Kulicke and Soffa Industries Inc

NASDAQ:KLIC

Earnings Call Transcript 2019-Q3

[Operator]

Greetings and welcome to the Kulicke & Soffa Second Quarter Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Elgindy, Senior Director of Investor Relations and Strategic Initiatives for Kulicke & Soffa. Thank you, Mr. Elgindy you may begin.

[Joseph Elgindy, Director, IR & Strategic Planning]

Thank you.

Welcome everyone, to Kulicke & Soffa’s Third Quarter fiscal 2019 conference call. Joining us on the call today are Fusen Chen, President and Chief Executive Officer and Lester Wong, Chief Financial Officer and General Counsel. For those of you who have not received a copy of today’s results, the release, as well as the latest investor presentation, are both available in the Investor Relations section of our website at investor.kns.com.

In addition to historical statements, today's remarks will contain statements relating to future events and our future results. These statements are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and financial condition may differ materially from what is indicated in those forward-looking statements.

For a complete discussion of the risks associated with Kulicke & Soffa, that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10-K for the year ended September 29, 2018.

I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead Fusen.

[Fusen Chen, President, CEO & Director]

Thank you Joe.

Throughout these unique industry conditions, we continue to generate profits, invest towards our organic development programs, reduce our shares outstanding and drive market acceptance of several new offerings.

Several of our end markets continue to be generally soft, with limited capital spending visibility partially due to the current macro environment. Despite this limited near-term visibility, we are confident in gradually improving demand and also our longer-term market drivers and product opportunities into fiscal 2020.

We reported earlier today that we had shipped several PIXALUX systems to multiple locations in the June Quarter and expect additional shipments in the current September quarter. The shipment of these tools, ongoing customer interest, and additional planned shipments further increases our confidence that PIXALUX will help accelerate market adoption of mini and microLED technology.

As many of you are aware, this is not our only high potential, market expanding opportunity – APAMA, our thermo-compression tool, is very competitive and in production for a premium-logic application, separately, Katalyst our high-accuracy, flip-chip tool was recently shown at Semicon West and continues to generate significant customer interest for leading edge-memory and logic applications. I’ll provide a more detailed update to our growth initiatives after the financial review.

For the June quarter we recognized revenue of 127.1 million dollars, an increase of nearly 10 percent sequentially, driven by an increase in demand from our OSAT customers with exposure to general semiconductor; and also an increase in demand for our LED products. Softness continued in Automotive, Memory and for Advanced Packaging products.

Capital Equipment sales increased by 11.5 percent sequentially, to 89.9 million, driven by a strong increase in Ball Bonding and partially offset by decreases in Wedge Bonding and our EA businesses.

Sequentially, revenue increased by 65 percent in ball bonding, driven by increased demand from our OSAT and LED customers – a significant change over the March quarter. This helps to highlight the diversity of our business, but also implies improving underlying market conditions due to our relatively short-lead times for ball bonding.

Our aftermarket products and services segment, APS, displayed similar characteristics and sales increased 5.4 percent sequentially to 37.2 million dollars. This change was driven primarily by an increase in ball bonding.

Considering the broader macro-driven uncertainty, our global organization continues to be focused on cost control while also prioritizing ongoing business development and efforts to drive fundamental business optimization.

Stronger ball bonding demand, increased consumables sales, improved customer sentiment and ongoing improvements to our outlook, increases confidence that the industry is showing signs of improvement. As we look ahead, we remain focused on market adoption of our new tools and continue to be operationally prepared for demand improvements.

I would now like to turn the call over to Lester Wong who will cover this quarter’s financial overview in greater detail, Lester?

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

Thank you, Fusen. My remarks today will refer to GAAP results, unless noted.

Net revenue for the quarter was 127.1 million dollars, gross margins of 46.2 percent generated 58.8 million dollars of gross profit. We anticipate gross margins to be approximately 45 percent in the September Qtr.

We continue to benefit from the flexibility of our manufacturing operations and continued to drive SG&A efficiencies through the June quarter. We are all very focused on limiting controllable and discretionary costs and driving workforce efficiency. As mentioned on our last earnings call, this cost containment exercise is extremely selective and we do not intend to jeopardize our long-term growth initiatives.

Compared to the June quarter, one year ago, our global workforce has been reduced by over 12 percent, while we are maintaining an elevated level of R&D investments.

In the long-term, we plan on maintaining our existing operating expense target of 53 million of fixed quarterly expense plus 5 to 7 percent of variable quarterly expense, tied to revenue. Due to our aggressive focus on controllable and discretionary spending in the near-term, we are targeting to again achieve the lower range of our variable expense component in the current, September quarter.

Turning to tax, we booked a net tax expense of 3.9 million dollars, resulting in a rate above our long-term effective tax rate target of 15 percent, as mentioned on last quarter’s call. The higher June quarter tax rate is due to the dynamics of our business in a lower demand period. Specifically, our jurisdictional income mix, and valuation allowances on certain deferred tax assets impact our effective tax rate more significantly during lower demand periods. Going forward, we have raised our long-term effective tax rate target to approximately 18 percent. Looking into the September Quarter, we are anticipating the absolute tax expense, excluding discrete items, to be around 2.5 million.

Turning to the balance sheet, we ended the June quarter with a total net cash and investments position of 572 million dollars, or 8 dollars and 75 cents on a diluted share basis.

As a reminder we have begun to draw down from our overdraft facility during the March Quarter. At the end of the June Quarter we have drawn down 71.2 million, to support US cash needs including the repurchase program.

During the June quarter, we have again increased our repurchase activity, and deployed 33.2 million dollars to repurchase 1.5 million shares. At the end of our June quarter we had approximately 112.1 million dollars remaining under the existing share repurchase authorization.

Cumulatively, from our initial program inception, through the June Quarter, we have repurchased 16.6 million shares outstanding, for a total value of 287.9 million dollars.

Our overall repurchase activity has accelerated in coordination with our organic development progress over the past 2 years. While we began our initial repurchase program nearly 5 years ago, 68 percent of the total value was deployed in the past 2 years, with approximately 30 percent deployed in the past 9 months.

On a book value per share basis, we closed the June quarter with 12 dollars and 3 cents, a decrease of 46 cents from the March Quarter, due primarily towards our ongoing repurchase activity.

Working capital, defined as accounts receivable plus inventory, less accounts payable, was effectively flat at 207 million dollars, down 1 million dollars sequentially.

From a DSO perspective, our days sales outstanding decreased from 108 days to 107 days. Our days sales of inventory decreased from 153 days to 129 days and days of accounts payable increased from 50 days to 56 days.

This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the September quarter’s business outlook.

[Fusen Chen, President, CEO & Director]

Thanks Lester.

While we continue to operate in a very dynamic macro environment that is difficult to predict, we remain cautiously optimistic considering recent demand improvements at our global OSATs. Additionally we are also uniquely positioned to create meaningful value through our market expansion efforts in advanced packaging and next-generation LED opportunities.

As mentioned in today’s press release, we believe the soft demand environment is gradually improving and we expect revenue to be approximately 130 million to 150 million dollars, representing a 10 percent sequential improvement.

We remain extremely focused on several of our development initiatives and our ongoing efforts to drive market and customer adoption of our newly introduced advanced packaging, mini and microLED systems. These ongoing development efforts provide an opportunity to emerge this period of softness a much stronger and higher-growth organization.

A few weeks ago we participated in the Semicon West trade show, where advanced packaging techniques and approaches were highlighted by several leading logic and foundry companies. This focus on advanced packaging highlights our long-term view that new packaging approaches provide alternatives to node shrink by delivering power efficiency, performance and form-factor benefits for next-generation devices.

We are well positioned to directly participate in this transition through our competitive and comprehensive advanced packaging offerings. Over the coming years, we anticipate meaningful leverage in our operating model as our served market expands through share gains in these new businesses.

During Semicon, we exhibited our Katalyst high-accuracy flip-chip tool to the broad market. Due to its unique architecture, throughput and accuracy, we are pleased with the competitiveness of this tool. Our rapid development approach facilitated by our R&D organization, has allowed us to develop and introduce this tool in just over 1 year. The Katalyst system provides increased placement accuracy and dramatically enhances throughput for next generation, high density flip-chip devices.

Today, flip-chip equipment is the 2nd largest interconnect market behind wire bonding with a total available market size of approximately 250 million dollars. Over the coming years we anticipate new forms of advanced packaging, such as high-accuracy flip chip, thermo-compression and fan out wafer level packaging to displace traditional flip chip tools, a market we do not participate significantly in. For K&S, this anticipated transition will enhance our share of leading edge logic and memory applications.

Also as mentioned last quarter, APAMA, our thermo-compression system continues to perform well and remains very competitive verses alternative systems, at a leading OSAT for a high-volume logic application.

Separately, we shipped our first evaluation of the Liteq 500 lithography system during the June Quarter. This system has been installed successfully and on schedule. We have received positive feedback on the systems ease of use and are targeting to ship a second evaluation tool, to a separate customer early in calendar year 2020.

Finally, in just over a year, we engaged with a technology partner and subsequently developed, shipped and recognized revenue for our mini and microLED tool – Pixalux.

This tool sets a new benchmark for high-speed placement and operates up to 5 times faster than competing pick and place solutions. Considering these capabilities, our recent sales, and end-customer interest, we expect this tool will enable cost effective and high-volume production of mini and microLED devices in the near-future.

Over the coming year we anticipate new forms of backlighting to drive initial adoption of the Pixalux tool, and longer-term, direct-view LED displays are also a high-potential end application for this tool. While we are focused on mini and microLED usage for high-resolution displays, there is also meaningful potential for lighting and general informational displays within automotive and consumer electronics.

As of today, we have shipped a total of 7 systems, several of which we have already recognized revenue. We continue to operationally prepare for an initial production ramp.

We are confident that our current and new technology solutions are extremely aligned with significant long-term trends in Advanced Packaging, Automotive, IoT and Display markets.

In addition to our new system revenue contributions, which are anticipated to deliver meaningful operating leverage benefits over the longer-term, we also continue to anticipate a more near-term and gradual demand recovery in our core businesses as seasonal dynamics including the smartphone cycle, followed by the US and Asia holiday seasons drive capacity digestions and incremental capacity demands into fiscal 2020. Our strong balance sheet, expanding portfolio, dominant market positions, ongoing repurchase activity, and high-potential customer engagements provide us with increasing confidence that we’ll exit this soft-demand environment with enhanced fundamental strength and growth prospects.

This concludes our prepared remarks. Operator, we will now be happy to take questions.

Question-and-Answer Session

[Operator]

[Operator Instructions]. Our first question comes from the line of Christian Schwab with Craig-Hallum.

[Christian Schwab, Craig-Hallum Capital Group]

Last quarter, Fusen, you talked accurately that you kind of felt that the March quarter would be the trough for your business, but the time into the magnitude, recovery and the growth from there would be somewhat difficult to predict. But it seems like we've got a couple of quarters here going in the right direction. With that in mind, have you guys given any updated thoughts to what your long-term target model is and the time frame to get there and potentially the trajectory of that recovery?

[Fusen Chen, President, CEO & Director]

Okay. Thank you for the question, Christian. So we discussed this question few times. Let me answer in a different way this times. So our 2018 revenue was about $900 million, actually it's at $890 million, and we generate $170 million profit. So our 2021 model did not consider 2019 downturn and was purely based on a 10% annual gross from 2018. And the [indiscernible] growth actual assumption come from semi unit growth and another half actually will come from a new product introduction, plus our APS growth. So with that formula, we'll come to $1.2 billion target for 2021 revenue.

So at this moment, as you mentioned, I think we guide March was our trough, and I believe we are at a beginning of a recovering phase -- recovery phase. So that's 2 reasonable assumption in our -- assume in 2021. Our industry can reach full recovery. So it means the same products we have in 2018 can contribute same revenue into 2021. So I mean is $900 million. And plus, the contribution from the new product development we introduced and -- or is going to introduce or introducing, including PIXALUX, the flip chip TCB and the APS, which, I believe, can generate additional $100 million to $200 million revenue into 2021.

So I think our '21 model will likely be delay 12 to 18 months due to 2019 downturn. This including the memory downturn and also the trade dispute between the 2 countries. But regardless, with our new product introduction, accompanying with our current stock repurchase plan, we believe we will create a very good shareholder value -- at least our shareholder into 2021. So that will be my answer to your questions.

[Christian Schwab, Craig-Hallum Capital Group]

Fabulous. Of the new products, which one in particular are you most excited about? If we're in 2021, and we do $200 million in revenue, which product is the one most likely of your new product introductions that we should be keeping the closest eye on?

[Fusen Chen, President, CEO & Director]

Okay. So I think in short summary, we believe there are 2 area. One is advanced packaging and one is mini and microLED. The LED market is a huge market and when people ask if [indiscernible] create green energy, actually people try to sell energy. So LED is a big market and the next phase is going to be mini and microLED. The bottleneck actually located at how to transfer this small die, right? So I believe all PIXALUX and -- has a very ultra high speed and the transfer rate is about 4x to 5x compared to the combination of pick and place solution. So that's the one, I think, we have a good hope.

The second one actually lie into advanced packaging, this included the flip chip we introduced, and we are very satisfied with the performance we have by engaging with a few customer at this moment. And also, TCB is in transition to I call TCB 2, which is capable to handle bigger die in our up to 7-centimeter and different cloud interface content. So also including our APS, I think we see a lot of improvement in our APS engagement with our customers. So there are areas, I mean, let me give you a summary. I think this additional $100 million to $200 million of revenue I just mentioned will come from Mini-LED, microLED and also our advanced packaging, including flip chip, including a new TCB engagement with customer and also our APS growth.

[Operator]

Our next question comes from the line of Craig Ellis with B. Riley.

[Craig Ellis, B. Riley FBR, Inc.]

I'll start with a clarification. So another quarter of very strong gross margin performance at 46% plus. So what I was hoping to do is just have you guys reflected a little bit on some of the trends that are driving that because given the volumes, I wouldn't normally expect gross margins coming back, I think, in such a healthy fashion.

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

Craig, so I think, as you know, our gross margin is highly contingent on product mix. So in the quarter, the margin went down a little bit because we filled more ball bonders, like more LED bonders versus wedge bonder and our APMR equipment, our pick and place equipment. I think as we go into the September quarter, our fourth quarter, we guided around 45%, we believe that the ball bonder and LED will continue to recover. I think the wedge bonder is a little soft because of automotive, but I think going into 2020, I think we're confident it will recover.

[Craig Ellis, B. Riley FBR, Inc.]

That's helpful. And Fusen, I just want to follow up on some of your PIXALUX commentary. Nice to see some traction in the marketplace in June and September. The question is I think the company believes that, that business could be one that adds 5% to revenues. And next year, maybe double that in two years' time. How should we think about the path between some initial engagements and shipments now versus much more material levels? Do you envision that being fairly linear or are there things related to be engagements that you're having with customers that [indiscernible] either of you for a more front-end or a more back-end-boded ramp?

[Fusen Chen, President, CEO & Director]

Okay. So I think as of this moment, we have shipped seven systems and recognized most of our revenue, and we expect our next two quarters, we will have additional appeal and deliver to customers and also recognize revenue. These are system, 7 plus next few ramp is going to be a system looking customer site doing qualification. So we don't expect this going to be linear until next production from the customer side upon qualification. But upon qualification, we do expect next year can contribute meaningful revenue to us. What we mean is probably in the mid-to high single digit of our revenue, if this qualification will be successful. And that would be the total calendar year revenue because we probably cannot precisely predict which months is going to be high volume production started like. So that would be my answer. I don't know if I satisfy your questions.

[Craig Ellis, B. Riley FBR, Inc.]

Yes, that's helpful. And then, lastly, just wanted to go back to some of your higher level commentary. That you were a little bit more confident in a general improvement in demand and you mentioned some things that you were seeing on the OSAT side. I was hoping you could elaborate a little bit further on what you're seeing and whether some of the confidence either comes from customer interactions or other things you've seen and are there any concerns that you've seen. And are there any concerns that you've seen and incremental negatives that we need to bear in mind as we look forward at potentially coming off a cyclical bottom up from the March quarter through your guidance in the September quarter?

[Fusen Chen, President, CEO & Director]

Okay. So Craig, let me answer this way. I think every year is about 2 trillion semiconductor devices finish the process, and they need to do a packaging. The majority -- what I mean majority is about 80% and which I don't see going to be dramatically change next -- for the next couple of years. 75% to 80% use ball bonder. So during any optimal downturn, I think that ball bonder is a leading indicator. So if you recall our 2018 Q3 revenue was very high, I remember this was $270 million. And that actually -- we suffer this downturn, including trade tension between U.S. and China and also memory downturn. Actually I think we declined pretty fast. So in March quarter, actually, we believe we reached to a trough. And we just deliver June quarter 10% sequential growth, and we are guiding September quarter will be another 10% increase. And we will work hard and hoping maybe December quarter will also show a sequential growth, although is too early to say. So what we are feeling right now by engaging with customer, hopefully after Chinese New Year 2020, we can see more significant growth if macro environment don't deteriorate anymore, right? So that's what have seen as of this moment.

[Operator]

Our next question comes from the line of Krish Sankar with Cowen and Co.

[Krish Sankar, Cowen and Company]

I have a couple of them. Number one is on the PIXALUX product for the mini, microLED. If it's something like mid-single percentage of revenues, I'm just trying to figure out the math. Are we talking about like shipment of maybe like 60 or so PIXALUX tools? Is that in the ballpark or?

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

Chris, it's Lester. 60 or 70 PIXALUX tools ship when? I'm sorry -- I'm not clear on the question.

[Krish Sankar, Cowen and Company]

In calendar '20.

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

I would say it would be north of that.

[Krish Sankar, Cowen and Company]

North of that, got it. All right. Fair enough. And then how much was advanced packaging as a percentage of revenues in June?

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

So same question. I think now we -- everyone defines advanced packing differently. We include advanced memory in our advanced packaging. Historically, we've been around 20%, but due to the memory downturn, I would say, for the quarter, we are probably around 12% to 13%.

[Krish Sankar, Cowen and Company]

Got it, got it. Okay. Okay. All right. And then just some other question on your sales into China. How much was that?

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

Around 52%.

[Krish Sankar, Cowen and Company]

And this includes everything across all products?

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

Across all products.

[Krish Sankar, Cowen and Company]

Got it, got it. All right. Fair enough. And then a final question. Like, Fusen, you kind of like mention how -- I mean, it's nice to see that you guys have passed the cyclical bottom and hopefully, probably grow in December quarter also sequentially. And I'm just trying to understand like that is not a normal seasonality for you, right? But is it because that you're going through coming off a downturn that we should not think about traditional seasonality?

[Fusen Chen, President, CEO & Director]

So actually, Krish, I think since [indiscernible]. But if you look at the fuels, fuel has some excess capacity, right? So first step is to digest [indiscernible] excess capacity and that's why I mentioned, this is our strategy if you can digest some evaluation. Then hopefully start from next year, February, after Chinese New Year, we can have more significant growth for the whole industry, not only the mutual K&S. And of course, our whole December quarters is still little bit early for us to predict, but I think we will work hard to see if we can show the growth in the December quarters. And our [indiscernible] still have hope. Is it because of a -- we believe I think [indiscernible] and I think a lot of people they don't buy and they have a chance as yet to buy it in December quarters. Early to say, but I think we will work hard on that.

[Operator]

[Operator Instructions]. Our next question comes from the line of Tom Diffely with D.A. Davidson.

[Thomas Diffely, D.A. Davidson & Co.]

Question on the PIXALUX tool. It sounds like some nice momentum there. I was wondering is that with multiple customers at this point?

[Fusen Chen, President, CEO & Director]

Yes, actually, Tom, I think we do have multiple customers. Actually we work together our partner Rohinni to decide our customer bases, and as they have end customer network being consumer electronics, auto and display industry. So at this moment, we actually are engaging with multiple customers.

[Thomas Diffely, D.A. Davidson & Co.]

Okay. And we talked in the past about how this fills the Mini-LED market. Is it the same tool that does microLED as well?

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

It's the same tool for micro.

[Fusen Chen, President, CEO & Director]

Oh, yes. It's the same tool as...

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

So, Tom, it's Lester. So I think the PIXALUX is very well-suited for mini-LED. As Fusen says, it's the fastest tool on the market, 4x to 5x faster than the current pick and place machine. So Mini-LED, we believe that even the higher speed is needed, and I think we are already working on what we call basically PIXALUX 2, the next generation of Mini and microLED, which will -- it will not be the same tool, but it will be based on same platform, and we will build on the tool that we have now and to the experience we have for Mini-LED.

[Fusen Chen, President, CEO & Director]

So Tom, I think I got your question right now. We do believe Mini-LED and microLED will have a huge growth opportunity for the next couple of years, and we are quite confident that the PIXALUX provide the current need for the industry for initial mini and microLED adoption. Although we still believe our next couple of years, the pricing of our LED energy our performance of LED so as the next transfer rate speed need to be increased. And of course, we are working on that to give at least our partners to -- for the futures.

[Thomas Diffely, D.A. Davidson & Co.]

Yes, all right. That makes sense. And then looking at the Katalyst, you said the flip chip market is about $215 million right now. What is the size of the high-density flip chip market? Is that just a small segment of that?

[Fusen Chen, President, CEO & Director]

So we think maybe high density, high accuracy, we say maybe half of the market. That would be our guess, yes.

[Thomas Diffely, D.A. Davidson & Co.]

Okay. And then finally, what are the current utilization rates you're seeing out in the field that -- it sounds you're a little more confident of a little less seasonality at the end of this year.

[Lester Wong, SVP, Legal Affairs, General Counsel & CFO]

Well, Tom, as you know, utilization rate is not uniform across all customers, all regions, right? And so there's patches are doing better than others. I think earlier in the quarter, we were seeing it move. As we indicated in our last earnings call, we've seen it moving to its mid-70s. However, with the trade tensions and some of the events in May, I think we see a little bit more chop and, obviously, today's announcement probably will not help. So I think it's going to be a little bit choppy in terms of utilization rate across.

[Operator]

There are no further questions in queue at this time. I would like to turn the floor back over to Joseph Elgindy for closing comments.

[Joseph Elgindy, Director, IR & Strategic Planning]

Thank you, Rhea. Before closing, we wanted to inform investors that we will be participating in several upcoming conferences and roadshows through the September quarter, including Jefferies in Chicago, D.A. Davidson in New York City and also several non-deal roadshows. Thank you all for the time today. As always, please feel free to call up directly with any additional questions. Rhea, this concludes our call. Good day.

[Operator]

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.