Cohu, Inc. (COHU) Q2 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Cohu, Inc. Second Quarter 2013 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James A. Donahue, Chairman and Chief Executive Officer with Cohu. Thank you, Mr. Donahue. You may begin.

Good afternoon, everyone. Welcome to this conference call that covers Cohu's results for the second quarter that ended June 29, 2013. 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 may obtain one from our website, cohu.com, or by contacting Cohu Investor Relations at (858) 848-8106. Today, I'll provide an overview and comments on Cohu's results for the second quarter, and then Jeff will take us through the financial statements. I'll then comment on the current business environment, and then we'll take your questions. But before we go on, Jeff has information concerning forward-looking statements, estimates and other matters that will be discussed during today's call.

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, July 31, 2013, and the company assumes no obligation to update these comments. Certain matters discussed on this conference call, including statements concerning Cohu's transition of production to Asia and consolidation of our handler manufacturing operations, 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, 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 and accounts receivable 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 questions will not make reference to any specific customers, as we are precluded from disclosing such information by our nondisclosure agreements.

Thank you, Jeff. Second quarter sales were $66.7 million compared to $56 million in the first quarter of 2013. The non-GAAP loss was $0.05 per share compared to a loss of $0.32 per share in the first quarter. Our core Semiconductor Equipment business and also our Video Camera operations were profitable during the second quarter. Sales and operating income at our mobile microwave business were significantly below planned, impacting gross margin and resulting in the operating loss for the quarter. The revenue shortfall at BMS was due to continuing budget uncertainties on several U.S. government programs and delays by a Middle East customer in processing letters of credit, which prevented us from shipping products as planned during the quarter. We expect that these letters of credit will be issued in the third quarter. Orders were $83.1 million compared to $60.3 million in the first quarter. Semiconductor Equipment orders were up 44% sequentially to $75.4 million compared to $52.5 million in the first quarter. Systems orders, which represented 62% of the total, were up 109% sequentially, reflecting the strength of our new and expanded product portfolio. Recurring business was about the same quarter-on-quarter and represented 38% of total orders. Our recurring business consists of spares, consumables, conversion kits, upgrades and services, and typically has lower volatility through the cycles. Cohu's balance sheet strengthened during the quarter. Cash flow from operations was $8.1 million, and the quarter ending cash balance increased to $54.2 million. Both DSOs and inventory decreased significantly, and Jeff will provide more detail in his remarks. Now I'll provide additional information on orders and other key activities during the quarter. Handler utilization remained near the 80% level as it has since March. The primary drivers for our Q2 Semiconductor Equipment orders were mobility, automotive, consumer, MEMs, LEDs and package…

In Q2, we recorded approximately $1.4 million of stock-based compensation expense and $1.7 million of purchased intangible amortization expense. The comments I make today include the impact of these items. Gross margin was 32.2% in Q2 and lower than our projection as a result of the revenue shortfall at BMS. We expect the Q3 product mix will be less favorable than Q2. However, this impact on gross margin will be offset by the projected increase in BMS performance. As a result, we expect the Q3 gross margins to be about the same as Q2. As we've previously discussed, a key to improving our gross margin is the transition of our handler manufacturing to Asia. Our plans are progressing well, and the first handlers from the Malaysia facility are scheduled to be completed in Q1 of 2014. Operating expense in Q2 was $25.9 million and in line with our projection. We expect operating expense in Q3 to be about the same as Q2, and will include approximately $600,000 of restructuring costs in connection with the transition of manufacturing to Asia. The Q2 income tax provision was a benefit of $400,000, and we expect our 2013 effective tax rate will be approximately 10%. The Q2 loss per share on a GAAP basis was $0.16. Non-GAAP loss per share, which excludes the after-tax impact of share-based compensation, amortization of intangibles, the step-up of inventory valuation and acquisition cost incurred in connection with the acquisition of Ismeca, was $0.05 for the quarter. Moving to the balance sheet. Cash and investments increased by $5.5 million to $54.2 million at June. Cash provided by operations in Q2 was $8.1 million. Net accounts receivables increased by approximately $3.8 million to $60.4 million at June as a result of increased shipments from our Semiconductor Equipment group during the quarter. DSO at June was 78, which was down from 86 at March, primarily due to collections of past-due receivables within our semi-equipment group. Inventory was $67.7 million at June, decreasing $5.6 million from March, primarily as a result of increased shipments and strict inventory management by our Semiconductor Equipment group. Additions to property, plant and equipment for Q2 were approximately $1 million, and depreciation has -- depreciation was approximately $1.4 million. Deferred profit at June was $6.9 million compared to $5.6 million at March, and the related deferred revenue at the end of Q2 was $10.4 million compared to $6.7 million at March and consists primarily of revenue deferrals on shipments of test handlers.

Thanks, Jeff. Commenting briefly on our other businesses. As noted earlier, revenue at BMS was significantly below planned and resulted in the operating loss for the quarter. A significant portion of BMS business is contract-related, so revenue is inherently lumpy. During the last 2 quarters, several large government-related orders that were expected to be received and shipped in the same quarter were delayed due to budget cuts and uncertainties associated with sequestration. It's not clear to our customers how long this situation will continue, and as a result, we're taking actions to align costs with the revenue level that we expect over the near term. Sales improved sequentially at the Electronics Division, driven by the U.S. traffic market. Key orders were received from multiple traffic incident management applications, including a first-time order from a new customer in a southern U.S. city, where we displaced the competitor. During the third quarter, we expect to release our new model 3760 high-def PTZ camera targeted at cost-sensitive security applications. Now returning to our Semiconductor Equipment business. With the Ismeca acquisition, we now participate with turret-based systems and the package inspection market, as well as the final package test segment. Package inspection usually follows test in the final manufacturing process flow. In package inspection, our handlers perform automated vision inspection of the package electrical context, marking features and overall package quality before the packages are loaded in the final shipping media by our equipment, which is typically [indiscernible]. Package inspection handlers are used in all market segments, and our turret-based solutions are particularly cost-effective for small and wafer-level packages, which represent a growing portion of semiconductor volume. In the second quarter, we received multi-unit orders from several test subcontractors in Taiwan, China and Korea for our turret package inspection handlers. As a first step…

[Operator Instructions] Our first question comes from the line of Jairam Nathan with Sidoti. Jairam Nathan - Sidoti & Company, LLC: Just a follow-up on your comment on shipping in the fourth quarter. Is there any particular segment of the market where you're seeing that delayed shipping? And is that typically normal with that product?

It really is just the customer's desired delivery dates, Jairam. It's nothing more than that. They often provide target dates. Not all of them want the products immediately. Jairam Nathan - Sidoti & Company, LLC: Okay, and as far -- now that your operating expenses are kind of starting to stabilize this acquisition, can you give us an idea of what your break-even level is?

Jairam, the break-even levels at $65 million on a non-GAAP basis, $75 million on a GAAP basis. Jairam Nathan - Sidoti & Company, LLC: Okay, and the -- and then, you mentioned a little about the package inspection market. And can you give us an idea what the SAM for that market would be, and what kind of growth rate it's growing at?

Sure. I think the package inspection market is sort of similar inside to any of our handlers segments. And it's not as large as pick and place, but not too dissimilar from gravity or turret. It's about $100 million market, complimentary to our current products. And ICs are electrically tested using any of our handlers: pick-and-place, gravity, strip or turret. But most of them eventually need to pass an automated vision inspection process. And Ismeca has been in that space many years with its turret equipment, primarily focused on expecting small and wafer-level packages, which as I said, are a growing segment of the market. So we will continue to invest in particular in the vision technology that's critical to this package inspection product, and where we can leverage it across all our handler platforms. First, growth rate, I think it would be comparable, Jairam, to the handler growth rate in any particular year. It will be unit volume -- tend to be unit volume-related.

Our next question comes from the line of Tony Grillo with Needham & Company.

I guess, my first question is, I was hoping you can talk a little bit about cross-selling opportunities that you saw in the quarter and hopefully going forward.

We are very pleased with the cross-selling opportunities since the Ismeca acquisition. In fact, going all the way back to their -- to the Rasco acquisition some years ago. During the second quarter, we were able to realize some benefits for our pick and place products. We're able to realize some benefits where Ismeca turret customers, both couple of OSATs that we were pursuing purchased MATRiX handlers. So we'll take those cross-selling synergies whichever way they come. Since the acquisition, we've seen -- until this quarter more opportunities where we're getting turret handlers into our pick and place or gravity handlers installed base. So this was a nice win, capitalizing on a couple of OSATs where Ismeca is the incumbent turret handler.

Perfect. And I guess my other question was, is the booking trend that you're seeing going into the third quarter, expecting to see more of that revenue or shipments in the fourth quarter? Is that kind of a trend you're expecting to see going forward? Or is that just simply based on this one customer kind of a onetime thing?

By that, you mean where we're not going to necessarily ship within the next quarter everything we booked in the preceding quarter?

Right. I know that's not always the case, but specifically you mentioned in the Semi business, it's a little more so, which is why you're guiding quite a tie [ph]. I'm just kind of wondering if that's the trend that you might expect to see going forward.

I don't really think there's anything kind of a trend, Tony. I just think it was the specific situation with a couple of customers and their plans to bring in equipment. I just -- I don't think there's anything more than that, not a trend.

Our next question comes from the line of Dick Ryan with Dougherty & Company. Richard A. Ryan - Dougherty & Company LLC, Research Division: Say, Jim, on the bookings front, you mentioned the strong T-Core bookings in the quarter. How should we look at that? Is that kind of a lumpy affair? Or is this kind of some new opportunities that we should expect going forward?

I would say, yes, to both your questions, Dick. I mean, with the growth of mobility products like tablets and smartphones and the use of package-on-package technology where a memory device is stacked with an application processor, what we're seeing is a new requirement developing. The test of the final integrated package. The memory device itself and the microprocessor, the application processor are already tested. Those tests will continue. So this is a new opportunity, a new developing requirement, as opposed to eliminate infant [ph] mortalities and reduce warranty returns presumably on the consumer product from the field. So this is, I guess, a system-level test that's performed using specialized batch testing systems rather than traditional ATE. It does require precise control of the device temperature through the test process. And of course, we have significant proprietary thermal technology that's long been the benchmark for testing mid- and high-power microprocessors. And now that thermal technology is being used in these batch test systems. So we expect this is really a new opportunity, given that it's being used and integrated into a batch system process. We would expect this to be like OEM orders tend to be, somewhat lumpy. We receive a large order for x systems that are to be delivered over some period of time. It's not necessarily going to be a nice flat, even business. Richard A. Ryan - Dougherty & Company LLC, Research Division: Okay. And you talked about utilization rates, 80% or so since March. What -- in your conversations, what are your expectations going into the -- beginning further into the second half of the year for utilization rates?

Well, we don't see, really, any great insight from customers that, that level is going to move dramatically one way or the other. It seems to be relatively stable as it has been from March. And if anything, it's moving very slowly slightly upward, I would say. Richard A. Ryan - Dougherty & Company LLC, Research Division: Okay. And Jeff, you mentioned OpEx in general. How do you see R&D? Can you break those out a little bit? How do you see R&D and SG&A trending?

Yes, for the quarter for Q3, you see R&D around $11 million; SG&A, about $15 million, for the total of $26 million. Now recall that I've mentioned we've got about $600,000 of restructuring costs that are embedded in that SG&A number.

[Operator Instructions] We have a follow-up question coming from the line of Tony Grillo with Needham & Company.

I just wanted to follow up with one more. I was wondering what kind of activity you saw throughout the quarter in LED, and kind of how you see this trending going forward to the next half of the year and into 2014?

Well, we're seeing -- we had a pretty active quarter for LEDs. It was one of the main drivers in our turret business. And we see that being one of the stronger areas as we look at the various market segments we serve. So we're expecting that to be healthy the rest of the year.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Well, thank you for joining us today, and we look forward to speaking to you next when we report Cohu's third quarter 2013 results. Thanks again, and good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.