Cohu, Inc. (COHU) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Cohu Third Quarter 2013 Earnings Conference Call. [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. Thank you. You may now begin.

Good afternoon, everyone, and welcome to this conference call, which will cover Cohu's results for the third quarter ended September 28, 2013. With me today is our Chief Financial Officer, Jeff Jones. If you need a copy of our press release, you may obtain one from our website, cohu.com, or by contacting Cohu Investor Relations at (858) 848-8106. Jeff will provide an overview and comments on Cohu's results for the third quarter and take us through the financial statements. I'll provide details on orders, key activities and the business outlook, and then we'll take your questions.

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, October 30, 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 shipments from our Malaysian facility, expectations of business conditions, orders, sales revenues 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 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.…

Order utilization was about 80%, about where it's been since March. The global economic outlook remains a concern and customers are hesitant to add capacity in this environment. The automotive market was an exception, and towards the end of the third quarter, we saw signs of improvement in the industrial power segment as well. I'll have additional comments on the automotive market later. In the pick-and-place segment, we received multi-unit follow-on orders for MATRiX handlers from 2 major automotive IC companies. Additionally, we won an initial order from another major automotive IC supplier, following a 2-year campaign. While design ins are typically a long process in automotive applications, follow-on business is expected to last for many years. We received an initial multi-unit order for our new ambient-hot pick-and-place handler, the Eclipse, which is targeted at the OSAT market and at other value-sensitive applications. Another volume order was received for tray automation from a large microprocessor manufacturer as this customer continues the retooling of its assembly operations that is expected to continue over the next several years. Gravity handler orders were spread relatively evenly across the product portfolio, with demand driven mainly by automotive and industrial power applications. A major European components -- automotive component supplier evaluated and accepted our new Jupiter large package handler. This represents a competitive win against the long-time incumbent. Additionally, a second European automotive chip supplier evaluated and purchased Saturn, our new gravity handler targeted at smaller-sized semiconductor devices, and also placed an order for a second system with plans to purchase additional units in the fourth quarter. And several other customers have requested evaluation of these new gravity handlers, which we expect to initiate in the next 2 quarters. Orders for turret handlers were broadly distributed across products and applications. However, the market for LED equipment remained weak as customers continued to absorb capacity while driving further reductions in LED bulb prices that will trigger widespread adoption of high-brightness LED products in the general lighting market. We continue to be heavily involved in new process development and applications work with several major LED customers that we believe will lead to expanding opportunities as business conditions improve in this market. Our primary focus continues to be the launch of our new NY20 turret handler, and a major milestone was achieved with acceptances on a multi-unit shipment to major fabless IC company. We're also encouraged to see an improvement in orders in the discrete market. Additionally, we received multi-unit orders for our higher-end turret handler configurations for package inspection of delicate dye, displacing a competitive system at a high-value account. We offer a unique system in this market that inputs sowed [ph] wafers on film frame for high-speed inspection and then output to tape. A recent new customer placed follow-on orders for MEMs device testing used in mobile products, further validating another high-end turret handler configuration. And now, Jeff will provide details on the financial results for the quarter.

In Q3, we recorded approximately $1.2 million of stock-based compensation expense, $2.6 million of purchased intangible amortization expense and $900,000 of restructuring costs related to our manufacturing transition and severance. The following comments are based on our non-GAAP results, which exclude the impact of these items. During the quarter, we adjusted the accounting for the acquired intangible assets at Ismeca, which resulted in a one-time catch-up adjustment to amortization expense of approximately $600,000. Our intangible amortization expense in Q4 and future quarters will be approximately $2 million. Our non-GAAP gross margin was 27.7%. As a result of the decline in business conditions during Q3, we recorded a $4.8 million charge for excess semiconductor equipment inventory primarily related to the PC market. This charge negatively impacted our gross margin by approximately 800 basis points. We expect Q4 gross margin to be approximately 35%. Non-GAAP operating expense in Q3 was $23.9 million. We expect operating expense in Q4 to be about the same as Q3. In Q4, we expect to incur approximately $1 million of restructuring costs related to severance in our manufacturing transition. These costs are excluded from our non-GAAP Q4 operating expense forecast. The Q3 GAAP income tax provision was a benefit of $1.1 million and is lower than the federal benefit normally expected on the pretax loss due to the valuation allowance on our U.S. deferred tax assets. We expect our 2013 effective tax rate will be close to 10%. At Q3, non-GAAP loss per share, which excludes the after-tax impact of share-based compensation, amortization of intangibles, step-up of inventory valuation, manufacturing transition and employee severance costs, was $0.27 for the quarter. Moving to the balance sheet. Cash investments decreased by $1.4 million from June and totaled $52.9 million at September. Cash provided by operations in Q3 was approximately $500,000. Net accounts receivable decreased by approximately $2.2 million to $58.2 million at September as a result of lower sequential shipments from our semiconductor equipment group. DSO at September was 93, up from 78 at June, primarily due to past receivables within our semi equipment segment, most of which have been collected in October. Inventory was $64 million -- $60.4 million at September, decreasing $7.3 million from June, in part due to the $4.8 million write-down, but also tight control of our supply chain. Additions to property, plants and equipment in Q3 were approximately $1.3 million. Depreciation for the third quarter was also approximately $1.3 million. Deferred profit at September was $5.5 million compared to $6.9 million at June. The related deferred revenue at the end of Q3 was $7.2 million compared to $10.4 million at June and consists primarily of revenue deferrals on shipments of test handlers.

Okay. Thanks, Jeff. Earlier, I commented on the strength of our automotive-related business. But much of the talk today about semiconductor application centers on smartphones and tablets. The automotive segment is growing rapidly, and Cohu is an excellent -- is in an excellent position to benefit. The market for automotive semiconductors is well established. Until recent years, this was a mature, low-growth business, mainly associated with increased sales of automobiles. But this is no longer the case. The automotive sector has become a dynamic driver of growth for the semiconductor industry. While the largest overall industry segments are expected to remain computing and communications at least through 2017, the automotive sector is the fastest growing, with a CAGR of 9.4% compared to 6.5 for the total semiconductor market. Global automotive sales will exceed 100 million units by 2017, and that represents 28% growth over 2012. Analysts expect that semiconductor content per car will grow from $215 in 2012 to $385 in 2017. The key drivers for this growth are powertrain, chassis and safety, in-vehicle infotainment and advanced driver assist systems. And while historically, innovations that were introduced in the luxury end of the market had a slow transition to lower-priced vehicles, that too is changing. Customers are demanding more capability and features that manufactures are now able to provide as costs continue to fall and innovation accelerates. While long-time automotive semiconductor suppliers like Infineon, ST, Freescale and NXP will continue to be major players, the growth of communications applications and processing capability within the vehicle provides opportunities for companies such as Broadcom, Qualcomm, Marvell and Nvidia, even Samsung, the world's largest maker of memory chips and the second largest semiconductor maker, is taking a fresh look at the automotive semiconductor market. Automotive safety and quality requirements are among the strictest…

[Operator Instructions] Our first question comes from Jairam Nathan from Sidoti & Company. Jairam Nathan - Sidoti & Company, LLC: I just had a couple here about order pushouts and hope to get some clarities in 4Q and 1Q. Can you just give us some more details? Is that in preliminary 4Q order rate that you can give us?

What was the last part of that, Jairam? I think... Jairam Nathan - Sidoti & Company, LLC: Any preliminary estimate for fourth quarter orders, how do you see that given that we are close to 1 month in the quarter.

Well, as I indicated in my remarks, based on what we're hearing from our customers, and this is very, very current information, we expect in the near term to see a pickup in mobility, industrial power, which began to improve earlier in the year and continue to improve through the third quarter, we expect that will continue, and automotive will remain strong. Automotive has been a solid performer all year, and we expect it to continue to be. Jairam Nathan - Sidoti & Company, LLC: Okay. And my second question was on LED. Can you give us an -- I know you're penetrating on a couple of them, but can you give us an idea on about what would it take to penetrate on the other LED manufacturers? And yes, I just want to get an idea on that.

Yes, we have a solid position in at least 2 of the 2 majors and are working to expand our business at other major players as well. I think the main themes in LED at the moment are adequate capacity, maybe even excess capacity, depending on a particular customer. And that, we believe and they believe, will change as the prices of the LED bulb decline somewhere below $10 per lightbulb. Now interestingly, we're working with those customers on process improvements that are designed to reduce their cost and enable those kind of price reductions for the consumer.

Our next question comes from Dick Ryan with Dougherty. Richard A. Ryan - Dougherty & Company LLC, Research Division: Jim, I think you mentioned delays or pushouts in Q3. Can you kind of quantify what was pushed or -- and is that into Q4 or will that be further out?

Yes, there was a couple of customers, Dick, and some of it was pushed into Q4 and some into Q1. It wasn't widespread, but it was the case with a couple of customers. Richard A. Ryan - Dougherty & Company LLC, Research Division: Okay. When you look at your guidance for Q4, the $60 million, what are you assuming for the SEMI side and what are you assuming for the other, the microwave and the video camera side?

Dick, this is Jeff. On the Q4 forecast for SEMI is approximately $50 million, with the balance of $10 million for electronics and our BMS operation. Richard A. Ryan - Dougherty & Company LLC, Research Division: Okay. And are you doing any restructuring in the other 2, I thought I -- the restructuring, the severance and that sort of thing, is that across the 3 business units or is that concentrated?

The -- it doesn't involve the electronics division. The electronics division has been restructured over the past year, and it lowered their breakeven point or operating profitably. The restructuring that we referenced is in the semiconductor equipment group and BMS. Richard A. Ryan - Dougherty & Company LLC, Research Division: Okay. And looking at your strategic point, how is the Ismeca cross-selling opportunities progressing? Are you getting any traction there yet?

We're very pleased with that, and it's a 2-way street. We're seeing that Ismeca customers are interested in and purchasing our pick-and-place and gravity handlers and similarly, our gravity and pick-and-place customers are interested and purchasing Ismeca turret handlers. Of course, it depends on what each customers packaged portfolio is and what type of equipment they need. So not every customer needs all 3 flavors of handlers. Richard A. Ryan - Dougherty & Company LLC, Research Division: Okay. And on the competitive landscape, with the new owner of Multitest, that will be too early to tell there, but anything changing on the competitive side?

Nothing with respect to that transaction that we're seeing and nothing in particular to report, other than that I think everyone in the space is seeing that it's a difficult time right now, so we're looking forward to improve conditions.

[Operator Instructions] There are no further questions at this time. I'd like to turn the floor back over to Mr. James Donahue for closing remarks.

Thank you for joining us on today's call, and we look forward to speaking to you early next year when we report Cohu's fourth quarter results. Thanks, again, and good day.

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