Cohu, Inc. (COHU) Q4 2007 Earnings Report, Transcript and Summary

Greetings and welcome to the Cohu Incorporated Fourth Quarter Fiscal Year 2007 Earnings Call. (Operator Instructions) It is now my pleasure to introduce your host, James Donahue, President and CEO of Cohu Incorporated. Thank you Mr. Donahue, you may begin.

Good afternoon everyone and welcome to this conference call that will cover Cohu’s results for the Fourth Quarter ended December 29, 2007. 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. If you need a copy you may obtain one either from our website cohu.com or by contacting Cohu Investor Relations at 858-848-8106. I will provide an overview of our results for the quarter then Jeff will take us through the financial statements and I will conclude with comments on operations and our view of the business environment. We will then take your questions, but first Jeff has information concerning forward-looking statements, estimates and other matters that we will discuss in today’s call.

Before we go on, I must remind you that the company’s discussion this afternoon will include forward-looking statements reflecting management 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 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 31, 2008 and the company assumes no obligation to update these comments. The company’s actual result may different materially from those stated or implied by our forward-looking statements due to the risks and uncertainties associated with the company’s business which include but, are not limited to the concentrations of our revenues from a limited number of costumers, our ability to convert new products under development into production on a timely basis, support product development and meet costumer delivery and acceptance requirements for next generation equipment, failure to obtain costumer acceptance resulting in the inability to recognize revenue and accounts receivable collection problems, inventory write-off, intense competition in the semi-conductor test handler industry, our reliance from the patents and intellectual property, compliant 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 fillings 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 costumers as we are precluded from this disclosing such information by our non-disclosure agreement.

Cohu’s Fourth Quarter Sales were $57.1 million with semiconductor equipment accounting for 81% of the total. Net income was $2 million or $0.09 per share. And this was above our internal estimate due to better than expected operating results at each of our businesses. Cohu’s orders worth $50.6 million in the Fourth Quarter compared to $54.9 million in the Third Quarter. Orders in our semiconductor equipments business were about the same as in the Third Quarter and this actually is encouraging in view of current weak conditions in the back-end of semiconductor equipment industry. Backlog at the end of the year was $59.5 million. Unit order breakdown for semiconductor equipment in the Fourth Quarter was as follows: high speed handlers 13%, thermal handlers 21%, thermal sub systems 64%, and other systems 2%. Thermal sub systems represented a higher percentage than we would normally expect due to low unit orders for test handlers during the quarter. We are particularly pleased with the important contributions that thermal sub systems made to Cohu sales in 2007. This business is a result of our 2006 asset purchase from Unisys and grew rapidly as we introduced product performance improvements that incorporate our proprietary thermal technology. For all of 2007, sales were $241.4 million, a decrease of 11% from $270.1 million in 2006. Net income in 2007 was $8 million or $0.34 per share compared to $17.7 million or $0.77 per share in 2006. Net income in 2006 benefited from a $3 million gain on the sale of our Littleton, Massachusetts facility. Cohu’s 2007 results reflect weak conditions in backend semiconductor equipment that deepened during the second half of the year. Semis book to bill ratio for backend equipment has been below parity since last August. While business conditions were difficult in 2007, Cohu made an important progress throughout the year that set the stage for our continued growth. We were selected over our competitor to develop the next generation thermal handler from one of our largest costumers, a leading microprocessor device manufacturer. Additionally, we received the first orders from a large graphics IC manufacturer for summit thermal handlers for use at their Asian test subcontractor’s production facility. These orders follow more than a year of evaluation and analysis that demonstrated the benefits of our thermal technology. Whether they are testing microprocessors or high speed graphics chips, our proprietary thermal technology enables IC manufacturers to successfully test that the optimum speed, thereby maximizing device ASP’s and directly and positively impacting their profitability. It is for this reason that our thermal test handlers, our plan of record tools for the largest producers of microprocessors and a number of other high speed, high power IC manufacturers. In the high speed handler segment of our business, we near completion of a new system aligned with the growing need for short index time, highly parallel test applications. The increasing use of new highly efficient logic in system on chip testers that make it cost effective to test at higher levels of parallelism creates a requirement for a new generation of handlers that can take advantage of the potential significant increases in productivity that these testers can deliver. But without the right handler the tester is constrained. Our new high speed handler is designed to test up to 32 devices at a time and deliver high throughput in short test time applications. In December, our system was selected by a major US-based immigrated device manufacturer following an evaluation against a competitor’s new product. Also in the fourth quarter, a leading US-IDM designated our tri-temperature castle, high speed handler as plan of record for full temperature testing. To improve responsiveness to our costumers and to capitalize on favorable labor rates, in the fourth quarter we began an expansion of our handler tooling manufacturing operation in the Philippines. When complete in the second quarter of this year, our capacity of that facility will be increased by 50%. In our mobile microwave communications business, the March 2007 purchase of the Tandburg ABS Business in Germany added critical mass, high definition products and a strong presence in the European market. And now Jeff will provide details on Cohu’s financial performance.

Semiconductor equipment related revenues for the Fourth Quarter of 2007 were approximately 82% international and 18% domestic. International sales were distributed 94% Asia Pacific, 4% the Americas and 2% other. We recorded approximately $900,000.00 SFAS in 123R stock based compensation expense in Q4. The comments I make regarding operating expenses includes the impact of SFAS 123R. This margin in Q4 was 33.7% versus 32% in Q3. Our Q4 gross margin was in line our projection and was higher than Q3 gross margin as a result of improved product mix within our semiconductor equipment business. We expect that our gross margin in Q1 to be about the same as Q4. R&D expense was $9 million in Q4 compared to $9.6 million in Q3. R&D expense was lower than have forecasted to the lower engineering labor expenses. We expect Q1 R&D expense to be slightly higher than Q4. SG&A expense was $8.8 million in Q4 compared to $9.9 million in Q3. SG&A expense was lower than we had forecasted to the lower selling expenses within our semiconductor equipment business. We expect SG&A expense in Q1 to be slightly higher than Q4. Interest income was $2.1 million in both Q4 and Q3. Our effective tax rate was 42.6% in Q4 resulting in a full year 2007 effective tax rate of 36.8% versus 34.6% for the nine months ended September 2007. The increase in the 2007 effective tax rate is due to higher than projected pretax income and slightly lower benefits from R&D tax credits. The Federal R&D tax credit expired on December 21, 2007 and it is uncertain as to when or if it will be extended without any benefit from Federal R&D tax credits, we expect that our effective tax rate for 2008 to be approximately 37% or the actual rate may vary in is highly sensitive to our pretax earning levels. That income per share in fourth quarter was computed based on $23.2 million weighted average shares and share equivalents from stock options and RSU’s. Moving to the balance sheet, cash and investments were $170.1 million at December increasing approximately $13.9 million from September due to Q4 earnings and changes in working capital. Net accounts receivable were $45.5 million at December compared $47.6 million at September and represented about 72 day sales outstanding. The decrease in accounts receivable was due to lower shipments in November and December compared to August and September and cash collections in Q4 compared to Q3. Inventory decreased $1.6 million from September and was due to the decrease in our order backlog and inventory reduction initiative. Additions to property plant and equipment for Fiscal 2007 were approximately $5.2 million and depreciation and amortization was approximately $7.4 million. Deferred profit at December was $4.9 million compared $4.6 million at September. Deferred profit relates to deferrals pursuant to SAB 104 primarily on delta test handlers and thermal sub systems and VMS products. Our deferred revenue at December 2007 was approximately $9.2 million.

As we all know, the current macro economic backdrop is unfavorable. Conditions in the backend semiconductor equipment industry are no better and we expect customers to remain cautious with capital equipment purchases over the near term. At least through the first quarter, we do not foresee any change in the limited visibility that most costumers are providing as to their requirements. For the first quarter, we expect Cohu sales to be between $52 million and 57 million. Cohu’s Board of Directors approved a quarterly cash dividend of $0.06 per share payable on April 25, 2008 to shareholders of record on March 11, 2008. Cohu has paid consecutive quarterly cash dividends since 1977. We will now be happy take questions.

(Operator Instructions) Our first question comes from Michael Trotsky with Par Capital Management, please proceed to the question. Michael Trotsky – Par Capital Management: Just a couple of questions, can you talk about what you think the utilization rights are and backend equipment at your major customer-base and how it compares to a year ago? Secondly, is there any potential tax rate benefit from the ramp in the Philippines assembly plant?

As far as utilization, we really are in two quite distinct markets, the microprocessor market and then the general purpose logic market. And in the microprocessors market, I think utilization rates are high in the 85% to 90% range and that is looking at the two major players in that market on a combined basis. And I would say that comparable within a few points of where it was about a year ago. In the high speed handler market the general purpose market, it is our perception that utilization rates are somewhat lower, maybe in the mid 80’s. And your second question had to do with the potential tax benefits in the Philippines, I will ask Jeff to address that.

Yes. We are going to see limited benefits from that in the Philippines as the tax holiday there expires in 2007. We are working to have it extended at the moment, but we have not modeled any benefit for the extension at this time. Michael Trotsky – Par Capital Management: I thought of another question, but I will get back in queue.

(Operator Instructions) We have a follow up question from Michael Trotsky. Michael Trotsky – Par Capital Management: So you alluded being selected for the next generation thermal handler by a major customer, can you give any more details into a design cycle testing product launch, any details on that?

We are in the midst of product development with a large engineering team developing the product. The development will continue through this year and we would expect to be making our first production shipment of this system next year, midyear, approximately. Michael Trotsky – Par Capital Management: The high speed system development that you alluded to that can do high parallelism and has been selected by a major, that is a brand new product that is competing well with the competitors out there, when was that launched, and where do you view its ramp?

Well, actually we have not officially launched that product. Its development is nearing completion; I would say that we were in the top of the eighth inning, maybe something like that with regard to the completion of the product. So this evaluation at the major US IDM was really with a product that was not yet fully developed, but we are in there because their product development timeline requires them to be looking at equipment that can play into this high parallel short index time application. So, we went in, we competed against our competitor’s new product and we won, and we would expect to be making our first shipments of that machine in the second quarter, probably late second quarter. Michael Trotsky – Par Capital Management: Well, that is good news. Is this particular product applicable to other markets and other costumers or do you think it will also compete well?

Absolutely, yes it will augment our existing product line, which is today anchored by our edge test handler. This new machine is tri-temperature higher parallelism faster and also incorporates vision technology whereas our edge today is an ambient hot machine. We have expanded the parallel test capability up to higher levels, but the metrics, our new product will take this performance in this area to a completely new level. Michael Trotsky – Par Capital Management: You mentioned the $0.06 dividend, but as I sit here and look at the cash balance of a $170 million, your stock is trading at roughly two times cash which is quite reasonable. Have you thought about any other possible uses of the growing cash balance?

Yes, absolutely and our preferred use for the cash is an acquisition, an acquisition of a company that it synergistic with our current key major business, that is semiconductor backend equipment, material handling, electromechanical, intensive backend capital equipment. We certainly do not think that using our stock at this time for the reason you have stated is a good way to find an acquisition. Having said that, we have talked about stock repurchase with our Board and at the appropriate time, if we do not find a suitable acquisition that is something we would consider.

(Operator Instructions) Our next question comes from Michael Trotsky. Michael Trotsky – Par Capital Management: What is a suitable acquisition in your mind in financial terms? Not so much in what kind of company?

Well, in terms of size, we would like it to be significant enough that it has the ability to impact our current financial performance. We have made over the last several years a number of smaller technology-type acquisitions that have actually been quite successful and contributed importantly to our revenue growth in the thermal handler area in particular, but none of them brought significant new products that contributed direct revenue from the addition of those products to our portfolio. We will be looking for an acquisition of a complementary product or product lines that have the potential to impact our financial results in a material and positive way. From the standpoint of what are the acquisition criteria, we would not be inclined to do an acquisition that was dilutive even in the short term. Michael Trotsky – Par Capital Management: As you look at potential companies, is there anything on your radar currently or is this just sort of always evaluating mode?

Well, we are always looking at acquisition and we do it in a structured way. If there were a specific company that we were looking at, I would not be able to comment on it anyway. So all I can tell you is that we look at acquisition in a structured way, we are not strictly awaiting inbound inquiries and dealing with them opportunistically, it is a process. Michael Trotsky – Par Capital Management: My last question, I promise, is just a review of the other businesses as the non-semiconductor businesses, how are they doing? How critical to your future are they, and what are your plans?

Well, we were not happy with the results from either of those businesses in 2007. The camera business was down slightly from a sales standpoint and contributed an operating loss. Its prospects for 2008 however, looked to be improved and we expect it to be a positive contributor in 2008. The microwave communications business, I think is in a position to be a very solid contributor going forward. It had a disappointing year from a profitability standpoint for a variety of reasons, but we think that that business has good prospect. And we look for it to be as solid contributor in 2008.

(Operator Instructions) Mr. Donahue, there are no questions at this time.

Okay, thank you everyone for attending today’s conference call and we look forward speaking with you again in April when we will be covering Cohu’s results for the First Quarter of 2008. Thank you and good day.

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