Cohu Inc (COHU) 2011 Q4 法說會逐字稿

Greetings and welcome to the Cohu International fourth quarter 2011 and year-end 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, James A. Donahue, Chairman and Chief Executive Officer for Cohu. Thank you, Mr. Donahue. You may begin.

Good afternoon and welcome to this conference call that will cover Cohu's results for the fourth quarter ended December 31, 2011. With me today is Jeff Jones, our Chief Financial Officer. I hope you have a copy of our earnings release and have had an opportunity to review it. 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 fourth quarter, and then Jeff will take us through the financial statements. I'll conclude with comments on the current business environment and then we'll take your questions. But first, Jeff has information concerning forward-looking statements, estimates, and other matters that we will discuss during today's call.

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, February 1, 2012, 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, a 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.

Thanks, Jeff. Sales for the fourth quarter were $66.6 million, compared to our guidance of approximately $65 million, and Q3 sales of $71.8 million. Non-GAAP income per share was $0.12, compared to $0.21 for the third quarter of 2011. Cash and investments were $105 million, and Cohu's balance sheet remains free of bank debt. Orders were $44 million compared to $61.4 million in the third quarter. Semiconductor equipment orders were $33.9 million compared to $48.5 million in the third quarter, reflecting the slowdown in the semiconductor test market in the second half of fiscal 2011. Backlog was $51.9 million at the end of the year.

The semiconductor equipment group unit order distribution for the fourth quarter was high-speed handlers, 46%; thermal handlers, also 46%; and other systems, 8%. Low equipment utilization resulted in a significant decrease in our systems business during the fourth quarter. Our checks of customer test floors indicate that average utilization was in the high 60s at the end of the year, which would be the lowest point since July of 2009. And in line with this, semi reported that monthly industrywide orders for backend semiconductor equipment were essentially flat during the four months ended in December. Backend equipment orders in December were 38% below the level in mid 2011, and 64% lower than the most recent peak in mid 2010. And that's industrywide backend equipment I'm referring to. Later I'll comment on how we see the current business environment.

But first I will recap key highlights from the fourth quarter in our Test Handler business. The Pyramid system, our newest thermal handler, continued to ramp at a leading microprocessor IDM, but orders were lower quarter-over-quarter. We expect increased orders for the Pyramid handler in Q1. MATRiX, our latest high speed pick-and-place handler, was released to production by a major IDM in the fourth quarter, and the second global IDM qualified the handler for MEMS testing along with a MEMS test unit developed by Rasco. Evaluations are in progress at two major customers that are expected to lead to orders when business conditions improve. Additional valuations are scheduled currently with six customers throughout the first half of this year.

Although equipment utilization suppresses demand for new capacity, it is an excellent time to qualify new equipment. That's why we have been aggressive in supporting multiple customer evaluations in order to have our equipment approved for production as utilization increases and customers need to add capacity. A large graphics IC company qualified our new T-Core thermal sub-system during the fourth quarter. This system, utilizing the same proprietary thermal technology incorporated in the Pyramid handler, will be used to limit temperature fluctuations during testing of advanced, high-speed graphic chips. As with microprocessors, precise control of the device temperature during testing optimizes speed grading and ASPs.

Despite overall weak market conditions, we added three new gravity handler customers during the quarter, and each purchased their first units. One application for a Japanese customer is for testing automotive power management ICs using hybrid electric vehicles. While handler orders were down, sales of MEMS test units continued to multiple customers for applications including pressure and magnetic sensing. The explosive growth of smartphones, tablets, and other consumer electronics products is expanding applications for MEMS devices. We are broadening our portfolio of MEMS solutions for use in our pick-and-place gravity and also on our test and strip handlers. An important milestone was reached with the first order for our next generation of gravity handler. Delivery is scheduled during the second half of this year, and an evaluation is underway at another customer. We are very excited about this new handler that comes to market with a faster index time and higher parallel test capacity than the legacy gravity handlers that were installed many years ago, and are in use still throughout the industry.

Turning to our other businesses. At the electronics division, the rollout of the new Helios product line continued, as the Company transitions its cameras to IP-based, high definition format. Sales of Helios products increased 147% year-over-year. Our initial focus has been on the US traffic incident management market where we have a leadership position. And during 2012, we're launching new Helios products for the global security and surveillance market. Sales at Broadcast Microwave Services were below plan due largely to orders that have been pushed into 2012. The unrest in the Middle East affected BMS throughout 2011, including the fourth quarter, as a number of countries delayed or suspended routine commercial activities. But as the year ended, we began to see renewed activity; and we expect BMS to have a strong 2012 in the Middle East.

During Q4, BMS antenna systems were selected by the US military for use with their latest data link that will begin being deployed this year, and we expect sales of these systems to begin this quarter. BMS is capitalizing on its focus on the government surveillance, unmanned aerial vehicle, and law enforcement markets for mobile microwave data links. BMS is providing critical capability to the US military in major global hot spots. Business opportunities are expanding, especially in the Middle East, where BMS is a recognized leader with a sizable install base of equipment. And now Jeff will provide details on Cohu's financial results.

Semiconductor equipment-related revenues for Q4 were approximately 84% international and 16% domestic. International sales were distributed 78% Asia-Pacific; 16% the Americas; and 6% other. We recorded approximately $1.4 million of stock-based compensation expense and approximately $1 million of purchased intangible amortization expense in Q4. The stock-based compensation expense in Q4 was higher than past quarters due primarily to a true-up of prior estimates and one additional week in Q4. We expect stock-based compensation expense in Q1 to be approximately $1 million. The comments I make today include the impact of stock-based compensation and purchased intangible amortization expense, and the impact of Q1 of 2012 being 13 weeks compared to 14 weeks in Q4.

Gross margin was 32.2% in Q4 and in line with our projection. We expect gross margin in Q1 to decline approximately 350 basis points on lower sales volume and product mix. We expect gross margin to improve when order levels in the semiconductor equipment business increase. Operating expense in Q4 was $20.2 million and in line with our projection. We expect operating expense in Q1 to be approximately $18 million, declining $2 million from Q4 due to lower variable selling expense, 13 weeks in Q1 versus 14 weeks in Q4, and cost reduction actions we've taken in light of soft business conditions.

The effective tax rate for 2011 was approximately 12%. The lower rate is due primarily to the partial reversal of the domestic deferred tax asset valuation allowance recorded in 2009, and our foreign earnings being taxed at rates substantially below the US Federal rate. We expect 2012 effective tax rate to be comparable to 2011, for the same reasons. Q4 EPS on a GAAP basis was $0.03. Non-GAAP EPS, which excludes the after-tax impact of share-based compensation and amortization of intangibles, was $0.12 for the quarter.

Moving to the balance sheet. Cash investments were approximately $105 million at December, increasing $3.3 million from September. Cash provided by operations in Q4 was $5.7 million. Net accounts receivable were $41.9 million at December, decreasing $8.1 million from September. DSO at December was 68, decreasing from 70 at September. Inventory was $82.7 million at December, decreasing $1.5 million from September; and we expect continued declines in inventory as shipments of Pyramid remain strong in Q1 and production rates have been aligned with near-term handler demand.

Additions to property, plant and equipment for Q4 were approximately $100,000; and depreciation was approximately $1.4 million. Deferred profit at December was $2.8 million, compared to $5.8 million at September. The related deferred revenue at the end of Q4 was $6.6 million, compared to $12.7 million at September and consists primarily of revenue deferrals on shipments of test handlers.

Taking a look at the current business environment. First-quarter results will be impacted by the slowdown in the semiconductor equipment industry that has resulted in lower equipment utilization and reduced orders during the last several quarters. For Q1, we expect sales to be approximately $50 million. The latest data from semi indicates that industrywide orders for backend semiconductor equipment have been bumping along the bottom since last August. In recent earnings reports and in guidance for the current quarter, a number of semiconductor and semiconductor equipment companies have said that they believe order levels have reached a bottom.

In the last several weeks, we have seen increased customer activity, particularly in automotive and consumer applications, though the industrial segment seems to be lagging a bit. Improvement is spotty, not yet widespread, but this is an encouraging sign. We will continue to take prudent steps to control cost, but without compromising funding of key product development programs. We will also aggressively support new product evaluations as these set the stage for increased sales of our systems when business improves. Cohu's Board of Directors approved a quarterly cash dividend of $0.06 per share, payable on April 20, 2012, to shareholders of record on March 6, 2012. Cohu has paid consecutive quarterly cash dividends for over 34 years. That concludes our prepared remarks. And we will now take questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment please while we poll for questions. Our first question comes from the line of [Ang Sing] from Needham & Company.

Hello. Thank you for taking my question. I am calling on behalf of Vern Essi. My first question is, you gave a decent overview of what you expect going forward. I'm wondering if you have any sort of visibility as to how long this will take to recover; it's your lowest guide in nearly two years. I'm wondering if there's anything else going on out there that might be impacting you disproportionately or if you feel that this is the status across the board.

I think we are seeing some reports from companies that are somewhat bullish. Others that are a bit muted. So it's been our experience that in the early stages of a recovery, the signs are not always clear and consistent. They are somewhat mixed. I don't think there is anything in particular about our situation that is any different than the industry in general.

I noted some positive comments from a test equipment company and some surprisingly muted comments from an assembly equipment company this week. I think it will just take some time for the direction, short-term direction, to become a bit clearer.

Okay, thank you. That's very helpful. And also as far as these orders that could materialize once the situation recovers, I'm wondering if you can give an update on what sort of lead time there is from when the orders actually come in versus when they are shipped out? And what period we are dealing with there?

Sure. On the front end of a recovery what typically happens is that customers wait too long to pull the trigger on new buys, and generally find themselves in a situation where they needed the equipment yesterday. So, for some period of time, we will be able to meet that demand rather quickly in a matter of weeks, because business has been weak as it is in down cycles, inventory building. So we are able to respond relatively quickly.

Okay. And regarding the OpEx, there was a question on the last call. I know you mentioned that you are taking aggressive steps to keep that under control and cut anything that is extraneous. I'm wondering if you could just give an overview of what cost-cutting measures you are taking beyond what were highlighted in the previous earnings call.

Sure. We're going to talk specifically about the semi-equipment operations where we've implemented a hiring freeze and we've reduced headcount, in line with the decline in the production requirements. And we've also implemented mandatory time off. So, these actions have resulted in about $1 million of cost reduction per quarter; and of course we will continue to monitor business conditions and take any additional actions we feel are necessary.

Okay, thank you. Also, on the inventory position. The age of inventory is creeping up, and I believe that was increased to handle anticipated orders for the Pyramid handlers. I'm wondering if you can give any color on what the status of Pyramid handler orders look like, if it's similar to the other ones, if it's any better visibility, reduced visibility there, and if you're comfortable with the level of inventory, and if it's still manageable at these levels?

We generally have a little better visibility with Pyramid forecasts than we do with our other business just because of the primary customer. The Pyramid handler looks out a little further. So, where as generally we have maximum one quarter visibility in the general-purpose business. We see out maybe several quarters on Pyramid, which is very helpful.

And, Pyramid orders and shipments will move in and out almost on a weekly basis as the customer adjusts its production requirements. But we do expect Pyramid orders to increase in the first quarter and to be strong throughout the year.

Okay. Thank you. And just a couple more questions. You'd indicated that industrial is a little weak, and you're seeing increased customer activity for automotive and consumer applications. Can you give any indication as to how the other end markets might be faring and what else is possibly strong or weak out there?

Well, certainly consumer and automotive. Automotive has been strong throughout 2011, and, of all of the end markets, seems to have been the least affected by the general macro economic decline. We are continuing to see strength there.

On the consumer side. Anything mobility related has been strong. PC and industrial has been lagging up to this point. We have seen increased activity on the automotive and consumer fronts in recent weeks. But not so much on the industrial side.

Understood. And one final question from me. I'm wondering, on the gravity-feed handler where you saw an order from the global automotive IC company, do you have any indication or color as to what opportunity might be there? I realize you said you have another customer that might be in qualification. I'm just wondering if you can give any color on the revenue opportunity or handler opportunity there?

Well, what we are really enthusiastic about with this new product is that it is a step function improvement in gravity handler performance over existing installed equipment at multiple customers throughout the industry. So, much of that equipment is ripe for replacement as it's quite aged in some cases. We see great opportunities across the board, and it's why we are eagerly pursuing evaluations at multiple customers to see that we get qualified so that when business ramps and when customers decide to replace aging legacy gravity equipment, our handler will be qualified and ready to go.

Understood. Okay, that wraps it up for me and thank you very much.

Thanks for the questions.

Thank you. Our next question comes from the line of [Darren Nefan] with Sidoti & Co. Please proceed with your question.

Thanks for taking my question. I had a question on a non-semi-backlog days declined significantly, and apart from the semi, as well, and it seemed like they were pretty stable before 3Q. Is there any reason for that?

You are speaking, Darren, about the non-semi-backlog?

Yes, for -- yes.

I guess you're imputing that somehow?

Yes, non-semi, I meant orders. They came down to the $30 million range from $17 million, $18 million range.

Got it. Non-semi orders. Yes. Our camera orders were relatively flat quarter to quarter. And our microwave equipment orders were down in the fourth quarter. That's somewhat of a lumpy business given the contract nature of that business, where the timing of receipt of large contract orders will have an effect quarter-over-quarter. And we had some orders for microwave equipment that were delayed, from the fourth quarter, and moved into 2012. That's really the story there.

Okay. And, on the expense side, if I go back to '08 time frame, your OpEx, you brought it down to $16 million, $17 million on a quarterly basis.

Yes.

Now, you're looking at $18 million for 1Q. I'm just wondering, with the amount of cuts that you have done, already getting close to $18 million already, are you expecting a tough, long slog here or are you just being more proactive in doing things?

We've taken some actions, but not the extreme actions we took during the extreme downturn of 2009. Our view is that it's more likely that business is going to improve than drop off into a valley like it did throughout the industry in 2009. So we've taken some steps, but not to the extent we did back then.

And [Jayrol], I would also add that back in 2008, when you referenced those dates, that was prior to the Rasco acquisition, so.

Okay. Rasco.

Yes.

When you talk just on the order front in 1Q, are you seeing the decline in 4Q as for there's some improvement that you are seeing in 1Q, are you seeing it across products or is it more in high-speed or parallel gravity?

It is across all products. And the common theme across the applications, which are -- of course are packaged applications that tend to dictate whether the preferred handling system is gravity or pick-and-place. The common theme is automotive and consumer related.

That's where the strength is on the improvement?

Yes. And we are seeing that favorably impacting pick-and-place across the board, our high-speed pick-and-place, and gravity as well, gravity equipment as well.

Okay. Sounds good; that's all I had. Thank you.

Mr. Donahue, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you for joining us today and we look forward to speaking to you again when we report results for Cohu's first quarter 2012. Thank you and good day.

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