Cohu Inc (COHU) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cohu, Inc. second quarter fiscal year 2006 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, and welcome to this conference call covering Cohu's results for the second 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, Cohu.com, or by contacting Cohu Investor Relations at (858)848-8106. I'll provide an overview of our results for the quarter.

John will then take us through the financial statements, and I'll conclude with comments on operations. And we will 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 it's 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, July 20, 2006.

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 resulting in the inability to recognize revenue in accounts receivable collection problems, the concentration of our revenues from a limited number of customers, inventory write-offs, intense competition in the semiconductor test handler industry, our reliance on patent and intellectual property, 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 Securities and Exchange Commission, including our most recently filed Form 10-K and 10-Q.

We assume no obligation to update any 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.

In May, we completed the sale of our metal detection equipment subsidiary, FRL, as a result the operating results of FRL have been presented as discontinued operations, and all prior period amounts have been reclassified accordingly. My comments today refer to our continuing business and exclude FRL.

Second quarter sales were 61.9 million, compared to 49.7 million for the second quarter of 2005, and 56.8 million for the first quarter of 2006. Net income for the second quarter of 2006 was 4.7 million, or $0.21 per share, compared to net income of 5.6 million, or $0.25 per share for the second quarter of 2005, and net income of 3.6 million, or $0.16 per share, for the first quarter of 2006.

Net income for the second quarter of 2006 benefited from a gain on the sale of our Littleton facility of approximately 3 million, which was offset by 0.7 million of stock compensation expense. The semiconductor test handling equipment produced by Delta Design contributed 88.5% of sales in the second quarter. Semiconductor equipment orders excluding burn-in products acquired from Unisys in March of 2006, decreased 15% from the first quarter, as a result of lower orders for thermal handlers, and were about the same as in the fourth quarter of 2005. Unit order breakdown for the second quarter was high speed handlers 70%, thermal systems 20%, and other products, primarily burn-in, 10%.

Orders in the second quarter were 63.4 million, compared to 75 million in the first quarter. However, first quarter orders included 14.5 million from the Unisys asset acquisition that we completed in March of this year. Excluding that acquired Unisys backlog, second quarter orders for semiconductor equipment increased from 53.5 million in the first quarter, to 54.4 million in the second quarter. Backlog was a record 102.8 million at the end of the second quarter.

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

Semiconductor equipment related revenues for the second quarter of 2006 were approximately 85% international, and 15% domestic. International sales were distributed 89% Asia Pacific, 9% the Americas, and 2% other.

In Q1, we adopted FASB-123-R that requires the recording of stock-related compensation in financial statements. We recorded approximately $700,000 of expense in the second quarter. The comments I make regarding operating expenses include the impact of FASB-123-R, in addition, as Jim indicated, we sold our subsidiary FRL in the second quarter, and all amounts I refer to in my remarks, again reflect the continuing business, and exclude FRL.

Gross margin in Q2 was 35.1%, versus 35.6% in Q1. Our gross margin in Q1 was impacted by higher than expected costs associated with supporting certain customer test handlers. While these costs were lower in the second quarter, our gross margin in Q2 was impacted by a change in product mix, with lower margin edge and capital handlers representing a greater percentage of sale. We currently expect our gross margin in Q3 to be about the same as Q2, recognizing that this is heavily dependent on product mix.

R&D expense was 9.7 million in Q2, compared to 7.6 million in Q1. The increase in R&D was due to the longer reporting period, as Q2 consisted of 13 weeks, and Q1 12 weeks, increased costs as a result of the Unisys acquisition, and higher new development costs for products for the type D test handling market. We expect Q3 R&D to be slightly higher than Q2.

SG&A expense was 8.7 million in Q2, compared to 8.6 million in Q1. We expect SG&A in Q3 to be slightly higher than in Q2. Interest income was 1.7 million in Q2, versus 1.4 million in Q1, with the increase primarily attributable to higher interest rates.

Our effective tax rate for the second quarter and 6 months of 2006, was approximately 35% of pretax income. If the federal R&D tax credit is extended in 2006, we expect our effective tax rate for 2006 to be slightly lower than the 35% recorded for the first 6 months. Net income per share in the second quarter was computed based on 22.8 million weighted average shares, and share equivalents from stock options.

Moving to the balance sheet, cash and investments were 138.8 million at June, increasing about 8 million, from the roughly 131 million in March of 2006, the increase was primarily attributable to the sale of our Littleton facility, and FRL. Net accounts receivable on 53.9 million, compared to 55.4 million at March 2006, and represented about 77 days sales outstanding. This was a decrease in DSOs from March 2006 due to better cash collection. Net inventory increased to 52.4 million from 48.1 million at March, in anticipation of orders expected to be received in Q3.

Addition to Property Plant and Equipment for the first six months of 2006, excluding the 1.6 million in additions resulting from the Unisys acquisition, were approximately 3.4 million, Depreciation and Amortization was approximately 3.3 million for the 6 month period. Deferred profit at June 24 was 17.4 million, compared to 16 million at the end of March, deferred profit relates to revenue deferrals pursuant to SAV-104 primarily on delta test handlers, and burn-in products, and our contract for microwave communications equipment with the United Arab Emirates.

Thanks, John. Last week, we exhibited at the Semicon West Trade Show, where we met with customers and our industry colleagues. With respect to short term business prospects, we saw more uncertainty, rather clear optimistic or pessimist bias about business conditions. Based on customer forecast, we anticipate that orders for our proprietary thermal systems will continue near current levels for the rest of this year. The competitive struggle in the microprocessor industry should be neutral for us, as we supply thermal handlers to both companies. Evaluations of our thermal systems are progressing at fabless graphics chip companies.

We have sold several of our non-automated engineering systems to these customers, and believe that we will see our first order for a production system, by the end of this year. We are not yet able to quantify the potential market for our thermal handlers, as these graphics IC companies.

Volatility in the capacity driven segment of the market served by our high speed handling group is as dramatic as we've seen it. For example, at the end of the second quarter, orders received from one of our largest customers in this segment, exceeded their early Q2 forecast nearly four fold. The second half 2006 forecast from this customer continues to fluctuate.

Given the uncertainly that we see across the industry concerning near-term prospects for back end equipment, we were quite pleased that our orders for out semiconductor equipment increased for the second consecutive quarter, excluding the impact of the acquired Unisys backlog. We are excited about our new product development programs, and the opportunity to grow our revenues, particularly through new applications for our proprietary thermal technology, and high power burn-in systems.

Cohu's balance sheet is strong, we have cash of 138.8 million, and no bank debt. Cohu's Board of Directors declared a cash dividend of $0.06 per share, payable on November 3, 2006, to shareholders of record on September 8, 2006. Cohu has paid consecutive quarterly cash dividends since 1977.

For the third quarter, we expect sales to be between 55 and 60 million. This estimate does not include up to 15 million in additional revenue or new burn-in products that may be recognized in the third quarter. We acquired this product line in our Unisys acquisition, and have been shipping systems, that are currently under going normal customer assessment procedures, when acceptance is completed, we will recognize the revenue. However, we cannot predict with certainty if this will occur in the third quarter.

And we continue to defer revenue on our $8.9 million contract with the United Arab Emirates, or microwave communications equipment, as we have previously announced, this revenue will be recognized upon customer acceptance. And now, we will happy to take your questions. Operator?

Thank you. Ladies and gentlemen, at the time, we will be conducting a question and answer session. [OPERATOR INSTRUCTIONS]

Our first question comes from the line of Robert Maire with Needham & Company.

I just wanted to ask about the near term momentum in the industry. We heard from Intel that there's a slight reduction in CapEx, but it seems that it is focused more on the back end assembly and test segment, and though you have similar exposure to either microprocessor manufacturers, any near term indications you can give us as to momentum, you know, over the past two or three weeks, or things you heard from your customer, aside from what's out there?

Robert, in the microprocessor segment, there's really been no change in momentum for several months, as it's been pretty much status quo. We don't see any significant change.

Does that mean a relatively low level of business currently?

Well, we've commented that our thermal handler business is off significantly, you can see that in the product mix that we reported in this quarter, where we had 70% in our high speed handlers, 20% in our thermal systems. That's quite a shift from a year ago, but, you know, just a little bit of an additional reduction in thermal handlers from the first quarter. We expect to see this level based on our current visibility and customer forecast through the rest of the year.

In terms of high speed handler sales, is there any seasonality such that I would see the high speed handler sales pick up, you know, in front of the busy season in the fall, and slow down after that, or is there any seasonality attached to that? Sort of the near term momentum on that piece of business?

We don't really see any seasonality in this side of the business, on that side of the business, volatility, but not seasonality.

Okay. In terms of margins on that side of the business, any change in terms of competitive positioning, versus others, who in that part of the business can run it slightly more commodity-like?

We commented that our margins are higher on our proprietary thermal tools than they are in the high speed handlers, and you know, there is more competition, and thus the margins are lower on that side of the business.

But no particular change in the near term on that?

No, no change, no.

Okay. Great. Thank you.

Thank you.

Our next question comes from the line of Chip Moore with Canaccord Adams.

Thanks, guys. How are you doing?

Good.

I want to go back to the 15 million from the Unisys burn-in products. What's the likelihood that gets recognized, is this more of a binary event or how should we be thinking about this?

Typically, it would be, Chip, if by binary you mean all or nothing obviously, in terms of the entirety of that amount. Because the systems are all the same types of units, so we are waiting for obviously the customer to accept the platform, the unit basically. And as far as, I think in the press release and Jim's comments, I think it really is the best information that we have today, and that is we cannot predict with certainly whether they will or will not, we felt that it was important to add to the press release, but right now, it's difficult to say, and we really won't know until we work through the quarter, Chip, as to whether that will or will not be recognized in Q3.

I think the important, the other important thing to note is if it's not accepted in Q3, it presumably would most likely be accepted in Q4, so it's really just a timing issue, obviously, as opposed to any particular issue with the product itself.

And then you all talked about just general industry conditions on the microprocessor side. I've seen similar across all your businesses, or is that primarily just on the microprocessor side?

Well, on the high speed handlers side, we think that side of the business today is characterized increasingly, and it's been developing over the last couple of years, into a very volatile business, where customers are changing their forecast frequently and suddenly, and you know, historically we had pretty good visibility per quarter, we don't even have that any more on this side of the business. Customers are very conservative, and as a result, when they do require additional capacity, it's always quite a scramble to meet their needs.

Great, thanks.

Thank you.

Our next question comes from the line of Michael Trotsky with Par Capital Management, Inc.

Hi.

Hi, Mike.

You mentioned a little bit about, you know, the graphics IC companies that are testing your systems, and you expect an order by year end for a production system. Is that new news? Were you saying that last quarter?

I don't think I said last quarter necessarily that we would get a production order. We have got the customer identified, he's on our forecast, and so that's a change from the general positive progress, that we have been making for several quarters in this margin.

So presumably, things have gotten beyond the testing stage, where they are comfortable they will need it for production?

Yes.

And the issue now is how many systems they'll need, and can you elaborate on that? You know, is it, what's it dependent on?

It is really dependent on two major factors, one you mentioned, and that is unit volume. The second is finding the point, and the customer is still assessing this, at which the benefit of our thermal control technology are compelling enough to use the tool in those applications, versus their existing existing tool.

I think in general, the higher the power and speed of the graphics chips, the more benefit will be derived from using our thermal systems, but the precise parameters around that have not yet been developed, and that's why I said it's a little early to, for us or for them, to accurately size what the opportunity is.

Where is the testing for these graphics chips done? Is that an [OSES] provider, or is it at the company, or somewhere else?

It's done at OSES.

And they are not currently using thermal for any of this?

That's correct.

Would it be a new [HOSAC] customer that would take delivery? Or do they have some thermal capability already?

They don't have our thermal capability, so it would be a new application for us.

Right. Okay. And then just a little more on the $15 million that you are not including in the revenue.

Okay.

I'm sorry, but I missed a little bit of the last question. What makes the approval process different in this case than, you know, the other approval processes?

Yes, that's a good question, there isn't any difference, Michael. I think the reason we singled this out was because of the size, the amount, and the fact that it was directly related to our recently completed acquisition of that Unisys product line, so I think that's why we felt we should call out.

Since it's a new product, and one that, you know, we acquired through the acquisition. We felt it was important to at least help the reader understand that there's a significant portion of our backlog that is related to this, and again, we just don't know with certainty whether it will be accepted and recognized in Q3 yet.

And more granularity on that, is it all one customer?

Yes.

And do you have experience with that customer in terms of recognizing shipments --

Yes, yes.

And so you have some sort of knowledge on how they --

Yes, yes, definitely.

All right. Thank you.

Thank you.

Once again, ladies and gentlemen, [OPERATOR INSTRUCTIONS] Gentlemen, there are no further questions at this time. Do you have any closing comments?

Yes, I'd like to thank everyone for attending today's conference call, and we look Ford to speaking to you in October, when we will be reviewing Cohu's third quarter results. Thank you, and good day.

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