Cohu Inc (COHU) 2014 Q2 法說會逐字稿

Greetings and welcome to the Cohu, Inc. second quarter 2014 earnings conference. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. James Donahue, Chairman and Chief Executive Officer for Cohu, Inc. Thank you, you may begin.

Good afternoon and welcome to this conference call that covers Cohu's results for the second quarter of fiscal 2014. 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 second quarter, discuss orders and key activities, and Jeff will take us through the financial statements and I will conclude with comments on the business outlook. Finally, we will take your questions.

Jeff?

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, July 30, 2014, and the Company assumes no obligation to update these comments.

Certain matters discussed on this conference call including statements regarding the transition of manufacturing to Malaysia, expectations of business conditions 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, 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 U.S. 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 non-disclosure agreement.

Thank you, Jeff. Sales in the second quarter increased to $77.9 million and we are at the very top end of our guidance of $70 million to $78 million as our semiconductor equipment group had a stronger than anticipated quarter.

Non-GAAP income was $0.19 per share compared to $0.02 in the first quarter and a loss of $0.06 per share in the year earlier quarter.

Orders increased to $98.5 million. Semiconductor equipment orders were $95.4 million which is a 28% increase compared to the first quarter and an all-time record. Since the fourth quarter of 2013, our semi equipment orders have increased 40%.

Handler utilization gained a couple of points throughout the quarter to 85% as customers continued to ramp production.

Systems represented 64% and recurring comprised 36% of semi equipment orders.

As we have commented before, recurring business is less cyclical and also less volatile than the systems business. We have seen a strengthening in our device kit and contact orders that drove a sequential 10% increase in recurring business.

Cohu's solid performance in the second quarter demonstrates the advantages of our broad product line, diversified customer base, and the multiple market segments that we serve. It is encouraging that even the PC sector appears to be improving as we enter the third quarter.

Each of our three semi equipment business units recorded strong sales and orders in the second quarter. Orders for gravity handlers were the second highest in Rasco's history. Since our acquisition of Rasco, the Company's market share in the gravity handler industry has more than doubled and according to recent market survey data, we are within a few points of becoming the market leader.

Orders at Ismeca, the turret handler market leader that we acquired at the beginning of 2013, were the highest since 2010.

I would like to highlight some of the key orders and drivers behind this strong quarter. The automotive and industrial IC markets continue to be very strong, resulting in repeat volume production orders for our industry leading MATRiX pick-in-place handler and a new win for the Jupiter gravity handler at a major European IDM where we displaced a long-time incumbent supplier.

Multiunit orders for gravity handlers were received from several customers, mainly for analog, industrial power, and also automotive applications. These markets have returned to production volumes not seen since mid-2010.

The new Saturn and Jupiter gravity handlers captured design wins at three customers, replacing incumbent competitors for microcontroller test.

We received a follow on order for Pyramid handlers from a large IDM for testing high performance devices. The test process for these devices requires fast and precise temperature conditioning and benefits from use of our proprietary thermal technology. This is an expansion of the Pyramid handler application and customer base and we expect further growth in future quarters.

Ismeca's new NY20 turret handler platform has gained widespread acceptance. It is the fastest new product introduction and ramp in Ismeca's history. In addition to successfully transitioning current customers, in the second quarter we won business at six new customers. One of these new customers is a tier one LED manufacturer that placed an initial multiunit order for the NY20 and also our NX32W systems. This further validates the technological capability of our turret systems for testing and inspecting devices in the growing mid to high powered LED market.

In the mobility market, we are in volume shipments of our new Fusion HD thermal subsystem that enables accurate temperature control during test of mobile processors.

Additionally, we have been qualified by a key [fab width] customer for testing some of their next generation products using our pick-in-place handlers.

Significant progress was made in our Asia operations in Malaysia and the Philippines with both operations actively contributing to the steep production ramp to meet strong customer demand.

During Q2, the first pick-in-place handlers were shipped from our Malacca operation and that is a key milestone.

Commenting briefly on our other business, our mobile microwave data link business continued to be impacted by customer order delays. We expect that business in the government, surveillance, and law enforcement markets will improve in the second half of the year.

In the second quarter we announced that BMS' German engineering and manufacturing operations would be consolidated into our U.S. operations. We will retain a sales application and service operation in Germany to support European customers. These actions are expected to result in annual savings of $1.5 million when they are completed in Q4.

We previously announced the sale of our video camera business in early June. As a result, financial results for that operation are reported as discontinued operations. Cohu recorded a $4.2 million gain on the sale.

Cohu's Board of Directors approved a quarterly cash dividend of $0.06 per share payable on October 24, 2014 to Shareholders of Record on August 29, 2014.

And now Jeff will provide details on Cohu's financial results.

In Q2 we recorded approximately $1.7 million of stock based compensation expense, $2.1 million of purchased intangible amortization expense, and $850,000 of restructuring costs.

The downsizing of BMS associated with consolidation of the German operation accounted for $600,000 of Q2 restructuring costs with the balance related to the pick-in-place handler manufacturing transitions to Asia.

The following comments are based on our non-GAAP results which exclude the impacts of these items and a reconciliation of non-GAAP measures to equivalent GAAP measures can be found in our earnings release located on the Investor section of our website.

On June 6, 2014 we announced the completion of the sale of substantially all the assets of our video camera segment, Cohu Electronics, and as a result, the operating results of Cohu Electronics have been presented as discontinued operations and all prior period amounts have been reclassified accordingly. Unless otherwise noted, all amounts discussed on this call will be from continuing operations.

In Q2, we had three customers representing 10% or more of sales compared to two customers in Q1.

Gross margin in Q2 was 35.5% and in line with our projection. In Q2, we continued to ramp production of the new NY20 turret handler in our Malaysia plant as well as build and ship 100% of the assembly automation tool from our Philippines factory.

In Q2 we also shipped the first pick-in-place handlers from our Malaysia plant and will ramp production of this new product in Q3.

Order backlog is near record levels and we expect shipments and revenue in Q3 to increase sequentially. Gross margin is expected to be about the same as Q2 as the benefit from higher sales will be offset by the higher initial cost of manufacturing our new handlers.

Product costs are expected to decline as we complete the transition of supply chain management and volume manufacturing to Asia. Near term focus is on ensuring the aggressive ramp and response to our customers' demands for equipment.

Operating expense was $22 million in Q2 and in line with our forecast. Operating expense in Q3 is expected to be approximately $23 million, up from Q2 due to increased engineering cost to support the high level of quotes in customer specific equipment configurations, higher commissions due to sales mix, and the sequential increase in shipments, and the benefit in Q2 from the collection of a previously reserved receivable.

We expect to incur approximately $600,000 of restructuring costs related primarily to the downsizing of BMS that is excluded from our Q3 OpEx estimate. There was a small Q2 GAAP income tax provision on earnings in foreign locations. We expect our 2014 effective tax rate to be approximately 15%.

The Q2 non-GAAP EPS which excludes the after tax impact of share based compensation, amortization of intangibles, manufacturing, transition, and employee severance costs was $0.19.

Moving to the balance sheet, cash and equivalents were $58.2 million at June, increasing $17.1 million from March, driven primarily by the $9.9 million received from the sale of Cohu Electronics and cash provided from operations which was approximately $7.9 million in Q2.

Net accounts receivable increased approximately $5.5 million to $69.6 million at June as a result of higher sequential shipments from our semiconductor equipment group.

DSO at June was 75, down from 87 in March due to strong cash collections throughout the quarter.

Inventory was $61.5 million in June, increasing $2.5 million from March in support of ramping production due to increased shipments expected in Q3. Additions to property, plant and equipment in Q2 were approximately $400,000 and depreciation for the second quarter was approximately $1.4 million.

Deferred profit at June was $8.9 million, increasing $2.6 million from March and a related deferred revenue at the end of Q2 was $15.3 million compared to $9 million in March and consists primarily of revenue deferrals on shipments of test handlers.

Thank you, Jeff. Now looking at the current business environment, industry wide orders for backend semi equipment have increased for eight consecutive months. At Semicon West earlier this month, the tone from customers was upbeat and positive. At the show, we announced our next generation strip handler for in-process test of 3D advanced packages. This system provides precision handling and contacting for delicate bare die devices. We received an initial order for this system that is scheduled to ship in the third quarter.

Wafer level chip-scale packages are becoming an important package technology for certain RF, power, and sensor ICs that are widely used in mobile devices. We expect additional opportunities to develop our handling and inspecting equipment that is well suited to this application.

For the third quarter we expect sales to be between $84 million and $91 million. We continue to benefit from improved business conditions and are gaining share due to sales synergies in the unique combination of capabilities that we bring to the IC test handler industry that include new products in each market segment, the performance advantages of our equipment, the breadth of our product line, key enabling and proprietary technologies, and the largest global sales and service organization in the industry.

That concludes our prepared remarks and we will now take questions, Scott.

Thank you. At this time we will be conducting our question and answer session. (Operator Instructions)

Our first question is coming from the line of Jairam Nathan with Sidoti. Your line is now open. You may proceed with your question,

My first question was regarding the sales (inaudible). It still seems a bit lower than normal compared to the backlog. Are these revenue recognition issues, are they kind of continuing here or is there something else?

We do have a large percentage, Jairam, of new products shipping so there is some deferrals associated with that and Jeff commented on that. The guidance is difficult to predict precisely because the timing of customer acceptance is impossible, frankly, to predict with any accuracy so that is really the only moving piece in the story.

On the gross margin side, with the (inaudible) of the way you handle that business, how should we, what are your gross margin targets now compared to ? you know, we talked about (inaudible) at $19 million kind of thing. Can you kind of abridge that?

Sure, Jairam. In association with our release on the sale of electronics division, we did update our financial model and at $60 million, that is the low end of our model, we've got gross margin at 35%, Jairam. At $75 million, the gross margin grows to 38%. At $90 million per quarter, we've got a gross margin of 41% so that has been updated. That excludes the electronics division impact.

Lastly, just on the OpEx run rate, again excluding the electronics, can you update us on what we should expect as far as $23 million? Is that $22 million, $23 million, is that a pretty good run rate going forward?

Surely for the next quarter or two through the year. Again, on our quarterly financial model we have, we are modeling operating expenses at $85 million to $90 million. We expect to hit about $22.5 million to $23 million so we are right in that range. I would model $23 million for the next two quarters, Q3 and Q4.

My last question is on the BMS business. What is the breakeven level now? What would be the breakeven level once you are done with the restructuring of the German operations?

It would be $19 million to $20 million.

(Operator Instructions) Our next question is coming from the line of Dick Ryan with Dougherty. Your line is now open. You may proceed with your question.

Jeff, with your new modeling it looks like Q3, a little bit lighter than you just kind of gave the breakdown for. Is this primarily due to getting some of these initial products out the door or are there other reasons for that?

That is part of the reason, absolutely. We need to complete the manufacturing transition as well which will take us through the end of the year. We will get through these initial production runs, stabilize supply chain and produce the systems in volume. Those are the reasons.

Jim, you talked about good order activity in the backend, for the eight months of the year so far. Can you give a sense of what this might mean, if you can give us an initial look for the December quarter?

You mean September quarter or do you mean --?

Just seeing if you will give any commentary, what you might think of the December quarter as well.

As you know, this is a short sight, limited visibility, inherently volatile business and that is why we have never provided guidance. I don't think, I don't know of any ? certainly not many backend equipment companies that do that because we just have such limited visibility. I would say equipment utilization increased to the 85% level in Q2. That is a very healthy level historically so we are glad to see that range and I will tell you that third quarter orders are off to a strong start.

Our next question is coming from the line of Kim Donovan with Needham. Your line is now open. You may proceed with your question.

My question is how do you see gross margin trending with the transition with the manufacturing to Malaysia? Do you have any color on that?

Kim, once the manufacturing transition is complete, we should be providing results in line with our financial model that we published and again, at a revenue level of $90 million or more, we are expecting gross margin of approximately 41%, delivering operating income of 15% or higher.

Thank you. At this time there are no further questions. I would like to pass the floor back over to the Management Team for any closing comments.

Thank you for joining us on our call today and we look forward to speaking to you in October when we report Cohu's third quarter 2014 results. Thank you and good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.