Cohu Inc (COHU) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Cohu Incorporated third 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 of Cohu Incorporated. Thank you, sir. You may begin.

Good afternoon, everyone, and thanks for joining us today on this conference call that will cover Cohu's results for the third quarter ended September 24, 2011. Our Chief Financial Officer, 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 can 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 third quarter of 2011, and Jeff will then take us through the financial statements. I'll conclude with comments on the current business environment, and we'll take your questions. But before we go any further, Jeff has information concerning forward-looking statements, estimates, and other matters that we will discuss during today's call.

The Company's discussions 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, October 19, 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, inventory, goodwill and other intangible asset write-downs, 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, the concentration of our revenues from [allotted] 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.

Okay, thanks, Jeff. Sales for the third quarter were $71.8 million, compared to our guidance of approximately $70 million and second-quarter sales of $80.9 million. Non-GAAP income per share was $0.21, compared to $0.28 for the second quarter of 2011. Cash and investments were $101.7 million, and Cohu's balance sheet continues to be free of bank debt. Orders were $61.4 million, compared to $80.6 million, reflecting softening conditions in the semiconductor industry and global macroeconomic decline.

Semiconductor equipment orders were $48.5 million, compared to $69.1 million in the second quarter, and backlog was $74.5 million at the end of the third quarter. The semiconductor group unit-order distribution was high-speed handlers, 35%, thermal handlers, 56%, and other systems, 9%. While declining equipment utilization resulted in a general decrease in systems business, there were notable accomplishments during the quarter, and our pyramid thermal handler achieved record unit orders during Q3. This system is being utilized during testing of advanced microprocessors. With our proprietary thermal technology, the customer optimizes yield and speed grading, resulting in higher ASPs.

Recapping key highlights from the third quarter in our test handler business. We are very excited about opportunities to grow our MEMS testing business. By developing test modules, we provide customers with a complete MEMS integrated test cell. In addition to the MEMS test module business that is, in its own right, attractive, we realize incremental sales of test handlers. We are leveraging R&D resources from our global handler operations. As an example, a MEMS test module developed at Rasco's German factory will be integrated with a delta design pick-and-place handler manufactured in California or in Asia.

During the fourth quarter, we expect MEMS-related orders from multiple customers for applications including microphones, pressure, Hall Effect, and 3-D earth magnetic sensors. The explosive growth of smartphones, tablets, and other consumer electronics products is expanding applications for these types of MEM devices. Rasco's gravity handlers were selected by a major Asia-based test subcontractor over the equipment of an entrenched competitor. And we began an evaluation at a major analog IC producer to replace aging legacy gravity-feed handling equipment. We anticipate that similar opportunities will develop at a number of IDMs over the next several quarters.

A European-headquartered IDM ordered its first matrix pick-and-place handler, following a lengthy evaluation. This customer is converting certain ICs to a new, small-footprint package that is well suited for handling in the matrix system. Follow-on orders are expected during the next 12 months. A US-based IDM completed acceptance testing on the matrix handler at two of its Asian production-test facilities. Additional orders are expected in the fourth quarter. And we're also working with this customer's MEMS group on potential business for pressure sensors used in automotive engine control systems. Orders were received from two IDMs for multiple EDGE pick-and-place handlers for use at their Asia test sites and at their US production engineering location.

Turning to our other businesses. At the Electronics Division, quote activity and interest in our new Helios IP cameras is high. Customers are excited about the capabilities of these new cameras, including the exceptional video quality from Cohu's high-definition models. In the third quarter, we received and shipped our first order for installation of Helios cameras in a traffic-incident management system in a major South American country that has adopted US traffic standards. As a result, Cohu is in an excellent position to capture additional business, as new traffic control systems are planned throughout this South American country. As you may recall, Cohu is the US market leader in traffic-incident management.

During Q4, Cohu will release additional cameras in the Helios family, and we expect orders to increase as the new products roll out. BMS continues to capitalize on its focus on the government surveillance, unmanned aerial vehicles, and law enforcement markets for mobile microwave data links. BMS equipment is providing critical capability to US special operations in major global hot spots. Business opportunities are expanding, particularly in the Middle East, where BMS is a recognized leader and has a sizeable installed base. We expect BMS to have a strong fourth quarter. And now Jeff will provide details on Cohu's third-quarter financial results.

Semiconductor equipment-related revenues for Q3 were approximately 86% international and 14% domestic. International sales were distributed 82% Asia-Pacific, 10% the Americas, and 8% other. We recorded approximately $900,000 of stock-based compensation expense and approximately $1.1 million of purchased intangible amortization expense in Q3. The comments I make today include the impact of these items. My comments also include the impact of 14 weeks in Q4, compared to 13 weeks in Q3.

Gross margin was 32.5% in Q3 and in line with our projection. We expect gross margin in Q4 to decline approximately 150 basis points on lower sales volume and less favorable product mix. Operating expense in Q3 was $20.7 million and in line with our projection. We expect operating expense in Q4 to be approximately $20 million. Consistent with our Q2 remarks, our 2011 effective tax rate is expected to be approximately 15%, as the expense on our US earnings is largely offset by the partial reversal of a deferred tax asset valuation allowance recorded in 2009, and our foreign earnings are taxed at rates substantially below the US federal rate.

Our Q3 tax provision was favorably impacted by a reduction in our liability for unrecognized tax benefits of approximately $1 million. Excluding the impact of this reduction and reversal of the deferred tax asset valuation allowance, our 2011 effective tax rate would be approximately 28%. Q3 EPS on a GAAP basis was $0.14. Non-GAAP EPS, which excludes the after-tax impact of share-based compensation and amortization of intangibles, was $0.21 for the quarter.

Moving to the balance sheet. Cash and investments were approximately $101.7 million at September, increasing $300,000 from June. Cash provided by operations in Q3 was $3.9 million. [Bad] accounts receivable were $50 million at September, decreasing $3.3 million from June. DSO at September was 70, increasing from 65 at June.

Inventory was $84.2 million at September, increasing primarily due to higher production rates to meet previously forecasted handler orders, with shipments planned through Q1 of 2012. Due to slowing demand, orders for high-speed handlers in Q3 were lower than initially forecasted. As Jim mentioned, demand for our thermal handler is strong, and we expect to increase shipments in Q4 and Q1, and as a result, we maintain the level-loaded production through Q3. We have since adjusted production rates to align with near-term handler demand.

Additions to property, plant, and equipment for Q3 were approximately $900,000, and depreciation was approximately $1.3 million. Deferred profit at September was $5.8 million, compared to $7.7 million at June. The related deferred revenue at the end of Q3 was $12.7 million, compared to $19.5 million at June and consists primarily of revenue deferrals on shipments of test handlers.

Looking ahead now, key business opportunities and our focus areas in the fourth quarter include evaluation of our SO3000 Test-In-Strip Handler at two Asia-based customers. Additional orders for MEMS test modules and accompanying handlers for multiple customers, completion of a matrix-handler evaluation by a major US-based fabless IC company for production use at its Asia-based test subcontractor, and new evaluations of the matrix handler by two Asia test subcontractors, completion of an EDGE handler evaluation at an Asia test subcontractor for use in mainstream IC testing of a wide range of products for a wide variety of its customers. As you can see, we are very busy with handler evaluations at multiple customers. These evaluations position our equipment in the production flow for new IC technologies and products, and we expect capacity orders when business conditions improve.

Orders for our T-Core thermal control system that were initially planned for the third quarter are now expected to be received in Q4. A major fabless graphics IC company has selected T-Core for use in testing its most advanced chips. The customer chose us because it optimizes test yield -- because the T-Core optimizes test yield with tight temperature control, where conventional thermal electric systems are limited, and because of the higher parallel test capability of our solution.

Also during the fourth quarter, we expect to achieve a significant milestone in our next generation gravity-handler development, as we expect to ship the initial system to our beta-site customer. According to recent comments from Gardner, and from various semiconductor and semiconductor equipment companies, the worldwide semiconductor market has been slowing. 3 key factors are shaping the short-term outlook, excess inventory, manufacturing overcapacity, and slowing demand due to economic weakness. August orders for back-end semiconductor equipment, as reported by our trade organization, SEMI, were down 17.7% sequentially and down 53.6% from a year ago.

We track utilization of test equipment on our customers' production floors, and we expect our thermal handler business to continue to be strong as our customer ramps pyramid test handler capacity. In general, though, test equipment utilization has decreased, and in some instances, is in the 70% to 75% region. In this environment, it's no surprise that many customers are limiting spending on new production test equipment.

Given current conditions in the semiconductor industry and global economic concerns, we have taken steps to reduce costs, and our outlook for the near term is cautious. For the fourth quarter, we expect sales to be approximately $65 million. Cohu's Board of Directors approved a quarterly cash dividend of $0.06 per share, payable on January 3, 2012 to shareholders of record on November 25, 2011. Cohu has paid consecutive quarterly cash dividends for over 34 years. That concludes our prepared remarks, and now we'll take your questions.

Thank you.

(Operator Instructions)

Vernon Essi, Needham & Company.

Jim, I was wondering if you could give us a background on what you see going on over in Thailand with these recent floods that have been taking place and some of the back-end operations of -- some major IDMs are getting caught up in that. What implications might that have for the equipment market?

And if you could size that up in terms of how much volume you think overall for the industry. It's obviously been down a lot, I imagine, over the last 10 years, but how much of the business is impacted by that? You may see refresh rates or refresh orders on the equipment front.

Yes, Vern, unfortunately, I really don't know. I wish I could provide some useful information on that. We're trying to understand that ourselves and frankly do not yet have any kind of a handle on that, I'm sorry to say.

If you look into the next quarter on your guide, last time you had revenue in this range was back in the first quarter of 2010. Your gross margin's come up a little bit since then, but unfortunately the OpEx has been building.

From the standpoint of how we should be thinking about the OpEx line. Do you have a lot of discretion going into the fourth quarter to pull back that spending, or should we be looking at it at roughly the same run rate we've had in the last couple of quarters?

There's a variable component to that in our variable sales expense, based on volume, sales commissions, and so forth. So that's going to automatically ratchet down and is built into the number that Jeff provided.

We've already taken some actions to reduce cost, which have included hiring freezes, some head-count reductions, some facilities consolidation, and closing facility during the Thanksgiving holiday, our US test-handler operations during the Thanksgiving Holiday. And we'll do more if it's indicated. So, I think you'll see us ratchet that down to the extent that volume declines further, if it should decline further.

I would just add to that, given our guidance, we are projecting a reduction in OpEx quarter-over-quarter. Expect it to be in the $20 million range, Vern, for Q4.

No, I understand that. I'm just trying to get a feel for if there's -- obviously, there's a function of your commissions, but if there were any -- I think Jim answered the question -- if there's any real discretion you can put into place. I guess I'm leading in to my next big point here. You've obviously seen a lot of interest on some of these newer products. The orders seem to be going through somewhat of a lull, relative to where they were 6 months ago.

Do you have feel or indication that you're going to see a pick-up from some of your customers that's broad enough to reverse the trend we're on right now? Or do you anticipate a sideways situation for the next couple of quarters? I know your business is volatile, but anything you can give further out would be helpful.

Near term, which is about as good as our visibility gets from the vast majority of our customers, as you look out there, I don't see any apparent catalyst for improvement in the near term. Again, 1 to 2 quarters is, as you know, is the max visibility we get in this industry. Circumstances could change dramatically, but at least for that period, I don't see any reason to think that business in the near term is going to improve.

And I think each day, as more and more companies are reporting -- we're actually one of the companies out on the early side this week and next week, more companies will be reporting. I think most companies are cautious and providing downward guidance in the high single-digit or teens for Q4. So that's our customer base. So, we're going to be following that.

If you could explain a little bit more in depth, you had said there was analog customer of yours that's going in and replacing their -- it sounds like a substantial portion of gravity handlers. What is the typical shelf life of that product, and what's the reasoning behind the upgrade? Could this be the beginning of a lot more scenarios like that?

Yes, that's a good question. The shelf life of handler equipment is pretty long. And customers tend to use it just moving it progressively into the back of a factory or into the older plants, because seems like these old packages never go away.

After a time, there is a point where that old equipment, that old legacy equipment, is difficult to support. That situation has been exacerbated over the last 5 to 10 years, as a number of competitors, companies in our industry, have literally gone out of business and are no longer supporting this equipment.

So, as a result, customers are caught in a box where they like this fully depreciated equipment, but they can't achieve effective production with it anymore. I think we're at a point where we're going to, as I indicated in my remarks, see more of that. That's one driver.

Another driver, and this is probably the most significant in our business, is new packages that benefit from a new handling solution, and hopefully our handling solution. And that's what happened in the instance that you cited.

We have a customer who's converting some leaded TSSOP packages to a new DFN package, which is like a QFN, very small, space-efficient package. And they want to do it in high parallelism, and at temperature. Well, that's exactly what our matrix does. And we're an ideal solution for that.

Thank you.

(Operator Instructions)

Gentlemen, it appears there are no further questions at this time.

All right. Thank you. I'd like to thank everyone for joining us today, and we look forward to speaking to you again when we report our fourth-quarter and full-year 2011 earnings. Thank you, and good day.

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