Cohu Inc (COHU) 2015 Q4 法說會逐字稿

Greetings and welcome to the Cohu, Inc. fourth-quarter and full-year 2015 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jeff Jones. Please go ahead, sir.

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, we will provide details of our performance for both the fourth quarter and full-year 2015 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.

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, February 11, 2016, 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.

Now I'll turn it over to Luis.

Thanks, Jeff, and good afternoon everyone. We delivered strong results in a challenging environment and another sequential increase in orders in the fourth quarter that included the first customer order for our new wafer level package program. Another customer, a leading test subcontractor who will soon be evaluating this product for testing singulated dies and WLPs that will be integrated in advanced packages.

In the automotive market, last quarter we completed the qualification and secured customer acceptance of a tri-temperature active thermal control handler configuration for testing automotive processors. This segment of the market has tremendous potential as car manufacturers continue to add driver assist features to vehicles.

Before Jeff provides details of our financial results, I want to recap our progress in 2015 and discuss our outlook and strategy going into 2016. We began 2015 with strong fundamentals and an outlook for increasing semiconductor unit volumes. But late in the second quarter, the industry faced slowing growth in China and a weakening macroeconomic environment. Customers quickly reduced capital spending plans and for the rest of the year equipment utilization hovered just below 80%. We estimate that the test handler market contracted about 20% year-on-year.

Importantly, 2015 was the year we set the foundation for expansion into adjacent markets with a sole focus in the semiconductor industry. In June, we divested our last non-core business, Broadcast Microwave Services, enabling us to concentrate resources in the more profitable test handler businesses where we are the industry leader.

Our target is to expand the addressable market to $2 billion, leveraging our leading test handler market share position to grow sales in test contacting and wafer level package growth.

We executed the transition of pick and place manufacturing to our Malaysia operation and reduced the infrastructure in the US. In December, we completed the sale of our Poway, California facility, monetizing a fixed asset to fund strategic investments. In conjunction with the sale, we signed a lease for a smaller portion of the building that better suits our current needs for a product development focused organization.

During the year, we introduced a stream of new products that helped buck the industry trend and delivered quarter-over-quarter order growth in an otherwise soft market. In early 2015, we introduced the Eclipse high-speed pick and place handler to satisfy high-mix production requirements of test subcontractors. This new system enables customers to leverage existing device kit infrastructure while utilizing Cohu's high-performance thermal technology that optimizes test yields. In September, we completed the qualification of this platform at multiple customers and received the first volume order for testing mobile processors from a globally recognized leader in the industry.

At SEMICON West in July, we introduced our next generation wafer turret platform, the NY32W. This handler is well-suited for RF devices, small power management ICs, solid-state lighting devices, and many other ICs in wafer level packages, which is one of the fastest-growing technologies. We completed the successful qualification of this new platform at a large US-based customer, resulting in a multi-unit order and capitalizing on another cross-selling opportunity for our turret business unit. Interest and order activity for this product line is high as more customers need a solution for testing small, delicate semiconductor devices.

Also in July, we introduced the 3D Flex Vision system for wafer level package inspection. Based on Moire interferometry, this vision system generates a topographic view of devices and accurately measures ball or bump height, coplanarity, quality, and body warpage, enabling high-speed inspection with micrometer resolution. This system is well-suited for semiconductors, semiconductors used in mobility and wireless communication markets.

Last year, we formed a new business unit called ITS, which stands for Integrated Test Solutions. This group is chartered with growing Cohu's share in the less volatile higher-margin $650 million contactor market by capitalizing on our leadership position in handlers and global sales and customer support channels. During the second quarter, our contactors were qualified for testing power devices at a key European customer and, in July, we entered into a licensing agreement that gave Cohu exclusive access to key RF contacting technology, enabling us to supply solutions for high-frequency device test applications.

2015 marked the expansion of Cohu's manufacturing capability in Asia. We consolidated two factories into a single facility in Melaka, Malaysia, and are now able to ship approximately 70% of our handler volume from Asia compared to 50% a year ago. Further cost benefits will be realized in 2016 with the transition of gravity and strip manufacturing to Asia along with the implementation of a common ERP system.

Reviewing our performance by key end markets, automotive and industrial represented 40% of system sales in 2015, and this market is expected to remain healthy. IC content per vehicle is forecasted to grow at a 6.7% CAGR in the next four years. The fastest-growing auto segment, Advanced Driver Assist Systems, is leading to the proliferation of processors and sensors that present unique challenges in handling and thermal control. Certain countries are providing significant incentives to businesses and consumers to build and buy electric vehicles, and we are positioned at the forefront of supplying equipment to enable testing of high-powered semiconductors used in this market. In industrial, we remain bullish with the growing momentum, particularly in the US and China, for renewable energy installations in the coming years.

Mobility, which was 33% of our system sales last year, has been a major success story. As device complexity and silicon integration increases with advanced packaging, so will opportunities for optimizing yields in the upstream manufacturing processes and through system-level tests. Traditional test approaches will no longer be sufficient to economically satisfy customers' quality requirements.

We achieved a major milestone, securing our first win and aligning with a second leading fast subcontractor to evaluate new products to satisfy these emerging opportunities. These early commitments validate our strategy and approach to solving a challenge that customers will be facing in mainstream production starting later this year.

Computing and memory were 18% of system sales in 2015. Cohu is the fast handler leader for CPUs and GPUs that are used in all major servers and data centers around the world. Our main customer is increasing capital spending in 2016 to support continued growth in cloud computing.

Solid-state lighting grew to 9% of system sales, almost doubling from the previous year. We have successfully focused our products on high power premium applications in automotive, mobile, and outdoor lighting. We expect to capture new customers and continue the growth momentum in this segment.

Each of these end-use market applications will have some component of the emerging IoT, Internet of things. IoT drives demand for sensors, RF, and power management ICs as well as computing that connects electronic devices to the Internet and among themselves. The trend is towards integrating multiple functions on a single device that will benefit from our new product investments in singulated wafer level package and system-level tests.

Now, onto my last topic. Our strategy for 2016 is centered on three pillars -- first, expand share in mobility, automotive, and solid-state markets. While Cohu gained new customers last year, there are sizable additional opportunities. We are off to a great start, having won two key new customers early this quarter. We captured a multiunit order for our tri-temperature pick and place handler for testing automotive semiconductors, displacing a competitor's system. At the same time, we secured a first route of orders from an industry leader for our new NY32W wafer turret handler for testing high-power LEDs. Additionally, we received a new round of orders for thermal subsystems from an existing key customer.

The second strategic pillar is the implementation of plans to expand served available market in test contacting and wafer level package growth.

Cohu has a rich pipeline of disruptive new products launching this year and we have established a foundation in test contacting with design, global applications, and manufacturing infrastructure. We plan to expand our product portfolio and deliver incremental sales in markets previously not served.

Third, continue executing with a strict financial discipline that is delivering results in line with our model. Acquisitions and partnerships will be an important part of this strategy, and we regularly review opportunities to accelerate our plans.

Though concerns about China and emerging markets are currently affecting the macroeconomic environment, we started a new year with encouraging near-term customer forecasts. I'm optimistic that our broad customer base, leading handler share and diversified end markets position Cohu to capitalize on the new opportunities in the semiconductor industry.

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

Thanks Luis. Before I move into Q4 financial details and our Q1 outlook, I'd like to touch on a few highlights from 2015. Cohu had strong cash generation from operations of approximately $22 million. We also realized $33.3 million of cash from the sale of our San Diego facility and approximately $5 million from the sale of our last non-semiconductor equipment business, BMS. Cohu returned $6.2 million to shareholders through quarterly cash dividends.

Non-GAAP gross margin for the year was 35.3% and comparable to 2014 despite challenging handler market conditions in 2015. Gross margin is benefiting from the expansion of Cohu's Asia manufacturing, which has enabled us to reduce our footprint in the US and monetize the San Diego facility. Throughout 2015, we achieved non-GAAP profits each quarter, in line with our near-term financial model, and Q4 was Cohu's eighth consecutive quarter of profitability. Adjusted EBITDA was $24 million, or 9% of sales.

For Q4, the GAAP to non-GAAP adjustments include approximately $1.7 million of stock-based compensation expense, $1.8 million of purchased intangible amortization expense, and $400,000 of restructuring costs. My comments are based on Cohu's 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 Investors 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 the Q4 results, sales were $63.5 million, in line with guidance, and profitability was better than expected. Four customers each represented 10% or more of sales, two in automotive, one in solid-state lighting, and one in the computing market. Q4 gross margin was stronger-than-expected at 34.4%, benefiting from higher-margin sales of more complex turret and gravity feed systems. Operating expense was $19 million and in line with our estimate.

The effective tax rate on income from continuing operations for 2015 was 21%. For 2016, we are modeling a tax rate of approximately 22%.

Cash used in operation during the quarter was $3.1 million. DSO was 91, and inventory was essentially flat quarter-over-quarter.

Cohu's balance sheet continues to strengthen. During the quarter, cash and investments increased by $26.3 million to $117 million. As a result of the sale of the San Diego facility, property, plant and equipment decreased approximately $13 million sequentially. Fixed asset additions in Q4 were approximately $2.9 million, and depreciation for the fourth quarter was approximately $1 million.

Deferred profit at December was $3.7 million, down $2 million quarter-over-quarter. The related deferred revenue at the end of Q4 was $5 million. That's down $3.6 million sequentially.

Cohu's directors approved a quarterly cash dividend of $0.06 per share payable on April 15, 2016 to shareholders of record on March 1, 2016.

And now moving to our guidance for Q1, we expect sales of approximately $64 million with gross margin of about 32%, which is lower than our financial model due to the initial production of new Eclipse handlers in the higher cost San Diego facility. These handlers were scheduled to ship last quarter. However, our customer delayed delivery into Q1.

Eclipse handlers have gained quick market traction and it was necessary to build initial units in San Diego to satisfy strong customer demand. We expect to reach full manufacturing capacity for the Eclipse handler in Malaysia in Q2 and gross margin is projected to improve substantially during the second quarter and will be in line with our financial model. With the footprint reduction in San Diego and the consolidation of our Malaysia factory, future pick and place product introductions will transition to Malaysia in a much shorter time frame, limiting the initial pilot builds in San Diego.

Operating expenses for the first quarter are expected to be comparable to Q4 and will include approximately $300,000 related to our global ERP alignment project. Total 2016 costs for this project will be approximately $2 million. We expect to incur $200,000 of restructuring costs in Q1 which are associated with the transition of handler manufacturing to Asia.

As a result of the significant actions completed during 2015 to strengthen our balance sheet, divest our last non-core business, consolidate our Malaysia factories, and reduce our footprint in San Diego, Cohu is well-positioned financially to execute on our strategic growth plans in test contacting and wafer level package probe.

That concludes our prepared remarks and now we'll take questions.

(Operator Instructions). Craig Ellis, B. Riley.

Thanks for taking the question. I was hoping, Luis, you could just start by going into a little bit more detail in terms of what you are seeing with customer forecasts and orders to start the year. You had mentioned something in the transcript and there was some good end market color on 2015 and some of the momentum that's persisting into the year, but further color on the order environment would be helpful.

Sure. It's a little difficult to predict too far out in this industry, as you know, but what we are seeing right now is very much in line with a typical seasonal pattern for the first half of the year. You know, we have a pretty diversified business across many end markets and, as I mentioned, strongest in the automotive that has a secular trend.

And I think, more importantly, we are hard-working here to increase our addressable market so we can deliver profitable growth and not be at the mercy of macroeconomics.

On that point, you mentioned that you were interested in acquisitions or partnerships. Can you provide some further color on where acquisitions make more sense and where partnerships might be a better path for Cohu?

That will vary on a case-by-case basis, Craig. And beyond that, I would say we don't typically provide any more comments on acquisitions per se, but the differentiation is a case-by-case basis.

Okay. And then I'll just follow up with Jeff on a gross margin question. Just looking at the gross margin guidance in the quarter, it looks like it's related to products that were built in the fourth quarter and shipping in one quarter rather than the pace of the manufacturing transition over to Malaysia. Is that the right read, or do I have things turned around there?

Craig, that's the right read. Those units were built Q4, expected to deliver in Q4 but they are now being shipped in Q1.

Thanks guys. Congratulations on the nice performance.

Edwin Mok, Needham and Company.

So, the first thing is, on those systems that you mentioned, that was going to be built I guess now shipping in first quarter, how much was that and did that cause a shortfall that you make up by seeing growth in some other area?

I'm not sure I totally understood that question, but I can tell you that, again, these are the new Eclipse units that we manufactured in Q4. They were manufactured in San Diego at a higher cost.

Looking at the margin for Q2 at 32%, that is below the model, financial model, for that level of revenue. And the impact of these handlers is anywhere -- is about 150 basis points.

Maybe I'll try it differently. So, you know, since you were expecting that those Eclipse tend to be shipped in the fourth quarter, I would suspect that your previous guidance of $63 million in the fourth quarter would have included revenue from that. But then you meet or slightly beat that guidance even though those slips in the first quarter, so you must have seen strength from somewhere else. I'm trying to understand the puts and takes there.

You are absolutely right. That revenue did slip, and we made up that revenue with higher sales of both the gravity feed products and the turret-based products.

Okay, great. Thanks for clarifying that.

And then, for the quarter, any color you can provide on booking? I think, Luis, you might have said that booking increased sequentially, and so maybe some color that book to bill will be about 1.0 this quarter? And if not, can you provide bookings for the full-year? I think you talked about strengthening trend going into the first quarter. Are you anticipating stronger booking in the first quarter?

Yes, we are definitely going into the first quarter with a lot of momentum, interest from customers in our products and a strong forecast going into Q1.

I see. But no book to bill number? You cannot say if book to bill was over 1.0 or not for the quarter?

Edwin, we haven't communicated book to bill in prior quarters. It's not something that we talk about.

Okay, that's fair. On your commentary about auto and industrial, I notice that kind of as a percentage of total as well since your total revenue is down, as a percentage of total has also declined a few points this year versus last year. So, this is probably one of the weaker performing end markets for you guys in 2015. What contributed to that? And your comments suggest that you think that's a great kind of growth area for this in 2016. What turned that ship around?

Yes, you are correct in the observation. It was about 45% of our total systems in 2014 and 40% in 2015. As you may recall, and I made these comments in prior quarters, we saw, with the consolidation of two major customers in the auto space, the automotive market, last year, that, as usual, there was a pause or a delay in orders until those consolidations completed, which, as you know, a major one has just closed at the beginning of this last December here a few months ago. So that was a key contributor to sort of a slowdown or a holdup in the automotive market through a good portion of last year.

I see. So given that these deals are done, you expect the ordering trend in the business to be more stabilized plus the growth or plus the win you have on order to drive growth this year?

Exactly, that's exactly correct. I would expect the -- now that this is behind us, that we're going to see more of a normal pattern from those customers and in general from the automotive market.

Okay. Last question and I'll let the other guys ask. So talk about in our end market mobility, there's some discount fear on investor that weakness in the high-end mobile handset will impact not just handset guys but also the supply chain. And you guys have -- I think your mobile business actually grew last year and you got these wins. Can you give us like the present take on that? Have you seen kind of any slowdown or impact from kind of commentary by the large mobile handset guys in the high-end market? Have you seen an impact to your business, and how are you going to be able to outgrow that if in fact the market is slowing?

Yes, when we describe the mobile market, that means a variety of applications for us from the high-end mobile processor to the RF content to power and management ICs (technical difficulty) three semiconductors. So, it's a very broad application base not necessarily tied to only high-end smartphones but across the full spectrum. We continue to do well and capture new customers and new sockets in socket applications at existing customers throughout last year. So I think the momentum for us continues to be positive as we exit 2015 into 2016 in the mobility market.

All right. Great. Actually can I squeeze one in? Just on the contactor with the asset that you guys put in place, how much was contactor revenue? If you can kind of give a high-level roughly how much was contactor revenue for last year? And how do you kind of think about that business -- if I kind of look out three to five years, how do you think that business will transpire?

I'll answer at least the first part of it Edwin. Contactor revenue for the year was about 6% and Luis mentioned in his comments about all of the sort of groundwork that we are doing for meaningful revenue growth in 2016 and beyond. In terms of anticipated growth rates, I don't know if we've shared those before.

We shared at the analyst day that we have a double-digit actually in the 20% growth rate projection revenue for contactors over our midterm. So it is definitely an area of focus as I mentioned in my prepared remarks, and we should see substantial growth from the numbers that we had last year that Jeff just commented.

Great. That's all I have. Thank you.

Dick Ryan, Dougherty & Company.

Luis, I'm not sure if I heard your utilization commentary coming out of Q3 going into Q4 and I think it dropped from low 80s% or something in Q2.

Yes, our utilization was at about 77% at the end of Q3, and it increased a couple of points to 79% at the end of Q4.

Okay. And you mentioned evaluation on the WLP prober. Has that starting yet, or could you give a little more color on that evaluation? And has the first order shipped yet, or when do you expect shipment on that?

I would have to save that discussion for when we -- after we actually introduce, publicly introduce the product to market.

Okay. And Jeff, the customer concentration for Q4. Do you have what that was for the year?

I do. That was two customers. One was computing and the other one was automotive.

Okay, great. Thank you.

David Duley, Steelhead.

Typically, when you see some significant weakness in the back half of a calendar year, which is typically a strong seasonal period for you, the following recovery really snaps back pretty strongly. Do you think that there's any reason that we wouldn't see that type of behavior coming out of this particular downturn in the second half of last year?

That's perhaps a good question to ask to the semiconductor manufacturers because ultimately they are the ones that drive the demand for our products, and I would say they probably have at least a few months visibility ahead of our visibility. So I don't know how to answer that question other than it's a speculation and I don't have facts beyond our time horizon.

Has that been the past -- let me ask it a different way. In the past, when you've seen this type of behavior, you know, a major slowdown in the second half of the year, the seasonal uptick that you see coming out of it, has it been larger than normal, or do you expect a normal seasonal uptick from kind of -- with the market down 20%, there's got to be some sort of snapback. Historically, has that been the pattern?

Yes, you are correct. I mean you know this industry moves on the so famous stick and slip. And when you stick for too long, eventually the slip is faster. That's your snapback effect. It's the typical behavior on a capacity equipment base. Yes.

There's major mobility platforms coming out this new calendar year, and it's not just an upgrade from the previous ones. Both guys are putting out new phones. We've seen the test guys, particularly Teradyne, see a significant increase in the tick-tock years, I guess it's the even years. Do you see that type of phenomena with your mobility business as well?

Yes, I mean if you have an increase in test capacity, that generally applies to both the electronic component, the tester, as well as the automation component, the probers and the handlers. Nevertheless, handler orders usually lag testers by a few months.

And did you mention that you received a big subsystem order this quarter or a subsystem order this quarter, and that's usually for the compute application processes or CPU type products, correct?

Yes, we have received orders in beginning of this quarter for thermal subsystems, as I mentioned in my prepared remarks here. And these are used for essentially testing of processors.

Okay. Thank you so much. And I imagine that was one of the reasons why your orders were up sequentially.

Well, the comment I just made here was actually Q1, starting the beginning of this quarter of Q1 in (multiple speakers)

I see. So the thermal orders came in Q1, not in Q4.

Not sequentially related to Q4.

Okay. Thank you.

(Operator Instructions). Patrick Ho, Stifel.

This is actually Brian on for Patrick. Thanks for taking my question. The first question maybe is can you provide a rough idea of how much the overall test camera market contracted in 2015 and also frame your market expectations for 2016?

Sure. First of all, we don't have hard facts on 2015 overall market yet. But as I mentioned in the beginning, we do estimate that the test handler market contracted about 20% year-on-year in 2015.

Regarding the second part of your question here, 2016, it is very difficult to predict a full year ahead in this industry and all I can really say is that, near-term, we are seeing increasing customer interest in order momentum, and that suggests a typical seasonal pattern for the first half of the year. We do have a business that's pretty diversified, so I think I can only speak mostly about this momentum that we are seeing now for the first half of 2016.

Okay, okay. Thanks for some of the color there. Also just to follow-up on the wafer level package prober, I think someone asked about it earlier and you disclosed in the release. How normal is it to book a system prior to formal introduction? And what does that say in terms of your typical booking policies about revenue recognition timing? Is it typically sort of a six-month turnaround, or maybe any discussion you could provide there?

On any new product Brian, there will be up to a six-month time frame typically before the customer is satisfied with the performance of the machine and that it meets their criteria. So I think six months is a pretty typical standard time frame based on the experience before we can recognize revenue on delivery of a new unit.

Okay, great. Thank you.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management at this time.

Okay. Thank you for joining us on today's call and we look forward to speaking with you during one of our marketing trips or when we report our first-quarter 2016 results. Have a good day.