Cohu Inc (COHU) 2015 Q3 法說會逐字稿

Greetings and welcome to Cohu third-quarter 2015 earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jeff Jones, VP of Finance and Chief Financial Officer. Thank you, sir. You may begin.

Good afternoon and welcome to our discussion of Cohu's most recent financial results. I am joined today by our President and CEO, Luis Muller. Following our opening remarks, we'll provide details of our performance for the third quarter of 2015, as well as our outlook for the fourth 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 the 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, October 29, 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 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. Good afternoon. In the third quarter of 2015, Cohu again delivered solid financial results and better-than-forecasted profitability. We received customer validation of our new Eclipse handler, capturing the first volume order from a globally recognized industry leader. We are excited about the momentum and strength of our thermal products that enable next-generation mobile processor tests.

While semi reported a 38% decline in back-end equipment orders in September and utilization across our installed base dropped slightly to 77%, we are encouraged by share gains with our new products that are more than compensating for the near-term market softness as we reported a sequential increase in orders. We increased market share last year to 36% and continue to focus on high-growth applications and customers to capture additional market share this year.

With 43% of total system orders, automotive remained our strongest and market. Although we do well in all segments of the automotive market, particularly right now we're seeing strong demand for handlers testing power semiconductors. Most automotive companies in the world are trying to fuel the electric hybrid and plug-in hybrid vehicles. The trend towards electrification of vehicles is becoming a significant driver of our gravity handler business.

We anticipate excellent opportunities and growth as various countries work to meet new carbon emission targets to reduce greenhouse gases and improve air quality. There is a push not just on the consumer side with cars, but also from government entities to drive the electrification of public transportation. Additionally, relentless growth in electronic content in cars related to safety, entertainment, and the upcoming driver assist capabilities will continue to be a major driver of our business.

We scored a key design win with our Saturn handler at a customer in China, continuing to gain market share in the gravity segment. Since the acquisition of Rasco in December 2008, we have almost tripled market share in this segment, from approximately 17% to 50%, expanding the customer base and capitalizing on the strength of our global customer support organization. Several orders were received from MEMS test units for pressure and magnetic sensor applications that are prevalent in new vehicles.

Although the logic tests segment slowed, we captured two new customers in China and Taiwan -- yet another affirmation of our product leadership in the tri-temperature pick-and-place market. We also gained further traction at a large Japanese IDM with our turret handlers.

The consumer and mobility market was 29% of system orders. As I mentioned upfront, we reached a key milestone in Q3 with our first volume order for the Eclipse pick-and-place handler that incorporates Cohu's proprietary T-Core thermal technology to tightly control device temperature during test, optimizing yields. You may recall that last year we won a major mobile customer with our T-Core thermal subsystems, which contributed to our 48% organic revenue growth in 2014. We have now captured a second large customer in this market.

As mentioned in our last call, we expected to see new tooling requirements for late this year and into the first half of next year for production test of mobile processors that will power 2016-model smartphones and tablets. This order was the beginning of this process, and we forecast additional capacity requirements in the coming quarters. We are exploring future opportunities for our thermal technology in testing wearable processors.

Repeat turret handler orders were received from a leading Korean customer for test and inspection of RF devices. Additionally, we captured two new customers for our turret handlers and expect to capitalize on that success for future cross-selling of our pick-and-place systems. In the last year, we have made substantial progress in the Korean market, securing several design wins and expanding our presence in that country.

A major milestone was achieved in the quarter towards expanding our addressable market in wafer-level package tests. We received the first customer order for our new programming. Development will continue over the next several quarters, and this early customer commitment is drawn validation of our strategy and approach to solving the wafer-level package test discontinuity. As device complexity and silicon integration increases, so will opportunities for optimizing yield in upstream tests, ensuring quality in advanced IC packages.

Computing was 19% of system orders and stronger than expected. We received additional orders for pyramid handlers with demand tied to a new device family launched by a key customer testing data center and traditional PC processors. Another key US customer placed the first order for the tri-temperature T-Core configuration of the Eclipse handler that is still in development, another validation of our roadmap for next-generation active thermal solutions for high-power dissipative server processor tests.

Solid-state lining was 9% of system orders. A current major European customer continued to ramp production and placed a multiunit order for turret handlers. We expect to benefit from further capacity expansions for automotive application by this leading high-power LED manufacturer in the fourth quarter.

Progress is being made in parallel testing of LEDs for general lighting application with a new system that we expect to bring to market next year. Our focus is to provide innovative solutions that can disrupt the status quo, significantly improve yield and productivity, and give us a technological advantage to capture new customers and profitably grow market share.

A leading European automotive customer qualified our contacting solution last quarter for testing power management semiconductors with our strip handlers. We are also executing our plan to train engineers and install production capability for our RF contactors after signing a licensing agreement that provides access to critical technology, enabling Cohu to supply solutions for high-frequency device test applications.

Looking forward, we are encouraged by the positive reception from customers for our new products, recent share gains, and continued momentum across multiple end markets. Although industry conditions are soft and the December quarter is typically weaker, we are creating opportunities for design wins that are bucking that trend. Over the long run, we see secular growth in automotive, industrial, and mobility markets driving higher semiconductor unit volume, and increasing device functionality and packaging challenges fueling higher complexity in thermal and test automation.

While test parallelism is reducing the cost of ATE in the ATE market, that is not the case with handlers. As test parallelism increases, so does handler complexity in ASP, because mechanical systems do not benefit from and scale as electronics do with Moore's Law.

For these reasons, we expect the handling equipment market to continue to outpace the growth of the ATE market. With our industry-leading market position, broad product portfolio, and proprietary technologies that are aligned with emerging IC industry requirements, we are excited about Cohu's prospects.

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

Thanks, Luis. Before I move into Q3 financial details and our Q4 outlook, I would like to touch on a few highlights from our results.

We had strong cash generation, with cash from operations of $20.8 million. And this is our seventh consecutive quarter of non-GAAP profitability, with adjusted EBITDA of 10.1% and EPS of $0.17, both of which are in line with our near-term financial model at this level of revenue.

Our GAAP to non-GAAP adjustments included approximately $1.6 million of stock-based compensation expense, $1.7 million of purchased intangible amortization expense, and approximately $200,000 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 GAAP equivalent 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 operating 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 Q3 sales and profitability were better than guidance. Sales were $67.5 million compared to our forecast of approximately $66 million, due mainly to stronger recurring revenue and demand from our turret handlers. In Q3, two customers represented 10% or more of sales, one in mobility and the other in the computing market.

Q3 gross margin was also stronger than expected at 35.9% and benefited from lower product costs and higher-margin sales of more complex turret-based systems. Operating expense was $18.4 million, lower than our estimate due to the strengthening of the US dollar against the Swiss franc and the Malaysian ringgit. The effective tax rate on income from continuing operations was approximately 24%. For Q4 and full-year 2016, we are modeling a tax rate of approximately 20%.

Our balance sheet also strengthened during the quarter, with cash and equivalents growing to $90.7 million. DSO was down to 80 as a result of improved cash collections. And we reduced inventory by another $2.3 million. Additions to property, plant, and equipment in Q3 were approximately $1.5 million; in depreciation for the third quarter was approximately $1 million.

Deferred profit at September was $5.7 million, which is down $1.9 million quarter over quarter. And the related deferred revenue at the end of Q3 was $8.6 million, down $3.5 million sequentially. Cohu's directors approved a quarterly cash dividend of $0.06 per share payable on January 4, 2016, to shareholders of record on November 20, 2015.

And now moving to our guidance for Q4, we expect sales of approximately $63 million with gross margin of about 32%, which is lower than our financial model due to lower recurring sales and the initial production of our new Eclipse handlers in the higher-cost San Diego facility. Building production handlers in San Diego is not in line with our operating model. However, we did this for a number of unique reasons.

First, as we have discussed previously, we are in the process of combining our Malaysia facilities, which began in Q4, and we are not in a position to support this new product ramp concurrent with the move. Additionally, the Eclipse handlers are quickly gaining market traction; and we decided to satisfy the initial customer ramp from our current San Diego operation.

We are in the process of transitioning the manufacturing of the Eclipse to Asia and plan to have the first units manufactured in our factory by the end of this year. In Q1 of next year, we expect 50% of Eclipse handlers will be manufactured in Malaysia and will reach full capacity for this product by Q2.

As previously disclosed, we are in escrow to sell our San Diego facility for approximately $34 million and lease back approximately 40% of the building for the next 10 years. We expect to close escrow later in Q4. However, the transaction remains subject to normal closing conditions. In the future, pick-and-place product introductions will transition to Malaysia in a much shorter time frame, limiting the initial pilot builds in San Diego, where we will not have the capacity to support large builds, based on the reduced facility footprint.

Our operating expenses for the fourth quarter are expected to be about the same as Q3. And we expect to incur approximately $200,000 in restructuring costs in Q4, which are associated with the transition of manufacturing to Asia. As our balance sheet continues to strengthen and our cash balance grows, through operations and with the potential cash from the facility sale, we are well positioned financially to execute on our strategic growth plans in test contacting and wafer-level package probe.

On December 10, Luis and I will be presenting at the fourth annual Midtown Cap Investor Summit in New York City; and in mid-January, we are planning to participate in the annual Needham and Sidoti investor conferences, also in New York City. That concludes our prepared remarks. And now we'll take your questions.

(Operator Instructions) Edwin Mok, Needham and Company.

Congrats on very good profitability for the quarter. So the first question I have: did you guys disclose your booking number for the quarter?

No, we did not. And that is consistent with our approach in Q2.

What was that again? Sorry, can you repeat that?

We did not disclose it in Q3, and that is consistent with our approach in Q2.

Yes. So can you at least describe -- was book-to-bill above 1, below 1, kind of in generalized terms?

I did make a comment that we saw a sequential increase in orders in Q3, Edwin.

Okay, that's helpful actually. I wanted to dive in a little bit on the market condition. I think you mentioned that semi had reported pretty tough numbers, but it sounds like you guys are doing a little bit better than the market, right, with your share gains, all the products that you have.

Right.

Do you have a view in terms of how the market is progressing beyond this quarter? I know, obviously, you have already provided guidance for the quarter.

No, it is difficult to talk about market for -- beyond this quarter, meaning next year at this point in time, Edwin. It is too early to talk about that.

Okay, that's fine. On the Eclipse product, on the recent announcement, I think you guys gave some color on the prepared remarks. I was wondering how, at least based on what the customer has indicated to you so far -- how do you see contact ramp-up happening? Is the majority of the orders being shipped in the fourth quarter, or are we starting with a slow ramp-up and expect a stronger shipment onto that order as we get into 2016?

As I mentioned -- actually, it was on the last call -- we are expecting to see capacity and, frankly, new capability additions starting already at the end of this year and into the first half of next year for the new smartphone and tablet models that will be launched in 2016. So we continue to forecast additional demand, and it's really from both of our customers -- I mentioned we have really two leading customers there for thermal products, which can ship starting in Q4 and into next year.

I see, okay. So it sounds like not everything is all happening fourth quarter. There will be some additional or even greater shipment in the coming year. That's helpful.

On the WLP product, I think you mentioned that you received an order during the quarter. That order is for first evaluation, or beta site? Can you give some color on that? And in terms of kind of timing of revenue and potential follow-on order -- any way you can kind of give us some views on that?

Sure, yes, yes. So for this product, we believe we have a very unique solution solving a real challenge out there in the industry, which is simulated testing of WLP. And we received a first order; so, obviously, what can I say? It is the very first order for this product, which is still in development. That's actually highly unusual in our industry, to be honest with you, and a good testament of the value proposition of the product.

We may be able to have some revenue in 2016 from this product line. By and large, this is a product that we would see ramping production 2017 forward.

I see. So basically there are two or three in develop, but the customer is excited about all the potential, so they placed an order, and they will get the first two when the development is complete, which should be sometime in 2016? Is that the time frame?

That's right.

I see, okay. Last question I have, and I will let the other guys ask: on the contactors side of the business, I think you mentioned you signed a contract related to some IT related to RF contactor. Can you give us some color in terms of that kind of opportunity there? I think it's -- typically RF contactors 3-D niche; these are highly valued in the marketplace. So is that an area that you guys are focused on driving growth now? Or is it just one of the pillars on growth for the contactor business?

I am not sure I completely understood the question here, Edwin. But I will just tell a little bit, and hopefully this answers your question. We have really done a lot this year in contactors. A lot of it is actually not visible from the outside.

We have developed technologies, products still in development; built infrastructure - we're still building infrastructure in the Philippines to manufacture contactors. And we have established a first licensing agreement to get access to key RF technology. Sure, we still have a lot more work to do, but I will say we are setting up the stage for growing the revenue stream in the contactor space. That is one of our key strategic initiatives, as I mentioned.

On the RF, and particularly we see that being about $70 million to potentially $90 million segment of a $650 million contactor market. I continue to be very confident and extremely committed to expanding our revenue stream in this new addressable market. And I hope that answers your question.

Yes, I was asking a question, so I looped a few things together, but you kind of touched on key points in terms of the size of that market and where you are on that license agreement. That's all I have. Thanks very much.

Jairam Nathan, Sidoti & Company.

Luis, is there a way you can handicap this Eclipse order? And not this order specifically, but the market? And what could be the potential here?

Yes, it is a little tricky to do that. But I do believe that in the near-term, the opportunity with the Eclipse is probably going to be about half the size of that first major customer in the mobile processor arena that we capture. And that the right revenues last year, you know, the key element of our 48% organic growth in 2014. So that is sort of a ballpark for the near-term opportunity.

Okay. And Jeff, with regard to your sale and lease back, can you -- just for modeling purposes, can you let us know, like, what would be the impact on lower D&A, higher rent expense? Would that kind of knock each other out, or is there an impact?

We don't expect a significant impact to the operating costs as a result of the leaseback. We are basically replacing the depreciation expense, as you mentioned, and some other facility costs -- replacing that with the rent expense. But the rent expense based on only about 40% of the building.

All right, okay, okay. And what is the -- I know you own the building even in Germany, and you are moving production out of there as well. So what is the potential of doing a similar transaction in Germany?

I think it is very low. The facility there will still be used for a pilot. It is a much smaller facility. So at the moment we don't have similar plans for that facility.

Okay, thanks. That is all I had.

Patrick Ho, Stifel.

This is Brian calling in for Patrick. First question, again going back, your Q4 expected revenue decline again is fairly benign, especially factored into widely-reported weaker semiconductor environment. To better appreciate the impact of your share gains, can you give us a sense of how much sales might have pulled back were it not for your recent wins? Or perhaps what you would characterize as normal Q4 seasonality?

That is a difficult one to answer now without going back into typical past few years Q4 seasonality. But I think you can, perhaps as a better reference, look at some of the other companies -- maybe even ATE companies in the back-end space. I think that gives you a good gauge for what the ATE, which we are pretty much part of that industry, is seeing typically for Q4 softness and contrast that with what we are guiding for. I think that will be a better help.

Sure. Got it, yes. I know some of them have talked about 40%, 50% order declines. And you are talking about a sequential order increase in Q3. Okay.

Maybe a second question: some semiconductor companies have recently talked about weaker demand in inventory builds, specifically in their automotive end market. And given your very strong position in the auto market, can you discuss whether this is having any near-term impact in your gravity feed handler business?

Yes, what I have seen -- and again, this is perhaps as much secondhand as you are, or directly from customers, which is also secondhand to some degree -- is more of a inventory buildup on the -- perhaps more the microcontroller side or more the digital side, as I call, on the automotive chain.

But if you go down to the analog ICs, I would say the inventories are -- the inventory in the channel seems to be leaner, and the opportunities are greater. And that is why I commented here. We are seeing stronger pull in the quarter in the automotive for power semiconductors or analog type ICs for our gravity handlers, despite sort of a softer digital side or the automotive market. So it is kind of a dichotomy. There is one positive and one negative in there in reality.

Okay, got it. Thank you.

(Operator Instructions) Dick Ryan, Doherty.

Luis, you mentioned previously that one of your key auto customers was going through some M&A, hopefully closing the fourth quarter, and that was kind of putting a pause in some of the orders. What are you hearing from that customer? And is that kind of pushing business into 2016?

Yes, what I've got right now is pretty much the same as I said the last quarter. They still have not closed and expecting that this is going to happen in Q4. I actually believe individually their businesses may be a little soft right now.

I don't know exactly what it means for 2016 at this time, Dick. We are in the process of collecting data -- our sales team -- collecting data and building up future forecasts or potential forecasts. So I don't know if it's time if, as they close it, there will be a spring-back, or how soon would there be a spring-back in capacity addition for their businesses.

Okay. And Jeff, you mentioned -- you talked about the Eclipse production moving to Malaysia. Can you refresh me on where you are with the rest of the capacity move over there?

At the end of this year, so the next couple of months, we will have capacity in Malaysia to manufacture about 70% of our handlers in total. That will climb to probably roughly 90% at the end of next year. We will always have a small amount, pilot builds and whatnot, that we would do within our development centers.

Okay. And Luis, you talked about the utilization rate dipping -- I think it was 77%. When you look at Q4 in your various sectors, is there any sort of contribution shift that you are anticipating -- auto, mobility, computing -- versus what you saw in Q3?

You mean looking ahead in orders for Q4?

Yes, yes.

I would expect just basically, based on past couple of years' seasonality, I would expect the mobility market to start ramping up as I -- even like I mentioned, actually, in our Q2 earnings call, I still get the same thing: that the mobility market would start ramping ahead of everybody else already in Q4.

I mean, frankly, they already started here in Q3. But I expect that you accelerate into Q4. And then, in the past, just looking at past seasonal patterns, I would think a lot of the other segments are going to wait and see for after Chinese New Year, as it has been in the past. I would say LED is typically strong. The solid-state lighting market is typically strong in the fourth quarter or in the second half of the year in general.

Okay, thank you.

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to Mr. Muller for any additional concluding comments.

Thank you. Thank you for joining us on today's call. We look forward to speaking to all of you at the upcoming investor conferences or when we report our fourth-quarter and full-year 2015 results. Have a good day.