庫力索法 (KLIC) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Kulicke & Soffa third-quarter 2006 results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. At this time I would like to introduce Michael Sheaffer, Director of Investor Relations. Please go ahead. Thank you, Mr. Sheaffer, you may begin.

Thank you, Ryan. Good morning everyone and welcome to Kulicke & Soffa's third fiscal quarter results conference call. 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 website at www.k&s.com. The content of this conference call is owned by Kulicke & Soffa Industries and is protected by U.S. copyright law and international treaty. You may not make any recordings are other copies of this conference call. You may not reproduce, distribute, adapt, transmit, display or perform the content of the 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 our SEC filings especially for the 10-K for the year ended September 30, 2005 and our other recent SEC filings.

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

Thanks, Mike, and good morning. The purpose of this call is to discuss K&S's financial results for our third fiscal quarter which ended July 1, which we announced earlier today. For those of you who may have missed that press release, those results are available on our website, www.k&s.com in the investor relations section.

June quarter's revenue of $169.9 million was above the high end of the range of revenues we offered as guidance a quarter ago. That is partly because of the stronger bonder demand than we expected, partly because of strong shipments in wire as measured on a feet of wire basis, but especially because of the mid-quarter surge in gold prices which pushed up wire revenues and wire cost of goods sold alike but with negligible bottom-line affect.

About the bonder demand, we were pleased with the demand which was about evenly balanced between IDMs and subcontractors. This demand confirms the broad acceptance of the Maxum Ultra as the standard-setting wire bonder especially for the increasingly sophisticated stack die applications that are the hottest part of today's IC packaging world.

Stack die is no longer confined to memory applications but increasingly mixes memory logic and sometimes RF or analog chips to create true Systems in a Package. The Maxum Ultra with its superior bond force and ultrasonic control and looping capability is clearly the machine of choice for these emerging applications.

When we look at the geographic distribution of our wire bonder sales, we are struck by China as being the region taking the largest number of bonders at about one-third of our production. While Japan at about 15% is our third largest region after Taiwan. Historically K&S was underrepresented in China and Japan and we believe the strength of our business today or at least in part reflects market share gains. Wire demand was also strong in the quarter with unit wire shipments measured on a feet of wire basis higher than we expected.

The last driver of revenue was a surge in gold prices peaking at $725 per ounce in May. Changes in gold prices tend to inflate or deflate our revenue line and our cost of goods sold line equally but with negligible effect on either gross or net profit. Because the gold content is such a large percentage of our wire business, it supports K&S's income state ratios and asking them good performance of the Company including that part of our wire business where we add value to the gold during the fabrication of the wire. Of the quarter's $169.9 million in revenue, about $77 million was gold sales. Similarly there is the same $77 million included in our $126 million of cost of goods sold.

For more details about our financial performance, I'm going to turn the microphone over to our CFO, Maurice Carson.

Thank you, Scott. So the numbers I'm going to be talking about are Q3 June quarter versus our Q2 March quarter. And I just want to remind everybody that Test division can continue to be treated as a discontinued operation and all of these sales exclude Test, these numbers I'm talking about.

Continuing with Scott's point on gold value, gross margin was down in the quarter 237 basis points due to this increase in gold pass-through. Our weighted average price of gold in Q3 was $612 per troy ounce while the average in Q2 was $536 per troy ounce.

Margins in the equipment segment were up slightly due to good cost management on the Maxum Ultra. We finalized the move into our new headquarters building and this had an impact on both the income statement and the balance sheet. We have a onetime decrease in expenses of $4.5 million from this sale. The balance of operating expenses was up $0.6 million coming primarily from spending on the new wire bonder platform.

Capital expenditures were $1.9 million of which $0.9 million was for the new headquarters building. We had $1.2 million of resizing much of which was directed at reducing the fixed costs left over by the Test divestiture. This is an ongoing project for the Company.

We had $1.6 million of discontinued operations all related to the final transfer of the non-China Test assets. We will have expenses at the September quarter as we close the sale of the China Test assets.

Onto the balance sheet. Cash and cash equivalents went from $122 million to $110 million. This decrease was driven by the wire business primarily increased gold costs with additional impact from increased business.

DSO jumped by one day to 81 days and the accounts receivable balance went up by $10 million. Wire was the primary driver of this increase with additional impact from the equipment segment as our bonder sales were flat with an increased proportion coming from Japan with traditionally longer turns. Inventory days were up to 37 days from 36 alls from the wire business. Equipment inventory balance and days were both down. Long-term debt is down by $10 million and PP&E is reduced by $5.5 million from the finalization of the building sale. Scott?

Thanks, Maurice. As we've discussed in previous calls, ROIC is the principal metric we use internally and for incentive compensation purposes. We like ROIC as a metric as it focuses managers on the balance sheet as well as the income statement implications for their decisions. This is especially important in working capital intensive parts of our business such as wire. ROIC for the June quarter was about 24% well above the Company's cost of capital.

Considering these revenue levels and the impact of gold prices were increased with these ROIC results. For those of you who are interested, our ROIC calculations are shown on the Company's website in the investor relations section.

Looking forward, we've seen a significant change in customer sentiment in just the last couple of weeks. Our current guidance for the September quarter is for revenue to be in the 135 to $145 million range including gold revenue of 75 to $78 million respectively. Please keep in mind that this guidance is based on current gold prices and that significant changes in gold prices will affect this guidance roughly proportionately.

Beyond September, our customers generally are indicating a recovery in their run rates. The conventional wisdom is at the current levels of short-term industrywide correction, not some broader cyclical pattern. In any case, K&S has worked hard to shape the Company so we can generate a profit at these revenue levels all the while sustaining the R&D programs that have made us the market leader.

Ryan, we will be happy to take a few questions now.

(OPERATOR INSTRUCTIONS) [Brian Sen].

Hi. Just a few questions. Going back to that last comment you made about (indiscernible) growth into your September guidance -- start there. I thought the press release indicated that the equipment and the consumables business would both be downtrending in the September quarter. Just giving your guidance here, 75 to $78 million for the gold wire, that seems to be pretty much in line with what the number was in June. Is it the capillaries that are coming down sequentially? And overall, what do you see consumables declining international?

Actually that range includes small declines in both capillaries on a unit basis and wire on a unit basis.

Okay, so it could be --?

They are small, they are in the big scheme of things noise level changes but they are down a little bit.

So like low single digits, 5% decline in materials?

Or less even.

Or even less, okay. So in terms of the equipment business -- in terms of where you are at on a unit basis, is it fair to say that you are sort of 300 to 400 units maybe above the historical trough levels you've seen? In terms of that business?

You know, I love it when you guys and try and play 20 questions from the bonder unit number. You know, Brian, I'm just not going to go there. These are pretty low numbers. They are not absolute trough cycle numbers but they are getting down there. They are pretty low.

Okay. I think you said 50-50 on the mix for subcon IDMs in the June quarter? I think it was -- it's been trending sort of two-thirds/one-third subcons IDM I think. Was that more a reflection of parity in terms of subcons coming down or IDMs coming up?

From the June quarter to the September quarter we're expecting them both to go down. That is what seems to be -- just a minute -- Michael is giving me a cheat sheet. Actually the subcons as t is normal, the subcons are coming down faster than the IDMs. It's not that the IDMs are going up. Everybody is coming down, subcons coming down faster which is the normal pattern. Business is more volatile.

So they could actually be less than 50% in September?

That is what we are expecting, and it's listed in the guidance we gave you.

Okay. And then just lastly, in terms of your comments about beyond September and the recovering run rates, can you maybe be a little bit more specific in terms of what you mean by recovery? And then is that more from the subcon side relative to the IDM side?

That sentiment is more or less across the board. It is not quantified so I can't really help you there and help you in how much one side will go up relative to the other. But understand that this is a result of us distilling anecdotal conversations with customers. And the customers are -- their posture is that this is not the industry falling out of bed; this is not the end of the world; the sky is not falling. I think it was put very well actually in the TSMC press release that came last night or this morning. They are seeing their customers correcting some imbalances of inventory in the supply chain. They think it is a short-term effect and they think there it is legs left in this cycle.

Thank you.

Edward White with Lehman Brothers.

Customers are sort of qualitatively saying that they don't think this is the beginning of a down cycle. Yet you did mention that there is a significant change in customer sentiment. As you talk to customers, do you get a sense as to why there was a significant change? And sort of what's going on and their minds as they look at the short-term?

The changes happened only in the last couple of weeks as I said in my comments. And it is just sort of everybody has taken stock of the fact that there is a little bit of inventory in their chains and that they are going to squeeze it out now rather than count on Christmas to deal with it later, is the sense we get. I don't know, does that help you, Ed?

Yes, okay. That is what I'm looking for. And secondly, in looking at the stack die opportunity, is there any way to quantify how important that is to you now and how important it might be say looking a year down the road? Is it something that is still small volume but growing rapidly or has it reached a lot of critical mass at this stage?

We think it has reached critical mass. With a few exceptions, everybody who evaluates a bonder now evaluates the stack die application among the applications they look at. That doesn't mean they're going to run it all day every day on the stack die application especially in the subcontractors. But they all know that stack die is a big part of their future. We've seen forecasts from some of the IDMs that that talk about multiple die packages or stack die packages being as much as one-third of their revenue in a couple of years.

I think Philips put out a projection somewhere around that. Now, I'll a point, it was one-third of their revenue, not one-third of their units, I'm not sure quite what you do with that. But it is still a big number. It is already the standard in a lot of memory stuff. It's going to be a big deal in the future. And I think that our customers are still finding new ways to exploit the capabilities that we've built into the bonders and we think it's a very major part of our future.

I'll give you a short commercial. We think that the inherently superior process control that we have in our products has bond force control, that's ultrasonic control, and that's XYZ, real-time XYZ positioning on a millisecond by millisecond basis which ultimately translates into wolfing capability. It gives us a huge leg up in these applications. So we are really excited about what it means for us.

Okay. And then finally on the financial side, if your guidance is met for the September quarter, is there any way to get a sense as to how much sensitivity there is on the bottom line? I think clearly it would be less than what we've seen in the past when you didn't have the benefits of the lower cost structure. But as you are looking forward, how are you looking at expenses trending as the revenue goes down?

Well here, first let me go off in a somewhat different direction. We've seen you guys, you guys publishing analysts, not just Lehman Brothers, but we've seen all the publishing analysts struggle to deal with the issue of gold and margins and incremental improvements or not. So that is why we decided to start to give you this gold number to help you fine-tune your models and to understand how inherently profitable the Company is.

Our operating expenses are more or less in the short-term fixed. There is some variability in things like commissions but so much of our operating expenses are focused on the R&D programs that are certainly the key to our next generation products and key to sustaining our industry leading franchise. Also our SG&A is in the short-term also relatively fixed. I talked about market share gains in China, market share gains in Japan, the front end of those is putting bodies on the ground that go out and build relationships with customers. So we will continue with those expenses.

So there's not a ton of variable expenses in the short-term. Probably the biggest single variable expense is actually incentive compensation which tracks linearly with operating profit. So on the upside actually that is a good story that profitability comes quickly or incremental profitability comes quickly. I don't mean to imply that we are not going to be profitable. We expect to be profitable in this guidance range. On the downside, you have the other effect though.

Yes, okay. Thanks. That is helpful. Thank you.

David Duley with Merriman.

Just a couple more things following along on Ed's commentary and questions. Can you give us an idea of where we should set growth margins with this range of revenue? Maybe you can give us a range at the low-end or at the high-end?

If I were constructing a model here, my lawyer is making beady eyes at me across the table, if I were constructing a model I'd go and strip out gold and figure out what our gross margin was last quarter and figure it will be a little bit lower -- or gross margin without gold -- figure it will be a little bit lower just on absorption overhead this quarter. That is the process I would go through.

So in a way we look at the bonder business and look at the margins there since volumes are going down ,we should see a down -- an appropriate downtick in the margins of that business?

A little bit. Dave, you know enough about how we run the bonder business to know that that is a very high variable cost business because we push all -- as much as the overhead off on our subcontractors as we can. So it will go down a little bit. It's not a lot, it's not linear to volume or anything like that.

Okay. A couple of subcons reported last May and I'd say they probably had some fairly negative commentary listening to Amcor kind of saying that they don't think they are going to spend the rest of their $100 million that they are supposed to spend in the balance of this year. I'm just kind of wondering, I'm sure you've listened to all these subcons speak about them talk about the second half the year. Is that real negative commentary that they just threw on the table and the last 24 hours worked into your guidance statements on revenue?

I've got two or three things to say about that. First, we had a long harangue this morning as we polished up our opening comments and it was specifically about the -- sometime the dichotomy between what our customers say publicly and what we hear from the middle levels of the organization and that dichotomy does exist. Actually some of the comments that were made yesterday by our customers were more bullish than we've also baked into our forecasts. So I can spin that one either way. There is upside, there is downside. I think we've done pretty well in the past year or two with forecasting bonder shipments.

The second point I'd make is the point that I've been trying to make to you guys all along, that for some of the subcontractors, bonders are no longer the largest single ticket item in their capital forecasts. But those capital forecasts represents an awful lot of testers and things like that that they buy on a different schedule. So I wouldn't overreact to negative comments you heard yesterday. Because I don't think most of that is directed at bonders. I can't imagine that any subcontractor would not buy a bonder because if they had the silica on their dock, to support that bonder. The time to money for a customer on a bonder purchase, the payback is so short that they will buy the bonders. The will give us no warning. They will come in and demand them and that is why we have the business model we have which has tremendous upside flexibility. That is why we've been able to ramp the business so quickly, and if the generally accepted wisdom that business will come back in the fall is correct, we will see a pop in our bonder shipments perhaps not in time for this quarter but it's out there sooner or later.

Do you have an idea now about the spread of your bonder shipments into in markets, i.e., cell phone, PC, consumer?

No, not at all.

Okay, thank you.

Tom Diffely with Merrill Lynch.

Materials business now in the gross margin --

Tom, I'm sorry. Could you start again. We missed the first part of the question.

Okay. I just want to talk a bit more about the materials business. And I understand that the gross margin percentage is obviously a factor of the gold prices but I was surprised to see that the margin dollars actually came down a little bit in the quarter when I thought units would have -- or feet would have gone up?

Maurice, why don't just take that one.

So we had a decrease margins even outside of gold in these businesses primarily due to the mix between the type of capillaries we sold and the customers we sold them into. And the same thing with wire as we shift between our customers so nothing in there was fundamental to the business just kind of normal movement in the margins of those product lines.

Okay. So you are seeing fairly stable pricing on the value-added portion of your business?

For the most part. Although it changes by application and product where a customer will react but there hasn't been a gigantic swing anywhere.

Okay. And then on the R&D pickup in the quarter, I thought there was still a little bit of R&D savings that was going to come from the divestiture over the next couple of quarters. Was I just thinking about that wrong?

There it is ongoing operating expense that we're working on that is the tail end of the divestiture of Test and that -- there was some in the quarter, there will be some more in this quarter. But that was more than offset by a pop in prototype material expense for our next generation bonder which is coming out next spring and it's a real honey. We're really looking forward to that product and we are right at the point where we build a lot of prototypes to start to put it through the reliability testing and process verification testing so there is a pop in prototype parts.

Okay. And then finally, what are you seeing on the utilization front?

Utilizations continued to bounce around in about a 5 ,6 percentage point range from high 70s to mid-80s. And it's not clear whether there is a trendline yet.

Okay. Well hopefully the bears come out of hibernation and eat up the honey.

High 70s to mid-80s. Is that what I said before? High 70s to mid-80s. I'm sorry, question about it -- we're very excited about the -- was that a question about the next generation bonder?

I was just saying that I hope that the bears come out of their hibernation over the next couple of quarters.

Us too. Us too. We really still don't think you guys get this story. But that is my chronic complaint.

Thank you.

Timothy Arcuri from Citigroup.

Scott, hi. Just on one kind of very big picture thing here, you are not commenting that the utilization of your equipment out in the field -- is it really changing that much? There is no real clear trendline. Yet there is definitely a clear trendline in their buying patterns of your tools. That is a little different than we've seen in prior cycles where there's a clear relationship between utilization and between buying patterns. So I'm wondering why is it different this time? If your business is down so much yet utilization is not down that much, what has changed?

Well I think that the model our customers are trying to achieve is to solve the capacity utilization or the capacity addition question in a way that gives them relatively constant high utilizations. And the deep ended variable is capacity additions. And as long as in that model if their run rates go flat, their orders go to zero. So we are a true first derivative kind of bonder demand at the first derivative of their run rates. Now that model is clearly overly simplistic because we also see people buying for capability reasons. We see buying where IDMs take capacity out of the subcons and bring it back into their own factory which has happened in meaningful increments now for the first time in probably ten years.

But you put that aside and you try and oversimplify the situation, they buy bonders on the first derivative, all the while trying to keep capacity utilization at the 80% plus level as we measure it. And you've heard me say 100 times all the caveats about how we measure it isn't an actual digital measure but it ought to be treated as an analog and blah blah blah blah blah.

But I think this is absolutely rational behavior on our customers' basis. I think the idea that the industry is able to perceive a relatively small build up of inventory in the supply chain and react to it now before it gets really large and destructive and then get back on the buying pattern quickly as opposed to falling into a deep hole and staying there for multiple quarters. I think that is a relatively positive and healthy pattern.

So all in all I feel pretty good about these things in a big scheme. No that doesn't help the day traders but we don't run the Company for the day traders.

Of course. One more thing. You and I talked about this trend that there are some of the big IDMs that are actually building up their own internal capacity because the subcons are not investing on their behalf anymore. So is there an argument to made that maybe the whole argument that there has been is that spending has been more rational this time maybe doesn't hold water simply because some of the big IDMs have built up their own internal capacity and so you really don't see it when you are just looking at the subcons?

Well, look you make a good point. But first the amount of spending by IDMs for bringing capacity back in is -- might be a 10% of our bond -- I'm just estimating off the top of my head -- it might be 10 or 15% in those kinds of programs. It is not 30 or 40 or 50%.

Secondly, the capacity utilization numbers that we talk about are a blend of IDMs and sub (technical difficulty). They are not just subcons. Third, not that it matters to your point but you talk about IDMs bringing capacity in because subcons won't invest on their behalf. I think were your exact words. I'd say it's different that IDMs are bringing capacity in for cost reasons that the subcons have decided that they actually want to make a profit going forward and have priced accordingly and that IDMs have recognized that if they can keep a factory consistently loaded, their cost structure is lower than they can buy it from the subcons. I mean that doesn't matter in the big scheme, but it is a different twist on those things. Because implicit in that is the good news that the subcons are actually profitable. So I don't know if that helped you or not.

It does, Scott. Thanks a lot.

Andrew Schopick from Nutmeg Securities.

Thank you and good morning. I do have some questions here I'd like to run through. First let's start with my prior appeals for a cash flow statement. Didn't get it. I think it would certainly help us on these calls to be able to see a cash flow statement at the time of these reports to understand everything that is occurring. So I will make that appeal one more time and hope that you will be able to provide cash flow statements as part of your financial press releases.

Okay, we've registered the appeal.

On the gold, I want to be sure that I understand everything that is being said. Included in the revenue for the Packaging Materials segment as well as with cost of goods sold, is $77 million of gold related sales and cost of goods sold?

That is correct.

What was it for the nine months?

You know, I don't know that we have it for the nine months at our fingertips. But it will be in the Q.

Okay. So that is kind of missing from the equation right now. On the impact of gold on cash, I'm not sure I understood that. Cash was $110 million down from $122 million and if I understood what you had said correctly, it was mostly related to the wire business and the gold cost?

Inventory and accounts receivable in the wire business that are inflated by gold value.

Of course there is an opposite side of the coin here. If the bears don't come out and gold rises to 1000, which of course some people are saying, I'm just wondering what this potentially -- what risk or exposures you may potentially have should gold accelerate into a higher price level?

In terms of bottom-line risk it is negligible. In general, we buy and sell the gold at the same time. But it had closed to the balance sheet not the income statement in that we have to pay for the gold more quickly than our customers pay us for the gold which is why you get the accounts receivable bulge.

Okay. Any reason at this stage of the game why you would not want to consider a stock buyback given the strengthening balance sheet situation, given everything that has occurred here? You know it's the bottom of the cycle and you are able to generate cash and you remain profitable with a cleaner balance sheet, what is wrong with considering a share repurchase program?

It's a thing that we periodically analyze. We weigh the pros and cons of stock repurchase against debt retirement against simply sitting on the cash, looking at that day in 2008 when we have to pay back the bondholders. And to date the Board of Directors has decided that we're better off focusing on the debt than the stock. Obviously their stock price at which point they may change their mind and I'm not going to make a forecast to their sentiment one way or the other.

Okay, that clears up --

But the question of do we consider it, we consider it on a regular basis.

Okay. Stock-based comp, Maurice. Will it continue to run at about $1 million a quarter from everything you can see here?

No, we haven't had a significant grant since the stock-based comp got onto the P&L. We will have grants coming up in the first quarter of next year --

First calendar quarter.

First fiscal quarter, our first fiscal quarter, October.

Okay, I'm sorry.

First fiscal quarter and at that point the stock-based compensation will increase. This was for the plan that we had approved by shareholders last year.

Okay. So you'll give us some indication on that at that point.

As we get (technical difficulty)

(technical difficulty) historically always reported GAAP to your credit I might add. The reality is that this is a number that most companies now are in fact adjusting for (technical difficulty) you do give us a commentary on it (technical difficulty) press release. You know what is your thinking perhaps going forward about perhaps providing an adjusted non-GAAP measure in terms of financial reporting?

Andy, you are trying to have it both ways.

Not really. I know what you mean.

You know our Board of Directors has historically taken the position of we're going to report GAAP numbers; we're not going to do funny pro formas. I think this is a subject that we will bring up at her next audit committee meeting. We will relay your sentiments to them but --

Scott, I actually agree with you, I really do. I think this is so out of control that I don't even understand half the reports I'm looking at now. But it is what it is.

So, unless your words convince the audit committee, we will continue with GAAP, with GAAP reporting and to try in make the other information sufficiently available so you guys can construct you own pro forma.

And that is fine.

Which by the way is why we are giving you more visibility into the gold.

I think that is very important and I'm glad that you have done this. I would like to have actually had that nine-month number but I guess we'll have to wait for the Q to be filed on that. And other than that, Scott, I just don't know how you can safely conclude that you are not seeing signs of a cyclical downturn again. I mean I really have big concerns about this and I have had for a couple of months.

You know, I sort of made the reputation as one of you guys, the canary in the coal mine, although I hate that metaphor of being the guy that slides the downturns. And it just it doesn't feel like it. Our customers are not getting the head for the hills, run for cover, find your fall-out shelter message that they sometimes give us. They are giving us a different body language which is, yes, there's going to be sort of a soft quarter in terms of capital purchases. But run rates are okay. We've got a little inventory to deal with. But don't overreact. There is good stuff coming. I don't know, maybe they are conning me. But it doesn't feel that way right now. And all I can do is give you their sentiment and play it out.

Okay. Thanks.

Peter Kim with Deutsche Bank.

Good morning. Thanks for taking my questions. First I wanted to ask about the cost of operating expenses for the bonder business. It looks and little high right now when you compare it to the prior quarters. I understand we have to make adjustments for the residual overhead from the tester business. And also the division of the corporate tax or the corporate expenses into this business segment. But even so, I'm seeing a 3 or $4 million higher OpEx. Is there any reason for that? And is this temporary?

Let me just clarify the question -- did I understand which periods you are looking at, Peter?

I'm sorry?

What periods are you looking at --?

I'm looking at like the product like fiscal Q4 '05 for you. That's because that is a prior quarter when you used to divide out the corporate expenses. And the Test business. So our estimate was that about $3 million from the corporate expenses have come on to the bonder business plus 2 to $3 million coming on the residual overhead from the Test business.

$2 million, I think we took everybody through it a couple of quarters ago. 1.8 million we estimate on that part. The corporate expense was close to 3 but it was highly dependent upon the quarter because we used to run intensive comps through that line. So it mattered a lot by quarter which quarter you are comparing to and how profitable we were, Peter.

And I don't believe there was any incentive comp in Q4 '05.

Right. And I think that that might be a big part of the comparison that you getting to is that that period there was not any incentive compensation.

We just didn't pay any back then. Didn't earn any back then. Let's put it that way. And then the other issue is there's this bubble of R&D associated with associated with ATX3.

Exactly.

So when do you expect that R&D expenses to roll down? Is this like in the Q1 '07 timeframe? Okay, I won't squeeze you with that.

I'm sorry I'm trying to compose the answer. And the answer is it depends. I mean this is ultimately a Company that loves R&D and will spend every dollar that Maurice will let us spend on R&D. So I know what the numbers are and the trendline will be for ATX3 but it's not like we're going to launch ATX3 and get out of the R&D business. There's an ATX4 and there's other programs we like to do that we are not doing because we can't afford them right now. So I don't know how to give you a meaningful answer.

So bottom line, is this operating expense run rate comparable -- I mean is this going to be pretty much where it is and it's going to stay in this trendline?

I have a personal objective from the Board of Directors to squeeze some more operating expenses out of the Company. So we are not satisfied with this level of operating expense. Maurice indicated that. There were some severances in the quarter for instance, the quarter just ended that had to do with continuing to reduce operating expenses. We are continuing to look throughout the Company how can we reduce operating expenses? How can we reduce corporate overheads, manufacturing overheads? Philosophically we're a glass is half empty kind of company and we've got more than we can do. We are not complacent.

You talked about the outlook based on current gold prices. What is the gold price per troy ounce that you are using as a base for that for your guidance?

Okay, I'm going to give you a number that is sort of that's hard for you guys to track. The numbers we use is sort of a weighted average number based on bookings and when they occur. In Q3, the weighted average was 612 for the whole quarter. We are assuming right now about a 620 for the September quarter, and it can go up and down from there. We are not in the gold forecasting business.

So, the last question is considering your outlook for the gold segment for the next quarter, your assuming that unit demand is going to go down then?

A little bit, single-digit percentages.

Would that reflect a decline in utilization for the wire bonders?

I don't know how much of it is a decline in utilization wire bonders and how much of it is customers working off inventories. You know, and mix changes and there's a lot of stuff that could go into that number. And when you're talking about low single digit percentages, it's noise. And I'm not sure that you can build an investor thesis around that small a number. It could easily be just customers tightening up on their own in-process inventory.

Thank you very much.

Okay, Ryan, do we have any other questions?

Gentlemen, I'm showing that there is no further questions at this time. Do you have any closing remarks?

Michael?

Thanks, Scott. First, I would like to remind everyone that a GAAP reconciliation of the ROIC calculation that Scott mentioned is posted on the investor relations page of our website. And secondly, we will be participating at the Merriman Curhan Ford annual investor summit in San Francisco on Monday September 18.

This concludes today's Kulicke & Soffa conference call. As we announced at the start of the call, an audio recording has been made at 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 website at www.k&s.com. Thanks everyone and have a great day.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.