Cohu, Inc. (COHU) Q2 2008 Earnings Report, Transcript and Summary

Greetings and welcome to the Cohu, Inc. second quarter 2008 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. James A. Donahue, President and Chief Executive Officer of Cohu. Thank you, Mr. Donahue. You may begin.

Good afternoon everyone and welcome to this conference call that covers Cohu's results for the second quarter ended June 28, 2008. With me today is Jeff Jones, our Chief Financial Officer. 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 web site, www.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, then Jeff will take us through the financial statements and I'll conclude with our view of the near-term business environment and our guidance for the third quarter. We'll then take your questions. But, before we go any further, 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'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, July 24, 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 U.S. 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 non-disclosure agreements.

Thanks, Jeff. Cohu’s second quarter sales were $51.8 million compared to $66.4 million in last year’s second quarter and $58.4 million in the first quarter of 2008 and they were in line with our guidance of approximately $50 million. On this expected lower volume of sales, net income decreased to $174,000 or $0.01 per share. Orders declined 8% to $50.1 million due to lower sequential bookings at Delta Design, that were not a surprise and that reflect continuing soft conditions in the semiconductor equipment industry. Backlog at the end of the second quarter was $54 million. Unit order breakdown for semiconductor equipment in the second quarter was high-speed handlers 38%, thermal handlers 29%, thermal subsystems 29% and other systems 4%. Operating results in our semiconductor equipment business were ahead of our internal plan due to higher sales than expected and to favorable product mix, partially offset by increased warranty expense. Unit orders for thermal handlers were about the same as we have seen since mid 2007. Our largest microprocessor customers have not added test capacity for some time. However, in the second quarter, a large graphics chip manufacturer placed a follow-on multiple unit order for thermal handlers, further validating the significant benefits that our thermal technology provides in testing high-speed, high-power integrated circuits such as GPUs and microprocessors. Unit orders for high-speed handlers decreased sequentially following an unusually large order from a major US-based IDM in the first quarter. Recent results reported by wireless IDMs have been generally weak and this is certainly consistent with the low demand we have seen from our customers who serve these markets. Last week at the Semicon West Trade Show in San Francisco, we exhibited for the first time our new MATRiX high-speed handler. This system is a major leap forward in SOC handler technology with the capability to test up to 32 devices in parallel at temperature ranges from minus 55 degrees Celsius to 175 degrees Celsius with fast index time and vision alignment for small form factor and fine pitch integrated circuits. Importantly, we've integrated our proprietary conductive thermal control technology into MATRiX that until now has been utilized only in our high performance logic handlers. This chamberless approach to full temperature testing will provide our customers with improved temperature accuracy and stability. Customers will also realize higher levels of utilization to sharply reduce temperature transition times during production testing and reduce downtime when servicing the equipment. During the second quarter, we received a follow-on order for MATRiX from our initial customer, a large US-based IDM with production facilities in Southeast Asia. At Semicon, we also introduced the ETC-3000 thermal control and characterization system. Our ETC systems are used by device manufacturers and test subcontractors to characterize integrated circuits during design, qualification and pre-production. They utilize the same thermal technology as our production handlers, enabling customers to accurately characterize the test performance that they will achieve in production. In a compact, space-efficient form factor, the new ETC-3000 incorporates our latest modular thermal control technology which we call T-core that is also being designed into our next generation production thermal handler that is now in development. Turning briefly to our other operations, sales at our CCTV business increased slightly sequentially. Customer interest is strong for new products developed for the high-end security and surveillance markets, and we expect order levels for these products to increase in the second half of this year. Sales at our microwave communications unit decreased from Q1 as a result of a delay in obtaining customer acceptance and a customer requested rescheduling of shipments that was planned for the second quarter. We expect the customer acceptance and the delayed shipments to be made in the third quarter. And now, Jeff will provide details on Cohu’s financial results during the second quarter.

Semiconductor equipment related revenues for the second quarter were approximately 70% international and 30% domestic. International sales were distributed 90% Asia Pacific, 8% the Americas, and 2% other. We recorded approximately $1.1 million of FASB 123R stock-based compensation expense in Q2. The comments I make regarding operating expenses include the impact of FASB 123R. Gross margin was 35.6% in both Q2 and Q1 and in line with our projection. We expect our gross margin in Q3 to be about the same as Q2. R&D expense was $10.4 million in Q2 compared to $10 million in Q1, and again, in line with our forecast. We expect the Q3 R&D expense to be about 5% lower than Q2. SG&A expense was $9 million in both Q2 and Q1 and slightly lower than our projection due to reduced sales commissions at our microwave communications equipment business. We expect SG&A expense in Q3 to be slightly higher than Q2. Interest and other income was $1.4 million in both Q2 and Q1. Our effective tax rate increased to 43% for the six months ended June 28 from 40% in Q1. As a result, and due to our Q2 pretax income level, our effective tax rate for Q2 was an abnormally high 63%. We currently expect the effective rate for the balance of 2008 to be approximately 43%, but the actual rate may vary and is highly sensitive to our pre-tax earnings levels. Net income per share in Q2 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 $175.8 million at June, increasing approximately $3.7 million from March. Net accounts receivable were $36.3 million at June, compared to $41.7 million at March and represented about 64 days sales outstanding. The decrease in accounts receivable was due to cash collections in excess of shipments in Q2. Inventory increased $1.3 million from March 2008 and additions to property, plant, and equipment for the first six months of fiscal 2008 were approximately $1.3 million with depreciation and amortization of approximately $3.5 million. Deferred profit at June was $6 million compared to $5 million at March. Deferred profit relates to revenue deferrals pursuant to SAB 104 primarily on Delta test handlers and thermal subsystems and BMS products. Our deferred revenue at June 2008 was approximately $9.9 million.

Thanks again, Jeff. Semi’s book-to-bill ratio for test and assembly equipment has been below parity for nine of the last eleven months including June. In its latest semiconductor equipment market update, Gartner forecasted that ATE revenue would decline about 20% in 2008. These indicators are consistent with the prevailing sentiments at last week’s Semicon West Trade Show. Nor are the current macroeconomic conditions helpful. So for the third quarter, we expect sales to be approximately $50 million. In the current business environment, it’s understandable that most customers are keeping their powder dry and will only make commitments for capital expenditures at the very last minute. They are able to do so because back-end semi equipment suppliers like Cohu have dramatically reduced lead times over the last several years. While current business conditions are unfavorable, it seems as if we are bouncing along the bottom and that when improvement occurs, it could be quite sudden and sharp. Throughout this downturn, Cohu has continued to make significant investments in new product development that will benefit us for many years. We have reduced our cost structure and expect to realize the financial leverage from these actions during the next upswing. We’re highly optimistic about our products and about our technologies, and I believe that we have never been better positioned to benefit when conditions in the semiconductor equipment industry improve. And now, we’ll take your questions. Kelly?

Thank you. (Operator instructions) There are no questions in the queue at this time. Gentlemen, do you have any closing comments?

I'd like to thank those who are listening to today’s call and we look forward to speaking to you when we report our third quarter earnings. Thank you and good day.

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