Greetings, and welcome to the Cohu Inc 2017 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jeff Jones, Chief Financial Officer for Cohu. Thank you, Mr. Jones. You may begin.

Good afternoon. And welcome to our discussion of Cohu’s most recent financial results. I am joined today by our President and CEO, Luis Müller. Following our opening remarks, we’ll provide details of our performance for the first quarter of 2017, as well as our outlook for the second quarter of this year. If you need a copy of our earnings release, you may obtain one from our website cohu.com or by contacting Cohu Investor Relations. Before we begin, you should all be aware that during the course of this conference call, we will make forward-looking statements reflecting management's current expectations concerning the company’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. Forward-looking statements include our comments regarding the company’s expectations for industry conditions, future operations, financial results, market share gains, expansion into new markets, and any comments we make about the company’s future in response to your questions. Our comments speak only as of today, April 27, 2017 and the company assumes no obligation to update these comments. We encourage you to review the forward-looking statements section of the earnings release as well as Cohu’s filings with the Securities and Exchange Commission, including the most recently filed Form 10-K and Form 10-Q. Cohu assumes no obligation to update these statements as a result of developments occurring after this call. Further, our comments and responses to any questions will not make reference to any specific customers, as we are precluded from disclosing such information by our non-disclosure agreements. Now I’ll turn it over to Luis. Luis Müller: Thanks, Jeff and good afternoon, everyone. Cohu had an excellent first quarter of 2017 with sales up 15% sequentially to $81.1 million and non-GAAP earnings per…

Okay. Thanks, Luis. Overall results for the quarter were much better than forecasted due in part to delivering over 90% of our handlers from Cohu's Malaysia manufacturing operation benefiting gross margin. Q1 was Cohu's 13th consecutive quarter of non-GAAP profitability generating 14% operating income and nearly 16% EBITDA. Strong order momentum in Q1 drove over 24% increase in backlog which sets the stage for sequential increases in shipments and revenue in Q2 and second half of the year. Integration of Kita is on track and we remain very optimistic about contactor sales synergies. For Q1, the GAAP to non-GAAP adjustments include approximately $1.7 million of stock based compensation expense, $1.1 million of purchased intangible amortization expense, $104,000 of restructuring costs, $187,000 of costs related to the acquisition of Kita and $347,000 of costs related to step up and valuation of inventory acquired. My comments are based on Cohu's non-GAAP results which exclude the impact of these items. A reconciliation of non-GAAP measures to GAAP -- equivalent GAAP measure can be found in our earnings release located on the Investor information section of Cohu's website. Sales for the quarter were $81.1 million and higher than guidance due to increasing demand for our take and place handlers, particularly from customers in the automotive and mobility market. One customer in the automotive market represented 20.1% of sales during the quarter. No other customer represented 10% or greater of Q1 sales. Q1 gross margin was 41.3% significantly better than our forecast and our financial model at this level of sales. Gross margin benefited from better manufacturing cost leverage in Asia and favorable product mix. We also benefited from one time cost of good solid credit for inventory evaluation and warranty cost which contributed about a 100 basis points to gross margin. We plan to…

[Operator Instructions] Our first question comes from the line of David Duley from Steelhead Securities. Please proceed with your question.

Yes. Thanks for taking my questions and congratulation on nice results. Just a couple things. Since -- have you changed your expectations for the size of the handler market since the start of the year given the results that were a bit better than expected? Luis Müller: May be we were towards the upper end of that expectation, Dave. I mean we talked before about the handler market likely going into $800 million to $825 million in 2017. I believe that's the number we gave you a quarter ago. And I'd say it's pushing towards the upper end of that range.

Okay. And just commentary about seasonality for you guys. I think I heard you say you thought you would see continue growth in shipments in the second half of the year but maybe you could just talk about what the puts and takes are for seasonality that you might see this year. Luis Müller: Yes. Dave, we commented it was back in Q4 of last year actually was that we didn't see the typical seasonality pattern for 2017. We thought 2017 would be more of stable, flattish year. Obviously, there will be some variations but not to the extent that we had seen in the past in 2015 or 2016. And at this point I still hold to that. I think the degree of seasonality this year would be significantly lower than it was in the last couple of years.

Okay. And then could you talk a little bit about -- obviously gross margins I think were better than expected. It's great to see that they've cracked a 40% level there. Did you hint you were going to raise the target model? Did you mention what gross margins you might be able to target? $400 million now or any color there would be helpful.

Yes. You bet Dave. And yes we are updating the metrics on our financial model as we talked about we are realizing greater cost benefits than we had originally projected from high volume manufacturing operation in Malaysia. That's about the higher end of our financial model. But say in current range maybe about $90 million we'd expect gross margin in the 40% plus range. EBITDA 17% and then when we looked to the mid term target which again is annual sales of $400 million, that gross margin is increasing 200 basis points to 42% with an EBITDA of 18%.

Our next question comes from the line of Edwin Mok with Needham & Company. Please proceed with your question.

Hey, guys. This is actually Arthur on for Edwin. But thank for taking our questions and congrats on a great quarter. The first one is just earlier this morning [Terry] and it talked about how RO is particularly strong for them and in this quarter your admission auto was also strong for you too. Just wanted to get a sense as to what is driving the strength for you in auto and how sustainable we should think about it going into the rest of 2017? Luis Müller: Okay. So in the auto segment not much has changed from what we mentioned a quarter ago actually. If you recall we commented that particularly China was accelerating the implementation of some new tougher emission standards. They are ready like plan for 2020 and now pulled in. It's pretty well known they have some of the worst air pollution in the world and they have to do something about it. So these are the so called the National Six Standard that they have over there implemented. And that has been a significant drive of the auto segment for us in addition to just general infotainment and electrification and we don't see any letting go at the moment from the auto industry this year.

Perfect. Thanks for confirming that. And then thanks for providing a little bit more color on the progress on your long-term growth drivers. With the wafer level prober, I think previously you talked about revenue target of $10 million - $20 million in second half 2017 and your system level test product I think the target was $5 million to $10 million. Are those still applicable or do you think there is an opportunity for that to go higher as move to the end of the year? Luis Müller: At this point those are still applicable and you are correct on the numbers.

Great. Thank you. And then maybe just last question. What are some of the puts and takes for gross margin coming in that 40% next quarter versus the strong gross margin at this quarter?

Yes, Arthur, Q2 has a less favorable product mix when compared to Q1 and then as I mentioned in my remarks it is about 100 basis points in Q1 due to what I call this one time credit related to inventory and warranty. And so our Q2 guidance were 40% and in line with our financial model. And as I talked to Dave, we are seeing increases at the higher end of those ranges up to 42% at our mid term target.

Our next question comes from the line of Patrick Ho from Stifel. Please proceed with your question

Hi, this is Brian Chen on for Patrick. Thanks for asking me -- letting me ask a few questions. First just congratulation and to double back on gross margins in a brisk market environment which is sensibly what we are in right now, can you talk about how are you are able to up shift to 90% manufacturing from Asia? And I guess how much incremental could we expect to see in addition here throughout the rest of the year?

So we are shifting manufacturing of -- we've shifted the manufacturing of pick and place and gravity. So we essentially have completed that whole transition of manufacturing to Malaysia. Our target has been to get to this 90% of handlers shipping in a quarter manufactured in Malaysia. So essentially accomplished what the original objective is. I'd expect that in future quarters that we are going to continue hover around that 90%, maybe 90% plus mark in this as you put it brisk environment.

Okay, got you. I was making going back to I think it was around 80% last quarter, seems like a decent step up on improving revenues to get that level. Maybe secondly computing, I have noticed at least from a quarter, recent core standpoint your big computing customer make it about the 10% threshold. Typically they are stronger kind of Q2, Q3 from a seasonality perspective. Is that the right way to think about that customer coming back in fold maybe Q2, Q3 giving you little bit better visibility and strength. Luis Müller: I don't tend to think of that customer having a seasonality pattern like the rest of the industry in as much I think they are customers mainly driven by sort of technology you know introductions and increased test coverage. Obviously, still depended on end markets consumer and deployment of our several farms out there no doubt but I don't tend to see that customer particularly as a seasonal customer. Maybe you have found a seasonal pattern there but I generally don't see it that way for that particular customer. So I don't know exactly what is to be reserved. I mean there could be an increase on a second half of the year with that customer or not and I am not 100% sure.

Okay, yes, fair enough. Maybe one last question, I think it is alluded too early but a measure tester company is talking about the increased test complexity specifically for handset components leading to a very healthy capacity buying environment at the moment. Whether these test complexities also benefit your thermal subsystem business? Is not maybe some relationship to your test handler business as well. Luis Müller: Yes. I think the increased test complexity really ends up translating into increased test time. And an increased test time is translating to additional capacity of systems in general. I mean it could also be handlers and we do sell handlers into mobile processor test. And, yes, it is ours good win, here is increased test complexity as it is when there is transition to smaller notes and general speaking increased test coverage into silicon matures at the new note.

Our next question comes from the line of Craig Ellis with B. Riley & Co. Please proceed with your question

Hi. This is Peter Kim calling in for Craig Ellis. Thanks for taking our question. The first question I have is on the deferred revenue of $12 million. Is this going to be rev rack over two quarters, three quarters or is this going to be mainly in Q3?

Well, so let me clarify Peter. It's -- the $12 million that I referenced is an increase in shipments quarter-over-quarter. And not all of that gets deferred to subsequent quarter. I'd say about $4 million of that increase will be deferred into we expect into Q3 revenue.

And then on the kind of the 6% QonQ guide what are some of the gives and takes in your end markets? Luis Müller: The sales grow from -- the activity continues to be pretty much in the same markets that have been in quarter one. And so we continue to be pretty strong in automotive. As I said there was a ramp that we saw in Q1 and continues into Q2 and the mobility market and here I am talking particularly mobile processors. And I'd say the mobile RF segment, analog RF and power sort of remains the same visibility for Q2 as it was in Q1, both from the mobility as well as IoT application. So not much of a change more so I'd say in ongoing ramp on the mobile processor side.

Okay. And then on the Kita acquisition, it seems like it's slightly tracking ahead of the $60 million annual run rate. Is this kind of a sustainable for the year or are you going to see kind of take down this quarter? Luis Müller: I don't see any take down this quarter but it's hard to know what it's going to be for the full year particularly as we -- I made a comment here during my prepared remarks as particularly we start designing in Kita pins or their spring probes into our digital mixed signal contactor bodies, those probes over time are going to start seeing sort of replenishment revenue or replacement revenue. They are the blade that wears out over time right. And it's a little tricky for us to model how that could influence revenue in future quarter. So I don't know to be honest with you other than certainly not letting go in quarter two.

Our next question comes from the line of Steve Marascia from Capital Securities. Please proceed with your question.

Thank you. Good afternoon, gentlemen. And congratulation on a good quarter. Just a couple of quick questions. I think you've already touched on. Did you say that with revenues running at about $90 million you expect about a 40% gross profit margin?

Yes. 40 slightly over 40% plus that's correct, Steve.

And next quarter revenues coming at somewhere about $86 million once you factor in or out all of different things coming with sales recognition factors.

Yes, that's right.

Okay. And what about the run rate for your R&D and SG&A expenses going forward for the next -- for the rest of this year.

Yes. So as I guided $22 million for Q2, that's flat to Q1, that's OpEx exactly. So our base run rate for operating expenses should be approximately $19.5 million per quarter. Then we've added Kita, so that's another $1.3 million per quarter and as we've talked in past quarters. We are currently implementing an ERP system at couple of our major location. So we've had about $400,000 to $500,000 of project cost each quarter. So the base should be about $19.5 million plus the Kita, so it talk about $21 million after we get past this ERP project.

So should we expect any time of ramp up in that side of equation as assuming your revenues keeps drawn towards $90 million or $100 million or do you guys pretty much see this is being predictable from these levels?

Yes, yes. It is very predictable. There is some variability to sales in SG&A as well as some in R&D as you can imagine, in omission, a bit of commission, a bit of travel and then as customers continue to ramp, they will need additional engineering support. So there is some variable aspect to it but its minor piece of the OpEx.

Gentlemen, there are no further questions in queue. I'd like to hand the call back over to management for closing comments.

Right. Thank you for joining us on today's call. We look forward to speaking with you at our Corporate Access Day in July or the investor conferences we will be attending over the next few months or when we report our second quarter results. Have a good day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your line at this time. And have a wonderful day.