Cohu, Inc. (COHU) Q4 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Cohu Incorporated Fourth Quarter and 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 and Chief Executive Officer. Thank you, Mr. Donahue. You may begin.

Good afternoon, and welcome to this conference call that will cover Cohu's results for the fourth quarter ended December 29, 2012. Our Chief Financial Officer, Jeff Jones, is with me today. I hope you have a copy of our earnings release and 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. I will provide an overview and comments on Cohu's results for the fourth quarter, and Jeff will take us through the financial statements. I'll then discuss our recent acquisition of Ismeca, comment on the current business environment, and then we'll take your questions. First, though, Jeff has information concerning forward-looking statements, estimates and other matters that we will discuss 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, January 30, 2013, and the company assumes no obligation to update these comments. Certain matters discussed on this conference call, including statements concerning Cohu's new products, expectation of business conditions, orders, sales, expected accretion from the Ismeca acquisition, growth in the LED market 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, including the acquisition of Ismeca on December 31, 2012, 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 questions will not make reference to any specific customers, as we are precluded from disclosing such information by our nondisclosure agreements. And lastly, on December 31, the second day of Cohu's 2013 fiscal year, we completed the acquisition of Ismeca. The comments we make today about Cohu's fourth quarter do not include Ismeca. Beginning with the first quarter of 2013, Ismeca will be included in Cohu's financial results.

Sales for the fourth quarter were $50.7 million compared to $57.7 million in the third quarter of 2012. The non-GAAP loss was $0.07 per share compared to a loss of $0.01 per share for the third quarter. Orders were $42.1 million compared to $50.1 million in the third quarter. Semiconductor equipment orders were $33.7 million compared to $38.5 million in the third quarter. Backlog was $44.7 million at the end of the fourth quarter. Our results are in line with overall orders for back-end semiconductor equipment, as reported by SEMI, that have trended downward during the second half of 2012, and also with recent results and commentary from a number of semiconductor and semiconductor equipment companies. Equipment utilization on customer test floors remained in the low- to mid-70% range, and capacity expansion, therefore, is generally not needed. What capacity buys we did see, were driven by mobility. The semiconductor group unit order distribution for the fourth quarter was high-speed handlers, 76%; thermal handlers, 24%. So while business conditions have not been favorable, we did have a number of important accomplishments and highlights in the fourth quarter. Demand for our EDGE pick-and-place handler was the highest since the third quarter of 2010. Two IDMs placed multiunit orders for testing MEMs sensors, that are used in major-brand mobile device applications. This particular opportunity is expanding, and we expect a couple [ph] on our orders for EDGE, or possibly MATRiX, as these customers increase test parallelism throughout the year. Multiple evaluations of the MATRiX handler are underway or are planned during the first quarter, with the common requirement to increase test parallelism. These include a large fabless company in the mobile chip space, an OSAT, and a major IDM. With its fast index time, MATRiX is an ideal solution for high parallel test.…

Semiconductor equipment-related revenues for Q4 were approximately 81% international and 19% domestic. International sales were distributed 77% Asia Pacific, 17% the Americas and 6% other. We recorded approximately $1.4 million of stock-based compensation expense and $1.1 million of purchased intangible amortization expense in Q4. Beginning in Q1, we estimate our purchase -- our purchased intangible amortization expense will increase by approximately $600,000 per quarter, as a result of the Ismeca acquisition. Comments I make today include the impact of these items. Gross margin was 32.8% in Q4 and in line with our projection. We expect gross margin in Q1 to be approximately 200 basis points lower than Q4, as we will absorb the one-time impact that results from the required change in accounting method at Ismeca, from IFRS to U.S. GAAP standards. The impact of this change is to decrease gross margin and operating income by $2 million in Q1. Operating expense in Q4 was $22.4 million, and was higher than our projection as a result of due diligence costs incurred in connection with the acquisition of Ismeca. We expect operating expense in Q1 to be approximately $26 million, with the addition of Ismeca. The Q4 income tax provision was a benefit of $500,000. We expect the 2013 effective tax rate will be approximately 10%. Q4 loss per share on a GAAP basis was $0.21. The non-GAAP loss per share, which excludes the after-tax impact of share-based compensation, amortization of intangibles and acquisition costs incurred in connection with the acquisition of Ismeca was $0.07 for the quarter. Now moving to the balance sheet. Cash and investments were $110.2 million at December 29. Our Q4 ending cash balance excludes the impact of acquiring Ismeca, for a cash purchase price of $54.5 million, which again occurred on December 31, 2012, and was funded out of existing cash reserves at that date. Cash provided by operations in Q4 was approximately $2 million. Net accounts receivables were $37 million at December, decreasing $6.6 million from September. And the DSO at December was 65, decreasing from 72 at September. Inventory was $62.3 million at December, decreasing $6.4 million from September, as a result of strict inventory and supply-chain management. Additions to property plant equipment for Q4 were approximately $900,000, and depreciation was approximately $1.2 million. Deferred profit at December was $2.1 million compared to $1.8 million at September, and the related deferred revenue at the end of Q4 was $3.6 million compared to $2.4 million at September and consists primarily of revenue deferrals on shipments of test handlers and mobile microwave communications equipment.

Thanks, Jeff. Now I'll comment on the Ismeca acquisition, how it fits into our semiconductor equipment group, and why we are so excited about the expanded opportunities, synergies and growth that it brings. Through this acquisition, we combine the #1 supplier of turret-base test handling and back-end finishing equipment, with Delta Design, the #1 supplier of Logic [ph] pick-and-place test handlers; and with Rasco, the #2 supplier of Gravity Feed and test-in-strip handlers. The acquisition of Ismeca strengthens our leadership position; provides new growth opportunities and significant cost synergies. Our SAM increased to $900 million. Ismeca turret technology enables us to move into markets that test smaller IC and discrete components at faster speeds, and also provides an entry into the LED equipment market with an industry leader. According to industry analysts, the LED market is forecasted to grow at a compounded rate of 28% over the next 4 years, as a result of this technology being adopted for general lighting. The LED industry is rapidly evolving, and Ismeca has unique product solutions and strong relationships with key LED manufacturers. Cohu's semiconductor equipment group now comprises 3 businesses, with a range of complementary products and technology capabilities that is unmatched in the industry. The semiconductor industry needs suppliers that have the technical resources, manufacturing capability and global scale to deliver effective solutions, as technology change drives new form factors, smaller geometries, critical temperature control, new sensors and lighting applications in a very dynamic market environment. Of course, semiconductor test is a 7/24 operation, mainly in Asia, where the timely availability of qualified technical personnel is critical. During the fourth quarter, we celebrated the 20th anniversary of our Asia sales and service operation. And with the addition of Ismeca, this award-winning customer support organization grows even wider and deeper. Customers realize…

[Operator Instructions] Our first question comes from Vernon Essi with Needham & Company.

This is Tony Gollo [ph], calling in for Vernon Essi. Just a couple of quick questions for you guys. One was I -- I may have missed a couple of numbers, cash flow from operations, did you guys mention that?

Yes, that's $2 million in Q4.

Okay. And then also, when you talked about your sales breakout for semi-equipment, cameras and microwave, could you go over that again for me?

We had sales of -- sales of semi-equipment accounted for 79% -- excuse me, yes, 79% of the quarter, microwave was 14%, and video camera, 7%.

Our next question comes from Jairam Nathan with Sidoti & Company.

My first question was on the gross margins. You said it was in line with your expectations, but can you just give us an idea of what led to the sequential uptick, and despite the decline in revenue?

Yes, it was primarily product mix, Jairam. Again, it was in line with our projection, so it was a mix that we had anticipated. We also had strong recurring business in the quarter in our semi-equipment group.

Can you expand on that, Jeff, just when you talk about product mix, is it more Pyramid handlers? Is it -- or in the quarter, all you suggest -- business is like -- your BMS was better or...

The product -- the favorable product mix really relates back to that recurring business, and the strength of the recurring business in the margin on that business is what I'm referring with the favorable product mix.

Okay, and on the operating expense side, I noticed that your R&D has gone up. I think you mentioned -- is that in line with -- I believe you had indicated that, but are those pretty much in line with your guidance figures?

Operating expense in the quarter was higher than what I had guided. But of course, we've got the due diligence acquisition costs in Q4. And in Q1, Jairam, I expect that on a comparative basis, that we'll see a drop in Q1, but then when we add Ismeca, we'll have operating expense of about $26 million in the first quarter.

Okay, I got that. And just on your guidance of $52 million to $57 million, semi orders were around $30 billion, $34 billion [ph]. Should we kind of look at Ismeca adding around $10 million to $15 million in the quarter?

Yes, I think you're in the ballpark.

Okay, okay. And my last question was on -- and do you have a break-up of fixed assets and intangible in the -- when you consolidated Ismeca?

We're going to -- we will have that for the Q1 results. We don't have that currently at Q4. Ismeca is not part of the balance sheet at the end of the fourth quarter.

Okay. And just, if I may one more, on -- the current liabilities spend are down significantly. Is there anything going on there or...

Nothing unusual there, Jairam. Normal business.

I would just supplement that by saying, we've had a real focus throughout the year, particularly in the semiconductor equipment group, and controlling our inventory, reducing our inventory, we were quite successful in doing that. So I think it's directly attributable to the success of those activities, which were a key focus of 2012 and a very good story, a good result.

[Operator Instructions] Mr. Donahue, there are no further questions in queue at this time. I would like to turn the call back over to you for closing comment.

Thank you for joining us today, and we look forward to speaking to you, again, when we will be reporting Cohu's results for the first quarter of 2013. Thank you and good day.

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