Cohu Inc (COHU) 2010 Q1 法說會逐字稿

Greetings and welcome to the Cohu Incorporated first-quarter 2010 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, Mr. James Donahue, Chairman, CEO and President 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 first quarter ended March 27, 2010. With me today is our Chief Financial Officer, Jeff Jones. If you need a copy of our press release, you may obtain one from our website, cohu.com or if you prefer by contacting Cohu Investor Relations at 858-848-8106.

First I'll provide an overview and comments on Cohu's results for the first quarter of 2010 and discuss the current business environment. Jeff will then take us through the financial statements, and we'll conclude by taking your questions. But before we get started, Jeff has information concerning forward-looking statements, estimates and other matters that will be discussed 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, April 21, 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 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 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 problems; customer orders may be cancelled or delayed; inventory, goodwill and other intangible asset write-downs; 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 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 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.

Okay. Thanks, Jeff. We're pleased to report a third consecutive quarter of non-GAAP profitability, with sales and gross margin that exceeded our previous expectations. Cohu was also profitable on a GAAP basis for the second consecutive quarter. Sales were $64.8 million, an increase of 24% compared to the fourth quarter of 2009 and a 77% increase compared to the first quarter of 2009. Non-GAAP net income was $0.13 per share, compared to $0.11 in the fourth quarter and a loss of $0.20 per share in the year-ago quarter.

Orders continued their upward trend, with both consolidated and semiconductor equipment orders at their highest levels since the first quarter of 2000. Q1 consolidated orders increased 19% sequentially to $81.8 million, following a 28% sequential increase in last year's fourth quarter. Semiconductor equipment orders increased 25% sequentially to $74.7 million.

Unit orders for test handlers were once again broad-based across products, customers and geographies. The unit order distribution was thermal handlers, 23%, and high-speed handlers, 77%. Q1 unit orders for handlers increased 42% sequentially and a remarkable 650% from the first quarter of 2009. Nothing better depicts the volatility and cyclicality of the semiconductor equipment business than this amazing swing in orders year over year.

IC manufacturers and test subcontractors essentially curtailed capital spending during the downturn amid falling equipment utilization, and now many are scrambling to add capacity as rapidly as possible. But it's not only the recovery in the semiconductor industry that is driving Cohu's growth. We are confident that we are gaining market share as well.

Now I'll go over highlights of the first quarter. Unit orders for our new thermal handler, Pyramid, were the highest so far, signifying the beginning of the transition from qualification to production that will accelerate later this year at our initial Pyramid customer.

We received the first orders from two major IDMs for the full temperature version of our new MATRiX high-speed pick-and-place handler. Customer interest in this system is high, as it's up to x32 parallel test capability and short index time delivers quite impressive output. During Q2, two new customers will evaluate the MATRiX, and a third customer is scheduled to complete its evaluation of the handler with vision alignment capability, which is an advantage when testing very fine pitch ICs. We also expect to receive a multi-unit follow-on order from a major IDM for MATRiX handlers, as that customer continues to facilitize a new assembly test plant in Southeast Asia.

But orders for our established pick-and-place handlers were also strong. Two IDMs placed multiple unit orders for the EDGE pick-and-place handler. We won a new EDGE customer following an evaluation against two of our competitors. We benefited from improving conditions in the automotive sector, as a long-time customer and major IC supplier to that industry ordered multiple Castle full temperature range pick-and-place handlers.

And the good news and strong results continued at Rasco, with first quarter orders establishing a new company record. Bookings for the last two quarters are also a six month Company record. Increased orders are from Rasco's traditional customers, who were quiet during the downturn last year, and also from new customers. It's clear to us that Rasco is gaining market share, and that the end markets driving Rasco's business are diversified and broad-based. For example, like Delta Design, Rasco is a key supplier to automotive IC producers.

Over the last year, Rasco developed new products for MEMS device testing, including acoustic and Hall effect sensor ICs. These MEMS modules can be integrated either on Rasco or on Delta Design handlers. We recently received the first order for a Rasco MEMS module integrated with a Delta EDGE pick-and-place handler. During the first quarter, Rasco booked follow-on orders from a major US IDM for test-in-strip handlers and also received an order from an Asia-based test subcontractor for its test-on-strip system.

Turning to our other businesses, results at Cohu's Electronic Division were near planned. Orders were lower than expected due to customer delays. The sales forecast is up, with strong interest in our new high-definition cameras for the traffic and high-end security and surveillance markets.

BMS results were below plan, also due to customer delays. A number of orders expected in Q1 were delayed, but most of these are forecasted to be received in the second quarter. The pipeline of sales opportunities is growing, and we expect BMS to have a strong second quarter. And now Jeff will provide details on Cohu's financial results for the first quarter.

Semiconductor equipment related revenues for Q1 were approximately 88% international and 12% domestic. International sales were distributed 90% Asia Pacific, 5% the Americas, and 5% other. We recorded approximately $800,000 of stock based compensation expense and approximately $1.6 million of purchased intangible amortization expense in Q1. The comments I make today include the impact of these items.

Gross margin was 30.8% in Q1, compared to 31.5% in Q4, and in line with our projections. As previously discussed on our Q4 earnings call, gross margin has been impacted by initial production of our new test handlers in our Poway plant. We originally planned to build these handlers at Asia-based subcontractors, but a surge in customer orders with early delivery requirements made it necessary to ramp production at our Poway facility.

During Q1 we completed the manufacturing transition of the MATRiX ambient-hot system and expect to transition the MATRiX full temperature system by the end of Q2. The Pyramid I/O module has been transitioned to Asia, and we're planning to complete the entire Pyramid transition by the end of this year. We expect gross margin in Q2 to be about the same or slightly better than Q1 and to improve in the second half of the year as we complete the transition to manufacturing subcontractors in Asia.

Total operating expense was $18.5 million in Q1 compared to $17 million in Q4 and in line with our projection. The increase in operating expense is the result of increased business volume and reinstating pay cuts that were in effect through 2009. We expect total operating expense in Q2 to be approximately $20 million, increasing mainly as a result of variable selling expense.

The Q1 effective tax rate of 45% is a result of foreign earnings and a domestic loss. Our Q1 tax provision reflects income tax on foreign earnings, primarily Germany and, to a lesser extent, Asia. In accordance with GAAP, no tax benefit was generated from the Q1 domestic loss, and therefore our effective tax rate for GAAP purposes was higher than projected. We expect this rate to decline significantly throughout the remainder of 2010, as the tax provision on US profits will be offset by the partial reversal of the deferred tax asset valuation allowance recorded last year and resulted in effective tax rate for this year of approximately 15%. Absent this reversal, our estimated tax rate for this year would be approximately [40%].

Q1 EPS on a GAAP basis was $0.04. Non-GAAP EPS, which excludes the after-tax impact of share based compensation and amortization of intangibles, was $0.13 for the quarter.

Moving to the balance sheet, cash and investments were $84.7 million at March, decreasing $200,000 from December. Net accounts receivable were $44.9 million at March, a $1.5 million increase over December, resulting from higher business volume. DSO at March is 62. This is an improvement of four days over Q4.

Inventory at $59.4 million at March was -- is $7 million higher than December, resulting from increasing production requirements in our semiconductor equipment operations, as shippable order backlog increased by 44% sequentially. Additions to property plant and equipment for Q1 were approximately $1 million, and depreciation was approximately $1.[2] million.

Deferred profit at March was $7.4 million, compared to $5.3 million at December. The related deferred revenue at the end of Q1 was $20.8 million, compared to $20.2 million at December, and consists primarily of revenue deferrals on shipments of our new pick-and-place test handlers.

Thanks, Jeff. It's been 16 months since we purchased Rasco, and I'd like to provide an update on the acquisition. We closed this transaction in the midst of the recession and at what turned out to be the bottom of the most recent down cycle in the semiconductor equipment industry. Orders for back-end semiconductor equipment reached a low in February 2009, and it was no different for us. Despite the weak business conditions that prevailed at that time, we were confident that acquiring Rasco would prove to be an important strategic benefit for Cohu's shareholders and customers for the following reasons.

First we were increasing our available market in IC test handlers by 70%. The acquisition brought together Delta Design, with a number one market position in pick-and-place handlers, and Rasco, the number two player in the gravity handler market. We would offer customers an unparalleled and complete range of solutions, from pick-and-place to gravity to test-in-strip.

The customer base was broadened significantly, with no product overlap and there would be many opportunities for cross selling. Combining the global sales and service organizations would deliver cost and competitive synergies. Our knowledge of the market told us that Rasco's gravity handlers were well-positioned for the growth of smaller IC packages, especially in consumer electronics applications where small size is critical. And our due diligence convinced us that the acquisition would deliver meaningful accretion when business improved from the depressed levels of late 2008 and early 2009.

This acquisition was a unique opportunity to expand our product and technology portfolio in an industry we understood very well, strengthening Cohu's strategic position and providing increased opportunities for growth. As optimistic as we were at the time, I'm very pleased to report that the acquisition is delivering even better results than we expected. Thanks to outstanding leadership and execution by the management team, post acquisition integration and operations have gone smoothly. We completed the integration of the sales and service organization and achieved our cost synergy objectives for 2009.

Business picked up in last year's third quarter, and has improved in each of the subsequent quarters. As equipment utilization across the industry increased, Rasco's traditional customers made repeat purchases of the Company's field proven gravity handlers. As I mentioned earlier, Rasco's first quarter orders were an all-time company record. It was a bonus when a major US-based IDM decided to transition testing of certain ICs to test-in-strip. This customer, a long-time Delta Design pick-and-place handler customer, selected Rasco's SO3000 test-in-strip handler and has placed multi-unit orders in each of the last three quarters. We believe that Rasco is now the leader in test-in-strip handler sales.

This is not the only example of cross-selling synergies that we have realized. Over time an equipment supplier can develop a strong trusted relationship with a customer that's based on a positive track record of performance. It's not impossible for a competitor to break in, but it's difficult and typically a long process. Cross-selling opportunities have materialized much sooner and turned out to be more significant than we expected. Delta's customers are more open to considering Rasco's products because of their longstanding relationship with Delta. Similarly, Rasco's established customers are more willing to consider Delta's pick-and-place handlers. It's a competitive advantage and the result is more opportunities to gain market share and a shorter process to unseat a competitor.

Customers want to do business with an industry leader. They need to work with a supplier that can provide a full range of solutions with the resources to develop and implement long-term product strategies and the global infrastructure to support their operations around the world. In the test handler industry, Cohu alone, through its Delta Design and Rasco operations, is capable of meeting this important customer requirement. We had high expectations that the acquisition of Rasco would deliver tangible and significant strategic and financial benefits and it definitely is.

Now looking ahead. The environment for semiconductor sales has improved significantly and is reflected in recent earnings releases from IC companies. Equipment utilization on customer test floors is at levels that require investment in additional capacity. And as a result, orders for back-end production equipment have increased for 12 consecutive months. Estimating semiconductor demand over the near term is very difficult, particularly since the highly unpredictable consumer electronics segment is the principal end market for ICs.

It's challenging for most IC companies to accurately predict short-term demand, and inevitably they over or undershoot production requirements. So it will not be a surprise if near term demand is volatile. But customer sentiment continues to be very positive. The strong order momentum in our business has continued into the second quarter. For the second quarter, we expect sales to be approximately $75 million, and this includes our best estimate of new product revenue, mainly Pyramid and MATRiX, that will achieve customer acceptance during the quarter. And that concludes our remarks. And now we'll take your questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator instructions). Our first question is from the line of Kelly Anderson with Sidoti and Company. Please go ahead.

Hi, guys. Thanks for taking my questions, and congratulations on the strong guidance. Just wondering, you gave a little bit of industry commentary there, Jim. Could you talk a little bit more about what the utilization rates look like, specifically for your IDM versus OSAT customers?

I think in both cases, Kelly, it's in the 90% range.

Okay, great. And in terms of the gross margin, obviously we were expecting some pressure in the first half of the year, but as you worked through the outsourcing efforts, is there any way to gauge what kind of linearity we would be looking at?

Well we do expect to see improvement as we progress through the year, as Jeff mentioned as he provided the detail on what products we've transitioned. That -- some are transitioned. Some are in process. So we do expect incremental improvement throughout the year, subject to business volume and through product mix.

Okay. And just reading a little bit into the guidance that Jeff gave on the gross margin line, he said it could be flat to up slightly I think was the comment. I'm just wondering with the expected completion of some transitions in Q2, if there's anything there that might be holding it up, or if flat is just sort of your best case conservative estimate.

It's our best estimate based on product mix for the second quarter.

Okay. And then just looking at the gross margin profile for the new Pyramid tool, is there any -- is that comparable to the corporate average? And is there any chance that after you get the initial units out the door, are the follow-on orders going to be a higher margin product? Or how does that work exactly?

Well, our plan is to achieve the general model, which is our target gross margin -- composite gross margin is 45%. That's our expectation for that handler when it's fully transitioned as well.

Okay. And then just a final housekeeping question. Was the full amount of the $14 million order recorded in Q1?

The -- are you referring to the deferred revenue that we guided in Q4?

Yes.

Yes. $3.5 million of that was recognized in Q1. That was related to the MATRiX handler.

Okay, great. That will do it for me. Thanks, guys.

Thank you. Our next question is from the line of Vernon Essi with Needham and Company. Please go ahead.

Thank you very much. And I want to just follow on the gross margin point here. In terms of this transition, and, Jeff, you've walked through a couple different product lines. But where are we at in terms of a percentage of units that you're going to be addressing that's actually going through this process? Are we still sort of midway through this or more than halfway? I mean, you expect this to be over by the end of the year, but then you also have a phase on the cost structure as well. Correct?

Yes, and understand, when you're talking about potential gross margin being up multiple hundreds of basis points, is this something that we should be looking at extending all the way to the early part of 2011, or is it possible this will be taken care of sooner?

Vern, we expect the entire process to be completed somewhere between the end of this year and early next year. In terms of maybe providing some color, some additional detail, the EDGE handler transition is complete some time ago. We've previously discussed that. There are two versions of the MATRiX handler, the ambient hot and the full temperature range machine. The ambient hot transition was just recently completed. So we will begin to ship in the second quarter machines from Asia, ambient hot MATRiX handlers. The tri-temperature version of the machine will be completed late this quarter, shipments beginning in the third quarter.

And then finally, the Pyramid handler, is transitioning -- there's two -- in two phases. There's two main components to that system, the I/O module and the test site module. The I/O model -- module is -- has transitioned. The test site transition, which is a more complex -- the more complex piece of the machine, will transition in the second half, and we're hoping to complete that in the fourth quarter. So, again, predicting exactly what the impact of the improved gross margin is going to be depends to a great degree on product mix, but we do expect -- putting that aside, we do expect to see incremental improvement in the third quarter and again in the fourth quarter and onward until we are fully transitioned.

Okay. So we should be expecting a much higher rate, assuming revenue doesn't go southbound on us real quickly, but assuming we're in a consistent trend line here, you would expect to see much more of a gross margin delta, pardon the double entendre there, from June to September than you're looking at from March to June?

Yes, that's right.

Okay. Wanted to also dive into the operating expense lines and where you see those growing towards, as you get into what I would guess would be a record revenue level on a quarterly basis. Do you think you can contain this SG&A line or should we be expecting it to pretty much grow in step with revenue?

Well, we took substantial costs out, like most companies did, during the downturn. And it's our plan to keep the vast majority of that cost out. We -- if business continues to improve throughout the year, it's potentially we'll look at a salary increase. It's been several years since we've done one. That depends on overall business conditions. The other component in there that will move is variable selling expense; commissions, commissionable sales expense. Other than that, we are planning to keep a tight cap on OpEx.

Okay. Just a final question here. If we look at -- well, actually another question real quickly here. Your tax rate next year. Should we be looking at low 30s? I mean in 2010? I'm sorry, for 2010?

In 2010, as I stated, with the anticipated reversal of that allowance for the deferred tax valuation, we would see on a GAAP basis, we'd see an effective tax rate in that 15% area. That 15% range. If you exclude that and normalize it, you'd be in a 30% range.

Okay. And then finally, if we look at your revenue peak way back in the early part of 2000, you were $86 million on a quarterly basis. Obviously, we have Rasco latched onto that this time around. This is a high-class problem question, but what do you feel is kind of your quarterly throughput capabilities if you're on a fully outsourced model? Do you have any idea what your upper bound would look like before you have to really start stretching your lead times for your customers?

Oh, until we have to stretch lead times. Well I think we can achieve that number or plus maybe 10% to 15% from that number. But so much depends, Vern, on product mix. We're using several contract manufacturers precisely because we didn't want to have all of our sales restrained potentially by one contract manufacturer's capacity. But quite honestly, that -- I don't really view that as a significant concern. I think we'll be able to meet customer delivery requirements, or at least come very close to doing so. I don't view it as a significant issue.

Okay. All right. Thanks, Jim

Thanks.

(Operator instructions). There are no questions in the queue at this time.

Thank you, everyone, for joining us today, and we look forward to speaking to you when we report Cohu's second quarter results. Thank you and good day.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.