Cohu, Inc. (COHU) Q3 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the Cohu Third Quarter 2012 Conference Call and Webcast. [Operator Instructions] 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. Thank you. Mr. Donahue, you may begin.

Good afternoon, everyone, and welcome to this conference call that covers Cohu's results for the third quarter ended September 29, 2012. I'm traveling on business today, and Jeff Jones, our Chief Financial Officer, is joining us from our headquarters in California. 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 contact Cohu Investor Relations at (858) 848-8106. I'll provide an overview and comments on Cohu's results for the third quarter. Jeff will take us through the financial statements. I'll conclude with comments on the current business environment, and then we'll take your questions. But first, Jeff has information concerning forward-looking statements, estimates and other matters that will be discussed during today's call.

Thanks, 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, future operations, financial results, and any comments we make about the company's future in response to your questions. Our comment speak only as of today, October 24, 2012, 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, 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 and accounts receivable collection problems; customer orders may be canceled or delayed; the 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 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 10-K and Form 10-Q. Cohu assumes no obligation to update the information in this release. Further, our comments and responses to any question will not make reference to any specific customers as we are precluded from disclosing such information by our nondisclosure agreements.

Thanks, Jeff. Sales for the third quarter were $57.7 million that compares to $59.4 million in the second quarter. The non-GAAP loss was $0.03 per share compared to a loss of $0.01 per share for the second quarter. Cash and investments increased to $110.1 million, and Cohu's balance sheet remains free of bank debt. Orders were $50.1 million compared to $69.8 million in the second quarter. Semiconductor equipment orders were $38.5 million compared to $59.5 million in the second quarter. Backlog was $54.4 million at the end of the third quarter. Our results are in line with overall orders for back-end semiconductor equipment that have trended downwards since earlier this year and according to SEMI, decreased in September to the lowest level in over 3 years. Semiconductor sales have slowed as a result of weak macroeconomic conditions. It is not surprising then that equipment utilization on customer test floors has dropped from near 80% last quarter to about 71% in September. The semiconductor group unit order distribution for the third quarter was high-speed handlers, 83%; thermal handlers, 17%. Against what's a generally negative economic backdrop, we had a number of key accomplishments and highlights in the third quarter. And I'd like to recap them, as they give us a sound basis for optimism as business conditions improve. First, unit orders for high-speed pick-and-place handlers declined 14% sequentially. But that follows a very strong second quarter when increased demand for automotive ICs drove near record orders for Castle handlers. Unit orders for EDGE handlers more than doubled during the third quarter and were split evenly between IDMs and a major test subcontractor. The majority of the IDM orders were to provide additional capacity for testing acoustic MEMS devices. And as I noted last quarter, the EDGE was qualified by a major OSAT for testing consumer mobility ICs, and this customer placed a multiunit order during the third quarter. Following that exceptional second quarter for Castle handler orders, several follow-on units were booked in the third quarter, mainly for automotive. Orders for MATRiX handlers were at the highest level in more than a year, and were split 70% IDM and 30% OSAT. We're finding that customers are transitioning their high-volume products to MATRiX due to its speed and parallel test capability. A major IDM selected MATRiX as its future handler platform, and we expect to begin receiving orders in the fourth quarter. We're also working with another major IDM on an important program that will enable them to test high-volume automotive ICs in by 16 and by 32 parallel configurations. And 3 customers at 4 locations are scheduled to start evaluation of MATRiX handlers during the fourth quarter as we continue to expand this product's market penetration. Orders for Pyramid handlers declined after a record second quarter. We expect demand to be limited due to weak end-market PC demand. Unit orders for our Summit thermal handler were at the highest level in more than a year, driven by 2 companies that have standardized on this platform for testing high-power microprocessors. Opportunities for our T-Core thermal subsystems are increasing as certain customers implement batch testing and system-level test methodologies for consumer mobility ICs. Additionally, during the fourth quarter, we expect to shift our first EDGE handler with integrated T-Core thermal capability for testing low- to mid-power dissipated processors. T-Core utilizes the same propriety thermal technology incorporated in our Pyramid production handler, and we have solutions to address thermal requirements across the broad range of test handling applications. Unit orders for gravity handlers were essentially flat sequentially and booked repeat orders from multiple customers for incremental capacity in the automotive and industrial markets. We also received orders for MEMS test solutions linked to our handlers for pressure, magnetic and acoustic applications. A repeat order was placed for a strip handler and 2 new evaluations were started at OSATS in Taiwan and China. So we expect both application -- evaluations to result in orders later this year or in Q1 subject, of course, to industry conditions. . Last quarter, we introduced our next-generation gravity handler called Saturn to customers in Southeast Asia. The Singapore-based showing was well attended, very well received by test and production personnel from Asia OSATS and Asia IDM production facilities. Jupiter, which is the large package version of Saturn, was successfully qualified and transferred to production in Asia at our initial customer, and we expect a follow-on order for this handler in the fourth quarter. Operationally, we successfully transferred production of the first pick-and-place handler to our Philippines factory during the third quarter. This is a key step in our new manufacturing strategy that involves outsourcing subassemblies and performing final assembly and test in-house. We'll continue to expand our Asia operations infrastructure to support off-shoring future handler manufacturing. And now Jeff will provide the financial details.

Semiconductor equipment-related revenues for Q3 were approximately 83% international and 17% domestic. International sales were distributed 82% Asia-Pacific, 12% the Americas and 6% other. We recorded approximately $1 million of stock-based compensation expense and $1 million of purchased intangible amortization expense in Q3, and the comments I make today include the impact of these items. Gross margin was 31.4% in Q3 and in line with our projection. We expect gross margin in Q4 to be approximately 32%. Operating expense in Q3 was $20.7 million, again in line with our projection, and we expect operating expense in Q4 to be approximately $20 million decreased in due to reduced work hours and lower variable selling expenses. Interest and other includes a $677,000 gain from the sale of a building previously occupied by our metal detection business FRL that was divested in 2006. The Q3 income tax provision was a benefit of $100,000 and we expect a nominal benefit for Q4. The Q3 loss per share on a GAAP basis was $0.07. Non-GAAP loss per share, which excludes the after-tax impact of share-based compensation, amortization of intangibles and the gain on the sale of the FRL building, was $0.03 for the quarter. Now moving to the balance sheet, cash and investments were $110.1 million at the end of September, increasing $3.5 million from June and cash provided by operations in Q3 was approximately $5 million. Accounts receivable were $43.6 million at September, increasing $1.4 million from June. DSO at September was 72, increasing from 61 at June primarily due to a $2.5 million receivable. The collection of which was tied to customer acceptance of our product. We achieved customer acceptance late in Q3 and expect to collect this receivable in November. Inventory was $68.7 million at September, decreasing $4.3 million from June as a result of increased shipments of our Pyramid handler and improved inventory and supply-chain management. Additions to property plant and equipment for Q3 were approximately $1.1 million and depreciation was approximately $1.2 million. Deferred profit at September was $1.8 million compared to $4.2 million at June, related to -- deferred revenue at the end of Q3 was $2.4 million compared to $6.9 million at June and consists primarily of revenue deferrals on shipments of test handlers and mobile microwave communication equipment.

Thanks, Jeff. Now I'll provide brief comments on our non-semiconductor equipment operations and then discuss the current business environment. Sales decreased slightly at the electronics division. During the quarter we launched and received initial orders for our new 5970SD thermal imaging camera that has pan, tilt and zoom capability. We also introduced our new 7500 series of commercial security cameras. Both of these products are part of a strategy to broaden our product line from discrete specialized cameras and enable us to sell end-to-end video surveillance solutions. BMS sales improved sequentially, but we're below planned as several orders that were expected to book and bill during the quarter were delayed by customers. BMS equipment was used by multiple law-enforcement agencies during the Republican National Convention in Tampa to provide airborne video downlinks and to distribute the video to ground-based security personnel. Activity continues to be high in the Middle East for government surveillance and security applications. Now looking ahead, according to SEMI, back-end semiconductor equipment orders had decreased since May. And the book to bill for the most recent month, which is September, was only 0.54. As the year has progressed, both the SEMI and the semiconductor equipment industries have been increasingly affected by negative global economic conditions and by geopolitical factors. A number companies have issued downward revisions or reported lower Q3 results and guided to further reductions in the fourth quarter, and I think more are expected to do so. Recently, industry researchers, IDC and Gartner, said third quarter PC shipments fell more than 8%, which is the sharpest decline in over 10 years. So clearly, the industry is facing headwinds and it's our view that business conditions will not improve until there's more certainty in the U.S. political arena and also with global economic conditions. So in this environment, we're tightly controlling discretionary spending, but we're continuing to invest in key projects to expand our product portfolio, grow our customer base and streamline manufacturing, all designed to position the company for growth when industry conditions improve. Cohu's Board of Directors approved the dividend of $0.06 per share that will be payable on January 2, 2013, to shareholders of record on November 23, 2012. Cohu has paid consecutive quarterly cash dividend since 1977. For the fourth quarter, we expect sales to be between $45 million and $50 million. And that concludes our prepared remarks, and we'll now take questions. Manny, please?

[Operator Instructions] Our first question is from Vernon Essi of Needham Company.

I wondered if you could go into a couple of things here. First off, on the gross margin guidance, it looks to be actually a pretty decent gross margin given the sort of negative revenue trajectory that you're guiding, and I'm wondering what seems to be the offsets going on there and if there was any specific -- I know you're saying you're doing cost of goods, anything specific in the cost of goods line?

Vernon, the improvement there quarter-over-quarter is primarily due to mix. There is some benefit for some cost-reduction actions, but it's primarily due to the product mix we see in Q4.

And specifically, would that be just more traction on the higher end -- I mean, it's just, what, particular handlers and the less on the gravity side, more on the pick-and-place or how is that specifically?

It's more on the high-speed handlers and it's mostly within semi group.

Okay. And then if you could give us an update, I guess, Jim, in your prepared comments, you started to talk a little bit about the Summit product line. Could you talk a little bit more about where that's heading? It seems like you're sort of coming off of a -- I don't want to pour it in your mouth, but it's somewhat like you're coming off of a trough, is that what seems to be happening with the major customers on that end of things? Or is it sort of a wait-and-see situation?

Vernon, you're speaking about the Summit handler?

Yes.

As you know, the summit was our first-generation thermal tool, and we began selling that product in the late 1990s. Our largest customer transition to the Pyramid several years ago, which for them was a next-generation product. But the balance of our thermal handler customers have continued with Summit, albeit at much lower volumes than our lead Pyramid customers. So we foresee those customers continuing with the Summit for the foreseeable future as it meets all of their requirements.

I guess, I'm trying to understand so it's sort of well -- in terms of -- I realize the Pyramid is obviously with the larger customers. But what's the interest on the Summit side? Or is it just sort of in a status-quo mode with some of the legacy customers that you see? I'm trying to understand what the statement is there that things look to be improving into the first quarter? I mean, I know it's in a lower run rate but is there anything else to read into that?

No. I think you're correct when you said it's our -- our other customers will continue -- we expect them to continue to purchase Summit handlers. They don't need the additional capability that the Pyramid handler provides, at least they don't need it in the near-term. So they will continue to purchase. We expect them to purchase Summit handlers, but it will be at much lower volumes. This is a first-generation product succeeded by the Pyramid. So our smaller customers, we expect to continue to purchase it in smaller quantities.

Okay. And then finally, I guess, going back to the gross margin longer term, Jeff, and maybe just an update overall on the offshore migration. Can you talk about the implications of the migration of that product to the Philippines and anything and sort of the time line and how that's going to play out? And then remind us again what proportion of product that you have sort of slated to go offshore versus still built in California?

Yes. We've identified a high-speed handler that will be manufactured in the Philippines. We also have a subassembly of a thermal handler unit that will be manufactured in the Philippines. This process of transitioning will continue through early 2013 to mid-2013. It's necessary to complete this transition, as well as improvement in business conditions. And when those 2 events occur and we believe we can hit our target margin of 40%, which at the moment, looks like will be in late 2013, early 2014.

I would just add to that, Vernon, that our plan is also that any new products will be manufactured in Asia.

Our next question is from Jairam Nathan of Sidoti.

Considering the weak set of results over the last few quarters and the continued uncertainty, is there anything that can be done on the cost side? We haven't seen OpEx doing -- declining as much as sales has, and I'm just wondering if there's any room there.

Yes. We've taken actions. We've got actions still to take in Q4. But we've had an elevated level of OpEx for the past couple of quarters as we've been supporting our evaluations, our customer evaluations of our newer product as well as ramping of our development of thermal subsystems. So those 2 items have increased sort of our normalized OpEx over the last couple of quarters, Jairam. I see that level of development, investment and evaluation support continuing to Q4. And we will see a drop in Q4, which is attributable, as I said, to reduce work hours as well as a lower variable selling cost. So with respect to overall OpEx, those are the main reasons why you're seeing a higher level over the last few quarters as the investment in thermal subsystem and customer evaluations.

Okay. And could you provide us with numbers for revenue numbers for -- by segment?

No, we didn't. In the press release, we indicated that revenue or sales of semiconductor equipment was 81%.

[Operator Instructions] Gentlemen, we have no further questions in the queue at this time.

Okay. Thanks everyone for joining us for this call. And we look forward to speaking to you when we report our fourth quarter and full year results. Thank you, and good day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.