Cohu Inc (COHU) 2009 Q4 法說會逐字稿

Greetings and welcome to the Cohu, Inc. fourth quarter and full year 2009 earnings conference 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 A. Donahue, President and Chief Executive Officer. Thank you; you may begin.

Good afternoon, everyone, and welcome to today's conference call that will cover Cohu's results for the fourth quarter ended December 26th, 2009. With me today is Jeff Jones, our Chief Financial Officer. I hope you have a copy of our earnings release and have had a chance to review it. 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 fourth quarter and discuss the current business environment. Jeff will take us through the financial statements, and then we will take your questions. But first, 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, 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, January 27th, 2010, 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 risk 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 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; customer orders may be cancelled or delayed; inventory, goodwill and other intangible asset write-downs; the concentration of our revenue from a limited number of customers; intense competition in the semiconductor test handler industry; our reliance on patents and intellectual property; compliance with U.S. 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 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.

Okay. Thanks, Jeff.

This was another strong quarter for Cohu, as we capitalized on improving conditions in the semiconductor equipment industry, and benefited from continued solid performance by our microwave communications business, and improved financial results from our video camera operation. Sales were $52.2 million, at the high end of our guidance, and an increase of 18% from the third quarter. Cohu was profitable on both a GAAP and non-GAAP basis. Non-GAAP net income was $0.11 per share, compared to a net loss of $0.17 per share in last year's fourth quarter and net income of $0.07 per share in the third quarter of 2009.

Each of our businesses was profitable on a non-GAAP basis in the fourth quarter. Orders for semiconductor equipment increased 28% in Q4 from the preceding quarter, following a 41% sequential increase in the third quarter. Demand for our test handlers was broad-based across products, customers and geographies, with high-speed handlers representing 85% of unit orders and thermal handlers 15%. The order momentum that began in the third quarter continued to build through the fourth quarter.

A major U.S.-based IDM placed follow-on orders for our new high-parallel fast-index-time MATRiX handler. These systems are being installed in a new test facility in Asia. And as we stated in last quarter's call, we are building initial MATRiX handlers in our California facility, rather than at our contract manufacturing partner in Asia, to meet a sudden surge in demand from this customer. While this adversely affects gross margin in the short-term, it is the right action, as it enables us to support our customer's requirements and advances our long-term competitive position.

We also received additional orders from a large U.S. IDM for our full temperature range Castle handler for use in testing automotive ICs. And we booked follow-on orders for our new thermal handler, Pyramid. Based on the latest information from our customer, we expect the production ramp for Pyramid to begin mid-year. We're particularly pleased with the significant increase in orders for Rasco's gravity-feed and test-in-strip handlers. Orders received in the fourth quarter exceeded the cumulative total for the first three quarters of 2009.

A major U.S.-based IDM placed follow-on orders for Rasco's test-in-strip handler. Initial systems are now in production at one of the customer's Asia test facilities. This company has been a major customer for our pick-and-place handlers for many years, and the selection of Rasco's test-in-strip handler is an example of the synergies we are realizing through the acquisition of Rasco. Demand for Rasco's handlers was strong, and unit orders doubled sequentially in the fourth quarter.

Turning briefly to our other businesses. Cohu's Electronics Division was again profitable in the fourth quarter and also for the year, following an operating loss in 2008. 2009's improved operating income is the result of higher gross margin and cost-reduction actions.

The Electronics Division has developed key new products for the high-end security and surveillance markets. The first, a high-definition camera with pan, tilt and zoom capabilities, was released in Q4, and initial orders have been received. This HD camera produces sharp and clear video images that will be of great value in demanding security, surveillance and traffic monitoring applications. Derivative products are scheduled for release in Q1 and Q2.

Our mobile microwave communications business, BMS, had another excellent quarter, and for the year achieved record sales, operating and net income. BMS has new lightweight small-form-factor high-performance standard and high-definition transmitters and receivers that are opening new opportunities in the government surveillance, UAV and law enforcement markets. Operating results are benefiting from redesigned and cost reduced analog products, and also from new digital products.

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

Semiconductor equipment related revenues for Q4 were approximately 88% international and 12% domestic. International sales were distributed 87% Asia Pacific, 10% the Americas, and 3% other. We recorded $900,000 of stock-based compensation expense, and approximately $1.6 million of purchased intangible amortization expense in Q4. The comments I make today include the impact of these items.

Gross margin was 31.5% in Q4, compared to 36.8% in Q3. It was higher than projected due primarily to favorable product mix. As Jim mentioned and as we discussed on our Q3 earnings call, we've ramped production of our new test handlers in our Poway plant to meet customer delivery dates. This, combined with typical new product startup costs, impacted our gross margin in Q4 and will have a similar effect on gross margin in Q1. And as a result, we expect our gross -- Q1 gross margin to be about the same as Q4. We expect gross margin to improve in Q2 and subsequent quarters as we complete the transition to manufacturing subcontractors.

Total operating expense was $17 million in Q4 and in-line with our projection. R&D expense was $7.9 million in Q4 compared to $8.3 million in Q3. SG&A expense was $9.1 million in Q4 compared to $8.7 million in Q3. We expect R&D and SG&A expense in Q1 to be approximately 10% higher than Q4 as a result of increased business volume and reinstating pay cuts that were in effect through 2009.

The Q4 tax benefit was primarily due to the expanded federal net operating loss carryback provision enacted during Q4, increasing our 2009 tax refund and tax benefit by approximately $1.2 million. As previously announced, we took a $19.6 million charge for a deferred tax asset valuation allowance in the second quarter of 2009. The reinstatement of some of these deferred tax assets as a result of anticipated earnings reported in 2010 will result in an abnormally low effective tax rate in 2010, perhaps 10% or lower. Absent the reinstatement of the deferred tax assets, our 2010 estimated tax rate would be approximately 30%.

Q4 EPS on a GAAP basis was $0.03. Non-GAAP EPS, which excludes the after-tax impact of share-based compensation and amortization of intangibles, was $0.11 for the quarter.

Moving to the balance sheet, cash and investments were $84.9 million at December, decreasing $2.4 million from September, as a result of production ramps in our semi-equipment businesses and growth in our accounts receivable balance.

Net accounts receivables were $43.4 million at December, an $8.5 million increase over September resulting from higher business volume. Our DSO at December is 66 and consistent with Q3. Inventory was $52.4 million at December compared to $51.2 million at September. Additions to property, plant and equipment for Q4 were approximately $1 million, and our depreciation was approximately $1.2 million.

Deferred profit at December was $5.3 million compared to $5.1 million at September. The related deferred revenue at the end of Q4 was $20.2 million compared to $12.9 million at September, and increased primarily from revenue deferrals on shipments of our new pick-and-place test handlers.

Thanks, Jeff. There are many signs of improvement in the semiconductor and semiconductor equipment industries, including recent earnings releases from IC companies. Industry analysts expect semiconductor sales to increase between 15% and 20% in 2010. Orders for back-end semiconductor production equipment have increased for nine consecutive months, though the rate of increase moderated in the fourth quarter.

Analysts expect equipment sales to grow significantly this year, for example with Gartner forecasting that back-end equipment sales will increase more than 50% from 2009. Equipment utilization on our customers test floors increased steadily throughout 2009 and in most cases is now in the 80% range or higher. With utilization at these levels, we've seen improving forecasts and requirements from customers for very rapid delivery.

As is the case in semiconductor equipment up-cycles -- and never more so than in this one -- demand has returned suddenly. In response, we have ramped production to levels we haven't seen in recent years.

A large percentage of current shipments are comprised of three products; our new high-speed pick-and-place handler, MATRiX; our new thermal handler, Pyramid; and our test-in-strip handler, the SO3000, all of which require customer acceptance before revenue is recognized.

And as a result, in the first quarter, there is a sizable difference between what we ship and what we expect to recognize as sales. We estimate that this gap will close significantly in Q2 as we obtain customer acceptance and will be resolved by the third quarter, if not earlier. All three products are performing well on customer test floors, and we expect that the customer acceptance process will proceed normally.

For the first quarter, we expect sales to be approximately $53 million, excluding up to an additional $14 million in revenue for semiconductor test handlers that could be recognized in the first quarter upon customer acceptance.

Through the global recession and one of the worst downturns in the semiconductor equipment industry, we reduced cost and conserved cash, but made important investments in new products, including our new MATRiX and Pyramid pick-and-place handlers. We also expanded our served market through the acquisition of Rasco.

As a result, our product line has never been stronger and broader. The order momentum that began in Q3 and grew through Q4 has continued into the New Year. We are off to a great start with very strong orders for semiconductor test handlers in January, and a strong and growing forecast from multiple customers for all of our major test handler products.

Finally, I'm pleased to report that Cohu's Board of Directors approved a dividend of $0.06 per share, payable on April 23rd, 2010, to shareholders of record on March 9th, 2010. Cohu has paid consecutive quarterly cash dividends since 1977. And that concludes our prepared remarks, and now we'll be happy to take your questions.

We will now be conducting a question-and-answer session. (Operator Instructions) The first question is from Vernon Essi with Needham & Company. Please go ahead with your question.

Thank you very much. A couple questions here just concerning the customer acceptance on that remaining $14 million. How should we think about this number in terms of the next, say six to nine months? Should we expect there to be more instances of acceptance with customers, or is this pretty much the bulk of the customer mix that would go through this procedure with you?

I'm trying to understand if you may have a situation where this is a perpetual effect as you ramp your production with new customers, or do you feel that this is kind of the bulk of the acceptances that you might have to outlay going into 2010?

Vernon, I think it's likely that in the first quarter and potentially carrying over into -- somewhat into the second quarter, we'll have the bulk of these revenue recognition issues, just given the size of the orders from two large customers in particular.

As we ship new product to a new customer, the revenue recognition issue arises there, but if it's for a couple of handlers, it's not as -- obviously as significant as an issue as it is for a customer who is taking delivery of large quantities of machines. And that's what spikes this up.

So two things work there. One, we've got a couple of customers who are ordering large amounts of equipment, and then secondly, once they accept those, will no longer have those issues, we'll no longer have the revenue issues with those large customers. They'll -- will be recognized in the revenue upon shipment. And then our other customers who obtain this equipment will be -- just by their relative size compared to these other customers, it will be less significant.

Okay, and then from a cost accounting convention, if I'm not mistaken -- well, maybe you can just walk me through that. But the costs of these are incurred up front, correct, in terms of your P&L? Or are they timed with the actual acceptance?

Vern, they're timed with the actual acceptance. When we recognize the revenue, we recognize the cost as well.

Okay. And then, can you just give us a little more color in terms of the manufacturing transition? Anything granular that we can get our arms around in terms of progress, or how that's shaping up as you go into sort of -- it sounds like the second quarter you should be handing off a lot of this to your contract assembler. What could go wrong? What could go right? How does that look relative to where we were three months ago?

Well, if you recall, there were three handlers that we were transitioning to CMs. The first has been complete for quite some time. That's the EDGE handler.

The second is the MATRiX high-speed pick-and-place handler, and that's the product where we got this sudden spike in unexpected demand from a major customer, and in order to meet that customer's requirements, decided we would build product in San Diego so that we could satisfy their delivery requirements.

So we didn't delay the transition. It's just that in order to meet this accelerated delivery requirement for this customer, the -- really, the only way to do that was by building in San Diego. So we take a hit on gross margin in the short-term, but long-term it's the right decision since we support a very important customer.

The transition of manufacturing to the CM in Asia for that product is going well. We expect towards the end of this quarter to begin shipping machines from the CM, and we'll see the full benefit of that product shipping from the CM in the second quarter. Now, our thermal handler, Pyramid, that's also proceeding per plan, and we'll begin to see those units shipping from the CM in Q3.

Okay. And then finally, one last question. As much detail as you're willing to give out, but what were the shipments out of Rasco for all of 2009? Just a rough idea. And if you maybe know its recent quarter as well?

Yes. For the year, it was just under $20 million.

Okay. And for the fourth quarter, any --?

For the fourth quarter --

I got it.

Just a second. I would say this while Jeff's looking for that number; the sales impact of the sharp increase in Rasco orders is going to appear in -- beginning in Q1.

Okay.

I think that's where you were going. It's really Q1 where we see the uptick.

$7 million. Just about $7 million.

Yes, it was about $7 million in Q4.

Oh wow, okay. All right. Thank you. Thank you very much.

You bet.

(Operator Instructions) The next question is from Kelly Anderson with Sidoti & Company. Please go ahead with your question.

Hi, guys. Thanks for taking my questions. First off, just to follow on what Vern was asking about the acceptance of the $14 million. Are there any specific milestones that you have to meet in order to get these accepted? And is there any possibility that it could be accepted in part in Q1 and the rest would fall into Q2?

Yes to both questions.

Okay. That makes it easy.

There's always specific performance criteria or upgrade commitments that have to be made. So, yes, absolutely. That's all part of the process. And, it could -- we not necessarily will recognize that $14 million in one chunk.

Okay. Great. And then, Jeff, if I could pick your brain a little bit about the gross margin for the quarter. You said that it was partially impacted by product mix. And just looking into the numbers, it looks like thermal handler sales, which are typically your highest-margin segment, were actually down for Q4. Is there any way you could give us a little bit of additional color as to what the favorable mix shift was?

Yes. Just remember that those -- when I quoted the mix business, those were orders, not sales, in the fourth quarter.

Okay.

And the favorable mix in Q4 is really due to more spares and kits and miscellaneous than we had anticipated for the quarter. So that's where it came from, Kelly.

Okay. Now with what you've done to restructure the other two business segments with electronics and microwave, is there a narrowing gap between the gross margin differences between the two business? Has that gotten significantly better on the other two sides?

Gross margin improved at both of those businesses, yes.

Okay. But it's not like we can expect to see something even approaching your historical norms, I would take, right?

Try that again. I'm not sure I follow the question. I'm sorry.

Well, for Cohu as a whole, we've seen margins above 40% in the past. I take it we're still way short of that for the other two segments.

No. We would expect margins in that business to be in that range.

Okay. Great. And I'm just wondering -- I know typically in the Q you disclose the revenue breakdown between the three businesses. Is it possible to get that now?

We're trying to see if we have that in front of us.

We have the percentages in the press release for the quarter.

Okay.

Semiconductor equipment, 74%; microwave, 16%; and cameras 10%.

Yes. So off of $52.2 million.

Okay. That's perfect. I'll use those numbers then. Thanks a lot, guys.

I'm showing no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Thank you for joining us today, and we look forward to speaking to you in April when we report our first quarter results. Thanks and good day.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.