Cohu Inc (COHU) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Cohu, Inc.Third Quarter 2010 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, Mr. James A. Donahue, Chairman and Chief Executive Officer for Cohu, Inc. Thank you, Mr. Donahue. You may begin.

Good afternoon, everyone and welcome to this conference call that covers Cohu's results for the third quarter, ended September 25, 2010. Our CFO, Jeff Jones, is with me today. 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.

Today, 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'll 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. Statements are based on current information that we have assessed and 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 comment we make about the Company's future in response to your questions. Our comments speak only as of today, October 20, 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 results 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 account receivable collection 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 export regulations.

There is a 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 another strong quarter for Cohu and the third consecutive quarter of increased non-GAAP operating income and earnings per share. Non-GAAP net income was $9.8 million, increasing 13% sequentially and 483% from the year ago quarter. Sales were $86.1 million, a 15% increase from the second quarter, and a 95% increase from the third quarter of 2009. Non-GAAP income per share was $0.41, compared to $0.36 in the second quarter, and $0.07 a year ago.

Cash and investments were $91.3 million at the end of the third quarter. Orders were $90 million compared to $95.4 million in the second quarter. Semiconductor equipment orders were $74 million, compared to $84.8 million in the second quarter and represented 82% of total orders. Backlog was $120.8 million at the end of the third quarter, and that's a Company record. The unit order distribution was high-speed handlers 80%, thermal handlers 19% and other systems 1%.

Now we'll go over highlights of the third quarter. Last quarter, we stated that two customers were evaluating our new MATRiX high-speed pick and place handler. I'm pleased to report that, upon completion of the evaluations, both customers placed orders during the third quarter. We have a 100% capture rate as every MATRiX evaluation thus far has resulted in orders. Additional evaluations are underway in Q4 and are also planned for Q1 of next year. Once this system is on the test floor, customers realize the significant advantages that MATRiX delivers with fast index time up to bi-32 parallel test capability and the unique chamberless design that improves up-time and equipment utilization.

Unit orders for our Delta edge handler increased 69% sequentially and were at the highest level in three years. During the third quarter, we also acquired a new customer, an Asian test subcontractor for our full temperature range Castle test handler. Follow-on orders were received from two IDM's for our Delta summit thermal handler with its proprietary thermal technology that enables optimization of test yields for high ASP microprocessors and high-speed graphics devices.

The capabilities of this technology have been extended in our next generation thermal handler, Delta's Pyramid. Unit orders for Pyramid were the highest thus far, increasing 26% from the second quarter. We expect our initial customer to begin volume production using Pyramid in the fourth quarter.

Once again, Rasco delivered outstanding results, and for the third consecutive quarter established a new Company record for orders. A key driver for Rasco's increasing sales is analog IC's used in consumer, automotive, and industrial applications. These are often leaded packages with short test times, and Rasco's gravity handlers have demonstrated excellent results running these types of IC packages.

We've commented before about the sales and customer synergies from the Rasco acquisition and last quarter we benefited, again. As a long-standing Delta design customer placed an order for a Rasco gravity handler following a successful evaluation at one of its Asian test facilities. Multiple orders were also booked for Rasco's bi-8 parallel SO 2800 gravity handler from both IDM's and test subcontractors, including the first orders from a major analog IC customer. That represents market share gain and significant future opportunities.

Turning to our other businesses. At Cohu's electronic division, the newly developed family of IP cameras, called Helios, is gaining market traction. The first order for our outdoor standard definition PTZ camera, for several hundred units, was received for a major West Coast traffic control and monitoring application. During the quarter, a new outdoor fixed position high-definition camera was also introduced.

In Q4 and throughout 2011, we will be rolling roll out additional products in the Helios family as the division's product line is transitioned from analog to IP technology. Industry analysts expect sales of mainstream IP video cameras to grow significantly, and Cohu is in a good position to capitalize on this trend with the Helios product line.

BMS sales increased 29% from the second quarter, and orders were near record levels. The pipeline of opportunities is growing in each of the major market segments that BMS serves; law enforcement, government surveillance, and small target call UAB's. BMS is a leader in the US airborne law enforcement market, and government surveillance business is also strong and growing.

BMS equipment is in use in the US southern border, and we have excellent opportunities to expand coverage to the US northern border, as well. BMS has multiple customers in the Middle East, both local and US government entities, and we expect our business there to continue to grow. We are making a major thrust into Asia, where we believe there are considerable opportunities in the law enforcement and government surveillance markets. We expect BMS to record strong results in Q4.

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

Semiconductor equipment related revenues for Q3 were approximately 91% international and 9% domestic. International sales were distributed 87% Asia Pacific, 3% the Americas, and 10% other. We recorded approximately $960,000 of stock based compensation expense and approximately $1.5 million of purchased intangible amortization expense in Q3.

The comments I make today include the impact of these items. Gross margin was 34.9% in Q3 and better than our projection of 33%, due to favorable product mix. We expect gross margin in Q4 to improve about 100 basis points to approximately 36%. Operating expense in Q3 was $21.3 million and higher than our projection due to variable selling expense on higher sales volume and foreign currency exchange laws. We expect operating expense in Q4 to be approximately $22 million, excluding currency exchange impacts and increasing mainly as a result of variable selling expense on higher revenue.

The Q3 effective tax rate was 14.6%, bringing our nine month year-to-date effective tax rate to 22.4%. We currently expect our full-year 2010 effective tax rate to be about 21% as the tax expense on our US earnings are largely offset by the partial reversal of the deferred tax asset valuation allowance recorded in 2009, and our foreign earnings which our tax rates substantially below the US federal rate.

Q3 EPS on a GAAP basis was $0.32. Non-GAAP EPS, which excludes the after-tax impact of the share based compensation and amortization of intangibles, was $0.41 for the quarter. Moving to the balance sheet, cash and investments were $91.3 million at September, increasing $1.4 million from June. Net accounts receivable were $67.2 million at September, a $12 million increase over June, resulting primarily from a sequential increase in shipments from $9 million. DSO at September is 67 versus 61 at June.

Inventory was $66 million at September, a $4.2 million increase over June, resulting from increasing production requirements in our semiconductor equipment operations. Additions to property planning equipment for Q3 were approximately $1.4 million and depreciation was approximately $1.1 million. Deferred profit at September was $13.6 million compared to $11.7 million at June. The related deferred revenue at the end of Q3 was $32.8 million compared to $28.1 million at June and consisted primarily of revenue deferrals on shipments of test handlers.

Now to conclude with some comments on the current business environment. It was no surprise to us when SEMI reported that August orders for test and assembly equipment declined after 17 consecutive months of increases extending back to February 2009. But what's not clear at this time, is whether this is anything more than an understandable break in momentum following a lengthy period of rising orders. From our perspective, during the third quarter, we did see near term forecasts soften from several customers.

Equipment utilization on customer test floors remains high, in the 90% range in most cases, and we've started the fourth quarter off with sizable orders from two major customers. There are multiple drivers for our semiconductor equipment business, and we also benefit from our broad product line and diverse customer base. Cohu's backlog is at a record level and for the fourth quarter, we expect to achieve sequential improvement in revenue and operating income. We currently expect fourth quarter sales to be approximately $95 million, and that would be a Company record.

Finally, I'm pleased to announce that Cohu's Board of Directors approved a quarterly cash dividend of $0.06 cents per share, payable on January 3, 2011 to shareholders of record on November 26, 2010. Cohu has paid consecutive quarterly cash dividends since 1977.

That concludes our remarks and now we'll take questions, Manny.

Thank you. (Operator Instructions).

Our first question is from the line of Kelly Anderson with Sidoti and Company. Please go ahead.

Good afternoon. Thanks for taking my questions.

First off, I'm wondering, Jim, if we can dig a little further into the customer feedback that you're getting at this point? Particularly, in light of the fact that KNS had some negative things to say about their Q4 outlook. Now, I realize that you have a very different customer mix than they do, but I'm just trying to think of what they are saying versus your relatively optimistic outlook for the business. And also, if you can talk a little bit about Rasco's positioning? It seems like they have a little bit more exposure to the OSATS. Could you talk about how their business has been faring?

Sure, sure. Kelly I think the picture out there is fundamentally not clear to us. There's multiple data points. For example, the fact that back end orders in August were down, the KNS guidance that you mentioned, the fact that our orders declined in Q3. But also the fact that we started Q4 with sizable multi-unit orders from two major customers, orders that had they been placed in the preceding week would have actually resulted in flat or actually, probably slightly increased Q3 orders. And it was just matter of timing on the customer's part placing that order.

We've got our backlog at record level. And I would also mention that there's multiple drivers for our business. The ramp of our Pyramid thermal handler, capacity additions on newly constructed test floors as well as just the underlying bread and butter capacity additions that fundamentally drive the business. Market share gains that we are absolutely achieving, both at Rasco and at Delta, as a result of the synergies from the acquisition.

With regard to Rasco and its exposure at OSATS, I would not say Rasco has substantially more exposure. Slightly more exposure than Delta at the OSATS, but both businesses are more weighted toward the IDM's.

Okay. Great. That's very helpful.

Also wondering if you can give us an update on the outsourcing programs? I know we were expecting the MATRiX to be completed during the quarter. Just wondering if that was on schedule.

Also, if you can talk about the evaluations you're doing with customers -- will those orders be shipped out of Asia, as well?

Yes. The MATRiX transition was completed in the third quarter, and the shipments we're now making of MATRiX are from our contract manufacturer. The answer to your question is, yes, they will this made from the contract manufacturer from this point on.

Okay.

I know Jeff had mentioned that he expects gross margins to be up in Q4. I think you said that was mostly volume related? Is there any impact from outsourcing as well?

I would say a little bit from outsourcing, about half and half between the volume and the outsourcing.

Okay. Great.

In terms of the BMS business, obviously, you has some very impressive sequential comps there. Did that also include the sizable contract that we've talk about in the past? And if so, without that contract it looks like revenue probably would have been down quarter-over-quarter. Can we talk about what's going on there a little bit?

I'm not sure which contract you may be referring to. If it's that Middle East contract from several years ago, that was, again, several years ago. There was no significant contract revenue in recent quarters, Kelly.

Okay. I must have been mistaken. I thought you said during the last call there was a multi-million dollar contract that was pending that flipped into Q3.

Oh, yes. Absolutely. Let Jeff clarify that.

Yes. On our last call, we had mentioned that there was a contract out there that was still requiring customer acceptance. We thought we would get it in Q2, but it did slip into Q3.

Okay. Perfect. That's all I needed to know. Thanks very much.

Thanks, Kelly.

(Operator Instructions).

Our next question from the line of Vernon Essi from Needham & Company. Please go ahead.

Thank you very much.

Wondering if I can follow on some of Kelly's questions on the gross margin side? Can you re-visit where you're at in the transitions and where you expect to see the real incremental gains to be had? Sounds like this is still sort of a first quarter, second of next year where you're going to get a multi-- a 100 basis point move in that, or should we be revisiting that?

So, where we are, Vernon, is with the three products we're transitioning-- the edge handler was completed some time ago; the MATRiX handler transition was completed in Q3; the Pyramid handler, that transition is underway. We're working very diligently to ensure that we meet the quality and delivery expectations of our customer on this product. This handler is the most complex thermal control handler we've ever built. So we're being very diligent and deliberative in this transition to make sure there are no compromises to quality and performance.

Additionally, demand has increased. It's actually increased several times, requiring that we divert resources originally designed for the transition to extend manufacturing in Poway. We've mentioned that before. Extend manufacturing here, production in Poway in support of our customers' accelerated production ramp. So, we think first half of next year is still the right timing to realize the benefits of the final transition of the Pyramid handler.

Okay.

And it sounds -- obviously congratulations on that attempt ; it's kind of a high-class problem to have this demand schedule placed upon you, it sounds like. Any way you could characterize -- if you can break out the Pyramid versus the rest of your business going into the first half of next year on this backlog. You have a lot of wiggle room in terms of your top line and your delivery schedule to your customers, or do you feel though, if things were soft through the winter months, that you may be getting a little bit ahead of yourselves on the revenue front? That's the fear we all have, I suppose, looking at the back end equipment space. But how much visibility and confidence do you have in the backlog going through to, say the March time frame?

Do you mean the -- with regard to confidence in the backlog, I'm not sure what --

Non-Pyramid, specifically. Obviously, you get a lot of disability there, but in terms of Rasco and Edge and some of your other products, you are talking about some interesting demand pickup in the analog area. I'm just wondering if those customers are specifically giving you visibility that goes out to year-end and beyond as to what their requirements might be?

Well, as has always been the case in this business, we rarely get more than one quarter visibility and that's no different today. With the ramp of our thermal handler, it's a little different. We have slightly better visibility on that; but, not more than one or two quarters. So, we just -- that's just the reality of the business. Today, the $120 million backlog is fairly well-diversified. It's not overly concentrated in any one particular product.

Okay.

And I always ask this unfair question, but would this be a record quarter without Rasco for you in terms of orders?

No.

Okay.

And then just to revisit the -- and I don't know, Jeff, if you had talked about this, but SG&A line and the reasoning for why that moved up so much? Maybe you did say something. I apologize if I missed it.

Vernon, we had actually projected that Q3 OpEx would be higher than Q2, because of the additional variable of selling expense, based on the higher sales volume. And I also touched upon the unfavorable foreign exchange impact that occurred in the quarter.

What was the ForEx amount?

It's essentially -- it's a loss from the settlement of US dollars, the nominated US dollars. It's about $0.5 million from the settlement of US dollars denominated transactions in our Rasco, Germany operation. About $0.5 million, Vernon.

Okay. All right. Thank you very much.

Thank you.

(Operator Instructions).

We have no further questions in the queue at this time.

Thank you for joining us today. We look forward to speaking to you when we report our fourth 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.