Cohu Inc (COHU) 2016 Q4 法說會逐字稿

Greetings and welcome to the Cohu 2016 fourth quarter and full-year earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jeff Jones, CFO. Thank you. You may begin.

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'll provide details of our performance for the fourth quarter and full year of 2016 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 16, 2017, and the Company assumes no obligation to update these comments. We encourage you to review the forward-looking statement 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 non-disclosure agreements.

Now, I'll turn it over to Luis.

Thanks, Jeff, and good afternoon, everyone.

Last year, I laid out a strategy to grow share in test handlers, expand and serve the available market in test contacting and wafer-level package probe, and continue executing new product developments with strict financial discipline.

For fiscal 2016, Cohu's sales were up 4.6% year on year. Non-GAAP income from continuing operations increased 20%. And we gained approximately 2 points of market share in test handlers. We also grew our contactor business and executed the acquisition of Kita, a Japan-based company that designs, manufactures and sells spring probes used in final test contactors, probe cards, PCB test boards, and connectors sold to customers worldwide.

For the year ended December 31, 2016, Cohu achieved sales of $282.1 million, non-GAAP income of $18.8 million, and earnings per share of $0.68. After generating $24.7 million in operating cash flow, we ended the year with $128 million in cash and investments and Cohu's balance sheet remains strong. Cohu returned $6.4 million to shareholders through quarterly cash dividends.

We started 2016 scoring a key design win with our tri-temperature pick-and-place handler at a large European automotive semiconductor customer and later captured significant new opportunities with our turret handlers testing and inspecting RF devices. Despite lower demand for thermal subsystems, customer wins with the Eclipse handler at various fabless and test subcontractors led to further expansion in the mobile processor segment.

In the contactor market, the introduction of new products for testing power management semiconductors led to a 17% increased order year on year. Additionally, in early 2016, we announced the RF Scrub solution, our first foray in the high-performance contacting segment, testing high-frequency devices.

We capped the year with the Kita acquisition that provides technology and manufacturing capability, enabling our expansion in the largest segment of digital semiconductor test. With Kita, we can supply test contactors to Cohu's large installed base of handlers at automotive and mobile customers.

We introduced two new handler platforms last year. At SEMICON West in July, we announced the NY32 turret for test and inspection of thin, fragile, small semiconductor packages. We realized tremendous success in the second half of the year capturing new customers, particularly for semiconductor filters used in mobile communications and IoT markets.

In December, we introduced the Eclipse tri-temperature handler that provides precise multi-site temperature management and yield optimization for an emerging class of powerful processors used in autonomous vehicles, augmented virtual reality, and deep learning applications, giving Cohu continued leadership in advanced thermal test.

Overall, automotive and industrial grew to 52% of system sales following share gains and continued segment momentum. Mobility, which was 32% of system sales last year, was the main driver of turret handlers, primarily for test and inspection of RF semiconductors. Computing and memory was 9% and solid state lighting was 7% of system sales.

Our strategy is based on continued expansion of market share in test handlers and inspection, growth in test contactors and probe, and investment discipline that has led to sustained improvements in gross margin and profitability. Looking ahead, Cohu will benefit from cross-selling synergies as we execute the strategy and expand the addressable market to approximately $1.5 billion.

The introduction of new contactors and wafer level package probe will augment share gains in our core test handler space. We start the year with several projects and evaluation opportunities for contactors that will drive an increase in recurring revenue. Cohu's new prober is in evaluation at a leading semiconductor customer for testing several power management and RF devices in singulated wafer-level packages. As previously stated, we plan for this product to generate revenues in the second half of this year.

We expect both the handler and test contactor markets to grow year on year and Cohu's plan is to outperform these and further enhance profitability. We're benefitting from recent customer wins and order momentum is strong with forecast book-to-bill above 1 for the March quarter. Customer and end market diversification, as well as growing revenue contribution from recurring that includes test contactors, are driving improved predictability in the business model. Acquisitions have been an important and successful part of our strategy and we will continue to identify and evaluate opportunities.

Now, I turn it over to Jeff for more details on the financials and Q1 guidance.

Thank you, Luis.

Before I move into Q4 financial details and our Q1 outlook, I'd like to touch on a few highlights from last year. 80% of our handlers for 2016 were delivered from Cohu's Malaysia manufacturing operation benefitting our gross margin, which averaged nearly 37% in the second half of the year, and we're expecting a strong gross margin in Q1.

Throughout 2016, we achieved non-GAAP profits each quarter in-line with our near-term financial model and Q4 was Cohu's 12th consecutive of profitability. Cohu had strong cash generation from operations of approximately $25 million and adjusted EBITDA was $27.1 million or approximately 10% of sales.

For Q4, the GAAP to non-GAAP adjustments include approximately $1.9 million of stock-based compensation expense, $1.5 million of purchased intangible amortization expense, $496,000 of restructuring costs, $896,000 of costs related to the acquisition of Kita, and $588,000 of costs related to the reduction of a tax indemnification receivable recorded in connection with Ismeca acquisition in Q1 of 2013.

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 Investor Information section of Cohu's website. Unless otherwise noted, all amounts discussed on this call are from continuing operations.

Sales for the quarter were $70.7 million and higher than guidance due to increasing demand for our turret handlers particularly from customers in the mobility and communications market testing high-performance, mixed-signal, and RF devices. One customer in the automotive market represented 22.6% of sales during the quarter. For the year, one customer in the automotive market represented 14% of sales and one customer in computing represented 17% of sales.

Q4 gross margin was 37.8%, significantly better than our forecast, benefitting from higher sales and manufacturing cost leverage in Asia, lower manufacturing overhead in San Diego, and product mix. Operating expense was $18.3 million and lower than our forecast of approximately $20 million due to foreign currency gains as a result of the strengthening of the U.S. dollar against the euro and Swiss franc.

The Q4 effective tax rate on income from continuing operations was 22.7%. The full-year 2016 effective tax rate was 22% and in-line with our projections. We're projecting a 23% effective tax rate for 2017.

Accounts receivable increased sequentially. Q4 shipments were approximately $8 million higher versus Q3. And DSO remained virtually unchanged at 79. The inventory balance decreased sequentially, mainly due to higher shipments quarter over quarter, and inventory remain flat at 97.

Accounts payable days improved during Q4 and accounts for the overall cash conversion cycle improvement of 15 days to 108. Fixed asset additions in Q4 were approximately $800,000 and depreciation for the fourth quarter was also approximately $800,000. Deferred profit at December was $6.9 million. That's up $1.2 million quarter over quarter. The related deferred revenue at the end of Q4 was $9.3 million and that's up $2.9 million sequentially.

Cohu's directors approved a quarterly cash dividend of $0.06 per share payable on April 14, 2017 to shareholders of record on February 28, 2017.

And now, moving to our guidance for Q1, we expect Q1 sales will be approximately 10% higher than Q4 at $78 million. Kita will add approximately half of the increase quarter over quarter.

Gross margin in Q1 is forecasted to be approximately 38%, which is better than our current financial model by approximately 100 basis points. With 80-plus% of our handlers produced in Asia, we plan to revise the financial model up going forward for similar revenue levels.

Operating expenses for the first quarter are projected to be approximately $22 million including roughly $1.3 million for Kita. Our projection for Q1 non-GAAP OpEx excludes approximately $300,000 of Kita acquisition costs, which are mainly audit and legal fees. Additionally, with the acquisition of Kita, we expect Cohu's depreciation expense in Q1 will increase by approximately $400,000 to $1.2 million.

We are in the process of determining the purchased intangible assets and inventory write-up in accordance with U.S. GAAP purchase accounting. However, our preliminary estimate is that Kita will add approximately $200,000 of intangible amortization per quarter and Cohu's total intangible amortization expense estimate for Q1 is $1.3 million, which is approximately $500,000 lower than previous quarters because certain intangible assets acquired in the Rasco acquisition during Q4 of 2008 have been fully amortized. The Kita inventory write-up could be approximately $1 million, which would flow through cost of sales during the first three quarters of this year. Any changes to our initial estimates of the fair value of Kita assets, including intangible assets acquired, may result in different amortization amounts being recorded in the first quarter or subsequent quarters.

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

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. (Operator Instructions). Edwin Mok, Needham & Company. Edwin, your line is now live. You may proceed with your questions.

Sorry about that. Actually, this is Arthur on for Edwin. Congrats on the great quarter and the good guidance. And thanks for taking my questions.

So, just to jump straight into it. I just wanted to see what end markets were an area of strength (inaudible) in 4Q. If you could just provide a breakdown of the mix that you have seen between the key markets that you planned for 4Q and kind of what your expectations are for the change in mix going to 1Q.

Okay. Hi, Arthur. This is Luis. In the fourth quarter, from an order perspective, we saw strength in both the RF and high-performance mixed-signal market, as Jeff had already stated. And, frankly, this has to do much with RF filters that are growing I think at about a 15% rate according to several research reports I've seen. Frankly, the number of communications bands is increasing, driving, I guess, proliferation of RF content in smartphones and tablets. I saw recently a study that showed that premium smartphones have now over $16 of RF content driven by the sort of integration of RF technology.

And this not a particular Q4 event. So, not a blip in business, but something that we think is going to continue here in Q1 and subsequent quarters. We have been seeing sort of a steady demand for products in that space for over five quarters now.

The other piece is automotive. If you look at Q4 alone, it was 55% of our system business and continuing. As you know, China is accelerating the implementation of emissions standards, or tough emissions standards, that were originally planned for 2020, but were pulled in now. And it's well-known that they have some of the worst air pollution in the world due, in part, to years of sort of lax emission regulations covering their factories as well as vehicles.

These new standards in China, I think they're called National 6, are meant to the equivalent to the Euro 6 standards that were implemented in 2015 in Europe. And I think they're here to drive the auto semiconductor industry for a least the next few quarters and perhaps even for the balance of this year.

Got it. Thanks for that color. So, Luis, just going off of your comments in your prepared remarks about improved predictability in the model off of your customer and end market diversification. You guys have historically shown that you have been strongest in the middle of the year. How should we think about linearity of revenues as you go into 2017? Should we, with this stability in the revenue, should we expect more steady quarterly growth? Or do you feel like seasonal trends will still continue?

There are still going to be seasonal trends in the equipment side of the business. But, as you know, for this year we're also increasing our contactor sales from the acquisition of Kita, new products that we'll be introducing, and, obviously, the cross-selling synergies, opportunities with Kita that should me materializing through the year. As well as we're doing the introduction of our new prober this year that should bring incremental revenue in the second half of 2017. So, that is going to add on to the seasonality, the typical seasonality of the test handler business. And particularly the contactors that adds onto recurring will dampen the effect of the test handler seasonality.

Okay, thanks. That was great. And last question for me. Can you provide a little update on the progress that you have made on the system-level test solution? I think last time you had mentioned that you're planning to launch a product this year. Do you have a ballpark timeframe when we can expect that?

Sure. Yes, just to recap and add some color on what that is, actually. As the industry moved to smaller silicon nodes and greater integration, some of the major semiconductor manufacturers, particularly the ones delivering integration of processors, memory, RF, power management, ICs, they needed to test these in what we call system package, system-level package, system in a package. We have been, in this market, actually supplying thermal subsystems and now we're pursuing more of the automation platform.

But, with that, that is a product that is actually behind in development relative to our wafer-level package, which comes first; behind being just second in line. So, we will see some revenue this year. We have originally modeled something on the order of $5 million to $10 million this year. Timing will tell. It certainly would be in the sort of the second half of the year and potentially into 2018 at this stage.

Great. Thanks for answering my questions.

Craig Ellis, B. Riley Financial.

Thanks for taking the question and congratulations on the very strong performance in the quarter and the outlook.

The first question is really just a clarification from a comment made on the last call. I believe on the last call the Company identified that there was around $5 million of turret handlers that were shifting from the fourth quarter to sometime in the first half of calendar 2017. Is any of that $5 million incorporated into the first quarter's guide or how should we expect that to land?

Hi, Craig. It's Jeff. Yes, in the quarter we didn't end up deferring revenue for all $5 million. We were able to recognize some of that. So, we did defer about $3 million and that rolls into our Q1 forecast.

Okay. Thanks for that, Jeff. And then, the follow-up, just sticking with some revenue items. Luis, in your prepared remarks, you talked about handler, test, and contactor year-on-year growth and I wasn't sure if you were talking about industry growth or if you were speaking to Cohu growth. So, if it was the latter, can you provide more color around that and some of the specific product programs and when they might hit through the year that leave you confident in year-on-year growth?

Okay. On the prepared remarks I was really talking about two things. One was the industry growth. I believe the handler market and the test contactor market will be growing 2% to 5% this year, but that's just our estimates. So, in all, viewing the handler market growing to somewhere between $800 million to $825 million in 2017.

And relative to our products, I did say our plans are to outperform or outgrow the industry. And the timing on the products are -- we'll be rolling out contactors through the year starting in Q1, now essentially, and throughout the year. We'll be rolling out the wafer-level package prober in the first half of the year and likely towards the summer or late summer, the system-level test platform.

That's very helpful. Moving down to a couple gross margin items or at least one. Jeff, you mentioned that there were really three things that contributed to gross margin upside in the quarter. Can you break out the relative contribution of those items? Were they about equal or were you going in order and, if so, to what degree is the first greater than the second and third?

Right. Yes, the manufacturing cost leverage that I mentioned was about two-thirds of the improvement above our guidance. And then, the overhead and the product mix made up the last third almost equally.

Super. And then, lastly for me, on operating expenses we climb up to the $22 million level, which includes essentially a full quarter of Kita. Is that a good run rate or is there anything that we should think about as being incremental in the model either way? For example, I would expect there is some FICA that would roll off as we go through year. But what are the gives and takes as we look out through 2017?

Sure. In Q1 and Q2 we will still have some costs related to our ERP project implementation. So, if you recall, last year we started this project and the costs are running anywhere from about $400,000 to $500,000 per quarter.

So, our base run rate is, call it, $19.5 million a quarter. Then you add Kita on top of that. And for Q1 and Q2 we will have this additional cost for the ERP project of $400,000 to $500,000. So, Q1 we also have some timing with respect to things like audit that happened in the beginning of the year. So, that pushes Q1 a little bit higher. But, on average, it should be the $19.5 million plus roughly $1.3 million for Kita. So, that takes us close to about $20 million on a run rate.

That's very helpful. Once again, real nice job with the execution, guys.

Thank you.

Patrick Ho, Stifel Nicolaus.

Thank you very much. Luis, first off, in terms of the commentary regarding handler growth of 2% to 5% from an industry. For Cohu specifically, which market do you believe will be the key growth drivers for your projected outperformance?

Well, I think we still have room to grow and capitalize on some recent penetrations we had at a major Japanese RF filter semiconductor manufacturer of our turret handlers. There's also more that can be done for us to penetrate test subcontractors in Taiwan and an opportunity to expand at a large IDM in Korea testing logic devices and processors that go into the mobile market.

And this is a customer that we have received a repeat order, actually earlier this quarter, for a system that is still in development. We basically have an order for two handlers now already from this Korean IDM, but we don't have the system yet to ship and not until Q3, which actually adds to a question. I forgot to answer this to a previous question. There's another product coming out in Q3 this year. And I know there's demand for more handlers there that we want to execute against if we could move faster.

And that's not to talk about the wafer-level prober that we'll be introducing that we still view as an opportunity for $10 million to $20 million this year and the system-level test that is an opportunity for $5 million to $10 million. So, in all, $15 million to $30 million. And the test contactors that I already mentioned.

Great. That's really helpful. As a follow-up question, with the markets growing in China over the next several years, you've leveraged your manufacturing operations to Malaysia. How do you see the investment profile for the Company in terms of services and support in that region? Is there a potential uptick in OpEx particularly as the Chinese market grows?

We're not projecting an uptick in the service expense. Currently, we do have a location in China. We have quite a number of field service engineers in China supporting a large number of handlers in the field. Currently, we're not projecting significant increases in that expense in the near term, Patrick.

Just to add on to that; today, the largest installed base of our test handlers is in China and, concurrent with that, our service infrastructure.

Great. So, I just want to make it clear. You feel very comfortable with your install base and infrastructure needs even as that marketplace grows?

Correct. That's our largest country today for installation and service of equipment.

Great. Thank you very much, guys.

Thank you, Patrick.

You're welcome.

Thank you. It appears we have no additional questions at this time so I'd like to pass the floor back over to Mr. Jones for any additional concluding comments.

Alright. Thank you for joining us on today's call. And we look forward to speaking with you when we report our first quarter results. Thank you and have a nice day.

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.