Cohu Inc (COHU) 2003 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Cohu fourth quarter and fiscal year 2003 operating results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host Mr. James Donahue, President of Cohu Incorporated. Thank you, Mr. Donahue, you may begin.

Good afternoon everyone and welcome to Cohu's conference call covering our results for the fourth quarter of 2003. With me is John Allen, our Chief Financial Officer. I hope you have a copy of our earnings release, if you don't you can obtain one from our Web site, cohu.com or by contacting Cohu Investor Relations at 858-848-8106. I'll first provide an overview of our results, John Allen will then take us through the numbers in some detail, and I will conclude with comments on operations and our view of the business environment going forward, and we will then take some questions. First John will make necessary disclaimers covering forward-looking statements, estimates, and other matters, which we will cover in today's call. John.

Before we go on, I must remind you that the company's discussion will include forward-looking statements, reflecting management's current expectations concerning certain aspects of the company's future business. These statements are based on current information that we have assessed but which by its nature is subject to rapid and even abrupt changes. Forward-looking statements include our comments regarding the company's expectations regarding industry condition and future operations and financial results, and any comments we make about the company's future in response to your questions. Our comments speak only as of today, January 28, 2004 and the company assumes no obligation to update these comments. The company's actual results may differ materially from those stated or implied by our forward-looking statements due to risks and uncertainty associated with the company's business which includes but are not limited to the concentration of our revenues from a limited number of customers, intense competition in the semiconductor test handler industry, inventory write-off, value to obtain customer acceptance and recognized revenue. The typical and unpredictable nature of capital expenditures by semiconductor manufacturers, goodwill, and intangible asset write-down due to impairment testing required by accounting standards, Cohu's ability to convert new products under development into production on a timely basis, support product development and meet customer delivery and acceptance requirement for next generation equipment, difficulties in integrating acquisitions and new technologies, and other risks addressed in filings with the Securities and Exchange Commission including our Form 10-K for the year ended December 2002 and our most recently filed Form 10-Q. We assume no obligation to update any of the information shared in this conference call. Our comments and responses to any questions will not make reference to any specific customer, as we are on disclosing such information by our non-disclosure agreement. Jim.

We are pleased that Cohu has reported improved sales, operating, and pre-tax income for the quarter and for the year ended December 31, 2003. Our improved fourth quarter results are due to Delta Design, our semiconductor test handling operation. Cohu's sales for the fourth quarter were $40.9m compared to $28m for the fourth quarter of last year, and $34.5m for the third quarter of 2003. Pre-tax income in this year's fourth quarter was $1.9m compared to a pre-tax loss of $2.9m for the fourth quarter of 2002, and a pre-tax loss of $715,000 in third quarter of 2003. The income tax provision for the fourth quarter of 2003, includes a noncash valuation allowance, on deferred tax assets and other items, resulting in a net loss of $2.2m or $0.10 per share, compared to a net loss of $566,000 or $0.03 per share for the fourth quarter of 2002, and a net loss of $615,000 or $0.03 per share for the third quarter of this year. Cohu operated profitably during the fourth quarter, but various noncash income tax items including the valuation allowance I just mentioned, were recorded in accordance with accounting requirements and converted our pre-tax income into a loss. Orders for the fourth quarter were $35.5m compared to $34.5 for the third quarter. Backlog was $37.5m at December 31, 2003 compared to $42.9m at September 30, 2003. For the full year ending December 31, 2003, sales were $138.6m compared to $134.7m in 2002. The net loss for 2003 was $47,000, essentially breakeven compared to a net loss of $878,000 or $0.04 per share in 2002. John, will now provide details on our financial performance.

Semiconductor equipment related revenue for the fourth quarter were approximately 81% international and 19% domestic. International sales were distributed 83% Asia-Pacific, and 17% the Americas. Gross margin in Q4 was 36.7% versus 30.5% in Q3. The increase in gross margin was primarily due to higher business volume, reduced provision for excess inventories, and increased revenue recognized under SAB 101, during the fourth quarter in our semiconductor equipment business. R&D expense was $6.7m in Q4 compared to $5.6m in Q3. The increase in R&D was attributed to increased spending on our new test handled products, including the DELTA EDGE. We expect our Q1 2004 R&D to be above the same or slightly lower than in Q4. SG&A expense was $6.9m in Q4 compared to $6.3m in Q3. The increase in SG&A was due to a higher sales volume and related expenses including commissions. We expect Q1, 2004 SG&A to be about the same as Q4. Interest income was $429,000 in Q4 compared to $683,000 in Q3. Q3 interest income was higher primarily as a result of gains from security sale. As we noted in our press release, and as Jim alluded to earlier, the income tax provision for the fourth quarter include among other items, a noncash valuation allowance on deferred tax asset, recorded pursuant to accounting requirements resulting in an abnormally high effective tax rate of 100%. We have taken a very conservative view on the realizability of our deferred tax assets, which resulted in recording the evaluation allowance and the increase in income tax expense in Q4. We expect our tax rate in 2004 to be significantly lower at a statutory 35% federal rate, due to the benefits obtained from R&D credit and export sales. The net loss per share in the fourth quarter was computed based on $21.3m weighted average shares. The effective stock option was excluded from the quarter and yearly calculation, as their inclusions would be anti-dilutive.

Moving briefly to the balance sheet, cash and investments of $107.6m at December 31, were unchanged from September 30. Net accounts receivable of $25.6m were essentially the same as of September 30, and represented about 57 days sales outstanding, which is considered excellent for the semiconductor equipment industry. Net inventory increased to $31.6m from $29.8m at September 30, primarily as a result of inventory purchases to meet sales demand for our new Delta Edge handler. Addition to property, plant and equipment for the year, we're approximately $1.7m, and depreciation and amortization was approximately $4m. Deferred profit decreased to $4.1m at December 31, from $7.8m at September 30. The decrease resulted primarily from the recognition of revenue, under Staff 101 on our new Delta Edge handler and other test handler products. Jim.

During the fourth quarter, the Castle handler represented 20% of unit orders, while Summit and other products comprised 14%. Our newest test handler, the Delta Edge accounted for 66% of unit orders, up from 47% in Q3. This system which we began shipping in volume in mid 2003 is off to a fast start. The Delta Edge is enabling IC manufacturers and tested contractors to make more efficient use of their test equipment and to lower their cost of test. a highly successful Summit thermal field upgrades were consistent with Q3. This proprietary active thermal control or ATC technology increases the power penetration capability of the handler, and enables customers to optimize the speed grading of the latest and fastest microprocessors. This is very important, since higher speed, I mean higher ASP. During the fourth quarter, we established a manufacturing operation for handler kits in the Philippines. Kits or tooling configure a test handler for a particular IC package. Customers require new kits on an ongoing basis as they introduce new ICs. Our facility is being ready, fabrication equipment installed, and personnel hired. We expect to be producing and shipping kits this quarter. The operation is located near Manila, and enables us to provide our customers most of whom are located in Southeast Asia with quick delivery. We believe that the favorable labor rates in the Philippines will allow us to provide competitive prices going forward without a negative effect on our margins. Turning briefly from semiconductor equipment to our other operations, Cohu's BMS unit continues to make shipments of Microwave Communications equipment in connection with the $8.5m contract received last year from the United Arab Emirates Armed Forces. This system is designed to provide the UAE with real-time video monitoring of its borders via aircraft, land vehicles, and ships. We currently expect that deliveries will be completed in Q2 of this year with customer acceptance and revenue recognition as possible in the same quarter. We are pursuing other opportunities for this advanced Microwave communications technology, particularly in the Middle East where the requirement for border security is critical. Turning to the business environment, conditions in the semiconductor equipment industry continue to improve. A majority of our business is still driven by a handful of customers where we have seen a steady increase in the last few months of customers, who are increasing their forecast. Productivity is also up. It appears that equipment utilization rates, which rose steadily throughout 2003 has finally reached the point of the customers. Even though, its customers who have been ultra cautious in the aftermath of 1999 and 2000 have to add capacity. A number of semiconductor ATE and assembling equipment companies have reported improved orders recently. We are encouraged this early signs on recovery from the severe and protracted down turn in the semiconductor equipment industry is finally underway.

Coho is in excellent shape to benefit from an upturn. During 2003, we consolidated operations, reduced costs, but continue to invest in new product development and customer support. Our balance sheet remained strong, and we are looking forward enthusiastically to the opportunity to grow the business during 2004. And with that, we will be happy to take questions. Operator.

Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick your handset before pressing the star key. Our first question will be coming Mr. Michael . Mr. Trotsky, please state your questions.

Hi, great quarter.

Thanks Mike.

A couple of questions. First on the tax rate for the quarter, can you sort of break out what the pro forma income would have been had it not been for those one-time charges, and going forward, what would be your expected tax rate for the quarter sort of that would be much lower than the regulatory rate?

Sure. Yes, I think, most importantly, looking forward as, as I indicated, the effective tax rate in '04, obviously, you don't know that rate until you are well through the year because it is the function of a number of variables including the level of pretax income, most importantly, and secondarily the favorable impact of things like R&D, tax credit, and export sales, we have significant benefit from both of those, Michael. I think, you know, my sense is our rate -- federal tax rate is 35%. I am guessing that our rate will be, perhaps half of that, maybe 20%, and we'll know better as we work through the first and the second quarter as to a more precise estimate as to what the effective rate will actually be next year. But it will be substantially lower than 35%. Maybe, just speaking briefly about the charge that we took in the fourth quarter pursuant to FASB 109, if you care, which is the accounting requirements , the government accounting in this area. There was a substantial charge as a result of the valuation allowance that we refer to. Without that charge and the reason we didn't put all the numbers in there is, there where so many numbers that we would have to disclose. We felt that, that would better be done in the annual report in the financial statements, which probably takes up a full page. But just briefly, if we had not taken that valuation allowance, Michael, our effective tax rate for the year would have been at the low level of 35%, because we would have had tax credits and export sales benefit that would have driven the rate substantially below the 35% statutory rate for Federal purposes, that would have been substantially less than that. Obviously, with valuation allowance as I indicated, the effective tax rate was basically 100% that was equal to our pre-tax income. And I think just a footnote also as I indicated, the accounting in this area is extremely complex involves some judgment in subjectivity and I think where we ended up with, I think was arguably the most conservative position in this area. And pretty much all the other back end equipment companies, as you will look at, have already taken the year or end of last year or sometime during '03 of evaluation allowance similar to what we have here.

Okay and a follow-up on the United Arab Emirates business, did I understand you correctly and that you have not recorded any revenue or recognized any revenue from that?

That is correct Michael. As we've indicated before as we said our SEC filings, since that was a new contract involving some new technology for us. We didn't feel it was appropriate to recognize any revenue or related cost in that contract until we had complete acceptance from the customer.

Alright. And of the $8.5m contract, what percent of the equipment do you think has been shipped and is there right now?

Yes, it's a good question. I would -- it's approximately 50%, above half of it has been shipped. So, slightly less than that, but approaching 50%.

And is it up in running and working and you're getting feedback on it yet?

It's in the early stages, Michael, of the installation until it's all tied together and let up. It's really hard to comment, but the sub secondary pieces that have been installed thus far have gone in well.

And this represents what you referred to as phase 1 of the project?

Yes, there is -- the UAE talks about follow on phases, none of which are certain but they talk about phase 2, phase 3 follow on business, they could be similar in scope to this.

You referenced some other Middle East countries looking at this sort of thing, is there anything progressing that you can talk about?

Well, there is a number of countries throughout the Middle East basically, almost all of the Middle East countries do a similar board of security is concerned that the UAE have. So, they all have interest in this. The UAE is considered to be a technology leader. They over the last five to ten years have had both the inclination to utilize the latest advanced technology and they've had the resources to pay for it. So, we think there is a good opportunity that once the UAE contract is installed, and functioning the other countries will have a high degree of interest in following their lead.

That is the answer to that Michael. Obviously, until this first one is accepted, a lot of countries will wait and piggyback as Jim set off the UAE situation, hopefully.

Perfect. Can I ask one more?

Sure.

Okay, I guess the summit the logic portals were flat in the quarter? Can you -- first of all is that correct? And secondly, what is your outlook for that in terms of orders and do you think those companies are out of capacity constraint right now that'll will require them to order more in the future?

Yes, orders from Q3 to Q4 for the handlers and the upgrades were pretty level with Q3 and we don't consider that to be a bad thing. That's actually a good thing because throughout this downturn in that part of business has built up quite strongly, and I think we expect that business to continue at about that rate as far as we are able to see, which of course in this business is the quarter or two were best.

Right. Okay, thank you.

Thank you.

Thank you.

Our next question will be coming from Mr. Jason Trudy with Advest. Mr. Trudy, please state your question.

Actually, it is Jim.

Hi, Jim.

Hi.

How you are doing guys?

Good.

Good.

I didn't get a clear answer from John, on that pro forma number?

Which was that Jim? Could you please --

Fourth quarter you took such a large non-cash evaluation allowance, it's hard to gauge what the pro forma number would have been in the quarter?

Yeah, I think indicated that the effective tax rate for the year would have very low.

But, I am just talking about the quarter. Where would the $4.1m in your -- don't know how much of that is non-cash evaluation allowance?

Most of it. Overall, the majority of it is the evaluation allowance.

Would that pro forma earnings without that charge be about $0.05 to $0.10?

Well. Let me put this way, effective tax rate without that in the fourth quarter would have been, well below the 35% federal tax rate.

So, that would tell you that it would -- yes, we would have obviously had significant earnings.

It's kind of confusing the way you reported it. The other thing I wanted to ask you about DELTA EDGE machine, which we've been had out there for evaluation for long time? When we get the orders, we won't be able to recognize the revenue as we ship those machine?

We will with respect to it. If we have a customer that's accepted the machine, yes, definitely. If it's a first Oracle for that customer, with any new machine would defer revenue, but for an existing customer that has accepted EDGE, yes, we would recognize the revenue upon shipment.

All right. One more question, if you don't mind?

Sure.

The Microwave Communications contract in the United Arab Emirates, how is that going now? Is that been proceeding along without any major problems?

Yes. It is proceeding along without any major technical problems. We believe we will be continuing the delivery of the equipment as we indicated in the second quarter and we scheduled to begin system testing in acceptance in the second quarter and consistent with our revenue recognition policy; we'll recognize when the customer accepts the system.

Okay. And one more question. The $42.9m backlog, in the last quarter, includes that $8.5m?

That's correct.

And this backlog does not include that?

No, but also, it includes because we haven't recognized any revenue yet on that.

Okay, thank you very much. Nice quarter.

Thank you.

Our next question will be coming from Mr. Orin Hirschman with OH Investments. Mr. Hirschman, please state your question.

Hi, congratulations on the progress.

Hi, Orin.

Hi, how are you?

Good.

I apologize if you've mentioned this before, but there are two questions. One is of the competitive landscape right now, and the you guys on the handlers, et cetera, and also whether you actually saw demand accelerate throughout the quarter in terms of this pickup, you are finally seeing? And one follow-up please.

Sure Orin, this is Jim. I'll try to address those questions. I feel very good about our competitive position on the high-end. We continue to have a clear leadership position with Summit, with its advanced thermal technology capability, and the EDGE which we introduced mid last year into high-volume production, is really off to a great start. That covers a gap in our product line that we've had at the low end. This machine is particularly well suited to test subcontractors as well as integrated device manufacturers -- both of whom are looking for equipments that are made up with some of the low-cost test equipment, CTE that has appeared on the market in the last couple of years. So, we have real opportunities and have realized some of those opportunities to gain market share at test subcontractors, in particular, where we have not had a particularly strong position in the past. And a good portion of the EDGE revenue during 2003 is with new customers. The second part of your question, what was that please?

Yes, whether you actually saw a pickup in orders throughout the quarter, and if it may actually seem -- what kind of environment have you seen in the last four weeks or so as well?

We did see a pickup in orders, a substantial one in December. Having said that, I don't really pay much attention to what occurs in one month. I want to see a couple of months at least strung together. I think that's in part why SEMI smoothed their monthly numbers, you know, rather than reporting them on a -- they take a three-month smoothing. So, yes, we did see an acceleration in December, but I want to see what a full quarter looks like before making -- concluding too much from that.

Okay, and some -- let's see, in terms of where the gross margins should be on your SEMI business, where do you think that should be on an intermediate and long-term basis? Is this as good as your going to get because of the price competition, or we are going to see an improvement even with the price competition, or it's not so bad out there, et cetera, from this economic scale?

Right, It's a very good question Orin. I think you know the -- the quarter, the margin wasn't bad. Obviously we have some positive and negative things going on in the fourth quarter. One we are -- as Jim talked to you earlier, we are really introducing this DELTA EDGE. We are still bringing out some costs there, as you would expect with a new product. So, our margins on the DELTA EDGE, even though we recognized a fair bit of revenue, we were not that good actually because there were a lot of start-up costs that were expensed. Conversely, the Summit upgrades -- you know, we continue to enjoy very healthy gross margins there on that product, and then with a lot of that revenue recorded in Q4, we have sort of some positive and negative factors affecting the gross margin in the quarter. There was essentially no excess amount of recharge in the fourth quarter. So, that obviously -- our margin benefited from that. I think looking forward, it's obviously a margin for us as we have always stated, is very much related to mix because we have different margins on different products. And we are certainly hoping that as we continue to introduce the DELTA EDGE, we bring out some of those costs that our margins would be thrown on that product. And then obviously volume is the other key factor in terms of amortizing our fixed costs over larger volumes. So, obviously if the volume picks up and accelerates during the year, you know that will help pump our gross margins. Taking all that into consideration, I would hope that our margins would improve somewhat during the year as we progress on bringing the cost out of the EDGE, and hopefully if business conditions remain strong and improve certainly for us in our industry, then we will get some margin benefit from that as well.

And just two more questions, if I may. The pick up as you're seeing is spread across many customers and that sort of drift ?

Well, what we're seeing this far along is still the business being driven by a relatively small number of customers. What we are seeing however, is forecast -- credible forecast and requirements for quotation appearing from a extended array of customers versus what we've seen throughout 2003. So, we haven't yet seen the orders yet, but we're seeing certainly the work that normally leads up to a broadening of orders from a broadening base of customers.

And just one final question from me, and I apologize if you covered this early in the call because I had trouble getting in on the connection. In terms of the overall bookings at the Delta Design Division, what was that book-to-bill like overall for that whole division and if you were able to break that out?

Well, yes. I think it was slightly below one, close to parity.

Which would since imply that the bookings pickup happen more in the second half of the quarter?

Yes, I think that's true. And also, remember that our revenues and you can see the book-to-bill on our revenues reflect a fair amount of revenue for products that were shipped in earlier quarters, because we had the delayed revenue understand one-on-one. So, there's also that factor too that you have to look at.

I think on a shipment basis we were, if you look at book-to-bill on a shipment basis, we were above one.

I think you mentioned in the press release, sales this fourth quarter was higher than six quarters, is that for that the division as a whole?

Yes. What I'm referring to here is, yes, Delta designed the entire division. That's our semiconductor test handling our corporation.

Okay. So that's that 53% number that's in the press release?

Yes. We had a -- the orders in terms of dollars were the highest in six quarters. And then handle our unit orders meaning the number of systems ordered, not necessarily dollars, the number of systems ordered increased 53% quarter-to-quarter.

And then the only is that mix is from loans that your new -- from your new penetration into lower end handling?

Correct.

Okay. Thanks so much.

Thank you Orin.

Ladies and gentlemen, as a reminder, if you would like to ask a question, it's star one on your telephone keypad. We'll take one moment to poll for questions. And our next question will be coming from Jason Fuji with Adwest. Mr. Fuji, please state your question.

I'd like to ask a question on the Delta Age. The profit margins on that machine are not lower than the Summit ?

It has not yet. The Summit has the healthiest growth margins than any product in the company's history. So their margins will be below that yet.

Okay. Just wanted to check.

Sure.

Thanks.

Jim, just to clarify on that. We do expect that the margins on edge will be improving overtime. We are in the introduction phase for that product and there are cost incurred during that period going out over time.

Our next question will be coming from Mr. Michael Trotsky with RBC Capital. Mr. Trotsky, please state your question.

Yes. On the logic of the Summit handler. Are there any large ODMs that are currently not using your equipment which may have a need in the future and are they -- do you have systems in for evaluation etc?

Yes, you know, if you look at the high-end logic market and you look at market share and microprocessors, it's pretty clear there's just a couple of players, and it is a very dominant market share by one, but we do not have 100% market share. So, we are working with those companies including one large US-based microprocessor manufacturer who presently does not use Summit, you know, just try to gain their business.

And it's a decision a quarter or year away or sometime in '04 or --?

No, I really couldn't predict Michael. I wouldn't say it's within the current quarter, but beyond that I guess it's very difficult to say, because I'm just reflecting the guidance they're giving on their decision making process.

Okay.

Ladies and gentlemen, again that's star one if you have a question at this time. Mr. Donahue, there are no further questions at this time.

Well, thank you Doug. And I would like to thank everyone for joining today's conference call, and we will look forward to speaking to you in April covering Cohu's first quarter 2004 results. Thank you very much.

This concludes this afternoon's audio conference. Thank you for your participation.