Cohu Inc (COHU) 2005 Q1 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Cohu Inc. first-quarter fiscal year 2005 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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 this conference call covering Cohu's results for the first quarter of 2005. With me today is John Allen, Cohu's CFO. If you need a copy of our press release, you can obtain one from our website or by contacting Cohu Investor Relations at (858) 848-8106.

First, John has information concerning forward-looking statements, estimates and other matters that we will discuss in today's call.

Before we go on, I must remind you that the Company's discussions 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, 2005, 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 recognized revenue; the cyclical and unpredictable nature of capital expenditures by semiconductor manufacturers; our ability to convert new products underdevelopment 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 2004.

We assume no obligation to update any of the information shared on this conference call. Further, 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.

I will now 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 looking ahead. We will then take your questions.

This was a strong quarter for Cohu, driven by increased sales of proprietary thermal IC test handlers by Delta Design. We believe that Cohu's financial performance compares very favorably to other back-end semiconductor equipment companies.

Sales for the first quarter were 44.4 million compared to 35.9 million for the first quarter of 2004 and 38.1 million for the fourth quarter of 2004. Net income in the first quarter was 6.5 million, $0.30 per share, compared to net income of 2.1 million or $0.10 per share for the first quarter of 2004 and net income of 2.5 million, or $0.11 per share, for the fourth quarter of 2004.

Orders in the first quarter were 44.4 million compared to 46.1 million in the fourth quarter of 2004. Backlog was 62.6 million at both December 31, 2004 and March 26, 2005.

Now John will provide details on our financial performance.

Semiconductor equipment related revenues for the first quarter of 2005 were approximately 85% international and 15% domestic. International sales were distributed -- 79% Asia-Pacific, 15% the Americas, and 6% other. Gross margin in Q1 was 40.4% versus 39% in Q4 of 2004. The increase in gross margin was primarily due to changes in product mix with higher margins Summit handlers accounting for a significant portion of revenue for the quarter. We expect gross margin in Q2 to be slightly lower than the Q1 margin due to the anticipated revenue to be recognized from the contract with the United Arab Emirates.

R&D expense was 6.7 million in Q1 compared to 7.9 million in Q4. The decrease in R&D was due to lower R&D expenditures in our semiconductor equipment business during the first quarter. We expect Q2 R&D expense to be slightly higher than Q1.

SG&A expense was 7.3 million in Q1 compared to 7.4 million in Q4. We expect Q2 SG&A to be higher than in Q1 due to expected higher revenues.

Interest income increased to 690,000 in Q1 compared to 517,000 in Q4 due to higher interest rates. Our effective income tax rate benefit for the first 3 months of 2005 was 41%, which is attributable to the reversal of approximately $3 million of accrued income taxes, as a result of the completion of a tax examination in March 2005. Without this special item, our effective tax rate for Q1 would have been approximately 30%. This effective tax rate is based on the estimated annual effective tax rate for the entire year and is lower than the U.S. federal statutory rate, primarily due to R&D tax credits and export sales benefits.

The estimated effective tax rate is subject to adjustment in future quarters, as estimates of pre-tax income change, and does not consider any impact from a possible reduction in the tax valuation allowance that we will evaluate on a quarterly basis throughout 2005.

Net income per share in the first quarter was computer based on 22.1 million weighted average shares and share equivalents from stock options.

Moving briefly to the balance sheet, cash and investments were 121.1 million at March 26th, increasing 4.6 million from December 31. The increase was primarily attributed to cash generated from operations. Net accounts receivable of 29.6 million at March 26 compared to 32.7 million at December 31, 2004 and represented about 60 day sales outstanding. Net inventory decreased to 40.3 million from 41.5 million at December 31.

Additions to property, plant and equipment during the first 3 months of 2005 were approximately $800,000 and depreciation and amortization approximately 1.2 million. Deferred profit at March 26 of 9.7 million was approximately the same as December 31 and is primarily comprised of revenue deferred pursuant to SAB 104 on Delta test handlers and our contract for microwave communications equipment with the United Arab Emirates.

Delta Design contributed 83.9% of sales in the first quarter. Test handler unit orders at Delta were about the same as Q4. You may recall that in last year's fourth quarter, Cohu's orders increased 24% compared to the third quarter.

Thermal systems, our Summit and ETC handlers represented 71% of unit orders during the first quarter. Orders for general-purpose pick-and-place handlers improved slightly, but demand in this segment of the market remains soft through the quarter.

Looking at Cohu's other operations, at BMS, we made progress towards recognizing revenue on the $8.5 million contract to provide microwave equipment to the United Arab Emirates Armed Forces. It has been challenging to accurately predict when this contract would be accepted due to the different pace and different style of business in that region. Our equipment is performing well. We received additional payments during the first quarter. And the customer is current on amounts owed. We expect that this contract will be accepted and revenue recognized by Cohu in the second quarter. The work we've done in the EUA has established BMS as a credible supplier of this microwave technology, and we are optimistic about additional opportunities to provide similar systems in the Middle East.

Sales dropped quarter-to-quarter at Cohu's electronic division, primarily because December 31 backlog contained an unusually high number of orders that were not scheduled to ship in the first quarter. We expect business to return to normal levels in the second quarter at the electronics division.

Our metal detection business, FRL, recorded a small operating profit in the first quarter. It's first profit since 2002. Interest in FRL's portable walk-through metal detector, the M-Scope, remains high, and we expect orders to increase as this new product concept gains acceptance and customer purchasing cycles progress.

Looking at the current business environment, according to semi-monthly back-end semiconductor equipment orders appear to have stabilized since last October. Preliminary March data just released last Tuesday showed a slight increase in back-end orders for the month. Demand for general purpose pick-and-place handlers remains weak, but we are seeing some improvement in forecast from selected customers. This capacity-driven segment of the market is as volatile as ever. And when demand does return, we expect it to be sudden and possibly sharp.

We are excited by the strength of sales of our thermal systems. We're adding new customers. And the increasing demand for precise temperature control during test of a growing array of high-performance logic devices is creating new opportunities for our proprietary technology. Demand for these tools is strong, even as the capacity driven segment of our business remains soft.

Based on our quarter ending backlog and forecast, we expect to report improved sequentially results in the second quarter. Cohu's balance sheet remains solid with cash of 121 million and no debt. We are in excellent shape to benefit from improved business conditions.

And with that, we're ready to take questions.

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

Jim, you just said that the Q2 will show sequentially increase. If we exclude the United Arab Emirates contract, will it also show an improvement over Q1?

I think it could. It's dependent on the timing of certain orders we have forecast and also some SAB 104 revenue recognition issues. John, is there anything that you would add to that?

No, I think that's right. I think it could. And I think, as Jim indicated, it often depends on the exact timing of an order such that it has to be received obviously before we can ship product and recognize revenue. But there is strength in our thermal side of the business, as Jim indicated. And so depending upon when those orders may be received will dictate whether the revenue is up, excluding the UAE contract in the second quarter.

Well, given that we have been tossing the UAE contract's payment into the numbers on an offer several quarters, are you comfortable enough about at this time that we should be putting it into the estimates? So that it works out?

I cannot say with certainty, Theodore, to be perfectly honest. I think, as I mentioned my remarks, there is a very different pace and style to doing business in that region. And it is quite unlike dealing with normal commercial customers that we are accustomed to. So we expected to have this accepted quite some time ago, or we wouldn't have said so.

But to specifically answer your question, I am quite confident that we will recognize it in the second quarter. However, there is no certainty that it will be recognized.

Well, maybe you ought to be guiding the people on a call to expect the revenue to be flat, and then if it comes -- if that thing happens, then everybody's extra happy. But --

Yes, I think -- it could be up. I think as a practical matter, it may be flat excluding the UAE. But again, depending upon the timing of the receipt of some of those orders, Theodore, the revenue could be up, even without the UAE contract in the second quarter -- which we do expect as Jim indicated. So with a little bit of luck in terms of timing of orders, I would expect our revenues likely could be up above where they are in Q1, even without that UAE contract, which we still expect, as Jim indicated.

Okay, Jim, you're teasing us here with the thermal management equipment and saying that there is some potential new opportunities to flush out. Can you give us an idea what sort of things you're thinking of?

Sure. I guess looking at our thermal business in general, our underlying business, which is microprocessor test handling, continues to be very strong -- even surprising us with the strength of the underlying business. We added a second major microprocessor customer late last year. That customer in the first quarter is beginning a ramp that will continue through 2005. So that provides incremental business on top of our base.

And then were seeing requirements for this thermal capability in new applications, especially high-speed graphics chips. The performance of those chips can fluctuate dramatically, much as microprocessors can, as temperature fluctuates during the test process. So they really have the same requirements that microprocessors do. And this segment of the market is growing. Interestingly enough, as you may now, it's a fab-less and outsource manufacturing model.

Right.

So, whereas up until now, our systems have been exclusively on IBM test floors. We will begin to see our systems appearing at test subcontractors.

That's great. Does the dual-core architecture -- is that part of what's driving the -- I understand the physics of what's going on. But is the dual-core architecture somehow part of the equation of driving the demand for these?

I wouldn't say so. What is driving demand is the need for the temperature-control capability. The dual-core creates a different set of application-specific issues. But the fundamental requirement for temperature control is the same, whether it's a single core or a dual-core.

Michel (ph) Shaw (ph), Needham & Co.

I have a question on your auto run rate. Do you expect the orders to improve sequentially for next quarter?

Well, we typically don't do any forecasting of orders. And as primarily as we indicated, because it is so dependent on the precise day and week in which the order is received that it is almost impossible to predict that. Because if it is received 1 day after the quarter ends, then it is not included in the quarter obviously. I would just re-indicate, as we have, that our business in the (technical difficulty) thermal sector remains very strong. And business is healthy. We'd like to see some more orders from the capacity side of the business, as Jim indicated.

Okay. Could you also maybe help me understand how the upgrade process is going at one of your customers at the --?

How the upgrade process is going?

Yes.

I'm not sure I understand the question.

I think there was the upgrade going on on the Summit handlers side at one of your customers?

Oh, yes. Okay. Thank you for clarifying that. That upgrade process is largely complete. There was an installed base to upgrade, in it is largely complete. The quantities of upgrades that we're shipping in the last several quarters are very small. And we expect that business is essentially over.

Michael Trotsky (ph), Parke Capital.

Nice quarter. A couple of questions. First, during the last quarter, Intel has announced a couple of things. Most recently you know, of course, they have upped their CapEx. But before that, they announced a $300 million expansion to a packaging and test facility in China. Or excuse me, it was a new packaging and test facility in China. And I'm just wondering what those two things means to your forecast with Intel in particular.

Well, we don't talk about specific customers. But as microprocessor unit volume increases, so will our business. That's a fundamental, probably the fundamental driver for our business right now.

Okay, but as far as you know, are they going to be using some equipment from elsewhere in China? Or is it going to be new equipment?

I think it is probably, like most plants, it is a mix of both. This is a back-end assembly plant that you're mentioning, not a fab. So quite normally those are some combination of transfer and new purchases.

Okay. And have you seen any orders for that yet?

Well, we can't comment on specific customers, Michael. We are prevented through nondisclosure agreements from doing that, so I really can't go into any details.

Okay. The next question has to do with the test subcontractors. You mentioned there's a little breath of life from the capacity type buys. Could you elaborate on that a little bit? And what kind of utilization rate are these guys operating on on the test side of things?

What utilization rate is at the test subcontractors?

Yes.

Well, the increase in business that we are seeing at the test subcontractors is the result of the thermal business, some of which is now going to be outsourced. We also think that in addition to the fab-less high-speed graphic chip companies that I mentioned earlier, that some of the IDMs -- we have reason to believe that some of the IDMs will begin to use the test subcontractors for this high-performance logic test, which is clearly a change from historical patterns. The test subcontractors have historically not been involved in that market segment.

To the question of utilization -- and this is not recent database, but my guess is the utilization is generally somewhere in the 80% range. It's certainly not to the point where it is triggering significant capacity-related buys.

Right. And then, you mentioned that you're seeing a small improvement in the demand for general purpose pick-and-place. You're not classifying thermal into that, are you?

No, we look at our business has having two primary segments -- first, the thermal side, which is productized in our summit, which is the production tool and the ETC family of engineering tools. And then the second segment is what we refer to as the general purpose pick-and-place. Currently, our primary products in that market are the EDGE handler and the Castle handler. So these are products that are suited for, as the name suggests, the majority of IC testing. But not to the exclusion of microprocessors on high-performance logic, which have this unique active temperature control requirement.

So that general purpose or mainstream more capacity driven segment of the market continues to be soft. What we did see in the first quarter was that certain customers began to appear on the radar screen, not with a big footprint yet but at least they are appearing -- and after being missing for quite some time. So it's a little bit of improvement, but at this point, not more than that.

And the main product line in that area is the EDGE?

The EDGE and the Castle -- the EDGE is our ambient-hot system, and the Castle is our tri-temperature handler.

Okay. And given that those products have kind of been on holiday for 6 months to a year, what can you say competitively about where they stack up?

I think we are in good shape competitively. The Castle is considered to be, I think, a very solid, probably the industry-leading tri-temperature handler for general-purpose applications. And the EDGE, which is a lower-cost handler version of the -- suited for the test subcontractors and also for the IDMs, who choose to only purchase ambient-hot equipment, is very competitive. The price point also is very competitive.

(OPERATOR INSTRUCTIONS). Michael Trotsky.

Okay, I'll go if no one else wants to follow-up, I guess. These new graphics customers, can you just elaborate at what point about of the buy cycle they are on? I know it is most likely going to go through a subcontractor. But have they actually made the decision to go thermal? Or are they still in a valuation? And what is the likely timing of them accepting systems? Is it this year? Is it next year? Can you get a little more precise there?

I would think that we would begin to see initial orders in the second or third quarter and production volumes in the -- towards the end of this year, early next year.

Okay, terrific. Good news.

And gentlemen, you have no further questions in the queue at this time.

All right, I'd like to thank everyone for attending today's call. And we look forward to speaking to you after the conclusion of the second quarter. Thank you very much.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.