Cohu (COHU) Q4 2025 earnings review
Revenue Recovery Confirmation, Profitability Still Elusive
Cohu delivered a 30% YoY revenue surge, confirming the cyclical bottom is behind them. Utilization rates hit 76%, a critical threshold for recovery. However, the celebration stops at the top line. Non-GAAP Gross Margin compressed unexpectedly to 40.8% (down from 44.1% in Q3), and a heavy tax provision widened the Net Loss to $7.2M. While the AI pivot is gaining traction with Eclipse and Neon system wins, the immediate financial picture remains messy with ongoing losses despite the volume recovery.
🐂 Bull Case
Test cell utilization reached 76% in December, up from 74.5% in Q3 and 73% a year ago. This metric is the primary leading indicator for capital equipment spending; approaching the 80% threshold usually triggers significant capacity expansion orders.
The pivot to AI is yielding tangible results. Momentum is building for the Eclipse handler (active thermal control for 3,000W processors) and Neon inspection systems (HBM memory), with HBM revenue forecast at $10-11M for the year.
🐻 Bear Case
Despite higher revenues (+30% YoY), Non-GAAP Gross Margin fell sequentially to 40.8%, significantly missing the ~45% expectation set in the prior quarter. This indicates negative mix shift or pricing pressure that volume growth hasn't fixed.
The company remains unprofitable on both GAAP and Non-GAAP bases. A surprisingly high tax provision ($8.7M) in a loss-making quarter exacerbated the bottom line, resulting in a Non-GAAP EPS of -$0.15.
⚖️ Verdict: ⚪
Neutral. The top-line recovery is undeniable and the AI narrative is real, but the degradation in gross margins and persistent cash burn (operational) prevent a bullish rating. Execution on profitability is lagging the sales recovery.
Key Themes
Gross Margin Compression
Q4 Non-GAAP Gross Margin dropped to 40.8%, a sharp decline from 44.1% in Q3 and 41.8% a year ago. In the Q3 call, management guided for ~45% margins in Q4 due to favorable mix. The actual result missed this significantly. This disconnect suggests potential cost overruns or an unfavorable product mix shift that management failed to anticipate.
Recurring Revenue Strength
Recurring revenue continues to be the backbone of the recovery, growing 25% YoY and 4% sequentially. It now constitutes approximately 60% of total revenue. As the installed base utilization rises (76%), this high-quality revenue stream should theoretically support margins—making the Q4 margin miss even more perplexing.
Tax Provision Weight
Despite a GAAP pre-tax loss of $13.8M, the company recorded an income tax provision of $8.7M. This follows a volatile tax pattern (Q3 had a benefit). This tax burden pushed Non-GAAP net loss to $7.2M, significantly weighing on EPS (-$0.15) compared to Q3 (-$0.06).
AI & HBM Momentum
Cohu is successfully validating its thesis in AI. The Eclipse handler is winning designs for high-power AI processors (up to 3,000 watts), and Neon inspection systems are seeing repeat orders for High-Bandwidth Memory (HBM). Management reiterated robust design-win momentum in computing AI and HBM inspection metrology.
Cash Position Swells via Debt
Cash and investments jumped to $484M from ~$200M in Q3, driven by the issuance of $287.5M in Convertible Senior Notes. While this fortifies the balance sheet for potential M&A, it introduces leverage and interest expense in a period where the company is still operationally loss-making.
Auto & Industrial Lag
While Mobile and Compute are showing life, the 'elusive' recovery in Automotive and Industrial continues to drag. These core legacy segments are preventing a V-shaped recovery, keeping the company dependent on specific AI/Mobile wins rather than broad-based market uplift.
Other KPIs
Accelerating. Up from 74.5% in Q3 and 73% in 24Q4. This is the most critical leading indicator for the equipment industry. Crossing 75% typically signals the end of the inventory correction phase.
Reversing downward. Deteriorated from -$0.06 in Q3, despite revenue being roughly flat to down slightly. Driven by lower gross margins and higher taxes. Still an improvement vs -$0.23 in 24Q4.
With a GAAP Net Loss of $74.3M for the year and significant working capital needs during the ramp (Inventory $129M, AR $109M), cash generation from operations remains challenged.
Guidance
Stable. The midpoint of $122M is flat sequentially vs 25Q4 ($122.2M) but implies strong acceleration (+26%) YoY compared to 25Q1 ($96.8M). This suggests the recovery floor is solid, even if sequential momentum is pausing.
Key Questions
Gross Margin Disconnect
Q3 guidance called for ~45% margins in Q4 driven by mix, yet actuals came in at 40.8%. With recurring revenue at 60%, what specifically caused this 400bps miss? Was it pricing pressure or one-time inventory costs?
Tax Rate Volatility
The $8.7M tax provision in a loss-making quarter severely impacted EPS. Is this level of tax expense the new normal for FY26, or was this a one-time true-up?
Convertible Debt Usage
You raised ~$250M net cash via convertible notes. Given the pause in buybacks and current operational losses, is a significant M&A transaction imminent to accelerate the AI/Software strategy?