庫力索法 (KLIC) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Kulicke & Soffa first quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS.)

It is now my pleasure to introduce your host, Mr. Michael Scheaffer, Director of Investor Relations.

Thank you, Megan. Good morning, everyone, and welcome to Kulicke & Soffa’s conference call for the first quarter 2005 results. An audio recording will be made of the entire conference call, including any questions or comments that participants may contribute. The audio recording will be available on the Internet for a limited time and may be accessed from the Kulicke & Soffa Web site at www.KNS.com.

The content of this conference call is owned by Kulicke & Soffa Industries and is protected by US copyright law and international treaties. You may not make any recordings or other copies of this conference call. You may not reproduce, distribute, adapt, transmit, publicly display, or publicly perform the content of this conference call in whole or in part without the written permission of K&S.

Today's remarks are governed by the Safe Harbor provisions of the 1995 Private Securities Litigation Reform Act. Actual results may turn out significantly better or worse than indicated by any forward-looking statements that we may make this morning. For a more complete discussion of the risks associated with the operations of Kulicke & Soffa, please refer to the Company's SEC filings, especially our 10K, for the year ended September 30, 2004, and our most recent 8-K.

And now it's my pleasure to introduce the host for today's call, Scott Kulicke, CEO and Chairman of the Board. Scott?

Thank you, Michael, and good morning. Our letters to our shareholders this year was organized around the twin themes of technology leadership and cost containment. My comments today will reflect those two priorities.

Cost management has become a constant within K&S, since it’s a necessary tactic if we are to achieve our goal of profitability over the whole semiconductor cycle. Our efforts are necessarily spread over a broad array of projects, no one of which would necessarily get your attention. However, the cumulative effect of this work is striking. The last time K&S’s revenue was in this range, in the third quarter of fiscal 2003, we had losses of $11.4 million on $123 million of sales, and negative cash flow of $4.6 million.

Compared to this baseline, last quarter’s loss of $7.2 million on $116 million of sales, and positive cash flow of $15.1 million, demonstrates how effective we’ve been. And we’re not done. Current projects including moving back office operations to Malaysia, the ongoing shift of probe card manufacturing from San Jose to China, and we recently announced closure of our probe card shop in China and Scotland. That volume is also moving to China. These activities and ones that will inevitably follow will continue to push our cost base even lower.

But cost cutting by itself doesn’t drive success, hence the other part of equation, leading edge products. We intend to enter the next upturn with a suite of new products in every one of our major product lines. Of the projects I’m prepared to talk about publicly, the Maxum Ultra, our next ball bonder, will have the most near-term impact. This machine is scheduled to launch this spring, and is intended to extend K&S’s wire bond leadership position by lowering our customers’ cost of ownership while increasing process control. We’re building Maxum Ultra Beta machines now.

Also of note are our next generation probe Card efforts, geared towards both memory and area array applications. While both projects are running a little behind the schedule we outlined last time we spoke, the issues involved are ones of process and maturity, not feasibility. We’re embarrassed by the schedule switch, but we remain confident of our successfully launching these two new products in 2005.

We also have new cap-lowering wire products in our development pipeline. Of course, all this costs a lot of money, and given that we’re at the bottom of the semiconductor cycle, we’re supporting a hefty R&D program. But we believe the projects being generated will enhance our market position, and/or expand our share of the markets, making the company an even stronger competitor when the cycle turns.

Before I take your questions, I want to give Maurice a few minutes talk about some of the key financial issues in the quarter. Maurice?

Thank you, Scott. Let me take you through some of the key financial metrics this quarter. Gross margin percentage was down 5.8 points from the prior quarter, driven by a shift in mix from the higher-margined equipment segment to the lower-margined materials business, and in lower absorption in the test business.

This lower absorption in test can also be seen in the year-on-year numbers, where margin percent is significantly down in test also. This is driven by the fact that we have increased capacity in China to be ready to take on the business that comes from Scotland and the other moves that we’ve made.

The income statement includes $1.9 million from the gain of sale of the Willow Grove building and the Gilbert, Arizona building. OpEx was $1 million better than the prior quarter, and it included about $600,000 of costs associated with severance, from actions taken in several locations.

Net interest was better by 700,000. We are now seeing the full benefits of our debt restructuring done in fiscal year 2004.

On the balance sheet, restricted cash in short-term investments grew by about $15.1 million. The majority of this increase, almost $12 million, is due to the sale of the previously mentioned buildings.

Accounts receivable fell by $19.3 million, but DSO actually increased by three days, as we are experiencing continued pressure on payment terms. Inventory was almost flat. All the businesses were down except for Wire, which required additional inventory to support the revenue growth and market share that we’ve been experiencing. However, we believe we’re going to be able to mitigate some of that and drive that number down this quarter.

Both debt and property, plants and equipment decreased, as the variable interest entity that owned the building in Gilbert was unconsolidated.

Cap Ex was $3 million for the quarter, in line with projections for the year. Scott?

Thank you, Maurice. One last note before questions, inevitably we’ll have questions about the cycle, and our view is that we’re in the trough now. The obvious question is how long does the trough last? And while we can’t answer that exactly, we don’t see how a recovery could start sooner than the June quarter, and this is of course, reflected in our March quarter revenue guidance of $105 to $125 million.

Megan, we’ll be happy to have a few questions now.

Thank you, sir. Ladies and gentlemen, at this time, we will now be conducting a question and answer session. (OPERATOR INSTRUCTIONS.) Our first question will be coming from Michael O’Brien.

Michael O’Brien: A couple quick questions. Maybe just going into utilization rates at the subcons and what you’re seeing there, any positive trends, same trends, negative trends? Also, do you think that bonded units are at trough, or have we seen any signs that units can start to pick up and maybe we still have a little bit of pricing pressure?

Okay, first utilization. It is exactly what we would have expected and what we discussed on our last call, which is in the tail end of December, utilization stepped down noticeably. Material sales also stepped down noticeably, because we’re now in that dead period that runs from the end of December to after the lunar new year.

And I would say that is a normal, seasonal pattern, no surprises there. The truth is that we won’t have another useful indicator until the very end of February, beginning of March. It will take that long after the new year for people to gather themselves together. And until then, we’re sort of dealing with this as a seasonal pattern.

About the question on bonder units, bonder units are running at about the typical trough of the cycle level. ASPs are actually holding up. We’ve been able to maintain our ASP structure. We have seen a little bit of movement in our competitors, where they’re doing some unusual discounting, but it has not flowed through to us. And that’s basically, I think, the superior technical performance of our product.

Obviously, the subcontractors are the ones who have abandoned the market. And we’re seeing a disproportionate amount of our business from the IDMs. Again, that’s normal trough for the quarter business. And we’re seeing actually surprisingly strong business from a couple IDMs. Anything else, Mike?

Michael O’Brien: Yes. Are the subcons universally pulling back? We’ve heard some talk that Siliconware has stayed a little bit better and has recently pulled back. Are you getting any positive signs from the subcons, or are they just going to wait it out, get past Chinese New Year and see what their loading happens --?

The subcons I’ve talked to all are on a wait and see. And again, this is the dead period where you have no visibility in the marketplace. And really, we’ll take their temperatures again in the second half of February and try and make some sense out of it until then. But I’d be surprised if you see anything other than a few token orders, or very specific orders for very specific applications out of the subcon community. But again, the IDMs are actually rolling along.

John Pitzer, Credit Suisse First Boston.

Good morning, Scott, a couple questions. If you look at the midpoint of the March revenue guidance, and it’s essentially flat with December, I’m kind of curious what that might do to the expense structure? You talked about kind of unfavorable mix that hit margin in December. Is it right to think that materials might be down sequentially in March, so you’d probably get a better gross margin picture? I’m just trying to figure out what kind of profitability levels you can hit on flat revenues.

Well, it’s kind of confusing, and Maurice wants to add -- Here, I’ll let Maurice answer it and then I’ll add a little.

He likes to edit me more anyway. But I’d say that we do anticipate a slight improvement because tests will be up in the number that we’re looking at, and where the absorption losses came from, and materials will be down, and that should help the margin structure. So I think your calculations are in line.

Yes, and I would add, in many respects, the December quarter was a tough quarter, especially in test, because we have ramped up in China, and it was only in the very end of December that we started to take down expenses in San Jose and only in January that we started to take down expenses in Scotland. So we were in sort of that worst part of the move, where we had double expenses. So that will go the right way next quarter. Yes, there ought to be a little bit in the margin if the mix shifts again a little bit. So, stuff will start to come together.

Are you comfortable yet talking about a break even level to us? I know it’s a difficult question because of all the moving parts, but --.

You know, about 18-months ago, you guys browbeat me into talking about break even points after years of my saying, “I’m not going to go there,” because there’s too many variables, it’s too hard to forecast. The gross margin shifts can swamp the cost side shifts and distort the whole picture. And I gave in and I’m sorry I gave in, and I’m not going to go back there again.

You know, we’ll talk about cost base and we’ll talk about margins, and I’m going to let you do the calculations.

And then, Scott, you talked about potential recovery in the June quarter. Could you start to see evidence in (multiple speakers)--?

No! I said not before the June quarter.

Not before the June quarter, but if it happens to be the June quarter, would you expect to see that in the March order book?

You might start to see it in the end of March. Remember, most of our business now is turns business. We’re not a typical capital equipment supplier. Test is all turns business with average lead times of two weeks or so. Materials is turns business. In the bonders, even a long-term bonder order is eight, 10, 12-week delivery. So, it’d be the end of March.

And then the last question, Scott, on the Maxum Ultra, are you starting to take orders for those yet? Did any orders following the December quarter, will there be any in March?

No. No customer has seen an Ultra at this point. We will not put the Beta machines in the field before the end of the current quarter, and some customers won’t see them until the start of the June quarter. So, I expect to have no backlog on Ultra. Well, at best, we would have trivial backlog in the March quarter, and probably no backlog in the March quarter, realistically. You should not expect to see it.

And then just given the introduction of the Ultra, do you think that’s delaying some purchasing decisions by some of your customers?

You know, Maurice asked me that same question this morning. We sort of rehearse what we’re going to tell you guys. My view is that nobody is buying bonders in advance, given the lead times, how short they are. Everybody is buying bonders for virtually immediate delivery, or they’re placing an order but scheduling the actual deliveries as they need them. And I don’t think there’s anybody that is worrying about the difference in performance and holding off. The people that are buying bonders now need bonders now.

Edward White, Lehman Brothers.

Just to review a little of the evidence that things were popping out. We talked about wire bonder units being fairly low, average selling price as being fairly stable on wire bonders. And the backlog change from continuing operations wasn’t all that dramatic during the quarter. Are there any other signs you’re seeing out there that give you the sense that overall business is bottoming out?

Well, there are sort of two levels to that question. There’s our business and our customers’ business. Our business, we believe, is bottoming out, with all the indicators you just said, and also, because this is about where the industry gets to at the trough of the cycle, especially in bonders. If you'll go back and look at the last two or three cycles, the bonder run rates were in the, for us, a couple, 300 bonders a quarter. And we’re in that range.

The other question, which is how low will I see units go, again, is a question that can’t be answered until we get past the seasonal trough, which messes everything up anyway. And that will have a direct impact on our materials business. And will units be flat, will they be absolutely negative, will they be up a little bit through the first half of the year? It’s just too early to call.

In discussing it with out subcontract customers, they have put a good face on the unit volume question, but in fact, they have no more data than the rest of us, and I think their good face is as much anything, whistling past the graveyard.

Okay, in the test area, are there any particular trends you’re seeing in test demand? Sort of scripting out the dynamics, you know, that you’ve got new products coming out and there’s maybe some anticipation of that. If you look at just where the absolute level of test demand is, what do you think about that right now?

A lot of test demand tends to track -- Part of test demand tends to track new designs, and especially new designs enabled by changes in silicon fab capability. We’re sort of at the tail end of the 130 nanometer cycle. I would expect that as you see a lot of ramp in the 90 nanometer design node coming through the first half of ‘05, I would expect to see that reflected in test demand, but it’s premature for that yet. That should be the start of the next test cycle, but right now I think we’re at the tail end of the last test cycle, which is at the last 130 nanometer ramp.

Okay. And then in the press release, you talked a little bit about some of the very positive wire trends in Taiwan. If you look at overall packaging materials business, how do you square the strength in Taiwan with what’s been going on elsewhere? In other words, was there any other area that offset the strength in Taiwan or do you think it was just -- in other words, why haven’t we seen more of that strength showing up in the overall packaging materials segment numbers?

You had to sort of desegregate the package materials business to make sense of it. We show you in the segment analysis a kind of a hybrid number, which is our capillary business plus our wire business. And then you've got counter currents in that business. Capillaries, I mean, we're clearly the big dog in the marketplace. You're not going to see big shifts in share one way or the other, because we're already, we believe, a little bit above 50 percent. So we're tracking the market there.

There is constant ASP pressure that we have for the most part -- that we deal with two ways. One, trading up in terms of the level of technology from a standard capillary to a fine pitch capillary, from a fine pitch capillary to an ultra fine pitch capillary, which have price adders associated with them. And that blunts some of the ASP pressure.

The other half on the ASP pressure, of course, is continuing cost management, the move to China over the last two years, for instance, dramatically offset the ASP pressures. But you have those counter currents in the capillary business.

In the wire business we are gaining share. We focused on a few very large users in Taiwan, because that's where you get the most leverage for your SG&A dollar. In the wire business you also have the gold price fluctuation.

But our press release is in KFE (ph).

Yes, and that's if you look at it in dollar revenue. In KFE, it went up because we had good share gains in Taiwan.

David Duley, Merriman & Company.

Good morning. Hey, quick question. Just looking at the change in the backlog, can we assume that the order rate was just a couple of million dollars underneath the revenue run rate or were there any unusual changes to the backlog that we don't know about?

No. We've always run a pretty scrub backlog number and given how much of it is turns, the truth is, it's not a number we much deal with anymore.

Okay, but your revenue guidance, and I guess we should have some comfort that your incoming order rates were basically 114 million and your guidance is not too much different than that in the March quarter?

Yes.

Okay. Could you talk a little bit about -- I get the sense that what you said, the gross margins are going to improve sequentially a little bit. Could you give us a little -- are they going to improve from 22.7 percent back to 25 or?

Dave, you know I'm not going to play 20-questions around that kind of a number. You also should know that our resolution on that kind of a forecast isn't as tight as you guys think it is anyhow, because small changes in mix have an impact.

Okay, well maybe you could help us another way. You already kind of mentioned -- touched it, but on the three separate, you know, on the buckets of revenues, what is the direction of each bucket of revenue, given your forecast, so that maybe we can go back and try and tie each segment to its historical growth margins? Because you know, I guess versus my model, this is where I always have the toughest time predicting your business and I guess that's where you have the toughest time predicting your business too. So, if you can help us with any clues in this area it's helpful.

Well, since I also have a hard time predicting that, I'm going to pass this question on to Maurice.

So the equipment segment will be flat, because we're basically going to be stable in our mix between the bonders and the spare parts and the rest of the business and we don't anticipate any ASP. The materials business will probably be slightly down if gold will have a slightly bigger proportion. And the tests will be up as we look at increased sales and better absorption.

Will the duplicate factory loading that was happening in the December quarter be behind us in March or --?

A big chunk of it will. In San Jose we talked about, we had some layoffs there. In Scotland we'll be out of the equation for the most part. There'll be maybe some residual -- but those expenses will be out and will be into existing factories, China specifically. So we'll get the benefit from that and some increased revenue benefit.

Okay. Now when we move to the new wire bonder sometime in the June timeframe, are you targeting, you know, is there a specific throughput advantage that you're getting on this bonder and you know, typically that's how you relate to what sort of ASP increase or flat ASP that you might get for the new products. Could you share a few perimeters here with us?

UPH increases on a constant application, baseline application, are in the 10 plus percent range and that will vary a little bit by application. But you know, swag it around 10 percent. How much of that we get to keep and how much of that the customer gets to keep, as you know, will be subject to fierce negotiations in the Spring, and I wouldn't want to begin to forecast how that will come out.

Okay, one final question from me. In the calendar 2004, now that the year's over, could you take a guess at what your wire bonder market share is? And you also mentioned that you've been -- seems like you've been taking share in capillaries, you gave us a number there. What do you think your share is in wire?

Our share in wire is in the middle teens and growing.

Not known yet though. This is an estimate only.

Yes, these are swags, these are Scott's swags. But middle teens. That's what the business unit manager thinks. And that's up from low teens a year ago. Bonders, you know, bonders is tough, because we've seen both the peak and the trough in a year. And as you know, Dave, you've followed us long enough, we always gain share in the up cycle, because our core customers buy a ton of bonders and we tend to lose share in the down cycle, because our core customers are more volatile than our competitors' core customers.

And how you average that over the year, you know, I'm going to swag it somewhere in the 40s. It may have been as high, at the busiest part of the year, the peak quarter, which was way back in the March quarter, we may have been over 50 percent, and we're settling back down to the sort of more normal average. But we're clearly the big guy in this space.

Have you had years before where you've seen your peak and your trough in a single year? And what do you think the implications are on the durations of cycles going forward with that particular data point?

Okay, that's a really interesting question that we have tumbled over ourselves. My model -- and again, this is not a mathematical model that somebody's going to say could you send it to me? Sort of my gestalt for the way the industry works, is that cycles are ultimately tied to wafer fab feature size cycles. And the peak there, if you look back over the last decade or so, the peak to peak tends to be a little under three years. And I don't think that that's changed a whole lot.

What does seem to change are the U's or the V's and how long is that period at the bottom, versus how long is that period at the top. And it seems at least in the last cycle, we had a long period at the bottom and a very short period at the top. I don't know that you can extrapolate that forward though. And I would caution people that every cycle's had its unique twist and that there is no cookie-cutter cycle that you can go and take the chart from X number of years ago and overlay it over today and figure out what's going to happen in the future.

But we have remarked on it. It seems like we went from bust to boom to bust really quickly this time around. Didn't get to enjoy the top very much.

Bill Lu, Piper Jaffray.

Good morning, guys. A couple of questions. One is just a clarification. It looks like ASP was flat in the quarter and you had made some comments on your competitors' pricing strategies. In general are you seeing more rational pricing behavior from your competitors or is that too early to say?

No, actually we're not seeing more rational pricing behavior from our competitors. One of the nightmare scenarios -- this is not a forecast, but simply a nightmare scenario, is that a competitor will do something wacky. It's not clear yet whether that will happen or not.

Certainly we are maintaining a lot of price discipline. Our ASPs are holding up very well considering where we are in the quarter -- are holding up absolutely well. And whether somebody else in a desperation move, because they continue to lose share to us, does something nutty or not, we'll just have to see.

I guess I'm just a little bit confused here, because it sounds like you feel pretty good about the pricing, your ASP right now, that it's not going down a whole lot, but you're also saying that your competitors are pretty aggressive there. Are you just saying you're not going to follow that? Is that the message here?

Well, we don't have the need to buy share. We're earning our share based on performance, on UPH performance, on process performance and on broad-base company performance. For a big subcontractor they have all hollowed out their organizations. We are essentially their process development partner. There's a lot of intangibles that come with that hardware delivery. Our competitors can't match that. They don't have our depth of resources. They don't have our process development capability. They don't have the synergy between wire and capillaries and bonders.

And I will tell you, as I've been saying for some time now, a surprising amount of the ongoing process development is coming out of the capillary, this insignificant looking little $6-$7 piece of ceramic. There's a real cost going away from K&S and you better get a really sweetheart deal on the price if you're willing to walk away from all that technology development. And so far that equation has worked for us. We believe we're adding real value to our customers, not just adding capacity. And I don't think it's unreasonable that we should get paid for it.

Thanks for the clarification. And one other question, Scott, I think about a year, or year and a half ago, you started talking about how the cycle that we just had was going to be driven for wire bonders in terms of the multi-chip modules offset, wire bond and things like that. As you look into the next cycle, how do we think about sizing the wire bonder market relative to the overall semi market and equipment market? What's going to be some of the drivers that you see out there?

Okay, as I look into the next cycle, wire bond will still command 90 plus percent of all IOs. Those IOs -- that's been our story and we're sticking to it and we continue to be right on that one. Those IOs will come in more different formats. Packaging continues to fragment. And we're seeing customer demand come from high-end applications, even more wires, longer wires. We're seeing customer demand come from more and more stacked-I, which requires specific looking perimeters, very peculiar looping characteristics, very peculiar first bond characteristics to support an ultra-low loop.

We're also seeing it at the other end, a lot of interest in QFN, a lot of people for the low end going away from singulated parts to matrix lead frames and matrix molding for cost reduction. And that has implications at the wire bonder. So we're seeing the tension at both ends of the spectrum. We're also seeing a lot of interest in copper wire -- copper wire at the high-end for cost reduction -- copper wire at the high wire diameters, 1.3 to 2 mil diameters for cost reduction, where the gold content on the 2 mil wire is staggering. All the way down to copper at the very leading edge, 0.8 mil wire, graphics accelerator type applications, 1000 plus wire applications, where people need copper for electrical performance, and everything in between.

So there's a lot of drivers to wire bond. It's not going to be just capacity. It's going to be a lot of capability, a lot of process issues. And again, as I've said in my previous comments, that really plays to our strength, because we're the process guy, we're the embedded knowledge guy. We're the guy that will help you develop your product lines and your package technology. As opposed to our competitors who are much more just selling you capacity.

Gary Su, Smith Barney.

Hi, Scott. Recognizing that this is a dead period and also that longer term, wire bonders are still going to command a majority of the IOs, when you probe your subcon customers about the product mix or their CapEx spending in '05, do you get the sense that it's going to be more weighted towards flip chip and test? And do you think that's going to possibly delay, kind of, your recovery relative to the subcon recovery?

No. Well, yes and no. Certainly, their CapEx has shifted some towards flip chip, towards tests, but that's mostly because they are all high capital businesses. They go out and buy testers at $1 million a pop or you go out and put in a new flip chip bump line at $20-$30 million, whatever the hell it costs. I mean, they're big hard decisions that they have to make well in advance. Unlike the bonder decision where they leak bonders into their factory floor based on how much silicon arrived last week. There are different acquisition dynamics, different tempos. But I don't know any subcontractor who's going to turn away business because they weren't going to spend $65,00-$70,000 for a wire bonder. And that's just -- that doesn't make sense. They earn that $65,000-$70,000 back in a matter of months. So that's always a no-brainer decision. If they have the silicon they'll get the capacity.

Tom Diffley (ph), Merrill Lynch.

Yes, good morning. Another question about the price instability for bonders. Is some of this driven by the IDM concentration or are you also seeing the strength at the subcons?

When we talk about price we don't deal with it as an average price, which is what you guys have to do unfortunately. We go and look at our price per account. You know, in customer X what was it six-months ago, what is it now? Customer Y, what was it six-months ago, what is it now? And the prices tend to be pretty stable. We're not seeing a lot of degradation on an account by account basis. And of course, this is the toughest time in the cycle, because there's a new bonder coming and you know, you've sort of gotten all the benefit you're going to get out of the last introduction. So we're really happy that we're holding the prices up right now. And again, that's measured on an account by account basis.

Okay. And as far as the bonder mix goes, at this point in the cycle is it all predominantly the high end?

No. Our mix was always predominantly the high end through the cycle. New techs are always a relatively small part of this last cycle, the mix between new techs and Maxum plusses. I think it hasn't shifted a lot.

Krisha Rangerin (ph), CRT Capital.

Thank you. Good morning, guys. I had a quick question on the dynamics within the turns portion of your business. We've heard stats yesterday tied to sequentially lower revenues in the March quarter compared with December, and it's seasonally, therefore it seems like your materials business should trend down as well?

I think we very clearly said earlier in the call that in the second half of December we saw the materials business step down significantly -- well, noticeably, not significantly, but noticeably. There's a quantum shift as we go into this dead period.

Now, the question I had was what would it take for you to hit the upper end of your guidance? Because your business is 6 million, approximately, in turns business in December. If from what you're saying turns should be lower in March, so what would it take to get you to the high upper end of your guidance?

More orders. I'm really not sure I understand the thrust of the question. I'm not trying to be --.

What I'm asking is are there possibilities for share gains in the test business or share gains in the packaging business, something in the near-term? Clearly you've given a guidance that involves, at the higher end, a turns business in excess of December, and I would think there was some thought that went into it. My question really is what was the thought that led you to the upper end of the guidance?

Okay. There's two different ways to answer that. I'm not sure you're really internalizing the way forecasting works. Our guidance ultimately comes as a result of our sales forecast, which are built up account by account, product line by product line. And each one of those forecasts has a range. It's not an absolute number. So we sort of add up the highs and the lows and then we pick a midpoint.

I'll also be very candid with you. We take that and we also massage it a little bit, so that the ranges are broad enough that we don't accidentally trip into a pre-announced kind of a problem or a misguidance kind of problem, because that has a whole lot of other issues associated with it that doesn't do anybody any good.

If you were to ask the question differently, which is -- maybe this is really is what you're trying to ask and I just didn't get it, because I'm obtuse this morning. To get to the high end, what's the most likely thing that would trigger it? I mean, the obvious, easy one is a big bonder order. And we have bonder orders that are out there -- not bonder orders. Let me say it differently. We have customers who always talk more quantities than they take. If we were ever to add up all of the things that the customers say they're going to take, as opposed to what they actually order, it would always be a bigger number. But you can also get a pop in materials. You could get a pop in test that is unforecasted right now. So we always build cushion on both sides of the number we think we're going to turn in.

But primarily, the upside this quarter is in the bonder side. And it's the potential for it comes out of bonders in discussion with customers and sales people about that. So, that's the order. The upside is not significantly in tests.

Mehdi Hosseini, Friedman Billings Ramsey.

I came in late to the call, so I apologize if I am repeating some of the questions. I want to get some clarification on the test business, you had something in your press release. If you could help me understand how you're differentiating some of your new test products and just help us understand the competitive nature of that market and the type of customers that you're trying to penetrate with some of the new products that you are rolling out?

Okay. None of the new products rolled out in the December quarter. So, the December quarter dynamics are all standard, plain-Jane -- we think they're better than that, but standard mature test products. Cantilever probe cards, where the differentiation is on the basis of cost and service. And the way we're enabling that, of course, is concentrating the business in China for cost in a very efficient, short cycle time factory. Cobra cards or vertical test cards, where we've got a handful of big customers, and there it is mostly service levels, and again, cost. And in sockets, we do a fair amount of business in test sockets. And again, there are service levels and cost and a little bit of technology in that area.

The next generation products, which we'll start to rollout later this year, there there's some real technology issues and again, cost and service levels. I'm not sure if I've really answered your question or not.

Let's talk about the next generation and as much as you can offer us, some insight of what's coming. You're talking about technology. What are the things that this next generation probe cards are going to solve?

First, I don't want to talk a lot about it, because we'll wait until we've announced them formally and we can take you through it in a fair amount of detail. But if you look into the advanced probe card space you've got a very well established player in Form Factor -- good company, builds a really good probe card -- really two different classes of probe cards, one for array applications and one for memory applications. The technical performance of the card is excellent. The cost is sky high. The cycle time is extraordinarily long. The predictability for the customer is kind of like playing roulette. You saw that in their December quarter actually. What our customers are telling us is they want that level of technical performance at a reasonable price and with a transparent manufacturing infrastructure. We believe we will be able to offer that to them.

Okay. And in terms of manufacturing, how are you going to be able to manufacture these things so that cycle times are down and you're more --?

That's a question that will wait for the launch. I think it will become apparent when you see the probe cards.

Steven Pelayo, Fulcrum Global Partners.

Actually, let me compliment you first on your wire bonder gross margin. Normally, at this kind of revenue level on equipment sales, you guys would be doing half the gross margin and a negative 20 percent operating margin in equipment. So you're doing a phenomenal job variableizing (ph) those costs there.

Thank you, Steve, we've worked real hard at it.

Now, the bad news or (indiscernible) of the question is are we sure there's no secular pressures here, because my model has equipment sales back to 1995. Is this the lowest quarter ever in equipment sales since '95 at least?

No. When you go back and look at '95 you've got other strings of --.

I'm talking about every quarter since 1995.

Well, let me start my answer again. In our equipment segment, historically we have also had other classes of equipment that we are no longer in, because we never made any money in them. This is the first downturn where the equipment segment is pure ball bonders and associated spares. But when I talk about it, I'm tending to talk about it in terms of ball bonder units. And ball bonder units are about where they get, you know, at the trough of the cycle.

Okay, so it's just a pure bonder number, that's fine.

Yes, but there's no saws. In the late '90s we were selling Datacon dye bonders. There's no Datacon dye bonders in there. There's not enough wedge bonders to make a difference in there anymore. So it's really pretty close to a pure ball bonder number. So what you're trying to do is an apples to oranges comparison.

All right, fair enough. Now, the stuff that can move the needle from here is, I guess, the test business. I guess it's running roughly 20 percent of sales or so. You mentioned that you expected test to be up, yet I'm a little concerned with kind of the Chinese New Year black hole. What's the confidence level on test being up and can you help me understand what the magnitude could be? And then I want to talk about test margins.

Where test is coming up is we have a number of customers who really like the China proposition. And how fast we can load China is really gated by how quickly we are able to train probe card operators, which is a pretty high-skilled job and it's some months of training -- six to nine-months of training to be fully qualified. So our whole ramp in Cantilever, which is our whole ramp in China, is gated by that. And we've got customers who would load more today if we could load it in China, and we don't have the capacity.

So that's what's gating that. And we expect to increase our Cantilever business over the course of the year as we continue to ramp in China. And of course, we're ramping in China at better margins than we made anywhere else in the world on that business. So that's a two-for. It's a revenue pick up and it's a margin pick up. But again, it is gated by this human issue of hiring, training probe card operators.

I'd make the point that the parts we're loading in China are not bottom end of probe cards. That's not where the leverage is. It's high end load cards or high end probe cards. It's probe cards for graphics chips and DSPs and it's multi-duct Cantilever cards and it's really hard stuff. We're pretty excited about where that's going. At least in that part of our test business we know we're taking share. So it's going, but it's got this gate we have to get through, which is manpower training.

Could you help me try to quantify what the -- let's just imagine that you had done the transition, what the expense structure might have been? I guess you did about a 7 percent gross margin and roughly 11 million in operating expenses in the test group. So where are those going?

I'm not going to go there, Steve, it's too complicated for me to wing it. Plus you get into some pro forma stuff and we're not allowed to do pro forma. So I'm going to avoid that question.

Even on, like, an operating expense line? Forget the volume side of it all, and revenues and gross margin, but $11 million in the quarter for --?

Even on operating expense line.

Okay. Last question, I guess. Do you think backlog can stay in this flattish area, where you’ve been?

Give or take a little bit. As I made the point earlier, backlog is -- Given so much of our business is turns business, backlog is not a prime metric for running the business, except in the bonder business. The rest of it, we look at order flows on a -- now in the test business and the Cantilever probe card business, for instance, we look at order flows, literally on a daily basis. And we extrapolate from there.

Megan, do we have another question? We're about out of time.

Sir, we have another question coming from Andy Schopick, of Nutmeg Securities.

Okay Andy, we’re going to give you the last question.

Well, Scott, I’ve got a few I’m going to engage you in. First of all, can you characterize in some way what you think capacity utilization is right now in the back end and the front end in the industry?

I won’t touch front end. It’s not our area of expertise. On the back end, based on our data stream, which has its quirks, but based on our data stream, we think bonder utilization has, in the last month or so, sagged down from the high 70s to the middle, low 70s.

Okay. Historically, how low can this get?

On the chart I have in front of me, which only goes back to 1-1-02. Well, in 1-1-02, it was in the 50s, went up into the 70s, sagged back down into the high 50s, low 60s in the middle of '03 -- in the first half of ‘03. By the way, this is on the website, so you can go look at it for yourself. Went up and touched the 80s intermittently in the beginning of ‘04. Tended to bounce around with a fair amount of noise all through ‘04, in the high 70s, and now it’s dropped down into the low 70s.

Okay. On another matter, you may recall the discussion you had with us in a mid-quarter update in early June, when you looked at a tops-down approach versus a bottoms-up approach. Do you care to revisit that kind of view of your business, and what now seems to be happening? Because kind of the bottoms-up approach, which historically perhaps was not accurate, really seems to have been more telling this time.

It absolutely played out according to the bottoms-up approach. You raise an interesting question though, because if you go look at forecasts from people like VLSI, which is a top span (ph) kind of view of the world, all of their forecasts, even their forecasts of record today, say that the trough comes in ‘06 and that ’05 is a good year.

Now, clearly that’s not going to happen. Now, ’05 is going to be a bad year, and I guess you could argue that ’06 could even be worse, but I just don’t see it coming that way. Basically, we’ve looked at the VLSI data and we basically time-shifted a year, and say what they said was going to happen in ’06, is going to happen in ’05, and that the recovery that they see starting in the second half of ‘06 will probably start in the second half of ‘05.

But a lot of people, on their tops-down approach, called for this downturn to come a year form now, and not now. You’re right, the bottoms-up was the one that happened. We were sufficiently confused by it all, that we gave you both streams of data.

Yes, I remember it very well. Can I ask Maurice a couple questions? Maurice, operating expenses, did you say included about $600,000 of severance costs this quarter?

Yes, that’s correct.

And that’s all in what, SG&A?

Yes.

And are there any additional, remaining severance costs in connection with the prior actions, that we should be anticipating in the current quarter?

Yes, you’ll see more than that in the current quarter. Maybe not quite a million, but 800 to a million.

Okay, and after that, based on the current situation, is there any likelihood that there will be any remaining severance costs?

There will be, but we’re not going to be able to tell you which quarter, but over the balance of the year, there are a couple of other things that we will look at and that could potentially hit that line. But we can’t forecast it now.

Let me, philosophically, we’re not done cost management.

Yes, but the bulk of this is clearly behind you, it would seem.

The increments are tending to get smaller with time.

I want to ask you about some balance sheet issues, Maurice. With respect to the current inventory situation, perhaps even receivables if you can touch on it, depending on how severe or how long this current downturn is, to what extent are you going to have to review or reassess your current provisions? And are there some risks here or exposures, perhaps more specifically I should say, on the inventory side, in terms of where we might see some write downs?

We have to assess that every quarter and we do take a pretty good look at it. We don’t see, and I think we’ve talked about this even last quarter, we don’t see really any scenarios that would drive significant write downs, except for a couple of outliers that have to do with, not just pure volume, but how business shifts and how quickly it shifts. So there’s a very low likelihood, but not zero, that you would see an additional inventory provision.

On the accounts receivable, there’s nothing in there that we’re worried about from a bad debt provision, but there is real pressure on terms and I think you’ll continue to see a DSO number that’s worse than what we would like or worse than what we’ve seen at some times in the past.

What was that DSO for the current period?

Seventy-one.

Seventy-one? And finally here, income taxes payable, $13 million as of December 31. When are those taxes payable?

Those primarily will be payable when we repatriate income from foreign subs.

That brings up another question. You’ve got over $50 million of un--?

Unrepatriated income.

Yes.

So we have a lot of work going on right now, and we’ll look and see if the Job Creations Act will help us with the tax consequences on the US side for that. But we will probably repatriate a chunk of that this year, and in fact, some of it’s already been done this quarter.

Wouldn’t that sharply reduce the tax provision under that Jobs Creation Act, as I understand it?

No, it would reduce it, you’re correct, although a big chunk of that is the taxes due at the foreign location.

Oh, they are?

Right, which we don’t get any benefit.

Okay, so those taxes are going to be --?

They’re probably going to be paid, yes.

Yes. But you might be able to repatriate up to $50 million or so on unpatriated foreign earnings?

Right. But there would be no P&L issue with that, but here would be a cash component, because we would actually have to pay the foreign tax on that.

When will you know what you’re going to do in this regard?

It will be step wise. Some of it we took at each foreign location, quarter by quarter, and you’ll see some activity each quarter this year.

But under the Jobs Creation Act, when will you know whether or not you will be -- when or if you will repatriate those foreign earnings?

We will know if we’re going to reap any benefits from the Jobs Creation Act, in this quarter, by the end of this quarter.

Okay, because that could be a meaningful number.

It could be.

All right, thank you very much for listening in. Megan, we’re done with our questions. Michael, you have a few closing comments?

Yes, I do. Thank you, Scott. I would like to announce some important upcoming events which will be webcast. Our Annual Shareholders’ Meeting will be held on February 8th, at 4:30 PM Eastern Time, at our Corporate Headquarters in Willow Grove, PA. Next, our Semiconductor Business Update conference call will be held on March 3rd at 9:00 AM Eastern Time.

The following day, March 4th, we’re pleased to be hosting an investment event, here in Willow Grove at our Headquarters. The event is a Lehman Bus Tour, and webcast presentations are scheduled to begin at 10:00 AM Eastern Time. You can contact Lehman Brothers for further information on that event.

This concludes today's Kulicke & Soffa conference call. As we announced at the start of the call, an audio recording has been made of the entire conference call, including any questions or comments that participants may have contributed. The audio recording will be available on the internet for a limited time, and may be accessed on the K&S Web site at www.KNS.com. Thank you very much, everyone, and have a great day.

Thank you, ladies and gentlemen, for your participation in today’s teleconference. You may disconnect your lines at this time, and have a wonderful day.