Cohu, Inc. Aktie

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.

Good day, and thank you for standing by. Welcome to Cohu's Second 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 Jeff Jones, Chief Financial Officer. Please go ahead.

Good afternoon, and welcome to our conference call to discuss Cohu's second quarter 2025 results and third quarter 2025 outlook. I'm joined today by our President and CEO, Luis Muller. If you need a copy of our earnings release, you may access it from our website at cohu.com or by contacting Cohu Investor Relations. There's also a slide presentation in conjunction with today's call that may be accessed on Cohu's website in the Investor Relations section. Replays of this call will be available via the same page after the call concludes.

Now to the safe harbor. During today's call, we will make forward-looking statements reflecting management's current expectations concerning Cohu's future business. These statements are based on current information that we have assessed, but which, by its nature, is subject to rapid and even abrupt changes. We encourage you to review the forward-looking statements section of the slide presentation and the earnings release as well as Cohu's filings with the SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, July 31, 2025, and Cohu assumes no obligation to update these statements for developments occurring after this call.

Finally, during this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings release and slide presentation for a 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?

Hello, everyone, and welcome to our quarterly earnings call. I'm excited to share our second quarter results and third quarter guidance with you.

First off, let's talk about some highlights. Our estimated test cell utilization increased by 3 points quarter-over-quarter to 75%, which historically indicates the industry is entering a recovery cycle. Orders improved quarter-over-quarter, driven primarily by the mobile end market. This reflects the growing demand for our innovative solutions and our ability to meet the evolving needs of our customers. We also secured our first system order from a customer in India for silicon carbide test, opening a new geographical opportunity for our products.

Additionally, we have a revenue stream opportunity of approximately $20 million in the precision analog market with the qualification of the Ultra-S contactor from a leading IDM customer. This qualification is a critical step in expanding our footprint in the precision analog space and underscores our commitment to delivering high-quality, reliable solutions. Moreover, we're introducing the new Eclipse handler model, a configurable platform targeting share expansion at test subcontractors. The Eclipse handler is designed to provide unparalleled flexibility and efficiency, making an ideal solution for a wide range of applications.

Now let's dive into the detailed results. Our revenue for the second quarter of 2025 was just under $108 million with a non-GAAP gross margin of 44.4%. The revenue split was 63% recurring and the balance for systems. We saw a sequential increase in Cohu systems revenue across mobile, computing and industrial segments. Utilization improved across all segments, ranging from 2 to 4 points increase in each of our end markets.

Our Eclipse test handler has been upgraded to enhance versatility and configurability across various applications, including passive, ATC mobile, computing and automotive. During the second quarter, we secured a $28 million design win order from -- for our Eclipse handler from an existing customer for mobile and automotive end markets. This expands our presence at this customer to better cover their future test requirements. The order ships over multiple quarters this year, and we anticipate follow-on business in 2026, subject to this customer's growth in the market. Additionally, we landed $3.5 million in new customer wins in Q2, spanning testers, handlers and inspection systems.

Cohu is also enabling the future of display technology from larger automotive screens to ultrabright mobile displays and lightweight wearable interfaces. Our advanced test solutions are critical for cutting-edge OLED displays in smartphones and emerging AR devices.

We recently launched the PD3x instrument, the latest upgrade to our high-density flat panel display solution on our Diamondx tester. The PD3x offers unmatched precision and scalability, capable of measuring ultra-low currents and voltages across 320 channels simultaneously. This instrument is already deployed by the two leading vendors in the display driver IC market with production at major OSATs in Korea, Taiwan and China. We test display drivers that support a wide range of display formats, including foldable and automotive-grade panels.

As I previously mentioned, our interface business captured an important design win in the precision analog semiconductor test with the qualification of our new Ultra-S contactor. Ultra-S was in development by the EQT team in Singapore when we completed the acquisition in late 2023 and now adding to Cohu's revenue and innovative reputation. This design win is a significant milestone that highlights our ability to innovate and deliver solutions that meet the stringent requirement of the precision analog market.

Our software business booked $360,000 in Q2 with annual recurring revenue opportunity or ARR, of $530,000. We continue to run evaluations and proof of concepts, demonstrating yield and overall equipment efficiency improvements with our software solutions. Although this is a long journey ahead, customers continue to show interest and explore the new value creation in manufacturing using fault detection and artificial intelligence-driven process control and optimization in semiconductor test.

Our software solutions include DI-Core and Tignis pace monitor and pacemaker. DI-Core is designed to provide real-time data analytics and insights, enabling customers to make informed decisions and optimize their test processes. Tignis, on the other hand, leverages advanced machine learning algorithms to predict and prevent potential process deviations, ensuring the highest levels of reliability and performance.

Looking ahead, we're optimistic about the prospects for 2026. We're focusing on capturing new customer opportunities and investing in new products and configurations to address future market needs. Our manufacturing team is in the final stretch of completing the transfer of the remaining product manufacturing from the U.S. and Europe to our Asian factories, which will help consolidate and drive further efficiencies in future quarters.

We recognize the market recovery will not be linear, and we're likely to see some seasonal slowdown again in Q4 this year, but we're optimistic about our prospects, especially with our growing exposure in computing with service and data center processor test and HBM inspection.

Thank you for your attention. Let me now give it over to Jeff for further details on last quarter's results and next quarter's guidance. Jeff?

Thanks, Luis. Before I walk through the Q2 results and Q3 guidance, please note that my comments that follow all refer to non-GAAP figures. Information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures are included in the accompanying earnings release and investor presentation, which are located on the Investor page of our website.

Now turning to the Q2 financial results. Revenue for the quarter was $107.7 million and in line with guidance. Recurring revenue, which is largely consumable-driven and more stable than systems revenue, represented 63% of total revenue in Q2. During the second quarter, no customer accounted for more than 10% of sales. Q2 gross margin was 44.4% and in line with guidance.

Operating expenses for Q2 were $47.7 million, also in line with guidance. Q2 interest income net of interest expense and a small foreign currency loss was approximately $900,000. The Q2 tax provision was approximately $300,000 and non-GAAP EPS for the second quarter was $0.02.

Moving to the balance sheet. Overall cash and investments increased by $8 million during Q2 to $209 million due primarily to $16 million of cash flow from operations. No stock repurchases were completed in Q2. From inception of our share repurchase plan through Q1 2025, we have repurchased approximately 4 million shares for $117 million, leaving $23 million available for us to repurchase additional shares in the future. Total debt of $18 million is flat quarter-over-quarter. Q2 CapEx was $2.7 million and consists primarily of facility improvements. We're maintaining an annual CapEx target of $20 million, including the $9 million Melaka facility purchase in Q1.

Cohu's balance sheet continues to demonstrate strength overall, supporting our ability to invest in expanding served markets and enhancing our technology portfolio in line with our growth strategy. In addition, we remain committed to returning capital to shareholders via our share repurchase program.

Now moving to our Q3 outlook. Recent system orders for mobile and automotive test are driving a 16% increase in revenue quarter-over-quarter. Total recurring revenue is expected to be flat quarter-over-quarter, and we're guiding Q3 revenue to be approximately $125 million, plus or minus $7 million. The gross margin for the third quarter is projected to be approximately 44%. The Q3 revenue mix is expected to consist of approximately 47% from systems, mainly test automation systems for the mobile market, and about 53% from recurring revenue.

Q3 operating expenses are projected to be about $50 million, which includes around $2 million for variable R&D product development prototype materials. Total operating expenses are in line with the restructuring plan targets that were implemented in late Q1 of this year. Once the full impact of the restructuring plan has taken effect in the beginning of 2026, we expect quarterly operating expenses to be approximately $49 million per quarter when revenue is approximately $130 million. We're projecting Q3 interest income, net of interest expense and foreign currency impacts, to be approximately $900,000 at current interest rates.

The recent enactment of the One Big Beautiful Bill introduces changes to capitalized R&D, resulting in a midyear adjustment to Cohu's tax provision methodology. Consequently, a onetime year-to-date true-up will be recorded in Q3. Including this true-up, we anticipate that our Q3 tax provision will be approximately $15 million. For the full year 2025, the methodology change yields the same annual tax provision, but the quarterly amounts will differ. In Q4, we expect the effective tax rate to be in the 30% to 35% range. The basic share count for Q3 is expected to be approximately 46.8 million shares.

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

[Operator Instructions] Our first question will come from the line of Brian Chin with Stifel.

Can you hear me?

Yes.

Maybe first one, just to break down the $28 million order. Can you give us a sense of sort of timing across 3Q, 4Q? How much of a contributor to the sequential increase in Q3 is that? And also, is that -- in terms of the origin of that business, is it sort of tied into the utilization rate increases? Is it maybe like a market share shift in favor of that particular customer? And maybe is it more like digital handling? Or is it kind of different products?

Brian, so I'll handle the first part of that question. And in Q2, we shipped and recognized about $4 million of that order. We will ship and recognize about $12 million in each Q3 and Q4.

And to follow on your second part of the question here, Brian, this is essentially digital in the mobile space, digital. And it's a business expansion. For us, it's a business expansion, which we classify as design win at an existing customer. Now I believe that, that customer is doing well in the market. I think their business is good. But for us, this is a business expansion.

Okay. And then maybe to expand it out a little bit. I heard the discussion around maybe a seasonal down Q4 in the business, but kind of being encouraged by the trend on the utilization rates that you're seeing. Maybe building off that in particular, so Q3, maybe recurring is up a little bit. It sounds like this new order -- significant order could be a good chunk of the system revenue increase. What else is giving you encouragement here that there'll be more breadth kind of beyond a customer to -- obviously, utilization rate in itself is part of that. But what else can you sort of provide as backstory there in terms of why you think some of these trends can kick on here beyond second half?

Yes. We've seen orders sequentially improve across all segments in Q2, Brian, except for computing actually, as I look at the data here. Mobile obviously was up significantly, driven by this customer order, this design win. But we also had a sort of a decent increase, actually more than 100% in the automotive and industrial segments in Q2. I'm talking orders. A small -- very small increase in the consumer space and a very small decrease or lower in the computing space.

So we're seeing not only utilization picking up across market segments, but we're also seeing orders starting to pick up. And I'm talking systems, predominantly systems here. We've seen some green shoot orders from customers that have been mostly dormant for the last 2 years in the automotive market. So overall, I think we are in a recovery trajectory cycle. But with that said, it's a little early to call, but we think that there will be that typical slowing down towards the end of the year and the fourth quarter before things continue on.

So that's why I made the comment. Recovery seems to be forming, very encouraged by utilization pickup and the pickup in order across markets. But as always, this is not a linear story, right? There will be two steps forward, one step back and before taking another three steps forward. That's the nature of this industry.

Got it. Maybe just one last thing for me. I think in prior calls, you've talked about and referenced here some of the product expansions, new products and customer wins that irrespective of cyclical conditions would drive $30 million, $35 million, maybe $40 million of revenue this year. Are you still on track to achieve that within these numbers?

Yes. Yes. We're doing really well on a -- we had a tester design win. I think it was at the end of last year, actually, that we've been in deployment stage throughout this year. We will continue throughout the rest of this year. That is doing extremely well. Very, very happy with that story. We're getting qualified -- not qualified, but getting new products, applications designed into the platform, into the Diamondx.

We have had very good success in HBM, as I talked about earlier. We're projecting on the order of $7 million of revenue this year, could possibly be more, but it really depends on the timing of the next round of orders. Very excited here by this qualification in precision analog with contactors. So yes, really happy with the design win story, counting on those customers being successful in driving increasing capacity needs for test and even inspection for our equipment going into next year.

Our next question comes from Charles Shi with Needham & Company.

First off, I really want to congrats on the $28 million order from one particular customer. And based on what you just broke down for us, the quarterly distribution, it looks like you're going to have a 10% customer for the next 2 quarters, really -- I mean, almost 10%. Really congrats on that.

So I kind of want to circle back to this $28 million order. Given the size of this order, kind of curious why is it happening now? Is it product cycle related? And the size of it, do you think there's any factors like tariffs like -- or the worry about tariffs because we don't exactly know where you're shipping the $28 million orders from and to where. But would there be any tariff-driven temporary factors that cause a little bit of pull in for this particular batch of shipments?

No, I don't think there is any tariff implications in this order, by the way. We know exactly where we're shipping our products and we're in the process of installation. Some of it was already installed in the second quarter -- towards the end of the second quarter. And we have a pretty decent idea where this customer is shipping their products that are running through our equipment as well. Don't see anything related with tariffs there. I see more things related with edge AI deployment in the mobile space for a good chunk of these orders.

And I think as I said in the remarks here, this is a mix of mobile and automotive. So it's not all mobile, but the majority of this is mobile. The automotive piece, I think, has more to do with continued expansion of ADAS and infotainment in the automotive space and our customers' success in that particular market.

Maybe I just want to come back again on that Q4 color you just provided to Brian. I think you kind of were saying that maybe some typical seasonal slowdown in Q4. And I mean, let's back out that $28 million order. That's a little bit idiosyncratic here. But what kind of a seasonal slowdown you're expecting in Q4 for the rest of the business?

I think in this environment, I wouldn't be surprised to see something like a mid-single-digit pull down in the fourth quarter. We'll see how the quarter here evolves. A little too early to be providing full fourth quarter guidance, but that's our current view at the moment.

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

Congratulations on the nice revenue guide guys and the indications that we may be coming off a cyclical bottom. Luis, I wanted to follow up with that, but in a different way maybe than the prior two analysts approached it, and it's this, as you reflect on your conversations with your customers over the last 3 months since you last reported, how would you characterize the change in how they're looking at their business and what it means for you for 2026? So clearly, we've got a nice pop in the business going into the third quarter, but what are you telling -- what are your customers telling you about what you have to be ready for next year?

So if you look at our largest customers, which are typically in the auto and industrial space, Craig, they -- you can see from their earnings release and commentaries that they make that they've been basically rationalizing their inventory levels, not dramatically, but inventory days are coming down sequentially quarter-over-quarter. Some of them have called a bottom in the automotive market in Q1 of this year. A couple of others, I think, called it in Q2. And one in particular, I think, guided sequentially up Q3 and indicated sequentially up in Q4.

The consensus that I would say from these customers is that they view a steady, progressive recovery in the auto and industrial market. I don't think any of them is talking about a V-shaped recovery in the next 2 quarters. But you're all talking about going into next year progressively better, sort of sequentially quarter-over-quarter better. I don't think anybody can give much of insight towards the summer of next year. I think that's way too far out to say exactly how that's going to shape. But like I said, they're generally talking about progressive improvements. Some of our customers in the space seem to have struck new deals even in China for supplying the automotive industry in China, which is kind of refreshing to see.

When we look at computing, this is more of an area that we've been putting a lot of energy lately. And by lately, I mean, over the last year, to get design win. We have had some reasonable penetration in the server space, and we're trying to get more exposure into AI infrastructure at the moment, essentially GPUs, ASIC accelerators and even networking. This is not an area that I can talk much about yet, and it really highly depends on us being able to get our products qualified.

In the mobile space, as I've been saying for a couple of quarters now, we were expecting the recovery. We had a pretty decent uptick in mobile recurring orders in the first quarter of this year. And as mentioned, we would expect that to be picking up steam and leading to gains in the equipment side, which we had -- we were foreseeing already in the first quarter and as we talked here, materialize in the second quarter. I think mobile is going to have its typical seasonal puts and takes, accelerating here into Q3, a little bit into Q4 and then before it pauses and goes through the next round of product launches in 2026. So I think that's sort of the general perspective that I can give you from our customers across these various markets.

And the second question is a product question, and it relates to the opportunity you mentioned with GPUs and APUs. So you talked about the Eclipse Gen 2.5 new product release. What specifically does that enable your customers to do? And where should we expect uptake there? And how material could that be as we look out at either the rest of this year or next year?

Sure. There are two main things that are different here in this release 2.5 on the Eclipse. One of them is the configurability. We have a platform now that in one single system, you can cover, let's say, what we call passive, meaning RF discrete type components, analog ICs for mobile use applications to what we call ATC or active thermal control, mobile power dissipation to tri-temp automotive to tri-temp ATC, active thermal control again, for ADAS processors or even to some degree, compute applications. So we can do this in one system.

Historically, this is the kind of stuff that when you buy, you have to buy three configurations or four different configurations of a product. We can now really span that whole application range with one platform with some field upgrades. So that's a big plus to certain customers.

The second main vector is the power dissipation as we put up here, we're now people dissipating up to 3,000 watts during test. This is not the kind of thing you see on a mobile device, frankly, not even in an automotive ADAS device, but it's the kind of thing you would see on a high-end compute requirement. So if you're talking the latest generation GPUs in the market, that's the kind of capability that is required to test those devices.

So those are the two main performance factors that we are enabling customers to use and open up a spectrum of opportunities for us with the Eclipse. All these customers that I'm talking about here are essentially fabless. So they end up hitting the OSATs in Taiwan, in Korea or throughout Asia for outsourced testing. And the OSATs, by their nature, they want to make the maximum possible use of the capital investment being done here. So they do look for this flexible capability on the product.

Our next question comes from David Duley with Steelhead Securities.

My question is very similar to Craig's and involves the Eclipse. I get the impression that there is an upgrade cycle going on for thermal-controlled handlers, specifically in the GPU and ASIC space. I think your competitor -- I think Advantest has been talking about upgrading its products in this area. And I'm just curious, now that you put out a really flexible tool geared at this market, are you -- do you have evaluation systems at the OSATs or as you talked about, who are handling a lot of the volumes for the GPU guys and ASIC guys? Or when could we expect to hear some progress about you winning some business in this area?

Dave, we have evaluations frankly, mostly at fabless right now that will then migrate to the OSATs. It's not to say that we don't have it at the OSATs. At the end of the day, in some cases, the OSAT is the one that has the tester that we're connecting to, to run the program by the direction of the fabless. To answer your point here, when do we expect to see some more traction on, let's say, the GPU space, I hope to be able to say something in a quarter or 2, actually, that is more material on that front.

So there appears to be an opening with thermal-controlled handlers. I think I heard this on your competitors' conference call, correct me if I'm wrong, but I think they're going through an upgrade cycle. Also, the big GPU guys looking to diversify its supply chain and not rely on single vendors. So is this opening -- do you think this in general, is opening up the door to perhaps knock off some business? Is your competitors' product opening up a door for you, I guess, is really the question.

Yes. I don't know if it's our competitor that's opening up the door, but I think the customer is interested on more of a -- I have to use one of the customers' terms here, "a future-proof platform." Right? Something that can actually span not only the next 18 months -- 12, 18 months requirements, but can be used over multiple years ahead and keep up with their power requirements and overall device test requirements for at least for a couple of cycles. So they have better use of the capital investment.

Okay. I guess my final question is, you talked about your utilization rates increasing by 3%. Is that overall -- or I guess I'm really interested in -- we've already -- I think in the past, you've talked about how utilization rates in China were probably pretty high or certain areas were higher than others. I'm just kind of wondering is -- are there certain geographic regions like Taiwan and Korea or Asia where you're starting to see those areas might have higher utilization rates than the average?

Yes. I don't have at my fingertips by geography, Dave, but I can tell you this. So overall, yes, overall utilization is up 3 points to 75%. I'll give you another breakdown here. The IDMs increased 5 points sequentially and the OSATs increased 1 point sequentially 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 today, I'd like to note that we'll be attending some investor conferences over the next 2 months, and we'll be attending the Needham Virtual Semiconductor & SemiCap Conference on August 20, the Jefferies Conference in Chicago on August 26, the Evercore Conference also in Chicago on August 27, the Citi TMT Conference on September 4 in New York City and the CEO Summit Conference on October 7 in Phoenix. Now if you're planning to attend any of these conferences, please reach out to your conference contacts or let me know, and we'll arrange for one-on-one meetings.

That's all for today. Thank you for joining the call, and we look forward to speaking with you soon.

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