Cohu Inc Q2 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to Cohu's Second Quarter 2025 Financial Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jeff Jones, Chief Financial Officer. Please go ahead.

Good afternoon, and welcome to our conference call to discuss Cohu's second quarter 2025 results and third quarter 2025 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, July 31, 2025, 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 a reconciliation to the most comparable GAAP measures. Now I'd like to turn the call over to Luis Muller, Cohu's President and CEO. Luis?

Hello, everyone, and welcome to our quarterly earnings call. I'm excited to share our second quarter results and third quarter guidance with you. First off, let's talk about some highlights. Our estimated test cell utilization increased by 3 points quarter-over-quarter to 75%, which historically indicates the industry is entering a recovery cycle. Orders improved quarter-over-quarter, driven primarily by the mobile end market. This reflects the growing demand for our innovative solutions and our ability to meet the evolving needs of our customers. We also secured our first system order from a customer in India for silicon carbide test, opening a new geographical opportunity for our products. Additionally, we have a revenue stream opportunity of approximately $20 million in the precision analog market with the qualification of the Ultra-S contactor from a leading IDM customer. This qualification is a critical step in expanding our footprint in the precision analog space and underscores our commitment to delivering high-quality, reliable solutions. Moreover, we're introducing the new Eclipse handler model, a configurable platform targeting share expansion at test subcontractors. The Eclipse handler is designed to provide unparalleled flexibility and efficiency, making it an ideal solution for a wide range of applications. Now let's dive into the detailed results. Our revenue for the second quarter of 2025 was just under $108 million with a non-GAAP gross margin of 44.4%. The revenue split was 63% recurring and the balance for systems. We saw a sequential increase in Cohu systems revenue across mobile, computing, and industrial segments. Utilization improved across all segments, ranging from a 2 to 4 points increase in each of our end markets. Our Eclipse test handler has been upgraded to enhance versatility and configurability across various applications, including passive, ATC mobile, computing, and automotive. During the second quarter, we secured a $28 million design win order for our Eclipse handler from an existing customer for mobile and automotive end markets. This expands our presence at this customer to better cover their future test requirements. The order ships over multiple quarters this year, and we anticipate follow-on business in 2026, subject to this customer's growth in the market. Additionally, we landed $3.5 million in new customer wins in Q2, spanning testers, handlers, and inspection systems. Cohu is also enabling the future of display technology from larger automotive screens to ultra-bright mobile displays and lightweight wearable interfaces. Our advanced test solutions are critical for cutting-edge OLED displays in smartphones and emerging AR devices. We recently launched the PD3x instrument, the latest upgrade to our high-density flat panel display solution on our Diamondx tester. The PD3x offers unmatched precision and scalability, capable of measuring ultra-low currents and voltages across 320 channels simultaneously. This instrument is already deployed by the two leading vendors in the display driver IC market with production at major OSATs in Korea, Taiwan, and China. We test display drivers that support a wide range of display formats, including foldable and automotive-grade panels. As I previously mentioned, our interface business captured an important design win in the precision analog semiconductor test with the qualification of our new Ultra-S contactor. Ultra-S was in development by the EQT team in Singapore when we completed the acquisition in late 2023 and now adds to Cohu's revenue and innovative reputation. This design win is a significant milestone that highlights our ability to innovate and deliver solutions that meet the stringent requirements of the precision analog market. Our software business booked $360,000 in Q2 with annual recurring revenue opportunity of $530,000. We continue to run evaluations and proof of concepts, demonstrating yield and overall equipment efficiency improvements with our software solutions. Although this is a long journey ahead, customers continue to show interest and explore the new value creation in manufacturing using fault detection and artificial intelligence-driven process control and optimization in semiconductor test. Our software solutions include DI-Core and Tignis pace monitor and pacemaker. DI-Core is designed to provide real-time data analytics and insights, enabling customers to make informed decisions and optimize their test processes. Tignis, on the other hand, leverages advanced machine learning algorithms to predict and prevent potential process deviations, ensuring the highest levels of reliability and performance. Looking ahead, we're optimistic about the prospects for 2026. We're focusing on capturing new customer opportunities and investing in new products and configurations to address future market needs. Our manufacturing team is in the final stretch of completing the transfer of the remaining product manufacturing from the U.S. and Europe to our Asian factories, which will help consolidate and drive further efficiencies in future quarters. We recognize the market recovery will not be linear, and we're likely to see some seasonal slowdown again in Q4 this year, but we're optimistic about our prospects, especially with our growing exposure in computing with service and data center processor test and HBM inspection. Thank you for your attention. Let me now give it over to Jeff for further details on last quarter's results and next quarter's guidance. Jeff?

Thanks, Luis. Before I walk through the Q2 results and Q3 guidance, please note that my comments that follow all refer to non-GAAP figures. Information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures, are included in the accompanying earnings release and investor presentation, which are located on the Investor page of our website. Now turning to the Q2 financial results. Revenue for the quarter was $107.7 million and in line with guidance. Recurring revenue, which is largely consumable-driven and more stable than systems revenue, represented 63% of total revenue in Q2. During the second quarter, no customer accounted for more than 10% of sales. Q2 gross margin was 44.4% and in line with guidance. Operating expenses for Q2 were $47.7 million, also in line with guidance. Q2 interest income, net of interest expense and a small foreign currency loss, was approximately $900,000. The Q2 tax provision was approximately $300,000 and non-GAAP EPS for the second quarter was $0.02. Moving to the balance sheet. Overall cash and investments increased by $8 million during Q2 to $209 million due primarily to $16 million of cash flow from operations. No stock repurchases were completed in Q2. From inception of our share repurchase plan through Q1 2025, we have repurchased approximately 4 million shares for $117 million, leaving $23 million available for us to repurchase additional shares in the future. Total debt of $18 million is flat quarter-over-quarter. Q2 CapEx was $2.7 million and consists primarily of facility improvements. We're maintaining an annual CapEx target of $20 million, including the $9 million Melaka facility purchase in Q1. Cohu's balance sheet continues to demonstrate strength overall, supporting our ability to invest in expanding served markets and enhancing our technology portfolio in line with our growth strategy. In addition, we remain committed to returning capital to shareholders via our share repurchase program. Now moving to our Q3 outlook. Recent system orders for mobile and automotive test are driving a 16% increase in revenue quarter-over-quarter. Total recurring revenue is expected to be flat quarter-over-quarter, and we're guiding Q3 revenue to be approximately $125 million, plus or minus $7 million. The gross margin for the third quarter is projected to be approximately 44%. The Q3 revenue mix is expected to consist of approximately 47% from systems, mainly test automation systems for the mobile market, and about 53% from recurring revenue. Q3 operating expenses are projected to be about $50 million, which includes around $2 million for variable R&D product development prototype materials. Total operating expenses are in line with the restructuring plan targets that were implemented in late Q1 of this year. Once the full impact of the restructuring plan has taken effect in the beginning of 2026, we expect quarterly operating expenses to be approximately $49 million per quarter when revenue is approximately $130 million. We're projecting Q3 interest income, net of interest expense and foreign currency impacts, to be approximately $900,000 at current interest rates. The recent enactment of the One Big Beautiful Bill introduces changes to capitalized R&D, resulting in a midyear adjustment to Cohu's tax provision methodology. Consequently, a one-time year-to-date true-up will be recorded in Q3. Including this true-up, we anticipate that our Q3 tax provision will be approximately $15 million. For the full year 2025, the methodology change yields the same annual tax provision, but the quarterly amounts will differ. In Q4, we expect the effective tax rate to be in the 30% to 35% range. The basic share count for Q3 is expected to be approximately 46.8 million shares. And that concludes our prepared remarks, and now we'll open the call to questions.

Our first question will come from Brian Chin with Stifel.

Can you hear me?

Yes.

Can you provide details on the $28 million order, specifically regarding the timing across the third and fourth quarters? How much will it contribute to the sequential increase in Q3? Also, is this business tied to the increases in utilization rates, perhaps indicating a shift in market share towards that customer? Additionally, is this related to digital handling or different products?

Brian, so I'll handle the first part of that question. And in Q2, we shipped and recognized about $4 million of that order. We will ship and recognize about $12 million in each Q3 and Q4.

And to follow on your second part of the question here, Brian, this is essentially digital in the mobile space, digital. And it's a business expansion. For us, it's a business expansion, which we classify as a design win at an existing customer. Now I believe that customer is doing well in the market. I think their business is good. But for us, this is a business expansion.

Okay. To expand a bit, I heard the discussion about a potential seasonal downturn in Q4 for the business, but I'm encouraged by the trends in utilization rates that you're observing. Focusing on that, it seems like recurring revenues are up slightly in Q3. This significant new order could contribute notably to the increase in system revenue. What other factors are giving you confidence that there will be broader growth beyond just one customer? The utilization rate is certainly part of that, but what additional information can you share about why you believe these trends might continue into the second half?

Yes. We have observed a sequential improvement in orders across all segments in Q2, with the exception of computing. Mobile has seen a significant rise, driven by customer orders and design wins. Additionally, there was a substantial increase, over 100%, in the automotive and industrial sectors during Q2, specifically regarding orders. In the consumer segment, there was a slight increase, whereas computing saw a minor decrease. We are not only witnessing a rise in utilization across market segments, but also an uptick in orders, predominantly for systems. We've received some orders from customers in the automotive market who have been largely inactive for the past two years. Overall, I believe we are on a path to recovery. However, I want to emphasize that it’s too early to make definitive predictions. We anticipate a typical slowdown toward the year-end and the fourth quarter before things pick up again. Hence, I made the remark about recovery showing signs of development, and I am encouraged by the increase in utilization and orders across markets. Nonetheless, it's important to remember that this isn't a straightforward process; it often involves two steps forward, one step back, followed by another three steps forward, which is the nature of this industry.

Got it. Maybe just one last thing for me. I think in prior calls, you've talked about and referenced here some of the product expansions, new products and customer wins that irrespective of cyclical conditions would drive $30 million, $35 million, maybe $40 million of revenue this year. Are you still on track to achieve that within these numbers?

Yes, we're doing really well. We had a tester design win at the end of last year, and we've been in the deployment stage throughout this year, which we will continue for the rest of the year. That effort is going extremely well, and I'm very happy with it. We're integrating new products and applications into the Diamondx platform. Our success in HBM has been very good, and we're projecting around $7 million in revenue this year, possibly more, depending on when we receive the next round of orders. I'm particularly excited about the qualification in precision analog with contactors. Overall, I'm really pleased with the design win story and expect that our customers will continue to drive increasing capacity needs for testing and inspection of our equipment into next year.

Our next question comes from Charles Shi with Needham & Company.

First off, I want to congratulate you on the $28 million order from one particular customer. Based on your breakdown of the quarterly distribution, it seems like you're going to have a 10% customer for the next two quarters, which is impressive. I want to revisit the $28 million order. Given its size, I’m curious why it’s happening now. Is it related to the product cycle? And regarding the size, do you think there are any factors like tariffs or concerns about tariffs impacting this batch of shipments, especially since we're not clear on where the $28 million orders are being shipped from and to?

No, I don't think there are any tariff implications in this order. We know exactly where we're shipping our products and we're in the process of installation. Some of it was already installed towards the end of the second quarter. We have a good understanding of where this customer is shipping their products that are using our equipment as well. There’s nothing related to tariffs there. I see more connections to edge AI deployment in the mobile space for a significant portion of these orders. As I mentioned earlier, this is a combination of mobile and automotive. While it's not entirely mobile, the majority of it is. The automotive aspect is mainly linked to the ongoing expansion of advanced driver-assistance systems and infotainment in that sector, as well as our customers' success in that market.

Maybe I just want to come back again on that Q4 color you just provided to Brian. I think you kind of were saying that maybe some typical seasonal slowdown in Q4. And I mean, let's back out that $28 million order. That's a little bit idiosyncratic here. But what kind of a seasonal slowdown are you expecting in Q4 for the rest of the business?

I think in this environment, I wouldn't be surprised to see something like a mid-single-digit pull down in the fourth quarter. We'll see how the quarter here evolves. A little too early to be providing full fourth-quarter guidance, but that's our current view at the moment.

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

Congratulations on the positive revenue guidance and the signs that we might be emerging from a cyclical low. Luis, I’d like to approach this from a different angle compared to the previous analysts. As you reflect on your discussions with customers over the past three months since your last report, how would you describe the shift in their perspective on their business and its implications for you in 2026? While we see a nice uptick in business as we enter the third quarter, what insights are your customers sharing about what you need to prepare for next year?

If you examine our largest customers, usually in the automotive and industrial sectors, you'll notice from their earnings reports that they are rationalizing their inventory levels. While this isn't a dramatic change, inventory days are decreasing from quarter to quarter. Some customers believe they reached a low point in the automotive market in the first quarter of this year, while others have indicated that it occurred in the second quarter. One customer even guided for sequential growth in the third quarter and projected continued growth in the fourth quarter. The general sentiment from these customers is an expectation of a steady and progressive recovery in the automotive and industrial markets. Nobody seems to anticipate a V-shaped recovery in the next two quarters, but they all expect gradual improvements as we head into next year, showing positive quarter-over-quarter progress. It's difficult to provide insight into the summer of next year, as that feels too far off to predict accurately. Overall, they are discussing continued improvements. Additionally, some of our customers have established new agreements in China to support its automotive industry, which is encouraging to see. In the computing sector, we've dedicated significant effort over the past year to secure design wins. We've made reasonable inroads in the server space and are seeking greater involvement in AI infrastructure, focusing on GPUs, ASIC accelerators, and networking, although I cannot share much about this yet as it hinges on qualifying our products. In the mobile sector, I have shared in previous quarters that we expected a recovery, and we saw a noticeable increase in mobile recurring orders in the first quarter. As anticipated, this momentum is expected to continue and lead to improvements in equipment sales, which we predicted in the first quarter and discussed as materializing in the second quarter. Mobile will experience its usual seasonal fluctuations, with an uptick expected in the third quarter, a bit into the fourth quarter, before pausing for the next round of product launches in 2026. This summarizes the general outlook from our customers across these various markets.

And the second question is a product question, and it relates to the opportunity you mentioned with GPUs and APUs. So you talked about the Eclipse Gen 2.5 new product release. What specifically does that enable your customers to do? And where should we expect uptake there? And how material could that be as we look out at either the rest of this year or next year?

Sure. There are two main things that are different here in this release 2.5 on the Eclipse. One of them is the configurability. We have a platform now that in one single system, you can cover, let's say, what we call passive, meaning RF discrete type components, analog ICs for mobile use applications to what we call ATC or active thermal control, mobile power dissipation to tri-temp automotive to tri-temp ATC, active thermal control again, for ADAS processors or even to some degree, compute applications. So we can do this in one system. Historically, this is the kind of stuff that when you buy, you have to buy three configurations or four different configurations of a product. We can now really span that whole application range with one platform with some field upgrades. So that's a big plus to certain customers. The second main vector is the power dissipation as we put up here, we're now people dissipating up to 3,000 watts during test. This is not the kind of thing you see on a mobile device, frankly, not even in an automotive ADAS device, but it's the kind of thing you would see on a high-end compute requirement. So if you're talking the latest generation GPUs in the market, that's the kind of capability that is required to test those devices. So those are the two main performance factors that we are enabling customers to use and open up a spectrum of opportunities for us with the Eclipse. All these customers that I'm talking about here are essentially fabless. So they end up hitting the OSATs in Taiwan, in Korea, or throughout Asia for outsourced testing. And the OSATs, by their nature, they want to make the maximum possible use of the capital investment being done here. So they do look for this flexible capability on the product.

Our next question comes from David Duley with Steelhead Securities.

My question is very similar to Craig's and pertains to the Eclipse. I sense there is an upgrade cycle happening for thermal-controlled handlers, particularly in the GPU and ASIC markets. I believe your competitor, Advantest, has been discussing upgrades in this area. I'm curious, now that you have released a flexible tool aimed at this market, do you have evaluation systems at the OSATs that are managing a large volume for the GPU and ASIC sectors? When can we expect updates on your progress in securing business in this field?

Dave, we have evaluations frankly, mostly at fabless right now that will then migrate to the OSATs. It's not to say that we don't have it at the OSATs. At the end of the day, in some cases, the OSAT is the one that has the tester that we're connecting to, to run the program by the direction of the fabless. To answer your point here, when do we expect to see some more traction on, let's say, the GPU space, I hope to be able to say something in a quarter or two, actually, that is more material on that front.

There seems to be an opportunity with thermal-controlled handlers. I believe I heard this mentioned in your competitors' conference call, but please correct me if I'm mistaken; it seems they are undergoing an upgrade cycle. Additionally, the major GPU companies are looking to diversify their supply chains and not depend on single vendors. Is this opportunity potentially allowing you to capture some business? Is your competitor's product creating a chance for you, is what I am really asking.

Yes. I’m not sure if it’s our competitor who is creating the opportunity, but I believe the customer is looking for a future-proof platform. They want something that not only meets their needs for the next 12 to 18 months but also remains relevant for several years to come, capable of keeping pace with their power and device testing requirements over multiple cycles. This way, they can make better use of their capital investment.

Okay. I guess my final question is, you mentioned that your utilization rates have increased by 3%. Is that figure overall? I'm particularly interested in whether you've indicated in the past that utilization rates in China are high or that some areas are higher than others. I'm just wondering if there are specific geographic regions like Taiwan and Korea or other parts of Asia where you're starting to see higher utilization rates compared to the average.

Yes. I don't have at my fingertips by geography, Dave, but I can tell you this. So overall, yes, overall utilization is up 3 points to 75%. I'll give you another breakdown here. The IDMs increased 5 points sequentially and the OSATs increased 1 point sequentially quarter-over-quarter.

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 today, I'd like to note that we'll be attending some investor conferences over the next 2 months, and we'll be attending the Needham Virtual Semiconductor & SemiCap Conference on August 20, the Jefferies Conference in Chicago on August 26, the Evercore Conference also in Chicago on August 27, the Citi TMT Conference on September 4 in New York City, and the CEO Summit Conference on October 7 in Phoenix. Now if you're planning to attend any of these conferences, please reach out to your conference contacts or let me know, and we'll arrange for one-on-one meetings. That's all for today. Thank you for joining the call, and we look forward to speaking with you soon.

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