庫力索法 (KLIC) 2023 Q2 法說會逐字稿

Hello, and welcome to the Kulicke and Soffa 2023 Second Quarter Results Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Joe Elgindy, Senior Director of Investor Relations. Please go ahead, Joe.

Welcome, everyone, to Kulicke and Soffa's Fiscal Second Quarter 2023 Conference Call. Fusen Chen, President and Chief Executive Officer; and Lester Wong, Chief Financial Officer, are both also joining today's call.

Non-GAAP financial measures referenced today should be considered in addition to, not as a substitute for or in isolation from our GAAP financial information. Complete GAAP to non-GAAP reconciliation tables are available within our recently filed earnings release as well as our earnings presentation. This information in addition to our prepared remarks for today's call are available 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 and 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 October 1, 2022, and the 8-K filed yesterday.

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

Thank you, Joe. We continue to operate in a very dynamic global environment and remain focused on expanding served market through close customer engagement, prudent acquisitions and ongoing development activities.

Macro factors such as global banking issues, inflation and the downstream inventory digestion are all contributing to a slow but still gradual rate of demand improvement over the coming quarters.

While the pace of macro-driven recovery remained greater, we see strengthening demand in our high-volume market and the broadening customer adoption and the interest of our latest advanced packaging system. At this point, our delivery schedule for higher volume system provide confidence we are past trough. We now see an uptick in core activities which supports further improvement over the coming quarters. Overall, our longer-term industry outlook remains fairly consistent and aligned with the third-party market forecast. We continue to anticipate positive semiconductor unit growth in fiscal year 2023 and a higher level of capacity and technology-related demand through fiscal year 2024.

In addition to improving level of demand, our end market opportunity -- has expanded significantly over the prior years due to more complex assembly needs, including heterogenous integration, electric vehicle and infrastructure adoption, new display innovation and broadening connected electronics and the power semiconductor needs.

As disclosed in late February, we have completed the dispense acquisition, and we welcome AJA to the K&S team. As a reminder, this new market provides access to adjacent dispense opportunity in both semiconductor and electronics assembly, collectively representing a $2 billion addressable market and providing a new set of a long-term opportunity.

Our integration priority ensure that AJA team can efficiently leverage K&S as a resource, including our flexible and efficient manufacturing capabilities, our direct sales and distribution network and our broad portfolio of system and the subsystem architectures. We have identified several target market areas for AJA, which we anticipate will ramp in later fiscal 2024.

Turning to March quarter's results. We generated $173 million of revenue and $0.38 of non-GAAP EPS, significantly above our prior expectations due to better gross margin and operating expense performance.

Our total capital equipment revenue was $133.7 million in March quarters with a similar competition across end markets as last quarter.

Within general semiconductor, we continue to see technology-related demand for IoT applications, high-performance compute and the growth in emerging applications such as artificial intelligence, and the co-packaged optics. This trend, which are occurring both in leading edge and the high-volume market, are enabling share gains and higher margin opportunities.

Regarding TCB, we generated record quarterly revenue during the March quarters in support of IDM demand for higher volume mobility production and high-performance computing. During the March quarter, we also shipped several fluxless TCB solutions and are preparing to ship our largest number of quarterly fluxless TCB system to leading OSAT, foundry and IDM customers during the June quarters.

In addition to heterogeneous, assembly complexity trend are also increasing technology-driven replacement for our feature-rich high-volume system, which will continue to enhance corporate level gross margins. We remain on track to introduce several new wire bonding systems through the first half of 2024. Over the near term, we expect customer demand to continue improving due to seasonal strength and ongoing inventory division.

Moving to LED, we are beginning to see greater improvement within lighting opportunity and remain engaged with industry leader for both backlighting and the direct-emissive applications. In addition to supporting ongoing capacity addition with PIXALUX, we are progressing LUMINEX engagement and the final qualification in support of large format, direct-emissive application and also emerging automotive display opportunities. Lastly, we are preparing to ramp production related to Project W, so that we are ready to move into higher production upon receiving the customers' next phase demand.

Within automotive and the industrial, we continue to participate in power storage and the power semiconductor growth, which support transition to electric vehicle and sustainable energy. We are currently preparing to launch our next battery bonder for higher form factor using both ultrasonic and the laser interconnect solution in addition to supporting the production ramp for customer and the commercial vehicles.

Within power storage, our base of engaged battery customers continue to grow steadily with a renewed interest from our largest EV customers. Due to safety and reliability needs, we are also beginning to see high-volume applications such as [E-Bikes,] transitioning to higher reliability ultrasonic bonding. Finally, we have also engaged in a promising new opportunities supporting the emerging eVTOL market.

Within power semiconductor, we continue to see strong ongoing demand, driven by charging and the inverter applications, which are directly supporting this industry transition. Like many other areas of semiconductor assembly, we see stronger growth in highest value and the most advanced applications such as power modules. Compound semiconductors such as Gallium nitride and Silicon carbide are accelerating this growth and are directly supported by our market-leading portfolio of wedge bonder system.

Next while memory remains sluggish near term, we are also anticipating improvement toward the end of fiscal 2023. Finally, our Aftermarket Products & Solutions segment generated $39.3 million of revenue, fairly consistent with the last quarters.

Before handing is to Lester for the financial review, I wanted to summarize a few key points. First, we are actively participating in several fundamental and the long-term transition across our served market. This transition are providing both market expansion and profitability opportunities. Next, we remain in a very strong financial position, which has allowed us to invest through this recent period of market softness.

Over the past year, we aggressively deployed resource towards organic development, internal capacity expansion, new inorganic opportunity and the return value to shareholders through a competitive dividend and an aggressive pace of open market and accelerated share repurchase.

Finally, core activity for high-volume business has recently improved, which provides additional optimism, we are past trough. This trend is anticipated to continue improving through fiscal 2023 and 2024.

Despite macro and the industry headwind, it remains a very exciting transformational time for the company as we are on the verge of several new product ramps, which can further enhance our long-term revenue composition and through-cycle profitability. I look forward to demonstrating our effort over the coming quarters.

With that said, I will now turn the call over to Lester who will discuss our financial performance and outlook. Lester?

Thank you, Fusen. My remarks today will refer to GAAP results unless noted. As Fusan mentioned, it is a very exciting time for the company as our core markets is showing clear signs of improvement, and our new technology solutions are reaching final stages of development and customer acceptance.

Additionally, our private market expansion efforts have directly contributed to a much stronger trough-to-trough performance level. Over the trailing 12 months, our net revenue has increased by nearly 40%, while operating profits increased by nearly 2x versus the similar trough period in fiscal '19. We expect our fiscal -- relative fiscal year '23 financial performance to also significantly exceed our fiscal year '19 results.

Despite this material progress, macro dynamics will largely determine the trajectory of near-term growth and we remain extremely vigilant to conduct our operations and development efforts in the most efficient and cost-effective manner. Additionally, we are actively building out our Kranji facility here in Singapore. This site increases our capital equipment production footprint by 44% in support of these meaningful new opportunities.

During the March quarter, we generated $173 million of revenue, 48.6% gross margin and $0.38 of non-GAAP EPS. Gross margins came in above our guidance midpoint at 48.6% due to product mix throughout capital equipment and Project W related accounting.

Non-GAAP operating expenses came in at $64 million below our prior expectations due to the capitalization of specific expenses associated with Project W and ongoing cost control activities. Finally, tax expense for the quarter was $5.6 million.

Turning to the balance sheet. Working capital days decreased to 517 days in the March quarter, primarily due to a sequential reduction in accounts receivable. Our repurchase program remained opportunistic and price dependent. Activity has slowed through the March quarter, and we anticipate increasing the cadence through fiscal year-end.

Looking ahead to the June quarter, we anticipate revenue of approximately $190 million, plus or minus $20 million with gross margin of 48%. Non-GAAP operating expenses are anticipated to be approximately $73 million, plus or minus 2%, due to additional R&D investment largely associated with our set of emerging opportunities as well as the inclusion of the new dispense business. We remain focused on controlling and limiting any noncritical activities have maintained our hiring freeze. Our collective cost control efforts have reduced our June quarter operating expenses by over $5 million from our original budget.

Non-GAAP net income for the June quarter is expected to be approximately $18 million of non-GAAP earnings per share of approximately $0.32. We are anticipating an additional increase in tax expense during the June quarter.

Looking into September, we currently anticipate seeing sequential revenue growth of approximately 10% over our June quarter's expectations. As we see gradual improvements in our high-volume business and participate in several long-term transitions affecting the semiconductor, advanced display, electronic assembly and automotive markets remain excited for the future.

Looking into 2024, we remain optimistic on broader macro trends and remain extremely focused to support the technology needs of our customers.

This concludes our prepared comments. Operator, please open the call for questions.

(Operator Instructions) Our first question today is coming from Tom Diffely from D.A. Davidson.

Yes. And congratulations on getting past the trough is a nice thing. Fusen, I was wondering when you talk about sequential recovery here from the trough levels, can you frame the industry or your business as far as utilization rates and where you're seeing pockets of strength?

Okay. Maybe I can make a few comments, and Lester have maybe integration information provided to you. So actually, last quarter, we are pretty burdened because of the revenue is quite low. But we do believe our second half will recover. But actually, we did not forecast the banking crisis, which actually likely will impact us spending patterns. So therefore, actually, the Q3 and Q4, actually, the growth is not as originally expect as fast, right? So at this moment, we still believe second half will be up while the growth rate maybe it was will be impacted by the banking crisis. So that's what we are seeing right now. And utilization rate?

Tom. So utilization rate is around 65%. But in pure inventory digestion, the absolute percentage of utilization rate is not as important as the trend of the utilization rate. So we've seen actually for Q1 and Q2 utilization has basically been a bit flat. And then from what we see from our customers, utilization is going up in Q3.

Okay. And then just the pockets of strength from a regional base. Are you seeing even in China, some pocket strength?

Actually, yes, we actually have robust demand actually from China. And our wedge bonder actually deal with high-power devices actually quite strong. But wedge bonder other than the EV and the automotive, we really see the strength in the power semi and wedge bonder is a record year for this year. We also see other opportunity, like I mentioned, eVTOL.

This is the electrification of a aircraft, and we're also seeing some transformation that are some low-cost welding, we call resistant welding used to make low-cost applications like EBAC are transitioning into ultrasonic welding. So this will also provide the strength for us to move forward. And I think our AP is continued to be strong, and we do believe the next year attentive spread will be very positive for us.

Okay. Great. And as a follow-up, previously, you talked about perhaps seeing the recovery or resumption of some display activity for you in the second half of the year. Is that still on track?

Yes. So let me update a little bit of our advanced display. So we actually recognized total advanced display revenue of about $240 million since we ship from PIXALUX. And the past 2 years from June '21 to March '23, actually, we recognized $160 million of advanced display. I think at this moment, the industry really needs a very disruptive high productivity for the fast-growing mini LED and micro LED mixed transfer technology.

So '23 is a transformation year for us for the advanced display business. At this moment, both our LUMINEX and W project are progressing well. So very short summary. I think LUMINEX, because it is going to be a product for many, many customers, qualification takes a little bit longer time to serve many, many requirements. But we expect a successful qualification of both big lighting and the large-format direct initial application with 3x productivity compared to a PIXALUX by September of this year, and we will win multiple customers in FY '24.

And we also project -- expect a W project will go to initial production early '24. So we are preparing for the ramping. So in addition, I think '23 is a little bit tough for everyone. It's a transformation year for us and also a very challenging year for any incremental capital expenditure. So majority of our discrete business probably we expect probably in Q4. But beyond that, I think it will be quite positive for us from here.

Next question is coming from Dave Duley from Steelhead Securities.

Yes. I have a couple. I guess, Lester in one of your slides, it talks about executing margin enhancement strategy. I guess this is for your core wire bond business. Could you just update us on how much gross margin improvement you would expect from that new product and the timing?

Yes. So Dave, I think we've been very focused on our ball bonder optimization in terms of increasing the gross margin with some of the technology changes have helped, I think Fusen mentioned for capital intensity. I think we're also doing some SiP packages, which also requires higher in count more advanced bonders, which gives us better margin.

I think we're in the process of introducing a new suite of products from -- all the way from our LED bonders, all the way up to [High Kulicke bonders] in late '23 to '24, so we believe that will help us -- the ball bonder gross margin will continue to rise.

Okay. And then just on curiosity, one of your competitors talked about introducing a thermal compression bonder on their conference call, and they historically been focused on the hybrid bonding opportunity. I guess from your perspective, do you think thermal compression bonding is a bigger opportunity than hybrid bonding? And if so, why?

Dave, so let me answer this. I think the heterogeneous integration, this is a lot of triplet process together, consist of multiple packaging technology, such as hybrid bonding, TCB and there are many technology can coexist. So at this moment, the hybrid bonding and our TCB really not necessity to be competing and in certain technology they can coexist.

So K&S solutions actually serve both fine pitch C2S and C2W process, and both of them are very sizable. And we expect our C2S is about same size as C2W. So our C2W, actually, they are 2 ways. We love hybrid bonding and I think there is still a big market. The current -- the pitch is about 35 micron and hybrid bonding actually are focused on actually below 10-micron -- probably 10 microns. So there are a lot of volume actually with TCB and hybrid bonding actually more brand and process.

In some areas, hybrid bonding and TCB can be complementary for our C2W. For example, our C2W TCB is capable to place a hybrid bonding bond in our bonding type actually on silicon interposer. So your question is, is the TCB, the market size can be bigger? We tend to agree. But of course, we are not the major player yet for hybrid bonding, but it's capable of technology and some customers actually starting to use production. So Dave, I wish you to answer all your questions?

Yes. And then just as a follow-on, I think you mentioned you had record revenue in this area. So maybe give us an expectation for now that you've started to ramp this product, what kind of revenue levels you can reach on an annual basis at any of time in the future here annual target?

So I think last time Christopher asked it, but I can give you a little bit color. So this quarter, our dedicated AP -- dedicated, we have 80 premium is wafer-level bonding and plus SiP, active, passive altogether SiP plus TCB. So this quarter, Q2 total dedicated revenue is $33.7 million. And this $33.7 million, the TCB alone is about $20 million, right? So that's for the Q2.

And for the Q3, I think we say we are going to expect to shift numerous fluxless and the momentum will continue. So at this moment, our TCB actually customers, including IDM, OSAT and foundry. I think on last quarter, when we did our guidance this year our TCB alone will be over $68 million. And I think last quarter, we guide in the next year will be sequentially higher. So maybe a later part of this year, maybe another one or 2 quarters, we have a more concrete number. We can guide the TCB for the next year. For this year, I think we expect $68 million.

Next question is coming from Krish Sankar from Cowen & Company.

Thanks for the color on the June and September guidance. I'm just kind of curious, when I look at it, 6 months before, we thought FY '23 would be about $900 million. Last quarter, you said it will be about $840 million. Now it looks like more like $750 million. So I'm just -- I understand that we are probably at the trough, but it looks like the recovery seems to be more gradual. So I'm kind of curious, a, number one, what is the reason for a slow recovery versus 3 months ago besides the banking crisis. Number two, what gives you the confidence that we might not be stagnating at these levels for a longer time?

Okay. Krish, I think we was expecting faster recovery. Unfortunately, I think not only us the industry and also some of our peer group also see the same phenomenon. So maybe there are 2 things. I think majority impact to us, actually, we are seeing a high-volume business, particularly ball bonder. We always expect will actually grow faster. But actually, the quotation activities get increasing very, very dramatically, but come to scheduling, we see in our Q3, Q4 also are seeing some push out. And we are hoping if our third-party forecasts are right, this year, I think unit growth is about 3%, and market right now is a forecast about 10%.

So if you ask me, I think the -- maybe the inventory is not fully depleting yet. And also the banking crisis probably caused consumer confidence and spending -- impact their spending pattern. This is up to, I can think of. But we do believe '24 will be a better year for everyone.

Got it. Got it. Fair enough. And then a quick question. Can you guys say what your backlog or book-to-bill was?

Yes. So our backlog is right now, as -- I think we've discussed it before, Krish. Backlog for us, we define it as POs with delivery dates. So that's about $500 million right now. But if you add the POs without delivery date, that's another $250 million. So that's basically where our backlog stands. And backlog is pretty healthy. That's also on the reason we think the recovery is -- we are past trough and we're going towards recovery.

(Operator Instructions) Our next question is coming from Charles Shi from Needham & Company.

I think your guidance for June and September looks very encouraging. You're seeing sequential growth for 2 consecutive quarters of the trough in March, and that's certainly encouraging. Just wonder can you help me reconcile a little bit what your 2 other competitors are seeing versus what you're seeing? The 2 other competitors of yours, they are seeing the calendar second half possibly slightly lower than the calendar first half. I know you're only guiding to your fiscal year end, which ends in September. But I think can you kind of help us understand given that where your September numbers are it's looks like your calendar second half probably is flat to up relative to the calendar first half. Can you help us reconcile what's the difference here between what you're seeing and what your competitors are seeing? Sorry. Yes. .

Yes. So I think I look at the competitor we have 2 of them. I -- only the [member of number], I would not be this person to come and compete this financial performance. If you'd like to make a comment, we welcome your comments. Yes.

And also, Charles, I think -- I mean, we've already indicated that we see our order book going up, backlog going up. And also we're involved in a couple of, I guess, vectors where there is a strong recovery, right? AP, automotive, electric vehicles that Fusen mentioned earlier as well as power management. So again, I mean, they see what they see. We see what we see, right? And as we indicated, we believe that the second half will be stronger than the first half.

Right. So -- and Charles, I think sometimes compare same quarter with a different company might not be a best one. For example, in '21, '22, I think we go up to $1.5 billion. In one quarter, I remember, it's almost $500 million. So pick up a quarter to make a comparison. I don't know it's the best comparison. I think just for K&S, we want to make sure in this difficult environment, we ramp up our future products and we watch our spending. And we respect -- as you know we have a good competitor, and we respect them. But for the quarter-to-quarter comparison, actually, I actually don't have accurate number. So if you were to make a comment, we work...

Yes. No problems. So maybe another question on backlog and book-to-bill. Your backlog has been kind of covering probably 3-plus quarters of the revenue for a while. It looks like some of the movement within the backlog is a little bit stagnant. When do you expect the backlog to return to more normal range in terms of how much it covers the quarterly revenue? Maybe -- I remember, maybe it's somewhere between one to 2 quarters will be the more normalized backlog level? And when do you expect that to happen?

So Charles, I mean -- thanks for the question. I mean the backlog obviously spiked tremendously during the ramp, right, due to supply chain issues and long lead times. So it's been coming down. We continue to expect it to come down. As far as when backlog will match exactly to 2 quarters, I mean, that -- historically, that has been true for some -- in some quarters. But I think actually, for us, also the way we define backlog. I think the backlog continue to go down, but it's difficult for us to say when it will match 2 quarters of backlog going forward.

Yes. And what's the book-to-bill ratio you're seeing in March quarter? Certainly, I understand that you are seeing increased quote activities. But what's the actual book-to-bill in March quarter?

It's less than one.

Do you expect that book-to-bill to come back up above one maybe in June? Just trying to understand the ordering trend here.

Well, so, I think, again, as I indicated before, it fluctuates quite a lot. I would not say we expect it to go above one in June. I think over the next couple of quarters move up and down. I mean, historically, it's been around -- last couple of quarters is an around [0.81] .

Got it. And -- yes, yes. Go ahead, Fusen.

Go ahead. Go ahead.

Go ahead. Charles?

Yes. No, no, I just want to say good to hear you guys are passing the trough, but (inaudible) if you have a comment, please make it.

So Charles, I'll give you an example. I think we start to see core activity increase. But actually, some of the bigger customers, we start to engage. They give you indication of a period of time, for example, maybe like beginning of '24. There is no definite day. So even though we get the PO, actually, we didn't put that into our [big lock]. Like you know what I mean, right? So even we get a PO on this it's definitely we put this as a big lock . That's what we're talking about. .

But let me repeat again, we do actually get in (inaudible) much, much often. And I think last quarter, we started to see actually a smaller one and they probably need to have much, much less number. But right now, I think we are actually working with a few actually midsize. So we do believe, I think it will recover will happen on the way. Of course, unless something happens, it's going to impact.

Next question today is coming from Tyler Burmeister from Craig-Hallum.

A couple of questions here. So first, maybe a little bit of a clarification and if you could expand your assumption for semi unit growth, I think you said this year is up maybe 3%, if that's correct. And any update on where you guys kind of see that going next year?

Okay. I think this year, of course, the semiconductor revenue is going down, but the number, if I remember correct, unit number still up a little bit. But even though like some devices, the price is down a lot. That's why I think semiconductor revenue go down, right? So I think this year it's above maybe slightly above 0 next year. If a third party altogether, we feel like it will be between 8% to 10% versus the number we are we are getting.

All right. Perfect. And then last quarter, I guess, just a little update on -- from last quarter, you guys highlighted advanced packaging some inroads you're making, I believe, with the large foundry setting yourself up for some potential market gain shares down the road. Any comment or update on progression there and how that's tracking?

Well, We don't talk specific customer, but we do believe we have a differentiated too. And the engagement we have a numerous customer and also in a different area, like we have IDM, we have OSAT, we have a foundry. I think we probably will report the progress, but the engagement with foundry is probably a little bit later than IDM. So -- but I think as we go on, we will give you more color. But the progress, actually, we are quite happy at this moment.

We reach the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Thank you, Kevin, and thank you all for joining today's call. Over the coming months, we will be presenting at several investor conferences. As always, please feel free to follow up directly with any additional questions. This concludes today's call. Have a great day. .

Thank you. You may now disconnect and have a wonderful day. We thank you for your participation today.