Cohu Inc (COHU) 2004 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Cohu Inc. second-quarter fiscal-year 2004 operating results conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. James Donahue, President and CEO of Cohu Inc. Thank you Mr. Donahue. You may begin.

Good afternoon everyone and welcome to Cohu's conference call covering our results for the second quarter of 2004. I'm joined today by John Allen, our CFO.

I hope you have a copy of our earnings release and have had a chance to review it. If you need a copy, you may obtain one from our website, cohu.com, or by contacting Cohu Investor Relations at 858-848-8106.

I will provide an overview of our results for the quarter. John Allen will then take us through the numbers in detail. And I will conclude with comments on operations and our view of the business environment looking ahead. We will then take your questions. But first, John will make the necessary disclaimers covering forward-looking statements, estimates and other matters we will cover today.

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, July 22, 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 a 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 in 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 in 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 non-disclosure agreements.

This was a great quarter for Cohu, driven by strong performance in our semiconductor equipment business. Cohu's sales increased 48 percent year-over-year and 32 percent sequentially. Net income exceeded expectations, due primarily to improved gross margin in our IC test handling operation.

As we entered the second quarter it was not clear whether the apparent recovery in the semiconductor industry would enable us to match or exceed the 64 percent sequential increase in orders that we recorded in the first quarter. After a slow start, order momentum accelerated throughout the second quarter and we ended with orders up slightly and semiconductor equipment orders about the same as in Q1. In light of the volatility in the sector during this period we think this is encouraging.

Sales for the second quarter were 47.3 million compared to 32.1 million for the second quarter of 2003 and 35.9 million for the first quarter of this year. Net income in the second quarter was 6.9 million, or 32 cents per share, compared to net income of 4.1 million, or 19 cents per share, for the second quarter of 2003 and net income of 2.1 million, or 10 cents per share, for the first quarter of this year. Included in the second-quarter 2003 results were a $7.9 million gain on the sale of land and a $2.5 million investment write-down.

Operating income during the second quarter of 2004 increased significantly from a loss of 609,000 a year ago to 7.1 million during the second quarter.

Orders in the second quarter were 59.9 million compared to 58.2 million for the first quarter. Backlog increased to 72.4 million at June 30th compared to 59.8 million at March 31st. Incoming orders and backlog are at the highest levels since 2000.

Now John will provide details on our financial performance.

Semiconductor equipment-related revenues for the second quarter of 2004 were approximately 85 percent international and 15 percent domestic. International sales were distributed 80 percent Asia-Pacific, 17 percent the Americas, and 3 percent other.

Gross margin in Q2 was 44.2 percent versus 41.5 percent in Q1. The increase in gross margin was primarily due to favorable product mix with higher margins Summits continuing to account for a significant portion of revenue for the quarter and increased business volume. We expect gross margin in Q3 to be comparable or slightly lower than the Q2 margin.

R&D expense was 6.6 million in Q2 compared to 6.2 million in Q1. The increase in R&D was due to an increase in R&D expense in our semiconductor equipment business. We expect Q3 R&D to be slightly higher then in Q2.

SG&A expense was 7.2 million in Q2 compared to 6.9 million in Q1. The increase in SG&A was primarily related to increased business volume and expenses that vary with increase in revenue and profitability. We expect Q3 SG&A to be about the same or slightly higher than in Q3. Excuse me, Q2.

Interest income was 336,000 in Q2 compared to 620,000 in Q1. Q1 interest was higher as a result of the collection of approximately $270,000 of past due interest on a $9 million real estate note that was fully paid off in February.

Our effective income tax rate in Q2 was 6.7 percent and 9.1 percent for the first six months of 2004, down from the 16 percent we had recorded in Q1 of this year. The decrease in the effective tax rate is the result of higher-than-expected pre-tax income. The effective tax rate is based on the estimated annual effective tax rate for the entire year and is significantly lower than the US federal statutory rate as a result of the deferred tax asset valuation allowance we recorded at December 2003. The estimated effective tax rate is subject to adjustment in subsequent quarters as estimates of pre-tax income change and does not consider any impact from the routine IRS examination of our prior-year tax returns or a further reduction in the valuation allowance.

Net income per share in the second quarter was computed based on 22 million weighted average shares and share equivalents from stock options.

Moving briefly to the balance sheet, cash and investments were 115.6 million at June 30, a decrease of 1.2 million from March 31, due in large part to the increase in receivables and inventory due to increased business volume. Net accounts receivable of 39.3 million at June 30 compared to 32.1 million at March 31, and represented about 75 days sales outstanding. Net inventory increased to 38.6 million at June 30 from 33.3 million at March 31, primarily as a result of inventory purchases to meet sales demand.

Additions to property, plant and equipment for the first six months were approximately 1.3 million, and depreciation and amortization approximately 2 million.

Deferred profits increased to 9.8 million at June 30 from 6.9 million at March 31. The increase resulted from the deferral of revenue pursuant to SAB 104 on our new Delta EDGE handler and other test handler products and our contract for microwave communications equipment with the United Arab Emirates.

This was a strong quarter at Delta Design, our IC test handler business. Handler unit orders were about the same as in Q1, and are at levels we haven't seen since 2000. Significantly, orders were from a larger number of customers and for a broader range of our equipment than we've seen in quite some time.

Our proprietary thermal tools, Summit and ETC, represented 37 percent of unit orders. The Delta EDGE accounted for 23 percent, Castle handlers 34 percent, and other systems represented the remaining 6 percent. The Castle business develop suddenly and was from customers who had not added capacity for several years.

During the quarter we expanded the customer base for our Summit test handler. Summit, with its proprietary active thermal control technology, provides customers with enabling capability to optimize the speed grading of the fastest advanced microprocessors. And this is very important since higher speed means higher average selling prices.

Turning from semiconductor equipment to our other operations, our BMS unit continued work on 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 that deliveries will be completed during this quarter with customer acceptance and revenue recognition possible in the third quarter as well. We are pursuing other opportunities for this advanced microwave communications technology, particularly in the Middle East where daily events highlight the importance of border security.

Our metal detection business, FRL, has its new portable walk-through metal detector in beta test at three locations. Similar in function to the walk-through metal detectors at airports, FRL's unit is unique as it can be disassembled in five minutes and moved to another location. It's comparable in size to a large piece of wheeled luggage. The portability of the unit provides security services with flexibility and the ability to quickly adapt security screening to changing circumstances. The first orders for this unit were received in Q2 and we expect to make our first shipments in the third quarter.

Cohu's electronics division, which designs and manufactures CCTV cameras, had a solid quarter with improved sales, orders and net income. Prospects in the machine automation industry, which uses our cameras for inspection and alignment, are improving.

Looking at the current business environment, most of our semiconductor customers are positive about near-term business conditions. We're encouraged that new orders and current forecasts are from an expanded number of customers. The need for our proprietary thermal tools remains strong, and we've increased our customer base. Some customers who haven't added capacity in several years are back. We are seeing demand in both the capacity and the technology segments of our business. With our strong backlog and the anticipated acceptance of new equipment by customers, we expect improved sales during the third quarter.

Cohu's balance sheet remains very strong with cash at 115.6 million and no debt. We are in excellent shape to capitalize on continued improvement in business conditions.

And Mandy, with that we will happy be happy to take questions.

(OPERATOR INSTRUCTIONS) Michael Trotsky (ph), Par Capital.

Congratulations on a very nice quarter. I was wondering if you could give any more detail. You said on your thermal tools you have increased your customers. Can you give us any insight as to what those customers are and if they are potentially ramping into decent volume?

I can't go into any specifics or name customers of course, but we do expect the customers that we've added to purchase production quantities. They are going to be using the machines in production beginning later this year, and presumably for quite some time thereafter.

Is it a question of them replacing someone else's equipment? Or is it a -- can you give us an idea of how big it is potentially?

We did win this business. The customer was using a competitor's tool and switched to us.

I know you can't give us the exact name of the account, but what kind of business are they in?

They are in the high-powered (ph) advanced logic.

Thank you.

Peter Wright, CIBC World Markets.

Congratulations on a great quarter. I was hoping -- a couple questions. First of all, you made the remark on gross margins that they might be flat to down slightly in the next quarter and just wanting to know the reason to expect that.

These were the highest gross margins we've seen obviously in many years actually; I think even going back to the peak years of 2000. As we play it out in the release and in the comments, our margin is very mix-dependent, and the Summit has the highest margin. So it's really -- the margins vary quite significantly between product offering.

It's possible the margins could be -- I think I sort of qualified it -- about the same or slightly lower. So it's possible we could match these margins. But again, it's really very much mix-dependent. If we have more -- if Summit constitutes a smaller percentage of our revenue in Q3 than it did in Q2, then I would expect our margins to be slightly lower. And that's the reason that we've indicated that. It's not an indication of any negative consequence; it is just really product mix.

I guess the reason for the question is I was looking at the BMS segment and some of the others that might have larger revenue contribution in the next quarter. Is there a substantial gross margin differential between your semiconductor business and your other ancillary businesses?

That is a very good question. And there is today, again because Summit is really helping margins in the semi business, so it's -- I think the margins in the other business are lower, that is correct. That's another factor that would impact the margin potentially.

I was hoping, if not with exact numbers, is the bookings distribution between your three business segments that you segment your revenue in very different for your bookings?

It's pretty consistent, I think. The bookings were probably -- I think we indicate what sales were -- 83 percent of the sales in the quarter were semi. And I would say the bookings were generally consistent with that. They were fairly close to that. But I think the percentages of the sales that you see is reasonably representative of the bookings in the quarter between the various segments.

Thank you.

(OPERATOR INSTRUCTIONS) Michael Trotsky.

Could you again just give us a little more detail on the United Arab Emirates contract and the revenue recognition potential going forward? I know you touched on it, but --

I would be happy too. We continue to make deliveries against that contract, and we expect to complete the deliveries in late July or in August. The equipment will then need to be accepted by the customer, and it's possible that will occur in the third quarter.

There have been delays in this contract, in large part due to administrative issues on the customer's end; the long process time to install the equipment in the various vehicles -- aircraft, land vehicles and so forth -- and the administrative process in obtaining buy-offs. We're learning that that administrative process is quite involved with contracts of this nature in that region.

What is the size again? I know you mentioned it.

It's $8.5 million.

Do you expect that all to be recognized at once as soon as approval is being made or is it going to trickle in over a couple of quarters?

It would be all in the same period because the contract has acceptance clauses that run through the entirety of the contract.

So it's all or nothing kind of acceptance?

Right.

There's a chance it happens in Q3, but even if it doesn't it would definitely happen this calendar year you would expect?

Yes.

In the past you talked about some follow-on programs to that. Are you still in discussion on follow-on programs?

Yes we are, and we're optimistic about that follow-on business.

Can you give us a timeframe from when that might happen? And is it around the same size contract?

It's all sequenced. The first step is success with what we're calling Phase I here. And we're quite confident that the system will meet the expectations and perform as required. But there have been these delays, basically out of our control, in obtaining installation and the acceptance process.

If the contract completes as we've just discussed, we would expect Phase II of the program to kick in sometime next year; perhaps in the first half of next year. And the size of that business could be comparable to Phase I. There's a third phase presently identified which would also be of the same general magnitude. The order for that, as best we can tell, would be received late next year or early in 2006.

So is it possible that Phase II will be awarded before you even get recognized revenue on Phase I or is it --?

No, I wouldn't expect that.

Is it possible that they coincide?

It's possible that Phase II could follow shortly on the heels of acceptance, I suppose. But our best estimate is that there's going to be a lag of several months, something in that range.

If I can just continue on this subject, I think you also mentioned in the past that other countries may be interested in a sort of similar system. Can you talk about how that's going?

We are discussing proposals -- some large, some small -- for this type of equipment with 10 or 15 different organizations or operations throughout the Middle East. The most eminent prospects are the UAE-related applications that we just discussed -- the Phase II, the Phase III. I think once the -- this is new technology. We think it's very compelling, powerful system. And once it is installed and in work, I think that follow-on business is likely to develop as time progresses.

In the metal detector business, how much to those sell for and what is the precise application for that? Where are the trials being done, if they are trials?

The price to the end-user for this system is 4500 to $5000. Of course, as you know walk-through metal detectors are used at airports. We're probably all most familiar with the use of this type of unit at an airport.

We don't think our unit is, initially at least, going to be used in most types of applications. Rather it's going to be used in applications which presently probably don't employ a walk through metal detector at all. For example, the three beta sites that we presently have in progress, one is at a courthouse, another is at a police department, and the third is at a broadcast studio in a major West Coast studio screening people as they enter the studio and the offices of that broadcast operation.

So we think that the initial applications are going to be quite different than the applications that exists today for walk-through detectors because this unit, unlike the existing walk-through detectors, is portable; can be easily transported from place to place; provides security professionals with an opportunity to introduce some unpredictability into their security processes and also provides an opportunity for applications that might never have considered using a walk-through metal detector, like a school or special event of some type at a civic or community function, to use a walk-through metal detector.

Peter Wright, CIBC World Markets.

Just one quick follow-up. When looking at your bookings over the past couple of quarters, it seems a bit of a run away from the revenue run rate. And if a comparable 80 percent of that is going into the test handler business, I'm wondering what the turns is on that business and what we can expect from that growth rate-wise. Would a 20 or 30 percent growth rate quarter-over-quarter be an outrageous number to assume?

It's a fair question, but it's very difficult because of what's going into deferred. I think if you look at -- and that's why we break out every quarter the deferred profit. If you just look at that real quickly, a normal rule of thumb would be to say take what we disclosed as deferred profit and double that number, that gives you the deferred revenue. So roughly 9.8 million, or say 10 million, double that; about 20 million of deferred revenue and end of June. And since we disclose that every balance sheet date, if you use that sort of rule of thumb you get an idea of how much -- you can take it back to (ph) shipments then and converts the revenue into shipments. So there's a significant amount of revenue spillover or it will come in in succeeding quarters when we recognize the revenue that's deferred.

So I think when you look at the numbers I think you have to sort factor in because those numbers of course are included in backlog. Any revenue we differ is obviously included in backlog. So when you look at that I think you have to -- if you try to reconcile those, I think that's the way I would try to look at it.

Mr. Donahue, we have no further questions at this time.

Thank you. We'd like to thank everyone for participating in this conference call. And we look forward to speaking with you when we report our third-quarter results. Thank you very much.

This concludes today's conference. Thank you for your participation.