Cohu Inc (COHU) 2011 Q1 法說會逐字稿

Greetings and welcome to the Cohu Inc. first quarter 2011 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, Chairman, President and Chief Executive Officer. Mr. Donahue, you may begin.

Thank you, and good afternoon, everyone. Welcome to this conference call that covers Cohu's results for the first quarter ended March 26, 2011. With me today is our Chief Financial Officer, Jeff Jones. 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.

I will provide an overview and comments on Cohu's results for the first quarter of 2011 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.

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, 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 20, 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, our reliance on third-party contract manufacturers, 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 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 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.

Thank you, Jeff. Sales for the first quarter were $89.7 million, and at the high end of our guidance. This represents a 38% increase from last year's first quarter, and a decrease of 7% from the fourth quarter of 2010. As you may know, SEMI reported that industry wide orders for semiconductor equipment declined, last August and for the next four months, following 17 months of consecutive increases. Cohu's non-GAAP income per share was $0.36 compared to $0.48 in the fourth quarter of 2010, and $0.13 in the year ago quarter.

Cash and investments increased to $106.7 million and Cohu's balance sheet remains free of bank debt. Orders were $75.3 million, about the same as fourth quarter 2010's total of $75.8 million. Semiconductor equipment orders were $61.1 million, compared to $67.1 million in the fourth quarter, and represented 81% of total orders.

The Japan earthquake affected the wafer supply of one of our largest customers. As a result, a multiple unit handler order that we expected in the first quarter, and that we had planned to partially ship in the first quarter, was delayed. We currently expect to receive that order in Q2. Backlog was $85.2 million at the end of the first quarter.

The unit order distribution for the first quarter was high-speed handlers, 57%; thermal handlers, 42%; and other systems, 1%. Unit orders for gravity handlers increased 30% sequentially. And we received our initial orders from a current customer to replace older competitor equipment with higher productivity Rasco systems. This represents a market-share gain for us, and we expect to book follow-on business in the second quarter.

Interest is growing at a number of our customers who have legacy gravity handlers for dual in-line packages and are looking to upgrade to current generation handlers to increase throughput, reliability and equipment uptime. Rasco's SO1000 system handles these DIP packages efficiently, and we have near-term opportunities from at least three customers who are looking to upgrade their production capability.

Following a pause in the fourth quarter last year to digest significant handler capacity that was added throughout 2010, a major Rasco customer ordered several handlers in the first quarter, and we forecast additional systems in Q2 from this customer as well. Interest in our MEMS product line is increasing. We have extended the product portfolio over the last two years, and are seeing opportunities linked to both Rasco's gravity and test and strip systems, and to Delta Designs Pick and Place handlers. Rasco added a new customer in the first quarter, and we expect at least one new customer win in the second quarter.

We have selected our beta site customer for our next generation gravity handler, called Saturn, that is scheduled to ship in Q3. Saturn is a full-temperature handler capable of faster index times while handling a variety of package families and sizes. First quarter Pick and Place orders were weighted towards our thermal handlers as the ramp of the pyramid continued at a major microprocessor, IDM, and also by the order delay from MATRiX handlers caused by the Japan earthquake that I mentioned earlier. We received follow-on orders for MATRiX handlers from two customers, one a major IDM and the other a fabless IC company. We are installing equipment at their facilities and also at their test subcontractors, and we anticipate additional orders from these customers in Q2. We expect repeat orders from another IDM who is using our Edge Pick and Place Handler with an integrated MEMS test module built by Rasco.

Turning for a moment to our other businesses, at the electronics division, quote activity and interest in our new Helios camera family is growing. In Q1, we introduced a new thermal camera, and this quarter we plan to launch new box and dome day/night cameras. Customers are excited about the capabilities of these new cameras, and we expect orders to increase throughout the year. This month, we received a major order from a State Department of Transportation that will install several hundred Cohu Helios cameras along their highways as part of an upgrade to their incident management system.

Finally, our mobile microwave data link business, BMS, is benefiting from its focus on the intelligence, surveillance and reconnaissance community. As we expand our antenna system product line, BMS is increasing market share in unmanned air systems applications. And now, Jeff will provide details on Cohu's financial results.

Semiconductor equipment-related revenues for Q1 were approximately 85% international and 15% domestic. International sales were distributed 91%, Asia Pacific; 3%, the Americas; and 6%, other. We recorded approximately $1 million of stock-based compensation expense, and approximately $1.4 million of purchased intangible amortization expense in Q1. The comments I make today include the impact of these items.

Gross margin was 32.1% in Q1, and lower than anticipated, as the implementation of a favorable price adjustment to one of our handler products was delayed until Q2. In the second quarter we expect gross margin to be about the same as Q1, as the benefit of this price adjustment will be offset by higher discount on a volume handler order that will ship in Q2. For the full year, we expect the gross margin will be comparable to 2010, in the mid-30% range.

Operating expense in Q1 was $21.2 million and in line with our projections. We expect operating expense in Q2 to be approximately the same as Q1. The Q1 effective tax rate was 15.2%. This is our expected 2011 effective tax rate as the expense on our US earnings is largely offset by the partial reversal of the deferred tax asset valuation allowance recorded in 2009, and our foreign earnings, which are taxed at rates substantially below the US federal rates.

Excluding the impact of the deferred tax asset valuation allowance, our 2011 effective tax rate would be approximately 30%. Q1 EPS on a GAAP basis was $0.27, 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 approximately $107 million in March, increasing $8.5 million from December. Cash generated from Operations in Q1 was $7.4 million. We will make a $7 million German tax payment in Q2, and as a result we do not expect our cash balance to increase in Q2. Net accounts receivable was $57.8 million at March, decreasing $9 million from December. DSO at March was $67 million, increasing from $60 million at the end of the year. Inventory was $68 million at March, a $4.8 million increase from Q4 as a result of the delay in receipt and shipment of a multi unit handler order that Jim mentioned earlier.

Additions to Property Plant and Equipment for Q1 were approximately $200,000 and depreciation was approximately $1.4 million. Deferred profit at March was $9.3 million, compared to $14.8 million at December. The related deferred revenue at the end of Q1 was $25.6 million, compared to $36.9 million at year-end, and consists primarily of revenue deferrals on shipments of test handlers.

Now, taking a look at the current business environment. In the back-end semiconductor business industry, monthly orders as reported by SEMI have increased for three months through February. This is an encouraging trend following four months of decline that began last August. Checks on customer floors show that test handler utilization continues to be high.

Some customers are taking a cautious approach due to uncertainty over the longer-term impact that the Japan tragedy may have on the electronics supply chain. We expect that the situation will become clearer as more companies in the electronics industry, from material and equipment suppliers to consumer electronics manufacturers, report results over the next several weeks and provide commentary on near-term prospects. For the second quarter, we expect sales to be between $77 million and $82 million.

From our perspective, the fourth quarter of 2010 and the first quarter of 2011 order patterns for our semiconductor equipment were very similar. We continue to benefit from a broader customer base that helped to mitigate the immediate effect that the Japan disaster had on one of our key customers as I mentioned earlier. Our current forecast and outlook suggest that business is improving, consistent with the recent improvement in back-end equipment bookings that has been reported by SEMI. And that concludes our prepared remarks and now we will take questions.

Thank you, sir. We will now be conducting the question-and-answer session.

(Operator Instructions).

Our first question is coming from the line of Vernon Essi of Needham and Company.

Thank you. Jim, I'm wondering if you could just maybe dive a little bit more into the comments concerning Japan. We've seen from the device side, at a pretty diverse tone from actually two of your larger customers, and I'm just curious, when something like this happens, of course everyone is reticent to take delivery. Do you feel as though this is more a -- what I'm trying to gauge I guess is, is this a scenario where this could be lifted very quickly and we would be back to sort of a normal bullish environment? Or, do you get the sense that this is sort of more of an interim excuse to not take delivery for right now?

I don't think it's an excuse to not take delivery, Vern, I think it is a genuine concern. And, with respect to the customer that I mentioned, they publicly announced that they had two damaged fabs in Japan and there was a tangible impact. I think they were able to quickly mitigate some of the impact as I understand it, a significant portion of the impact.

I appreciate -- I guess, I mean my point is though, on that particular customer I understand that situation. But, sort of on the broader picture, one of your other large customers just upped their capital expenditure budget this year, and I'm just wondering what the tone is from the test assembly providers, all the way down the line to sort of smaller analog players, what seems to be the feedback that you are hearing, and if this just seems like a situation that could linger for the rest of -- into the third quarter time range.

What I'm hearing from some customers, and I would agree with your assessment that it's mixed, some customers do not seem concerned about it at all. But those that are, are expressing a concern over mid and long-term time period, whatever that means. I take that to mean the next several quarters and beyond, so exactly what it's going to take to more specifically address that concern is not clear.

I think we're going to learn a lot more as most companies will be reporting earnings and making comments over the next week or two. The larger ones are already out doing that. There clearly is some question about whether there's going to be mid or longer-term impact before the situation returns to normal.

Okay. And a question to change off the equipment side. On the microwave products business, you had a very strong finish last year and we all knew going into this year that you would be operating at a lower run rate. Should we be looking at sort of the $7 million-ish number that we just had in the first quarter, is that the baseline that we should be looking at for that business, or is that a revenue quarter that feels maybe a little bit below where you thought you might be targeting that for 2011?

Yes, we expect the rest of the year to be up from that level In fact, we're -- we expect to be up a nice double digit in the second quarter, and then maintaining that level through the rest of the year, well above the $7 million run rate in Q1, which was due to some timing issues, mainly.

Okay. And, then, finally just on a product perspective, could you just share more detail about the Saturn product what you're going to do there from a next-generation perspective? What is the feature set for the upgrade path?

Sure. The -- our MATRiX Pick and Place Handler is a fast index time, high parallel, up to 32 test site capability, tri-temperature system. The easiest way to describe the Saturn is it's the gravity feed equivalent of that machine. Fast index time for a wide variety of package styles, high degree of parallelism and tri temperature operation. Complements the MATRiX Pick and Place machine very well.

Well, so, in your -- what is sort of the value proposition there? I mean what, why would -- obviously with faster throughput you command a much higher premium for this in the marketplace? What are the trade-offs?

Well, the customer will achieve higher throughput, particularly at a mix of lower test time and high degree of parallelism, substantially above what they can realize today from our gravity handlers or any competitor gravity feed handlers. So, it's all about throughput and, of course, the reliability has to be there for the customer to realize the benefits of that, and we're confident it will be.

And, just to give us an order of magnitude, what throughput improvement would you be looking at relative to the average gravity handler it would be replacing?

It would be 2X or more and, in some cases, could be well above that.

Okay, that's helpful. Thanks a lot, Jim.

Thanks, Vern.

(Operator Instructions).

Our next question is coming from the line of Kelly Anderson of Sidoti and Company.

Good afternoon. Thanks for taking my questions. First thing, I just wanted to touch on, obviously, there's some puts and takes with the gross margin issue, but given that you can't outsource the entire pyramid system to a contract manufacturer, I'm wondering if you could outline a little bit more specifically what initiatives you are pursuing to improve the gross margins on the whole for the company?

Sure, sure. Well, we're sourcing materials from Asian suppliers, Kelly, to start with and realizing increased benefits from that. We're also reducing the manufacturing cycle time on all of the products, and then, finally, we're looking at our alternatives including final assembly and test of the product in a low cost geography. For example, in our own facility.

Okay. And, just moving over to the camera segment quickly. Is there any justification for the dip there? It seems, I don't know if this just a coincidence that there is a little bit of a seasonal weakness in that business in the Q1, but is there anything else that might be motivating a tougher comp versus Q4?

Kelly, it gets back to the order that Jim had indicated that came in, in Q2. We had anticipated that, that would come in Q1, we would have-- we also anticipated partially shipping on that order as well, so it's just really a delay in a significant customer order at that operation.

Okay. And, I'm not trying to trap you in any way into giving any kind of Q3 guidance, but if I just read into the comments you made about the customer having the issue in Japan, and you think that that's been resolved and the resume orders during Q2, and then your comments also with new customer wins and installs. Does the sequential drop in revenue here really more reflect an overhang from lower second-half back-end orders, and you think things would turn around heading into Q3?

Well, certainly, the Q2 projection as a result of the reduced orders that we saw and in fact the industry saw on the second half of last year. And, that has really continued into the first quarter, as I mentioned, we saw the first quarter being comparable to Q4. But, we're generally optimistic about the second half of the year, our forecast looks good.

With some qualification for this Japan issue, but I wouldn't say it is a major modification from certain of our customers. We find the customer base to be generally positive about 2011.

Okay, well, that's encouraging. Thanks very much for your time.

Thank you.

Gentlemen, that seems to be no further questions at this time.

Okay, well, I would like to thank you for joining today's call and we look forward to speaking to you when we report Cohu's second quarter earnings. Thank you and good day.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.