Good day, and thank you for standing by. Welcome to today's Conference Call to discuss Cohu's First Quarter Financial Results and Second Quarter Outlook. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your host today, Jeff Jones, CFO. Please go ahead.

Good afternoon, and welcome to our conference call to discuss Cohu's first quarter 2023 results and second 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 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, May 4, 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?

Good afternoon, and thanks for joining us. I'll first discuss some of our thoughts on growing Cohu's business, aligning investments to key global trends. Jeff will then review first quarter financial results and second quarter guidance before we open up for questions at the end. We are pleased with first quarter profitability that reflects our focus on continuing improvements in operational performance in the recruiting business, which delivered $334 million in revenue over the last 12 months. Cohu's recurring business provides stable revenue through industry cycles, allowing the company to deliver profitable results and cash flow to invest in new technologies and products to generate growth through market upturns. First quarter non-GAAP gross margin of 48.2% increased 210 basis points year-over-year and is better than our target financial model at this revenue level. Cohu's recurring business contributed 43% of first quarter revenue and approximately 53% gross margin, and recurring revenue grew at a three-year CAGR of 6.4% through Q1 2023. Service is a key component of Cohu’s recurring revenue, bringing a sticky business as demonstrated by our greater than 87% annual renewal rate on service contracts. Also part of recurring revenue, Cohu's test interface business has landed a series of new opportunities in the first quarter, helping expand our contactor penetration across automotive and industrial semiconductor customers. We manufacture approximately 81% of our contactors in Asia in the first quarter as we continue to transfer new designs into our Philippines factory and work to establish the local supply chain. With this, we've closed on the target to produce approximately 80% of contactors in Asia. Going forward, we're planning for long-term growth of the interface business, and in support of those plans, we broke ground in January on the construction of a new 92,000 square foot facility in the Philippines adjacent to our current factory. The plan is to start production at this new site early next year and be fully operational by mid-2024. We are also working to expand the local supply chain to increase flexibility and quickly ramp production in support of customers' needs. Furthermore, our software business is developing additional analytic capabilities for predictive maintenance. We see a trend across many semiconductor customers to implement factory automation, and our DI-Core software is key to enabling higher productivity of Cohu’s large installed base of handlers. Switching over to Cohu's systems business, it contributed 57% of first quarter revenue at approximately 45% gross margin, which is a 250 basis points improvement year-over-year as we continue to focus on selling differentiated products and work to offset cost pressures from inflation and supply chain constraints. Now, estimated test cell utilization was 77% at the end of Q1, down 2 points quarter-over-quarter. Commenting on this utilization across market segments, automotive and industrial were sequentially down a couple of points in Q1 but remained the strongest segments. Mobility increased a point, computing was up 2 points sequentially, and consumer remained flat. First quarter systems revenue was notably stronger in automotive and industrial end markets that remain more resilient through this industry cycle. Cohu continues to benefit from the automotive market's direction toward electric drivetrains, along with a technology shift to more autonomous vehicles. We are aligning our tester, handler, and interface product investments to gain greater participation in our customers’ future capital expenditures in these markets. In the first quarter, we received a multi-unit $5 million order for silicon carbide device test automation and inspection. Cohu offers automation, test interface, and vision inspection for these high power devices, ensuring known good die traceability from wafer to device and tape, supporting later integration in power modules. We are discussing the applicability of this product, the NY32W, with our C-Gator interface to other customers manufacturing wide bandgap power dies. Mobility revenue grew a few percentage points sequentially as we continue to make inroads into new applications and also benefited from two months of revenue from the recently acquired MCT business. Core to our strategy is the development of products that support test and inspection at wafer and die level that we expect to accelerate in the coming years and align with the expansion of AI and high-performance computing, as well as increasing MEMS sensor technology. Moving on, Cohu is committed to responsible business practices, and we recently published our 2022 sustainability report, which you can read in detail on our website at www.cohu.com. We made progress in the use of electricity derived from renewable sources that increased to 26% last year, increased recycling efforts, maintained our stellar safety and ethics record, and continued progress in employee gender and ethnic diversity, along with details about Scope 1 and 2 greenhouse gas emissions. Now discussing our view for the balance of this year, we expect demand for the second half of 2023 to remain challenged by a weak economic outlook that continues to put pressure on semiconductor market recovery. Despite these macroeconomic headwinds, we remain well-positioned to deliver strong profitability and cash flows that allow for investments in new technologies and products. We are focused on aligning our resources to major trends in industrial automation, autonomous vehicles, increased processing, and sensing power. The focus now is on growing the business and ensuring our product roadmaps are aligned with these secular growth market opportunities. Let me now turn this presentation over to Jeff for further details on first quarter results and second quarter 2023 guidance. Jeff?

Thanks, Luis. Before I walk through the Q1 results and Q2 guidance, please note that my comments that follow will 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 Q1 financial results. Cohu delivered strong profitability on revenue of $179.4 million, which is in line with the midpoint of our guidance range. During the first quarter, two customers in the automotive market each accounted for more than 10% of sales. Q1 gross margin was strong at 48.2%, about 70 basis points higher than guidance, driven by Cohu's resilient recurring business and differentiated products. Headwinds from cost increases for IC components used in our tester products had a minor impact on our Q1 gross margin of approximately 29 basis points. We expect similar minor impacts to gross margin in future quarters as we work through the remaining inventory purchased in prior quarters at higher than normal costs. Operating expenses for Q1 were in line with guidance at $52.3 million. First quarter non-GAAP operating income was 19.1% of revenue, and adjusted EBITDA was 21.1%. The non-GAAP effective tax rate for Q1 was approximately 23% and higher than guidance due to projected concentration of annual pre-tax income in higher tax rate jurisdictions. Non-GAAP EPS for the first quarter was $0.56. In summary, Q1 gross margin and adjusted EBITDA were strong, exceeding the midterm financial targets at this level of revenue. Moving to the balance sheet, cash and investments ended Q1 at $324 million. Debt repayment totaled $35.3 million, and we ended Q1 with a net cash position of approximately $280 million. Cohu’s shares repurchased in Q1 totaled 3.5 million. The MCT acquisition for $27 million in cash closed on January 30th. CapEx in Q1 was $5.1 million, with approximately $2 million related to the construction of the new Philippines facility mentioned by Luis to support long-term growth prospects in our interface business. The Philippines building will drive another $7 million of CapEx through the remainder of 2023. Total CapEx for 2023, including the new building, is expected to remain at approximately $20 million, and cash flow from operations in Q1 was $17 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 Q2 outlook. We’re guiding Q2 revenue to be between $161 million and $173 million. Q2 gross margin is forecasted to be approximately 47%, better than the financial target model at this level of revenue. With a three-year compound annual growth rate of 6.4%, Cohu's high margin and stable recurring business adds resilience to profitability and provides consistent cash flows through industry cycles. Operating expenses for Q2 are projected to be approximately $52 million, essentially flat quarter-over-quarter. We're projecting Q2 interest expense to be approximately $1 million, offset by interest income of approximately $2 million. We expect Q2 adjusted EBITDA at the midpoint of guidance to be approximately 18%. The Q2 forecasted non-GAAP tax rate is approximately 24% at the midpoint of guidance. The diluted share count for Q2 is expected to be approximately 48.2 million shares. That concludes our prepared remarks, and now we'll open the call to questions.

Our first question comes from Craig Ellis with B. Riley Securities.

I was wondering if you could provide any additional color on the back half of the year. And specifically as we're looking toward the September quarter, do you see sales coming down on seasonality or going on a lower base?

It's a good question, but I don't think anything has changed in our view since what we described about a quarter ago. So there's really no change for the second half of the year; it's still the same perspective we talked about three months ago.

Our next question comes from the line of David Duley with Steelhead Securities.

I was wondering if you can elaborate a little bit more on this silicon carbide opportunity that you talked about or win that you talked about. And I think you talked about a win on the previous conference call as well as this new customer, or is it more business with the current customer?

Dave, it is more with the current customer that we have described a quarter ago. A quarter ago, we talked about the design win, the qualification, and acceptance of the first couple of tools. Now it's more of the description of an initial volume ramp on the business.

And I think you mentioned inspection and handling, and you're basically trying to figure out which are the known good die. Is this an opportunity where you could expand your footprint of equipment to the customer with other solutions or would the opportunity here be to take this solution that you sold to the initial customer to other customers?

It's more of the latter, Dave. What we're selling here is a piece of equipment that does the electrical test, provides the automation for the electrical test, and also provides the interface, as well as the contactor for very high voltage and current testing. It performs die inspection and sorting, ensuring that you have known good dies on the output side. So we're pretty much providing all we can for these types of applications. The opportunity forward is to take the same solution to other customers in the market that do silicon carbide, aimed at improving the quality of their known good dies before doing the stacking of each module.

And then switching topics, you mentioned how you're expanding capacity for test contactors in the Philippines. Could you just elaborate a little bit more on where you've seen recent wins in that business? I think initially you had a lot of automotive wins. I'm just curious if you've picked up customers in other markets or if it continues to be in that initial market, and what's your success rate as far as attach rate goes at this point?

So a couple of things are going on. First of all, the automotive market continues to grow. Our automotive revenue is up year-over-year. I don't have the exact figures on hand specific to automotive for contactors, but our overall automotive business is up about 43% year-over-year in Q1. With that, we're obviously manufacturing more and more contactors for automotive, where we get the greatest exposure. Additionally, we have won a series of probe head opportunities in the first quarter, design wins for probe heads. Two of those are in automotive, and a third one is in the communications segment of the market. We're at a point where we need more manufacturing capacity, more space, more tools, and more suppliers. With that, we're pushing to increase the output out of our Philippines operation and also pushing to enhance the output and capability of our suppliers in the region. That's our current strategy to enable further wins and business ramps.

Could you just remind us how big was the contactor business in calendar 2022? And you've talked about how it's had a CAGR of about 6% even though it was a super difficult year. Do you think that business grows for you in '23?

Dave, last year that business was about $130 million for Cohu. Yes, we do anticipate that growth this year, and the target is ultimately to be 20% of the total revenue target of a billion, which means up to $200 million. We expect that business to grow at a high single-digit growth rate.

Just as a follow-up, the capacity you're putting in place in the Philippines now, the new building and everything, does it cover, does it get you to this $200 million annual run rate?

Yes, between the internal capacity and the supply chain that we're trying to develop in the region, yes, it does.

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

This is Tyler on behalf of Christian. So first, I guess, maybe at gross margins, above model right now. As we look into the back half of the year, I was wondering, recurring revenue, by definition, should kind of remain at these strong levels. And if the second half is the same view as before, we should see some directional improvement, although, maybe modest. Should we expect then gross margins to trend down a little bit from the 47% we got in Q2, or how should I think about them in the back half?

I think the street has us in a pretty good spot, not only for the revenue in the back half but also gross margin, somewhere in the high 46 to low 47. So I’d call it maybe an average of 47; we’re pretty comfortable in that range.

And then, I guess, second question, you talked about automotive and industrial strength continuing, but in the quarter, if I heard you right, your test cell utilization in the auto industry was down a little bit, while the rest of the markets are up a little bit. Any color or comment there on quarter-on-quarter fluctuations or anything to call out?

Tyler, it was not specific to automotive or industrial. We said the test cell utilization was down to 77%. Auto and industrial combined were down a couple of points. However, as you can see, our Q1 revenue profile indicates that industrial was down 3 points relative to Q4 last year. Automotive remained about the same, but it was up a point. I think it's normal fluctuation at this moment. What we're noting with more interest is computing being up a couple of points, and mobility is also up a point. Overall, these trends do not indicate a market upturn in those segments; rather, they suggest a bit of stability and hopefully an improvement as we get into the second half.

Our next question comes from Krish Sankar with Cowen.

This is Bob Mertens on for Krish. Let me just come back to the automotive exposure that you have, just a little bit more color between the handler side and test products, how those are playing out in the market? And then also, maybe if you just had a gauge on who some of the main competitors are, or any sort of market share dynamics that are at play within that business?

I don't have exact numbers to break it down for you by product. I can tell you that our highest market exposure from our data set for Q1 results is in automotive. We have 22% of market exposure in automotive. Our handlers and contactors are most primarily exposed to automotive, where we hold a significant leadership position. On the tester side, approximately 25% to 30% of our tester revenue comes from automotive. Of course, we desire to significantly increase our tester business in automotive and industrial, and we're currently working on it. Yet, we remain further behind companies like Teradyne and Advantest in the ATE automotive market.

And then just real quick, how have the current lead times progressed throughout the quarter? Last quarter, you mentioned that handlers were around 24 weeks, and testers around 12.5. Is that still the same, or have lead times improved this quarter?

No, lead times are generally the same. Handlers are maybe a couple of weeks shorter, about 22 weeks for handlers. Testers and contactors are about the same, though contactor lead times improved slightly, down to around six weeks. However, no dramatic change quarter-on-quarter in lead times.

Our next question comes from the line of Quinn Bolton with Needham.

This is Trevor on for Quinn. To start, when looking at the backlog for the second half, has there been any shifts or cancellations of that backlog within the quarter, and can you speak about your visibility into the second half?

Yes, to answer the first part of that: No shifts or cancellations in the backlog. Typically, our visibility extends six months and further, and it's the same situation now. We have good visibility to Q2 and into Q3, but anything beyond that is still vague.

It's not different than it was one quarter ago. We have decent backlog into Q3 already and orders booking now for Q3 shipments. However, anything beyond that is much less clear at this time.

And I believe you stated that mobility and PC were up in the quarter. Do you expect this trend to continue into the second half? Also, any insight on these inventory levels would be helpful?

I don't think necessarily that there will be a big improvement in mobility over the next quarter. I'd expect mobility to gain more traction towards the end of the year. However, I do think computing will be on a positive trend, particularly in the cloud segment during the second half of this year.

And one more, if I may. Are you having more conversations recently with silicon carbide customers than you may have expected two quarters ago when you first mentioned this opportunity? And are you able to quantify as a percentage of revenue what silicon carbide could be in '23?

Yes, to the first question: Certainly, and to the second as well. When we talk about silicon carbide revenue, we see this being in the order of 2% to 3% of our total revenue on an annual basis.

Our next question comes from Brian Chin with Stifel. Are you having more conversations recently with silicon carbide customers than you may have expected two quarters ago when you first mentioned this opportunity? And are you able to quantify as a percentage of revenue what silicon carbide could be in '23? Yes, to the first question: Certainly, and to the second as well. When we talk about silicon carbide revenue, we see this being in the order of 2% to 3% of our total revenue on an annual basis.

Maybe Luis, to give a bit more detail, there have been some questions about sustainability or visibility for the second half of the year. Typically, in a stable year, we see higher revenues in the middle of the year, around the second and third quarters, and then generally softer performance at the beginning and end of the year. As you assess your order book and other indicators for the end markets, especially for the fourth quarter, what are the key factors? Is it the sustainability of the automotive and industrial sectors? You mentioned earlier this year about a moderation in certain areas, or is it more about anticipating a recovery in sectors that have been underperforming this year, such as mobility and consumer? How else would you describe your outlook for the second half?

So Brian, I would be more comfortable discussing the fourth quarter during the next quarter, as you can appreciate. Based on our equipment lead time, we have good visibility a quarter out, fairly decent two quarters out, and then it drops off from there. My best guess right now is that the end of the year may be flat to potentially up sequentially from Q3. I believe automotive and industrial have already moderated, and the real question is when computing and mobility start recovering. As I mentioned earlier, I think computing, especially cloud, will come in first, while mobility remains a big question. Mobility is currently very depressed, indicating that in a quarter or two, it may begin to pick up steam. Does that mean in Q4 or Q1 next year? I cannot say at this moment; I'd appreciate one more quarter for better clarity. I think this year, we may not follow the typical seasonal pattern; it may turn out to be an atypical year where we may see one of those two quarters as seasonally high, and which one exactly remains unclear at this time.

This can be wrong, and you can correct me, but in the past, the ATE market has sometimes led test handlers by a quarter or a little more. Some of your peers seemed to have a strong automotive and industrial ATE business into their third quarter this year at least. Do you see that relationship playing a part in this a little bit?

Yes, absolutely; that's playing a part in all that we're doing right now, enabling us to run a profitable business and deliver the cash flows we need to invest in new products. The question remains about the depressed markets and when they will start turning up. I believe we will start seeing movement in the second half. The real question is the magnitude of it, and we could exit the year with accelerating revenue or orders.

One last question, maybe for both Jeff and you, Luis. Going back to the statements on expanding capacity, strategic expansion capacity in the Philippines? I guess, one, you made good gross margin improvements in that business, probably towards the mid to upper 40s at this point. How should that continue to trend as you start to build that footprint and eventually produce out of it? Additionally, is that a sign of the type of fill that you'll be able to handle out of that facility once it's ready?

So I guess I’ll take the first part regarding gross margin. You're right that business is operating around mid-40s, and we've modeled them to be in high-40s. We believe we can achieve that through expanding operations and increasing productivity and cost efficiencies.

The second part of your question regarding the design wins in Q1 in that business were all in probe heads. Currently, probe heads are not produced in the Philippines. We’ve transferred most of our contactor manufacturing there; in fact, we now produce over 80% of our contactors in the Philippines. However, these probe heads are designed and still manufactured in the US or Europe, depending on whether they are power or high signal speed RF applications. So our challenge is finding a path to get those produced in the Philippines as well, but that is not where we are currently.

Thank you, Luis. Before we sign off, I'd like to mention that we'll be attending a number of investor conferences in person during the second quarter. I'm going to list them here: It's B. Riley Conference in Los Angeles on Thursday, May 25th; TD Cowen Conference in New York City on Wednesday, May 31st; Stifel Conference in Boston on Tuesday, June 6th; Baird Conference in New York City on Thursday, June 8th; and the CEO Summit in San Francisco on Wednesday, July 12th. So if you plan to attend one or more of these conferences, we'd like to meet with you. Please reach out to your respective analyst or conference contact to schedule the meeting. Again, thank you for attending today’s call, and we look forward to speaking with you soon.

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