Cohu Inc (COHU) 2014 Q4 法說會逐字稿

Greetings and welcome to the Cohu fourth-quarter and full-year 2014 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, Jeff Jones, Chief Financial Officer for Cohu. Thank you, Mr. Jones. You may begin.

Thank you. Good afternoon and welcome to our discussion of Cohu's most recent financial results. I'm joined today by our President and CEO, Luis Muller.

Following our opening remarks, I will provide details of our performance for the fourth-quarter and full-year 2014 as well as our outlook for the first quarter of this year. If you need a copy of our earnings release, you may obtain one from our website, Cohu.com, or by contacting Cohu investor relations.

But before we get started, I must remind you that 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, February 19, 2015, and the Company assumes no obligation to update these comments.

We encourage you to review the forward-looking statements section of the earnings release as well as 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 these statements as a result of developments occurring after this call. Further, our comments and responses to any questions will not make reference to any specific customers, as we are precluded from disclosing such information from our nondisclosure agreements.

And now I will turn it over to Luis.

Thanks, Jeff. And good afternoon, everyone. This was another great quarter for Cohu, with near-record sales of $96.2 million, above our initial estimate and guidance of $80 million to $85 million. We closed the quarter with several multiunit customer acceptances for the new MATRiX and NY20 handlers that we originally expected would not happen until Q1. The early acceptances, while good news, shifted significant revenue from Q1 into Q4.

In Q4 we had a design win for a MATRiX tri-temperature handler testing power management ICs; received a repeat multiunit order for our new gravity handlers, testing MEMS sensors used in automotive applications; and captured two new customers for turret handlers, growing our penetration in the analog IC market and increasing our cross-selling synergy scorecard. Before Jeff provides details of our financial results, I want to recap our progress in 2014 and discuss our outlook and strategy going into 2015.

A strong handler market in 2014 that we believe grew 17% year on year to $850 million, combined with our estimated 5 point-plus share gain and OpEx reductions, led to Cohu's significant improvement in financial performance. Sales were up 44% to $333.3 million, an all-time record. And non-GAAP operating income improved by approximately $52 million from 2013.

Our semiconductor equipment businesses reported a sales increase of 48%, validating our strategy to capitalize on cross-selling synergies and gain share with new products in growing markets. Since the acquisition of Ismeca, we have been focused on opportunities to cross-sell our products at existing customers. And in 2014 we delivered nearly $25 million of incremental sales. This strategy has particularly benefited sales of our turret handlers, as Ismeca accessed the larger network of customers from Cohu and a strong global sales and service and support infrastructure.

Additional share gain came from a stream of new products introduced over the last 18 months. We delivered a new generation of our MATRiX pick-and-place handler tailored for automotive IC tests. This system is particularly compelling, as it uniquely addresses temperature management at cold, enabling customers to optimize operational efficiencies.

At the beginning of 2014, we announced a key design win for our new Saturn gravity handler at Elmos that was selected to test next-generation QSN products. During the year we captured two additional strategic customers for testing automotive and industrial ICs, propelling us to a market-leading position with an estimated 40% share in the gravity segment.

At SEMICON West in July, we introduced our new strip handler, focused on delicate bare die and ceramic substrates. In the second half of the year, we completed delivery of the first system for in-process testing of multi-stack memory devices and captured a key design win at a large European-based automotive IDM that placed multiunit orders for this new system.

And third, our new NY20 platform has gained widespread acceptance during its rollout year, shipping over 107 units and benefiting from growth in testing near-field communication devices in consumer and mobile markets. We also had several design wins for our NX32 turret handler, testing wafer-level CFCs, QSNs, and LEDs on film frame media. With these products we captured a top-tier Korean LED manufacturer in the second quarter.

Last year marked the beginning of a disruptive change in thermal requirements for testing application processors, and we made volume shipments of our T-Core thermal subsystem. T-Core actively manages the dynamics of power dissipation during final and system-level tests of processors used in smartphones and tablets. This is a growing requirement as customers develop greater processor capabilities on smaller silicon nodes. We estimate that our solution is currently only being used in testing about 14% of smartphones and tablet processors in the market, so there is significant upside.

Our most recently announced new handler, the Eclipse, features the same T-Core technology for optimizing test yield and speed rating of high-end mobile processors. We received an initial multiunit order for Eclipse from a top Korean OSAT, with deliveries starting in late Q1.

2014 was also a year of expanding our manufacturing capability in Asia. In the first half we started building our assembly automation module in the Philippines and ramped production of the new turret handler in Malaysia.

In the second half we focused on transferring the new MATRiX tri-temperature handler manufacturing to Malaysia, a task completed in December. We are now able to ship over 50% of our system sales from Asia compared to about 25% a year ago.

The next step in this process is the transition of gravity handler manufacturing. We expect to ship the first system from Asia by midyear and ramp capacity in the second half, just before completion of a new, consolidated facility in Melaka that will house manufacturing of all our volume handlers.

Now on to my last topic: entering 2015, fundamentals are strong across the major end markets. According to IC Insights, semiconductor unit sales grew about 8% in 2014 and continues to pick up momentum with the projected 11% unit growth for 2015. Automotive and industrial that represented 45% of our system sales in 2014 are expected to remain healthy.

IC content per vehicle is increasing, driven by improvements in powertrain, safety, and infotainment. Advanced driver assist systems are leading to the proliferation of sensors and high-end processors in future cars. These present thermal challenges at test -- similar to what we were seeing with application processors -- and present a great opportunity for us.

In industrial semiconductor we are not projecting the same strong start of the year as in 2014. But this market still has some tailwind, with positive GDP projections at all major economies worldwide.

Mobility, that was 30% of our system sales last year, continues to offer the greatest near-term opportunity for growth. Early in January we received a follow-on $17.8 million order for T-Core thermal subsystems, testing mobile processors for a market leader. We expect additional demand for T-Core-based products during the year as next-generation phones and tablets are launched.

Computing and memory were at 20% of our system sales in 2014. The proliferation of mobile devices is driving the need for additional cloud services and communications infrastructure. We are an established leader for testing high-end processors that are used at all major servers and data centers.

In memory, we offer solutions to test multi-stack memory devices. Although a small portion of our sales today, we are in discussions with several major memory manufacturers. While the solid-state lighting industry awaits that inflection point that will drive rapid expansion of LEDs for general lighting, we expect moderate growth in the market with the continued expansion of mid- and high-power LEDs in cars and mobile Flash applications.

Our strategy going into 2015 remains centered on the four pillars we previously discussed. First, to maximize sales synergies across our product lines. We have done very well on this goal, delivering substantial growth year on year. Going forward, we plan to leverage our leading handler market share position to expand sales of our recurring products, such as test contactors.

Second: expand share in mobility and LED markets. We have much more to accomplish in both these segments, and the recent introduction of the new Eclipse pick-and-place handler is the next logical step towards capturing additional customers. Third: lower product cost structuring with the transition of manufacturing to Asia. I already described what we have accomplished in 2014 and plans for this year.

Fourth, we will continue executing to a strict financial discipline, selectively developing products that address key customer challenges in growing markets where we can differentiate through innovation. Acquisitions will continue to be an important part of our strategy, and we regularly review opportunities to expand our served market.

Let me now turn it over to Jeff for further details on our financial results and Q1 guidance.

Okay. Thank you, Luis. I'll start with key highlights from 2014 and then go into financial details of the fourth quarter and, lastly, provide the Q1 outlook.

Sales in 2014 were $333.3 million, driven by 48% growth year over year in our semiconductor equipment business, establishing a new record. Our growth was 100% organic and outpaced the test handler market as we continued to gain share with our new products and sales synergies from the Ismeca acquisition.

Non-GAAP gross margin for 2014 was approximately 36%, improving by 500 basis points year-over-year due to higher volume, product mix, and the initial benefits of expanding our manufacturing in Asia. And despite the significant increase in shipments and customer activity, we reduced non-GAAP operating expenses sequentially by approximately 2% net of foreign currency gains with the completion of key development programs and disciplined cost control.

In 2014 we delivered non-GAAP EPS of $1.02 versus a loss of $0.78 in 2013. Orders for 2014 were also at record levels, driven by strength in the automotive and mobility markets. We differentiate our products in these markets by delivering handlers capable of thermally conditioning ICs at cryogenic temperatures and providing or proprietary active thermal control technology for optimizing test yields of power-dissipative ICs, including advanced mobile processors.

Now, looking at Q4, our semiconductor equipment orders were $56 million, down 32% sequentially as customers digest the significant capacity additions from recent quarters and a large customer order that was delayed into early Q1. System orders were at 42% and recurring 58% of the total. As we've discussed in the past, we see a seasonal trend to the order demand for certain markets, such as automotive and industrial ICs, that slowdown during the winter months.

Equipment utilization remains in the 80% range, and orders started strong in 2015. Semis reported Q4 backend equipment orders are down 58% from peak in June, mirroring the same seasonal pattern we have seen.

Before I move into the Q4 results, I will comment on our GAAP to non-GAAP adjustments, which in Q4 included approximately $1.8 million of stock-based compensation expense; $1.9 million of purchased intangible amortization expense; $700,000 of restructuring costs; and $5 million for the impairment of goodwill and other assets at BMS, which was triggered by a market analysis indicating the carrying value of that business exceeded its current market value.

My comments are based on our non-GAAP results, which exclude the impact of these items. But a reconciliation of non-GAAP measures to the equivalent GAAP measures can be found in our earnings release, located on the investors section of Cohu's website.

Additionally, in Q2 of 2014 we announced the completion of the sale of substantially all the assets for our video camera segment, Cohu Electronics. And consequently 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 from continuing operations.

Now moving into Q4, it was another solid quarter of execution at Cohu. Our semiconductor equipment business had stronger-than-expected results, and our mobile microwave data link business met their plan. Fourth-quarter sales were $96.2 million, up 2% sequentially and higher than our guidance of $80 million to $85 million. Semiconductor equipment sales of $90.6 million were ahead of plan, due in large part to customer acceptances of new products that were received earlier than expected, particularly for our new NY20 turret handler and the MATRiX tri-temperature pick-and-place handler.

In Q4 we had one customer representing 10% or more of sales. And for the full year we had one customer in the computing market representing 10% or more of 2014 sales. And we had two other customers which fell slightly below the 10% threshold for 2014 that are in the automotive and mobility markets.

Q4 gross margin was 34.4% and in line with our estimate. Q4 included a high percentage of revenue from the initial shipments of our new pick-and-place handler, which had a higher than normal cost basis due to the production and supply chain startup process. As we move into volume production in Q1 and beyond, the cost of this handler will improve to operating plan level.

Operating expense was $21.7 million in Q4 and lower than our forecast, due primarily to a $900,000 foreign-exchange gain as the US dollar strengthened against the euro and the Swiss franc during the fourth quarter. We also had lower product development costs as the timing of expenditures on certain projects moved from Q4 to Q1, and lower sales commissions in the quarter due to customer mix.

The effective tax rate on income from continuing operations for Q4 was 35.5%, and higher than projected because of the impairment loss of $5 million of BMS is not benefited for tax purposes. For 2015 we are modeling a 20% tax rate. Q4 non-GAAP EPS was $0.39.

Now, moving to the balance sheet, cash and investments increased quarter over quarter by $10.3 million to $72 million at year end. Cash provided from operations in Q4 was $15.2 million.

Net accounts receivable decreased approximately $12.9 million to $73.6 million at December as a result of lower sequential shipments from our semiconductor equipment group. DSO at year-end was 78, and that's unchanged from Q3. Inventory was $55.5 million at December; that's a decrease of $4.6 million quarter over quarter. Inventory days at December were 82. That's down from 96 at September.

Additions to property, plant, and equipment in Q4 were approximately $400,000. And depreciation for the fourth quarter was approximately $1.4 million.

Deferred profit at December was $7.4 million, decreasing $3.8 million sequentially. And the related deferred revenue at the end of Q4 was $11.2 million compared to $22 million at September 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 April 17, 2015 to shareholders of record on March 3, 2015. And now, moving to our guidance for Q1, we expect sales of approximately $63 million. Q1 gross margin is expected to be approximately 32% and lower quarter over quarter, mainly due to low sales volume and product mix.

Operating expenses for Q1 are expected to be approximately $23 million, up sequentially due to the turnaround of the Q4 foreign currency gain into a one-time $1 million foreign currency loss in Q1 as a result of the sudden and sharp appreciation of the Swiss franc in January. Additionally, we expect to incur approximately $250,000 in restructuring costs in Q1 associated with completing the downsizing of our BMS operation in Germany and initiating the manufacturing transition of gravity feed handlers to Asia.

That concludes our prepared remarks. And now we will take questions.

(Operator Instructions) Brett Piira with B. Riley & Company.

Maybe if I start out on the target model timing, when can we start thinking about gross margins getting more in line with that? Is it when we get 100% of the systems from Asia, or is it somewhere in between where we are with the 50% in full on the way?

As you know, Brett, that achieving the model is contingent on revenue levels. In 2015 we do expect to achieve our profitability levels in our model, which reflects quarterly sales -- $90 million plus -- and the margins of profitability in that model without completing the balance of the manufacturing transition.

Okay, that's helpful. And then maybe -- you touched on it briefly, on the new Jaguar in the strip testing; you had a key design win. Can you just talk a little bit more in detail how you see that market evolving, and what your expectations are?

Yes, we had -- I mentioned a key design win at an automotive IDM with production facilities in Asia, obviously. We expect to see continuation of growth opportunities for that product line. I can't get into specific details of customers or volumes but it's -- like I said, it was a key win we had in the second half of last year, and -- additional shipments planned for it.

All right, thanks.

Jairam Nathan with Sidoti & Company.

Just a couple on the $18 million T-Core order. Now, is that -- when does that get into revenue? Or when is delivery scheduled?

We start shipping that product in the beginning of Q2.

Okay. And you also mentioned -- I think Jeff mentioned that there was one other order which was shifted from 4Q to 1Q. Is that the -- are we talking about a T-Core, or was that some other product, too?

That was the same order, referring to the same order.

Okay. And as far as gross margins, did it come a little below your own expectations for the fourth quarter? And if so, what was behind that?

No, Jairam; actually, we expected Q4 margins to be approximately 34%. That was our estimate on our last call. And it was due to the shipments of the new pick-and-place handler that had the initial higher costs due to production startup that I mentioned.

Okay. And lastly, you mentioned that 14% -- Luis mentioned 14% of the apps' processors are currently tested using T-Core. Is there a way to quantify the test yield difference between the chips tested under your system and otherwise?

Yes. There is definitely a measurable advantage by testing using the T-Core technology, so that you optimize yield and also speed grading of the processors. That information, as you can imagine, is highly proprietary to our customer and not something that we are privy to share anything.

Okay. I will get back in the queue.

David Duley with Steelhead Securities.

You mentioned some things about unit volume growth. I think you mentioned 8% this year and 11% in 2015. If the units grow at 11% in 2015, is that a fair guess to estimate what the handler market will do?

Yes, that's a great question. As you know, we personally have very limited visibility and information on the handler market ahead of one quarter. We typically build up our bottoms-up forecast. We do that every quarter.

And we have these reference data points from external market forecast firms. I think you can reach that conclusion. I mean, we -- honestly, we do, like I said, build up our quarter-by-quarter on a bottoms-up basis. Nevertheless, I do have to say I'm fairly confident going into next year, with end markets being healthy, as I mentioned here in my remarks.

But generally, there's a high correlation between unit volume growth and handler purchases for that. So I'm not asking you to make a forecast. I'm just trying to understand: if the market does go anywhere in that range, is that a good guess for what the handler market will do?

Yes, you are correct. There's a very good correlation between IC unit volume growth and handler market growth. That is correct.

And could you talk about -- you mentioned the size of the market. Could you talk about your market share in perhaps each of the main pieces in 2014?

So I did mention the market ended the year at approximately $850 million, according to our estimates. That's an all-inclusive market. We -- as you know, we are a key participant in the non-memory portion of the market. And we view our market share at about 40% on the non-memory portion of the handler market. I don't have data handy here to break that further down into the different subsegments.

Okay. And you mentioned something about some revenue being pulled in from the first quarter into the fourth quarter. And I guess the implications of that statement is Q4 was better than you would have expected, and Q1 will be a little bit worse than you would have expected because of that event. But the normal seasonality between Q4 and Q1 for Cohu, on average, is what, approximately?

This is Jeff. So just looking back over history here, we do see a decline generally from Q4 into Q1. I don't see a real, I guess, pattern as to a consistent percentage. But there's definitely a trend of lower sales volume in Q1 as opposed to Q4.

If you take 2011 onwards, the market has become substantially more driven by mobile, mobility products, automotive products, and then you start seeing that trend that Jeff just described.

Okay, thank you very much.

(Operator Instructions) Dick Ryan with Dougherty & Company.

Great, thanks. Luis, you've talked in the past about the split of business -- CapEx versus recurring. And I think you briefly mentioned one of the areas in the consumables part, the contactors. Can you give us a little more color on what you are thinking as far as that split, and what you can do to maybe gain share into the consumables side?

Sure. Our contactor business is actually fairly small today. But the theory here is, with the 40% share in our non-memory handler market -- and the fact is every handler we ship, ship with contactors for testing semiconductor devices -- that we do have an opportunity, and more so in certain applications than others, actually, to differentiate and capture a portion of that revenue and essentially grow our business, penetrating some into the contactor revenue stream.

And that contractor market is sizable. I think we have it somewhere -- $600 million to $700 million. So we think there's good opportunity there for us.

Okay, thank you. And Jeff, the pull into Q4 -- if you excluded that, where would you have landed in your guidance, $80 million to $85 million? Would you have split the goalpost there at the higher end or lower end?

Yes, the higher end, Dick. The higher end for sure.

And did you say you would be able to hit your target margin at the 90% target model this year without increasing the component coming out of Asia to 100%?

That's correct.

Okay. Great, thank you.

There appear to be no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Okay. Thank you for joining us on this call today. We look forward to speaking to you next time, when we report our first-quarter 2015 results. Thank you and good day.