Cohu Inc (COHU) 2016 Q1 法說會逐字稿

Greetings and welcome to the Cohu first-quarter 2016 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Jones, Vice President Finance and Chief Financial Officer. Thank you, sir. You may begin.

Thank you. 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 will provide details of our performance for the first quarter of 2016 as well as our outlook for the second quarter of the year. If you need a copy of our earnings release, you may obtain it 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, 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, April 28, 2016, and the Company assumes no obligation to update these comments.

We encourage you to review the forward-looking statements section of our 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. In the first quarter of 2016, Cohu again delivered solid financial results and better than forecasted profitability. While Semi reported an 11% decline in backend equipment orders in March, measured test cell utilization across the installed base gained a couple of points to 81%. We are encouraged by strong orders and substantial progress in the mobility market with key design wins in the growing RF segment and repeat orders for our active thermal handlers for testing mobile processors.

In the automotive market, we captured a large European customer with our tritemperature pick-and-place handler. At 39% of total system orders, consumer and mobility was Cohu's strongest market in the first quarter. We introduced a series of products in the last 15 months that we expect will drive significant share gains, and, for the first time, orders in this market surpassed automotive and industrial, historically our largest segment.

Cohu's new turret systems are well suited for handling and inspection of wafer-level and, then, fragile QSN packages that are prevalent in RF semiconductors. With these systems we captured sizable orders from two new customers, a leading US and a major Japanese semiconductor manufacturer with test operations in China.

We plan to fulfill these orders with shipments in the second and third quarters.

In the mobile digital segment we received repeat orders for the Eclipse handler for testing power dissipative processors from a leading fabless customer that qualified this handler in the first half of last year. The majority of these systems will be installed at test subcontractors in Taiwan and Korea during the second quarter.

As we have commented before, the thermal subsystems business is inherently lumpy. And, while we expect weaker demand for the next few quarters, we received multiunit orders in the first quarter for testing server processors and orders from a leading mobile customer in early second quarter.

In the automotive and industrial market was 33% of system orders. We scored a key design win with our Matrix pick-and-place handler, displacing a European competitor. We expect this new customer to drive about a point share gain for Cohu in the test handler market starting this year.

We also have solid demand for handlers testing power semiconductors in MEMS devices, particularly pressure in magnetic sensors that are part of the growing IIC content and intelligence in vehicles.

Computing was 20% of system orders and stronger-than-expected. We received additional orders for turret handlers in support of testing high-end processors.

Solid-state lighting was 8% of system orders. A current major European customer continued to ramp production and placed the multiunit order for turret handlers. We had the design win from another large customer for testing five side emitter LED devices, particularly notable since these devices present complex challenges for handling and contacting.

On our market expansion initiatives, we have made good progress and are beginning to develop and deliver solutions for critical customer applications. [In RF], the growth of Internet traffic and network devices that include wearables, machine to machine and vehicle to vehicle or vehicle to infrastructure systems demand faster wireless speeds that drive higher semiconductor volumes with devices like near field communications, filters, switches and power amplifiers.

We're already benefiting from this secular growth trend, gaining share with turret and also starting to develop new opportunities outside our core handler market. Last July we introduced a 3D flex vision system for wafer level package inspection. This three-dimensional measuring capability is now a key differentiator enabling share gains and increased ASPs for our turret platforms.

We recently introduced the RF scrub test contactor and received a first round of orders following several of qualification at five customers, validating this innovative, long-lived, elastomer-free solution for testing high-frequency semiconductors over a wide range of temperatures. And we are in customer evaluation of our new WLP [program]. This system provides token handling of bare die wafer level packages, reconstituting a round wafer input onto an ostomized forecast rectangular [chuck] that enables reuse of existing probe card infrastructure. A full configuration of this platform is also capable of laser marking, final vision inspection and casing, eliminating the need for material transfers between equipment, reducing work in progress and risk of device damage.

We believe this could drive $10 million to $20 million of incremental annual sales starting in 2017.

The increasing vertical integration of semiconductors enclosed in a single module that performs various functions, known as system in package, drives the need for comprehensive test solutions that transcend the boundaries of traditional IC test. In response, we're developing and secured a design win and initial order for a new system-level test platform that is still under development. Such early orders are evidence of the strength of our product solutions and further validate our strategy to organically expand in core adjacencies.

Looking forward, we see positive momentum in the automotive, mobile RF and IoT markets as well as customer attraction for our new contactor products.

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

Thanks, Luis. Overall, our results for the quarter were either in line or better than forecasted, and Q1 represents Cohu's ninth consecutive quarter of non-GAAP profitability.

During the quarter we continued to make progress in reducing costs by shipping our first Eclipse unit produced in our Malaysia factory and we restructured our handler subassembly operations in the Philippines. Consistent with our operational strategy, we are reducing the number of -- the amount of vertical manufacturing activities within Cohu by outsourcing subassemblies to local contract manufacturers and converting approximately $700,000 of annual fixed costs into variable costs.

Additionally, this move will focus the Philippines operation on our strategy to grow our contactor and other recurring business.

Now moving into the Q1 financial details, the GAAP to non-GAAP adjustments included approximately $2 million of stock-based compensation expense, $1.8 million of purchased intangible amortization expense and $140,000 of restructuring costs. My comments are based on Cohu's 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 information section of Cohu's website.

As a reminder, on June 10, 2015, we sold our microwave communications business. Operating results for this business is presented as discontinued operations with all prior-year period amounts being reclassified. Unless otherwise noted, all amounts discussed on this call are from continuing operations.

Sales for the quarter were $65.8 million, and higher than guidance as we achieved customer acceptance of new products sooner than originally anticipated. Two customers each represented 10% or more of sales, one in automotive and one in the computing market.

Q1 gross margin was in line with forecasts at 31.6%, which includes the impact of the initial Eclipse handlers manufactured in San Diego, as we discussed during our last earnings call. And as I mentioned earlier, volume manufacturing of the Eclipse handler has been transitioned from Malaysia, and we project achieving gross margins in line with our other handler products and our financial model.

Operating expense was $18.6 million, lower than our estimate as a result of product development materials originally planned for Q1 that will now be received in Q2.

The effective tax rate on income from continuing operations was approximately 30% and higher than our 22% projected rate for 2016, because of a domestic loss in Q1 on which no tax benefit was provided, due to our valuation allowance on deferred tax assets.

Cash used in operations during the quarter was $1.5 million. Accounts receivable increased sequentially as shipments increased by $8 million quarter over quarter. DSO improved slightly to 89, and the inventory balance also increased sequentially in preparation for higher shipments in Q2 versus Q1. Inventory days improved by four to 114 and our overall cash conversion cycle improved by 13 days to 133.

Our fixed asset additions in Q1 were approximately $1 million and depreciation for the first order was approximately $900,000. Deferred profits at December was $5.6 million, up $1.8 million quarter over quarter. The related deferred revenue at the end of Q1 was $7.3 million. That's up $2.3 million sequentially.

Cohu's directors approved a quarterly cash dividend of $0.06 per share, payable on July 29, 2016 to shareholders of record on June 17, 2016.

And then moving to our guidance for Q2, we expect sales of approximately $74 million with significant improvement in gross margin to between 36% and 37%. Operating expenses for the second quarter are expected to be approximately $1 million higher than Q1 as a result of the development materials that were anticipated coupon but delayed into Q2, and new product development costs related to the opportunities Luis refer to in RF and system-level test with the initial product delivery starting late this year and volume in the first half of next year.

In order to meet this timeline, we are accelerating product development costs and project R&D expense in Q3 and Q4 to be comparable to Q2.

Q2 operating expenses will include approximately $400,000 related to our global ERP alignment project. And as I mentioned previously, total 2016 costs for this project will be approximately $2 million. We expect to incur approximately $100,000 of restructuring costs in Q2 associated with the transition of handler manufacturing to Asia.

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

(Operator Instructions) Patrick Ho, Stifel.

This is Brian on for Patrick. Thank you for letting me ask a question. First question, ATE company orders, so your adjacent equipment vendor there in the test cell -- it's leveled off or even declined some here in Q1 after an unexpectedly, perhaps, strong initial uptick. Can you discuss the sustainability of test handler shipment growth, given these dynamics, and maybe your confidence level in Company-specific initiatives, be it share gain or product or market momentum, etc., that could allow your trajectory maybe to prove more durable?

I can't comment on the ATE orders or what happened there. But speaking from our side, we have, as we mentioned in the past, about a quarter's visibility, good visibility in the business. And it's very difficult to predict what's going to happen beyond this near term.

Nevertheless, we do see strong momentum for handlers in the automotive space as well as for our products link to RF test in mobile and BIOT markets. And just going to say perhaps most important thing to remember here is that the business today is balanced across several end markets and we are not specifically tied to one big customer order, perhaps like what happened in the ATE side in the mobile-specific segment of the market.

Got it, that's helpful. Maybe one quick follow-up -- I appreciate the commentary on utilization trending up a little bit to about low 80%, 81%. Not getting to granular, but from an end market standpoint, or IDM versus subcontractor standpoint, do you see a little stronger uptick in any of those areas and maybe any markets that are lagging behind a little bit?

If you think in terms of IDMs and OSETs, they are running at about the same utilization right now. I think the OSETs may have picked up a little stronger quarter on quarter than the IDM on just 2 points gain. But they are both about equal at this point.

Okay. And anything on the end market side?

Well, on the end market it's like what I mentioned here from my remarks. We are seeing really good strength on the RF side, particularly, which applies both to mobile and IoT. We have seen a pickup in the automotive market. Particularly in Q1 we have seen stronger than anticipated computing market.

I would say industrial is still the market that hasn't come out as strong as we would have expected. LED markets continue to do well. And as I mentioned, we have picked up one new large customer for our turret equipment.

Okay, great. Thank you.

Edwin Mok, Needham & Company.

So the first question would be -- [let's have] the new product. The WLP -- you said that you are targeting somewhere between $10 million to $20 million of revenue [that was mentioned] in 2017. I was wondering is that number just from the first order that you guys have previously disclosed, or is it from incremental order that you expect to secure as you start sampling this product to your customers?

That would be as we start to get volume orders for volume production for this product line. And yes, it is still associated with the initial customer. But that first order was not for $20 million.

I see. Okay, that's fair. That's, okay, good to know. And then on the new system-level test product you guys are talking about for the RF that you guys are developing, can you give some color on that? Maybe it's cause of use case for that.

I know that you guys sold some system-level tests for thermal test products before for mobile processors, the kind of similar type of system-level test. Maybe a little bit more color where that product sits in terms of where in the test space, basically?

Look at it this way. As the market moves towards greater silicon integration, major semiconductor manufacturers that deliver products that integrate a processor, memory, RF, power management ICs need to test these so-called systems in a package. Okay? As you pointed out, we have been, in this market, supplying thermal subsystems.

But we saw an opportunity here to develop a full automation platform leveraging on our core competencies. So that's what this is about is the integration, the automation that we are capable of doing through our handlers with the thermal subsystems that we have been supplying into this space, creating a new platform that we think will be quite disruptive and a very interesting proposition to where semiconductor technology is going with system in a package.

Okay, okay. Actually, that's good color there.

On the order fronts, I think you mentioned that was very strong in the first quarter. But you -- I think in the prepared remarks you talked about maybe potentially to coming down a little bit in the second order on the thermal subsystems side. Did I hear that correctly? And is that mostly related to kind of processor side, or can you clarify that?

Sure. That's not exactly how I characterized it. What I did mention is that the thermal subsystems business is inherently lumpy. And we had forecasted or expected a weaker demand for thermal subsystems for the next few quarters.

Nevertheless, we have received a multiunit order in the first quarter and have received an order already in the beginning of the second quarter for these thermal subsystems. That's essentially what I said.

Okay, okay. That's helpful for clarifying that. Last question and I'll let the other guys ask -- I know you guys officially don't start providing quarter data, but is it fair to say that in first quarter your book to bill was way, way over 1.0, given -- well, obviously, given your guide to your guidance? And do you think that is sustainable as you go into 2Q?

Yes, you are right. We don't provide orders and we also don't provide a book to bill. But I think what is fair to say is quarters were in Q1 from Q4, so we get another sequential increase in orders for the first order. As far as what is going to happen ahead, that's a very tough-to-answer question. It's difficult to forecast these things.

Okay, that's very helpful. Thank you.

(Operator Instructions) David Duley, Steelhead Securities.

Just off the top, do you guys think the handler market will increase in size this year?

That would be an even more difficult question to answer than trying to predict Q3 at this point, because you would be including fourth quarter. So again, I don't know where the handler market is going to do this year, and we tend to focus more on how can we drive growth organically through share gains and opportunities we are pursuing with the new products including WLP probe, system-level tests and the test contactor market that we're going after.

For the segments of the market that you serve -- you rattled off four or five of them here in your prepared remarks -- which one of those do you think might grow here in the near term?

RF semiconductor market is going really strong for us right now, and I think that's combination of RFs going into mobile as well as Internet of things.

Okay. Do you have market share data from 2015, and do you have a guess as to what your market share was of the market last year, perhaps even in the gravity or pick-and-place area?

We will have that data for the next call. In fact, that third-party data should be coming out available in a matter of weeks. And then we have to do some intelligence and review and adjustment to that data. So by the end of Q2, we should have our accurate view of the market share for 2015. But no, I don't have the specifics by segment yet.

Okay. And what currently are your leadtimes for pick-and-place and gravity?

It will vary from -- on the order of nine weeks to probably 14 weeks at this time.

Okay, thank you.

It depends on the configuration of the system. We have simpler and more complex configuration products.

All right, thank you.

(Operator Instructions) Dick Ryan, Dougherty.

Jeff, what was the impact from Eclipse on margins in Q1? Rough impact, I guess?

Yes, the impact in Q1 was a couple hundred basis points.

Okay. So that will be completely gone for Q2 and it's -- the volume getting into the mid-70s to get it to the 36-37? Anything else in there?

No, that's really it. We got over the hump on Eclipse. As I mentioned, that's fully transitioned to Malaysia. And so now it's back to achieving that financial model that we've been talking about. So it's really the Eclipse impacting back to the revenue level of $75 million, $74 million.

Just to refresh, has everything been transitioned over to the Asian production now? Or is there still something yet to come?

There is still some gravity feed. And we do have the first handler, gravity handler that has been transitioned. And actually we are shipping volume out of Malaysia on that handler. So we are working on subsequent gravity handlers.

We are also transitioning spares out of -- spares business out of San Diego into Malaysia. So that is still to come. And pick-and-place -- for the most part we will have additional configurations. But as I said, we've already transitioned the Matrix and the Eclipse pick-and-place handlers.

Okay, thank you.

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

All right, thank you for joining us on today's call. We look forward to speaking you at the upcoming B. Riley investor conference in Los Angeles on May 20 or the Stifel conference in San Francisco on June 7 or when we report our second-quarter 2016 results. Have a good day.