Cohu, Inc. (COHU) Q1 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Cohu's First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Vice President, Finance and Chief Financial Officer. Thank you, sir. 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 Müller. Following our opening remarks, we’ll provide details of our performance for first quarter of 2016 as well as our outlook for the second quarter of the 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. Before we begin, you should all be aware that during the course of this conference call, we will make 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, April 29, 2016 and the company assumes no obligation to update these comments. We encourage you to review the forward-looking statement section of our 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. Now I’ll turn it over to Luis. Luis Müller: Thanks, Jeff and good afternoon everyone. In the first quarter of 2016 Cohu again delivered solid financial results and better than forecasted profitability. While semi reported an 11% decline in backend equipment orders in March, measured utilization across installed base, gained a couple points to 81%. We are encouraged by strong orders and substantial progress in the mobility market with key design wins in the growing RF segment, and repeat orders for active thermal handlers for testing mobile processors. In the automotive market, we captured a large European customer with our tri temperature pick-and-place handler. At 39% our total system orders, consumer and mobility was Cohu's strongest market in the first quarter. We introduced a series of products in the last 15 months that we expect will drive significant share gains and for the first time orders in this market surpassed automotive and industrial, historically our largest segment. Cohu's new current systems are well suited for handling and inspection of wafer level and then fragile thin packages that are prevalent in our semiconductors. With these systems, we captured sizeable orders from two new customers, a leading U.S. and a major Japanese semiconductor manufacturer with test operations in China. We plan to fulfill these orders with shipments in the second and third quarters. In the mobile digital general segment we received repeat orders for the eclipse handler for testing power in processes from a leading established customer that qualified this handler in the first half of last year. The majority of these systems will be installed and test of contractors in Taiwan and Korea during the second quarter. As we've shared before, the thermal subsystems business is inherently lumpy and while we expect weaker demand for the next few quarters we received multi-unit orders in the first quarter for testing server processors in orders from a leading mobile customer in early second quarter. In the automotive and industry market was 33% of system orders. We scored a key design win with our matrix pick-and-place handler displacing a European competitor. We expect this new customer to drive about a point share gain for Cohu in the best handler market starting this year. We also have solid demand for handlers testing power semiconductors and NIMs devices, particularly pressure in magnetic sensors that are part of the growing IC content and intelligence in vehicles. Computing was 20% of system orders and stronger than expected. We received additional orders for pyramid handlers in support of testing high-end processes. Solid-state lighting was 8% of system orders. Our current major European customer continue to ramp production and place the multi-unit orders for headless. We had a design win from another large customer for testing five-side emitter LED devices, particularly notable since these devices presents complex challenges for handling and processing. On our market expansion initiatives, we've made good progress and are beginning to develop and deliver solutions for critical customer applications. In RF, the growth of internet traffic and network devices that include wearables, machine-to-machine, and vehicle-to-vehicle or vehicle-to-infrastructure systems demands faster wireless speed that drive higher semiconductor volumes with devices like near field communications, filters, switches and power amplifiers. We are already benefiting from the secular growth trend gaining share with various and also starting to develop new opportunities outside our core handler market. Last July, we introduced the 3D flex vision system for wafer level package inspection. This three-dimensional measurement capability is now a key differentiator enabling share gains and increased AFPs for our third platforms. We recently introduced the RF cash contact and received a first round of orders following several months of qualification at five customers validating this innovative long-life elastomer-free solution for testing high frequency semiconductors over a wide range of temperatures. And we are in customer evaluation over our new WLP program. This system provides delicate handling of their guy wafer level packages reconstituting a ground wafer input onto an optimized forecast, rectangular chuck that enables reuse of existing probe card infrastructure. A full consideration of this platform is also capable of laser marking, final vision inspection, and tapping; eliminating the need for material transfers between equipment reduce working progress and risk of the device damage. We believe this could drive $10 million to $20 million of incremental annual sales starting in 2017. The increasing vertical integration of semiconductors enclosed in a single module that performs various functions known as system-in-package drives the need for comprehensive test solutions that transcends the boundaries of traditional IC desks. In response, we're developing and secured a design win and initial issue order for a new system level platform that is still under development. Such early orders are evidence of the strength of our products solutions, and further validates our strategy to organic growth extent in core adjacent fees. Looking forward, we see positive momentum in the automotive, mobile RF, and IOT markets, as well as customer traction for a new concept of products. Let me know turn it over to Jeff for further details on our first quarter of financial results; and second quarter guidance.

Thanks, Luis. Overall our results for the quarter were either in line or better than forecasted and Q1 represents Cohu's ninth consecutive quarter of non-GAAP profitability. During the quarter we continue to make progress in reducing costs by shipping our first eclipse unit produced in normal laser factory and we restructured our handler sub-assembly operation in the Philippines. Consistent with our operational strategy, we are reducing the number of -- the amount of vertical manufacturing activities within Cohu by outsourcing sub-assemblies to local contract manufacturers and converting approximately $700,000 of annual fixed cost into variable cost. Additionally, this move will focus the Philippines operation on our strategy to grow our contractors and other recurring business. Now moving into the Q1 financial details, the GAAP to non-GAAP adjustments included approximately of stock-based compensation, $1.8 million of purchase intangible amortization expense and $140,000 of restructuring costs. My comments are based on Cohu's non-GAAP results which exclude of these the items and a reconciliation of non-GAAP measures to equivalent gap measures can be found in our earnings release located on the investor information section of Cohu's website. Bit of reminder, on June 10, 2015 we sold our microwave communications business. The operating results for this is presented as discontinued operations with all prior period amount being reclassified. And unless, otherwise noted, at all amounts discussed on this call are from continuing operations. Sales for the quarter were $65.8 million and higher than guidance as we see achieved. The customer acceptance of new products sooner than originally anticipated. Few customers each represented 10% or more of sales, one in automotive and one in the computing market. Q1 gross margin was in line with forecast at 31.6% which includes the impact of the initial eclipse handler's manufactured in San Diego as we discussed during our last earnings call. And as I mentioned earlier, volume manufacturing of eclipse handler has been transitioned to Malaysia and we project achieving even gross margins in line with our other handler product and our financial model. Operating expense was $18.6 million, lower than our estimate as a result of product development materials, originally planned for Q1 that will now be received in Q2. Effective tax rate on income from continuing operations was approximately 30% than our 22% projected rate for 2016 because of a domestic loss and in Q1 of which no tax benefit was provided due to our valuation allowance on deferred tax assets. Cash used in operations during the quarter was $1.5 million, accounts receivable increased sequentially as shipments increased by $8 million, quarter-over-quarter. DSO improved slightly to eighty nine. And the Inventory balance also increased sequentially and preparation for higher shipments in Q2 two versus Q1. Inventory days improved by 4 to 114, and overall cash conversion cycle improved by 13 days to 133 days. Our fixed asset additions in Q1 were approximately $1 million and depreciation for the first quarter was approximately $900,000. Deferred profit at December was $5.6 million, up $1.8 million quarter-over-quarter, and related deferred revenue at the end of Q1 was $7.3 million, that's up $2.3 million sequentially. Cohu's Directors approved a quarterly cash dividend of $0.06 per share payable on July 29, 2016 to shareholders of record on June 17, 2016. And then moving to our guidance for Q2, we expect sales of approximately $74 million with significant improvement in gross margin to between 36% and 37%. Operating expenses for the second quarter are expected to be approximately $1 million higher than Q1 as a result of the development materials that were anticipating in Q1 but delayed into Q2 and new product development costs related to the opportunities Luis referred to in RF and system level test was initial product delivery starting late this year and volume in the first half of next year. In order to meet the timeline, we're accelerating product development cost and project R&D expense in Q3 and Q4 to be comparable to Q2. Q2 operating expense will include approximately $400,000 related to our global ERP alignment project, and as I mentioned previously, total 2016 cost for this project will be approximately $2 million. We expect to incur approximately $100,000 of restructuring costs in Q2 associated with the transition of handler manufacturing to Asia. And that concludes our prepared remarks. And now we'll take your questions.

[Operator Instructions] Our first question is coming from the line of [indiscernible] with Stifel. Please proceed with your question.

This is Bryan on for Patrick. ATE company orders, so kind of your adjacent equipment vendor there in the test. So it's leveled off or even declined some here in Q1 after an expectedly perhaps strong initial uptick. Can you discuss the sustainability of test handler shipment growth given these dynamics and maybe your confidence level in company specific initiatives be it share or product and market momentum etcetera that could allow your trajectory maybe to prove more durable.

I can't comment on the ATE orders or what happened there but speaking from our side and we have as we mentioned in the past about our quarters' visibility, his good visibility in the business and it's very difficult to predict what's going to happen beyond this near term. Nevertheless we do see strong momentum for handlers and in the automotive space as well as for products went too RF test in mobile and the IOT markets and I was just going to say perhaps the most important thing to remember here is that the business today is balanced across several end markets and we’re specifically tied to one big customer perhaps like what happened in ATE side in the mobile specific segment of the market.

Maybe one quick follow up, appreciate the commentary on the utilization trending up a little bit low 80%, 81%, not getting too granular but from an end market standpoint or IDM versus subcontractor standpoint, do you see a little stronger uptick in any those areas and maybe mainly markets that are hiding behind a little bit?

If you think in terms of IDMs and those test they are running in about the same utilization right now. I think the [indiscernible] may have picked up a little stronger quarter-on-quarter than the IDM on this two point gain, but they are both about equal at this point.

Okay. And anything on the end market side?

Well on the end market it's like what I mentioned here in my in remarks. We were seeing really good strengthen on the RF side particularly which applies both to mobile and IOT, we have seen a pickup in the automotive market it's particularly in Q1, we have seen stronger than anticipated computing market. I would say industrial is still the market that hasn’t come out strong as we would have expected. LED markets continue to do well and as I've mentioned we picked up one new large customer for our spare [ph] equipment.

Our next question is coming from the line Edwin Mok with Needham & Company. Please proceed with your question.

So first question on the new product, [indiscernible] you said that you’re talking from $10 million to $20 million for 2017, I was wondering is that number just from the first order you guys proceed to disclosed or is it from incremental order that you expect to secure as sought them [indiscernible].

There would be as we start to get volume orders for volume production for this product line and yes it is associated with the initial customer but that first order was for $20 million.

And then on to kind of new systems product you guys were talking for the RFs, you guys are developing, can you give us some color on that -- is that maybe color used case for that and I know that you saw sold system levels test [indiscernible] maybe more color on where that product fits in terms in the test basically?

Look at this way, as the market move towards greater silicon integration, major semiconductor manufacturers that deliver products that integrate processor, memory, RF, our management ICs, need to test these so called system in a package. As you pointed out we have been in this market supplying thermal subsystems but we saw an opportunity here to develop a full automation platform leveraging on our core competencies So that's what this is about the integration of the automation that we’re capable of doing our handlers with the thermal subsystems that we have been supplying each of this space creating a new platform that we think will be quite disruptive and a very interesting proposition to where semiconductor technology is going with system in a package.

On the order front I think you mentioned that mobile was very strong in the first quarter, but I think on February and March you talk about potentially to come down a little in second quarter on the thermal subsystem side, did I hit it correctly and is that mostly related to other processes side? Can you clarify that?

Sure. I mean that’s not exactly how I characterized it, what I did mention is that the thermal subsystem business is inherently lumpy and we had forecasted or expected a weaker demand for thermal subsystems for the next few quarters. Nevertheless we have received a multi-unit order in the first quarter and have received an order already in the beginning of the second quarter for these thermal subsystems. That’s essentially what I said.

Just I know you guys obviously don’t stop providing order data, but is it fair to say that on the first quarter your book to bill was extremely was over 1.0 given obviously given through your guidance and do you think that is sustainable as you go into 2Q?

Yes, you’re right we don’t provide orders and we also provide book to bill but I think what fair to say is orders were up in Q1 from Q4, so we had another sequential increase in orders in the first quarter. As far as what's going to ahead that’s a very tough to answer your question, difficult to forecast these things.

Our next question is coming from the line of David Duley with Steelhead Securities. Please proceed with your question.

I guess just off the top, do you guys think the handler market will increase in size this year?

That will be an even more difficult question to answer than trying to predict Q3 at this point because you will be including fourth quarter so again I don’t know where the handler market is going to do this year and we potentially focus more on how can we drive growth organically through share gains and the opportunities we’re pursuing with new products including WOP probe, system level test and the test contractor market that we’re going after.

Okay, for the segments of the market that you serve, you ravel 4 to 5 of them here in your prepared remarks which one of those do you think might grow here in the near term?

The RF semiconductor is going really strong for us right now and I think that’s a combination of steel RF is going into mobile as well as internet of things.

Okay, and what are the I guess do you’ve market share data from 2015 and do you’ve a guess as to what your market share was at the market last year? Perhaps either in the gravity or in [indiscernible] area?

We will have that data for the next call, in fact that third party data should be coming out available in a matter of weeks and then we have to do some intelligence and review and adjustments to that data. So by the end of Q2 we should have our accurate view of the market share for 2015 but no I don’t have this specifics by segment yet.

And what's currently are your lead times for pick and place and gravity?

It will vary from on the order of nine weeks to all the way up to probably 14 weeks at this time. It depends on the configuration of the system. We have simpler and more complex configuration products.

[Operator Instructions]. Our next question is coming from the line of Dick Ryan with Dougherty. Please proceed with your question.

Jeff, what was the impact from eclipse on margins in Q1?

Rough impact I guess.

The impact to Q1 was a couple of 100 basis points.

Okay, so that will be completely gone for Q2 and it's the volume getting into the mid-70s to get it there to 36, 37 anything else in there?

No that’s really, we got over the hump on eclipse as I mentioned that’s transition from Malaysia and so now it's sort of back to achieving that financial model that we have been talking about. So it's really the eclipse impact and back to the revenue level of 74 million.

Just to refresh is everything being transitioned over to Asian production or is there still something's yet to know?

There is still some gravity feed, we do have the first handle that -- gravity handle that’s been transitioned and actually we’re shipping volume out of Malaysia on that handler. So we’re working on subsequent gravity handler. We’re also transitioning spares business out of San Diego into Malaysia but that’s still to come and pick and place for the most part we will have additional configurations but as I’ve said we have already transitioned the metrics and the eclipse pick and place handlers.

Thank you. It appears we have no additional questions at this time. I would like to turn the floor back over to Mr. Jones for any additional concluding comments.

All right thank you for joining us on today's call. We look forward to speaking with you at the upcoming B. Riley Investor Conference in Los Angeles on May 25 or the Stifle Conference in San Francisco on June 7th or when we report our second quarter 2016 results. Have a good day.

Thank you. Ladies and gentlemen this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.