Executive Summary / Key Takeaways

• Strategic Pivot to AI and Data Centers: Cohu is aggressively repositioning its business towards high-growth AI and data center applications, leveraging its advanced thermal control handlers and HBM inspection tools. This strategic shift is expected to drive significant system revenue growth, with approximately $40 million in AI-related system revenue projected for 2025, growing into 2026.
• Technological Differentiation in High-Power Testing: The company's Eclipse handler, with its proprietary active thermal control (ATC) supporting up to 3,000 watts, and Neon HBM inspection tools, are critical differentiators for next-generation AI processors and high-bandwidth memory, offering a "future-proof platform" to customers.
• Resilient Recurring Revenue and Operational Efficiency: Cohu's stable recurring revenue stream, comprising over half of its total sales, provides consistent cash flow and profitability resilience, offsetting cyclical system revenue volatility. Ongoing restructuring initiatives are set to further optimize manufacturing and operating expenses, targeting quarterly OpEx of approximately $49 million at $130 million revenue by early 2026.
• Strengthened Balance Sheet for Strategic Growth: A recent $287.50 million convertible senior notes offering has significantly bolstered liquidity, providing capital for strategic initiatives, including potential acquisitions, and enhancing financial flexibility to pursue long-term growth.
• Cautious Optimism Amidst Market Recovery: While anticipating a seasonal slowdown in Q4 2025 systems revenue, management remains optimistic about long-term prospects, particularly in computing and HBM inspection, as test cell utilization shows signs of industry recovery.

The Strategic Evolution of Cohu: Powering Next-Gen Semiconductors

Cohu, Inc., established in 1947, has evolved into a pivotal supplier of test and inspection metrology systems and data analytics software, essential for optimizing semiconductor manufacturing yield and productivity. The company's journey, marked by strategic acquisitions like Xcerra in 2018, has positioned it at the forefront of semiconductor testing. Today, Cohu is undergoing a significant strategic pivot, aggressively targeting the burgeoning high-performance computing (HPC) and artificial intelligence (AI) markets, while simultaneously enhancing its operational efficiency and financial flexibility.

The company's core business is segmented into Systems (capital equipment like test handlers, testers, and inspection systems) and Recurring revenue (consumables, services, and software). This dual-revenue model provides a foundational stability, with recurring revenue historically demonstrating lower cyclicality. Cohu's overarching strategy now centers on expanding its served available market (SAM) through new product investments, particularly in data center and Edge AI applications, to counteract the ongoing inventory correction in its traditional automotive, industrial, and mobile segments.

Technological Edge in High-Performance Testing

Cohu's competitive advantage is deeply rooted in its differentiated technology, which addresses the increasingly complex demands of advanced semiconductor manufacturing. The company's Eclipse handler stands out with its proprietary T-Core Active Thermal Control (ATC) solution. This technology is critical for testing next-generation AI processor devices, capable of managing power dissipation up to 3,000 watts with ultrafast temperature ramp rates and tight thermal guard bands. This quantifiable capability is a key differentiator, enabling the Eclipse platform to scale seamlessly across diverse power applications and support customers' evolving high-performance processor roadmaps. Customers are seeking a "future-proof platform" that can handle escalating power requirements over multiple product cycles, a need Cohu's Eclipse is designed to meet.

In the realm of memory, Cohu's Neon HBM inspection tools are gaining significant traction. These systems are vital for the inspection and metrology of high-bandwidth memory (HBM) devices, which are indispensable components in HPC and generative AI applications. The company has shipped its first system configured for HBM4 inspection, reinforcing its optimism for future market prospects in this critical area. For 2025, Cohu projects HBM inspection revenue to be between $10 million and $11 million, a testament to its early success and technological relevance in this high-growth segment.

Beyond handlers and inspection, Cohu's Diamondx tester is making inroads in mixed-signal test markets. The recently launched PD3x instrument, an upgrade to the Diamondx, offers unmatched precision and scalability for high-density flat panel display solutions, capable of measuring ultra-low currents and voltages across 320 channels simultaneously. This instrument is already deployed by leading display driver IC market vendors, supporting advanced OLED displays in smartphones and AR devices. Furthermore, Cohu has qualified and received initial orders for its power probe cards for silicon carbide (SiC) IGBT products. This unique, patented technology is designed for very high voltage testing at the probe level, enabling multi-site testing of high-voltage die applications and addressing a critical need in the growing SiC market.

Software and AI: The Future of Semiconductor Manufacturing Optimization

A cornerstone of Cohu's long-term strategy is its expanding software business, particularly through the acquisition of Tignis, Inc. on January 7, 2025. Tignis provides artificial intelligence (AI) process control and analytics-based monitoring software, which is intended to significantly expand Cohu's analytics offerings in the semiconductor process control market. Tignis's PAICe Monitor and PAICe Maker solutions leverage cutting-edge AI, machine learning (ML), and data science to deliver advanced predictive and prescriptive automation for semiconductor manufacturing. This acquisition deepens Cohu's expertise in data science and adds advanced analytics to its existing DI-Core software.

Cohu believes there is a substantial opportunity to grow its software revenue at an annual rate of 50% or more over the next three years. This ambition is fueled by the industry's increasing demand for solutions to optimize yield and productivity using AI-powered process control and data analytics. As the CFO of TSMC (TSM) noted, a 1% productivity improvement can drive $1 billion in value for their business, highlighting the immense potential of this market. Cohu's DI-Core, which provides real-time online performance monitoring and process control, is being augmented by Tignis's AI capabilities to expand predictive maintenance beyond Cohu's own equipment to the broader semiconductor back-end space.

Competitive Landscape and Strategic Positioning

Cohu operates in a competitive landscape dominated by major players like Teradyne (TER) and Advantest (ATEYY), and specialized firms such as FormFactor (FORM). While Teradyne and Advantest often hold advantages in overall scale and technological breadth for high-volume applications, Cohu strategically differentiates itself through specialized offerings and a strong focus on software integration.

Cohu's Eclipse handler with its advanced thermal control provides a distinct advantage in the high-power testing segment, where few competitors possess the engineering and technology to handle 3,000-4,000 watts of power dissipation. This specialized expertise allows Cohu to address critical customer requirements for next-generation AI processors, potentially leading to market share gains in this high-value niche. The company's DI-Core software suite and its integration with Tignis's AI capabilities offer a unique value proposition for end-to-end solutions, enhancing operational efficiency and fostering stronger customer loyalty. This software moat helps Cohu compete against hardware-centric rivals by offering qualitatively faster innovation cycles in data-intensive applications.

However, Cohu faces vulnerabilities, including a potentially narrower product range compared to larger, more diversified competitors and exposure to supply chain dependencies. These factors could impact its ability to compete on cost or speed in broader market segments. Barriers to entry in the semiconductor test equipment industry, such as high R&D requirements and regulatory complexities, help Cohu defend its position and protect its financial performance. The company's strategy of focusing on customer-specific adaptability and specialized services allows it to carve out a strong position, particularly as the industry shifts towards more complex, high-performance devices.

Financial Performance and Operational Discipline

Cohu's recent financial performance reflects both the challenges of an industry downturn and the early benefits of its strategic initiatives. For the third quarter of fiscal 2025, net sales increased 32.40% year-over-year to $126.20 million, primarily driven by stronger demand for mobile and AI-based computing applications. This growth helped offset ongoing pressures in the automotive, industrial, and consumer segments. For the first nine months of fiscal 2025, net sales grew 7.50% to $330.70 million.

Despite revenue growth, the gross margin for Q3 2025 was 43.80%, a decrease from 46.80% in the prior year. This was attributed to the mix of systems sold and increased manufacturing employee compensation and inventory charges related to the strategic transition of manufacturing activities to Asian factories. For the first nine months, gross margin declined to 43.70% from 45.80%. Research and development (R&D) expenses increased in Q3 2025 due to higher material costs for new product development and an additional $1 million from the Tignis business, underscoring Cohu's commitment to innovation. Selling, general, and administrative (SGA) expenses also rose, driven by higher business volume and $0.40 million in incremental costs from Tignis.

Operational discipline is a key focus, with Cohu implementing a global restructuring program in Q1 2025. This program, which includes consolidating operations and headcount reductions, is expected to yield quarterly cost savings of approximately $2 million (split between manufacturing overhead and operating expenses) once fully implemented in 2025. Total restructuring charges for the first nine months of fiscal 2025 amounted to $8.30 million. These efforts aim to optimize the cost structure and improve profitability, with a target of approximately $49 million in quarterly operating expenses when revenue reaches around $130 million per quarter by early 2026.

From a liquidity perspective, Cohu's primary source of capital has historically been cash flow from operations. Net cash used in operating activities for the first nine months of fiscal 2025 was $8.10 million, impacted by working capital changes, including a $28.50 million increase in accounts receivable.

To bolster its financial position and support long-term growth, Cohu successfully completed a $287.50 million offering of 1.50% convertible senior notes due 2031 on September 29, 2025. This move significantly strengthened the balance sheet and enhanced strategic flexibility, including the ability to pursue meaningful acquisitions. Capped call transactions were also executed to mitigate potential shareholder dilution upon conversion of the notes. As of September 27, 2025, $22.80 million remained available under the company's share repurchase program.

Outlook and Risks

For the fourth quarter of fiscal 2025, Cohu anticipates revenue to be approximately $122 million, plus or minus $7 million, representing a seasonal slowdown in systems revenue. However, recurring revenue is forecasted to increase for the fourth consecutive quarter, expected to comprise about 60% of total Q4 revenue. The gross margin for Q4 is projected at approximately 45%, benefiting from the resilient recurring business. Operating expenses are expected to be around $50 million, including $2 million for R&D prototype materials. Net interest income is projected at $1.7 million, with a tax provision of approximately $4 million. The diluted share count for Q4 is projected to be about 47.1 million shares.

Management remains optimistic about long-term prospects, particularly in computing and high-bandwidth memory inspection, driven by increasing customer traction for AI-based applications. Test cell utilization, which stood at 74.5% at the end of September, indicates a potential industry recovery. Cohu's exposure to China remains limited, accounting for a low single-digit percentage of total consolidated results, and the company does not anticipate a material direct impact from tariffs due to its Asia-based supply chain and customer-as-importer-of-record shipping terms.

However, investors should be mindful of several risks. A sustained decline in Cohu's market capitalization below its book value could trigger a goodwill impairment review, negatively impacting results. The current financial market volatility directly affects fair value measurements, requiring significant judgment. The company's indebtedness, while recently restructured, could reduce flexibility and increase borrowing costs, with potential default or refinancing risks. Provisions in the convertible notes could also deter takeovers, and the capped call transactions, while mitigating dilution, could still affect common stock trading prices. Furthermore, counterparty risk exists with the hedge and option counterparties for the convertible notes.

Conclusion

Cohu is undergoing a transformative period, strategically pivoting its core business towards the high-growth segments of AI and data center infrastructure. The company's differentiated technologies, particularly the Eclipse handler's advanced thermal control and Neon HBM inspection tools, are critical enablers for next-generation semiconductor testing, providing a robust competitive moat. Coupled with a resilient recurring revenue stream and a disciplined approach to operational efficiency through restructuring, Cohu is building a more robust and future-oriented business model.

The recent convertible notes offering significantly strengthens Cohu's financial foundation, providing the necessary capital to fuel its strategic growth initiatives and explore opportunistic acquisitions. While the semiconductor industry's cyclical nature and ongoing inventory corrections present near-term challenges, Cohu's focused investments in AI-driven solutions and its ability to adapt to evolving market demands position it for a compelling long-term growth trajectory. Investors should closely monitor the continued traction of its new AI-focused products and the realization of operational efficiencies as key indicators of its successful transformation.