Luis Müller - Chairman and Chief Executive Officer Jeff Jones - Chief Financial Officer.

Brett Piira - B. Riley & Company Jairam Nathan - Sidoti & Company David Duley - Steelhead Securities Dick Ryan - Dougherty & Company.

Greetings and welcome to the Cohu Fourth Quarter and Full Year 2014 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 for Cohu. Thank you, Mr. Jones. You may begin..

Thank you and 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 will provide details of our performance for the fourth quarter and full year 2014 as well as our outlook for the first quarter of this year.

If you need a copy of our press release, you may obtain one from our website, cohu.com, or by contacting Cohu Investor Relations.

But before we get started, 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, 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, February 19, 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 from our non-disclosure agreements. And now, I will turn it over to Luis..

Thanks, Jeff and good afternoon, everyone. This was another great quarter for Cohu. We have near record sales of $96.2 million above our initial estimating guidance of $80 million to $85 million.

We closed the quarter with several multiunit customer acceptances for the new MATRiX and NY20 handlers that we originally expected would not happen until Q1, the early acceptances why our good news shifted significant revenue from Q1 into Q4.

In Q4, we had a design win for a MATRiX tri-temperature handler testing power management ICs received a repeat multiunit order for our new gravity handlers testing MEMS sensors using automotive applications and captured two new customers for third handlers growing our penetration in the analog IC market and increasing our cross-selling synergy scorecard.

Before Jeff provides details of our financial results, I want to recap our progress in 2014 and discuss our outlook and strategy going into 2015.

A strong handler market in 2014 that we believe grew 17% year-on-year to $850 million combined with our estimated 5 point plus share gains and OpEx reductions led to Cohu’s significant improvement in financial performance.

Sales were up 44% to $333.3 million, an all-time record and non-GAAP operating income improved by approximately $52 million from 2013. Our semiconductor equipment businesses reported a sales increase of 48% validating our strategy to capitalize on cross-selling synergies and gain share with new products in growing markets.

Since the acquisition of Ismeca, we have been focused on opportunities to cross-sell our products at existing customers. And in 2014, we delivered nearly $25 million of incremental sales.

This strategy has particularly benefited sales of our turret handlers as Ismeca accessed the larger network of customers from Cohu and a stronger global sales and service and support infrastructure. Additional share gain came from a stream of new products introduced over the last 18 months.

We delivered a new generation of our MATRiX pick-and-place handler tailored for automotive IC test. This system is particularly compelling as it uniquely addresses temperature management at Cohu enabling customers to optimize operational efficiencies.

At the beginning of 2014, we announced the key design win for our new Saturn gravity handler at Elmos. They were selected to test next generation QSM products.

During the year we captured two additional strategic customers for testing automotive and industrial ICs propelling us to a market leading position with an estimated 40% share in the gravity segment. At Semicon West in July we introduced our new strip handler focused on delicate bare die in ceramic substrates.

In the second half of the year we completed delivery of the first system for in process testing of multi-stack memory devices and captured a key design win at a large European based automotive IDM that placed multi-unit orders for this new system.

In turret, our new NY20 platform has gained widespread acceptance during its rollout year, shipping over 170 units and benefiting from growth in testing near field communication devices in consumer and mobile markets. We also had several design wins for our NX32 turret handler testing wafer level CSDs, QSMs and LEDs on film-frame media.

With these products we captured a top tier Korean LED manufacturer in the second quarter. Last year marked the beginning of a disruptive change in thermal requirements for casting application processors and we made volume shipments of our T-Core thermal sub-system.

T-Core actively manages the dynamics of power dissipation during final and system level tests of processors used in smartphones and tablets. This is a growing requirement as customers develop greater processor capabilities on smaller silicon nodes.

We estimate that our solution is currently only being used in testing about 14% of smartphones and tablet processors in the market. So there is a significant upside. Our most recently announced new handler the Eclipse features the same T-Core technology for optimizing test yield and speed grading of high end mobile processors.

We have received an initial multi-unit orders for Eclipse from a South Korean OSAT with deliveries starting in late Q1. 2014 was also a year of expanding our manufacturing capability in Asia. In the first half we started building our assembly automation module in the Philippines and ramp production of the new turret handler in Malaysia.

In the second half we have focused on transferring the new MATRiX tri-temperature handler manufacturing to Malaysia, a test completed in December. We are now able to ship over 50% of our system sales from Asia compared to about 25% a year ago. The next step in this process is the transition of gravity handler manufacturing.

We expect to ship the first system from Asia by mid-year and ramp capacity in the second half just before completion of our new consolidated facility in Melaka that will house manufacturing of all our volume handlers. Now, on to my last topic, entering 2015 fundamentals are strong across the major end markets.

According to IC Insights, semiconductor unit sales grew about 8% in 2014 and continues to pick up momentum with a projected 11% unit growth for 2015. Automotive and industrial that represented 45% of our system sales in 2014 are expected to remain healthy.

IC content per vehicle is increasing driven by improvements in power train, safety and infotainment. Advanced driver assist systems are leading to the proliferation of sensors and high-end processors in future cars. These present thermal challenges adapt similar to what we were seeing with application processors and present a great opportunity for us.

In industrial semiconductor, we are not projecting the same strong start of the year as in 2014, but this market still has some tailwind with positive GDP projections in all major economies worldwide. Mobility that was 30% of our system sales last year continues to offer the greatest near-term opportunity for growth.

Early in January, we received a follow-on $17.8 million order for T-Core thermal subsystems testing mobile processors for a market leader. We expect additional demand for T-Core-based products during the year as next generation phones and tablets are launched. Computing and memory were at 20% of our system sales in 2014.

The proliferation of mobile devices is driving the need for additional cloud services and communications infrastructure. We are an established leader forecasting high-end processors that are used at all major servers in data centers. In memory, we offer solutions to test multi-stack memory devices.

Although a small portion of our sales today, we are in discussions with several major memory manufacturers. While the solid-state lighting industry awaits that inflection point, they would drive rapid expansion of LEDs for general lighting.

We expect moderate growth in the market with the continued expansion of mid and high-power LEDs in cars and mobile flash applications. Our strategy going into 2015 remains centered on the four pillars we previously discussed.

First, to maximize sales synergies across our product lines, we have done very well on this goal delivering substantial growth year-on-year. Going forward, we plan to leverage our leading handler market share position to expand sales of our recurring products, such as test contactors.

Second, expand share in mobility and LED markets, we have much more to accomplish in both these segments and the recent introduction of the new Eclipse pick-and-place handler is the next logical step towards capturing additional customers. Third, lower product cost structure with the transition of manufacturing to Asia.

I already described what we have accomplished in 2014 and plans for this year. Fourth, we will continue executing to a strict financial discipline selectively developing products that address key customer challenges in growing markets, where we can differentiate through innovation.

Acquisitions will continue to be an important part of our strategy and we regularly review opportunities to expand our served market. Let me now turn it over to Jeff for further details on our financial results and Q1 guidance..

Okay, thank you Luis. I will start with key highlights from 2014 and then go into the financial details of the fourth quarter and lastly provide the Q1 outlook. Sales in 2014 were $333.3 million driven by 48% growth year-over-year in our semiconductor equipment business, establishing a new record.

Our growth was 100% organic and outpaced the test handler market as we continue to gain share with our new products and sales synergies from the Ismeca acquisition.

Non-GAAP gross margin for 2014 was approximately 36% improving by 500 basis points year-over-year due to higher volume, product mix and the initial benefits of expanding our manufacturing in Asia.

And despite the significant increase in shipments in customer activity, we reduced non-GAAP operating expenses sequentially by approximately 2% as foreign currency gains with the completion of key development programs and disciplined cost control. In 2014, we delivered non-GAAP EPS of $1.02 versus a loss of $0.78 in 2013.

Orders for 2014 were also at record levels driven by strength in the automotive and mobility markets.

We differentiate our products in these markets by delivering handlers capable of thermally conditioning ICs at cryogenic temperatures and providing our proprietary active thermal control technology for optimizing test yield of power dissipative ICs including advanced mobile processors.

Now looking at Q4, our semiconductor equipment orders were $56 million, down 32% sequentially as customers digest the significant capacity additions from recent quarters and a large customer order that was delayed into early Q1. System orders were 42% and recurring 58% of the total.

As we have discussed in the past we see a seasonal trend to the order demand for certain markets such as automotive and industrial ICs that slowdown during the winter months. Equipment utilization remains in the 80% range and orders started strong in 2015.

Semi reported Q4 back end equipment orders are down 58% from peak in June mirroring the same seasonal pattern we have seen.

Before I move into the Q4 results I will comment on our GAAP to non-GAAP adjustments which in Q4 included approximately $1.8 million of stock-based compensation expense, $1.9 million of purchased intangible amortization expense, $700,000 of restructuring costs and $5 million for the impairment of goodwill and other assets at BMS which was triggered by the market analysis indicating the carrying value of that business exceeded its current market value.

My comments are based on non-GAAP results which exclude the impact of these items and a reconciliation of non-GAAP measures to the equivalent GAAP measures can be found in our earnings release located on the Investors section of Cohu’s website.

Additionally in Q2 of 2014, we announced the completion of the sales, substantially all of the assets of our video camera segment, Cohu Electronics and consequently the operating results of Cohu Electronics have been presented as the discontinued operations in all prior period amounts have been reclassified accordingly.

Unless otherwise noted all amounts discussed on this call are from continuing operations. Now moving into Q4 with another solid quarter of execution at Cohu, our semiconductor equipment business had stronger than expected results and our mobile microwave data link business met their plan.

Fourth quarter sales were $96.2 million, up 2% sequentially and higher than our guidance of $80 million to $85 million.

Semiconductor equipment sales of $90.6 million were ahead of plan due in large part the customer acceptances of new products that were received earlier than expected particularly for our new NY20 turret handler and the MATRiX tri-temperature pick and place handler. In Q4 we had one customer representing 10% or more sales.

And for the full year we had one customer in the computing market representing 10% or more of 2014 sales. And we had two other customers which fell slightly below the 10% threshold for 2014 that are in the automotive and mobility markets. Q4 gross margin was 34.4% and in line with our estimate.

Q4 included a high percentage of revenue from the initial shipments of our new pick-and-place handler which had a higher than normal cost basis due to the production and supply chain startup process. As we move into volume production in Q1 and beyond the cost of this handler will improve to operating plan levels.

Operating expense was $21.7 million in Q4 and lowered our forecast due primarily to a $900,000 foreign exchange gain as the U.S. dollar strengthened against the euro and Swiss franc during the fourth quarter.

We also had lower price development costs as the timing of expenditures on certain projects moved from Q4 to Q1 and lower sales commissions in the quarter due to customer mix.

The effective tax rate on income from continuing operations for Q4 was 35.5% and higher than projected because of the impairment loss of $5 million of BMS is not benefited for tax purposes. For 2015, we are modeling our 20% cash rate.Q4 non-GAAP EPS was $0.39.

Now moving to the balance sheet cash and investments increased quarter-over-quarter by $10.3 million to $72 million at year end. Cash provided from operations in Q4 was $15.2 million.

Net accounts receivable decreased approximately $12.9 million to $73.6 million at December as a result of lower sequential shipments from our semiconductor equipment group. DSO at year end was 78 and that’s unchanged from Q3. Inventory was $55.5 million at December, that’s a decrease of $4.6 million quarter-over-quarter.

Inventory days at December were 82 days, that’s down from 96 days at September. Additions to property, plant and equipment in Q4 were approximately $400,000 and depreciation for the fourth quarter was approximately $1.4 million. Deferred profit at December was $7.4 million decreasing $3.8 million sequentially.

And related deferred revenue at the end of Q4 was $11.2 million compared to $22 million at September and consists primarily of revenue deferrals on shipments of test handlers. Cohu’s directors approved a quarterly cash dividend of $0.06 per share payable on April 17, 2015 to shareholders of record on March 3, 2015.

And now moving to our guidance for Q1, we expect sales of approximately $63 million. Q1 gross margin is expected to be approximately 32% and lower quarter-over-quarter mainly due to low sales volume and product mix.

Operating expenses for Q1 are expected to be approximately $23 million, up sequentially due to the turnaround of the Q4 foreign currency gain into a one-time $1 million foreign currency loss in Q1 as a result of the sudden and sharp appreciation of the Swiss franc in January.

Additionally, we expect to incur approximately $250,000 of restructuring costs in Q1 associated with completing the downsizing of our BMS operation in Germany and initiating the manufacturing transition of gravity-feed handlers to Asia. And that concludes our prepared remarks. And now we will take questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brett Piira with B. Riley & Company. Please proceed with your questions..

Great, thanks for taking my question.

Maybe I start out on the target model timing, when can we start thinking about gross margins getting more in line with that, is it when we get 100% of the systems from Asia or is it somewhere in between where we are with the 50% and fully on the way?.

As you know, Brett that achieving the model is contingent on revenue levels. And in 2015, we do expect to achieve the profitability levels in our model, which reflects quarterly sales of $90 million plus and the margin profitability – margin to profitability in that model without completing the balance of the manufacturing transition..

Okay, that’s helpful.

And then maybe you touched on it briefly on the new Jaguar strip testing you had a key design win, can you just kind of talk a little bit more in detail how you see that market evolving and what your expectations are?.

Yes. We had I mentioned a key design win on automotive IDM with production facilities in Asia obviously. We expect to see continuation of growth opportunities for that product line.

I can’t get into specific details of customers or volumes, but it’s – like I said, it’s – it was a key win we had in the second half of last year in additional shipments planned for it..

Alright, thanks..

Thank you. Our next question comes from the line of Jairam Nathan with Sidoti & Company. Please proceed with your question..

Hi, guys. Thanks for taking my question.

Just a couple on the $18 million T-Core order, is that – when does that get into revenue – when is the delivery scheduled?.

Hi, Jairam. We start shipping that product in the beginning of Q2..

Okay.

And you also mentioned, I think Jeff mentioned it, there was one other order which was shifted from 4Q to 1Q, is that the – are we talking about a T-Core or was that some other product too?.

Jairam, that was the same order, referring to the same order..

Okay.

And as well as gross margins, I know it did come a little below your own expectations for the fourth quarter and still what’s behind that?.

No, Jairam, actually we expected Q4 margins to be approximately 34%. That was our estimate on our last call. And it was due to the shipments of the new pick-and-place handler that had the initial higher cost due to the production startup that I mentioned..

Okay. And lastly, you mentioned 14%, Luis – you mentioned 14% of the apps closes are currently tested using T-Core.

So, is it a way to kind of quantify the test yield difference between the chipsets around your system and otherwise?.

Yes, there is definitely a measurable advantage by testing using the T-Core technology so that you optimize yield and also speed grading of the processors. That information as you can imagine is highly proprietary to our customers and not something that we are pretty to share anything..

Okay, that’s all I had. I will get back in queue..

Thank you. Our next question comes from the line of David Duley with Steelhead Securities. Please proceed with your question..

Yes, thanks for taking my questions. You mentioned some things about unit volume growth, I think you mentioned 8% this year and 11% in 2015.

If the units grow at 11% in 2015, is that a fair guess to estimate what the handler market will do?.

Yes, that’s a great question. As you know, we personally have very limited visibility and information on the handler market ahead of one quarter. We typically built up our bottoms-up forecast. We do that every quarter. And we have these referenced data points from external market forecast firms. I think you can reach their conclusion.

I mean, honestly, we do like I said build up our quarter-by-quarter on a bottoms-up basis. Nevertheless, I do have to say fairly confident going into next year with end-markets being healthy as I mentioned here in my remarks..

But generally, there is a high correlation between unit volume growth and handler purchases, so I am not asking you to make a forecast, I understand.

If the market does go anywhere in that range, is that a good guess what the handler market will be?.

Yes, you are correct. There is a very good correlation between IC unit volume growth and handler market growth. That is correct..

And could you talk about, you mentioned the size of the market could you talk about your market share and perhaps into the main pieces in 2014?.

Yes. So, I did mention the market ended the year at approximately $850 million according to our estimates. That’s an all-inclusive market. As you know, we keep participating in the non-memory portion of the market and review our market share at about 40% on the non-memory portion of the handler markets.

I don’t have data handy here to break that further down into the different sub-segments..

Okay. And you mentioned something about some revenue being pulled in from the first quarter into the fourth quarter and I guess that implication of that segment is Q4 was better than you would have expected and Q1 will be a little bit worse than you would have expected to cover that event.

With the normal seasonality between Q4 and Q1 for Cohu on average is what approximately?.

Yes, Dave, this is Jeff. So, just looking back over history here, we do see a decline generally from Q4 into Q1. I don’t see a real I guess pattern as to a consistent percentage, but there is definitely a trend of lower sales volume in Q1 as opposed to Q4..

If you take 2011 onwards, the market has become substantially more driven by mobile, mobility products, automotive products and then you start seeing that trend that Jeff just described..

Okay, thank you very much..

Thank you. [Operator Instructions] Our next question comes from the line of Dick Ryan with Dougherty & Company. Please proceed with your question..

Great, thanks. Luis, you are talking in the past about the split of business CapEx versus recurring, and I think you briefly mentioned one of the areas in the consumables part, the contactors.

Can you give us a little more color on what you are thinking as far as that split did much you can do to maybe gain share into the consumable side?.

Sure.

Our contactor business is actually fairly small today, but with the – the theory here is with the 40% share in our non-memory handler market and the fact is every handler we ship shift with contactors for testing semiconductor devices that we do have an opportunity and more so in certain applications than others actually to differentiate and capture a portion of that revenue and essentially grow our business penetrating some into the contactor revenue stream.

And that – Dick, that contactor market is sizable, I think we have somewhere $600 million to $700 million. So, we think there is good opportunity there for us..

Okay, thank you.

And Jeff, the fall in the Q4, if you excluded that where would you have landed in your guidance $80 million to $85 million, I mean, would you then kind of split the goalpost there at the higher end or lower end?.

At the higher end, Dick..

And did you say you would be able to hit your target margin at the 90% target model this year without increasing the components coming out of Asia to 100%?.

That’s correct..

Okay. Great, thank you..

There appear to be no further questions at this time. I would like to turn the floor back over to management for closing comments..

Okay. Thank you for joining us on this call today. We look forward to speaking to you next time when we report our first quarter 2015 results. Thank you and good day..

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