In the fast-paced world of semiconductor manufacturing, Cohu, Inc. (NASDAQ:COHU) is a well-known small-cap that has been making waves with its recent acquisition of Equiptest Engineering Pte. Ltd. This strategic move, announced on October 2, 2023, is poised to reshape the landscape of semiconductor testing and production optimization. With Equiptest Engineering now under its wing, Cohu is positioning itself as a force to be reckoned with in the industry. Let us delve deeper into the operations of Cohu and the benefits of the acquisition of Equiptest Engineering, assessing Cohu's potential as an investment opportunity.
What Does Cohu Inc Do?
Cohu, Inc. is a global player in the semiconductor industry, serving clients across China, the United States, Taiwan, Malaysia, the Philippines, and beyond through its subsidiaries. The company specializes in providing semiconductor test equipment and related services. Their comprehensive product portfolio includes semiconductor test and inspection handlers, micro-electromechanical system (MEMS) test modules, test contactors, thermal sub-systems, and semiconductor automated test equipment. These offerings cater to the needs of semiconductor manufacturers and test subcontractors, facilitating efficient testing and quality control in the production process. Cohu also offers semiconductor automated test equipment designed for both wafer level and device package testing. Their diverse range of test handlers, including pick-and-place, turret, gravity, strip, MEMS, and thermal sub-systems, ensures versatility and adaptability in meeting customer requirements. Moreover, the company provides interface products such as test contactors, probe heads, and pins, along with spares, kits, warranties, and training services for system maintenance and operation. Cohu's commitment to excellence extends to data analytics with products like DI-Core, a software suite that optimizes equipment performance through real-time online monitoring and process control.
Cohu's Recent Quarterly Performance
In the second quarter of 2023, Cohu reported a 22% drop in revenue to $169 million, a result that was in line with expectations. However, beneath the headline figures lies a more promising story. Notably, the company achieved a non-GAAP gross margin expansion to an impressive 47.8%, outperforming market expectations with a non-GAAP EPS of $0.48, 9% higher than anticipated. In the Cohu Systems business, which contributed 52% of second-quarter revenue at an approximate 41% gross margin, the automotive and industrial segments remain focal points. Despite challenging market conditions, Cohu is poised for growth by expanding its product portfolio and securing new customer applications. Notable achievements include a crucial ATE win with a leading OSAT in Korea and successful handler design wins in the high-power semiconductor market.
These positive financial indicators reflect Cohu's resilience in navigating challenging market conditions. While the path to recovery seems promising, it is essential to exercise caution. Certain segments, such as Automotive and Industrial, have faced declines, and Cohu's performance remains closely tied to tester utilization rates. The timing and extent of recovery in these segments remain uncertain, despite signs of a potential bottom. The key driver of optimism lies in the company's ability to maintain steady growth over the next two years, mirroring historical cycles. Cohu is poised to leverage its expanding recurring revenue segment and improving gross margins to fuel this growth. Historically, it has experienced 40%+ growth rates from troughs, indicating a potential upward trajectory in the foreseeable future.
Key Expansion Plans
Cohu's strategic expansion initiatives are also noteworthy. The construction of a substantial 92,000 square foot facility in the Philippines, set to be operational in the first half of 2024, underscores the company's commitment to supporting its growing interface business. Additionally, efforts to enhance the local supply chain aim to boost flexibility and accelerate production ramp-up to meet customer demands.
The company's innovative DI-Core software has garnered attention, with a significant order from a European IDM to monitor Cohu third handlers' performance, potentially translating into $1.3 million per year in future software subscription sales. Cohu's interface products, including contactors and probe cards, have seen notable design wins, driven by their exceptional RF performance and final test capabilities.
Synergies From The Equiptest Acquisition
Equiptest Engineering, a company specializing in semiconductor test contactors and other consumables, has recorded an impressive trailing twelve months revenue of approximately $20 million. This acquisition marks a significant step for Cohu as it strengthens its Interface Solutions Group, bringing together cutting-edge products and technologies aimed at accelerating market penetration. Furthermore, it promises to enhance Cohu's intricate machining capabilities, expand its engineering capacity, and boost its customer presence, all of which are essential ingredients for sustained growth.
The synergy between Cohu and Equiptest Engineering appears to be a winning formula for the future. The acquisition provides an opportunity to accelerate growth in recurring revenue, expand products, manufacturing, and customer presence. With a vision to thrive in mid- to high-power test applications in the automotive and industrial markets, Cohu is poised to unlock new opportunities and secure its position as a dominant player in the semiconductor industry.
Final Thoughts
Source: Yahoo Finance
In the above chart, we see that Cohu's stock has been volatile and there hasn't been much of a spike post the Equiptest acquisition announcement. Despite Cohu's impressive performance in challenging market conditions, it is trading at an EV/ Revenue of 1.21x and an EV/EBITDA of 6.02x, both of which are significantly below the industry average. With a compelling combination of improving financials, historical growth patterns, and a favorable valuation, the company appears well-positioned to ride the wave of the semiconductor industry's upcycle. However, investors should remain vigilant and closely monitor the recovery of key segments to make informed decisions in this dynamic landscape. Overall, we believe that Cohu is a compelling investment opportunity for our readers with a high risk appetite and a liking for the semiconductors space.
