庫力索法 (KLIC) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Kulicke & Soffa first-quarter financial 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. Thank you. Mr. Sheaffer, you may begin.

Thank you, Claudia. Good morning, everyone, and welcome to Kulicke & Soffa's first fiscal quarter conference call, the purpose of which is to discuss the K&S December quarter financial results released earlier this morning.

For those of you who may have missed that press release, it is available on the Company's Web site at www.K&S.com, in the investor section.

An audio recording will be made of the entire conference call, including any questions or comments that participants may contribute. The audio recording will also be available on the Internet for a limited time and may be accessed from the Kulicke & Soffa Web site.

Reconciliation of any non-GAAP financial numbers discussed during the call will also be available on the K&S Web site.

The content of this conference call is owned by Kulicke & Soffa Industries and is protected by U.S. 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, display or 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 our SEC filings, especially the 10-K for the year ended December 30, 2006, and our other recent SEC filings.

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

Thanks, Mike. Good morning to all of you.

For some time now, we've been talking to you about K&S twin objectives of good financial performance over the whole semiconductor cycle and long-term growth. This quarter's results of $0.08 per share, $0.08 per share earnings and over $11 million of operating cash flow, in spite of revenue approaching trough of cycle levels, confirms our success in remaking K&S into a company able to generate good financial results over the whole semiconductor cycle.

We've also kept our focus on future growth. R&D spending in the quarter was up as we started to build preproduction versions of our next wire bonder, due to be launched later this year. We expect that machine to extend K&S' industry-leading franchise and to drive future market share gains.

The quarter also saw wire and bonding pool products introduced as well, extending our product portfolio in those areas.

As previously announced, during the quarter, we completed our acquisition of Alphasem, launching K&S into the die bonder market and expanding our [TAM] by about $500 million. The integration of Alphasem with K&S is going well, as is the work on our next generation die bonder, scheduled for launch in 2008. These new products are positioned to drive the Company's growth, as the semiconductor industry starts its next growth spurt, possibly as early as later this year.

Maurice, why don't you take our audience through the key financial issues for the quarter?

Thank you, Scott. Good morning, everyone.

As is always the case, I'm going to be talking about our current quarter compared to the prior quarter, in this case December quarter versus September.

Let's start with the gold metal pass-through component of our financials. In order to bring better understanding of this part of our business, we have been discussing the gold metal portion of our business in more detail the last few quarters. As most of you know, we are a leading supplier of gold metal wire. This [isn't] part of our material segment and included in the revenue and cost of sales from this business is the value of the gold metal. The gold metal value is essentially a pass-through to our customers. This pass-through does not affect gross margin dollars but it does have a large impact on all metrics that are calculated as a percent of sales.

Last quarter, the amount of the gold metal pass-through was $80 million. This quarter, the amount is $71 million. This decrease includes the impact of lower volumes and a 1.7% decrease from the average price of gold.

For the total company, gross margin percent was down 100 basis points from last quarter. As we discussed in our 10-K, Q4 included a one-time adjustment for gross profit that should have been included in prior periods. This adjustment improved gross profit in Q4. Comparing this quarter to the last quarter without the effects of this adjustment, gross profit margin was better by 120 basis points.

As we had an increase in operating expense of $4.7 million due to the inclusion of two months worth of die bonder expense and 4.4 million and prototype materials for the next generation wire bonder, exactly what Scott mentioned earlier about R&D spending.

Capital expenses decreased from 1.4 million in Q4 to 1.1 million in Q1. Tax expense was $1 million, down from 1.3 million last quarter. All of this resulted in a net income of 4.9 million and an EPS of $0.08, fully diluted. While this is down from last quarter's net income of 12.8 million and an EPS of $0.19, it does represent the 13th consecutive quarter where we have been profitable or breakeven from continuing operations.

On the balance sheet, cash, cash equivalents and short-term investments decreased from 157 million to 139 million. This was due to the purchase of Alphasem for 29.4 million, including deal costs, offset by over $11 million of cash from operations, another metric that we consider very positive.

Mixed performance on working capital--before adding die bonder-related accounts, AR and inventory decreased in absolute terms but were up in days. The addition of the die bonder business increased both dollar balances and days. We have work to do on the die bonder balance sheet but we have started already.

ROIC came in at a disappointing 11.6%. With little change in the balance sheet, this was driven by the earnings decrease. As you will see when we publish our 10-Q, we do not anticipate a charge for in-process research and development from the Alphasem acquisition, in other words no P&L hit. While we have much of the purchase accounting done, the final evaluation of certain assets is not complete, and so this may change later in the year.

Altogether, another good quarter--another quarter of good financial performance. $0.08 and a positive cash flow from operations at this point in the cycle further validates the steps we have taken to strengthen Kulicke & Soffa over the last couple of years.

Scott?

Thanks, Maurice. Claudia, let's see if we have any questions from our audience.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Timothy Arcuri, Citigroup.

This is actually Brian Lee calling in for Tim. I just had a few quick things. First off, could you characterize what you're seeing in terms of bonder demand between the IDMs and subcon segments and maybe how that has changed since the last quarter? Then I had a few follow-ups.

Mike, how did that (technical difficulty) for the quarter, 60/40 subcons.

Correct.

60/40 subcons.

60/40 subcons? Okay. Then I guess specific to subcons, it sounds like they ticked up a little bit. Can you give us a sense for what your expectations are looking out into '07, relative to kind of the restrained spending we saw in '06? Would you be expecting more of the same, so maybe a flattish or even down sentiment from them year-over-year (multiple speakers)?

No, I think there's a lot of misunderstanding. From our point of view, the subcons were aggressive when there was wafer demand, you know, wafers that needed to be assembled. I wouldn't say they were constrained, at least not in the wire bonder space, perhaps in the tester space, where they are clearly rethinking their business models.

Looking ahead, my (indiscernible) decision has been what it always has been. We think the first half of the year is going to be a little tough, and we expect to see demand reaccelerate in the second half of the year.

Okay, thanks. Maybe if I could sneak in a last quick one--if you look at the industry book-to-bill numbers which were released a few weeks ago, for the December quarter, it looks like back-end bookings were down about 30% Q-on-Q. But if my numbers are right, it looks like your orders were flat to slightly up in December. Teradyne just came out the other day; they said their orders were up 20%, quarter-over-quarter. So am I missing something there? Could you maybe help me understand why the industry book-to-bill numbers for the back-end look so down but recent results seem to suggest otherwise?

Well, you know, given our guidance for the next quarter, which is down guidance, clearly, we would--our experience was that orders in general will have been getting harder and harder to find over the last--actually over last year. I mean, our revenue peaked four quarters ago and has been steadily declining in classical cyclical fashion through that period.

You know, one month more or less doesn't tell you a whole lot because it's a very sloppy market. None of us have a lot of visibility in terms of near-term order flow. That said, we think that we are approaching trough of cycle--the trough of the cycle. I don't know whether it's going to be the March quarter or the June quarter, but we expect it to reaccelerate after that.

Okay, thanks a lot, guys.

Edward White, Lehman Brothers.

I was wondering if you could talk a little bit about how you see operating expenses for the next quarter. Are there more investments that you need to make related to the new products, or what are your thoughts on that?

Operating expenses in general will be flattish. Maurice is sort of making hand signals here; he wants to say something different. Go ahead.

I just want to mention that we said last quarter during our call that we would be increasing the operating expenses associated with die attach. That has not been fully realized in the numbers yet, so you will see an increase in R&D expense over the next couple of quarters.

Yes, although to some extent offset because we had a big pop in prototype parts for Next Generation bonder last quarter. I think that's roughly a push, you know, no big trendlines either way.

The prototype parts for this round of prototype builds for the Next Generation wire bonder are behind us. We're really excited about that product. The way we launch those products, we build a lot of prototypes, about two dozen prototypes that are now in process characterization and reliability testing. We like what we see with that machine. But that big lump is behind us now. To some extent, as Maurice said, that will be offset by ongoing investments in die bonder R&D and (indiscernible).

Okay. The second question is, you know, if you look at the subcons in particular, you know, what we are hearing some of them coming out with caution on their capital budgets, but at the same time, they seem to think their customers' business is bottoming out. What are your thoughts on as you look at the customer set right now and how are they looking at capital purchases? What gives you confidence that we are approaching a bottom?

Some of it is history, although we have the issues and normal caveats that every cycle is a little different than the last one. But if you look back over the last bunch of cycles, it's about time for things to turn. Some of that has to do--will do with acceleration of next-generation fab processes which flow through the system and drive demand. Our customers have kept their capacity utilizations in check so that those numbers are high--inventories, or pockets of inventory but know real big inventory overhanging in the system. Economies of the world tend to hold up or are holding up right now. It just feels like it's time.

Okay, great! Thanks.

Tom Diffely, Merrill Lynch.

Good morning. I was hoping you could talk about some of the industry trends in 2004. Did you see any meaningful shifts in market share for either wire bonders or die bonders?

Tom, 2004?

I'm sorry--I should say calendar 2006.

Okay, I'm sorry. Ask the question again; I was disconcerted by the--.

I'm just looking to see if you've seen any shift changes in the marketplace for either the die bonder market or the wire bonder market.

The only thing that struck us as out of the ordinary, and I'd don't think it's a surprise, is the strength of the DRAM business. Normally, the DRAM business is not a big consumer of wire bonders, but especially in the second half of the year, those guys were disproportionately strong.

Okay. What about--I was thinking more along the lines of you versus your direct competitors.

Oh, market share shifts?

Yes.

No, I don't think there was any meaningful stuff there, just a normal amount of noise. Typically, some of our competitors do a little bit as the industry slows down, because we are at such a big share with the subcons who tend to cut off their purchases faster than some of the smaller and specialty people that ASM in particular does well with. Although we've been driving hard for market share increases in that part of the market with our maxim (indiscernible) and actually had the best quarter ever for that product line in the December quarter. But I don't know that there's anything beyond the normal amount of noise. We've maybe taken a little some places. They had the normal advantage in this part of the cycle but there's no dramatic shifts.

Okay. Then looking at the next quarter, or current quarter, would you expect your die bonder business to be up?

No, we think all of our businesses will be down in the March quarter. A lot of that has to do with holidays, Chinese New Year and it's just a sloppy time in the market.

Yes, on the die bonder side, I was just thinking that since you are only a partial a quarter left, I'm--.

Okay, I'm sorry. We sort of normalize it for whole quarters. On a whole quarter to whole quarter basis, it will be down a little bit. On a partial quarter to whole quarter basis, I guess it will be up but that's cheating. You can't really take credit for that.

All right. Finally, what are your tracking the utilization rates for wire bonders right now?

We are not really paying a lot of attention to it. As we said in our last call, that number has kind of flatlined at the current high 70s/low 80s level, and there's just no data, there's no wisdom to be found in that data stream right now.

Okay, thank you.

Dave Duley, Merriman Curhan Ford.

Good morning. A couple of questions from me. First of all, just a housekeeping--did you have any cancellations during the quarter?

I don't even know--not that I'm aware of, but you have the normal amount of push-ins and pull-outs and pull-ins and push-outs (LAUGHTER). No, in terms of outright cancellations, I don't know if I can remember the last time we had an outright cancellation.

Okay, well I guess then that just kind of solves the backlog issue, because I think the backlog was flat, so that kind of indicated, as a previous gentleman was asking, your order rates were most likely very close to your last quarter's revenue. So I'm curious what the order rates at that level and you guiding down in March, are the orders you are getting now more longer lead time in nature, are they service contracts? What's the disconnect for that particular (multiple speakers)?

Well, first, our backbone is not a particularly useful number. As we've said over and over again, because so much of our business, including the bonder business, is turns business, but also a lot of that is materials, so trying to figure out something from the backlog will not help you a lot in terms of future business.

Orders were off a little bit in the quarter and continue to be spotty. Especially right now, we're seeing some holes in material demand, and again, we think that is all Chinese New Year-related, where most of our customers will be shutting down for a while and simply don't need those consumable products.

Okay. As a follow-on, you know, you mentioned, kind of in your prepared remarks, you kind of have two big goals as to show profitability throughout the cycle. Clearly, this last quarter near the [trough] zone up $0.08 is a good performance with the cash flow. Congratulations on that part.

I'm more curious on the growth part. You know, when you look out, I get the sense from your commentaries when you're saying the wire bonders declining for four or five quarters in a row now, it seems like it's time for things to start to get better. What is it besides utilization rates that you might be looking at to make that commentary? Is it perhaps the DVR 2 ramp is really helping you or I'm just kind of trying to understand your commentary a little bit.

Well, the DRAM business clearly has been countercyclical in its timing, and there were significant numbers of wire bonders, both from us and from some of our competitors that went into DRAM applications in the last six months. You know, that won't go on forever, although hopefully Vista will pull a lot of demand. But we are so far down this stream from that that we can't really make the hard correlation one way or the other.

Our sense about the end of the cycle is partly it's what our customers are telling us into the down part of the cycle, and partly the historic patterns. Again, the bonders are very far down in the food chain, so it is hard for us to do cause and effect between a given bonder order and what's happening in the macro market.

Fair enough; just one other thing about the DRAM business. You know, historically, I guess DVR 1, I didn't really think you were a major player of packaging that type of part but clearly now as we've moved to DVR 2, it seems like it's a little more to the K&S high-end sweet spot. Is that a fair characterization?

Well, first, we were a significant player for some of the DVR 1 stuff and earlier. DRAM has always been--we've always had several key customers in that space.

In general, the DRAM puts different demands on the bonders than, say, a high-end subcontractor. The applications are I don't want to say easy but they require less sophistication from the bonder. Also, the customers tend to have much larger lot sizes. They are not always changing the bonder over. Our bonders, because we have this--in particular historically targeted the subcons, had a lot of flexibility built into that the memory guys don't need. What the memory guys do want is productivity and we are clearly the productivity chance. What they want is process robustness, which gets high yield, and we are clearly the process robustness chance. And what they want is uptime and we've gotten pretty good at uptime as well. So we're holding our own in that business.

It's a slightly different twist in terms of what makes a good bonder in a DRAM application than, say, subcons high-end logic application, but either way, they play to the fundamental strengths of our bonder platform.

Final question from me is, you know, maybe help us a little bit more with the P&L statement in the March quarter or maybe give us what taxes might be, share count, other income.

Maurice, I'm going to let you --.

Well, all I'm going to say is that we generally don't guide to other than revenue at this call. I think we continue to stick by that. This quarter, I will say we don't expect any significant changes in the structure of the P&L, quarter-over-quarter.

Help us with the tax rate and the share count.

The same thing there, it's tax rate. What you see today is the effective tax rate you'll probably see going forward this year, unless there's significant changes into our forecast. Share count will go along the same as it's been, only really affected by 401(k) and options exercises.

Thank you.

Claudia, do we have another question?

Andy Schopick, Nutmeg Securities.

Thank you and good morning. It's a slow process but we will get there.

You know, we think we've made tremendous progress in reshaping the Company. I mean, to be making a profit and to be cash flow positive at this part of the cycle is, you know, was unheard of in the old K&S. I am really impressed with what this team has accomplished.

You are still a victim of the cycle unfortunately, but when things do turn, I'm sure that will be reflected in your performance.

Well, the stock is a lot higher than it historically would be at this part of the cycle, and hopefully we'll see that same premium on the upside.

Well, the balance sheet looks a little better as well so that's a big help.

We're getting there.

A couple of questions--stock comp expense. Maurice, could you review for us your options-granting policy and in which quarter or quarters we may see a change in what you're currently reflecting as stock comp expense?

You saw it in the December quarter. We grant options primarily except for new hires in the October time frame, and the expenses related to those, both options and restricted shares, are reflected in the numbers you see today. Of course, under 123R, we have to forecast our performance and so this is the first year or the first quarter of a three-year performance cycle, so I doubt if you'll see a lot of change in the near-term from what you see in this quarter.

Okay, that answers that question. This is more of a 10-K question. In your 10-K, you typically each year provide a simple table of the ten largest customers. You've had two 10% customers in each of the last two fiscal years, but in the aggregate, can you tell me what the aggregate contribution from the ten largest customers were in fiscal '06 versus '05?

I don't have that in front of me, but I can tell you--and Scott, you can jump in if you like, but I don't think there's anything significantly changed from that, that aggregate contribution, but we will go calculate that number and put it on our Web site or something like that (multiple speakers).

Sure, I'd like to be able to see that. I just wondered to what extent you are anticipating any kind of new customer acquisition, whether there are really any opportunities to speak of in terms of perhaps affecting some increased market penetration.

The answer is yes. We have, over the last, starting about a year ago, maybe a little earlier than that, have put on a concerted effort to broaden our market share, especially in the bonder space. Historically, we have over-focused on a handful of big subcons and IDMs because historically that's where the growth was. Starting about 18 months ago, we perceived a change in that profile, in the growth profile, with more growth coming from some smaller IDMs, some DRAM-focused IDMs, and especially from--I don't want to call them second-tier because it demeans them but not the big four subcons but the next bunch of subcons. Also, there's a lot of accounts in China. So we have redeployed some of our sales staff to try and have a more balanced penetration in the market. So we are seeing an extension in our customer list as a result of that.

Now, it's not that any one of these new accounts is going to displace an ASE or an Amcore or a (indiscernible). Most of these will not make the top ten account list. But I would expect to see, over time, a diminution of the total percent of sales that the top ten have as we broaden that customer list.

That's kind of what I was getting at, and I did notice that Amcore dropped out of the top ten last fiscal year for the first time in the last few years. That was apparently replaced by United Test and Assembly Center. I don't know exactly (multiple speakers).

UTAC, Yes.

There's a lot of people out there. There's a lot of accounts that, in general, our conversations with the financial community always revolve around the usual suspects. The usual suspects, while they are a big part of the market and are very important customers to us, don't represent the whole market. We've found that, A, there's--it makes a little more growth available to us by going after it by a more balanced attack in the market. Secondly, we've found that because we were under-serving some of those accounts, our competitors were getting a free ride. So there's not only the question of us getting the business and driving it, but it's ultimately a 0 sum gain and we've been trying to (indiscernible) competitors the easy market share and the gross margin that went with what they viewed for a long time as a captive customer base.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Gentlemen, it appears there are no further questions.

Thank you, Claudia. Mike had some last-minute housekeeping issues.

Yes, thanks, Scott. 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 and any non-GAAP reconciliations will be available on the Internet for a limited time and may be accessed on the K&S Web site at www.K&S.com.

Thanks, everyone, and have a great day.

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