Cohu, Inc. (COHU) Q1 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Cohu, Inc. First Quarter 2021 Financial Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Jeff Jones, Chief Financial Officer. Please go ahead.

Welcome to our conference call to discuss Cohu's First Quarter 2021 Results and Second Quarter 2021 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, April 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 key points of our first quarter results, explain our new presentation format by market segment, provide highlights and summarize Cohu's progress in sustainability. Record first quarter revenue of $225.5 million was up 11.4% sequentially and exceeded the midpoint of our guidance due to strong traction for our contactor products. Cohu's interface business is growing faster than consolidated results, with contactor revenue up 14% quarter-over-quarter and benefiting from the ramp in the automotive and industrial segments. Non-GAAP gross margin of 45.6% and adjusted EBITDA of nearly 24% were records in both absolute dollar value and percentage of revenue. First quarter orders were also a record, driven by robust automotive segment demand that was up 51% quarter-over-quarter and strength across all major markets. Estimated test cell utilization increased 2 points sequentially to 88% at the end of March. The improved utilization was most notable with automotive semiconductor customers, primarily U.S. and European integrated device manufacturers increasing test capacity at their factories in Asia. The next larger quarter-over-quarter order increase came from industrial segment customers, ramping production to support growing consumer demand as economies start to reopen and in line with improving GDP forecast. Starting this quarter, we will discuss revenue by recurring in systems. We will also break down systems revenue by end market drivers. Cohu's recurring business was 35% of consolidated revenue in the first quarter, delivering strong 48% non-GAAP gross margin. Recurring is driven by new semiconductor product designs that create opportunities to sell more contactors as well as growing system installed base that enables sales of application kits, services and spares supporting a fleet of approximately 28,000 handlers and testers globally. Our recurring business is benefiting from expanding contactor sales in the first quarter, particularly for power management applications where Cohu leads with cantilever technology that is better suited for high current and voltage semiconductor test. System business was 65% of consolidated revenue and stronger in the mobility segment that was 24% of total in the first quarter. Systems gross margin was approximately 44%. And as indicated in prior quarters, it lags recurring by a few hundred basis points. We continue to enjoy a leading position in testing RF front-end ICs, both with our ATE and handler platforms and growing presence in structural tests with Diamondx. The shift to design for test continues to gain momentum with greater semiconductor complexity. Originally, this was a focused solution for smaller process nodes, but now expanding more across semiconductor applications. We have validated that the Diamondx platform offers significant cost of test advantages for customers implementing structural test. Cohu's solutions spans across RF devices, power management, transceivers and other applications. This is an approximately $300 million market opportunity, and we recently captured greater than 50% share of structural tests at a major semiconductor manufacturer and plan to pursue similar opportunities at other customers. Automotive segment orders increased further in the first quarter, following a strong fourth quarter, with shipments scheduled over the next several months. First quarter automotive segment revenue was 12% and projected to increase in the second and third quarters of this year. With the steep ramp in handler demand, system lead times have stretched to an average 18 weeks. Costs are increasing due to labor shortages, logistic disruptions and some commodity cost increases across the supply chain. We're challenged with controlling and minimizing the impact, eventually expecting to pass some of these to customers over time. Switching topics. Cohu recently published our second annual sustainability report. We're pleased to highlight that in 2020, revenue grew 9% year-over-year, while we reduced direct energy usage by 15% from 2019. We at Cohu are committed and proud to reduce direct energy consumption and further improve our corporate ESG programs. The highlights are included in the first quarter earnings presentation and the report details are available at cohu.com corporate sustainability page. Now looking ahead, we remain encouraged by market momentum and customer traction for Cohu products. Once again, we'll be guiding revenue up for next quarter and extending visibility into the second half of the year. Now I'd like to turn it over to Jeff to provide details on first quarter results, share second quarter guidance and our expectations for third quarter. Jeff?

Thanks, Luis. Before I walk through the Q1 results and Q2 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. In March, Cohu closed a common stock follow-on offering totaling approximately 5.7 million shares, raising net proceeds of approximately $223 million after deducting underwriting discounts and commissions and offering expenses. We raised the capital to repay outstanding principal on our term loan facility, thereby reducing interest expense and fund future growth initiatives. Prior to the end of Q1, we reduced our outstanding debt by $102 million. 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. Q1 revenue was $225.5 million, $3.5 million higher than the midpoint of our guidance range. Q1 revenue was 11% higher than Q4 of last year and set a new record for Cohu. In Q1, no customer accounted for 10% or more of sales. In the first quarter, Cohu's gross margin was 45.6%. Operating expenses were $52.2 million and lower than guidance as we continue to optimize our expense structure. First quarter non-GAAP operating income was 22.5% of revenue, and adjusted EBITDA was 23.9%. Return on invested capital in the first quarter was approximately 60%, well above our target model objective to make investments with ROIC of 30% or higher. Cohu's non-GAAP effective tax rate for Q1 was approximately 12%, lower than guidance, primarily as a result of higher U.S. income, offset by NOLs and tax credits. Non-GAAP EPS for the first quarter was $0.89 and about $0.07 better than our target financial model. Now turning to the business model. The midterm financial targets remain unchanged as we expect the increase in the diluted share count from the follow-on to be offset by a reduction in interest expense as the Term Loan B is fully repaid over time and an adjustment of the effective tax rate to 18%, reflecting greater leverage from U.S. income, offset by NOLs and tax credits. We have met or exceeded the EPS targets over the last 2 quarters. However, 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. Now moving to the balance sheet. The capital raised in March has strengthened the balance sheet. We've added approximately $121 million to our Q1 cash balance after reducing our outstanding debt by approximately $102 million. The Q1 balance sheet reflects a net cash position with increased resources for additional debt reduction and investment in opportunities to expand served markets and technology portfolio in line with our growth strategy. The growth in accounts receivable reflects the sequential increase in shipments as our DSO has remained essentially flat quarter-over-quarter and is the primary reason cash flow from operations was near breakeven. Orders and utilization of equipment at our customers' test facilities remain strong. The second quarter revenue forecast is in line with the directional guidance we provided in early February. For Q2, we're guiding sales to be between $234 million to $250 million. The low end of the revenue range considers some supply chain uncertainty and potential risks associated with book and bill and customer acceptance, which is required for revenue. We're achieving the high end of our quarterly target revenue model sooner than the 3- to 5-year time horizon discussed during our December Analyst Day. The current growth is driven by a steep ramp in test handlers at lower than corporate average gross margins. We're forecasting Q2 gross margin to be between 42% to 43% due to the mix of system versus recurring revenue and the mix of system revenue between handlers and testers. System revenue for Q2 is projected to be approximately 67% of total sales compared to approximately 55% of sales in our target model. We're realizing volume benefits from greater leverage of fixed manufacturing and operating costs, contributing to 20% plus operating income, and we remain on track to grow tester and contactor businesses that are in line with our target financial model. Q2 operating expenses are projected to be between $53 million and $54 million. We're currently managing operating expenses lower than the target model to compensate for the gross margin forecast. The goal, as I previously mentioned, is to execute gross margin expansion through growth of higher-margin systems and recurring revenue, leading to the midterm business model and proportionately grow our investments on new products over time. We expect Q2 adjusted EBITDA at the midpoint of guidance to be approximately 22%. The Q2 forecast non-GAAP tax rate is approximately 18% at the midpoint of guidance. Most of Cohu's profits are generated offshore and subject to statutory tax rates in foreign jurisdictions. Income taxes on profits generated in the U.S. are mitigated by net operating loss carryforwards. The diluted share count for Q2 is expected to be approximately 49 million shares. With a record backlog entering Q2, high levels of equipment utilization and continued strong order forecast across various markets, we're projecting Q3 revenue to be approximately flat to up 5% over the midpoint of Q2 guidance. 2021 is shaping up to be another record year for Cohu, and we remain optimistic about our midterm prospects, enabling testing of new high-growth technologies in RF, battery management and ADAS processors and automotive, while growing contactor and recurring business, along with gains in automated optical inspection. That concludes our prepared remarks. And now we'll open the call to questions.

[Operator Instructions]. Our first question comes from the line of Brian Chin with Stifel.

Congratulations on the results. Maybe first question, this might be for you, Jeff. But can you just give a breakdown of the effects -- temporary effects in Q2 that are causing gross margins to be down, I guess, roughly 300 basis points at the midpoint Q-on-Q? And how much of that is product mix versus the higher input costs that were referenced? Also, are there any impacts kind of within handlers turret versus pick-and-place, for example, that may be impacting as well? And also, at this time, when you look at 3Q and the higher revenue level, how much of these margin impacts do you think it'll carry into 3Q and maybe second half?

Yes, you bet, Brian, and thank you. The Q2 gross margin is nearly all impacted by product mix. So it's the steep ramp and the steep increase in handler systems revenue that I referenced with gross margins that are below the corporate target. So we're seeing record handler system revenue, driven mainly by high automotive demand. So typically, or in our midterm model, we're seeing Q2 handler revenue that's about 50% higher than our midterm model. So it's really a steep, steep ramp in handler revenue for Q2. You asked about the configuration or the type of handler. Most of the automotive handler is pick-and-place, and that's what's driving this revenue. It's coming more from the pick-and-place technology. And so overall, it's just a very steep ramp. It exceeds the relationship and the sort of pro rata numbers out of our business model. And so that is really all mix in Q2. We've seen some cost increase that's impacting Q2, but that's limited for now to about $0.5 million. So it's minimal in the big picture. Q3 gross margin view is preliminary. And actually, a little premature at this point in time. I will say that the mix of revenue is similar to or it's looking to be similar to Q2. But to really peg a gross margin for Q3 is a little premature at this time. The underlying business itself is tracking to the business model. And so the gross margin is going to recover over the midterm, but it's really a cause in this sort of accelerated ramp in handler revenue.

Okay. Yes. That makes sense. That makes sense that the handler business is a lot of the incremental upswing that you're seeing on the system side. Also curious, though, if you see the growth in test have been very strong, dating back to last year. Do you think by the end of the current year, you could start to see that become more of a -- improve in terms of the revenue contribution?

Yes. That is the plan. It's -- we are growing. We're definitely growing year-over-year in the tester business and the contactor business. And so we feel good about our position there and the growth prospects.

Got it. Got it. Maybe fanning out just in terms of the demand environment. Clearly, many of your customers in the auto and industrial markets are reporting lean inventory and long duration demand trends now and into -- and beyond second half. It looks like that's being somewhat reflected here in your third quarter initial view. I'm just curious, to what extent is that even sort of paying out across the second half? Maybe, I think, typically, there's a little bit of a let off the gas pedal into Q4 in sort of the test space in general. But I mean, do you think maybe that will sort of buck the typical trend just based on the way things are set up?

Brian, this is Luis. It's a little too early to also call fourth quarter. But clearly, demand is -- demand remains pretty strong. And as indicated here, we gave you guys some directional for what's up ahead here in the third quarter. So the demand environment remains pretty strong. And it's not just auto, it's also in the mobility space. I mean you can see that mobility was the largest revenue segment for us in the first quarter by quite a long shot, actually.

And our next question comes from the line of David Duley with Steelhead.

I was wondering, when you look at the size of the SOC market, what would be your expectation for this current year? And do you think you're going to grow your test business at a more rapid clip than the overall test market?

David, yes. I mean, frankly, if I just look at the current numbers here, we -- our test business has grown on a revenue basis year-over-year, 144% already, year-over-year in revenue. So that's a substantial increase. And I expect on an annual basis, yes, we're going to outgrow the market, the expected market growth, which I'm actually now tagging what I heard from others here that I think we're looking at an SOC market that will be approaching $4 billion this year.

And where do you think -- is it just because your customers are spending at a greater clip than other people's customers? Or have you actually picked up sockets and new wins? And if you are picking up any wins, what areas do you see success in?

It's been primarily in the RF market for us, David. I mean, twofold, yes, we picked up some wins, that is for sure. But I would say, by and large, the RF market is outgrowing the overall SOC test market. We all know there is a 5G deployment in full swing today in the market. I think we're looking latest estimates that I've seen on and about 500 million cell phones that are 5G capable, that's the forecast for this year. So we're in a big, big full swing in the RF space. And that is the area that Cohu's tester business is strongest with RF front-end ICs. So we're really enjoying this market growth that we expect will be here for the next 2 to 3 years still.

And final question for me is, you've seen this huge increase in wafer fab equipment spending. I think it's going to be up like 30% this year to greater than $75 billion. How do you see that translating into the back end into the test and handler markets? And do you think that, that increased levels of wafer fab equipment spending is going to prolong the cycle for the back end?

Yes, absolutely. I think that's the final kicker here on the market. We have these super big trends in automotive and mobility and computing. But right behind it is this sort of technology race here between Intel, TSMC, Samsung, and I guess, I'd say, some others too. Incredible spending on the front end equipment side and that's going to translate into growth to the back end, I think, for several years to come. I mean we see it right now that lead times are stretching. We talked about our lead times, but I also noticed that assembly equipment lead times are stretching close to a year now. So all in all, I think we're looking at this mega investment on the front end to generate substantial capacity additions in the back end. And as we know from past cycles, this means the back end is going to enjoy a long period of growth here to support test, I think, also assembly for all this silicon production.

And our next question comes from the line of Craig Ellis with B. Riley Securities.

Appreciate the incremental color on this call on things like gross margins for the different businesses. So I wanted to follow-up on the former question just by approaching it a slightly different way, Luis. So if we look at dynamics in the RF world and in connectivity, in the last 24 hours, we've seen a leading Tier 1 smartphone OEM, absolutely blowout numbers, a leading baseband and APU provider out of Taiwan blow out first quarter and second quarter guidance. And so the question is, as you look at order dynamics for 5G test cell coming into you, to what extent are you seeing strength driven really by smartphones versus things like ultra-wideband, which are highly correlated to smartphones, but other things as well, and then Wi-Fi 6, where there's a material consumer push away from smartphones? Just any color on how that business could break down and the momentum that you've seen over the last 3 months with orders, would be helpful.

Okay. Craig, I don't have a breakdown between 5G smartphones versus other RF applications in industrial or even automotive to give you here on the spot. But I know we've been picking up momentum on RF IoT and ultra-wideband applications. But at the same time, qualitatively, I can tell you that the mobile space is still -- is the largest piece of the RF market or the RF test market for us. It may be sort of a ratio of 2:1 or 3:1 between mobile and everything else. But with that said, you are correct, the everything else outside of mobile is picking up steam, particularly with the industrial market recovery that we're seeing right now, we are seeing other RF applications outside of mobile growing as well.

That's helpful. And then the second question is flipping over to the automotive business. And one of the things that we saw in your remarks in the deck that was posted is the momentum that you have in EV and ADAS. And this question, Luis, is really longer term. So from where we are today with EV and ADAS mix -- and if you can quantify what that is, it would be really helpful, how would you think that would evolve over not just the next 1 year, but the next 2 years, given the prioritization automakers are giving to both of those platforms and current production and plant production?

So EV and ADAS we're probably in the order of 35% to 40% of our handler orders -- sorry, of our automotive handler orders in the first quarter. And that's a climb from what we saw in the fourth quarter, which I think it was in the order of 25%, if I'm not mistaken. It remains predominantly EV in that mix. Although our ADAS business literally doubled from fourth quarter to first quarter. And now I'm speaking from an order base, not revenue base. And we're seeing the ADAS continuing to ramp here. The forecast that we have for second quarter deliveries, third quarter deliveries are kind of picking up momentum on the ADAS side. How do we see this unfolding? Frankly, you look at the total data set here in electrification, electric vehicles or hybrids are just booming, and they're absolutely booming since late last year, and all the forecasts remain incredibly bullish, but there is still a very, very long way ahead. When we talk about the 5G and the fact that we probably ended last year about 15%, 16% 5G penetration in smartphones and have a long road ahead. It's even longer on the automotive side. And as you all know, that transition in automotive takes, generally speaking, longer than it does, just product life cycles, buying cycles than it does in mobility. So we are just incredibly bullish about both the mobility and the automotive market into next year and beyond.

That's helpful. And I have a great -- 5G's an S-curve that's got a multiyear trajectory to it. EV and ADAS are linear lines through the end of the decade, and it's one of the interesting things with your business. Jeff, I don't want to ignore you. So the question on your end to start is with respect to debt paydowns. Nice to see the $102 million, that's a little bit above what I think the company announced in the late March time frame. How should we think about the ability to pay down debt in 2Q and 3Q? And to what extent do you want to accelerate your collections to help enable quick debt reduction?

Yes. So Craig, like I said in my remarks, the priority for cash and capital allocation continues to be debt reduction. And so we expect to make meaningful quarterly debt repayments. Of course, keeping in mind our cash flow projections, and as you mentioned, collections from customers is a significant piece of that. But also, we're seeing some large, and rightfully so, payments to suppliers. So the timing of those items really matter. But the priority here is to continue to make meaningful debt repayment. I'm sure you noted that in the business model, the -- expecting the interest expense to offset a portion of the share increase, the dilution from the share increase. So we will be focused and continue to make meaningful debt reduction. At the same time, we're going to keep some dry powder on the balance sheet for investment opportunities to continue to expand our served markets and increase our technology portfolio.

Okay. And I'm looking at my decoder ring, and it says that meaningful could be something between $75 million to $100 million a quarter. Is that right? Or is that north or south of what you think meaningful could translate to?

Meaningful, probably, I think, more in the $20 million to $40 million a quarter in sort of in that range, Craig.

Okay. And then just finally, on OpEx, you're running the business well below target, and that's to compensate for gross margins, which were all below target. The question is, given your experience at turning tactical OpEx overachievement to structural, to what extent are some of the gains that you're seeing potentially structural in nature versus more temporal?

Well, I think it's a good observation, Craig. And I think we have significant changes that are more structural and we're actually going through a restructuring right now. I've talked about it in the past, but we're going through a restructuring in Germany. And so that is part of the lower OpEx, at least for this year. And as -- for the time being, as we continue to work on expanding gross margin, we're going to manage OpEx down. So I hear what you're saying, some of the costs will be coming back, things like travel will eventually come back. But many of the actions that we're taking today and have taken over the last few quarters will end up being structural and reductions in cost on more of a permanent nature.

Let me just to add to that a little bit. Cost will come -- travel will come back, but not to the same degree that it was in the past. We have rolled out virtual assistant, goggles and infrastructure for our service organization that we don't expect to be just a temporary bridge because of COVID-19 travel restrictions. It is really a permanent solution. So even though travel will return, expenses will return, we expect it to be lower on a forward basis.

And our next question comes from the line of Krish Sankar with Cowen & Company.

I had a couple of questions. One is, what is your revenue capacity today?

Our revenue capacity?

Yes.

Look, we -- Krish, reality is we've been scaling our revenue to the demand. We have a tester business that is largely outsourced, I think as many of you know to Jabil, which is a $24 billion, $25 billion contract manufacturer. We -- I think we're extremely far away from the ceiling there. On our handler side, we have described in the past, we do a hybrid outsourced model, meaning instead of outsourcing the entire handler, we outsource the subassemblies. So we have some 15, 20 large contract manufacturers that supply subassemblies to us and then we do final integration and test in-house. That in-house final integration test is reasonably fast. You're talking about a week or 2 weeks in in-house. So we're -- again, we're leveraging the outside infrastructure of supply chain, contract manufacturers. Similar to Jabil, in this case, but for subassemblies. So we don't have much of a constraint there either. We scale. We're also bringing in outside suppliers to do some simple system integration. The constraint is perhaps more on the contactor side, which we do in-house manufacturing, and we have to build the infrastructure. On the other hand, that's part of recurring. The recurring business has more of a sort of a steady, linear growth trend that we're just keeping up to. So I can't say that we have a ceiling because we keep moving that ceiling by leveraging outside contract manufacturers.

Got it. Got it. I mean this is the question. The reason I ask is because if you looked at the supply chain, while bond and lead time has stretched out to the past 6 months, wafers and substrates are in tightness. So I'm just trying to figure out if that has actually increased your visibility because of your customers or because you still have not -- you don't have any constraints that the customers are not stretched yet with the -- in terms of what they're giving you?

Yes. Our constraint is timing, Krish. So sure, our lead times have stretched. I think the last call, I mentioned that we're about 14.5 weeks lead time. I'm saying now we're about 18 weeks lead time. So it has stretched. It's not necessarily because of capacity constraints. It's more about timing to reach a higher output level. You can't flip a coin and get there a week or 2 later. So as orders continue to increase here, we are ramping, we continue to ramp our manufacturing capacity, but it does take 1 quarter to 4 months to get to the new level.

Got it. And then the final question is on your mobility side, how much of your RF test business do you think is coming from millimeter-wave? And it seems like it hasn't taken off a whole lot, but it has huge potential. I'm kind of curious if that ever comes back in a bigger way, is that better? Or is it neutral for Cohu?

I missed it a little bit, how much of our auto business comes from what, sorry?

No. How much of your mobility comes from millimeter-wave?

Millimeter-wave mobility. It's a very small portion right now, Krish. Realistically speaking, millimeter-wave is not even representative of the -- not even a representative number of the $225 million. We expect millimeter-wave will be meaningful starting probably next year. There will be -- there is revenue, obviously this year, but I expect meaningful next year and even then, it's a bit of a prediction here based on what customers are telling us.

And our next question comes from the line of Tom Diffely with D.A. Davidson.

One more supply chain question. A lot of companies are talking about the fact that the freight costs are the biggest issue they have today. I'm curious, when you talked about the impact in your quarter, was that freight driven? Or is that actual material costs going up?

Yes. We've seen the same thing, Tom. We've seen freight costs go up, and we've taken actions over the last few quarters to plan further out and change the nature of the shipment by shipping by sea as opposed to air to try to minimize those costs. But yes, we certainly -- we've seen it over the last few quarters. Now actually since -- probably since COVID came about. But I think we've done a pretty good job to manage those. In terms of material costs, we're in discussions right now with suppliers. And so it's a challenge to maintain material costs, not impacting in a material way, anyway, the Q2 forecast, but it's certainly a challenge for us as we go forward.

Okay. And then Jeff, when you look at the freight costs, is there any sign of that abating? Or is it still kind of a black box?

I don't see any significant signs of abatement here. But again, we've been able to do a good job to manage, as I said, try to move as much as we can to see versus there.

Okay. Great. And then as a follow-up, Jeff, when you look at the target model, given the margin differences between systems and recurring, is there a certain assumption in your target models at the different levels for that mix?

Yes. Yes, absolutely. And that's why I was saying in Q2, the handler revenue is significantly exceeding the planned mix, which there are benefits to that as well, right? It's a lot of volume that runs through our Melaka manufacturing, better leverage of fixed costs since it's definitely contributing to higher operating income, 20% plus operating income. So we're seeing benefits. It's just a sort of misalignment of mix, if you will, for at least Q2. And as I said, over the near term, as contactors and tester business continues to grow, we expect it to come back in line with the business model.

Okay. And then, I guess, when you look at the model today, if you hit the high end of the revenue target today versus a year or two down the road, how does that impact the performance, do you think?

In the mix of year two would be the impact?

Yes. I guess, how would the cost structure be different a year from now versus today? And so how would that impact the target model if you hit the revenue levels today versus a year from now?

Well, again, we're maintaining lower operating expenses. And so that will be certainly a benefit to the model. I think if we have to assume that we have this type of product mix or something close to it, then we'll have pressure on gross margins. But I think that would mostly be offset by a reduction in operating expenses.

[Operator Instructions]. And our next question comes from the line of Christian Schwab with Craig-Hallum Capital.

Great quarter. And thanks for offering up two quarters of revenue visibility. I just have one quick question or maybe a clarity question. On the record orders that you have, can you give us a rough estimate of how much of that might be from mobility currently? And how much of that is automotive? And with lead times extending to 18 weeks and discussions about delivering product in a timely manner for acceptance, how long does that visibility extend? Do we have 3, 4 quarters of visibility in certain markets? Any clarity there would be helpful.

Christian, this is Luis. So the order strength on the first quarter was more heavily weighted towards automotive, as you can imagine, because we are talking about the automotive handler revenue in the second quarter. So to give you some numbers here, automotive system orders were 24% of total in the first quarter. So it kind of flipped with mobility. Mobility came in strong, though. It came in still at a strong 15% of orders. And then following that is industrial, who has been picking up momentum here and then the other markets. So as far as delivery visibility, as you can imagine, with 18 weeks lead time, we're looking here at decent visibility into the third quarter from a revenue base. But we also do have some visibility to forecast into the second quarter, which, again, as Jeff already expressed, indicates that this is going to be a very strong year for Cohu, and in fact, most likely a record, an all-time record year. But I -- it's too early for us to start calling fourth quarter, if you want the full year.

No, that's great color. Congratulations again.

And our next question comes from the line of Charles Shi with Needham & Company.

This is Charles on behalf of Quinn Bolton from Needham. I have a few questions. First, I want to ask you about the gross margin. If I look at your split between systems versus recurring, if I keep your recurring revenue gross margin at 48%, just like last quarter, it looks like your system gross margin is going to be down to 40% to 41%. But at this kind of revenue level, it looks to me, it implies a massive shift from your testers to your handlers, and which I understand the handler strength, but are you suggesting you're seeing some sort of a tester volume reduction in Q2? Maybe that's due to the seasonality factor, but I just want to ask -- clarify a little bit about the mix shift within the systems.

Charles, I would say your observations are pretty accurate. Except that, we always have shifts in revenue between products and business units every quarter. So I wouldn't really read anything into a change in tester revenue quarter-over-quarter. But in fact, the math is, as you described, seeing some reduction in tester systems with higher margins being replaced and actually increased with the handler revenue, which I mentioned is at record levels and far exceeding our target model for handler revenue. So that is the math. But again, I wouldn't read anything into sort of quarter-over-quarter mix shifts. Again, we're tracking well in growth in testers and contactors. And we've had quarter-over-quarter, of course, growth, but expecting year-over-year growth as well, significant.

Got it. Definitely when the lead time stretched out, your customers probably are pulling whatever they can get at this point. And so that could amplify some of the variability, I understand. On the other -- I mean just following up on the run rate for the handler business. If my math is right, your full year run rate for handlers is probably tracking above your 2023 target model, what that target model implies. I know you released that target model, not so long ago. Are you seeing any structural factor that can support a higher handler revenue over the next few years? Or do you sort of expect, I mean, some of the demand, slightly reduction, given how strong this year is in '22 or forward? So I just want to get a little bit of sense what you think about your handler business.

Yes. It's a good question, Charles. We're obviously capitalizing on these macro mega trends and anticipating that they will continue here over at least the near term, if not over the next 2 to 3 years. So it's just premature, I think, to make a -- to conclude on whether or not we need to structurally change the target model for handlers. So I think we need to give it a few more quarters and see how everything develops, but that's a very good question.

Okay. Maybe the last question. What is your contactor attach rate for first quarter '21? I think last quarter, you said that it was about 19%. Just curious.

It went up, Charles. I don't have a number to give you here because, as I mentioned in the quarter, last quarter, this mathematics of looking it on a quarterly basis is queuing up things. But I'll tell you this much, our revenue went up about 11% Q4 to Q1. On a consolidated basis, contactor revenue went up 14% Q4 to Q1. So contactor growth is outpacing Cohu consolidated growth right now.

And I'm showing no further questions at this time. And I would like to turn the conference over to Mr. Jeff Jones for any further remarks.

Great. Before I sign off, I'd like to let everybody know that we'll be attending a number of virtual conferences in June, including Cowen, Craig Hallum, Stifel and CEO Summit. We hope to have meetings with you at any or all of these conferences. And I'd like to thank you for joining today's call, and I hope that you have a good day. Thank you.

Bye, bye.