Cohu Inc (COHU) 2015 Q2 法說會逐字稿

Greetings and welcome to the Cohu, Inc. second-quarter 2015 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Jones, Chief Financial Officer. 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 Mueller. Following our opening remarks, we will provide details of our performance for the second quarter of 2015, as well as our outlook for the third 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.

Before we begin, you should all be aware that during the course of this conference call, we will make forward-looking statements reflecting management's current expectations concerning 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 for industry conditions, future operations, financial results, market share gains, expansion into new markets, and any comments we make about the Company's future in response to your questions.

Our comments speak only as of today, July 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.

Luis?

Thanks, Jeff, and good afternoon. In the second quarter of 2015, Cohu delivered solid financial results that were better than our near-term target model. We made good progress on execution of new product developments and completed the transition of our highest-volume gravity handler manufacturing to Asia.

Entering Q3, equipment utilization across our installed base dropped slightly to 80%. Certain customers, particularly those that have announced merger agreements, have caused capacity additions, mirroring the recent decline in equipment orders reported by semi.

With 49% of total system orders, automotive remained our strongest segment. We had a new customer win with the MATRiX pick-and-place handler, and this product is also well positioned to gain additional share in the Taiwanese market in coming months. Additionally, we shipped an evaluation unit integrated with our T-Core thermal control technology for testing automotive processors that we expect to convert into a sale within the next few months.

It is exciting to see and benefit from the growth of processors in automotive applications. Like servers, mobile, graphics, and network processors, these devices will rely on active thermal control technology to optimize yields.

We also had a design win with the Saturn gravity handler and captured new opportunities for testing pressure sensors utilizing our Jaguar strip handler and MEMS test units at a major European-based customer with test operations in Asia. This is a long-time Cohu customer, where we are capturing new applications and displacing a competitor.

Turning to the consumer and mobility market that was 32% of system orders, an important milestone in testing mobile processors was achieved with the acceptance of the Eclipse pick-and-place handler by a leading Korean test subcontractor. This system incorporates Cohu's proprietary T-Core thermal technology that tightly controls device temperature during tests, optimizing yield. We launched this product in January, and as we commented in our Q1 earnings call, quickly achieved acceptance at a major US fabless customer. We have now closed the loop with acceptance by one of these customers major test subcontractors in Asia. Evaluations at other key customers in Taiwan are underway, and we expect those to be completed with positive results in coming months.

We are encouraged by the recent statement from a major test subcontractor expressing optimism for the fourth quarter with the anticipated launch of flagship mobile devices. Look ahead into Q4, in first half of 2016, we expect mobile processor manufacturers to ramp production ahead of market introductions of new-model smartphones, wearables, and tablets. The move to smaller silica nodes and higher processing capability that makes these devices power-dissipative during tests should continue to drive demand for our T-Core-based products.

Repeat turret handler orders were received following a successful evaluation earlier in the year at a leading Korean customer for test and inspection of RF devices. These semiconductors play a critical role in connectivity, especially in feature-rich smartphones and in the fast-growing IoT market. Additionally, the NY20 turret handler captured a design win for testing RF devices for key a US-based customer. The exponential growth in data exchange will drive exciting new opportunities for test handling equipment in coming years.

We recently announced a new turret handler, the NY32W, tailored for handling a variety of wafer-level packages and other small semiconductors. This new product received first acceptance by a large US headquarter customer, and it's another example of the cross-selling synergies we realized across our broad product portfolio.

In the computing market, device overheating during test is a complex problem. And our thermo technology plays a critical role in optimizing test yield. We received a repeat order for our Pyramid handler for testing high-end processors and forecast additional systems to satisfy near-term capacity expansion for data center applications that continue to grow.

Solid-state lighting was 11% of our system orders, and a current major European customer placed a multiunit order for turret handlers. We expect to benefit from further capacity expansions for automotive applications by this leading high-power LED manufacturer in the second half of the year.

In early 2015, we formed a new business unit called ITS, Integrated Test Solutions. This group is chartered with growing our share in the less volatile, higher-gross-margin $650 million contractor market by leveraging our leadership position in handlers, global sales, and customer support channels. During the second quarter, our contractors were qualified for testing QSN-based power products at a key European customer. And in July, we enter into a licensing agreement that gives us exclusive access to key RF compacting technology, enabling Cohu to supply solutions for high-frequency device test applications. Also in Q2, our Philippines operation installed critical manufacturing capability and capacity to support customer ramps.

In operations, the transition of manufacturing for our highest-volume gravity handler is complete. And during the second quarter, multiple systems shipped directly from our Malacca factory to customers in Europe and Asia. The next steps are the transfer of the new Eclipse pick-and-place and NY32W turret handlers that we expect to complete by the first quarter of next year.

During the second quarter, we sold our last noncore business, broadcast microwave services, and are now exclusively focused on growing Cohu's core semiconductor equipment and contractor product lines.

In June, at the NASDAQ market site in New York City, Cohu's senior management team conducted our first investor and analyst day. We described our strong and broad product portfolio, leading technologies such as [ThermoEnvision] and key strategic growth initiatives. A copy of the presentation is available on Cohu's website.

Looking forward, we remain focused on achieving our near-term financial model, executing our strategy to gain handler market share, and increasing our served market as we expand into adjacent verticals of test contactors and wafer-level package tests. Combined, these will expand our total available market from $850 million to about $2 billion, further diversify our product offering, and create new opportunities to drive topline revenue and earnings growth.

Let me now turn it over to Jeff for further details on our second-quarter financial results and third-quarter guidance.

Thanks, Luis. Before I move into Q2 financial details and our Q3 outlook, I'd like to touch on a few highlights from the second quarter.

We had strong sales and earnings growth in Q2. Sales grew 19% sequentially to $75.2 million. Operating income was 10.6%. And EPS was $0.27 compared to $0.06 in the first quarter of this year and $0.21 in the second quarter of last year.

Q2 was Cohu's sixth consecutive quarter of non-GAAP profitability. Gross margin and profitability was in line with our target financial model, and cash increased $4.3 million sequentially.

Due to the increasing lumpiness of orders from certain customers, primarily in the mobility market that place large orders for equipment that ships over multiple quarters, we will no longer comment on total orders or backlog.

Now, before I move into the Q2 results, I'll comment on our GAAP to non-GAAP adjustments, which included approximately $1.7 million of stock-based compensation expense, $1.7 million of purchased intangible amortization expense, and $300,000 of restructuring costs. My comments are based on our non-GAAP results, which exclude the impact of these items. A reconciliation of non-GAAP measures to equivalent GAAP measures can be found in our earnings release located on the Investor Information section of Cohu's website.

As a reminder, in 2014, we sold our video camera business, and on June 10, 2015, we sold our microwave communications business. The operation results for these businesses are presented as discontinued operations, with all prior-period amounts being reclassified. Unless otherwise noted, all amounts discussed on this call are from continuing operations.

Now moving into Q2. Sales and profitability were better than guidance. Sales at $75.2 million compared to our revised guidance of approximately $73 million. In Q2, two customers represented 10% or more of sales; both were in the mobility and computing markets.

Q2 gross margin was 36.3% and in line with our estimate and financial target model. Operating expense was $19.3 million and also in line with our estimate. R&D benefited from lower product development costs, as the timing of expenditures on certain projects moved to Q3. And in SG&A, we recorded higher-than-anticipated sales commissions due to higher sales and customer mix and incurred a foreign-currency loss due to the US dollar weakening against the euro and the Swiss franc during the quarter.

The effective tax rate on income from continuing operations was unusually low as a result of higher income in the US with no tax provision because of our deferred tax asset valuation allowance. For 2015, we are modeling a tax rate of approximately 20%.

Now turning to the balance sheet, cash provided from operations was $200,000, and cash and investments at the end of the second quarter was $74 million. Net accounts receivable increased approximately $7.2 million as a result of higher sequential shipments. DSO at the end of the second quarter was 84.

Inventory was essentially flat quarter over quarter at $53.2 million, and inventory days in June were 104. Additions to property, plant and equipment in Q2 were approximately $1.2 million. And depreciation for the second quarter was approximately $1.1 million. Deferred profit at June was $7.6 million, essentially flat quarter over quarter. And the related deferred revenue at the end of Q2 was $12.1 million, also flat sequentially.

Cohu's Directors approved a quarterly cash dividend of $0.06 per share payable on October 23, 2015, to shareholders of record on August 28, 2015.

And now moving to our guidance for Q3, we expect sales of approximately $66 million. Q3 gross margin is estimated at approximately 34%, in line with lower sales. Operating expenses for the third quarter are expected to be about the same as Q2 at approximately $19 million. Additionally, we expect to incur approximately $200,000 of restructuring costs associated with the transition of Handler Manufacturing to Asia.

Additionally, I want to note that we will be participating in the Jefferies Tech Conference in Chicago on August 25 and 26.

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

(Operator Instructions) David Duley, Steelhead.

Thank you for taking my question. Just regarding your guidance for the September quarter, I guess I would've thought it would have been up a little bit. Could you talk about which segments perhaps have become weak or what you might have seen over the last month or two that would have a down seasonal quarter?

Yes, this is Luis. As we have mentioned here, we have had a pause in orders from certain customers, particularly those involved in merger agreements. And it's pretty much reflective, as you can see, on data reported by semi as well, sort of mirroring that situation.

And could you just talk about which segments those customers are in?

We have seen that sort of across mobility, and also to some degree in automotive.

Okay. And as far as your -- I guess you're talking about your new Eclipse handler there being adopted by a second -- is that a second major customer, IDM customer? Or is it just the same customer now going into a different OSAT? I was just wondering if that business has started to broaden out a little bit.

Okay, yes. Let me talk about the whole timeline so you can place it correctly. Now, we had qualified the Eclipse back in Q1, and we have announced as well, qualification acceptance at a major US fabless account. And then from there, we moved into their test subcontractors in Asia.

What we're now stating is we have achieved the qualification and actually the acceptance of the first few units at major Korean test subcontractors, and we're still working on and expect to close the qualification at other test subcontractors in Taiwan in the coming months.

Okay. So it sounds like it's all connected to that initial customer, then.

Correct.

Okay. I guess maybe to explain the -- understand the food chain there a little bit. Thank you.

And can you just give us -- the final question from me is, and I think you mentioned it, just remind me of the timeline of moving -- when you'll complete manufacturing move of the different types of handlers to Asia. I think you've already done the Gravity, but you mentioned the other ones are moving there by end of this year or something like that. If you could just give a little bit more detail, that would be great. And of course, then, what you would expect the market impact to be once that move is completed.

Right. Okay, Dave, this is Jeff. You know, the model that we're working through right now, the near-term financial model, assumes benefit for the manufacturing transition. And we expect that our results will meet the model, just depending on the revenue level. So we still will be transitioning manufacturing of various models to Asia. At the end of 2015, we expect to have about 70% capacity in terms of total manufacturing -- handler manufacturing. And we expect that will go up closer to about 90% in 2016.

Okay. That's it for me. Thank you.

Jairam Nathan, Sidoti.

Thanks for taking my question. Just first, can you give us more details on this licensing? I think what you said was the contactor, not the set -- take you into it -- expand you into the other two segments of contactors?

Sure, Jairam. This is Luis. When we did our investor/analyst day here in June, we talked about the contactor market being a $650 million size approximately, having three main segments: spring probes, cantilevers, and rocking RF contact. We do have today internal technology to serve the cantilever space. And with this licensing agreement, we essentially close a key gap on our technology portfolio to supply into the RF segment of the market, which we view at approximately a $70 million space.

Okay. Thank you. And so is this an existing customer -- existing participant, so the licensee would be selling this product as well as licensing it to you?

Yes, I don't want to get into the details of where this is coming from, Jairam. Obviously the agreement itself is also -- the details are not for disclosure at this time. But suffice to say that we gain access to key RF technology, like I stated here, so that we can supply our own Cohu contactors to this segment of the market.

Okay, thanks. And my final question, on -- I understand during the order numbers or the backlog, but the -- is all of the reduction, sequential reduction, in revenue, is that all order related, or is there some timing issue as well?

I think there's a combination of the two, Jairam. If you recall, we -- and the reason for the change in the orders is because of the large orders that we ship over multiple quarters. So I think it's really a combination of the two.

Okay. Thank you. That's all I had.

(Operator Instructions) Kim Donovan, Needham & Company.

Thanks for taking my question. Can you give us an update around the new growth drivers, such as contactor? And is there any additional color around the timing and details of the new WLP tool?

This is Luis. Like I stated here a minute ago, on the contactor front, what we essentially did recently here is open up the opportunities to supply to the RF contactor market, the $70 million or so segment of the market. Obviously revenues to that are yet to come, since we just had this agreement here in July.

As far as the WLP probe equipment, as I stated in the past, we will not be disclosing a specific status on that product development, for competitive reasons. But clearly we are making good progress on that and have been working closely with a key target customer to hone in the features required to test cingulated WLPs, the integrator vision inspection and testing capability.

Great. And how do you think about M&A going forward? I know you've had a fairly acquisitive history, and you have a solid balance sheet.

Okay. Yes. We did mention also at the investor and analyst event in New York that acquisitions will be part of our arsenal to grow and also to close technology gaps, particularly, as we mentioned, in the contactor space. As I noted today, we signed a licensing agreement, not particularly around M&A. But that's part of our strategy. And we will be talking more about that as anything -- if anything materializes in the future.

Great. Thank you.

There are no further questions at this time. I would like to turn the floor back over to Luis Muller for closing remarks.

Thank you, Gary. Thank you for joining us on this call today. We look forward to speaking to you at upcoming investor conferences or when we report our third-quarter results. Have a good day.