Cohu Inc (COHU) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cohu Fourth Quarter Fiscal Year 2005 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Mr. James Donahue, President of Cohu Inc. Thank you. Mr. Donahue, you may begin.

Good afternoon and welcome to this conference call that covers Cohu’s results for the fourth quarter and FY05. With me today is John Allen, our CFO.

I hope you have a copy of our earnings release. If not, you can obtain one from 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 and year. John will then take us through the numbers in some detail and I’ll include with comments on operations and our view of the business environment looking forward 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, February 2, 2006, 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, failure to obtain customer acceptance and recognize revenue and accounts receivable collection problems; 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; 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 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 nondisclosure agreements.

This was an excellent quarter and year for Cohu with sales, net income and EPS the highest in five years.

Fourth quarter sales increased 95% year-over-year and 8.0% sequentially. Fourth quarter net income rose 399% year-over-year and 29% sequentially.

Sales for the fourth quarter were $74.1 million compared to $38.1 million for the fourth quarter of 2004 and $68.6 million for the third quarter of 2005. Net income for the fourth quarter was $12.3 million or $0.53 per share compared to net income of $2.5 million or $0.11 per share for the fourth quarter of 2004 and net income of $9.6 million or $0.42 per share for the third quarter of 2005.

Orders in the fourth quarter were $71.4 million compared to $72.7 million in the third quarter of 2005. Fourth quarter orders for semiconductor test handling equipment declined 19% from the third quarter, but were substantially offset by an increase in orders for microwave communications equipment. Backlog was $83.2 million at December 31, 2005 compared to $85.9 million at the end of the third quarter.

Cash increased $16.5 million to $139 million at the end of the fourth quarter. Cohu’s Board of Directors approved a cash dividend of $0.06 per share, payable on April 28, 2006, to shareholders of record on March 14, 2006.

For the fiscal year, sales were $238.9 million, an increase of 36% over 2004. Net income increased 103% to $34 million and EPS increased 97% to $1.50. These strong results were driven primarily by unexpectedly strong demand for our Summit thermal handlers. It was a significant accomplishment to successfully ramp the business to meet the sudden and steep increase in demand that began in the second quarter of 2005.

In addition to the excellent financial and operational performance at Delta Design, that is at our test handler business, we saw substantial improvement at BMS, our microwave communications business. While still a small part of consolidated operations, BMS sales for the year increased 145%. The operating loss was reduced by 95% and the business was profitable in the fourth quarter and near break even for the year.

John will now provide details on Cohu’s financial performance.

Semiconductor equipment-related revenues for the fourth quarter of 2005 were approximately 87% international and 13% domestic. International sales were distributed 77% Asia-Pacific, 20% the Americas, and 3.0% Other. Gross margin in Q4 was 40.7% versus 39.6% in Q3. We expect gross margin in Q1 to be slightly lower than Q4.

R&D expense was $8.4 million in Q4, compared to $7.6 million in Q3. The increase in R&D was primarily due to higher R&D expenditures in our semiconductor equipment business for new product development. We expect Q1 R&D expense to be slightly lower than Q4.

SG&A was $9.8 million in Q4, compared to $9.7 million in Q3. The slight increase was due primarily to higher business volume and higher variable expenses tied to profitability. We expect SG&A in Q1 to be lower than Q4 due to expected lower revenues.

Interest income increased to $1.4 million in Q4, compared to approximately $1.0 million in Q3, due to higher interest rates and average investment balances.

Our income tax provision for 2005 was only $400,000 and was lower than federal statutory rate, due to, the reversal of approximately $3.1 million of accrued income taxes and the completion of a tax examination in March 2005, a $5.1 million reduction in the valuation allowance on deferred tax assets, R&D tax credits and export sales benefits. Based on current projections, we expect our 2006 effective tax rate to be approximately 31%.

Net income per share in the fourth quarter was computed based on 23.1 million weighted average shares and share equivalents from stock options.

Moving to the balance sheet, cash and investments were $138.9 million at December 31, increasing $16.5 million from September. The increase was primarily attributed to proceeds from stock option exercises, income tax refunds received during the quarter, a reduction in accounts receivable as a result of excellent collection and net income.

Net accounts receivable of $47.2 million compared to $56.3 million at September 24, 2005 and represented about 57 DSO. This is a decrease of 17 days compared to 74 days at September, due to the timing of cash collection.

Net inventory increased slightly to $44.8 million at December from $43.9 million at September. Additions to property, plant and equipment for the year were approximately $5.7 million and D&A was approximately $5.8 million.

Deferred profit at December 31 was $13.8 million, compared to $12.9 million at September. 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).

Semiconductor test handling equipment produced by Delta Design contributed 84% of sales in fourth quarter. Test handler unit orders decreased 26% in the fourth quarter. However, to put this in perspective requires taking a look at quarterly orders throughout 2005.

In the second quarter, handler unit orders increased 75% sequentially and then increased another 21% in the third quarter. So while our fourth quarter handler orders are down, they remain at levels that we haven’t seen since the year 2000.

Unit order breakdown for the fourth quarter was thermal systems 61%; high speed handlers 28% and other products 11%.

2005 was an exceptional year for Cohu. Sales of Summit handlers reached record levels and we expanded our customer base. Business spiked up suddenly and sharply in the second quarter and remained at that high level through Q3.

We’ve seen orders back off somewhat in the fourth quarter, but quarter-to-quarter changes of this type are not at all unusual in our business and history has taught us that it’s wise to take a longer view in assessing business prospects and in developing our operating plans. For example, in January, orders for our test handlers have been quite strong.

In addition to the Company’s solid financial performance, we are making ongoing investments to improve our product lines and competitiveness. We continue to strengthen our intellectual property portfolio and believe that applications for our proprietary thermal technology are increasing.

As I commented earlier, fourth quarter orders were about the same as in the third quarter, but the traditional method of modeling Cohu’s sales for the next quarter will not yield an accurate result for the first quarter.

First, the mix of orders in the fourth quarter is unusual. Handler orders declined 19% but were largely offset by the increase in orders for microwave communications equipment. However, most of this microwave equipment will not ship in the first quarter.

Second, we expect deferred revenue to increase in the first quarter as a result of higher shipments of new products and the normal customer acceptance procedures associated with these shipments. Therefore we expect first quarter sales to be between $50 and $55 million. This does not include any revenue from our $8.9 million contract for microwave communications equipment with the UAE.

And with that Marissa, we’ll take questions.

Thank you. [Operator Instructions]

Dennis Wassung of Canaccord Adams.

Thanks, guys, a couple of question, first on the order side of things here. The semi order is obviously backing off a little bit here in Q4, I guess. Where specifically did that slow down? Was it in the Summit side of the business as well as the general purpose or capacity-driven high speed orders? How is the -- I guess how does it break out between the different applications?

It was pretty evenly distributed across both product lines, Dennis.

Okay and you mentioned January picked up or at least orders appear quite strong. How does that compare to the order rate in Q4? Would you say that -- I guess what I’m trying to get at was did you see one month in Q4 that it was slower and we’re back at a higher pace or are we coming off of a peak level and kind of running at a little bit of slower pace right now?

Well, January was quite strong, but I’m hesitant to extrapolate that to the full quarter.

Okay.

And that, Dennis, as you know, is primarily because -- and it goes both ways, up and down. It’s just the timing of the receipt of the order. I mean, if it occurs on December 31st it gets booked in Q4. If it occurs on January 2nd it gets booked in Q1. So the difficulty with trying to extrapolate, as Jim says, with one month is it can be misleading, [inaudible - multiple speakers].

Sure. Okay. So, when you look at, I guess, I mean, the phenomena itself, I mean, would you say, I mean, do you see that phenomena, like things slipping out of Q4 into Q1? Or has it just kind of been a steadier month of January. I don’t know if I’m asking the question properly. Was this kind of front loaded at the beginning of January?

I wouldn’t say it was especially front loaded. I mean, I would say it was just normal order patterns. Some orders arrive just as expected and others arrive a little later. Occasionally some are early. So I don’t think there’s any obvious explanation for the order pattern, Dennis. It’s just more or less business as usual, with respect to their order pattern.

Okay. Any differentiation between IDM customers and the subcontractors?

Differentiation with respect to what?

I guess in respect to order patterns. Were they stronger than expected? Or when you talk about orders kind of backing off in Q4, sort of similarly across a few product lines, was it also similar across your IDM customers and the subcons?

Yes. I wouldn’t say there was a clear explanation that the IDM’s were strong and the subcons were not. There was no pattern of that type.

Okay, another set of question, I guess. On the Summit side of the business you’ve been talking about some new opportunities with graphics customers, other gaming applications. Any material change or updates there, any orders from any of these new applications or customers on the Summit side?

Well, we recently have booked some additional orders for the gaming chips. The evaluations continue for high speed graphics applications. We’ve not booked any orders for that business yet. My best estimate is that the high speed graphics evaluations are going to be completed this quarter or early next quarter and we begin to see more clearly what the opportunities are in that market, at that time.

Okay. That’s helpful. And I guess the last question over onto CMS group with the microwave communication order. Obviously it sounds like a follow-on order to your original order there. Any update in the revenue timeline of these orders? Obviously there has been an ongoing saga with the original contract and you got a follow-on order here. Is it, in fact, the same customer here and is there any better predictability in terms of when that could turn into revenue?

Actually, it’s not a follow-on order. It’s a totally unrelated order and we did receive another large order in the fourth quarter, but it’s unrelated to the UAE contract.

As I indicated in my remarks and in the press release, most of that equipment - and it’s really the nature of that business - tends to ship in future quarters versus the Delta Design test handler business, which typically ships, the bulk of it, ships in the next quarter. So that’s why we wanted to highlight that for this quarter.

As far as the UAE contract, as we mentioned last quarter, we are going to publicly announce when the equipment on that contract has been accepted and payment received. We’re in what I consider to be the last steps, final steps of administrative acceptance of the payment details and we believe the receivable is collectible and it’s just a matter of when that occurs.

Okay, thanks guys.

Thanks, Dennis.

Robert Stottman of Bentley Capital.

Hi, thank you. One follow-up on what was just asked. You indicated that in the first quarter guidance you’re assuming no recognition of revenues from the UAE contract. Is it conceivable that some of that would fall into the first quarter?

It’s always possible, yes, and we didn’t mean to suggest either way whether it may or may not occur in Q1. I think, as Jim said, we haven’t tried to predict the precise period in which that would be collected and we would publicly disseminate that information. And keep in mind that it’s really all or nothing. That contract, once it’s accepted, the payment would be due and we would recognize the entirety of that contract, with a minor hold-back. So it’s not something that will be spread over multiple quarters.

Okay. Are the margins on that business substantially lower than the corporate average? I presume that they [inaudible - multiple speakers] --.

They are lower. It’s probably around 30%.

Okay, versus 40% for the [inaudible - multiple speakers] average?

Correct, correct.

Okay and are you aware of any particular issues with regard to acceptance of that? Are there technological hurdles or are there things in dispute with the UAE or is it just going through normal motions in getting them to accept it?

Yes, it’s really the latter. We’ve been in contact with them daily, weekly, and I think it’s really their way of doing business. It just takes time to work through what appear to be minor things and not significant issues. So we believe it’s just, as Jim said, working through the final throes of what we consider the administrative details and then ultimately the customer acceptance sign-off.

One last overall question. It looks like the semiconductor capital goods business is finally starting to pick up. Do you see the fourth quarter order drop-off as basically an aberration or just a randomness of the way orders fall in, especially after such a huge jump in Q2 or Q3? Or is it the beginning of an order flattening or order decline for Cohu?

Well, the way I look at it personally is that in the second and third quarter we had a tremendous spike of business. We were up 75% sequentially and then another 21% sequentially. So our fourth quarter unit order rate for handlers is still about 30%, 35% higher than it was at the beginning of 2005, so within the business, we’re still operating at a very high level.

As far as what are the trends out there, if the semiconductor equipment industry, back-end semiconductor industry is headed up, we’re going to participate in that. But our visibility in this business continues to be little more than a quarter. That’s just the nature of this industry.

Okay. Thank you very much.

[Edward Ho] of Orion Capital.

My questions have been answered.

[Operator Instructions] Paul Wick of JW Seligman.

Hi. Could you comment on customer concentration in the quarter and whether there is anyone who is over 10%?

Well, our major customer, for the year, would be the traditional customers and they would include Intel and Texas Instruments and AMD will be a 10% customer in 2005.

What about in Q4?

Those same customers would be the 10% customers.

Were they all between 10 and 20% or were any of them more than 20%?

We don’t break out that information. We disclose it annually. But Intel, for the year, last year I think was over 40% and it’ll be certainly in that range this year and the others are significantly less.

Okay. Thank you.

Sure.

Gentlemen, there are no further questions in queue at this time.

Okay. We’d like to thank you for attending today’s conference call and look forward to speaking to you again at the end of the first quarter. Thank you.

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