Cohu Inc (COHU) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cohu, Inc. First Quarter 2006 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Mr. Jim Donahue, President and CEO of Cohu.

Good afternoon and welcome to this conference call covering Cohu’s results for the first quarter of 2006. With me today is John Allen, our Chief Financial Officer.

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 or by contacting Cohu Investor Relations. I’ll provide an overview of our results for the quarter. John will then take us through the financial statement and I’ll include with comments on operations 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, April 20, 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 include but are not limited to, failure to obtain customer acceptance and recognize revenues 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 2005.

We assume no obligation to update any of 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.

First quarter sales were $58.3 million, compared to $44.4 million for the first quarter of 2005 and $74.1 million for the fourth quarter of 2005. First quarter revenues exceeded our guidance due to higher than expected sales of semiconductor test handling equipment.

Net income for the first quarter of 2006 was $3.4 million or $0.15 per share, compared to net income of $6.5 million or $0.30 per share for the fourth quarter of 2005 and net income of $12.3 million or $0.53 per share for the fourth quarter of last year.

Net income in the first quarter of 2005 benefited from an income tax adjustment of approximately $3.0 million, or $0.14 per share. The first quarter net income in 2006 was reduced by $0.03 per share as a result of stock option expense.

Semiconductor test handling equipment produced by Delta Design contributed 85% of sales in the first quarter. Test handler unit orders increased 27% in the first quarter. Unit order breakdown for the first quarter was thermal systems, 29%; high-speed handlers, 56%; and other products, primarily burn-in products, 15%.

During the quarter we added a new major customer, a large IDM who selected our EDGE handler for volume production at a Southeast Asia facility.

Orders in the first quarter were $76.5 million, compared to $71.4 million in the fourth quarter of 2005. First quarter orders include $.14.5 million from our asset acquisition from Unisys last month. Fourth quarter 2005 orders included a single $9.0 million order for microwave communications equipment. Excluding both items, orders were essentially the same in both quarters.

In our semiconductor test handling business, first quarter orders increased to $53.6 million from $51.8 million in the fourth quarter and backlog was a record $101.4 million at the end of the first quarter.

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

Semiconductor equipment-related revenues for first quarter of 2006 were approximately 76% international and 24% domestic. International sales were distributed 87% Asia-Pacific, 7.0% the Americas, and 6.0% other.

As we noted in the press release, we currently expect Q2 sales to be comparable to Q1, excluding revenue from our $8.9 million contract with the United Arab Emirates (UAE) that has been deferred and will be recognized upon customer acceptance.

In Q1 2006 we adopted FASB 123R that requires the recording of stock-related compensation in financial statements. We recorded approximately $800,000 of expense in Q1. The comments I make regarding operating expenses include the impact of FASB 123R

Gross margin in Q1 was 35.5% versus 40.7% in Q4. Our gross margin in Q1 was impacted by higher than expected costs associated with supporting certain customer test handler applications and a more conservative estimate of future handler support costs. We expect these support costs will be lower in Q2.

During the first quarter of 2006, orders for our advanced thermal semiconductor test handlers represented a smaller percentage of our total handler orders, compared to the fourth quarter of 2005. Orders for our high-speed test handlers and burn-in products, including the acquired backlog from Unisys, represented approximately two-thirds of our handler unit orders in Q1.

As we previously commented, our advanced thermal test handlers have higher gross margins than our high-speed test handler and burn-in products. If this product mix continues, that is with a significant portion of the unit orders being from high-speed and burn-in products, our gross margins in the second half of 2006 will be impacted.

R&D expense was $7.8 million in Q 1 compared to $8.4 million in Q4 of 2005. The decrease in R&D was primarily due to the shorter reporting period, as Q4 consists of 14 weeks and Q1 12 weeks, offset by higher costs for the development of a new product for the high-speed test handling market. We expect the Q2 R&D expect to be higher than Q1 due to the longer reporting product - 13 weeks versus 12 - and the additional expenses from our Unisys acquisition completed in late March.

SG&A was $9.1 million in Q1, compared to $9.8 million in Q4. The decrease in SG&A was primarily due to the shorter reporting period and also reduced business volume. We expect SG&A in Q2 to be higher than Q1. Interest income of $1.4 million in Q1 was unchanged from Q4.

Our income tax provision for the first quarter of 2006 was $1.8 million or about 35% of our pre-tax income. Our effective tax rate was higher than the 31% previously forecasted due to the inability to include any federal R&D tax credit benefit in the effective rate, as the law extending the credit to 2006 was not signed in Q1. And also the impact of FAS 123R that does not allow for recording a deferred tax benefit for incentive stock option expense.

If the federal R&D tax credit is extended in 2006, we expect our effective tax rate for ‘06 to be lower than the 35% recorded in Q1, perhaps as low as 32%.

Net income per share in the first quarter was computed based on 23 million weighted average shares and share equivalents from stock options.

Moving briefly to the balance sheet, cash and investments were $130.9 million at March 25th, decreasing $8.0 million from December 2005. The decrease was primarily attributed to our asset acquisition with Unisys.

Net accounts receivable of $56.2 million compared to $47.2 million at December and represented about 87 DSO. This was an increase from December and was due to the lower cash collections and an increase in deferred revenue.

Net inventory increased slightly to $50.4 million from $44.8 million at December, due to the Unisys acquisition and the increase in overall backlog. Additions to property, plant and equipment for the first quarter, excluding the $1.8 million in addition resulting from the Unisys acquisition, were approximately $800,000, D&A approximately $1.5 million.

And lastly, deferred profit at March 25th was $16 million compared to $13.8 million at December. Deferred profit relates to revenue deferrals pursuant to SAB104, primarily on Delta test handlers and our contract for microwave communications equipment with the UAE.

Thanks, John.

During the quarter we were honored to be recognized by two customers with quality awards. Intel presented us with its Preferred Quality Supplier Award. This is the sixth consecutive year that we’ve received a quality award from Intel. And Texas Instruments presented us with a supplier award for outstanding support to its Baguio, Philippines plant, which is TI’s largest IP test facility

I’ve commented in the past about the volatility of our industry, particularly in the capacity-driven segment of the market served by our high-speed handling groups and how this makes forecasting future performance inherently inaccurate.

The first quarter was the latest example of this volatility, as significant new business developed quite suddenly. Our manufacturing operations have been ramping to meet customer delivery requirements ever since.

In March we acquired patents, other intellectual property and burn-in products from the Unigen operation of Unisys. We now own important patents that further solidify our proprietary and industry-leading thermal technology that is used by the world’s leading microprocessor manufacturers to optimize the speed rating and thereby the ASPs of their devices. We provide critical capability that directly improves their financial performance.

Through this acquisition, we’ve added highly skilled and experienced engineers to our Company. We have assembled the strongest team of thermal engineering talent and manufacturing capability in our industry. Our strong technical team, formidable portfolio of thermal IP and increasing requirements for precise temperature control during semiconductor tests and burn-in place us in a very strong competitive position. We are very excited about potential new business opportunities as a result of this acquisition.

Recently, IC companies and industry analysts have remarked on softness in the PC sector. Comments and results this week from the largest microprocessor manufacturer indicate that this segment is currently under some pressure. Forecasts from other customers for our thermal systems are quite strong, but we anticipate reduced total demand for thermal handlers in the near-term.

At the same time, prospects for our high-speed handlers are the best we’ve seen in recent quarters. And while this market is always volatile, orders and forecasts are positive and the trend is encouraging. Additionally, we are working with customers to expand the use of our proprietary thermal technology in new applications, some with significant potential.

And with that, Megan, we’ll be happy to take questions.

Thank you, sir. [Operator Instructions] First question, Robert Maire of Needham Capital.

Hi, congratulations on the nice numbers.

Thank you, Robert.

Thanks.

I guess a basic question here is, on the last conference call I noted a significant sense of hesitation or conservatism in terms of outlook. Could you give us a little more detail or flavor as to maybe why we perceived that or why I perceived that? Was there some particular lumpiness in the order pattern or did one of your major customers kind of back off a while and then come back? Because you’ve indicated that orders were flat, minus the acquisitions. Was there any timing that would have contributed to that feeling?

Gee, I’m sorry, Robert. I really -- I guess I’m struggling a little bit to understand why you may have come to that conclusion, quite honestly.

I think, Robert, just recollecting back to the last call, we had come off such a great third quarter, booking-wise, into the fourth quarter. We didn’t think it was particularly bad, but the orders were down and that may be what you’re referring to, with respect to the semi business, from Q3 to Q4. So, yes, I think that’s presumably what you’re recollecting.

So, to the extent that the orders were down in the core business, that was a fact and that was obviously disclosed and discussed on the call. But I don’t think it was any particular pessimism that I recall, with respect to the business overall. I think it was just that the order pattern that we saw, moving from Q2 to Q3 then to Q4.

Okay. Did you have any more turns in the current quarter compared to previous quarters or how was the quarter sort of laid out?

I think it was pretty consistent. I don’t think there was any abnormal trend one way or the other in that regard, Robert.

Okay and your new large customer order was another microprocessor manufacturer I would imagine?

No. That was actually a non-microprocessor customer.

Or graphics.

No. Robert, it’s actually in the other segment of our business, the non-thermal side, the high-speed handling group, the general purpose side.

Okay. In terms of current tone going into the second quarter, would you feel that orders are continuing at the rate you saw throughout the first quarter or up a little bit or any sort of indication, near-term, for what you’re seeing in Q2?

Well, as I mentioned, I think we’ve seen just this week what the large microprocessor manufacturer had to say about his business, at least in the short-term and I commented that I expect we’re going to see some near-term reduction in orders on that side.

However, interestingly enough, other customers for our thermal systems are quite bullish and the forecast looks to be quite good from those customers. On the high-speed handling side, which last year was rather soft and lagged our thermal business, it’s really the reverse situation right now. That side of the business is strong and forecasts look good and the trend is positive.

Okay. If I had to put numbers on it, I’m imagining the high-speed business was up while the thermal was down on an order basis, with one up 20 to 30% while the other down 20 or 30%. Or was it a smaller shift?

Well, let’s see. I mentioned the thermal systems were about 29% in the first quarter. That might have been -- I don’t recall offhand, but I would guess they were about double that in the fourth quarter, roughly double that in the fourth quarter. And the high-speed handlers were 56% in the first quarter and I would guess they were roughly half of that in the fourth quarter as well.

Okay, so almost as if they’ve swapped percentages somewhat.

Right.

Yes.

And do you see that continuing into the second quarter?

Yes. I would anticipate something like that in Q2.

Okay. So, for modeling purposes, in the near-term, we’re going to see a little hit to gross margins as the high-speed stuff has a little bit lower - or I should say somewhat lower - gross margin in the near-term?

Yes. That’s true. I think because we’re working off of backlog and obviously deferred revenue, Robert, what happened in the second quarter, you know we’re likely to see actually an improvement in gross margins. And then obviously we’ll see the effect of this shift in product mix that we’re discussing, more likely in the third quarter.

Okay, so it’s a little over --?

Yes, if the trends continue, obviously, and that’s a little hard to predict, but yes. I think that’s what we’re looking at.

So we’re looking at roughly a three-to-four-month lead time or lag time?

Yes, generally. And then, again, sometimes the lag on the turning of the deferred revenue is even longer, because we’re qualifying new customer sites. So that can be four, five, six months even, so you get sort of delayed effect.

And one last thing - and I’m sorry to hog this here - in terms of microprocessor manufacturers and their views about perhaps nothing is bullish on units going forward. Would you suggest or is there positioning to you that they’re going to be a little bit more cautious going forward throughout the year, because of this concern about units not being up? Or is that what we’re just interpreting from what they’ve publicly said or have they kind of indicated that they might be a little more conservative?

Well, I think it’s a customer-by-customer situation and I think the large company is in a somewhat conservative posture, at this point. But the others are fairly positive, depending on their individual circumstances.

Chip Moore of Canaccord Adams.

Hi, thanks. I think most of my questions have been answered. But maybe you can give some sort of updates on the opportunity you’re seeing with high-speed graphics and nex-gen gaming systems customers?

Sure, Chip. The evals continue. They’re going well. I don’t have any tremendous update, I think, from what I said at the last meeting. These evals, by their nature, are months in duration and continue going well. We’d expect some sort of indication as to what the opportunity might be from specific customers to materialize, maybe as soon as the earliest at the end of this quarter, but certainly in the third quarter.

Okay, great, that’s helpful. And can you talk a little bit about some of the -- I think last quarter you had some customer acceptance issues that were revolving around revenue recognition. Can you just talk about that a little bit?

Nothing out of the ordinary, Chip. It’s just the ongoing typical situation with either a new product at a new customer or a new customer site. I mean, it’s just the routine that we have to go through. It takes some months. But I don’t recall anything out of the ordinary.

Okay, great. Thanks.

Michael Trotsky of Par Capital.

Hi, just another clarification on the graphics decisions for Q2/Q3. I know it’s very early, but in the event that they do decide to going forward with thermal, would this be an ‘06 revenue opportunity?

Hi Michael. Could be, I mean, we really don’t have a great deal of insight yet, relative to the specifics on what the graphics opportunity is or when it would materialize. My best estimate is that we would see some small number of units this year and volume would be in ‘07 and beyond.

Okay. I’m also interested in the breadth of the high-speed orders. You mentioned you have one new major OEM. Was most of the uptick in the business from that OEM or was it more broad-based than that?

It was more broad-based and our long-standing, strong IDM customers were significant contributors in the quarter, as were some new customers such as this one. But this new customer was important but was not, by any stretch of the imagination, the primary reason for the strong performance in the quarter for that group.

Okay and how were the orders split in the high-speed arena versus the OSAT companies?

Small amount of OSAT, actually. I don’t know that I have that exact number in front of me, but I’m guessing it was at least 80%, 85% IDM, something like that, Michael.

Okay. So the OSAT customers really haven’t come back in a major way for you?

Correct. At least they didn’t in the first quarter - that’s true.

Right and they are buying testers, so what’s going on in terms of market share in those customers?

Well, I think we have our OSAT customers that we do well with and then there’s others where our competitors have a little stronger position. I think in general we are gaining and I would also point out that there is a lag, typically, between testers and handler orders that could be as much as a quarter.

Okay. The gross margin guidance, John, or not the guidance, just the performance.

Right.

Almost a 5.0% sequential decrease. Can you quantify how much was mix related, thermal versus high-speed, and how much were other factors? And then you mentioned a rebound going forward. What are the factors leading to that rebound?

Sure, yes. Most, the overwhelming majority of the margin degradation, Michael, was really due to what we referred to in the press release as the additional customer applications support costs and probably a little more conservative view with respect to those costs, I think. So they’re really -- it really wasn’t much of a mix issue in Q1. Our margin without those costs would have been close to our margin in Q4, maybe not quite that healthy because the revenues were lower.

But I think, with respect to the comment with respect to Q2, we expect those costs to be lower. We don’t expect to see a repeat of the magnitude of those costs in Q2. So, as a result solely of that, we would expect the margin to be better in Q2, perhaps several percentage points versus Q1.

Okay. That helps. Now that specific customer, was that in support of new evaluations that we’ve talked about?

Not necessarily new evaluations, but new applications that are being run on the product.

Okay and it’s with existing customers?

Yes. Yes. Yes.

Okay. Okay and then the last question. You’re not really talking about the revenue recognition issue from the UAE contract. It’s been a long time and I just want to get your current thoughts on that and, in particular, how long. Do we wait until you declare it just uncollectable or is that even an issue?

Sure. Actually, we don’t include it in the press release. But since you asked, I mean, we have made progress during the quarter. One specific thing was we had a standby letter of credit where we had it reduced significantly. That supports the contract, yes, via the customer, which is the first step toward, presumably, working toward acceptance, Michael.

We’ve said before we’re not going to try to predict the precise period in which the acceptance will occur, but we’re working closely with the customer. We remain optimistic that ultimately it’s going to be accepted and that therefore we don’t believe there’s a receivable collectibility problem.

Okay, very good. Thank you.

Sure.

Robert Maire of Needham Capital.

Yes, just to go back to the acquired business, should we be modeling that as relatively flattish, kind of, going forward? Or could you give us a little more guidance as to that part of the business?

Well, we picked up that $14.5 million in backlog and we expect that to shift through the balance of this year. That will be subject to SAB 104 revenue recognition requirements, so more likely that revenue will be recognized in the second half of the year. That’s one piece of this Unisys acquisition.

The second piece is our new business opportunities, some of which are very exciting and potentially significant. Those, if they are to develop, will do so in the second half of the year and lead to revenue at the end of this year, next year, and beyond.

Okay, so most of that $14.5 million will be in the second half and if there are any additional orders or adding to the backlog from that acquisition it’ll probably be, again, in the second half?

That’s right, Robert.

Okay, great. Thanks.

Thanks.

Gentlemen, there are no further questions at this time. Do you have any closing comments?

I would like to thank all for attending today’s conference and we look forward to speaking to you at our Q2 2006 conference call. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today’s teleconference. You may disconnect your lines at this time and have a wonderful day. 9