High-Tech: Stock Drifts
Downward, But Company
Still Called a ‘Strong Buy’
Jim Donahue is happy about reaching the top, but aware of the realities of the business world.
As one of his close friends told him after he was named CEO of Cohu Inc. last month, “Now you only have one way to go.”
After 22 years with Cohu, the San Diego-based manufacturer of semiconductor test handling equipment, Donahue, 51, was named CEO last month. He replaces Chuck Schwan, 61, who resigned after leading the company for four years. Schwan, who retired on his own, retains his title as chairman of the board.
If Donahue is feeling more pressure these days, there’s good reason. He has been with Cohu since 1978, and president of its largest subsidiary, Delta Design, for the past 17 years. In October, he was named Cohu’s president and chief operating officer in a move that signaled his apparent succession to the top position once Schwan left.
The additional title won’t alter Donahue’s job all that much and comes at an opportune time. The firm enjoyed its best year ever, reporting record annual profits, record first quarter results, and a record in new orders and backlog of new business.
Cohu, like some of its biggest customers , Motorola, Texas Instruments, Intel , is riding the wave of the high-tech boom. The firm’s main product is the specialized machines that automate the testing of integrated circuits, or chips.
Earnings
Last year, Cohu earned nearly $26 million on sales of $208.8 million, nearly double its profit of $11.6 million on sales of $144 million in 1998. In its first quarter, profits increased sevenfold to $9.9 million on sales of $72.5 million, compared to profits of $1.3 million on sales of $29.5 million in last year’s first quarter.
“Every integrated circuit and chip that’s made has to be tested,” said Theodore O’Neill, an analyst for Needham & Co. in New York. “The more chips that are made, the more test handling equipment is necessary. There’s a one-to-one relationship.”
The growth spurt last year caused Cohu to add some 400 workers, bringing its total employee count to about 1,300 worldwide, including about 1,000 in San Diego. It operates a smaller plant in Littleton, Mass., outside of Boston that employs about 200.
Despite its long history (it was founded in the late 1940s) and recent success, Cohu remains something of a mystery locally. It may be attributed in part to its complex product, but part of it is the firm’s conservative management, which keeps a low profile.
Donahue said the firm probably should do a better job in telling its story if for no other reason than to attract top talent. Cohu, as with many other high-tech firms, is constantly looking for electrical, mechanical and software engineers.
Testing
As for Cohu’s largest product line, the outlook is rosy. Sales of cell phones, PCs, and wireless devices are expected to increase in the coming years. All of the products use semiconductors, which require testing.
Cohu’s equipment doesn’t conduct the actual tests but handles the chips, placing them in precisely controlled temperature environments to verify the chip performance under extreme conditions. The equipment varies in price but an average test handler is about $250,000, Donahue said.
Cohu’s Delta Design makes the test handling equipment that accounted for 84 percent of its sales last year. The subsidiary has about 100 customers in about 150 plants around the world with two-thirds of the equipment used in places like Singapore, Malaysia, the Philippines, Hong Kong and Taiwan.
Cohu has three other business units, including a closed-circuit camera division that’s been around for about 40 years, and generated $21 million, or 10 percent of the total last year.
Donahue, a native of Rutland, Vt., started his professional career as an accountant and joined Delta Design, one of his clients, in 1978 as a controller. Five years later, he was named president of Delta, then a much smaller division within Cohu.
“For me, the biggest challenge has been moving from a small company that had only about $4 million in sales, and where everyone knew everyone else on a first-name basis to a company that has about 1,000 employees, and making sure we are building the infrastructure to accommodate that type of growth,” he said.
An adjustment Donahue is still making is the interaction with the financial community concerning the company’s operations. “Analysts and investors can be a tough audience,” he said.
As to the stock, it’s about half the price of the 52-week high of about $61, but so is practically every other tech stock these days, said O’Neill, who tabbed the stock as a “strong buy.”
Donahue said he received a raise for the promotion that officially takes effect June 30, but declined to reveal it. He earned $546,000 in salary and bonuses last year.
