Morning or good afternoon, and welcome. My name is Jeff Jones, and I'm Cohu's Chief Financial Officer. We're glad you could join us today, and we look forward to walking you through the Cohu growth strategy and recently expanded 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 40 minutes, followed by about 45 minutes of Q&A. Our CEO, Luis Müller, will start by sharing an overview of our markets and strategy. Next, our executive team will provide more details about our plans and how we differentiate in fast-growing markets and applications. I'll conclude the presentation with an overview of our financial results and three year financial target model. We'll move to the Q&A session. Now I'll turn it over to our President and CEO, Luis Müller.
Hello, and thanks for joining us. Our main topics today will center around raising the bar in business performance. We'll discuss served markets, our products, and explain Cohu's strategy for profitable growth. The team will expand on the dynamics in each segment and how Cohu is aligning to secular trends. They'll share specifics on product differentiation and unique value delivered to our customers. Jeff will wrap up with a recap of the last few years' results and reinforce how we'll manage the business to achieve the target financial model and drive shareholder value. At a glance, Cohu delivered progressively stronger results over the last several years. Revenue grew an impressive 26% CAGR, ending fiscal 2021 at $887 million and with a strong balance sheet.
We support a large installed base of equipment across many blue-chip customer names, leading to opportunities to create growth with new products and services. Cohu is uniquely positioned to solve our customers' most complex test and inspection challenges. We have a differentiated and broad product portfolio, including semiconductor testers, interface products, and test and vision automation, and currently serve approximately 20% of a large addressable market. The opportunities are many, but we focus on the mega market trends that most benefit from our technology. At our core, Cohu is a technology-driven company, and we win with innovation. Cohu is well-positioned financially with a healthy balance sheet and a scalable model to deliver through-cycle profitability. We're acutely focused on growing by delivering best-in-class premium products and services that expand gross margin and shareholder value. Cohu is a leader in each of our business verticals.
Today, we'll discuss the four segments driving Cohu's targeted growth to $1 billion revenue. Semiconductor Test Systems is introducing differentiated products to broaden the addressable market. Inspection and Metrology is successfully delivering on a strategy launched a few years ago. We'll also discuss Cohu's large recurring revenue that includes test interface and services. This is the first time we describe Cohu's service business and its steady revenue and high gross margin profile. Finally, we'll not talk today about our already well-known automation business, which encompasses test handlers, thermal subsystems, MEMS test modules, and semiconductor assembly automation. We're a leader in these markets, and we'll leverage our position into growth opportunities for the premium products and services we'll describe next. Our goal is simple. We're aligning the organization to the largest end market opportunities where we can provide differentiated products and customer value, namely higher test yield.
These are well-understood applications across the semiconductor industry, spanning high-performance computing, automotive, industrial, and communications. In aggregate, a $4.4 billion addressable market for Cohu. Starting from a 2021 baseline, we target to deliver mid-teens compound annual growth rate from the strategic product groups. The services vertical reflects steady growth bolstered by our high-margin data analytics software. Equally important is to have clarity on why we win business. The team will explain the technology innovation in our products. They'll provide quantified examples of yield and productivity benefits. Here I want to touch on a different value, the one coming from the strength of our organization. We don't only deliver innovative products. We focus on satisfying our customers' production ramps. We know they must be competitive, and for that, they need to rely on our total support.
This means quickly ramping capital equipment deliveries and flawlessly executing on installations. Ensuring our customers achieve target yield and productivity early is Cohu's key competitive advantage. Cohu's infrastructure spans the globe. It is not surprising that most of our product installations are in Asia, where our customers have factories. We, too, manufacture products in the region and have a large field and applications engineering organization that is local to customers. Our global footprint, the strong balance sheet, trusting management, and innovative products are keys to winning business. The Cohu management team is committed to continue the journey, not only growing revenue, but even more importantly, driving gross margin expansion. We invest in premium differentiated products, have done so organically with a large commitment to R&D over the years, and at times also through acquisitions that help accelerate execution of our strategy.
Circling back to the beginning, this team is focused on executing the plan to grow revenue to $1 billion over three years and drive gross margin and profitability to new levels. Today, we'll provide more details on the strategy for each of our growth factors, including what's driving market growth, what differentiates our products and services, and why we win business. Thank you for your time. Now I'd like to introduce Ian Lawee, Senior Vice President and General Manager for Cohu's Semiconductor Test business. Ian?
Thank you, Luis, and hello, everyone. Today, I'll provide an update on what's driving accelerated growth in the markets we serve, how we differentiate with our products, and expand on recent design wins and plans to further diversify and grow beyond RF front-end module test. Our strategy is to focus on mixed signal ICs that contain digital, RF, analog, and power technologies. These are the underlying technology drivers of well-known secular market trends. Electric cars have three times the semiconductor value of gas vehicles. Driver assistance and safety ICs are forecasted to double by 2025. These trends are driving increased analog sensing and power management content in batteries and powertrains. RF bandwidths are expanding in smartphones, and content is proliferating to consumer and industrial applications. Concurrently, the increase in data rates is roughly doubling test intensity per device.
In the computing and networking markets, we intentionally don't target high-performance processors as part of our SAM, but we do test the peripheral mixed signal devices. We are executing our strategy to diversify beyond RFM and into analog power management, RF IoT systems, and microcontrollers. Orders outside of RFM are fueling recent 30% annual growth in Cohu's Semi Test business, primarily from design wins over the past one to two years for our Diamondx platform. This rapid expansion of Diamondx sales have more than doubled the installed base with gains in display driver ICs, analog ASSPs for data storage, and power management for multiple end markets. Diamondx is a universal platform well-suited for customers with broad product portfolios. We have a differentiated solution over competitors who offer dedicated systems that are optimized for just a single device market.
We have a much lower cost solution over competitors attempting to sell high-end digital platforms to mixed signal portfolio customers. In summary, we provide a high-density mixed signal test platform with mid-range digital instrumentation at lower cost of test. Cohu's strategy is to focus on large customers with a broad portfolio of mixed signal products. These customers are stretched with ever-increasing device complexity and the need to be cost-competitive in high unit volume growth markets. The Diamondx universal air-cooled platform is cost and performance optimized for the many low pin count devices that dominate our customers' portfolios. We are also rapidly expanding the instrumentation capability in analog, RF, and power management, bringing valued solutions to market often ahead of our larger competitors. I outlined two recent design wins to demonstrate why customers are adopting the Diamondx.
A leading U.S. IoT customer switched from a competitor's liquid-cooled universal platform to the Diamondx for testing a UWB device. We delivered to this customer better test time and more instrument channels at an equivalent cost, all without sacrificing gross margin. These advantages yielded 4x higher throughput on the Diamondx test cell over the competitor's liquid-cooled system. The second example is from a customer who has recently transitioned from a dedicated power tester to our universal platform. Diamondx delivered improved cost of test for their power devices, and ultimately a more scalable and higher utilization solution to address this customer's entire power and broad mixed signal portfolio. Cohu is investing in disruptive technologies and customer application support to expand in the analog device segment.
We have steadily penetrated 10 of the top 15 market leaders, in some cases as their primary tester supplier, while in others establishing a foothold, testing a subset of their portfolios. We are excited by the opportunities to grow in the $650 million ATE segment and already started delivering incremental design win orders in Q1 of this year. We offer a more cost-efficient solution to address the growing test intensity requirements, providing higher density instruments and the flexibility of a universal platform solution. We have several ongoing R&D investments in this segment, releasing new instruments and software to intercept customers' evolving technology requirements and cost challenges over the next two years. Changing customer requirements is also driving new business in the approximately $275 million power management segment. Data centers and vehicles, for example, are transitioning to higher power distribution systems.
Diamondx already offers a suite of power instruments, and we have in development next generation high-power, high-density instruments to further penetrate the list of leading IC customers. The Internet of Things is expanding to many end nodes, the vast majority being low-power wireless. There are a series of standards here, such as Wi-Fi, Bluetooth, and emerging narrowband and ultra-wideband IoT. Certain semiconductor manufacturers are providing the entire signal chain, including RF, microcontrollers, and power management technology, so they value a flexible test platform. In addition, as opposed to the cellular IC signal chain, these devices run at lower performance digital combined with mixed signal capability. Customers select the Diamondx because it hits the sweet spot for their portfolio strategy. The Diamondx delivers leading-edge RF and power management instruments with mid-range digital, lowering the overall cost of test for these IoT devices and enabling scalability as these technologies mature.
In summary, we are focused on a mixed signal market that is growing to $1.8 billion with increased test intensity in analog, RF, and power content combined with mid-range digital. Our differentiated universal platform and instrumentation offers best-in-class throughput and cost performance. Recent design wins validate our diversification strategy is working. We will be rolling out a series of new instruments over the coming years that will increase the Diamondx differentiation for large mixed signal portfolio customers. Thank you for your time. Now I'd like to introduce Devin Sheridan, Vice President and General Manager of Cohu's Interface Solutions business.
Thank you, Ian, and hello, everyone. Today, I'm going to talk about our growth opportunities driven by increasing test intensity in each of our core markets. This starts with automotive, where we are well-positioned to serve electrification in ADAS, and extends to 5G in the data center, where our RF technology lowers cost of test. Additionally, we have extended our RF technology to wafer test, where our probe cards solve major challenges in high-frequency testing. Cohu's Interface Solutions group delivers innovative technologies to solve complex test challenges with a core strength in power, thermal, and RF applications. Different from our systems businesses, our products are consumables and create a steady stream of recurring revenue that is not based on test capital expenditures, but rather on the customer's need to keep production running 24 by 7.
Additionally, lead times for our high-performance interface products are much shorter than systems products, and the ability to ramp production to support customers is essential. We deliver on these requirements by manufacturing a majority of our interface products in our Asia facilities, which also drives lower cost and is a key reason for gross margin increasing by approximately 300 basis points during full year 2021, and continued margin increase moving forward as we direct more interface manufacturing into our Asia operations and away from higher-cost Europe and U.S. suppliers. We have three primary markets. In automotive, we expect robust and sustained growth driven by two sub-segments, electrification and ADAS. Here, our customers need increasing power density in driving high-end computing requirements. In computing and networking, softness in PCs is being offset by growth in data center and AI.
Both data center and AI are driven by the need for high interface speeds and increasing adoption of advanced packaging. Finally, in mobility and consumer, rapid adoption of 5G and its expanding frequencies into millimeter wave are increasing the need for cost-efficient solutions at the high end of the performance spectrum. Cost of test increases exponentially with frequency, and to make millimeter wave affordable, our customers are looking for simplified solutions. This has created an opportunity for Cohu to extend its technology into wafer test, growing our serviceable market. Cohu has a strong leadership position in automotive, which is driven by our large install base of handlers and our broad contactor product line. Robust growth is projected in this segment, and there are two key mega trends that align with our strengths and will drive Cohu's growth faster than the market.
First is electrification, with silicon carbide demanding much higher current load at the interface. To solve this, we have engineered contactors to extend the current carrying capacity beyond today's technology by more than 30%. We are using new materials and designs that lower pin wear and enable extended contactor life, resulting in a 50% lower cost. Second is ADAS driving higher computing power. As an example, NVIDIA is projecting automotive processing requirements to increase 10x by 2030. This translates into processors that generate significant heat during test, negatively affecting yield results. By integrating thermal management features in our contactors that can be controlled by our test handlers, we are able to achieve greater thermal accuracy than today's solutions. Improved thermal accuracy translates into improved yield that has significant value to our customers.
In addition to power and thermal, we have a core strength in high-frequency RF applications. This positions us well to capture opportunities in both the 5G mobility and data center markets, where demand for higher data rates is projecting to continue growing. The trend toward high frequency, smaller devices, and advanced packaging significantly complicates test, leading to higher instrumentation and interface costs. In the case of data center applications, new protocols expand the IO bandwidth, making them susceptible to crosstalk that reduces test yield. To address this, we developed a coaxial contactor that improves isolation by 2x existing solutions, ensuring better signal fidelity. Similarly, in 5G millimeter wave, we have developed a cost-effective pin technology that performs at frequencies up to 60 GHz. The new solution is more scalable and reduces cost by over 50%.
Now I'm going to discuss an exciting opportunity to extend our RF technology to wafer testing and significantly expand our addressable market by approximately $300 million. As we discussed earlier, complexity and cost increase exponentially with high frequency. Traditional advanced probe card technologies are limited in their ability to operate at higher frequencies and scale to multi-site testing. They typically can solve one of these challenges, but not both concurrently. Leveraging our RF technology, we have developed a multi-site probe card that delivers at speed performance up to 60 GHz that is needed for millimeter wave. We have also simplified the probe card with a unique direct attach construction technique, eliminating a costly component and source of noise in the signal chain to the instrumentation.
Cohu's test interface revenue grew approximately 25% year-over-year in full year 2021, and I'm excited about the opportunities to continue growing at 3 x the market rate over the next few years. In automotive, we are leveraging the large installed base of Cohu equipment to deliver active thermal contactors controlled by our handlers. In 5G millimeter wave, we are leveraging our contactor and semi test expertise to develop new products and expand our addressable market. We are uniquely positioned to leverage our equipment expertise to solve our customers' test challenge and deliver a complete solution across all markets that Cohu serves. Equally important, we continue to grow gross margin as we increase our low-cost insourcing at our factory in the Philippines. Thank you. Next, I would like to introduce you to Yves Hirschy, our Vice President and General Manager for the Inspection and Metrology business.
Thank you, Devin. Hello, everyone. This is Yves joining from our Inspection and Metrology Innovation Center in Switzerland. Our focus is to develop vision technology products like Neon that drove Cohu's rapid growth in the inspection and metrology market last year, delivering 130% revenue growth year-over-year. We are now working to bring to market new technologies for inspection and more precise solution for metrology of advanced packages. Advanced packages actually deliver more functionality by integrating multiple dies in a package, thus increasing the quality requirements of each die in a stack. Today, we address three main markets. First is system in package, which integrates small form factor Wafer Level Chip Scale Packages to deliver ultra-fast mobile connectivity, typically used in 5G applications. Next, we address the analog market driven by automotive EV with a focus on emerging silicon carbide technology.
This new semiconductor-based material delivers higher power efficiency that is critical for electric vehicles and many industrial applications. Finally, we are expanding into Inspection and Metrology of 2.5D and 3D advanced packages, enabling the next generation of high-performance computing, advanced processors, and also life-critical decision-making automotive ADAS. Our customers face many complex challenges as they transition to system in package. This package technology brings smaller structures requiring higher inspection quality. It is critical for customer to identify defects and micro cracks. The challenge is to differentiate real defect from cosmetic patterns and reduce over-rejection. Cohu NV-Core provide leading-edge inspection in the standard and high-resolution visible light spectrum, but also go further, providing true infrared vision capability combined with deep learning to optimize yield. True infrared provide 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 defect. Cracks potentially impact performance, while scratches do not. The challenge then is to distinguish between the two in high volume production. Our NV-Core vision technology has unique capability, proven in high-speed production, to find real defect and minimize over-rejection. The benefit to our customers is a significant increase in yield. Depending on the customer device, we estimate that 1% yield increase deliver cost savings of $1 million per system per year. This explain the success of our Neon product, which integrate all necessary features for leading-edge Inspection and Metrology quality in volume production. The key challenge with automotive power modules is yield loss because they integrate multiple dies into a single module. One single die defect can lead to failure of the entire high-value module.
For example, a module integrating 24 dies with 99.7% yield per die will decrease the final module yield down to 93%. The customer interest is then to ensure that every die is fully functional before assembly into the final module. Cohu offers a unique known good die solution to confirm the full functionality of each single LED die via electrical test, followed by visual inspection, enabling total quality from wafer to tape pocket in one machine in one process flow. The outcome is a process capability that delivers up to 7% higher yield processing known good dies for applications. As previously mentioned, we are expanding our inspection and metrology expertise for high-performance digital devices. Advanced packages are more and more commonly used for critical automotive ADAS application, as well as high-performance computing in data centers, graphics, artificial intelligence, and any dedicated high-end computing function.
Our customers are faced with the challenge of meeting tight quality requirements in high-volume production, ensuring quality by inspecting and measuring ever smaller features in larger and very expensive devices. We are developing a new inspection and metrology system for advanced packages, which enable detection of smaller defects in addition to increasing productivity by 30% and bringing readiness for Industry 4.0 factory automation. The plan is to release this disruptive product to market in the first half of 2023. In summary, we deliver value to our customers with higher inspection yield, accurate metrology, and doing so at production speeds. We target to grow our inspection and metrology revenue two times faster than the market over the next three years. Thank you for your time, and next you will hear from Chris Bohrson, Senior Vice President of Cohu Global Customer Group.
Thank you, Yves, and hello, everyone. Today, I will give you an update on our service and data analytics businesses. As part of Cohu's recurring revenue, the service business includes the supply of spares, device kits, instrumentation board repairs, and service contracts for our large installed base of systems. More recently, we started offering a software product called DI-Core for data intelligence and analytics. The value proposition for both services and DI-Core is enabling customers to improve equipment uptime, resulting in higher production output per system. Based on inputs from customers, the annual value of 1% higher uptime ranges from $10,000 to $400,000 per test cell. The $10,000 estimate is based on cost avoidance.
However, because many of our customers can be capacity constrained, the $400,000 estimate is the value of lost revenue, as customers may lose market share in the short term because they cannot easily add capacity. These estimates, of course, will vary by customer. Referring to the left-hand side of the page, we plan to grow the spares and board repair business with a continuously expanding global equipment fleet, which currently stands at approximately 23,500 systems, and by promoting better spares management to customers with below-average uptime. Services is an attractive part of Cohu's portfolio. It is stable, growing year-over-year, and delivers attractive gross margins of 50%+. It represents the large, non-CapEx-dependent part of Cohu's business, along with the interface business that Devin Sheridan described. On the right-hand side of the chart, I cover data analytics with Cohu's DI-Core software products.
These software products provide customers the ability to monitor their equipment and proactively correct anomalies. Cohu's opportunity is to leverage the large installed base of equipment into a stable and highly profitable revenue stream by selling software licenses and subscriptions for functionality that will deliver greater equipment uptime and output. DI-Core is an umbrella name for Cohu's suite of software products focused on increasing equipment uptime and production output. The first product, called InSight, is outlined on the left-hand side of the page. InSight is available today and deployed with multiple customers. The key features include online monitoring of equipment and production, central management of equipment applications, and alarm reporting. Customers invest in InSight to increase productivity, but also to reduce the cost of managing the test floor. On the right-hand side of the page, you will see another product called PDM software.
PDM is an industry acronym for predictive maintenance. This is a new product from Cohu that is currently undergoing beta evaluation with lead customers. To predict the useful life of critical components, Cohu's Predictive Maintenance software is a condition-based monitoring product that tracks several equipment parameters, making use of sensors available on our machines. Roadmap functionality will include machine learning computation. In real time, the software provides information to customers enabling proactive replacement of components and correction of anomalies. Like InSight, the value proposition of predictive maintenance is to reduce downtime and therefore increase uptime and productivity of our customers' installed base of equipment. To provide an understanding of the value of Cohu's Predictive Maintenance software, on this page, I cover two use cases. These show results of the most recent beta evaluations with lead customers.
The first outlines real-time tracking of thermal performance. As background, Cohu's automation systems enable testing at extreme temperatures, including down to -45 degrees Celsius as shown. In normal production, anomalies can cause the testing temperature to be out of range. Today, the equipment detects these and disables those sites affected. This situation can continue for several days or longer until corrected by a service technician. The result is a loss of output during those days when the equipment is waiting for a service technician to be scheduled. DI-Core will detect this and send an alert, enabling an immediate fix, thereby increasing output. In the case study shown, the test cell running under DI-Core monitoring could deliver approximately 4% higher productivity. The lower example shows degradation of component functionality. In this case, we are tracking the time to pick up a device with vacuum.
Using statistics and analysis, we track the performance and determine which component is degrading, enabling customers to replace and avoid reduced output. To summarize, these examples show significant productivity gains. Based on the value estimates for a 1% gain in uptime that I discussed on a previous slide, it is easy to understand why customers are interested to implement the DI-Core software suite in their fleet of Cohu equipment. Now that I have covered the specifics of Cohu's data analytics with DI-Core, I want to put this in perspective with the broader market opportunity. As shown by the diagram on the left, predictive maintenance is a large and growing market. According to market research, the opportunity for predictive maintenance software as part of the global manufacturing industry is sized at $1 billion and growing at 20% compound annual growth rate.
My point here is that by developing products and expertise with our semiconductor customers, this will enable Cohu to look for adjacencies where we can apply our accumulated knowledge to further expand a high-value and high-margin software business. In conclusion, we are excited about the contribution that the services and data analytics businesses are having on Cohu's P&L. Both add significant value to our customers' operations, increase differentiation for our systems businesses, and add to Cohu's stable recurring revenue at attractive margins. Also, over time, the expansion into data analytics offers new greenfield opportunities to expand the business by leveraging the deep understanding we have of the thousands of systems installed at Cohu customers globally. Thank you for your time, and next you will hear from Jeff Jones, our CFO.
Thank you, Chris, and hello again. Now I'll walk through our recently expanded financial targets and summarize the markets, products, and actions Cohu is taking to deliver shareholder value. Fiscal 2021 was a strong growth year for Cohu, both financially and competitively, as we secured key customer wins in our Semiconductor Test, Inspection and Metrology, and Interface Solutions businesses. Design wins in high-growth segments, coupled with our strong services business and leadership in test automation, was the motivation to expand the target model in mid-December of last year to revenue of $1 billion, delivering EPS of $4 and free cash flow equal to 18% of revenue. Additionally, the target model is based on an organic growth plan over a three year time frame from fiscal 2021 to fiscal 2024. M&A continues to be a part of our strategy and could accelerate achievement of these financial targets.
As you've heard from the Cohu team, our strategy for profitable growth is multidimensional, focusing on fast-growing market segments where Cohu can provide differentiated customer value with premium higher-margin products and services. We've structured Cohu's operating model to be profitable through industry cycles, enabling us to maximize profits and cash as revenue grows. Our priority for capital allocation is reinvestment in the business to support continued growth, and our strong balance sheet also supports potential M&A and returning cash to shareholders through ongoing share repurchases. Cohu has an impressive record of consistent revenue growth over the last seven years, generated by a combination of organic investments and acquisitions. Removing approximately $27 million of fiscal 2021 revenue from the PCB test business we divested in June of last year, we're targeting a CAGR of approximately 7% to achieve revenue of $1 billion over the next three years.
Cohu's path to this revenue target includes contributions from the four growth businesses described earlier. These opportunities are not overly dependent on a particular market segment and are well-distributed among our businesses. Semi Test represents the highest value opportunity. However, the Test Interface and Services growth represents stable recurring revenue. The Inspection and Metrology business delivered significant growth last year, and we believe that our differentiated technology will enable continued expansion, supporting customers' needs in advanced packaging. The strategy described today grows revenue contribution from premium higher-margin products at a faster rate than the automation business. Cohu's revenue has a significant recurring or consumable component that is more stable with gross margins above 50%. Recurring increases as the Interface and Services business grows and becomes a larger percentage of total revenue.
Cohu has also demonstrated a steady track record of gross margin expansion over the last seven years, yielding 10 points of margin improvement with targets set and repeatedly achieved over time. Gross margin for the first half of 2022 is tracking to 46%, benefiting from growth in premium product sales and lower costs from increased insourcing of contactors. The plan is to expand gross margin to 49% with greater revenue contribution from Semiconductor Test, Inspection and Metrology, and Interface Solutions, which will outpace the growth from the automation business. Cohu's priorities for cash generation and capital allocation are investments in technology and product development, consistent and meaningful debt repayment. The Term Loan B has been reduced so far by $265 million, including a $10 million repayment made in Q2. The remaining balance is approximately $85 million.
Cash returned to shareholders through a $70 million share repurchase program, of which 550,000 shares have been repurchased through April of this year. Cohu's business is CapEx light. Capital expenditures over the last three years have averaged approximately $16 million per year, primarily related to expansion of contactor manufacturing. Why invest in Cohu? Because we've demonstrated the ability to execute our plans, delivering progressively stronger results over the last seven years. Because we have a strategy to grow revenue to $1 billion and achieve stronger profitability over the next three years. We're focusing on high-growth market segments where we provide premium products that help solve customers' increasingly complex test and inspection challenges and improve yield. Cohu's gross margin has grown to 46%, and our plan drives margin to 49%.
A richer mix of interface and services revenue will also provide a more stable stream of profitable revenue through industry cycles. We've already demonstrated discipline in managing operating expenses, and increasing profitability strengthens free cash flow that we intend to use for product and technology development, potential M&A, consistent and meaningful debt repayment, and share repurchases. In summary, Cohu is well-positioned to capitalize on market opportunities and deliver financial results in line with our target model. This concludes our presentation, and now we'll move to the Q&A session.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. Our first question comes from Brian Chin with Stifel. Brian, your line is open. You can ask your question.
Session.
Ladies and gentlemen, Brian, your line is open. You can ask your question.
Oh, my apologies. I was on the webcast, so trying to kind of fast-forward into the call. Sorry about that. Yeah, thanks so much for all the significant detail in the investor presentation. Very helpful. Maybe just to kind of begin, this may tap some of the general managers of the segments. Luis, you may want to weigh in here as well. I'm just curious, you know, how does Cohu at this stage work across business lines to harness some of the revenue synergies that certainly are there, apparent, and probably being delivered upon here.
Kind of curious how, you know, based on the organization of the company, based on, you know, the different levels of success in different business lines, how you're sort of really harnessing some of that, those potential synergies?
Yeah. Hi, Brian. Good to hear from you again. Let me chime in here. I think it's pretty simple. I mean, at the end, the center of what we do is the customer, and we do run a centralized sales organization that, with that, we do pull the business unit managers, the product marketing managers together to review sort of the customer opportunities and the customer dynamics. It's really led by, like I said, by the sales team. That's, you know, the whole company really revolves around the customers, and that's the integration point.
You know, if I go back to when you last increased the target model back in December, again, about six months or so ago, it seemed like semi test. There clearly was a lot of good business momentum that you've continued to demonstrate, I think, through the earnings report since then. Luis, I guess I'm curious, yeah. When you look out to the 2024 targets now that you've put a timeframe on it, do you think that, you know, other areas maybe you're being too conservative about maybe the momentum you could see from a revenue standpoint through that timeframe? Again, it seems like a lot of progress that you're making in semi test. Do you think there's maybe still an aspect of conservatism even relative to your outlook?
Hey, Brian. This is Jeff. I would say I think we're tracking to where we thought we would be, and then also, in terms of the target model, you know, back in December when we updated the model, right, if you recall, we had just announced design win in South Korea. You know, in addition to that customer, there were other activities that were ongoing that were very positive, very favorable.
Seeing, v ery good results there, you know, as well as in the test interface business as well as inspection metrology. You know, I wouldn't say we're aggressive. I wouldn't say we're conservative on these targets. I think they're lining up pretty well to the activity and our success over the last, call it, you know, three to six quarters.
Okay. Maybe flipping back either to Luis or maybe Ian back on the semiconductor test business again. You know, what do you kind of expect to be the competitor response towards some of the initial significant successes you're seeing really broadening out the adoption of Diamondx? It is kind of historically a sticky business where, you know, I think some of the gains here could prove beneficial for you. I'm kind of curious what you think what could be the sort of competitive response you see over the horizon.
Yeah, good question, Brian. Why don't have Ian answer that one?
Hey, Brian. Thanks for the question. You know, as we described in our strategy, we're very focused on the mixed signal market. Within that market, you know, we think we have a very solid value proposition with the Diamondx, and we're competing with, especially the larger competitors' liquid-cooled strategy, which is very much focused on the high-performance computing market and with their universal platforms. For those competitive situations, we see that, you know, the larger competitors are still have to focus on that market. Their ability to stretch that platform down to the devices that we're targeting has some limits.
On the flip side, there are a few other competitors that are more focused, more limited, smaller market share, but maybe focused on a single device within that category, let's say power management. We don't see those platforms being able to stretch out of their position, which really allows us to continue to expand on, for our customers on the flexibility of the Diamondx platform and the value propositions that we're developing within our instruments.
All right. Great. Yeah. Thank you so much for your time.
Thanks, Brian.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch tone telephone. Our next question comes from Craig Ellis with B. Riley Securities.
Yeah, thanks for taking the question, and really appreciate all the information today, team. I just wanted to start by following up on one of Brian's questions. He asked about some of the momentum in the business since the target model was set. Jeff, I was hoping that you could just talk a little bit more about where there might be gives and takes, either things that may have been a little bit slower, at least as we sit here today at mid-year or very close to it, or alternatively, parts of the business where businesses simply perform better than the company might have expected, either because end markets are doing a little bit better or the company's execution is a little bit ahead of what the team might have thought six months ago.
Hey, Craig. I would say where we're doing a little bit better than perhaps anticipated or expected at this point would be definitely on the tester design wins and the revenue and the contribution there. We're also doing very well on both a design win revenue front, but also a margin improvement front with the test interface business. As you know, we continue to move more of the manufacturing in-house, and we do that in the Philippines, so we're seeing good progress there. Also in Inspection and Metrology. There was just tremendous growth last year, and we're looking forward to continuing that, particularly when we announce you know a new product here at the end of this year, beginning of next year.
I guess the one item that we're not talking much about today is automation. I would say to date the gross margin there has improved. We're in the low 40% sort of overall that in that gross margin. So that business, you know, it remains strong. It has moderated as we predicted, as we said it would. It's moderated, but it is a profitable business. The price increases to customers helped to offset the increasing costs. I would say in general, Craig, I mean, across the board, I've touched on all of our business units doing a little bit better than originally anticipated.
Yeah, that's helpful. Then I wanted to see if I could jump in to some questions for the SVPs. I'll start with Ian. Ian, from your presentation, it wasn't clear to me which of the market opportunities is the biggest incremental opportunity from here. And on the surface, maybe my inclination would be to point towards the IoT because that's where there seems to be the greatest upside potential for further new customer penetration. How would you frame up the, you know, a ranking of the incremental opportunities and where should we expect that Cohu could be successful with new customer acquisition over the next year? Thank you.
Go ahead, Ian. It's a good question, Craig.
Sure. Craig, yeah, great question. You know, if you look at the slides of the sort of the three main opportunities we outlined, we tried to give a sizing of each of the markets. You know, with $650 million for the analog part of the market, $275 million for the power management, and about $280 million, roughly, right, all these are rough estimates, for the IoT, which expands across multiple device segments. That represents somewhat the overall size of opportunity. I would say they each have their own elements why they're attractive to us. On the analog side, we are fairly well penetrated within a fairly large number of customers.
Being able to expand once those customers have adopted us into more devices within that category, you know, is a great opportunity for us. On the power management side, we're a little bit more behind in terms of the number of customers. We see some good reasons why customers are gonna look for more flexible platforms, and we've seen some of that in the recent design wins that we've had. Finally, on the IoT side, that's certainly an area where from the end market, there's a lot of drive on growth, especially for the lower power, you know, lower performance-oriented nodes that I think suit our Diamondx platform very well. It is starting from a smaller size, you know, overall. That also offers a good opportunity.
I would say, quite frankly, in summary, I think we have opportunities in all three, and we're focused on growing within all three.
Got it. Then the next question may be a combination for both you, Jeff, and Devin. In the past, you've been able to provide us with a scoping of ADAS and EV mixes, a percent of the automotive bucket, and I'm hoping you can do that. As we look at those, Devin, can you just give us a few things that you're focused on executing on both the ADAS side and the EV side as we look out through next year? If you could provide any color on the degree to which, especially with EVs, customers are becoming more worried about battery supply and that being a potential gating factor to EV builds, that would be helpful. Thank you.
Yeah, Craig, I don't have that breakout right off the top of my head here on the EV versus ADAS for automotive. I don't know if, Devin, if you've got any insight into that, but
For contactors.
Yeah, exactly, for contactors. Overall, Craig, we don't, I don't have that data right here.
Yeah, Craig, just one quick comment. Last time we talked about this was handler related last year, and I think we're hovering at 25%-30% of handlers going into EV at ADAS. I don't remember that we broke out the contactors, but let Devin comment.
Yeah. In terms of the percentage of that business today, it's probably right around that 25% to 30% at this point. You know, where the growth is gonna come more, you know, the ADAS, as I put in the presentation, you know, is growing pretty significantly. And that includes the sensors and also the processing that goes around that. The electrification has been, you know, I would say quite exciting. So the growth rate has been pretty significant. The interest is very significant, and that's predominantly because they're, you know, like you said, you know, they're very interested in improving on the, you know, the charging and the drive power. And so that's really driving a higher current density for us, right?
We need to be able to handle a much higher current load. As we put in the presentation, that's an area that we've done a lot of innovation. There's some IP around that. And we've done a lot of work in analyzing it and testing it and optimizing our solution to enable much higher current load. And that is very much in demand. We have a lot of customers that are asking for that, and we expect that to continue to increase as we go forward. The demand there is, again, we see customers, you know, very much interested in getting a lot more help in that area.
Got it. Good to hear. Lastly, before I hop back in the queue, I'll just direct one your way, Luis. Can you just talk about how you're looking at the inorganic growth landscape today? Maybe six months ago, you know, valuations were at a level where that might have been difficult. They've certainly normalized quite considerably. How do you look at what's possible in the environment that we're in? Are there particular areas where you'd like to develop capability, technology, customer, et cetera, over the next 12, 18 months? Thank you.
Yeah. Certainly the environment has changed quite a bit, Craig, and it seems to remain pretty dynamic on a day-to-day basis almost. Our focus is pretty simple. It's the strategy we're laying out in this presentation. If we see opportunities to execute on something that accelerates any one of these vectors that we're putting forth, and assuming we can execute, we will do so. You know, we manage it as a process. We're not sitting idle waiting for, you know, a banker to show up with a great idea. We're actually investigating, scoping the landscape. We meet weekly on this. We have a person dedicated to it in corporate development. Obviously the business unit people on this call get involved in some of the opportunities to assess. Whether it will or when something will happen, I can't tell you.
Fair enough. Thanks, Luis.
Sure.
Our next question comes from Quinn Bolton with Needham & Company.
Thanks for letting me ask a question, and I appreciate all of the helpful information. I wanna start off with Ian. In the past, Ian, it seems like new instrumentation has been key to some of your share gains, whether that's in the display driver segment or Red Dragon in the RF side. Wondering as you look at your share aspirations expanding into analog power management and IoT, do you require additional new instrumentation sets for those share aspirations, or you feel like you've got the right set of instrumentation to accomplish those share objectives?
Yeah, good question, Quinn. Go ahead, Ian.
Sure. Hey, Quinn. Thanks for the question. Let me start with, you know, a lot of the share gains we've been driving, especially within the mixed signal arena, have been really based on, the Diamondx core platform, value with a suite of instrumentations that have been developed over time. That being said, Diamondx is a relatively modern system, really only been developed over the last, roughly 10 years. So it's had a fairly solid growth of new instruments. A lot of the success I think we've seen, especially in the mixed signal arena, outside of, I'll get to your question on new instruments, have really been a result of focus. Focus in terms of our strategy, and we focus also our worldwide app support and focus on certain customers to gain share.
In the midst of that, over the last couple years, we've had a few targeted new instruments come into Diamondx that certainly helped. As an example, we took our strong RF instrumentation for RFM, and we've adapted that for RF IoT and released that onto the Diamondx. Going forward, we do have a pretty solid R&D plan for new instruments. As you can see, you know, there's a fairly large market to go after between analog, power management, and IoT. There are some areas of that market that we're very strong today, and there's other areas that we can see we can drive some improvement versus what we have and what the competitors have.
We have a series of instruments coming out on the Diamondx over the next two years that we think are gonna help us in those corners of the market that we wanna strengthen. Again, it's back to our core strategy, really focused on diversifying into that mixed signal market, covering analog, power, and RF IoT devices.
Great. Thank you. Second question for Devin. You mentioned the insourcing opportunity on the interface side to the Philippines location. I know that's been something you guys have been working on now for some time, but just wondering where are we in that opportunity? Do you still see significant business to insource ahead of you, or are we getting close to a steady state in terms of the percent of the business that will be insourced versus manufactured outside?
Yeah. Go ahead, Devin.
Okay, in terms of insourcing, where we're at today is roughly around probably about 55-60%. Today is what's being insourced. We've made continuous progress there over the last year and a half, I would say. That's been going well. We have a steady, you know, climb going on at the moment. By the end of the year, we think we're gonna be upwards of 80% of the contactors coming internally. At that point, what I would say in terms of percentage is that we would start to steady out, right? We'll continue to look at that percentage and decide if that's still the right number, should we be looking at a higher or lower rate of insourcing. What I would add to that is that's not the end.
Yes, we're gonna insource more, but we're making other adjustments, right? Even the 20% that is outsourced, we have strategies about how to lower that cost. The other aspect I would say is even if you're insourcing 80%, there's efficiency gains that the factory is gonna have over time. I would expect that to continue to improve. Then on top of that, what I'd also say is that we would expect to. We've been investing some of our R&D resources in improving the manufacturing process, so how we do manufacturing. Instead of you know, maybe you know, a non-batch solution but is going into more of a batch you know, process. By doing that, we can lower the cost significantly.
We got a lot of actions, I think, to drive, you know, further gross margin improvement. I wouldn't say at the end of the year, even if we're upward towards our target, that we're done with our gross margin improvement. I think we can go further than that.
Great. Just two, I guess, last ones for Jeff. Jeff, you mentioned the $10 million debt repayment. Obviously, the Fed seems to be in the beginning of an interest rate hike cycle. Wondering if that changes your thoughts on repaying debt, especially if M&A activity may cool given market conditions. Second, I'm not fast enough to do the numbers, but looks like all of the business outside of automation are growing double digits, yet you talked about a 7% CAGR to hit your billion-dollar target model. Should we be thinking that the automation business, I know it was expected to be down in 2022 from 2021, but from 2022 to 2024, does automation relatively, is that relatively stable in the outlook to get to the billion-dollar target model?
Yeah, Quinn, yes. You're right. I'll start with the second one first. That's correct. It's stable. As we said, it moderates and then it remains stable. We'll leverage that business, that leadership, and that market to generate synergistic opportunities for the balance of our products. Mainly, you know, contactors and the DI-Core and so forth.
Any thoughts on the debt, Jeff?
Yep, absolutely. Yep. Yeah, you're right, Quinn. We're watching closely how the rate reacts. We happen to have it locked in at the moment through July, but certainly keep that into consideration as we move forward and very sensitive to that, to the increase.
Understood. Thank you.
Our next question comes from Hans Chung with D.A. Davidson.
Yeah, thank you for taking my question. I guess my first question is regarding the probe, our probe card, the new temp, a new SIM. Maybe just can we understand, like, what's the current landscape here, or what's potential opportunity you are looking for here, near to medium term? Who might be the direct competitor here? Any other momentum in terms of designing going on, et cetera?
Hey, Hans, this is Jeff. Good questions for Devin to talk about the probe opportunity and competitors.
Thanks for the question. Really, we're in the early stages of the probe card opportunity we have. You know, millimeter wave is a big piece of that. It does extend a bit beyond millimeter wave. In the short term, you know, we've been in kind of the single-digit range in terms of the revenue opportunity, but we expect that to grow at a much higher rate. You know, basically going in next year and possibly doubling. That's due to a number of activities we got going on with customers today. You know, we've had some early design wins. We're expecting more. You know, we're very excited about this and our ability to take it further.
Because, you know, one is we've got a pretty strong IP. I think we've got a great solution going in. It solves a lot of problems our customers are having. And it's not easy to solve it, especially at millimeter wave, because basically your tolerances at that frequency range are very small. So you have very, you know, low room for error there. Our competitors there, you know, probably some of the bigger ones. So in terms of, you know, there's membrane manufacturing from FormFactor, Technoprobe. They're all, you know, in this area. But the way that, you know, what we've seen in terms of generally the customers, how they're solving it's a difficult path.
What we've done is taken, you know, common materials that our customers are very used to, and generally that means that they don't perform at millimeter wave frequency. Our IP then drives the performance of those materials up so that we're able to operate in that millimeter wave frequency. We've demonstrated this and we've had some sales in this area and, you know, we're very excited to ramp with our customers and drive much higher revenue here in the next year.
Got it. That's very helpful. I guess next just if what we have to kind of look at the other contributor to the gross margin improvement, let's say, to target 49% in next few years, then can you order, like what's the major contributor? I know this could be the mix, and it could be the contract outsourcing or the manufacturing efficiency improvement and so on. Just kind of walk through, like, the key contributors and then what could be the biggest one and then the smaller one? Thank you.
Yeah, you bet. I'll take that one, Hans. For the first half of this year, you know, our Q1 actual was roughly 46%. We guided again 46% Q2. In order to take it to 49%, Mix has a big impact. You mentioned mix. In fact, we're expecting the growth of these businesses that we're talking about today to improve the gross margin over the next three years. As SemiTest grows, we're expecting that to reach about 30% of our revenue. With the test interface business, we're expecting that to reach about 20%, and then Inspection Metrology reaching about 10%. At that point, they become the majority of the revenue. The automation becomes about 40%.
It's also important to note the systems versus recurring mix. The model is about 45% recurring and 55% systems. As you've seen on the most recent quarterly earnings presentations. That recurring in total, the gross margin there is over 50%. By and large, it comes down to mix. We're also doing other things in operations, as Devin has elaborated on, in terms of insourcing and gaining efficiencies as in-house manufacturing increases. Those are the major points that I would touch on today.
Got it. The next question is, can you help me understand just regarding the capital allocation. Do you have a like big picture, like how much the percentage is going to maybe to the capital return to shareholder versus the potential looking for M&A acquisition and so on. Just kind of high level thoughts that can like as we continue to go through the 2024.
Yeah, absolutely. The item that we're highly confident on is the reinvestment in the business, you know, through R&D and product development, and that's in the range of, you know, 10% to 12% of sales. The balance of your question is pretty difficult to answer. You know, with M&A being part of the strategy, and there's a lot of uncertainty with M&A, not only from when a transaction would happen, but also the size of the transaction. You know, we want to have the dry powder to respond, to act quickly on opportunities. We believe, we strongly believe that the business, you know, needs to continue to grow, has opportunities organically. But again, it's part of our strategy to continue with acquisitions. It becomes difficult to put numbers behind that.
Now, we do see it, you know, it's important to continue to return capital to shareholders. As you know, we have a share repurchase program in place. Once we run through that share repurchase program, you know, we'll have discussions again with the board of directors about reestablishing the share repurchase program or means to continue to deliver capital back to the shareholders.
Then just last one, a quick follow-up on the M&A related. As you going forward, what kind of the strategy you would implement, I mean, in terms of the potential target? Like, what kind of the business you will be interesting to you guys? I mean, basically, it could be like a very new market, adjacent market, or it could be just do consolidation, or it's very high synergy, very strategic or very high margin type of business. Just any kind of the color, like what kind of the strategy you are looking for?
Yeah, you bet. Yeah. I think you've touched on many of the criteria. You know, as Luis indicated, we're interested in M&A that accelerates the strategy that we've talked about here today. In any of these growth vectors, acquisitions would be interesting to us. Even going beyond that, yes, there are criteria in terms of growth markets, in terms of gross margins, and in terms of the synergies that we can generate out of any acquisition. Those are all internal metrics that, you know, we track, we have objectives. At the end of the day, we do measure the internal rate of return, and that has to hit a threshold of 20% or higher.
I would say from a market opportunity, it would be everything we talked about today and accelerating that strategy. The criteria for an actionable target would be gross margin, market growth, market position, and potential synergies.
Copy. Thank you. I'll jump. Thank you.
Thank you.
Our next question comes from Toshiya Hari with Goldman Sachs.
Hi, thank you so much for taking the question, and thank you for putting this event together. I had two questions as well. First, on the data analytics business. I think you guys talked about a SAM of, I think roughly $25 million today, you know, going to $35 million in a couple of years. I think in one of the slides, you also had the broader predictive maintenance software market being about $1 billion, and I think you mentioned your ability to potentially tap into that broader market over time. Just curious how you're thinking about your ability there to again grow beyond the $25 million SAM, and what kind of timeline we should be thinking about as we monitor your progress.
Hi, Toshiya. This is Chris. I think we think about data analytics is, first of all, we do have a big opportunity within the Cohu install base that we really just have started to tap. Our intent with that would be to develop additional expertise, which we could then leverage into looking at adjacencies.
Then think about how to attack those adjacencies. I would think about that as a kind of a midterm because we do have some progress to make on the Cohu install base. You know, as all along the way, we'll look at organic and inorganic opportunities in order to expand.
Great. Thank you for that. My second question is for you, Jeff. Just on the free cash flow margin target of 18%, obviously significantly higher relative to, you know, what you achieved in 2021. You're guiding to profitability obviously higher than what you achieved in 2021, so I'm sure that's a big part of that. Anything beyond your margins improving over the next couple of years that drives free cash flow margins to that 18% number? You know, specifically, I'd be curious what you're assuming for working capital over the next couple of years. Thank you.
Yeah. Hi, Toshiya. Absolutely, driving that number higher through profitability also, improving management of the assets, particularly inventory and receivables. In 2021, I mean, coming out of 2020 and the steep ramp that we hit in 2021, took a lot of cash to finance the inventory, to finance the receivables. That had an impact on our working capital, had an impact on free cash flow.
Typically, you know, you see that in this business as customers ramp, you know, we have to make the investment in inventory and the receivables. I mean, that's what happened in 2021, where we, you know, we delivered about $85 million of free cash flow or about 10% of sales. Yeah, feel good about the ability to drive that to $1 billion. Excuse me, to 18% of $1 billion.
Jeff, one quick follow-up on the inventory dynamic. I guess quite a few, maybe not so much your peers, but semiconductor companies have talked about potentially carrying more inventory going forward, just given the ongoing sort of episode of shortages and supply chain dislocations. But for you guys, should we expect anything that's different going forward, you know, vis-a-vis how you've been operating over the past couple of years? Or is there really no change in how you think about your setup on the manufacturing and inventory management side?
No, I mean, thanks for mentioning that. That has been one of the drivers as well. In addition to the ramp, we've also gone out to secure inventory, because of the supply chain shortages, not completely across the board, but obviously in those areas and those products that have become hard to get, we've gone out and secured more than we typically would have. Would hope at some point that we're able to relax that, but, you know, it looks like these constraints, you know, will be around for the next few quarters anyway. I would imagine that inventory planning, that inventory is going to remain somewhat elevated over the next, you know, near term, if you will.
Got it. Very helpful. Thank you.
Our next question comes from Craig Ellis with B. Riley Securities.
Thanks for taking the follow-up question. I wanted to dig a little bit deeper into software, where we've got the $35 million TAM out there in 2024. When I look at that relative to the current install base of tools, it equates to about $1,500 per installed tool. I wanted to see if you could help us better understand which tools the software would be most relevant for since, you know, most enterprise software would be attaching at a much higher rate than $1,500. I suspect it may not be relevant for all tools. Can you talk about the growth in the application suite, not just over the next couple years, but maybe a little bit more about what the vision is three to five years from now.
For a business that's small but quite powerful for gross margins, we have a better sense of the intermediate to long-term potential of the business. Jeff, you've been, excuse me, Luis, you've been asked a few times about M&A, including by myself. How would software rank on the list of priorities relative to some of the other businesses? Thanks, team.
Craig, this is Chris. Let me first talk about the market size to give a perspective on that. When we size the market, I think in Luis' slide, and I mentioned in my slide, there's 23,500 systems. We look at a subset of that because those are the systems that we really think customers will be most interested in. A way to think about the subset is those are really the more recent or modern handlers. That's the initial target for the DI-Core software suite.
You know, the actual amount per handler that we think about is closer to, say, $4,000 or $5,000 per year than it is to the $1,500 that you mentioned, 'cause obviously, the denominator is smaller. Secondly, in terms of the perspective on longer term, we have a product right now called InSight, which we've introduced. That product is primarily focused on, to put it at a high level, really on monitoring and managing the installed base of handlers.
We are in beta right now with the Predictive Maintenance software, which should provide customers the ability to get higher uptime and higher output because they can now anticipate, you know, problems and anomalies and correct those in advance. Beyond that, we are looking at technology additions to that, which would include machine learning for additional data collection and analysis for additional uptime improvement. Even beyond that, we're looking at more what I would call device tracking, whether you're tracking thermal performance or other aspects of the device in order to look at yield improvement. Those are sort of the categories that I would think about in terms of the roadmap going forward.
Let me step in on the M&A here. Craig, it does rank high because it is part of our strategy. As you can imagine, this is, again, law of small numbers. Whatever we're doing here today, or even in the near future, would still be, you know, relatively small for a $1 billion revenue target, but obviously high margin, interesting in terms of applicability, across our equipment base and potentially more over time. It's a developing story like it was when we got into the Interface contactor businesses, about six years ago, and when we started launching Inspection and Metrology four years ago. It's still in the early infancy.
We have a lot to learn, but we think we have a pretty big install base of our own equipment to mine for information and translating to value to customers and ourselves and learn from it and understand how we can continue to deploy that forward. It's kind of stay tuned, you know. The story is developing, we're learning and adapting as we go along. Yes, it is an area of high interest for us.
That's great perspective. Thanks, guys.
Your next question comes from Brian Chin with Stifel.
Hi, thanks. Thanks for the follow-ups. Maybe Jeff, can I just ask you about a comment you made earlier? I know it's not really the explicit focus here of the presentation, but I think you said Cohu certainly has reoriented the business to remain profitable across industry cycles. You're obviously sharing kind of how you expect to achieve the target model. But what, where could you potentially place sort of a normalized earnings or P&L for the company? I mean, we've sort of sketched it out. This is just our projection, but maybe in and around $2.50, maybe that's sort of like a high teens op margin.
Again, a lot of caveats to that, but just kind of curious where you might place that, even if it's not quantitatively, you know, qualitatively? I think clearly the drive pattern is here for kind of reduced cyclicality as the business sort of composition changes over time.
Yeah. Brian, just to be clear, are you asking my thoughts on normalized rates or cyclicality, or what, both?
Yeah, sort of like through the cycle, what do you think a normalized earnings level could be for the company? You know, certainly in a good environment, you know, you've laid out why $4 is achievable. You expect to remain profitable across the cycle. You know, sorry to put you on the spot, but is there sort of a normalized earnings level, we've put it around $2.50, you kind of think about for the business?
Yeah, I think you're in the right range. I think that $2.50 is a bit of a sweet spot. As you know, the business can move, you know, quarter- to- quarter based on cycles, based on customer buying patterns and so forth. In terms of some of the, you know, call it cyclicality that we've seen on a quarter-over-quarter basis, that tends to be a little bit higher than on a year-over-year basis. We typically would follow that normal seasonality. When we say roughly $2.50, it would be, you know, a little bit lower, seasonally lower Q4 and Q1, stronger Q2 and Q3.
You know, given the growth in the recurring business through the contactor business, the strong recurring business we have with all of the systems in the field, you know, certainly that business is less susceptible to any cyclicality. And then with the broadening of the tester business, you know, beyond RF, we anticipate that will also have a bit of a, you know, a muting impact, if you will, on cyclicality. I would say sort of quarter-over-quarter, we're still gonna be subject to customer buying patterns, things of that nature. You know, perhaps 10%, 10% to 15%, maybe quarter-over-quarter, and particularly if we look back in history, I think we can support that.
On a year-over-year basis, you know, we think of cyclicality, you know, in single-digit, maybe high single-digit, at least over time. That's what we've seen.
Let me add here. We're not targeting to be $1 billion, $4 EPS and the best year ever. We're obviously not accounting for a recession either. There are worst case scenarios out there when the macroeconomic environment goes to hell, basically. We're looking at the company performing annually at that level that we're targeting to achieve here in the next three years. You know, all things being equal, which is not in this industry, as we all know, all things being equal, operating at that plateau and then creating the plan to go forward from there. I think the number that Jeff just quoted is sort of where you are now if you take a peak-to-trough average, but that's not where we wanna be in three years' time.
Yeah. No, it makes sense. I think you know the handler business could operate at more of a on a cyclical frequency, but these other businesses, there are ones where you basically would establish a higher foundational level as you sort of tap into those segments. Maybe one last question.
Go ahead, Brian. I wanna make a comment about the handler business too, but go ahead.
Yeah. Go ahead. Sorry.
I was just gonna say, the handler business too, we have over the last two, three , I think 2.5, actually, years, we really have resized the R&D investment in it to a point that it can much better sustain now the sort of the cyclicality of the business, as if you will. I mean, it operates at a definitely at a much lower than corporate consolidated R&D investment level. It doesn't require much of a field application. So it is a business that, yes, it does have a low degree of cyclicality on the top line, but it is substantially skinnier down and down at the operating expense level.
Got it. That's helpful. Just kinda one last thing. This sort of cuts across, you know, a lot of the presenters and the slides, but, you know, increasing customer productivity output and yields, that, you know, I mean, that cuts across. Yeah, that's basically a core value proposition. It's also a way you win business, the way you sustain business, you know, and intrinsically, a way you lower costs, right? Cost of test. I think there's concerns out there that the cyclical aspect of sort of what's driving the business could soften a little bit. I'd imagine structurally, with a lot of your customers that you talk to, I mean, you really struck a chord here, right?
Yeah, maybe there's a kind of a little bit of a cyclical aspect to this today, but kind of structurally, most of them are probably fearing there's gonna be too little supply, they need too much demand, you know, over the next several years, certainly even into the back end of the decade. I mean, do you think the market generally is just sort of a little bit too narrowly focused in terms of thinking about the cyclical aspect of this and not sort of really fanning this out to think about sort of where this train is going ultimately, and how you've really tapped into something in terms of, you know, flexibility, functionality, small form factor at a relatively lower price point? I mean, it seems like it could be fairly potent over time.
Yeah, that's our view, Brian. That's our view. I think Ian put it well relative to the Diamondx tester. It is a low-cost, basically air-cooled universal platform. We have an instrumentation suite for that. We're broadening that instrumentation suite over the next couple of years. Probably will continue even beyond that, obviously. We have some serious investments to make that happen and deliver a low-cost solution to market. I do think that there is a very high degree of focus on cyclicality among investors in the industry and among investors, right? It's a capital-intensive business, so it has its ups and downs.
When we look at our business over the last 10 years, and you look at a quarter-to-quarter fluctuation, you know, you don't get more than a ±15% quarter- to- quarter in aggregate. If you look at even average of quarter to quarter over that 10 year period, you really end up with single digit. That concept of cyclicality, I think it's a bit of history and perhaps even more so history of when Cohu was a $300 million predominantly handler company. You know, today operating at, you know, $800 and some to $900 million, it's a different business profile when it comes to that.
We have multiple market segments, multiple products, and, you know, it's, they kind of offset each other, and we have a very large recurring business stream as well, revenue stream that I think the cyclicality is a little overblown, to be honest with you.
Okay. Yeah, appreciate the color. Thanks, guys.
Our next question comes from David Duley with Steelhead.
Yeah. Thanks for taking my question. I'm sorry I had a little technical difficulty earlier. I just wanted to ask about the semi test business. You've listed, you know, your the growth rate of the industry, I guess, roughly at 6%, and your target revenue is 14% growth. The reason that you think you can grow more than 2x the market, I'm assuming, are these new product segments that you've talked about. Maybe you could just kinda handicap and help us understand, you know, where the most growth is going to come from these three areas that allow you to essentially outgrow the market?
Hey, Dave. We'll pass that over to Ian.
Thanks, David. So, look, you know, I think I'd start with our view of the future at growing at 14% is really to continue the momentum we've been on, in terms of gaining share and really getting a fairly large, you know, $1.5 to $1.8 billion market to continue to see the value of our platform, our platform strategy. And that's really underlying it, right? Why we can outgrow the market? You know, as you asked, I think this is similar to a previous question, you know, which of these markets really represent the most opportunity?
I think we actually have taken the entire SemiTest TAM, which, you know, in the last couple of years has grown significantly, and really focused in on the area that we think has a good tie to end market growth, right? You know, these mixed-signal products are really the core of what allows, you know, cars to sense things better, what allows wearables on human beings, right, to measure our health statistics better. There's some underlying reasons why these particular products are gonna grow with these end markets.
Then two, we also have sort of narrowed our focus to just a subset of the entire market where we've sort of proven to ourselves that we have a differentiated platform and we're investing heavily just in those markets to penetrate deeper and like I said, continue the momentum that we've been on. You know, we've been on a 30% CAGR over the last two year growth path, so it feels like a 14% CAGR is a rational number to aim at and well within our ability to do so over the next three years.
As far as the underlying unit growth, IC unit growth assumptions, if you're kind of assuming that your market grows 6%, can we assume that your assumptions for unit volumes are roughly around the same? If unit volumes happen to grow, let's say, at 10% over the next three or four years, the period of this 2021 to 2024 that you're showing in your slides here, what would happen to the growth rate of your test business?
That's a great question, right? Because we do look at not only you know the ATE growth rate, but also the underlying semiconductor growth rate in terms of revenue, but also even below that, the unit volume growth as well. In many cases, the unit volume is actually growing higher than the overall ATE rate that we see, and even higher, frankly, than the semiconductor revenue, our customers' revenue per year. It varies in the different marketplaces. You know in sort of a recent set of data that we've looked at for these numbers, you know the markets we're looking at from a semiconductor test are growing 6% to 8%.
In some cases, the higher volume applications, like the automotive ASSP that we're targeting, are growing closer to 10% to 12%. I think you're right that the underlying unit volumes are growing faster than the market size that we're describing. A piece of that is our value proposition is better efficiency. We're going out there with systems that offer, you know, more throughput per test cell versus the existing systems, and that allows us to displace them. It also means that we're offering a lower cost of test that these, you know, our customers really demand. I think your premise is exactly right.
Unit volumes are growing faster than the underlying market rate, and we intend to grow our business and our share faster because we're gonna improve on the efficiency of the tester.
Okay. One other question from me as far as the handler business goes. You know, we've certainly seen, you know, automotive unit volumes not be at what we would initially have expected, you know, for a variety of reasons. Maybe we fast-forward, you know, six or nine months, and we're back to normal production levels in the automotive market. I guess, first off, what do you think the unit volume growth in automotive can be over the next couple years? And then how would that translate to your handler business starting to grow again, or what kind of growth rate it could achieve?
You're asking specifically on the handler business side, Dave, not the tester in this case?
Yeah.
Okay. Well, we saw
You can also talk about the tester side too, if you like. That's fine.
No, it's just that you pivoted there. I would just make sure that that was the intention. We saw obviously a bump in the beginning of 2021 on the handler business, kind of a snapback from a very constrained 2020, as we all know. As we spoke, even in the middle of last year, we said we expected a moderation on the handler business, which we're seeing it now. It's still a strong business, but it moderated from that bump that we saw in the first half of last year. What we expect the handler business to be is, it, you know, it's gonna be, you know, sort of it's gonna continue to grow with the automotive business, but basically back to the 2021 level, if you will.
You know, we expect it to be roughly flat for the three-year period that we're outlining here. In essence, it is a moderation after a snapback in 2021 and then, you know, a steady climb back to the same level. Vis-a-vis, if you look at 2021 to 2024, essentially, flat. It goes down and then it comes back up to the same level.
Now, is there an opportunity or is there a chance that the market can grow again in this period if automotive production snaps back or if EV's growth is higher? Or what could lead to upside in the handler market over, you know, in, let's say, 2023 or 2024?
I don't know. I mean, we do expect the automotive business to grow indeed. Like I said, it basically just grows to recover from the moderation after the snapback in 2021. It's not that the industry is not growing, it's that we have a high bar for starters in 2021, and then a moderate down in 2022, and then slowly climb its way back to 2021 level. The starting point being 2021 in our analysis here was a high bar for handlers. Then it, you know, it contracts in 2022, and then it steadily, slowly grows to that same level in 2024. Now it's a small growth rate relative to everything else, and from the starting point, like I said, it's about flat.
Okay, thank you.
I'm not showing any further questions at this time. I'd like to turn the call back to Jeff Jones for any closing remarks.
Okay, thank you. On behalf of the entire Cohu team, I'd like to thank everyone for participating in today's event, and look forward to meeting with you again real soon. Thank you.