover that. It's going to take a few quarters to get there, but I think we're going to inch our way there as we get into 2023.

Great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Christian Schwab with Craig-Hallum. Please go ahead.

Hey, guys. This is Tyler on for Christian. Thanks for letting me ask a question here. A lot of ours have been asked and answered already. I just want to follow up, and I appreciate the color. Into Q4, you guys typically kind of give some qualitative or directional commentary two quarters out. I was just wondering, into Q4 with the weakening mobility consumer and auto industrial markets remaining strong. If you could just comment maybe on that mix and how that may impact your visibility to that potentially actually give you an improving visibility two quarters out in this environment, or any comments on that mix and visibility would be great?

Looking ahead to the fourth quarter, I don’t have precise numbers to share at this moment. However, I believe that the automotive and industrial sectors will be the strongest as we enter Q4. I also anticipate that the computing segment will remain relatively strong, especially since we have secured some design wins after a year of effort. These design wins are expected to become more significant, particularly for data center applications, in the latter half of this year. Therefore, as we approach Q4, I expect that automotive, industrial, and computing will be the leading segments, likely in that order.

All right. I appreciate that color. That's all for us. Thanks guys. Congrats on a good quarter.

Thanks, Tyler.

Thank you. One moment for our last question, please. Our last question comes from Hans Chung with D.A. Davidson. Please proceed.

Hi, guys. Thank you for taking my question. So first, I want to follow-up on the inspection metrology platform. I think you mentioned you've got a qualification by two customers, and then sending the evaluation to six new customers. So first, I think do you have any sense, like whether or when you could potentially get the following order from a customer being qualified? And then also regarding the evaluation process, how long it typically take from, let's say, evaluating to qualification to the real order?

Yeah, Hans, I would expect about three quarters for it to become real production orders. We could in a couple of quarters, get an evaluation converted to a PO, and the system is already delivered, so it becomes revenue. So one unit, if you will, at a customer eval. But to start getting actual volume, I would say three quarters is the minimum because once you qualify the system, once you get it all buttoned up and ready and you get the feel and you recognize repeat order from there, you're subject to the lead time of that system configuration. So three quarters is kind of the minimum time to start getting volume orders and volume revenue from those qualifications.

That's helpful. And then second question, can you provide some color around the lead time for your different products: tester, handler, and contactor?

Yes. I can do that. So let me look here in my data. We're looking at our test automation systems. They're hovering between 14 and 24 weeks lead time. It really depends on the configuration of the product. Inspection systems are sort of 20 to 24 weeks, testers, the ATE platforms 16 to 20 weeks approximately. We have some configurations that are longer. Contactors, the interface products actually have extended the lead time a bit. They're up to 12 weeks, as demand has increased, and spare systems continue to be about the same, about five weeks.

Got it. And then, actually, last question. So do you have any exposure to Intel, and so surprising that given they just have the CapEx cut for the year. And is there any implication to you guys?

Well, as you know from our Qs, Intel has not been a 10% customer. Not in the quarter, we don't have any 10% customer, I believe, in this quarter. But we do obviously have business with Intel. We do supply automation systems for their assembly side of the house. And we still supply some recurring business, some kit configurations for test as well, particularly on the data center side. So yes, we do have some business with Intel. It's not a 10% customer.

Got it. Thank you.

Thank you. And I would now like to turn the conference back to Jeff Jones for closing remarks.

Okay. So before we sign off, I'd like to mention that we'll be attending a number of investor conferences over the next few months. These conferences include the Big Sky and D.A. Davidson Technology Conference on August 23rd, also the Needham Virtual SemiCap Conference on August 24th. We will attend the Citi Global Technology Conference in New York City on September 9th, and we'll also attend the Goldman Sachs Technology Conference in San Francisco on September 14th. So if you'd like to attend any of these events, please reach out to your respective banking and conference contacts and arrange a meeting with Cohu. We look forward to speaking with you soon. Thank you for joining today's call. And have a good day.

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