Executive Summary / Key Takeaways

• Cohu is weathering a prolonged semiconductor downturn by strategically focusing on cost controls, preserving R&D, and expanding into high-growth markets like High Bandwidth Memory (HBM), Silicon Carbide (SiC), and AI/Data Center applications.
• The company's differentiated technology, including its DI-Core software suite, new inspection platforms (Krypton, Neon), and advanced power probe cards (cStrider), provides a competitive moat and is key to capturing new design wins and market share.
• Recent financial performance reflects the cyclical trough, with Q1 2025 revenue of $96.8 million and a non-GAAP loss of $0.02 per share, but management's Q2 2025 guidance signals a potential turning point with a projected 10% sequential revenue increase driven by recurring orders and HBM systems.
• A global restructuring program is underway to optimize the cost structure, with expected quarterly operating expense savings beginning in Q2 2025 and fully realized by early 2026, positioning Cohu for improved profitability as revenue recovers.
• While core automotive and industrial markets face ongoing inventory correction, Cohu's strategic pivot, coupled with signs of recovery in mobile and computing segments and strong liquidity, supports an outlook for year-over-year growth in 2025.

Setting the Stage: A Semiconductor Test Veteran Adapts

Cohu, Inc., a company with roots stretching back to 1947, has evolved into a global supplier of semiconductor test and inspection equipment and services. Operating within the highly cyclical semiconductor capital equipment industry, Cohu provides essential solutions including test handlers, automated test equipment (ATE), interface products like test contactors and probe cards, inspection metrology systems, and increasingly, data analytics software. The company's business model is characterized by two main revenue streams: volatile capital equipment (systems) driven by customer capacity expansion, and more stable recurring revenue from consumables, spares, services, and software, which demonstrates approximately one-third the volatility of systems revenue.

The industry is currently navigating a significant downturn, marked by global macroeconomic headwinds, slowing end-market demand, and substantial inventory correction across key segments. This environment has pressured Cohu's traditional markets, particularly automotive and industrial, and led to depressed test cell utilization rates at customer facilities, which remain below the threshold typically needed to trigger large capital equipment orders.

In this challenging landscape, Cohu competes with larger, more diversified players like Teradyne (TER) and Advantest (ATEYY), which hold significant market share in automated test equipment and handlers, as well as specialized competitors like FormFactor (FORM) in the interface solutions space. While Teradyne and Advantest often boast superior scale, faster processing speeds (Teradyne systems can be 20-30% faster, Advantest 25-35% more efficient in package testing), and higher profitability margins (gross margins typically 50-60% vs. Cohu's 44-47% in recent quarters), Cohu differentiates itself through cost efficiency, specialized niche technologies, and a growing software offering. Cohu's solutions may offer 10-15% lower per-unit operating costs due to efficient thermal subsystems and a global service network.

A key strategic response to this competitive environment and market cycle has been Cohu's deliberate focus on expanding its addressable market (SAM) through targeted R&D and new product introductions aimed at high-growth areas less impacted by the current downturn. This strategy, alongside efforts to optimize its operational cost structure, forms the core of Cohu's investment thesis during this period.

Technological Differentiation and Strategic Expansion

Cohu's competitive positioning is increasingly underpinned by its differentiated technology portfolio, which extends beyond traditional handlers and testers into advanced inspection and software solutions.

The company's DI-Core software suite, enhanced by the recent acquisition of Tignis, represents a significant technological moat. DI-Core provides real-time performance monitoring and predictive maintenance for equipment, while the integration of Tignis' artificial intelligence (AI) process control and analytics software adds advanced predictive and prescriptive automation capabilities. This AI-powered platform is designed to optimize manufacturing yield and productivity, a critical need for semiconductor manufacturers. Management estimates the total available market for data analytics in back-end semiconductor manufacturing to be approximately $600 million and believes there is an opportunity to grow Cohu's software revenue at an annual rate of 50% or more over the next three years. This subscription-based software not only adds a high-margin recurring revenue stream but also strengthens customer stickiness by demonstrating tangible yield and productivity gains.

In inspection metrology, Cohu has introduced new platforms like Krypton and Neon. Krypton targets larger semiconductor devices and has secured a major customer benchmark award potentially worth $100 million over five years, as well as a selection for an aerospace application. Neon is specifically configured for High Bandwidth Memory (HBM) inspection, a rapidly growing market segment driven by AI and data center demand. The HBM market is estimated at $23 billion today with a projected 22% CAGR through 2029, and the HBM inspection market alone is estimated at $100 million and expanding rapidly. Neon's technology enables full 6-sided optical inspection and measurement of micro pillars, leveraging Cohu's AI inspection technology for yield optimization. The company received its first HBM inspection system order in Q3 2024, shipped it in Q4 2024, and received a repeat multi-unit order in early Q1 2025 expected to ship mid-year. Cohu sees the potential for $7 million in HBM revenue in 2025 and expects this to grow in 2026. While competitors like Hanmi are significant players in this space, Cohu's entry with Neon positions it to capture a portion of this fast-growing market.

Cohu is also expanding its presence in the Silicon Carbide (SiC) market, which is projected to grow at a 25% CAGR through 2029. The company's new cStrider power probe card utilizes unique patented horizontal MEMS technology designed for high voltage and high current testing at the probe level, enabling multi-site testing of SiC IGBT products. This technology offers improved performance and durability compared to alternatives. Furthermore, Cohu has developed a die-level burn-in solution for SiC, selected by a leading European customer. This solution is expected to significantly improve yield and productivity by eliminating losses from burning in known bad dies on a wafer, effectively displacing less efficient wafer burn-in processes. This die-level burn-in opportunity is estimated to be a $150 million market at large, and the power probe card opportunity with the initial customer is estimated at $2 million per year.

These technological advancements and market expansion efforts are critical for Cohu to differentiate itself from larger competitors and capitalize on growth pockets within the broader semiconductor market, contributing to future revenue growth and margin expansion.

Financial Performance and Operational Resilience

Cohu's recent financial performance reflects the challenging market conditions that persisted through fiscal 2023 and 2024. Full year 2024 revenue was $401.8 million, a significant decrease from prior peak years, resulting in a GAAP net loss of $69.8 million. The first quarter of fiscal 2025 continued to show the impact of the downturn, with net sales of $96.8 million, down 10.1% year-over-year. This decline was primarily driven by lower demand in the automotive, industrial, and mobile segments, although partially offset by increased demand in AI-based computing applications. The company reported a GAAP loss of $30.8 million ($0.66 per share) and a non-GAAP loss of $0.8 million ($0.02 per share) in Q1 2025.

Despite the revenue pressure, Cohu has demonstrated resilience in its gross margin, which stood at 43.7% in Q1 2025 and 45% for the full year 2024 (non-GAAP). This is supported by the stable, high-margin recurring revenue stream, which accounted for 63% of total net sales in Q1 2025. While Q1 2025 gross margin saw a slight decline due to lower volume impacting fixed cost absorption, the company's differentiated products and cost optimization efforts have helped maintain profitability relative to revenue levels.

Operating expenses increased in Q1 2025 to $49 million (non-GAAP forecast), partly due to the inclusion of Tignis operations and typical Q1 labor cost resets. However, Cohu initiated a strategic restructuring program in late February 2025, including consolidating manufacturing to Asia factories and reducing headcount in the U.S. and Europe. This program is expected to yield approximately $2 million in quarterly cost savings once fully implemented by early 2026, with benefits starting in Q2 2025. Management models quarterly operating expenses to be around $47 million at $100 million revenue and $49 million at $130 million revenue post-restructuring.

Liquidity remains a strength for Cohu. As of March 29, 2025, cash and investments totaled $201 million. While this decreased by $61 million from the prior quarter due to the Tignis acquisition ($35 million), share repurchases ($9 million), and cash used in operations ($10 million), the company believes its liquidity sources are sufficient to meet anticipated cash requirements for at least the next 12 months.

Cohu continues to return capital to shareholders through its share repurchase program, with $22.8 million remaining available as of Q1 2025, although the program is paused for Q2 2025. Total debt increased slightly to $17.7 million in Q1 2025, primarily related to financing the purchase of a facility in Malaysia.

Outlook and Path to Recovery

Cohu's outlook, particularly for the second quarter of fiscal 2025, signals a potential turning point after a prolonged period of revenue contraction. Management guided for Q2 2025 revenue of $106 million plus or minus $7 million, representing a projected 10% sequential increase. This anticipated growth is driven by recent increases in recurring revenue orders, predominantly within the mobile segment (though concentrated), and initial shipments of HBM inspection systems. This marks the first time in approximately 3.5 years that Cohu has guided for a quarter to be up year-over-year, a development management views as a "noticeable turn of corner."

While cautious, management expects 2025 to be a year of year-over-year growth for Cohu. The strategic focus on new products and market expansion is expected to contribute meaningfully to this growth. Quantifiable contributions in 2025 are anticipated from HBM inspection systems ($7 million), Silicon Carbide power probe cards and die burn-in (estimated $5 million), and a significant Diamondx tester win at an automotive customer ($10-15 million), totaling an estimated $25-30 million in incremental revenue from these specific initiatives this year. The software business, including Tignis, is expected to grow rapidly but contribute less materially to revenue in 2025, with more detailed projections anticipated around the Q3 earnings timeframe.

The recovery is expected to be phased by market segment. Mobile and computing are showing signs of improvement, with demand expected to materialize in the latter half of 2024 and early 2025. Industrial is likely to follow, potentially recovering in the first half of 2025. The automotive market, which was the last to enter the downturn, is expected to be the last to recover, with the timing of its turn remaining a key variable, potentially in Q1 or Q2 2025. Test cell utilization, while improving sequentially in some segments, remains below the level needed for broad capacity orders, suggesting that a surge in spares demand may precede a significant increase in equipment orders.

The restructuring program is crucial to improving profitability as revenue recovers. The expected cost savings, combined with the higher gross margins associated with new, differentiated products and the stable recurring revenue base, position Cohu for improved operating leverage as the cycle turns.

Risks and Challenges

Despite the positive signs and strategic positioning, Cohu faces several risks and challenges. The most significant remains the cyclical nature of the semiconductor industry and the dependence on customer capital expenditures. The duration and depth of the current downturn, particularly the pace of inventory correction in the automotive and industrial markets, could impact the timing and strength of the recovery. While management sees signs of improvement, a prolonged period of low test cell utilization would continue to pressure system sales and could even lead to further cannibalization of the installed base, impacting recurring revenue from spares and services.

Competition is intense, with larger players like Teradyne and Advantest possessing greater scale, R&D budgets, and market share. Cohu must continue to innovate and execute on its differentiated technology roadmap to maintain and grow market share against these formidable rivals. The success of new product introductions in HBM, SiC, and software is critical to achieving growth targets and offsetting weakness in traditional markets.

Global macroeconomic and geopolitical factors, including changes in trade policies and tariffs, could also impact Cohu's business. While management currently believes tariffs will not have a measurable direct impact on COGS due to their Asia-based supply chain and shipping terms, the broader impact on customer demand and the global semiconductor market remains a risk. Foreign currency exchange rate fluctuations also pose a risk, impacting reported earnings and the value of foreign investments, although hedging strategies are employed to mitigate some of this exposure.

Finally, the company's reliance on critical accounting estimates, particularly related to inventory valuation, income taxes (including the valuation allowance against U.S. deferred tax assets), and the assessment of goodwill recoverability, introduces potential volatility in reported financial results. A sustained decline in Cohu's market capitalization below its book value could necessitate an interim goodwill impairment review, potentially resulting in a significant charge.

Conclusion

Cohu is navigating a challenging period in the semiconductor cycle, marked by depressed demand and inventory correction in its core markets. However, the company is not merely waiting for a market recovery; it is actively positioning itself for future growth through strategic investments in differentiated technologies and expansion into high-potential segments like HBM, Silicon Carbide, and AI/Data Center applications.

The strength of Cohu's recurring revenue base provides a degree of resilience during the downturn, while new products like Neon for HBM inspection, the cStrider power probe card, and the enhanced DI-Core software suite offer tangible opportunities to capture new design wins and market share. The restructuring program is expected to improve the cost structure, enhancing profitability as revenue rebounds.

While significant risks remain, particularly the timing and pace of the broader market recovery and intense competition, the sequential revenue increase guided for Q2 2025, driven by new product traction and a pickup in recurring orders, suggests that Cohu may be nearing an inflection point. Investors should monitor the trajectory of test cell utilization, the successful ramp and adoption of new products, and the realization of cost savings from the restructuring program as key indicators of Cohu's path towards sustained growth and improved profitability in the coming cycle.