Cohu Inc (COHU) 2014 Q3 法說會逐字稿

Greetings and welcome to the Cohu, Inc. third-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

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

Well, good afternoon, everyone, and welcome to this conference call. We'll be covering our third-quarter results. With me today are our Chief Financial Officer, Jeff Jones; and also the President of our Semiconductor Equipment Group -- or as we call it, SEG -- Luis Muller, who, as we previously announced, will be succeeding me as President and CEO of Cohu upon my retirement from that position at the end of this year.

If you need a copy of our press release, you can obtain one from our website, Cohu.com, or by contacting Cohu Investor Relations at 858-848-8106.

I'll provide an overview of Cohu's results for the third quarter and comment on our BMS business, while Luis will discuss orders and key activities at our SEG business. Jeff will then take us through the financial statements, and conclude with our fourth-quarter guidance. And, finally, we'll take your questions.

But before we get started, Jeff will provide comments on our discussion today.

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 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, October 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 Asia, expectations of 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, 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.

Okay, thanks, Jeff. This was an outstanding quarter for Cohu with the highest sales and non-GAAP earnings per share since the fourth quarter of 2010, and continued strong orders in our semiconductor equipment business. These results reflect excellent execution of our strategy to achieve significant sales synergies through the integration of our three handler companies, and also the transition of manufacturing to Asia.

Third-quarter sales were $94.4 million compared to our guidance of $84 million to $91 million. And non-GAAP net income was $0.42 per share compared to $0.19 per share in the second quarter. Orders were $86.7 million.

Our semiconductor equipment business had a stronger-than-expected quarter, while our mobile microwave data-link business continued to be impacted by customer order delays. We expect that BMS's business in the government surveillance and law enforcement markets will improve in the fourth quarter.

Semiconductor equipment sales were a record $91.6 million, and above plan, due in part to customer acceptances of new products that were received earlier than expected, particularly for our new NY20 turret handler that has been the fastest new product ramp in our history. We also secured earlier-than-anticipated acceptance of a Saturn gravity handler at a new customer, and this marks another win against an incumbent competitor.

Semi equipment orders were $82.6 million, and strong across our product portfolio, up 70% from the same quarter last year, and down 13% from our all-time high in Q2. System orders were 55%, and recurring was 45% of the total. We continued to see strengthening in our recurring business, which was up 8% sequentially. Handler utilization remained at 85% through September.

Now, Luis will highlight the key drivers of our semiconductor equipment business in the third quarter, comment on current business conditions, and provide an update on progress against our strategy.

Thanks, Jim, and good afternoon, everyone. Let's start with the automotive and industrial IC markets that continue to drive the majority of our system demand, including repeat volume production orders for our industry-leading MATRiX pick-and -place handler from several customers. Many of these systems shipped from our Asian manufacturing operation, establishing new capability, in line with a strategy that we presented last year to lower costs and increase engineering resources close to our customers.

We also received multi-unit orders for gravity systems, and a new design win for the Saturn handler at a key European IDM. As previously stated, we plan to transfer production of these systems to our Asian manufacturing operations starting in 2015.

Our Rasco business has captured significant market share in gravity in recent years, a trend that we expect will continue. We received an initial multi-million dollar order for Jaguar strip handlers, following a successful qualification for testing high-volume automotive ICs at a large IDM with operations in Asia.

The customers selected the tri-temperature Jaguar because of its demonstrated productivity advantages, displacing an incumbent competitor. As is usually the case at this time of year, the automotive and industrial IC markets are likely to slow down during the winter months.

The fundamentals in these markets remain strong, particularly in automotive, with the adoption of new technologies in vehicles related to safety, infotainment, and fast-growing driver assist technologies that require a myriad of semiconductors. We have tremendous experience in this space, and see opportunities to combine technologies from our handler companies, including our active thermal control, to solve new [dash] challenges.

In the computing market, we saw an improvement during the quarter, with a multi-system order for Pyramid's pick-and-place handlers for testing PC and high-powered data center processors. Our proprietary active thermal control technology is the best solution for optimizing fast yield of power dissipative ICs, including high-end processors used in a range of applications from smartphones to tablets and PCs, to multicore processors used in cloud servers.

Our strategy is to continue developing solutions for the evolving, complex applications in this market that are usable across our various handlers platforms, as well as suitable for subsystem applications in custom high parallel test solutions.

We also received a follow-on, multi-unit order for Pyramid for use in testing high-performance memory devices. As we noted last quarter, a large IDM selected Pyramid for its fast thermal response capability that enables precise temperature control of devices under test. This represents an expansion of Pyramid beyond computing, and we are continuing to evaluate new applications to solve test challenges in advanced memory.

Additionally, we obtained acceptance of our first Jaguar in process test for 3D specced ICs. This Jaguar is being used in the IC assembly process to verify quality at each step in the buildup of memory layers on a multi-stack device. Jaguar was selected because this advanced packaging process requires delicate handling and contacting to avoid damage to exposed copper fillers in silicon structures.

In the consumer and mobility markets, we made volume shipments of our Fusion HD product for system-level test of next-generation mobile processors. This is the same thermal technology that is utilized in our pick-and-place handlers for final tests.

As previously mentioned, our new in NY20 turret platform has gained widespread acceptance during its rollout year, and is benefiting from the growth in testing near-field communication devices that are becoming a standard in smartphones. In addition to successfully transitioning current customers, in the third quarter we captured another cross-selling opportunity with a design win for this turret system at one of our longtime gravity handler customers. The breadth of our product portfolio and global customer support capability provides unique cross-selling opportunities.

In the solid-state lighting market, we received follow-on orders from a large European customer for testing LED and phosphor-converted products. We also made initial handler deliveries of orders placed in the second quarter by a newly acquired, top-tier Korean LED manufacturer. We continue to see gradual capacity additions for testing LEDs going into premium lighting, particularly automotive and Flash, and we are positioning ourselves to be a key player for the broader adoption of LEDs into general lighting.

Switching now to our Asia manufacturing transition, significant progress was made during a record shipping quarter. As previously stated, our strategy is to perform final assembly and test of volume handlers at our plant in Malaysia. Turret platforms are already produced in this facility. And by the end of this year, we will complete the transition of our MATRiX pick-and-place handler.

We delivered some pick-and-place systems in the third quarter, as well as executed on the extraordinary ramp of the new NY20 turret. Next year, we will begin the transfer of volume gravity and other new products we have in the pipeline for 2015.

The Philippines plant was qualified to produce pick-and-place subassemblies, and is now working to qualify production of gravity handler modules in support of our next-year production plans.

Now, looking at the current business environment: industry-wide orders for back-end semiconductor equipment have tightened in recent months; a result, at least in part, of a seasonal pattern in the automotive and industrial markets, and also an understandable need for customers to absorb the significant capacity added this year.

While recent economic news at the macro level appears to be driving a more cautionary tone on near-term CapEx spending at some customers, we believe market fundamentals remain strong. The IC industry today has multiple major end markets that make it less susceptible to the extreme cyclicality of the past. At Cohu, we will continue to benefit from our breadth of products, wide customer base, and the diverse end markets that we serve.

Going forward, our strategy remains intact: maximize sales synergy with the Ismeca acquisition -- this year, so far, we secured over $9 million of incremental product orders from existing customers. Expand share in mobility and LED markets -- we delivered that with our Fusion HD and major new LED customer in the second quarter, with additional gains possible in coming quarters. Lower manufacturing cost structure with the transition of production to Asia; and this is being executed, per plan. And implement strict financial discipline that, in combination with the manufacturing transition to Asia, will enable us to deliver 15% non-GAAP operating income at $90 million a quarter in sales.

This quarter's results demonstrate the progress we are making in achieving this model performance.

Now Jeff will provide details on Cohu's financial results and outlook for the fourth quarter.

Okay. Thanks, Luis. As highlighted during James remarks, Q3 represented another solid quarter of execution at Cohu. Revenue grew sequentially and year-over-year, and we continue to gain market share with our new products and sales synergies from the Ismeca acquisition.

Our gross margin was strong in the quarter, and with the completion of key development programs and disciplined cost controls, we have reduced our OpEx spending nearly 6% through 9 months in 2014 versus the same period last year, despite a 39% increase in sales year-over-year, demonstrating the leverage in our operating model. Non-GAAP operating income in Q3 was 14.6%, and within striking distance of our 15% target.

Now, looking at the results in more detail, in Q3 we recorded approximately $1.6 million of stock-based compensation expense, $2 million of purchased intangible amortization expense, and $700,000 of restructuring costs.

The downsizing of BMS associated with consolidation of the German operation accounted for $500,000 of the Q3 restructuring, with the balance related to the pick-and-place handler manufacturing transition to Asia.

The following comments are based on our non-GAAP results, which exclude the impact 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 the Cohu's website.

In Q2 of this year, 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 are coming from continuing operations.

In Q3, we had two customers representing 10% or more of sales, compared to three customers in Q2. The Q3 customers are in the computing and mobility markets.

Gross margin was 37.1%, and better than our projection, due to higher sales volume and a favorable product mix, including higher revenue from recurring business and the deferral of revenue from the initial shipments of our new pick-and-place handler that has an initial higher cost due to production startup.

First-time shipments of new handlers are subject to customer acceptance prior to recognizing revenue; and customer acceptance is not 100% in our control. However, we are expecting to recognize a significant amount of revenue from the initial shipments of our new pick-and-place handler in Q4; and, to a lesser degree, in Q1 of next year.

As a result of the higher cost of the new handler due to production startup and lower overall sales volume, we expect our Q4 gross margin to be approximately 34%. The transition of our volume pick-and-place handler manufacturing is tracking to plan. And next year we will begin the transfer of volume manufacturing for gravity and other new products scheduled for release in 2015, leading to model profitability in the first half of next year on sales of $90 million per quarter.

Operating expense was $21.3 million in Q3, and lower than our forecast, due primarily to a $1 million foreign exchange gain, as the US dollar strengthened significantly against the euro and the Swiss franc during the quarter. We also had a lower product development cost, as the timing of expenditures on certain projects moved from Q3 to Q4.

Operating expense in Q4 is expected to be approximately $23 million, up sequentially, mainly due to the foreign currency gain in Q3 and higher product development costs. We expect to incur approximately $400,000 of restructuring costs in Q4. These are primarily due to the restructuring associated with the downsizing of our BMS operation in Germany, which will essentially be complete by the end of this year.

The effective tax rate on income from continuing operations for Q3 was 26.5%, and higher than projected because of higher-than-expected profits in Germany. We're modeling a 23% tax rate in Q4, and 20% for 2015.

Q3 non-GAAP EPS -- which excludes the after-tax impact of share-based compensation, amortization of intangibles, manufacturing transition, and employee severance costs -- was $0.42.

Now moving to the balance sheet, cash and investments were $61.7 million at September, increasing $3.5 million from June, driven primarily by cash provided from operations totaling $6 million in Q3.

Net accounts receivable increased by approximately $16.9 million to $86.5 million at September, as a result of higher sequential shipments from our semiconductor equipment group. DSO at September was 78, up slightly from 75 in June.

Inventory was $60.1 million at September, decreasing $1.4 million from June as a result of Q3 shipments. Inventory days at September is 96. That's down from 113 at June. Additions to property, plant, and equipment in Q3 were approximately $100,000. And depreciation for the third quarter was approximately $1.4 million.

Deferred profit at September was $11.2 million, increasing $2.3 million sequentially. The related deferred revenue at the end of Q3 was $22 million compared to $15.3 million at June, and consists primarily of revenue deferrals on shipments of test handlers.

Cohu's Directors approved a quarterly cash dividend of $0.06 per share, payable on January 2, 2015, to shareholders of record on November 21, 2014.

For Q4, we expect sales of $80 million to $85 million. And at the midpoint of this guidance, we'll end 2014 with a 29% year-over-year increase in sales.

And now that concludes our prepared remarks, and we'll now take questions.

(Operator Instructions). Dick Ryan, Dougherty & Company.

Hey, Jeff, just a couple modeling questions. I think you briefly touched on R&D. It's been at a fairly steady decline this year, and from 2013. So it looks like that's going to come back up in Q4, or how should we be modeling that?

That will be up just maybe $300,000 to $400,000 in Q4. And looking at OpEx in total, at about $23 million.

Okay. And looking at the target model -- and obviously that's a little bit further down the road -- the gross margin, I think the target was 40%. You are at 37%. So obviously some of that is the continuing transition to Asia. But what else was in there? Did you say there were some higher costs with first-time shipments? Did I catch that right?

There is. We did recognize a number of the NY20 units that were first-time shipments -- a new product, a new turret handler, in Q3. Also in Q4, we're expecting to recognize revenue from a new pick-and-place handler.

The model itself is achieving that 40% gross margin on $90 million in revenue. And so those were the comments for this quarter, Dick. Yes, we had new handler revenue in Q3, and we will have new pick-and-place handler revenue in Q4 as well.

Okay. And one last one from me, on the order side. Very strong orders last quarter, $98 million; but I think if I recall right, there was a large customer in last quarter. Was there any concentration in this quarter regarding the customer book? Was it concentrated, or is it fairly broad?

Dick, there were no large customers in last quarter's orders, and the same is true for Q3.

Okay, okay.

It has a very broad-based demand.

Great. Thank you, guys. I'll get back in line.

Brett Piira, B. Riley & Co.

Maybe just start out, could you just recap and give us an update of where you are with these Asia transitions, and when we should see the orders picking up? And then a follow-up on being held back by the initial shipments; and so do we really see the benefits -- what is it -- a couple quarters after the transition is actually completed, and shipments are going from there?

So, I'll take a shot at that first part there. So the transition, it's progressing as planned. We do expect to have this pick-and-place transition on the MATRiX unit complete at the end of the year.

As I mentioned in my comments, we're going to have some deferred revenue with some higher costs that largely will be recognized in Q4, but with some of it is going to spill over into Q1 as well. So your comment about working through the first two quarters of 2015 is accurate. We're going to have to work through the deferred revenue so that we get to the point where we are in a position to achieve the model on the quarterly revenue.

Okay, thanks. And then maybe can you help us with geographic mix in the quarter, where you are seeing strengths from -- can you break that out for us?

Well, Brett, most of our equipment ends up installed in Southeast Asia, probably 80%, 85%; just the nature of the semiconductor test process. So, the orders may originate from IDMs located in the US or Europe. But, inevitably, the equipment ends up in Southeast Asia.

Okay. And then maybe one more. You guys did mention quite a few share gains it seems like you've capitalized on. Where do you think the opportunity is best for share gains into 2015? Is that on the gravity side?

I think the opportunity for share gains into the -- going forward, still on the gravity side, as well as the turret handlers. But, nevertheless, we do look for opportunities all around our products. Wherever one product is strong at a particular customer, we'll bring in other systems, too.

All right. Thanks, guys.

(Operator Instructions). David Duley, Steelhead Securities.

I was wondering, [if you] take a shot at suggesting what you think the size of the handler market will be in 2015. I realize it's early, but maybe just help us -- flat, or up or down -- what would be your best handicap at this point?

This is Luis. That's a tough one to answer; taking a shot, one year out, for the size of the market. I would venture here, at just a wild guess, that this is going to be at approximately $800 million to $850 million size for our served available market in handlers, test handlers.

And how does that compare to 2014?

We need to see the data come out to compare that. I don't have it at this point.

So, would your guess be that it's a flat market? I'm sorry, I don't know how to reference that number. So I'm just looking for some guidance here, whether qualitatively you think it's going to be an up or a down handler market next year.

Dave, this is Jim. And I would just echo Luis, very hard to predict. But I think if there is growth next year, it's going to be single-digit growth. I wouldn't expect double-digit growth.

Okay, fair enough. And in the handler revenue that you recognized during the quarter, could you help us understand how it breaks out amongst the three categories of pick-and-place and gravity and turret? And I don't need an exact number, just rough figures.

We don't break it out, for competitive reasons.

Okay. And as you finish 2014, now that you've guided to the quarter -- that is, the last quarter of the year -- what do you think your market share will be in both gravity and pick-and-place?

Well, I have a hard time estimating what the market share is going to be. I can tell you that we're number one in pick-and-place; we're number one in turret; we could be number one in gravity. We're within a couple of points, at the last milepost we looked at several months ago, having more than doubled our share in gravity handlers since the acquisition of Rasco.

So, sort of in a worst-case, I would say we're first, first, and second. And in a best case, we have the number-one market share in all three segments. And on a combined basis, we will be number one overall.

Okay. Final question for me is -- I haven't -- could you just remind me what your typical seasonality is for the fourth quarter? I realize that almost all back-end equipment businesses are down. But for the handler business, what has the average been down for the last four or five years? Or however you would like to characterize it; and how would you characterize the typical seasonality versus against the guidance you just gave us?

Seasonality is more of a market-by-market assessment. You can say, typically, the automotive market will have a slowdown in the fourth quarter. Mobility, industrial, LED -- they all have their own patterns. So it would depend on the strength and our position in each market to be able to give you an answer. It's really difficult when you look across the board, because there's no one answer for all markets.

I would say that it looks like the fourth-quarter pattern is not at all atypical from what we've seen.

Okay, thanks.

Dick Ryan, Dougherty & Company.

Say, Jeff, just a clarification -- the 34% gross margin you said in Q4, was that GAAP our non-GAAP? What was your reference there?

That's non-GAAP, Dick.

Okay, thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

I'd like to thank everyone for joining our call today. And we look forward to speaking with you next time when we report our fourth-quarter and full-year 2014 results. Thanks again, and good day.