Cohu Inc (COHU) 2007 Q3 法說會逐字稿

Greetings and welcome to the Cohu, Inc. Third Quarter FY 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. If anyone should require Operator assistance during the conference please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jim Donahue, President and CEO of Cohu. Thank you, Mr. Donahue. You may begin.

Good afternoon and welcome to this conference call covering Cohu's results for the third quarter ended September 29, 2007. With me today is John Allen, our Chief Financial Officer and Jeff Jones, who will succeed John upon his previously announced retirement on November 2nd.

I hope you have a copy of our earnings release and have had an opportunity to review it. If not and 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 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 then we'll take your questions.

But first John has information containing forward looking statements, estimates, and other matters that we will discuss during today's call.

Before we go on I must remind you that the Company's discussions 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 including 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 25, 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 includes 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 10-K and Form 10-Q.

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.

Thank you John. Cohu's third quarter sales were $64.5 million, at the high end of our guidance due to better than expected sales of semiconductor equipment that accounted for 87.3% of third quarter sales.

Net income was $2.2 million or $0.10 per share for the third quarter. Gross margin in our semiconductor equipment business improved 3.7 percentage points over the second quarter as a result of improved product mix including benefits realized with our second generation thermal system, a redesigned version of the product we acquired last year.

However, the improved results in our semiconductor equipment business were offset by losses in our closed circuit television and microwave communications operations. The results of our microwave communications business were negatively impacted by a sales shortfall caused by the deferral of revenue from a large shipment due to revenue recognition rules and customer requested rescheduling of another large order.

Cohu's orders decreased 12% overall and 21% for semiconductor equipment compared to the second quarter of 2007. The decline in orders is the result of the generally weak environment from semiconductor test related equipment and a reduction in orders during the quarter for thermal subsystems from a major customer. Backlog at September 29, 2007 was $66 million.

Unit order breakdown for semiconductor equipment in the third quarter was high speed handlers, 33%, thermal handlers, 15%, and thermal subsystems, 52%.

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

Semiconductor equipment related revenues for the third quarter of 2007 were approximately 84% international and 16% domestic. International sales were distributed 96% Asia Pacific, 3% the Americas, and 1% other. In Q1 2006 we adopted FASB 123(R) that requires the recording of stock related compensation in financial statements. We recorded approximately $1 million of stock based compensation expense in Q3 2007. The comments I make regarding operating expenses include the impact of FASB 123(R).

Gross margin in Q3 was 32% versus 29.1% in Q2. Our Q3 gross margin was in line with our projection and was higher than Q2 gross margin as a result of improved product mix within our semiconductor equipment business. We expect our gross margin in Q4 to be about the same or perhaps a percent higher than Q3.

R&D expense was $9.6 million in Q3 compared to $9.4 million in Q2. We expect Q4 R&D to be about the same as Q3. SG&A expense was $9.9 million in Q3 compared to $8.7 million in Q2. The increase in SG&A expense that was higher than we had forecast was due to higher selling expenses and professional fees. We expect SG&A expense in Q4 to be about the same or slightly lower than Q3. Interest income was $2.1 million in both Q3 and Q2.

Our effective tax rate was 31.8% in Q3 resulting in a nine month, year to date effective rate of 34.6%. We currently expect our effective tax rate for 2007 to be approximately 35% but the actual rate will vary based on our pre-tax earning level.

Net income per share in the third quarter was computed based on 23.4 million weighted average shares and share equivalents from stock options and RSUs.

Moving to the balance sheet, cash and investments were $156.2 million at September 29, decreasing approximately $1.5 million or about 1% from June. Net accounts receivable of $47.6 million compared to $35.7 million at June 2007 and represented about 67 Days Sales Outstanding. The increase in accounts receivable was due to higher shipments in August and September compared to May, June and to the timing of cash collections in Q3 compared to Q2.

Inventory decreased $4.5 million from June due to the decrease in order backlog and inventory reduction initiative. Additions to property, plant and equipment for the first nine months of fiscal 2007 were approximately $3.7 million. Depreciation and amortization during this period was approximately $5.6 million. Deferred profit at September was $4.6 million compared to $6.4 million at June. Deferred profit relates to revenue deferrals pursuant to SAB 104, primarily on delta test handlers and thermal subsystems and BMS products. The decrease in deferred profit is primarily the result of the recognition of revenue for certain semiconductor equipment products on which customer acceptance was obtained in the third quarter of fiscal 2007.

Thank you John. During the third quarter we obtained customer acceptance on our improved second generation thermal subsystem and as a result, we recognized significant revenue associated with shipments of this system that began earlier this year. The customer's schedule for the production ramp of new products is dynamic and resulted in lower orders than expected during the third quarter. We expect their forecast to continue to be volatile over the near term. Our thermal subsystems provide enabling capability required for the customer's new products and we continue to expect significant orders in the future.

Orders for thermal test handlers increased during the quarter though no orders were received from our large microprocessor customers. We received follow on orders from a large graphics chip company. These handlers are being installed at their Asia based test subcontractor and will be used to test advanced, high performance graphics ICs. We expect to see a gradual increase in orders from this customer as they transition to their newer, high performance products. This is the latest validation that our proprietary thermal technology provides customers in the high speed, high power logic device segment with important yield and speed thinning benefits.

During the third quarter, development of our next generation thermal handlers for both production and engineering applications reached full tapping levels. We had started this development late in the second quarter. These systems will incorporate our proprietary thermal IP and are aligned with the future requirements of our largest customers.

As expected, unit orders for high speed handlers declined during the third quarter. This segment of our business, driven primarily by ICs for consumer electronics applications including mobile phones, continues to be highly volatile with frequent and significant changes to customer forecast. We expect near term demand in this market to be soft but we are prepared for a sudden increase in business as customer forecast can change suddenly and significantly and we must be able to respond, and we are able to respond to their requirements for short lead times.

In this market segment, often referred to as General Purpose Logic or SOC, customers are moving to higher levels of parallel test at lower test times. This creates a need for handlers with increased parallel test capability and with faster index times to enable high utilization of the test system. Our product line is well positioned to address these requirements. During the third quarter one of our largest customers successfully evaluated an important upgrade to our popular EDGE handler that enables productivity improvements of up to 30%.

We are also nearing completion of our next generation high speed handler that began last year. This handler delivers full temperature range testing capability and is aligned with the increasing level of parallel test and speed requirements of this market segment.

Looking ahead to the fourth quarter we expect sales to be approximately 57 to $62 million. Cohu's balance sheet remains strong with cash and short term investments totaling $156.2 million and no bank debt. Cohu's Board of Directors approved a quarterly cash dividend of $0.06 per share payable on January 4, 2008 to Shareholders of Record on November 30, 2007. Cohu has paid consecutive quarterly dividends since 1977.

We previously announced that John Allen will be retiring as Cohu's Chief Financial Officer effective November 2nd. I want to thank John for his many and significant contributions to Cohu during his more than 12 years with the Company. We will miss him. I'm pleased that John has agreed to stay on with us for at least several months to facilitate the transition of his responsibilities and to assist me with certain projects and other activities. As we previously stated, Jeff Jones who is with us today and is currently Vice President and Controller at our semiconductor equipment business will succeed John as Cohu's CFO on November 2nd. We are fortunate to have someone of Jeff's caliber and with highly relevant experience in our largest operation. Jeff will join me at the AEA Classic Conference in Monterey, California on November 4th and 5th and those of you attending will have an opportunity to meet him.

And finally, I want to inform you that the serious wildfires throughout the San Diego area where we are located have not damaged our facilities. Like most businesses in the San Diego area, we were closed on Monday and Tuesday but reopened yesterday and we are operating normally.

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

Ladies and gentlemen at this time we will be conducting a question and answer session. If you would like to ask a question please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the * keys. One moment please while we poll for questions.

Mr. Donahue, there are no questions at this time.

Actually, now we do have a question from Colin McArdle.

Hi, how are you doing? Thanks for taking my question.

You bet.

In Q2 some of the orders were approximately $3 million. I wondered if you'd share that dollar level.

Do we have that information John?

I think it was -- I am going to guess. I don't know Jeff if you -- I'm going to guess it was maybe five to $6 million but that's a rough guess.

That would be in the ballpark. We don't have the specific number in front of us Colin but that's in the ballpark.

Okay, and then in terms of gross margin you said that it was going to be about the same as Q3 for Q4. Is that basically lower volumes offsetting a favorable mix shift as high speed is less as a percentage? Is that the way to think about that?

The volume is a little bit less. It's not dramatically less. It's a little bit less. I think it's a combination of things. You know, when you have the other two smaller businesses, Colin, and I think part of it is slightly improved margins in those businesses as much as anything. I think the delta margin is not that much different from what it was but I think it's a slightly better margin in the other businesses that maybe brings us up a little bit. When you throw those into the mix, it's a little more complicated when you estimate that but I think it's as much that as it is the items that you referred to.

Okay, and then we also talked on the last call about Texas Instruments' build out in the Philippines and how you have a presence there. I wondered if you had had any additional discussions with them or if there is any update on that project.

Yes, in fact I traveled to the Philippines during the third quarter and met with our customers there. The T.I. facility is going into the Clark Air Force Base area. It's going to be, I think they broke ground about a month ago. They're going to start production about a year from now but initially what they're going to do is transfer some processes, not final tests, from Texas and they won't be putting final test in there until sometime in 2009 so T.I.'s main facility in Baguio, Philippines will continue to be the location for expansion up until that time.

Okay, thank you guys.

You bet, thank you.

As a reminder ladies and gentlemen, it is *1 to ask a question.

Mr. Donahue, there are no questions at this time.

I'd like to thank those of you for attending today's conference call and we look forward to speaking to you when we report our fourth quarter 2007 results. Thank you and good day.

This concludes today's teleconference. You may disconnect your lines at this time.