Cohu Inc (COHU) 2010 Q2 法說會逐字稿

Greetings, and welcome to the Cohu second quarter 2010 earnings conference call. (Operator Instructions). It is now my pleasure to introduce your host, Mr. James Donahue, Chairman, President and Chief Executive Officer for Cohu, Incorporated. Thank you. Mr. Donahue, you may now begin.

Good afternoon, everyone, and welcome to this conference call that will cover Cohu's results for second quarter ended June 26, 2010. 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, www.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 discuss the current business environment. Jeff Jones, our CFO who is with me today, will take us through the financial statements, and then we will take your questions. But before we do that, 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, July 21st, 2010, and the Company assumes no obligation to update these comments. Certain matters discussed on this conference call include statements concerning Cohu's new products and expectations of business conditions, orders, sales, and operating performance that are forward-looking statements and 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 collection problems; customer orders may be canceled or delayed; inventory goodwill and other intangible asset writedowns; 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 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 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 non-disclosure agreements.

Thanks, Jeff. This was a very strong quarter for Cohu. Non-GAAP operating income grew to 14.9% from 6.3% in the first quarter. Sales increased to $74.9 million, up 15% from the first quarter and a 95% increase from the year-ago quarter. Non-GAAP earnings per share grew to $0.36 compared to $0.13 in the first quarter. Cash and investments increased $5.2 million and stood at $89.9 million at the end of Q2.

Orders increased 17% sequentially to $95.4 million. Semiconductor equipment orders grew to $84.8 million in the second quarter, representing 89% of total orders. Backlog was $116.6 million at the end of the second quarter. Consolidated semiconductor equipment orders and backlog are each Company records. Unit orders for handlers were broad-based across products, customers and geographies. The unit order distribution was thermal handlers 14%, and high speed handlers, 86%. Second quarter unit orders increased 32% sequentially and were six times the level booked in the same quarter a year ago.

Now we'll go over highlights of the second quarter. Unit orders for our new thermal handler, Pyramid, were the highest so far - increasing 36% from the first quarter. A significant milestone was reached as we achieved initial customer acceptance, and as a result were able to recognize revenue associated with multiple, but not all, Pyramid handlers in the quarter. Follow-on orders were booked for the full temperature version of our new MATRiX high-speed pick-and-place handler. A major IDM qualified and accepted both the ambient/hot and the full temperature MATRiX handlers that were installed earlier in the quarter at one of its Southeast Asia production facilities. Evaluations are currently underway at two additional customers, and we expect at least one more customer to evaluate the system during Q3.

We are very excited about the traction that MATRiX is gaining in the marketplace. During evaluations, customers quickly realized that this system, with its up to x32 parallel test capability, short index time and unique chamberless design delivers high output and significantly reduces the cost of test. Two IDMs placed follow-on multi-unit orders for our EDGE pick-and-place handler, and an order was received for an EDGE integrated with an acoustic chamber developed by Rasco. This is the first joint Delta Design Rasco system, and will be used to test MEMS microphone devices in x8 parallel configuration.

We continue to capitalize on improving conditions in the automotive industry. A long time customer and major IC supplier to that industry once again ordered multiple Castle full temperature range pick-and-place handlers. Our customer tells us that the key drivers for this business are the rapidly growing market for automobiles in China and the general increase in automotive silicon content, as features previously considered to be high-end are now becoming standard in more models. Additional orders for Summit thermal handlers were received from two large IDMs, the result of growing demand for high-performance microprocessors used in internet servers. As the number of connections to the internet increases from computers, smart phones, and like devices, the need for fast and high capacity servers is growing.

Our proprietary thermal technology provides enabling capability to optimize speed grading and ASPs of microprocessors and high-speed graphics devices. Rasco once again delivered outstanding results. In Q1, Rasco established a company record for orders that lasted only one quarter, as Q2 orders set a new all-time high. Orders were strong from both IDMs and test subcontractors. Rasco also established a new quarterly record for sales. A key driver for Rasco's increasing sales are analog ICs used in consumer, automotive, and industrial applications. These are typically leaded packages with short test times, very well suited for Rasco gravity handlers. Power management applications for analog ICs are expected to grow at a high rate due to consumer requirements such as long battery life and global concern about energy cost and conservation. And like Delta Design, Rasco is a key supplier to automotive IC IDMs. Rasco's automotive orders are both traditional functional electrical tests and for MEMS applications.

Though Rasco's business is already at record levels, we expect to add more new customers as equipment evaluations that are currently in progress complete. During the second quarter, Rasco booked orders from multiple customers for its test and strip handlers -- both repeat and new customers, IDMs, and test subcontractors. Turning briefly to our other businesses, sales at Cohu's Electronic division were lower than planned, due mainly to customer order delays, and operating income was slightly above breakeven. 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 planned, as customer acceptance on a sizable contract was not completed, and therefore we did not recognize the associated revenue in the second quarter. We currently expect that this revenue will be recognized in the third quarter. The pipeline of sales opportunities is growing, and we expect BMS to have a strong Q3. Now, Jeff will provide details on Cohu's financial results.

Semiconductor equipment related revenues for Q2 were approximately 86% international and 14% domestic. International sales were distributed 81% Asia Pacific, 8% the Americas and 11% Other. We recorded approximately $750,000 of stock based compensation expense and approximately $1.5 million of purchased intangible amortization expense in Q2. The comments I make today include the impact of these items. Gross margin was 36.6% in Q2 and better than our projection of 32%, as revenue recognized from Pyramid and MATRiX handlers was lower than forecasted. As sales of these initial low margin Poway manufactured units are recognized in Q3, our gross margin is expected to be about 33% and consistent with comments from our Q1 earnings call. We expect incremental improvement in Q4 gross margin and are projecting to approach 40% in the first half of 2011after the manufacturing transition to Asia-based subcontractors is complete.

Operating expense in Q2 was $18.5 million and lower than our projection due to lower variable selling costs and foreign currency exchange gains. We expect operating expense in Q3 to be approximately $20 million, excluding currency exchange impacts, and increasing mainly as a result of variable selling expense on higher revenue. The Q2 effective tax rate was 26% and reflects income tax on foreign earnings, primarily Germany, and to a lesser extent Asia. We expect this rate to decline throughout the remainder of 2010 as the tax provision on US profits will be offset by the partial reversal of the deferred tax asset evaluation allowance recorded last year and result in an effective tax rate for 2010 of approximately 20%. Absent this reversal, our 2010 estimated tax rate would be approximately 27%.

Q2 earnings per share on a GAAP base was $0.28. Non-GAAP EPS, which excludes the after-tax impact of share-based compensation and amortization of intangibles, was $0.36 for the quarter. Moving to the balance sheet - cash and investments were $89.9 million at June, increasing 5.2 million from March. Net accounts receivable were $55.1 million at June, a $10.2 million increase over March, resulting from a sequential increase in shipments of 17 million. DSO at June is 61 versus 62 at March.

Inventory was $61.9 million at June, a $2.4 million increase over March, resulting from increasing production requirements in our semiconductor equipment operations, as shippable order backlog increased 18% sequentially. Additions to property plant and equipment for Q2 were approximately $1 million, and depreciation was approximately $1.3 million. Deferred profit at March was $11.7 million compared to $7.4 million at March. The related deferred revenue at the end of Q2 was $28.1 million compared to $20.8 million at March, and consists primarily of revenue deferrals on shipments of our new pick-and-place test handlers.

Okay, thanks, Jeff. Yesterday, Semi reported that backend equipment orders in June increased 14% over May. This marks the 16th consecutive monthly increase, and orders are now above the last peak level that was reached in mid-2006. So that's quite a run, and it wouldn't be unexpected to see at least a temporary pause or leveling off given the slope and the duration of the increase since early last year. On the other hand, the indicators that we track remain positive. Equipment utilization on customer test floors is high, in the 90% range in most cases. Order momentum has continued into the third quarter, and customer forecasts are strong.

Our Q3 is off to a great start, and more often than not, new orders are accompanied by requests to pull in deliveries. A key reason we are optimistic is that there is not one but rather several major drivers for our business in the second half of this year -- the ramp of the Pyramid thermal handler into volume manufacturing; the expanding deployment of MATRiX at multiple customers and production sites in Southeast Asia; and strong broadbased demand for gravity handlers from current and from new customers. For Q3, we expect Cohu sales to be approximately $83 million.

Finally, I'm pleased to announce that Cohu's Board of Directors approved a quarterly cash dividend of $0.06 per share, payable on October 29th, 2010 to shareholders of record on September 3rd, 2010. Cohu has paid consecutive quarterly cash dividends since 1977. That concludes our prepared remarks, and now we will take questions.

(Operator Instructions). Our first question is coming from the line of Vernon Essi with Needham & Company. Your line is now open. You may proceed with your question.

Thank you very much, and congratulations on the strength here.

Thanks, Vern.

Wanted to dive into the gross margin structure here, and can you just walk us through some of the moving pieces here? It sounds like things are going to compress a little bit. And can you just give us an understanding of when you see that handoff specifically for them to expand? I mean, you're talking about a gross margin improvement into the first half, but how much should we look for in the fourth quarter off of this dip in the third quarter?

Yes, Vern, we expect margin, as I said, to improve incrementally, and that's approximately 100 to 200 basis points in Q4 and Q1. And as we complete the manufacturing transition in early next year, we expect to approach the 40% gross margin mark.

Okay. And so we're still -- I guess the flip side is what happened -- just to walk through so I'm clear here -- what happened in this quarter and why the gross margin was so strong this quarter relative to next. Just you didn't have any of the specific handlers that went out the door recognized in this current quarter? Of can you just walk me through that?

Well, we recognized less revenue from MATRiX and Pyramid units produced here in Poway. So we recognized some of the revenue, but not all of it. And the revenue that was not recognized was replaced with revenue from higher margin products. So it came down to really a mix change, and that change in mix resulted in a higher composite gross margin.

And the mix on the MATRiX and Pyramid -- the actual gross margin structure of those if we go out six to nine months will be comparable if not better than the rest of the margin structure that they came in?

That's correct.

Okay. And then just moving on, the BMS revenue was held up by recognition. Can you give us an understanding of what sort of the sizing was of that?

That was several million dollars, and it was a single large contract that the acceptance of which was not accomplished by the end of the quarter. We expect it to be accomplished in this quarter.

And will that be sort of a one-time upside and then it will sort of moderate from there? Or do you expect this to extend multiple quarters?

Well, this particular contract is a one-time item, but BMS typically -- it's not unusual for BMS to have contracts of this size. It's just not an unusual amount.

Okay. No, it's usually lumpy, but this is going to be pretty much all in the third quarter, this specific piece of revenue?

That's what we currently expect, yes.

Okay. And then just as we look at your OpEx structure, should we be thinking this is -- I mean, you've held it in a very nice range here with this revenue expansion - should we be looking for sort of on an absolute dollar basis the same sort of growth? Or are there any -- is there any projects in R&D that might come in heavier, or should we look at it to be kind of in the same dollar range?

We expect that to be in the same dollar range, Vern. We guided in the quarter for Q3 to be at 20 million -- hopefully you noticed that in our comments. But that's where we expect that to stay.

Yes, I think the only piece that we expect to move in there is the variable selling expense that's volume related.

Okay. And then lastly, obviously, the -- all of your industry brethren are doing really well and the market doesn't seem to care. I wonder if you can give any anecdotal points in terms of what you're seeing out there, and if there are any possible red flags that might be of concern? Not to make this a glass is half empty conversation, but is everything really that rosy?

Well, I'm well aware of the concerns over the last week reaction to companies' earnings releases and so forth. As I said in my prepared remarks, we're seeing nothing that indicates to us that conditions have changed or leveled off. So on the one hand, after 16 months of increased bookings in the back end, anyone with a historical perspective would say it wouldn't be a surprise to see conditions moderate at least. But the tactical indicators that we deal with to run the business and that are -- are all positive, are all green right now. We've seen no change.

Okay. And one last question here. I -- and congratulations on the record orders. If we were to rinse out the Rasco piece of that, would you still have record orders on the business going back, I guess it would be the late '90s, early 2000s?

No.

Okay. Fair enough. Thank you very much.

Thanks, Vern.

(Operator Instructions). Our next question is coming from the line of Kelly Anderson with Sidoti & Company. Your line is now open. You may proceed with your question.

Hi, guys. Thanks for taking my questions. First off, just wanted to touch on the operating expense guidance for Q3 as well. Just wanted to make sure that in that $20 million guidance that you gave there, does that presume that all the previous cost cuts that were expected to come back have been fully restored?

No, it doesn't, Kelly. I think we mentioned on a previous call that we reinstated the pay cuts, but we've done no other reinstatement other than those pay cuts. So to answer your question, no, we haven't fully reinstated all the cost cuts we've made in the past.

Okay, and then just looking at the outsourcing programs, just wanted to make sure those are still on track, and if you could maybe remind us when you expect to shift, for example, the MATRiX and the Pyramid offshore?

Sure. This was a three part transition involving the EDGE, MATRiX and Pyramid handlers. The EDGE transition is complete. The MATRiX transition should be complete sometime in Q3 -- probably by the end of August, is our current estimate. And the third and final product is the Pyramid, and that is underway and we would expect that to be completed by the end of Q1, if not sooner.

Okay. That's very helpful. Thanks. And then just briefly on the product that you talked about with the Rasco piece attached to it, is there any kind of specific pipeline that you have in place for developing -- or for codeveloping products with the old Rasco group?

Well, the current major opportunity that we've identified is to incorporate the various Rasco MEMS stimulation modules that have been developed over the last few years. So we are productizing those which were really developed on a customer-specific basis over the last several years into standard products that can be used on either Rasco gravity handlers or on Delta pick-and-place handlers. And that's the major and significant co-development at this time, Kelly.

Okay. And just a final one for me. Thanks for the color on what you expect to see in the broader market, just in reference to the comments you made about potential order slowdowns materializing at some point. Given that some of your products are geared to specific shifts with specific customers, do you think that it's possible that even if orders slowed down in the broader ATE market that you have enough in the mix going, enough new cross-selling opportunities that you could offset that kind of pullback?

Well, and that's really the point I was trying to make at the close of my remarks, is that there's multiple drivers for our business -- significant ones -- as we look at the second half of the year. So I don't think we're completely dependent on any one market, any one significant customer. There's multiple drivers, so that alone makes me optimistic that even if business slows down, that I would think the impact on us would be moderated at least.

Great, thank you very much.

Thank you, Kelly.

(Operator Instructions). Mr. Donahue, at this time there are no further questions.

We'd like to thank everyone for joining us today, and we look forward to speaking with you when we report our third quarter earnings. Thank you, and good day.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation, and have a wonderful day.