Cohu Inc (COHU) 2009 Q3 法說會逐字稿

Greetings and welcome to the Cohu, Inc., third quarter 2009 earnings call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Donahue, President and CEO for Cohu, Inc. Thank you Mr. Donohue. You may begin.

Good afternoon everyone, and welcome to this conference call that will cover Cohu's results for the third quarter that ended September 26, 2009. With me today is Jeff Jones, our Chief Financial Officer.

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 may 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 third quarter and discuss the current business environment. Jeff will take us through the financial statements, and then we will take your questions.

But before we get started, Jeff has information concerning forward-looking statements, estimates and other matters that we will discuss in today's call.

Thanks Jim. 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 21, 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 receivable collection problems, reduced demand for our products as a result of the global economic crisis, customer orders may be canceled or delayed, the concentration of our revenues from a limited number of customers, intense competition in the semiconductor test handler industry, our reliance on patents and intellectual property, compliance with US export 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. 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.

Thanks Jeff. This was a strong quarter for Cohu. Sales were $44.1 million and exceeded guidance of $40.0 million as a result of higher semiconductor equipment sales. We are very pleased to return to profitability on a non-GAAP basis, and each of our three business segments was profitable.

Non-GAAP net income for the third quarter was $1.7 million or $0.07 per share compared to net income of $1.2 million or $0.05 per share in last year's third quarter and a net loss of $1.4 million or $0.06 per share in 2009's second quarter.

The improved net income is the result of a 440 basis point improvement in gross margin compared to the second quarter arising from favorable product mix and the impact of cost reduction actions taken during the downturn.

Third-quarter orders for semiconductor equipment increased 41% compared to the second quarter. And unit orders were as follows. High-speed handlers, 76%. Thermal handlers, 22%. And other products, 2%.

Customer forecasts strengthened as the quarter progressed, and this trend has continued into the fourth quarter.

Orders for handling equipment were broad-based across customers and products. Unit orders for pick and place handlers were at the highest level since the first quarter of 2008. And orders for gravity handlers were the highest since the third quarter of last year.

Several of our historically largest customers who have not purchased handlers in over a year placed a multi-system orders in the third quarter and continue to have strong forecasts. A major US IDM ordered multiple full temperature range Castle handlers in response to a surge in demand for automotive ICs. A major US graphics IC company placed a multi-unit order for our Summit handlers for use in testing next-generation GPUs.

We received initial orders from a large US-based IDM for our new high-parallel fast index time matrix handler that will be used by this customer for testing high performance analog ICs.

And we're very excited about a major win for Rasco, as a large IDM placed on multi-system order after selecting Rasco strip handler. This customer just placed an even larger follow-on order for more systems.

We also booked additional orders for Pyramid, our next-generation handler that incorporates our proprietary thermal technology. Pyramid successfully passed a critical performance qualification milestone at the customer's validation site. And we expect the production ramp to begin in the first half of next year.

In the cyclical back-end semiconductor equipment industry, we are familiar with sharp and sudden changes in business, as we have seen during this latest and severe industry downturn. The customer tone changed for the positive in the third quarter from a lack of visibility to tangible and increasing forecasts with a need for fast deliveries. It seems that customers have been surprised by increased demand, and that demand is substantial in some cases. Having resisted adding capacity during the recession, they are now struggling to keep up, and we are under extreme pressure to pull in our deliveries. As a result, we are delaying the transfer of certain handler products to our Asia-based contract manufacturers and will continue to build them in our California factory until our CMs are fully qualified, ramped and in a position to meet customer delivery requirements.

Turning to our other businesses, Cohu's electronics division was again profitable in the third quarter and for the first nine months of 2009. Beta testing of our new, high definition PTZ camera is proceeding successfully at a municipality in Southern California. Demo units have been shipped to Cohu's sales force, and production release is scheduled for this quarter. We will then further expand our high definition product line early next year with derivative fixed and dome HD cameras. We expect these new high-definition products to provide excellent growth opportunities in both traffic and security markets.

The strong performance in our mobile microwave communications business continued as BMS had another excellent quarter. The improvement in this business is clear in year-over-year comparisons. For the first nine months of 2009, sales increased 22% and operating results improved from a loss of 4.1% in 2008 to operating income of 17.2% this year, an increase in dollars of $5.3 million.

BMS continues to grow revenue and profit and is benefiting from its strong repetitive position and products for the law enforcement, government surveillance and tactical UAV markets. For the fourth quarter we expect sales to be between $48 million and $53 million.

Now Jeff will provide details on Cohu's financial results.

Semiconductor equipment related revenues for Q3 were approximately 83% international and 17% domestic. International sales were distributed 90% Asia-Pacific, 7% the Americas, and 3% other. We recorded approximately $900,000 of stock-based compensation expense and approximately $1.6 million of purchased intangible amortization expense in Q3. The comments I make today include the impact of these items.

Gross margin was 36.8% in Q3 compared to 32.1% in Q2, and as Jim said, was higher due to -- due primarily to favorable product mix.

Also as noted in Jim's remarks, as a result of our accelerated production ramp in Q4, the manufacturing transition to Asia will be delayed, and our new test handlers will be produced in our Poway plant rather than by our contract manufacturers. This combined with typical new product startup costs will impact gross margin, and as a result we expect gross margin in Q4 to be approximately 29%. We expect gross margin to improve in the first half of 2010 as we transition to manufacturing subcontractors and work through the production startup.

Total operating expense was $17 million in Q3 compared to $16.4 million in Q2 and in line with our projections.

R&D expense was $8.3 million in Q3 compared to $7.8 million in Q2.

SG&A expense was $8.7 million in both Q3 and Q2.

We expect R&D and SG&A expense in Q4 to be about the same as Q3.

Interest and other income was $300,000 in Q3 and Q2 as a result of lower interest rates. We expect interest and other income in Q4 to be approximately $300,000.

The Q3 tax benefit of $400,000 was primarily due to foreign losses. Since we recorded a valuation allowance on our US deferred tax assets in Q2, we had essentially no US tax provision (inaudible - background noise). Our Q4 tax provision will be computed similarly. Absent the impact of the valuation allowance, our effective tax rate was approximate 31%.

Q3 EPS on a GAAP basis was breakeven. Non-GAAP EPS, excluding the after-tax impact of share-based compensation and amortization of intangibles, was $0.07 for the quarter.

Moving to the balance sheet, cash and investments were $87.3 million at September, decreasing $1.7 million from June but better than our projection by $3.8 million, benefiting from strong collections.

Net Accounts Receivable or $34.9 million at September, a $9.2 million increase over June resulting from higher business volume.

Inventory was $51.2 million at September compared to $50.4 million in June. Additions to property, plant and equipment for Q3 were approximately $900,000, and depreciation was approximately $1.3 million.

Deferred profit at September was $5.1 million compared to $3.8 million in June. The related deferred revenue at the end of Q3 was $12.9 million compared to $6.7 million at June and increased primarily from revenue deferrals on shipments of our new test handlers.

Thanks Jeff. Conditions have clearly improved in the semiconductor and semiconductor equipment industries. Orders for back-end equipment have now increased for six consecutive months. Customer forecasts have strengthened, and there is considerable upside before we return to the order levels of recent peaks in the back-end equipment industry. We are ramping production to meet increasing demand for our products. In its latest estimate, Gartner points to improved conditions in the ATE market during the second half of 2009 and estimates that 2010 ATE spending will increase 44%.

While encouraged by these positive developments in our industry and our business, the global economic environment remains uncertain, and it's unclear how this will ultimately affect the consumer electronics, semiconductor, and semiconductor equipment industries. But if we indeed are in the early stages of a recovery in the back-end semiconductor equipment industry, Cohu is very well-positioned to benefit.

Throughout the downturn we continued to invest in new product development and streamlined our operations. We acquired Rasco and significantly expanded our served market. Our next-generation thermal handler, Pyramid, has been qualified and is ready to ramp. Matrix, a new modular, scalable high-speed pick and place handler for analog, logic, and wireless IC testing is in production. We have successfully integrated the Delta Design and Rasco global sales and service organizations and will increasingly leverage the resulting synergies as business improves.

As demonstrated most recently by the selection of Rasco's strip handler by a major Delta Design customer, we are realizing tangible benefits by offering customers the broadest range of products in the industry supported by our strong global service and engineering support organization.

Throughout the downturn our balance sheet has remained strong, and we closed the third quarter with $87 million in cash and no bank debt.

I am pleased to report that Cohu's Board of Directors approved a dividend of $0.06 per share, payable on January 4 to shareholders of record on November 27, 2009. This is the 32nd year that Cohu has paid consecutive quarterly cash dividends.

That concludes our remarks, and now we will take your questions.

(Operator Instructions). Vernon Essi, Needham & Company.

Thank you, and congratulations on the business turning and a lot of good things going on here.

Let's start out with I guess the more -- the tough question here, and that is the manufacturing transition you have, and having that sort of put on ice for right now. And Jeff, walk me through the levers behind the scenes there and how you have such a -- and the gross margin's obviously going to be materially lower quarter on quarter. How did we get there? And what's really going on there? And how is that going to be alleviated going forward?

Well again, that has to do with product -- a combination of things, product startup costs as well as producing more units in Poway than we had anticipated originally. The product startup costs, it's really the learning curve that we experience on any new product. These are additional costs on the initial units that will be driving the gross margin down.

It's not that the transition is so much put on ice. There is a delay because we are accelerating to meet customer deliveries. The transition will be progressing in the background, but we will be building more units in Q4 in Poway than we had originally intended.

If I can just add to that, as I commented in my remarks, customer sentiment and customer demand -- it was almost like a digital switch in the third quarter. It -- this is a -- we've all seen how the tremendous change in demand that can occur going up or going down in a cycle. But this is as steep and sharp as we have seen. And customers require delivery literally yesterday, in most cases.

So as a result, we have no other choice but to do everything we can to accommodate their requirements. We think that's clearly in the best long-term interest of the company. And so we are reducing the risk of missing their delivery requirements by continuing our production here.

We will still accelerate the -- or we'll still continue with the transition of these products to the contract manufacturers. That's not slowing down at all. But we are going to be building them here longer than we otherwise anticipated as a result of this spike in demand. And the only way to realistically meet it is to build it here where we have the expertise, and the expertise is not yet developed, nor the capacity, at the CM. So it's a delay, not a change in strategy.

I apologize, by the way, for characterizing it as not -- as being put on hold for now. But to be clear here, what we're looking at is basically a combination, as you said, of startup costs. It sounds like also an expedite sort of mentality going on where you're probably seeing overtime and a lot of other sort of ancillary costs around that as well. And what I'm trying to gauge is -- you've obviously got some deferred revenue as some of these newer products have gone out the door. Are we going to see this sort of continue into the March quarter? How does this play out as you come up the curve? And is this sort of pressure going to be ongoing, if you will, for some time?

The pressure from customers for early delivery?

Well that, of course, we can't predict. But let's assume it's still pretty busy all the way through the fourth quarter. Do you have a carryover into the first quarter where this is going to impact in the P&L as you recognize some of that revenue and whatnot?

Well, there's a couple of things going on here. There's the manufacturing transition to the contract manufacturers, and then there's the shipment of new products that are subject to customer acceptance and GAAP revenue recognition rules. So there's two issues. And our deferred revenue is increasing, as Jeff indicated, because of the shipments of these new products, Matrix and Pyramid, to new customers. So that will continue into the fourth quarter. And some of it will continue into the first quarter as well. It's somewhat difficult to predict exactly when customer acceptance is going to occur. It's not completely in our control.

If you are asking, do we intend to be building products, continue to build products in California until the fourth quarter? Well, we are always going to be building some product here. There's just certain products, and they're the new ones, that we are transitioning over to Asia, Pyramid and Matrix, EDGE has already transitioned. And yes, we do expect that we will continue to build both those products into early next year. Precisely when the exact transition is made is not completely defined at this point.

And let me -- I'd like to switch gears here. But looking at your order book, obviously very robust, what sort of window are we looking at in terms of -- is this a six-month order outlook? Or how does that shape out? You have to remind me how that shapes out for your orders.

Customer visibility hasn't improved very much. They're still only looking out about one quarter. There are several customers with forecasts slightly beyond that. But in general that hasn't changed. It's just that what they are seeing in their sights right now are much bigger numbers than they saw just a month or two ago.

But my concern and the comment I made was, I don't know whether the global economy is in sync with what seems to be going on in the back-end semiconductor industry and specifically at our business, both of which are pretty robust right now.

Okay. I'm just trying to reconcile the robust book-to-bill versus the guidance, and obviously a piece of that order book is going to be deferred going out further.

That's exactly right, by the way. The shipment level, that is to say, the products we're shipping out the door, versus the sales, that is, the shipments that we're recognizing -- there is a gap because we are shipping new products.

And then finally, always a favorite topic of ours, the strip handler is suddenly showing signs of life. Can you just walk through the evolution of that and sort of what changed per prior cycles when this concept has been floated? And why is it suddenly being adopted?

Well, I would point out that it's the adoption by -- what I talked about in my remarks and the orders that I talked about were orders from a single customer, happens to be a very large customer, a historically large Delta Design pick and place handler customer. And following the acquisition of Rasco last December, as we made our rounds to our customers for our periodic updates and of course addressed the acquisition, including our now broadened product line which included Rasco's highly regarded strip handler, it piqued this customer's interest.

This customer had already done some work to investigate the potential benefits of transitioning the strip, just for certain of its products, its packages, and made that decision relatively quickly. And evaluated our machine over the summer, liked it, it did very well. And placed an order in the third quarter. And then placed a follow-on order, an even larger follow-on order, this month.

So we are very pleased with it, but it's one customer. I don't want to signal that this is any broad-based adoption by the industry of test on a strip. I don't think it is. It's very dependent on the variables, customer by customer.

I appreciate that, and I -- what I guess I'm trying to understand too, though is, is it finally within -- behind the scenes at this customer and they're running the numbers, it clearly -- it's getting a green light from an economic perspective. That's what I'm trying to understand, is this still sort of in a kind of an R&D Skunk Works kind of feel? Or is this like a trend that you think is developing in this customer?

Well, I wouldn't call it an industry trend. I frankly don't know. As you know, test -- the adoption of test on strip has been very slow. I still think it's going to be a portion of the total requirement. I don't think it's going to be the -- I don't at all think it's going to be as widespread as pick and place, or gravity. But for some customers in some applications, it makes sense.

And it has always made sense. It's just that there are substantial barriers that a customer has to be willing to overcome to implement test on strip. It essentially requires changing the way you assemble your products and change the way you process them through the back-end.

Most customers, when they look at it say, yes, there are some benefits, but I am not going to obsolete my current production processes, so I'm going to stay with what I'm doing. This customer has, as a few have over the years, made the decision -- and we think it makes sense -- it's cost effective and we're going to do it. And it is high-volume production. It's not R&D.

Right. Right. Okay. All right. Thank you.

Kelly Anderson, Sidoti & Company.

Thanks for taking my questions. And congratulations on the stronger results across all three segments no less.

I'm just wondering if you could sort of remind me of what the timeline looks like for the new gravity feed handler launch.

Sure. That looks like the second half of 2010.

Great. And just in terms of the pull-ins that you're seeing, do you currently have the capacity at your California facility to meet these new delivery dates?

We have the physical capacity. We don't have all the resources in place right now, because as you can imagine, during the downturn we have contracted our workforce and our capacity, in some cases significantly. So we are ramping back. But the levels -- the shipment levels that we are talking about in the fourth quarter and into the first quarter are still below -- well below our peak output in prior up-cycles. But it's a challenge because we are -- we have to come up to speed and add significant capacity very quickly. Can't do it quickly enough to satisfy the customers.

Right. So I guess what I'm wondering here, I don't know if I missed this, Jeff, but maybe did you give any directional guidance for R&D and SG&A? I imagine that with the pull-ins we're probably going to have to see at least a short-term spike in SG&A, and given the visibility, is it possible that that would not reverse?

Actually, our guidance is that operating expense, both of those items, R&D and SG&A, will be the same as they were in Q3. So we are holding those steady.

So is the motivation behind a flat SG&A number just sort of cost cuts offset by the addition of headcount to meet these new orders?

Well, we are really not adding any headcount in SG&A and R&B. This is really manufacturing.

Okay. And then just wondering. I think we've said previously that the EDGE handler transition, for example, was complete. If there are products that have already been transitioned to the contract manufacturer, would they be -- would you build them out of the contract manufacturer? Or are you pulling those in-house too just to sort of catch up?

No, the first product, the EDGE is transferred, so -- and successfully so, and the contract manufacturer is ready to fill demand for that product, and is. It's the two, it's the Matrix and the Pyramid that we are talking about.

Okay. I was under the impression that the Matrix and the Pyramid weren't sort of going to be transitioned near term anyway because you had to work out some of the kinks with the new products.

Well, the Matrix was going to be completed sooner than the Pyramid. And it's really the Matrix that we are focused on with this immediate demand.

Okay. Just out of curiosity, Jim, I think you said in your prepared remarks that you had some orders there from a graphics chip manufacturer for the Summit. I guess I'm wondering, is it that the Summit has a more attractive price point these days? Is at that they weren't willing to wait for the Pyramid launch? Or is there anything specific why they would choose that product when you've got a better one now on the market?

Well, this customer already has an installed base of Summit handlers. They have been buying the Summit for a number of years. And the Summit is still a very strong product with excellent thermal control capabilities. And they're simply ordering more of their existing installed base. It makes sense for them.

We don't think transitioning to Pyramid -- well, it's not feasible for them at the present time anyway. The Pyramid isn't ready for them. And the Summit provides all the capability they need, and we think they will continue to buy additional Summits for some time.

Great. And then just one last one from me. I'm wondering if you could sort of break down the broader back-end picture. No surprise here there's a lot of companies that are pre-announced that have been saying the back-end is particularly strong these days. I'm just wondering if you're seeing the most momentum for you specifically in maybe OSATs versus IDMs. And is it fair to assume that right now most of the strength is coming from high-speed handlers over maybe even gravity feed at this point?

Well, when we provide our breakdown, we are combining gravity into our high-speed segment. So our high-speed segment includes both gravity, pick and place, high-speed pick and place, and test on strip. And the thermal category includes just that, the thermal -- namely, Pyramid, Summit, those handlers that incorporate our proprietary technology.

So the demand has been broad-based across all of our products, but there are more high-speed products than thermal products. So yes, the demand is primarily in the high-speed area. And it's both pick and place, gravity, and because of this sizable -- these two sizable orders from this single large IDM, strip as well.

Sorry. I think when I said high-speed, I'm too used to referring to the legacy Delta products. I meant Delta versus Rasco, but --

Oh. Well -- so your question is -- what we are seeing -- we are seeing strong demand for gravity and pick and place. It's broad-based. I think as we've mentioned before, Delta's customers have tended to be concentrated on the larger IDMs, and Rasco's customers have been -- it's been a -- sort of a larger customer base with no single customer accounting for the kind of volumes that Delta's largest customers do. So it's a large number of customers participating, and product -- and demand for products across the board.

Well, that's great news.

It is.

Keep up the good work.

Is good news, you are right.

Thanks guys.

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

Well, thank you everyone for joining us today, and we look forward to speaking to you next time when we report Cohu's results for the fourth quarter and full year 2009. Thank you and good day.

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