Cohu Inc (COHU) 2016 Q2 法說會逐字稿

Greetings and welcome to the Cohu second-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Good afternoon and welcome to our discussion of Cohu's most recent financial results. I'm joined today by our President and CEO, Luis Muller. Following our opening remarks, we will provide details of our performance for the second quarter of 2016, as well as our outlook for the third quarter of the year.

If you need a copy of 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 and 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, working 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 28, 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 10K and Form 10-Q. Cohu assumes no obligation to update these statements as a result of developments occurring after this call.

Further, our comments and responses to any questions will not make reference to any specific customers, as we are precluded from disclosing such information by our nondisclosure agreements.

And now I'll turn it over to Luis.

Thanks, Jeff, and good afternoon. In the second quarter of 2016, Cohu delivered solid financial results and better than forecasted profitability. Sales increased 16% sequentially to $76.4 million. Measure test [cellularization] across the installed base gained a couple of points to 84% and we secured the first order from a market leading Korean semiconductor manufacturer for our Eclipse pick-and-place handler.

At over 50% of total system orders, automotive and industrial is having a very strong comeback after a pause last year due to mergers and consolidation in the industry. We received a repeat volume order from a first-quarter customer design win for our major pick-and-place handler that is projected to derive share gains this year.

Trends in the segment, particularly in automotive, drove demand for all our handler technologies and also MEMS modules for testing sensors. We secured a new application for our strip handler, displacing a competitor's gravity platform. We expect continued momentum in the automotive segment for the remaining of the year.

Mobility and communications was 35% of system orders and particularly strong for our turret business. These systems are used for test and inspection of analog semiconductors, specifically RF and foreign management ICs. We recorded the first volume sale of the new 32-position turret platform at large European- and Japanese-based customers, replacing one of our older generation systems.

Also, in the second quarter, we received the first volume order from a business that merged with our current customer that gave us an opportunity to expand turret market share. [25]% of our turret orders in the second quarter were dedicated to vision inspection without electrical tests. This reinforces the success of our vision technology investments that are helping penetrate a more diversified 100 million segment of the market.

Overall, our turret acquisition from early 2013 has delivered substantial sales growth and has proven to be highly synergistic.

In the processor test side of the mobility market, we received repeat orders for the Eclipse handler from a leading fabless customer and a repeat order, though smaller than expected, for thermal subsystems. The recent announcement of declining smartphone sales by a leading US manufacturer is affecting near-term demand for these thermal subsystems.

As mentioned last quarter, we are in development of an integrated system level test platform, combining our thermal and automation capabilities that we expect to deliver $5 million to $10 million of incremental sales next year, expanding our product offering beyond traditional final test of mobile processors.

Computing had a strong shipment quarter, but as we previously noted, we are approaching the end of a [tooling] cycle and expect limited demand during the second half of this year. Our largest customer just completed an acquisition and selected our thermal handler as the standard platform for the newly acquired business.

Once again, we benefit from a consolidating customer landscape.

In solid-state lighting, we have repeat orders from a key European customer for our turret platforms, giving continuity to a business that has grown to represent close to 10% of our sales. Our contactor business had a sequential 18% increase in orders as we continued to gain traction across digital, analog power, and RF applications at various customers.

We have several new products and customer evaluations under way and we expect to convert in the coming months, growing our less volatile, higher-margin recurring business.

We are seeing some near-term reduced demand in computing and mobile processor test that is being offset by strength in automotive, solid-state lighting, and mobile RF with current handlers. We are benefiting from our broad and diversified product line end markets and project to end this year with a couple points share gain.

We also forecast double-digit growth in test contactors and we are projecting $15 million to $30 million incremental revenue from our wafer level package and system-level test platforms starting in the first half of next year.

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

Thanks, Luis. Overall, the results for the quarter were better than forecasted and Q2 represents Cohu's 10th consecutive quarter of non-GAAP profitability. The financial results were in line with our financial model, generating adjusted EBITDA of $8 million and cash from operations of $7.4 million.

In Q2, the GAAP to non-GAAP adjustments include approximately $1.7 million of stock-based compensation expense, $1.8 million of purchased and tangible amortization expense, and $276,000 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 to equivalent GAAP measures can be found in our earnings release located on the investor information section of Cohu's website. And unless otherwise noted, all amounts discussed on this call are from continuing operations.

Sales for the quarter were $76.4 million, higher than guidance due to the increase in demand for handlers, particularly from customers in the automotive market. One customer in the computing market represented 10% or more of sales.

Q2 gross margin was at the high end of our forecast, at 37%, stemming from lower product costs as a result of better cost absorption in our Malaysia manufacturing operation. Operating expense was $21.1 million, higher than our estimate, resulting mainly from a deferred compensation market adjustment, a small foreign exchange loss as the US dollar declined slightly against the foreign currencies we operate in.

We also had an increase in variable selling expenses and costs related to our ERP alignment project that were accelerated in the Q2 from the second half of the year. This is timing impact only and will not affect the total projected 2016 costs.

A Q2 effective tax rate on income from continuing operations was 17.4% and the year-to-date effective tax rate is 20.4% and tracking to our projected rate of 22% for 2016.

Selections were strong in Q2 and accounts receivable decreased sequentially despite shipments increasing by 8 million quarter over quarter. DSO improved by eight days to 81. The inventory balance also decreased sequentially, improving inventory days to 98 and our overall cash conversion cycle improved by nine days to 124.

Fixed asset additions in Q2 were approximately 900,000 and appreciation for the second quarter was also approximately 900,000. Deferred profit in June was $6.9 million; that's up $1.3 million quarter over quarter. And the related deferred revenue at the end of Q2 was $9.9 million. That's up $2.6 million sequentially.

Cohu's directors approved a quarterly cash dividend of $0.06 payable -- $0.06 per share payable on October 21, 2016, to shareholders of record on August 26, 2016.

And now moving to our guidance for Q3. Sales will be approximately $68 million, reflecting seasonally strong demand from automotive and global RF markets and some reduction in near-term demand from the computing and mobile processor test markets. We expect Q3 gross margin to be approximately 35%, which is in line with our financial model at this level of revenue. Operating expenses for the third quarter are also expected to be in line with our financial model at approximately $20 million, including roughly $450,000 related to our global ERP alignment project.

Q3 R&D expense will include new product developing costs related to the opportunities Luis referred to and WOP and system-level tests with initial product deliveries starting late this year and volume in the first half of next year. We expect R&D expense in Q3 and Q4 to be comparable to Q2.

That concludes our prepared remarks and now we will take your questions.

(Operator Instructions) Patrick Ho, Stifel.

This is Brian calling in for Patrick. Thank you for letting me ask a question.

Maybe first, just to go back to some things you discussed in the prepared remarks. I think I heard you say that in the first half of next year you expect $15 million to $30 million of incremental new product revenues.

So is that basically taking the prior $10 million to $20 million wafer WLT [prober] revenue and kind of adding a layer of $5 million to $10 million for the subsystem level test? That's my first part of the question.

Yes, Brian. That's correct. Because the numbers we quoted here were related to the wafer level package prober and the system-level test platform.

Okay, thanks. And thinking about that revenue stream, correct me if I'm wrong, but generally speaking, new products tend to carry lower initial gross margins due to higher warranty and after sales support costs.

So I guess my question is, do you expect that situation to play out initially here and can you give us any guidance in terms of what that drag would represent and also whether you plan to manufacture those platforms initially in San Diego or Asia?

So I'll take those questions, Brian. Maybe I'll start with the last half of that. We plan to move the production -- the volume production of those units into Malaysia. And that's also a big reason why we're not expecting to see a drag on the gross margin after these products are launched. So we're going to build their first units, first two to three units in one of our development centers most likely -- Germany for one product and San Diego for the other product. But shortly thereafter the volume manufacturing is transitioned to Malaysia and we expect to realize when revenue is recognized margins in line with our model.

Okay. And maybe a quick follow-up, then. I think you also mentioned that you have a new win for a Korean customer.

Is that a mobility customer, so similar to some of your recent Eclipse wins. And then using that as sort of a proxy, can you give us any sense in terms of the magnitude and maybe timing of revenue for this win?

This customer in particular is making semiconductors for a variety of applications, mobility being one of them. I think they also have a series of consumer products.

So, what I can tell you is that it is a non-memory type of device that we are testing on the Eclipse handler. And I really view this as an entry point into that customer that we expect to expand into other applications over the course of the next few quarters.

So I don't have much to comment in terms of the size of the total opportunity. Needless to say, it's a market-leading customer entry.

Okay. Maybe just one last thing just in terms of maybe seasonality here. But in terms of your guidance for Q3, down sequentially off a strong Q2 and you had some commentary about and markets there.

But utilization rates bumping up to the mid-80%, pretty good level. So does this kind of speak to sustainability, given that utilization rates are at a pretty good level here, exiting Q2? Is that really what this guidance is a reflection of?

Yes, I think that's a good assumption. At these utilization rates, we do see a pretty good strength across many end markets.

And on the other hand, as I mentioned in my prepared remark here, there has been a reduction in smartphone volume production year on year from a leading manufacturer that negatively impacts our mobile processor application of thermal subsystems.

Nevertheless, like I said, at 84%, we are seeing really good strength in automotive industrial solid-state lighting. And the other side of mobile and RF actually, even applicable to IoT as it pertains to our turret-based platforms. So yes, quite a bit of strength across many of our handler platforms.

Okay, great. Thanks, guys.

(Operator Instructions) Edwin Mok, Needham & Company.

Great, for taking my question. First question, just following the guidance. So based on the commentary, you should have a lower customer concentration because fewer large customers in mobile and car computing or PC are buying less, right? Wouldn't that help you on your margin [price]?

Not necessarily. It just depends on the particular product and the particular customer. And volume obviously, lower volume is going to negatively impact the gross margin. Perhaps you are referring to in quarters where we have lower overall revenue, recurring tends to be a higher percentage of the overall revenue, so that is somewhat of a benefit. But I don't think your statement about fewer customers helping to drive a higher gross margin is true. I think it's more about product mix.

Okay, that's helpful. I think recently you said your turret product -- 25% of the turret orders -- or is it orders; sorry, I missed that -- was dedicated to vision only. And I think you gave some kind of market opportunity, a number there. So seems like that is doing quite well. Any way you can give us some color in terms of why consumer buying just vision only turret handler? And then also what's your share and how big do you think the market is right now?

Yes, just start from the end. We still have a small percentage share of the inspection only market with our turret systems. Why do customers by our turret systems during inspection? Frankly what's in the market today is more of a pick and plays linear-based system which is slower, relative to our turret-based applications. There are some inherent difficulties to getting turrets to be as flexible as the pick and plays and pulling the vision system into a turret-based system. And that's what we have in overcoming with vision technology that you may recall, we introduced a 3D flex vision in July of last year and now with the new 32 position turret platforms, whether wafer or now just a basic turret that we just introduced now, we have a [steep] advantage in a capable vision system now to really go at the vision-only inspection market applications.

So, how much of -- was that 25% of your order or shipment and how much revenue were you generating from this vision-only system?

What I said was 25% of our total turret platform orders in the quarter were for vision inspection only. I didn't peg a number to that, but you get the percentage.

I see, okay. That's still helpful. Moving on to [Cohu auto drivers], so first on a contact revenue, you say is up 18% sequentially. And you expect double-digit growth for contactor. How big is your contactor business right now, at least in a rough -- is it 10% of the business? So if you've got some rough idea. And this growth, is it mostly driven by just organic assets and how do you think about M&A with that business now working well?

Well, our contactor business was about $16 million last year. And like I said, we're targeting to grow at double digits this year and that's purely organic thus far. As I mentioned in the past, we don't think of growing contactors only organically. I think there are various mechanisms, one of them partnership, which we have announced last year in RF. Other potential ones that include acquisition in the future. But thus far, the numbers that I'm quoting are purely organic growth.

Okay, that's helpful. And then on the wafer level packaging product, you guys haven't officially announced a product, but I think, if I hear you correctly, you said $5 million to $10 million of wafer level packaging revenue expected in 2017? Is that based on -- I think two quarters ago, you guys announced you might have secured an order for yet to announce product. Is that based just on that one order from that one customer or is it based on your conversation with multiple customer that leads you to believe you [can't] get to that level of revenue?

No. Actually, you're mixing up the numbers a little bit, Edwin. What I did mention in the prepared remarks is that we expect to deliver $5 million to $10 million of incremental sales of our new system level of platform next year. And then later on, I mentioned that we are projecting $15 million to $30 million incremental revenue next year from both the system level test platform and the wafer level package program. So combining the two products now.

Right, so that means the -- if you back out the system level sales, it means your wafer level product will be more like $10 million to $20 million, then. Right?

That is correct. That is correct.

So -- okay, thanks for clarifying that there. But my question is actually -- more pertains is that based on one particular customer that you guys announced order to recently? Or is based on multiple customers you have discussions with?

We think there's one customer that can drive that volume, one customer alone. I'm sure -- expect to be driving revenue from multiple customers, but I think one customer alone has that potential.

Okay, great. That's very helpful. Lastly, just Jeff, going back to the OpEx side. I think you mentioned that there was some pull-in of ERP-related expense into the second quarter. Does that mean that we should expect lower ERP spending out of fourth quarter this year, then?

Yes, slightly lower. But in the full year, it was still pegging at $2 million costs in 2016.

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

There are no further questions at this time. I would like to turn the floor back over to Jeff Jones for closing comments.

Okay. Thank you for joining us on today's call. We look forward to speaking with you at the upcoming Dougherty investor conference in Minneapolis on September 28th or when we report our third-quarter 2016 results. Have a good day.