Cohu Inc (COHU) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cohu, Incorporated third quarter 2008 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will be following the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. James Donahue, president and chief executive officer. Thank you, Mr. Donahue. You may begin.

Good afternoon, everyone. Welcome to this conference call that covers Cohu's results for the third quarter ended September 27th, 2008. With me today is our chief financial officer, Jeff Jones.

I hope you have a copy of our earnings release, have had an opportunity to review it, but if you need a copy, you can 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 and comment on the quarter. Jeff will then take us through the financial statements and I'll conclude with our view of the business environment and guidance for the fourth quarter, and we'll then take your questions.

First, though, Jeff has information concerning forward-looking statements, estimates and other matters that we'll 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 23rd, 2008, 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 US 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. 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 nondisclosure agreements.

Okay, thanks, Jeff. Cohu's third quarter sales were $48 million, compared to $64.5 million in last year's third quarter and $51.8 million in the second quarter of 2008. Net income was $37,000, essentially breakeven on this lower sales volume. Orders were $46 million, compared to $50.1 million for the second quarter of 2008. Third-quarter orders for semiconductor equipment were $31 million, compared to $39 million in the second quarter, and backlog at the end of the third quarter was $52 million.

Unit order breakdown for semiconductor equipment in the third quarter was high-speed handlers, 41%; thermal handlers, 14%; thermal subsystems, 38%; and other systems, 7%. Despite challenging business conditions, our operations are extremely busy and we made significant progress in the third quarter.

Delta Designs' MATRiX Handler was approved for wireless test applications at a major US-based IDM. Our EDGE Handler was approved for testing of home entertainment devices by a major European-based semiconductor company, and following an extensive evaluation process, our Summit Handler was qualified for testing of small form factor devices at two major US-based microprocessor manufacturers.

While we don't expect any incremental sales of thermal handlers for these applications in the near term, we are already seeing an increase in orders for handler conversion kits. We completed the first beta system of our ETC-3000 that incorporates Delta's latest modular thermal technology in a compact footprint for engineering and validation applications. We expect to ship the first system in the fourth quarter.

The ETC-3000 uses the same thermal technology that is at the heart of our next-generation thermal production handler that's now in development. This enables customers to accurately and consistently characterize, in the engineering lab and the pre-production environment, the test performance that they will achieve as they ramp production.

The development of our next-generation thermal handler is progressing very well and we expect to complete the initial beta unit in the fourth quarter. Customer testing will begin soon thereafter and, subject to market conditions, production shipments could begin in mid 2009.

As we have discussed previously, we are manufacturing dedication kits, the package-specific tooling that configures our test handlers for different ICs at a production facility we established in The Philippines in 2004. This operation has been highly successful in providing cost-effective solutions with shorter lead times to our customers, the majority of whom are located throughout the Southeast Asia region.

We just recently completed an expansion that increased production capacity by 60% in this facility, and we plan to further expand the operation in 2009. Last year, we began planning for the transition of certain of our handler manufacturing to Southeast Asia. We determined that the most cost-effective alternative was to utilize an experienced and qualified contract manufacturer. Delta's EDGE Handler, a mature and high-volume system in our high-speed handling line was the logical first handler to transition.

Earlier this year, we began that process and it's gone even better than we anticipated. Last quarter, the initial systems manufactured at the Singapore-based CM were shipped to our main facility here in California for testing and validation.

We're very pleased with the results and expect to continue the migration of manufacturing to contract manufacturers in lower-cost geographies in Asia. Over time and with sufficient volumes, we believe that we will achieve gross margin improvement of up to seven to 10 percentage points.

Turning to our non-semiconductor equipment operations. As a result of the transition of handler manufacturing, we have been able to free up space in our primary facility in Poway, California. Cohu's electronics division will be relocated from leased space into this facility next month, resulting in annualized savings of approximately $750,000. Operating results at the electronics division were essentially flat sequentially.

Camera products developed over the last 18 months are gaining traction and we have a growing pipeline of opportunities, particularly in the high-end security and surveillance area, and we expect this will lead to improved results in the fourth quarter. Results at our microwave operation fell short of expectations, primarily as a result of administrative delays and obtaining customer acceptance on several large contracts and a shortfall in business that was expected to be booked and shipped in the third quarter.

BMS orders for the third quarter reached 10.2 million, the highest since Q4 of 2005 and the second-highest quarterly bookings ever for BMS. We expect BMS to report improved operating results in the fourth quarter.

Jeff will provide details on Cohu's financial results for the third quarter.

Semiconductor equipment-related revenues for the third quarter of fiscal '08 were approximately 77% international and 23% domestic. International sales were distributed 87% Asia-Pacific, 10% the Americas and 3% other. We recorded approximately $1.1 million of FASB 123R stock-based compensation expense in Q3. The comments I make regarding operating expenses include the impact of FASB 123R.

Gross margin was 36.6% in Q3, compared to 35.6% in Q2 and was in line with our projection. We expect our gross margin in Q4 to be approximately three points lower than Q3, due to lower volume and product mix. R&D expense was $9.1 million in Q3, $10.4 million in Q2, and was slightly lower than our projection due to reduced product development cost at our semiconductor equipment business.

We expect Q4 R&D expense to be slightly lower than Q3. SG&A expense was $9.7 million in Q3, compared to $9 million in Q2 and slightly higher than our projection due to a formula-driven increase in the accounts receivable reserve at our semiconductor equipment company.

We expect SG&A expense in Q4 to be lower than in Q3 and approximately the same as Q2. Interest and other income was $1.4 million in both Q3 and Q2. Our effective tax rate for the first nine months of 2008 was 44%, compared to 43% at the end of Q2.

Our Q4 rate is dependent upon on our pretax income level and will benefit from the federal R&D credit that was extended on October 3rd. The credit is retroactive and therefore, the benefit for all of 2008 will be recorded in Q4.

Net income per share in Q3 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 $171.2 million at September, decreasing approximately $4.6 million from June, due to an increase in inventory of $4.5 million, related primarily to the initial production of our MATRiX Handler.

Net accounts receivable were $34.5 million at September, compared to $36.3 million at June, and represented about 65 days sales outstanding. The decrease in accounts receivable was due to steady cash collections and lower shipments in Q3.

Additions to property, plant and equipment, for the first nine months of fiscal '08, were approximately $2.1 million and depreciation and amortization was approximately $5.1 million. Deferred profit at September was $4.8 million, compared to $6 million at June.

Deferred profit relates to revenue deferrals pursuant to SAB 104, primarily on Delta test handlers and thermal subsystems and BMS products. Our deferred revenue at September 27th, 2008, was approximately $7.8 million.

Okay, thanks, Jeff. Conditions in the back-end semiconductor equipment industry were relatively flat for the first half of 2008, but began deteriorating midyear. Last week, semi reported that preliminary orders for test and assembly equipment for September declined 47% from September 2007 and that the book-to-bill ratio dropped to 0.7.

The effects of the global financial crisis are spreading rapidly through the supply chain and have accelerated the decline in business, not only for semiconductor equipment manufacturers, but in semiconductor devices and technology in general.

Recent earnings releases from technology companies and others indicate that order rates declined sharply towards the end of the third quarter. Business and consumer confidence have severely eroded and in this environment, it's highly unlikely that capital spending will expand.

It seems clear to us that business conditions will remain difficult well into next year and, accordingly, we will continue to reduce expenses wherever possible. For the fourth quarter, we estimate that sales will be approximately $37 million.

Despite the current environment, we remain highly optimistic and enthusiastic about the long-term prospects for our industry, but even more importantly, we have never been more excited about our products and about our competitive opportunities. We recently introduced the MATRiX High Speed Pick-and-Place handler, targeted at a wide range of consumer device applications, with industry-leading high parallelism and fast index time.

We're also well along with the development of our next-generation thermal handler that incorporates our proprietary and enabling thermal technology. The transition of handler manufacturing to Asia-based contract manufacturers is well underway as well, and will improve our gross margins. So while we plan to further reduce spending during this downturn, we will continue to invest in those strategic programs and initiatives that will position us for success with our customers and lead to market share gains and improved financial performance.

While the current economic headwinds are beyond our control, we have never felt better about our long-term prospects. With our strong products and profit improvement activities, we can power out of the downturn with great performance when business conditions improve.

And, Scott, that concludes our prepared remarks and we'll take questions, please.

Thank you, we will now be conducting a question and answer session. (Operator Instructions)

Our first question comes from the line of Kelly Anderson of Sidoti & Company. Your line is now open.

Hi, guys. Thanks for taking my questions. Just a quick one on the guidance for the fourth quarter. It looks like orders came in at 46 and backlog was relative flat. Are you expecting any cancellations or delays in this $37 million guidance for the fourth quarter?

No cancellations, Kelly. As far as delays, possibly.

Okay, and then just with respect to the new MATRiX Handler, you sort of gave a qualitative overview of what the thermal handler ramp could look like in 2009. It looks like you're getting very good initial traction with the Matrix. Can you sort of give us some sense of how you see that product ramping over the next six months to a year?

Well, I think six months ago, I would have been in a much better position to give some fairly good insight into that. In this environment, it's extremely difficult. The fact is that most of our customers have really pulled in the reins and, barring some change in economic conditions that I think will open up the capital spending, I just can't predict what's going to happen and what the ramp is going to look like.

As I've indicated in my remarks, we think it's going to be a pretty difficult environment for the next few quarters, and predicting specific activities like the ramp of MATRiX is just really not possible when our customers have essentially clamped down pretty tightly for the moment.

Fair enough, thanks very much.

You bet, Kelly.

Thank you. Our next question comes from the line of Brad Evans with Heartland. Your line is now open.

Thanks for taking the question. I guess, first and foremost, Jeff, do you have a cash flow from operations number for the quarter or for your year-to-date?

Yes. Cash flow from operations, I've got $6.8 million, year-to-date.

Okay. Your full-year capital budget for 2008, and just, I guess, preliminary thoughts in 2009, I guess in light of the environment, what are your thoughts on CapEx?

I think the major CapEx for 2009, Brad, is likely to be a further expansion of our manufacturing operation in The Philippines. And we think that's a wise investment to make because we're achieving cost reduction, gross margin improvement, by manufacturing our handler conversion kits over there. So we'd like to build that out. We did a 60% expansion in 2008 and we might just do something slightly less than that, which would fill out our facility over there in 2009. I think that's probably around a $2 million investment.

That would be $2 million above your maintenance spend?

I'm sorry, $2 million above what?

That would be in addition to just maintenance CapEx, I'm assuming?

Yes, that would be $2 million in capacity additions in the Philippine facility.

On a base of -- you're thinking what type of number for 2009, then?

Oh, total CapEx?

Yes, sir.

Yes, total CapEx generally runs about $4 million, and that $2 million then would be included in that $4 million total.

So say maybe $4 million to $5 million CapEx for next year, something like that. We're actually in the process of putting together our 2009 plan anyway. This is the timing when we do that and under current business conditions, everything is being re-scrutinized, anyway.

Below the gross profit line, your operating expenses are $18.8 million this quarter, so if you back off the $1.1 million for stock-based comp, that gives you $17.7 million of cash operating expenses. Are we to assume that for the fourth quarter that number should come down slightly? Or is that too conservative?

You're speaking about R&D and SG&A, essentially?

That's right. Yes, Jim, that's right.

I think Jeff indicated it's going to be -- we expect it to drop, right, in the fourth quarter?

Yes. We guided down on R&D, as well as SG&A. So both of those will be coming down.

Could you give us a sense as to magnitude? I mean, is it bigger than a breadbasket?

Well, SG&A, it will be very similar to what the Q2 number was, which was 9 million in Q2, so we think it'll be similar to Q2 for SG&A.

A little lower. We're expecting it to be a little lower than Q3, but about the same as Q2.

Right, exactly.

Okay.

And you see R&D down directionally, as well?

We do, we do.

Okay.

A lot of that has to do, Brad, with just the timing of material purchases for our development projects, particularly the thermal handler project, which is most of the material purchases are behind us.

Okay. So, Jim, when you're talking about the seven to 10 percentage point improvement in gross margins as you continue to outsource to the contract manufacturers, should we think about -- that is off of kind of the 36% level that you're currently at, assuming that over time, you get back to something north of $50 million on a quarterly basis. Is that correct?

Yes, it's off of where -- yes, exactly.

And would that be sometime in 2009 or beyond 2009 that you'd hope to be able to show that improvement?

At this point, I don't know when we're going to get to numbers like $50 million. That's the whole rub right now. We're entering a very difficult period. But to give you some -- maybe some color on that, let's say we get to the $50 million in mid next year. We wouldn't achieve the full 7% to 10%. I would say it's going to be a process of getting there, and with decent business conditions, decent shipment levels, I think we could get there, fully there, in 2010. That's what our plan looks like now.

That's very helpful. And just my last question just pertains to -- I tip my hat to you guys. Clearly, you're managing the business conservatively in a tough environment and obviously, the cash balance provides a lot of safety in a difficult environment. Just recognizing the stock is trading, I guess, right around tangible book value or stated book value, is there any thought as to the merits of a share buyback, even a modest one?

Well, sure, and we've talked about that before and we've had questions on that before, and I think Cohu, like just about every other company these days, has very depressed valuations, so, yes, we are talking with the Board about share buybacks.

We have not approved one. If and when we do, we would announce that. I still believe that the best long-term return for our shareholders is going to be through a strategic acquisition that expands our long-term growth prospects of serve market, but if there is no such acquisition on the horizon, then at these levels, certainly, I think any responsible board has to look at the merits of a share buyback.

All right, thanks for taking the questions.

Thank you, Brad.

Thanks, Brad.

Thank you. (Operator Instructions)

Our next question comes again from the line of Brad Evans with Heartland. You may ask your question.

I guess, just to dovetail on your comment about the M&A environment or the opportunity there, can you just give us a 35,000-foot view of what the M&A landscape looks like without getting into specifics? Is it a good environment right now?

Well, I don't know that the environment for M&A today is any different than it normally is. I guess -- except maybe distressed companies that might be facing financial difficulties in view of the expected prolonged downturn, but -- our criteria for acquisitions has always been looking at the long-term picture, looking at companies that are going to expand our serve market, provide complementary products and where there are opportunities for synergies. Those tend not to be distressed companies.

Okay, that's -- and I'm just curious, in terms of recognizing that, Jim, I understand your point about the environment, it's obviously very difficult and visibility is not good. Could you just give us your thought as to the level of capacity utilization that you're seeing in the back end in terms of your tools and whatever information you have there would be helpful to help us understand kind of, if indeed we go through a period of maybe lackluster demand for a quarter or two, does that set up -- obviously, as demand or the semiconductor industry shows some improvement, that would, I guess, lead one to think that there could be a fairly strong recovery, especially when you consider the new product cycle you have coming with the MATRiX and the Pyramid.

I think -- this is not industry-wide data, but just recently, I had some feedback from Asia that quoted utilization rate at a major IDM in the 80%, 85%, and at subcons in the 70% range. I do agree with your conclusion, or your prediction that when business recovers, it's likely to recover sharply. I mean, that's the way it's always been in this industry and I think the current difficult economic conditions are just exacerbating that.

So I think customers are going to wait. If they've waited until the 11th hour historically, they're going to wait until five minutes to midnight before they pull the trigger on CapEx these days, or over the next few quarters. So I think we have to be prepared for a very sudden increase in demand.

Fortunately, we've reduced lead times over the last couple of years to deal with that and I think we'll be in a good position to respond.

Okay, thanks for the follow-up. Appreciate it.

Thank you, Brad.

Thanks, Brad.

Ladies and gentlemen, at this time there are no questions in queue. (Operator Instructions)

Mr. Donahue, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you for attending today's call and we look forward to speaking to you when we report Cohu's fourth quarter earnings results. Thank you, and good day.