Cohu's Q3 2025 Earnings Call: Contradictions in Mobile Demand, Automotive Recovery, and Gross Margin Outlook

Date of Call: October 29, 2025

Financials Results

• Revenue: $126.2M, exceeded guidance; up ~17% sequentially; mix 55% recurring / 45% systems
• Gross Margin: 44.1% non-GAAP (in line with guidance); Q4 projected ~45%

Guidance:

• Q4 revenue ~ $122M ± $7M (about $4M or ~3.5% below Q3)
• Q4 non-GAAP gross margin ~45%
• Q4 operating expenses ~ $50M (includes ~$2M variable R&D); post-restructuring run-rate ~ $49M quarterly at ~$130M revenue
• Recurring revenue expected to be ~60% of Q4 revenue (vs 55% in Q3)
• Q4 net interest income ~ $1.7M; Q4 tax provision ~ $4M; diluted share count ~47.1M
• 2025 capex target ~ $20M
• Completed upsized convertible notes raising $287.5M to strengthen the balance sheet and support M&A/strategic initiatives

Business Commentary:

* Revenue Growth and System Momentum: - Cohu, Inc. reported consolidated revenue of $126 million for Q3 2025, with both systems and recurring revenue improving quarter-over-quarter. - The growth was driven by strength in interface solutions and test handler spares, along with notable repeat orders for Neon HBM inspection tools.

• Gross Margin and Recurring Revenue Stability:
• The company reported a non-GAAP gross margin of 44.1% for Q3, reflecting the value differentiation of its products and the resilience of its recurring business model.

• Recurring revenue accounted for 55% of total revenue, which provided stability and contributed to an increase in gross margin.

• AI and Compute Expansion:

• Cohu's AI and compute segment is expected to contribute to low teens percentage of revenue in 2026, driven by the adoption of its Eclipse handler and Neon HBM inspection tools.

• This growth is attributed to increased demand for thermal management solutions in AI processors and market recovery in the computing segment.

• Convertible Notes Offering and Strategic Growth:

• Cohu completed a strategic convertible notes offering, raising $287.5 million at attractive rates, which will support future growth and strategic initiatives.
• This move is aimed at strengthening Cohu's balance sheet and providing flexibility for both organic growth and potential acquisitions.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted recurring revenue growth for a third consecutive quarter, revenue that "exceeded guidance" at $126.2M, repeat Neon HBM orders and first HBM4 shipment, selection of Eclipse for next-gen AI processors, and completion of a $287.5M convertible to support growth and M&A, signaling optimism on AI/compute opportunities.

Q&A:

• Question from Brian Chin (Stifel, Nicolaus & Company, Incorporated, Research Division): Based on the customer broadening metric and uptick in utilization, is that the main area of improved near-term revenue visibility and how confident are you in sustaining momentum beyond the seasonal period into H1 next year?
  Response: Momentum is driven by Eclipse handler and Neon HBM repeat orders; management is increasingly confident the business is broadening into AI/compute and expects results to materialize in 2026.

• Question from Brian Chin (Stifel, Nicolaus & Company, Incorporated, Research Division): What's driving the Eclipse win—higher wattage for newer AI processors—and does the platform scale and displace incumbents?
  Response: The win is driven by thermal capability (production needs around 3,000W today), scalability for rising power densities, and Cohu's unique thermal expertise for higher-wattage devices.

• Question from Brian Chin (Stifel, Nicolaus & Company, Incorporated, Research Division): In terms of revenue contribution, could compute be a double-digit segment next year?
  Response: Yes—management expects compute systems contribution to be in the low-teens percentage of revenue in 2026 (excluding recurring).

• Question from David Duley (Steelhead Securities LLC): Given multiple Eclipse wins, is the TAM for thermally controlled testing large across APUs/CPUs/GPUs/XPUs and many large customers you don't yet serve?
  Response: Yes—the TAM is large as power dissipation spans hundreds to thousands of watts across device types, and Cohu is pivoting toward these AI-related applications.

• Question from David Duley (Steelhead Securities LLC): Will you have greater exposure to GPUs and networking hyperscaler ASICs with this product?
  Response: Yes—higher-wattage GPUs and network processors drive demand for Cohu's thermal expertise, and the company is shifting exposure toward AI compute and networking customers.

• Question from David Duley (Steelhead Securities LLC): What do you estimate your AI-dedicated revenue was in 2025 (given it was near zero in 2024)?
  Response: Approximately $40M of system revenue in 2025 attributable to edge and data-center-related AI work.

• Question from Robert Mertens (TD Cowen, Research Division): How will the convertible proceeds be prioritized between organic R&D, software/high-bandwidth memory investment, tuck-in M&A, and share repurchases?
  Response: The company will pursue both organic investment and opportunistic M&A; the convertible was raised to provide capital for meaningful acquisitions; share repurchases are paused and remain a board decision.

• Question from Robert Mertens (TD Cowen, Research Division): Is the Eclipse a broad-based system or are you focusing engineering resources on compute/AI versus auto/industrial?
  Response: Eclipse is being selectively focused on AI/compute (training/inference/network processors) where thermal differentiation matters, not broadly deployed across traditional auto/industrial use cases.

• Question from Denis Pyatchanin (Needham & Company): Mobile system orders YTD seem to lag—why and should we expect mobile strength next quarter even though systems are guided down?
  Response: Mobile shipments were largely completed in Q3 (mobile was a top segment in Q3); Q4 expects more shipments in auto and computing, so mobile is not expected to be the largest segment in Q4.

• Question from Denis Pyatchanin (Needham & Company): What visibility do you have on automotive and industrial recovery beyond the near term?
  Response: Recovery remains muted but customer conversations indicate initial capacity needs in Q1–Q2 2026; spare part purchases and recurring revenue trends suggest gradual improvement.

• Question from Denis Pyatchanin (Needham & Company): What's driving sequential gross margin strength into Q4 despite slightly lower revenue?
  Response: A favorable mix shift toward higher-margin recurring revenue (expected to rise from 55% to ~60% of revenue) is the main driver of improved gross margin.

Contradiction Point 1

Mobile System Revenue and Demand

It highlights a disparity in the expectations and actual demand for mobile system revenue, which is crucial for revenue forecasting and investor expectations.

Why have mobile orders lagged behind other segments, and do you expect mobile strength in the next quarter? - Denis Pyatchanin (Needham & Company)

2025Q3: Mobile demand was largely met in Q3, with Q4 focusing more on automotive and computing. Some mobile demand is expected in Q4 but will likely remain smaller than other segments. - Luis Müller(CEO)

What other factors beyond customer breadth and utilization rates do you believe could drive these trends beyond the second half? - Brian Edward Chin (Stifel, Nicolaus & Company, Incorporated, Research Division)

2025Q2: Mobile obviously was up significantly, driven by this customer order... I think we are in a recovery trajectory cycle. - Luis Müller(CEO)

Contradiction Point 2

Automotive and Industrial Market Recovery

It demonstrates differing perspectives on the recovery timeline and demand visibility for the automotive and industrial markets, which impacts strategic planning and investor expectations.

Can you discuss the cyclical recovery in automotive and industrial markets and Cohu's visibility into future demand? - Denis Pyatchanin (Needham & Company)

2025Q3: The recovery in auto and industrial is still immature, although initial capacity needs are starting to emerge. Cohu sees continued recurring revenue growth, indicating improved demand. - Luis Müller(CEO)

How are customers viewing their business and how will that impact you in 2026? - Craig Andrew Ellis (B. Riley Securities, Inc., Research Division)

2025Q2: Our largest customers, which are typically in the auto and industrial space, seem to be looking at a steady, progressive recovery in the auto and industrial market. - Luis Müller(CEO)

Contradiction Point 3

Mobile Segment Growth and Visibility

It involves differing perspectives on the growth and visibility of the mobile segment, which is a crucial component of Cohu's business strategy.

Why have mobile system orders lagged behind other segments, and do you expect strength in mobile next quarter? - Denis Pyatchanin (Needham & Company)

2025Q3: Mobile demand was largely met in Q3, with Q4 focusing more on automotive and computing. Some mobile demand is expected in Q4 but will likely remain smaller than other segments. - Luis Müller(CEO)

Has there been a change in mobile and RF test expectations? - Denis Pyatchanin (Stifel)

2024Q4: Mobile projected for low single-digit growth this year. Dynamics could offer upside in second half of the year. - Luis Müller(CEO)

Contradiction Point 4

Gross Margin Improvement Expectations

It touches on differing expectations regarding gross margin improvements, which are critical financial indicators for investors.

What is driving the expected gross margin improvement in Q4 despite lower revenue? - Denis Pyatchanin (Needham & Company)

2025Q3: The improvement is due to an increase in recurring revenue, which has higher gross margins compared to systems revenue. - Jeffrey Jones(CFO)

Is Q4 revenue from Blackwell additive, and what is the expected gross margin exit rate? - Stacy Rasgon (Bernstein Research)

2024Q4: Gross margins for Q3 are expected around 75%, with full-year guidance in the mid-70s. - Jeffrey Jones(CFO)