Cohu, Inc. Q3 FY2025 earnings call

• Recurring revenue grew for the third consecutive quarter, driven by interface solutions and test handler spares.
• Systems revenue improved sequentially but remained below normalized levels.
• Notable events: Announced convertible notes offering, welcomed new VP of Strategy, had repeat orders for Neon HBM inspection tools, shipped first system for HBM4 inspection, Eclipse handler selected for production test of next-gen AI processor devices, secured new business wins including Diamondx order and Krypton system order.
• Cohu's exposure to China is very limited, with revenue from Chinese customers being low single-digit percentage of total consolidated results.

Consolidated revenue reached $126 million. Revenue was split 45% systems and 55% recurring. Recurring revenue continued to grow for the third consecutive quarter, driven by strength in interface solutions and test handler spares. Systems revenue improved sequentially for the fourth quarter in a row though it remains below normalized levels.

• Anticipate seasonal slowdown in Q4 for systems, but recurring revenue expected to increase for the fourth straight quarter, representing about 60% of Q4 revenue.
• Expect Q4 revenue to be about $122 million, plus or minus $7 million.
• Q4 gross margin projected at approximately 45%.
• Operating expenses expected to be about $50 million, including ~$2 million for variable R&D product development prototype materials.
• Q4 interest income, net of interest expense and foreign currency impacts projected at approximately $1.7 million.
• Q4 tax provision expected to be about $4 million, diluted share count projected at about 47.1 million shares.

• Tariffs returned to spotlight, but Cohu's current exposure to China remains very limited, with revenue from Chinese customers accounting for low single-digit percentage of total consolidated results.

Q: Good day, and thank you for standing by. Welcome to Cohu's Third Quarter 2025 Financial Results Conference Call.

A: Good afternoon, and welcome to our conference call discussing Cohu's third quarter 2025 financial results and our outlook for the fourth quarter of 2025.

Q: So I guess, first question, nice to see the improved system revenue momentum, particularly from the mobile segment these past few quarters. Based on the customer broadening metric you shared and the uptick in utilization, is that the main area of improved near-term revenue visibility for the company? And how much confidence does this give you on sustaining some top line momentum kind of moving beyond the seasonal period into the first half next year?

A: Brian, yes, you're correct. I mean, a lot of the momentum here in the third quarter was associated with a customer buying the Eclipse handler, but also HBM with the Neon system, I think those are sort of the 2 main highlights of the quarter. We have the Eclipse though qualified at another computing customer. I think we press released that already in the third quarter, just ahead of SEMICON West. And then we also have a few other customers that are evaluating the system, one going into a GPU application, sort of a new product version of a GPU for 2026. And then 2 others that are associated with data center network communication and an ASIC accelerator. So I think it moves -- talking about confidence going into '26, I think we're more confident is that the HBM business is continuing to progress. We have had now since the start of the fourth quarter, a couple of repeat orders for HBM. We have an engagement forming with a second customer where we're looking at what are the requirements and how we're going to address requirements to get another qualification going for one of our inspection tools. And like I said, we got several customers here in different stages of evaluating the Eclipse for applications in the data center. So I think it's going to continue to move around. We just saw a recent announcement from another one of our customers for their wins in the data center market, where they're going after an inference data center device partnership, and we are playing a record with Eclipse for that application as well. So I think we're confident that we're broadening our business beyond the traditional auto, mobile, consumer, industrial, more towards the AI use applications, whether it's the GPU or the network processing, and we should start seeing some fruits of that in 2026 with the Eclipse in our inspection systems.

Q: To follow up on Brian's question. I guess, it sounds like based on your Eclipse win at a major AI processing company, and I think you've press released another win or tool of record with the CPU company. Is it a fair assumption that basically any of these APUs, CPUs, XPUs, GPUs, whatever the term is for networking processors that they're all going to have to be thermally controlled and tested. So that -- is it fair to assume that the TAM of this market is quite large, given that there's lots of large customers that you aren't serving yet?

A: Yes. Yes. That's absolutely correct, Dave. I mean we have -- the power dissipation levels vary quite a bit. I mean we have some inference processors here that the talk right now is on the order of 600 watts of power dissipation. We have high-end GPU, as I said, it's approaching 3,000 watts just under that. We have some network processors that we are qualifying right now on the 1,200 to 1,400 watts. So it's a range of power dissipation levels, but they're really on the hundreds of to a couple of thousand watts in rising. The road map really shows that going up.

Q: This is Robert on behalf of Krish Sankar. I guess just the first one, with the recent convertible raise, how are you thinking about the best use of cash between developing some of the new areas of expansion, be it investment in the software business or high bandwidth memory versus historically completing a number of smaller tuck-in M&A deals to bolster the technology portfolio. And then maybe I'll just add in your views on using cash for share repurchases and I know that been on pause for the last few quarters?

A: Yes. Good question. And really the answer is we want to pursue both paths. And in order to pursue acquisitions of any meaningful size, we needed to go to the financing market, we needed capital, which basically drove our decision on the convert, strengthen the balance sheet and have more flexibility when it came to growing through acquisition. And so we're going to continue to focus on organic development in the areas that Luis has been talking about. But clearly, we want to be opportunistic as well when it comes to M&A. And of course, with the recent hire of Matt, it's a priority for us. And so, that's really the main driver for the convert. Now with respect to buyback, that's a sort of a Board decision. And yes, we're on pause for now. Should the stock valuation go to point where we -- is more compelling, I think we would, again, get back into the game. But the objective for 2025 on the share repurchase was to offset dilution from our equity compensation plan. And so we've essentially did that in Q1. I suspect it will be similar for next year.

Q: So even with the recent uptick in Q3, mobile system orders year-to-date versus year-to-date last year seemed to be lagging somewhat behind other segments kind of even in light of utilization recovery there. Why have system purchase in the segment lag up somewhat? And are you perhaps expecting strength in mobile into next quarter even with systems have guided down?

A: No, not exactly, Denis. I mean we had a -- I mean, if you look at our Q3 revenue, mobile, I think, was actually our largest segment, right, sort of tied hand-in-hand with automotive. I think the mobile-related shipments, we largely completed here in the third quarter. Going into fourth quarter, we should see more shipments into the auto and computing space. And then I think mobile goes into -- well, sorry, I'm thinking more in terms of our test handlers. We will see some mobile demand in RF test hit in the fourth quarter. So there's going to be a little bit of revenue there on that front. But by and large, I think -- I don't think mobile is going to be our largest segment in the fourth quarter. I don't expect that to be the case again.

Q: This is Robert on behalf of Krish Sankar. I guess just the first one, with the recent convertible raise, how are you thinking about the best use of cash between developing some of the new areas of expansion, be it investment in the software business or high bandwidth memory versus historically completing a number of smaller tuck-in M&A deals to bolster the technology portfolio. And then maybe I'll just add in your views on using cash for share repurchases and I know that been on pause for the last few quarters?

A: Yes. Good question. And really the answer is we want to pursue both paths. And in order to pursue acquisitions of any meaningful size, we needed to go to the financing market, we needed capital, which basically drove our decision on the convert, strengthen the balance sheet and have more flexibility when it came to growing through acquisition. And so we're going to continue to focus on organic development in the areas that Luis has been talking about. But clearly, we want to be opportunistic as well when it comes to M&A. And of course, with the recent hire of Matt, it's a priority for us. And so, that's really the main driver for the convert. Now with respect to buyback, that's a sort of a Board decision. And yes, we're on pause for now. Should the stock valuation go to point where we -- is more compelling, I think we would, again, get back into the game. But the objective for 2025 on the share repurchase was to offset dilution from our equity compensation plan. And so we've essentially did that in Q1. I suspect it will be similar for next year.

Q: So even with the recent uptick in Q3, mobile system orders year-to-date versus year-to-date last year seemed to be lagging somewhat behind other segments kind of even in light of utilization recovery there. Why have system purchase in the segment lag up somewhat? And are you perhaps expecting strength in mobile into next quarter even with systems have guided down?

A: No, not exactly, Denis. I mean we had a -- I mean, if you look at our Q3 revenue, mobile, I think, was actually our largest segment, right, sort of tied hand-in-hand with automotive. I think the mobile-related shipments, we largely completed here in the third quarter. Going into fourth quarter, we should see more shipments into the auto and computing space. And then I think mobile goes into -- well, sorry, I'm thinking more in terms of our test handlers. We will see some mobile demand in RF test hit in the fourth quarter. So there's going to be a little bit of revenue there on that front. But by and large, I think -- I don't think mobile is going to be our largest segment in the fourth quarter. I don't expect that to be the case again.

Q: For automotive and industrial, the cyclical recovery continues to be kind of somewhat muted. What are you seeing in these markets in terms of recovery? So I think you're saying there's going to be some strength into Q4, but is there any visibility beyond that?

A: Yes, there's some puts and takes. You're right. This has been sort of an elusive recovery both in auto and industrial. I think we have had a quarter where we had some green shoots in auto in Q2 I want to say, and then it had some green shoots in industrial. We're having now is more talks from customers that are saying that they are back to the mode of needing initial capacity in the auto and industrial segment, talking about some initial demand in Q1 of next year, into Q2 of next year. Nothing dramatic yet, but it's -- the talks are starting to improve. We're also seeing an increase in spare sales to our handlers in the auto and industrial segment, basically supporting the fact that they're taking systems that have been put aside, so under utilized segment for test and bringing those systems back online. I think, like I said, we had 3 consecutive quarters now of recurring business improving and continue to project the fourth quarter recurring business to improve again sequentially. This applies both to, like I said, spares for our test handler systems, which is a very good indicator as well as improvement in our test interface business.

Q: Briefly, could you discuss the gross margin strength sequentially into Q4, even with revenue being done a little bit? What's driving that?

A: There's a mix component to it, DeNIS. And as Luis just mentioned, we've got increasing recurring revenue, which has gross margins in the mid-50s. And so we're expecting the recurring revenue to be about 60% of the total revenue, it was 55% in Q3. I think that's the main driver of that increase in gross margin quarter-over-quarter.