Cohu Inc (COHU) 2010 Q4 法說會逐字稿

Greetings and welcome to the Cohu, Incorporated forth quarter webcast and conference call.

At this time, all participants are in listen only mode. A brief question-and-answer session will follow the formal presentation. Anyone should require operator systems turn the conference please press star zero on your telephone keypad.

As a reminder, this conference is being recorded is now my pleasure to introduce your host Mr. James A. Donahue chairman, President and Chief Executive officer of Cohu Incorporated.Thank you, sir you may begin.

Thank you and good afternoon everyone.Welcome to this conference call that covers Cohu's results for the fourth quarter ended December 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 fourth 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 go on, Jeff has information concerning forward-looking statements, estimates and other matters that we will discuss during today's call.

Thank you, 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 on which by its nature, is subject to rapid, even abrupt changes. Forward-looking statements include our comments regarding the company's expectations regarding industry conditions and future operations and financial results. Any comments we make about the company's future in response to your questions. Our comments speak only as of today on the January 26, 2011, 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 an ill ability to recognize revenue and account receivable problems.

Customer orders may be canceled or delayed, inventory, goodwill and other intangible asset write-downs, and 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 semi-conductor manufacturers. These and other risks and uncertainties are discussed more fully in Cohu's filings with the Securities 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. Sales for the fourth quarter and for fiscal 2010, set new Cohu records. This was the fourth consecutive quarter of increased operating income and earnings per share on a non-GAAP basis. Sales were $96.9 million, a 13% increase from the third quarter, and an 86% increase from the fourth quarter of 2009. Non-GAAP income per share was $0.48 compared to $0.41 in the third quarter and $0.11 in the year ago quarter. Cash and investments were $98.2 million, an increase of $6.9 million from the third quarter. Orders were $75.8 million compared to $90 million in the third quarter.

Semiconductor equipment orders were $67.1 million, compared to $74 million in the third quarter and represent an 89% of total orders. Year ending backlog was $99.6 million. The unit order distribution for the fourth quarter was high-speed handlers 60%, thermal handlers 36%, and other systems 4%. For fiscal 2010, high-speed unit orders increased 189% and comprised 76% of 2010 unit orders. Unit orders for thermal handlers increased 195%, year-over-year, and represented 23% of 2010 unit orders.

Now, I will go over highlights of the fourth quarter. Following a slow Q3, orders for major handlers increased substantially in the fourth quarter. Follow on multiple unit orders were received from two IDM's and an initial multi-unit order was booked from an Asia-based test subcontractor. An initial order was also received from and major target customer, a European-based IDM. This particular matrix handler will be integrated with two mems test modules from Rasco. Orders for edge handlers were booked from two IDMs and orders for Castle Tri-temp handlers were received from two IC test subcontractors.

Summit handler orders were received from an IDM, and a first time order from a new test subcontractor customer was also logged. Our largest thermal handler customer has transitioned to our new system the Pyramid.In the fourth quarter, this leading microprocessor IDM began volume production of its next-generation microprocessor, using our Pyramid handler. Multiple systems are in 724 production and are performing well.

At Rasco, fourth quarter orders declined following three consecutive record quarters that began in Q1 of this year, of 2010. 2010 was an exceptional year for Rasco with new records for sales and orders. The automotive mem's business remains strong with orders from two major customers for multiple gravity handlers with mem's test modules. In addition to repeat order for gravity handlers from a variety of IDMs, Rasco also received an initial order from a major Asia-based test subcontractor. We are really pleased with the cross-selling opportunities and synergies that have materialized as a result of the acquisition of Cohu and the comprehensive portfolio of testing handling solutions that we can now offer our customers.

Turning to our other businesses, at the electronics division the rollout of new high-definition cameras continues. With two major product introductions planned for Q1. And indoor fixed position camera and the dome camera. In addition, Cohu will be introducing a suite of analytics for traffic monitoring applications and a dual camera system that includes a high resolution thermal camera. Cohu is leveraging its leading position in the US traffic incidence management market, into developing opportunities in the Middle East.

BMS had an outstanding and a record quarter as sales increased 144% over Q3. BMS Equipment was utilized by the Pima County Sheriffs Department during the recent Tucson shooting and BMS systems will be on board US customs aircraft providing airborne surveillance at the Super Bowl next month. BMS opportunities and prospects are strong and growing, especially in the law enforcement, government surveillance and compact tactical UAV markets. And now Jeff will provide details on Cohu's financial results.

Semiconductor equipment related revenues for Q4 were approximately 86% international, and 14% domestic. International sales were at 89% Asia Pacific, 2% the Americas, and 9% other. We recorded approximately $1 million of stock-based compensation expense and approximately $1.5 million of purchased intangible amortization expense in Q4. The comments I make today include the impact of these items.

Gross margin was 33.5% in Q4 and lower than expected due to product mix in our semiconductor equipment operations. We expect Q1 gross margins to be about the same as Q4. Certain new developments are now affecting our expectations for gross margin improvement. To meet customer delivery requirements and ensure required quality levels, we have decided to maintain certain manufacturing operations in our Poway factory rather than at our Asia contract manufactures. Also, we are facing increased competitive pricing pressures in certain segments of the test handler market. As a result, we now expect gross margin in 2011 to be comparable to 2010, subject of course, to volume and product mix. We continue to believe that our gross margin of 40% is achievable longer-term.

Operating expense in Q4 was $22 million and in line with our projection. We expect operating expense in Q1 to be approximately $21 million as a result of lower sales volume, and variable selling expense. For Q4 effective tax rate was 11.2%, bringing our effective tax rate, for the year, to 18.5%. The lower rate in Q4 was due in part, to adjustments of certain prior tax accruals and the normal, year end true up of estimated tax rate used to record interim tax expense.

We currently expect our 2011 effective tax rate to be approximately 20% as the tax expense on our US earnings is largely offset by the partial reversal of the deferred tax asset valuation allowance, that was recorded in 2009, and our foreign earnings which are taxed at rates substantially below US Federal rates. Excluding the impact of the deferred tax asset valuation allowance, our 2011 effective tax rate would be approximately 28%.

Q4 EPS on a GAAP basis was $0.39, non-GAAP EPS, which excludes the after-tax impact of share-based compensation and amortization of intangibles, was $0.48 for the quarter. Moving to the balance sheet, cash and investments were $98.2 million, increasing $6.9 million from September. Cash generated from operations in Q4 was $8.5 million. That accounts receivable were $66.8 million at December, a decrease in $400,000 from September, DSO improved to 60 from 67 at September.

Inventory was $63.2 million at December, a decrease of $2.8 million from September. Additions to property, plant, equipment for Q4 approximately $1.2 million and depreciation was approximately $1.3 million. Deferred profit, at December, with $14.8 million compared to $13.6 million at September. The related deferred revenue at the end of Q4 was $36.9 million compared to $32.8 million at September, and consists primarily of revenue deferrals on shipments of test handlers.

Thank you, Jeff. And now taking a look ahead, in the back end semiconductor equipment industry, monthly orders as reported by semi- declined last August following 17 months of sequential increases. And, continue to drop through last November. Before increasing 2.4% in December, last month. The decline from July to November reached 48%. At Cohu, however, the decline was much less, just 9.3% from Q3 to Q4. After such a sustained period of rapid, sequential growth, the industry-wide slowdown in orders that began last fall, is not unexpected. If for no other reason, than as an understandable pause, to absorb the significant capacity that was added during 2010. The final figures have not yet been released, both Gartner and VLSI believe that 2010 was the strongest, growth year ever for semiconductor equipment following the biggest decline ever in 2009.

Most industry analysts forecast year-over-year growth in semiconductors and semiconductor equipment. Though of course have much lower rates than in 2010. Gartner expects business levels to increase in the second half of this year . Recent checks with our customers, show a mixed and highly dynamic picture. One of our largest customers, a major, high-performance analog IDM saw a significant increase in demand in September -- excuse me in December, driven by consumer electronics.

Another customer told us that they typically see a pullback in orders at the end of the year, but not this time. But, on the other hand, one of our major gravity handler customers expects first quarter sales to decline up to 10% and as a result, is taking a cautionary approach to near term equipment purchases.

So Cohu's orders softened in the fourth quarter, and that pattern has continued into early Q1, we believe that we have fared better than the overall back end semiconductor equipment industry due to the breadth of our product line, that now spans pick and place, gravity and test on strip technologies, the multiple drivers for our business, and the diversity of our customer base. So, whatever the short-term demand picture looks like, we have an exceptionally strong product line and are extremely bullish about our future prospects. For the first quarter, we currently expect sales to be approximately $85 million-$95 million.

Finally, I am pleased to report that Cohu's board of directors approved a quarterly cash dividend of six cents per share, payable on April 22, 2011. To shareholders of record, on March 8, 2011. Cohu has paid consecutive quarterly cash dividends since 1977. That concludes our remarks and now we will take questions.

Thank you. (Operator Instructions)

One moment please while we pole for questions. Our first question comes from the line of Kelly Anderson and with Sidoti and Company. Please proceed with your question.

Hello, thanks for taking my questions.Jeff, just wondering if you could give use just a little bit more color than just customer mix on the reason for the gross margin here?

Kelly, it was product mix. We had revenue forecast in Q4 that was deferred into Q1, and that revenue was then replaced in Q4 with some lower margin revenue. The deferral is due to the county roles, the standard process by which we typically don't have control over the entire process and so, nothing unusual, it is just a deferral of some revenue that was replaced with revenue at a lower gross margin.

Okay.

And then Jim, just on the backend trends that you are seeing, I was just curious, it sounded like last quarter you said you kicked off Q4 with two pretty sizable orders from two key customers and given that the backend has pulled in a little bit, could you walk us through how you saw business trending month-to-month in Q4 in terms of orders? Is it primarily due to backend pressure or do you think a few customers are going to drive the bulk of your business over the near term?

We started off, early Q4, with a bang, actually. Some orders that we expected to receive in Q3, so, it's just the replacement of those orders by the customer. So, we got off to sort of a real, nice start to Q4 last October.

But then, we began to see, clearly a slowing in order patterns, pretty much across the board with the exception of the ramp of our pyramid handler into high volume manufacturing. And that continued at that lower rate throughout the quarter. And actually, into the first quarter, but as I mentioned, towards the end of my remarks, we are now seeing some customers who are telling us that they've seen a pick up in demand it rather suddenly and are now increasing their forecast.

But that's not across the board and that is why I call it a mixed bag right now. Some customers, one of our major gravity handler customers who announced its earnings release last week, I think guided to 6% to 10% up to 10% lower revenue in the first quarter. But generally, I would say we're more optimistic about how the year is going to unfold, then we were a couple of months ago.

Okay. And, if I could just ask a few questions on the matrix, specifically, I think you said in your prepared remarks that you had two follow on orders from two major IDMs, but I seem to recall you are working on some new evaluations in Q4 and you're expecting another into evaluation to take place in Q1. Just wondering if those were the customers that were placing orders and given your impressive capture rate so far for that product, were you able to secure orders there yet? Do you expect those orders to come in Q1, and even if possible if you could ballpark how many matrix customers you have to date, that would be extremely helpful.

Yes. The evaluations continue to go very well, matrixes doing great. For the fourth quarter, I don't believe that any of the eval's that were in process actually converted to orders in the fourth quarter. We're expecting that to occur though, in the first quarter actually, this quarter. They're all going well. Matrix customers are approaching double digits I believe now.

Okay. Great. And, could you give us maybe a little bit more color on what motivated the huge increase that we saw in the BMS business?

Overall, the strong demand for the product, but also the timing of some deferred revenue recognition and record shipments to meet a particular customer order in the fourth quarter. But, it was a tremendous, a tremendous performance and a hard act to follow. You're not going to see that kind of increase sequentially.

Okay. Fair enough. And then just one last quick one for me, would you be willing to share any (inaudible) customers you have for 2010?

I think we will have to wait for our 10K on that.

Right.

Okay, fair enough. Thank you.

Thanks, Kelly.

Thank you. Our next question comes from the line of Vernon Essi from Needham & Company. Please proceed with your question.

Thank you very much. I was wondering, Jim and Jeff, could you delve into the price pressure comment that you made and just overall to make sure we are on the same page here, you are insinuating, I guess, a gross margin level that in 2011 that would be similar to what you posted for 2010. And can you just kind of walk through the puts and takes there and really, kind of what's happening. It sounds like you're just postponing the manufacturing transition and can you tell us exactly what's going on and why that is?

Sure. And I think that's an accurate way to depict it. There is a number of moving pieces here. First, we're always under competitive pricing pressure, what business isn't? So that is nothing new, recently we're seeing additional pressure in certain segments of our market, especially the high-speed pick and place segment of the market.

And then, with respect to the manufacturing, handlers are extremely complex systems, and we have recently concluded that certain aspects of the manufacturing process, particularly the final integration and test are more effectively performed here in our factory. So, we will continue to use contract manufacturers to manufacture the varying elements of the product and that will depend on the handler. With our very simple handlers, the CM will continue to manufacture the entire product. Of some of our other handlers and certainly with our more complex systems we may retain final test and integration, have them do major sub-assemblies are elements of the handler, but we will do the final integration and test of certain systems in our factories.

So, I think it's really just a refinement of our outsourcing strategy. We still intend to make significant use of contract manufacturers.

Well is it fair to say, though, just looking at, there are two ways to look at this right, I mean you've got -- it sounds like you have the pyramid been built in Poway, that's basically the key point here and what I'm trying to understand is is there any wiggle room out of the situation you are in on that margin structure of that product being built in Poway over the next nine months or so?Are we sort of on this track where a more proportionate of that that blend into your P&L, the more of a lead you have on the gross margin as you are shipping out of Poway?

Vernon, I'm sorry. I'm not sure I completely got the gist of your question.

Let's backup. The pyramid handlers being built out of Poway, correct?

Parts of it. Not the entire handler.

And is that, I mean it's really one of the last big products that you have in Poway right now, correct? In terms of manufacturing?

Correct.

So you right now look at this as being a continuation, I mean there is no set plan at least into the middle of 2011, that the steps you're taking is going to be taken offshore, but I guess I'm trying to understand is there any room for margin improvement in our product. I mean theoretically if gravity doesn't pick up in some other high-speed areas you see a little bit come back, but theoretically it sounds like the customer behind the scenes on pyramid is going to have a lot of business. So I'm trying to understand if there are any real possibilities for that margin to get out of that zone despite all of your best efforts.I mean, of course you're saying this, but what the change to make it better? I guess is the way to phrase the question.

Okay, thanks for clarifying that. I understand the gist your question now. Yes, there is room for incremental improvement and we have plans underway to reduce cycle time, working our supply chain and overall improving manufacturing efficiencies. But, I think those improvements are more likely to be achieved towards the back end of this year and into 2012 than this year.

Okay. And then, just to sort of, a quick I guess it sort of quasi guidance question, Jeff. R&D picked up a little bit, should we be looking at that same sort of level going into 2011 in the first half or how should we be looking at that?

Just talk about operating expense in total, we see that declining by $1 million in Q1, R&D, going into Q1 will also have a small decline and so that's really what I would model off the remainder of the year is a lower R&D on a quarterly basis as opposed to the number in Q4.

Okay, and then finally, just looking at your balance sheet you have a very good working capital deficiency going on right now. You have taken down inventory quite a lot in this last quarter. What is that level going to look like in the next couple of quarters? Do you be having inventory sorted in the same, almost one quarter of sales kind of range or do you think days will climb back up?

I expect the days in inventory levels to stay about where they are right now, Vern, given what we just talked about with manufacturing certain aspects here in Poway. For the foreseeable future I would expect our inventory levels to be approximately where they are right now.

Okay. Sorry, I have one final quick question. Depreciation in the quarter, I'm sorry if I missed that?

It's $1.3 million.

Okay. Thank you.

Thank you Vern.

Thank you. (Operator Instructions)Gentlemen, it appears there are no further questions at this time.

Well thank you everyone for joining us today. And, we look forward to speaking to you when we report Cohu's first quarter 2011 results. Thank you and good day.

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