Transcript of

Cohu, Inc. (COHU)

Fourth Quarter & Full Year 2010 Earnings Conference Call

January 26, 2011

 

 

Participants

James Donahue, Chairman, President & CEO

Jeff Jones, CFO

 

Presentation

 

Operator

Greetings and welcome to the Cohu, Inc. fourth quarter and full year webcast and conference call.  At this time all participants are in a listen-only mode.  A brief question and answer session will follow the formal presentation.  If anyone should require operator assistance during the conference, please press *0 on your telephone keypad.  As a reminder this conference is being recorded.  It is now my pleasure to introduce your host Mr. James A. Donahue, Chairman, President and Chief Executive Officer for Cohu, Inc.  Thank you sir, you may begin. 

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Thank you and good afternoon everyone.  Welcome to this conference call that covers Cohu’s results for the 4^th quarter ended December 25^th, 2010.  Our CFO, Jeff Jones, is with me today.

 

I hope you have a copy of our earnings release and have had an opportunity to review it.  If you need a copy, you may obtain one from our website www.cohu.com or by contacting Cohu Investor Relations at 858-848-8106.  Today I will provide an overview and comments on Cohu’s results for the 4^th quarter of 2010 and discuss the current business environment.  Jeff will take us through the financial statements and then we will take your questions.  

 

First, Jeff has information concerning forward looking statements, estimates, and other matters that we will discuss during today’s call.

 

Jeff Jones – Cohu, Inc. – CFO

Thank you, Jim.  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, January 26^th, 2011, and the Company assumes no obligation to update these comments.  

Certain matters discussed on this conference call, including statements concerning Cohu’s new products and expectations of business conditions, orders, sales 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, 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 inability to recognize revenue and accounts receivable problems; customer orders may be cancelled or delayed; inventory, goodwill and other intangible asset write downs;  the concentration of our revenues from a limited number of customers; intense competition in the semiconductor test handler industry; our reliance on patents on intellectual property; compliance with U.S. 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 10K and form 10Q.  Cohu assumes no obligation to update the information in this release.  

 

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.

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Thanks Jeff.  Sales for the 4^th quarter and for fiscal 2010 set new Cohu records.  This was the 4^th consecutive quarter of increased operating income and earnings per share on a non-GAAP basis.  Sales were $96.9 million, a 13% increase from the 3^rd quarter and an 86% increase from the 4^th quarter of 2009.  Non-GAAP income per share was $0.48 compared to $0.41 in the 3^rd quarter and $0.11 in the year ago quarter.  Cash and investments were $98.2 million, an increase of $6.9 million from the 3^rd quarter.  

 

Orders were $75.8 million compared to $90 million in the 3^rd quarter.  Semiconductor equipment orders were $67.1 million compared to $74.0 million in the 3^rd quarter and represented 89% of total orders.  Backlog was $99.6 million at the end of the 4^th quarter.  

 

The unit order distribution for the 4^th quarter was high speed handlers 60%, thermal handlers 36% and other systems 4%.  For fiscal 2010, high speed unit orders increased 189% and comprised 76% of 2010 unit orders; unit orders for thermal handlers increased 195% year-over-year and represented 23% of 2010 unit orders.

 

Now, I’ll go over highlights of the 4^th quarter:

 

-       Following a slow Q3, orders for MATRiX handlers increased substantially in the 4^th quarter.  Follow-on multiple unit orders were received from two IDMs and an initial multi-unit order was booked from an Asia-based test subcontractor.  An initial order was also received from a major target customer, a European-based IDM.  This particular MATRiX handler will be integrated with two MEMs test modules from Rasco.  

-       Orders for EDGE handlers were booked from two IDM and orders for Castle tri-temperature handlers were received from two IC test sub-contractors.  

-       Summit handler orders were received from an IDM and a first-time order from a new test subcon customer was also logged.  

-       Our largest thermal handler customer has transitioned to our new system, the Pyramid.  In the 4^th quarter, this leading microprocessor IDM began volume production of its next generation microprocessor using our Pyramid handler.  Multiple systems are in 7/24 production and are performing well. 

-       At Rasco, 4^th quarter orders declined, following three consecutive record quarters that began in Q1. 2010 was an exceptional year for Rasco, with new records for sales and orders.  

-       The automotive MEMs business remains strong with orders from two major customers for multiple gravity handlers with MEMs test modules. In addition to repeat orders for gravity handlers from a variety of IDMs, Rasco also received an initial order from a major Asia-based test subcontractor.  

 

We are really pleased with the cross-selling opportunities and synergies that have materialized as a result of the acquisition of Rasco and the comprehensive portfolio of test handling solutions that we can now offer our customers.  

 

Turning to our other businesses:

 

-       At the Electronics Division, the rollout of new high definition cameras continues with two major product introductions planned for Q1: an indoor fixed position camera and a dome camera.  In addition, Cohu will be introducing a suite of analytics for traffic monitoring applications and a dual camera system that includes a high resolution thermal camera.  Cohu is leveraging its leading position in the U.S. traffic Incidence management market into developing opportunities in the Middle East.  

-       BMS had an outstanding and record quarter as sales increased 144% over Q3.  BMS equipment was utilized by the Pima County Sheriff Department during the recent Tucson shooting and BMS systems will be onboard U.S. Customs aircraft providing airborne surveillance at the Super Bowl next month.  BMS opportunities and prospects are strong and growing, especially in the law enforcement, government surveillance and combat tactical UAV markets.  

 

Now Jeff will provide details on Cohu’s financial results.

 

Jeff Jones – Cohu, Inc. – CFO

Semiconductor equipment related revenues for Q4 were approximately 86% international and 14% domestic.  International sales were distributed 89% Asia Pacific, 2% the Americas, and 9% other.  

 

We recorded approximately $1.0 million of stock-based compensation expense and approximately $1.5 million of purchased intangible amortization expense in Q4.  The comments I make today include the impact of these items.  

 

Gross margin was 33.5% in Q4 and lower than expected due to product mix in our semiconductor equipment operations.  We expect Q1 gross margin to be about the same as Q4.  Certain new developments are now affecting our expectations for gross margin in 2011.  To meet customer delivery requirements and ensure required quality levels, we have decided to maintain certain manufacturing operations at our Poway factory rather than at our Asia contract manufacturers.  Also, we are facing increased competitive pricing pressures in certain segments of the test handler market.

As a result, we now expect gross margin in 2011 to be comparable to 2010, subject to volume and product mix. We continue to believe that a gross margin of 40% is achievable longer term.  

 

Operating expense in Q4 was $22.0 million and in line with our projection.  We expect Operating Expense in Q1 to be approximately $21 million as a result of lower sales volume and variable selling expense.  

 

The Q4 effective tax rate was 11.2% bringing our effective tax rate for the year to 18.5%.  The lower rate in Q4 was due in part to adjustments of certain prior tax accruals and the normal year end true-up of the estimated tax rate used to record interim tax expense.  We currently expect our 2011 effective tax rate to be approximately 20% as the tax expense on our U.S. earnings is largely offset by the partial reversal of the deferred tax asset valuation allowance that was recorded in 2009 and our foreign earnings which are taxed at rates substantially below U.S. federal rate.  Excluding the impact of the deferred tax asset valuation allowance our 2011 effective tax rate would be approximately 28%.  

 

Q4 EPS on a GAAP basis was $0.39.  Non GAAP EPS, which excludes the after tax impact of share based compensation and amortization of intangibles was $0.48 for the quarter.  

 

Moving to the balance sheet, cash and investments were $98.2 million at December, increasing $6.9 million from September.  Cash generated from operations in Q4 was $8.5 million.  

 

Net accounts receivable were $66.8 million at December, decreasing $0.4 million from September.  DSO improved to 60 from 67 at September.  

 

Inventory was $63.2 million at December, a decrease of $2.8 million from September.  Additions to property, plant and equipment for Q4 were approximately $1.2 million and depreciation was approximately $1.3 million.  

 

Deferred profit at December was $14.8 million compared to $13.6 million at September.  The related deferred revenue at the end of Q4 was $36.9 million compared to $32.8 million at September and consists primarily of revenue deferrals on shipments of test handlers.

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Thank you, Jeff. Now taking a look ahead-in the backend semiconductor equipment industry, monthly orders as reported by SEMI declined last August following 17 months of sequential increases and continued to drop through November, before increasing 2.4% in December.  The decline from July to November reached 48%.  At Cohu however, the decline was much less, just 9.3% from Q3 to Q4.  

 

After such a sustained period of rapid sequential growth, the industry-wide slowdown in orders that began last fall is not unexpected if for no other reason than an understandable pause to absorb the significant capacity that was added during 2010.  Though final figures have not yet been released, both Gartner and VLSI believe that 2010 was the strongest growth year ever for semiconductor equipment, following the biggest decline ever in 2009.  Most industry analysts expect year-over-year growth in semiconductors and semiconductor equipment, though of course at much lower rates than in 2010. Gartner expects business levels to increase in the second half of this year.  

 

Recent checks with our customers show a mixed and highly dynamic picture.  One of our largest customers, a major high performance analog IDM, saw a significant increase in demand in December, driven by consumer electronics. Another customer told us that they typically see a pull back in orders at the end of the year, but not this time.  On the other hand, one of our major gravity handler customers expects first quarter sales to decline up to 10% and as a result, is taking a cautionary approach to near term equipment purchases.  

 

Though Cohu’s orders softened in the fourth quarter, and that pattern has continued into early Q1, we believe that we have fared better than the overall backend semiconductor equipment industry due to the breadth of our product line, that spans pick and place, gravity and test-on-strip technologies, the multiple drivers for our business and the diversity of our customer base.  Whatever the short term demand picture looks like, we have an exceptionally strong product line and are extremely bullish about our future prospects.  

 

For the first quarter, we expect sales to be approximately $85 million to $90 million.  

 

Finally, I’m pleased to announce the Cohu Board of Directors approved a quarterly cash dividend of $0.06 per share payable on April 22, 2011 to shareholders of record on March 8, 2011.  Cohu has paid consecutive quarterly cash dividends since 1977.  

 

That concludes our remarks and now we’ll take questions.

 

Operator

Thank you.  Ladies and gentlemen, if you would like to ask a question, please press *1 on your telephone keypad.  A confirmation tone will indicate your line is in the question queue.  You may press *2 if you would like to remove your question from the queue.  For participants using speaker equipment, it may be necessary to pick up the handset before pressing the * keys.  One moment please while we poll for questions.  Our first question comes from the line of Kelly Anderson with Sidoti and Company, please proceed with your question. 

 

<Q>:  Hi, thanks for taking my questions.  Jeff, just wondering if you could give us a little bit more color than just customer mix for the reasons for the gross margin here?

 

Jeff Jones – Cohu, Inc. – CFO

Kelly, it was product mix.  We had revenue forecasted for Q4 that was deferred into Q1 and that revenue was then replaced in Q4 with some lower margin revenue.  The deferral is due to the accounting rules, it’s a standard process by which we typically don’t have control over the entire process and so nothing unusual, it’s just a deferral of some revenue that was replaced with revenue at a lower gross margin.

 

<Q>:  Okay. And then Jim, just on the back-end trends that you’re seeing, I was just curious, it sounded like last quarter you said you kicked off Q4 with two pretty sizeable orders from two key customers and given that the back-end has pulled in a little bit, could you maybe walk us through how you saw business trending kind of month to month in Q4 in terms of orders? Is it primarily due to the back-end pressure or do you think a few customers are going to drive the bulk of your business over the near term?

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

We started off early Q4 with a bang, actually some orders that we expected to receive in Q3, so it’s just the placement of those orders by the customer, and we got off to a real nice start to Q4 last October.  Then we began to see a slowing in order patterns pretty much across the board with the exception of the ramp of our Pyramid handler into high volume manufacturing and that continued at that lower rate throughout the quarter and into the first quarter.  But, as I mentioned towards the end of my remarks, we’re now seeing some customers who are telling us that they’ve seen a pick up in demand rather suddenly and are now increasing their forecast. But, that’s not across the board and that’s why I call it a mixed bag right now because some customers, including one of our major gravity handler customers who announced its earnings release last week, guided to 10% lower revenue in the first quarter.  Generally, I would say we’re more optimistic about how the year is going to unfold than we were a couple of months ago.

 

<Q>:   Okay. And if I could just ask a few questions on the MATRiX specifically.  I think you said in your prepared remarks that you had two follow-on orders from two major IDMs. But, I seem to recall that you were working on some new evaluations during Q4, and you expected other new evaluations to take place in Q1.  I’m just wondering if those were the customers that were placing orders and given your impressive capture rate so far for that product, were you able to secure orders there yet? Do you expect those orders to come in Q1 and even if possible could you ballpark how many MATRiX customers you have to date?  That would be extremely helpful. 

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Yes, the evaluations continue to go very well.  MATRiX is doing great.  For the 4^th quarter I don’t believe that any of the evals that were in process actually converted to orders in the 4^th quarter.  We are expecting that to occur, this quarter, they’re all going well.  MATRiX customers are approaching double digits I believe now.

 

<Q>:  Okay, great. And can you give us a little bit more color on what motivated the huge increase that we saw in the BMS business?

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Well, overall strong demand for the product, but also the timing of some deferred revenue recognition and record shipments to meet a particular customer order in the 4^th quarter.  But it was a tremendous performance and a hard act to follow because we’re not going to see that kind of increase sequentially.

 

<Q>:   Okay, fair enough.  And then just one last quick one from me, would you be willing to share any 10% customers you had for 2010?

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

I think we’ll have to wait for our 10K on that.

 

Jeff Jones – Cohu, Inc. – CFO

Right.

 

<Q>:  Okay, fair enough.  Thank you.

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Thanks Kelly.

 

Operator

Thank you.  Our next question comes from the line of Vernon Essi with Needham and Company.  Please proceed with your question. 

 

<Q>:   Thank you very much.  I was wondering Jim and Jeff, if you’d delve into the price pressure comment that you made and just overall, to make sure we’re on the same page here.  You’re insinuating a gross margin level in 2011 that would be similar to what you posted for 2010; and can you just kind of walk through the puts and takes there and really what’s happening.  I mean it sounds like you’re just postponing this manufacturing transition, can you tell us exactly what’s going on and why that is?

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Sure, and I think that’s an accurate way to depict it. There are a number of moving pieces here. First, we’re always under competitive pricing pressure, what business isn’t, so that’s nothing new, but recently we’re seeing additional pressure in certain segments of our market, especially the high speed, pick-and-place segment of the market.  And then, with respect to the manufacturing, handlers are extremely complex systems and we’ve recently concluded that certain aspects of the manufacturing process, particularly the final integration and test, are more effectively performed here in our factory.  So, we’ll continue to use contract manufacturers to manufacture various elements of the product and that will depend on the handler.  With our simple handlers, the CM, will continue to manufacture the entire product. With some of our other handlers and certainly with our more complex systems, we may retain final test and integration and have them do major sub assemblies or elements of the handlers.  But we’ll do the final integration and test of certain systems in our factory.  It’s really a refinement of our outsourcing strategy. We still intend to make significant use of contract manufacturers.

 

<Q>:  Well, is it fair to say there’s two ways to look at this right. I mean you’ve got, it sounds like the Pyramid being built in Poway and that’s basically the key point here, and what I’m trying to understand is there any wiggle room out of the situation we’re in  on that margin structure for that product being built in Poway over the next 9 months or so?  Are we sort of on this track where the more that blends into your P&L, the more of a lid you have on that gross margin as you’re shipping out of Poway?

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Vern, I’m sorry, I’m not sure I completely get the gist of your question.

 

<Q>:  Well, let’s back up, I mean the Pyramid handler is being built out of Poway, correct?

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Parts of it, not the entire handler.

 

<Q>:  Okay, and that is one of the last big products that you have in Poway right now, correct?  In terms of manufacturing.

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Correct.

 

<Q>:  So, you look at this as being a continuation. I mean, there’s no set plan at least until the middle of 2011 that the steps you’re taking are going to be taken off-shore, what I’m trying to understand is there any room for margin improvement in that product?   I mean, theoretically if gravity doesn’t pick up and in some of the high speed areas you feel a little bit come back, but theoretically it sounds like the customer behind the scenes on Pyramid is going to have a lot of business.  So I’m trying to understand if there are any real possibilities for that margin to get out of that zone, despite all of your best efforts, I mean, what could change to make it better?  I guess that’s the way to phrase the question.

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Okay.  Thanks for clarifying that, I understand your question now.  Yes, there is room for incremental improvement and we have plans underway to reduce cycle time, working our supply chain and overall improving manufacturing efficiencies.  But, I think those improvements are more likely to be achieved towards the back end of this year and into 2012.

 

<Q>: Okay. And just, sort of a quick sort of quasi guidance question, Jeff.  R&D ticked off a little bit, should we be looking at that thing sort of level going into 2011 in the first half or how should we be looking at that?

 

Jeff Jones – Cohu, Inc. – CFO

Just talking about operating expenses in total we see a decline by a million in Q1.  R&D in Q1 will also have a small decline and that’s what I would model off for the remainder of the year.  Lower R&D on a quarterly basis as opposed to the number in Q4.

 

<Q>:  Okay and finally just looking at your balance sheet, you’ve got a very good working capital efficiency going on right now.  You’ve taken down inventory quite a lot in this last quarter.  What is that level going to look like in the next couple of quarters?  So, you’ll be having inventory sort of in the same almost one quarter of sales kind of range or do you think days will climb back up?

 

Jeff Jones – Cohu, Inc. – CFO

I expect the days and the inventory levels to stay about where they are right now Vern, given what we’ve just talked about with manufacturing certain aspects here in Poway for the foreseeable future.  I would expect our inventory levels to be approximately where they are right now.

 

<Q>:  Okay and sorry I have one final quick question.  Depreciation in the quarter?  I’m sorry if I missed that.

 

Jeff Jones – Cohu, Inc. – CFO

$1.3 million.

 

<Q>:  Okay.  Thank you, guys.

 

Jeff Jones – Cohu, Inc. – CFO

Thank you, Vern.

 

Operator

Thank you.  Once again, ladies and gentlemen, if you would like to ask a question, please press *1 on your telephone keypad.  As a reminder, if you are using speaker equipment, you may need to pick up the handset before pressing the *keys. Gentlemen, it appears there are no further questions at this time. 

 

James Donahue – Cohu, Inc. – Chairman, President & CEO

Thank you everyone for joining us today and we look forward to speaking to you when we report Cohu’s first quarter 2011 results.  Thank you and good day.

 

Operator

Thank you.  Ladies and gentleman this concludes today’s teleconference.  You may disconnect your lines at this time.  Thank you for your participation.