Greetings, and welcome to the Cohu Incorporated First Quarter 2014 Earnings 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 CEO of Cohu Incorporated. Thank you, Mr. Donahue, you may begin. .

Good afternoon, everyone, and thanks for joining us on today's call. 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. .

I'll provide an overview of Cohu's results for the first quarter, discuss orders and key activities. Jeff will take us through the financial statements and we'll conclude with comments on the business outlook. Then we'll take your questions..

But first, Jeff has some opening remarks regarding forward-looking statements. .

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, April 30, 2014, and the company assumes no obligation to update these comments..

Certain matters discussed on this conference call, including statements regarding expectations of business conditions -- and business and market 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 on 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 on 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. .

Okay. Thanks, Jeff. In our last conference call, we commented that orders increased as 2013's fourth quarter developed. That trend continued as business improved further during the first quarter. Demand was broad-based across market segments for all our product families, pick-and-place, gravity and turret. .

First quarter sales increased to $68.4 million compared to $64.7 million in the fourth quarter, and we're ahead of our guidance..

We're pleased to report a return to profitability with non-GAAP net income of $0.02 per share compared to a loss of $0.10 in the fourth quarter.

Financial results in the first quarter reflect favorable product mix, initial benefits from the transition of pick-and-place handlers manufacturing to Asia that we previously discussed and lower operating expense..

Orders increased 7% to $81.6 million, following a 33% increase in the fourth quarter. Semiconductor equipment orders were $74.3 million compared to $68.3 million in the fourth quarter. And as you may recall, Q4 included a large order for thermal subsystems to meet customer requirements for several quarters..

Handler utilization reached 82% in March, 4 points higher than the previous quarter and indicating continued ramp in semiconductor production volumes. Some customers, notably in the computing segment, are still operating at lower utilization levels..

Overall systems represented 58% and recurring business comprised 42% of semiconductor equipment orders. .

First quarter orders demonstrate the advantages of our broad product line and diversified customer base.

While our pick-and-place and gravity handlers benefited from continued strong demand in the automotive and industrial segments, turret business was driven largely by the consumer, mobility and discrete markets, and as the quarter ended, by increased demand from LED customers. .

The automotive IC sector is clearly in a ramp, and this is good news as our MATRiX pick-and-place handler is a leader in this market..

First, increased IC content per vehicle, driven by power train, chassis, safety, infotainment and advanced driver assist systems; second, the migration of these capabilities and features from the high-end of the market to lower-priced vehicles at a much faster pace than in the past..

We think that down market trend is the result of competition and government mandated safety and fuel efficiency standards..

Signaling improved business conditions and confidence, customers pulled in follow-on orders for thermal subsystems and assembly automation modules, which were not expected until later this year. .

So as you can see, there are multiple drivers for our business, which mitigates the risk inherent with dependence on limited market segments or customers during downturns and provides increased opportunities during up cycles..

In the first quarter, demand was strong for all of our product families. The investments we've made last year to support customer valuations over our new products during what was a soft period in the industry are paying off as customers place volume production orders..

Now Jeff will provide details on financial results. .

In Q1, we recorded approximately $1.5 million of stock-based compensation expense, $2.1 million of purchased intangible amortization expense and $850,000 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.

Gross margin was 37.3%, increasing 520 basis points from Q4, and benefited from favorable product mix, lower rework and scrap costs associated with the initial production of certain new products and the initial benefits from the transition of manufacturing to Asia..

Transfer of supply chain management and volume manufacturing to Asia is on plan. We are now 100% building and shipping the assembly automation tool from our Philippine factory.

Our Malaysia plant ramps production of the new NY20 turret handler in Q1, and is finalizing the first pick-and-place systems, which will be in volume production in the second half of this year..

Gross margin in Q2 is expected to be about the same as Q1..

Operating expense was $24.5 million in Q1 and higher than forecast due to increased engineering cost to support the high level of quotes in customer-specific equipment configurations, as well as higher commissions in sales mix. .

The operating expense in Q2 is expected to be approximately $23.5 million, down from Q1, primarily due to product development programs that are nearing completion..

We expect to incur approximately $500,000 of restructuring costs related to severance and our manufacturing transition that is excluded from our Q2 OpEx estimate..

We expect the pick-and-place manufacturing transition will be largely complete by the end of Q2 and restructuring costs will be $100,000 or less per quarter in the second half of the year..

There was a minor Q1 GAAP income tax benefit as the provision on earnings in Asia was offset by a tax benefit on losses in other foreign locations. We expect our 2014 effective tax rate will be approximately 15%. .

The Q1 non-GAAP EPS, which excludes the after-tax impact of share-based compensation, amortization of intangibles, manufacturing transition and employee severance costs, was $0.02..

Moving to the balance sheet. Cash investments were $41.1 million at March, down $11.8 million from December, driven by the production ramp and the resulting increase in accounts receivable and inventory. Cash used in operations in Q1 was approximately $9 million. .

Net accounts receivable increased by approximately $6.2 million to $67 million at March, as a result of higher sequential shipments from our semiconductor equipment group..

DSO at March was 87 and essentially unchanged from December. Inventory was $62.5 million at March, increasing $3.5 million from December in support of ramping production and increasing shipments in Q2. Additions to property plant equipment in Q1 were approximately $700,000. Depreciation for the first quarter was approximately $1.4 million.

Deferred profit at March was $6.3 million, increasing $300,000 from December. The related deferred revenue at the end of Q1 was $9 million compared to $7.4 million at December and consists primarily of revenue deferrals on shipments of test handlers. .

Now commenting briefly on our other businesses. Sales of video cameras were below plan due to customer order delays. This business operated profitably during the quarter as a result of improved product mix and ongoing product cost reduction initiatives..

We expect most of the late orders to be booked and shipped during the second quarter..

Our mobile microwave data link business was also impacted by customer order delays, but there are clear indications that conditions in the government surveillance and law enforcement markets are improving after those segments were essentially frozen last year due to budget uncertainties and spending cuts..

We expect improved results at BMS in Q2. .

Thanks, Jeff. Now providing further information on our semiconductor equipment business. New products accounted for 63% of unit orders in the first quarter, and I'd like to provide additional information on each of these systems..

In the last 12 months, we've introduced 2 new gravity-feed handlers developed by our Rasco team. Saturn is a hybrid system that combines the simplicity and high productivity of gravity input and output with the reliability and high speed of pick-and-place technology at the test site.

This tri-temperature handler delivers unparalleled speed to lower cost of test at cold and hot temperatures for small- to medium-sized devices, primarily power management and microcontroller ICs for the automotive and consumer markets..

Jupiter is a derivative system for large devices, such as power management ICs used for industrial applications. .

Shortly after the Ismeca acquisition, we released a new turret platform, the NY20. This system has multiple configurations from testing small ICs used in the mobility and discrete markets to LEDs at high throughput rates, to vision inspection of delicate devices.

The NY20 sets a new benchmark for productivity with autonomous features that reduce the number of operators required at a customers' production facility..

The NY20 accounted for 75% of turret orders in the first quarter..

Delta Design brought 4 new products to market in the last year. First, their material handling system called Linx [ph] that automates tray handling in semiconductor assembly lines.

We also launched the new configuration of our T-Core subsystem that uses our proprietary active thermal control technology to optimize test yield of application processors in the mobility market..

And leveraging our broad technology and IP portfolio that was developed initially for high-power microprocessors, we brought innovative solutions to the fast-growing mobile market. .

We're now launching a new version of our successful tri-temp MATRiX handler, increasing the scalability of a system that is already considered the benchmark for pick-and-place cold testing of automotive and industrial ICs..

Along with MATRiX, we're in the early deployment phase with our new eclipse handler, a cost-effective ambient hot solution for testing products for the consumer and mobility markets..

Both handlers have a suite of options that includes our most advanced T-Core, thermal controls solution, enabling testing of processors using communication, computing, graphics and mobility..

With 7 new products launching and ramping in the last year, Cohu is uniquely positioned to capitalize on evolving customer requirements, to optimize yield and reduce cost of test. Our strong orders in the last 2 quarters are evidence of the competitive advantage and strength of these new products.

And we expect further share gains as we continue to execute on our strategy to realize cross-selling synergies in the coming quarters..

Now looking at the current business environment. Orders for back-end semiconductor equipment have increased each month since last November, and March orders were at the highest levels since last July.

This improvement is consistent with the trend we are seeing in our business and with comments from certain other back-end semiconductor equipment companies. The order momentum that we've seen all year continued into April and we're off to a great start in the second quarter..

We are benefiting from the upturn in business and also from the success of our new products. Current customers are transitioning to our new platforms, and we are displacing competitors due to strong product performance, the advanced capabilities of our new systems and cross-selling synergies that are being generated across our product portfolio..

We've ramped production to support the strong orders received during the last 2 quarters in each of our 3 handler businesses. .

An unusually high percentage of second quarter shipments are new products and revenue recognition will be deferred until the equipment completes customary acceptance processes, which are only partly under our control.

It's always difficult to predict the precise timing of customer acceptance, and with so many variables in play, it's really challenging to forecast sales this quarter..

Our current estimate is that second quarter sales will be between $72 million and $80 million. .

That concludes our prepared remarks. And now we'll be happy to take your questions. .

[Operator Instructions] Our first question comes from Jairam Nathan with Sidoti & Company. .

My first -- you mentioned that a lot of the orders are coming from new products.

Now do you see any significant gross margin changes as you launch new products in the sense you would have -- would you think you have cost efficiencies built in there?.

Jairam, yes. I mean, we're planned for a lower gross margin on the initial production of our new unit. And we also expect that the margin will improve as we work through the initial production runs, stabilize the supply chain and produce the systems in volume.

So some of the new products that ship in Q2 will be recognized in Q2 and have been considered in our Q2 gross margin estimate. So as you know, the gross margins, depending on number of different variables, including volume and mix, so it makes it difficult to predict.

But we don't anticipate a significant negative impact on future gross margin from the revenue or profit deferrals of the new product shipments in Q2. .

Okay.

And with respect to revenue recognition, does the variability, the range you provided for Q2, is that -- would you hit the higher end if there are no -- if all of the units that you ship are accepted? Or how should we think about the range there?.

Yes, that's a fair way to look at it. I mean, there's other variables in play. But I think that's a fair way to look at it. .

Okay. And last question on the operating expense. I know it was a little higher than we thought it would be.

How should we think about OpEx on a kind of a steady-state basis once you finish all the restructuring actions?.

Yes, on a non-GAAP basis, Jairam, we were projecting that OpEx second half of the year is going to be about $23 million per quarter. We've got development programs, other cost reduction actions that are taking place that will take the number from where it is down to about $23 million per quarter second half of the year.

The restructuring charges, again, estimating $500,000 for Q2. Expect that to be down $100,000 or less the second half of the year, Q3 and Q4. .

[Operator Instructions] Our next question comes from Dick Ryan with Dougherty & Company. .

Jim, I missed your comments on the LED activity.

Can you kind of recap that?.

Yes. What we said, Dick, was that we had broad-based diversified strength across all our product line and market segments. And that the LED demand, in particular, started to develop towards the end of the first quarter. .

Okay.

Is that new customer wins or existing customers?.

I think it was -- well, it was principally existing customers. .

Okay. And how should we look at the backlog flowing? I mean, I think last quarter, you talked about the thermal subsystems kind of impacting the backlog flow.

How should we look at that now?.

Well, most of our business is not like that. We're -- the thermal subsystem business is unique in that the integrator places a bulk order intended to satisfy several quarters of systems build on its part. So that's really the only type of business where we have revenue stretching out several quarters.

Most other customers want their equipment as fast as they can get it, and that's certainly the case here in this what appears to be ramp -- clearly appears to be a ramping-type environment. So the variable that exists is the one we mentioned, and that's the heavy mix of new products that will result in deferred revenue in some instances.

And right now, with so many new products in play, there's a quiet wide range of variability in what revenue will be recognizable in the second quarter due to the customer acceptance process, which is only partly under our control.

Certainly, we support it and do everything that we can to make that a timely process, but the customer has his own cadence as well. So really, that's why we provided this, what for us is a relatively wide range of guidance, revenue guidance [indiscernible]. .

With the good momentum you said starting the second quarter and the utilization rates ticking up, is there any -- do you have any sense of how the third quarter could shape up? Any early conversations there with some of your customers?.

Well, in this business, about 1 quarter of visibility is all the reliable visibility that you get. But there's no one talking down this. None of our customers are talking down the second half of the year. .

[Operator Instructions] Gentlemen, there are no further questions in the queue at this time. .

Well, I'd like to thank you for joining us on today's call, and we look forward to speaking to you when we report Cohu's second quarter results. Thank you, and good day. .

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you, all, for your participation..