Cohu Inc (COHU) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Cohu Incorporated first quarter 2004 operating results conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to introduce your host Mr. James A. 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 first quarter of 2004. With me is John Allen, our Chief Financial Officer. I hope you have a copy of our earnings release and have had a chance to review it. If you need a copy you can obtain one from our web site cohu.com or by contacting Cohu's Investor Relations. I'll first provide an overview of our results for the quarter then John will take us through the numbers in detail and I'll conclude with comments on operations and our view of the business environment moving forward. And we'll then take your questions. But before we begin John will make the necessary disclaimers covering forward-looking statements, estimates and other matters that we will cover in today's call. John.

Before we go on, I must remind you that the company's discussion this afternoon 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 conditions 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, April 21, 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 uncertainties associated with the company's business which include, 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-offs, failure to obtain customer acceptance and recognize revenue, the cyclical and unpredictable nature of capital expenditures by semiconductor manufacturers, Cohu's ability to convert new products under development into production on a timely basis, support product development and meet customer delivery and acceptance requirements for next generation equipment, difficulties in integrating acquisitions and new technologies and other risks addressed and filings with the Securities and Exchange Commission, including Cohu's Form 10-K for the year-ended December 2003, and our most recently filed Form 10-Q. We assume no obligation to update any of the information shared on this conference call. Our comments and responses to any questions will not make reference to any specific customers as we are precluded from disclosing such information by our nondisclosure agreements. Jim.

This was a solid quarter for Cohu in the improved performance was driven by our semiconductor equipment business. While sales were actually down quarter to quarter, this is the result of customer acceptances and related revenue recognition on test handling equipment that shipped earlier in 2003. This served to increase sales in the fourth quarter of 2003. On a normalized basis, sales increased in the first quarter of 2004 along with operating, pre-tax and net income. Order growth in our semiconductor equipment business during the first quarter significantly exceeded our expectations.

This is consistent with increasing evidence across the industry that a recovery from steep downturn in the semiconductor industry is underway and also demonstrates the strength of our product line that serves the needs both of IC manufacturers and of test subcontractors. Sales for the first quarter were 35.9 million compared to 31.1 million for the first quarter of 2003 and 40.9 million for the fourth quarter of 2003. Net income in the first quarter was 2.1 million or 10 cents per-share compared to a net loss of 1.4 million or 7 cents per-share for the first quarter of 2003 and a net loss of 2.2 million or 10 cents per-share for the fourth quarter of 2003.

Orders in the first quarter were 58.2 million compared to 35.5 million for the fourth quarter of 2003. Orders for test handling equipment were 50 million, an increase of 77% over the preceding quarter. Backlog increased to 59.8 million at March 31, 2004, compared to 37.5 million at December 31, 2003, up nearly 60%. John will now provide details on our financial performance.

Semiconductor equipment revenues for the first quarter were approximately 80% international and 20% domestic. International sales were distributed 86% Asia-Pacific, 13% the Americas and 1% other. Our shipment in Q1 increased from Q4 but sales were down from Q4 due to the deferral of revenue under SAB-101. As our deferred revenue increased from 9.3 million at December to 16.5 million at March.

Growth margin in Q1 was 41.5% versus 36.7% in Q4. The increase in growth margin was primarily due to favorable product mix with higher margin summits making up a greater portion of revenue and also from revenue recognized under SAB-104 previously SAB-101 during the first quarter in our semiconductor equipment operation. We expect growth margin in Q2 to be slightly lower than the Q1 margin.

R&D expense was 6.2 million in Q1 compared to 6.7 million in Q4. The decrease in R&D was attributed primarily to a decrease in R&D material expense in our semiconductor equipment business. We expect our Q2 2004 R&D expense to be about the same or slightly higher than in Q1. SG&A expense was 6.9 million in Q1 and in Q4 of 2003. We expect Q2 2004 SG&A to be slightly higher than Q1 as a result of expected higher revenues.

Interest income was 620,000 in Q1 compared to 429,000 in Q4. Q1 interest income was higher as a result of the collection of approximately $270,000 of past due interest on our $9 million real estate note receivable that was fully paid off in February. Our affective income tax rate in Q1 was 16%. The effective tax rate is lower than the U.S. Federal Statutory rate primarily due to the significant deferred tax asset evaluation allowance recorded in December of 2003. This estimated effective tax rate is subject to adjustment in subsequent quarters as estimates of pre-tax income change. We currently expect our tax rate in 2004 to be at about the level we recorded in the first quarter. This estimated effective tax rate does not consider any impact from the routine IRS examination of our prior year tax returns or the reversal of any of the deferred tax valuation allowance recorded in 2002 and 2003.

Net income per-share in the first quarter was computed based on 22.1 million weighted average shares and share equivalents from stock options. Moving briefly to the balance sheet, cash and investments were 116.8 million at March 31 an increase of 9.2 million from December 31. This increase was due to the collection of the $9 million note receivable and interest in February. Net accounts receivable of 32.1 million at March 31 compared to 25.6 million at December 31 and represented approximately 80 days sales outstanding. The increase in day's sales outstanding in Q1 over the fourth quarter of 2003 was primarily due to the increase in revenue deferred under SAB-104 in Q1 versus Q4 and the higher shipment levels in March of about 17 million versus 11 million. That's in our semiconductor equipment business.

Net inventory increased to 33.2 million at March 31 from 31.6 million at December 31, primarily as a result of inventory purchases to meet increased order and sales demand. Additions to property plant and equipment for the first quarter were approximately 755,000 and appreciation and amortization was approximately 1 million. Deferred profit increased to 6.9 million at March 31 from 4.1 million at December 31. The increase resulted primarily from the deferral of revenue pursuant to SAB-104 on our new Delta Edge handler and other test handler products in our contract from microwave communications equipment with the UAE. Jim.

This was an especially strong quarter at Delta designs our IC test handler business. Unit orders for test handlers increased 68% after a 53% increase in the preceding quarter. Order momentum accelerated throughout the quarter. We saw strength across our product line for both our proprietary thermal handling systems and for general-purpose, pick-and-place test handling equipment. It is clear to us that customers are increasingly making decisions to add capacity after several years of very limited capital investment. Unit orders for handlers during the first quarter were at the highest level since the third quarter of 2000. During the first quarter the Delta Edge handler, our newest product represented 42% of unit orders; Summit, our advanced thermal test handling system comprised 30%; engineering thermal systems accounted for 14%, castle handlers, 8% and other systems, 6%.

Unit orders for our highly successful Summit thermal field up grades increased 55% during the quarter. This proprietary act of thermal control or ATC technology extends the power dissipation capability of the handler providing enabling capability for customers to optimize the speed grading of the fastest advanced microprocessors. This is very important since higher speed means higher ASP's. We shipped the first handler tooling from our new manufacturing operation in the Philippines and last month Delta Design received Intel's preferred quality supplier award. This is the fourth consecutive year that Delta has been recognized by Intel for outstanding performance.

Turning briefly from semiconductor equipment to our other operations, our BMS unit continued to make shipments of microwave communications equipment in connection with the $8.5 million 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 the deliveries will be completed in the second quarter with customer acceptance and revenue recognition in the third quarter. We are pursuing other opportunities for this advanced Microwave Communications technology, especially in the Middle East where the requirement for border security is critical. In March, our metal detection business, FRL, introduced an innovative portable walk-through metal detector, similar in function to the walk-through metal detectors at airports, FRL's unit is unique as it can be disassembled in about five minutes and moved to another location.

It's comparable in size to a large piece of real luggage. The port ability of the unit provides security services with flexibility and the ability to quickly adapt security screening to changing circumstances. We expect to ship the first unit by the end of the second quarter. Looking at the current business environment, conditions in the semiconductor equipment industry continue to improve. More customers are adding capacity. Prospects for our proprietary thermal tools remain strong. Quote activity is up across the board. For the first time in several years we are seeing strength in both the capacity and technology segments of our business. With the strength of our backlog, we expect improved results during the second quarter. Cohu's balance sheet remains strong with cash at a record of 116.8 million and no debt. We are in excellent shape to capitalize on continued improvement in business conditions. And with that, operator, we'll take questions.

Ladies and gentlemen, at this time we'll be conducting a question and answer session. [OPERATOR INSTRUCTIONS] Our first question is coming from Dennis Wassung with Adams, Harkness & Hill. Please state your question.

Thank you, guys, and great jobs on the orders.

Thank you.

A couple of quick questions here. On the Summit, it sounds like gross margin was up in the quarter based on higher percentage of Summit in the mix. The question is that predominantly driven from the big up-tick in upgrades or is this sort of a broadening of I guess of system units and I guess follow-on from that is, there is additional customers, are there additional customers in the mix at this point? Are we still talking about sort of your major customers at this point?

I guess, Dennis, this is John. I'll take the first part and maybe Jim can supplement that. I think you're basically right on the assumptions there regarding the margin. It was both systems and upgrades that propelled the increase in revenue related to Summit. I think it was both and the margins were strong there and that really did help our overall growth margin during the quarter.

Dennis, would you repeat the second part of your question?

Sure. Sort of a combination of a question regarding, was it more upgrade driven? Are there systems -- I guess an increase in the number of systems going out on the Summit side? And then, also, the customer diversification of the Summit product is obviously you have got a major customer that has been using the product and I'm curious if that is broadening and that is part of the reason you saw the strength or is it just sort of a step-up with those existing customers?

And maybe I didn't -- I'm sorry, it was an increase in systems so there were more systems shipped as well as the continued upgrade, which have been fairly Lynn years throughout the last couple of quarters I would say but -- I would say would be a increase in more -- more systems for Summit.

The second part of the question, Dennis, the customer profile, the customer breakdown has remained relatively consistent with Summit in Q1 as in preceding quarters.

Dennis Wassung Okay. And I think you had mentioned at one point in your opening remarks that the Summit upgrades were up was it 58% sequentially?

I think 55 as I recall.

55%.

55.

On the upgrade side, how far along in that process, do you think you are at this point?

Yeah. I would say that is a good question, 55 to 60% of the way along and roughly. We still have a ways to go and I think we're expecting the upgrades to continue throughout 2004.

Perfect. Moving over to the Edge product I'm curious about sort of further broadening of that customer base you guys have had some really success in the subcon market segment, any comments on that side? You seen more units in the same customers or sort of a broadening acceptance of the machine?

It's both, Dennis and as I mentioned in my remarks, what characterizes the first quarter for us was strength on both the thermal proprietary thermal tools and the general tools taking place and lead by Edge so we're seeing business from repeat customers and new customers for Edge both IDM's and subcons.

Okay and are you pretty much and I guess a question for John, are you pretty much recognizing revenue either at shipment or soon after on the Edge product at this point?

Yeah, it is very customer specific and that is one of the reasons you see the increase in deferred revenue as I allude to earlier is edges with the new customers and we're being extremely diligent in revenue until we have completed all the customer acceptance requirements and so I think that what you've seen in some cases we recognize revenue on edge with certain customers where we have customer acceptance and we're deferring revenue on Edge where we're still pending customer acceptance and that is the primary reasons for the increase.

So I guess it is fair to say when you're looking at the deferred revenue and you said it went up from 9.3 to sixteen 5 that is correct?

Correct.

Just to read between the lines it means there is some pretty new customer activity happening with the Edge.

Right.

Okay. And last question, if I might, sort of looking forward here at Q2 I know you guys don't like to give a formal revenue number or guidance range here historically that backlog at the end of one quarter is it pretty good at least indicator of revenue levels for the following quarter obviously you have a big jump in the backlog here. What is does that mean for you this time around? Is there -- would some of the shipment versus revenue recognition issues, is it a little aggressive to look at a number up in the high 50's for revenue or is it --

Yeah, let me walk you through that. That's a fair question. First of all, as we indicated I think Jim indicated, the UAE contract which we are shipping product but until we recognize revenue with the entire order, which is 8.5 million, it resides in our order backlog so of the 58 or 9 million of backlog, 8.5 million of that was comes right out because as Jim indicated, the current expectation is that would be recognized in Q3.

That comes out so then you're down to roughly 50 million of the other backlog and I would say with respect to that as we discussed briefly, Dennis, on the Edge, since it's very difficult to estimate the precise date in which the product would be accepted and hence revenue recognized it would stand to reason that there would be some of the backlog that relates to Edge that we would not expect to be converting to revenue in Q2 so that would reduce the expectation on revenue below that $50 million mark. It -- estimating exactly how much that is it is difficult because it gets very customer specific. But I would say that is the way I would look at revenue in the second quarter. We could get some turn's business, too, but that is how I sort of look at the revenue for Q2.

Okay. And looking at Q1 was there a predominance or any meaningful percentage of turn's business?

There was some but again not to complicate it but again since we're going this route, I think that my guess as to turn's business, you know, might be $7 million but again we have some other backlog in one of our other divisions that typically doesn't always shift -- it is not a 90 day backlog and it can run a little bit further than that. So I think where that would take you then if you would add all that up it would be revenues perhaps somewhere in the mid 40's which would take you a little bit below the 50 million mark I would say.

Okay. Fair enough. Thanks much and great job.

Thank Dennis

Our next question is coming from Oran Hirschman (ph) with OH Investment Group. Please state your question.

Hi, congratulations on the progress in particular the booking side. Can you just review the gross margin guidance again on the Handler side and how the mix affects that. I know you said it might be down a drop this coming quarter.

Right. The margin on submit, which represents a pretty significant portion, very submit portion of the revenue is traditionally been significantly higher than our other products. And as a result it -- the quarter did benefit by having a somewhat higher percentage of Summit as a total percentage of total revenue. I think as we look at Q2, Oran, as we see Summit perhaps trend down at the percent of total revenue we would expect a margin solely for that treason to trend down slightly in Q2, perhaps a point -- it would be my guess at this point and again it is, you know, trying to get that mix because the margins are pretty significantly different and I mean they can differ by more than 10 basis points easily between products so that's why a precise estimate gross margin is somewhat difficult but I would say we're looking at probably a point, maybe a point and a half and that's a conservative view today with respect to gross margin in Q2.

On terms of the flip side, in terms of efficiencies or inefficiencies as you begin to ramp up the semiconductor-related business, what are your thoughts on that?

That is a good question. I mean, we have seen particularly on our Summit line, some increase in margins over the last couple of quarters comparing Q3 and Q4 to Q1, we did see the margin on that product which has always been strong increase even further in Q1 which is some evidence I think of our ability to ring out any inefficiencies in that product, although we have been producing it for sometime. I think we have a little ways to go with Edge still on that. But I think your point is fair that certainly over time we have seen with some of our products, and Summit is a good example an increasing margin, as we -- particularly with the upgrades which were very difficult to build initially a year ago and since we have shipped a number of those now we have rung out a number of sub costs due to inefficiency.

Does that mean we could see over the next few quarters' margin expansion if the business continues to grow?

I think that's a reasonable expectation.

Okay. In terms of lead times both to your customers and, if that's creating some of the order or some order improvements and I would say maybe even order acceleration as the quarter continued and we go into this quarter, is some of that because they're scared and they're not going to be able to get product, order today and deliver tomorrow type of lead times any more and how would the lead time vie with your supplier, is any constraints there?

This is Jim Donahue. I think, you know, at the last conference call we commented that, you know, all things being equal, which they often aren't, but we would expect our orders, that is orders for test handlers to lag ATU (ph) orders by about a quarter and I think that is pretty much what we're seeing here. Handlers tend to be ordered generally at the last minute and it is just the nature of this business. So what we're seeing is very consistent with that historical scenario. As far as our ability to respond to that, we've over the years developed the capability to ramp and contract our business rapidly. It is a survival skill in this industry that is required. And we're in the midst of ramping. We had seen some lead times from suppliers stretch out particularly the machine shops that we use; although we have been able to shield our customers from shipment delays resulting from those stretch-outs.

Okay. Thank you so much.

[OPERATOR INSTRUCTIONS]. Our next question is coming from Peter Right (ph) with CIBC World Markets. Please state your question.

Congratulations guys, on a great quarter and a lot of surprise on the upside. The first couple of questions are on more of a macro perspective, Jim. Firstly if you can characterize the business that you've received and specifically this upturn in orders. Would you classify it thus far as capacity additions as compared to installed capacity upgrades? And what, the direction do you see that going through the course of the year across your entire Handler line?

Well, I think clearly that the business in the first quarter is capacity, capacity additions overwhelmingly. As far as what will the rest of the year look like, you know, that's -- as you've said, that's a macro economic question and it begins with that and it is driven off of that. So the nature of our business, test handlers, is very limited accurate visibility, three to four months, and beyond that one really has to look at the macro-economic landscape to draw any conclusions whatsoever. Frankly, we don't spend much time other than in a very general way in terms of very fundamental business planning looking at the macro-economic picture. We're very much focused on our customers and the specific forecast and indicators that we receive from them and the reality is that's limited to about three to four months. With several customers it can be six months.

I was hoping you would be able to quantify, you know if we roll back 90 days ago, the 77% order growth I think would have surprised anybody. Would you be able to quantify where that's coming from, from either package type or an end-market?

Well, it's coming across the border. We're seeing strength on both the thermal side of our business, which is oriented towards high-end microprocessors and advanced logic. Now, that's very much PC driven business. But, at the same time, we're seeing substantial demand. The most substantial demand in quite some time for our general purpose pick in place handling equipment, which is utilized in extremely broad range of applications, DSP, RF, mixed signal, general purpose logic, a very wide variety of applications. So there's nothing in particular that I would point to other than just broad demand on all fronts.

Great. And John, I was hoping that you would be able to either quantify or qualify the number of new customers that have taken place in the quarter and then possibly give us a customer concentration ratio, what ever you feel most comfortable with the top five or top ten.

Sure. Let me try to help you on that. If you looked at our numbers in the annual report last year as far as customer concentration, I think it remains pretty much as you saw there with the two big companies, Intel and TI still representing a significant portion of orders in revenue.

Maybe to try to answer the question about the number of new customers, as John indicated earlier in the -- in his comments about revenue recognition, it's our policy and also a requirement under SAB 101 to not recognize revenue until customer acceptance so any shipments to new customers of which there were several during the first quarter we would not yet have recognized the revenue on those shipments. Those would come presumably in the -- mainly in the second quarter we would expect.

Great. Thanks a lot and congratulations again.

Thank you.

Our next question is comes from James Poochie (ph) with Advest Inc. Please state your question.

Congratulations, guys, we finally got results from R&D.

Thank you.

Thanks, Jim.

Excuse my voice I got a cold. Would it be fair to say that the new Cohu today has new business we didn't have before for the Delta Edge focused on a new business that we didn't have any customers in?

Yeah. The Delta Edge was designed to fill a gap in our product line at the test subcontractors. Our equipment over the years had tended to be full-featured, full capability equipment most suited to the IDM's. Test subcontractors are willing to accept a reduced set of capabilities that are highly concerned about equipment acquisition cost. That was the genesis of the Delta Edge and incidentally, it is also quite suitable for the IDM's and we're seeing, you know, good sales both at the IDM's and the test subcons.

Is it fair to say this machine has developed a new business for Cohu rather than us trying to analyze Cohu's order rates based on just what the Summit and other handlers were addressing before?

Well, I think we're much -- in a much better position to win test subcontractor business than we ever have in the past, yes.

Now, I want to ask some questions. Recently there has been a lot of interest in companies that are run any kind of a temporary security business and we have a couple new products here addressing that area rather in the United Arab (inaudible) and also this new machine that is a portable walk-through metal detector.

Uh-huh.

Does the camera division have any new products addressing that area and if it does would it be wise to maybe combine these areas, these different businesses into one unit?

Well, to the first part when the electronics division offers an array of CCTB cameras and the unique capability of the electronics division is to develop systems and to adapt the standard products to custom applications, so there are no new cameras developed for security applications rather an on-going stream of applications of all types, including security, traffic, law enforcement, military applications and so forth. In terms of combining the businesses into some security-related entity, they're really quite different businesses, and they serve -- they serve different markets so we -- we have looked at that but really don't see a common denominator that makes sense.

Okay. Thank you very much.

Thank you, Jim.

Bye.

[OPERATOR INSTRUCTIONS] Our next question is coming from Michael Trotsky (ph) with Par Capital. Please state your questions.

Hi, congratulations on a great quarter.

Thank you.

Thank you.

Just to revisit the new customer question again. Is it -- did the Summit Thermal products did any of the orders come from new customers there?

I don't believe so, Michael. I think this is basically the same customer set. Certainly overwhelmingly the same customer set if not 100%.

Okay. Is there any opportunity to penetrate new customers in that area?

Yes. Because we don't have -- we don't have 100% market share and there definitely is room to do that and we are working diligently on that.

And can you tell us if you have any trial systems in those customer's hands?

No, we don't have any -- any systems being evaluated by any major new --potential major new customers.

In that area.

For Summit, yes.

For Summit. Okay. And on the United Arab Emirates order, I think we're expecting that revenues could be recognized as early as Q2. Has there been some sort of push out there or is this progressing to your expectations?

Well, the contract is moving more slowly than we expected but as far as push outs, no, it is just the relatively normal delays in completing complex work and projects. Technically we have no significant issues. It is just a matter of working through the myriad of details involved in creating the contract and shipping the equipment to the UAE. Additionally we factored into our Q3 revenue recognition estimate the fact that the pace -- the pace of business -- the pace of business and customer acceptance over there needs a bit of a buffer in reality.

Okay. And do you have a pretty high degree of confidence that the order will definitely be recognizable in Q3?

I have a high degree of confidence that the very high degree of confidence that the revenue will be recognized and just, you know, slightly less high degree of confidence that it will be recognized in Q3, but we fully, all of us involved in the contract fully expect the revenue to be recognized in Q3.

And is there any -- is there any potential for a follow-on order in that?

There is potential for follow-on business in the United Emirates and adjacent countries in the Middle East and we're pursuing those very aggressively. Obviously the installation of this system and some track record is a very good reference for future business and in that regard we're doing well.

And, you know, would you expect those orders this year or, you know, how soon, you know, if those things come together could you see additional business in that area?

In terms of sizable contract business, which by its nature has long -- long business development cycles, you know, I would say the end of this year at the earliest and, you know, more possibly into next year, more probably into next year.

Okay, great. Thank you.

Thank you.

Gentlemen, there are no further questions at this time.

Okay, well, we would like to thank you for participating in this conference call and we look forward to speaking with you next time as we discuss our results for the second quarter. Thank you very much.

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