Cohu, Inc.

raised to withdraw your question please press star 1 1 again 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 co Hughes second quarter 2025 results and third quarter 2025 outlook I'm joined today by our president and CEO Louise Mueller If you need a copy of our earnings release, you may access it from our website at cohue.com or by contacting Cohue Investor Relations. There's also a slide presentation in conjunction with today's call that may be accessed on Cohue'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 CoHUE'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 statement section of the slide presentation and the earnings release, as well as CoHUE'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 31st, 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 reconciliation to the most comparable GAAP measures. Now I'd like to turn the call over to Luis Mueller, COHU's President and CEO.

Hello, everyone, and welcome to your 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 three 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 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 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 CodeHue systems revenue across mobile, computing, and industrial segments. Utilization improved across all segments, ranging from two to four 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, HTC 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. CoHeal 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 Diamond X 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, We have 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 adding to Qohu'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 requirement of the precision analog market. Our software business booked $360,000 in Q2 with annual recurring revenue opportunity, or ARR, 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 tests. Our software solutions include DI Core and Tignes PaceMonitor and Pacemaker. DI Core is designed to provide real-time data analytics and insights, enabling customers to make informed decisions and optimize their task processes. Tignes, 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 tests 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 Malacca facility purchase in Q1. Cohue'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 tests 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 percent 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.