Cohu Inc (COHU) 2006 Q4 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Cohu Incorporated fourth quarter and year-end 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 Incorporated. Thank you. Mr. Donahue, you may begin.

Good afternoon, everyone, and welcome to this conference call that covers Cohu's results for the fourth quarter and for the year ended December 30, 2006. With me today is John Allen, our Chief Financial Officer.

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 then take us through the financial statements and I'll conclude with comments on operations and our view of the near-term business environment 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 1st, 2007 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, our ability to convert new products under development into production on a timely basis, support product development and meeting customer delivery and acceptance requirements for next generation equipment, failure to obtain customer acceptance, resulting in the inability 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, 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 10K and 10Q.

We assume no obligation to update any of the information shared on this conference call. Further, 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 non-disclosure agreements.

Okay, thank you, John. Cohu's fourth quarter sales were $76.6 million, up slightly on a sequential basis and 18% above our previously issued guidance. Semiconductor test handling equipment accounted for 88% of fourth quarter sales.

These results do not include any revenue from burn-in related thermal subsystems that remained unrecognized at year-end. The increase in sales in the fourth quarter was due to stronger than expected shipments of test handling equipment produced by Delta Design.

Net income increased 26% sequentially to $5.3 million, or $0.23 cents per share for the fourth quarter, compared to $4.2 million, or $0.18 per share for the third quarter.

As we anticipated in our third quarter comments, Q4 orders declined and were $58.4 million compared to $76.5 million for the third quarter. In the third quarter, orders were unusually high under generally weak semiconductor industry conditions, due to strong demand for our Summit Handler and we received a large initial order for thermal subsystems for us in an advanced IC burn-in system.

Thermal subsystems are a new product for us and, unlike our continuing test handler business, we expect that orders for multiple units will be placed periodically at longer intervals, with deliver spread out over several months or longer.

Cohu's backlog at December 30th, 2006, was $86.3 million. Unit order breakdown for semiconductor equipment in the fourth quarter was thermal handlers 30%, high-speed handlers 30%, thermal subsystems 36% and other systems 4%. For the full year, sales from continuing operations increased to $270.1 million, compared to $231.4 million in 2005. Income from continuing operations was $18.6 million, or $0.81 cents per share, compared to $34.3 million, or $1.51 cents per share in 2005.

Net income in 2006 was impacted by product mix, acquisition and integration cost, increased R&D spending on test handling equipment and thermal subsystems and stock compensation expense that, under GAAP, was not expensed in 2005.

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

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

Semiconductor equipment related revenues for the fourth quarter of 2006 were approximately 87% international and 13% domestic. International sales were distributed 95% Asia-Pacific, 4% the Americas and 1% other.

In Q1, 2006, we adopted FASB 123R that requires the recording of stock related compensation in financial statements. We recorded approximately $900,000 of stock based compensation expense in Q4. The comments I make regarding operating expenses include the impact of FASB 123R.

Gross margin in Q4 was 31.7%, vs. 35.6% in Q3. The decline in gross margin was about what we expected and resulted from revenue recognized on certain lower margin semiconductor equipment products, primarily a product from the Unisys acquisition. We expect our gross margin in Q1 will be approximately 2% higher than our Q4 margin, on significantly lower sales.

R&D expense was $10.5 million in Q4, compared to $11.3 million in Q3. The decrease in R&D was primarily a result of decreased expense for certain new product development programs for semiconductor test handlers and the shorter accounting period of 13 weeks in Q4, vs. 14 seeks in Q3. We expect Q1 R&D expense to be slightly lower than Q4.

SG&A expense was $9.1 million in Q4, compared to $10.7 million in Q3. The decrease in SG&A was primarily due to the recognition of the revenue and related deferred costs associated with our microwave communications contract with the United Arab Emirates armed services and the shorter accounting period. We expect SG&A in Q1 to be about the same as in Q4.

Interest income of $1.9 million in Q4, compared to $1.8 million in Q3. Our effective tax rate was 18.3% for the fourth quarter, bringing our effective tax rate for the full 2006 year to 29.5%, vs. 33.2% for the nine months ended September, 2006. The decrease in the effective tax rate was due primarily to the impact of the Federal R&D tax credit that was approved by congress in December, retroactive for the full 2006 year.

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

We expect our effect tax rate for 2007 to be approximately 33.% to 34%. But the actual rate may vary significantly and is highly sensitive to our pre-tax earnings levels.

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

Moving to the balance sheet, cash and investments were $147.9 million at December, increasing approximately $7.8 million from September, due to cash generated from operations.

Net accounts receivable of $50.1 million compared to $45.6 million at September and represented about 59 day's sales outstanding. Net inventory decreased to $48 million, from $54.7 million at September, due to the decrease in Q4 orders and inventory reduction initiatives. Additions to property, plant and equipment for 2006, excluding the $1.8 million in additions resulting from the Unisys acquisition, were approximately $4.7 million. Depreciation and amortization for 2006 was approximately $6.5 million.

And finally, deferred profit at December, '06, was $9.8 million, compared to $11.1 million at September. Deferred profit relates to revenue deferrals pursuant to [SAV] 104, primarily on Delta test handlers. The decrease in deferred profit was in part a result of the recognition of revenue and profit associated with the earlier mentioned product from the Unisys acquisition that was recognized in Q4 as a result of customer acceptance. Our deferred revenue, at December, '06, was approximately $22 million.

Thanks, John. 2006 was a strong year for Cohu as sales grew more than 16% following very strong growth of 36% in 2005. This was a significant accomplishment as orders for Summit Handlers declined sharply from the record levels achieved in 2005. Orders for our tri-temperature high speed handler, The Castle, reached the highest level since 2000, as customer requirement for cold testing increased.

In 2006, we won new customers and diversified our customer base. We completed the acquisition of the [Uniging] group from Unisys and successfully integrated the acquired products, technology and personnel into our operations. We further capitalized on this acquisition and commenced development of the thermal subsystem I commented on earlier. Development of this product is progressing well and we expect to begin making shipments this quarter.

To reduce costs and to provide our customers with the shortest possible lead times, we increased output at our Philippines manufacturing operation. At this facility, we manufacture the conversion kit that configures our test handlers for each IT package type.

We are currently producing approximately 50% of the kits sold to our Asia-based customers at our Philippine operation, and we expect to increase capacity at that operation further in 2007.

As John noted, in May we completed the sale of our metal detection equipment business. This business had generated operating losses in recent years.

Now, looking ahead, we expect first quarter sales to be between $53 million and $58 million. This excludes deferred revenue on our initial thermal subsystem product that increased from $11 million at the end of Q3 to $14.5 million at the end of Q4. We expect that this revenue will be recognized in the second half of 2007.

Visibility in the back end semiconductor equipment industry is limited to about one quarter. Under current industry conditions, we anticipate that customers will remain cautious with capacity purchases during the near-term. We expect volatility to remain high as consumer electronics, with its myriad of products and unpredictable demand are now the primary end market for semiconductor devices.

Our balance sheet is strong, with cash of $147.9 million and no bank debt. Cohu's directors approved a quarterly cash dividend of $0.6 per share, payable on April 27th, 2007, to shareholders of record on March 13th, 2007.

And with that, we'll be happy to take questions, Jen.

[OPERATOR INSTRUCTIONS]

Our first question comes from Colin McArdle, with Needham and Company. Please proceed with your question.

Good evening Tom and John how are you?

Good.

My question refers to your comments just now on consumer electronics driving your end markets. Within that do you see the quarters building sequentially and business continuing to build in to Q4, and a seasonality to it that should become a more normalized pattern?

Colin, this is Jim. I really don't know, I mean I probably read the same reports, or maybe some subset of the same reports you do. I mean our customers who are primarily the consumer products oriented IC manufacturers are telling us that in the near term, the next quarter or so, they expect demand to be muted. And that's about as far ahead as they're giving us any visibility.

Okay, and then for modeling purposes, you said that R&D was going to be coming down in the current quarter somewhat. Is that an absolute dollar value that we should think about throughout the rest of the year?

I didn't make any reference to the rest of the year; I really think it depends upon development programs and how they progress. So we didn't give any guidance, and I would hesitate to do so at this point.

Okay but with a lot of the investments already finished, just in thinking about it, let's say in terms of a percentage of revenue even, is there some way to get closer to the number?

I think I look; I probably really focus on absolute dollars in terms of my comment, Colin. I think you're right, as I said; I'm just looking at what I said, slightly lower than Q4. And as far as how you want to model it going on from there -- I mean certainly, historically I think, although it's always dangerous to say this, the most recent quarter is the best indicator of future quarters I guess. So if you're going to model, you have to model, I think, based on the most current information, which would be the Q1 numbers.

Colin I would add that on an absolute dollar basis, we don't anticipate R&D expenditures increasing throughout the year.

Okay, all right, thank you very much.

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

Hi, thanks guys. Just a couple of quick housekeeping questions. So the Q1 outlook, I believe you said that excludes the deferred revenue on the initial thermal subsystems. Could you just walk me through those numbers again? I didn't quite catch those.

Sure. That revenue at the end of the third quarter, Chip, was $11 million, and we made additional shipments in the fourth quarter so that at December 30 that deferred revenue was $14.5 million.

And that's excluded from Q1 guidance?

Yes. We expect that to be recognized --

Second half?

Yes.

Okay. And on the stock option expense, could you break that out by line item?

It's a little more than 50% SG&A, we didn't provide that, we stopped giving all that information Chip, because I think most people have too. But if you look at, I think it was probably 50% SG&A and then the smallest component would be manufacturing and then R&D would make up the balance.

Okay. I'll let someone else hop on.

[OPERATOR INSTRUCTIONS]

Our next question comes from the line of Charlie Carter with Trustco. Please proceed with your question.

Thanks. I had a question on what the weighted average cost of capital you all use for your investments positions.

We don't have any, obviously we don't have any debt, we haven't borrowed any money for a number of years. All the cash on the balance sheet has been generated from operations. Probably in the mid teens I guess is what I would look at. But honestly we haven't really focused on that in terms of acquisitions. We've never had any borrowing.

Well the reason I asked the question is I'm interested in the cash balance, and I noticed it earned about less than 5% over the past 12 months. So I know that you all have had that for a while, and I'm sure you like to have it nearby for opportunities, but nevertheless it's earning, I guess obviously well below your cost of capital. So I just wanted to see what the board thought about that capital allocation decision.

I think the board and management believe that the best use of our cash on a long term basis to increase shareholder value is through an acquisition, a strategic acquisition. We've made several what I would call technology acquisitions in recent years where the cost of capital criteria was not the predominant criteria for determining the merit of those acquisitions. It was rather the need to solidify, or the opportunity to solidify some important technology and intellectual property.

As John mentioned, I think looking at a strategic acquisition we would look to a cost of capital metric much more so than we have in a technology acquisition, and that's really what we intend to utilize our cash, or a substantial portion of our cash for, is a very good acquisition that's synergistic to our core business.

I guess the question then, I would assume then, well I don't know how big of an acquisition that you're looking to do, but you still have access to the capital market. So you could come back and raise a couple of hundred million dollars if you needed to, if it was, if that acquisition met your cost of capital threshold. So it's not absolutely necessary that you have capital that's just kind of sitting there idly. I'm just curious because it's a significant amount relative to the size of the company and I wanted to know how the board thought about that. Thanks.

It's a fair question. But I think you'd see a lot of companies, the stronger companies in our sector, have large cash positions, large liquid balance sheets, and there's a number of reasons for that, some of which Jim touched on. But certainly I think we feel that the best use of the cash is to grow the business through, potentially, acquisitions that could use a portion of that cash.

Increasingly our customers are looking at the financial health of suppliers, not simply their current product portfolio.

Well you have a very healthy balance sheet, that's for sure. Thanks.

[OPERATOR INSTRUCTIONS]

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

Okay. I was wondering, John, I may have missed this. But in last quarter you gave guidance of $65 million for top line and you came in at 76.

Right.

Is that the $11 million from the burn in, or is that the business was just much better?

That's a good question, Theodore. No the incremental revenue, Jim made reference to this, did not have anything to do with that $11 million. And that remains deferred.

That's now $14 million.

That's right, exactly. So it was additional shipments of semiconductor related systems, handlers and spares, kits, the normal products. So shipments were better than we had forecast.

They were a lot better than forecast. Sort of, can you give us an idea about what happened? Some last minute ordering?

Part of it had to do with the spares and kit volume was clearly higher. Our forecast was conservative, obviously, in that area and that volume continued strong throughout the entire quarter. In addition we shipped more handlers than we had forecast. Sometimes it's difficult, as you know, to get it exactly right in terms of how many systems we'll actually ship in a quarter. It depends on a lot of factors, including the timing of the receipt of a purchase order from a customer.

So I think it was a combination of both. It wasn't any one product, it was multiple products, and it was, as I indicated, a fairly significant increase over what we had forecast for non-systems, which is a fairly significant component of our total revenue.

Okay, great. Thank you.

Thank you. We have a follow up question from Chip Moore with Canaccord Adams. Please proceed with your question.

Thanks. That was actually what I was going to ask. But I think the other thing that I was curious about was the graphics opportunity, if you'd seen any progress there?

Chip there's really been no fundamental change during the quarter. The evaluation processes continue at those companies, and they're progressing well, but are ongoing. So no real news to report on that front.

Okay.

Hey Chip, this is John. You had asked earlier about the stock compensation expense, in terms of split I believe, between various line items. And I was fairly close I think, what I said. I have numbers for the whole year and it was roughly 55% SG&A, probably high 20s to R&D, excuse me, maybe about 30, and then cost of goods sold was probably around the low teens, roughly in that area.

Okay.

Thank you. Our next question comes from Dennis [Scannow] with Rutabaga Capital. Please proceed with your question.

Good afternoon guys. Just one quick thing, you talked a little bit about gross margin, John, I think you mentioned that you're expecting it to go up a bit, 200 basis points in the first quarter. As we look out a few quarters, and maybe into a more normal cycle, what kind of gross margin do you think you should be able to generate?

That's a very good question. As you may know from our prior calls, it's heavily dependent on product mix, because there's a fairly significant difference in the gross margin depending upon the product. I think you can see that the difference between the '05 margin of 40%, where we had a heavy influence from the thermal tools, which have the better margins, and then lower margins in '06, where there was a more balanced product mix between the thermal tools and the high speed tools.

So it really, and I'm not trying to dodge the question, it really is so sensitive to product mix that it is difficult to really go out too far on that margin estimate. And you're right; we did say it would be a percent better, a couple hundred basis points as you referred to it, in Q1. I think we would hope that the margin would improve from there certainly, because that isn't a particularly good margin, we recognize that.

So I think if we get some help from the overall industry and orders are returned to some of the higher levels, I think the margins should improve from there.

Could we see 40% gross margins again? I definitely understand the point on its very mix dependent. But I don't know, I'm just trying to get a sense of was '05 that unusual? And actually in '04 I think you were around 40% too.

Sure, we could see that. Obviously we're a ways from that right now, but yes. It will take a healthy product mix and some better overall business conditions I think. But yes, I don't think it's out of the question.

And then just a final thing on that then. What was the percentage of revenues that would have been generated by thermal back a year ago versus -- and I guess what we said was it was about 30% in the most recent quarter? I'm sorry, 36% in the fourth quarter.

Those figures that we provided were unit orders not sales. But if we look at 2005, pretty close to probably almost two-thirds of our business was thermal in 2005. Whereas this year, as John commented, the distribution amongst the products was more even. In fact, the high speed handlers were more like maybe 40, actually a little more than that, close to 50% and the thermal would be about 35% with miscellaneous making up the balance. Those are not exact numbers, but they're in the right ballpark.

But it is conceivable that we could see that mix shift back to being a bit more favorable on the thermal side.

It's possible, sure.

Okay thanks a lot, that's it for me.

[OPERATOR INSTRUCTIONS]

It appears there are no further questions at this time.

Thank you for joining us today on this conference call, and we look forward to speaking to you when we report our first quarter results. Thanks again.

Thank you. Ladies and gentlemen, this concludes today's teleconference; you may disconnect your lines at this time.