Good morning or good afternoon, and welcome. My name is Jeff Jones, and I'm the Chief Financial Officer for Cohu. We're glad you could join us today, and we look forward to walking you through the Cohu growth strategy and new financial model. Before I go further, I'd like to call your attention to our Safe Harbor statement and remind everyone that this presentation is being recorded and will be available for future viewing in the Investor Relations section of our website at cohu.com. Today's presentation will last approximately sixty minutes, followed by about thirty minutes of Q and A.
Our CEO, Luis Mueller, will start by sharing an overview of our markets and strategies for differentiation and growth. We're fortunate to have two guest speakers today that will discuss their company's market leading technologies and how Cohu adds value to their test process. Our guest speakers are Michael Campbell, Senior Vice President of Product and Test Engineering at Qualcomm and Ganesh Moorthy, President and Chief Operating Officer of Microchip Technology. Ganesh has recently been appointed the next CEO of Microchip starting in March. Congratulations, Ganesh.
Then our General Managers will provide more details about our strategy for growth and how we differentiate ourselves in some focused markets and applications. I will conclude the prepared presentations with an overview of our financial results and new midterm business model, and then we'll have about thirty minutes for Q and A. Now I'll turn it over to our President and CEO, Luis Muller.
Thanks, Jeff, and welcome, everyone. Yesterday, we issued a press release in which we increased our Q4 guidance and Q1 outlook due to strong order momentum, particularly in Mobility and Automotive. Jeff will get into more specifics about this later. I'll begin today's presentation reviewing our new midterm strategy and target model for growing revenue profitability. We're also fortunate to be able to share the voice of our customers directly with you to illustrate how our solutions fit into their semiconductor manufacturing process and deliver value to their business.
Cohu is a fast growing company in semiconductor test and inspection, an industry estimated at $6,500,000,000 At the midpoint of our revised Q4 guidance, Cohu will deliver revenue of approximately $631,000,000 this year, capping a three year compound annual growth rate of 21%, which far exceeds the industry average. We have an active installed base of over 28,000 systems across many blue chip customers where we have built strong partnerships, Cohu's revenue composition is unique with about 45% coming from a more stable base of recurring business. Our midterm three to five year plan is to grow revenue to $940,000,000 and operating income to 23%. The main pillars of the Cohu growth strategy consist of extending our leadership in the high growth RF test segment, serving a $400,000,000 addressable market solidifying our strong handler position with cutting edge thermal and vision technologies improving customers' yield in a $700,000,000 market with secular growth applications in automotive and mobility, increasing the contactor attachment rates to our semiconductor equipment in a $500,000,000 market by leveraging our significant installed base and enhancing test cell differentiation and building a competitive moat. Finally, we plan to provide a suite of software and data analytics to optimize test cell productivity and increase recurring business.
We're focusing on select end markets that are making semiconductors more ubiquitous to our everyday lives. We believe that the industry is at the beginning of a multiyear growth period. Five gs is a disruptive new technology that will connect everyone and everything, delivering orders of magnitude faster data exchange. Five gs penetration in smartphones is only 12% today and projected to more than double next year and continue growing for several years as millimeter wave proliferates. RF content in smartphones is forecast that should grow by 50% in the next three years.
This will open the gates for new applications, not only in mobility, but also in industrial and medical, automotive and computing with an estimated 40% increase in global data creation, transmission and storage over the same time period. In automotive, where Cohu has a leading position with thermal handlers, digitalization with ADAS processors, sensors, telematics and the electrification of the drivetrain will transform the way we move around. Market researchers forecast an 18% annual growth rate for automotive semiconductors over the next three years. We will focus on these secular and multiyear trends to achieve above industry revenue growth, delivering differentiation in a $2,500,000,000 serviceable market. Cohu's one stop shop solution enables our customers to achieve faster production yields and optimize equipment productivity with best in class RF test instrumentation, the most responsive active thermal control solution in the market, utilizing artificial intelligence to maximize inspection yield and data analytics to optimize productivity.
We aim to capture $35,000,000 or more of incremental test cell revenue next year in addition to growing in each of our served markets. We're well positioned to capitalize on these multiyear megatrends, targeting 14% annual revenue growth, two times the industry rate and 23% operating income, accelerating share gains in Test and Inspection with disciplined R and D spending that delivers 30 or invested capital. At the target model, the business is estimated to generate $160,000,000 annual free cash flow. I hope you find the presentations that follow informative as they bring to light our plans and product differentiation. Next, I want to introduce Michael Campbell from Qualcomm.
Good morning, good afternoon and good evening. This is Michael Campbell. I'm Senior Vice President of Product and Test Engineering at Qualcomm. I'm here today to talk to you a little bit about Qualcomm and how Qualcomm works with Cohu. The world everywhere is becoming a five gs world.
Everything needs to be connected and interconnected intelligently. That drives bandwidth and the need for more speed and more data at all places and points. Five gs allows us to build the bandwidth needed to accommodate your parking meter, your RoboDog, your car, and everything else that's being interconnected these days. Qualcomm is the leading wireless technology innovator that has been working for thirty five years to build the patents of basic technologies and the strengths to be able to continuously compete. We started off with CDMA, moving analog to digital, moved into the smartphones and desktop.
And today, with five gs, we're going to connect everything virtually everywhere from your car to your to the cloud, to AI, to your Internet of Everything. Qualcomm's R and D engine is a $64,000,000,000 cumulative R and D engine with over 140,000 patents and 300 license agreements. Our world class technology portfolio includes wireless connectivities, processors, multimedia components and the RF front end. Today, Cohu is our partner with the tester for the RF front end, the advanced thermal handling capabilities for our processors and multimedia testers. Our business segments at Qualcomm are really the semiconductor business segment, which in 2019 was about $14,600,000,000 and our licensing group in 2019, which was about $4,600,000,000 Qualcomm's growth vectors are really tied to five gs, scaling that five gs and four gs business into the adjacent business structures and growing new opportunities.
VR glasses, the factory of the future, automation, AI are all things that we're working on for the future that will change and transform how the world connects, computes and communicates. Five gs wireless becomes a superior technology that will disrupt everything. It's as fast and as reliable as cable. With that very fast infrastructure, we can go from sub-six, which is basically a straight extension of the current LTE networks, to millimeter wave. All that will give us the bandwidth and the capabilities to connect everything, driving up to a 13,200,000,000,000 economic impact of five gs enabled goods and services by 02/1935.
We're not just in another handset upgrade cycle. 10x decrease in end to end latency, 100x increase in network efficiency are just two of the spectrum ideas that drive the five gs drives when it's fully enabled from LTE extensions into the millimeter wave. Five gs is accelerating globally. 85 operators commercially deployed, three ten additional operators are investing in five gs. There'll be 2,800,000,000 connections in five gs by 2025.
This is a huge market with a diverse and very robust across the whole gamut from factories to your phone of applications and uses. The digital transformation that we're going to be driving with five gs goes from healthcare to manufacturing, from agriculture to energy. All these bandwidths, all these items require cloud communications or AI communications to be able to make them better, more efficient and more effective. Five gs allows the cloud to the device to through the AI connectivity that drives improvement in whether your traffic signals or your retail signals or your energy signals. When we break through, not if we break through the technology barriers, we're going to drive and leap the ecosystem forward with us.
Today, a great example is streaming multimedia. Today, you can stream multimedia, but it's got glitches quite often snags and lags. On your cell phone with five gs, there won't be those things. We will be streaming Netflix Prime Video, Apple Video, Spotify and Hulu seamlessly. The question is, what will the consumer do with it, and how will the consumer change both the delivery vehicle and the execution vehicle for the five gs.
The truly immersive VR experience with your smartphone will allow you, Steve, to sit at home and enjoy the video from your house, in the comfort of your own home, but you will be there because you'll be able to see the key cameras in the marketplace that are streaming the video, you'll be able to see the stage, you'll be able to hear the sound, and you'll be able to feel the intense stadium all around you while you're on your five gs phone. Five gs phone is also going to enable you sports experiences that have been never seen before, real time sports with real time stats, play by play action being screenshot to your cell phone and enabling your cell phone to be basically your own artificial intelligent announcer for the sports. The car is part of the five gs network. The five gs network will enable cars to be more intelligent. It will tell cars where consumers are, where there's bikes, where there's other cars are, and what traffic patterns are.
That will enable smoother traffic flow and will enable an easier commute to work, from work and automatic cars one step closer to reality. Five gs is also making the age of virtually everything smarter a reality, whether you're making your home smarter by having your home connected to your cell phone or connected to your office desk or to whatever, your AI assistant, the world will become a smarter place. Cohu, our partner, has helped us with MSMs, which are our basebands, our digital basebands, by using their active thermal controlled handlers to keep the temperature accurate. Why is that important? The temperature coefficient of these very complex, very dense, high speed devices is critical to keep on an accurate basis.
The Cohu's active thermal control allows them to or allows us to both improve yield and improve the consistency of the product we're marketing for PCs and other more complicated devices. That temperature is more accurately measured with Cohu's equipment and allows us to drive yields up and test times down, thus making the product more robust in the marketplace. Same thing for the RFFE products, Cohu's RF subsystem and the cost point in the marketplace allows very accurate and robust testing of RFFE components and allows us to bring that marketplace, especially for five gs to the market much easier. So those two things come together. Qualcomm using Cohu's products and leveraging Cohu's technology and Cohu leveraging us by figuring out where our roadmaps are going, so they can build better technology looking forward.
In this age, the real age of five gs made concrete, made practical by Qualcomm, everything starts to interconnect. We're going to be driving enabled consumers, we're going to transform industries, enrich lives, and we're going to invent breakthrough technologies around this bandwidth and infrastructure that we have that will change the world. So with that, I'd like
to say this is the
age of five gs, made real by Qualcomm and being helped by our key business partners. Thank you very much, and I hope this talk was of use.
Hello, everyone. My name is Ian Lauwey. I am the Vice President and General Manager of Cohu Semiconductor Test Group. I joined Cohu in 2019 after twenty five years in the industry, initially at Teradyne and most recently at Analog Devices, where I led multiple semiconductor product and end market segments. Cohu's recent results highlight how increasing test intensity is fueling our growth.
In 2020, we saw a strong ramp of first generation five gs and Wi Fi six RF semiconductors. As Michael shared with you, the world is becoming increasingly interconnected. Many new applications and devices need higher data rates and lower communication latency. This need is achieved with more frequencies and wider bandwidth per IC, increasing test times up to 25%, and the average system selling price by an average of 30. These trends allow us to sell new systems and upgrades to our current installed base.
We are projecting to grow revenue 18% annually in mobility, leveraging our leading position in RF front end IC tests and targeting new applications with our universal platform. Multiple factors are contributing to both near term and future growth outside of mobility, particularly in the automotive and industrial segments, where we are forecasting 13% revenue growth annually. Automotive and industrial RF are benefiting from the introduction of new standards like ultra wideband and with Industry four point zero, the increasing number of distributed sensors. Furthermore, proliferation of advanced packaging is leading to more complex mixed signal and power management devices. This trend is increasing the adoption of structural tests, which is an early step in the test flow typically at WaferProbe.
For these insertions, our air cooled test platforms offer a cost effective solution, including for complex devices such as application and AI processors. Through the 2020, we executed on the fastest ramp yet of a new instrument, our Redragon RF instrument suite. This third generation instrument suite covers all the RF technology inflection points I just discussed and is designed for the wave of new standards and technologies being adopted now and in the near future. As Michael described, our customers depend on us to provide accurate and robust systems and to make it easier to deliver their complex five gs technology. That means accelerating the time to ramp at high yields and delivering solutions that address our customers' entire device portfolio.
The Redragon instrument suite covers Wi Fi six and sub-six gigahertz and millimeter wave five gs devices while maintaining backwards compatibility to four gs and older Wi Fi standards. By designing the Red Dragon into our well established platforms, customers can upgrade existing systems in the field at a fraction of the cost of a new test cell, strengthening our advantage over competitors, and better positioning Cohu to sell incremental capacity to test five gs devices. Cohu has the scale to enable high volume production ramps and simultaneously support our customers' worldwide engineering and production facilities. We have seen a number of design wins this year, where Tier one customers selected Redragon over their existing Rack and Stack in house systems, recognizing the need for a next generation platform that better aligns to RF front end IC test requirements as the segment grows from $15,000,000,000 to $25,000,000,000 over the next five years. The Redragon RF suite is available on our PACS and DiamondX platforms.
Cohu's universal test platform provides the broadest priceperformance range spanning from a true zero footprint five slot configured tester to a system that delivers hundreds of devices tested in parallel. Our platform strategy has a strong advantage for RF devices, including RF transceivers for IoT. It is also well aligned to power management, display drivers, and microcontroller device testing. The Cohu Universal Test Platform is also suited for the growing structural test applications I discussed earlier. These are device categories that cut across many applications and benefit from tailwinds in the automotive, industrial, consumer, and computing market segments.
Cohu is expanding our value by integrating differentiating technology in the test cell. An example is millimeter wave, where tester to contact or calibration is key to performance. Our customers historically had to manage this challenge themselves through design and cross vendor coordination. As the technical challenge grows with millimeter wave, so does the difficulty of homegrown solutions. A Cohu test cell reduces the risk and effort, thus delivering improved yields and faster time to market.
Five gs and Wi Fi six are driving significant growth this year. And in the future as the technology adoption spreads and frequency requirements expand. We have planned our Red Dragon instrument suite to deliver that capability modularly so customers can add functionality as needed. We are also seeing the early adoption of new instrumentation in automotive and industrial connectivity, radar, and growing satellite Internet applications. We have leading RF test solutions today for these emerging markets, and we are investing to meet the needs of what we believe will be a growing $400,000,000 RF test market in the next two to three years.
So to summarize, we are very focused on the fast growing device segments that are best served by our platform strategy, delivering differentiated solutions to a $1,100,000,000 addressable semiconductor test market. We are growing with five gs and IoT RF markets that are transitioning from rack and stack in house systems to production testers. We have visibility to at least $20,000,000 of incremental revenue in the first half of next year from share gains in this segment. Given our strong global RF expertise, a proven established platform, and the ability to upgrade a large installed base, we are confident this will continue to be a strong component of our Semi Test business. We are also extending to applications in automotive, industrial, and computing markets.
As you will hear from Ganesh from Microchip, our platform is well positioned at leading customers, and we are investing to add instrumentation to extend our advantage for testing other devices, such as OLED and microLED display drivers, power management devices for electric vehicles and data centers. The Semi Test revenue growth target of seventeen percent is driven by our differentiated test instrumentation, universal platform, and Cohu's unique position to solve challenging customer integration problems and deliver a test cell solution. Thank you. Next, you will hear from our second keynote speaker, Ganesh Moorthy from Microchip.
Good morning or good afternoon, everyone. My name is Ganesh Moorthy. I'm the President and Chief Operating Officer of Microchip Technology. Microchip is a customer of Cohu for many years and it is my distinct pleasure to speak to the Cohu Investor Conference today. By way of introduction, Microchip is a leading total system solutions provider, providing high performance microcontrollers, microprocessors and digital signal controllers, analog of many forms, mixed signal, power, interface, security solutions, clock and timing, which are universal in all systems, wired and wireless connectivity, FPGA solutions, non volatile memory, and flash IP solutions.
Our fiscal years, which end in March, in March 2020, the fiscal year ended with $5,300,000,000 of revenue. We're headquartered in Phoenix, Arizona in a city called Chandler, and we have about 18,000 employees worldwide. Our enduring vision for the last twenty five plus years has been to be the very best embedded control solutions company ever. That has meant different things at different stages of the company. Today, that is built on three pillars: How do we enable systems to be smarter, smarter?
How do we add more value to the smart systems when they're connected? And how do we ensure that a connected system is secure? As we think of our roadmap of total system solutions, we look at this from the point of view of our clients. What is it that they're trying to build? Obviously, you can see here in the center in the dark is the intelligence inside the system.
But that alone is not enough. You need the signal chain that brings the information to the intelligence. You need power. You need clocks, which are universal in all systems. You need to have all the communication requirements, the security requirements.
We build all of these building blocks either as discrete or integrated onto our microcontrollers themselves. We have had a remarkable track record of growth and profitability, starting from 1993 when we went public and over the last twenty seven plus years. During this whole timeframe, we've had 120 consecutive quarters of profitability, including some of the time when we were private. That is an unmatched track record for anybody in the semiconductor industry. Through good times, through bad times, we've been rock solid in profitability, allowing us to be strategic in our investments, in our support for customers, in our innovation, in our capacity, etcetera.
And you can see how this has tracked over time with different product lines, microcontrollers and processors in blue, which are about 55% of the company, analog and mixed signal, are about 28%, 29% of the company in orange, FPGA, which is a more recent addition, about 7% to 7.5% and then everything else about 10% or so. Our growth has been fueled by a relentless gain in market share in the microcontroller business, which is the business we've been in the longest. This shows you that remarkable progress from 1991 when we entered the market as a small underfunded company in a field of giants and the consistent shares that we have gained over this timeframe, reaching number three in the twenty seventeen-twenty eighteen timeframe and continuing to close the gap with numbers two and one. Today, we're only 16% away from number one and growing faster than both number one and number two. It is our full expectation that we will cross them somewhere in the next three to five years.
While the world knows us well for our microcontrollers, we are less well known for analog, but we are gaining substantial share in analog, too. Here's the data for 2019 showing that for the first time, we're in the top 10 at 1,000,000,000 point dollars of revenue, the only analog company in the top 10 that recorded growth in 2019, this becoming the second engine of growth for Microchip. As we look ahead, we have six end markets that we play in, shown on the left hand side of this slide. Equally importantly, we have six megatrends that we see providing durable growth for the next five to ten years. Those six megatrends are the advent of five gs and the rollout of that infrastructure over the next five to ten years IoT, as it pertains to the industrial IoT, the insatiable growth of data and what it does to driving data center growth electric vehicles becoming a higher and higher percentage of the total vehicles in the world artificial intelligence and machine learning from the cloud to the edge to the end nodes themselves And last but not least, automated driving and autonomous driving.
These are six outstanding growth trends that we intend to capitalize on in the coming years. Looking at our business by end market, the largest end market we plan is the industrial end market, followed by data center and computing, followed by automotive, and then smaller segments in communication, consumer appliances, in particular aerospace and defense. So industrial and automotive, which are the focus for this conference, are really two very large market segments for Microchip. So what do we mean by the industrial market? It's a very fragmented set of end applications that are pictorially represented here for some of the applications, but really represents hundreds of other applications, things that go into the factory infrastructure, things that go into the cities and other infrastructure, and really represent a great long term sticky business.
It takes a long time for it to develop and a long time over which that revenue will last. In automotive too, we are designed into a wide range of applications, all the way from body control to human machine interface to USB to networking to touch interfaces to audio systems. In an average car, we have somewhere between thirty and forty microchip products designed into it. A high end car, probably in the neighborhood of about 70 to 80 components of microchip that are designed into it. Shifting now to manufacturing.
Unlike most semiconductor companies, we own and operate a significant amount of manufacturing capability. About 20 different factories around the world, six of them which are very high volume factories, producing on average about half to maybe slightly more than half of the output for the company. It is in the area of manufacturing that Cohu begins to intersect Microchip and our strategy. Now, one of our guiding values is that suppliers are our partners, and we started our partnership with Cohu fifteen years ago. We learned quickly that Cohu takes the time to listen and understand our needs and to partner with us to develop creative solutions that end up exceeding our expectations.
Let me share with you one of many examples. Almost every microcontroller we sell has high performance analog circuits. Cohu listened to our need for an analog resource that enables testing a very large number of units at the same time that resulted in a new tester board. I will show you the benefits of this collaboration on the next slide. Cohu understands that changes to capital equipment strategy often require a long term view.
Design and development of products and hardware take quarters to years to complete. And Cohu realizes that more engineers that are trained on using their equipment and the more designs they enable on their equipment through their applications teams result in future purchases. They have made investments in application support in both good times and bad times to help both of us. We also appreciate that Cohu recognizes the benefits of the embedded control solutions that Microchip offers and incorporates into their own designs. The result of our partnership with Cohu is that they are one of several suppliers that have enabled Microchip to improve the efficiency of test by enabling highly parallel test solutions as much as 80%, 90% reduction in the footprint that is required and in the labor that is required.
And while the results will vary by product family, Cohu's test solutions have allowed us to implement these on many product families and make significant manufacturing improvements in the process.
In
conclusion, our market leadership requires clarity of vision, continuous innovation, consistency of purpose, relentless execution, and of course, partners to enable our business. We are proud of our partnership with Cohu and expect this to continue for years to come. Thank you for the opportunity to speak to you today.
Hello, everyone. My name is Chris Borson. I am the Senior Vice President and General Manager of Cohu's Test and Inspection Handler business. As you have seen in the opening video, Cohu develops and supplies a broad portfolio of handlers with unique thermal, vision, contacting and mechanical stimulus for testing semiconductor devices and sensors. Our systems are used both in test and scan as well as stand alone vision inspection applications in the semiconductor industry.
I would like to start by discussing the evolution of package technology and how it influences handling and inspection. The two segments where we expect the biggest impact in growth are automotive mobility, including inspection. As you just heard from Ganesh Moorthy, in automotive, the two trends, turbocharging growth are electrification and ADAS or autonomous driving. Included in the growth of ADAS are higher powered microprocessors, microcontrollers and sensors. These trends are driving changes in how devices are tested.
For ADAS devices, there are two significant impacts. First, while these devices have traditionally been tested at extreme temperatures ranging from minus 55 Celsius to plus 175, in order to support ever increasing quality standards, these devices now must be tested with tighter temperature variation and up to 32 in parallel. To compound the challenge, ADAS microprocessors also operate at higher power and self heat during test. So in order to maximize yield and minimize test time, the handler must dynamically control device temperature while rapidly removing heat at very high temperatures. Also, electrical vehicles require devices that operate at higher voltage, and testing at higher volume production without arcing requires a specialized testing environment.
Addressing these challenges will enable Cohu to grow test handler revenue in the automotive segment at 21% compound annual growth rate in a $300,000,000 market segment. About half of this growth will be driven by returning to normalized levels from where we expect 2020 to close and about half driven by the changes I have just outlined. Moving to Mobility and Inspection. To support device miniaturization in smartphones, the industry is increasing the use of wafer level chip scale packages or WLCSPs. With tighter quality standards, it is critical that our customers can identify defects in these advanced packages, including subsurface micro cracks.
The challenge is to differentiate real defects from cosmetic problems and reduce over rejection. Also, sensors are getting more complex, particularly the latest generation of microphones that require precision testing and high volume production. Overall, Mobility and Inspection are major segments for Cohu, and we are targeting to grow revenue in Test and Inspection Handling at 7% compound annual growth rate in this $400,000,000 market segment. I would like to now focus on how Cohu is addressing these challenges and translating them to higher yields for our customers. Cohu has a long history and is the industry leader in active thermal control, or ATC, for testing high power devices.
ATC enables our customers to dynamically control the temperature of the device during high volume testing in order to make sure they can minimize test time and maximize yield. We cut our teeth in this space with the world's leaders in computing and in the past six years have extended that to mobility. As I pointed out earlier, the challenge is now to provide this in the automotive space for higher power microprocessor. Co's solution for this is T Core. T Core technology is widely deployed on a range of systems around the world in computing, mobility and now automotive.
In head to head benchmarks, T Core continues to provide best in class active thermal control for high volume applications as well as our customers' most challenging devices. For advanced inspection of WLCSPs, the challenge is to find real defects and meet the stringent quality requirements of our customers. I emphasize real defects as without the right capability, it is very easy to over reject parts due to cosmetic problems. These do not affect performance but create a nuisance as traditional inspection systems mistake them for real defects, thereby reducing yield. Koh's NVCore Vision technology provides best in class inspection in the standard and high resolution visual light spectrum.
Also, we have extended our unique capability further to include true infrared inspection and deep learning algorithms. True infrared inspection provides the ability to see micro cracks on and below the surface of the device. Cohu has also developed deep learning algorithms to distinguish scratches from actual defects. Cracks potentially impact performance, while scratches may not. The challenge then is to distinguish between the two in high volume production.
Cohu's NVCore Vision technology has unique capability proven in high speed production to find real defects and minimize over rejection. The benefit of this to customers is that by ensuring quality by reducing over rejects, this protects our customers' quality standards while increasing yields. Beyond T CORE and NVCORE, Cohu provides other capabilities that also deliver better testing and higher yields. First, our system for testing MEMS sensors enables handling of delicate devices at very high speeds. Also, Cohu architecture isolates testing of sensors from environmental influences, including vibration and noise.
A good example of this is testing precision microphones where we need to minimize the noise floor for accurate measurement. Second, our ability to provide more or all elements of a test cell is a significant Cohu differentiator. Two examples of this include that we can combine T Core with Cohu's Protrace contacting technology to extend our thermal performance in test cell applications. Further, our solution for testing high voltage devices is a handler configured with an inert gas chamber combined with Cohu contactors to create an arc free high voltage IC test in volume production. Okay.
To summarize, for the test and inspection handler business at Cohu, our served available market is $900,000,000 We plan to grow revenue at 12% compound annual growth rate by delivering leading edge capabilities to segments that we serve today, including Computing, Industrial and Consumer, while focusing on the higher growth automotive, mobility and inspection opportunities. Cohu's growth in automotive will be based on our unique ability to address our customers' technical challenges with emphasis on the high growth segments. This includes more semiconductor content in automotive, including engine management, safety and infotainment. Growth in automotive will also be turbocharged by new IC content supporting ADAS and electrification. ADAS is driving the need for active thermal control for high power microprocessors that require dynamic heat removal during extreme temperature testing.
Is uniquely positioned to take advantage of this with its production proven T Core technology providing active thermal control. We will extend this advantage by providing solutions combining handlers configured with T Core technology and Cohu's ProTrace contactors. Also, electrification is driving growth in the semiconductor content in vehicles and creating demand for high voltage testing. Deploying handlers that utilize specialized test chambers combined with Cohu contactors will provide our customers with high quality, high volume, arc free testing for this application. In Mobility and Inspection, growth is based on Cove's best in class NV Corp vision inspection technology that delivers more accurate inspection, including infrared.
We further enhanced defect recognition with artificial intelligence algorithms to maximize inspection yield. Finally, we have developed a unique architecture to isolate sensor testing from the environment, enabling precision measurements required for advanced microphones and other applications. As a result, we deliver value to our customers with lower test costs and higher yields by providing differentiated solutions for fast growing applications in automotive, mobility and inspection. So that concludes my update. Thank you for your time.
And next, you'll hear from Devin Sheridan, General Manager of Cohu's Interface Solutions Group.
Hello, my name is Devin Sheridan. As Chris indicated, I'm the General Manager of Cohu's Interface Solutions Group. I joined Cohu in August, I'm very excited to be working with a dynamic and highly innovative team. Previous to Cohu, I spent over twenty seven years in the semiconductor business in various roles from process engineering to global operations management and test and new product introduction. More recently, I was Director of Operations for Asia New Product Introduction and Test Innovation at NXP.
Now moving to the presentation. The Interface Solutions Group develops innovative technologies to solve complex test challenges. Differently than what Ian and Chris previously described, Cohu's Interface Solutions Group sells consumable products to semiconductor manufacturers and as such, create a steady recurring revenue stream that is not based on test capital expenditures, but on the customer need to keep production running day in and day out. The Mobility segment represents a high growth opportunity for us, driven by expanding five gs adoption. Within this market, initial growth has been primarily in sub-six gigahertz applications.
However, we see a growing number of devices and applications expanding to higher frequencies known as millimeter wave. The millimeter wave device applications represent a significant increase in complexity, supporting a growing number of RF bands. Additionally, at millimeter wave frequencies, managing signal integrity efficiency through the entire hardware stack from the device to the tester instrumentation becomes very challenging. The complexity around test causes the cost per channel in the test instrumentation to grow exponentially. To address these challenges, customers are requiring innovative interface designs and a higher level of integration to efficiently balance technical complexities with test economics.
In the automotive and industrial markets, semiconductor companies will continue to benefit from growing silicon content in vehicles, the highest growth coming from vehicle electrification at an estimated three year 27% CAGR and ADAS with an estimated three year 29% CAGR. The automotive market is characterized by stringent quality requirements that demand robust and reliable solutions. Growing silicon content in vehicles will demand zero defects where time to yield is highly valued. Test must innovate around electrical and thermal control as well as integrate within yield and data analytics to enable zero defect performance. For electrification, this requires greater precision for improved battery and power management.
With increased performance requirements, customers expect higher test parallelism to control costs. As Chris mentioned earlier, ADAS processors require active thermal control across high parallel tests to minimize test time and maximize yield. Here, an integrated approach between handler and interface hardware is needed to accurately manage temperature across the full test array. Devices in the computing and networking market, which target cloud, AI and edge processing, use state of the art process technology and advanced packaging. As computing demands increase, pin count and interface speed requirements stress the limit of contacting technology.
We believe this represents a significant opportunity to disrupt the interface market with innovative solutions that enable testing of high bandwidth, large scale pin count devices while driving improved cost of test. Cohu's interface products provide innovative solutions that maximize performance, particularly when combined with our handlers and testers in key market segments. For five gs, we developed contactor technologies that control impedance and inductance for applications up to 50 gigahertz. Our solution extends standard contactor components to higher frequencies with the use of engineered materials and designs, providing a high level of efficiency for our customers. For frequencies above 50 gigahertz, our XWave platform provides a direct signal path from the device to test instrumentation, critical for maintaining high signal fidelity.
In high performance digital computing, networking and ADAS applications, our innovative coaxial contactor combines exceptional impedance control with full signal isolation that is critical in today's high bandwidth protocols. Cohu's solutions are scalable to high pin count packages. For analog devices used in the industrial and automotive markets, we have a full array of precision measurement contactors at scale to high power, enabling test at peak voltages and high current that are used in electric vehicles in today's industrial applications. What we are most excited about is our ability to innovate beyond the standard contactor. Cohu has developed a class of intelligent interface solutions under the Protrace brand that enables greater yield and operating efficiency for our customers.
For applications with high thermal demand, we embed sensors into the contactor to enable fast calibration and closed loop temperature control. For RF, we integrated millimeter wave switching capability to expand parallelism and enable calibration to the device under test. The latter combines improved cost structure with greater test accuracy, optimizing cost and efficiency for millimeter wave devices. Cohu is in the unique position to extend innovation across the entire test cell. This is a highly valued capability that reduces our customers' time to yield.
This is especially critical for technically challenging applications and for customers with limited integration resources. Here, Cohu has attached the Redragon RF enabled tester with the Protrace intelligent contactors to extend millimeter wave frequencies to higher parallelism with greater test accuracy. With our smart contactors, we can tightly integrate Protrace in our T core system to reduce temperature variation across the test array and reduce calibration time. Cohu test cell solutions improve test quality and accelerate the time to volume manufacturing of customers' new semiconductor devices. Essentially, the Cohu test cell allows for entire integration, reducing time to market and delivering greater operational efficiencies faster for both semiconductor manufacturers and their test subcontractors.
Innovative high performance whole test cell solutions will provide differentiating value to our customers and enable Cohu to capture a higher market share. Our strategy enables our rate of attachment to double over the next three to five years. I am extremely excited about the opportunities in front of us and believe we have the right team, the right products and the right strategies to win. Our strength is in solving our customers' most complex test challenges. In applications that require high link and transmission speeds, we deliver conventional probe technology that is familiar, manageable and cost effective for our customers.
In mobility, this means we provide standard test economies to millimeter wave applications. And for computer networking, we bring exceptional signal performance to high bandwidth protocols. For automotive, we bring a long history of performance and quality devices that must scale on computational capacity with tight thermal control and ADAS and support precision power management required for electrification. Cohu's ability to innovate across the entire test cell, addressing both cost and performance, is unique and differentiating strength that sets us apart in the industry. We are confident that our strategy will enable us to win and grow.
We set our target to grow at 20% annually in this $500,000,000 addressable market. Thank you. And now I'd like to pass the presentation over to Jeff.
Hello, again. I hope you found the business presentations helpful to understanding our customers' test and inspection challenges and the innovative technology we bring to address them and ultimately improve production yield. As Luis mentioned, yesterday, we issued a press release increasing our Q4 twenty twenty financial guidance driven by share gain in RF test and accelerating automotive demand. We now forecast Q4 revenue to be 195,000,000 to 200,000,000 which at the midpoint is 31% higher than our Q3 twenty twenty revenue. Gross margin to be between 4546%, operating expenses to be approximately $53,000,000 and adjusted EBITDA to be approximately 20%.
Please note that all these figures and my comments to follow are non GAAP figures. Please see the presentation appendix for explanatory notes and reconciliations. Moving to the balance sheet. We have reduced our Term Loan B debt by nearly $21,000,000 so far in Q4, executing on our priority to deleverage the company. Looking ahead, we now project Q1 twenty twenty one revenue to be approximately 5% higher than our Q4 updated revenue guidance.
Now I'll walk through our recent performance and new financial model targets, highlighting the results of of our strategic actions and operational execution. The estimated 2020 numbers reflect actuals through Q3 plus the midpoint of our updated Q4 guidance. Our strategy has resulted in a revenue growth rate over the last three years of 21% and gross margin expansion of 300 basis points. We attribute this growth to organic development and acquisitions resulting in share gain and high growth RF test with scalable precision instrumentation, strong handler market leadership delivering differentiated thermal control technology to improve test yield, increasing contactor attachment rate by leveraging our handler market position and best in class technologies, delivering test cell solutions to accelerate customers' time to yield and nearly half of our revenue coming from a steady base of consumable and other recurring business necessary to support the utilization of more than 28,000 systems in our customers' test facilities. As a result of increasing demand for mobility and automotive test, we estimate Cohu's second half twenty twenty revenue will increase by approximately 23% compared to the first half of the year.
On the cost side, prior to the 2019, we completed the actions necessary to reduce annual costs by $40,000,000 Operating costs are tightly managed and the model has strong operating leverage as reflected in the expanded profitability estimated for the 2020. Due mainly to improved operating leverage, we estimate second half of the year profitability will approximately triple the profitability in the 2020. Today, we are introducing a new midterm target financial model that delivers higher profitability at all revenue points. Our new target model achieves $3.6 of annual EPS on revenue of $940,000,000 versus $3 of EPS in our previous model. This represents a 20% increase in profitability at target revenue.
On a quarterly basis, the new model reflects an increase in EPS of zero one zero dollars growing to $0.15 at target revenue of $235,000,000 Gross margin expands with higher revenue from greater leverage of fixed costs in our manufacturing facilities and favorable product mix as our higher margin Semi Test and Contactor businesses grow at a faster pace than our Handler and PCB Test businesses. Higher profitability comes from further reductions in operating expenses. OpEx has limited variable cost and will continue to increase at a rate of about $1,000,000 for every 10,000,000 increase in sales. The combined effect is an improvement in operating leverage with about 45% of incremental sales falling through to operating income. We have added free cash flow targets at each level of quarterly revenue.
CapEx requirements are relatively modest and are modeled at about $20,000,000 per year. We had a strong cash position at the end of Q3 at $171,000,000 95% of our debt is the Term Loan B, which partially funded the Excerra acquisition. The Term Loan B is covenant light, has favorable minimum payment requirements and matures in five years. Our priorities for cash generation and capital allocation are investments in technology and product development to support organic growth consistent and meaningful debt repayment. We're targeting annual repayments of approximately $60,000,000 subject business conditions and cash projections and acquisitions to expand our served markets and possible technology tuck ins.
Starting with our estimated revenue for 2020, the path to $940,000,000 includes leveraging our market leadership and best in class technologies to improve test yield, as you heard in detail from our business unit general managers. Automotive test was low throughout most of 2020. However, we remained well positioned with our customers and have experienced a steep order recovery in Q4 that sets the stage for an excellent start to 2021 automotive revenue. The automotive test market is poised for multiyear growth based on projections for the proliferation of semiconductors required for electric vehicles and driver assist. In mobility, RFIC test demand accelerated in the 2020 and this market is projected to continue growing over the next few years as the number of five gs enabled phones is projected to double in 2021 compared to 2020 and double again in 2022 compared to 2021.
As you heard from our general managers, opportunities for cross selling Cohu products and providing the complete test cell is growing and creates competitive differentiation and barriers. Now why Cohu? Our strategy is to grow revenue profitably and faster than the overall market rate. We can achieve a growth rate 2x the overall market by focusing on high growth end markets and increasing our customers' test and inspection yield with technologies and products that help solve increasingly complex challenges. We believe current market growth drivers, specifically for automotive and mobility, will exist for multiple years with increasing adoption rates of five gs phones, electric vehicles and automated driver assist.
We have taken significant steps since the Excerra acquisition to eliminate redundancies, streamline manufacturing operations and optimize our overall cost structure. As a result, our operating leverage continues to increase. The estimated fall through of incremental revenue to operating income is 45%, and we've increased EPS by 20% on target revenue of $940,000,000 Increasing profitability strengthens free cash flow that we intend to use for product development supporting organic growth, consistent and meaningful debt repayment and potential acquisitions to further expand our served market and or technology portfolio. In summary, Cohu is well positioned to capitalize opportunities and deliver financial results in line with our midterm target model. This concludes our presentation.
And now we'll move to the Q and A session.
Thank you. Our first question comes from Brian Chin with Stifel. Your line is open.
Hi there. Good morningafternoon. Thanks very much for hosting the event and for all the significant detail and disclosures. Maybe first question here, just kind of zeroing in on the model a little bit before I move to products. On a quarterly basis, it looks like Cohu is approaching or at approaching $200,000,000 in sales, which annualizes out to roughly 800,000,000 Your three year plus annual sales target is $940,000,000 which is about 15%, 20% higher than this.
I guess my question is, could this three year target be either too conservative in terms of expected sales synergies, market growth or timing? Or is there some degree of cyclicality that you might be accounting for over the horizon?
Brian, it's Jeff. Yes, I mean, as you know, it's extremely difficult to forecast out even a couple of quarters. And so going over the next few years is virtually impossible. We know there is seasonality in the business. We know that in times of ramps, customers have had occasional pauses while they digest equipment and reassess the market.
So we feel pretty good about where we are. We've got a lot of momentum coming into 2021 and aiming for that $940,000,000 target.
Okay. Got it. Maybe shifting quickly to the bottom line, one of the key updates here seems to be the tighter OpEx control at the higher revenue levels and the better earnings fall through. I guess if I run the 12% of sales R and D sort of target to the business, that implies again very minimal creep up in the SG and A expense dollars. And I think you said 1,000,000 for every 10,000,000 I think that might be was that SG and A or is that total OpEx?
Total OpEx. Total OpEx. Total OpEx. Yes, really minimal creep up in SG and A expense. Maybe can you just dig in on sort of how you again plan to achieve this sort of efficiency over the years?
And then maybe also for Luis, in terms of the growth in the R and D dollars, how much of that is roughly to improve and strengthen within existing served markets versus to expand into new served markets?
Yes. So let me just give you a couple of points of reference, Brian. So we're targeting total R and D, includes in this case includes application engineering, which is heavier for our semi test or tester business. So we're targeting total R and D to reflect about 14% of sales. Now that's on average, so it's going to be a little bit higher for some business units, lower for others.
But we do indeed feel that that's adequate to develop products necessary for organic growth. Overall, the relationship is that OpEx grows by about $1,000,000 for every $10,000,000 in sales, And that's roughly split between the R and D and the SG and A.
And just to continue on to your second part of that question, Brian, the majority of that R and D is assigned to existing markets that we serve. Now as you heard here from the business units, in certain of those markets, we have a smaller share and we're aspiring to grow faster. And so it's already a market segment that we supply to, but there's a big opportunity ahead for us to increase our penetration and share in those segments. So that's where the R and D is going to, whether it is inspection or RF test or power management IC, automotive ADAS, CV, they're all segments that we currently serve.
Okay. That's helpful. Maybe my last question is sort of a three parter on contactors. As a benchmark for Cohu's 20 revenue growth target for this segment, what do you expect the underlying growth rate for the contactor served addressable market to be over the comparable horizon? The second part of that is maybe the what is your current revenue profile for contactors now?
I think you sort of distributed that across three buckets: mobility, auto industrial, computing. I would imagine there's a bit of a lean towards auto industrial, but I'd be curious what that profile looks like today. And then maybe to sustain your 20% growth, what attach rate is likely required to achieve this?
Yeah, okay, Brian. So I would say the current revenue profile, we give a on one of the slides there, as you noticed, a pie chart of the estimated breakdown for revenue for 2020. So currently at a rate of about $100,000,000 for 2020. Maybe I'd turn it over to Devin to address the other two questions terms of and of that revenue profile, we don't necessarily break that down into markets. Maybe Devon could give a little color on that.
But in terms of your growth rate of the SAM and then your attach rate to hit the target 20% growth rate. I'll turn that over to Devin.
Yes, Brian. Hey, thanks for the question. Yes, so I'd say that the auto market and mobile market are probably the largest ones for us, right, and the largest opportunities for us going forward. They that's where a lot of our innovation is targeted. And that is going to drive help us drive to that 20%.
Coming up behind that, I think computing, which is not necessarily as large, but as a large market, we also have some key innovations there that gives me confidence that can help support our revenue targets for the coming years.
And then Devin, related to the attachment rate to sustain the 20% annual growth, we're looking at moving that up to about 50% to 60%. Is that correct?
Yes, that's correct. And so the key areas for us in attachment, right? So we have a strong track record in automotive that drives that. And so as that drives up, that's going to increase our overall attach rate. But really the innovation that the team has, working with Ian and Chris and their organizations.
And innovation in mobility, I think, really helps us there. And that's going be a driver that helps build up our attach rate. And then like I said, even in the compute area, as we have a strong position in handlers. And so as we innovate there and bring in some of our products, it will help with the attach rate.
Got it. Just to clarify in case I missed it, again the target bogey for the contactor business for Cohu is about 20% growth over the three years. Do think the SAM there is growing 10%, 15% just to sort of triangulate?
Devin, what's your estimate on that?
Yes. No, that would be correct. It's right around 10% is what we see the SAM growth there. And so we would see expansion beyond that with our 20%.
Okay. Thank you. Appreciate it.
Our next question comes from Krish Sankar with Cowen and Company. Your line is open.
Yes. Hi. Thanks for taking my question and for the good presentation overall. I had a couple of them. First one, either Jeff or Louis, on your long term or your mid term revenue target of $940,000,000 in revenues, how does the composition of the revenue look like between five gs, auto, recurring,
etcetera?
So, hey, Chris, this is Jeff. So let me give this to you and let me look at it maybe a slightly different way and we can get to your answer. So looking at the more or less the handlers that are have a heavier focus to automotive and industrial, it's going to be about 48% of that nine forty revenue. If we look at the semi test, the testers which are be more focused on mobility, that would be about 30 of the business. And then contactors, which would be probably sixty-forty between automotive and mobility would be closer to 20% of the business.
Got it. Got it. That's very helpful. And then just to follow-up on the point, you kind of also emphasized how you're seeing a massive boost in orders on the auto side and clearly auto should be driving the incremental revenue growth in calendar twenty twenty one. I'm just kind of curious, like I think you guys mentioned about a $400,000,000 SAM for the auto semi test market.
How would that grow as semi content and auto increases? Do you
still think it's going to be
a $400,000,000 or do you think that could move higher down the road?
So why don't I turn that over to Chris, who talked about the Handler and Inspection business?
Yes. So from the if I understood your question correctly, yes, this is Chris Borson. The when we think about automotive, there are really two factors driving the growth, right? One is obviously growth in the vehicle demand. And we've estimated that to be about in 2021 to be about, I think, 13%.
And then there's growth in content. And the content is really driven by several factors. Obviously, there's a growth in the normal infotainment and safety systems and pollution control and whatnot. But as I mentioned in the presentation, it's really being turbocharged by two factors, right? One is growth in electric vehicles, the other one is in automated driving.
So we see the content growth next year of round numbers about 11%. So that's really driving a major chunk of growth in the semi industry of up to 23% for next year. And I think Luis mentioned about an 18% compound annual growth rate in the automotive semi business going forward. And that's what's really driving our growth of the 21% that I mentioned as in that $300,000,000 market segment for automotive.
Chris, I'm
just going to add that's very focused on the handler side, right? There's also portion of the contactor business attached to automotive and as Ian mentioned, also the semiconductor test business in automotive. Obviously, we're strongest there on the handler side that Chris just detailed, but the other pieces as well.
That's super helpful. And then just a final question, if I could just squeeze in either for Luis or Ian or Chris. I think you guys mentioned how auto demand is kind of at least in Q4. The current quarter has gotten back to 2018 levels. I'm just kind of curious from the way you when you look at it, what is the correlation between auto units in a given year to semi test opportunity for you folks?
Is it a one to one correlation? Or is it more there's a lag effect? How should we think about that?
Chris, you want to talk about it? Maybe Luis can add some color, too.
Yes. Chris mentioned during the talk there that we have two components going on, right? We have the IC content penetration in automotive, which is now actually running at hundreds of dollars and depending on the automotive, whether it's an electric vehicle, it could be going up to $506,100 dollars per car. And then there's obviously the unit growth in vehicles. The correlation is really a combination of both two factors, right?
And we're looking ahead here. We have both looking pretty strong going into 2021. As Chris mentioned, I think the they're both running in the teens right now for 2021 and compounded sort of that kind of 20% I think it was a 23% growth for semiconductors and automotive for next year and 18% compounded over the next three years. So it's not a one:two:one:two unit vehicles, but it's more of a one:two:one:two, a combination of unit vehicles plus content growth.
Got it. Thanks, Louis. Very helpful. Thank you.
Thanks, Krish.
Our next question comes from Tom Diffely with D. A. Davidson. Your line is open.
Yes. Good afternoon and thanks for the presentation today. First, Jeff, I just want to confirm, all the numbers that we saw today as far as growth rates go are based off of the twenty twenty full year numbers for its growth this Yes, that's right, Tom. Okay. So I'm curious then if you look at a cycle over cycle, maybe peak to peak or trough to trough level, how different would those growth rates be versus the ones that you gave us today starting today going over the next three years?
You know, I would say that, you know, we're in a fairly unique period here with the tailwinds that we have. I would say that if we look back over the recent cycles,
Yes, we did I took a at the over the last ten years and it looks similar to the coming off of 2,009, for example. I mean, that's sort of the closest relationship you can find. Right now, it's obviously different. Right now we have both this massive deployment of five gs, is good for us since we did the acquisition of Xcerra because of the semi test position and strength in RF. And also there's two massive factors in automotive with EV, right, and sort of this immense drive towards being carbon neutral at the same time that there is automated assist they can hop in automotive.
So obviously this wasn't happening in 2010, but if we look at just purely on numbers, that was the closest correlation that I could find.
Okay. I'm just trying to get my arms around which of these segments are more just kind of cyclical recoveries versus really true cycle over cycle growth drivers?
I think there's probably some recovery in automotive, but I think, as I mentioned, we're going to see multiyear growth from both automotive and mobility for the reasons we talked about electrification, ADAS, and five gs enabled smartphones. So projections are multiyear growth in all of those areas.
Great. Okay. That's helpful. Jeff, was wondering too, when I look at your new model, how much variability is there on an EPS basis at any revenue level depending on either mix from products or customers?
I mean mix plays a definitely plays a role, right? Margins will vary anywhere from mid-40s to mid-50s depending on the product. But we've obviously taken that into account as we put together the model. So I would say, yeah, if there was one spike in a ramp in a particular business unit that wasn't anticipated or foreseen, that could influence gross margin. I would say the variability on the EPS would be relatively low at that point, but we could see some.
Okay. And then maybe a product question here. I think in the presentation you talked about a $200,000,000 incremental market for the inspection business driven by AI? Maybe just a little more color on how that transpires over time.
Sure. I'll let Chris answer that.
Sure. So yes, so for the inspection business, the fundamental drivers really one of the main ones is miniaturization, which drives growth in some of these advanced packages like wave function scale packages. That's also occurring in the automotive space. And those devices, because of miniaturization and because of higher quality standards, require more inspection. And then, you know, in order to get higher quality inspection, we've extended the inspection from what you think about as visual spectrum to infrared.
Infrared allows us to see cracks and micro cracks on the surface and under the surface, again, for higher quality standards. But it and when we implement AI algorithms, it also allows us to one of the big challenges we're looking at some of these defects, whether they're scratches or cracks, some of these defects don't affect performance. They're more cosmetic. And therefore, you don't want to over reject the devices and impact yield from the customers. So the big challenge is figuring out, okay, how do you find the defects, but how do you make sure you don't over reject?
And through implementation of the algorithms we use for infrared as well as these advanced algorithms with machine learning and AI, that allows us to maintain these high quality standards while minimizing over rejects and maximizing yield. So that's kind of the color around the inspection part of this.
Okay. And is most of that market going to be driven by replacement with these new technologies of existing capacity? Or is it going to be driven by new units in the marketplace that require new inspections?
It's really driven by growth again of these Wakefield and ChipScale packages. So it
would be
adding capacity to what they already have to handle these new types of devices.
Great. All right. Well, thanks again for all the great information today.
Yes. Thanks, Tom.
Our next question comes from Sidney Ho with Deutsche Bank. Your line is open.
Thanks for doing the presentation today and congrats on the strong near term results. Maybe I'll start off with the near term question. I promise there will be a longer term angle here. But the last update, you did not increase your financial guidance because my understanding is that you have longer lead times, you were not able to service some of these upsides. Some of these upsides.
Some upsides. Upsides. Upsides. And Some of did orders continue to increase since a month ago or you're able to service some of the orders upside sooner? And the longer term angle for that question is do you have enough capacity to meet any kind of rush orders?
And maybe what kind of revenue level can you support without major capacity additions?
Maybe I'll start with the last one, and then we'll go backwards from there. Sydney, we capacity now to achieve the target model even beyond it. Now recall that we do have a manufacturing model that is a bit of a hybrid. We've got in house manufacturing for contactors. There's some outsourcing in that, but mainly in house.
We've got final assembly and final test for handlers in house. And then we outsource 100% our testers. So in each of those areas, we have additional capacity to take us to that target model of revenue level. So we're good there. Know, with respect Luis, did you want to?
Yes. No, I'm just going add. Obviously, there's a CapEx component to this the contactor manufacturing side. You're right, for the bulk of it, it's there. I was just going to say with respect to the quarter, I mean, are two things sort of recurring business has a shorter lead time, right?
And the second one is in our forecast, we always have a component of new equipment qualification or qualification of new customer and when does that really going to get the qualification signature and approval and revenue recognition. So a few of those actually have come in faster than we had anticipated for fourth quarter. So increase our confidence in the fourth quarter. I think it's sort of positive. I mean the customers have the demand and they want to get this through and continue with volume introduction of these new products.
Sidney, I think you had one more question. Can you remind us?
No, I think you actually addressed those two questions already. Maybe moving on to a different set of questions. If I look at the mobility side, obviously that's the largest end market segment that you have. And you have product that cut across semi test, the handlers and contactors. And if I eyeball and mix adjusted that, it looks like you guys are looking at somewhere around 10% to 15% target revenue CAGR for that segment.
First, hopefully the math is right. But the question is how much of that growth do you think is coming from market expansion itself? And how much of that is because of share gains and SAM expansion? And maybe one more question related to this, how much of that revenue growth comes from product that you already you have already introduced versus there's some future products that you will still need to come up with?
Okay. Yes. You're very close to the growth rate that we talked about for our tester business anyway of 17% annual growth. So I'm going to turn it over though to Ian and let him dig into some of those answers for you.
Sydney. This is Ian. So let me touch on the last question first. In the next three years, a fair amount of that growth is centered around products that we already have or as I described, we just introduced over the course of this past year. But we're certainly continuing to invest heavily to augment those products, but and to also target new types of devices out in the next two, three years and beyond.
As I look at the second question, which is how much is market expansion and how much is share gain, I would say it's roughly half and half, maybe a little bit more tilted to market expansion. And there's two elements of market expansion. One is, obviously, there's an increased number of five gs phones, Wi Fi six, other things that we're especially strong in going into the marketplace. But also there's an increased amount of test intensity. So each one of those devices, there's more frequencies, more test time and more expensive equipment that has to go in.
The second piece is share gain. So if I look at our growth this year, a lot of the share gain has come from customers who were using in house RF racking stack systems. And as their needs grew and they had to move to next generation systems, they selected our platform because it's got a leading position, especially for RF front end ICs.
Also an element of growth
in this in the contactor side. I mean, it's really big on the tester and the contactor side. So Ian talked a lot about the tester side, but there's a big component in contactors. Don't if Devon, you want to tee off some of that as well.
Yes. And what I would say is that we do have an existing decent business with mobility. And so a lot of our growth is going to occur due to going into the higher frequency ranges, right? So we've got products that are there. We already are there with products.
We are enhancing those products. And so those will help drive that share gain for us.
Great. Maybe one last question for me. Louis, in the past you talked about this cross selling opportunities in 2021 and I think you talked about $35,000,000 I assume you already included those revenue growth opportunity in your midterm forecast. But can you talk about give us an update what the opportunity look like beyond 2021? Where are you seeing the best traction?
And in general, how do those engagements with customers look like?
So if I start from today, right, we have a handful of customer engagements, a couple that have already converted and selected our platform, but volumes are expected beginning of the year and for the balance of next year. And you're correct, those are included in the midterm and in particularly in 2021 here. After $35,000,000 there are really three pieces to this equation. They're about $30,000,000 or a little less than that that are the equipment side, the testers, the handlers and the balance of it is the contactor. As we model it for the following years, it's really included in the growth rate that we were talking.
So it's a subset of the growth rates. When we talk about growing the tester business at 17%, or the contactor business at 20%, it's really all a subcomponent of that. And as you can imagine on the contactor, it's a very large component because the contactor strategy is really associated with selling into our installed base. So the cross selling opportunity is the big element for contactor growth. I'm not going to be able to break it down for you how much in 2022 or 2023 right now.
I don't want to start peeling it off beyond that deep. But you can imagine that, like I said, majority of the contactor growth is cross selling, but there are elements of it in the tester and the handler projections as well.
Great. Thank you very much.
Thanks, Sydney.
Our next question comes from Craig Ellis with B. Riley Securities. Your line is open.
Yes. Thanks for taking the questions. And as others have mentioned, thanks for all the detail, the color provided by the general managers. Jeff, I just wanted to start with a clarification to make sure I understood what you're seeing in the business as you revised guidance last night into today's event. So I think what I saw in the release and what I've heard today is that significantly it's on the mobility side with some share gain and testers, but also with automotive.
Were any of the other end markets like industrial or compute contributing? And as you look to the color you provided for the calendar first quarter being up 5%, is that just a continuation of the strength we're seeing in auto and mobility? Or do you expect at that time we'll see some different gives and takes in the other end markets? Just a further detailed view of the current and first quarter environment would be helpful.
Yes. Hey, Craig. I would say, yes, you're largely correct in that it's the story in Q4 is largely driven by RF test and automotive. Industrial, I think we see a small increase in industrial. But by and large, what's driving the business at the moment is related to mobility, RFIC Test as well as automotive.
And that story continues into Q1. I'm just going
to add to it. I do see a trend that industrial will be improving in the first quarter. I think that is rising right behind automotive. I think it's coming strong behind it.
And what about compute data center then, Luis? We heard, I think it was the week of Thanksgiving from analog devices that they had seen industrial certainly broadening out. So if you see improvement in the first quarter, that would make sense. But Micron, when they guided up, talked about cloud being much more stable and they're seeing some increased strength in their business. So is compute data center starting to come back?
Or is that something that might come back later in calendar twenty twenty one for the company?
I think it will be later in calendar twenty twenty one, Craig. It hasn't necessarily gone weak. It's been a healthy market this year, perhaps stronger in the first half than in the second half, but hasn't seen any cyclical down. It's more of steady as she goes. We think there will be another upside opportunity on the second half of next year, but nothing visible at this time
Okay. For the And then got it. Thanks. And then a follow-up to one of the issues that Sidney honed in on and it's regarding share gains. So it sounds like the transition to five gs is catalyzing customers to go from internal solutions to Kohu.
The question is, are there other transitions coming across other end markets that you see that could provide similar such share gain inflections as we look out over the next two to three years?
Well, I mean, we could expand and describe more detail what's going on in the RF space, because I think that is the biggest wave of transition into the Cohu platforms. There's definitely expansion in automotive, but that is an area that we already have a about a 60% share in the handler automotive market and there's a new technology coming up, which is beneficial to us. But perhaps maybe we pass it on to Ian and have Ian depict a little bit more what's happening in the RF space. We tend to talk a lot about mobility and five gs, but there are other standards and other opportunities in RF that we're broadening, which I think is beneficial to our platform, including structural test. So maybe Ian you can expand that a little bit for us.
Yeah, I'd love to do that. So Craig, let's just start with RF and think about RF outside of mobility. So some of the new technologies coming along that really lend itself to our leading position in testing RF front end ICs are also moving into other markets. So as an example, satellite, Internet communications, vehicle to vehicle are all seeing a pickup of technologies that are looking for more bandwidth, lower latency, all the same things that are driving the increased test intensity and the increase in these RFICs in five gs. So what that means for us is we're seeing more adoption, more design wins in market with customers outside of mobility for RF.
And our existing customers who are obviously very strong in mobility are also increasing their attach rates into automotive and other places. And we've seen some of the share gains this year, but we think this is going to be sort of waves of activity that are going on over the next number of years sort of alongside five gs and continuing beyond it. Now I did want to touch on when you talk about share gains in other markets. So this gets back to our core strategy in test. So we've picked focused end applications and markets that really align to our Air Cool platform that we think give us and our customers advantage versus other platforms and other competitors in the marketplace.
And some of these, we have relatively low share today, flat panel display drivers, an example, which is in mobility, but also in computing power management, which extends across especially into automotive and industrial. So all of these are areas that as part of our 17% growth plan, we're expecting to drive primarily share gain in order to increase our position outside of RF and sort of leveraging our universal platform that can test RF, power management, structural tests and so on. So I hope that helps a lot.
That helps a lot. Thank you. Jeff, if I could just jump into some target model questions. So I just want to understand the contrast between the intermediate term models, $940,000,000 and 3.6 in earnings. And by the way, congrats on all the incremental leverage with the model up 20% is pretty remarkable.
And that with the high end of the quarterly model which annualizes at $1,000,000,000.00 dollars what's the difference between the high end of the quarterly model and intermediate term models nine forty, March?
We thought it would be appropriate since there is some seasonality to the business that we not only had revenue targets quarterly revenue targets that led up to the February but also went beyond. So it's as we're all aware, seasonality provides different revenue rates per quarter. So we thought it was appropriate that not only did we show a lead up to that target, but also what the profitability is beyond it.
Okay. And then switching to the free cash flow part of the new target model, 160,000,000 quite impressive. The model also expresses potential debt paydown of about $60,000,000 annually. Clearly, you're on a pace that's far greater than that in the current quarter. So is the model intended to give you the flexibility to be either consistently active with small tuck ins with M and A?
Or if you couldn't execute either tuck ins or more transformative larger deals as we saw with Exera, would you just take the debt paydown portion of the model up above $60,000,000 annually?
Yes, that's right, Craig. It does give us that flexibility. We'd continue to monitor it. And with priority for cash being to grow the business, support the business, but also to deleverage. So yes, yes, you're correct.
If there were no other opportunities for SAM expansion or technology tuck in, then yes, we would have more meaningful debt repayment.
Got it. And then the follow ups for you, Luis, and I'll use this as my wrap up then get back in the queue. Can you just talk about where you might have interest in M and A? I think you talked about potentially doing things that either expanded the SAM or tech tuck ins. Where do you feel like you've got an opportunity to bolster your current technology base?
And where might you be seeing New Sam opening up where you'd want to have first mover advantage or an opportunity to get in on something as it starts to inflect?
Sure, Greg. Well, we are a test and inspection company. So I think here if you just hold that for a second and for definition means opportunities that will help expand our portfolio, accelerate our growth in these high growth end market segments we described today, whether it's semiconductor test or an inspection of the semiconductors or things that help optimize the overall efficiency of the test cell, help us deliver greater value through the test cell or also help us accelerate time to yield or improve yields at our customers. It could be like Chris described, the infrared technology is one piece, the active thermal control is another one, the precision measurement instrumentation. So again, areas that add up to our strategy here to get to $940,000,000 in higher profitability faster is what we're interested in.
And given the crazy year that we've had in calendar twenty twenty, where does the deal funnel stand right now? Do you have an active M and A funnel? Or is that something that you plan to work on as we head into calendar twenty twenty one?
We always have an activity around M and A, Craig. Even after we did Xcerra acquisition, obviously, were in no position to go out and do another one. But we always have an active engagement and portfolio of opportunities that we monitor. It's part of our process.
Got it. Thanks guys.
Thanks Craig. Thank you.
Our next question comes from Christian Schwab with Craig Hallum Capital. Your line is open.
Congratulations on the strong results guys. Ian, in the Semi Test share gains that you talked about and the shift from in house Rack and Stack to Cohu, can you give us an idea if that's a couple of substantial customers who made that decision? Or is there many customers in your share gain thoughts?
Yes. I mean, don't share a lot of information, Christian, this is Jeff, on customer specifics. I think we have talked about a couple of wins, couple of major wins as a matter of fact in past quarters. Ian can probably add some color to this, but it is it's more or less a broad based customer base.
Yes. So as Jeff said, I don't want to point out specific customers. But it is an interesting trend that we've seen not only in customers that are new to Cohu meaning they hadn't previously used Cohu's test equipment, and we certainly have some significant ones there. But we've also seen this in well established customers, customers who already adopted our platform a number of years ago, where they had a mixed strategy of in house testers and our testers. So we've really seen this almost across the board in new customers and existing customers, which I think is a strong testament to sort of this transition, the industry going on for a need for moving to higher production worthy systems, but also sort of the investment we've put in place to really extend our capability into five gs and WiFi six, a lot of these new standards that customers need to move to in high volume.
Okay. And then not that 18% revenue growth isn't quite strong in the mobility side, Ian, on the test side again. But we do have five g phones that that are gonna begin to ramp, you know, materially over the next, you know, two to four years, which have, you know, 30% plus, you know, more RF content in each phone chip versus a four g phone. And they also have, you know, 30 to 40% increased test intensity time to test those specific chips for five g. So if if we double, you know, smartphones, you know, this year and, you know, maybe we'll double them again afterwards or maybe, you know, it it it slows down depending upon whose number you wanna believe for how many five g phones are actually gonna be shipped this year.
But let's go with Qualcomm's number of 750,000,000, you know, by 02/2022.
That look
with the with the market share gains that you've talked about or not?
Sorry, Christian, you cut out just for a moment there. Can you repeat that question? Just the very end.
I was just wondering if that 18% growth rate looked conservative given all the data that I just talked about? The doubling of phone growth, we're probably going to have smartphone unit growth in aggregate again next year on top of that versus this year, more RF content, more test intensity. That seems like that could be a conservative number over the next few years.
Well, think we're certainly hoping that that's the case. But maybe Ian, you want to give a little more color on that growth rate?
Yes, sure, Christian. So certainly we're looking at this increase in number of cell phones as one of the key drivers. And also as millimeter wave comes on board, it also there's different models of how much adoption rate we'll see over the next three years on millimeter wave. But that again increases sort of the test intensity. Now one of the things we focus very hard on and it's a key value we're delivering to our customers is we are constantly improving our test instrumentation and our software for existing instrumentation to reduce the overall test time as these new standards come on board.
So to some degree, to be a leader in this market, we have to be sort of improving on the number of devices that can be tested in a particular test cell. So that is why, you know, it's not just a sort of mathematical number of taking the number of new phones coming out every year and saying what is the end market growing. So that's one of the dampening factors. But I will say, you know, we try to have not a conservative number or not an overly optimistic number, but what we think is a realistic number for the sort of rapid growth in the market and how much share we're going to continue to grow within it.
Great. And then I guess my last question, a follow-up. Don't remember who asked it. But talking about not just seasonality quarter to quarter, but cycle seasonality peaks and troughs. I don't ever remember there being a time frame.
I know we've mentioned 2010 somehow or another, but I I don't remember ever seeing a cycle where you have multiyear tailwinds that you have dominant market share in. You know? We haven't had a a refresh phone cycle with more RF content, you know, where you are well positioned, across the test cell. And we certainly haven't seen the likes of which could be extremely strong automotive growth for the next decade. Am I thinking about that right?
Hi, Christian, it's Luis. Yes, you're thinking about it right. That's why we referenced it as sort of a multiyear megatrend here or a series of megatrends because you're right, we have a perfect storm in automotive and mobility with big technology transitions happening in both segments.
Okay, great. No other questions. Thank you.
Thank you. Our next question comes from Quinn Bolton with Needham and Company. Your line is open.
Hey guys, thanks for fitting me in and thanks for hosting today's presentation. I wanted to follow-up on Brian and Christian's questions here on sort of the sustainability. I guess when I look at your calendar 'twenty one sorry, calendar 'twenty revenue at $631,000,000 you guys in the first quarter per year guidance are probably going to be run rate in at close to $820,000,000 to $840,000,000 And so you've clearly seen a large step function up towards your new September target. And I guess my question is, do you think things in the fourth quarter and in the first quarter are a little overheated now? Or do you think we're just really catching up for a two year from a two year downturn in at least the automotive market and from the level of kind of Q4, Q1, the trends in automotive towards ADAS and XEVs and the trends toward five gs and RF kind of now provide a new baseline of growth with perhaps some seasonality along that new baseline?
Hey, Quinn, it's Jeff. We look at it more towards your latter explanation. There's a bit of catch up here near the end of the year for automotive, but we had a second half pickup in mobility. So what is driving us into 2021 are really these tailwinds that we've been talking about. In terms of sustainability, again, would look to these as multi year megatrends.
And so we think that this is more than just a well, it's hard to predict, right, out beyond a quarter or two. But we do know that the what the predictions are in terms of growth and then it is multi year.
And I guess you guys historically haven't forecasted test cell utilization. You often report it historically, but I think you've said is test cell utilization of your customer base gets into the high 70s to low 80s that's where they really start to order. And I think you said in October, it was up at 84%. Do you think the capacity that's being added in Q4, Q1 will significantly reduce that utilization rate into kind of back to the mid-70s? Or do you think it's almost catch up demand and test cell utilization is going to remain at a fairly healthy level into 'twenty one?
Again, bit of a prediction here, but I would again go with your latter comment in that we would anticipate that the utilization rate remains healthy for the foreseeable future. Yes. I think if we
were running at 90% utilization, would be concerned that there is a trend down eventually, but that's not where we're at. We're at about 84% now. It's still sort of a healthy point and the business can or the industry I should say, can operate at the low 80s consistently. So I'm not too worried. We don't forecast test utilization like you said, but not too worried about it from the numbers that we have today.
Got it. And then for Devin on the contactor side, I guess I just wanted to come back and as I think about contactors, I guess we'd sort of thought contactor growth in aggregate would tend to trend with IC unit growth. One just wanted to see is that a good base assumption? I know you'd mentioned you thought the contactor market would grow about 10% for the next three years, which I would likely put above IC unit growth in that timeframe. So just wondering, does the contactor market typically grow with units?
Or are there other factors that allow it to grow faster?
Yes, I think there this is Jeff, Quinn. Other factors play into it. Maybe Devin, you can give us some color on that.
Yes, think similar to what Ian stated in like the RF market, the increase in complexity there in some of these markets is going to increase the demand and the opportunities for sockets. So for that certainly in the RF as we've discussed. But it also is in even into the computer networking Okay. With some of those key
And so that increased complexity, is that just sort of kind of longer test times when you need more contactors to test a given number of units? Or does that increased complexity kind of result in higher ASPs for the contactors or maybe both?
Devin, what do you think about that?
Yes. No, I would say it's a lot of it is going to be in units for the contractors themselves and some of that is a smaller portion of that is in ASP. It's getting more complex. And if I go to the RF market, right, and there really are very high level of challenges when you get into those higher frequencies. And so that obviously is creating a challenge.
You have to innovate around that. There's some differentiation that goes in there and that drives a price differential associated with that. So there certainly is when the test complexity comes up in some of these markets, there's very high complexity coming. And those that would certainly be a portion of it is to increase the ASP price.
Great. And then my last question for Ian and I apologize if I missed this, you talked about $400,000,000 RF test TAM. I think most of that is for mobility or five gs. I guess I just as we think about IoT use cases, whether it's tracking devices, whether it's factory automation, it would seem to me that there's a lot of wireless connectivity, Bluetooth, low energy, Wi Fi going into those devices. Does that become a growing part of the RF TAM?
Or do you think five gs handsets is really going to be the dominant part of your RF test opportunity for the next few years?
Ian, can you clarify that for us?
Sure. No problem. So I think coming back to the term I tried to use before, Quinn, which is sort of waves of growth. So certainly, five gs is one of the predominant waves of growth that's taking us our prediction for the served market that we're really focused on from $200,000,000 in 2020 to our estimate of $400,000,000 in 2023. So five gs is one of those.
I will say that WiFi six is a very clear driver this year and into the coming years as that moves into not only handsets, but consumer devices as we think about them as what goes on consumer premises for and also into computing. But then as we look out even just a little bit beyond that into 2021, 2022, 2023, we do think that satellite Internet communications, where we have a very, very strong position and ultra wideband, which is just at its initial adoption stage, which has maybe more of a place in automotive and consumer and devices. We think all of those are going to add incremental growth over that course of the time. I don't think I have it in front of me broken out exactly how much of that $200,000,000 is just mobility and five gs. But I think it is I think all of them contribute to that number.
Okay. Thank you. Thanks,
Quinn.
Our next question comes from David Doley with Steelhead. Your line is open.
Yes. Thanks for taking my question and I'll echo the comments of everyone preceding me. It's great presentation. It's great to have all the incremental information. Along those lines, just a clarification, if you hit your numbers in the fourth quarter that you just guided to, how big will your test business be and your handler business be in 2020 so that we can gauge these growth rates that you've given us?
So the handler business and Dave, we do give a pie chart in the slide presentation. The handler business is roughly about 50% of 2020. The tester business is about 20% I believe it's 27% or 28% of the business in
2020.
Okay. Thank you. If you again, if you hit your numbers in the fourth quarter, will the automotive business have filled in the I think it was 30,000,000 or $35,000,000 that it was kind of dragging on results on a quarterly basis. If you hit the guidance in Q4, will you have caught up on all of that automotive business? Or is there still more catch up to come?
From an order perspective, yes, we've caught up. But hitting those revenue numbers, we have begun to close the gap but haven't closed it entirely. And just
for reference, was 25,000,000 to $30,000,000
Okay. So on an order just to clarify, on an order basis, yes, you've seen the catch up, but the revenue hasn't yet caught up. So that's more like Q1 and Q2 is when you should see the fill in on the revenue side from the orders you're getting in automotive now.
Yes, Dave, I think that's reasonable.
Then just the final thing from me is, you talked about this $400,000,000 of incremental TAM in the mobility space from five gs and an assortment of other things. How far along are we at realizing that? Is there still how much more of that has to come? Or how much have you already achieved?
Yes. Maybe Ian can help us with that.
Yes. No problem. So let me just try to clarify sort of the numbers we provided, which is as we look at the RF served market within just the tester side, we think that is growing from $200,000,000 in 2020 to $400,000,000 in 2023. And again, to we think a very significant portion of that is growth is five gs. But that market, as we think about RF, which covers all the markets we serve, certainly RF IoT, which extends into computing and industrial, is a significant portion of that growth as well.
Okay. And then I do have one more question. I'm fascinated about this market share gains that you're referring to in the RF test space. I guess I'm kind of curious, as you talked about, it's a broad set of customers and we can kind of all guess who those guys are. But historically, you've done mostly power amplifiers, but I guess the share gain opportunities is you moving into other parts like switches and LNAs.
Could you just elaborate a little bit more on that? And because it would seem like if you've moved from power amplifiers to other components from these large customers that you already serve that the mobility growth rate could be a little bit conservative?
Ian, would you like to add some color to that?
Sure, absolutely. So I think Excerra historically focused on what we call the PA market. And the PA market is a portion of the RF front end IC market that is the core part of our served market on the RF side. As we as, you know, in the last couple of years we focused our sights on a larger market. We really said, you know, we saw the opportunity of looking at the entire RFIC market as our primary market that we're going after on the RF side.
Now what does that include? That includes PAs, which kind of roughly makes up 50% of that market in 2020. It includes low LNAs, filters, antenna modules, antenna tuners and front end modules, which is the device that has a number of these elements all put together within it. As we look at that market and also included how much of that market is served by a rack and stack equipment, we sort of said, okay, this is a larger market of which we have a real opportunity of growing share in. And that's the $200,000,000 market I described, again, mostly in mobility, but extending outside of mobility.
So that's one piece of it. You asked again about are we being overly conservative. Our estimate is we're in that market. We're roughly 40 share of that market now. And our goal is to continue to grow share within it.
But we also see it as a market that is attractive a number of our competitors and also expect to see competition from other competitors in the marketplace. So that's why we sort of said, I think the numbers we provided are realistic, attainable, achievable numbers given the strength we have, but also includes a fair amount of share gain, you know, going forward with it.
Just to clarify that 40% market share number you just talked about, what was that of again?
That's that 40% in the RF front end IC market.
Okay. And so your share in power amplifiers would obviously be much higher, right? Is it more like
five For sure, it's
percent of the
And we have we believe we have both more opportunity to gain share outside of that, and we've seen some of that this year. But also, we see that with these more complex RF technologies like five gs, like satellite Internet, there is actually more growth outside of PA into some of these other elements of the RF front end IC chain.
Right. And just to clarify these market share numbers, so 40% of the total RF front end business, but 65% power amplifiers, that would imply that the LNA antenna tuners and RF front end modules are at a very low market share, perhaps in the 20s or something like that. So there's a lot of room to grow market share in these new parts that you're starting to pick up test slots for.
Yes. Again, to emphasize, I think there's opportunity for us to grow share because we're at a smaller position, but also there's also more activity and more growth there. And that's also fueling some of the folks who are deciding to switch from in house rack and stack to a more high volume production tester. And again, I'll emphasize the advantage we're providing is that for these customers who often have all of these devices in their portfolio, they can have one test platform that can test them all. So they can manage sort of the ups and downs in their quarterly business more effectively.
Thank you.
Thanks, Dave.
Our next question is a follow-up from Brian Chin with Stifel. Your line is open.
I know we've moved into overtime, so thanks for the follow ups here. Maybe just I found your slide, I think it's Slide 61, pretty instructive. It kind of shows how certain key applications align to Cohu's opportunity and product offering. And I do want to hone in on sort of the middle two columns tied to EV and ADAS. I'm just curious, yes, those two applications really seem to be driving some of the initial growth here in auto that you've seen the recent quarter moving forward.
I'm kind of curious, obviously, sales in aggregate haven't bounced back yet, these two applications themes are certainly incremental. So I'm just wondering from a to peer into sort of your customers' test floors, is there a dynamic here where their IDMs and unlike subcons, you maybe kind of have more fungibility or reconstitution of test cells around different product sets. Are these like EV, electrification, high voltage and ADAS, are they more greenfield test cell that you're seeing? And is that sort of the reason why the aggregate market combustion cars obviously hasn't fully bounced back at this point to prior kind of production levels, but you are seeing the incremental out of those businesses and could continue moving forward. I'm just kind of curious if that's the dynamic that makes sense.
Maybe we should answer this in pieces here. First of all, when we talk about a test cell, we're really talking about entailing two at least two out of the three components that we provide, either a handler of a tester or the contactors. And for these two middle blocks here, think the primary discussion for us is around contactor attachment rate to the handlers. But maybe answering to your question, it greenfield? Is it sort of a current application?
Maybe I'm going to pass it on to Chris to expand a little bit more on the handler side and we can top off with Devon giving some more color on the contactor side.
So hi, Brian, this is Chris. Let's start with ADAS. So for example, the real application here, the growth of these processors, which require there's a lot going on in the processor, where they're processing all this different information from the vehicle and they're the automotive guys are very cost driven. So they're looking at how to reduce package cost and a lot of these packages now are generating a lot of heat. So the heat has to be removed.
So what we're seeing is some upgrades because we can upgrade existing systems on the test floor. But the majority of the business we've seen so far is new systems, which would I think would imply more of a what you would call the greenfield opportunity. And similar on electrification, it's an upgrade to a current system. But most of the activity we are seeing right now is people wanting additional system capacity.
Got it. That makes sense. Maybe that plays into the fact that these are expected to be durable increasing trends and penetration rates, right, on vehicle sales moving forward, right? That's really helpful. And just kind of last thing quickly here.
I think there's a reference made to that you're seeing a lot of on the test side, a lot of upgrades maybe tied to sort of the recent introduction of the Red Dragon instruments. I'm just wondering, are you seeing a pretty high skew there towards sort of upgrade instrument upgrades like with the Red Dragon or kind of full system sales? I sort of imagine the margin is pretty robust in either direction.
Ian, you want to address that?
Yes, sure. So I think we're seeing a combination in this past six months as we're going through this ramp of both new test systems as well as upgrades. And our upgrade business is still pretty early on. We introduced the Red Dragon fully into the marketplace in calendar our Q3 of this year. And we're still at the ending Q3, we're still at only 10% of the installed base that we were able that have demanded upgrades from us.
We do see that continuing through the course of twenty twenty one. Our target right now for 2021, which we think is quite achievable, is 30% of the installed base. We still see that our revenue overall this quarter and into the next quarters are still going to be higher for new systems. But quarter to quarter, it's going to be some mix of the two.
Great. That's really helpful. Thanks again for all the help today.
Thanks, Brian.
Thank you. And I'm currently showing no further questions at this time. I'd to turn the call back over to Jeff Jones, Chief Financial Officer for closing remarks.
Thank you. And before we sign off, I'd like to let you know that Cohu will be participating in a number of virtual investor conferences over the next six weeks, and we'd welcome meeting with you. The conferences are the D. A. Davidson Investor Conference on December 15, the twelfth Annual CEO Summit on December 16, and the Conference on January 1213.
So on behalf of the entire Cohu team, I'd like to thank you for participating in today's event, and we look forward to meeting with you again soon. Thank you and goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.