Cohu, Inc. Stock

Good day, and thank you for standing by. Welcome to Cohu's Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Matt Hutton, Vice President of Strategy and Investor Relations. Please go ahead.

Thank you, operator, and welcome to Cohu's Second. Quarter 2026 Earnings Call. Our agenda begins with Luis Mueller, Cohu's President and CEO, who will provide a business update, followed by a financial review and outlook from Jeff Jones, our Senior Vice President and Chief Financial Officer. Following our prepared remarks, we will open up the call for your questions. If you need a copy of our earnings release, it can be found on our website at cohu.com or by contacting Cohu Investor Relations. A slide presentation accompanying today's call is also available in the Investor Relations section of the website. Replays of this call will be accessible via the same page after the conclusion of the call.

During this call, we will be making forward-looking statements that reflect management's current expectations concerning Cohu's future business. These statements are based on the information available to us at this time, but they are subject to rapid and sometimes abrupt changes. We encourage everyone to review the forward-looking statements section of our 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 are current as of today, July 30, 2026, and Cohu does not assume any obligation to update these statements for events occurring after the call. Additionally, we will discuss certain non-GAAP financial measures during this call. 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 Muller, Cohu's President and CEO. Luis?

Good afternoon, and thank you for joining Cohu's Second Quarter 2026 Earnings Call. We delivered a strong quarter with sales of $149 million, up 38% year-over-year and recurring revenue of approximately 53% of total. These results reflect solid execution across the company and continued customer adoption of our solutions. Our Q2 results show progress in areas where we have focused investments, advanced thermal test handlers for AI processors, HBM inspection, flexible ATE platforms for power and connectivity devices and software analytics.

Cohu is benefiting from durable demand drivers in AI infrastructure and edge computing, where customers are investing to address increasing power levels, production yield and increased factory productivity. Estimated semiconductor test sterilization improved sequentially to 80% at the end of the second quarter, typically a turning point for test Capex by our core IDM customer base. The strongest segments were computing and industrial with test sterilization in the low 80s, followed by automotive and mobile in the high 70s. Bookings generally follow utilization trends.

And in the second quarter, computing led with 46% of total system orders, representing an impressive 150% increase year-over-year, driven by eclipse growth in high-performance computing. With utilization above 80%, industrial was the next largest growth area with orders up 87% year-over-year. The balance included consumer up 29% year-over-year, mobile essentially flat year-over-year and automotive down 24% year-over-year in a segment that continues to struggle in this recovery cycle. Let me now review the quarter by product line, starting with the areas where we see the strongest customer traction.

Starting with our test handlers. Building on the momentum from Q1, we continue to expand our position in high-performance computing through the adoption of our Eclipse handler, enabled by advanced active thermal control for extreme power and next-generation Jet MAX devices used in data centers. The Eclipse delivers a configurable thermal handler that can be used across multiple device generations, helping customers reduce capital risk, extend the value of their installed base and support faster production ramps. Our high-power thermal control technology remains a key differentiator, improving task quality and first pass yield.

During Q2, high-performance computing customers also expanded adoption of Cohu's PACE prescriptive analytics software, reinforcing our strategy to improve equipment efficiency and customer value. Separately, we are increasing our presence in infrastructure at OSATs in Southeast Asia to support fabless and hyperscaler programs as they move from qualification to our production ramp. Overall, this momentum reinforces an expanding high-performance computing customer pipeline that we now estimate at approximately $850 million annually. This includes about $190 million in qualified annual opportunity across 4 customers, $250 million in active qualification across 5 customers and approximately $445 million in early-stage engagement across 10 additional customers.

Based on this progress, we are raising our fiscal 2026 high-performance computing revenue estimate to between $100 million and $110 million. To support this demand, we are working with supply partners to increase capacity, and we're expanding our internal manufacturing in Malaysia. We expect this expansion to double output by year-end and support another step-up in capacity by mid-2027.

Now turning to our inspection and metrology. During Q2, we shipped additional final inspection systems for HBM 3, HBM 4 and HBM 4E devices to a U.S.-based IDM with a strong forecast into the second half of 2026. HBM is the memory backbone of AI training and inference infrastructure, and we continue to invest to stay ahead of customer road maps into HBM 5 and beyond. We recently qualified Neon at a Taiwan-based OSAT, establishing a strategic foothold in a high-volume outsourced assembly environment where we can pursue additional advanced package, mobile and AI adjacent inspection opportunities. We also released a new vision inspection sensor with short-wave infrared capability that detects inner cracks in complex silicon devices. This gives customers a step change improvement in outgoing quality for advanced packages and further reinforces Neon as a reference platform for silicon inspection applications.

Moving to semiconductor test. Demand is increasingly tied to 2 AI-enabling requirements. efficient power delivery and high-speed connectivity across edge devices, vehicles, industrial equipment and connected infrastructure. These systems depend on precise power management to achieve peak performance while controlling energy consumption, heat and operating costs. Customers are increasingly adopting gallium nitride power devices for their efficiency and power density advantages.

At the same time, AI-enabled devices require seamless connectivity. The industry is investing in both ground-based and non terrestrial networks, including satellite constellations and high-altitude platforms that extend coverage globally. Together, GaN power and advanced connectivity represent an estimated $340 million annual addressable market opportunity over the midterm. During Q2, we continued to engage with leading power and RF customers on Diamondx configurations for GaN, mobile front-end and advanced connectivity applications.

Switching to software analytics. We built on last quarter's momentum and moved from early production wins toward a repeatable pattern, land a first deployment, prove measurable value and expand within that account. This business delivered the first $1 million revenue quarter and orders increased an impressive 140% year-over-year. First, land and expand is working. Last quarter, we noted that a leading high-performance computing chip maker had committed to deploying our predictive maintenance technology across its test handler fleet. We're now progressing toward what is expected to become our largest software deployment to a single customer with expansion planned during the second half of the year.

Second, we are deploying Agentic AI where the data lives. Semiconductor manufacturers operate under strict data sovereignty requirements and most cannot send process, yield or equipment data to a public cloud. In Q2, we advanced our on-site AI appliance, which runs modern AI models and autonomous agents entirely inside the customer's network with no data leaving the factory. These agents can conduct investigations across equipment, maintenance and past data more frequently and at a lower cost than manual analysis. These deployments are important because they convert Cohu's installed base into a recurring software revenue opportunity while helping customers improve uptime, yield learning and factory productivity.

Moving to our interface solutions. This is a key element of our recurring revenue stream and about 19% of Cohu consolidated revenue in Q2. Our high-speed interface technologies continue to gain traction in silicon photonics test. We booked $500,000 in interface solutions used in optical engine test and are pursuing additional customer engagements tied to emerging requirements for co-packaged optical devices. In parallel, we remain focused on increasing share of our core semiconductor customer base, where new applications and replacement of incumbent technologies create opportunities for additional Cohu content.

In summary, Q2 demonstrated progress across the strategic priorities we outlined earlier this year. scaling high-performance computing handler adoption, advancing inspection solutions, expanding Diamondx into power and connectivity, converting software pilots into production deployments and broadening interface solution adoption into optical and advanced semiconductor devices. I want to thank our customers for their partnership, our employees for their execution and our shareholders and supply chain partners for their continued support. With that, I'll turn the call over to Jeff to review our financial results and outlook in more detail. Jeff?

Thank you, Luis. Before reviewing the second quarter results and providing third quarter guidance, please note that my comments refer to non-GAAP figures. Details about non-GAAP financial measures, including GAAP to non-GAAP reconciliations and other disclosures are included in the earnings release and investor presentation on our website.

For Q2 2026, revenue of $149 million exceeded the midpoint of guidance. Recurring revenue driven primarily by consumables represented 53% of total revenue. One industrial customer accounted for more than 10% of total sales during the quarter. Gross margin was 45.5%, above guidance, primarily reflecting a more favorable product mix. Operating expenses were in line with guidance at $52.7 million, reflecting our decision to scale resources to support the rapid increase in high-performance compute opportunities. Net interest income after interest expense and a $600,000 foreign currency loss was approximately $1.7 million. The Q2 tax provision was lower than guidance at $2.7 million due to improved profitability in the U.S. Non-GAAP EPS for the second quarter was $0.26 and adjusted EBITDA was 12%.

Moving to the balance sheet. Cash and investments increased by approximately $9 million during Q2 to $498 million and cash from operations was $10 million. No stock repurchases were completed during the quarter. Total debt is $304 million and includes $288 million from the Q4 2025 convertible debt offering. Capital expenditures were approximately $2 million, mainly for manufacturing machinery and equipment, facility improvements and IT equipment. We're targeting total capital expenditures to be about 2% of revenue in 2026, including the capital expansion of our Malaysia test handler manufacturing facility mentioned by Luis.

Looking ahead, we expect Q3 revenue to increase 14% sequentially and 35% year-over-year to approximately $170 million, plus or minus $7 million. The increase is driven by demand tied to the ramp in high-performance compute opportunities and continued recovery in our core business segments. We're increasing our full year 2026 revenue outlook for growth over last year to approximately 35%. Q3 gross margin is projected to be approximately 45%. And for full year 2026, we continue to expect gross margin in the mid-40% range.

The rapid expansion of high-performance computing opportunities has increased demand across our supply chain and production base, resulting in longer lead times and higher input costs for certain semiconductors and specialty components. We're taking proactive steps when available to secure critical components to minimize impacts on our lead times, profitability and customer pricing. Operating expenses are expected to be about $54 million. We intend to continue investing in resources to capitalize on the growing list of HPC opportunities, and we expect quarterly operating expenses through the balance of the year to remain in the low $50 million range, consistent with our Q3 guidance.

In light of expanded resources to support HPC-related growth, our operating model continues to demonstrate solid profitability leverage with approximately 40% of projected sequential revenue growth expected to convert to operating profit. Net interest income in Q3 after interest expense and foreign currency impacts is projected to be approximately $1.6 million at current interest rates.

The Q3 tax provision is expected to be about $5.2 million, and diluted shares are projected to be approximately 55 million, including 5.8 million shares attributable to the convertible debt. And of that amount, 2.4 million shares will be fully offset by the capped call but are required for U.S. GAAP diluted EPS calculations. In summary, our 2026 priorities remain focused on supporting the R&D investments and production ramp required to secure multiple design wins in the compute market, including AI data center infrastructure, HBM memory and physical AI applications while progressively increasing EBITDA margin and free cash flow. That concludes our prepared remarks, and now we'll open the call to questions.

[Operator Instructions] Our first question comes from Krish Sankar with TD Cowen.

On the solid results and guidance. Luis, I had 2 questions. The first one, I just want to check, of your pipeline of $850 million, you said you have 4 customers qualified. Are those 3 HPC and 1 HBM customer? And the other 5 customers in qualification, are they all HPC for AI handlers? And when do you expect that to potentially convert into revenues?

Krish, yes, you're correct on all your statements here. We have 3 HPC, 1 HBM on the qualified, which we view about $190 million annual opportunity for revenue. And then we have close to $200 million in the near-term qualification here. So your question on the time line, it straddles over months, to be honest with you. We have one customer that is right on the edge of giving us the green light of being qualified. I think the data all supports it, but we don't have the official yet. We are already planning on shipping a production configuration for the actual production IERceP device, which is the next generation. We typically qualify on an existing generation device, so it can do correlation to what they have with other systems out there.

But we're shipping the production configuration here at the end of August to get it, I don't know if the right word is certified, so we can go on with the actual intercept. So we should get a qualification pretty soon within a month, I would say. And then I think the fifth one on the list, we're looking at early next year, systems that we're shipping late August and I think accounting for about a 6-month qualification process, I think would put us sort of mid-Q1 for the last one on this bucket of in qualification.

Got it. Very helpful, Luis. And then as a quick follow-up, you mentioned about you're getting traction in silicon photonics for the optical engine. Can you quantify how much that opportunity to be either this year, next year and the next few years? And is this mainly an insertion 1 or which insertion are you targeting?

Yes. Today, we are shipping interface solutions, not handlers, not full handlers yet. We're shipping interface solutions for insertion 3, which is the optical engine test. And that's what we commented here in prepared remarks that we booked in the second quarter. I think it was a $0.5 million order for interface. And this is a continuation of a business we started in Q1. We are shipping or planning to ship a qualification unit for insertion 3 by the end of the year with a handler. We're also demonstrating an insertion 4 configuration with a handler to certain customers that I don't really have a specific time line for shipment yet. I don't know if it's going to be Q4 or Q1 next year. A little tricky now getting systems to go on qualification, given the production orders that we're satisfying. I haven't quantified -- we haven't quantified yet the total CPO revenue in '27, '28 because we view it as part of the evolution of HPC. So it's embedded in the $850 million pipeline at the moment.

Our next question comes from Brian Chin with Stifel.

Nice results and outlook. Maybe the first question, looking at this -- the multistage pipeline graphic you have in the slides, I think last cut, it was aggregating to $750 million. Now it's $850 million. Can you maybe break down what that $100 million increase is? And I think part of this maybe is that recurring portion. Can you also maybe explain and break down what you mean by recurring?

Okay. Brian. Yes, two separate things. On the totality of the pipeline increase to $100 million -- by $100 million, it's really getting better visibility in the forecast. And I think we added a couple of customers on the engagement phase as well. But we certainly have better visibility now on the customers that are in the unqualified or qualified, I should say, the qualified portion of the pipeline. And the numbers are bigger, what they're giving us for next year than what we had originally estimated.

To your question on recurring, there are really 3 components to recurring. One of them is device application kits. You -- these device life cycles are typically 18 months in production, something else launches and you got to do a new device kit for that handler. The other component is thermal heads. You don't necessarily change the entire thermo head. But as devices grow in size, so does the required thermo head coverage over the die. It could be multi-dies. It could be actually even multi-skyline heights on dies. So that thermal head touch down on the die has to evolve with the product evolution. So that's an upgrade element of the system. It could also include a thermo head itself if the upgrade includes higher following. And the third element is basically the maintenance of the equipment. There are spares and consumables in the equipment.

Part of that today, I guess, a fourth element that is novelty here is the software sale. As I mentioned last quarter, we sold -- I think it was about $330,000 a year subscription software into an HPC customer in conjunction with system orders. And that has a lifetime through the product life cycle, I think we estimated a few million dollars life cycle value -- lifetime value of that software subscription. So that will be sort of the fourth component that I forgot to mention, but it's part of recurring.

Great. That's super helpful. Also, in terms of the full year revenue guide increase going from 25% to 35% growth, I think it's something like $45 million on the math there. You only increase your HPC forecast by maybe, call it, $10 million to $15 million. And so I guess the majority residual there is all the kind of like the core business, historical core business for Cohu. Can you maybe expand upon kind of what you're seeing there in terms of improvement? Industrial obviously is taking up...

Yes, that's right, Brian. Seeing industrial pick up, we're seeing the utilization rate overall pick up and part of the growth there in the second half or actually full year is the growth in recurring revenue. So that's grown nicely. I think it's been a CAGR of 5% here over the last 6 quarters or so. So it's really a nice increase. But you're right, it's the core business that's coming back led by industrial.

Maybe if I could sneak one last thing. Just from a supply standpoint, Jeff and Luis, I know that the in-qualification bucket is not banded within 2027 or a year interval even. But what are you sort of targeting to be able to get capacity to in 12 months' time or whatever horizon in terms of the Malaysia expansion and kind of what that -- given what the business looks like in terms of the following in?

Yes, Brian, frankly, that's a key question because as part of the 35% projected growth in fiscal '26 this year, I don't think we have much more room to grow on the HPC side this year. We are expanding capacity between end of Q2 and end of the year. The plan is to increase output by about 50% over the next 6 months, and that's for the HPC handlers specifically. Between now and the middle of next year, the intent is to increase output by a little more than 100%. So double essentially the output or a little more than double between now and July -- June, July next year. And we do see a path to triple that output between now and the end of next year if the market takes us there on the HPC side. So that's essentially -- we are evolving that HPC production pipeline in Malaysia and our factory in Malaysia in line with the expansion of the business in this customer pipeline that yields $850 million here. That's the idea.

It's a bit easier to do it in our own site. We are expanding the factory in Malaysia. We already started the fitting out the production floor. We're looking at a new construction of a building, essentially office building at this point. I think it will be suffice so that we can clear up production space on the current facility to be ready probably in Q1 of next year. It's quite a bit more challenging is exercising the supply chain. That's what's taking most of the attention right now so that we can get suppliers and more suppliers to support the expansion plan that we have in plan and been presenting here.

Our next question comes from Kevin Garrigan with Jefferies.

On the great results. Your new customers and engagement, can you just talk a little bit more about how those opportunities develop? Are these customers that are using competing platforms and are looking to switch? And how much additional opportunity do you see beyond the current pipeline that you have? So you mentioned $850 million. I mean is it pretty much sky is the limit at this point?

Well, there is always a limit. There's a finite number of customers out there. We're not really engaged with all of them yet. And I think we're quite honestly, fairly busy here, Kevin, with the sort of the 20 -- sorry, the 19, 20 customers that we have on the list. There's a lot to do here. There's a lot of projects, a lot of applications and qualifications in work. Will we add more? Sure. As these customers flow down this pipeline and it starts to get wider at the bottom, we'll start adding a few more at the top. But you can imagine who the names are, right? I'm not going to rattle them on the call.

I shouldn't, but they're essentially the fabless and hyperscalers that are developing or have developed their own semiconductor GPUs or custom ASIC devices, network processors, in the variety of names there, including cancer processors and whatnot that they have their own names for their custom ASIC devices, right? So those are the constituents on this customer pipeline.

Got it. Okay. Yes, that makes a ton of sense. And then can you just talk about the -- you mentioned higher input costs. Any specific components that you can kind of call out? And are these components something that you expect to be a potential headwind for getting systems out the door at some point?

Kevin, it's Jeff. At the moment, it's mainly memory. Memory is sort of leading in the higher costs and longer lead times. And so we've taken advantage of advanced purchases and looked out over multiple quarters and made buys based on the quantities that we need for that time frame. So it's not an issue for Q3 and our guidance has taken into consideration all of the risks and potential constraints. So at the moment, we're working through it. Like Louis said, though, it is probably the biggest challenge at the moment is ramping supply chain.

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

Nice job on the execution, guys. I'll start with some things that are just near term. You mentioned that we're looking for third quarter growth of 14% quarter-on-quarter with HPC and some of the traditional businesses contributing to growth. Can you provide a little bit more detail on the relative contribution of each as we look at this quarter's growth?

Yes. Craig, it's roughly about 50% HPC driven and 50% core business. So about $10 million out of each.

Got it. And then as we look ahead to the fourth quarter, remind us what you would think the seasonality would be of 4Q? And then as we look ahead, are there any particular items we should be aware of as we think about more one-off things that could be impacting the business beyond the third quarter?

To answer the first part of your question, we have stated that we now see revenue increasing about 35% year-over-year. So that puts us in a range of about $610 million to $615 million for the year. And to get there, that would basically be Q4 sort of flattish to Q3...

Yes. As far as seasonality, Craig, with utilization now broadly hovering at 80%, right? In a couple of markets here at 82%, a couple of markets at 77%, 78%. We're right at that threshold that if we see a seasonality pull back, I think it would quickly accelerate again in Q1. But we're not really sure exactly how that's going to play in Q4. So at the moment, we're viewing this core business kind of staying flattish going into Q4.

As I mentioned before, I think we're kind of maxed out on output on HPC side in Q4 as well. We're still building that capacity through the end of this year. So that's the positive news. We did get a we did get here in early Q3 a single customer order for $26 million again for our Eclipse systems for the HPC market. And that's largely going to ship in Q4 as well. So that Eclipse output capacity is filling up quickly here in the fourth quarter already.

Yes. So you've got really good visibility on the fourth quarter. And going back to the comment on capacity and being pretty high with output relative to capacity, Louis, what are the levers that you have that can give you some wiggle room in the first half of next year before you get the big 100% increase around midyear to the extent that you do have any?

Well, I don't know if it's wiggle room, Craig. It's really a lot of hard work. from the supply chain side and operations side with the expansion of the factory in Malaca. We're also doing a small expansion in the Philippines because that's where we build the thermal heads. So I wouldn't necessarily call it wiggle room, but I think we're on track right now to -- like I said, to really double our output between the quarter just finished and beginning of next year -- end of this year, beginning of next year. So really looking forward to being able to deliver a $200 million to $250 million incremental HPC or $200 million to $250 million HPC revenue next year or more. I mean it depends. I think we have some wiggle room is more into next year where we could potentially triple the output as the market takes us there.

Got it. Yes. Okay. So the step-up is exiting this year to next year, not a year from now.

Our next question comes from David Duley with Steelhead Securities.

I'm sorry to kind of continue along the HPC questions. When I look at your funnel chart this quarter of qualified customers, you have 4 for $150 million and last quarter, it was 3 for $100 million. So there was one customer kind of adding to the qualified segment that added up to about $50 million. I'm kind of wondering when you look at the 5 other customers that are in Qual are how should we think about the mix of those customers? Are they all -- so I just take 5 and divide by the average there? Or how should we think about how each customer adds to the qualified SAM?

Yes. Dave, so we do have -- no, there's a bit of a range here. We have customers that we view as $30 -- low $30 million annual opportunity. We have a couple of customers that are likely to be individually $60 million annual opportunity, and I'm looking at a table here. And that's about the range, actually. It's a sort of $30 million to $60 million on a per individual customer base.

You just gave us -- gave me one of my other questions, which is the way your capacity expansion is unfolding, you will be able to double the revenue stream of your Eclipse high-performance computing segment in 2027?

Yes, into early 2027. And then from there, I think tying a little bit with Craig Ellis' question, we do have some wiggle room to expand further from there, and we'll see how this funnel develops and then we'll drive that expansion in 2027. But for now, you just hang your hat on, we'll be able to double the output we just finished in Q2 of this year by the end of this year, meaning into early 2027.

Now remember, that's more than where we started in 2026. So the reality is if we're delivering $100 million to $110 million this year, we should have the capacity to do more than $200 million, probably close to $250 million by the beginning of next year, all things being linear throughout the year. And from there, we can expand more in '27 to exit at a higher rate in 2027 again.

Okay. And as far as -- just remind us who the key competition is for some of these slots and -- or are a lot of these brand new that you know where it's a jump ball? Or is there someone that is kind of the incumbent with a lot of these customers?

It's pretty much a single competitor, so to speak. I mean you can claim there's a second one -- a second competitor out there. But I would say there's primarily a single competitor, which has been the forever supplier at the Tesla contractors. It's Han Precision from Taiwan has been the primary competitor in this space. And as power levels are increasing in these more complex processors, right, all sorts of classification of processors. The management of power dissipation is becoming much more prevalent and driving a much stronger interest by, like I said, the fabless and the hyperscalers into finding a solution to the problem, which Cohu' Thermo Technology is one big company here in the Bay Area said Cohu Thermal Technology is sort of the best thermal in a market period in the story. Let's figure a way to make this happen.

Okay. Well, that's great to hear. Now just switching gears, final question for me is when you look at your core business, kind of -- obviously, you're guiding flattish. That seasonality is being overcome by the return of -- the cyclical business, so to speak. And I think when I listened to the big OSAT in Taiwan's conference call last night, they were basically they upticked their growth rate for wire bonding core assembly business from 13% this year to 20% for calendar '26, and they expect that growth rate to continue. So I'm kind of wondering -- and their utilization rates are also in the 80%, 85% and the quote was we can't keep up with purchasing equipment.

So I'm wondering what your customer -- your core customer behavior is. There's a list of 8 or 10 of these guys, and they're not all -- some of them are automotively exposed. And so I think probably that those guys aren't inflecting yet. But could you talk about the customers that are inflecting and what their behavior is? Are they coming in and asking for big orders and big slots and whatnot?

Yes. We're seeing the earlier inflection on the industrial space, as we commented here. And yes, indeed, the ones that have inflected so far are coming in for the sort of additional volume that we've seen in the past where they're ordering somewhere between 10 and 20 systems in 1 -- so that's -- it's sort of coming back to that original pattern that we're familiar with from the past, predominantly with the industrial-based customers. And I think you can see from the earnings release, which ones are kind of spearheading the return to business. Congratulations on nice results.

Our next question comes from Denis Pyatchanin with Needham & Company.

So I have a question about the HPC raise. So I think previously, it was about $90 million expected for calendar '26. Now I think it's about $105 million, so $15 million incrementally higher. Maybe you can tell us is more of the upside coming from Eclipse handlers or the Non HPM inspection systems?

Denis, yes, you're right. If you pick up the midpoint of the ranges we gave before and now, it is really a $15 million increase. Note that the new range is also tighter. We originally had an $80 million to $100 million range, and now we're calling $100 million to $110 million. This whole increase is on the Eclipse HPC side, entirely there.

Got it. And then I have a question related to some of these challenges with the components specifically related to memory. So do you think you'll be able to pass on some of these costs to your customers within the next, say, 3 or 6 months? Or will you basically have to kind of eat that into your gross margin?

Denis, we have just started conversations with customers. So I would say stay tuned on that.

Our next question comes from Quinn Fredrickson with Baird.

Just on the cyclical piece, specifically on automotive, I think you mentioned in your prepared remarks that orders were soft there. It sounds like one of the few areas that was the case. So what's your visibility of the timing of a turn in that business?

Yes, Quinn, it's a good question. I think that is a market that has been a little bit more sporadic. We had -- if I'm not mistaken here, we had a bit of a bump in the last 2 quarters in the automotive. And then the last quarter, it kind of came back down a bit again. So I think it's been bouncing around. I would expect, frankly, that automotive will not be at 80% up until probably late Q1 or Q2 of next year. That would be my expectation. But like I said, it's been the one that's lagging a bit across the end markets on the core business side.

That's helpful. And then on OpEx, can you discuss just your ability to pursue the full $850 million HPC pipeline? Would you be able to pursue that full pipeline at this third quarter level of about $54 million of OpEx? Or would there be additional investment you'd have to make?

That is the plan and the forecast at the moment is to stay at this, and we think it's a bit elevated from our prior model, but to continue to invest and have OpEx remain pretty constant at this level, about $54 million. So we think that's a good level that provides the resources necessary to capitalize on these opportunities.

And just to help clarify as well, Quinn, for you and for others. When we talk about the $850 million, that's sort of an annual spend, right? That's what we see these customers spending annually on this class of equipment, which is largely eclipse for HPC. So if we were to capture the totality of this opportunity now immediately, we would see an $850 million revenue stream next year. That's not the case. We're qualifying over time, and we'll see how this evolves. The market is also changing and growing, but that's just to clarify that it's not $850 million over multiple years, it's $850 million spend per year for the customers that we're talking about here.

Our next question comes from Vedvati Shrotre with Evercore ISI.

The first one I have is, so with Agent AI, we are seeing the CPU to GPU ratios changing, right? We're seeing a higher CPU ratio versus GPU. How does this sort of play for you in the HPC opportunity? Like where do you see -- how do you see yourself participating in this kind of shift?

This is Luis. First of all, you're correct. We're seeing a much strong -- a very strong demand on the CPU side Traditionally, I would say the CPUs would have been at slightly lower power levels than the GPU, but that's actually changing. And CPU power in test, I should say, is really approaching the GPU levels. How does it change? I don't know that it really changed. The whole intention and purpose of our product configuration is to be flexible and be able to straddle across applications without having to change the capital equipment, but changing the configuration instead perhaps upgrading thermo heads for different applications.

So we do a pretty good job right now straddling both CPU and GPU and reusability of the equipment. So it doesn't quite matter to us where the market and that ratio goes because that's one of the fundamental value propositions of our Equipped system. You can do both the thermal management at the higher power levels, but you can also use the same equipment at straddling down to lower power levels and across different applications.

Understand. So how about the penetration like there are 3 across the x86 and the ARM ecosystem, like how are you thinking about the pipeline and the penetration at the customers at the CPU suppliers?

It's -- I mean, I would have to go count to tell you where we are today. I don't know at the top of my head. But I'm going to venture to say well, I'm not going to venture to say. I'm going to say I would have to go count. But it is, again, not that relevant to us. We have probably strongest shipments in Q2 that were maybe by 86 or maybe that's going to be Q3 shipments. I would have to go look, but it straddles across both.

Understand. Okay. And then one last question. So on -- you talked about sort of the input costs and also alluded to your kind of the supply chain shortages. So maybe can you talk about how your lead times have changed in the last 3 months for the Eclipse tools?

Yes. I mean just for clarification, we haven't seen any shortages yet. And again, when we've got the opportunity to make some prebuys, we're doing it, and that's worked for us pretty well. However, these prebuys, particularly on -- mainly on integrated circuits are purchased at an increased cost. And so that there's the higher input cost. Although we have -- we're securing the supply, it's coming at a little bit higher cost.

And as I mentioned before, we're just initiating discussions now with customers about how we pass that on. And Eclipse handler right now is -- I think the lead times are still in check. We're holding well to 13, 14 weeks from receipt of PO. With that said, we have signals that the orders are coming. We have the customer forecast. And so we're getting ahead of it, so to speak, in part of what Jeff just said. So when we get the PO itself, we can respond.

Now like I said, earlier, we got -- a couple of weeks ago, we got a $26 million single customer order, right? So as you can imagine, there are tens of systems. We're not going to ship all that quantity in 13 weeks lead time. We got a certain capacity per week, and that quantity is going to fill up multiple weeks of shipments. So 13 weeks to the first system shipment, but straddles across multiple weeks from there and then gearing up for the subsequent order from another customer now that would ship in the latter part of Q4.

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

Great quarter and guide. I just have one question. It's been quite some time since we've been operating in our core business with 80% plus utilization and customers ordering to add capacity. Can you remind us historically when capacity is added when utilization rates go above 80% and the demand environment works to be continued. How many quarters or how long does capacity typically get added? You talked about initial orders kind of being 10 to 20, which was in line with historical norms for systems. But how long does that happen?

Yes. We would say about 6 quarters is probably the typical average or call it a cycle. And I've got this table in front of me, and it goes back to '21, and that was a pretty unique time frame in '21 and '22, and that happened -- we happen to be above 80% utilization for 8 quarters or at least 7. So I think 6 is probably the norm.

Great. Fantastic. And then lastly, I know we started a few quarters ago talking a little bit more aggressively or about M&A. But given the fact that the core business and the AI market growth is -- well, we're chasing extremely strong demand. Are you still looking at M&A or we don't want to get distracted with M&A when the core business is so strong?

Yes. This is Matt. Yes, I think you're right, right? The #1 priority is obviously execution. There definitely are opportunities to accelerate in some areas, our growth areas in HPC and in software, and we'll continue to look at build versus buy opportunities there. But yes, I think you nailed it. It's execution then looking at other ways to possibly accelerate some of our growth areas.

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

Thanks, operator. Before we sign off, I'd like to note that we will be attending the following investor conferences over the next 3 months: the Needham Virtual Semiconductor Conference on August 19, the Jefferies Semiconductor Conference on August 24 in Chicago and the CEO Summit on October 13 in San Francisco. If you plan on attending any of these conferences, please reach out to your conference contacts or let us know and we'll arrange for a one-on-one meeting. I'm also pleased to announce that Cohu will host an Investor Day on November 10 in New York City, where we will provide a deeper look at our strategy and long-term financial framework. Additional event details will be shared closer to the date. Thank you for joining today's call. We look forward to speaking with you soon.

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

Good day, and thank you for standing by. Welcome to Cohu's First Quarter 2026 Financial Results Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to Jeff Jones, Chief Financial Officer. Please go ahead.

Good afternoon, and welcome to our conference call discussing Cohu's first quarter 2026 financial results and our outlook for the second quarter of 2026. The I'm joined today by Luis Müller, Cohu's President and CEO; and Matt Hutton, Cohu's VP of Strategy and Investor Relations. If you need a copy of our earnings release, it can be found on our website at cohu.com or by contacting Cohu Investor Relations.

A slide presentation accompanying today's call is also available in the Investor Relations section of the website. Replays of this call will be accessible via the same page after the conclusion of the call.

During this call, we will be making forward-looking statements that reflect management's current expectations concerning Cohu's future business. These statements are based on information available to us at this time, but they are subject to rapid and sometimes abrupt changes. We encourage everyone to review the forward-looking statements section of our 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 are current as of today, April 30, 2026, and Cohu does not assume any obligation to update these statements for events occurring after this call. Additionally, we will discuss certain non-GAAP financial measures during this call. Please refer to our earnings release and slide presentation for the reconciliation 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 day, everyone. Thank you for joining our Q1 2026 earnings call. We started the year with strong momentum across multiple product lines with orders up 57% year-over-year, reflecting both improved semiconductor market conditions, and the increasing relevance of our technology portfolio across AI and high-performance compute applications. An important driver of this momentum is the expansion of AI workloads and inference processing, driving greater computing power density that has become a primary bottleneck.

AI accelerators and HPC processors generate immense amounts of heat during operation. Testing these chips requires maintaining precise temperature environments to ensure functional accuracy and long-term reliability. A chip is tested at the wrong temperature, its performance metrics may be skewed leading to lower yields or worse latent field failures.

As a result, Cohu's proprietary and industry-leading thermal capabilities are highly valued by customers. Based on current engagements and design activity, we now see a computing segment opportunity pipeline of approximately $750 million, including roughly $650 million in test handlers and an additional $100 million from HBM inspection and both growing at rapid rates.

For fiscal 2026, we're now increasing our high-performance computing revenue outlook to approximately $80 million to $100 million. We are emboldened by the opportunity pipeline across 12 customers with 5 customers in qualification stage and another 7 in early engagement stage.

During the first quarter, we continued to benefit from rising device complexity, higher power density in accelerating AI adoption, trends that are reshaping test, inspection and manufacturing requirements across the semiconductor value chain. In fact, semiconductor value is moving to the mid and the back-end manufacturing, driving substantial growth in the test arena.

Estimated semiconductor test sterilization also increased sequentially to 78% at the end of the first quarter. Automotive and industrial markets are gradually improving again as customers started investing in test capital. Many of our customers are broadening their product portfolio to serve AI data centers as these transition to 800-volt DC infrastructure in more power management efficient solutions with gallium nitride technology at Rackscale server boards, such as the new veraruban platform.

Across each of these applications, our customers are prioritizing quality performance and scalability. At the same time, software platform gained traction as analytics move from pilot deployments into broader production environments. These wins validate both the technical performance of our solution and the growing appetite for software-enabled yield and productivity investments.

There's a significant SAM opportunity for Cohu in this space and a significant lifetime value in software subscription. This is illustrated well in the first quarter. When a $20 million system order came together with $330,000 a year of software subscription which over the course of the lifetime of these systems could yield approximately $5 million in recurring revenue.

The financial implication of this shift is twofold. First, Software subscriptions provide high margin, recurring revenue that is less susceptible to CapEx cycles. Second, by improving overall equipment efficiency and reducing mean time to repair for customers, we build deep operational stickiness that makes it difficult for competitors to displace our systems.

I would now like to highlight a few customer wins in the first quarter. Starting with our test handler business with orders up 54% year-over-year. We secured 2 major Eclipse orders in the first quarter. The first win supports AI data center applications with a U.S. fabless customer, developing server and inference devices. As power density and mechanical complexity increase. Eclipse combined with our TCR active thermal control, enables the customer to standardize on a common handler platform across multiple device generations. This reduces capital risk while extending the life and value of the installed base.

Closed-loop junction temperature control was a key differentiator, ensuring consistent temperature tests, quality, higher yields and faster production ramps. In addition, the customers adopting Cohu's based prescriptive analytics software to improve equipment efficiency, increasing system value, enabling recurring revenue for Cohu and strengthening long-term engagement.

Strategically, this win deepens our computing footprint, embeds Eclipse into the customers' road map and positions us as the platform of record, representing an estimated $100 million incremental revenue opportunity at this account over the next 3 years.

The second order supports data center computing, mobile and automotive processors and another U.S.-based fabless customer using the Eclipse platform. Our solution allows both the customer and their OSATs to address multiple markets while leveraging T-Core thermal control to maximize yield and asset utilization.

Together, these strengthen our engagement across high-performance computing and AI markets. driving near-term system revenue and long-term platform, software and recurring value growth. Our customer engagement for Eclipse expanded in the first quarter with an additional 5 customers in different stages of qualification, representing an incremental $200 million of revenue opportunity starting late this year and into next year.

We're very bullish about the customer traction and the growing opportunities to expand our presence in the $750 million high-performance computing market. These opportunities are rapidly taking shape as compute power increases and with the need to actively manage seller conjunction temperature at higher power and power densities. Now turning to our inspection and metrology business, with orders up 64% year-over-year.

In HBM memory, we continue to see strong momentum for final inspection of HBM 3 and HBM 4. We're investing in this market in keeping pace with design requirements to support next-generation HBM 5. We're now forecasting revenue growing 80% year-over-year to approximately $20 million with our Neon HBM platform.

In the first quarter, we also secured significant volume repeat order for neon inspection system from a U.S. headquarter and also from a Korean customer. Our inspection business is growing fast and we estimate revenue at approximately $70 million this year.

Semiconductor Test orders recorded an impressive 163% increase year-over-year, headlines around AI infrastructure typically focus on the massive compute devices required to train and run large language models, along with the memory and networking technologies that enable scale across the data center. Less visible but equally critical, is power delivery.

Every AI system depends on precise, efficient power measurement to sustain peak performance. This is where the Diamondx precision instrumentation becomes decisive. Our tester was qualified for testing power devices strategically expanding our footprint in AI-related applications and embedding it more deeply into our customers' road map. Power density increases customers implementing GaN-based technology to minimize energy loss and thermo impact.

While GaN offers a clean efficiency advantage, it remains less mature than traditional CMOS creating technical and economic challenges as customers scale production to meet data center demand. Moving to our Interface Solutions Group. We've seen increased adoption of higher current contactors for AI power applications at existing customers. We also expanded our product offering and received multiunit order for a new silicon photonics solution. These photonic switches form the backbone of cloud and AI Ethernet fabric and we're now testing them.

In closing, Q1 was a strong start for the year and a clear validation of our strategy. We see momentum rapidly build across AI infrastructure, high-performance compute, power management and smart manufacturing, driven by rising device complexity and increasing power density. Our expanding presence in thermal handling, advanced inspection, precision test and high-value software is translating into larger platform wins, recurring revenue opportunities and deeper customer engagement.

With a $750 million computing segment opportunity in front of us, and improving utilization across our core markets, we are accelerating R&D investments to capture new customers, and we are expanding production capacity to move confidently through the remainder of this year and into 2027. These secular tailwinds, combined with disciplined execution and continued investment in innovation position Cohu to deliver durable value for our customers and shareholders.

Thank you for your continued support. I'll now turn the call over to Jeff for a deeper review of our financial results and forward-looking guidance. Jeff?

Thank you, Luis. Before reviewing the first quarter results and providing second quarter guidance, please note that my comments refer to non-GAAP figures, details about non-GAAP financial measures, including GAAP to non-GAAP reconciliations and other disclosures are included in the earnings release and investor presentation on our website.

For Q1 2026 revenue exceeded midpoint of guidance at $125.1 million. Recurring revenue driven primarily by consumables and typically more stable than systems revenue represented 60% of total revenue. No customer accounted for more than 10% of total sales during the quarter. Gross margin was 46.5%, above guidance, primarily reflecting a more favorable mix as recurring revenue exceeded our forecast. Operating expenses were higher than guidance at $55 million reflecting our decision to scale resources to support the rapid increase in high-performance compute opportunities.

This included accelerated spending on design materials as well as incremental engineering and field support to fulfill production orders and complete new opportunity qualifications. Net interest income after interest expense and a small foreign currency loss was approximately $2.1 million. The Q1 tax provision was lower than guidance at $4.8 million.

Now moving to the balance sheet. Cash and investments increased approximately $5 million during Q1 to $489 million and cash from operations was $10 million. No stock repurchases were completed during the quarter. Total debt is $305 million and includes $288 million from the Q4 2025 convertible debt offering.

Capital expenditures were approximately $2 million, mainly for facility improvements and IT equipment. We're targeting total capital expenditures to be about 2% of revenue in 2026. Looking ahead, we expect Q2 revenue to increase 15% sequentially and 34% year-over-year to approximately $144 million, plus or minus $7 million. The increase is driven by demand tied to the ramp in high-performance compute opportunities and continued recovery in automotive and industrial segments. We're increasing our full year 2026 revenue outlook for growth over last year of 20% to 25%.

Q2 gross margin is projected to be approximately 44% for the full year 2026, we project gross margin in the mid-40% range as we ramp our supply chain and production capacity to support the rapid business expansion, in high-performance computing customers. Operating expenses are expected to be lower than Q1 at about $53 million. We intend to continue investing in resources to capitalize on the growing list of HPC opportunities, and we expect quarterly operating expenses through the balance of the year to remain in the low $50 million range, consistent with our Q2 guidance.

Net interest income in Q2 after interest expense and foreign currency impacts is projected to be approximately $2 million at current interest rates. The Q2 tax provision is expected to be about $5.3 million and diluted shares are projected to be approximately $52.6 million, including 4.2 million shares attributable to the convertible debt. And of that amount, 3.3 million shares will be fully offset by the capped call, but are required for U.S. GAAP diluted EPS calculations.

In summary, our operational focus for 2026 is to support R&D investments and production ramp needed to secure multiple design wins in the compute market, including AI data center infrastructure, HBM memory and physical AI applications while progressively increasing free cash flow generation. That concludes our prepared remarks. And now we'll open the call to questions.

[Operator Instructions]. Our first question comes from Brian Chin with Stifel.

Let me ask a few questions. So a lot here, but in a good way. Maybe firstly, breaking down the guidance for 2Q, 15% Q-on-Q growth. Can you maybe give us a sense how much of that is the ramping new HPC customer business versus maybe ramp in the broader base business, if that makes sense? And also tied to that, of the maybe $100 million if you were to sign up no more new customers through the end of the year, that $100 million, how much of that still remains to be revenue through the second half?

Yes. So at least on your first point here, Brian, the quarter-over-quarter increase in HPC systems revenue, was about $10 million. So it's just under half of our increase quarter-over-quarter. And that puts us then for HPC least systems revenue in the first half of 2026 at roughly about $30 million.

I think that pretty much answers the second part of the question of what's left for the second half right then.

I can do that math. Okay. That's helpful. And in terms of the -- how are you thinking about -- and this maybe could mature over time or on higher volume, but how should we think about the system margin contribution gross margin relative to the overall blended average company?

Yes. What we saw in Q1 was a gross margin split of roughly on recurring roughly 40% on systems. So I think we're going to hold that for the balance of the year. The systems revenue percentage will increase systems revenue is going to increase faster than the recurring. And so that is why we see the 46.5% gross margin in Q2 hitting a little bit of a headwind in the second half. And so we think we're going to end the year somewhere in the mid-40% gross margin.

Okay. Great. And then maybe one other question. You talked about sort of this pipeline where you have 3 customers, was that $100 million kind of the aggregation of this year? Or is that over a multiyear horizon?

No, the qualified $100 million is sort of this year's spend from these customers. Now we're like I said, we're probably going to be getting a portion of that this year, not the entirety of it to see.

Annualized sort of potential.

Yes, yes.

With the other 5 customers are they kind of equal size within that $150 million to $200 million? Or how would you sort of gauge which ones are like further along or less far along in terms of ones that could be contributors even to the back end of this year?

Yes. They're not all equal sized, Brian. I mean we got kind of a $10 million to $40 million spread depending on the customer here on an annual basis the way we see it. We expect to be getting some qualifications completed by early Q3. The question is do we then have an opportunity to get orders and participate on demand still in 2026? Does our lead times support that as well. or not. And so it's hard to call right now if it's going to end up hitting revenue in Q4, plus obviously, revenue recognition as well. You got to account for accounting rules or if this is going to end up spilling more like early 2027 at this point?

Great. Great. And then maybe a good problem to have here. But in terms of where lead times for sort of the thermal test handler, TCOR, Eclipse are where do you think you can kind of keep them this year, not maybe also, like you said, inform what the revenue could be this year versus what may have to be captured next year?

So we are operating at about 14 weeks, I should say, cycle time instead of saying lead time on handlers, right now on our thermal handlers. I think a bit of the challenge is if you get a $30 million order, not all of it's going to ship in 14 weeks, as you can imagine, it's spread over several weeks, several months. And as we start layering additional customers, we are working hard here to open that manufacturing pipeline. Both from a supply chain side, meeting regularly now with suppliers and understanding who are the choke points, particularly for our thermal heads as well as internally, we are hiring resources in Malaysia. We're looking at relay out of the facility in Malaysia to open up more floor space. So I can tell you 14-week cycle time, but lead time really largely depends on the size of the backlog we have in front of it.

Our next question comes from David Duley with Steelhead Securities.

Congratulation on nice -- particularly the outlook. I was wondering, as far as your core business goes, all of your customers on the conference calls are really talking about how their AI data center business are ramping at very rapid growth rate, 50% to 100%. And I get the sense that, that kind of fills all the excess capacity that might have been pointed from those customers at other end markets. And so I guess -- are you hearing that from your customers that essentially that their AI businesses have kind of filled up their utilization rates and they're coming in for more larger volume purchase orders going forward?

What I'm seeing more, Dave, is actually a bit of a pivot towards CPU, large CPU demand ASIC, accelerators. We're seeing also network processing demand. Up until recently, a lot of it seems to be very focused on a singular -- or largely a singular customer driving a lot of GPU capacity in the industry as of maybe a quarter ago, a little bit more than a quarter ago, that seems to be spreading out more broadly here.

As inference starting to pick up and sort of the realization, we need more computing power going along with the GPU power that's being deployed. That's more of what I'm seeing. It's sort of that spread out of demand for different types of processors and network processes inclusive.

Okay. That kind of proceed to my next question is, I think you used the term XPU but particularly CPUs, GPUs, XPUs, TPUs whatever you want to call them right, of all sorts all have high voltages, create a lot of heat. So all of these in-market customers that you hear about from the custom ASIC guys to the GPU guys to the CPU guys, all of them need some sort of temperature-controlled handling equipment for their processors, correct?

That is correct.

And is that the market that you're referring to when you talk about the $750 million TAM, is that kind of aggregating what most of these customers thermally controlled temperature handler demand is? Or how do you come up with that $750 million?

Yes. And by the way, we're not calling it necessarily a TAM. We're calling it more like a SAM to be fair, because we have a pretty defined list of customer and customer device classes that we're telling up to $750 million. I think if we were to talk about a TAM, it's likely a bigger number, and we're not attempting to gas that, so we're not going there. We're being very targeted here to the list of the list of 15 customers that we have tallied and customer applications that we have tallied up, that comes up to the $750 million. That's what it is. It's a very targeted list. We know what these customers have for buying pattern this year. And that's how we come up with that number.

We also understand that some of these customers are ramping. So I guess the expectation is that SAM itself could be bigger next year. But like I said, we're not trying to guess the TAM, the total available market. We're just guessing here from customer information, what we see for their spending this year.

Okay. And then final question for me is, could you just elaborate a little bit more on the silicon photonics and what exactly the application is you addressed there? And how big a piece of business that could be, let's say, next year, I realize because we're just starting off now. But maybe just elaborate a little bit more on what you're seeing there.

Sure. That is really, I would call a beachhead business at this point. We sold a number of interface, we call it contactors, right? interface products here. for silicon phoponic application at one of the large accounts. There's really 2 major drivers in the industry, I think, today and a few others.

But these are interface products. So you're talking about sort of $10,000 or so contactors that we sold several off. We are working to provide solutions that include our handler with the contractors. But I'm not going to venture to guess what kind of revenue opportunity for 2027 that is at this point. It's not included not really included in our $750 million at the moment.

Okay. But the point is, you kind of got your foot in the door with the test contactors and hopefully, you can sell them a piece of capital equipment as well because -- that is going to be a big market.

That is correct.

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

Yes. Congratulations on the revenue performance in the quarter and the outlook, guys. Luis, I wanted to start off just by understanding the specific drivers to the increase in HPC system revenues this year, it looks like about a $20 million increase at the midpoint of the prior to the new expected range. Can you just detail what's going on inside of that?

Yes. Yes. Thanks, Greg. Thanks for the question. We -- I think we finished the -- we're very successful on the qualification of the Eclipse at 1 particular account that sort of looked like, okay, we could capture a bigger share of the revenue in 2026. So we qualified, I guess, in time to catch the next round of orders and that just increased the size of the pipeline for this year. That's just simply that.

Okay. And then nice to see orders up 62% quarter-on-quarter. Can you help us with some color on where you're seeing that strength? Is there a performance towards OSAT versus IDM? And do you expect to ship all those systems this year? And any color on linearity would be helpful.

Yes. When we look at orders here, it's actually roughly depending on the market segment you pick, it's about 30%, 40% increase year-over-year. There's 1 segment in particular that is driving -- not surprising given what we're talking about here, it's computing that it's up about 211% year-over-year. That's pretty much what's driving the business. Now I do have to say, the industrial segment is picking up a bit as well. That is also strong, came out pretty decently strong in the first quarter.

Okay. And regarding shipment timing for all those orders?

We see a ramp in Q3. And of course, some of that will fall into Q4 as well.

Got it. And then just going back to the point that the company is making on Page 7 of the deck, where we've got expanded AI computing pipeline with almost $0.5 billion in engagement and then $150 million to $200 million in qualification. Can you provide any color of how quickly we can move some of that engagement activity into qualification. And then through qualification, how much of that is really something that can convert in 2026 versus what you might have your eye on for 2027 guide.

I think at this point, Craig, it would be safe to say that we're working to complete the qualification of the about $200 million opportunity in 2026. As I mentioned earlier on a previous question, we'll see if we can get some of that revenue also in 2026, but largely 2027. On the balance here, the remaining $450 million, $500 million those engagements are likely to move into qual later this year, beginning of '27. I don't expect it should be any sooner than that.

Okay. So a way we could look at it would be you have an opportunity to convert a significant amount this year, but the larger percentage would be something that you could convert next year. Is that right, Louis?

That is right. That is right. And our qualification of these things take a good 6 months time frame and then from their production ramp. I do have to point out a little bit of a -- a little bit here, too. Largely, the recurring portion of this is going to come out about a year after shipping systems, right? So you got to remember, our systems ship of about a year's worth warranty once that expires, you start getting the spares, the service. These devices typically have 18 months lifetime anyways thereafter you start getting new kit orders, you start getting potentially new Thermo had orders for upgrades. It's high-performance computing. So those Thermo heads are very specific to the application. Maybe you can use it across 2 generations, but the thermal heads themselves eventually need to replace. So within a 12-month time frame, we should start seeing the recurring revenue kicking in. And the recurring revenue, maybe it wasn't really clear on the slide here is included on that $500 million bucket as well.

Okay. So you've got a nice one, too, but with the second punch included in the chart.

Yes.

Our next question comes from Robert Mertens with TD Cowen.

This is Rob Mertens on for Chris Sankar. So I believe last quarter, you had highlighted a Crypton inspection metrology system order for an automotive customer had transitioned into -- you've seen some positive benefit in your inspection software subscription. And then also mentioning all the additional software opportunities during this March quarter. I'm just trying to wrap my head around how we should think about the potential software opportunities throughout your business, if there's a specific platform or area that the software opportunity might be higher?

Yes. Sure, Rob. The softer right now is very much going kind of hand-in-hand with our sort of test handlers and inspection systems. So basically, the automation pieces, okay? We have an element of software we call pace inspection goes in with the inspection platforms. It helps optimize yield of the inspection systems.

And then we got a PACE prescriptive that goes along with both test handlers as well as inspection metrology systems that help optimize overall equipment efficiency, optimize maintenance, predictability and output of the factory. So if you think about that software base, we are now currently at an ARR, annual recurring revenue here of about $1.2 million. So this is what we have or bookings for annual subscription and software.

The attachment rate of that subscription, it's still pretty low. It's really about 1.3% of our systems have a software subscription attached to it. So a little number, so plenty of room to grow. But as I pointed out here in the script, the value of that software is pretty big because if you get it in, like we got here in the example given $20 million system order softer annual subscription through the lifetime of that product that's about a $5 million of recurring revenue we're going to collect through the lifetime of the product at a pretty high margin, right?

So it's still a small piece of the business. It is a growing piece of the business. It's growing fast. I think we're expecting it to be close to $3 million in revenue this year. That's more than 200% growth year-over-year. but it does carry out a really nice lifetime value recurring component that adds to our overall recurring business.

Got it. That's very helpful. And then just -- you mentioned some incremental strength in the orders from automotive and industrial markets this quarter. I'm just trying to wonder how you expect that business, the auto handler business to pick up in the back half of the year? And then maybe if I can squeeze one last one in, if there's any typical seasonality in the RF test business?

So on the first portion, I think if I refer to how Jeff answered the question of what's driving the incremental quarter-over-quarter here in Q2, about half of our increase in revenue is driven by noncompute markets, right? And that is fundamentally industrial and to a small degree, auto. But fundamentally industrial, we're seeing that pickup right now.

Another interesting data point here. The industrial utilization test sterilization at the end of Q1 was 79%. So it's right there that capacity by threshold of 80%. Industrial is doing well. It had a good increase in orders quarter-over-quarter and about half of the revenue growth quarter-over-quarter going into Q2.

On the RF side, to your question, we're also seeing a bit of a pickup on RF tester orders, sales in the second quarter. There is typically a seasonality. That seasonality tends to be late year like Q4 to early Q1 when RF picks up. It's a little late here. We're going to Q2 and seeing a bit of a pickup in RF. I can't completely explain that to you, why? And then obviously, there are technology transition points that are major drivers in RF with one coming up in the next 18 months or so associated with FR3 or what's commonly known as 6G.

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

Great. Thanks for all the guidance and congratulations on giving multi-quarter guidance again. My other question has to do with M&A. Previously, we've talked about acquisitions particular possibly in recurring revenue streams that you were looking at and targeting. Can you give us an update on your thoughts on M&A currently?

Chris, it's Matt here. SP26859281 Yes. So I mean, we continue to look at opportunities, as you can imagine from what Luis and Jeff highlighted mostly opportunities in the reoccurring space are growth areas. We'll continue to be disciplined, look at buy versus build analysis and look for opportunities Unfortunately, a lot of the tailwinds that some of these companies are receiving that we're receiving, they're also receiving. So lot of valuations remain elevated, but we'll continue to be disciplined and look at opportunities in our growth areas.

Great. And then, Luis, given -- I know we're moving now a multi-quarter guidance here for '26. But given all the positive dynamics as well as future orders transition to revenue in '27 and in 26%. Should we assume if all things remain consistent that you'll grow in '27 your top line same rate that you expect to grow in '26?

We certainly expect growth in '27. I mean, we have that in qualification bucket there of $150 million to $200 million that will add to 2027. Also pretty encouraged with overall test utilization getting very close to that 80% mark. So all things being equal, yes, growth in '27. At what rate, we haven't tried to pencil that in yet. So we're going to reserve another quarter or 2 before we talk about that.

Our next question comes from Denis Pyatchanin with Needham.

Great. So prior to your HPC forecast was about $25 million to $30 million for this year and now you've moved it up to about $100 million. And I think in your presentation that said that about $30 million of the $100 million or so would be equipped. So can you tell us about the remaining like $50 million to $70 million, is that mostly testers? Is that other handlers? Can you kind of break down that remainder, please?

Yes. Let's back up a little bit. So initially, we came out we said HPC revenue in the $60 million to $85 million range for 2026. What we're doing now is increasing that $60 million to $85 million, we're increasing that to $80 million to $100 million. Most of that relates to the Eclipse handler, the Neon for AM inspection we previously said was 15 to 20. I think we're at the higher end now of that range. And we are -- as Luis had mentioned, we in qualifications or finish qualifications for our testers also participating in some HPC revenue. Does that help clarify, Denis?

Yes. Yes, yes. And then so I think -- so you also said that you're now kind of connecting 2026 total revenue to be up 20% to 25%. So I mean if I kind of just run rate you at $144-ish million basically for the rest of the year, you basically get to that number. So we're basically assuming revenue will be going flat from $144 million through the rest of the year will be -- will there be a little bit of a dip in Q3? Is there anything more you can say about kind of the cadence of revenue?

Yes. The way we see it now, Denis, we would expect Q3 to be pretty similar to Q2, somewhere in that $144 million, $145 million range. Q4, we could have some seasonality. So a slightly weaker Q4, maybe down single mid single digit quarter-over-quarter.

Great. That's helpful. And then lastly, maybe I think you had mentioned some further engagements with the U.S. and Korean customers. Can you tell us more about that, please?

Yes. We were talking about inspection and metrology business here. We saw a big increase in orders in inspection metrology in the first quarter. In fact, -- let's see here. I think it's up year-over-year, 64%. We are expecting that business to hit about $70 million in revenue this year. And what's driving that? One is HBM, which we're now guiding to about $20 million in the year. And the other one is just further demand for our inspection products from both a U.S. and a Korean customer with large orders in the Q1 time.

Our next question comes from Vedvati Shrotre with Evercore ISI.

So I kind of wanted to double click a little bit on the gross margin piece. So you have good ramps on the HPC front in the second half. So like with the systems gross margins, like wouldn't they sort of pick up in second half versus first half?

Yes. I think that's a good observation, V. However, we are having -- we are incurring some higher initial costs here to ramp the Eclipse supply chain and production. It's coming out very quickly. It's a new configuration. And so we're having to pull more money, more cost, again, on supply chain and production I expect those costs to carry through almost probably through this year. So 2027.

We'll see lower costs, particularly for Eclipse. On top of that, I think similar or line with other companies, right? There's a small impact from higher energy and freight costs, something to the tune of about 10 basis points.

On top of that, we are also seeing higher cost of memory ICs that we use on our products. It's not a large, huge number, but it's about 10 basis points.

Understand. And are those the drivers for the dip into Q1 gross margins? Is that like the 200 bps of decline that you have, can you maybe characterize what's cost driven, what's kind of mix driven?

Well, yes, it's kind of a combination here. It is definitely cost driven, as I mentioned, for the Eclipse platform in terms of supply chain and production. And then to a certain extent, that also relates to mix, right? But I'd say, cost versus mix second.

Understood. Okay. And then in terms of R&D spend, like how should we think about R&D intensity for the rest of the year? Like I would assume like as you're going after these bigger markets [ 750 million ] SAM opportunities. Essentially, what's the right way to think about R&D intensity? I assume it will be higher, but made some color there.

Yes, you bet. So I'm forecasting Q2 will be lower than Q1, but we're going to still be elevated from the model. So we're going to be about $53 million for Q2 operating expense, and that's because we are going to continue to invest in the -- to capitalize on these opportunities that we have in HPC. So I expect that sort of 53 or call it, low $50 million range to persist through the second half of this year.

For OpEx.

For OpEx, yes.

Okay. And then the last one, on the qualifications you have on the pipeline, $150 million to $200 million, how is that split or maybe the 5 customers? Like how does that split Neon versus Eclipse opportunity?

These are all Eclipse. These are all eclipse thermal, thermal handler application to some form or another of a processor device.

Understood. Yes, that's all the questions I had in.

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

Thank you very much. And before we sign off, I'd like to note that we'll be attending the following investor conferences during Q2, and those conferences are the TD Cowen Conference on mid-27 in New York City. Craig-Hallum Conference on May 28 in Minneapolis, the Stifel Conference on June 2 in Boston and the Evercore Conference on June 3 in San Francisco. And if any of you plan on attending these conferences. Please reach out to your conference contacts or let us know and we'll arrange for a one-on-one meeting.

So thank you for joining today's call. We look forward to speaking with you again very soon.

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

Good day, and thank you for standing by. Welcome to Cohu's Fourth Quarter 2025 Financial Results Conference Call. [Operator Instructions] 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 discussing Cohu's fourth quarter 2025 financial results and our outlook for the first quarter of 2026. I'm joined today by Luis Muller, Cohu's President and CEO.

If you need a copy of our earnings release, it can be found on our website at cohu.com or by contacting Cohu Investor Relations. A slide presentation accompanying today's call is also available in the Investor Relations section of the website. Replays of this call will be accessible via the same page after the conclusion of the call.

During this call, we will be making forward-looking statements that reflect management's current expectations concerning Cohu's future business. These statements are based on the information available to us at this time, but they are subject to rapid and sometimes abrupt changes. We encourage everyone to review the forward-looking statements section of our 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 are current as of today, February 12, 2026, and Cohu does not assume any obligation to update these statements for events occurring after this call. Additionally, we will discuss certain non-GAAP financial measures during this call. 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 Muller, Cohu's President and CEO. Luis?

Good day, everyone. Thank you for joining our Q4 '25 earnings call. I'm pleased to share our latest results as we close the year and highlight the continued momentum across the business. First off, let's talk about some highlights. Recurring business remained strong, representing about 60% of total revenue in the fourth quarter. Recurring bookings were up 34% sequentially, driven by stronger demand across service contracts, interface solutions and handler-related spares business. Systems demand increased 47% quarter-over-quarter, driven by higher equipment orders from major global customers, specifically increased activity from a leading analog and mixed signal semiconductor customer, renewed investment from a top automotive and industrial semiconductor manufacturer, strength from RF and connectivity device customers and stepped up spending from top-tier fabless computing and mobile companies. The top 10 customers accounted for approximately 63% of Q4 bookings, a healthy level of diversification for this stage of the cycle. For the full year 2025, orders increased 29% year-over-year.

Now let's dive into the detailed results. Fourth quarter revenue of $123 million is up 30% year-over-year and split 40% systems and 60% recurring. Recurring revenue grew 4% quarter-over-quarter and 25% year-over-year. We believe the strong recurring business reflects the value of our installed base and customer reliance on Cohu across their production environment. Our recurring model continues to provide stable performance, particularly over the past two years of soft equipment demand. Full year revenue of $453 million is up 13% year-over-year, confirming the trajectory of the market recovery and initial design win successes.

We estimate higher test sterilization trends from September through December among both OSAT and IDM customers with revenue improvements most pronounced in markets tied to computing and automotive applications. Estimated test sterilization is up 1 point to 76% at the end of December with computing segment the strongest at 78% and automotive at 75%. We believe this improved utilization during an otherwise slow seasonal quarter underscores a broader positive market dynamic.

While some long-standing customers strengthened their installed base support as utilization levels gradually improved, others have engaged with us on new programs. There's a clear change in customer engagement, reflecting both new program ramps and renewed investment in back-end test infrastructure. Design win activity was strong in Q4 with expansions across automotive ADAS, analog and power devices, compute-related applications and predictive maintenance use cases. More specifically, we secured a key transition win for Cohu test interface products at a leading analog and mixed-signal customer. We closed the first order for a high-performance thermal configuration of the Eclipse handler, supporting a customer's AI device road map. We booked a multiunit order for a new handler still in development, targeting automotive and physical AI device test. We'll be shipping an initial qualification system this summer and follow-on units later in the year.

We received a new order for HBM inspection at a customer's engineering lab supporting development activity of next-generation memory devices. Won the first mixed-signal tester order at an analog and connectivity business unit of a large semiconductor manufacturer, broadening the Diamondx tester penetration beyond earlier wins. When we secured an order for Krypton inspection metrology system for production of automotive ADAS processors. This order continued to demonstrate the success of Krypton and it included the subscription component for PAICe Inspection software that uses machine learning to improve yield. We secured booking for tri-temperature handlers across multiple customer sites to support growing power module test demand.

Across markets, customers consistently emphasize quality, yield and productivity and cost of test efficiency, areas where Cohu solutions continue to be highly differentiated. As global trade dynamics remain fluid, our low direct exposure to China and strong customer diversification across North America, Europe and the rest of Asia provide a solid risk balance profile. We remain confident in our ability to navigate regional shifts while staying aligned with customers investing in critical long-term technology transitions.

To conclude, Q4 reflected continued market recovery across end markets. With a balanced mix of recurring and system revenue, improving customer engagement, increasing design win traction, expanding AI data center opportunities and strengthening market signals across several strategic verticals, we entered 2026 with a solid foundation and positive momentum. Thank you for your continued support.

I'll now turn the call over to Jeff for a deeper review of our financial results. Jeff?

Thank you, Luis. Before reviewing the fourth quarter results and providing first quarter guidance, please note that my comments refer to non-GAAP figures. Details about non-GAAP financial measures, including GAAP to non-GAAP reconciliations and other disclosures are included in the earnings release and investor presentation on our website.

For Q4 2025, revenue was in line with guidance at $122.2 million. Recurring revenue, which is primarily driven by consumables and is more stable than systems revenue, accounted for 60% of total revenue for the quarter. Revenue for the full year 2025 was $453 million and 13% higher year-over-year. During the fourth quarter, two customers, one in the mobile segment and in the automotive segment, each represented more than 10% of our total sales. For the full year 2025, no customer represented more than 10% of our total sales.

The Q4 gross margin of 40.8% was lower than guidance due to onetime inventory charges resulting from discontinuing certain product lines and consolidating offerings, which better align our engineering and support resources with customer requirements. By streamlining our offerings, we're better positioned to respond quickly to market changes and focusing our resources on high-performance computing, HBM memory and AI-related high-growth opportunities.

Operating expenses for Q4 were in line with guidance at $49.8 million. Net interest income after accounting for interest expense and a small foreign currency loss was approximately $1.9 million for Q4. The Q4 tax provision was higher than guidance due to a $5 million increase in tax reserves against tax assets. The reserves had no impact on the future benefit of the tax assets or cash taxes. Therefore, while the accounting rules require an increase in reserves, this does not change our expectation of using these assets in the future or affect our cash flow.

Moving to the balance sheet. Cash and investments increased by $286 million during Q4 to $484 million at year-end. This was due to the net proceeds from the convertible debt and cash generated by operations. No stock repurchases were completed during Q4. Total debt is $305 million and includes $288 million from the Q4 convertible debt offering. Q4 capital expenditures were $3.4 million, mainly for facility improvements. Capital expenditures for full year 2025 were $21 million, including $9 million for the purchase of our Malaysia factory in Q1.

In late Q3, we announced a strategic convertible notes offering. Early in Q4, we completed the upsized offering, raising gross proceeds of $287.5 million at attractive rates, including 1.5% interest rate, 32.5% conversion premium and a five-year term. We purchased a 100% capped call to limit shareholder dilution until the stock price doubles and exceeds $41 per share. The repayment structure of the notes is net share settlement, meaning Cohu will repay the principal of $287.5 million in cash the banks cover the capped call up to $41 per share. And thereafter, Cohu has the option to settle any in-the-money amounts in cash, shares or a combination of both. This structure limits shareholder dilution. The net proceeds will provide additional liquidity to strengthen our balance sheet and support strategic initiatives.

Looking ahead, we expect Q1 revenue to be seasonally flat with Q4. Our recurring revenue is forecasted to represent about 60% of total Q1 revenue, while systems offset the typical seasonality of the first quarter and account for 40% of total Q1 revenue. Our guidance for Q1 revenue is approximately $122 million, plus or minus $7 million. The gross margin for Q1 is projected to return to corporate average at approximately 45%. The unique inventory charges that occurred in Q4 are not projected to continue in Q1. Operating expenses are expected to be flat compared to Q4 at about $50 million. Q1 interest income net of interest expense and foreign currency impacts is projected to be approximately $1.9 million at current interest rates. The Q1 tax provision is expected to be about $5.5 million and the diluted share count for Q1 is projected to be approximately 48.5 million. We're targeting total capital expenditures to be about 2% of revenue in 2026.

The company is well positioned now to support the business ramp, and we anticipate normal maintenance CapEx each quarter this year. Our focus for 2026 will be to support R&D investments that are enabling several design wins in the compute market, including AI data center infrastructure, HBM memory and physical AI applications, along with progressively increasing our cash flow generation.

This concludes our prepared remarks. And now we'll open the call to questions.

[Operator Instructions] Our first question comes from the line of Craig Ellis from B. Riley Securities.

Luis, I wanted to go back to the order activity in the fourth quarter. It looked very strong in both systems and recurring. Can you just talk about what you're seeing with those orders? How much of that converts in the first quarter versus being pipelined for later in the year? Appreciate any insight on that.

Okay. Craig, Yes, I can make some comments on the orders here. I'm probably going to need a little bit of help from Jeff on the timing of the conversion to revenue.

So just to recap, right, we had systems orders were up 47% quarter-on-quarter. So that really sort of bucked the trend on the seasonality. That really affected primarily handlers, thermal subsystems which we typically sell for mobile processor test in SLT and some testers for mixed signal and RFM device. On the recurring side, orders were up 34% quarter-over-quarter. There was actually a couple of large service contracts involved on that recurring business that renew annually. And so that obviously is going to spread out throughout 2026. But we also saw an increase in bookings on interface products and handler spares that typically go along with utilization improvement.

And Jeff, I don't know if you have better comments on the timing.

Yes. I think you're absolutely right about the recurring orders, Luis, and the portion that's going to be longer term, multiple quarters. The systems, we have about 70% of our guided revenue in backlog coming into Q1 with a majority of the balance being shipped in Q2. So it's really the system shipments showing up in Q1 and Q2, Craig.

Got it. And then the follow-up question is related to revenue and then with a clarification on gross margin. So Neon high-bandwidth memory has been a sharp focus through the year in 2025. Luis, can you tell us where the business exited with revenue in that product group and remind us what your expectations are in 2026 and then the clarification is on your end, Jeff, and it relates to gross margin. Is it fair to say that, that onetime end of manufacturing charge in the fourth quarter was about 400 basis points or the variance between guidance and what was reported? Or were there other things at play?

That was the majority of it, Craig. I'd say about 350 of it was 350 basis points was due to that onetime charge. There was some mix that accounted for the balance.

And to your comment about the Neon revenue, we did exit 2025 at $11 million on the HBM market. We booked a system in Q4. We already booked three more systems here in January for Q1. Obviously, that's next quarter, but it's booked. And we're forecasting revenue this year in HBM between $15 million and $20 million.

Our next question comes from the line of David Duley Steelhead Securities.

I was wondering if you could just recap what you said about Eclipse activity during the quarter. I think there was a couple of mentions of that. And maybe help us understand how that product line should ramp throughout 2026. And do you have the capacity to meet demand?

Dave, yes. So we booked a first configuration of a I guess I can say super high power, but probably a year from now, there's going to be another super high power. So let's just say, an even higher power version of our T-Core thermal control on an Eclipse handler. We booked that system in Q4. It's a system that we have been working with a customer on qualification. We shipped a first unit, the real production unit here already in the late January time frame.

I don't think I can really sort of disclose what the volume projections are for the year for the Eclipse handler, but fair to say that we have forecast for ramping production, and we do have the capacity. Yes, we do have the capacity to ship systems this year based on the forecast that we have received so far from more than one customer actually for that system.

Okay. And then when you think about 2026 and just whatever revenue profile, it's obviously going to grow. But I'm just kind of wondering how you might think about the first half versus the second half. And it seems like you have strong order momentum and you kind of buck seasonal trends in the first quarter here. And so I suspect that we're kind of starting our recovery period through the balance of the year. Maybe you could just make some comments on that.

Yes. We were certainly seeing an increase in order momentum across our traditional customers in auto and industrial space. With that said, I think we're a lot more excited really is about the high-performance computing opportunities that we see with the Eclipse handler. We should be increasing shipment rate of Eclipse in the second quarter going into third quarter.

A little too soon to talk about what it looks like in the fourth quarter, perhaps more of a typical seasonality, I don't know. But right now, we're seeing sort of a ramp heading into the middle of the year.

Okay. Jeff, if you could just comment on the -- how the gross margin profile should look throughout the year with the higher revenues expected in Q2 and Q3.

Yes, absolutely, Dave. So I'll just go back to my model here. And kind of reference, maybe I'll just reference the analyst consensus as well, which, let's just call it roughly $130 million Q2 and Q3. So at that level of revenue, $130 million a quarter, gross margin should be sort of in the high 46% range, 46.7%, 46.8%, that range. And then as we get into a range of $150 million per quarter, that starts to breach the 48% gross margin number, so just under 48%. And then when we get back to what we believe at the moment is sort of our normalized run rate sort of normalized business conditions would be about $160 million a quarter, and that would be 48% gross margin.

Okay. And then final thing for me is if you could just comment, I think many companies have seen an increase in customer activity and customer forecasts increasing. And maybe you could just describe how your customer activity has changed over the last month or so as we're moving into an upturn year.

Well, I think it goes along with what I said initially here, Dave, that we are seeing an increase in demand for our systems from traditional Cohu customers, the traditional automotive industrial IDMs. But we're -- but more importantly, we're seeing a strong pull or I should say, a forecast for the Eclipse product line going into compute and mobile applications. So yes, it is a situation that's improving. I think it's visible on the utilization rate that in a seasonal fourth quarter went up instead 1 point to 76%.

So I think we're pretty excited about how we're entering 2026. It should be a good year. We're definitely projecting another growth year. We did have 13% revenue growth in 2025, and we are modeling another growth in 2026.

Just to add to that, Dave, in terms of a market indicator, recurring revenue now has increased sequentially four quarters in a row. And so that, as you know, is a sign of market recovery. And so we couple that with utilization, and it looks like it's all headed in the right direction.

Our next question comes from the line of Robert Mertens from TD Cowen.

This is Robert on behalf of Krish. I just wanted to clarify in terms of the high bandwidth memory inspection, you secured a new win for that to use an engineering lab. Is that working with the same customer? Or is that a new customer that you've worked with?

That is -- Robert, that's the same customer. Same customer, but going into the lab for future HBM development.

Okay. Got it. And then just in terms of -- just making sure I heard correctly, the multiunit order for the new handler under development with the qualification shipment later in the summer, is that revolving around your Eclipse handler and the GPU opportunity? Or is that separate from that commentary?

That's separate from that commentary. That is targeting primarily automotive ADAS and physical AI type devices. So a different type of application, different product altogether.

Our next question comes from the line of Brian Chin from Stifel.

This is [ Daniela Talio ] on for Brian Chin. My first question is around HBM inspection to continue on that. Is your customer, the same customer doing 100% inspection with your Neon platform? And how does that inspection intensity for this step change moving to HBM4?

Yes, the customer is doing 100% inspection with our platform. As new generation HBM devices come up, the requirement in terms of size, defects that you're looking -- size of defects you're looking for or ball pillar count that you have to measure obviously increases. And with that, so does the time it takes to do the inspection. I don't have a number to give you right now and say what percentage increase in the time of inspection and therefore, slowdown of the process. But certainly, those devices are getting larger and with higher interconnect count as we move along here in newer generations.

Okay. Great. And then also, I know you mentioned $15 million to $20 million for that revenue base. Do you see the shipments more linear or weighted to the first half or the second half going into 2026?

At this point, we're seeing this fairly linear through the year.

Our next question comes from the line of [ Mr. Dennis ] from Needham & Company.

My first one is about the IDM versus OSAT performance. Maybe you guys could provide some more color on what you saw in the fourth quarter for IDMs versus OSAT and then maybe some segment color from what you're seeing in the first quarter? And then maybe beyond that, if you can.

Dennis, what I can say is from a utilization standpoint, in the fourth quarter, IDMs were a little over 76% and OSATs a little over 75% -- as we look into the first quarter here, I'm starting to think that we don't typically forecast utilization, but starting to believe that, that may flip. I think utilization may go up a bit, but I'm thinking the OSATs may be going up faster than the IDMs, at least as an early view of the first quarter. We'll see how that really ends up in March.

Great. And then for the second part of the question about the segments, so maybe compute versus auto and industrial, how are they looking from a systems perspective into the first quarter?

Compute, as we exited Q4, compute was at 78%, auto, 75%; industrial, 77%; mobile, 72%, consumer 76%. Going into first quarter, I'm seeing the biggest momentum around mobile, thinking mobile is going to -- utilization of mobile is going to potentially cross the 75% mark. Compute should continue to rise. And I don't know much about the others at this point.

Great. And then for my second question, regarding that analog and mixed signal win, could you give us some more color on that?

Sure. We have won a customer a little over a year ago that is a large mixed-signal supplier into the automotive market. They're one of the top six or seven automotive semiconductor manufacturers. We've been deploying that tester into more recently here, two out of their three major business units. And they also have been diversifying their product line.

So we got an order qualification from that second business unit that I just referenced. We know that their products that are going through our testers now are some digital controllers and PMIC devices that are being used in data centers. They actually shown in some news released there for data center racks and data center boards surrounding large GPUs. And we're expecting to see an acceleration, at least one of these tester design wins, particularly in the digital controller side, coming up towards the middle of the year.

Thank you. At this time, I would now like to turn the conference back over to Jeff Jones for closing remarks.

I'd just like to say thank you for joining today's call, and we look forward to speaking with you again soon. Have a good day.

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

Good day, and thank you for standing by. Welcome to Cohu's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to Jeff Jones, Chief Financial Officer. Please go ahead.

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. And I'm joined today by Luis Müller, Cohu's President and CEO. If you need a copy of our earnings release, it can be found on our website at cohu.com or by contacting Cohu Investor Relations. A slide presentation accompanying today's call is also available in the Investor Relations section of the website. Replays of this call will be accessible via the same page after the conclusion of the call.

During this call, we will be making forward-looking statements that reflect management's current expectations concerning Cohu's future business. These statements are based on the information available to us at this time, but they are subject to rapid and even abrupt changes. We encourage everyone to review the forward-looking statements section of our 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 are current as of today, October 29, 2025, and Cohu does not assume any obligation to update these statements for events occurring after this call.

Additionally, we will discuss certain non-GAAP financial measures during this call. 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 day, everyone. Thank you for joining our Q3 2025 earnings call. I'm pleased to share our latest results and provide guidance for Q4. First off, let's talk about some highlights. 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.

We had several notable events in the third quarter. We announced an offering of convertible notes on favorable terms, which closed just after the quarter end and will support future growth and strategic initiatives. Jeff will discuss this in more detail later.

We welcomed [ Matthew Hutton ], our new Vice President of Strategy focused on advancing our growth initiatives, including mergers, acquisitions and partnerships. Prior to joining Cohu, Matt was Head of Corporate Development at AspenTech.

We communicated repeat orders for Neon HBM inspection tools, raising this year's revenue forecast for these systems to between $10 million and $11 million. These systems are used for inspection in metrology or high-bandwidth memory devices, which are critical components in high-performance computing and generative artificial intelligence applications. We shipped our first system configured for HBM 4 inspection, reinforcing our optimism for future market prospects and high-bandwidth memory. Our Eclipse handler equipped with proprietary active thermal control was selected for production test of next-generation AI processor devices by a leading U.S.-based semiconductor manufacturer. The Eclipse platform is designed to scale seamlessly across diverse power applications, providing the flexibility and operational efficiency required to support our customers' evolving high-performance processor road maps.

This adaptability ensures that as processor technologies advance, our solution remains a reliable foundation for next-generation computing needs.

Our current thermal solution ensures optimal device temperature control and test repeatability up to 3,000 watts power dissipation with ultrafast temperature ramp rates and tight thermal guard band, supporting the [ manning ] semiconductor test requirements.

Now let's dive into the detailed results. Consolidated revenue reached $126 million with both systems and recurring revenue improving quarter-over-quarter. Revenue was split 45% systems and 55% recurring. Non-GAAP gross margin of 44.1% reflects the value differentiation of our products and the resilience of our recurring business model. Estimated test realization remained stable quarter-over-quarter ending September at 74.5%.

While systems orders moderated last quarter, growth in recurring revenue and new wins position us well for Q4 and beyond. We secured new business wins, including orders for our automated test equipment and automated optical inspection for high-growth markets. During the quarter, we secured roughly $1.7 million in new business, highlighted by our first Diamondx order from a long-standing Cohu handler customer. This order will support the testing of application-specific analog power integrated circuits, serving key automotive and industrial market segments. This customer win marks the continuation of Cohu's growth in the mixed signal test market with Diamondx as we push to diversify our test platform beyond RF and display driver IC test.

We secured a new order of our Krypton system with a European customer, enabling advanced optical inspection of devices used by a prominent U.S. mobile phone brand. We booked a $2.3 million order for precision analog test contactors at a U.S. IDM and continue to diversify our test platform portfolio of this customer. We anticipate a seasonal slowdown in Q4, partially offset by ongoing market recovery and remain optimistic about long-term prospects, especially in computing and high-bandwidth memory inspection.

As tariffs returned to the spotlight in recent news, I want to reassure everyone that Cohu's current exposure to China remains very limited. Revenue from customers based in China accounts for only a low single-digit percentage of our total consolidated results. Additionally, a substantial share of our business is generated outside of the U.S. further diversifying our global footprint.

Thank you for your attention and continued support. I'll now turn it over to Jeff for a deeper dive into our financial results and Q4 guidance. Jeff?

Thank you, Luis. Before reviewing the third quarter results and providing fourth quarter guidance, please note that my comments refer to non-GAAP figures. Details about non-GAAP financial measures, including GAAP to non-GAAP reconciliations and other disclosures are included in the earnings release and investor presentation on our website.

For Q3 2025, revenue exceeded guidance and reached $126.2 million. Recurring revenue, which is primarily driven by consumables and is more stable than systems revenue accounted for 55% of total revenue for the quarter. During the third quarter, 3 customers, 1 in the mobile segment and 2 in the automotive segment, each represented more than 10% of our sales. The Q3 gross margin was in line with guidance at 44.1%. Operating expenses for the quarter were $48 million, which is $2 million lower than guidance. This reduction was mainly due to the timing of R&D material now scheduled for receipt in Q4.

Net interest income after accounting for interest expense and a small foreign currency loss was approximately $1.1 million for Q3. The tax provision came in about $3.5 million lower than forecast at $11.7 million, resulting from the reversal of tax reserves following the completion of a jurisdictional tax authority audit.

Moving to the balance sheet. Cash and investments decreased by $11.2 million during Q3. This was primarily due to cash used in operations to support a 17% growth in sales quarter-over-quarter and to fund a $33 million increase in accounts receivable. No stock repurchases were completed during Q3. Since the inception of our share repurchase plan, we have repurchased around 4 million shares for approximately $117 million, leaving about $23 million available for additional future repurchases. Total debt stands at $18 million, unchanged from the previous quarter. Q3 capital expenditures were $4 million, mainly for facility improvements.

We're maintaining our 2025 capital expenditure target of approximately $20 million, which includes the $9 million Melaka facility purchase completed in Q1. In late Q3, we announced a strategic convertible notes offering. In early Q4, we completed the upsized offering, raising gross proceeds of $287.5 million at attractive rates, including 1.5% interest rate, 32.5% conversion premium and a 5-year term. We purchased a 100% capped call to limit shareholder dilution until the stock price doubles and exceeds $41 per share. The repayment structure of the notes is net share settlement, meaning Cohu will repay the principal of $287.5 million in cash and has the option to settle any in-the-money amounts in cash, shares or a combination of both. This structure, combined with the up 100% capped call limits shareholder dilution. The net proceeds will provide additional liquidity to strengthen our balance sheet and support strategic initiatives.

Looking ahead to Q4, as Luis noted, we anticipate a seasonal slowdown for systems, which is partially offset by a continued market recovery. Overall, we expect Q4 revenue to be about $4 million or 3.5% lower than Q3, driven by systems revenue. Our resilient recurring revenue is forecasted to increase for the fourth straight quarter and should represent about 60% of total Q4 revenue. Our guidance for Q4 revenue was approximately $122 million, plus or minus $7 million. The gross margin for Q4 is projected at approximately 45%.

Operating expenses are expected to be about $50 million, including around $2 million for variable R&D product development prototype materials. Total operating expenses are consistent with the restructuring plan targets implemented in late Q1 of this year. Once the full impact of the restructuring plan is realized at the beginning of 2026, we anticipate quarterly operating expenses to be approximately $49 million when revenue is around $130 million per quarter. Q4 interest income, net of interest expense and foreign currency impacts is projected to be approximately $1.7 million at current interest rates.

The Q4 tax provision is expected to be about $4 million, and the diluted share count for Q4 is projected to be about 47.1 million shares.

That concludes our prepared remarks, and now we'll open the call to questions.

[Operator Instructions] Our first question comes from Brian Chin with Stifel.

Few questions. 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?

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.

Got it. Maybe just a key on the points you made about the Eclipse handler with the active thermal T-Core subsystem. Kind of what's -- can you help us understand sort of what's driving that win? Is it the higher [indiscernible] now for some of the newer AI processors that's coming out? And does your platform continue to scale? It sounds like with every single kind of every year cadence here now in terms of more advanced and hotter chips kind of coming into introduction? And are you supplanting existing incumbents with that tool?

Yes. Yes, you basically hit the nail on the head. We talk here about 3,000 watts of power dissipation. I mentioned that in my prepared remarks, but that's sort of the current state what would be shipping for production needs in 2026. With that said, the requirements continue to go up, and we're already working on the next-generation thermals that will support 2027 in different sets of applications coming up later next year as well.

So your question is pretty much the answer to it. It's all about the thermal power dissipation and power densities. We never talk about power densities, but power density per square inch of silicon as well. The size of the dies, how delicate and the amount of force you have to apply. So it's all related to that complexity of dynamically controlling heat dissipation on very complex semiconductors actually doing tests.

Maybe just one last quick follow-up. In terms of revenue contribution, is that sort of first half next year? And just compute, I think, has not historically been in recent years, like a double-digit exposure segment, but do you feel pretty comfortable thinking that could be double digits next year for the year?

Double digit, you mean double-digit growth, double-digit from a revenue contribution. If you look from a revenue contribution, I would say -- I would expect computing to be sort of in the low teens. We always talk about systems and recurring, so not counting recurring in the mix here. I'm thinking it would be sort of the low teens percentage contribution of revenue going into 2026.

Our next question comes from David Duley with Steelhead Securities.

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 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?

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 in 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.

So the higher the wattage, the higher the heat, and so that becomes a more and more important. And so I guess it's a fair assumption that going forward, you might have a little bit more exposure on the GPU side with this product, and networking the hyperscaler custom ASIC customers?

That's correct. That's correct. The higher the water, the more complex these things are getting, the more it lands itself to expertise that we have at Cohu. We're being asked by quite a few customers now to address some of their requirements. They're very difficult. I mean, as you can imagine, when you're approaching 3,000, 4,000 watts of power dissipation, this is fairly complex. There aren't that many people out there that have the engineering and the technology to do this. So we're working pretty heavily on it. Needless to say, we're pivoting the business more towards AI applications.

Okay. And then when you think about overall AI exposure in 2025, could you just help us with -- you add up this HBM inspection product and the Eclipse and a few other things. What do you think your revenue stream is that's kind of dedicated to AI in 2025? And I basically assume it was almost next to nothing in 2024?

Yes. I would say it's pretty close to 0 in 2024. The AI -- I mean, the AI here got to be a little careful, right, to talk about AI, everybody tends to think of data centers. But there is actually sort of a blend here of processors that are already running some level of language model in them. And I think if I look at 2025, a little tally here would tally up maybe sort of in the order of $40 million -- approximately $40 million of system revenue this year on things that I could associate with edge AI or data center-related AI, and we expect that to be going into 2026.

Our next question comes from Robert Mertens with TD Cowen.

This is Robert on behalf of Krish Sankar. I guess just the first one, with the recent convertible rate, how are you thinking about the best use of cash between developing some of the new areas of expansion via 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 [indiscernible] cost for the last few quarters?

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.

Got it. Thanks for the color on the latest Eclipse system. Maybe just going back to that, in terms of the areas where that's focused, is that sort of more of a broad based system or any sort of end market and you're just seeing more traction on the compute side, the power and the heat requirements and just end demand in that end market today versus sort of your traditional auto and industrial? Or is that something that audio and industrial customers could start to look into more once their end demand picks back up?

Yes, Robert, the Eclipse is not really a traditional product for industrial applications or other applications. So you could say we can use it for consumer products. We can use it for RFIC test. We can use it for general mobile applications. But we've been really being more selective here with our engineering resources and putting them more around these complex thermal requirements that we see in general AI processor needs. I think they've shared a collection of letters here that people using AI today, right, from XPU, TPU, NPU, APU, GPU. And so we are really focused on that. We're really focused on, look, if it is AI related, whether it's training or inference mode or network mode, backbone network connectivity. That's interesting because it applies or it lands itself well to our thermal technology. It lends itself to where we can differentiate [indiscernible] itself where we can bring value to the table.

So we're being quite selective on where we are deploying the Eclipse right now and the bandwidth that we're deploying against customers that have those challenges. So the product could be used for a variety of other things, not traditionally, not your traditional industrial auto use in this case. And so we're being more focused on AI and use cases.

Our next question comes from [ Dennis Pyatchanin ] with Needham & Company.

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 the systems have guided down?

No, not exactly, Dennis. I mean we had a -- I mean, if you look at our Q3 revenue, mobile 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 past 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.

Great. So on -- so 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?

Yes. There are 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 of a talk from customers that are saying that they are back to the mode of meeting 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 top are starting to improve.

We also see 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 [indiscernible] 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.

Great. And then briefly, could you discuss the gross margin strength sequentially into Q4, even with revenue being done a little bit? What's driving that?

There's a mix component to it, Dennis. 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.

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 just like to note that Cohu will be attending several investor conferences over the next 3 months, The Stifel Midwest Conference on November 6 in Chicago. The New York City CEO Summit Conference on December 16 and the Needham Virtual Conference on January 15 of next year. If you plan to attend any of these conferences, please reach out to your conference contacts or contact us directly to arrange a one-on-one meeting. Thank you for joining today's call, and we look forward to speaking with you again soon.

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