Cohu, Inc. CEO Interview: James A. Donahue

• On 10:45 am EDT, Wednesday August 26, 2009

67 WALL STREET, New York - August 26, 2009 - The Wall Street Transcript has just published its Semiconductors, Semiconductor Equipment, and Software Report offering a timely review of the sector to serious investors and industry executives. This 103 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: DRAM Industry Reorganization -- Semiconductor Supply Chain Status -- Netbook Growth -- LCD TV Growth -- NAND Pricing and Demand -- Micro-Electro-Mechanical Systems (MEMS) Demand Cycle -- Ultra Low Voltage Processors -- Semiconductor Inventory Aging and Type -- Processor Power Developments

Companies include: Intel (INTC); Micron Technology (MU); Microsemi (MSCC); STEC, Inc. (STEC); National Semiconductor (NSM); Texas Instruments (TXN); Taiwan Semiconductor Manufacturing (TSM); ON Semiconductor (ONNN); Intersil (ISIL); Linear Technology Corporation (LLTC); Monolithic Power Systems (MPWR);Advanced Photonix (API); Waytronx Inc. (WYNX); LTX-Credence (LTXC); Mattson Technology Inc. (MTSN); Oclaro, Inc. (OCLR); Silicon Laboratories (SLAB); Microchip Technology, Inc. (MCHP); Cohu, Inc. (COHU); FSI International, Inc. (FSII); Jaco Electronics (JACO); Cadence Design Systems (CDNS); Synopsys (SNPS); Mentor Graphics (MENT); Magma Design Automation (LAVA)

In the following brief excerpt from the 103 page report, James A. Donahue, President and CEO of Cohu, Inc., discusses the outlook for the sector and for investors.

TWST: Let's start with a brief history of your company.

Mr. Donahue: Cohu was founded in 1955 and is publicly traded on Nasdaq under the symbol COHU. Today we have four operating businesses and a small corporate staff.

TWST: What does Cohu do?

Mr. Donahue: We are the largest supplier of integrated circuit (IC) test handlers to the global semiconductor industry through our subsidiaries, Delta Design, Inc., and Rasco GmbH. IC test handlers automate, thermally condition and control the temperature of the integrated circuit during final test. Cohu's electronics division produces a wide range of video cameras and related products specializing in the practical application of video and IP solutions for surveillance and process monitoring. Broadcast Microwave Services, or BMS, designs, develops and manufactures mobile microwave transmitters, receivers, accessories and turnkey systems.

TWST: What percentage of revenue do each of those areas account for?

Mr. Donahue: Semiconductor equipment has historically accounted for 80% to 85% of our sales and operating income. However, the global recession has resulted in sharply lower sales of consumer electronics and PCs. That has created idle production capacity on semiconductor test floors and severely depressed sales of semiconductor capital equipment. At the same time, our mobile microwave data link business has grown significantly. As a result, in the second quarter of fiscal 2009, semiconductor equipment represented about 65% of sales, microwave equipment, 24% and video cameras, 11%.

TWST: Are you looking at any new product lines now?

Mr. Donahue: We have a strong pipeline of new products in each of our businesses. In semiconductor equipment, we recently introduced a new high-speed, high-parallel pick-and-place handler called MATRiX. We are beginning customer qualification on a next-generation thermal handler named Pyramid. This system is targeted at microprocessors and high-performance graphics chips, and incorporates our proprietary thermal technology that limits temperature fluctuations during testing, thereby optimizing speed grading and ASPs for our customers. In our gravity handler segment, we're developing a new high-speed, high-parallel gravity handler that in many respects is the gravity equivalent of the MATRiX pick-and-place handler. Our video camera business is focused on introducing a line of IP, megapixel and high-definition cameras with H.264 compression technology targeted at high-end security and surveillance. Finally, in our microwave communications business, we're developing new standard and high-definition transmitters and receivers that utilize H.264 video compression and IP screening technology. These products are particularly well suited for the law enforcement and government surveillance markets.

TWST: I would think there is a big market out there for all that right now.

Mr. Donahue: The security and surveillance markets are quite strong.

TWST: You mentioned the proprietary thermal technology. Where does your technology come from?

Mr. Donahue: Delta Design, our pick-and-place test handler business, was founded in 1959, initially to develop temperature chambers to test components for a defense contractor. Delta developed an expertise in environmental temperature conditioning that was needed by the semiconductor industry that was just beginning to develop in the 1960s. As that industry grew, we grew along with it, automating our temperature test chambers to enable customers to increase throughput and productivity.

TWST: You announced your second-quarter results in July. What were the highlights of the second quarter?

Mr. Donahue: Our financial results for the second quarter of fiscal 2009 exceeded our guidance by 24% and were up slightly compared to the first quarter. We also reported positive cash flow and increased orders in a business environment that remains difficult. We benefited from improved turns business in our semiconductor equipment operation, primarily spares, upgrades, device conversion kits and repairs. Gross margin increased to 33% from 20% in the first quarter as a result of higher volume, favorable product mix at BMS and the absence of charges in the second quarter for excess or obsolete inventory. BMS achieved record operating income, above 20% in the second quarter. Finally, we benefited from the cost-reduction actions that we've taken since late last year that included headcount reductions, salary cuts, furloughs, reduced work weeks and elimination of the 401k matching contribution.

TWST: Do you think the market for your sector is on its way back up, or are we still in the trough?

Mr. Donahue: No one can reliably predict when macroeconomic conditions will improve. In our semiconductor equipment business, the key to a significant recovery is higher-capacity utilization on the test floors of our customers, integrated device manufacturers and independent test subcontractors. As consumer confidence increases, we expect to see increased demand for consumer electronics, products that will drive increased semiconductor production. Equipment utilization on customer test floors has increased slowly throughout this year. Today we estimate that utilization across the semiconductor test industry is in the 70% range, and that's up from 50% to 60% earlier in the year. So the trend is in the right direction. Historically, new equipment has been purchased when utilization is in the 80%-plus range.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 103 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

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