Good afternoon, and welcome to our conference call to discuss Cohu's first quarter 2022 results and second quarter 2022 outlook. I'm joined today by our President and CEO, Luis Müller.

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, April 28, 2022 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 Müller, Cohu's President and CEO. Luis?

Good afternoon, and thanks for joining us. First quarter revenue was approximately $198 million, and non-GAAP EPS was $0.66, both exceeding expectations, driven by customer acquisitions and effective supply chain management.

Cohu is benefiting from several key design wins in late 2021, with those customers starting to place volume orders this past quarter. This has been particularly beneficial for the tester business that booked incremental $45 million in design win orders in Q1, broadening our addressable market beyond RF front-end IC test.

The success in new customer acquisition-driven orders, increased backlog to a new record and is putting Cohu on pace to achieve our midterm targets of 25% non-GAAP operating income at $1 billion revenue. Our supply chain team also did an effective job managing the ongoing challenges and controlling costs.

Combined with progress of our contactor manufacturing in-sourcing, we're delivering better-than-anticipated gross margin, and again on pace to achieve our midterm target of 49% non-GAAP gross margin. In all, Cohu is progressing well against our strategic plans.

Semi Test is expanding applications in display driver IC, capturing business in Korea and Taiwan, gaining new sockets for testing power management and analog ICs as we continue to expand, the instrumentation portfolio in our low-cost Diamondx platform. Our test interface business is gaining momentum in millimeter wave and delivering on the promise of expanding into the probe card market.

Our services business, including spare parts, upgrades and data analytics software remain robust in continuing to develop a new frontier with DI-Core data analytics software that is now use at several major automotive customers. We're also qualifying new customers on the Neon package and inspection system on our path to grow our number two position in this market.

Our test automation business is advancing with new products in the push-to-automate back-end operations. We got a key order for a next-generation MEMS sensor test platform that brings test to a new level, enabling ultrasensitive sensors used in mobility and automotive applications.

We have demonstrated the superior thermal performance of our T-Core thermal technology in the Eclipse handler, testing high-performance computing processors and ultra-large form factor devices. The push-to-automate back-end factories improved productivity, also known as Industry 4.0 is creating new sales opportunities for Cohu to provide automation and data analytics solutions to customers.

We are excited to be at the forefront of this factory automation revolution, leveraging our engineering competencies to promote value upgrades to a large installed base of equipment. Moving to discuss ESG.

In Q1, we published Cohu's 2021 Sustainability Report, which you can read in detail in our website at www.cohu.com. We are excited to communicate our progress on energy usage, addition of two operating sites with solar power generation and to continue our stellar safety and ethics record.

The report also promotes our progress on employee gender and racial diversity, details about Scope 1 and 2 greenhouse gas emissions and corporate ESG targets for 2022. Switching topics.

We are disheartened by the conflict in Ukraine. Although, we have very limited exposure to customers and supply chain in that region, we have opted to join other global corporations in halting any business engagements with Russian companies starting on March 1.

We're also participating with employees in contributing to the relief efforts for Ukrainian refugees in Europe. Finally, I want to comment on COVID disruptions and supply chain constraints that continue to impact many semiconductor and equipment companies.

We're not immune to shortages, cost increases in regional lockdowns. But the Cohu team has done an outstanding job putting in place countermeasures and anticipating these challenges, requesting and receiving help from our suppliers, some of which are also our customers.

These challenges are not new. They have been around since March 2020 and are probably going to continue, but I'm confident that our proactive approach in managing disruptions will continue to yield positive results.

The fact is that one company's challenge is also another growth opportunity, and we're working hard to capitalize on these disruptions to support and win new customers. Let me now turn it over to Jeff to share first quarter results and provide specifics about our second quarter guidance.

Jeff?

Thanks, Luis. Before I walk through the Q1 results and Q2 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 financial results, Cohu again delivered strong revenue and profitability in the quarter.

Q1 revenue was $197.8 million and at the higher end of our guidance range. During the first quarter, one automotive segment customer accounted for more than 10% of sales.

Gross margin in Q1 was 46.1% and higher than guidance. Quarter-over-quarter, our semi test business grew in part from recent design win orders as our automation revenue moderated, resulting in a first quarter revenue mix and gross margin closer to the mid-term target.

Operating expenses for Q1 were lower than guidance at $50.9 million as certain product development, travel and other costs have shifted from Q1 to Q2. First quarter non-GAAP operating income was 20.3% of revenue, and adjusted EBITDA was 22.7%.

Return on invested capital in the first quarter was approximately 39%. The non-GAAP effective tax rate for Q1 was approximately 19% and higher than guidance as a result of less benefit from the annual RSU vesting process and reduced credit against US tax for foreign taxes paid.

Non-GAAP EPS, for the first quarter, was $0.66. In summary, Q1 profitability was strong on seasonally low revenue and is progressing to the mid-term target.

Now moving to the balance sheet, the Q1 cash balance was $359 million and total debt was reduced to $110 million. During the first quarter, we repaid approximately $9 million of debt and used $6.4 million to repurchase approximately 214,000 shares of common stock.

Cumulative through Q1, Cohu has used $13.7 million to repurchase approximately 420,000 shares of common stock. Overall, Cohu's balance sheet is in 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 $205 million and $221 million.

Entering Q2, our backlog is at a record level of $363 million and is scheduled to ship over multiple quarters as determined by customer requirements and material availability. As Luis mentioned, the supply chain remains challenging.

And to-date, Cohu has effectively navigated supply constraints to locate required material and control costs. Strong order backlog and test cell utilization bodes well for sequential revenue growth in Q3.

However, similar to last quarter, given the uncertainty with supply chain and semiconductor availability, we're hesitant to comment in further detail about future quarterly revenue at this time. Q2 gross margin is forecasted to be approximately 46% favorable product mix and increased contactor in-sourced manufacturing is having a positive impact on gross margin.

Q2 operating expenses are projected to be between $54 million and $55 million, higher than Q1 due to increasing R&D investments to support greater customer traction for our products and increasing travel pushed from Q1 to Q2 to support our 2022 plans. We're projecting Q2 interest expense to be approximately $1 million, and we expect Q2 adjusted EBITDA at the midpoint of guidance to be approximately 22%.

The Q2 forecast non-GAAP tax rate is approximately 20% at the midpoint of guidance. Full year 2022 non-GAAP tax rate is also estimated to be approximately 20%, which is 200 basis points higher than our prior guidance due to the annual impact of less tax benefit from the annual equity vesting and reduced credit against US tax for foreign taxes paid.

The diluted share count for Q2 is expected to be approximately 49.6 million shares. And that concludes our prepared remarks, and now we'll open the call to questions.

Yes. Thanks for taking the question and congratulations on the nice execution guys.

I want to start with the clarification and then the question. The clarification is on systems.

So very robust gross margin improvement, up 400 basis points. Jeff, can you just break out the subcomponents there?

And to what extent are some of the things that were driving the improvement, perpetuating into the second quarter or the second half of the year?

Hey, Craig. One of the drivers there was mix.

So we had more tester systems in the quarter. But also, we're seeing manufacturing efficiencies out of our operations, our foreign operations.

And so, that contributed to the improvement in the systems gross margin as well.

And I think in prior quarters, you talked about managing pricing within systems and did that have any impact in the quarter?

It has had incremental impact over the last few quarters, as orders become subject to that price increase. We had to work through the backlog.

We had to work through certain customer contracts. But as of the end of Q1, it's effectively been fully realized.

Got it. Helpful.

Okay. And then the next question is for Luis.

Luis, I wanted to go back to a comment you made in your prepared remarks around testers in the $45 million in design wins beyond RFIC test. Can you just talk a little bit more about that?

And to what extent are those design wins reflected in that increase in backlog to $363 million.

Yes. Hi, Craig.

Yes, if you recall, we have mentioned that in the fourth quarter, we had sort of a single quarter with the largest number of design wins that I recall, at least in my history. And those are starting to pan out into volume orders, now in the first quarter, beginning this year.

Yes, they are certainly a key component of that backlog increase, for sure. But even if you take that out, you can see that we have had a pretty good first quarter bookings.

That design win, as I mentioned before, cuts across different segments, flat panel display, PMIC. We also had some design wins in ultra-wideband, Wi-Fi and RF IoT.

Got it. And if I could just sneak in one more before hopping back in the queue.

Luis, I think you and Jeff were amongst the first to talk about a return to seasonality in the business. I know it's a really challenging macro environment out there.

But can you just comment on the degree to which you're seeing that manifest in the order and engagement activity that you're getting from your customers, both on the system side and on the recurring side?

Yes. It's very much like we spoke a quarter ago.

We expect a little bit of seasonality this year again. Nevertheless, if you look at post Xcerra acquisition, our seasonality has been muted a lot.

I mean it's been de-amplified, if you will. But it's still prevalent when you see typically a bit stronger second and third quarter, typically a little weaker first and fourth quarter.

Nevertheless, much lower amplitude than in the past or some of the other companies that I've seen releasing earnings recently?

Yep, got it. Thanks guys.

Very helpful.

Hi, there. good afternoon and thanks for letting us ask a few questions.

Maybe first, just to talk about supply constraint. You did a really nice job delivering in this environment where other test companies are seeing something like 6-to-12-month lead times.

I think last quarter, Jeff, you talked about a $8 million to $10 million revenue constraint. Your backlog clearly grew in the quarter.

Has this constraint grown as well and can you maybe place or quantify that?

Hey Brian, no. The constraint hasn't necessarily grown.

But so, what we're seeing as Louis mentioned, I mentioned as well, record backlog. And so, the rollout over the next few quarters is obviously gated by customers' ability to take more equipment, trying to match that up when they have lead frames and so forth.

And then material availability on our side. So, I would say -- I wouldn't try to track that $8 million beyond Q1.

Now it's sort of a new set of parameters that we're dealing with and it's customer requirements and our material availability.

Okay. Got you.

Actually, that makes sense. And then maybe on the – back on the Test business, again, the $45 million of design win orders, I guess roughly how many customers are represented in this?

What's the timeframe against which you plan to deliver against this backlog? And also, Luis, would you characterize this more as a penetration of existing SAM still, but maybe perhaps positioning yourselves for some SAM expansion at these customers?

Yes. I think that's a good characterization to some of them, Brian.

We have -- I'm looking here, it's really a list of seven customers. And indeed, we have bigger aspirational plans with these customers.

So, it is an entry point. It is a start, but it's actually a fairly decent start in terms of volume.

And I would say in terms of the backlog and the way it rolls out, as we said at the end of the quarter, we're seeing about 80% of it roll out over the next two quarters.

Okay. Got it.

That's very helpful. And maybe a last quick one.

Last couple of quarters since inception, you repurchased sort of a ratable amount of your stock. At these levels, where is that – why not an even more aggressive posturing in terms of the repurchase?

Brian, we put in a 10b5-1 plan. So that's been sort of gating our ability to go back into the market and buy additional shares on a daily basis.

And I think that's really the main reason at the moment. So, we're evaluating those plans and plan to put another 10b5-1 in place here soon.

So, we're reevaluating the metrics on that.

Okay, fair enough. Thanks a lot.

Hi guys. Congratulations on the nice execution and margins.

Wanted to follow-up on Craig question on the test. It sounds like you guys are winning beyond your traditional strength in the RF front end.

And as you do that, I'm wondering, are you -- do you view this as sort of your expanding the portion of the test TAM that you're now able to capture, or do you think the test TAM hasn't really changed. You're just executing better and grabbing a higher share of that available TAM?

Hi Quinn, it's a bit of both, to be honest. We have previously communicated a portion of this as being our addressable market, but we're still working on developing the instrumentation to go at it.

For example, in-display driver IC, we did mention before that was part of what we define as addressable. But we're limited to what we could test and two new instruments would come online out of our roadmap development.

But in other parts, I got to say realistically, we have expanded a little bit our SAM, and I think we're going to talk more about it in the near future, but we have expanded our SAM bit.

Understood. And then maybe for Jeff, I know you're not giving guidance beyond the second quarter.

But as you look at the backlog, can you give us some sense what do you see as the relative mix between inspection, handlers, test, and contactors as we come through the second and third quarter. Does the mix stay relatively similar to Q1?

Does it shift in favor of test given the strong test backlog that you mentioned?

Yes, I would say that it stays at a favorable mix level over the next couple of quarters. I would expect tester revenue to be strong.

And so that bodes well for gross margin. But in addition to that, I don't want to leave this out.

We've made headway and then we're seeing efficiencies in the manufacturing process, and we continue to in-source on contactors. So, all of this together is supporting the gross margin.

But to your question about mix, yes, I see a strong mix over the next couple of quarters.

Great. Thank you.

Hey guys. This is Tyler on behalf of Christian.

Thanks a lot. A couple of questions.

First, just on the model a little bit. OpEx up in Q2 and there's some push out of travel from Q1.

So, this $54 million to $55 million level, is that the kind of level we should expect through the rest of the year, or maybe that falls off a little bit? Any help think about that would be great.

Yeah. You bet Tyler.

I wouldn't model Q3 pretty comparable to Q2. So somewhere 54.5% continued R&D investment.

And then, I would model Q4 down just slightly, maybe $0.5 million.

Perfect. That's much appreciating the color.

And then given the stronger start here to 2022 than expected and these design wins now ramping, just wondering any color or any comments on the midterm target and the time line you're expecting. I know its three to five years is kind of a broad range.

Is that accelerating now after this quarter or two? How do you think about the timing of your midterm model?

I think we're going to stick to what we said here in the prepared remarks. So we're on pace to that plan.

And as you stated, midterm is a three to five-year horizon. So I think that's what we're sticking with for the moment.

Yeah. Yeah.

I mean, I would add to that, that as we've said, within that strategy, we're planning for higher growth rates in the tester business. And so I would say we're executing well on that, Tyler.

Perfect, sounds good. Appreciate, that's all for us.

Thank you, guys.

Thank you.

Hi. Thank you for taking my question.

So I have a couple of questions. First, just I know -- I mean, it seems like you have done a great job in terms of activation and whether through the supply chain constraints.

But just kind of curious like, is there any -- the supply chain we should follow somehow limited upside to the second quarter outlook or outlook kind of immune to the whole challenging industry?

I would say it's a bit of a balance. I would say, yes, we're working through availability on material on our side, but also gated by customer and their ability to receive and utilize equipment within a reasonable period of time.

So do they have the wafers, the lead frames, et cetera, that they need in order to absorb more test equipment? So I would say it's a real balance there between those two constraints.

Yeah. I was going to say, it's not so much limiting.

It's more of metering the quarter-on-quarter capacity additions by our customers.

Got it. Okay.

And then next just regarding the automotive business. Just -- I know we are kind of in a correction phase given in the last Christmas [ph].

Just kind of curious like how -- when do you think the correction cycle end? And what could be the signal for the inflation in the future?

Yes. I wouldn't quite characterize it the way you mentioned.

I don't think there is a correction going on. What we have seen is more of a snapback in demand in late 2020, beginning of 2021, because of a very constrained environment due to COVID and factory shutdowns in the middle of 2020.

Since then, it kind of returned to its normal growth path. I don't necessarily see a correction going or a return to anything.

It's more of a natural growth now driven predominantly by ADAS devices, essentially processors and sensors for automotive applications and electrification, which continues to be pretty strong. So, again, I don't view it the same way you do.

It's not -- there is no correction in place right now. And I think there is a -- there's just a past snapback effect in early 2021 and now more of a resume growth path.

Okay. Got it.

Got it. Thank you.

Welcome

All right. Thank you very much.

Before we sign off, I'd like to remind everyone that Cohu will be hosting a virtual Investor and Analyst Day on Monday, May 16. This is an opportunity to hear details from our business unit general managers about our strategy to achieve the mid-term financial targets.

Some more information regarding this event is located on the Investor Relations page of our website. And then lastly, I'd like to mention that we'll be attending a number of Investor Conferences over the next few months.

These include the B. Riley Conference May 25th.

And Craig-Hallum virtual conference, on June 1st, Cowen Conference on June 2nd, Baird Conference on June 6th, Stifel Conference on June 7th, Rosenblatt Virtual Conference on June 9th and the CEO Summit on July 13th. So if you'd like to attend any of these events, please reach out to your respective banking and/or conference contacts to arrange a meeting with Cohu.

We look forward to speaking with you soon. Thank you for joining today's call, and have a great day.