Ladies and gentlemen, thank you for standing by, and welcome to Cohu Incorporated's third quarter 2020 financial results call. I would now like to hand the conference over to your speaker today, Jeff Jones, Chief Financial Officer. Please go ahead, sir.
Thank you, and good morning, and welcome to our conference call to discuss Cohu's third quarter results and fourth quarter 2020 outlook. I'm joined today by our President and CEO, Luis Müller. If you need a copy of our earnings release, you may access it from our website at cohu.com or by contacting Cohu Investor Relations. There's also a slide presentation in conjunction with today's call that may be accessed on Cohu's website in the investor relations section. Replays of this call will be available via the same page after the call concludes. Now to the safe harbor. During today's call, we will make forward-looking statements reflecting management's current expectations concerning Cohu's future business. These statements are based on current information that we have assessed, which, by its nature, is subject to rapid and even abrupt changes.
We encourage you to review the forward-looking statement section of the slide presentation and the earnings release, as well as Cohu's filings with the SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, October 29th, 2020, and Cohu assumes no obligation to update these statements for developments occurring after this call. Finally, during this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings release and slide presentation for reconciliations to the most comparable GAAP measures. Now I'd like to turn the call over to Luis Müller, Cohu's President and CEO. Luis?
Thanks, Jeff. Good early morning, everyone, and thanks for joining us. Today, I'll discuss some of the dynamics from third quarter, what is driving our expected business improvement into next quarter, summarize how Cohu is improving its infrastructure and adapting to the pandemic, and highlight our alignment with momentum growth markets for 2021. Revenue in the third quarter was $150.6 million, exceeding our updated guidance, with business conditions continuing to improve throughout the quarter. As orders strengthened, we were able to accelerate some recurring shipments in support of customers' production ramps. Our operations team and supply chain partners did a great job meeting customer needs in the third quarter, and even more so going into the fourth quarter, as we'll soon discuss.
Third quarter orders were split 40% recurring and 60% systems, with a sharp increase in demand for our testers and handlers, and another sequential record booking quarter for PCB test equipment. Overall, estimated test cell utilization increased three points quarter-over-quarter to 81% at the end of September. Mobility continues to be a very strong segment for Cohu, particularly for RF test of devices going into next-generation 5G smartphones. In the third quarter, we launched a suite of RF test instrumentation addressing 5G, Wi-Fi 6, and ultra-wideband requirements. We're seeing strong and wide customer adoption for these products and are successfully managing an accelerated production ramp. I couldn't be more proud of our engineering, operations, applications, and service teams for delivering such a successful product introduction.
There is much more to do in the fourth quarter and into 2021, but so far, this has been a great testament of value creation from our October 2018 acquisition of Xcerra. Still in mobility, we're also managing a fast production ramp for handlers used in testing application processors and RFICs and growing customer traction for the new Neon package inspection platform. 5G deployment is still in the early stages, with an estimated 16% penetration in smartphone units. Industry analysts expect that this market will continue to expand in 2021 and beyond, likely reaching peak demand in 2023- 2024. There are other applications in automotive, industrial, and IoT that are not yet considered in this forecast and should extend the technology beyond this time horizon. Test complexity is also increasing, leading to higher ASP systems and greater test intensity.
The net result is very positive for Cohu's RF testers, handlers, and our new line of contactors. In the third quarter, we also saw new U.S. export restrictions to Huawei. I believe everyone understands that the smartphone demand remains unchanged, but the business redistribution is translating into incremental orders for Cohu products from customers where we have greater share. There were new U.S. export restrictions on China in military end-use applications and end users. We have conducted reasonable due diligence on our customer base and don't believe this rule will impact Cohu at this time. In the third quarter, we started seeing a recovery in volume orders from automotive and industrial semiconductor customers. This ramp is happening sooner than anticipated and led to a near 3x increase quarter-over-quarter in automotive system bookings and 2x increase in the industrial segment.
Despite all the excitement, the combining segments were still about half the order rate from 2018 and should have more room for improvement in the near future. Utilization across automotive semiconductor customers is picking up, so are orders in the first few weeks of fourth quarter. It is no surprise that automotive demand is coming back stronger for testing ADAS and power management semiconductors, as well as sensors that include new optoelectronic devices. In the consumer segment, we're seeing initial deployments of Mini and Micro LEDs in new large panel TVs, driving the forecast for incremental test capacity. Also, new, more powerful gaming GPUs are set to benefit from Cohu's thermal handlers that optimize yield for actively managing thermal dissipation during test. The computing segment is going through a transition. New Edge devices and supplier diversification are creating new business opportunities for our thermal handlers and subsystems.
As I mentioned in an earlier call, we have been working to deliver time-to-yield value to several customers through better integration of our test cell elements, tester, handler, and contactor. In the third quarter, we captured a design win for RF test, where a major OSAT customer recognized the value of buying a complete test cell from Cohu that accelerates time to achieving target production yields and overall equipment efficiency or OEE. We are working with other customers across different markets to demonstrate similar capability. I hope to describe new application wins in coming quarters. On the contactor front, with the sharp increase in system orders, our contactor attachment rate is now at 29%. As I previously explained, this number will fluctuate up and down quarter-over-quarter.
In light of rapidly improving business conditions, strong cash generation, in our forecast during the third quarter, we took action to reduce outstanding principal under our Term Loan B debt associated with the financing of the Xcerra acquisition by $17.3 million. Looking at the impact of the COVID-19 pandemic to our business. This has been an incredibly challenging year for our employees, customers, suppliers, and communities. We're committed to ensuring the safety of all stakeholders, to protecting our livelihood, and doing the best we can for our communities. Cohu has increased supply chain resilience and implemented policies to safeguard our employees, ensure business continuity, and support our customers. Because of the pandemic, Cohu has reduced travel and other expenses, and we're now finding new ways to support customers. Among these, we're implementing virtual reality assisted technologies to bring experts to the field without leaving their homes.
We're excited to pilot new technologies like this to enhance customer support and expect long-lasting benefits from such solutions, including lower operating expenses when the pandemic crisis subsides. Now, looking ahead, we're encouraged by the momentum across Cohu's main market segments and by customer interest for our new products. We'll be guiding fourth quarter revenue and profitability up and are forecasting this trend to continue into 2021. Cohu is poised to grow next year with accelerating 5G deployments, compounded by a projected increase in smartphone units, growing ADAS and electrification on anticipated expanding automotive unit sales, new opportunities in computing with edge processing, AI, and next-generation GPUs, and expected recovery in the industrial segment with improving global GDP. All in all, Cohu is improving its operations and service infrastructure to meet the evolving pandemic-driven challenges, lowering operating expenses, and aligning products with momentum markets that will deliver revenue growth.
Before we continue with financial results, I'd like to announce a senior management change and thank Pascal Rondé for his outstanding leadership of Cohu's global customer group over the past two years as we integrated Xcerra. Pascal will be scaling down his time commitment starting in the first quarter of next year, and he will eventually transition from Cohu at the end of the first quarter 2022. Looking forward, I'm pleased to announce that Chris Bohrson, who is currently the Senior Vice President and General Manager of our Test Handler group, will assume Pascal's role around mid-February next year. Chris is a highly respected industry veteran with strong multicultural and business experiences and is held in high regard not only by customers but all Cohu. In conjunction with this transition, our three handler business units will report directly to me.
Now I'd like to turn it over to Jeff to provide details on third-quarter results and share fourth quarter guidance.
Thanks, Luis. Cohu delivered strong results in Q3. Sales were higher than our revised guidance as of August 31st, 2020. Gross margin exceeded our business model. Operating expenses were in line with forecast. Q3 non-GAAP profitability was higher than our business model. Before I walk through the balance of the Q3 results and the Q4 guidance, let me talk about our GAAP to non-GAAP adjustments. Please note that in my comments that follow, I'll refer to non-GAAP figures. For GAAP to non-GAAP reconciliations and disclosures, see the accompanying earnings release and investor presentation. For Q3, the GAAP to non-GAAP adjustments include approximately $3.3 million of stock-based compensation expense. Intangible amortization expense was approximately $9.8 million. The gain on sale of our German facility was approximately $4.5 million, and restructuring costs were approximately $3 million. The Q3 2020 net cash impact of restructuring was approximately $400,000 due to severance and facility closure.
The Q3 GAAP to non-GAAP adjustments also include a $7.3 million impairment charge related to in-process R&D assets from the Xcerra acquisition. This was a non-cash charge caused by COVID-19- driven delay in our customers' expected adoption of products currently in development. Turning to Q3 results. Revenue was $150.6 million and $4.6 million higher than our updated guidance as provided on August 31st. In Q3, no customer accounted for 10% or more of sales. In the third quarter, Cohu's gross margin was 44% and in line with the high end of our guidance. The Q3 gross margin is approximately 100 basis points higher than our business model. Operating expenses were $48.3 million and in line with guidance. Temporary cost reductions remained in effect throughout the quarter. Third quarter non-GAAP operating income was 11.9% of sales and adjusted EBITDA was 13.5%.
Cohu's non-GAAP effective tax rate for Q3 was approximately 16% and lower than guidance, primarily as a result of tax benefits derived from operating losses generated in Europe. Non-GAAP EPS for the third quarter was $0.27. Turning to the business model. As we've previously discussed, the actions required to achieve the $40 million of acquisition cost synergies were completed as of the end of fiscal 2019. At the end of March 2020, we implemented temporary salary reductions which took effect of April and further reduced operating expenses by approximately $3 million per quarter, adding about $0.05 of EPS to our model. Given the improvement in business conditions, Cohu is lifting the cost reductions and reinstating full base salaries and board of directors cash retainer compensation as of the beginning of November Q4 2020 guidance. Moving to the balance sheet.
Our cash balance at the end of Q3 was approximately $171 million and supports our operational needs of approximately $80 million, debt service, and funding the inventory and receivables associated with the steep production ramp we are currently experiencing. During Q3, Cohu reduced debt by approximately $17 million. Deleveraging continues to be a capital allocation priority. Cash flow from operations during Q3 was $14.7 million, and CapEx for the third quarter was $5.6 million, driven mainly by purchases of equipment to increase contactor manufacturing capacity in the Philippines and Japan, as well as capital additions necessary to consolidate our German test handler operations into one facility. The fourth quarter sales forecast has improved significantly since the directional guidance we provided during the last week of July. For Q4, we're guiding sales to be between $176 million-$192 million.
The low end of the revenue range considers some supply chain uncertainty caused by COVID-19 and potential risks associated with book and bill sales and customer acceptance, which is required for revenue. Gross margin for Q4 is expected to be between 44%- 45% and in line with our business model. Q4 operating expenses are projected to be approximately $51 million. Q4 will include two months of reinstated base salary costs plus higher variable expenses such as sales commissions resulting from the sequential increase in revenue. Other expenses, such as travel and marketing costs, remain at reduced levels in Q4 and the foreseeable future as Cohu has adapted well to this new business environment with more remote interaction with customers and between our operations.
Looking to quarters beyond Q4, which will include the full impact of salary reinstatement, we expect operating expenses to be approximately $52 million on quarterly revenue of approximately $180 million. We expect Q4 adjusted EBITDA at the midpoint of guidance to be approximately 18%. The Q4 forecast non-GAAP tax rate is approximately 22% at the midpoint of guidance. As a reminder, most of Cohu's profits are generated offshore and subject to statutory tax rates in various foreign jurisdictions. Income taxes on profits generated in the U.S. are mitigated by net operating loss carryforwards. The diluted share count for Q4 is expected to be approximately 42.7 million shares. With increasing backlog and strong order forecast across various markets, our current projection for first quarter revenue of 2021 is to be approximately flat to up 5% from the midpoint of Q4 guidance.
That concludes our prepared remarks, and now we'll open the call to questions.
Our first question comes from Brian Chin with B. Riley. Your line is open.
Hi, good morning, and congratulations on the pickup in the business, and also thanks for letting us ask a few questions. Maybe first question, coming off low levels, but the system order pickup in auto industrial certainly sounds fairly substantial. I usually think of service-oriented sales leading a recovery in utilization and also system orders. Maybe can you talk about the underlying drivers you're seeing, your view on sustainability, and then inclusive of this and your Q1 sort of outlook as well, are you building backlog here beyond 4Q?
Yeah, Brian. As we described in the comments, yes, orders are increasing. Book-to-bill Q3 was above 1, expect the same for Q4. Yes, we are building backlog. You mentioned the automotive coming off of low order rates, and that's absolutely true. We believe we still have a ways to go there to get back to a normal run rate. We think we're about $25 million-$30 million per quarter in orders lower than our normalized rate.
Got it. Just have a question about the mobility side of the business. In terms of the customer strength, is it pretty broad across customers and geography?
Hi, Brian. It's Luis. Yeah, it is broad on customer base and geographic as well. As I mentioned, it is particularly strong for RFICs, but we also seen a strong pull for our thermal handlers for application processors and also an increase forecast here on the flat panel display drive, some of it associated with mobility. RM management I see as well related to mobility.
Great. In terms of the RF test part of the business, which has been strong this year, I think in the past, Luis, you've commented that you see the TAM there perhaps growing sort of maybe 20%-ish, per annum over the next couple of years or so. I think last night Samsung talked about the potential for the industry shipping over 500 million 5G phones next year, up from, say, 200 million to 250 million this year. That's one of the higher numbers I've heard, and that's last night. I'm curious, how would you think of sort of the RF TAM growth relative to that sort of a number?
Yeah. We think the RF TAM, and by that I don't mean just in phones, but connectivity in general, some of it, take it for a grain of salt here, some of it is in automotive or IoT, that TAM is growing to about a $400 million market size or addressable market size for Cohu in the next two to three.
Okay. One last quick one here for Jeff. At the revenue level you're guiding for 4Q, I guess the target might suggest in the neighborhood of $0.30-$0.45 in earnings. You did mention that the temporary cost measures are coming back. It sounds like the OpEx is still going to be lower than the target model. Can you kind of perhaps quantify sort of the benefit you're getting from sort of the reduced travel and other sorts of cuts in expenses right now? I guess it's your guidance for 4Q OpEx, subtracted against sort of where you would normally be at those revenue levels?
Yeah, that's a good way to look at it, Brian. As I mentioned in my remarks, I think the way to look at it is at a quarterly revenue rate of 180, think about $52 million in operating expenses. With every $10 million change in revenue, our OpEx will move by $1 million. As revenue goes up to 190, we'd expect OpEx to be at $53 million.
Okay. That's helpful. Thank you.
Thank you. Our next question comes from Krish Sankar with Cowen and Company. Your line is open.
Yeah, hi. Thanks for taking my question, and congrats on the great results and guidance. Luis, I got a couple of them. First one is there a way to segment off your mobility orders of sales, how much of it is coming from 5G? If you can also give that kind of granularity over the last couple of quarters, so we can see the trend of how 5G is either increasing or how it's trending for you folks.
Yeah. Hi, Krish. I won't have all the details handy here, but I can tell you this, the third quarter RF tester orders were almost entirely 5G related, if not really entirely 5G related. The handler orders in mobility are a little bit more difficult to call because we are testing an application processor, which is a digital device, when our handler's in. It's really a difficult call to say whether it's going on a 5G or a traditional 4G phone, ultimately, because we don't know which supplier may be using that processor. Similarly, with the display drivers or the power management ICs, we don't have that visibility down to a specific cell phone model that it's used. The RF is easier to call because we know the device. On the other ones, it's hard to know how it gets integrated.
Got it. Fair enough, Luis. Along the same path, when you look at the RF customers, not the OSATs, but the actual, the other front-end module makers, it seems like there are roughly five of them, four in the U.S. and one in Japan. How would you characterize your market share amongst all those five end customers?
The OSATs?
With the OSATs, you're talking about the share?
Not the OSATs. I was talking about like the Qorvo, Skyworks, Avago, Qualcomm, Murata of the world.
Oh, I see. We have had traditionally the largest share of the power amplifier market, and that continues to be the case. We have more recently gained share into other RFICs, particularly antenna tuners and low noise amplifiers and switches. I would say, give or take 60%+ share on the power amplifiers. I can't tell you exactly the share on the other elements, but it's on the rise. It's increasing.
Got it. Then a final question, either for Luis or Jeff. Auto, it seems to be kind of on a recovery mode, but as a percentage of your system orders, it's still pretty low. I'm kind of curious when you would expect it to get back to some of your early 2019 levels or the prior ones.
Yeah, that's a very good question there, Krish. It's hard to make those kind of predictions, we did expect coming into last quarter that the market would be in a recovery by the end of fourth quarter, beginning of first quarter 2021, and that possibly be in a full swing in the second half of 2021 or 2022. Where we stand today is, things have turned on faster than we had anticipated at the end of third quarter and continue to be here at the beginning of fourth quarter. I'll be a bit more bullish this time and say that we think we're going to be back in normal business environment for automotive sometime in 2021. I can't precisely say when, I'll be a bit more bullish from where we stand today.
Terrific. Thanks, Luis. Thanks, Jeff. Congrats on the good results.
Thanks, Krish.
Thank you.
Thank you. Our next question comes from Craig Ellis with B. Riley.
Yeah. Thanks for taking the question, guys. Congratulations on the real robust execution and totally getting to be reinstating normalized salaries for the team, given what you're doing with your execution. I wanted to start following up with a comment that you just made regarding Krish's question. My understanding is that Cohu has a very strong position in EV power and ADAS-related applications. When we're thinking about the business's capability on a go-forward basis relative to its order intensity in either 2018 or 2019, wouldn't we expect for order intensity to actually be higher, given how strong your position is in these two secular growth areas?
Hi, Craig. Yeah, this is Luis. Yes, I think that's the direction we expect the market to go and ultimately to grow. To Krish's prior point, we think we'll be back to that quarterly rate sometime in 2021. We see the trajectory already from where we stand today. Beyond that, the electrification of the drive chain and the adoption of ADAS seems to be accelerating, so we think automotive has the potential to go beyond where we were a couple of years ago. I don't know if that then translates into 2022 or exactly the timeframe. One thing is certain, the ramp in automotive now is, and we see on every order coming through now, is very heavily centered around battery management systems, testing battery management devices, or high-end microcontrollers, or you could call it microprocessors that are power dissipative, therefore, for ADAS applications.
Also sensors that we believe are also related to ADAS applications in vehicles. Yes, those are the segments of the automotive market that are coming back stronger, and I think will continue to propel growth here for the next several years now.
That's great. Very helpful. Then, Jeff, just a clarification on gross margin in the quarter. The 44%, great to see the leverage. Were there any one-timers in that number? If not, any implications for how we think about gross margins versus the target model going forward?
Yeah. Hey, Craig. No one-timers in Q3, 44% gross margin. As a matter of fact, I would say we probably had some one-time costs that could have weighted down the gross margin a bit. Looking forward, and modeling gross margin, the business model on the gross margin line is still largely accurate. I would follow the gross margin at the different revenue levels in the current model. It's the operating expenses that need an update on the guidance, and that's where I came in with the $52 million on about $180 million, and then changing or fluctuating roughly about 10% of the change in sales.
Got it. Okay. Very helpful to get some of the color regarding visibility into calendar 2021. Luis, as you look at calendar 2021, can you just characterize where your visibility is relatively stronger, where you're more confident? Given how robust we're exiting the year versus normal seasonality, what are the implications for calendar 2Q and 3Q 2021 seasonality from our exit velocity in calendar 2020?
Okay. Let's take those in pieces then, Craig. The strength that we see going into 2021, I think is very much aligned with what we've been talking about here for fourth quarter. The mobility 5G deployment is going to continue into 2021 and beyond. I think it was Brian Chin who even made the comment about unit sales, cell phone unit sales, which are finally projected to grow next year in addition to the further deployment of 5G technologies. I think you compound the two, we're very optimistic for the mobility market, particularly RFICs, RFIC tests. We also have a lot of optimism about auto, as we just described here and talked about the EV and ADAS and sensors. That's another big area of driving growth and potentially here turning on faster as we see, than we had originally anticipated.
Another one of those sort of big trends that will continue to go for the next several years. Seasonality becomes a tougher question to answer. Simply because we have normal times, semiconductor industry is usually anything short of normal, and we have two mega trends happening at the same time, which is this 5G technology deployment and then all these ADAS EV deployment in automotive. It gets hard to talk about seasonality when you have two big segments for semiconductors ramping at the same time. I don't have a clear view yet on seasonality for next year, Craig, I'm going to have to defer that by another quarter and comment a little bit more for next year.
That's totally understandable, Luis. Appreciate the color that you provided. Just regarding the points you made around multiple mega trends at play. In your experience, when was the last time you've seen dynamics this favorable for Cohu as you look back at history? What would be a comparable point for you?
Okay. If I look back in history, a more recent history, I know we had a very strong automotive market a few years ago, 2017, 2018. Automotive was particularly strong with tighter emissions control in the U.S., Europe, and China. I think that was the singular major driver there. If I go back a few more years, we had, I want to say it was 2014, if I'm not mistaken. It was the point in time in which application processors' power dissipation during tests crossed the threshold that opened up the window for us to sell our active thermal control technology, the same that we're using for laptops and, at the time, computers, servers. That technology found its way into application processors smartphone market. That was a big one, too. I don't recall in this recent history having two big things happening at the same time.
I guess I would have to look a little deeper here, but I don't recall two big things happening at the same time. Yeah. I think that's my answer there, Craig.
That's helpful, guys. Thanks. I'll hop back in the queue.
Thank you. Our next question comes from Sidney Ho with Deutsche Bank. Your line is now open.
Great. Thanks for taking my question. Congrats on the strong quarter, guys. Maybe my first question is on the RF test module, the new product that you guys have announced. Maybe can you put some context around this particular product in terms of revenue opportunity that brings? What's the attach rate that you are seeing with your install base, and how quickly do you think that can be ramped up?
Hi, Sidney. This is Luis. We don't really break out revenue by product line. Let's see if I can answer some of your questions here. As I mentioned earlier, we are looking at a RF addressable market, so there's not everything RF can do today. An RF addressable market for Cohu that is growing to about $400 million in the next two to three years. We do have a very strong share today in power amplifiers, and this $400 million extends beyond power amplifiers into things that we are penetrating now, as I mentioned earlier. I think over time, the opportunity is there to grow this to close to $200 million in RF revenue for Cohu, if we execute successfully on all of our plans. That doesn't answer what we have it today, but I really don't want to get into particular product line today.
Okay. That's fair. Maybe my follow-up question is, in the past, you talked about test cell utilization at 80% is the line when you start seeing system sales pick up, and obviously you saw a pretty good pickup here. With the overall cell utilization at, I think you mentioned, 81%, can you talk about which end market do you expect to see system sales start accelerating? Obviously, mobility is one, but also try to think about whether there is some sort of seasonality you think about these utilization.
Yeah. You're right, I agree with you. The business is particularly strong for an 81% utilization right now, and that's what gives us more optimism about 2021. The utilization is now particularly strong for applications in mobility. We see it particularly strong at OSATs. I think there is more room for improvement of utilization for customers in automotive. Like I said, we are seeing a sharp increase in automotive orders. That said, the utilization there on average is still below 80%. I think what's happening now is we're seeing technology being driving the business in addition to utilization. 5G deployment, ADAS, these are all new technologies that almost like notwithstanding utilization, you need type of capital in order to test these devices. You got a compounded effect here on top of the general utilization discussions that we have.
Maybe one last question from me. For your comment on first quarter revenue being flat to up 5%, can you talk about what areas you are expecting to improve or maybe there are areas that are declining to get to that kind of net growth? I know you just answered a previous question about seasonality that may or may not exist, try to figure out if you think this is above seasonality, are you still in kind of catch-up mode in some of the areas?
Yeah, Sidney, I would say you're correct. We're probably in catch-up mode still, and in particular in a utomotive and industrial. We saw a pickup. We're seeing a bit of an increase in utilization in automotive and industrial, but we do have a ways to go to get back to sort of a normalized run rate in those segments. Absolutely agree with the fact that still in catch-up mode for auto and industrial.
Okay, thank you.
Thank you. Our next question comes from David Duley. Your line is open.
Yeah. Thanks for taking my question. You made a comment earlier in your prepared remarks, I think about 5G RF test times. Do you have an idea about how much more test intensive or handling intensive the parts are that you're talking about?
Hi, David. It's Luis. Yeah, I do have some specific examples that are tabulated in terms of what it was on a prior generation device, what it is in this generation device. Generally speaking, the test times are going up, and there are obvious desire from customers to sort of bring it back down, and that's why you introduce new products, new capabilities, and test program techniques. Yeah, without being specific on numbers, the test time intensity, I guess, to call it that way, for increase in test times is generally going up in RF.
Can you take a stab? Is it going up by 20% or 50%? From your experience, what have you seen thus far?
Depending on devices, obviously, but I've seen things from, we've been able to bring it down to parity, to, there is 30%- 35% increases that I've seen on different test programs.
Okay. As far as the guidance for the December quarter, it's up like roughly call it $35 million. Which segments will be contributing to that nice incremental growth of $35 million in the December quarter?
It's going to be mobility, 5G RF test, as well as a pickup in automotive and industrial.
Okay. Could you help us understand, as far as the automotive segment, how much of a I think it was dragging on a quarterly basis by $25 million or $30 million. I'm just kind of curious, in your December quarter guidance, how much of an improvement you've made. It's obviously not dragging by $30 million a quarter anymore. I'm kind of trying to figure out how close you are to getting back to normal run rates.
Yeah. Dave, I'll tell you, we did that same calculation, we think that now after Q3, we are about $25 million-$30 million away from a normalized run rate today. You kind of hit it on the head there. That's the gap that we see currently, we see improvement in that segment, that, as Luis said, I think we can close that gap sometime in 2021.
Yeah, that's the incremental opportunity from where we are now, Dave.
Yeah, from the September quarter revenue level.
Yes.
Yeah. Okay. I guess the update is you think you can get this, the entire $25 million or $30 million on a quarterly basis back by sometime in mid-2021. Before you were saying you weren't sure when you could achieve getting back to that run rate.
Yeah, just one quick correction here, Dave. We were looking at the September quarter booking level when we talked about an incremental $25 million-$30 million. Obviously we didn't talk about bookings, but as a number. That September booking translates into fourth quarter revenue.
Okay. Final question from me is, I think you mentioned thermal handlers. Traditionally, I thought those have gone into the APU segment of the market, but it sounded like, I thought I heard you talk about other parts or other markets for your thermal handlers. Could you just elaborate a little bit?
Sure. First of all, when I'm referencing thermal handlers here, I'm talking about the ones with active thermal control technology, which are for the APUs, GPUs, like you described. I'm also including, in that terminology now, the cold cryogenic test handlers, which are used in automotive. That's what I mean by thermal handlers. With that said, I have to admit, those two things are now converging in automotive with ADAS business picking up. We're seeing now the same active thermal control technology on cryogenic handlers for automotive applications. It's pretty much the processor market, if you will, is meeting the automotive market.
Okay. Thank you.
Sure. Thanks.
Thank you. Our next question comes from Christian Schwab with Craig-Hallum. Your line is open.
Yeah. Congratulations on a great quarter and great outlook. On the RF side, I'm just wondering as we move into other 5G applications where you may have opportunity outside power amplifiers. I'm just wondering if you could talk about if you have any meaningful opportunity for millimeter wave RF front-ends, if you have an opportunity and as we roll out more picocells, small cells, and microcells for the active RF devices that will go into 5G infrastructure, and should accelerate in 2021 versus 2020. Are you well-positioned in either one of those areas?
Yes, in some. Others, we still have to deliver the product and get the share, get the socket. Yes, this RF product or suite of product instruments that we delivered here in the third quarter, they're not just for RFICs going into smartphones. We have good capability on Wi-Fi 6 and ultra-wideband. Many of these are used outside of the phone on fixed stations. The answer is really mixed because it's yes, but there's more that we need to do still.
Okay. Great. Well, most of all my other questions have been answered. Thank you.
Thanks. Thanks, Christian.
Thank you. Our next question comes from Tom Diffely with D.A. Davidson. Your line is open.
Great. Thank you. Good morning. One more question on the 5G RF cell. How much of your business is driven by just the full- cell order versus the best pieces, the tester, the handler, the contactor? I guess in other words, which of those segments inside of the RF cell are over or under-penetrated for you?
Christian, without being on the numbers, the majority of our business in RF today is still selling the tester and the handler as separate pieces. In some cases, they come together, in many cases here, they're not actually. We're selling testers and handlers completely separate. We have been promoting, in the third quarter, we did get an RF customer to recognize the value of bringing a complete solution to production from us, as it really simplifies the integration to the customer and essentially the time to get to production yield. That really matters, particularly in the mobile space. You have a device life cycle that is probably measured in a couple of years, you have a significant ramp in front of you and stiff competition. Getting to that production yield fast is incredibly important.
We got finally a sort of an OSAT customer to recognize that value and take our complete cell. We're working on that same proposition, not only in RF, but a few other segments with different customers. I hope to be able to bring that to the table here in future quarters. Like to complete again, the majority of the sale today are on separate individual pieces, tester here, handler, contactor, and not as a complete cell.
Okay. I guess going along with that, then it sounds like there's an opportunity to get the contactors into these sections that already have a tester and that already have a handler then. It's a nice contactor growth avenue for you going forward?
Yes. We have quantified that opportunity. We think there's a chance here of adding something in the order of $30 million-$40 million of incremental revenue next year by selling more of the complete package and then with that, selling something that we don't sell yet to a customer or another customer, basically.
Okay, great. Jeff, when you look at the guidance 18% EBITDA, about 200 basis points above your model, it sounds like from your comments earlier that maybe it's not truly 200 basis points above what the model should be. Maybe it's only 100 basis points or so. That's the part of the model that might get adjusted upwards.
Yeah, that's right, Tom. We're working on a refresh of the model now. I should have it out before the end of the year.
Okay, great. Looking forward to it. Thanks for your time.
Thank you.
Thank you. Once again, ladies and gentlemen, that's star one to ask a question. Our next question comes from Charles Shi with Needham & Company. Your line is open.
Thank you for taking my question. I apologize, my line was dropped and if my question has already been answered, I really apologize. My first question is really going back to the gross margin. You guys kind of guided the fourth quarter gross margin pretty much in line with your long-term model, a midterm model, and which is not so much of a upside from the third quarter. I understand there's no one-time item in the third quarter, but if I think about the higher revenue base, you would get a better cost absorption. Does that indicate that there is some product mixture going on there for the fourth quarter? Probably your relatively lower margin line of product, like in the handlers, those will get a greater growth for the fourth quarter, probably driven by some of the things you mentioned, the surge demand from the auto customers.
Yeah, you're right, Charles. I think you hit it right on the head. At Q3, there was different mix than what we had forecasted. Some of that mix related to recurring revenue that Luis indicated that we delivered. We see a bit of a drop quarter-over-quarter in the recurring revenue, but obviously a big pickup in the systems. As you mentioned, with more of the handler systems, that'll bring down the margin a bit on a blended basis. You've hit it right on the head.
Okay, great. Thanks. Maybe the next thing is really about the RF tester side of the business. I think one person, other person already asked. You said the 20% year-over-year growth for next couple of years, obviously, with a strong upside in the third quarter and possibly fourth quarter, the comp for 2021 will be a little bit difficult. Are you still expecting sort of 20% growth into next year for the RF tester side?
I don't know that we actually mentioned a particular growth number for RF test into next year. Nevertheless, yes, we do expect continued growth in RF test in 2021 for two reasons. We're still out to see probably a doubling of deployment of 5G technology in phones next year. In addition to market forecast now is for also smartphone unit growth next year. I think the compounded effect of that is an expected growth in RF tester deployment. I also mentioned that we are continuing to introduce new products and go after other elements of the RF front-end IC. As we get those design wins, that's gonna increment our revenue into this market segment that I said, growing to about $400 million, addressable market segment to about $400 million over the next two to three years.
Got it. Thanks. Next question really about automotive side of the business. We were a little bit surprised to see the pull forward of automotive recovery you are seeing today, because we were sort of expecting the unit growth of automotive semis should precede the equipment recovery. Why the earlier than expected recovery now? Are there some technology upgrade components there? For example, maybe you are targeting some of the new applications, or there are some technology refresh cycle going on here. Maybe some of the better thermal management handlers, subsystems are needed to cut in now instead of waiting for really the unit getting recovered.
Yeah, your question already has the answer, Charles. You're correct. To be honest with you, we were a bit surprised. We were expecting the automotive recovery to happen mid to late Q4 or even early Q1 of next year. It has come in sooner than we expected ourselves. At the same time, you're also correct that much of this has to do with technology pivot to, as I mentioned to an earlier question, where the processor market is actually hitting the automotive market, and we have a demand here for testing thermal or managing temperature control and thermal dissipative devices. We're finding applications now where we're selling active thermal control technology on our TriTemp cryogenic handlers.
That is a technology change in the automotive market. They don't have that installed base capacity today. There is definitely a technology component here happening in automotive because, as I said earlier, I'm not sure if you were on the call or dropped out, utilization in automotive is still below 80%, and yet we're seeing a ramp. They are for new products, so it is a technology shift.
Great. Thanks for the color. Maybe my last question, one of your leading logic IDM customer, I know you don't really have a 10% customer for a couple of quarters. That particular customer apparently is moving from ATE-based testing into some of the modular testing and with their in-house modular testers. How do you see that trend is coming along, and how do you see the impact on your business?
Talking about that customer, we continue to see the business there robust and pretty much staying at the same level quarter-over-quarter through the end of this year. I don't know exactly what's going to happen next year, but there is no weakening of business on that account, in that market segment. At the same time, we're seeing some traction and interest from other customers, particularly for microprocessors and GPUs and network processors for our active thermal control technology. The computing segment may actually open up some new opportunities for us in 2021, but it's a little too early to talk and quantify them.
Got it. Thank you very much. Congrats on the nice results. Thanks.
Thanks, Charles.
Thank you. At this time, I'm not showing any further questions. I'd now like to turn the call back to your speakers for any further remarks.
Thank you. Before we sign off, I'd like to let you know that Cohu will be hosting a Virtual Analyst and Investor Conference on December 2nd, 2021. This conference will provide you with an opportunity to gain more in-depth knowledge about Cohu's products, markets, and our strategy for differentiation and growth. I hope you can join us. In addition to the Cohu conference, we'll be participating in a number of virtual investor conferences during Q4 and would welcome meeting with you. The conferences are the Stifel Midwest Growth Conference on November 11th and 12th, the D.A. Davidson Investor Conference on December 15th, and the 12th Annual CEO Summit on December 16th. Thank you for joining today's call, and we look forward to meeting with you at an upcoming conference.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a good day.