Cohu Inc (COHU) 2009 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cohu Incorporated second quarter 2009 earnings call. (Operator Instructions). This conference is being recorded. It is my pleasure to introduce your host, James Donahue, President and CEO for Cohu Incorporated. 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 ending June 27, 2009. With me today is our Chief Financial Officer, Jeff Jones. I hope you have a copy of our earnings release and 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 will provide an overview and comments on Cohu's results for the second quarter and also discuss the current business environment. Then Jeff will take us through the financial statements and we'll close by taking your questions. But, before that, 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 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, July 22, 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 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 to inventory, goodwill and other intangible asset write downs, 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 receivables collection problems, difficulties in integrating the Rasco acquisition 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, reduced demand for our products as a result of the global economic crisis, customer orders may be canceled or delayed, a concentration of our revenue from a limited number of customers, intense competition in the semiconductor test handler industry and our reliance on patens and intellectual property, compliance with regulation 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 and further, our comments in responses to any questions will not make reference to any specific customers as we are precluded from disclosing such information by our nondisclosure agreements.

Thanks, Jeff. The global economy remains in a recession and conditions in the semiconductor equipment industry continue to be as difficult as we've seen. Nowhere was this more evident than last week at Semi Con West in San Francisco. Historically, this is a premier trade show for semiconductor equipment and materials manufacturers. The mood last week clearly reflected the gloomy economic environment. Semiconductor equipment is, of course, a cyclical business and industry veterans have been through downturns before but this one is different as the causes and scope of the economic decline are global in nature and encompass virtually all industries.

Fewer companies exhibited at semi con this year and those that remained reduced the scale and cost of their booths. Like many companies, we chose not to exhibit in order to reduce costs and because in the current business environment, there are more effective ways to engage with our customers. Semi now expects worldwide semiconductor equipment sales in 2009 to decline 52% year-over-year and that follows a 31% drop in 2008.

So while there is no doubt that 2009 will be a second consecutive down year for this industry, the question is have we reached a bottom yet. In the tests and assembly area, recent evidence indicates that we have and that we're beginning to climb out of the trough. After reaching a low in February of only $21 million, orders for back end equipment have increased four consecutive months. In data released just yesterday by semi, preliminary June orders for test and assembly equipment were $110 million, and that's up more than 400% from February but it's important to recognize that it's still down 52% from the June 2008 level.

Against this difficult back drop for the second quarter of 2009, Cohu recorded improved sequential operating results, positive cash flow and increased orders. Sales were 24% higher than our guidance as a result of stronger than expected turns business that was mainly spares, upgrades, kits and repairs in our semiconductor equipment business. With our device kit business in particular, it seems that certain of our IDM customers are dealing with highly dynamic and increasing demand from their customers, especially in consumer electronic applications. And, as a result, they need to quickly adjust their production capacity.

Our gross margin increased to 33% from 20% in the first quarter as a result of higher volume, favorable product mix at Broadcast Microwave Services and no charges this quarter for excess or obsolete inventory. Orders increased 33% sequentially to $45.6 million, and orders for semiconductor equipment were $33.3 million, and that represents an increase of 65% compared to the first quarter. Though still well below historical levels, unit orders for our handlers and thermal subsystems were the highest since the third quarter of 2008 and orders for spares, upgrades and device kits, as I indicated, were also up sharply. Unit system orders were as follows, high speed handlers 40%, thermal handlers 27%, thermal subsystems 20%, and other products 13%.

Equipment utilization at IC device manufacturers and test subcontractors improved during the quarter to around the 70% range in some cases but generally remains below the 80% plus levels that have historically triggered capacity buys. We received follow on orders for Pyramid, the next generation handler that incorporates our proprietary thermal technology. The system is undergoing characterization and qualification at a major micro processor IDM. Like its predecessor, the Summit Handler, Pyramid provides enabling capability to optimize speed grading of microprocessors and high speed graphic chips. We expect to ship additional [qual] systems throughout 2009 in anticipate of a production ramp expected mid next year.

While most customers are not adding capacity due to equipment utilization that is still below healthy levels, we are beginning to see increased forecasts from certain customers. One of our largest customers is accelerating plans to ramp its new test and assembly plant. Equipment installs that were originally planned for next year have been pulled into late Q3. And we continue to realize opportunities at some of our historically smaller customers, especially for gravity handlers. Rasco's relatively wide customer base continues to be a benefit as some smaller customers are successfully pursuing niche markets that require new capability and capacity.

In response to increased demand for handler device kits, we fast-tracked the expansion of our Philippine kit facility and brought the latest production machines online this month, that's two months ahead of our original plan. We're proceeding with a further expansion that will be completed by the end of this year. Our customers are benefiting from reduced lead times and we're realizing cost benefits through designing and manufacturing in this lower cost geography.

Turning for a moment to our other businesses, Cohu's electronics division was profitable for the second quarter and for the first half of 2009. This business provides a wide selection of video cameras and related products, specializing in video and IP solutions for surveillance and process monitoring. Cohu electronics has a market leading position in the US traffic management market and in the second quarter received a $2.4 million order to replace 450 camera systems in the San Francisco Bay Area. Shipments have already started and will continue through May 2010.

Cohu electronics also has excellent opportunities in high-end security applications and in the third quarter we plan to introduce a new high definition surveillance camera. This is the first in a line of a new IP cameras and it combines the advantages of HDTV image quality manned with efficient H.264 compression and a responsive variable speed positioner all housed in our new rugged camera enclosure. This is an exciting new product that should provide growth opportunities in the years to come.

Broadcast Microwave Services, or BMS, had an outstanding quarter and the contribution from this business is particularly welcome at this challenging time for the semiconductor equipment industry. This mobile microwave business achieved record operating income in the second quarter, above 20%, and has a strong pipeline of business opportunities in law enforcement and government surveillance. BMS is introducing new lightweight, small form factor, high-performance, standard def and high def transmitters and receivers which should open new opportunities in both airborne and grounds applications. This business is also delivering strong margins as they are realizing the benefits of redesigned programs initiated last year, particularly in certain analog systems used by our UAV customers. We expect that BMS will have a strong Q3. Jeff.

Thanks, Jim. Semiconductor related revenues for Q2 were approximately 85% international and 15% domestic. International sales were distributed 88% East Pacific, 7% the Americas and 5% the other. We recorded $840,000 of FASB 123(R) stock-based compensation expense and approximately $1.5 million of purchased intangible amortization expense in Q2. The comments I make regarding operating expenses include the impact of FASB 123(R) and purchase intangible amortization expense.

Gross margin was 32.1% in Q2 compared to 20.2% in Q1 and was higher than our projection of 26% due to the stronger than expected turns business that Jim referenced and our semi equipment operations and favorable product mix at BMS. We expect our gross margin in Q3 to be approximately the same as Q2. Total operating expense, including R&D and SG&A, was $16.4 million in Q2 compared to $17 million in Q1 and in line with our projection. We expect total operating expense in Q3 to be slightly higher than Q2.

R&D expense was $7.8 million in Q2 compared to $8 million in Q1. We expect R&D expense in Q3 to be slightly higher than Q2 due to new product development in our semi equipment business and in BMS. SG&A expense was $8.7 million in Q2 compared to $9 million in Q1. We expect SG&A expense in Q3 to be slightly higher than Q2 due to variable selling expenses in our semi equipment operations. Interest and other income was $300,000 in Q2, down from half a million in Q1 as a result of lower interest rates. We expect interest and other income in Q3 to be approximately $400,000.

In Q2, we recorded on $19.6 million charge for an increase in our deferred tax asset valuation allowance in accordance with the accountings set forth in FASB 109. This is a noncash, nonoperational charge and does not preclude us from using our tax losses, tax credits or other deferred tax assets in the future. Excluding the $19.6 million charge, we -- our expected effective tax rate benefit for 2009 would be approximately 29% based on our current projection of pretax results. Q2 net loss per share on a GAAP basis was $0.97, including $0.84 per share resulting from the tax charge of $19.6 million. Non-GAAP net loss per share which excludes the tax loss and the after-tax impact of share based compensation and amortization of intangibles was $0.06.

Moving to the balance sheet, cash investments were $89 million in June, an increase of $6 million from March due primarily to cash generated by improved operating results and accelerated cash collections which lowered our days sales outstanding from 66 in Q1 to 59 in Q2. We expect our net cash burn in Q3 to be approximately $5.5 million based primarily on an increase in production of next generation handlers and the related increase in accounts receivable. Shipment of these handlers is expected to occur late in Q3 and the revenue associated with these shipments deferred to a future quarter based on customer acceptance. Q3 dividend and CapEx are expected to be approximately $1.4 million and $1 million respectively. Net accounts receivable were $25.7 million at June compared to $26.5 million at March and inventory was $50.4 million at June compared to $50.2 million at March.

Additions to property plant and equipment for Q2 were approximately $500,000 and depreciation was approximately $1.5 million. Deferred profit at June was $3.8 million compared to $3.4 million at March. Deferred profit relates to revenue deferrals pursuant to FASB 104 primarily on semiconductor equipment test handlers and thermal subsystems and BMS products. Our deferred revenue at June 27, 2009, was approximately $6.7 million.

Thanks, Jeff. No one knows when business conditions will improve. With our strong balance sheet, we are able to weather a prolonged downturns if that's necessary. And at the same time, we can continue to make strategic investments in new products and operational improvements that will enable Cohu to gain market share, deliver profitable growth and enhance shareholder value. I'm pleased to report that Cohu's Board of Directors approved a dividend of $0.06 per share payable on October 30, 2009, to shareholders of record on September 4, 2009. Cohu has paid quarterly dividends consecutively since 1977. And, finally, for the third quarter we expect sales to be approximately $40 million.

That concludes our prepared remarks and we'll now take your questions. Scott, we're ready.

Thank you, ladies and gentlemen. (Operator Instructions). Our first question comes from the line of Vernon Essi with Needham & Company. Your line is open. You may proceed with your question.

Thank you very much. Glad to see a turn here in the orders.

It looks a little -- it looks a little better than it has for a few quarters, Vern.

Right. Let's, just if you could, discuss a little more your -- one of your larger customers obviously turning back on the test floor and what -- you said that you should see a production or at least the shipments rather kicking in into the first half of next year it sounds like with some of these going out the door in 2009. But the tricky part is your revenue recognition of those units. Can you give us a sense of what size and scale this might be? In general terms?

Vern, I think a range to work with with respect to the shipments that may be deferred in Q2 -- Q3, excuse me, the range would be $5 million to $9 million.

That's just for the first quarter. Obviously this is going to be a multi quarter situation, it sounds like.

Yes. That's just -- that's just the shipments that we would expect to make in the third quarter.

Okay. Can you give us an update on the -- some of the other product lines and how they're faring with other customers? One thing in particular, just to revisit your parallel gravity handler and anything that is new out of Rasco.

Well Rasco's business has been effective -- the gravity business like the pick-and-place business and like virtually all back end business is to say it's been down, down substantially year over year. We do have a new product in development at Rasco, it's a high parallel fast index time gravity handler that is really the gravity equivalent of our new Matrix handler, our new Matrix pick-and-place handler. So we expect to begin some customer evals on that towards the end of this year, fourth quarter most likely.

But is there -- let me rephrase the question. Some of the other back end companies had talked about some orders that were spotty but they were here and there and it sounded like just general capacity additions. Would you say, very modest, but would you say you're seeing anything along those lines out of the gravity handler side that are sort of onesy, twosy orders across a lot of customers or is it still very much very quiet?

The largest customers our historical larger -- largest customers for gravity have been very quiet. What we're seeing is an occasional order from one of the smaller companies, one of our smaller customers, sometimes new customers, sometimes customers we've had in the past that have just been not among our largest and I think that's simply the result of even in this down economy some companies have hot products that are doing well, and if they're working in a niche, serving a niche that is doing well, they need capacity, but it's very spotty. There is certainly no pattern to it at all yet.

Okay. And one other point you made just from an end market perspective, consumer electronics applications seemed to be one of the big drivers behind the scene. Can you be more specific as to what you're referring to there? Is this more on the computing side or is this more on the home electronics front?

I think it's more on the home electronics, the mobile electronics but not necessarily PC, although you look at the report from the microprocessor companies the last day or two and they were reasonably good. But what I was referring to specifically was consumer electronics. We've had some customers come in and need significant quantities of new device kits in very short periods of time and I think they're just reacting to spikes in demand from some of their customers who have some hot C.E. products.

Okay. All right. Well thank you. Thank you very much.

Thank you, Vern.

Thank you. Our next question comes from the line of Kelly Anderson with Sidoti & Company. Your line is open. You may proceed with your question.

Hi, guys thanks for taking my questions and congratulations on a job well done in a tough market. Just wanted to touch on the new gravity feed handler a little bit more. Just trying to get a sense of how key role customers play in the new product development. I know with the Pyramid handler obviously you have the blessing of one of your key MPU guys on that front, but just wondering how involved they are in that process and what a potential rollout could be for this product?

As you point out, Kelly, in the thermal handler area where the target customers are a select few, specifically the microprocessor IDMs, it's absolutely essential that we work in tandem, very close relationship with a major customer because without a buy-in from that customer you are not going to have a successful product because it's a relatively small market segment. In the general purpose market, which is what the bulk of our pick-and-place handlers and our gravity handlers address, it's important that we cover a broader swath of the market requirement. So we solicit input from many customers, all of our large customers, any customers that we're trying to target as new opportunities, and then we integrate all the requirements in an effort to develop a handler that covers the largest available market that where we can have the right blend of price, capability and performance.

So we do not necessarily march arm and arm the way we did with our thermal handler development with a customer. However, we always have customer partners that we proceed with for initial evaluations of our beta site and prototype machines, whether it's pick-and-place or whether it's gravity and we'll certainly have that with gravity. We would look to place at least one, perhaps more, of our new gravity systems with a customer in the fourth quarter of this year and then begin production deliveries say mid 2010.

Okay. Great. And then, Jeff, if I could just ask you a question on the balance sheet.

Sure.

I know that one of the key levers that we talked about in realizing the gross margin improvements from the outsourcing initiative is sort of flushing through some of the systems that we already have in inventory. It looks like the inventory levels were flat. I'm just wondering, what the break down is at this point? Are you able to clear some of these systems out so that we can start to see some margin improvement?

The shipments in the first couple of quarters because we've indicated have had a high concentration of our turns business, spares kits and other, which the inventory that we carry for those products is a lot lower and so we're having to buy that inventory, ship it in the same quarter, have less affect on the overall inventory balance. Once we start shipping more systems related to our edges and our castles and our summits, then we'll see the inventory drop in future quarters.

Just to add one comment there, Kelly. I mentioned in my remarks that we have this one large customer who has pulled in the ramp of their new test and assembly facility and this may require that we ship handlers far earlier than we had anticipated, handlers that we would have built at the CM we may now need to build in Poway. So not all of these details are flushed out yet, but that's quite possible, that in order to meet the delivery requirements on these initial orders we'll have to build these units here in Poway in California at our current facility.

Okay. Is there any way to gauge how many systems you would have to test in the field, for example on the pyramid side before we could start shifting those systems over to the CM?

I think that's going to occur in the second quarter of next year. And we're planning that based on current forecast, that's when the volume shipments will begin. So the units we're shipping now are -- even though there is -- significant quantities of them are still qualification or validation systems, they're not for production use yet.

Okay. And one final question for me on the modeling front. At what -- what is your break-even level of revenue look like at this point and when do you start reintroducing some of these previously cut costs?

When you say previously reintroducing what, Kelly?

Some of the cost cuts that you've instituted so far.

Okay. Kelly, our break even models on a non-GAAP basis and break even threshold to revenue is $45 million. And with respect to the cost cuts, we've taken a lot of actions over -- between Q4 and Q1. We've realized benefit from those actions, as I think you can see based on the direction of our operating expenses over the last few quarters. And we've brought that non-GAAP loss down significantly over the last couple of quarters. So no plans currently to take any further significant cuts. Certainly if things turn to worse in Q3 and Q4, then we would take another look at that. But at the moment we have no plans on the drawing board to take additional significant actions in that area.

Kelly, on the flip side of that, and maybe if you're question was hey, there seem to be some improved conditions here even though maybe just slightly but nevertheless improved, are we planning to restore some of the cuts we've made in the past, and my answer to that would be no.

I think I want to see a clearer indication that business has indeed improved. We've been through false starts and double dips and all of these kinds of things in the past. So I think it's encouraging that business seems to have improved but we're still at very low levels. Semis back end, test and assembly bookings are up 400% but still 52% below what they were a year ago and I think 70% what they were -- 70% off what they were at the 2006 peak. So it's not time to really seriously yet think about backing off on any of these cost control measures that we've implemented.

I think that's what I wanted to hear. Thanks very much.

You're welcome.

Thank you, Kelly.

(Operator Instructions). Mr. Donahue and Mr. Jones, it appears there are no more questions at this time. I would like to leave the floor with you for any closing comments.

I would like everyone for attending our call today and we look forward to speaking to you when we report our third quarter earnings. Thank you and good day.

Ladies and gentlemen, this does conclude the teleconference. You may disconnect your lines and thank you, very much, for your participation and have a wonderful afternoon.