Cohu Inc (COHU) 2008 Q4 法說會逐字稿

Greetings, and welcome to the Cohu, Inc. fourth quarter 2008 and yearend conference call. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jim Donahue, President and Chief Executive Officer for Cohu, Inc. Thank you. You may begin?

Good afternoon, everyone, and welcome to this conference call that covers Cohu's results for the fourth quarter ended December 27th, 2008.

With me today is our Chief Financial Officer, Jeff Jones.

I hope by now you have a copy of our earnings release and have had an opportunity to review it, but 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 will provide an overview of our results and comment on the quarter, as well as the business environment. Then Jeff will take us through the financial statements, and after that we'll take your questions.

First, though, Jeff has information concerning forward-looking statements, estimates, and other matters that we will discuss during today's call.

Thanks, Jim.

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 5th, 2009, and the Company assumes no obligation to update these comments.

Certain matters discussed on this conference call, including statements concerning Cohu's new products and expectations of business conditions, orders, sales, revenues, and operating performance are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected or forecasted.

Such risks and uncertainties include, but are not limited, difficulties in integrating the Rasco acquisition, the expected synergies and cost savings from the acquisition may not be realized, market opportunities as a result of the acquisition may be smaller than anticipated or may not be realized, demand for our products as a result of the global economic crisis, customer orders may be cancelled or delayed, the concentration of our revenues from a limited number of customers, our ability to convert new product 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 export regulations and the cyclical and unpredictable nature of capital expenditures by semiconductor manufacturers.

These and other risks and uncertainties are discussed more fully in Cohu's filings with the Securities and Exchange Commission, including the most recently filed Form 10-K and Form 10-Q. Cohu assumes no obligation to update the information in this release.

Further, our comments and responses to any questions will not make reference to any specific customers, as we are precluded from disclosing such information from our nondisclosure agreement.

Okay. Thanks, Jeff.

Like other companies in the backend semiconductor equipment industry, Cohu has been severely impacted by the global economic crisis. Consumer and business confidence has eroded, resulting in lower sales of electronic products and sharply reduced demand for semiconductors.

Utilization rates of production test equipment at IBM's and at test subcontractors have fallen as low as 50% in some cases. And in response customers for backend semiconductor equipment appear to have suspended spending for new equipment, and we are seeing indications that purchases of spares and nonessentials are also being reduced. We'll know more about that as Asia's businesses fully resume operations following the Chinese New Year.

[Semi] reported that December 2008 orders for backend semiconductor equipment were only $43.7 million, and this is the lowest since Semi began reporting such data in 1991, and a 75% decline from December of 2007.

Cohu's results for the fourth quarter reflect this difficult environment, as we booked orders for only seven handlers and three thermal subsystems. We haven't seen handler orders at this low level in at least 15 years.

Cohu's sales for the fourth quarter of 2008 were $41.4 million compared to $57.1 million in the fourth quarter of 2007, and $48 million in the third quarter of 2008. The net loss for the fourth quarter was $7.6 million or $0.33 per share and includes pretax charges of $5.5 million to write-down inventory due to weak business conditions in the semiconductor equipment industry, and $2.6 million for acquired in process research and development in connection with our acquisition of Rasco last month.

Orders were $34.4 million compared to $46 million for the third quarter of 2008. Fourth quarter orders for semiconductor equipment wren $21 million compared to $31 million in the third quarter. And backlog at the end of the fourth quarter was $46.6 million. We expect sales in the first quarter of 2009 to be approximately $33 million.

In response to deteriorating business conditions in the semiconductor equipment industry, we shut-down operations during the Thanksgiving and Christmas periods last year, are reducing payroll and labor expense by approximately 20% through headcount reductions, have cut salaries where permitted from 5% to 20%, reduced workweeks in selected operations, required mandatory time off each quarter, and eliminated the Company's matching contribution to the 401(k) plan.

Cohu's non-semiconductor equipment operations have not seen the same sharp drop-off in business. In part that's because customers in our mobile microwave data link and CCTV camera businesses are primarily government and military in nature and the buying cycles are typically longer than in the commercial marketplace. In many cases, we are working with customer budgets that were approved a year ago or longer.

Sales and orders in Cohu's CCTV camera business have been relatively flat and are projected to remain so in the first quarter. Sales opportunities are concentrated in two main areas, high end security and surveillance, and traffic management.

Last quarter this operation was relocated from a leased facility to our main Poway, California Headquarters. We expect to realize annual cost savings of about three-quarters of a million from this facility's consolidation.

Broadcast Microwave Services had a strong fourth quarter for sales, operating income, and orders. BMS achieved record sales of $29.2 million in 2008, and sales have grown from $12.8 million in 2005. BMS has become a leading supplier of microwave data links for airborne public safety and law enforcement, government security and surveillance, and unmanned air vehicles, both fixed wing and helicopters.

BMS began fiscal 2009 with a record backlog, and we expect sales to increase at least through the first half of 2009. BMS' improving financial results are especially welcome now as the semiconductor equipment industry struggles, as we all know.

Last month we announced the acquisition of Rasco. Through this acquisition we combined Delta Design, the number one supplier of logic pick-and-place IC test handlers with Rasco, the number two provider of gravity-feed handlers. This expands our customer base, broadens our product and technology offerings and further strengthens our global sales and service networks. By acquiring Rasco we expand into the fast-growing, small IC package segment with products that are complementary but with no product overlap.

Particularly in today's challenging market conditions this is a logical industry consolidation step that provides strategic benefits and synergies and less execution risk as we know the industry so well. In addition to current gravity and strip handler products, Rasco has a new high parallel, fast index time gravity handler in development.

With our two handler Companies, Delta Design and Rasco, we expand our total available market by 70%, from $330 million to $560 million, based on the most current market data. We now address more than 60% of the overall IC test handler market with a breadth of customers and products that is unmatched in the industry.

In today's difficult business environment this transaction will be moderately dilutive this year. We expect this acquisition to deliver accretion greater than 20% once business conditions recover. This accretion is driven by cost synergies in manufacturing, sales and service, by incremental market opportunities for the two Companies, and finally by putting excess cash to work in a higher return investment. After the acquisition, Cohu maintains a strong balance sheet with cash of $88 million at yearend and no bank debt.

In addition to the strategic benefits of the Rasco acquisition, we have two next generation pick-and-place handlers at Delta that will drive growth. Last year we introduced MATRiX with industry leading [bi 32] parallelism, vision alignment, and [cheverless tri-temperature] capability that reduces production downtime and will lower cost of tests. MATRiX is ideally suited for testing micro controllers, high performance analog, automotive, wireless, and other cost sensitive ICs.

We're also completing development of a next generation thermal handler. The successor to our industry leading Summit. This new system incorporates Delta's proprietary thermal control technology and is closely aligned with the future requirements of microprocessor and graphics chip testing.

Equipment utilization rates throughout the industry are far below the 85% range that is often the defacto threshold for capacity based capital expenditures. Given the gloomy short-term economic outlook it's not realistic to conclude that the widespread idle capacity throughout the industry will be absorbed anytime soon. And, as a result, the first half of 2009 will continue to be difficult.

And as for the second half, in an industry where visibility under normal conditions rarely extends more than a quarter or two, at most, customers today seem to have essentially no visibility, at all. However, our view is that at the present time there is no apparent catalyst for broad based recovery in the second half of the year.

We are operating the business with that in mind, while continuing to make major investments in new product development and maintaining an effective and efficient global customer support capability.

It is not easy to find much to be positive about in this economic climate, but fortunately Cohu has the financial resources to withstand a prolonged downturn if that should become necessary. No one can reliably predict at this time, at least, when business conditions in the backend semiconductor equipment industry will improve, but when they do I'm confident that Cohu will benefit.

With three new products recently introduced or in development, and Asia manufacturing strategy to enhance gross margin, and synergies from the Rasco acquisition, we have never been in a better position to gain market share, extend our leadership in the handler industry, achieve profitable growth, and increase shareholder value.

Lastly, before I turn it over to Jeff, beginning this quarter Cohu is also presenting non-GAAP financial information to provide additional insight into the Company's underlying operating performance on a comparable basis.

And, now, Jeff will provide details on Cohu's financial results.

First, I should mention the fourth quarter results include the Rasco results from the acquisition data of December 9th, 2008. Semiconductor equipment related revenues for the fourth quarter of fiscal 2008 were approximately 66% international and 34% domestic. International sales were distributed, 88% Asia-Pacific, 9% the Americas, and 3% other.

We recorded approximately $800,000 of FASBE 123 R stock based compensation expense, and approximately $800,000 of purchased intangible amortization expense in Q4, including $300,000 from our acquisition of Rasco. The comments I make regarding operating expenses include the impact of Rasco, FASBE 123 R, and purchased intangible amortization expense.

Gross margin was 19.7% in Q4 compared to 36.6% in Q3, and includes a $5.5 million write-down of inventory due to deteriorating business conditions in the semiconductor equipment industry. Excluding the write-down Q4 gross margin was 33% and in line with our projection. We expect our gross margin in Q1 to be approximately 28% due to lower volume.

R&D expense was $8.5 million in Q4 compared to $9.1 million in Q3, and was slightly lower than our projection due to reduced labor costs in our semiconductor equipment business. Rasco added approximately $300,000 to our Q4 R&D expense. We expect Q1 expense to be slightly lower than Q4.

In connection with the acquisition of Rasco we recorded and acquired in process R&D charge of $2.6 million in Q4 related to a new gravity-feed handler under development.

SG&A expense was $9 million in Q4 compared to $9.7 million in Q3 and slightly lower than our projection due to a decrease in sales related expenses in our semiconductor equipment business. Rasco added approximately $800,000 to our SG&A expense in Q4. We expect SG&A expense in Q1 to be higher than Q4 and approximately the same as Q3 with the addition of Rasco.

Interest and other income was $1.2 million in Q4, down from $1.4 million in Q3 as a result of lower interest rates and average cash balances. We expect interest and other income in Q1 to be approximately $600,000.

Our effective tax rate for Q4 was a benefit of 29% resulting in an effective tax rate benefit for the full year of 20%. The effective tax rates for Q4 and the full year were impacted by, among other things, the in process R&D charge on which no tax benefit was provided as the charge is not tax deductible, changes in the valuation allowance, and federal research credits.

Forecasting our full year 2009 effective tax rate in this business environment is extremely difficult and is dependent on 2009 earnings levels that are uncertain. For the first quarter of 2009 we are currently estimating an effective tax rate benefit of 33% and are using this rate as our internal estimate for 2009.

Q4 net loss per share on a GAAP basis was $0.33 and was computed based on 23.3 million weighted average shares and share equivalents from stock options in the RSUs. Non-GAAP net loss per share for the quarter was $0.17.

Moving to the balance sheet, cash and investments were $88.4 million at December, decreasing from $171.2 million at September due to the Rasco acquisition that closed in early December.

Net accounts receivable were $31.9 million at December compared to $34.5 million at September and represented about 70 days sales outstanding. The decrease in accounts receivable was due to steady cash collections and lower shipments in Q4. Rasco added approximately $5.5 million of accounts receivable as of the end of the year.

Inventory was $53.3 million at December compared to $48.3 million at September and increased by approximately the amount of the Rasco inventory.

Additions to property, plant and equipment for fiscal 2008 excluding the impact of assets acquired from Rasco were approximately $2.7 million and depreciation was approximately $4.4 million.

Deferred profit at September was $4.4 million compared to $4.8 million at September, deferred profit relates to revenue deferrals pursuant to SAB 104 primarily on Delta test handlers and thermal subsystems, as well as BMS products. Our deferred revenue at December 27th, 2008 was approximately $6.7 million.

The cost reduction actions described by Jim earlier will result in a savings of approximately $13.5 million in 2009. Approximately $3.3 million of this cost savings is due to temporary reduction, such as pay cuts and suspension of our 401(k) contribution that we intend to reinstitute when business conditions have improved.

That concludes our prepared remarks. And now we'll take your questions. Joe?

Thank you. We will now be conducting the question and answer session. (OPERATOR INSTRUCTIONS.)

Our first question is from Kelly Anderson with Sidoti & Company. Please go ahead with your question.

Hi, guys. Thanks for taking my questions. Just wanted to talk about Rasco a little bit. Can you give us an update on where we stand with the integration process?

Sure, Kelly. We're right on track. The initial integration activities involved the combination of our sales and service organizations, and that's proceeding well. We, I would say are ahead of plan.

As far as the manufacturing synergies, which largely involves capitalizing on the transition to an Asia based contract manufacturing model that Delta has embarked on, we're in the early phases, about where we planned, and we'll be getting into that in more detail over the next quarter or two.

Okay. And you referenced a new product that Rasco was currently working on. Could you maybe give us a little bit more details about the value proposition of this tool and when we could expect to see it launched?

Sure. It's a high parallel fast index time gravity handler, and we expect to have a prototype in the third quarter, customer evaluations in -- beginning in the fourth quarter, and expect to begin production shipments in 2010.

Okay. And then just two quick housekeeping questions. Jeff, do you mind telling me what the contribution from Rasco was included in the Q1 guidance?

Yes, on a revenue basis they are contributing about $3 million.

Okay. And could you give me the cash flow from operations for the fourth quarter?

Sure. Cash flow from operations was about $1.2 million, Kelly.

Great. Thanks very much.

Okay. Thank you.

(OPERATOR INSTRUCTIONS.)

The next question is from Vernon Essi with Needham & Company. Please state your question.

Thank you. First off, just wondering if you could give some color on the market with regards to secondary equipment? Is there a lot of vendors looking for used equipment in the market right now, and how does that look?

Vernon, you said a lot of vendors, do you mean customers or you--?

I'm sorry, customers, correct. Sorry.

Yes, I haven't heard really of any dramatic increase in that. In part, that may be because customers aren't buying anything, be it new or used equipment. It's as if the tap has been shut-off.

Well, I guess what I'm trying to understand is do you face the sort of double threat of obviously waiting for things to recover and then competing with more legacy equipment in sort of the midrange areas of your customers? Do you think that's a possibility as things recover, or do you feel most of your technology is sort of expensive on the standpoint of your customers that are cutting back? And buy the advanced thermal capabilities, the high-speed capabilities and what-not that you offer?

My opinion is that the sales of used equipment will probably continue at historical levels. It's always been a factor. What I suppose could be different is if some businesses don't survive and close down, that would be additional equipment on the market.

But as far as the impact on us, as we come out of this downturn, whenever that will be, we have three new products. One in each of our three product lines, in high-speed pick-and-plays, and high performance logic, our new thermal handler, and this high-speed, high parallel gravity handler that I just mentioned to Kelly. So we're really expecting our growth out of this downturn to be driven by new capability buys, new technology, and not purely capacity.

Okay. And then in your prepared comments you made a -- you gave some color on the actual mix of handlers, if I recall I think it's just seven units. Could you go over that again?

Well, it was seven units, and the mix, the reason I didn't break it out is the mix becomes rather irrelevant at those low numbers. We -- I guess we had four of the systems I would put in the other category, and they were our offline [venner], which is an offline sorter, not actually a test handler, so that was four of the seven. And the other -- the remaining were high-speed handlers, and then three thermal subsystems.

Okay. And then what would the -- I don't know if you're going to be splitting this out, because what was the order -- and if you mentioned this, I apologize, but what was the order book like for Rasco?

I didn't mention that. And we picked up Rasco as of December 9th, and the orders received after the acquisition were $1.8 million. And we had the yearend backlog contribution from Rasco was $2.8 million.

Okay. And so -- all right, on a normalized rate, this is obviously running almost analogous to your Company, or to Delta, rather, pre-Rasco. You're going to be running this at least it looks like about a 30% level of where it probably would have been had this been sort of a generally normal year. Is that kind of how we should be thinking about this?

Yes, I think you're in that ballpark. Exactly where it levels out is difficult to know, although when you've got handler orders at this level, it's hard to go much lower.

And then just on that point, obviously, you're in touch with your customers and some of their planning structures. Are you feeling more or less, I guess the question is if you were to go back four months ago versus today, do you feel that there's more of a general strategic sense as to where things might go for the rest of the year if your customer is spending and they're working on that, or do you get the impression it's still very defensive and very trying to keep cash within and not being open to the possibility of technology investing?

I mean I'm just trying to get a gauge for where you feel the business is today versus when we talked three months ago on your last release when the world was coming to and end, you know, metaphorically, in terms of the financial world? It seems like things have stabilized somewhat and on the device side you're seeing a little bit of dialogue. I'm wondering if that's translating, at all, into your end of things in the equipment front?

Well, conditions clearly worsened in the fourth quarter in terms of the number of handler orders received, and a significant downscaling in customer forecasts across the board. So I think while the impact of the global financial crisis maybe reached its apex in the September, October timeframe, I think it was in the -- it's been in the few months subsequent to that that customers in our industry have really taken down their forecasts.

So where we are today is I think a very defensive position, pulling in the reins, no one is thinking very far ahead, and it's a very abnormal situation because if you talk to customers today you would almost think there's going to be no business anytime. It's just a very abnormal situation, and it's not clear what is going to be required in the macro environment perhaps starting with that to change this. So, for now, I think we're in a very, very odd period.

Okay. And then, finally, just, Jeff, back to some of the comments you made, and I think the way you walked through them I couldn't parse together the -- what sort of your OpEx picture is going to look like going forward. But how should we be thinking about your OpEx levels as 2009 progresses, assuming -- well, let's assume things are sort of stabilizing from here, what would that look like?

Well, so for R&D, Vernon, we're guiding down, and that, we should see a decrease throughout the year in R&D. SG&A, we're guiding to a slightly higher number than previous quarters, primarily with the addition of Rasco, but we'll see that number certainly decline throughout the year, as well, a slight decline.

And so you're talking about R&D actually being down in dollar terms from the $8.5 million in the first quarter?

Right.

Okay.

Yes, slight decrease in Q1 for R&D.

Okay. All right. That's it. Thank you very much.

There are no further questions in queue. I'd like to turn the call back over to Management for closing remarks.

Okay. Thank you. I'd like to thank everyone for joining us today, and we look forward to speaking to you in April when we report Q1 results. Thanks, and have a good day.

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.