Cohu Inc (COHU) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cohu Incorporated first quarter fiscal year 2007 earnings 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. Thank you, Mr. Donahue, you may begin

Good afternoon, everyone, and welcome to this conference call that covers Cohu's results for the first quarter ending March 31, 2007. With me today is John Allen, our CFO.

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 Web site, cohu.com, or by contacting Cohu Investor Relations at 858-848-8106. I'll provide an overview of our results. 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, though, 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 26, 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 meet 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. 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.

Thanks, John. Cohu's first quarter sales were $53.4 million. Semiconductor test handling equipment accounted for 81% of first quarter sales. These results do not include any revenue from burn-in-related thermal subsystems, which remained unrecognized at the end of the quarter. Net income was $1.7 million, or $0.07 per share for the first quarter of 2007, compared to $5.3 million, or $0.23 per share for the fourth quarter on-demand 2006.

Against the backdrop of weak industry conditions that we noted in our Q4 2006 earnings release and conference call, first quarter orders declined and were $46.5 million compared to $58.4 million for the fourth quarter. These reduced order levels reflect a continuation of the general softness in the back end semiconductor equipment industry that began in late 2006. Backlog at March 31,2007, was $79.4 million. Unit order breakdown for semiconductor equipment in the first quarter was thermal handlers 32%, high-speed handlers 49%, thermal subsystems 15%, and other systems 4%.

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 financials, 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 first quarter of 2007 were approximately 79% international and 21% domestic. International sales were distributed 93% Asia-Pacific, 5% the Americas, and 2% other. In 2006 we adopted FASB 123(R) that requires the reporting of stock-related compensation in financial statements. We reported approximately $1.1 million of stock-based compensation in Q1 of 2007. The comments I make regarding operating expenses include the impact of FASB 123(R).

Gross margin in Q1 2007 was 36.8% versus 31.7% in Q4 2006. Our Q4 margin was impacted by, among other things, a very low margin--approximately 20%--on burn-in product revenue recognized in that quarter. The increase in our Q1 gross margin was greater than we expected and resulted from a slightly better product mix and lower product support and E&O cost. We expect our gross margin in Q2 will be about four percentage points lower than our Q1 margin due to product mix, with significantly fewer Summit handlers expected to ship in Q2 than in Q1.

R&D expense was $10.3 million in Q1 and was comparable to $10.5 million in Q4 of 2006. We expect Q2 R&D expense to be about 5% lower than Q1. SG&A expense was $8.8 million in Q1, compared to $9.1 million in Q4. The decrease in SG&A was primarily due to the decreased business line in our semiconductor equipment segment. We expect SG&A in Q2 to be about 5% higher than Q1.

Interest income of $2.1 million in Q1 compared to $1.9 million in Q4 of last year. Our effective tax rate was 34.8% in Q1. We currently expect our effective tax rate for the full year 2007 to be approximately 34%, but the actual rate may vary based on our pre-tax earnings level. Net income per share in the first quarter was computed based on 23.1 million rated average shares and share equivalents from stock options and RSU.

Moving briefly to the balance sheet, cash and investments were $155.6 million at March 31, increasing approximately $7.7 million from December due to cash generated from operations. Net accounts receivable of $42 million compared to $50.1 million at December of '06 and represented about 71 days sales outstanding. The decrease in accounts receivable is due to lower shipments in Q1 compared to Q4.

Excluding the inventory purchase from AVS in our March 30 acquisition, inventory decreased $4.2 million from December of '06 due to the decrease in Q1 orders and inventory reduction initiatives. Additions to property, plant, and equipment for the first quarter of fiscal 2007, excluding the $1.1 million in additions resulting from the ABS acquisition, were approximately $900,000.

Depreciation and amortization during the first quarter was approximately $1.6 million. Deferred profit at March 2007 was $12.4 million, compared to $9.8 million at December of 2006. Deferred profit relates to revenue deferrals, pursuance of SAB 104, primarily on delta test handlers and thermal subsystems. The increase in deferred revenue is primarily the result of additional revenue deferrals associated with delta sales of semiconductor equipment products that are awaiting customer acceptance as of March 2007. Our deferred revenue at March 2007 was approximately $30.5 million.

Thanks, John. During the first quarter, we delivered initial pre-production units of our new thermal subsystem that's incorporated in an advanced grinding system. Qualification at the customer's facilities in the United States and Asia is progressing well, and we plan to begin production shipments in the second quarter. This system provides enabling capability required for the customer's new products that are scheduled to be introduced in the second half of this year. We received the initial order for these thermal subsystems in Q3 2006, and we expect to receive follow-on orders for multiple units this quarter.

We believe that demand for thermal handlers will remain soft during the near term, though development and applications work on our installed handler base continues at a high level in support of new products that our microprocessor customers plan to introduce throughout the year.

In March, Intel presented us with their Preferred Quality Supplier award. We supply Intel with test handlers and with burn-in equipment. This is the seventh consecutive year that we have earned a quality award from Intel.

We have frequently commented on the volatility of our industry, particularly the segment served by our high-speed handlers. We believe this is due to the unpredictable and rapid change in demand that occurs in consumer electronics, now the principal market for semiconductors. Conditions in the high-speed handler segment continued to be soft through the first quarter. However, beginning in early April, we have seen an improvement in customer forecast, and we are encouraged by the recent increase in quote activity for these systems.

This week, two large suppliers of semiconductors for mobile phones, both of whom are our customers, guided to increasing demand for their products. Also during the first quarter, we added a new major IBM customer to our high-speed segment and installed the first handlers in their Asia test facility.

Turning to our microwave communications equipment business, at the end of the first quarter, our broadcast microwave unit acquired Tandberg Television AVS, and we are now in the process of integrating the acquired products, technology, and personnel into our operations. AVS, located near Frankfurt, Germany, designs, develops, manufactures, and sells digital microwave transmitters, receivers, and communication systems. In particular, AVS has developed high-definition video transmission products that enhance and expand the BMS product lines. HD is becoming an important competitive differentiator in the broadcast electronic news gathering industry and is increasingly a requirement in law enforcement applications where high resolution is critical.

The combined BMS/AVS product line was introduced at the National Association of Broadcasters show in Las Vegas last week. At the show, JVC, one of the leading suppliers of TV cameras for electronics news gathering applications, introduced a new high-definition camera that incorporates a new BMS HD transmitter. The BMS microwave unit enables wireless transmission of the high-definition signal in mobile applications such as news reporting from the field. JVC is marketing this new camera, along with the BMS transmitter, at a price point significantly below competitive products. The dramatic improvement in affordability may accelerate the adoption of HD by local TV stations for remote news gathering applications, and also prompt JVC competitors to introduce comparable products. We are in discussions with a second major TV camera company that is interested in the BMS HD transmitter.

While BMS contributions to Cohu's consolidated results are currently small, and we don't expect that to change significantly in the near term, we believe AVS is an excellent acquisition that provides complementary products and sales territories, and we expect to see continuing improved performance in this business.

Looking ahead, we expect second quarter sales to be approximately $50 million. This excludes approximately $25 million of deferred revenue related to shipments of thermal subsystems that have already been made and are awaiting normal customer acceptance at the end of the first quarter. If customer acceptance occurs and we are able to recognize a significant amount of this revenue in the second quarter, we plan to issue an update. As the year progresses, we expect to see improving demand for high-speed handlers driven by the mobile phone and consumer electronics markets.

Cohu's balance sheet remains strong, with cash and short-term investments totaling $155.6 million and no bank debt.

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

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions.) Our first question is from Dennis Wassung with Canaccord Adams. Please state your question.

Thanks, guys. A couple of quick questions. I guess first off, you just talked about a pretty good point factor for Q2 revenues, Jim, $50 million plus, potentially a big chunk of that $25 million. What are the, I guess, what are sort of the milestones here to get that accepted by the customer? These are all units installed and running today, I'm assuming?

That's correct. They've all shipped, and if you look at the increment over the last several quarters, you'll see that we've been continuing to ship these products. So the deferred revenue has been building. They will most likely be recognized in sizable chunks, not dribbled in. So because of the nature of these, which have been sort of a development and fast ramp, so that's why there's such a relatively high amount of deferred revenue, and we think the best thing to do is identify it as such and let investors know that if we obtain customer acceptance, we will, and we're able to recognize a significant portion of that revenue, we'll provide an update.

And do you expect this to sort of be an all-or-nothing thing? Because you mentioned big chunks. I mean, is it conceivable that this could happen in two or three sizable chunks, or is it more likely that you'll have 90% of it, or the whole pack or something like that, paid all at once?

Yes, Dennis, this is John. It's a couple of different products, so, but yes, as Jim was indicating, it's, since the products--there's two of them--are similar units, at least when you look at the two different products, yes, the revenue would be recognized, as you suggest, in large chunks and not in smaller portions. It's really kind of an all-or-nothing proposition, because we shipped multiple units of the same product, and we've seen this before. We saw it in the fourth quarter, as you may recall, where we recognized a large chunk of revenue. I think it was $12 million or $13 million for a new product, a new burn-in-related product. And again, it was a similar situation, where multiple units had been shipped, and because of ramp issues and the customer's need for the product, we had to defer that until we had acceptance. And they were accepted, all to currently, if you will.

You mentioned that it's two products, similar units--are these two different customers, or is it just the same customer?

Yes, it's two different.

Two different.

Okay. So it's feasible that the timing could be different?

Yes, absolutely.

Okay. And you sold them microprocessor applications?

Yes.

Okay. All right. On to the sort of, the rest of the business. You talked about improvements happening in April here from some of your customers. You mentioned improved forecasts and you highlighted a couple of your customers out there with their forecasts this earning season. You also mentioned the new IDM win. Can you give me more info here? What are you seeing in terms of these improved forecasts? Is anything material at this point? Have bookings been pretty good so far in April? And wondering if there's any feed to it. Is it specific customers or is it specific end-market applications? Summit? Non-Summit?

Well, we're speaking about our high-speed handler segment specifically, not the thermal handlers. But late March, early April, we really saw a turn in the dialogue with customers--more inquiries, improvement in forecast--not just from one customer, but from multiple customers, varying from small improvements to potentially significant improvements in forecast. So our sense is when we connect the dots between what we're seeing and some of the comments we've noted from some customers, who are our customers as well, about improving conditions and the expectation that that will continue throughout the year, we have an optimistic view of prospects for our high-speed handlers from this point forward based on that information.

Okay. So as you look forward through the year, it sounds like you're expecting to see the high-speed business take a bigger piece of the business in terms of product mix. Is that fair?

Yes, I'd say that's absolutely correct.

And the new IDM win that you talked about? Is this something that's sizable? Is this a U.S. IDM? Is this, I guess, well, maybe it's an end-market application there, if you can say, and what, I guess how did you guys make that win?

Well, we, as John notes in his opening remarks, we will not talk--we're precluded by our customers from talking specifically about them. It's a U.S.-based IDM with test facilities in Asia, a broad range of sort of mid-range logic-type applications, and we won the business based on an evaluation of our tool. And the product we're delivering is our Edge handler, which is currently the leading ambient tri-temp handler in our high-speed product line.

Is this something that could be a sizable contributor to your business this year? Will it take a longer time? Or is it just not that big of an opportunity perhaps?

I don't expect it to move the needle much this year. I think what the good news is, we have another major IDM in our customer portfolio, and that's very important, since the customers rarely make such changes.

Right. Okay. And last question sort of over onto the high-performance, the thermal side of the equation, Summit. You mentioned in your comments about Q2 that you expect lower margins because of lower numbers of Summit. How do you see that? There's two major customers there. Is there similar dynamics between those customers at this point? Obviously, there's been a lot of question markets around [ASU] with their recent announcement. I'm just wondering what the dynamic currently is on that side of your business, and anything else you can say there would be helpful.

I don't think there's much else we can say other than what we've said, which is in the near term, we expect this business to remain at the current soft levels that we're seeing, and as far as making any specific customer-related comments, we can't do that.

Okay. Let's talk about improvement for the second half. Anything you could mention there?

No, and that's simply because as much as anything, visibility is so limited, we wouldn't normally have much visibility beyond one quarter anyway.

Right. Okay. Okay, guys, thank you.

(Operator Instructions.) The next question is from Colin McArdle with Needham and Company. Please state your question.

Good afternoon, guys. Thanks for taking my question. First, on the 4% decrease in gross margin from the forecast this quarter, is that all product mix, or is there pricing in there?

Yes, it's essentially product mix, Colin. And again, to just reference that, it's really the Summit handler, fewer shipments expected in Q2 than in Q1. That's the primary factor.

Uh-huh. Does the Castle handler get closer to the corporate average at some point?

No, that's a low margin product.

Even at very high volumes of supplier type?

Right. Yes, this is a high-cost, low-margin product. Which is why we're developing new products. But yes, it's a low-margin product.

Okay. And then, I know spares and kits were responsible for some of your upside in Q4. I was wondering if you could talk about how that was in Q1 and what you see going forward?

I think in Q1, those returned to more normalized levels, and we would expect that to continue through the rest of the year.

Is there a dividend stream connected with the thermal subsystems on spares and kits that's higher or lower than--?

That's higher or lower than what?

Than other, than your other tools?

No, not really. I mean, there is a stream of revenue associated with spares and with kits, or new toolings that configure the handler to accommodate different package types. So to the extent that customers are going through a significant increase in new product introductions, we might see an increase in tooling to configure the installed base, and I've alluded to that in my remarks. We expect that business to be pretty, at a pretty intense level throughout this year.

Okay, thank you.

The next question is from Kelly Anderson with Sidoti and Company. Please state your question.

Yes, hi. I was wondering if you could give us any update with respect to the adoption of Summit handlers in the graphic high-speed market?

Yes, we continue to work with the two major players in that segment, Kelly, and they continue to successfully evaluate and achieve improved performance with our Summit tool versus their incumbent tool. I think what we're going to see is over time, they will adopt our technology on their high-end products. Exactly when that occurs is difficult to predict. We're not seeing any significant orders at this point.

Okay, great. Thank you.

Thank you.

At this time, I'm showing no further questions in queue. I'd like to turn the call back to the management for closing comments.

Thank you for attending today's call, and we look forward to speaking with you at the end of Q2 when we report our results for the second quarter. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.