Cohu Inc (COHU) 2014 Q1 法說會逐字稿

Greetings and welcome to the Cohu Inc. first-quarter 2014 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James A. Donahue, Chairman and CEO of Cohu Inc. Thank you, Mr. Donahue, you may begin.

Good afternoon everyone and thanks for joining us on today's call. With me today is our Chief Financial Officer, Jeff Jones. If you need a copy of our press release you may obtain one from our website, cohu.com, or by contacting Cohu Investor Relations at 858-848-8106.

I will provide an overview of Cohu's results for the first quarter, discuss orders and key activities. Jeff will take us through the financial statements and we will conclude with comments on the business outlook, then we will take your questions. But first, Jeff has some opening remarks regarding forward-looking statements.

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, future operations, 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 30, 2014, and the company assumes no obligation to update these comments.

Certain matters discussed on this conference call, including statements regarding expectations of business conditions and -- business and market conditions, orders, sales revenues 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 risks associated with acquisitions, 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 on 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 on 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. In our last conference call, we commented that orders increased as 2013 fourth quarter developed. That trend continued as business improved further during the first quarter. Demand was broad-based across market segments for all our product families, pick-and-place, gravity, turret. First quarter sales increased to $68.4 million compared to $64.7 million in the fourth quarter and we are ahead of our guidance.

I am pleased to report in return to profitability with non-GAAP net income of 2 cents per share compared to a loss of 10 cents in the fourth quarter. Financial results in the first quarter reflect favorable product mix, initial benefits from the transition of pick-and-place handler manufacturing to Asia that we previously discussed and lower operating expense. Orders increased 7% to $81.6 million following a 33% increased in the fourth quarter. Semiconductor equipment orders were $74.3 million compared to $68.3 million in the fourth quarter.

And as you may recall, Q4 included a large order for thermal subsystems to meet customer requirements for several quarters. Handler utilization reached 82% in March, 4-points higher than the previous quarter and indicating continued ramp in semiconductor production volumes. Some customers notably in the computing segment are still operating at lower utilization levels. Overall, systems represented 58% and recurring business comprised 42% of semiconductor equipment orders.

First quarter orders demonstrate the advantages of our broad product line and diversified customer-based. While our pick-and-place and gravity handlers benefited from continued strong demand in the automotive and industrial segment, turret business was driven largely by the consumer, mobility, and discreet markets, and as the quarter ended, by increased demand from LED customers. The automotive IC sector is clearly in a ramp and this is good news as our MATRiX pick-and-place handler is a leader in this market.

Two key factors are responsible for growth in the automotive IC market. First, increased IC content for vehicle driven by power powertrain, chassis, safety, infotainment, and Advanced Driver Assist Systems. Second, the migration of these capabilities and features from the high-end of the market to lower-price vehicles at a much faster pace than in the past. We think this down market trend is the result of competition and Government-Mandated Safety and Fuel-Efficiency Standard.

Signaling improved business conditions and confidence, customers pulled in follow on orders for thermal subsystems and assembly automation modules which were not expected until later this year. So as you can see, there are multiple drivers for our business which mitigates the risks inherent with dependence on limited market segments or customers during downturns and provide increased opportunities during upcycles.

In the first quarter, demand was strong for all of our product families. The investments we've made last year to support customer evaluations of our new products during what was the soft period in the industry are paying off as customers placed volume production orders. Now Jeff will provide details on financial results.

In Q1 we recorded approximately $1.5 million of stock-based compensation expense, $2.1 million of purchased intangible amortization expense and $850, 000 of restructuring cost related to our manufacturing transition and severance. The following comments are based on our non-GAAP results which exclude the impact of these items. Gross margin was 37.3% increasing 520 basis points from Q4 and benefited from favorable product mix, lower rework and scrap cost associated with the initial production of certain new products and the initial benefits from the transition of manufacturing to Asia.

Transfer of supply chain management and volume manufacturing to Asia is on plan. We are now 100% building and shipping the assembly automation tool from our Philippines factory. Our Malaysia plant ramps production of the new NY20 handler in Q1 and is finalizing the first pick-and-place systems which will be in volume production in the second half of this year. Gross margin in Q2 is expected to be about the same as Q1.

Operating expense was $24.5 million in Q1 and higher than forecast due to increased engineering cost to support the high-level of [quota] in customer-specific equipment configurations as well as higher commissions for the new sales mix. The operating expense in Q2 is expected to be approximately $23.5 million, down from Q1 primarily due to product development programs that are near in completion.

We expect to incur approximately $500,000, a restructuring cost related to severance in our manufacturing transition that is excluded from our Q2 [of best] estimate. We expect the pick-and-place manufacturing transitional be largely complete by the end of fQ2 and restructuring cost will be 100,000 or less per quarter in the second half of the year.

There was a minor Q1 GAAP income tax benefit as the provision on earnings in Asia was offset by a tax benefit on losses in other foreign locations. We expect our 2014 effective tax rate will be approximately 15%. The Q1 non-GAAP EPS, which excludes the after-tax impact of share-based compensation, amortization of intangibles, manufacturing transition and employee severance costs was 2 cents.

Moving to the balance sheet, cash and investments were $41.1 million at March, down $11.8 million from December driven by the production ramp and the resulting increased in accounts receivable and inventory. Cash used in operations in Q1 was approximately $9 million. Net accounts receivable increased by approximately $6.2 million to $67 million at March as a result of higher sequential shipments from our semiconductor equipment group.

DSO at March 87 and essentially unchanged from December. Inventory was $62.5 million at March, increasing $3.5 million from December in support of ramping production and increasing shipments in Q2. Additions to property, plant and equipment in Q1 were approximately 700,000. Depreciation for the first quarter was approximately $1.4 million. Deferred profit at March was $6.3 million increasing 330,000 from December. The related deferred revenue at the end of Q1 was $9 million compared to $7.4 million at December and consists primarily of revenue deferrals on shipments of test handlers.

Now commenting briefly on our other businesses, sales of video cameras were below plan due to customer order delays. This business operated profitably during the quarter as a result of improved product mix and ongoing product cost reduction initiatives. We expect most of the late orders to be booked and shipped during the second quarter. Our mobile microwave data length business was also impacted by customer order delays but there are clear indications that conditions in the government surveillance from law enforcement markets are improving after those segments were essentially frozen last year due to budget uncertainties and spending cuts. We expect improved results at BMS in Q2.

Thanks Jeff, now providing further information on our semiconductor equipment business. New products accounted for 63% of unit orders in the first quarter and I like to provide additional information on each of these systems. In the last 12 months, we've introduced two new gravity feed handlers developed by our Rasco team. Saturn is a hybrid system that combines the simplicity in high productivity of gravity input and output with the reliability in high-speed of pick-and-place technology at the test site.

This tri-temperature handler delivers unparallel speed to lower cost of test at cold and hot temperatures for small to medium sized devices, primarily power management and microcontroller ICs for the automotive and consumer markets. Jupiter is a derivative system from large devices such as power management ICs used for industrial applications. Shortly after the Ismeca acquisition, we released a new turret platform in NY20. This system has multiple configurations from testing small ICs to use in the mobility and discreet markets to LEDs at high (inaudible) rates to vision inspection of delicate devices.

The NY20 sets a new benchmark for productivity with autonomous features that reduced the number of operators required at a customers' production facility. The NY20 accounted for 75% of turret orders in the first quarter. Delta design brought four new products to market in the last year. First, the material handling system called [links] that automates [tray] handling in semiconductor assembly lines.

We also launched the new configuration of our T-Core subsystem that uses our proprietary active thermal control technology to optimize test yield of application processors in the mobility market. And leveraging our broad technology and IT portfolio that was developed initially for high-power microprocessors, we brought innovative solutions to the fast growing mobile market.

We are now launching a new version of our successful tri-temp MATRiX handler, increasing the scalability of a system that is already considered a benchmark for pick-and-place cold testing of automotive and industrial ICs. Along with MATRiX, we're in the early deployment phase with our new Eclipse handler. A cost effective ambient hot solution for testing products for the consumer in mobility markets.

Both handlers have a [sweep] of options that includes our most advanced T-Core thermal control solution, enabling testing a process or using in communication, computing, graphics and mobility. With seven new products launching and ramping in the last year, Cohu is uniquely positioned to capitalize on evolving customer requirements to optimize yield and reduce cost of test.

Our strong orders in the last two quarters are evidence of the competitive advantage and strength of these new products and we expect further share gains as we continue to execute on our strategy to realize cross selling synergies in the coming quarters. Now looking at the current business environment, orders for back-end semiconductor equipment have increased each month since last November and March orders were at the highest level since last July.

This improvement is consistent with the trend we are seeing in our business and with comments from certain other back-end semiconductor equipment companies. The order momentum that we've seen all year continued into April and we're off to a great start in the second quarter. We are benefiting from the upturned in business and also from the success of our new products.

Current customers are transitioning to our new platforms and we are displacing competitors due to strong product performance, the advanced capabilities of our new systems and cross selling synergies that are being generated across our product portfolio. We've ramped production to support the strong orders received during the last two quarters in each of our three-handler businesses. An unusually high percentage of second quarter shipments are new products and revenue recognition will be deferred until the equipment completes customary acceptance processes which are only partly under our control.

It's always difficult to predict the précised timing of customer acceptance and with so many variables in play, it's really challenging to forecast sales this quarter. Our current estimate is that second quarter sales will be between $72 and $80 million. That concludes our prepared remarks and now we'll be happy to take your questions.

Thank you. Ladies and gentlemen, we will now be conduction a question and answer session. (Operator Instructions). If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you need to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset prior to pressing the star queue. Once again ladies and gentlemen, star one on your telephone keypad if you would like to ask a question. Your first question comes from Jairam Nathan with Sidoti & Company, plese proceed with your question.

Hi, thanks for taking my question. My first -- you mentioned that a lot of the orders are coming from new products, now do you see any significant gross margin changes as you launch new products in a sense you would have -- would have [been] cost efficiencies (inaudible)?

Hey Jairam, yes, I mean we planned for a lower gross margin on the initial production of our new units. We also expect that the margin will improve as we work through the initial production runs, stabilize, you know, the supply chain and produce the systems and volume. So, some of the -- some of the new products that shipped Q2 will be recognized in Q2 and have been considered in our Q2 gross margin estimate [job].

As you know, the gross margin depending on a number of different variables including volume and mix, some makes it difficult to predict but we don't anticipate a significant negative impact on future gross margin from the revenue or profit referrals of the new product shipments in Q2.

OK and with respect to revenue recognition, does the variability, the range you provided for Q2, is that -- would you hit the higher [end] if there are no -- if all of the units are accepted or how should we think about the range then?

Yes, that's a fair way to look at it. I mean there's other -- there's other variables in play but I think that's fair way to look at it.

OK and last question on the operating expense, I know it was a little higher than we thought it would be, how should we think about effects on a kind of [city state] once you finish all the restructuring actions?

Yes, on a non-GAAP basis Jairam, we were projecting that off that second half of the year is going to be about 23 million per quarter. We've got development programs, other cost reduction actions that are taking place that will pick the number from where it is down to about $23 million for quarter, second half of the year. The restructuring charges again at estimating $500,000 for Q2, expect that to be down, $100,000 or less, the second half of the year Q3 and Q4.

OK, thanks, that's all I have.

Once again ladies and gentlemen if you would like to ask a question, star one on your telephone keypad. Your next question comes from Dick Ryan with Sidoti & Company, please proceed with your question.

Sure, thank you. Hey, Jim, I missed your comments on the LED activity, can you kind of recap that?

Yes, what we said Dick was that we had broad-based diversified strength across all our products line and market segments and that the LED demand in particular started to develop towards the end of the first quarter.

OK, that new customer [wins] or existing customers?

I think it was -- well it was principally existing customers.

OK and how should we look at the backlog flowing, I mean I think last quarter you talked about the thermal subsystems kind of impacting the backlog flow, how should we look at that now?

Well most of our business is not like that. We're -- the thermal subsystem business is unique and that the integrator in place is a bulk order intended to satisfy several quarters of system built on his part. So, that's really the only type of business where we have revenue stretching up several quarters. Most other customers want their equipment as fast as they can get it and that certainly the case here in this, what appears to be, ramp, fairly what appears to be a ramping type environment.

So, the variable that exist is the one we mentioned and that's the heavy mix of new products, that will result in deferred revenue in some instances and right now with so many new products in play, there's a quite wide range of variability and what revenue will be recognizable in the second quarter due to the customer acceptance process which is only partly under our control. Certainly, we support it and do everything that we can to make that a timely process but the customer has its own cadence as well. So, really that's why we provided this, what for us, is a relatively wide range of guidance, revenue guidance [showing up] in two days.

With the good momentum, you said starting the second quarter and utilization rates taking up, is there any -- do you have any sense of how the third quarter could shape up, any early conversations there with some of your customers?

Well, in this business -- in this business, about one quarter visibility is all the reliable visibility that you get but there's -- there's no one talking down this, none of our customers are talking down the second half of the year.

OK. Great, I'll get back with you. Thank you.

Thank you. Ladies and gentlemen, once again star one on your telephone keypad if you would like to ask a question. Gentlemen, there are no further questions in the queue at this time.

Well, I would like to thank you for joining us on today's call today. And we look forward to speaking to you when we report Cohu's second-quarter results. 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 all for your participation.