Good day, and thank you for standing by. Welcome to Cohu's Third Quarter 2024 Financial Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Jones, Chief Financial Officer. Please go ahead.

Good afternoon, and welcome to our conference call to discuss Cohu's third quarter 2024 results and fourth quarter 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, October 31, 2024, 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.

Hello, and welcome to our quarterly earnings call. Third quarter non-GAAP gross margin was strong at approximately 47%. Gross margin benefited from initial revenue of some new products and lower manufacturing costs. Jeff will get into more details on these later. Revenue of $95.3 million was split 67% recurring in the balance systems, continuing to demonstrate the resilience of our business model during a market downturn. Systems revenue increased sequentially in automotive and mobile segments, although offset by declines in computing, consumer, and industrial. The mobile segment was strongest in the third quarter at 12% of consolidated revenue. Mobile also posted 13% year-over-year revenue growth, defining a turning point in a segment that was first into this market downturn. We had a significant test cell design win last quarter at a top five automotive semiconductor manufacturer. With this win, Cohu is delivering a combined tester, handler, and interface solution for testing power management devices. We're excited to see traction with our Diamondx in the mixed signal market and expect to have additional good news in the coming quarters as more customers are evaluating our platform. While market conditions remain soft across our primary segments in automotive and industrial, we're busy realigning our investments to outsized growth opportunities. We made good progress recently entering the memory and silicon carbide power semiconductor markets. Earlier today, we announced a customer order for our Neon inspection metrology platform configured for high bandwidth memory, also known as HBM. The HBM market is estimated to be approximately $23 billion today and projected to grow about 22% a year through the end of this decade. We're pleased to have received an initial order from one of the world's leading semiconductor memory manufacturers, marking a big strategic win with substantial growth opportunities in the next couple of years. We believe the industry is purchasing approximately $100 million of inspection metrology equipment for this HBM manufacturing process step today and expanding at a fast pace to keep up with AI data center demand. Neon offers a highly efficient vision system, enabling full six-sided optical inspection and measurement of micro pillars, along with vision optimization powered by Cohu's AI inspection technology. We're expecting follow-on orders in early 2025 to support a production ramp in the second half of next year. We also announced today that a leading European customer has selected Cohu for high-speed handling and inspection of silicon carbide dies. We have been providing inspection metrology systems to silicon carbide manufacturing for over a year, but this solution extends our offering into burn-in tests at the die level. Cohu's product configuration will significantly improve yield and productivity, eliminating more than 40% losses through burn-in of tested good-only dies. We'll also be supplying a high-power test interface for 2.5 kilovolts tested per die, satisfying stringent automotive zero-defect requirements. The silicon carbide market is poised to grow at 25% CAGR through 2029, and we're pleased to be an enabler of the next generation of devices coming to market in 2025. Now turning to our DI-Core software platform. Several customers have expressed interest in our data analytics software that is demonstrating yield and productivity gains. While we have validations running at multiple customers, in Q3, a key Cohu customer placed orders to expand the use of our AI inspection software. This subscription-based software solution optimizes inspection yield through a convolutional neural network machine. In other words, it uses deep learning models to process vision data. We're excited to expand Cohu's recurring business with machine learning analytics. Although this is still a small part of our total revenue, the level of customer engagement and interest in our solutions is exceeding our expectations. Putting this a bit in context, we estimate that the semiconductor back-end manufacturing industry is spending about $600 million in data analytics for process control, data visualization, connectivity, and predictive applications. These investments are focused on positioning our products to growth applications while also enabling our customers to expand the use of factory automation and support on and near-shoring semiconductor manufacturing. We're committing resources to making this a growth vector in our strategy, expanding our recurring revenue with subscription software aligned with our customers' push for what is known as Industry 4.0. I'm expecting to see some very exciting years ahead for Cohu as we enter the memory market, expanding silicon carbide applications, including burn-in and stress testing, and very importantly, build on our analytics platform. Let me now turn it over to Jeff to provide further details on last quarter results and next quarter guidance.

Thanks, Luis. Before I walk through the Q3 results and Q4 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 Q3 financial results. Revenue for the quarter was $95.3 million and in line with guidance. Recurring revenue, which is largely consumable-driven and more stable than systems revenue, represented 67% of total revenue in Q3. During the third quarter, one customer in the automotive market accounted for more than 10% of sales. Q3 gross margin was strong at 47.1% and higher than guidance, benefiting from some new products, the one-time utilization of previously reserved inventory, as well as lower manufacturing costs in our interface or contactor business. Operating expenses for Q3 were $45.2 million and lower than guidance by approximately $1.6 million, driven by lower labor costs due to replacement and new hire delays as well as higher vacation utilization than forecasted. Third quarter non-GAAP operating income was approximately breakeven and adjusted EBITDA was 2.3%. Interest income, net of interest expense and a foreign currency loss of approximately $1.6 million was $900,000. The foreign currency loss was driven by typical balance sheet exposure to foreign currencies in conjunction with the devaluation of the U.S. dollar in Q3 after the Federal Reserve's rate cut announcement. Q3 pretax income consists of foreign profits combined with a loss in the U.S. The Q3 tax provision of $4.4 million reflects tax expense on foreign profits but no tax benefit from the U.S. loss due to our valuation allowance against deferred tax assets. Non-GAAP EPS for the third quarter was a $0.08 loss. Moving to the balance sheet, overall cash and investments increased by $7 million during Q3 to $269 million due mainly to positive cash flow from operations of $17 million less $8 million used to repurchase 315,000 shares of Cohu common stock and capital expenditures of $2 million related to our factories in the Philippines and Germany, supporting operations for our interface and automation businesses. Overall, Cohu's balance sheet remains strong supporting investment opportunities to expand our served markets and technology portfolio in line with our growth strategy and returning capital to shareholders through our share repurchase program. Now moving to our Q4 outlook. We're guiding Q4 revenue to be in the range of $95 million, plus or minus $7 million, essentially flat to Q3 as we bounce along the bottom of this cyclical trough. The initial order forecast for Q4 reflects a book-to-bill ratio over one, and our current view of Q1 revenue is approximately 10% higher than Q4. Fourth quarter gross margin is forecasted to be approximately 44%, lower than Q3, but higher than the financial target model at this level of revenue due in 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. We expect gross margin to increase again when our revenue recovers with the broader semiconductor device market and with better absorption of our factories' infrastructure. Operating expenses for Q4 are projected to increase about $1 million quarter-over-quarter to approximately $46 million due to an increase of labor costs as a result of the U.S. dollar weakening in Q3 against many foreign currencies. As I noted on prior calls, we've taken action throughout 2024 to reduce operating expenses without sacrificing critical new product investments while navigating through the trough of the cycle. Our main focus has been on structural changes, generating permanent cost reduction leading to projected 2025 operating expenses to be relatively flat compared to 2024 while supporting a recovery in business and higher revenue. We're projecting Q4 interest income, net of interest expense and foreign currency impacts to be approximately $1.8 million at current interest rates. The Q4 non-GAAP tax provision is expected to be approximately $3.1 million because of tax on foreign profits without benefit from the U.S. loss. Until the markets recover, we expect a similar tax provision profile as we navigate through the cycle. The basic share count for Q4 is expected to be approximately 46.5 million shares. And that concludes our prepared remarks. And now we'll open the call to questions.

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

And guys, congratulations on the new products that are coming to market. Luis, I wanted to start just by following up on your comments on mobile. I think you might have remarked that the business in its strength is at or near a turn? Did I hear that right? And was it just up in 3Q because of some of the strength we see seasonally at that time? Or do you really think it's hit a bottom, and we should be moving up sequentially from here?

Craig, yes, I did make the comment that mobile revenue was up year-on-year by 13%. But if I wanted to expand on that, I can tell you that also bookings in the third quarter were up sequentially across all market segments, which I didn't say in my prepared remarks, but that is also the case. And they're also up year-on-year across all segments, except for consumer. So, yes, we have seen an improvement in mobile revenue quarter-on-quarter, year-on-year, but we also haven't seen an improvement in orders across automotive, industrial, computing, and mobile. So, basically, across the board quarter-on-quarter and year-on-year as well. So, we're a little bit more optimistic now as we head into 2025.

Good to hear. And then I wanted to focus on Neon and die level burn-in tests. So, in the deck and in your comments, I believe you framed them as respected $150 million opportunities. What's a reasonable way to look at revenue potential for those respective products next year, Luis? And how long does it take to realize or build up to the market sizing that you identified, the $150 million?

Yes. First of all, Craig, the market sizing will be divided between us and other suppliers currently involved, particularly one company in Korea called Hanmi, which is the largest supplier in this space right now. We are just starting to enter this market. We received our first order and we expect to deliver the product in the coming months, with additional orders anticipated at the start of the year. We have been informed that production ramp-up should begin in the summertime. How quickly we will capture part of the $100 million is uncertain. There are three or four major manufacturers in this technology, and at this stage, we are collaborating with one as an initial entry point. Regarding silicon carbide burn-in, we have an opportunity to solve a significant issue by addressing the problem of starting with wafers that have low yields, which leads to wasting time burning in non-functional devices. We now have a solution in partnership with others for conducting burn-in at the die level. The leading supplier in this field is pushing us to expedite our product's production. Currently, we are the bottleneck, but we are also starting discussions with other customers about how to reduce their costs associated with burn-in testing of silicon carbide devices. I can't provide an exact timeline for how much of the $150 million opportunity we will capture or how quickly it will happen, but we have just entered both segments. On the HBM side, we are not only speaking to other suppliers but also looking into additional upstream inspection opportunities within the HBM market. We will update you on this as it develops in 2025.

Okay. And then, Jeff, if I could, I think I heard your remarks that orders were tracking up around 10% for the first quarter. Does that give you confidence that we can see revenues rise sequentially? And if revenues were to rise similarly, how would that compare to how you regard normal seasonality in 1Q?

Yes. I believe we are now beyond the typical seasonality. Therefore, I wouldn't place much significance on that aspect, Craig. My observation was that orders are expected to exceed one in Q4. Consequently, we are projecting that revenue in Q1 will be 10% higher than in Q4. To reiterate, we haven't experienced normal seasonality for nearly two years, and I don't expect it to resume in Q1.

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

So, a couple of questions. First on the high-bandwidth memory. Do you know if this is the high-bandwidth memory 3E or if this is high-bandwidth memory four that you will be inspecting?

No, personally, I don't have that information to share right now, Christian.

Okay. Regarding the wafer level burn-in process for silicon carbide, how does your product stack up against competitors in terms of average selling price and the number of wafers that can be tested simultaneously?

This is actually a singulated die burn-in, not exactly a wafer, so it’s somewhat different. You cannot make a direct comparison. We have several hundred dies in a carrier in a burn-in slot, and there are multiple slots like this. Therefore, it’s not a simple one-to-one comparison to wafer level. The key difference is that you have known good dies because you tested the silicon carbide wafer before the burn-in. This means you go into the burn-in with verified dies, unlike a known portion of a bad wafer that enters the burn-in. That’s the advantage in this process.

Okay. Okay. So, do you think that would be a complementary product then?

Complementary to what? To wafer burn-in, you mean?

Yes.

No. No. It's displacement off.

Yes. So, it's an alternative solution to that?

That's correct.

And then does the customer who is considering this solution believe that a lower cost, faster throughput option is beneficial, or are they conducting wafer-level burn-in on the wafer? Is this an additional step they are implementing to avoid putting it in a module and discarding it?

No, no. It's essentially the same question you asked earlier. This is about replacing the existing wafer burn-in process with a die burn-in process. It provides a much lower cost and more efficient method because you're not burning in known bad devices that are all stuck together in a monolithic wafer.

I want to ensure I fully grasped your points. Congratulations on the sequential growth in Q1, which, in response to the earlier query, seems somewhat countercyclical. As you mentioned, we should expect to see some stability here while we wait for an increase in end market demand, along with the potential impact of new products as we progress through 2025. Did I capture your message correctly?

Yes, you're correct. To add to Craig Ellis's earlier question, we are seeing improvements in demand. As I mentioned in the prepared remarks, recurring bookings increased by 8% quarter-on-quarter. Additionally, system bookings rose across all market segments quarter-on-quarter, and year-over-year too, with the exception of consumer. We are witnessing the beginning of a general improvement. This is partially due to new products and some market share gains. It's a mix of both factors. It's encouraging to see positive numbers in front of us, indicating improvements in bookings both quarter-over-quarter and year-over-year.

And I'm sorry, Jeff, I don't have your company file in front of me, but can you remind me how many quarters it's been since you felt confident in essence, to give directional guidance for two quarters in a row instead of just one to me, I think it's been over a year in my head, but if you know that off hand, that would be great?

Yes. Christian, it has been over a year. I don't have it right in front of me either, but it's definitely been over a year.

Our next question comes from Ross Cole with Needham.

I was wondering if you could provide some updated directional color on the different business segments going into 2025. I remember you had thought mobile and computing would have been a strong spot. And it's great to see that mobile did well this quarter. I just want to see your feeling going into next year.

I think I can comment on the orders. All segments have shown growth both quarter-over-quarter and year-over-year in terms of bookings. This could be the best indicator for the early part of next year. While I can't discuss the entire year, looking at the quarter-over-quarter and year-over-year data, the strongest booking segment overall has been mobile on a year-over-year basis. Automotive has performed best on a quarter-over-quarter basis and is the second strongest year-over-year. Industrial also showed significant improvement on a quarter-over-quarter basis. The overall trend we see highlights growth in mobile, automotive, and industrial sectors, with variations depending on whether we are considering quarter-over-quarter or year-over-year metrics. These three segments are leading the sequential improvements.

Our next question comes from Robert Mertens with TD Cowen.

I'm on for, Krish Sankar. Congrats on the design wins during the quarter. I guess my first question is just around your automotive business. It looks like it did much better in the quarter than previously expected, but the utilization in the space is actually down compared to the June quarter. Is this discrepancy largely just due to that one greater than 10% customer in the quarter? Or are you starting to see an actual quarter-over-quarter improvement in the automotive business? Just any color into the next quarter and next year would be helpful.

Yes, I can say that the automotive segment has shown improvement in bookings and revenue both quarter-over-quarter and year-over-year. However, we should view this with some caution since it follows a period of significant market decline, making improvements somewhat easier to achieve. The year-over-year growth is particularly encouraging. The automotive segment seems to have reached a low point in Q2 last year and is now on an upward trajectory, starting from Q3 this year. Currently, I'm focusing on the bookings, which are more indicative of future performance. A few customers have placed new orders this quarter, including one that has been proactive in driving demand earlier than others. This is a common pattern, with some customers taking the lead while others follow. That's the current situation in the automotive space.

Got it. That's helpful. And then just a quick question on the die level burn-in. I think on your slides, the revenue opportunity is around $50 million annually. Is that maybe what your win with the customer could ramp to? Or is that just for the overall market?

We think this is for the market at large, not one customer, but what the market could absorb as it starts to migrate from a wafer level to a die level burn-in.

Our next question comes from Brian Chin with Stifel.

This is Dennis speaking on behalf of Brian. My first question concerns the HBM opportunity. Could you elaborate on the steps or components of the process that you've successfully implemented? Are you competing with a company like Camtech or another one? Additionally, could you discuss the revenue significance and the timeline for generating revenue from these products?

Dennis, those are good questions. We're not competing with Onto or Camtek. To my understanding, they focus on inspection at the wafer level before simulation. What we have here is the stacked die inspection metrology. This involves inspecting multilayer HBM dies stacked on top of each other as part of the final product inspection metrology. That's our focus. Jeffrey, can you comment on the second part of the question?

There was revenue and there was timing next to it, which I think we addressed already just in terms of the revenues too soon to tell, but we'll provide updates as we have them.

All right. Great. And then for my follow-up, you'd also announced one with the leading, I think, multinational analog in the Midsemi-customer. How has that engagement progressed? And kind of what is the time frame for seeing revenue with this customer? And then maybe you can talk about the revenue contribution as well. And then is it just testers? Or is it handlers and contactors as well? Could you tell us a little bit more about that?

Sure. This is part of a press release we put out in July actually at semicon. So, it's a little dated now, but it was indeed part of a Q3 event. We have been talking about positioning our Diamondx tester more into the mixed signal market. A lot of it is analog, but there's some digital, some RF content. And in July, we announced that we won a selection at a top five semiconductor automotive manufacturer. And kind of coincidentally here, this win was not just the Diamondx, but also handlers and contactors. So, we essentially are selling them a complete test cell. We will see initial revenue, although it's still at an early stage, so small numbers, but initial revenue here in the fourth quarter, and there's a continuation of that going into next year. We are touching on several product groups with these guys and working our way up on test application development, so they can move products onto our Diamondx testing. In conjunction with that announcement we did in July, we announced a new instrument that goes along with the Diamondx called the VI-100, essentially a voltage current instrument that is used in analog applications. And anyhow, this is sort of a key instrument enabler for our positioning into the mixed signal market. There are a few other things that we did. There are some other platform enhancements that we did in conjunction with the VI-100, some refresh and other instrument capabilities so that we round up the Diamondx that is a very cost-effective test platform for general mixed signal customers, typically those supplying auto, industrial markets, also power applications for data centers.

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

Thank you. And before we sign off, I'd like to mention that we'll be participating in a few investor conferences over the next three months. First one is Stifel Midwest Conference in Chicago on November 7, followed by the New York Summit Conference in New York City on December 17. And then we'll be attending virtually the Needham Growth Conference on January 9 of next year. If you're interested in meeting with us at any of these conferences, please let me know or reach out to the respective research analysts to schedule a meeting. That's it, and I'd like to thank you for joining 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.