Good day, and thank you for standing by. Welcome to the Cohu, Inc. third quarter 2021 financial results conference call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press Star, then one on your telephone keypad. Please be advised that today's conference may be recorded. If you require operator assistance during the call, please press Star then zero. I'd now like to hand the conference over to Jeff Jones, CFO.
Thank you, and good afternoon, and welcome to our conference call to discuss Cohu's third quarter 2021 results and fourth 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 statement 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 28, 2021. 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?
Thank you, Jeff. Good afternoon, everyone, and thanks for joining us. Third quarter revenue was approximately $225 million, and that was up 49% year-over-year on strong demand for test and inspection systems. Earnings per share were in line of expectation at $0.70, and adjusted EBITDA at 21.8% was up over 850 basis points year-over-year, underscoring the significant growth in both revenue and profitability. Cohu remains on track for a record year with revenue forecast up approximately 40% in 2021. We continue deployment of our DI-Core data analytics software with follow-on orders from key automotive customer design win in the second quarter, as well as expansion to several new automotive segment customers in the third quarter.
As a reminder, Cohu's Data Intelligence, or DI-Core for short, is a suite of software solutions that provide real-time equipment monitoring and process control to improve overall equipment efficiency, or OEE, and productivity. Customers can monitor critical equipment parameters such as yield, OEE, throughput, and other equipment states to ensure optimal test cell performance. DI-Core software also interfaces with customers' manufacturing execution systems for remote equipment control, recipe, and lot management. As the need for data analytics grows, we plan to continue expanding DI-Core offerings to help improve quality and yield and to continue to increase value-add differentiation of our systems. We're essentially enabling our customers to upgrade the large install base of Cohu equipment to improve efficiency and productivity.
We estimate the market for test data analytics to be around $170 million with high customer interest, particularly in the automotive semiconductor segment, to increase and optimize productivity. DI-Core is a software solution, and thus, a 90%+ gross margin product expansion for Cohu. Now, on the tester business, we are encouraged by the growth of our DiamondX universal platform into power management, display driver, and RF applications. Cohu offers today a unique solution for test and inspection of high-performance RF devices deployed in satellites and ground-based transceivers. Our testers deliver advanced microwave RF measurement performance with integrated solutions for device under test, ensuring accurate signal integrity and temperature control.
The global small satellite market is projected to grow at 20% CAGR through 2025, and Cohu is at the forefront of supporting well-known customers on their endeavor to deploy low orbit satellites to create a global broadband communication network. With estimated test cell utilization of 87% at the end of September, we're encouraged by the momentum and customers' forecast for our test, inspection, and metrology equipment and interface products entering 2022. Mobility customers are forecasting and starting to drive demand for another wave of equipment for high-frequency RF tests, encompassing capabilities for 5G sub-six gigahertz, Wi-Fi 7, and even millimeter wave applications in the first half of 2022. There is a global shortage of power management devices that are limiting electronics manufacturing. Cohu is positioned to help customers address this growing demand and also support the expansion of high-performance computing applications.
Our vision systems, particularly the new Neon platform, continue to capture new customers and expand applicability beyond our original expectations, driving Cohu's inspection and metrology revenue to a projected $70 million in 2021. The automotive market seems to have passed the initial recovery cycle post-pandemic in 2020, and now reaching a new normal demand level that is largely supporting growth in battery management systems for electric vehicles and ADAS processors and sensors. Cohu is well-positioned in automotive with a broad portfolio of thermal handlers and interface contactors to address a variety of test requirements, from automotive processors to high-power management ICs. We have also made significant progress in operations, increasing insourcing and productivity at our Philippines contactor manufacturing facility, yielding a significant 410 basis points gross margin improvement from Q2 to Q3 in our contactor business.
As the contactor business grows and gains momentum in 2022, this is expected to be a significant contributor to our margin expansion toward the midterm target of 48%. Additionally, we completed the implementation of price increases to our handler product lines that largely offset gross margin erosion seen in the second and third quarters. Consequently, we're guiding fourth quarter margins up to 44% despite continuous trend in mix favoring handlers. We expect mix to shift in first half of 2022 to our last handlers and more testers with concurrent growth of our contactor business in line with plans to our Cohu's midterm targets. Switching topics, the supply chain continues to be extremely tight, and material shortages and logistic issues dominating the headlines.
Cohu has taken steps to get ahead on inventory and make sure we can continue supporting customers' capacity expansion plans and the introduction of new device technologies. Our business model is working. Cohu is delivering solid profitability and projecting a strong baseline EPS and cash flow during the typical seasonally low fourth quarter. Equipment lead times remained largely unchanged from a quarter ago, with handlers averaging 18 weeks and testers about nine weeks, contactors and spares about six weeks. Looking ahead, we are encouraged by our design wins and product traction in key growing segments, and we're equally optimistic about our gross margin improvements and order forecast in the fourth quarter. With so much investment going into wafer fab equipment, we're enthused about the midterm growth for the semiconductor test and the need for greater inspection and metrology in support of new advanced packaging technologies.
Let me turn it over to Jeff to share third quarter results, provide specifics about our fourth quarter guidance, and describe our board's authorization for a share repurchase program. Jeff?
Thanks, Luis. Before I walk through the Q3 results and Q4 guidance, please note that my comments that follow, I'll 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. Now turning to the financial results. Cohu again delivered strong revenue and profitability in the quarter. Q3 revenue was $225.1 million, a 49% increase compared to Q3 of 2020. During the third quarter, two automotive segment customers each accounted for more than 10% of sales. In the third quarter, Cohu's gross margin was 42.3% and in line with our guidance.
Operating expenses were $49.5 million and lower than guidance due to some one-time credits and tight management of expenses. Third quarter non-GAAP operating income was 20.2% of revenue, and adjusted EBITDA was 21.8%. Return on invested capital in the third quarter was 51%, well above our target ROIC of 30% or higher. Cohu's non-GAAP effective tax rate for Q3 was approximately 19%, higher than guidance, primarily due to lower income generated in the U.S., combined with higher income generated in Germany, which is subject to statutory tax rates higher than the U.S. Non-GAAP EPS for the second quarter was $0.70, bringing our nine-month year-to-date non-GAAP EPS to $2.48, more than double full year 2020 results, and illustrates the earnings leverage in the business model. Now moving to the balance sheet.
The Q3 balance sheet reflects a net cash position with increased resources for accelerated debt reduction, investment in opportunities to expand our served markets and technology portfolio in line with our growth strategy, and a newly authorized $70 million stock repurchase program to return capital to investors, offset dilution from our equity plans, and express confidence in Cohu's future growth prospects and cash generation. The ending cash balance for the third quarter was $365 million, which is net of debt repayment totaling $101 million during the quarter. The balance sheet reflects net cash of $245 million, as total debt at the end of Q3 was reduced to approximately $120 million. The Term Loan B outstanding balance at the end of Q3 was approximately $103 million.
Cash flow generation was solid again in Q3, with free cash flow at approximately 14% of revenue. Now moving to our Q4 outlook. Entering the typical seasonally low Q4, Cohu's business model is projecting to deliver strong profitability on revenue between $182 million-$195 million. Some customers have pushed new test capacity into 2022 due to shortage of wafers and lead frames impacting their semiconductor production. We expect first quarter sales to be incrementally stronger based on current order momentum and assuming our customers successfully work through their supply chain shortages. Q4 gross margin is forecasted to be approximately 44%. As predicted, we're seeing a moderation of automotive test handlers improving product mix and solid cost reductions in the manufacturing of contactors.
Recurring revenue for Q4 is projected to be approximately 41% of total sales and approaching the 45% midterm target. Q4 operating expenses are projected to be approximately $51 million, and we're projecting Q4 interest expense to be approximately $900,000. We anticipate Q4 debt repayment to be in the $1 million-$7 million range based on cash forecasts, including after anticipating potential share repurchases in Q4. We expect Q4 adjusted EBITDA at the midpoint of guidance to be approximately 19%, and the Q4 non-GAAP tax rates approximately 14% at the midpoint of guidance. The diluted share count for Q4 is expected to be approximately 49.5 million shares. That concludes our prepared remarks, and now we'll open the call to questions.
Our first question comes from Brian Chin with Stifel.
Hi there. Good afternoon. Nice results in a tough operating environment, and thanks for letting us ask a few questions. Maybe first, just a quick one, Jeff or Luis. How much of the 4Q decline is seasonality versus supply constraints, which you kind of reflected in that push to Q1 for some customers?
Yeah, we know for sure it's not. You know, it's somewhat difficult to understand the full impact, but we know for sure it's about $4 million that has been delayed out of Q4 into 2022.
Okay, got it. I think you said incremental based on your backlog visibility, you know, some incremental sequential growth into Q1. Can you put any sort of parameters around what you're seeing relative to backlog thus far in terms of the magnitude of increase?
Well, I mean, I'd kind of speak to that incremental comment first, Brian. It's you know, when we look at Q1, right, we're currently seeing current order momentum that is increasing. Let's you know, say that assuming that continues and customers successfully work through the supply chain constraints, you know, Q1 could be 5%-10% increase over Q4.
Yes. Got it. That's helpful. Then I guess maybe, you know, perhaps even more importantly, in terms of the mix and sort of the progress you're making on the gross margin front.
Mm-hmm.
in terms of initiatives as well as sort of, a more normalized mix to some degree, right? Maybe first, can you give us a sense of what mainly is driving the 170 basis points of sequential improvement in Q4? Also kind of moving into first half, you allude to tester demand potentially coming back, handler business sort of normalizing lower, further improvement on the contactors. There's some price increases on the handlers, you know, a couple pieces I'm missing.
Maybe think about how much of the gap you can, you know, if revenues, you know, Q1, just, I'm gonna throw a number out, if it's $200 million in Q1 relative to what, you know, the target model would suggest, I think something like 46% or somewhere in that territory on the gross margin. How much, how much can you start to narrow that, close that gap in first half?
Okay. All right. There's a lot there, Brian, so let me do my best, and you can remind me of some areas that maybe I don't touch on.
Yeah. Thanks.
In terms of the expansion, gross margin into Q4, couple of main areas here. One is the insourcing of more contactor manufacturing in the Philippines. We saw some great success in Q3 in increasing the gross margin, so we see that continuing. We continue to add more insourcing, if you will, into the Philippines. It's gonna increase our utilization and productivity, lower the costs. We're gonna continue to see higher contactor gross margins, again, targeting about 45% second half of the year for contactor gross margin. The other piece of it is, as I mentioned in my comments, the moderation of the automotive handler revenue, and so an overall more favorable mix of products.
Now, we're not where we need to be in the target model, but we're getting closer to it, and we're seeing a favorable impact. Price increase on handlers, not 100% effective yet as we work through backlog and long-term contracts with customers, but it has been effective to at least offset cost increases. As we look into 2022, as you mentioned, we do see a mix that has higher tester revenue, continuing to grow contactor revenue and the gross margin there. You know, we're modeling internally that 2022 is going to be, from a gross margin perspective, would be in the mid-40% range.
I would say if you're looking specifically at Q1, you know, projection there would be maybe about a 50 basis point or so improvement over Q4 on gross margin.
Great. That's really helpful. I'll hop back in queue for other folks.
All right, thanks. Thanks, Brian.
Our next question comes from Craig Ellis with B. Riley Securities.
Hey, guys. Thanks for taking the question and nice to see the gross margins moving back up again. I wanted to start just by asking a clarification question on revenue. I think three months ago, one of the messages was that there was $14 million of handler sales that had pushed from 3Q to 4Q. As we look at the fourth quarter guidance and what's embedded, did those revenues actually shift, and is the $14 million included in the guidance that we're seeing today?
Just a correction on that, Craig. That $14 million caused by suppliers that were under control movement orders, we knew that we wouldn't catch that up in Q3, and that would filter through Q4 as well. Thought we'd be caught up sometime end of year, beginning of next year. It was not a take out of Q2 and put into Q3.
Oh, yeah, I thought it was out of Q3 and into future quarters.
Oh, sorry. Yeah. Right.
Do I have the periods wrong there, Jeff, or?
No, no. No, that's correct. I mixed up the quarters.
Yeah, your point is you didn't expect to recapture it all in-
Right
The fourth quarter-
Exactly.
Some would be recaptured 4 Q. Okay. Got it.
Yes.
Got it. Okay. That's helpful. Secondly, given everything that we've seen happening in the automotive supply chain, centered around COVID issues with with Asia manufacturing disruptions, Malaysia, et c, what impact did that have on the third quarter for the company? To what extent is that also impacting guidance, excluding the $4 million that you mentioned earlier that's that may or may not be related to that in revenues, Jeff?
Well, let me take that on, Craig.
Yeah.
You're right. Automotive customers have had some had supply chain shortages, and it's embedded as part of the numbers that Jeff quoted here, sort of the $4 million pushing out to next year as they're having their shortages and their disruptions, right? They're the predominant driver of that, actually. Yeah. I mean, I think to the point of your question, that's about it. I think that's the net of it.
Yeah. I wanted to go back to gross margin. It was great to see the increase in recurring gross margin in the quarter. It sounds like, Jeff, that since that's based on utilization increases and yields in the Philippines, that's a structural gain. The question is, you know, from that 52% level, is there further upside you can achieve on that as volumes rise through the year as your mix normalizes? If so, to what extent can gross margins in recurring rise from where they are today?
Yeah. I would talk first about the contactor gross margin. As you know, all of the contactor revenue is considered recurring. We're gonna exit 2021 with about a 40% gross margin in contactors, expecting that to be about 45% second half of next year. That'll have an impact on the overall recurring margin, but I think it's important to look at that element first. Then, of course, on a higher base of revenue, it'll increase that overall gross margin, but not to the same extent that the contactor gross margin will grow.
Got it. Okay. Then lastly, just looking at the, you know, the backlog and some of the color you're providing, very helpful, Jeff, to get the color on the first quarter. Beyond the first quarter, any sense for what the contour of the year would look like? Are you getting the sense from your customers that as we've reached this more normalized level in automotive, for example, that we could be back to an environment where we see more normal seasonality, or are there other things that might give us a different profile that you're starting to hear, whether it be from your test customers, your handler customers, etc ?
Yeah. Let me take on this one, and Jeff, you know, feel free to add. We are, it's a little too early to comment on the balance of the year, Craig. We are rolling out the plan for next year right now.
We can comment better into the visibility we have in the first half of the year because there's already a lot of dialogue with customers for production requirements in the first half. We do see a lot of dynamics around RF front-end IC test coming up again, and thus the demand profile for our tester business improving. Concurrently, we see growth in the contactor business. I think we already discussed that. We are progressing quarter on quarter, both in terms of revenue as well as improvements in gross margin. On the handler side, what I think it's happening is the automotive segment has moderated down again, past the sort of recovery demand in the first half of 2021 from a very constrained, very much constrained environment in 2020.
What we see today is a much stronger demand from automotive customers producing battery management systems and ADAS processors, sensors, and you know, a plethora of other devices too. Those are taking the headlines. As far as seasonality, I think we're back to seasonality. We have been saying this, I think for a couple of quarters now to expect seasonality to resume in the second half of this year. I think this is where we're at. We are seeing a seasonally lower fourth quarter as typical. The difference is the company has a much stronger business model now on a lower fourth quarter.
We expect next year to, you know, demonstrate the normal seasonality, which is a ramp towards a stronger second and third quarter, you know, before the typical slowdown in fourth quarter next year again. We don't have that totally rolled up yet to discuss. More so that first half is looking strong, and the mix is shifting as we described.
Really helpful color, Luis. I'll jump back into the queue, guys. Thank you.
Mm-hmm.
Our next question comes from Tom Diffely with D.A. Davidson.
Yes. Good afternoon, thanks for the question. I was hoping to get a little bit from you on your view of the 5G or the RF tester market in terms of whether or not you think that the build-out over the next couple of quarters will be similar to what we saw a year ago. Maybe beyond that, where do you think we are in this multiyear build-out of 5G?
Hi, Tom. Yes, I think you will, actually. We saw a demand ramp for test to support approximately, if I'm not mistaken, it was approximately 250 million 5G phones at the end of 2020. Then, that ramp, though, happened quite late in the year, probably because of pandemic concerns in the first half of 2020. We're looking at 2022 as another 250 million phones that are 5G enabled. We're expecting the build-up to be very strong again. More importantly, I would say we have had some design wins in the last year and a half that we expect to generate incremental dollars for us next year. Yes, and we're looking very optimistically for a strong RF front-end IC ramp.
Okay. No, great. Switching gears a bit here, when you look at different regions throughout Asia where you're exposed and maybe specifically the Philippines, what has been the impact of COVID over there recently? Have you seen any labor shortages or labor impact?
No, we haven't. The Philippines, our Philippines factory, is running full capacity. We haven't had any bumps since, I think it was first half or even into the middle of last year when things were complicated in the Philippines. We don't have many suppliers in the Philippines. It's actually a fairly narrow supply chain for us, so not a supply chain problem. Our factory, like I said, it's fully operational, and our customers in the Philippines are taking products. Right now, totally transparent. No issues out of the Philippines.
Okay, that's great. Finally, on the DI-Core, I think last quarter you said it was a fairly small market for you today.
Mm-hmm.
When do you think it becomes a meaningful piece of your business?
Yeah, it's a very difficult to answer question, Tom. We're essentially crawling into it. Looking at raw, small numbers here, we're looking at close to $1 million of revenue this year. You know, probably a double to, if we're really good, maybe a little bit more than double that, into next year. It will continue to be a small revenue profile for the next couple of years, for sure. Nevertheless, it is a, as I said on the prepared remark, it is software, so it's essentially a 90% gross margin product sale. Revenue will increase as, not only as we succeed in demonstrating it to customers, but succeed in developing and delivering new capabilities. We intend to move to a subscription model on the new capabilities next year.
It will obviously augment the differentiation of our products and augment our recurring revenue stream. I think from a top-line perspective, it would still be kind of single digit, low to mid single digit for the next two to three years.
Okay, great. Well, thank you for your time today.
Thanks, Tom.
Our next question comes from David Duley with Steelhead Securities.
Good afternoon, and thanks for taking my questions. Just a couple of housekeeping questions. I guess could you help us understand what you think the size of the contactor market is in 2021, and then what you think the growth rate of the overall market is? Along that same topic, maybe tell us what your market share goals are currently for the next couple of years.
Okay. Dave, obviously the market forecast information for 2021 is not out there yet, but we're gonna venture to say it's around $800 million-$850 million for the contactor market that we can address. The market is growing. I mean, overall trend line looks like about a 7% CAGR from the last projections that I have seen in the contactor space. We've been looking at this, as I said in prior quarters, more as an attachment rate story. What is the attachment rate in contactors? Unfortunately, as we discussed in the past, the attachment rate has been calculated on a quarter-to-quarter basis, which we tend to have quite a bit of volatility from the equipment sales.
We took a look back and doing a more of a weighted average, it approximates to 29% attachment rate today. Our goal over the midterm is to grow that to 50%. That's our aspirational goal.
Okay. You mentioned that there was some ASP increases in some of your handler products. Where are we on recognizing that benefit? You know, it usually takes some time, you know. You have to run through the current backlog usually before you can recognize the price increases. Maybe just help us understand, you know, how much of that has been captured already and how much is to be captured.
Hey, Dave. Yeah, you're absolutely right. It rolls in really based on, you know, how much backlog is left and as new orders come in for customers. As I said, it's been effective. It was effective in Q3, essentially to offset costs. We're gonna see a small additional improvement in Q4, call it 25 basis points to 50 basis points. Then as we enter into Q1 of next year, more customers are subject to it, so about 100 basis points from that point on.
Okay. Could I just help us understand a little bit more. I know other people have asked about this, but my phone was kind of fading in and out. When we think about the gross margin progression next year-
Mm-hmm.
You know, from the Q4 level that you guided to, if these things happen, like you said, you know, and let's just say the revenue environment is a normal seasonal environment, what would you expect the gross margin trajectory be, you know, through the middle part to the end of the year? Can we hit 46% or 47% by year end or what do you think?
Yeah, Dave, I mean, I would kind of phrase it as mid-40s, and that to me means that a 46% is achievable. Our midterm target is 48%, right? That's over the you know about a three-year time horizon. 47%, I think might be a bit aggressive, but I think based on what we see out of the contactor business, reducing costs there, growing revenue and expectations for testers, then I think I'm comfortable with the mid-40s, 45, 46% being achievable in those strong you know seasonally strong quarters.
All right. Thank you.
Mm-hmm. Thanks, Dave.
Our next question comes from Krish Sankar with Cowen.
Hi, this is Robert Mertens on behalf of Krish. Thanks for taking my questions. First, could you provide some more clarity on the breakout of the automotive business? Is there any way to bifurcate between EV and ADAS or sort of how the margins are overall within the business line? I have a follow-up.
Yeah. Let me take the first part of the question. I'll let Jeff address the second on the gross margin. It's not an exact science, but the way we check, we tally, we're measuring about 30% of our automotive handler demand to be in the third quarter, to be associated with a combination of battery management and ADAS, not breaking it down. The vast majority of that, by the way, is battery management. ADAS is a small portion, but in aggregate, about 30%, close to one-third of our handlers.
Robert, on the margin, I don't wanna go into too much detail about the specific units, but I would just say that we presented in the deck today that systems gross margin for the quarter was 37%. Recurring was 52%. I think one more piece of data would be that overall the overall margin for handlers was about 40%.
Great. Thank you. That, that's helpful. Then just a last one before I hand it over. Just in terms of your pricing, do you typically have that under contract in sort of a step-wise function, or how should we think about the recent price increases and going forward if costs continue to rise?
Well, we have gone to our handler customers and issued essentially a price increase. Now, it's not applicable to some customers because there's long-term contracts and pricing is set for that period of time. Other customers had already ordered, and so we had a backlog of handlers. But once we get through the backlog and new orders are placed, it's not 100% across the handler orders, but it's a majority of them that new orders will be placed with that price increase. That's why, you know, we see the offsetting impact against the increase in costs, incremental with each quarter. As I said, as we get into Q1, we're closer to the full effect of it, perhaps 100 basis points impact in the quarter.
Great. Thanks. That's all for me.
Mm-hmm.
Our next question comes from Christian Schwab with Craig-Hallum.
Hey, guys. Most of my questions have been asked, but just a quick one. You know, we have a lot of different fabs, you know, in particular at legacy nodes adding capacity, where you historically have been very strong. You know, as we kind of think about kind of the multi-year layout of wafers starts ramping more materially at all these new fabs, when would you expect that to impact your results since it sounds like in next year you kind of expect to return to normal seasonality? Is any of that capable of offsetting typical seasonality on a go-forward basis, or am I thinking about that wrong?
Hi, Christian. I mean, that's it really is gonna happen across time, right? If you look, you're talking trailing edge nodes, Texas Instruments seems to be on the forefront of actually ramping trailing edge node capacity, largely for automotive and industrial applications. I think it's, you know, public knowledge they have new assembly test sites coming online in 2022, beginning of 2022. Many of the others are trailing that in looking at capacity additions that would start influencing 2023 and even late part of 2023. I think there's not a singular point in time. It's gonna spread out over time. As to whether that's gonna buck the trend on seasonality, it's a guess, honestly. I don't think so.
I don't think so because I think that seasonality is gonna be driven really by end market demand, end consumer demand, more so than the capacity additions. I think the capacity additions are more of a statement of confidence that the end market demand is increasing, that the semiconductor proliferation is increasing. You know, for example, I was talking to an executive a couple days ago about the semiconductor content in vehicles and what they used to supply when this individual got into the company and what they supply today, and it's just an incredible ramp of semi-content in cars. I think there's a very strong belief, you know, not wrong, as you can all read, that that is gonna continue over the next few years. I think the trend is positive.
The seasonality is likely to be driven by end market demand, and I don't think capacity will necessarily buck that. That's just my opinion.
Great. No other questions. Thanks, guys.
Thank you.
As a reminder, that is star then one to ask a question. Our next question comes from Charles Shi with Needham & Company.
Hi, Luis and Jeff. I'm asking questions on behalf of Quinn Bolton here. First off, I want to start with your tester, the trend line of your tester revenue growth. It looks to me the third quarter you may have a little bit of moderation in terms of the tester revenue. Is that kind of like a normal seasonality there? Do you expect the second half tester revenue kind of lower than the first half given how strong the first half was?
Yeah, I think that's right. That latter statement is correct. Customers took a lot of equipment Q4 of 2020 through Q2 of this year. I think as we discussed on our Q2 call that those customers essentially taking a pause, and so we're seeing softer tester business in the second half of this year. I think as Luis indicated, conversations with customers are indicating that we're looking at a next phase of a ramp here for RF test coming in the first half of next year.
Got it. Maybe this may be pushing you a little bit harder on understanding the tester revenue trajectory going forward. You said first half you expect tester demand to be strong. May I ask, is it stronger relative to second half 2021 or stronger than first half 2021?
I would say definitely relative to second half of 2021.
Yeah.
We'll get into more details when we get there as it compares to first half of 2021.
Yeah, yeah. Obviously, I know it was probably still a little bit early to really pinpoint what the first half 2022 number is like. Maybe a little bit on gross margin. You sort of mentioned mid-40s% gross margin for next year, maybe something like 46%, maybe even reach 47%. How much of that, from what you see today, can be driven by a little bit favorable product mix? Maybe you got a little bit more tester next year, a little bit more contactor, which you are steadily improving gross margin from first half this year through the fourth quarter. Just want to understand the product mix side of the puts and takes in terms of the gross margin improvement into next year. Thank you.
Yes, Charles, for sure. The product mix, as you described, plays a role in expanding the gross margin. We're, you know, confident that we're going to continue to grow the contactor revenue as well as increase that gross margin. That's a key point of our strategy, not only for growing revenue, but also gross margin and profitability. The other strategic point is growth of the tester business. Those gross margins are very good. The strategy and approach is to grow that tester revenue. As we do that and maintaining handler, our handler position and handler revenue, we will see an improvement in product mix from a gross margin standpoint.
Now, when I spoke earlier about the seasonally strong quarters for 2022, I was talking about a 45%-46% gross margin. Again, we haven't sort of mapped out our 2022 annual plan yet, but I would say, based on what I've seen so far and the confidence I have in the model, that with growth in testers and contactors, I would expect in those strong quarters in 2022 to be somewhere, as I say, mid-40s. 47% might be, you know, kind of pushing the edge, but, 45%-46% is. I'm a little more comfortable with that for those strong quarters.
Got it. Maybe last question from me. Luis, this is for you. You gave a very good industry level color, as always. I wanna, I noticed you mentioned the power management IC being one of the top kind of shortage components, semiconductor components so far. It looks to me, we heard that power management IC investment in terms of new capacity is gonna still be very strong next year. Can you just give us an overview how your products are exposed to this part of the market? What is driving the testers or handlers or the contactors side? Thank you. That's all for me.
Okay. Yeah, Charles, let me start from the end. We obviously do have contactor product lines for small power management IC applications, going all the way up to high voltage, high current applications. The whole gamut of PMIC devices. Again, by that I mean, you know, small PMICs that go into mobile phones to very large power devices. I wouldn't call them PMICs. I would call them power discretes, actually, that may go on industrial applications, trains, you know, you name it. That's sort of on the contactor side. Handlers very much the same.
You know, we have small, PMIC applications running on our turret handlers, and we have very large power management devices running, on gravity feed handlers, also on turret for non-good die power management applications, and, looking here at also MOSFETs, some silicon carbide. When it comes to the tester business, I would say we're much more narrow focused on small PMIC devices, small power, small applications, more mobile in nature, not so much the high voltage, high, current, not silicon carbide, for example, not MOSFETs, but more so the small PMIC, solutions on the tester side. Hopefully that covers it from all three product lines for you.
Yep. Thank you.
Our next question comes from Craig Ellis with B. Riley Securities.
Yeah, just, two follow-ups. First, just a lot of conversation today about the pricing action that's been taken on the handler side of the systems portfolio, and it's nice to see that. The question is, strategically, have you thought about pricing action in other parts of the portfolio? Since you're doing it in handlers, why wouldn't you try and execute it elsewhere as well?
Well, Craig, this is Luis. What we've done here is essentially repass cost increases to our customers. What we're not going out to gouge customers and try to obtain more money, unless obviously we have the product differentiation, we'll price based on the value of the product. You know, this year, what we've seen is essentially a cost increase on components that we use in our handler products, be it off-the-shelf components, motors, sensors, control boards, as well as some manpower for subassemblies are at our contract manufacturers, and we took those cost increases. We rolled up, and as soon as we had enough understanding of the value of it, we had a conversation with our customers to repass that.
We understand we're also not unique in doing that. Our competitors seem to be doing the exact same in even some lateral businesses in the semiconductor space. But we're not pushing for higher value unless we have the differentiation, obviously. Like I said, we're not pushing for price increases where we don't see cost increases.
Okay. Is the point there then, Luis, that you just haven't seen that much of a BOM cost increase with testers, or are the broader market dynamics different in testers, so would not allow you to make such a move even if you had a similar such cost increase?
Yeah, that is correct. We have not seen that level of cost increase on the tester side.
Okay. Lastly, because you mentioned and included in the press release the $70 million share repurchase program, I just wanted to give you an opportunity to talk about how you might go after that, whether it's in the fourth quarter or in coming quarters, and how you plan to execute on that repurchase.
Craig, we're gonna start with opportunistic buying here as early as next week. Soon thereafter, we'll put a 10b5-1 plan in place with different pricing parameters and let the purchasing happen you know essentially automatically, if you will. So that's sort of the mechanics of it. It's probably obvious why we put it in place. We truly believe the company is undervalued, wanted to take some action on that. Very confident in cash flows moving forward. Also would like to say that this doesn't mean that we won't be doing acquisitions.
We've sized it so that we believe we can continue, obviously, to pay down debt, make investments, do acquisitions, and we believe with cash generation, we project that we can also return some capital to shareholders, send a message to the market about how confident we are in the company.
Got it. Jeff, Luis, thank you very much.
Thanks, Craig.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Jeff Jones for closing remarks.
Thank you. Before we sign off, I'd just like to say that we'll be attending the following conferences: the Stifel Virtual Conference on November 11, the Craig-Hallum Virtual Conference on November 16, CEO Summit, which will be held in person on December 8 in San Francisco, and the D.A. Davidson Virtual Conference on December 15. If you'd like to attend any or all of these events, please reach out to your respective banking and/or conference contacts to arrange a meeting with Cohu. Look forward to speaking with you soon. Thank you for joining today's call, and have a good day.
This concludes today's conference call. Thank you for participating. You may now disconnect.