Transcript of
Cohu, Inc. (COHU)
Third
Quarter 2008 Earnings Conference Call
October 23, 2008
James Donahue,
President and Chief Executive Officer
Jeff Jones, Chief
Financial Officer
Operator
Greetings,
ladies and gentlemen, and welcome to the Cohu Incorporated Third Quarter 2008
Earnings Call.
At this
time, all participants are in a listen-only mode.
A brief
question and answer session will be following the formal presentation.
If anyone
should require operator assistance during the conference, please press
star-zero on your telephone keypad.
As a
reminder, this conference is being recorded.
It is now
my pleasure to introduce your host, Mr. James Donahue, President and Chief
Executive Officer.
Thank
you, Mr. Donahue. You may begin.
James
Donahue – Cohu Incorporated – President and Chief Executive Officer
Good
afternoon, everyone. Welcome to this conference call that covers Cohu’s
results for the third quarter ended September 27, 2008.
With me
today is our Chief Financial Officer, Jeff Jones.
I hope
you have a copy of our earnings release and have had an opportunity to review
it. But, if you need a copy, you can obtain one from our website, Cohu.com, or
by contacting Cohu Investor Relations at (858) 848-8106.
I’ll
provide an overview of our results and comment on the quarter. Jeff will then
take us through the financial statements, and I’ll conclude with our view of
the business environment and guidance for the fourth quarter. And we’ll then
take your questions.
First,
though, Jeff has information concerning forward-looking statements, estimates
and other matters that we’ll discuss in today’s call.
Jeff
Jones – Cohu Incorporated ‑ Chief Financial Officer
Before we
go on, I must remind you that 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 and future operations and financial results and any
comments we make about the Company’s future in response to your questions.
Our
comments speak only as of today, October 23, 2008. And the Company assumes no
obligation to update these comments.
The
Company’s actual results may differ materially from those stated or implied by
our forward-looking statements due to risks and uncertainties associated with
the Company’s business, which include, but are not limited to, the
concentration of our revenues from a limited number of customers; 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; failure to obtain customer
acceptance, resulting in the inability to recognize revenue and accounts
receivable collection problems; inventory write-offs, intense competition in
the semiconductor test handler industry our reliance on patents and
intellectual property; compliance with US export regulations; the cyclical and
unpredictable nature of capital expenditures by semiconductor manufacturers;
difficulties in integrating acquisitions and new technologies, and other risks
addressed in Cohu’s filings with the Securities and Exchange Commission,
including our most recently filed Form 10-K and Form 10-Q.
We assume
no obligation to update any of the information shared on this conference 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.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Cohu’s
third quarter sales were $48 million, compared to $64.5 million, in last year’s
third quarter and $51.8 million in the second quarter of 2008.
Net
income was $37,000, essentially break-even on this lower sales volume.
Orders
were $46 million, compared to $50.1 million, for the second quarter of 2008.
Third
quarter orders for semiconductor equipment were $31 million, compared to $39 million,
in the second quarter.
And
backlog at the end of the third quarter was $52 million.
Unit
order breakdown for semiconductor equipment in the third quarter was high-speed
handlers, 41 percent; thermal handlers, 14 percent; thermal subsystems, 38 percent;
and other systems, 7 percent.
Despite
challenging business conditions, our operations are extremely busy, and we made
significant progress in the third quarter.
Delta
Design’s MATRiX handler was approved for wireless test applications at a major
US-based IDM. Our EDGE handler was approved for testing of home entertainment
devices by a major European-based semiconductor company. And following an
extensive evaluation process, our Summit handler was qualified for testing of
small form factor devices at two major US-based microprocessor manufacturers.
While we
don’t expect any incremental sales of thermal handlers for these applications
in the near-term, we are already seeing an increase in orders for handler
conversion kits.
We
completed the first beta system of our ETC-3000 that incorporates Delta’s
latest modular thermal technology in a compact footprint for engineering and
validation applications. We expect to ship the first system in the fourth
quarter.
The
ETC-3000 uses the same thermal technology that is at the heart of our
next-generation thermal production handler that’s now in development. This
enables customers to accurately and consistently characterize in the
engineering lab and the preproduction environment, the test performance that
they will achieve as they ramp production.
The
development of our next-generation thermal handler is progressing very well,
and we expect to complete the initial beta unit in the fourth quarter.
Customer testing will begin soon thereafter. And subject to market conditions,
production shipments could begin in mid-2009.
As we
have discussed previously, we are manufacturing dedication kits, the
package-specific tooling that configures our test handlers for different ICs,
at a production facility we established in the Philippines in 2004. This
operation has been highly successful in providing cost-effective solutions with
shorter lead times to our customers, the majority of whom are located
throughout the Southeast Asia region.
We just
recently completed an expansion that increased production capacity by 60
percent in this facility, and we plan to further expand the operation in 2009.
Last year
we began planning for the transition of certain of our handler manufacturing to
Southeast Asia. We determined that the most cost-effective alternative was to
utilize an experienced and qualified contract manufacturer. Delta’s EDGE
handler, a mature and high volume system in our high speed handling line, was
the logical first handler to transition.
Earlier
this year we began that process, and it’s gone even better than we
anticipated. Last quarter, the initial systems manufactured at the
Singapore-based CM were shipped to our main facility in California for testing
and validation. We’re very pleased with the results and expect to continue the
migration of manufacturing to contract manufactures in lower-cost geographies
in Asia.
Over
time, and with sufficient volumes, we believe that we will achieve gross margin
improvement of up to 7 to 10 percentage points.
Turning
to our non-semiconductor equipment operations: as a result of the transition of
handler manufacturing, we have been able to free up space in our primary
facility in Poway, California. Cohu’s Electronics Division will be relocated
from leased space, into this facility next month, resulting in annualized
savings of approximately $750,000.
Operating
results at the Electronics Division were essentially flat sequentially. Camera
products developed over the last 18 months are gaining traction, and we have a
growing pipeline of opportunities, particularly in the high-end security and
surveillance area. And we expect this will lead to improved results in the
fourth quarter.
Results
at our microwave operation fell short of expectations, primarily as a result of
administrative delays in obtaining customer acceptance on several large
contracts, and a shortfall in business that was expected to be booked and
shipped in the third quarter.
BMS
orders for the third quarter reached $10.2 million, the highest since Q4 of
2005, and the second highest quarterly bookings ever for BMS. We expect BMS to
report improved operating results in the fourth quarter.
Jeff will
now provide details on Cohu’s financial results for the third quarter.
Jeff
Jones - Cohu, Inc. - Chief Financial Officer
Semiconductor
equipment related revenues for the third quarter of fiscal ’08 were
approximately 77 percent international and 23 percent domestic. International
sales were distributed 87 percent Asia-Pacific, 10 percent the Americas, and 3 percent other.
We
recorded approximately $1.1 million of FASB 123(R) stock-based compensation
expense in Q3. The comments I make regarding operating expenses include the
impact of FASB 123(R).
Gross
margin was 36.6 percent in Q3, compared to 35.6 percent in Q2, and was in line
with our projection. We expect our gross margin in Q4 to be approximately
three points lower than Q3 due to lower volume and product mix.
R&D
expense was $9.1 million in Q3, compared to $10.4 million in Q2, and was
slightly lower than our projection due to reduced product development costs at
our semiconductor equipment business. We expect Q4 R&D expense to be
slightly lower than Q3.
SG&A
expense was $9.7 million Q3, compared to $9 million in Q2, and slightly higher
than our projection due to a formula-driven increase in the accounts receivable
reserve at our semiconductor equipment company. We expect the SG&A expense
in Q4 to be lower than Q3, and approximately the same as Q2.
Interest
and other income was $1.4 million in both Q3 and Q2.
Our
effective tax rate for the first nine months of 2008 was 44 percent, compared
to 43 percent, at the end of Q2. Our Q4 rate is dependent on our pre-tax
income level, and will benefit from the federal R&D credit that was
extended on October 3rd. The credit is retroactive and, therefore, the benefit
for all of 2008 will be recorded in Q4.
Net
income per share in Q3 was computed based on 23.4 million weighted average
shares and share equivalents from stock options and RSUs.
Moving to
the balance sheet, cash and investments were $171.2 million at September,
decreasing approximately $4.6 million from June due to an increase in inventory
of $4.5 million related primarily to the initial production of our MATRiX
handler.
Net
accounts receivable were $34.5 million at September, compared to $36.3 million
at June, and represented about 65 days sales outstanding. The decrease in
accounts receivable was due to steady cash collections and lower shipments in
Q3.
Additions
to property plant and equipment for the first nine months of fiscal ’08 were
approximately $2.1 million, and depreciation and amortization was approximately
$5.1 million.
Deferred
profit at September was $4.8 million, compared to $6 million, at June.
Deferred profit relates to revenue deferral pursuant to SAB 104 primarily on
Delta test handlers and thermal subsystems and the BMS products. Our deferred
revenue at September 27, 2008 was approximately $7.8 million.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Okay.
Thanks, Jeff.
Conditions
in the backend semiconductor equipment industry were relatively flat for the
first half of 2008, but began deteriorating mid-year. Last week, SEMI reported
that preliminary orders for test and assembly equipment for September declined
47 percent from September 2007, and that the book-to-bill ratio dropped to
0.7.
The
effects of the global financial crisis are spreading rapidly through the supply
chain and have accelerated the decline in business, not only at semiconductor
equipment manufacturers, but in semiconductor devices and technology in
general.
Recent
earning releases from technology companies and others indicate that order rates
declined sharply towards the end of the third quarter. Business and consumer
confidence has severely eroded, and, in this environment, it’s highly unlikely
that capital spending will expand.
It seems
clear to us that business conditions will remain difficult, well into next
year, and accordingly, we will continue to reduce expenses wherever possible.
For the fourth quarter, we estimate that sales will be approximately $37
million.
Despite
the current environment, we remain highly optimistic and enthusiastic about the
long-term prospects for our industry. But, even more importantly, we have
never been more excited about our products and about our competitive
opportunities.
We
recently introduced the MATRiX high-speed pick-and-place handler targeted at a
wide range of consumer device applications, with industry-leading high
parallelism and fast index time. We’re also well along with the development of
our next-generation thermal handler that incorporates our proprietary and
enabling thermal technology.
The
transition of handler manufacturing to Asia-based contract manufacturers is
well underway as well, and will improve our gross margins. So, while we plan
to further reduce spending during this downturn, we will continue to invest in
those strategic programs and initiatives that will position us for success with
our customers and lead to market share gains and improved financial
performance.
While the
current economic headwinds are beyond our control, we have never felt better
about our long-term prospects. With our strong products and profit improvement
activities, we can power out of the downturn with great performance when
business conditions improve.
Scott,
that concludes our prepared remarks, and we’ll take questions, please.
Operator
Thank
you.
We will
now be conducting a question and answer session. If you would like to ask a
question, please press star-one now on your telephone keypad. A confirmation
tone will indicate that your line is in the question queue. You may press
star-two if you would like to remove your question from the queue.
For any
participants that are using speaker equipment, it may be necessary to pick up
your handset before pressing the star keys.
One
moment please, while we poll for questions.
Our first
question comes from the line of Kelly Anderson of Sidoti & Company. Your
line is now open.
Kelly
Anderson – Sidoti & Company
Hi,
guys. Thanks for taking my questions.
Just a
quick one on the guidance for the fourth quarter. It looks like orders came in
at 46, and backlog was relatively flat. Are you expecting any cancellations or
delays in the $37 million guidance for the fourth quarter?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
No, no
cancellations, Kelly. As far as delays, possibly.
Kelly
Anderson - Sidoti & Company
Okay.
And then,
just with respect to the new MATRiX handler, you sort of have a qualitative
overview of what the thermal handler ramp could look like in 2009. It looks
like you’re getting very good initial traction with the MATRiX.
Can you
sort of give us some sense of how you see that product ramping over the next
six months to a year?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Well, I
think, six months ago, I would have been in a much better position to give some
fairly good insight into that. In this environment, it’s extremely difficult.
The fact
is that most of our customers have really pulled in the reins. And barring
some change in economic conditions that will open up the capital spending, I
just can’t predict what’s going to happen, what the ramp is going to look
like.
As I’ve
indicated in my remarks, we think it’s going to be a pretty difficult
environment for the next few quarters. And predicting specific activities like
the ramp of MATRiX is really not possible when our customers have essentially
clamped down pretty tightly for the moment.
Kelly
Anderson - Sidoti & Company
Fair
enough. Thanks very much.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
You bet.
Jeff
Jones - Cohu Inc. - Chief Financial Officer
Thanks,
Kelly.
Operator
Thank
you.
Our next
question comes from the line of Brad Evans with Heartland. Your line is now
open.
Brad
Evans – Heartland
Thanks
for taking the question, I guess.
First and
foremost, do you--Jeff, do you have a cash flow from operations number for the
quarter or for year-to-date?
Jeff
Jones - Cohu Inc. - Chief Financial Officer
Yeah.
Cash flow from operations, I’ve got $6.8 million year-to-date.
Brad
Evans - Heartland
Okay.
Your
full-year capital budget for 2008 and just, I guess, preliminary thoughts on
2009, I guess in light of the environment, what are your thoughts on CapEx?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
I think
the major CapEx for 2009, Brad, is likely to be a further expansion of our
manufacturing operation in the Philippines. And we think that’s a wise
investment to make because we’re achieving cost reductions, and gross margin
improvement, by manufacturing our handler conversion kits over there.
So, we’d
like to build that out. We did a 60 percent expansion in 2008, and we might
just do something slightly less than that, which would fill out our facility
over there in 2009. I think that’s probably around a $2 million investment.
Brad
Evans - Heartland
So, that
would be $2 million above your maintenance spend?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Two--I’m
sorry, two million above what?
Brad
Evans - Heartland
That
would be in addition to just maintenance CapEx, I’m assuming?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Yeah,
that would be--Two million in capacity additions in the Philippine facility.
Brad
Evans - Heartland
On a base
of--you’re thinking--what type of number for 2009, then?
Jeff
Jones - Cohu Inc. - Chief Financial Officer
Oh, total
CapEx?
Brad
Evans - Heartland
Yes, sir.
Jeff
Jones - Cohu Inc. - Chief Financial Officer
Yeah,
total CapEx generally runs about $4 million, and that two million then would be
included in the $4 million total.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
So, say
maybe four to five million CapEx for next year, something like that. We’re
actually in the process of putting together our 2009 plan anyway. This is the time
when we do that. And under current business conditions, everything is being
re-scrutinized anyway.
Brad
Evans - Heartland
Okay.
Below the
gross profit line, your operating expenses are $18.8 million this quarter. So,
if you back off the 1.1 for stock-based comp, that gives you $17.7 of cash
operating expenses. Are we to assume that, for the fourth quarter, that number
should come down slightly, or is that too conservative?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
You’re
speaking about R&D and SG&A essentially, right?
Brad
Evans - Heartland
That’s
right.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
--Jeff
indicated it’s going to drop in the fourth quarter.
Jeff
Jones - Cohu Inc. - Chief Financial Officer
Right.
Yeah, we guided down on R&D, as well as SG&A. So, both of those will
be coming down.
Brad
Evans - Heartland
Could you
give us a sense as to magnitude? I mean, is it bigger--?
Jeff
Jones - Cohu Inc. - Chief Financial Officer
Well,
SG&A--it’s going to be--it’ll be very similar to what the Q2 number was,
which was nine million in Q2. So, we think it’ll be similar to Q2 for
SG&A.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Well,
again, a little lower. We’re expecting it to be a little lower in Q3, but
about the same as Q2.
Jeff
Jones - Cohu Inc. - Chief Financial Officer
Right,
exactly.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Yeah,
okay.
Brad
Evans - Heartland
Yeah, and
you see R&D down directionally as well?
Jeff
Jones - Cohu Inc. ‑ President and Chief Executive Officer
We do.
Brad
Evans - Heartland
Okay.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
A lot of
that has to do, Brad, with the--just the timing of material purchases for our
development projects, particularly the thermal handler project, which is--most
of the material purchases are behind us.
Brad
Evans - Heartland
Okay.
So, Jim,
when you’re talking about the 7 to 10 percentage point improvement in gross
margins as you continue to outsource to the contract manufacturers, should we
think about--that is off of kind of the 36 percent level that you’re currently
at, assuming that over time you get back to something north of $50 million on a
quarterly basis? Is that correct?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Yes,
exactly.
Brad
Evans - Heartland
And
how--would that be some time in the--in 2009, or beyond 2009 that you’d hope to
be able to show that improvement?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
You know,
at this point I don’t know when we’re going to get to numbers like $50
million. That’s the whole rub right now. We’re entering a very difficult
period.
So to
give you some color on that, let’s say we get to the $50 million in mid next
year. We wouldn’t achieve the full 7 to 10 percent. I would say it’s going to
be a process of getting there and with decent business conditions, decent
shipment levels. I think we can get there fully in 2010. That’s what our plan
looks like now.
Brad
Evans: Heartland
That’s
very helpful.
And just
last--my last question just pertains to--I mean, I tip my hat to you guys. I
mean, clearly you're managing the business conservatively in a tough
environment, and obviously cash balance provides a lot of safety in a difficult
environment, just recognizing the stock as trading, I guess right around
tangible book value, or stated book value.
Is there
a--is there any thought as to the merits of a share buyback, even a modest one?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Well,
sure. And we’ve talked about that before, and we’ve had questions on that
before. Cohu, like just about any other company these days has a very
depressed valuation. So, yes, we are talking with the Board about share
buybacks. We have not approved one. If and when we do, we would announce
that.
I still
believe that the best long-term return for our shareholders is going to be
through a strategic acquisition that expands our long-term growth prospects and
our served market. But, if there is no such acquisition on the horizon, then,
at these levels, certainly, I think any responsible Board has to look at the
merits of a share buyback.
Brad
Evans - Heartland
All
right. Thanks for taking the questions.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Thank
you, Brad.
Operator:
Thank
you.
Ladies
and gentleman, again, if anybody would like to ask a question, please press
star-one now on your telephone keypad. You may press star-two if you would
like to remove your question from the queue.
And if
anybody is using a speakerphone, it may be necessary to pick up your handset
before pressing the star keys. One more moment while we poll for questions.
Our next
question comes again from the line of Brad Evans with Heartland. You may ask
your question.
Brad
Evans - Heartland
I guess
just to dovetail on your comment about the M&A environment, or the opportunity
there, can you just give us a 35,000-foot view of what the M&A landscape
looks like without getting into specifics? Is it a good environment right now?
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Well, I
don’t know that the environment for M&A today is any different than it
normally is, except maybe distressed companies that might be facing financial
difficulties in view of the expected prolonged downturn. But, our criteria for
acquisitions, has always been to look at the long-term picture, to look at
companies that are going to expand our served market, provide complementary
products and opportunities for synergies. Those tend not to be distressed
companies.
Brad
Evans - Heartland
Okay.
I’m just
curious. In terms of recognizing that--Jim, I understand your point about the
environment. It’s obviously very difficult, and visibility is not good.
Could you
just give us your thought as to the level of capacity utilization that you’re
seeing in the backend in terms of your tools, and whatever information you have
that’ll be helpful to help us understand, if indeed, we go through a period of
maybe lackluster demand for a quarter or two, does that set up--I mean,
obviously as demand, or the semiconductor industry shows some improvement, that
would I guess lead one to think that there could be a fairly strong recovery,
especially when you consider the new product cycle you have coming with the
MATRiX and the Pyramid.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Yes, this
is not industry-wide data, but just recently I had some feedback from Asia that
utilization rates at a major IDM was in the 80, 85 percent range and at
sub-cons in the 70 percent range.
I do
agree with your conclusion that--or your prediction that, when business
recovers, it’s likely to recover sharply. That’s the way it’s always been in
this industry, and I think the current difficult economic conditions are
exacerbating that. So, I think customers are going to wait, if they waited until
the 11th hour, historically, they’re going to wait until five minutes until
midnight before they pull the trigger on CapEx over the next few quarters.
So, we
have to be prepared for a very sudden increase in demand. Fortunately, we’ve
reduced lead times over the last couple of years to deal with that and we’ll be
in a good position to respond.
Brad
Evans - Heartland
Okay.
Thanks for the follow-up. I appreciate it.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Thank
you, Brad.
Jeff
Jones - Cohu Inc. - Chief Financial Officer
Thanks,
Brad.
Operator
Ladies
and gentlemen, at this time there are no questions in queue. However, if
anybody would like to place another question into queue, you may do so now by
pressing star-one on your telephone keypad. One more moment while we poll for
questions.
Mr.
Donahue, there are no further questions at this time. I’d like to turn the
floor back over to you for closing comments.
James
Donahue – Cohu Inc. ‑ President and Chief Executive Officer
Thank you
for attending today’s call, and we look forward to speaking to you when we
report Cohu’s fourth quarter results.
Thank you, and good day.
