Cohu Inc (COHU) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cohu Incorporated second quarter fiscal year 2007 earnings call. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. James A. Donahue, President and CEO for Cohu. Thank you, Mr. Donahue, you may begin.

Good afternoon, everyone, and welcome to this conference call that covers Cohu's results for the second quarter ended June 30, 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 website, 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 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, July 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-offs, intense competition in the semiconductor test handler industry, our reliance on patents and intellectual property, compliance with U.S. export regulations, the cyclical and unpredictable nature of capital expenditures by semiconductor manufacturers, difficulties in integrating acquisitions and new technologies, and other risks addressed in Cohu's filings with the Securities and Exchange Commission, including our most recently filed form 10K and form 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.

Cohu's second quarter sales were $66.4 million, exceeding our previous estimate of $50 million due to the recognition of deferred revenue associated with burn-in related thermal subsystems.

Semiconductor equipment accounted for 86% of second quarter sales. Net income was $2 million, or $0.09 per share for the second quarter of 2007, compared to $1.7 million, or $0.07 per share for the first quarter of 2007.

Cohu's orders increased 35% overall, and 39% for semiconductor equipment compared to the first quarter of 2007 due to increased orders for thermal subsystems. Orders for thermal subsystems have increased and have partially offset the decline in orders for thermal test handlers that we have seen in recent quarters. Backlog at June 30th, 2007 was $75.6 million.

Unit order breakdown for semiconductor equipment in the second quarter was high-speed handlers, 38%; thermal handlers, 5%; thermal subsystems, 56%; and other systems, 1%.

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

Semiconductor equipment related revenues for the second quarter of 2007 were approximately 54% international and 46% domestic. The percentage of international sales is much lower than our typical percentage as the second quarter included sales of thermal subsystems through a U.S. systems integrator for ultimate sale to an offshore customer. International sales were distributed 89% Asia-Pacific, 6% the Americas, and 5% other.

In Q1 of 2006 we adopted FASB 123R that requires the recording of stock-related compensation in financial statements. We recorded approximately $1 million of stock-based compensation expense in Q2 of this year. The comments I make regarding operating expenses include the impact of FASB 123R.

Gross margin in Q2 was 29.1% versus 36.8% in Q1 of this year. Our Q2 gross margin was lower than projected as a result of a decrease in thermal handler shipments, the recognition of a significant amount of lower margin thermal subsystem revenue that was deferred at the end of Q1, and lower than expected margins in our non-semiconductor equipment businesses. We expect our gross margin in Q3 will be about 3 percentage points higher than our Q2 margin, due to a change in thermal subsystem product mix.

R&D expense was $9.4 million in Q2 compared to $10.3 million in Q1. We expect Q3 R&D expense to be about the same as Q2.

SG&A expense was $8.7 million in Q2 compared to $8.8 million in Q1. We expect SG&A expense in Q3 to be about 6% to 7% higher than Q2.

Interest income was $2.1 million in both Q2 and Q1.

Our effective tax rate was 37.2% in Q2. This was slightly higher than expected due to minor changes to tax accruals recorded in the second quarter. We currently expect our effective tax rate for the balance of 2007 to be approximately 34%, but the actual rate will vary based on our pre-tax earnings level.

Net income per share in the second quarter was computed based on 23.3 million weighted average shares and share equivalents from stock options and RSUs.

Moving to the balance sheet, cash and investments were $157.7 million at June 30, increasing approximately $2.1 million from March, due primarily to cash generated from operations.

Net accounts receivable of $35.7 million compared to $42 million at March of this year, and represented about 50 days sales outstanding. The decrease in accounts receivable was due to lower shipments in Q2 compared to Q1.

Inventory increased $1.5 million from March due to the increase in orders.

Additions to property, plant and equipment for the first six months of fiscal 2007 were approximately $3 million. Depreciation and amortization during this period was approximately $3.5 million.

Deferred profit at June, 2007 was $6.4 million compared to $12.4 million at March, 2007. Deferred profit relates to revenue deferrals pursuant to SAB 104, primarily on delta test handlers and thermal subsystems. The decrease in deferred revenue was the result of the recognition of revenue for certain semiconductor equipment products, primarily thermal subsystems on which customer acceptance was obtained in the second quarter.

Thank you, John.

Orders for thermal test handlers declined in the second quarter. And based on our current customer forecasts, we expect demand for these systems from our largest microprocessor customers to continue at these reduced levels.

During the second quarter, we began development of next generation thermal handler systems for both production and engineering applications that will incorporate our proprietary thermal intellectual property and offer customers increased throughput and parallel test capability.

In the second quarter unit orders for high speed handlers nearly doubled compared to the first quarter as the result of a large multi-unit order from one of our major customers. This segment of our business is driven primarily by ICs for consumer electronics applications, including mobile phones and, as we have said before, is characterized by short-term volatility and limited visibility. Near-term business conditions in this segment are soft, but we are confident that growth prospects over the longer term are very good.

For example, we are encouraged by the recent announcement from Texas Instruments that they plan to expand their already sizeable test and assembly operations in the Philippines with a major new site at the Clark Freeport Zone. We have significant sales, service and applications infrastructure in the Philippines to support our customers there, including a handler kit engineering and manufacturing facility.

Our product line in this market is very well positioned to address what we believe will be customers' increasing requirements for higher levels of parallel test in shorter test time applications.

I have discussed our new and growing thermal subsystems business on the last several conference calls, and I would like to provide a bit of background to help you better understand this exciting new area.

Thermal subsystems maintain and control the temperature of the integrated circuit during the burn-in and system level test processes. This equipment is used in semiconductor manufacturing for quality control purposes.

The burn-in process stresses devices during a batch test process to detect early failures, also known as infant mortalities, prior to shipment to customers, and also to develop reliability models for newly developed ICs.

The system level test process subjects the ICs to testing that mimics the final operating environment; for example, running Windows, other software such as graphics software and so on.

Both burn-in and system level tests of high-speed, high-power devices, such as microprocessors, require precise temperature control to optimize yield and test results. In essence, these processes require the same type of thermal capability that we incorporate in our thermal test handlers.

Over the past two years we have made several important acquisitions that enhanced our industry leadership position in IC thermal control. In May, 2005 we purchased the assets, including thermal intellectual property and a thermal subsystem product that is used in burn-in, from a small company called Cryotech.

At that time, thermal subsystems used in advanced burn-in applications represented a new market opportunity for us. And we're able to leverage our already substantial thermal IP and temperature control expertise.

We've been shipping this system since the acquisition and have made significant enhancements to the initial product. In the second quarter of 2007, we obtained customer acceptance and recognized a substantial amount of deferred revenue.

In March, 2006, with our purchase of the Unigen business of Unisys, we acquired additional thermal intellectual property and an advanced automated burn-in system that Unigen had developed and recently began to ship. Following the acquisition, we continued to make shipments and improve the design. In the fourth quarter of 2006 we recognized a substantial amount of revenue from this burn-in system.

Finally, over the last year, we developed a next generation thermal subsystem for use in both burn-in and system level test applications. We received orders for this system from one of our major customers beginning in the second half of last year. Qualification at the customer's production facility is progressing well and we currently expect to recognize significant revenue associated with this next generation system in the third quarter. This thermal subsystem provides capability required for the customer's new products that are scheduled to be introduced in the second half of this year.

Our strong thermal IP portfolio, consisting of various critical technology building blocks and depth of expertise in this area enables us to bring new products such as these to market in a relatively short period of time.

Now, looking ahead to the third quarter, we expect sales to be approximately $60 million to $65 million. Cohu's balance sheet remains very strong, with cash and short-term investments totaling $157.7 million and no bank debt.

Cohu's board of directors approved a quarterly cash dividend of $0.06 per share, payable on November 2, 2007 to shareholders of record on September 7, 2007. Cohu has paid consecutive quarterly dividends since 1977.

And now, we'll be happy to take your questions. Andrea?

Thank you. (OPERATOR INSTRUCTIONS.) Dennis Wassung with Canaccord Adams.

Thanks, guys. Good afternoon.

Hi, Dennis.

Hi, Dennis.

A few questions. I guess first, on the thermal subsystems business and opportunity here. Obviously, you guys are making a lot of traction. And it sounds like you've got a next generation product coming here. So, I guess what I was wondering is, if you could talk a little bit more about what you view as the overall opportunity with this new product line that Cohu has over the last few quarters.

And I guess when you think of the order you recognized in Q4 of last year, it sounds like it was more based on the Unigen product, and the one in Q2 this quarter here recognized is more Cryotech based. How do we look at this going forward? Is it all going to be based on this new next-gen product or it's going to be a mix of sort of all three?

I think, going forward, we see that what we're calling the next generation product is really a Cryotech -- I'm sorry, I got that wrong -- a Unigen related product. And this next generation product is actually a refinement of that initial product we acquired and it's for delivery to the same customer that we delivered the initial product to.

We see that we will have additional opportunities with the Cryotech product as well, although I think that's going to be a little less, over the short term at least.

Okay. Any way to size the opportunities for these thermal subsystems? And you mentioned that the Unigen product is also a burn-in system along with this thermal technology. How do you view the burn-in side of it there? And I guess trying to just put this whole thing together and see what the opportunity is for you guys. And one last part of it is, it seems like, at least initially, it's really focused on the MPU guys. Are there applications outside of that where this opportunity can expand?

Well, this capability is really most beneficial in high-power, high-speed devices applications. And those are principally microprocessors. So, in that sense, the customer -- the key customer base is really comparable and pretty much in line with the customers for our thermal test handlers.

As far as what's the size of this market, we can't put a number on it, but we have been told by one of our major customers that they need this product for their next generation microprocessors, which are scheduled for introduction in the second half of this year, and that they intend to totally upgrade or replace their existing equipment. So, based on that, I would guess we're in a -- the very early, early innings of that game.

Okay. That helps. A couple of other questions. First, you talked about the new facility that TI has discussed publicly on the Clark Freeport Zone in the Philippines. I'm wondering if -- any to look at -- I think they talked at least about the size of this being as big or bigger than current facilities they have. I'm wondering they've started ordering -- if you guys have seen any business from this if you could talk about it, and what the timing might be if not.

I don't think anyone -- we certainly haven't, and I don't think anyone would see any business from that until sometime next year. My understanding is that they're hoping to have it up and ready to go in the second half of next year, which is really pretty quick. It is just a test and assembly facility so they can move pretty rapidly. But, as we've said, customers wait in the high-speed area to order until the very last minute. So, I wouldn't expect that they would start ordering equipment for that facility until early next year at the earliest, in my opinion.

Okay. And for the last one for me, you talked about the unit -- I guess unit shipments breakdown. And obviously, the thermal handlers side, the (inaudible) side only 5%. Can you give that breakdown in dollars by chance for revenue? And I'm just curious as to -- if we're going to see any pick up on that Summit side. I mean, you mentioned that you expect it to be relatively flat at least from your largest customer. Overall, is that kind of the outlook for that product line?

Well, I think that's the current outlook. And when that's going to change is anyone's guess. That's just the current forecast that we have.

In terms of revenue, I'll -- I think I can put together a number for you and I'll ask John to keep me honest here if I'm wrong. I'm thinking the Summit -- well, actually, I don't have the order information.

But I think, Dennis, obviously with Summit, again, Jim was talking about orders--.

--Orders, not shipments--.

--Not shipments. So, I think the 5% orders--. I mean, the number of Summits shipped in the quarter was very small, so there wasn't a lot of Summit revenue in the quarter. And obviously, there wouldn't be in the next quarter because our orders were so small there. So, it's really -- unfortunately right now it's not a significant component of our revenue, as far as Summit handlers is concerned.

It's probably in the range of about $3 million -- $3 million of Q2 orders, approximately, Dennis.

Okay. And so the numbers you quoted there were units ordered in the quarter.

Correct. Orders.

Yes. Unit orders, right.

Okay. So, we look at the revenue mix, with 56% of the -- I'm sorry, of unit orders in the quarter coming from the thermal subsystems side, how much of your revenue do you think is going to be in the thermal subsystems side in the second half?

A significant -- a very significant portion, clearly. Very significant.

Certainly very significant in the third quarter. And in the fourth quarter, it's probably too early to say. It'll depend to a great extend on what the high-speed handler business looks like in the third quarter. Should we get some significant orders for high-speed handlers in the third quarter, the lead times are such that we can deliver a pretty good amount of that quickly.

Okay. Thanks. I'll jump back in the queue.

Thank you, David.

Thank you.

Kelly Anderson with Sidoti and Company.

Hi. Good afternoon, guys.

Hi, Kelly.

I was just wondering if you could possibly comment -- coming into the quarter we had $25 million in deferred revenue from the thermal subsystems. Is there any way you could break out how much of that is included in the second quarter revenue? Perhaps how much is still unrecognized? And is that reflected in the third quarter guidance?

Yes. Hi, Kelly. It's John. The overwhelming majority of that was recognized in the second quarter. There's a little bit of residual that's still to be recognized in the third quarter. So, that would be incorporated in our revenue projection of that $60 million to $65 million for Q3.

Okay. So, if you're looking at the unit order breakdown when we said that 56% was the thermal systems, does that include new orders then for the burn-in products?

Yes.

Yes.

Okay. And then just one other thing. It looks like -- correct me if I'm wrong -- you guys had a couple updated versions of some of our products advertised at SEMICON West. Is there any way you could possibly comment on how you expect them to contribute to revenue in the next year or so? What are maybe some of the performance advantages of the newer products?

Well, I think these are fairly technical upgrades to existing products that meet one or more specific customer's requirements. So, I view them as more evolutions than any revolutionary new product. They're just ongoing, continuous improvement programs.

I think the major new product, Kelly, is this second generation thermal subsystems that I spoke about.

Okay. But, with the sort of evolution of the products, is that going to help resuscitate the gross margin long term?

Well, I think we need higher levels of orders, and then sales of our thermal handlers to really impact that. And exactly when that business is going to increase, we just don't have any visibility beyond what our customers are telling us today.

Okay. Thank you.

Thank you.

Thank you.

Colin McArdle with Needham and Company.

Hi. I have a follow up on that gross margin question. Just in terms of granularity on the 3% increase you're expecting in the current quarter, would you mind breaking out what are the factors that go into that?

Sure. I think as I commented, and maybe to help you a little more, Colin, it's really product mix within our thermal subsystems product line. Jim gave a little chronology in his remarks about the recognition of a substantial amount of revenue in Q2 from one of the products. Well, the revenue that we expect to recognize in Q3 is a different product than that that was recognized in Q2, and it has a higher gross margin. So, that would -- that will help us with the margins.

But, I think the other part of the story is the lack of the thermal handler business. So, whole the margins improve because of that change in product mix of that thermal subsystems, they're still not where we'd like them to be because we don't have the benefit of those high margins from the Summit product.

Okay. And is past utilization increasing at all?

I think it's customer specific really, Colin. It -- I don't know how to comment across the industry. I think it's a customer to customer situation.

How about like your one or two biggest?

I haven't seen any significant change in the last few months.

Okay. Thanks.

Thank you.

Thank you.

Dennis Wassung with Canaccord Adams.

Thanks. Just wanted to follow up on the graphics opportunities you guys talked about in past quarters. Any progress on those from either side?

Well, in the second quarter we did actually get our first production handler order from a graphics IC manufacturer. We had previously shipped, and I commented in previously conference calls, an engineering tool to this customer who used that to characterize the benefits of the thermal technology. So, that customer did order a production tool. It's been shipped to their test subcontractor. It's an Asian subcontractor. So, we're certainly pleased with that progress, but what I'm really not able to do at this time is to size or time what the additional opportunity may be.

Okay. So, it sounds like it wasn't a volume purchase. It was a small number of units for production evaluation?

It was an initial unit.

Okay. Okay. And so, that's obviously from one of the two. Any progress with the second major guy out there?

I -- we continue to work with that customer, but that work's ongoing. There's nothing new to report.

Okay. I think that does it for me. Thanks.

Thank you, Dennis.

Thank you.

Kelly Anderson with Sidoti and Company.

Hi. Yes, just one follow up. I wanted to see if there had been any progress made with respect to the BMS business. I know we had a transmitter product included in one of JVC's products. I was wondering if you had made any progress with the second customer that you'd mentioned?

That work continues. There's just a certain amount of lead time built into bringing that opportunity to fruition. We feel very good about it. We're continuing to work with all those broadcast, television and camera companies. The acquisition of AVS is going well. The integration is going well and pretty much on track.

Okay, great. Thanks.

Thank you.

(OPERATOR INSTRUCTIONS.) There are no further questions at this time.

Okay. Thanks, Andrea. And I'd like to thank everyone for joining us today at this conference call and we look forward to speaking to you at our conference call covering our third quarter 2007 results. Thank you. Goodbye.

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