May 9, 2008
Executives
James Donahue - President and CEO Jeff Jones - CFO
Operator
Greetings, ladies and gentlemen, and welcome to the Cohu, Inc. First Quarter 2008 Earnings Call.
At this time all participants are in a listen-only mode. (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 CEO.
Thank you. You may begin.
James Donahue
Good afternoon, everyone, and welcome to this conference call covering Cohu's results for the first quarter ended March 29, 2008. With me today is our CFO, Jeff Jones.
I hope you have a copy of our earnings release and have had an opportunity to review it. If you need a copy, you can obtain one from our website, cohu.com, or you can contact Cohu Investor Relations at (858) 848-8106.
I'll provide an overview of our results for the quarter and some commentary. Jeff will then take us through the financial statements, and I'll conclude with comments on operations and our view of the near-term business environment.
We'll then take your questions. First, however, Jeff has information concerning forward-looking statements, estimates, and other matters that we will discuss in today's call.
Jeff Jones
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, April 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.
James Donahue
Thank you, Jeff. Cohu's first quarter sales increased to $58.4 million, from $53.4 million in last year's first quarter, exceeding the high end of our guidance and up slightly from the fourth quarter of 2007.
The improved sales were due to higher than expected turns business in our semiconductor equipment operation and strong sales in our microwave communications equipment unit. Net income was $2 million or $0.08 per share.
Orders increased to $54.6 million in the first quarter, compared to $50.6 million in the fourth quarter. Orders in our semiconductor equipment business increased 8% to $44.1 million from $40.7 million in the fourth quarter of 2007.
The improved orders were encouraging, if somewhat of a surprise, in view of weak conditions in the backend semiconductor equipment industry. Backlog at the end of the first quarter was $55.7 million.
Unit order breakdown for semiconductor equipment in the first quarter was high speed handlers 49%, thermal handlers 38%, thermal subsystems 4%, and other systems 9%. We have previously commented that order levels for thermal subsystems will vary significantly from period to period, as they are typically ordered on a batch basis.
Operating results in our semiconductor equipment business were ahead of our internal plan, and Jeff will provide details in his remarks. Stronger than expected bookings in the first quarter were driven primarily by orders for burn in systems from a larger microprocessor manufacturer and orders from a U.S.
based IDM, that placed orders for four different handler models, both high-speed and thermal systems. This customer's requirements were driven by automotive, transportation, and networking applications.
Recent results reported by mobile and wireless IDMs have been mixed and this is consistent with the muted demand we've seen from our customers who serve these markets. Unit orders for our Summit thermal handlers were about the same as in the fourth quarter and we've not seen any increase in demand from our largest microprocessor customers.
On the other hand, orders for thermal handlers and high performance graphics applications increased. During the first quarter, we received a multiple unit order and we expect additional orders from the same customer in the second quarter.
Our proprietary thermal technology enables leading edge graphic chips to test successfully at their optimum speed thereby maximizing ASPs and positively impacting the profitability of our customers. We expect a steady increase in business in the high speed graphics IC market as new high speed, high powered chips are introduced.
Last year following a competitive process, we were selected by one of our major customers, a large microprocessor IDM, to develop a next generation thermal handler. Development of this system is progressing well with a large engineering team and is a major reason for our higher levels of engineering expense.
We plan to begin production deliveries next year to our initial customer. And we expect that other customers for our thermal handlers will ultimately transition to this platform as well.
This new system will provide enhanced thermal performance, increased power dissipation, higher levels of parallel tests, and the ability to handle a broad range of IC packages including very small [beradye] type form factors. These ultra small microprocessors will provide the computing power for tomorrow's mobile PCs and Internet devices, SmartPhones, Netbooks, and an ever expanding array of smart consumer electronics products.
In the second quarter, our new high speed handler, Matrix, was qualified at a major U.S. headquartered IDM.
The successful production evaluation was conducted at one of the customer's Asian manufacturing facilities. Also during the quarter, we received the first order for Matrix from another IDM who last December selected the system as its next generation test handler following an extensive evaluation against a competitor's product.
Matrix is designed to test up to 32 devices in parallel, and to deliver high throughput in short test time applications. It is well aligned with the capabilities of high efficiency parallel test systems for SOC and general purpose logic testing.
We were pleased to receive awards from two important customers during the first quarter. Intel presented us with its Preferred Quality Supplier Award.
This is the eighth consecutive year that we have received a quality award from Intel. And Texas Instruments' Philippine IC Test and Assembly facility, TI's largest, presented us with their Regional Supplier Recognition Award.
Turning briefly to our other operations, there was good news in our microwave communications business where, excluding the third quarter of 2006 when we recognized $7.9 million in previously deferred revenue from a major contract, this operation reported record sales and operating income. We have an expanding pipeline of opportunities especially in microwave data links for small UAV applications.
Sales at our CCTV business were about the same as last quarter. We are seeing the first orders for new products that have been developed over the last 18 months and began to be introduced late last year, particularly for high end security and surveillance applications.
We expect operating results at this business to improve throughout this fiscal year. Now Jeff will provide details on Cohu's financial performance and results during the first quarter.
Jeff Jones
Semiconductor equipment related revenues for the first quarter of fiscal 2008 were approximately 74% international and 26% domestic. International sales were distributed 93% Asia Pacific, 6% the Americas, and 1% other.
We recorded approximately $1 million of FASB 123(R) stock based compensation expense in Q1. The comments I make regarding operating expenses include the impact of FASB 123(R).
Gross margin in Q1 was 35.6% versus 33.7% in Q4. Our Q1 gross margin was slightly higher than our projection and was higher than Q4 gross margin as a result of lower product support and lower excess inventory costs in our semiconductor equipment business.
We expect our gross margin in Q2 to be about the same as Q1. R&D expense was $10 million in Q1 compared to $9 million in Q4.
R&D expense was higher than we had forecast due to increased engineering labor costs from our semiconductor equipment business. We expect Q2 R&D expense to be about the same as Q1.
SG&A expense was $9 million in Q1 compared to $8.8 million in Q4 and in line with our projection. SG&A expense in Q1 was slightly higher than in Q4 as a result of increased expense incurred by our microwave communications equipment business due to increased business volume.
We expect SG&A expense in Q2 to be slightly higher than in Q1. Interest and other income was $1.4 million in Q1 compared to $2.1 million in Q4.
Q1 was lower due to a decrease in short term interest rates and a loss of $350,000 from the sale of a short term investment. Our effective tax rate of 40.2% for Q1 was higher than projected, due primarily to minor adjustments to prior year foreign tax accruals.
The federal R&D tax credit expired on December 31, 2007 and it's uncertain as to when or if it will be extended. Without any benefit from federal R&D tax credits, we expect our effective tax rate for the balance of 2008 to be approximately 37% to 38%, but the actual rate may vary and is highly sensitive to our pre-tax earnings levels.
Net income per share in Q1 was computed based on 23.2 million weighted average shares and share equivalents from stock options and RSUs. Moving to the balance sheet, cash and investments were $72.1 million at March, increasing approximately $2 million from -- excuse me, $172 million at March, up an increase of approximately $2 million from December.
Net accounts receivable were $41.7 million at March, compared to $45.5 million at December and represented about 65 day sales outstanding. The decrease in accounts receivable was due to cash collections in excess of shipments in Q1.
Inventory increased $400,000 from December. Additions to property, plant, and equipment for the first quarter of fiscal 2008 were approximately $500,000 and depreciation and amortization was approximately $1.8 million.
Deferred profit at March was $5 million, compared to $4.9 million at December. 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 March, 2008 was approximately $8.1 million.
James Donahue
Thank you, Jeff. [Semi's] book-to-bill ratio for test and assembly equipment has been below parity for seven of the last eight months including March, the most recent month that's been reported.
Macroeconomic conditions continue to be unfavorable and in this environment, it's not surprising that forecasts from the majority of our semiconductor customers are focused on very short-term requirements only. Based on shippable backlog and a normal level of turns business, we expect sales in the second quarter to be approximately $50 million.
And now we'll take a few questions. Jen?
Operator
Thank you. (Operator Instructions).
Gentlemen, it appears there are no questions.
James Donahue
Well thank you everyone for attending today's conference call, and we look forward to speaking to you in July when we report on Cohu's second quarter results. Thank you and good day.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation.