Cohu Inc (COHU) 2005 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cohu Inc. Q3 2005 earnings conference call. [Operator Instructions]

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 and welcome to this conference call, which covers Cohu’s results for Q3 of 2005. With me today is John Allen, our CFO.

I hope you have a copy of our earnings release. If you do not, you may obtain one from our website, www.Cohu.com, or by calling Cohu investor relations at (858) 848-8106.

I’ll provide an overview of our results for the quarter. John will take us through the numbers in some detail and then I’ll conclude with comments on operations and our view of the business environment looking ahead and we’ll then take your questions.

But 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 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, October 20, 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 includes but are not limited to the concentration of our revenues from a limited number of customers; intense competition in the semiconductor test handler industry; our reliance on patents and intellectual property; inventory write-offs; failure to obtain customer acceptance and recognize revenues; the cyclical and unpredictable nature of capital expenditures by semiconductor manufacturers; our 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 SEC, including our Form 10-K for the year ended December 2004. We assume no obligation to update the information shared in this conference call.

Finally, 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.

Thanks, John. This was a very strong quarter for Cohu. Sales, orders, and net income were the highest in five years.

Sales increased 25% year-over-year and 33% sequentially. Net income rose 84% year-over-year and 71% sequentially. Sales for Q3 were $68.6 million, compared to $54.9 million for Q3 of 2004 and $51.8 million for Q2 of this year.

Net income for Q3 was $9.6 million or $0.42 per share, compared to net income of $5.2 million or $0.24 per share for Q3 of 2004 and net income of $5.6 million or $0.25 per share for this year’s Q2.

Orders in Q3 increased to $72.7 million, compared to $71 million in Q2 of 2005, and are at the highest level since 2000. Backlog was $85.9 million at September 24th, a Company record compared to $81.8 million at the end of Q2.

Cash increased $5.0 million to $122 million at the end of the quarter. And Cohu’s Board of Directors approved a cash dividend of $0.06 per share, payable on January 6, 1006 to shareholders of record on December 2, 2005.

John will now provide details on our financial performance.

Semiconductor equipment-related revenues for Q3 of 2005 were approximately 90% international and 10% domestic. International sales were distributed 87% Asia-Pacific, 7.0% the Americas, and 6.0% Other.

Gross margin in Q3 was 39.6% versus 39.1% in Q2 of this year. We expect gross margin in Q4 to about the same or slightly lower than Q3.

R&D expense was $7.6 million in Q3, compared to $7.1 million in Q2. The increase in R&D was due to higher R&D expenditures in our semiconductor equipment and microwave communications businesses during Q3. We expect Q4 R&D expense to be slightly higher than Q3.

SG&A expense was $9.7 million in Q3, compared to $8.5 million in Q2. The increase in SG&A was primarily due to higher business volume and increased profitability. We expect SG&A in Q4 to be slightly higher than Q3.

Interest income increased to $965,000 in Q3, compared to $890,000 in Q2, due to higher interest rates.

Our income tax benefit for the first 9 months of 2005 was $700,000 and was attributable to, among other things, the reversal of approximately $3.0 million of accrued income taxes and the completion of a tax examination in March of this year, and a $3.3 million reduction in the valuation allowance on deferred tax assets.

Q3 reduction in the valuation allowance was the result of higher forecasted 2005 income in our Q3 analysis and the forecast of 2005 income used in the December ‘04 and March ‘05 analyses. Based on curve projections that are subject to change, we expect additional reduction in the valuation allowance in Q4.

Without the reduction in the valuation allowance and excluding the impact of the tax examination and certain other items, our effective tax rate for the 9-month period would have been approximately 30%. This effective tax rate is based on the estimated annual effective tax rates for the entire year and is lower than the U.S. Federal statutory rate, due to R&D tax credits and export sales benefits.

Based on current projections, we expect our Q4 effective tax rate to be approximately 13%. Again, this estimated effective tax rate is subject to change, as estimates of pre-tax income change.

Net income per share in Q3 was computed based on 22.9 million weighted average shares and share equivalents from stock options.

Moving briefly to the balance sheet, cash and investments were $122.4 million at September 24th, increasing $5.3 million from June ‘05. The increase was primarily attributed to proceeds from stock option exercises and net income.

Net accounts receivable of $56.3 million compared to $40.1 million at June and represented about 74 DSO. This is a slight increase of about 4 days compared to 70 days at June ‘05, due to slightly slower cash collections.

Net inventory increased to $43.9 million at September from $41.2 million at June. The increase was primarily related to the increase in backlogs.

Additions to property, plant and equipment for the first 9 months of 2005 were approximately $4.1 million and D&A approximately $4.0 million.

Deferred profit at September 24th was $12.9 million, compared to $12.6 million at June. Deferred profit relates to revenue deferrals pursuant to SAB104, primarily on Delta test handlers and our contract for microwave communications equipment with the United Arab Emirates (UAE).

Thanks, John.

Semiconductor test handling equipment produces by Delta Design contributed 87% of sales in Q3. Test handler unit orders increased 21%, following a 75% increase in Q2 and we saw growth in both our thermal and in our general purpose pick and place product lines.

Orders for our proprietary thermal systems established a record for the second consecutive quarter and represented 56% of unit orders during Q3, compared to 66% in Q2.

Orders for general purpose pick and place handlers rose 51%, accounting for 36% of unit orders, compared to 29% in Q2. Orders for general purpose pick and place handlers were at the highest level since Q2 of 2004.

Our other products contributed the remaining 8.0% in Q3.

For several quarters we’ve expected revenue from our microwave equipment contract with the UAE Armed Forces to be recognized. However, we’ve encountered repeated delays in the acceptance and payment process and we understand that this is not at all unusual.

Our equipment is performing well. We remain confident that we will recognize this revenue. We plan to announce when the acceptance and revenue recognition process for this contract is complete.

Looking at the current business environment, demands have been excellent for our thermal systems and we are very excited about the prospect to expand our customer base as the requirement for precise temperature control during tests of a widening array of high-performance logic devices increases.

Last quarter, we noted that we expect the general purpose pick and place portion of our business or capacity-related buys to continue to be highly volatile. Our prediction proved to be correct, as customer forecasts fluctuated significantly throughout Q3, but as I commented earlier, in the end resulted in a net increase of 51% in unit orders quarter-to-quarter.

Our responsibility is to position the Company to be able to respond to the realities of the business environment and to customer requirements, whatever they may be. I believe that the proliferation of new applications for IC’s and consumer end products and the shortening lifecycle of these products create a substantial challenge for our customers in forecasting demand.

Moreover, following the sharp industry downturn that began in 2001, customers are far more conservative with capital spending, often waiting too long to add capacity. These factors and the relatively short lead times for equipment such as test handlers mean that high volatility - even within a short time period such as a quarter - may a very well be the norm going forward.

Forecasting next quarter’s performance becomes quite a challenge, as turns business may play a larger role than it has historically. We are continually working to improve the ability of the Company to respond successfully to dynamic market conditions and customer requirements. Based on our quarter-ending backlog and outlook, we expect to report strong financial results for Q4.

And Melissa, we’ll be happy to take questions now.

[Operator Instructions] Dennis Wassung of Adams Harkness, Inc.

Thank you, a good quarter, guys.

Thank you.

A few questions for you here, first of on the Summit, the thermal side of the business. It sounds like you guys continue to hit records here.

I’m curious about new customer opportunities here, if you’re seeing sort of follow-through on some of these opportunities you guys have been talking about, IC graphics, some of these other customers. Are you shipping in volume now outside of your core, I guess the leading the microprocessor guys out there?

Well, Dennis, besides our core microprocessor business we have expanded our customer base over the last 12 to 18 months into several additional accounts. We’re shipping into all of those accounts.

With respect to the IC graphics chip opportunity that we’ve discussed before, we continue to be in the evaluation phase. We expect that to continue through Q4, where certain customers are evaluating the benefits derived from using our thermally enhanced handlers versus their current solutions.

We expect to begin seeing data from those evaluations later this quarter, perhaps into early Q1. Volume purchases, should this opportunity materialize, would be next year. We have not shipped any volume or shipped any units into the high-speed graphics applications at this time.

Okay. That’s helpful. So when you look at the record numbers that you guys are having at this point, is it driven by the core traditional customers for Summit or are these newer customers kind of really broadening this opportunity? And do you expect they’ll continue to grow, given the current environment? Can you continue to grow at this record Summit business in Q4 and Q1 at this point?

Well, I think all of our Summit customers are contributing to the increase and whether it’ll continue or not remains to be seen. It depends on economic conditions and the individual situations at each of those accounts.

Would you say your visibility has changed at all in that business? Has it increased at all, given the environment?

I would say the visibility is stable. We have more visibility certainly on that side of the business than we do in the general purpose side, which as a I mentioned, is fluctuating quite significantly.

Okay, a quick question on that side of the business, the general purpose side. If I remember right, that business in the last couple of quarters has been growing pretty fast but it’s still been focused on a couple of key customers. How is that translating at this point? Are more customers getting involved? Is it still driven by key customers? How do you characterize that business at this point?

Maybe a little bit of action beyond the same customers that we’ve had for the last few quarters, but generally this is still being driven by a select few, not broad based.

Okay and how are the subcon customers translating into this business, both on the Summit side and the general-purpose side?

Contributing on the general-purpose side, about the same as they had. Most of the business has been IDM-related and certainly the vast majority of the Summit business is IDM.

Okay and I guess the last question here on more Q4 expectations and obviously you’re sitting here with a record backlog. You still have this UAE contract with the mix. Would you expect to see sequential growth here on the revenue and earnings side, Q4?

Yes. I think, as we indicated, we do expect strong results in Q4. I think it really comes down to how much of that deferred revenue, which is sitting at just under $30 million, the deferred profit you see reflected there, I think about $13 million. It really comes down to how much of that will be recognized in Q4, Dennis.

I think we did pretty well in Q3 of recognizing revenue, probably a little better than we might have expected and our shipments were good. So I really -- I think in terms of trying to project anything north of what we saw in Q3 is extremely difficult at this point, until we get better visibility on the recognition of some of that deferred revenue later in the quarter.

So when you look at the deferred revenue mix versus what it was a quarter ago, it sounded like, if I remember right, last quarter you had -- there were some more questions about whether or not you’d be able to get that revenue recognized. I think you had some new customers in the mix. Is that still the case here in Q4 or have you guys gotten to the point where you’re getting quicker acceptance on these orders, I guess?

That’s a fair question. I think it’s pretty much the same as its been and there are a reasonable number of different customers that make up that deferred revenue. I mean, it’s a lot of different customers, for a lot of different products. And keep in mind that we defer revenue on a location-by-location basis, even if it’s the same customer. So it could be location A in a customer that hasn’t completed their acceptance and qualification of the product, even though a different location has.

So, I don’t think there’s been any dramatic change, as I recall from looking at the deferred revenue schedule, from Q3 to Q2. And obviously there’s always -- it’s always moving, but I don’t think we have necessarily better visibility as to projecting what will turn in a quarter now than we did, say, a quarter ago.

Okay and this UAE contract, it seems to be frustrating for you guys. What needs to happen at this point to get this on the books?

Well, we need to obtain acceptance and payment and once we’ve done that we’ll basically have met the deferred revenue requirements and can recognize the revenue. It is very difficult, as we have learned, to predict when this is going to occur, because the pace of business is quite different than it is elsewhere.

So, I guess, when we’re looking at these models, do we even consider putting that in the December quarter at this point?

Well, I think, as I mentioned on the conference call and also in the press release, we plan to announce when the acceptance and revenue recognition process for this contract is complete. So that, I think, an investor can decide how he or she wishes to deal with that.

What we’re saying is we’ll let you know when that’s complete and when it will therefore be recognized and included in revenue for that quarter and we plan to do that when that occurs, not at the end of the quarter at this conference call.

Okay, great, fair enough. Thanks guys.

Thank you, Dennis.

Michael Trotsky of Par Capital.

Hi, great quarter.

Thank you.

Thanks, Michael.

You mentioned that the demand remains excellent for the thermal product and you’re seeing an expanding customer base for that product and at the last quarter we talked a little bit about two new opportunities in that area, one for graphics and another for gaming chips.

Can you give a little more detail on where the customer base is, in terms of adopting thermal test capabilities there, and what stage you’re at? Do you have systems being evaluated in-house and is any of that in the bookings number?

Both of those opportunities are still in the evaluation phase and we are participating in some opportunities beyond just the traditional microprocessor area at this time. But both of those opportunities are certainly in the development phase, not in the shipping product phase and I would say both situations should materialize later this quarter, early next quarter. And if significant business is going to develop, the volume shipments would occur next year.

Okay and that sounds incrementally more positive and the fact that you’re saying within this quarter or early next year means that the evaluation must be going pretty well. Is that a good way to read into what you just said?

That’s not what I’m -- I’m not implying that. I’m not implying how the evaluation is going. I’m simply implying the evaluation is going on.

Okay.

And I think each customer whose evaluating the product has a fairly rigorous process they go through and it takes anywhere from 30 to 90 days, typically.

Right. But can you give us any color? I mean, obviously the same problems exist in those areas that exist in microprocessors.

Well, the reason we’re optimistic and excited about this opportunity is that we believe that.

We think that the high-speed graphics chips have some of the same issues that microprocessors have. Specifically that the speed of the chip is impacted by the temperature rise during tests and our Summit technology, our proprietary thermal technology limits temperature rise during tests, therefore allowing the chip to test at its highest optimal speed, which translates, of course, into a higher ASP for the customers.

That’s the case in microprocessors. That’s why the Summit is such a compelling product for the microprocessor manufacturer. Our analysis is that those same dynamics exist in high-speed graphics and the evaluation phase will validate whether our preliminary conclusion is correct or not.

Right. No advanced read on that is what you’re saying. You’re just confident.

We’re confident that there are benefits, based on what we understand today, yes.

Okay and then back to the UAE contract, which is ongoing and [imminent]. I just want to -- we’ve talked about competence levels of recognizing the revenues over the past couple of quarters and it’s hard for me to gauge how confident you are and whether your confidence is increasing or decreasing, as to whether you’ll be able to recognize that revenue. So I’m hoping that you can add a little more color into a confidence level or at least a contingency plan if this continues to drag on.

Well, in terms of confidence level, I don’t know. I mean, and that’s quite honestly why we’re stating that we will announce when the acceptance and revenue recognition process is complete. Because we have expected, based on our interaction with our customer and our agents over there that this was going to happen over the last couple of quarters.

So we are highly confident that we will obtain acceptance and recognize the revenue, but the fact is, predicting when that is going to occur is not possible to do with any degree of accuracy. So we thought it would be helpful if we made an announcement at the time when the revenue recognition process steps have been completed and that would allow one, looking at modeling the Company’s performance, to then take that into consideration at that time.

Great, so you want us to kind of just leave it out for now is the bottom line, till you hear something differently.

Well, I think by stating that we’re going to make an announcement, it sort of eliminates the need to make a judgment one way or the other on it.

Right. Now, in terms of contingencies, do you have any recourse to accelerate this process? I mean, it’s dragged on long enough.

Yes, I mean, it’s a fair question, Mike. I think you have to understand we’re dealing with a foreign government, obviously, and in talking to other companies, again, as Jim indicated, these delays, we’re told, are not unusual and to be patient and ultimately things will happen.

Again, I think that’s the reason it’s difficult to [use the] contingency or recourse. We don’t think at this time it makes any sense to do anything other than what we’re doing, which is continuing to work with the customers, continue to work through the channels over there and leading to, as Jim said, the completion of this and acceptance and revenue recognition. So, at this time, we don’t think there’s anything else we should or could be doing.

Dennis Wassung of Adams Harkness, Inc.

Thanks, just a couple of quick follow-ups here, financial questions. John, when you look at the tax line here, it sounds like you had a $1.6 million sort of nonrecurring tax benefit. Is that the way to model this?

Right, in a quarter. That’s right.

Right. So if you pull that out, you get to like a $0.35 pro forma EPS number? Does that sound reasonable?

That’s just -- well, quickly looking at it -- because if you added that back to the provision, I mean, I don’t have a calculator here. But it would probably be in the ballpark, yes, because you’re adding $1.6 million, the tax revision would have been around $3.0 million.

Right.

Yes that’s about right.

Okay. So is there anything else kind of onetime in the quarter that you should really think about here, as we’re going forward?

Is there anything else to hit the tax rate in Q3 that you should pro forma out?

Well, I guess in the tax rate or anywhere else that we need to know?

Oh, okay. No. I think the numbers are pretty straight up, Dennis. I don’t think there’s anything up or down that was particularly unusual.

Okay and looking forward into Q4, you alluded to continued potential changes to the tax asset, that valuation allowance. Should we be modeling that at this point? I mean, what are you [inaudible - multiple speakers] --?

Well, I think as I indicated -- and I appreciate that it’s very confusing. It’s very complex for all of us. I think I indicated that we were looking at an effective tax rate in Q4 fairly close to what you see in Q3. I think I said 13%. So that would take into consideration the additional decrease to the evaluation allowance.

Okay, so basically you’re saying 30% is your real tax rate?

Right.

In reality it’s going to come out to more like 13%.

Correct.

Okay, fair enough. And as you look into next year, is this something that’ll continue, depending on your profit levels or is it all going to be taken care of come the end of the year?

Yes, that’s another good question. I think the majority of it would be taken care of by the end of this year. There may be some small spill-overance to next year, but I would say, for your purposes, using a 30% model is probably a fair model at this point.

Okay and one more financial question here. As we look into -- as you look at Q3 numbers and kind of going forward here, you put up about a 14.5% operating margin in Q3 here.

Right.

How do you view that going forward? Do you use -- or what do you look at in terms of a target model at this point? Can you get materially higher than that, as we move forward here?

Obviously it’s product mix- and volume-dependent, both of which were pretty favorable in Q3 with Summit and our revenues at $68 million. I suppose there is -- yes. I mean, we’d like to believe there’s some route to go north of that operating margin.

But I think, right now, based on what I see, Dennis, it’s a reasonable number. We’re working on next year’s model right now as we speak, so I don’t have that completely pulled together. But I think there’s probably some potential upside there, but the profitability was good and we were pretty pleased with it. It is above what we had modeled internally.

Okay and I guess the last question is for you, Jim. When you look at the business environment, I guess, first off, how has it been so far in Q4? How has the month of October been and I guess what is your confidence level as you kind of look forward?

Obviously visibility isn’t super long in this business, but it seems like the confidence level you have on the thermal side of the business is pretty high, relative to how it’s been in past quarters. And I guess also, what’s your confidence level on the general-purpose side of the business?

I think it’s pretty much what I said in my remarks, Dennis, and the thermal business looks good and the general-purpose pick and place is fluctuating.

And through the early part of this Q4 that’s exactly what we’re seeing and fully expect that it’s going to be a volatile time with customer forecasts for general purpose, changing very significantly, placing very significant challenges in determining what the right production bill plan and on-time delivery issues are. So, high volatility on general purpose pick and place, strength in thermal.

Okay, fair enough. Thanks guys.

Thank you.

Thank you.

Michael Trotsky of Par Capital.

Hi, just on the new opportunities for thermal. Do you expect to be able to announce wins or how will you communicate to us whether this thermal technology has been adopted into other areas?

Michael, as you may know, we don’t normally - in fact, I think it’s quite uncommon, where we reference any specific customers. It requires their permission to do so; most of them are unwilling to do so.

So I wouldn’t anticipate that we would make any announcement upon winning any business in this high-speed graphics or in this gaming area. We would, however, at our conference call, make some reference to new customers and the applications. That’s how we would do it.

Okay, fair enough. But it won’t happen when it happens. It’ll happen on the normal quarterly conference call.

I would think it would be highly unlikely, since most customers insist that we do not make public announcements of that type.

Right. And then do you see any significant competition developing in the thermal area?

Well, we’re constantly monitoring and augmenting our thermal intellectual property portfolio. As you may know, we’ve made several technology acquisitions in recent years, intended, successfully, to do just that.

Today, we think we have a very strong position. It’s impossible with any degree of certainty to predict whether and how long that’s going to continue. But we are very confident in the strength of our intellectual property and our technology in this thermal area.

Okay. Just before I did this call, I was on the Broadcom call and they mentioned tightness in availability of assembly and tests, primarily in the test area and that actually utilization rates are very high and prices are going up. We saw a 51% increase in your bookings and general pick and place. Is most of that from the assembly and test space?

You mean from the subcontractors?

Yes.

Not most of it. It’s split between IDM’s and subcons. I don’t have the ratio in front of me, but it’s a mix of both.

Okay and regarding the subcons specifically, how would you characterize the environment, what you’re seeing from them?

Well, I would say it’s mixed and volatile and certainly that segment of the business, even more than the IDM’s, is subject to very sudden changes in demand, just given the underlying business model that the subcons have. They’re highly reactive, almost in a tactical fashion, to customer requests. So that’s the nature of the subcon business and it’s therefore difficult to predict any short-term trends because of that volatility.

Right. Okay. But it’s actually comforting for me to know that that big surge in general purpose pick and place was not a result of them, wholly.

Well, yes, it certainly was not a result. There were some orders from subcons, but I think it’s accurate - it is accurate - to say most of the business was from IDM’s.

Okay. Well, that’s good news. Okay.

Thank you.

Thanks, Michael.

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

Well, we’d like to thank you for attending today’s conference call and look forward to speaking to you during our conference call covering Cohu’s Q4 and full year 2005 results. Thank you and good day.

Ladies and gentlemen, this concludes today’s teleconference. We thank you for your participation and you may disconnect your lines at this time. 11