COHU - NASDAQ

Good day, and thank you for standing by. Welcome to Cohu, Inc.'s Fourth Quarter 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that I would now like to hand the conference over to your speaker today, Jeffrey D. Jones, Chief Financial Officer. Please go ahead.

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 one 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 one-time 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 are 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 a 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, Inc. will repay the principal of $287.5 million in cash. The banks cover the capped call up to $41 per share, and thereafter, Cohu, Inc. 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 are 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. We will now open for questions.

Luis, I wanted to go back to the order activity in the fourth quarter.

primarily handlers,

Yes. I think, well, you are absolutely right about the recurring orders, Luis, and the portion that is 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 is really the system shipments showing up in Q1 and Q2, Craig.

Got it. Thanks for that, Jeff. 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 one-time 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 is helpful, guys. Thank you.

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

Yes. Thanks for taking my question.

more than one customer actually for that system.

Okay. And then

when you think about 2026 and just whatever revenue profile, you know, it is obviously going to grow. But I am just kind of wondering how you might think about the first half versus the second half. And, you know, it seems like you have strong order momentum, and, you know, you kind of buck seasonal trends in the first quarter here.

Okay. Excuse me. Jeff, if you could just comment

on how the gross margin profile should look throughout the year with the higher revenues expected in Q2 and Q3.

Yeah. Absolutely, Dave. So just go back to my

model here and kind of reference. Maybe I will just reference the analyst consensus as well, which let us just call it roughly $130 million Q2 and Q3. So at that level of revenue, $130 million a quarter, gross margin should be driven to the high 46% range, 46.7%, 46.8%, that range.

And then as we get into, you know,

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

you know, I think

many

Added about how we are answering 2026. It should be should be a good year. We are 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 some of market recovery. And so we couple that with utilization and it looks like it is all headed in the right direction. Alright. Thank you. Thank you. One moment for our next question.

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

Thank you. One moment for our next question. Our next question comes from the line of Brian Edward Chin from Stifel.

Okay. Great. Thank you. Thank you. One moment for our next question. Our next question comes from the line of Denis Pyatchanin from Needham and Company.

Hi, Denis. 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 am starting to think that, you know, we do not typically forecast utilization, but starting to believe that that may flip. I think utilization may go up a bit. But I am thinking the OSATs may be going up faster than the IDMs, at least as an early view of the first quarter. We will see how that really ends up in March.

Have a good day.