Luis Müller - President and Chief Executive Officer Jeff Jones - Vice President Finance and Chief Financial Officer.

Kim Donovan - Needham & Company Dick Ryan - Dougherty.

Greetings and welcome to the Cohu First Quarter 2015 Earnings Conference 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 Executive Officer for Cohu Corporated. Go ahead sir, the floor is yours..

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 first quarter of 2015 as well as our outlook for the second 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, I must remind you that during the course of this conference call, we will may 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 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. And now, I will turn it over to Luis..

Thanks, Jeff and good afternoon, everyone. In Q1 sales were $68.1 million up 5% year-over-year and above our guidance of approximately $63 million. Orders increased 52% sequentially to $92.3 million driven by strong product momentum in the mobility in automotive markets.

Semi conductor equipment accounted for 93% of total orders in the system distribution by key markets in Q1 was consumer and mobility 51%, automotive and industrial 30%, computing and memory 11% and solid state lighting 8%.

Early in January we received another follow on order this time for $17.8 million for key core thermo subsystems that enabled testing of mobile processors for smartphones and tablets. These next generation devices need advanced thermo control to mitigate over heating during test.

Our products actively manage device temperature enabling customers to achieve improved yields that maximise degrading and value. These sub systems will ship in Q2 and Q3 satisfying demand from our leading company that has grown share in the smartphone market over the last six months.

We also reached an important milestone with acceptance from a top-tier U.S. fabless customer of our new Eclipse pick-and-place handler incorporates the same key core technology. This customer outsources device manufacturing and we made initial shipments of Eclipse to one of its test sub contractors in Korea during the first quarter.

Additionally, evaluation handlers were installed at three other tests of contractors in Taiwan and Korea that we expect to convert into sales in the coming months. As we mentioned in an earlier quarter, next generation mobile processors increasingly require active thermo controller test.

And we project continued growth in this segment for our key core based products replacing existing installed base of equipments. Additionally, we received repeated turret handler orders and continued to see strong demand for testing and inspecting RF devices like, near field communications, filters, switches and power amplifiers.

These semiconductors play a critical role in connectivity especially in feature rich smartphones designed to operate across multiple bands like 2G, 3G and 4G LTE networks as well as Wi-Fi blue tooth and GPS. The exponential growth in mobile data is driving a sharp increase in RF device content for phone and consequently increasing test CapEX.

We’re not only capturing near term sales opportunities with our handlers, but also developing in partnership with our leading customers an innovative new product as an alternative to traditional wafer probing.

This system enables much needed and sort after singulated die and wafer level package testing capability that will improve yield and integrated optical die inspection providing our customers a cost effective solution and further competitive advantage.

This new die prober will give us an entry point into the $450 million wafer test market that we don’t currently participate in.

Turning to automotive, we received repeat orders from several customers for our matrix pick-and-place system and also gravity feed handlers and we want additional business as a result of increase and demand for pressure and magnetic MEMs test units integrated with our handlers, captured a design win for our Jupiter system for testing large power devices and receive repeat orders for a 32 station third handler from a new customer, a leading Japanese integrated device manufacturer.

We also booked repeat orders for the new Saturn gravity handler from two key European customers. A large automotive customer selected our products for testing next-generation radar sensors that operate at near 80 gigahertz frequency. These sensors are part of new active safety systems aimed at reducing traffic fatalities.

The higher frequency creates an increasing interesting challenge at test and we’re playing a key role in this market that links radar signal with adaptive cruise control in collision warning systems. Also in Q1, we made the first shipment of a new versatile third handling.

This system handles a wider range of devices, integrates our new 3 dimensional vision inspection technology based on fast, more [Indiscernible] and provides customers with flexible module configure ability options.

The new vision technology enables more accurate detection of micro VSAT and makes precise topographical measurements particularly on bump dies and wafer level packages. We expect share gains in the estimated 120 million inspection market with this advanced vision system integrated on our more flexible handler platform.

The new handler is under evaluation at two leading U.S. headquarter customers and we have multi system backlog for shipment in Q2. In the computing market, device overheating during test is a complex problem. And our proprietary key core technology continues to be key to customers achieving target yields.

We received repeat orders for our pyramid handler for testing server processors and we expect to start shipments in Q3. The European customer in this solid state lighting market placed a multi unit order for bringing configuration turret [ph] handlers. This customer is a leader in high power LEDs for automotive applications.

This market is still under very stage with only 3% of the 87 million vehicles produced last year having high power LEDs in headwinds. We see continued momentum towards this technology and expect further orders for LED test handlers in Q2.

In operations, the first gravity handler built in Asia shipped to Germany for quality check prior to reaching its final destination of the customer facility. This handler incorporates sub assemblies from Asia CMs and a key module built at our Philippines operation with final integration and test at our Malaysia facility.

We are ahead of schedule on this manufacturing transition, thanks to our experienced team and established supplier base in Asia. We plan to continue quality check verifications in Germany incurring some incremental cost most likely through Q3 as the production process matures in Asia.

Earlier this year we formed the new business union within our semiconductor group called ITS, Integrated Test Solutions.

This groups charter is to profitably grow contact for sales in this last volatile higher gross margin 650 million consumables market by leveraging our market leadership positioning handlers, global sales and customer support channel in key technology capabilities to solve the challenges in testing ICs and LEDs.

We believe we have an excellent opportunity to expand sales in this segment of the market. Our handler product line has never been stronger and I’m optimistic about our growth prospects in wafer level package inspection, die probing and test contacting.

Combined, they will expand our total available market from $850 million to about $2 billion; further diversify our product offering in few new opportunities to drive top line revenue and earnings growth.

Let me now turn it over to Jeff for further details on our first quarter financial results and update on our progress towards improved gross margins and Q2 guidance..

Thanks, Luis. Before I move into the Q1 financial details and our Q2 outlook, I’d like to touch on a few highlights from the first quarter. We were profitable in this seasonally slow period generating 2.2 million of non-GAAP operating income and $0.03 of EPS. Q1 was our fifth consecutive quarter of non-GAAP profitability.

The actions we’ve taken with respect to manufacturing transition and operating cost of reductions are benefitting our operating results. We also continue to have positive cash flow. In Q1 we generated $4.2 million from operations and over the last four quarters we have generated approximately $33 million.

Orders were very strong and up 52% sequentially, our semi conductor equipment orders were $85.4 million and up 53% quarter-over-quarter driven by strong demand from mobility and automotive customers. System orders were 62% and recurring 38%.

Entering Q2, equipment utilization is approximately 81% and semi reported back end equipment orders increased every month in Q1 and are up 92% from the trough in November but still 23% below the last peak in June of 2014.

Before I move in to the Q1 results, I’ll comment on our GAAP to non-GAAP adjustments which include approximately 1.7 million of stock based compensation expense, 1.8 million of purchased intangible amortization expense, 200,000 of restructuring cost and 300,000 for the write down of a long term asset with a book value that exceeded its current fair market value.

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

As a reminder, in 2014 we sold our video camera segment and its operating results are presented as discontinued operation with all prior periods amounts being reclassified. Unless otherwise noted, all amounts discussed on this call are from continuing operations.

Now moving into Q1, our results were better than guidance from both a revenue and profitability standpoint. Our semiconductor equipment business had stronger than expected results which more than offset our mobile micro wave data link business that performed below plan.

First quarter sales were $68.1 million up 5% year-over-year and higher than our guidance of approximately $63 million. Semi conductor equipment sales were $63.4 million and ahead of plan due in large part to strong recurring revenue including device kits, test contactors and spare parts.

In Q1, we had two customers representing 10% or more of sales that are in the computing and automotive markets. Gross margin in Q1 was 34.2% and approximately 200 basis points higher than our estimate. Gross margin benefited from higher sales volume and a favourable product mix.

Operating expense was $21 million in Q1 and lower than our forecast too largely to a modest exchange gain, foreign exchange gain versus in anticipated loss as the U.S. dollar strengthened against the euro and the Swiss franc during the quarter.

We also had lower product development cost as the timing of expenditures on certain projects moved to Q2 and sales commissions were lower due to customer mix. The effective tax rate on income from continuing operations for Q1 was unusually high because we generated taxable income offshore and incurred a loss in the U.S.

The foreign income was taxed at a blended rate of approximately 20% but because our evaluation allowance on deferred tax assets the Q1 provision did not benefit from the U.S. loss. For 2015, we are modelling a tax rate of approximately 20%.

Now moving to the balance sheet, we ended the first quarter with cash and investments of $69.7 million and cash provided from operations in Q1 was $4.2 million. Net accounts receivable decreased by approximately $6.4 million to $67.2 million at March as a result of lower sequential shipments from our semiconductor equipment group.

DSO at the end of the first quarter was 89. Inventory increased by 2.9 million to $58.4 million at the end of Q1 as we planned for a 19% sequential increase in shipments in Q2. Inventory days at March were 123.

Additions to property, plant and equipment in Q1 were approximately $1.1 million and depreciation for the first quarter was also approximately $1.1 million. Deferred profit at March was $7.7 million essentially flat quarter-over-quarter.

The related deferred revenue at the end of Q4 was $12 million compared to $11.3 million at December 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 July 31, 2015 to shareholders of record on June 19, 2015.

And now moving to our guidance for Q2, we expect sales of approximately $81million up about 19% sequentially. Q2 gross margin is expected to be approximately 300 basis points higher than Q1 which puts it in the range of 37% to 38%. Operating expenses for Q2 are expected to be approximately $22 million.

Additionally, we expect to incur approximately $250,000 of restructuring costs in Q2 associated with completing the downsizing of our BMS operation and the manufacturing transition of gravity-feed handlers to Asia. The guidance for Q2 is in line with our financial model.

Our strategy to improve profitability by moving volume manufacturing to Asia and strict discipline and controlling operating expense is providing tangible results. Before we conclude our prepared remarks, I want to mention that we will be hosting our first investor and analyst day on June 18 at the NASDAQ market site in Times Square.

Additionally, in May we will be presenting at the Jefferies Conference in Miami and B. Riley Conference in Los Angeles. And that concludes our prepared remarks. And now we will take your questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question comes from Kim Donovan from Needham & Company.

Hi, this is Kim Donovan on for Edwin Mok. You mentioned the new ITS segment will target consumables area. Can you give us an idea of how the contactor business has grown, and how you see that business trending going forward? I know it was a small part of your business but represents a $650 million market..

Yes, hi Kim, this is Luis. We don’t send you a typically disclosed revenue by product line but like you said it’s fair to say it’s a small fraction of our sales at this time. In fact, its in the 5% to 6% of our sales in Q1.

And it’s a sizeable market, we are investing on it, we are looking at opportunities to expand and we will continue to give you an update as we make progress in the following quarters, but at this time no I don’t have a specific plan to put on the table and disclose exactly what we are going to be doing in that space other than yes we are growing and we have a specific business unit focussed on products and customers in that market..

Okay, thank you..

Next question comes from Dick Ryan from Dougherty.

Great, thank you.

Hey Jeff, when will the transition at gravity feed be completed? It sounds like the initial happened sooner than expected; but what's the timing?.

Hey Dick, yeah you’re right. We are making good progress on that transition. We expect that in the – we’ll do another quarter of the transition but in the second half of the year we’ll have that transition completed..

And that should help drive the margins even more closer to your model?.

Well yes, certainly I mean it sticks into the model. For 2015 we expect that benefit to be minimal and overtime we expect three to four hundred basis points for the gravity feed handlers and that equates to about 100 basis points overall for those [ph] you’ve consolidated.

Like I said it’s in the financial model and we are largely using the benefits to offset anticipated ASP erosion in the future..

Okay. Great, thanks. Hey Luis, on the die prober can you talk a little bit more about the timing of that? And I may have missed -- I thought you mentioned something about the RF filter market or providing product into that.

Can you give us a little more color on that as well?.

Yes sure, Dick. You know frankly its’ a little too early to talk about projected sales and in the die prober space. We have new products that’s under development, its not out there yet, but we do plan to share more details about the product itself for our June Investor Conference in New York.

So I think we’ll be expanding a little bit more on that topic there. But like I said it’s a little too early to say what is our penetration, sales penetration in that market like at this stage.

Regarding the – your question about the RF, we do have sale predominantly turret handlers already into that space and frankly the way I see it is the space is growing and it’s benefitting that product line that we have..

Okay.

Can you give a sense of the market opportunity you see there?.

I don’t have a specific number to back onto it right now, it would be starting to sort of break off turret specific sales relative to the other products which we don’t particularly disclose it..

Great. And can you talk a little bit about the share? I know that's one of the goals.

And it sounds like very good execution on the mobility side, but can you talk a little bit about what you're seeing on your share in that space?.

Sure. For us mobility really has two distinct lags, one is more of the application process where the mobile processor we say and then the rest of it is the power management ICs and our RF devices.

So specifically on the mobile processor I think as I have mentioned in earlier quarter there is a requirement for thermal control or active thermal control of these devices during the past. And that’s really surfacing here with the new generation smartphones or new generation processors and smartphones.

Its fair to say that we are today touching on the range of around 15% to 20% of the all processors going into phones in the market.

I think the opportunity is there and we’re certainly working hard with new products, including this Eclipse ATC that I mentioned that was introduced earlier in this year and we see opportunity to continue growing that space essentially as companies have to read through their handler capacity to be able to test these new devices.

So it’s almost like independent of total unit volumes growth or smartphones more related to a technology shift in the space..

Great. Thank you guys, good quarter..

Thank you..

Next question comes from Durham Nathan [ph] Private Investor. Please go ahead..

Hi, thanks for taking my question.

Just going further deeper on the thermal technology, now that’s becoming a bigger and bigger market for you and as part of revenue can you give us more details on what percentage of revenue is this? What’s the potential here? And as far as the margins are they better, similar or worse than your current average?.

Yes so, I mean as far as the – hi Durham, this is Luis. As far as the potential goes, it’s pretty much like around the lines of the answer I just gave.

We’re touching 15% to 20% of the market that’s sort of our penetration to date on smartphones and I think that gives you a sense of how much more it can go pretty clearly and we’re working towards that. The timing of it I can’t quite comment at this stage, but that’s the target..

And so as far as sort of a new phase starting 15% to 20% like who are you selling to, is it – are you selling it to the fastest [Indiscernible] Or is it to the device manufacturers and the consumer device manufacturers?.

Well we had too many products in this space. We have the thermal subsystem itself as I said based on the T-Core technology that product we sell into a system integrated that then performs the sort of the test for the microprocessor or sorry the processor manufacturer.

And then we have the Eclipse handler that we just recently introduced beginning of this year that product also features the T-Core technology, in this case we sell off that product directly to the manufacturers which could be in this case test, sub contractors in Taiwan and Korea as a reference we have several systems under evaluation there..

Okay, thank you. That’s all I had..

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

Okay, thank you for joining us on this call today. We look forward to speaking to you at the upcoming investor conferences and our first investor and analyst day in June or when we report our second quarter 2015 results. Thank you and good day..