Greetings, and welcome to the Cohu 2017 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference to your host Jeff Jones, Vice President of Finance and Chief Financial Officer. Please go ahead Mr. Jones.

Good afternoon and welcome to our discussion of Cohu’s most recent financial results. I’m joined today by our President and CEO, Luis Muller. Following our opening remarks, we’ll provide details of our performance for the second quarter of 2017, as well as our outlook for the third 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’s 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 market momentum, growth in our contactor business, market expansion into inspection markets, new products, and customers, future results including Q3 guidance and any comments we make about the company’s future in response to your questions. 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. Our comments speak only as of today, July 27, 2017 and 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. Finally, during the call today, we will also discuss certain non-GAAP financial measures. Please refer to our earnings release for reconciliation to the most comparable GAAP measures. Now, I’ll turn it over to Luis.

Thanks, Jeff and good afternoon everyone. For the second quarter, we reported strong results with sales of $93.9 million, up 16% sequentially and 23% year-over-year. And as reported on July 11, was above our original guidance of approximately $86 million. This was our highest quarterly sales since 2014, driven by continued momentum in automotive, mobility, and IoT markets. Non-GAAP earnings per share was $0.48, compared to $0.23 in the year ago quarter. Orders were a new record and for the first time exceeded $100 million, with increased momentum for industrial and solid state lighting applications. Systems accounted for 57% and recurring 43% of total orders. Additionally our contactor business increased to over 10% of quarterly sales, due to strong customer demand for a new RF solution and digital contactors coupled with Kita spring probes and is a growing opportunity for Cohu. Now looking more specifically at the system orders by segment in the second quarter, digital and mixed signal represented 28% of system orders, mainly for automotive, industrial, and consumer markets with strong demand for our turret temperature pick and place handlers for testing microcontroller devices. We continue to gain traction of our products in part due to the wide temperature range capability and expect to have two new customers evaluating our handlers before year-end. Processors were 24% of system orders in the quarter. There was a strong ramp for the Eclipse active thermal control handler at test subcontractors in Asia, supporting a production launch of new mobile processors from a leading customer that outsources assembly and test. Additionally, we had to repeat order for thermal subsystems for test of another customer’s device that will be in volume production in the second half of this year. Our leading microprocessor customer placed orders for capacity expansion at factories in the U.S.…

Thanks Luis. The results for the quarter highlight the strength of the financial model generating non-GAAP profitability of 16% operating income, and nearly 18% EBITDA in-line with the updated operating model targets as discussed last quarter on sales of approximately 94 million. Record orders in Q2 drove a 12% increase in backlog which sets the stage for solid Q3 sales. The integration of Kita is on track and we remain very optimistic about contactor sales synergies and our growth opportunities in this market. For Q2 the GAAP to non-GAAP adjustments include approximately $1.8 million of stock-based compensation expense, $1 million of purchased intangible amortization expense, $341,000 of restructuring cost, $465,000 of cost related to the step-up in valuation of inventory acquired from Kita, and 56,000 of other acquisition related costs. My comments that follow, including the Q3 guidance are all based on Cohu's non-GAAP results, which exclude the impact of these items. Sales for the quarter were $93.9 million, which was above our original guidance of approximately $86 million and our preliminary expectations of approximately $93 million, driven by continued momentum in the automotive and mobility markets. One customer in the automotive market represented approximately 21% of sales during the quarter. We had no other 10% or greater customers in the second quarter. Q2 gross margin was 40.8%, and in-line with our financial model. Operating expense was $23.1 million and in-line with our preannouncement. The non-GAAP effective tax rate for Q2 was 10.2%, and lower than forecasted. Our tax rate benefits from profit generated outside the U.S. in countries with lower statutory income rates and in certain countries where Cohu has income tax holidays. The tax rate also benefits from profits generated in the U.S., which do not currently incur a tax provision because of valuation allowance. In Q2, we…

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Patrick Ho with Stifel. Please proceed with your questions.

Hi, this is Brian Chen on for Patrick. Thanks for letting me ask a few questions. First, I just wanted to confirm, I don't think I caught it in the prepared remarks, but whether you still anticipate the $10 million to $15 million plus in sales from the new wafer level prober and SLT platforms in the second half?

Hi, how are you, this is Luis. As you know, we just introduced a Panther program in July. I think you were there, you saw the product and we are in the process of ramping production from our Malaysia operation for this product. As you have seen it, it is quite innovative, product includes testing, marking, inspection taping for cingulated wafer level chip scales, CSPs and bumped dies, but at this point, I’m not going to give any more specifics about PANTHER, particularly anything commercially related because I think it’s sensitive information and things that competitors will be listening in to.

Okay, fair enough. Also, I wanted to ask you, you gave some good qualitative commentary on the contactor business across the 10% threshold, like you mentioned, I know you’ve talked about maybe a 20% CAGR over the mid-term period for that particular segment, is it more realistic given the momentum you are seeing, maybe to think about that near-term of the lower base is kind of a minimum growth threshold?

Well, at this point we’re sticking to the plan that we have, that we have communicated which is a 20% CAGR over the mid-term and we’re actually good of the gate here with the beginning of the year and the first half results and the quarter-over-quarter order momentum, but we’re staying with our 20% number at the moment.

Okay, fair enough. One last quick question for me, I know you don't break it out this way precisely, but given the breakdowns of the order momentum that you saw in the quarter, it seems like maybe industrial and auto in aggregate, which is strong markets you might have been down a little bit sequential Q-on-Q, can you maybe provide any color in terms of the market commentary around that?

I don't have handy right now to comment auto and investor Q-on-Q, but I can tell you this for sure, it continued to be a very strong quarter for automotive orders in Q2. It was also a very strong quarter for the mobile segment and the IOT and we had also pick-up in strength in the industrial and LED. So, it was actually a very broad based quarter and that’s what led to record orders and like I said, for the first time above 100 million.

Okay, thank you very much.

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

Hi guys, it’s actually Arthur on for Edwin. Thanks for taking our questions. Just the first question is just on the system level test, congratulations on the progress you have made and targeting to get it out launch in this quarter, can you provide some color on the state of customer engagements and sort of the applications you are targeting in order to grow this business?

Sure, Hi Arthur. We haven’t quite announced the product yet, publicly speaking, even though we’re talking about having a first revenue or first shipment in Q3. We are looking at this product as an opportunity to get into the space where semiconductor manufacturers are integrating different devices together like processor, memory, potentially RFP, P-mix and others into a system and package. So the applicability for the system level test in the near term is more into - if you will into the mobile space, high-end devices on the mobile space, and as we mention here in mid-July there may be a longer term opportunity for these platforms into the memory market as well.

Got it. Thanks for that color. And then given that contactors and handlers pretty much go hand-in-hand, can you briefly talk about some of the sales synergies you’ve seen with your broad contactor portfolio and whether they have exceeded your prior expectations or remain consistent?

For the first two quarters of this year, I would say it really exceeded our expectations in the sense that it’s going faster than originally anticipated. We had strong bookings in contactors, increasing quarter-on-quarter. A lot of it has to do with the benefits of having a Kita spring probe and the opportunity to leverage that into - both into our handler install base and frankly also sale of new handlers to our customers. So, it’s been very positive actually.

Okay, great to hear that. Last question, with the launch of the Aquilae inspection module, what’s the go to market strategy here and how do you plan to grow that business?

Well we have, just to be clear we have been in the package inspection for quite some time now through our Ismeca acquisition. Most of our turret handler sales have included package inspection along with electrical test functions, right. It’s only more recently that we have seen an expansion with the capability of these products heading die inspection, micro-crack and sort of true physical measurement capabilities, and including the Aquilae that we just announced. So what we see today is more of an expansion of vision capability on turret, which was aimed for small packages, small semiconductor devices, and as we grow into this, we’re also having an increased focus on expanding the vision technology, as well as the automation technology. We may or may not be turret in the future into larger packages, like those that are used in the automotive and processor markets.

Got it, thanks for the color, that's helpful.

Okay, go ahead.

I was just going to say that was great color. Thank you for taking our questions.

Welcome.

Our next question comes from the line of David Duley with Steelhead. Please go ahead with your questions.

Yes, thanks for taking my questions. Most of them have already been asked, but I’ll take a shot at a couple others here. Just as far as your guidance goes in the September quarter, could you just talk about how some of the major pieces are going to act, I guess it’s relatively flat or slightly down, whatever the guidance is, but just from a macro perspective, could you just talk about what pieces are going to be up and down in the September quarter?

Hi Dave. As you said, overall it will be relatively flat. Shipments are expected to be relatively flat. I mean looking at the Q2 orders; I would say we're going to see strength sort of relative to what we're seeing in Q2. So, I mean automotive industry are still going to be strong, contactors although lower numbers, they will have good momentum. I don't know that we're going to see any major shifts in the sort of the make-up of the revenue of the shipments. So, I would say, it’s going to be pretty much strength in auto and industrial, followed by growth in contactors and then similar activity, and solid state lighting, computing and so forth.

Okay, and then just as a clarification, you mentioned how you gave a revenue range this quarter, and one of the explanations was customer acceptance and the other was ERP implementation, could you just help understand what you meant by that?

Sure. So those are the two, we call them timing variables that are identified for Q3, could impact the revenue, and so the first one, I’ll talk about relates to the ERP change over Malaysia and our Swiss locations, and you know so with any significant systems change, there is always a risk of transaction processing delays as the new system comes online, and you know we have done turret testing of the system it’s also a system that we know very well, it’s used in nearly all of our other Cohu locations, so that we believe the timing risk is low, but still exist. Secondly, we have $2 million to $3 million of revenue, which requires customer acceptance, new customers, so requiring acceptance before we can recognize the revenue that’s scheduled to achieve that acceptance near the end of the quarter. So any delay, any slight delay in this process, which by the way is a process that we don't control a 100% right, the customer has a very large say in the timing of acceptance. So any delay in this process will move that revenue into Q4.

Okay. As a final question, what is, can you hear me still?

Yes, we can hear you.

I'm sorry; it seemed like the phone faded out there. Just as a final question, you mentioned the wafer level to pick up packaging, just clarify what your statement was that you did make about that, I think you said you were shipping a system from Malaysia into production and so I’m not looking for any new information because you just updated as, repeat what you said about that, and then remind us, you have the evaluation systems in the field that customers with this product already so now you’re shipping a production system is that the point?

Yes that’s about right. We have multiple systems in the field and what we’re doing is, we’re ramping production of this product the PANTHER prober from our Malaysia manufacturing operation and should be ready to start shipping the product towards the end of third quarter from Malaysia.

Okay. So, I guess you would expect to be quoting systems into production towards the end of the third quarter?

Yes, to be specific, my comment was we will be shifting out of our production in Malaysia at the end of third quarter, but yes going into customers.

Great, thanks for that clarification.

Welcome.

Thanks Dave.

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

Hi this is Peter Kim calling in for Craig, congratulations on the strong execution.

Thanks.

Thanks Peter.

Just on a high level view of - I recall a few quarters ago, you provided some industry growth in the low single digits for a contactor and handler, so has that view changed or is this more of a share gain story for Cohu?

Well, it’s a combination, the view has not changed and we still believe in those growth numbers for the market, in addition to, we obviously have grown the business both from a share gain perspective in core handlers, as well as share gain in contactors, and obviously an acquisition that we closed beginning of this year of Kita manufacturing in Japan. So, you put all those pieces together and that’s what Cohu is in 2017.

Okay, thanks. And then just on the cash balance, you know with a growing cash balance and we’ve kind of a successful integration of Kita, how do you think about using cash for future, other dividends, M&A and so forth?

Yes, good question Peter. So, as you know, you mentioned we pay a dividend that is roughly $6.5 million a year, the operation requires $5 million to $7 million per year in CapEx and then we estimate that we hit about $35 million in reserve just to operate the business and provide customers with the confidence that we have the liquidity in order to continue to service them during ramps and so forth. So, all-in-all, we view it as requiring about $40 million to $42 million for the operation. The balance of which would be access that is earmarked currently for investments to grow the business. And we outlined that strategy in great detail during our corporate access day and it’s a combination of organic development, new products in the contactor space. We’re wrapping up the wafer level CSP product, new products coming into the core markets, but then there is also opportunities, future opportunities for acquisitions as we have done in the past with Rasco, Ismeca, and Kita. We will continue to look at opportunities to acquire companies to accelerate the growth to hit the financial targets that we laid out, also during that access day, which the mid-term target is now $500 million in sales, and a 45% gross margin. So that’s what the cash is earmarked for, it’s earmarked for strategic investments to achieve those targets.

Thanks for the helpful color, and a final question is, how should we think about margins as you launch these, kind of new products, and as we start [indiscernible] these products?

Well you should think about it in terms of the model that we’ve set forth. In the near term, we’re still operating under this Cohu 400 model, which is defined as 400 million in annual sales of 42% gross margin, and an 18% EBITDA. And we’ve made fantastic progress with respect to achieving that level of profitability even on sales that are slightly less than 100 million per quarter. So, as we release new products they start to gain traction. We grow our revenue, we will be achieving the 42% gross margin at $100 million in sales, and then over time, over the midterm the 3 to 5-year mark it’s discontinued growth in core markets, it’s further expansion and inspection. And potentially additions with acquisitions that could accelerate that timeframe, but it’s the expansion of revenue based on those products, which will have gross margins at or above the target model financial profile that will bring up the gross margin as the revenue increases.

Thank you. Congrats on the strong execution.

Thank you, Peter.

Thank you. At this time, I will turn the floor back to Jeff Jones for closing remarks.

Okay, before closing out today's call, I want to let you know of our upcoming IR events, which includes the D.A. Davidson Investor Forum in New York City on August 15; and the Dougherty Conference in Minneapolis on September 19. We’ll also be hosting road shows to Baltimore, Boston, Midwest and Dallas. If you would like to request a meeting in any of these cities, please contact either myself or our IR firm Shelton Group. And we look forward to providing an update when we report our third quarter results. Thank you and have a good day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.