Cohu, Inc. (COHU) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Cohu, Inc. Second Quarter 2015 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, Jeff Jones, Chief Financial Officer. Thank you. Mr. Jones, you may begin.

Thank you. Good afternoon and welcome to our discussion of Cohu’s most recent financial results. I am joined today by our President and CEO, Luis Muller. Following our opening remarks, we will provide details of our performance for the second quarter of 2015 as well as our outlook for the third quarter of this year. If you need a copy of our earnings release, you may obtain one from our website, cohu.com, or by contacting Cohu Investor Relations. But before we get started, you should all be aware that during the course of this conference call, we will may forward-looking statements reflecting management’s current expectations concerning 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 for industry conditions, future operations, financial results, market share gains, expansion into new markets and any comments we make about the company’s future in response to your questions. Our comments speak only as of today, July 30, 2015 and the company assumes no obligation to update these comments. We encourage you to review the forward-looking statements section of the earnings release as well as 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 these statements as a result of developments occurring after this 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. Luis?

Thanks, Jeff, and good afternoon. In the second quarter of 2015, Cohu delivered solid financial results that were better than our near-term target model. We made good progress on execution of new product developments and completed the transition of our highest volume gravity handler manufacturing to Asia. Entering Q3, equipment utilization across our install base dropped slightly to 80%. Certain customers, particularly those that have announced merger agreements, have paused capacity additions, nearing the recent decline in equipment orders reported by SEMI. With 49% of total system orders, automotive remained our strongest segment. We had a new customer win the matrix pick-and-place handler and this product is also well positioned to gain additional share in the Taiwanese market in coming months. Additionally, we shipped an evaluation unit integrated with our T-Core thermal control technology for testing automotive processors that we expect to convert into a sale within the next few months. It is exciting to see and benefit from the growth of processors in automotive applications. Like servers, mobile, graphics and network processors, these devices will rely on active thermal control technology to optimize yield. We also had a design win with Saturn gravity handler and captured new opportunities for testing pressure sensors, utilizing our Jaguar strip handler in MEMS test units at a major European-based customer with test operations in Asia. This is a long time Cohu customer where we are capturing new applications and displacing a competitor. Turning to the consumer and mobility market that was 32% of system orders, an important milestone in testing mobile processors was achieved with the acceptance of the Eclipse pick-and-place handler by a leading Korean test subcontractor. This system incorporates Cohu’s proprietary T-Core thermal technology that tightly controls device temperature during test optimizing yield. We launched this product in January and as we commented in our Q1 earnings call, quickly achieved acceptance in a major US fabless customer. We've now closed the loop with acceptance by one of this customer's major test subcontractor in Asia. Evaluations at other key customers in Taiwan are underway and we expect those to be completed with positive results in coming months. We are encouraged by the recent statement from a major test subcontractor expressing optimism for the fourth quarter with the anticipated launch of flagship mobile devices. Looking ahead into Q4 and first half of 2016, we expect mobile processor manufacturers to ramp production ahead of market introductions of new model smartphones, wearables and tablets. The move to smaller silica nodes and higher processing capability that makes these devices [indiscernible] during test should continue to drive demand for our key core based products. Repeat turret handler orders were received, following a successful evaluation earlier in the year at a leading Korean customer for test and inspection of RF devices. These semiconductors play a critical role in connectivity, especially in feature-rich smartphones and in the fast-growing ILT market. Additionally, NY20 turret handler captured a design win for testing RF devices for a key US-based customer. The exponential growth in data exchange will drive exciting new opportunities for testing equipment in coming years. We recently announced a new turret handler, the NY32W, tailored for handling a variety of refillable packages and other small semiconductors. This new product received first acceptance by a large US headquartered customer and is another example of the cross-selling synergies we realized across our broad product portfolio. In the computing market, device overheating during test is a complex problem and our thermal technology plays a critical role in optimizing test yield. We received a repeat order for a pyramid handler for testing high-end processors and forecast additional systems to satisfy near-term capacity expansion for datacenter applications that continue to grow. Solid state lighting was 11% of our system orders and a current major European customer placed a multi-unit order for turret handlers. We expect to benefit from further capacity expansions for automotive applications by this leading high-power LED manufacturer in the second half of the year. In early 2015, we’ve formed a new business unit called ITS, Integrated Test Solutions. This group is chartered with growing our share in the less volatile higher gross margin $650 million contactor market by leveraging our leadership position in handlers, global sales and customer support channel. During the second quarter, our contactors were qualified for testing QSN based power products at a key European customers and in July we entered in a licensing agreement that gives exclusive access to key RF contacting technology, enabling Cohu to supply solutions for high frequency device test applications. Also in Q2, our Philippines operation installed critical manufacturing capability and capacity to support customer ramps. In operations, the transition of manufacturing of our highest volume gravity handler is complete and during the second quarter multiple systems shipped directly from our Melaka factory to customers in Europe and Asia. The next steps are the transfer of the new Eclipse to complete and NY32W turret handlers that we expect to complete by the first quarter of next year. During the second quarter, we sold our last non-core business Broadcast Microwave Services and are now exclusively focused on growing Cohu’s core semiconductor equipment and contactor product lines. In June, as the NASDAQ market site in New York City, Cohu’s senior management team conducted our first investor and analyst day. We described our strong and broad product portfolio, leading technologies such as thermal and vision, and key strategic growth initiatives. A copy of the presentation is available on Cohu’s website. Looking forward, we remain focused on achieving our near term financial model, executing our strategy to gain handler market share and increasing our serve market as we expand into adjacent verticals of test contactors and refillable package tests. Combined, these will expand our total available market from $850 million to above $2 billion, further diversify our product offering and create new opportunities to drive top line revenue and earnings growth. Let me now turn it over to Jeff for further details on our second quarter financial results and third quarter guidance.

Thanks, Luis. Before I move into Q2 financial details and our Q3 outlook, I’d like to touch on a few highlights from the second quarter. We had strong sales and earnings growth in Q2. Sales grew 19% sequentially to $75.2 million, operating income was 10.6% and EPS was $0.27 compared to $0.06 in the first quarter of this year and $0.21 in the second quarter of last year. Q2 was Cohu’s sixth consecutive quarter of non-GAAP profitability. Gross margin and profitability was in line with our target financial model and cash increased $4.3 million sequentially. Due to the increasing lumpiness of orders from certain customers primarily in the mobility market that place large orders for equipment that ships over multiple quarters, we will no longer comment on total orders or backlog. Before I move into the Q2 results, I’ll comment on our GAAP to non-GAAP adjustments, which included approximately $1.7 million of stock based compensation expense, $1.7 million of purchased intangible amortization expense and $300,000 of restructuring costs. Our comments are based on our non-GAAP results which exclude the impact of these items. A reconciliation of non-GAAP measures to equivalent GAAP measures can be found in our earnings release located on the investor information section of Cohu’s website. As a reminder, in 2014, we sold our video camera business and on June 10, 2015, we sold our microwave communications business. The operating results for these businesses are presented as discontinued operations with all prior period amounts being reclassified. Unless otherwise noted, all amounts discussed on this call are from continuing operations. Now moving into Q2, sales and profitability were better than guidance, sales at $75.2 million compared to our revised guidance of approximately $73 million. In Q2, two customers represented 10% or more sales, both were in the mobility and computing markets. Q2 gross margin 36.3% and in line with our estimate and financial target model. Operating expense was $19.3 million, and also in line with our estimate. R&D benefited from lower product development costs as the timing of expenditures on certain projects moved to Q3 and in SG&A we recorded higher than anticipated sales commissions due to higher sales and customer mix and incurred a foreign currency loss due to the US dollar weakening against the euro and the Swiss franc during the quarter. The effective tax rate on income from continuing operations was unusually low as a result of higher income in the US with no tax provision because of our deferred tax asset valuation allowance. For 2015, we are modeling a tax rate of approximately 20%. Now turning to the balance sheet, cash provided from operations was $200,000 and cash and investments at the end of the second quarter was $74 million. Net accounts receivable increased approximately $7.2 million as a result of higher sequential shipments. DSO at the end of the second quarter was 84. Inventory was essentially flat quarter over quarter at $53.2 million and inventory days at June were 104. Additions to property, plant and equipment in Q2 were approximately $1.2 million and depreciation for the second quarter was approximately $1.1 million. Deferred profit at June was $7.6 million, essentially flat quarter-over-quarter and the related deferred revenue at the end of Q2 was $12.1 million, also flat sequentially. Cohu’s Directors approved a quarterly cash dividend of $0.06 per share payable on October 23, 2015 to shareholders of record on August 28, 2015. And now moving to our guidance for Q3, we expect sales of approximately $66 million; Q3 gross margin is estimated at approximately 34%, in line with lower sales; operating expenses for the third quarter are expected to be about the same as Q2 at approximately $19 million. Additionally, we expect to incur approximately $200,000 of restructuring costs associated with transition of handler manufacturing to Asia. Additionally, I want to note that we will be participating in the Jefferies Tech Conference in Chicago on August 25 and 26. And that concludes our prepared remarks. And now, we will take your questions.

[Operator Instructions] Our first question comes from David Duley with Steelhead.

Just regarding your guidance for the September quarter, I guess I would have thought it had been up a little bit, could you talk about which segments perhaps have become weak or what you might have seen over the last month or two that would have a down seasonal quarter?

As we have mentioned here, we have had a pause in orders from certain customers, particular those involved in merger agreements and it’s pretty much reflective, as you can see on data reported by SEMI as well, sort of mirroring that situation.

And could you just talk about which segments those customers were in?

We have seen that across mobility and also to some degree in automotive.

And as far as your – I guess, you’re talking about your new Eclipse handler there being adopted by a second – is that a second major customer IDM customer or is it just the same customer now going into a different [process], I was just wondering if that business is starting to broaden out a little bit?

Let me talk about this the whole timeline so you can place it correctly. We had qualified the Eclipse back in Q1 and we have announced that as well, qualification acceptance at a major US fabless account. And then from there, we moved into their test subcontractors in Asia. What we’re now stating is we have achieve the qualification and actually the acceptance of the first few units at a major Korean test subcontractor and we’re still working on and expect to close the qualification at other test subcontractors in Taiwan in the coming months.

So it sounds like it’s all connected to that initial customer then?

Correct.

[indiscernible] understand the food chain there a little bit, thank you. And can you just give us, the final question from me is and I think you mentioned it, just to remind me the time line of moving, when you complete manufacturing move of the different types of handlers to Asia, I think you’ve already done the Gravity and also you mentioned the other ones are moving there by end of this year or something like that, if you could just give us a little bit more detail that would be great. And of course then, what you would expect the margin impact to be once that move is completed?

The model that we’re working through right now, the near term financial model, assumes benefit for the manufacturing transition and we expect that our results will meet the model just depending on the revenue level. So we still will be transitioning manufacturing of various models to Asia. At the end of 2015, we expect to have about 70% capacity in terms of total manufacturing, handler manufacturing, and we expect that will go up closer to about 90% in 2016.

The next question comes from Jairam Nathan with Sidoti.

First, can you give us more details on this licensing agreement you said with the contactor [indiscernible] take you into – expand you into the other two segments subcontractors?

When we did our did our investor and analyst day here in June, we talked about the contactor market being a $650 million size approximately. Having three main segments, Spring Probes, Cantilevers and Rocking RF contact, we do have today internal technology to serve the Cantilever space. And with this licensing agreement, we essentially close a key gap on our technology portfolio to supply into the RF segment of the market which we view at approximately a $70 million space.

Is this in existing customers, existing participants, the licensee would be selling his product as well as licensing it to you?

Yes, I don’t want to get into the details of where this is coming from, Jairam. Obviously the agreement itself is also – the details are not for disclosure at this time. But suffice it to say that we gain access to key RF technology like I stated here so that we can supply our own Cohu contactors to this segment of the market.

And my final question on, I understand viewing the order numbers or the backlog, almost a sequential reduction in revenue, is that all order related or is there some timing issue as well?

I think that’s a combination of the two, Jairam. If you recall, we – and the reason for the change in the orders is because of the large orders that we ship over multiple quarters. So I think it’s really a combination of the two.

[Operator Instructions] The next question comes from Kim Donovan with Needham & Company.

Can you give us an update around the new growth drivers such as contactor? And is there any additional color around the timing and details of the new [WLP tool]?

Like I stated here a minute ago on the contactor front, we essentially did recently here is open up the opportunities to supply to the RF contactor market, the $70 million or so segment of the market. Obviously revenues to that are yet to come since we just had this agreement here in July. Of course, the WLP probe equipment, as I stated in the past, we will not be disclosing specific status on that product development for competitive reasons, but clearly we’re making good progress on that and have been working closely with a key target customer to hone in the features required to test, singulated WLPs, integrator vision inspection and taping capability.

And how do you think about M&A going forward? I know you’ve had a fairly acquisitive history and you have a solid balance sheet.

We did mention also at the investor and analyst event in New York that acquisitions will be part of our arsenal to grow and also to close technology gaps, particularly as we mentioned in the contactor space. As I noted today, we signed a licensing agreement, not particular an M&A, but that’s part of our strategy. And we’ll be talking more about that if anything materializes in the future.

There are no further questions at this time. I would like to turn the floor back over to Luis Muller for closing comments.

Thank you, Gary. Thank you for joining us on this call today. We look forward to speaking to you at the upcoming investor conferences or when we report our third quarter results. Have a good day.

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