Cohu Inc (COHU) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cohu Third 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. James Donohue, President and Chief Executive Officer of Cohu, Incorporated. Thank you, Mr. Donohue; you may begin.

Thank you, and good afternoon, everyone, and welcome to this conference call that covers Cohu's results for the third quarter of 2006. With me today is our Chief Financial Officer, John Allen.

I hope you have a copy of our earnings release and have had an opportunity to review it. If you need a copy, you may obtain one from our website, Cohu.com, or you can contact Cohu Investor Relations at 858-848-8106.

I will provide an overview of our results for the quarter, John will take us through the financials in some detail, and then I'll conclude with comments on operations, and then we'll 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 26, 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, the concentration of our revenues from a limited number of customers; failure to obtain customer acceptance, resulting in the ability to recognize revenue and accounts receivable collection problems; inventory write-off; intense competition in the semiconductor test-handler industry; our reliance on patents 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 Form 10-K for the year ended December 2005.

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 this information by our nondisclosure agreements.

In May 2006, we sold our metal detection equipment business, FRL. Effective with the June 2006 financial statements, the operating results of FRL are presented as discontinued operations, and all prior period amounts have been reclassified accordingly. Our discussion today will cover the comparative results from continuing operations.

Thanks, John.

As we noted in our press release, our contract with the United Arab Emirates Armed Services was accepted and paid, and third quarter results include 7.9 million in revenue associated with that contract.

Excluding that UAE revenue, sales increased 8% sequentially and were 16% higher than our midpoint third quarter revenue guidance. These are strong results in what is viewed as a challenging environment for back-end semiconductor equipment.

Third quarter sales were 74.8 million, compared to 66.8 million for the third quarter of 2005 and 61.9 million for the second quarter of this year.

Income from continuing operations for the third quarter of 2006 was 4.5 million, or $0.19 per share, compared to 9.7 million, or $0.42 per share, for the third quarter of 2005, and 5.2 million, or $0.23 per share, for the second 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.

Semiconductor test-handling equipment produced by Delta Design contributed 74.8% of sales in the third quarter. This percentage is lower than usual due to the recognition of the UAE contract revenue.

Orders in the third quarter increased nearly 21% to 76.5 million, compared to 63.4 million in the second quarter.

Orders for semiconductor equipment increased from 54.4 million in the second quarter to 66.2 million in the third quarter.

Demand for Summit test handlers that incorporate our proprietary thermal technology was strong. In addition, we received a large initial order from a major IDM for thermal subsystems for use in an advanced IC burn-in system.

Unit order breakdown for the third quarter was -- thermal handlers, 41%; high-speed handlers, 22%; and thermal subsystems and other systems, 37%. Backlog increased to a record 104.5 million at the end of the third quarter.

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

Semiconductor equipment-related revenues for the third quarter of 2006 were approximately 84% international and 16% domestic. International sales were distributed 91%, Asia Pacific; 7%, the Americas; and 2%, other.

In Q1 of this year, we adopted FASB 123-R that requires the recording of stock-related compensation in financial statements. We recorded approximately 1.1 million of stock-based compensation expense in Q3. The comments I make regarding operating expenses include the impact of FASB 123-R.

Gross margin in Q3 was 35.6% versus 35.1% in Q2 of this year. We expect our gross margin in Q4 will be lower than Q3 as a result of revenue expected to be recognized on certain lower-margin semiconductor equipment products, including a product we acquired in the Unisys acquisition. This is expected to result in a margin that is several percentage points lower than our Q3 gross margin.

R&D expense was 11.3 million in Q3, compared to 9.7 million in Q2. The increase in R&D was primarily a result of increased expense of our new product development programs for semiconductor test handlers in thermal subsystems. We expect Q4 R&D expense to be comparable to Q3.

SG&A expense was 10.7 million in Q3, compared to 8.7 million in Q2. The increase in SG&A was primarily due to increased business volume and recognition of the revenue and related deferred costs associated with our microwave communications contract with the United Arab Emirates. We expect SG&A in Q4 to be slightly lower than in Q3.

Interest income of 1.8 million in Q3 compared to 1.7 million in Q2.

Our effective tax rate was 30.3% for the three months ended September 30, 2006, bringing our effective tax rate for the nine-month year-to-date period to 33.2% versus 34.6% for the six months ended June 2006. The slight decrease in the effective tax rate was due to minor adjustments for tax credits and other items.

Our tax rate is less than the U.S. federal statutory rate, primarily due to state R&D tax credits, export sales benefits, and the domestic manufacturing deduction, offset by the effect of statement 123-R that does not allow deferred tax benefits to be recognized on compensation expense related to incentive stock options.

Net income per share in the third 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 140.1 million at September, increasing approximately 1.3 million from June of this year.

Net accounts receivable of 45.6 million compared to 53.9 million at June and represented about 55 days sales outstanding. The decrease in accounts receivable was due to lower shipments in September compared to June and the collection of our receivable from the United Arab Emirates.

Net inventory increased to 54.7 million from 52.4 million at June to support our slightly higher order backlog.

Additions to property, plant, and equipment for the first nine months of this year, excluding the 1.8 million in additions resulting from the Unisys acquisition, were approximately $4 million. Depreciation and amortization during this period was approximately $4.9 million.

Deferred profit at September 2006 was 11.1 million, compared to 17.4 million at June. Deferred profit relates to revenue deferral pursuant to [SAV 104], primarily on Delta test handlers. The decrease in deferred profit was, in part, the result of the recognition of revenue and profit associated with our contract with the United Arab Emirates that was accepted and paid during the third quarter. The decrease was also attributed to previously deferred revenue and profit on Delta test handlers that was recognized in Q3 as a result of customer acceptance. Our deferred revenue at September 2006 was approximately 32.1 million.

Thank you, John.

Orders were much stronger than we expected, driven by our thermal products, and we're the highest since the first quarter of 2000. Summit orders significantly exceeded our internal forecast. In the current industry environment, we do not expect near-term orders to continue at this level.

We achieved an important milestone when we received an initial multi-million-dollar order from a major IDM for thermal subsystems for use in an advanced burn-in system. We began development of this product earlier this year in anticipation of this business, and a portion of the increased R&D expense we have incurred this year is associated with this program. We expect to make initial shipments in the first quarter of 2007.

This product incorporates thermal technology acquired in our March 2006 asset purchase from Unisys. We are pleased to so quickly capitalize on this transaction with this new product, and we are excited by the opportunity to expand our served market beyond test-handlers. We believe that thermal subsystems will make a significant contribution to future sales.

Evaluations of our thermal handlers are continuing at fabless graphics chip companies. As we've commented previously, we have sold our non-automated thermal engineering systems to these customers. As a next step in the evaluation process, in the third quarter, we shipped a Summit production handler to the Asia-based test subcontractor for one of the major graphics IC companies. While we can't yet estimate the market potential for our thermal handlers in the high-speed graphics segment, the performance data collected thus far demonstrates that our thermal technology improves test results.

Visibility in the capacity-driven segment of the market served by our high-speed handling group continues to be very limited. Consumer electronics are now the major end-market for ICs, and the unpredictability of demand in that market makes it extremely difficult for our customers, the device manufacturers and test subcontractors, to accurately forecast their requirements. As a result, our customers delay their purchase decisions as long as possible. This results in high volatility, in near-term forecast, and challenges our operations to respond to very short lead-time requirements, which we're usually able to do.

As we have through the first nine months of this year, we plan to continue to make significant investments in new product development in both our market segments -- high-performance logic and high-speed handling -- during the fourth quarter and beyond. We believe that we have excellent opportunities to gain share in the handler market and to increase our served market by leveraging our thermal technology into new segments, such as thermal subsystems.

Cohu's balance sheet remains strong, with cash near record levels at 140.1 million and no bank debt.

Cohu's Board of Directors approved a quarterly cash dividend of $0.06 per share payable on January 5, 2007 to shareholders of record on December 1, 2006. Cohu has paid consecutive quarterly cash dividends since 1977, nearly 30 years.

We expect sales in the fourth quarter to be approximately 65 million. These sales exclude approximately 11 million in revenue for burn-in-related thermal subsystems that may be recognized in the fourth quarter upon customer acceptance.

And now, we will take your questions. Jen?

Thank you. [OPERATOR INSTRUCTIONS]

Our first question comes from the line of Theodore O'Neill with Nollenberger Capital Partners. Please proceed with your question.

Thank you very much. Terrific quarter.

Thank you, Theodore.

Yes, you said that gross profit margins would be down sequentially or you were guiding for gross profit margins to be down sequentially in the fourth quarter. And will that be down a couple of percentage points even if I don't include the $11 million of potential burn-in business?

Yes.

Or is that only if the 11 comes through?

No, it would be with -- even without the 11 million, Theodore.

With the 11 million, will it be -- go ahead.

Sorry? Now, your question was without the 11 million, will the gross margin be down several percentage points, and the answer was yes to that question.

Okay. Can you tell us what was burn-in business in revenue in the third quarter?

The -- you're talking about orders or --

Revenue.

Revenue?

It was --

Essentially --

Essentially zero.

-- zero.

Yes.

Great.

Thank you. Our next question comes from the line of Colin McArdle with Needham and Company. Please proceed with your question.

Good afternoon, and thanks for taking my questions. Also, in terms of modeling, R&D has been creeping up in the last few quarters, and obviously, product development is a good thing. But is there a plan, let's say, over 2007 to have that return to more normalized levels, or could you just walk me through particular projects that are increasing that budget?

Sure. Colin, we expect that the R&D in the fourth quarter will be comparable to the third quarter. However, we're now in the process of putting together our 2007 business plan, and we'll be in a better position to address that at the next call. We intend to continue to make very significant investments in new product development, but I'm just not prepared to say whether it's going to continue at this level or not in '07 at this point.

Okay, understandable.

I would just add that you referenced the last couple of quarters, the increase in R&D, which is correct. And as we've indicated before, certainly a part of that is due to the March acquisition of the Unisys asset purchase, and so that's increased our R&D alone right there fairly significantly.

Okay, understandable. I obviously applaud you for paying a dividend. That's a rarity, although it's becoming more of a fad. But I wondered, with 140 million, I believe, in cash right now if you have other opportunities out there either to return shareholder value or acquisitions as you've been on a platform thus far?

Well, we've used some of our cash for acquisitions, one this year, the one John referred to, in March and one last year. Both were relatively small acquisitions, but it is our intent to grow the Company, both organically and through acquisitions, so our intended principal use for some portion of our cash is in the acquisition area, yes.

And would you -- could you just walk me through what your strategy would be, whether it's building out a global platform of distribution or technological bolt-on acquisitions, maybe financial criteria, accretive within the first year or things like that?

Sure. Well, we look at acquisitions there at least as two types of acquisitions. First, the technology-type acquisition, which is the type that -- of our most recent acquisitions, both the Unisys and the one in '05, which was Cryotech. These are acquisitions that bring us important intellectual property or other technology.

In terms of a strategic acquisition that would expand our served market or available market, we would look at acquisitions in the back end of the semiconductor equipment area, in processed steps that were upstream or downstream, most likely, from the test segment, which is where we currently participate. It's our plan to continue to focus in back-end semiconductor equipment.

Okay. Thank you. Thanks [inaudible].

Sure. Thank you.

Sure.

Thank you. Our next question comes from the line of Dennis Wassung with Canaccord Adams. Please proceed with your question.

Thanks, guys. A few questions for you. I guess, first off, and I think I missed part of Theodore's question. I don't know it just blacked out or not, but in the Q3 revenue number, was there any Unisys revenue? Because I know you talked last quarter, I think, about there's a roughly $15 million number that may or may not be recognized. I'm curious if that was included in the Q3 numbers.

No, there was no Unisys revenue. That was not included in the third quarter, Dennis.

Okay. And so when you look at the Q4 guidance, it's 65 million, excluding this $11 million number. Now, is that the Unisys revenue, or is that the new business you're talking about with these thermal subsystems?

No, the 11 million that we're referring to is not -- it's not the -- when you say the new business, there's several different levels of new business, okay? So which -- it is not the latest order that we [received], if that's your question.

Okay. I guess what I'm trying to figure out, I think when you guys came across with -- or when the acquisition came in, you acquired some basically backlog that hit your order number.

Yes, right. You're talking about the Unisys acquisition, right?

Right. So that $11 million number is that piece of business?

It is not -- it is not related -- no, the 11 million is not the Unisys business.

Okay. So what, I guess -- what is the timeframe for that revenue? It sounded like last quarter you had expectations that it would either be Q3 or Q4. Any change, or am I not remembering [inaudible]?

Yes, the 15 million that we profiled [yet] that was not recognized in Q3 is Unisys-related business, and we currently expect that to be realized in Q4.

Okay. All right. So that's part of the 65 million?

Correct, correct.

Got it. Okay, thank you. Sorry for the confusion.

No, that -- it is. It's a little hard to follow.

Yes, it is -- it is a little confusing, admittedly, Dennis.

No worries. All right. So next question. Obviously, you guys had a very strong quarter here, and it sounds like the Summit was a lot stronger than you guys had expected. So I'm just curious what drove that out-performance? Was it your sort of traditional customers and traditional applications? What was the real -- I guess, what surprised you here, and which application is it?

Well, it's -- in the traditional -- in the traditional customer area, where one customer is adding capacity at a rate that was much higher than they previously forecasted.

Okay. And do you expect that to be sort of an ongoing trend here? Are they being pretty aggressive, or is this sort of a one-quarter phenomenon, from what you can tell?

I would think that in terms of ordering, that customer ordering at that level on an ongoing basis is not likely.

Okay. Okay, another quick question. You talked about the graphics application here, and it sounds like you shipped the first production Summit into this application at a subcon. I guess, first, is that a new subcon customer for you for the Summit? And is there any indication as to when that might turn into more volume in terms of additional systems?

It is -- it is a new subcon customer. It's really that graphics, that fabless graphics manufacturer's test subcon. We don't have any equipment of any type in it, that particular subcon, at the moment. This apparently is going to be quite a lengthy evaluation. I think it's going to extend into the first quarter of 2007.

Okay, that's helpful. And I guess, last question, the new -- the new application you're talking about here, it sounds like it was a pretty big chunk of the business in the quarter, the thermal subsystems. And I guess, first, clarification. The breakdown you gave, 37% in the quarter, I'm assuming that was of bookings?

Yes.

Okay. And what do you see in terms of market opportunity here? You made the comment that this new avenue could have a significant contribution to your business this year. Is this sort of a -- you're going to be limited to a couple of customers? What is the end-market application, if you can give it, and are there any specific drivers you can talk about?

Yes, the current market is providing thermal subsystems that are used in what we're calling advanced burn-in systems, distinguishing them from standard burn-in systems. These are burn-in systems that have the ability to both cool and heat the device.

Conventional burn-in systems, as the name suggests, are heating up the device and trying to detect infant mortalities as the device operates at an elevated temperature. So the market for these advanced burn-in systems in burn-in is really comparable to what the market is for our Summit test-handlers. It's high-power logic devices, and the principal high-power logic devices are microprocessors. There are a number of customers, but there are two very large customers in that segment, as you know.

Okay. So along the lines of your expansion into graphics, I mean is this something where this could expand into some other applications as well?

Yes, it certainly could. To the extent that our Summit thermal technology provides improved test performance, the same would hold true in burn-in.

Okay. Great. Thanks, guys. Good job.

Thank you.

Thank you. We now have a follow-up question from Theodore O'Neill with Nollenberger Capital Partners. Please proceed with your question.

John, can you just give us a little more color on the gross profit margin declining in the fourth quarter and sort of where that's coming from?

Sure.

And whether or not if the additional 11 million comes in, will that make it better or worse?

Sure. With respect to the decline in gross margin, I referenced in my remarks the margin on one of the products we acquired in the Unisys acquisition. And in that transaction -- I don't want to make it overly complicated, but some of the inventory that we acquired was basically in a near-finished state, so the accounting rules require you to write that inventory up to something approaching sales value. So that -- when we sell that, when we recognize that revenue, which we hope to do in Q4, and that is that $15 million that we referred to in the prior earnings release, that will have a lower margin. That was anticipated. It's not a surprise.

So that's a significant factor in [weighting in] on the gross margin in Q4, particularly, because it's a fairly significant portion of the revenue that we expect to record in Q4.

With respect to the potential $11 million that we reference in the Q3 earnings release that may be recognized if we achieve customer acceptance, the gross margin on that product is somewhat lower than our traditional margin on handlers, but so it probably wouldn't have a dramatic impact on our aggregate gross margin in Q4.

And should I think of that 11 million as a probability of greater or less than 50/50?

Yes, that's a very good question, Theodore, and honestly, it would be difficult for me to say. We've thought long and hard about this disclosure, obviously, when we put it in the press release, and I think at this point, it's a little early for me to comment on that. I think, obviously, as we work through the quarter, I'll have a much better feel and could really comment on that better. But right now, I suppose, yes, it's -- it might be 60/40, but honestly, when you have those kind of odds in revenue recognition, it's very hard to say whether we're going to have that or not. So it's a little difficult for me to comment right now any further on that.

Okay. Thanks very much.

Sure.

Thank you. [OPERATOR INSTRUCTIONS]

Gentlemen, there are no further questions at this time.

We'd like to thank everyone for attending today's conference call, and we look forward to speaking to you when we report our Q4 results. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.