Cohu Inc
NASDAQ:COHU
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
23.19
36.38
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Cohu Inc
You don't have any saved screeners yet
Good day, and thank you for standing by. Welcome to Cohu, Inc. Second Quarter 2021 Financial Results Conference Call. [Operator Instructions].
I'd now like to hand the call over to your host today, Jeff Jones, Chief Financial Officer. Please go ahead.
Good morning, and welcome to our conference call to discuss Cohu's second quarter 2021 results and third quarter 2021 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 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 29, 2021, 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 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 morning, everyone, and thanks for joining us. Today, I'll review the highlights of our second quarter results, discuss the industry's supply chain situation and describe Cohu's introduction of a new data analytics product that improves customers' test cell productivity.
Second quarter revenue was a record $244.8 million and grew 70% year-over-year, exceeding the midpoint of our guidance due to stronger-than-anticipated contactor and overall recurring revenues. With solid results year-to-date and strong forecast, Cohu is also on track for record full year revenue and profitability in 2021.
We are benefiting from the ongoing 5G technology ramp in mobility, selling RF testers and turret handlers, also robust automotive demand for our tri-temperature handlers and contactors, mainly for testing battery management systems and ADAS devices. Our contactor revenue increased 33% year-over-year, with significant design wins for testing new products from customers in the mobility and automotive segments.
We made good progress improving contactor operational efficiencies and expanding manufacturing in-sourcing in the Philippines, all leading to 270 basis points gross margin improvement quarter-over-quarter in the contactor business that is key to our midterm strategic plan.
Overall, gross margin in the second quarter was in line with guidance, reflecting a sharp increase in handler sales and higher supply chain costs as discussed when we provided Q2 guidance. We have been working to pass on these cost increases to our customers and have substantially completed the process that will take effect over the next few quarters.
Estimated test sale utilization is 87%, which is down 1 point sequentially from the end of March. Utilization remained notably strong with automotive segment customers, primarily U.S. and European integrated device manufacturers, and down slightly at OSATs in Asia.
In the second quarter, recurring revenue was again 35% of total and 50% non-GAAP gross margin, with the balance being systems revenue broken down by end market segments, and in aggregate, 39% non-GAAP gross margin. As expected, automotive was strongest and captured 18% of total revenue, with mobility staying robust at 14% of total revenue. The consumer segment gained more strength than anticipated due to a significant economic rebound in the U.S. and China.
In the second quarter, we completed the sale of Cohu's PCB Test business for approximately $125 million gross cash proceeds. This business came with the Xcerra acquisition in 2018. It was a well-run, profitable business but not a strategic fit for Cohu's growth plans and running below corporate gross margins. We feel this transaction was good for all parties, providing the PCB Test business better leverage as part of Swedish Mycronic, and allowing Cohu to monetize a non-core business and accelerate debt repayment.
In the second quarter, we continued to capture new customers with the Neon inspection system that is quickly becoming the go-to solution to ensure defect-free wafer-level chip scale packages used predominantly by leading mobile manufacturers. We're extremely happy with the success of the Neon platform and the fast adoption of our new vision systems introduced mid last year.
We also had a design win and repeat order in early Q3 for an RF test cell solution to a Korean customer. This is an opportunity we have been developing since late last year that finally qualified and got into mainstream production for a leading mobile device manufacturer. This has been part of our plan to deploy complete test cells with handler, contactor and tester for RF front-end IC applications.
We also had very strong contribution in the quarter from a customer supporting the deployment of a low-orbit satellite network as well as increased sales for testing Wi-Fi and Bluetooth RF devices.
Q2 was clearly a strong automotive quarter with significant contribution from our handler businesses. Cohu is the leader in tri-temperature handling for the automotive industry, in great part because of temperature accuracy during test that has become key to ensure quality of new generation, battery management systems and ADAS processors.
Testing ADAS processors is a perfect storm of thermal challenges, combining variable power dissipation with extreme temperature conditions and multisite test parallelism. This is a challenge we can solve today by combining our T-Core thermal technology and the MATRiX handler. We will continue to evolve our solutions as ADAS gains volume penetration in mid-market vehicles and the technology grows with greater computing power.
We're also happy to see our automotive tester sales growing in the quarter, essentially doubling their revenue contribution to our tester business quarter-over-quarter.
Switching topics to the supply chain. The industry is experiencing a unique dynamic. Customers are driving hard-to-increase semiconductor production. And at the same time, these are some of the gating items to produce the very equipment required to increase capacity.
Shortages are not limited to semiconductors. We're having constraints from motors, sensors, bearings and other supplies that are key to manufacture equipment, particularly handlers. Additionally, some Asian suppliers were forced to reduce operations and even shut down for a few days as governments are trying to curb rising COVID-19 cases in certain countries. We will continue to provide guidance that takes a balanced view on risks and upside, but it has become increasingly difficult to predict the true impact of these supply chain disruptions. Jeff will explain in more detail how we're assessing these risks in the third quarter guidance.
Moving on to my last topic. In line with the Cohu strategy, we're launching a new family of products, this time focused on software data analytics to address our customers' Industry 4.0 initiatives and factory automation objectives. Cohu's Data Intelligence, or DI-Core for short, is a suite of software solutions that provide real-time equipment monitoring and process control to improve overall equipment efficiency, or OEE, and productivity.
The equipment data is analyzed and displayed in real-time using a web-based graphical user interface accessible remotely on a laptop or other mobile device. Customers can monitor critical equipment parameters, such as yield, OEE, throughput and other equipment states, to ensure optimal test cell performance.
DI-Core software also interfaces with customers' manufacturing execution systems for remote equipment control, recipe and lot management. A central database for management of equipment data enables publishing of reports, dashboards and Pareto charts to help managers make decisions.
As the need for data analytics grows, we plan to continue expanding DI-Core offerings to help improve quality and yield. We're essentially enabling our customers to upgrade the large installed base of Cohu equipment to improve efficiency and productivity.
Today, we're starting to sell the foundation license. We expect next year to start offering subscription products that add on to this base capability. As we help our customers extend the value of their tools, we hope to tap into our large installed base of over 23,000 systems, offering subscription software services that deliver measurable productivity gains to our customers.
Now looking ahead, we're encouraged by design wins with our Neon inspection platform, gains in RF and automotive tests, revenue and margin expansion in our contactor business. At the same time, we're working through a period of supply chain disruption and cost increases that will, unfortunately, weight negatively on the third quarter. We're trying to be cautious but set realistic targets for third quarter, and we will avoid getting ourselves too far into fourth quarter details this time around.
Let me turn it over to Jeff to share second quarter results and provide specifics about our third quarter 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.
On June 24, Cohu completed the sale of the PCB Test business for approximately $125 million. Net proceeds after deal costs and taxes enabled a debt repayment of $100 million during the first week of Q3. I'll talk more about the debt repayment when I touch on the balance sheet and the Q3 guidance. Moving forward, capital allocation will continue to be focused on debt reduction and opportunities for expansion of our served markets and technology portfolio.
Now turning to the financial results. Cohu, again, delivered strong revenue and profitability in the quarter. Q2 revenue was $244.8 million and approximately $3 million higher than the midpoint of our guidance range. Q2 revenue was 9% higher sequentially and set a new record for Cohu. In Q2, no customer accounted for 10% or more of sales.
In the second quarter, Cohu's gross margin was 42.7% and in line with our guidance. Operating expenses were $52.8 million and lower than guidance as we continue to optimize our expense structure.
Second quarter non-GAAP operating income was 21.2% of revenue, and adjusted EBITDA was 22.6%. Return on invested capital in the second quarter was approximately 60% and well above our target model objective to make investments with ROIC of 30% or higher.
Cohu's non-GAAP effective tax rate for Q2 was approximately 12% and lower than guidance primarily due to lower withholding tax on future repatriation of foreign profits combined with higher U.S. income, offset by NOLs and tax credits. Non-GAAP EPS for the second quarter was $0.89, bringing our 6-month year-to-date non-GAAP EPS to $1.79, already well above our prior year results and illustrates the earnings leverage in the business model.
Now turning to the business model. The midterm financial targets remain unchanged after the sale of the PCB Test business. The business model remains a 3- to 5-year target as we execute our strategy to gain market share and grow our tester and contactor businesses. In the near term, we remain focused on consistently achieving the gross margin targets and significantly reducing interest expense as we further repay our debt over the coming quarters.
Moving to the balance sheet. The proceeds from the sale of the PCB Test business drove the higher cash balance at the end of Q2. As I mentioned, we made a significant debt repayment in early Q3, which reduces the Q2 cash and debt balances by $100 million each. The Q2 balance sheet reflects a net cash position with increased resources for additional debt reduction and investment in opportunities to expand our served markets and technology portfolio in line with our growth strategy.
The growth in accounts receivable reflects the sequential increase in shipments quarter-over-quarter. And despite the increase in accounts receivable, Cohu generated cash flow from operations of $29.5 million and free cash flow of $26.7 million.
Now moving to our Q3 outlook. Just as a reminder, our Q3 guidance excludes the PCB Test business, which was generating revenue of approximately $13 million per quarter, gross margin of about 37% and incurring operating expenses of approximately $2.3 million per quarter.
Entering Q3, our order backlog and utilization of equipment at our customers' test facilities remain strong. However, as Luis described, we are experiencing some material shortages and COVID-related constraints at several of our suppliers. Because of these supply chain constraints, we are forecasting approximately $14 million of originally scheduled Q3 revenue related to handler shipments will be delayed to Q4. As a result, we're guiding Q3 sales to be between $220 million to $235 million.
Consistent with prior quarters, the guidance range is a balance of potential risks and upside associated with supply chain uncertainty, book and bill revenue and customer acceptance, which is required for revenue. As we've previously discussed, we are experiencing a sharp increase in handler sales combined with a moderation of tester sales from the record-level achieved in Q1 of this year and higher supply chain costs. For Q3, we are forecasting gross margin to be approximately 42% mainly due to product mix.
Similar to Q2, system revenue for Q3 is projected to be approximately 65% of total sales compared to approximately 55% of total sales in our target model. The increase in handler production has created volume benefits from greater leverage of fixed manufacturing and operating costs, contributing to 20%-plus non-GAAP operating income projected for the first 9 months of fiscal year 2021. Additionally, we remain on track to grow tester and contactor businesses that are in line with our target financial model.
Operating expenses are projected to be between $51 million to $52 million. Given the $100 million debt repayment made in the first week of Q3, we're projecting Q3 interest expense to be approximately $1.1 million. Additionally, the $100 million repayment will generate a Q3 noncash charge for debt extinguishment of approximately $1.7 million, similar to the charge taken in Q1 of this year for a similar accelerated debt repayment.
We expect Q3 adjusted EBITDA at the midpoint of guidance to be approximately 21%. The Q3 forecast non-GAAP tax rate is approximately 18% at the midpoint of guidance. As previously stated, most of Cohu's profits are generated offshore and subject to statutory rates in various foreign jurisdictions. Income taxes on profits generated in the U.S. are mitigated by net operating loss carryforwards and tax credits. The diluted share count for Q3 is expected to be approximately 49.6 million shares.
Our visibility to reliably project revenue beyond Q3 has been temporarily impaired by the supply chain disruptions we described. As a result, we will not provide directional guidance on Q4 revenue, but continue to expect a return to normal seasonality in the business.
In spite of the short-term supply chain challenges we face, 2021 is tracking to be a record revenue and profit year for Cohu, and we remain optimistic about our growth prospects and opportunities to achieve our midterm financial targets.
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.
Maybe, Jeff, sorry, can you first quantify again what the revenue impact was that shipped in the 4Q due to the supply chain challenges? I missed that.
That was $14 million of handler shipments that moved from Q3 into Q4.
$14 million. Okay. Got it. Got it. Yes, so pretty hefty number. Maybe in terms of this push and pull of global supply chains that is certainly having a rippling effect on the business. In terms of that gross margin impact, as you try to remediate some of these issues, is there kind of a way to quantify what that is in 3Q? And maybe also outline some of the actions you're taking there, understanding that some of the end drivers are out of your control?
Yes. So we're seeing increases, as we've described, on some specific items, not completely across the board, but some specific items. And it's - it varies by configuration, by handler. So it's something we've taken action on, as you described and as Luis talked about. And so we're going to see some moderation of those increased costs in Q3, and that will continue to be offset in Q4 and then well into Q1 and then beyond.
So it's hard to quantify at the moment in terms of the gross margin impact. But the pricing increase that will go into effect in Q3 should benefit by about 25 basis points in the quarter and then continue to offset increased costs in future quarters.
Okay. Maybe approaching this also from a mix standpoint moving in the second half, I think some of the - one of the larger assembly test subcons did talk about a lot of strength in their RF front-end packaging and assembly part of their business into 3Q. And I was kind of curious, what visibility do you have maybe in terms of a bigger pickup in your RF-driven ATE business, which I'd imagine could have some favorable mix shift implications for gross margins?
Brian, this is Luis. I think I understand who you're talking about. And in fact, they were one of our large OSATs in Q2. And yes, we are benefiting from the same growth in the RF, but also - not only RF but also PMIC, power management ICs.
It's hard to know exactly timing, but from some other customers' initial forecast, it looks like there could be another pickup towards the end of the year or Q1 of next year as it relates to more 5G deployment into 2022.
Okay. Got it. I guess maybe one other sort of way of thinking about this, one of the larger ATE players also talked about really extended lead times for their platforms used to test automotive and industrial devices. So even though you're sort of spacing out maybe the scheduling on some handlers, is this kind of almost maybe more of a matching up of sort of the timing against some of the other key components of the test cell? Is there any kind of other way to think about it?
Not sure that, that is at play here so much, Brian. I mean there is a - as we explained, we do have some supply chain constraints. Our handler lead times, for example, are at about 19 weeks now, which is, give or take, at the same place it was a quarter ago. We thought we would have been reducing it by now. But the supply chain constraints have continued to hold lead times where they are.
I don't really think that there is much of gaining of putting elements of the test cell at the same time. I think at this time, we view everybody is operating and are about the same level of lead times.
Our next question comes from Tom Diffely with D.A. Davidson.
Maybe jumping on the utilization rates or the test cell utilization rates. You talked about 87%, still a very healthy level. Wondering if you could parse out kind of the relative health of testers versus the handlers? And you talked about the handler lead times of 19 weeks. What is your tester lead time right now?
Tom, this is Luis again. The - we don't parse out because when we measure tester utilization, it's literally what the word says, we're measuring the test cell. So we're not - it's hard to have a handler utilized without a tester and vice versa. So that number really applies to the test cell as an aggregate. To the second portion of your question, tester lead times right now are approximately 10 weeks.
Okay. All right. And I guess moving over to the contactor business. Previously, you talked about, I guess, before you started to really ramp up, there was a $75 million to $100 million opportunity to get attach rates up on your installed base. Where are you - after the progress you've talked about today, where are you along those lines?
So the contactor business continues to grow year-on-year. In fact, I think as I spoke here in the prepared remarks, the contactor revenue is up 33% year-on-year on the second quarter. We had some gains, but also market improvement, particularly in the automotive. Thinking in terms of attachment rate, which I always caution is a little dangerous because the denominator is handler sales, which is really strong right now, attachment rate is at approximately 22% as of second quarter.
Okay. All right. Great. And then finally, obviously, some nice traction on the inspection side. Who is your main competitor on that business? And how do you win? What is the selling point for your product?
So the inspection business, which is about $170 million to $100 million - $190 million. This is - I'm talking package inspection, though. The main supplier is KLA. And we view that we gained around 3 to 4 points of share last year in the space, generated about $40 million of revenue in 2020.
I think we're on track to generate about $70 million of revenue this year. So obviously, it's a more robust market in 2021, but I also think we are picking up some market share points. And it is - for us, it is, in particular, around wafer-level chip scale package. So mostly mobility applications, some consumer, but mostly mobility applications.
We have some really interesting vision technology. You may recall a year or so ago, we introduced infrared imaging capability for production. So basically, high-speed infrared imaging for production so you can detect subsurface defects. And that has become kind of the standard for the leading mobile manufacturers to ensure quality, and they are demanding of their suppliers to do so as well. That's essentially the benefit we have at the moment on the vision inspection space.
Our next question comes from Toshiya Hari with Goldman Sachs.
Jeff, I realize you're not going to give specific guidance for Q4. But I was hoping if you guys could remind us what normal seasonality is for Q4? And if - this might be a little bit too simplistic. But given the push in handlers, the $14 million from Q3 to Q4, if we should think of Q4 as being typical seasonality plus that $14 million? And then I've got a quick follow-up.
Good morning, Toshiya. The past seasonality into Q4 has ranged anywhere from low single-digit up to the 12%, 13%. I think I would sort of put a midpoint or expectation of about 10% seasonality. And that would be including the $14 million that rolled into Q4. So I wouldn't make any special adjustments for that.
Got it. So typical seasonality, including the push?
Yes.
Okay. Got it. And then as my follow-up, just wanted to go back to the gross margin question. So for Q3, you're guiding margins down a little bit on a sequential basis. Obviously, the PCB Test part of the business is out. You seem to be making very good progress in improving margins in the contactor business.
I don't know where you're guiding - where you're guiding handler revenue on an absolute basis. But given the push, I guess, that push stand-alone should be accretive to overall gross margins. So again, I'm just trying to understand the puts and takes for gross margins in Q3 and how we should think about Q4 gross margins as well?
Yes. I mean Q4 - let me start with Q3. So Q3, we're still seeing a handler-dominated revenue product mix in Q3. So even with the pushout of the $14 million, handlers are still the dominant percentage of the revenue. And so that's really what continues to drive the product mix.
You're correct. A little bit of benefit from not having a PCB Test on gross margin, but that's roughly about a 25% - 25 basis point improvement. So it's really - continues to be handler-driven.
So Q4, still too much uncertainty to really reliably provide any guidance on what the margin looks like. But I would say the mix is probably going to be predominantly similar to what we're seeing in Q3. So there's going to be some challenge in Q4.
Got it. And sorry, if I can squeeze one more in, one for Luis. The Data Intelligence system business, it seems really, really interesting. Can you speak to sort of the potential financial impact to the model when you think about adoption of this by your customers over the next, call it, couple of years? And curious if this was embedded in your long-term financial model when you put it out?
Toshiya, yes, it was all part of the plan. We have been working on this for a little while. So the way to think about it is, look, we have an opportunity here that they will develop really over time, and it could touch a number of our systems. And once you now pare out PCB Tests out of the equation, we have a little over 23,000 systems in the field.
It starts now with us selling what we're calling the foundation licenses, and these are perpetual licenses. And it's, at the moment, targeted at a couple - or handlers that we have in the automotive space. These are - we're talking about $5,000, $7,000 per license, right?
And we have an adoption already at a Tier 1 automotive IDM. So we're starting that deployment. And the intention is that over the next 3 years that we're going to - starting with next year, actually, that we're going to start selling subscription licenses to additional features on top of the foundation, for example, predictive maintenance capability and device tracking, some other things that will come on top of it. Think of it in the order of $1,000 per seat of the foundation license of a subscription-based product.
So we're not talking about a lot of dollars this year. And yes, it is for sure embedded in our model. I don't know, Jeff, if you have anything to add on that?
Yes. I mean maybe a little more color on the numbers here. So modeling about $1 million in 2021. And it's a bit of a slow roll as Luis was just describing. So too soon to predict next year. We'll model significant growth, but of course, it's coming off a low base this year. So really sort of expecting low single-digit millions over the next 18 months but as we gain customer traction.
And it is similar to our last series of investments outside of the original core of Cohu business, which is we have a large installed base, how can we deliver more value to our customers and at the same time monetize more out of the installed base of equipment that we have today.
Our next question comes from Craig Ellis with B. Riley.
I'll just start with a follow-up question on Data Intelligence. Can you just talk about where you think you've got the greatest differentiation with that capability? I would expect that a number of your customers are running something like that. So what will differentiate Cohu?
And Luis, you've been very vocal in the past about being interested in M&A. You've used it to scale up the company. Do you feel like you have all the capability internally to take the Data Intelligence suite with all of its subscription options to full maturity? Or could this be an area where tuck-in M&A or even something larger would enhance the model?
Craig, yes, good question on the differentiation. We - you'd be surprised because in reality, our customers do a lot of what we call preventative maintenance. You essentially plan for a period of time, just like a vehicle in the past, a few years back, you'd plan for every so many months to go in and do an oil change or whatever it is. Just old analogy here.
Predictive maintenance, which is, I think, one of the primary value propositions here for - particularly for handlers, relates to using all the sensor capability inside the handler to measure a series of events and track them over time and predetermine when you should take action. So essentially reducing the unscheduled downtime of the equipment.
We had some of our customers quantify for us the value of 1% unscheduled downtime and the value of that recovery. And it's actually staggering how much that costs to our customers. So that is one of the key value propositions here. We know the equipment very well. We know at what point certain thresholds would trigger a downtime. And we have the sensing capability already in the equipment. So it's making use of an old idea we had to monitor those parameters and flag an eventual downtime, an unscheduled downtime before it happens. There are other pieces to the puzzle, too, but that's the simplest one to explain and explain the value.
As far as internal capability to develop it, much of this has to do with data and understanding the equipment, which we do have; software capability, we have plenty of software engineers in the company. But for sure, some of the more advanced ideas around use of deep learning algorithms to optimize some other functions on the test cell, we may have to acquire that capability over time.
That - not everything we have in-house. But for the moment, for the foundation license and what we have planned for 2021, we do have the internal capability to develop. Further out ideas, yes, we'll have to acquire the capability.
That's helpful. And then the second question that I have also for you. In the past, you've, at times, commented on the mix of the ADAS and EV business within auto. Can you just characterize what you're seeing there now and the evolution of that mix as we look out to calendar '22, and what that could mean for Cohu?
Yes. We're about at the same mix right now on that, which is approximately 20% to 30% of our handler revenue in the quarter is ADAS and EV-related, strongest for EV in reality. Battery management systems test on our handlers is really a hot business right now. We expect that to continue to ramp into 2022, but we don't have necessarily a forecast of what that mix will be.
Similarly, ADAS is picking up momentum. We have a series of customers right now evaluating our T-Core active thermal technology embedded in our leading tri-temp handler, which is the MATRiX for automotive semiconductor test. And we understand there are production intercepts here in the second half of the year that depend on that capability. So we see also the ADAS ramping.
But truth be said, we don't have a forecast of how much EV and ADAS will represent of our total automotive business in 2022.
But I imagine with all the pull-ins we've seen with global auto OEMs and EV plants that that would likely be up and potentially up significantly as ever.
Yes, yes. Absolutely. The expectation is EV and ADAS will continue to take a bigger share of our automotive sales into next year. Absolutely.
Okay. And then, Jeff, I don't want to ignore you. And I'll turn to gross margins. I think the near term has been pretty well vetted at this point. But the question is, as we look at the target model and current revenues, the target model would say that gross margins should be about 47.5% at these revenue levels. And you've talked about the fact that you've got the - one of the issues at play is just the mix between contactors and really, the recurring business versus the systems business.
The question is, if we were to bin out that 550 basis point gap between where we are and implied levels of the target model, how do we bridge that gap? What are the 3 or 4 factors that take us from 42% to 47.5% at these revenue levels?
Yes. Okay. Craig, so first of all, it is overall mix of business. Handlers Q3 forecast, it will represent around 70% of the revenue. The model is 50% for handlers.
Second of all would be systems versus recurring. Because within that handler revenue percentage that I just quoted, most of that increase over the model is systems revenue. And so that drives the overall blend of systems versus recurring higher on the system side, and that gross margin is lower than recurring. So that's the second aspect of the lower gross margin.
The third aspect would be improvement in the contactor gross margin. And so we've been working on moving outside-purchased materials contactors from suppliers in the U.S. and in Europe into our factories in Asia, primarily the Philippines. And we're seeing improved utilization productivity. And so margin in the contactor business is improving. Luis stated quarter-over-quarter improvement of about 270 basis points.
But that needs to continue. So we're closing in on about 40% contactors. We need to get to about 45%. That's within our reach within 2022. So I'd say those are the main factors that bridge us from where we are today in gross margin to the model.
Okay. And just to clarify that point, Jeff, I heard earlier that there is some supply chain costs that's in gross margin. Would you throw that in as worth 100 basis points, plus or minus? Or is it just relative to the other factors that you mentioned, not that significant, maybe less than a 50 basis point variable?
I would say 50 to 100 basis points is probably a good estimate on a blended revenue. But the other points that I mentioned are really the main drivers.
Yes, the bigger structural issues.
Our next question comes from David Duley with Steelhead Securities.
Just a clarification on your revenue guidance compared to the second quarter revenue that you just reported. So if we want to compare those numbers, the $244.8 million that you just reported versus your guidance, then you're missing - you're subtracting $13 million from the Print Circuit Board business that isn't there anymore sequentially? And then you also mentioned another - what was that, $13 million of stuff, supply constraints?
It was $14 million, Dave, $14 million of handler shipments, yes.
So on an apples-to-apples basis, the guidance does not reflect $13 million of Printed Circuit Board revenue and $14 million of supply constraint pushes?
Correct.
Okay. So it's like a total of $27 million.
Correct.
Okay. And could you - just in the current - in the June quarter, could you break out, as far as the systems business goes, the relative mix between handlers and testers? I think you gave a number, but I just wanted to make sure I had it right.
So in Q2, the revenue breaks down the handler revenue, 60%; tester revenue, 21%; contactor, 13%; and PCB test, 6%.
And as far as the contactor business goes, I think you had a growth goal of approximately 15% on an annual basis as far as your guidance in Q - what do you think the annual growth rate will be in this current calendar year for contactors?
Yes. We're modeling internally 20% CAGR for the contactor business. And we're hitting that year-over-year.
Yes, year-over-year, just a couple of data points for the first half of the year, right? We had about - well, I don't have it blended. But Q1 of this year, we had a 30% growth year-over-year in contactors. In Q2, we had a 33% year-over-year growth. So blended, at about, I don't know, 31%, 32% so far.
And would you expect this percentage - I guess you just mentioned 13% for contactors, that percentage will be going up over time?
Yes. Yes, absolutely. Two things will happen. The handler revenue should moderate back to a normalized level and then continue to grow the tester and contactor businesses.
I think, Jeff, you meant the percentage of contactor contribution to revenue, right?
Yes. Yes, absolutely.
Yes. Yes. And then I guess, finally if you could just kind of - you guys have a lot of experience in this industry. What is your view on the sustainability of results as far as your tester - your equipment business going forward? Obviously, WFE continues to climb every year. And I think your larger competitor just increased the size of the SOC test market. So I'm kind of wondering what your views are on sustainability and multiyear upturn here.
Yes. Look, Dave, all indications right now is that this is going to be a long cycle. I mean we have a pretty robust automotive market with EVs and ADAS. I think we have a pretty robust mobility market still with 5G computing with AI and crypto.
But as we always said, there will be some seasonality to the industry. If we look back here over the last 10 years, actually, and Jeff already spoke to the fourth quarter seasonality, right? Typically, first quarter can be up or down a little bit relative to fourth quarter, but on average, flat. Second quarter is typically up around 10%, 15%, 20% sometimes. Third quarter then typically comes down a smidge, like low single-digit percentage. And fourth quarter, Jeff already said, kind of a - around a 10% drop. That's a typical seasonality.
So I think the seasonality is going to stay there. But the industry cycle, the underlying current is pretty robust. We also look at our own revenue over the last 10 years. And what we see here on average is about a mid-teens percentage growth year-on-year every quarter. That's sort of the average on a year-on-year basis. And we think that's going to continue because of these elements I just described in the industry.
Our next question comes from Krish Sankar with Cowen and Company.
This is Steven calling on behalf of Krish. The first one, if I could, on product lead times. I think earlier, I think you already mentioned that the tester lead times are about 10 weeks, which is down from 12 weeks last quarter. I was wondering if you could also fill in, in terms of handlers and contactors what the lead times were exiting the June quarter?
Yes, sure, Steven. You're correct on the testers. The handlers, I did mention it's about 19 weeks right now, 19 weeks lead time. I think last quarter was 18 weeks. We were hoping to be further down. But as Jeff described, the supply chain constraints kept it about the same level.
Contactors, we made an improvement. We're down to about 5 weeks lead time, in greater part, with the improved operational efficiencies and increasing in-sourcing in our Philippine factory. And spares have remained pretty stable on an about 6 weeks lead time.
Okay. Perfect. And then one question on, I guess, the revenue mix going forward into the September quarter. So in particular, automotive, in your presentation, automotive was at 18% of sales, and mobility was 14%, and each of those were - automotive was up sequentially in terms of mix, and mobility was down quite noticeably sequentially.
Just curious, like, for the September quarter, any thoughts on some of the seasonality that you're mentioning earlier come into play in terms of what the contributions might be in September? Or is there any customer-specific purchasing behaviors that might cause volatility downwards for those 2 end markets?
Yes. Relative to end markets, the best way that we have to look at it is looking at the order mix by end market in Q2, which mostly generates the Q3 revenue. And it looks to be about consistent with the Q2 revenue segmentation we provided on the deck. So I would expect Q3 revenue to have a very, very similar percentage distribution, at least across the top 4 end markets here, automotive, mobility, consumer and industrial.
If anything, maybe industrial will pick up a couple of points. But the rest seems very consistent Q2 to Q3.
Got it. And just maybe one last, like, product-related question, Luis. In terms of your handlers for the automotive market, I believe it might be mainly pick-and-place handlers, if I'm not mistaken. Do you see an opportunity to move some of your automotive customers to maybe higher-margin handlers like the gravity tool - gravity product line? Or is gravity more for industrial customers?
Yes. Gravity is more for industrial customers, Steven. On the automotive side, I think the primary pivot that could create an opportunity here is sort of the developments around ADAS processor test, which embeds requirements for active thermal management of power dissipative devices. I'm talking here devices that will dissipate 10 watts and above during test on a single site, and you're testing them multisite. That probably creates the greater opportunity for some changes, new technologies and, frankly, very complex technologies on the handler side.
Perfect, and nice job in navigating the challenging environment.
Thank you.
Our next question comes from Christian Schwab with Craig-Hallum.
I just have a quick follow-up on the decision to not give 2 quarters of guidance like you've done the past few quarters. Should we take that as a reflection of potentially less visibility or predictability of the business? Or is that really more in response to all of the supply challenges that you're facing, and you just want to get a better handle at all the moving parts of that as a reason why you guys decided this quarter not to do that?
Christian, yes, it's the latter. There's just too much supplier uncertainty related to the material shortages and potential labor constraints due to COVID issues. So that's what - that's the reason.
Our next question comes from Atif Malik with Citigroup.
And I have one for Luis. Luis, can you talk about where we are in terms of the adoption of millimeter wave on your mobility RF testers and handler side?
Sure. The way we look at the - and let me start in this place, right? The - what is driving the 5G volume today is the technology - device technology around what it's called frequency band 1, which is not millimeter wave, right? It's the - I think sort of the sub-6 gigahertz. That's what's driving the volume today, and we think still ramping next year.
Devices now on frequency band 2, particularly for us, we believe we'll start seeing greater volume in - in the second half of 2022 and into 2023. And this is both for testers as well as it is for contactors. We have - well, contactors and interface products, meaning probe heads as well, not just contactors but also probe heads or essentially probe cards for millimeter wave, we should see some revenue this year on that, but really expect the volume to be second half of 2022 and into 2023.
Great. And then one for Jeff. Super exciting announcement of the Data Intelligence product. In terms of the gross margin profile for this product, is it fair to assume it's above corporate average?
No. The software products, it is a higher gross margin. So it's going to be upward into that high 80s, 90% range.
Our next question comes from Charles Shi with Needham.
Asking on behalf of Quinn Bolton. So Luis and Jeff, I think if I look at your 3 - now is the 3 major business segments, compared to your target model, your testers and handlers on a quarterly run rate basis, you guys are actually getting quite close. For a while, the contactor side is a little bit lagging behind, but you do expect a higher growth rate.
So I heard some of your comments earlier, I believe, your contactor quarterly revenue is probably in the low $30s million in Q2. You're getting a lot closer, I mean compared to the previous quarters. I wonder if you can comment on where you see the momentum the contactor business is going from here? And I have a follow-up.
Charles, yes, you're right on your statements. And the biggest momentum or the biggest growth opportunity for us in contactors is in the automotive space. We have - we estimate that we have about 26% penetration in the automotive space contactors, and that's the area we expect to see the biggest growth rate? And then second, following that, about half of the automotive growth should come from the mobility segment.
Got it. Got it. So maybe a follow-up on the contactor gross margin. Definitely, I heard you, there's a very strong uptick in terms of quarter-over-quarter margin expansion for contactors. Can you kind of let us know, going forward, what is your expectation? Because as we didn't expect, relative to your handler business, certainly, this. As a consumer - a consumable business, your margin may still have room to expand in this side of the business. I wonder whether that is your view from today if you look at it.
Yes, Charles, it is. Absolutely. As I mentioned, we're making really good improvements on the manufacturing side, so reducing the cost of those contactors. So by the end of the year, I believe we'll be approaching or at that 40% mark. And then in 2022, continuing to make strides to hit a mid-40% gross margin late next year.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Jeff Jones for closing remarks.
We'd like to thank everybody for attending this morning's call. Before I sign off, I just would like to let everybody know that we'll be attending 5 conferences coming up in August and September. We'll be attending - in August, we'll be attending B. Riley, August 19; the Needham conference, August 24; Rosenblatt Securities, August 25; Jefferies, September 1; and Citi, September 13. Hope to talk to you at any one of those conferences or at any other time during the quarter. Thank you again, and have a nice day.
This concludes today's conference call. Thank you for participating. You may now disconnect.