Cohu Inc (COHU) 2013 Q4 法說會逐字稿

Greetings and welcome to the Cohu fourth-quarter and full-year 2013 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. I would now like to turn the conference over to your host, Mr. James A. Donahue, Chairman and Chief Executive Officer for Cohu. Thank you, Mr. Donahue, you may begin.

Thank you. And thank you, everyone, for joining us today. And joining me today is our Chief Financial Officer, Jeff Jones. If you need a copy of our press release you can obtain one from our website, cohu.com, or by contacting Cohu Investor Relations at 858-848-8106.

Jeff will provide an overview and comments on Cohu's results for the fourth quarter of 2013, comments on orders and take us through the financial statements. I will discuss key activities, provide an update on progress one year after the acquisition of Ismeca and comment on the business environment and outlook. And then we will take your questions. So I will turn it over to Jeff.

The Company's discussion this afternoon will include forward-looking statements reflecting management's current expectations concerning certain aspects of 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 regarding industry conditions, future operations, financial results and any comments we make about the Company's future in response to your questions. Our comments speak only as of today, February 12, 2014, and the Company assumes no obligation to update these comments.

Certain matters discussed on this conference call, including statements regarding the growth in the ATE industry, expectations of business and market conditions, orders, sales revenues and operating results are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected or forecasted.

Such risks and uncertainties include, but are not limited to -- risks associated with acquisitions, inventory, goodwill and other intangible asset write-downs; our ability to convert new products under development into production on a timely basis, support product development and meet customer delivery and acceptance requirements for next-generation equipment; our reliance on third-party contract manufacturers; failure to obtain customer acceptance resulting in the inability to recognize revenue on Accounts Receivable collection problems; customer orders may be canceled or delayed; a concentration of our revenues from a limited number of customers; intense competition in the semiconductor test handler industry; our reliance on patents and intellectual property; compliance with US export regulations; and the cyclical and unpredictable nature of capital expenditures by semiconductor manufacturers.

These and other risks and uncertainties are discussed more fully in 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 the information on 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.

Fourth-quarter sales increased over the third quarter and were above our guidance. Sales were $64.7 million compared to $60 million in the third quarter. The non-GAAP loss was $0.10 per share compared to a loss of $0.27 in the third quarter.

Orders increased 33% to [$]76 million compared to the third quarter, Semiconductor Equipment orders were $68.3 million and increased 41% sequentially. Q4 bookings include a large order for thermal subsystems for use in batch testing systems for mobile processors.

As we have previously noted, the OEM customer for this product periodically places large orders with us to satisfy demand for several quarters and we don't expect a comparable order in Q1. System orders represented 64% and nonrecurring business comprised 36% of the total.

In the fourth quarter handler utilization remained at about 80% where it was for most of last year. The automotive market remained strong and we saw improvement in the industrial power segment as the quarter progressed and this momentum has continued into the first quarter.

Among the bookings for pick-and-place handlers were multi-unit orders from several automotive IC customers for our MATRiX handler, which is the benchmark for testing of both hot and cold extreme temperatures. Orders for gravity handlers were at the highest level all year. Major applications included industrial power, automotive and consumer mobility.

Our new gravity handlers continue to gain traction as evidenced by repeat orders, successful evaluations and new customers. Saturn and Jupiter, for small and large gravity feed ICs respectively, are the first new platforms in the gravity segment in many years and provide a step function increase in performance and throughput.

Orders for turret handlers were also the highest all year and business accelerated late in the quarter and that momentum has continued into the first quarter. The key markets were industrial, analog and mobile. The LED segment showed early signs of improvement with multi-unit orders as the quarter ended and additional systems forecasted for the first quarter.

Now commenting briefly on our other businesses, sales of video cameras were below plan due to customer order delays. Still this business operated profitably during the quarter due to improved product mix and ongoing product cost reduction initiatives. We expect most of the late orders to be booked and shipped during the first quarter.

BMS had its best quarter in more than a year due in part to the receipt of a letter of credit that enabled shipment and revenue recognition on a large order for a Middle Eastern customer. After budget cuts and funding uncertainties that sharply reduced expected governmental related orders last year, several law enforcement customers have told us that they expect to resume capital spending in the first half of 2014.

Our guidance for Q1 is for sales to be approximately $65 million, about flat with last quarter as certain orders that we received in Q4 are not scheduled to ship until the second or third quarter. Cohu's directors approved a quarterly cash dividend of $0.06 per share payable on April 18, 2014 to shareholders of record on March 4, 2014.

Okay, thanks, Jeff. We noted improved conditions during Q4 in the industrial semiconductor market. This is a well-established market, but it is expected to accelerate with improved GDP and expanded applications, leading to a CAGR of close to 9% compared to 6.5% for the overall semiconductor industry.

Within the industrial segment it is likely that energy-related applications will have the strongest growth following efforts to increase efficiency across the value chain from generation through transmission and distribution and on to consumption. All that requires sophisticated electronics.

Other sectors that should exhibit growth are healthcare where connected devices will become increasingly ubiquitous as health services shift from clinical settings to the home environment. And also commercial and residential buildings as these structures become more connected to digital devices, often referred to as the Internet of Things for applications such as security and building automation.

Cohu has a strong position in this segment supplying solutions to longtime industrial semiconductor companies like ST Microelectronics, Linear Technologies, Infineon, Analog Devices and others that will continue to be major players in this market.

We have a broad portfolio of systems from Rasco gravity feed and strip handlers to delta pick-and-place to Ismeca Turret's and more recently augmented with our new line of high-powered contactors. We offer complete contactor and handler solutions for power management customers.

These products have enabled testing of large semiconductor devices that optimize current and voltage control for many applications. From solar and windmill generation to smart meters that are used by delivery services for homes and businesses. We also offer state-of-the-art systems for testing and inspecting smaller packaged ICs that are used in a variety of industrial and consumer products.

Our SO1000 gravity handler is a well-established solution and the new Jupiter high parallelism gravity feed and strengthens our competitive differentiation in this growing industrial segment. These systems deliver more than just handling capability for large semiconductor packages, they are uniquely able to control temperature at increasingly higher current and voltage safely testing some of the most powerful semiconductors.

Our precision Kelvin contactor solutions ensure testing results are highly accurate regardless of power, which at times can be in excess of multiple kilowatts. With the advent of power wafer level packages our NX32 turret handler tests and performs vision inspection in a single process, thus optimizing handling of delicate semiconductors and increasing final test efficiency.

Our latest turret platform, the NY20, addresses requirements for small power management device tests and also inspection with high speed and reliability. The industrial semiconductor segment, like the automotive market, is another example of a mature market where new applications are serving as a catalyst for accelerated growth and where Cohu, with its broad product line and differentiated technologies, has a unique opportunity to benefit. And now Jeff will provide details on Cohu's financial results.

In Q4 we recorded approximately $1.5 million of stock-based compensation expense, $2.1 million of purchased intangible amortization expense and $900,000 of restructuring cost related to our manufacturing transition and severance. The following comments are based on our non-GAAP results which exclude the impact of these items.

Gross margin was 32.1% and was negatively impacted by product mix and higher than forecasted cost to manufacture the initial units of our new thermal subsystems. In Q1 the manufacturing costs of the thermal subsystems are forecasted to be in line with our ongoing cost targets. Gross margin in Q1 is expected to be approximately 35%.

Operating expense was $22.8 million in Q4 and lower than the forecast due to adjustments to accrued employee compensation and benefits which totaled approximately $800,000 in the quarter. Operating expense in Q1 is expected to be approximately $23.5 million, excluding approximately $1 million of restructuring cost related to severance and our manufacturing transition.

There was a minor Q4 GAAP income tax provision as tax expense on earnings in Asia was offset by a tax credit on losses in other foreign locations. We expect our 2014 effective tax rate will be approximately 15%. The Q4 non-GAAP loss per share, which excludes the after-tax impact of share-based compensation, amortization of intangibles, manufacturing transition and employee severance costs was $0.10.

And moving to the balance sheet, cash and investments were $52.9 million at December, unchanged from September. Cash provided by operations in Q4 was approximately $3.8 million. Net Accounts Receivable increased approximately $2.6 million to $60.8 million at December as a result of higher sequential shipments from our semiconductor equipment group.

DSO at December was 85, down from 93 at September, primarily due to the collection of past due receivables within our semi equipment segment. Inventory was $59 million at December, decreasing $1.4 million from September. Adjusting for the inventory acquired with Ismeca on December 31, 2012, our net balance declined approximately $13 million in 2013 and approximately $35 million since September 2011 as a result of strict inventory management.

Additions to property, plant and equipment in Q4 were approximately $1.4 million and depreciation for the fourth quarter was approximately $1.3 million. Deferred profit at December was $6.1 million compared to $5.5 million at September. The related deferred revenue at the end of Q4 was $7.4 million compared to $7.2 million at September and consists primarily of revenue deferrals on shipments of test handlers.

Okay, thank you Jeff. It has been just over a year since we acquired Ismeca and I would like to provide an update on the status of that acquisition and the progress we made.

With this acquisition we expanded our customer base for test handling solutions to include discrete semis, wafer level packages and LEDs. We now field the broadest range of products in the test handler industry. This breadth of handling technologies enables us to address every major market segment from consumer mobility, automotive, industrial, computing, MEMS and LED.

Ismeca products and vision technology expanded at our [SAM] to include an additional process step in back-end IC manufacturing solutions for package and die inspection. Key enabling technologies such as thermal, vision and high-performance contactors differentiate our products and provide customers with solutions that improve yield and optimize ASPs.

One of the first actions we took following the acquisition was to integrate the global sales and service organization. Cohu's customer support team is one of our strongest assets with the customer contacts and applications expertise to deliver solutions in every major region of the world. With Ismeca we significantly expanded our support capability in China, the fastest growing semiconductor market.

At the same time our new turret business benefited from our long-established customer support organization and relationships in the Philippines and the Americas. We provide our customers with direct support regardless of location and this is a competitive advantage. Capitalizing on sales synergies was one of the key strategic objectives of the acquisition following the successes we realized with the 2008 acquisition of Rasco.

In 2013 we captured key cross-selling opportunities including selling turret handlers into one of Cohu's major analog semiconductor customers; penetrating back-end package inspection at several consumer mobile accounts; increasing our market share at OSATs; and planting the seeds for many more opportunities that we expect to realize in the future. We made a great start in 2013 and there are many more cross-selling opportunities in the pipeline.

Our expanded technology portfolio has enabled us to design solutions that lower cost of test for LEDs that are used in general lighting. Two of the largest suppliers of LEDs for automotive and general lighting depend on our technologies to keep them competitive in this fast-paced market. The general lighting market is poised to grow significantly as costs decrease and as new regulations take effect in major markets, eliminating or sharply reducing the use of incandescent light bulbs.

Our products cover a broad spectrum of applications, positioning us as the only Company to provide the full suite of handlers including pick-and-place, gravity feed, turret and test-in-strip. In the last 12 months we brought to market new solutions in each major segment completing one of the most intensive product development cycles in our history.

We delivered a new turret handler platform, the NY20; penetrated new accounts with two new gravity feed handlers, Saturn and Jupiter; ramped production of a new thermal subsystem for testing mobile processors and launched a trade automation product for back-end assembly, expanding our SAM. We completed design of two new pick-and-place handlers that are set to launch in the first half of 2014.

We are integrating the contactor technologies from our three handler companies to design and deliver high-performance solutions. This is a natural expansion of our served market and an attractive segment as we can leverage our existing sales channel in a segment that is less cyclical than the systems business.

A key strategic area where we expect to realize benefits beginning later this year is in global operations. Ismeca has had a successful manufacturing operation in Malaysia for over five years. We're leveraging this operation and just completed facilitizing an interim assembly and test plant near Ismeca's factory in Malacca, Malaysia. This plant will produce pick-and-place handlers beginning this quarter.

In the second half of 2014 we will begin construction of a new consolidated facility that will house turret, pick-and-place and future handler manufacturing. In addition to the benefits of an efficient central manufacturing facility in a lower-cost geography we will also receive savings through tax holidays and incentives.

Now looking at the business environment, 2013 was a tough year for the back-end Semiconductor Equipment industry, the mid-year increase in bookings proved to be a false start and the anticipated recovery in the second half of the year did not materialize. However, it seems to us that we've turned the corner and we're optimistic for a number of reasons.

The order momentum that built as the fourth quarter progressed has continued into Q1 and we find that more customers are firming up or increasing their forecast. We began this year with a backlog of $88.4 million which, after adjusting for the addition of Ismeca's backlog, is still a year-over-year increase of 49%. Gartner expects the ATE industry to resume growth in 2014. And this is consistent with our internal view and also with comments from many customers and peer companies.

For Cohu 2013 was also a year of setting the stage for profitable growth when industry conditions improve, as is expected in 2014 -- integrating global sales and customer support, executing on initial cross-selling opportunities and nurturing others that will bear fruit in the future, completing seven new products, expanding our served market into LED back-end inspection and contactors, and consolidating global operations and establishing a new manufacturing infrastructure that will enable improved financial results.

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

(Operator Instructions). Vernon Essi, Needham and Company.

(Technical difficulty). Congrats on that nice order rate there and just wanted to sort of -- and I apologize; I logged on a little bit late on the call here. But, Jeff, could you go over the sort of the timeline, or Jim as well, of the actual manufacturing transition almost on a -- as granular basis as you can. And give us an understanding about the sort of these manufacturing transition charges that we are seeing on the P&L side, when this is expected to be cleared up.

And really kind of what I'm trying to understand is when will we get sort of a clean quarter of where you are basically commencing the -- I know you are already shipping your pick-and-place out of Malaysia, but when you will sort of have a full quarter without these charges. And then when the actual transition will be complete, just update us on sort of the timeline there.

Well, maybe I will take the second half of the question and Jeff can address the first half. We will complete the first pick-and-place handler in this temporary facility in Malacca in the first quarter. So we expect that product to ship in the second quarter and some additional handlers to ship in the second quarter.

That will ramp up as the year progresses and the production will begin to -- pick-and-place handler production will begin to transition from primarily US-based to Malaysia-based towards the back end of 2014, more in the fourth quarter than the third quarter.

Okay.

So with respect to the restructuring costs, Vern, I expect, as I noted in my comments, that Q1 will be about $1 million for the cost of transitioning that manufacturing to Malaysia plus some severance that we will incur worldwide as a result of the restructuring.

The transition, the initial phase of the transition will last through Q2. So I expect to have costs -- restructuring costs in Q2, not at the extent of Q1 but we will have them in Q2 as well. So the first phase then will be done, the transition will be complete mid-2014. Then we will look to start the gravity feed transition.

So I would expect that each quarter we are going to have some level of restructuring, but certainly we are in the heaviest part of the restructuring costs, Vern, so that will trend lower Q2 through Q4 -- significantly lower.

Okay, so let me try to I guess characterize this, Jeff, not to totally get too granular here. But you had just under $1 million of transition costs in the third quarter of last year and the fourth quarter of last year. You are anticipating sort of a similar level in the first quarter and then will start to wind down from there until you commence the gravity migration. And then we would expect it probably to be up at these levels again?

No, no.

Okay, it would be less. So the gravity would be a lower watermark?

Exactly.

Okay. Okay, that is very helpful, thanks. And I am sorry I missed it earlier. And then just in your prepared comments you talked a little bit about integrating the contactor side of the technology front and trying to lever your existing sales channel. Can you dive into that a little bit more?

Are you looking to build sort of a material business around that or is this just sort of a synergistic internal restructuring of how you are going to sell the products? Can you just elaborate on that?

Yes, well, it is actually both, Vern. With three handler companies each of which produces, designs and develops its own contactor solutions to varying degrees, as well as using third-party contactors, there were obvious opportunities to consolidate technologies, look at best practices and solutions, and just make that as efficient and effective from a cost standpoint as well as from capitalizing on the best technology. So we are doing that.

Secondly, we do like the contactor business and see it as a real opportunity for growth, it is somewhat like a consumable, it is certainly less cyclical and it is more stable than the systems business. So we would like to grow that business and think we have good opportunities to do so.

Okay. All right, thank you very much.

(Operator Instructions). Jairam Nathan, Sidoti & Company.

Just I was trying to get some -- if you could give us some magnitude on the terminal systems order. And as this part of the business gets more and more meaningful can you give us some idea of what is the industry kind of potential (inaudible) and the potential market size? And you also talked about gross margin impact. When do you expect get back to normalized or will it -- has it -- does it have a lower gross margin profile than the corporate average?

Let me talk a little bit about the market opportunity and then Jeff can address the margin and cost question. Yes, this is an unfolding story and developing opportunity because of the growth of the mobile processing market. Historically the thermal requirement was primarily focused on microprocessors and we for many years were the pretty much exclusive supplier of thermal enabled test handling solutions for microprocessor testing, for all of certainly the major suppliers.

As the PC market has softened and as the mobile market has grown quite dramatically, there is a need for elements of the same thermal technology, not to the same extent required for high-end processors, micro high-end PC or server process. But there is still a requirement and definitely a yield and ASP benefit to using this thermal technology to precisely control test -- to precisely control temperature during test that optimizes ASP.

So we are working on opportunities as they develop. We for the last 18 months or so have had an excellent one here, the one we refer to. These thermal subsystems are used in -- typically in custom systems that batch test and in some cases perform functional tests as well as burn in. So it is not a conventional handler, it is a custom automated system typically built by an integrator into whom we provide the thermal subsystem.

So what is the market opportunity? I frankly don't know at this time. It is a developing story, but the good news for us is that we have unique proprietary thermal technology that gives us the capability to address this in a very compelling way.

Okay. And as far as the gross margins, I know today they are below corporate average and that impacted your gross margin for the quarter. But is that -- would it always remain like that way or --?

Jairam, we have worked through the issues that we experienced last quarter, so we are back on track with the cost and the gross margin is at an acceptable corporate profile level.

Okay. And just to follow up on the earlier question on contactors now. If I like do you -- what percentage of handlers do you sell with your own contactors? And where do you see and expect to see an increase in that [proportion]? Is that what you say talk about growth there (inaudible) talking about?

The percentage of handlers that we sell with our contactors varies depending on the technology. For example with gravity it is a very high percentage, it is high-double-digit. Likewise with turret handlers. Pick-and-place handlers there are can utilize third-party solutions so you find maybe half, slightly less than half of the pick-and-place handlers that we ship with our own contactors installed, the balance are from third-party suppliers.

Okay, okay. Okay, thanks. And last -- I will get back into the queue. Thanks.

(Operator Instructions). Gentlemen, there are no other questions in the queue at this time. I would like to hand it back over to management for closing comments.

Thank you for joining us on this call today. And we look forward to speaking to you next time when we report our first-quarter 2014 results. Thank you and good day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.