Cohu, Inc. (COHU) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Cohu, Inc. Third Quarter 2020 Financial Results Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeff Jones, Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning, and welcome to our conference call to discuss Cohu's third quarter results and fourth quarter 2020 outlook. I'm joined today by our President and CEO, Luis Müller. If you need a copy of our earnings release, you may access it from our website at cohu.com or by contacting Cohu Investor Relations. There's also a slide presentation in conjunction with today's call that may be accessed on Cohu's website in the Investor Relations section. Replays of this call will be available via the same page after the call concludes. Now to the safe harbor. During today's call, we will make forward-looking statements reflecting management's current expectations concerning Cohu's future business. These statements are based on current information that we have assessed, but which, by its nature, is subject to rapid and even abrupt changes. We encourage you to review the forward-looking statements section of the slide presentation and the earnings release as well as Cohu's filings with the SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, October 29, 2020, 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? Luis Müller: Thanks, Jeff. Good early morning, everyone, and thanks for joining us. Today, I'll discuss some of the dynamics from third quarter, what is driving our expected business improvement into next quarter, summarize how Cohu is improving its infrastructure and adapting to the pandemic, and highlight our alignment with momentum growth markets for 2021. Revenue in the third quarter was $150.6 million, exceeding our updated guidance with business conditions continuing to improve throughout the quarter. As orders strengthened, we're able to accelerate some recurring shipments in support of customers' production ramps. Our operations team and supply chain partners did a great job meeting customer needs in the third quarter and even more so going into the fourth quarter as we'll soon discuss. Third quarter orders were split 40% recurring and 60% systems, with a sharp increase in demand for our testers and handlers and another sequential record booking quarter for PCB test equipment. Overall, estimated test cell utilization increased 3 points quarter-over-quarter to 81%at the end of September. Mobility continues to be a very strong segment for Cohu, particularly for RF test of devices going into next-generation 5G smartphones. In third quarter, we launched a suite of RF test instrumentation addressing 5G, Wi-Fi 6 and ultra-wide band requirements. We're seeing strong and wide customer adoption for these products and are successfully managing an accelerated production ramp. I couldn't be more proud of our engineering, operations, applications and service teams for delivering such a successful product introduction. There is much more to do in fourth quarter and into 2021. But so far, this has been a great testament of value creation from our October 2018 acquisition of Xcerra. Still in mobility. We're also managing a fast production ramp for handlers used in testing application processors and RFICs and growing customer traction for the new Neon package inspection platform. 5G deployment is still in the early stages with estimated 16% penetration in smartphone units. Industry analysts expect that this market will continue to expand in 2021 and beyond, likely reaching peak demand in 2023 or 2024. There are other applications in automotive, industrial and IoT that are not yet considering this forecast and should extend the technology beyond this time horizon. Task complexity is also increasing, leading to higher ASP systems and greater test intensity. The net result is very positive for Cohu's RF testers, handlers and our new line of contactors. In third quarter, we also saw new U.S. export restrictions to Huawei. I believe everyone understands that the smartphone demand remains unchanged, but the business redistribution is translating into incremental orders for Cohu products from customers where we have greater share. Finally, there were new U.S. export restrictions on China military end-use applications and end users. We have conducted reasonable due diligence on our customer base and don't believe this rule will impact Cohu at this time. In third quarter, we started seeing a recovery in volume orders from automotive and industrial semiconductor customers. This ramp is happening sooner than anticipated and led to a near threefold increase quarter-over-quarter in automotive system bookings and twofold increase in the industrial segment. Despite all the excitement, the combining segments were still about half the order rate from 2018 and should have more room for improvement in the near future. Utilization across automotive semiconductor customers is picking up and so are orders in the first few weeks of fourth quarter. It is no surprise that automotive demand is coming back stronger for testing ADAS and power management semiconductors as well as sensors that include new optoelectronic devices. In the consumer segment, we're seeing initial deployments of mini- and micro-LEDs in new large panel TVs driving the forecast for incremental task capacity. Also new, more powerful gaming GPUs are set to benefit from Cohu's thermal handlers that optimize yield for actively managing thermal dissipation during test. The computing segment is going through transition. New edge devices and supplier diversification are creating new business opportunities for our thermal handlers and subsystems. As I mentioned in an earlier call, we have been working to deliver time to yield value to several customers through better integration of our test cell elements, tester, handler and contactor. In third quarter, we captured a design win for RF test, where a major OSAT customer recognized the value of buying a complete test cell from Cohu that accelerates time to achieving target production yields and overall equipment efficiency, or OEE. We are working with other customers across different markets to demonstrate similar capability, I hope to describe new application wins in coming quarters. On the contactor front, with the sharp increase in system orders, our contactor attachment rate is now at 29%. As I previously explained, this number will fluctuate up and down quarter-over-quarter. In light of rapidly improving business conditions, strong cash generation and our forecast during third quarter, we took action to reduce outstanding principal under our Term Loan B debt associated with the financing of the Xcerra acquisition by $17.3 million. Now looking at the impact of the COVID-19 pandemic to our business. This has been an incredibly challenging year for our employees, customers, suppliers and communities. We're committed to ensuring the safety of all stakeholders to protecting our livelihood and doing the best we can for our communities. Cohu has increased supply chain resilience and implemented policies to safeguard our employees, ensure business continuity and support our customers. Because of the pandemic, Cohu has reduced travel and other expenses, and we're now finding new ways to support customers. Among these, we're implementing virtual reality-assisted technologies to bring experts to the field without leaving their homes. We're excited to pilot new technologies like this to enhance customer support and expect long-lasting benefit from our, from such solutions, including lower operating expenses when the pandemic crisis subsides. Now looking ahead, we're encouraged by momentum across Cohu's main market segments and by customer interest for our new products. We'll be guiding fourth quarter revenue and profitability up and are forecasting this strength to continue into 2021. Cohu is poised to grow next year with accelerating 5G deployments, compounded by a: projected increase in smartphone units; growing ADAS and electrification; unanticipated expanding automotive unit sales; new opportunities in computing with edge processing. AI and next-generation GPUs; and expected recovery in the industrial segment with improving global GDP. All in all, Cohu is improving its operations and service infrastructure to meet the evolving pandemic-driven challenges, lowering operating expenses and aligning products with momentum markets that will deliver revenue growth. Before we continue with financial results, I'd like to announce a senior management change and thank Pascal Ronde for his outstanding leadership of Cohu's global customer group over the past 2 years as we integrated Xcerra. Pascal will be scaling down his time commitment starting in first quarter next year and he will eventually transition from Cohu at the end of first quarter 2022. Looking forward, I'm pleased to announce that Chris Bohrson, who is currently the Senior Vice President and General Manager of our Test Handler Group, will assume Pascal's role around mid-February next year. Chris is a highly respected industry veteran with strong multiculture and business experiences, and he's held in high regard not only by customers, but all Cohu. In conjunction with this transition, our three handler business units will report directly to me. Now I'd like to turn it over to Jeff to provide details on third quarter results and share fourth quarter guidance.

Thanks, Luis. Cohu delivered strong results in Q3. Sales were higher than our revised guidance as of August 31st. Gross margin exceeded our business model. Operating expenses were in line with forecast, and Q3 non-GAAP profitability was higher than our business model. Before I walk through the balance of the Q3 results and the Q4 guidance, let me talk about our GAAP to non-GAAP adjustments. Please note that my comments that follow, I'll refer to non-GAAP figures. For GAAP to non-GAAP reconciliations and disclosures, see the accompanying earnings release and investor presentation. For Q3,the GAAP to non-GAAP adjustments include approximately $3.3 million of stock-based compensation expense, intangible amortization expense was approximately$9.8million. The gain on sale of our German facility was approximately $4.5 million, and restructuring costs were approximately $3 million. The Q3 2020 net cash impact of restructuring was approximately $400,000 due to severance and facility closure. The Q3 GAAP to non-GAAP adjustments also include a $7.3 million impairment charge related to in-process R&D assets from the Xcerra acquisition. This is a noncash charge caused by COVID-19driven delay in our customers' expected adoption of products currently in development. Now turning to Q3 results. Revenue was $150.6 million and $4.6 million higher than our updated guidance as provided on August 31. In Q3, no customer accounted for10% or more of sales. In the third quarter, Cohu's gross margin was 44% and in line with the high end of our guidance. The Q3 gross margin is approximately 100 basis points higher than our business model. Operating expenses were $48.3 million and in line with guidance. Temporary cost reductions remained in effect throughout the quarter. Third quarter non-GAAP operating income was 11.9% of sales, and adjusted EBITDA was 13.5%. Cohu's non-GAAP effective tax rate for Q3 was approximately16% and lower than guidance primarily as a result of tax benefits derived from operating losses generated in Europe. Non-GAAP EPS for the third quarter was $0.27. Now turning to the business model. As we've previously discussed, the actions required to achieve the $40 million of acquisition cost synergies were completed as of the end of fiscal 2019.At the end of March 2020, we implemented temporary salary reductions, which took effect at the beginning of April and further reduced operating expenses by approximately $3 million per quarter, adding about $0.05 of EPS to our model. Given the improvement in business conditions, Cohu is lifting the cost reductions and reinstating full base salaries and Board of Directors' cash retainer compensation as of the beginning of 2020 guidance. I'll talk more about these when I cover the Q4 2020 guidance. Now moving to the balance sheet. Our cash balance at the end of Q3 was approximately $171 million, and supports our operational need of approximately $80million, debt service and funding the inventory and receivables associated with the steep production ramp we are currently experiencing. During Q3, Cohu reduced debt by approximately $17 million. Deleveraging continues to be a capital allocation priority. Cash flow from operations during Q3 was $14.7million, and CapEx for the third quarter was $5.6 million driven mainly by purchases of equipment to increase contactor manufacturing capacity in the Philippines and Japan as well as capital additions necessary to consolidate our German test handler operations into one facility. The fourth quarter sales forecast has improved significantly since the directional guidance we provided during the last week of July. For Q4, we're guiding sales to be between $176 million to $192 million. The low end of the revenue range considers some supply chain uncertainty caused by COVID-19 and potential risks associated with book and bill sales and customer acceptance, which is required for revenue. Gross margin for Q4 is expected to be between 44% and 45% and in line with our business model. Q4 operating expense are projected to be approximately $51 million. Q4 will include 2 months of reinstated base salary costs plus high variable expenses such as sales commissions resulting from the sequential increase in revenue. Other expenses, such as travel and marketing costs remain at reduced levels in Q4 and the foreseeable future as Cohu has adapted well to this new business environment with more remote interaction with customers and between our operations. Looking to quarters beyond Q4, which will include the full impact of salary reinstatement. We expect operating expenses to be approximately $52 million on quarterly revenue of approximately $180 million. We expect Q4 adjusted EBITDA at the midpoint of guidance to be approximately 18%. The Q4 forecast non-GAAP tax rate is approximately 22% at the midpoint of guidance. As a reminder Cohu's profits generated offshore and subject to statutory tax rates in various foreign jurisdictions. Income taxes on profits generated in the U.S. are mitigated by net operating loss carryforwards. The diluted share count for Q4 is expected to be approximately 42.7 million shares. With increasing backlog and strong order forecast across various markets, our current projection for first quarter revenue of 2021 is to be approximately flat to up 5% from the midpoint of Q4 guidance. 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.

And congratulations on the pickup in the business. Maybe the first question, coming off low levels, but the system order pickup in auto industrial certainly sounds fairly substantial. I usually think of service-oriented sales leading a recovery in utilization and also system orders. But maybe can you talk about the underlying drivers you're seeing, your view on sustainability and then inclusive of this and your Q1 sort of outlook as well? Are you building backlog here beyond 4Q?

Yes. Brian, sorry. As we described in the comments, yes, orders are increasing, book-to-bill, Q3 was above 1, expect the same for Q4. So yes, we are building backlog. You mentioned the automotive coming off of low order rates, and that's absolutely true. So we believe we still have the ways to go there to get back to a normal run rate. We think we're about $25 million to $30 million per quarter and orders lower than our normalized rate.

And just have a question about the kind of the mobility side of the business. But in terms of the customer strength, is it pretty broad across customers and geography? Luis Müller: Brian, it's Luis. Yes, it is. It is broad on customer base and geographic as well. As I mentioned, it is particularly strong for RFICs, but we've also seen a strong pull for our thermal handlers for application processors and also an increased forecast here on the flat panel display drive. Some of it associated with mobility are management IC as well related to mobility.

Great. And in terms of like the RF test part of the business, which has been strong this year, I think in the past, Luis, you've commented that you see the TAM there, perhaps growing sort of maybe 20%-ish per annum over the next couple of years or so. I think last night, Samsung talked about the potential for the industry shipping over 500 million 5G phones next year, up from, say, 200 million and 250 million this year. That's one of the higher numbers I've heard, and that's last night. I'm curious, how would you think of sort of the RF TAM growth relative to that sort of a number? Luis Müller: Yes. So we think the RF TAM, and by that, I don't mean just in phones, but connectivity in general. So some of it, taken for granted. Some of it is in automotive or IoT, that that TAM is growing to about $400 million market size or addressable market size for Cohu in the next 2 to 3 years.

Okay. And one last quick one maybe for Jeff. At the revenue level, you're guiding for 4Q. Against the target model, it might suggest in the neighborhood of $0.30 to $0.45 in earnings. You had mentioned the temporary cost measures are coming back. It sounds like the OpEx is still going to be lower than the target model. So can you kind of perhaps quantify sort of the benefit you're getting from sort of the reduced travel and other sorts of cuts and expenses right now? I guess it's just, it's your guidance for 4Q OpEx subtracted against sort of where you would normally be at those revenue levels?

Yes. That's a good way to look at it, Brian. Again, as I mentioned in my remarks, I think the way to look at it is at a revenue, quarterly revenue rate of $180 million. Think about $52 million in operating expenses. Then with every $10 million change in revenue, our OpEx will move by $1 million. So as revenue goes up to $190 million, we'd expect OpEx to be at $53 million.

And our next question comes from Krish Sankar with Cowen and Company.

And congrats on the great results and guidance. Luis, just had a couple of them. First one is, is there a way to segment half year mobility orders or sales? How much of it is coming from 5G? And if you can also give that kind of granularity over the last couple of quarters, so we can see the trend of how 5G is either increasing or how it's trending for you, folks? Luis Müller: Yes. Krish, I won't have all the details handy here. But I can tell you this, the third quarter RF tester orders were almost entirely 5G related, if not, really entirely 5Grelated. The handler orders in mobility are a little bit more difficult to call because we are testing an application processor, which is a digital device. When our handlers in, it's really a difficult call to say whether it's going on a 5G or a traditional 4G phone ultimately because we don't know which phone maybe--supplier may be using that processor. Similarly, with the display drivers or the power management ICs, we don't have that visibility down to a specific cell phone model that it's used. So the RF, it's easier to call because we know the device. But on the other ones, it's hard to know how it gets integrated.

Got it. Got it. Fair enough, Luis. And then along the same path, when I look at the RF for your customers, not the old side, but the actual, the RF front-end module makers, it seems like there are like roughly 5 of them, 4 in the U.S. and one in Japan. How would you characterize your market share with--amongst all those 5 end customers?

The OSATs. Luis Müller: With the OSATs, you're talking about the share with…

Not the OSATs, not the OSATs. I was talking about like the Qorvo, Skyworks, Marvell, Qualcomm, Muratas of the world. Luis Müller: I see. So we have had traditionally the largest share of the power amplifier market. And that continues to be the case. We have more recently gained share into other RF front-end ICs, particularly antenna tuners and low-noise amplifiers and switches. So I would say, give or take, 60% plus share on the power amplifiers. I can't tell you exactly the share on the other elements, but it's on the rise. It's increasing.

Got it. Got it. And then a final question, either for Luis or Jeff. Auto, it seems to be kind of in a recovery mode, but as a percentage of your system orders, it's still pretty low. I'm kind of curious when you would expect it to get back to like some of your early 2019 levels or the prior ones? Luis Müller: Yes. That's a very good question there, Krish. It's hard to make those kind of predictions. But we did expect coming into last quarter that the market would be in a recovery by the end of fourth quarter, beginning of first quarter 2021, and that possibly hit full sort of a--being a full swing in the second half of '21 or '22. Where we stand today is things have turned on faster than we had anticipated at the end of the third quarter and continue to adhere at the beginning of fourth quarter. So I'll be a bit more bullish this time and say that we think we're going to be back in normal business environment for automotive sometime in 2021. I can't precisely say when, but I'll be a bit more bullish from where we stand today.

Perfect. Thanks Luis, thanks Jeff. Congrats on good results. Luis Müller: Thanks, Krish.

Thank you. And our next question comes from Craig Ellis with B. Riley. Your line is open.

Thanks for taking the question guys. And congratulations on the real robust execution and totally getting to be reinstating normalized salaries for the team, given what you're doing with your execution. I wanted to start following up with a comment that you just made regarding Krish's question. So my understanding is that Cohu has a very strong position in EV power and ADAS-related applications. So when we're thinking about the business' capability on a go-forward basis relative to its order intensity in either '18 or '19. Wouldn't we expect for something, for order intensity to actually be higher given how strong your position is in these 2 secular growth areas? Luis Müller: Craig, yes, this is Luis. Yes, I think that's the direction we expect the market to go. And ultimately, to grow. So to Krish's prior point, we think we'll be back to that quarterly rate sometime in 2021. We see the trajectory already from where we stand today. But beyond that, the electrification of the drive chain and the adoption of ADAS seems to be accelerating. So we think automotive has the potential to go beyond where we were a couple of years ago. I don't know if that then translates into 2022 or exactly the time frame. But one thing is certain. The ramp in automotive now is, and then we see on every order coming through now is very heavily centered around battery management systems, testing battery management devices or high-end microcontrollers, or if you could call it microprocessors that are power dissipative, therefore, for ADAS applications and also sensors that we believe are also related to ADAS applications in vehicles. So yes, those are the segments of the automotive market that are coming back stronger. And I think we'll continue to propel growth here for the next several years in auto.

That's great, very helpful. And then, Jeff, just a clarification on gross margin in the quarter. The 44%, great to see the leverage. Were there any one-timers in that number? And if not, any implications for how we think about gross margins versus the target model going forward?

Craig, no. No one-timers in Q3, 44% gross margin. As a matter of fact, I would say we probably had some costs if, some onetime costs that could have weighted down the gross margin a bit. But looking forward and modeling gross margin, the business model and the gross margin line is still largely accurate. So I would follow the gross margin at the different revenue levels in the current model. It's the operating expenses that need an update on the guidance, and that's where I came in with the $52 million on about $180 million, and then changing and fluctuating roughly about 10% of the change in sales.

Got it. Okay. And then very helpful to get some of the color regarding visibility into calendar '21. So Luis, as you look at calendar '21, can you just characterize where your visibility is relatively stronger, where you're more confident? And given how robust we're exiting the year versus normal seasonality, what are the implications for calendar 2Q and 3Q '21 seasonality from our exit velocity in calendar '20? Luis Müller: Okay. So let's take that, those pieces then, Craig. So the strength that we see going into 2021 is, I think it's very much aligned with what we've been talking about here for fourth quarter. The mobility, 5G deployment is going to continue into 2021 and beyond. I think it was Brian, Brian Chin, who even made the comment about unit sales, cell phone unit sales, which are finally projected to grow next year in addition to the further deployment of 5G technologies. So I think you compound the two, we're looking, we're very optimistic for the mobility market, particularly RFICs, RFIC test. We also have a lot of optimism about auto. As we just described here and talked about the EV and ADAS and sensors, that's another big area of driving growth and potentially here turning on faster as we see than we had originally anticipated. And another one of those sort of big trends that will continue to go for the next several years. Seasonality becomes a tougher question to answer simply because we have normal times and semiconductor industry is usually anything short of normal. And we have 2 mega trends happening at the same time, which is this 5G technology deployment and then all these ADAS, EV deployment in automotive. So it gets hard to talk about seasonality when you have 2 big segments for semiconductors ramping at the same time. I don't have a clear view yet on seasonality for next year, Craig, and I'm going to have to defer that by another quarter and then comment a little bit more for next year.

That's totally understandable, Luis, and appreciate the color that you provided. Just regarding the points you made around multiple megatrends at play. In your experience, when was the last time you've seen dynamics this favorable for Cohu? If you look back at history, what would be a comparable point for you? Luis Müller: Okay. So if I look back in history, a more recent history, I know we had a very strong automotive market a few years ago. 2017, 2018, automotive was particularly strong with tighter emissions control in the U.S., Europe and China. But that was, I think that was the singular major driver there. If I go back a few more years, we had, I want to say it was 2014, if I'm not mistaken, it was the point in time in which application processors, power dissipation during test, cross the threshold that opened up the window for us to sell our active thermal control technology, the same that we're using for mobility, sorry, for laptops. And at the time, computers, servers and that technology found its way into application processor, smartphone market. So that was a big one, too. I don't recall in this recent history, having 2 big things happening at the same time. I guess I would have to look a little deeper here. But I don't recall two big things happening at the same time. So yes, I think that's my answer there, Craig.

And our next question comes from Sidney Ho with Deutsche Bank. Your line is now open.

Thanks for taking question. And congrats on the strong quarter and guide. Maybe my first question is on the RF test module, the new product that you guys have announced. Maybe can you put some context around this particular product in terms of revenue opportunity that, that brings? And what's the attach rate that you're seeing with your installed base? And how quickly do you think that can be ramped out? Luis Müller: Well, we don't--Sidney, this is Luis. We don't really break out revenue by product line. But I think--let's see if I can answer some of your questions here. As I mentioned earlier, we are looking at a RF addressable market. So there is not everything RF we can do today, an RF addressable market for Cohu that is growing to about $400 million in the next 2 to 3 years. We do have a very strong share today in power amplifiers. And this $400 million extends beyond power amplifiers into things that we are penetrating now as I mentioned earlier. I think over time, the opportunity is there to grow this to close to $200 million in RF revenue for Cohu, if we execute successfully in all of our plans. That doesn't answer what we have today, but I really don't want to get into particular product line revenue today.

Okay. That's fair. Maybe on my follow-up question is, in the past you talked about test cell utilization at 80% is in line when you start seeing system sales pick up, and obviously, you saw a pretty good pickup here. With overall cell utilization, I think you mentioned 81%, can you talk about which end markets do you expect to see system sales starts accelerating? Obviously, mobility is one, but--also try to think about whether there is some sort of seasonality you think about these utilization. Luis Müller: Yes. Yes. And you're right, I agree with you. It is--the business is particularly strong for an 81% utilization right now, and that's what gives us more optimism about 2021.The utilization is now particularly strong for applications in mobility. We see it particularly strong at OSATs. I think there is more room for improvement of utilization for customers in automotive. Like I said, we are seeing a sharp increase in automotive orders, but that said, the utilization there on average, it's still below 80%.And I think what's happening now is we're seeing technology being major pivot points driving the business in addition to utilization. 5G deployment, ADAS, these are all new technologies that almost like notwithstanding utilization, you need type of capital in order to test these devices. So you've got a compounded effect here on top of the general utilization discussions that we have.

Okay. Maybe one last question for me. For your comment on the first quarter revenue being flat to up 5%, can you talk about what areas you are expecting to improve or maybe there are areas of decline to get to that kind of net growth? I know you just answered a previous question about seasonality that may or may not exist. But trying to figure out if you are still in, do you think this is about seasonality? Or are you still in kind of catch-up mode in some of the areas?

Yes. Sidney, I would say, you're correct, we're probably in catch-up mode still, and in particular, in automotive and industrial. We saw a pickup. We're seeing a bit of an increase in utilization in automotive and industrial. But we do have a ways to go to get back to sort of a normalized run rate in those segments. So I absolutely agree with the fact that still in catch-up mode for auto and industrial.

And our next question comes from David Duley with Steelhead Securities.

You made a comment earlier in your prepared remarks, I think about 5G RF test times. Do you have an idea about how much more test intensive or handling intensive the RF parts are that you're talking about? Luis Müller: David, it's Luis. Yes, I do. I do have some specific examples that are tabulated in terms of what it was on the prior generation device, what it is on this generation device. Generally speaking, some of these test, generally speaking, the test times are going up. And there are obvious desire from customers to sort of bring in that down, and that's why you introduce new products, new capabilities and test program techniques. But yes, without being specific on numbers, the test time intensity, I guess, to call it that way for increasing test times is generally going up in RF.

Can you take a stab, is it going up by 20% or 50%? Or what, from your experience, what have you seen thus far? Luis Müller: I have seen, depending on devices, obviously, but I've seen things from, we've been able to bring it down to parity to, there is 30%, 35% increases that I've seen on different test programs.

Okay. And as far as the guidance for the December quarter, it's up like roughly, call it, $35 million, which segments will be contributing to that nice incremental growth of $35 million in the December quarter?

It's going to be mobility, 5G, RF test as well as a pickup in automotive and industrial.

And could you help us understand as far as the automotive segment, how much of a, I think it was dragging on a quarterly basis by $25 million or $30 million. And I'm just kind of curious in your December quarter guidance, how much of an improvement you've made? It's obviously not dragging by $30 million a quarter anymore. But I'm kind of trying to figure out how close you are to getting back to normal run rates.

Yes. Dave, I'll tell you, we did that same calculation. And we think that now after Q3, we are about $25 million to $30 million away from a normalized run rate today. So you kind of hit it on the head there. That's the gap that we see currently. And we see improvement in that segment. So that, as Luis said, I think we can close that gap sometime in 2021. Luis Müller: Yes. That's the incremental opportunity from where we are now, Dave.

Yes, from the September quarter revenue level.

Yes. Luis Müller: Yes.

Okay. So I guess, the update is, you think you can get the entire $25 million or $30 million on a quarterly basis back by sometime in mid-2021. And before you were saying you weren't sure when you could achieve getting back to that run rate. Luis Müller: Yes. Just one quick correction here, Dave. We were looking at the September quarter booking level when we talked about an incremental $25 million, $30 million. So obviously, we didn't talk about bookings, but as a number. But that September booking translates into fourth quarter revenue.

Okay. Final question from me is, I think you mentioned thermal handlers. Traditionally, I thought those have gone in to the APU segment of the market, but it sounded like -- I thought I heard you talk about other parts or other markets for your thermal handlers. Could you just elaborate a little bit? Luis Müller: Sure. Yes, first of all, when I'm referencing thermal handlers here, I'm talking about the ones with active thermal control technology, which are for the APUs, GPUs, like you described. But I'm also including in that terminology now the cold cryogenic test handlers, which are used in automotive. That's what I mean by thermal handlers. With that said, I have to admit, those 2 things are now converging in automotive. With ADAS business picking up, we're seeing now the same active thermal control technology on cryogenic handlers for automotive applications. So it's pretty much the processor market, if you will, is meeting the automotive market.

And our next question comes from Christian Schwab with Craig-Hallum.

Congratulations on a great quarter and great outlook. On the RF side, I'm just wondering, as we move into other 5G applications where you may have opportunity outside power amplifiers, I'm just wondering if you could talk about, if you have any meaningful opportunity for millimeter wave, RF front ends. If you have an opportunity as we roll out more pico cells, small cells and micro cells for the active RF devices that will go into 5G infrastructure and should accelerate in '21 versus '20, are you well positioned in either one of those areas? Luis Müller: Yes and some. Others, we still have to deliver the product and get the share, get the socket. But yes, I mean this RF product or suite of product instruments that we delivered here in third quarter, they're not just for RFICs going into smartphones. I mean we have good capability on Wi-Fi 6 and ultra-wideband. Many of these are used outside of the phone on stations, fixed stations. So the answer is really mix, because it's yes, but there's more that we need to do still.

Well, great. Most of all my other questions have been answered. Thank you.

Thank you. And our next question comes from Tom Diffely with D.A. Davidson. Your line is open.

Great. Thank you and good morning. So one more question on the 5G RF. So how much of your business is driven by just the full cell order versus the best pieces, the tester, the handler, the contactor? I guess in other words, which of those segments inside of the RF seller over underpenetrated for you?

So Christian [Indiscernible] without being on the numbers, we have--the majority of our business in RF today is still selling the tester and the handler as separate pieces. In some cases, they come together. But in many cases here, they're not. Actually, we're selling testers and handlers completely separate. We have been promoting. And in the third quarter, we did get an RF customer to recognize the value of bringing a complete solution to production from us as it really simplifies the integration to the customer and essentially the time to get to production yield. That really matters particularly in the mobile space. You have a device life cycle that is probably measured in a couple of years, and you have a significant ramp in front of you and stiff competition. So getting to that production yield fast is incredibly important. So we've got finally sort of an OSAT customer to recognize that value and take our complete sale. We're working on that same proposition not only in RF, but a few other segments with different customers. And I hope to be able to bring that to the table here in future quarters. But like to complete, again, the majority of the sales today are on separate individual pieces, tester here, handler, contactor and not as a complete cell.

Okay. And then I guess going along with that, then it sounds like there's an opportunity to get the contactors into the sections that already have a tester, that already have a handler then. So, it's a nice contactor growth avenue for you going forward? Luis Müller: Yes. We have--we have quantified that opportunity. We think there's a chance hereof adding something on the order of $30 million to $40 million of incremental revenue next year by selling more of the complete package. And then with that selling something that we don't sell yet to a customer or another customer, basically.

Okay. Great. And then, Jeff, when you look at the guidance, 18% EBITDA, about 200basis points above your model. It sounds like from your comments earlier that maybe it's not truly 200 basis points above what the model should be, maybe it's only 100basis points or so. That's the part of the model that might get adjusted upwards.

Yes, that's right. That's right, Tom. And we're working on a refresh of the model now. We should have it out before the end of the year.

Okay. great. Look forward to it. Thanks for your time.

Thank you. [Operator Instructions] Our next question comes from Charles Shi with Needham & Co.

I apologize, my line was dropped. And if my question has already been answered, I really apologize. My first question is really going back to the gross margin. You guys kind of guided the fourth quarter gross margin pretty much in line with your long-term model and mid-term model, and which is not so much of upside from the third quarter. I understand there is no onetime item in the third quarter, but if I think about the higher revenue base, you would get a better cost absorption. Does that indicate that there is some product mix shift going on there for the fourth quarter, probably your relatively lower margin line of products? Like in the handlers, those will get a greater growth for the fourth quarter, probably driven by some of the things you mentioned, the surge demand of the auto, from the auto customers.

Yes. You're right. You're right, Charles. I think you hit it right on the head. Q3, there was some, well, there's different mix than what we have forecasted. Some of that mix related to recurring revenue that Luis indicated that we delivered. We see a bit of a drop quarter-over-quarter in the recurring revenue, but obviously, a big pickup in the systems. And as you mentioned, with more of the handler systems, that will bring down the margin a bit on a blended basis. So you've hit it right on the head.

So maybe the next thing is really about the RF tester side of the business. I think one person, other person already asked. You said the 20% year-over-year growth for the next couple of years, but obviously, with the strong upside in the third quarter and possibly fourth quarter, the comp for 2021 will be a little bit difficult. Are you still expecting sort of 20% growth into next year for the RF tester side? Luis Müller: So I don't know that we actually mentioned a particular growth number for RF test into next year. Nevertheless, yes, we do expect continued growth in RF test in 2021 for 2 reasons. We're still out to see probably a doubling deployment of 5G technology in phones next year. In addition to forecast, market forecast now is for also smartphone unit growth next year. So I think the compounded effect of that is an expected growth in RF tester deployment. I also mentioned that we are continuing to introduce new products and go after other elements of the RF front-end IC. As we get those design wins, I mean that's going to increment our revenue. Each of this market segment that I said, growing to about $400 million addressable market segment to about $400 million over the next 2 to 3 years.

So the next question really about the automotive side of the business. So we were a little bit surprised to see like the pull forward of automotive recovery you are seeing today because we were sort of expecting the unit growth of automotive semis should proceed the equipment recovery. So why the earlier-than-expected recovery now? And are there some technology upgrade components there? For example, maybe you are targeting some of the new applications or there are some technology refresh cycle going on here. Maybe some of the better thermal management handler subsystems are needed to cut in now instead of waiting for the, really the unit getting recovered. Luis Müller: Yes. Your question already has the answer, Charles, it's, you're correct. To be honest with you, so were we a bit surprised. We were expecting the automotive recovery to happen mid- to late Q4 or even early Q1 of next year. So it has come in sooner than we expected ourselves. At the same time, you're also correct that much of this has to do with technology pivot to, as I mentioned to an earlier question, where the processor market is actually hitting the automotive market. And we have a demand here for thermal, dissipative testing thermal, or managing temperature control in thermal dissipative devices. So we're finding applications now where we're selling active thermal control technology on our tri-temp cryogenic handlers. And that is a technology change in the automotive market. They don't have that installed base capacity today. So there is definitely a technology component here happening in automotive. Because as I said earlier, I'm not sure if you were on the call or dropped out, utilization in automotive is still below 80%. And yet, we're seeing a ramp, but they are for new products. So it is a technology shift.

Maybe my last question, one of your leading logic IDM customer, I know you don't really have a 10% customer for a couple of quarters, that particular customer apparently is moving from 80 based testing into some of the modular testing and with their in-house tester, modular testers, how do you see that trend is coming along? And how do you see the impact on your business? Luis Müller: So talking about that customer, we continue to see the business there robust and pretty much staying at the same level quarter-over-quarter through the end of this year. I don't know exactly what's going to happen next year, but there is no weakening of business on that account in that market segment. At the same time, we're seeing some traction in interest from other customers, particularly for microprocessors and GPUs and network processors for our active thermal control technology. So the computing segment may actually open up some new opportunities for us in 2021, but it's a little too early to talk and quantify them.

And at this time, I'm not showing any further questions. I'd now like to turn the call back to your speakers for any further remarks.

Thank you. And before we sign off, I'd like to let you know that Cohu will be hosting a virtual analyst and investor conference on December 2nd. This conference will provide you with an opportunity to gain more in-depth knowledge about Cohu's products, markets and our strategy for differentiation and growth. I hope you can join us. In addition to the Cohu conference, we'll be participating in a number of virtual investor conferences during Q4 and would welcome meeting with you. The conferences are the Stifel Midwest Growth Conference on November 11 and 12, the D.A. Davidson Investor Conference on December 15 and the 12th Annual CEO Summit on December 16.So thank you for joining today's call, and we look forward to meeting with you at an upcoming conference.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may all disconnect. Everyone, have a good day.