Cohu Inc (COHU) 2015 Q1 法說會逐字稿

Greetings, and welcome to the Cohu first-quarter 2015 earnings conference call. At this time, all participants will be 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 Executive Officer for Cohu, Inc. Go ahead, sir. The floor is yours.

Thank you and 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, we will provide details of our performance for the first quarter of 2015, as well as our outlook for the second quarter of this year. Obtaining a copy of our earnings release, you may obtain one from our website, Cohu.com, or by contacting Cohu Investor Relations.

Before we get started, I must remind you that, during the course of this conference call, we will make 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 are 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, 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 by our nondisclosure agreements.

And now I'll turn it over to Luis.

Thanks, Jeff. And good afternoon, everyone.

In Q1, sales were $68.1 million, up 5% year-over-year, and above our guidance of approximately $63 million. Orders increased 52% sequentially to $92.3 million, driven by strong product momentum in the mobility and automotive markets. Semiconductor equipment accounted for 93% of total orders. And the system distribution by key markets in Q1 was consumer and mobility, 51%; automotive and industrial, 30%; computing and memory, 11%; and solid-state lighting, 8%.

Early in January, we received another follow-on order, this time for $17.8 million, for T-Core thermal subsystems that enabled testing of mobile processors for smartphones and tablets. These next-generation devices need advanced thermal control to mitigate overheating during tests. Our products actively manage device temperature, enabling customers to achieve improved yields that maximize speed, grading and value. These subsystems will ship in Q2 and Q3, satisfying demand from a leading company that has grown share in the smartphone market over the last six months.

We also reached an important milestone with acceptance from a top-tier US fabless customer of our new Eclipse stick-in-place handler that incorporates the same T-core technology. This customer outsources device manufacturing, and we made initial shipments of Eclipse to one of its fast subcontractors in Korea during the first quarter.

Additionally, evaluation handlers were installed at three other test subcontractors in Taiwan and Korea that we expect to convert into sales in the coming months. As we mentioned in an earlier quarter, next-generation mobile processors increasingly require active thermal control at test, and we project continued growth in this segment for our T-Core-based products, replacing existing installed base of equipment.

Additionally we received repeat turret handler orders, and continue to see strong demand for testing and inspecting RF devices, like near field communications, filter switches and power amplifiers. These semiconductors play a critical role in connectivity, especially in feature-rich smartphones designed to operate across multiple bands like 2G, 3G and 4G LTE networks, as well as Wi-Fi, Bluetooth and GPS.

The exponential growth in mobile data is driving a sharp increase in RF device content per phone, and consequently increasing test CapEx. We are not only capturing near-term sales opportunities with our handlers, but also developing, in partnership with a leading customer, an innovative new product as an alternative to traditional wafer probing.

This system enables much-needed and sought-after cingulated die and wafer level package testing capabilities that will improve yield and integrate optical die inspection, providing our customers a cost-effective solution and further competitive advantage. This new die prober will give us an entry point into the $450 million wafer test market that we don't currently participate in.

Turning to automotive, we received repeat orders from several customers for our matrix pick-and-place system and also gravity feed handlers. And we won additional business as a result of increasing demand for pressure and magnetic MEMs test units integrated with our handlers; captured a design win for our Jupiter system for testing large power devices; and received repeat orders for a 32-station turret handler from a new customer, a leading Japanese integrated device manufacturer.

We also booked repeat orders for the new Saturn gravity handler from two key European customers. A large automotive customer selected our products for testing next generation radar sensors that operate at near 80 gigahertz frequency. These sensors are part of new active safety systems aimed at reducing traffic fatalities. The higher frequency creates an increasingly interesting challenge at test, and we're playing a key role in this market that links radar signal with adaptive cruise control and collision warning systems.

Also in Q1, we made the first shipment of a new versatile turret handling. The system handles a wider range of devices, integrates our new three-dimensional vision inspection technology based on fast, more interferometry, and provides customers with flexible module configurability options. The new vision technology enables more accurate detection of micro VSAT and makes precise topographical measurements, particularly on bump dies and wafer level packages.

We expect share gains in the estimated $120 million inspection market with this advanced vision system integrated on our more flexible handler platform. The new handler is under evaluation at two leading US headquarter customers, and we have multi-system backlog for shipment in Q2.

In the computing market, device overheating during test is a complex problem, and our proprietary T-Core technology continues to be key to customers achieving target yields. We received repeat orders for our peer mid handler for testing server processors, and we expect to start shipments in Q3.

A European customer in the solid-state lighting market placed a multiunit order for premium configuration test handlers. This customer is a leader in high-power LEDs for automotive applications. This market is still in the very early stage, with only 3% of the 87 million vehicles produced last year having high-power LEDs in headlamps. We see continued momentum towards this technology and expect further orders for LED test handlers in Q2.

In operations, the first gravity handler built in Asia shipped to Germany for quality checks, prior to reaching its final destination at the customer facility. This handler incorporated subassemblies from Asia CM's, and a key module built at our Philippines operation, with final integration and test at our Malaysia facility.

We are ahead of schedule on this manufacturing transition, thanks to our experienced team and established supplier base in Asia. We plan to continue quality check verifications in Germany, incurring some incremental costs, most likely through Q3, as the production process matures in Asia.

Early this year, we formed a new business unit within our semiconductor group, called ITS, Integrated Test Solutions. This group's charter is to profitably grow contractor sales in this less volatile, higher gross margin, $650 million consumables market by leveraging our market leadership position in handlers, global sales and customer support channel, and key technology capabilities to solve the challenges using testing ICs and LEDs. We believe we have an excellent opportunity to expand sales in the segment of the market.

Our handler product line has never been stronger. And I'm optimistic about our growth prospects in wafer level package inspection, die probing and test contacting. Combined, it will expand our total available market from $850 million to about $2 billion, further diversify our product offering, and fuel new opportunities to drive topline revenue and earnings growth.

Let me now turn it over to Jeff for further details on our first-quarter financial results, an update on our progress towards improved gross margins, and Q2 guidance.

Thanks, Luis. Before I move into the Q1 financial details and our Q2 outlook, I'd like to touch on a few highlights from the first quarter.

We were profitable in this seasonally slow period, generating $2.2 million of non-GAAP operating income and $0.03 of EPS. Q1 was our fifth consecutive quarter of non-GAAP profitability. The actions we have taken with respect to manufacturing transition and operating cost reductions are benefiting our operating results.

We also continue to have positive cash flow. In Q1, we generated $4.2 million from operations, and over the last four quarters, we have generated approximately $33 million. Orders were very strong and up 52% sequentially. Our semiconductor equipment orders were $85.4 million and up 53% quarter-over-quarter, driven by strong demand from mobility and automotive customers.

System orders were 62% and recurring 38%. Entering Q2, equipment utilization is approximately 81%, and semi reported back-end equipment orders increased every month in Q1 and are up 92% from the trough in November, but still 23% below the last peak in June of 2014.

Before I move into the Q1 results, I'll comment on our GAAP to non-GAAP adjustments, which include approximately $1.7 million of stock-based compensation expense, $1.8 million of purchased intangible amortization expense, $200,000 of restructuring costs, and $300,000 for the write-down of a long-term asset with a book value that exceeded its current fair market value. My 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 Cohu's website.

As a reminder, in 2014, we sold our video camera segment, and its operating results are presented as discontinued operations, with all prior periods' amounts being reclassified. Unless otherwise noted, all amounts discussed on this call are from continuing operations.

Now moving into Q1, our results were better than guidance from both a revenue and profitability standpoint. Our semiconductor equipment business had stronger-than-expected results, which more than offset our mobile microwave data link business that performed below plan.

First-quarter sales were $68.1 million, up 5% year-over-year, and higher than our guidance of approximately $63 million. Semiconductor equipment sales were $63.4 million, and ahead of plan, due in large part to strong recurring revenue, including device kits, test contactors, and spare parts. In Q1, we had two customers representing 10% or more of sales that are in the computing and automotive markets.

Gross margin in Q1 was 34.2%, and approximately 200 basis points higher than our estimate. Gross margin benefited from higher sales volume and a favorable product mix. Operating expense was $21 million in Q1, and lower than our forecast, due largely to a modest exchange gain -- foreign exchange gain -- versus an anticipated loss, as the US dollar strengthened against the euro and the Swiss franc during the quarter. We also had lower product development cost as the timing of expenditures on certain projects moved to Q2, and sales commissions were lower due to customer mix.

The effective tax rate on income from continuing operations for Q1 was unusually high because we generated taxable income offshore and incurred a loss in the US. The foreign income was taxed at a blended rate of approximately 20%, but because our valuation allowance on deferred tax assets of the Q1 provision did not benefit from the US loss. For 2015, we are modeling a tax rate of approximately 20%.

Now moving to the balance sheet. We ended the first quarter with cash and investments of $69.7 million, and cash provided from operations in Q1 was $4.2 million. Net accounts receivable decreased by approximately $6.4 million to $67.2 million at March as a result of lower sequential shipments from our semiconductor equipment group.

DSO at the end of the first quarter was 89. Inventory increased by $2.9 million to $58.4 million at the end of Q1, as we plan for a 19% sequential increase in shipments in Q2. Inventory days at March were 123. Additions to property plant and equipment in Q1 were approximately $1.1 million, and depreciation for the first quarter was also approximately $1.1 million.

Deferred profit at March was $7.7 million, essentially flat quarter-over-quarter. The related deferred revenue at the end of Q1 was $12 million compared to $11.3 million at December, 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 July 31, 2015 to shareholders of record on June 19, 2015.

And now moving to our guidance for Q2. We expect sales of approximately $81 million, up about 19% sequentially. Q2 gross margin is expected to be approximately 300 basis points higher than Q1, which puts it in the range of 37% to 38%. Operating expenses for Q2 are expected to be approximately $22 million. Additionally, we expect to incur approximately $250,000 of restructuring costs in Q2 associated with completing the downsizing of our BMS operation and the manufacturing transition of gravity feed handlers to Asia.

The guidance for Q2 is in line with our financial model. Our strategy to improve profitability by moving volume manufacturing to Asia and strict discipline in controlling operating expense is providing tangible results.

Before we conclude our prepared remarks, I want to mention that we will be hosting our first Investor and Analyst Day on June 18 at the NASDAQ market site in Time Square. Additionally, in May, we will be presenting at the Jefferies Conference in Miami, and B Riley Conference in Los Angeles.

And that concludes our prepared remarks. And now we will take your questions.

(Operator Instructions). Kim Donovan, Needham & Company.

This is Kim Donovan on for Edwin Mok. You mentioned the new ITS segment will target consumables area. Can you give us an idea of how the contactor business has grown, and how you see that business trending going forward? I know it was a small part of your business, but represents a $650 million market.

Yes. Hi, Kim. This is Luis. We don't tend to typically disclose revenue by product line, but like you said, it's fair to say it's a small fraction of our sales at this time. In fact, it's in the 5% to 6% of our sales in Q1.

And it's a sizable market; we are investing on it. We are looking at opportunities to expand, and we'll continue to give you an update as we make progress here in following quarters. But at this time, I don't have a specific plan to put on the table and disclose exactly what we're going to be doing in that space, other than, yes, we are growing, and we have a specific business unit focus on products and customers in that market.

Okay, thank you.

Dick Ryan, Dougherty.

Hey, Jeff, when will the transition at gravity feed be completed? It sounds like the initial happened sooner than expected; but what's the timing?

Hey, Dick. Yes, you are right. We are making good progress on that transition. We expect that in the -- we'll go another quarter of the transition, but in the second half of the year, we'll have that transition completed.

And that should help drive the margins even more closer to your model?

Well, yes, certainly. I mean, it's baked into the model. For 2015, we expect that benefit to be minimal. Over time, we expect 300 to 400 basis points for the gravity feed handlers, and that equates to about 100 basis points overall for Cohu consolidated. Like I said, it's in the financial model, and we are largely using the benefits to offset anticipated ASP erosion in the future.

Okay. Great, thanks. Luis, on the die prober, can you talk a little bit more about the timing of that? And I may have missed -- I thought you mentioned something about the RF filter market or providing product into that. Can you give us a little more color on that as well?

Yes, sure, Dick. Frankly, it's a little too early to talk about projected sales in the die prober space. We have a new product that's under development. It's not out there yet. But we do plan to share more details about the product itself at our June Investor Conference in New York. So I think we will be expanding a little bit more on that topic there. But like I said, it's a little too early to say what is our penetration, sales penetration in that market, and what it will look like at this stage.

Regarding the -- your question about the RF, we do have sale of predominantly turret handlers already into that space. And frankly, the way I see it is the space is growing and it's benefiting that product line that we have.

Okay. Can you give a sense of the market opportunity you see there?

I don't have a specific number to bag onto it right now. It would be starting to sort of break off very specific sales relative to the other products, which we don't particularly disclose, Dick.

Sure. Great. And can you talk a little bit about the share? I know that's one of the goals. And it sounds like very good execution on the mobility side, but can you talk a little bit about what you're seeing on your share in that space?

Sure. For us, mobility really has two distinct legs. One is more the application process or the mobile processor, we say, and the rest of it is the power management ICs and our RF devices. So, specifically on the mobile processor, I think, as I have mentioned in an earlier quarter, there is a requirement for thermal control or active thermal control of these devices during test. And that's really surfacing here with the new generation smartphones or new generation processors and smartphones.

It's fair to say that we are today touching on a range of, I don't know, 15% to 20% of the -- all processors going into phones in the market. I think the opportunity is there. And we are certainly working hard with new products, including this Eclipse ATC that I mentioned, that was introduced earlier in this year.

And we see opportunity to continue growing in that space, essentially as companies have to retool their handler capacity to be able to test these new devices. So, it's almost like independent of total unit volume growth or smartphones more related to a technology shift in the space.

Great. Thank you, guys. Great quarter.

Thank you.

Jairam Nathan, private investor.

Hi, thanks for taking my question. Just going further deeper on the thermal technology, that's becoming a bigger and bigger market for you and as part of Cohu. Can you give us more details on what percentage of revenue is it, what's the potential here? And as far as margins, are they better or similar or worse than your [current] average?

Yes. So, I mean, as far as the -- hi, Jairam. This is Luis. As far as the potential goes, it's pretty much like along the lines of the answer I just gave. We are touching 15% to 20% of the market that is sort of our penetration today on smartphones. And I think that gives you a sense of how much more it can go pretty clearly. And we are working towards that. Timing of it, I can't quite comment at this stage. But that's the target.

And so, as far as to the new phase, I think (inaudible), who is it -- who are you selling to? Is it -- are you selling it to the fabless chip companies who make the (inaudible)? Or is it to the device manufacturers and the consumer device manufacturers?

Well, we have two main products in this space. We have the thermal subsystem itself, as I said, based on the T-Core technology. That product we sell into a system integrator that then performs the -- sort of the test for the microprocessor -- or sorry, the processor manufacturer.

And then we have the Eclipse handler that we just recently introduced beginning of this year. That product also features the T-Core technology. And in this case, we sell that product directly to the manufacturers, which could be, in this case, test subcontractors in Taiwan and Korea. As I referenced, we have several systems under evaluation there.

Okay, thank you. That's all I had.

There are no further questions. At this time, I would now like to turn the call back over to Luis Muller for closing comments.

Okay. Thank you for joining us on this call today. We look forward to speaking to you at the upcoming investor conferences, and our first Investor and Analyst Day in June, or when we report our second-quarter 2015 results. Thank you and good day.