Cohu Inc (COHU) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cohu Incorporated Third Quarter Fiscal Year 2004 operating results conference call. (OPERATOR INSTRUCTIONS). Mr. Donahue, you may now begin.

Thank you, Kelly, and good afternoon and welcome to Cohu's conference call for our previous results for the third quarter of 2004. I am Jim Donahue, President and CEO of Cohu, and with me today is John Allen, our CFO. I hope you have a copy of our earnings release and had a chance to review it. If you need a copy, you may obtain one from either our website, cohu.com or by contacting Cohu Investor Relations at 858-848-8106. I'll provide an overview of our results for the quarter, John Allen will then take us through the numbers in some detail, and I'll conclude with comments on operations and our view of the business environment looking ahead and will then take your questions. At first, John will make the necessary disclaimers carrying forward-looking statements, estimates, and other matters that we will cover in today's call.

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 for which biased 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 reference to your question. Our comments speak only as of today, October 21, 2004, and the Company assumes no obligations to update these comments.

The Company's actual results may differ materially from those stated and employed by our forward-looking statements due to risks and uncertainties 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 handling industry, inventory lay-off, failure to obtain customer acceptance and recognized revenue, the typical and unpredictable nature of capital expenditures by semiconductor manufacturers, Cohu's ability to convert new product 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 obligations to update any reaffirmations during this conference call. Our comments and responses, any questions will not make reference to any specific customers as we are precluded from disclosing such information prior to nondisclosure agreements. Jim?

From a sales and earnings standpoint, this was a solid quarter for Cohu driven by strong performance in our semiconductor equipment business. Sales increased 59 percent year-over-year and 16 percent sequentially. Results excluding the effect of special items lay were in line with our expectations. In the second quarter of this year, demand was broad based for both our technology driven and capacity driven testing existence but what a change a few months have made in semiconductor equipment industry. As the third quarter unfolded, customers became increasingly cautious. We haven't seen many cancellations, more pushouts but customer forecasts have been reduced substantially. This is a sudden and sharper change in customer plans as we've seen.

Cohu's sales for the third quarter were $54.9 million compared to $34.5 million for the third quarter of 2003 and $47.3 million for the second quarter of this year. Net income in the third quarter was $5.2 million or 24 cents per share, compared to net loss of $615,000 or three cents per share for the third quarter of 2003 and net income of $6.9 million, 32 cents per share to this year's second quarter. The gross margin for the third quarter of this year was negatively impacted by items totaling 1 million or 4 cents per share, primarily for its inventory reserves. Orders in the second quarter were 37.1 million, compared to 59.9 million for the second quarter of this year and backlog was 54.6 million at September 30, compared to 72.4 million at June 30. Earlier this week, Semi release preliminary data for September, reporting that the backend book-to-bill ratio fell to 0.64 during September. In this week, a number of ATE and backend equipment companies, have reported sharply lower Q3 orders. So, the drop in orders that we are seeing is not unique to Cohu, but rather is the result of a general slow down in the semiconductor industry, which some analysts are characterizing as an inventory correction. Now, John will provide details on our financial performance.

Semiconductor equipment related revenue for the third quarter of 2004 were approximately 86 percent international and 14 percent domestic. International sales were distributed 76 percent Asia Pacific, 20 percent of the Americas, and 4 percent other. Gross margin in Q3 was 37.1 percent versus 44.2 percent in Q2. The decrease in gross margin was primarily due to changes in product mix with lower margin handlers accounting for a significant portion of revenue for the quarter and increased charges for excess inventory.

We expect gross margin in Q4 to be about the same as the Q3 margin. R&D expense was 7.2 million in Q3 compared to 6.6 million in Q2. The increase in R&D was due to an increase in R&D expense in our semiconductor and microwave communications equipment businesses. We expect Q4 R&D to be about the same as Q3. SG&A expense was 7.7 million in Q3, compared to 7.2 million in Q2. The increase in SG&A was primarily related to increased business volume. We expect Q4 SG&A to be about the same or slightly higher than in Q3. Interest income was $390,000 in Q3 compared to $336,000 in Q2. Our effective income tax rate for the first nine months was 10 percent, which is our current expectations for the effective rate for 2004. 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, due to the deferred tax evaluation loss recorded at December 2003.

The estimated effective tax rate is subject to adjustment in the fourth quarter at estimates of free tax income change and does not consider any impact from the routine IRS examination of our prior tax return or a further reduction in the evaluation allowance. Net income per share in the third quarter was computed based on 21.9 million, weighted average shares and share equivalents from stock options. Moving to the balance sheet, cash and investments were 115.5 at September 30, essentially unchanged from June 30. Net accounts receivable of 41.9 million at September 30, compared to 39.3 million at June 30 and represent about 70 days sales outstanding.

Net inventory increased to 41.5 million at September 30, from 38.6 million at June 30, primarily as a result of inventory purchases to be anticipated sales demand. Addition to property, plant, and equipment for the first 9 months of 2004, were approximately 1.8 million and depreciation and amortization approximately 3 million. Deferred profit increased to 11.1 million at September 30 from 9.8 million at June 30. The increase resulted primarily from the deferral of revenue. Pursuant to SAB 104 and Delta test handlers, in our contract for microwave communications equipment with the UAE. Jim?

Our consolidated performance was led by Delta Design, which contributed 86 percent of total sales. Test handler unit orders during the third quarter declined 49 percent and the decrease was spread fairly evenly across our product line. During the third quarter, our proprietary thermal tools, summit, and ETC represented 54 percent of unit orders. The Delta Edge accounted for 21 percent, Castle handlers 13 percent, and other systems represented 12 percent. During the third quarter, we shipped initial Summit systems to a major new customer. Summit with its proprietary Active Thermal Control technology provides enabling capability to optimize the speed grading of the fastest advanced microprocessors. This is important since higher speed in the entire ASPs.

Turning from semiconductor equipment to Cohu's other operations, first VMS, our microwave communications equipment business continued shipments on the $8.5 million contract with the United Arab Emirates Armed Forces. This system is designed to provide the UAE with real-time video monitoring of its borders through an aircraft, land vehicle, and ship system. We currently expect that deliveries will be completed during this quarter with customer acceptance and revenue recognition either in this year's fourth quarter or next year's first quarter. We are pursuing other opportunities with this advanced microwave communications technology especially in the Middle East where daily events highlight the importance of border security. At Cohu's Electronic Division, which designs and manufactures CCTV cameras, sales were down 7 percent sequentially and the operation generated a small profit. Near-term prospects in the machine automation industry, which uses our cameras for inspection and alignment have weakened along with the overall slowdown in semiconductor equipment. Our metal detection business FRL completed successful data testing and made initial shipments of its new portable walkthrough metal detector. Similar in function to the walkthrough metal detectors at airports, FRL's unit is unique as it can be disassembled in a few minutes and moved to another location. It's comparable in size to a large piece of real luggage. The portability of the unit provides security services with flexibility and the ability to quickly adopt security screening to changing circumstances.

Looking at the current business environment, our semiconductor customers both IDMs and subcontractors are extremely cautious of our near-term business conditions. The question, of course, that everyone wants to know is how long current weak condition will last? Over the last several years, to meet the requirements of our customers, we've reduced product lead times. Customers have become accustomed to ordering back-end equipment, such as the test cameras we manufacture and ATE at the very last moment. This fact along with the underlying volatility in the semiconductor equipment industry suggests that the next upturn like the current downturn is likely to be sudden and sharp. The reality is that it is simply not possible for us to predict when that will occur as it is out of our control. We are, however, intensely focused on what we can control, we've reduced manufacturing capacity to align with near-term demand and we are closely controlling cost. We expect to maintain spending on new product development at approximately current levels. The fundamental need for our proprietary thermal tools remains as long as ever, and we have excellent products that serve the capacity driven side of our business.

Cohu's balance sheet is solid with cash of $115.5 million and no debt. We are in excellent shape to weather this downturn and to benefit when business conditions improve. And Kelly, with that, we will be happy to take questions.

(OPERATOR INSTRUCTIONS) Peter Wright, CIBC World Markets.

Yes, good evening gentlemen. My first question is trying to understand the month-over-month trend that you saw in the third quarter, was it a surprise in September being noticeably weaker than the July, August timeframe where your activity is fairly linear through the quarter?

It was fairly linear. We saw the first real signs of the downturn in the second half or weakening orders in the second half of July. And seen the business drop off significantly and just maintained a steady state from that point forward through the rest of the quarter.

Great. Also on gross margin, you guided that to flattish in the fourth quarter. Is it volume related? Next quarter, you've got -- if you assume that you get the border security, UAE border security, revenue could possibly be up if that hits. Am I still understanding that correctly?

Yes, let me -- Peter. Yes, we haven't specified which quarter that Jim said it would either be Q4 or Q1. So it depends on when you model that either one of those quarters. I think, even with that I would doubt that the revenues will be up in the quarter even with that. Our total backlog is what was that -- 54.6, I believe and that would definitely include everything including the full value of that contract as well as other products that would not likely be recognized in the quarter because of SAB 104. We never get 100 percent of the revenue recognized at the end of a quarter and in the preceding quarters, so I think even if we did have that; the revenues may not be north of what they were in Q3. But as far as the margins specific to your question, it really is a little bit difficult to take it exactly because it depends on which handler unit, which handler gets expected in the quarter and recognized and there can be, you know depending upon whether it's the summit or an edge, summit does have a higher growth margin so it's really a function of exactly what they think the handler will be expected on and that's going to drive what gets recognized in that quarter and it can have a somewhat significant impact on the margin in the quarter.

And then one more last follow up, taxes had about 10 percent this year, is that something we can model in 2005 as well or do you expect it inching up?

You asked a good question. It's going to hinge on whether we will do another evaluation allowance in Q4, which we set up largely in the fourth quarter of '03, that is the prior I think there is another ATE company, if you look at their tax rates they are in similar situations where they had recorded even allowances in prior years and so they are looking nominal income tax rates this year. If we decided that we were in position to reverse that evaluation allowance at the end of Q4 then our rate next year would approach a more normal rate, which would be probably in the low 30's. If the evaluation allowance remains there then we would still probably be in a very low effective tax rate next year as well. So we really will know really at the end of this year as we complete the fourth quarter as we look out sort of as we require to get the future business prospect at that time.

Great. Thank you very much.

Michael Trotsky, Capital.

Could you give us a little clear -- what is your outlook on orders going forward, I guess is my question, fractionally?

Well, Michael it's just not possible for us to provide any meaningful guidance on orders. It's difficult enough in normal circumstances and in a current environment it's very difficult so I am not prepared to quantify what we think orders are going to be for the fourth quarter because it's simply could be anywhere.

Right, but maybe could you give us a little more information on October, is it about at the same level as September or what do you think more near term?

Yes, I would say October, sure. October appears to be developing and consistent with what we've been seeing throughout the third quarter.

Okay. Then can you repeat again what your revenue expectation is for Q4 in terms of the Microwave of UAE contract?

Well we indicated Michael that Jim's remark were that it would be recognized based on information either in Q4 or Q1. So obviously depending on which quarter that falls in, that would be a roughly million dollars of revenue. So it depends on where you are modeled at?

Okay. It's not -- it'll all hit or it won't hit.

Yes, I think that's right. At least the overwhelming majority 95 percent of it will hit I believe in the same quarter.

We expect to complete shipments against the contract in the fourth quarter, what we don't have complete control over is the customer acceptance process, the administrative aspects of that certainly are outside of our control and therefore we can't predict with certainty whether that acceptance process will be completed in the fourth quarter or in the first quarter although we are confident it will be one of those 2 quarters.

And what constitutes customer acceptance?

Well in this it is pretty well laid out in the contract, there is a certificate, it's not totally unlike our test handling business, where in this case there is a certificate that has to be signed by the representative from in this case the UAE. And it's certainly in their purview that the system is doing what it was supposed to do --. And then we've our obligation pursuant to the contract and that's really it, and then they signed that and that's the evidence of acceptance.

Okay, and last question in the metal detection area, the suitcase device if you will, what is the average selling price and then what do you think the total available market is in terms of units?

Yes let me try that one, the selling price -- we are selling most of them to distributors in and then they in turn sell them to the end customer, but the end price is -- let me just give you a range, because I don't want to disclose some price information, but it's in the neighborhood of let's say $3,000 to $5,000 per unit.

And then relative to the total market size, that's a question where had been asking ourselves through the development of this product, because it is quite frankly a different type of product, it's not a directly competitive product with the existing standup walk through metal detectors one key is walk through metal detectors, instead this is opening up some new applications for use of this type of security device that haven't existed in the past. So we can't predict with certainty what the market size is but we think if the product is successful that will be selling a thousand units or more per year.

Okay.

(OPERATOR INSTRUCTIONS). Theodore O'Neill, Wells Fargo Securities.

And Jim you went through the percentage breakdown on the test handler side of the business Delta EDGE, Castle I got right, I didn't get that percent that was Summit.

Sure. Summit and ATC, Theodore, represented 54 percent of unit quarters during the third quarter.

You had a 16 percent sequential increase in revenue in the quarter, is there any one area that that was attributable to?

Well, yes I would say, and I just briefly covered in my remarks about the gross margin. We had a fairly significant number of Delta Edges recognized and we got them-.

All right that's what impacted the gross profitability.

You are right because the margin on that is a little -- it's lower than the Summit. That's right.

Mr. Donahue, there are no further questions at this time.

We would like to thank everyone for participating today, and we look forward to speaking with you again covering the fourth quarter and full year quarterly results. Thank you very much.

(OPERATOR INSTRUCTIONS). Thank you all for your participation, have a wonderful day .