庫力索法 (KLIC) 2007 Q2 法說會逐字稿

Welcome to the Kulicke & Soffa second-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. Please go ahead.

Good morning, everyone, and welcome to Kulicke & Soffa's second fiscal quarter 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 also be available on the Internet for a limited time and may be accessed from the Kulicke & Soffa website at www.KNS.com. Reconciliation of any non-GAAP financial numbers discussed during this call will also be available on the K&S website after the completion of this call.

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 any 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 September 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. Welcome to this call, the purpose of which is to discuss the K&S March quarter financial results which were released earlier this morning. In a moment I'll ask Maurice Carson, our CFO, to take you through the key financial issues for the quarter, but first I'd like to put the quarter's results in a broader context.

Demand, especially for die and wire bonders, was weak early in the quarter with the DRAM segment being the only bright spot as those customers continue to add both die and wire capacity. That probably surprises many of you given analyst reports of DRAM price contraction causing a pullback in DRAM fab investments. But we've seen continued investment in DRAM assembly capacity as manufacturers ramp up last year's fab investments. Over the last year we put a lot of effort into optimizing the Maxum ultra for DRAM applications and have seen that work rewarded by increased market share in this segment of the market. We believe we supplied most of the wire bonders sold for DRAM assembly during the quarter.

On the die bonder side of our business we've also gotten traction in the DRAM segment with the introduction of the 9022 HSL-Plus, an upgraded version of Alphasem's traditional DRAM die bonder which delivers significantly improved productivity. We'll be delivering our first HSL-Pluses in the June quarter.

While the quarter didn't start strong, in late February we saw a change in customer sentiment with a significant increase in the number of wire bonders scheduled for deliver right at the end of March and continuing through the June quarter. These increases weren't just for DRAM applications but included many of our traditional subcontract and IDM customers as well. We're also seeing similar trends in our die bonder business.

These positive trends in demand for both die and wire bonders are driving our June quarter guidance of about $167 million in revenue assuming today's gold prices. We expect revenue for most product lines to be up quarter-over-quarter but with the biggest gains in the Equipment segment. Maurice, why don't you discuss in more detail some of the financial issues?

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 the March quarter versus the December quarter. Let's start with revenue which declined 6% to $143 million from $152 million last quarter. The decrease was due to lower sales volume across all of our productlines and pricing related to the customer and product mix which I'll discuss in a moment. On the positive side, as Scott mentioned, we were very successful with sales of equipment into the memory market.

Overall a higher proportion of our sales were Maxum elite wire bonders and Easyline die bonders for the cost performance market. These models have fewer options and features than the products we well to our typical served market. We also had lower sales volumes from our subcontract customers, and this is consistent with the semiconductor cycle moving through a trough during the March quarter.

As for the gold metal pass through component of our financials, we continue to provide a breakdown of the Packaging Materials segment in order to bring a better understanding of this part of the business. Included in our revenue and cost of sales for this business is the value of gold metal. The gold metal value is essentially a pass-through to the customer. Last quarter the amount of the gold metal pass-through was $71 million and this quarter it's $72 million. While this change is small in dollar amount, it includes the impact of a 4% lower volume and 4% increase in average price of gold.

For the total company the gross margin percent was down 320 basis points from last quarter. The lower gross margin was due to the product and customer mix I just mentioned as well as lower sales volumes across all products. We anticipate slightly better gross margins in the June quarter with further improvements in subsequent quarters.

Operating expenses were flat quarter-over-quarter, although die bonder expenses this quarter included three months of expense versus only two months of expense last quarter. The increased die bonder expense was offset by not having incentive compensation expense in the quarter. We did not earn incentive pay during the quarter that was not profitable. Our die bonder expenses were consistent with anticipated expensing and we expect to maintain this level in the June quarter.

Based on our current guidance we also expect to resume earning incentive compensation in the June quarter. CapEx was flat, basically $1.2 million this quarter compared to $1.1 million last quarter. Tax expense was $364,000, down from $887,000 last quarter. All of this resulted in a net loss of $2.2 million or a loss of $0.04 per share from continuing operations. This represents the first time in 14 quarters that we have not been profitable or breakeven. The loss included $1.1 million of expenses associated with the integration of the die bonder system. Of the $1.1 million approximately $300,000 was related to cost of sales and $800,000 related to SG&A.

On the balance sheet cash, cash equivalents and short-term investments decreased from $139 million to $129 million. The two primary factors were a $5 million increase in AR associated with the strong shipments at the end of March and a $5 million increase in inventory as we purchased material for the ramp up of our equipment business.

ROIC came in at a disappointing 0.4%. As I mentioned last quarter, we do not anticipate that the purchase accounting for Alphasem acquisition will be completed until the end of the fiscal year. Until that time we will continue to work through the final valuation of certain assets and liabilities, with corresponding changes to goodwill.

To sum it up, the quarter's financials were significantly impacted by a combination of three circumstances -- industry wide trough level sales, costs associated with the die bonder integration, the ramp up of our equipment business at the end of the quarter. Taken altogether the Company finished the quarter with better results than we had originally anticipated, but we are certainly looking forward to the June quarter. Scott?

Thanks, Maurice. Before we take your questions I'd like to reiterate our longer-term goals for K&S, which were also part of the context in which you should evaluate these March quarter results. We talked in the past of K&S pursuing both technology leadership and being the low-cost provider as a way of achieving good financial performance over the whole semiconductor cycle all the while generating long-term growth.

The March quarter results demonstrate our commitment to these strategies. About half of the loss from the quarter, our first from continuing operations in 14 quarters, is attributed to integrating Alphasem's die bonder business into K&S. We expect this acquisition to be a major factor in our future growth -- both through die bonder sales and through our new-found ability to cross-sell die and wire bonders.

As for the rest of the loss, even though it's the trough of the quarter we maintained our investments in new technology as exemplified by new products like the HSL-Plus and the 8202 die bonder and the Cooper Plus capillary at MaxSoft and RADIX wires. These technology developments also drive -- these technology investments also drive continuous improvement of existing products, assuring their ongoing competitiveness. An example of this is the DRAM optimization of our Maxum family of wire bonders that we previously discussed.

We'll have the right products for this cycle and our technology and cost leadership will ensure our return to growth and profitability in the June quarter as the industry increases unit output. Jackie, let's have a few questions.

(OPERATOR INSTRUCTIONS). David Duley, Merriman Curhan Ford & Co.

In the DRAM market I was wondering with the move to DDR2 how large you think this market is getting and what you think your share of the market is?

It's hard for us to forecast where it's going, David. I'm the guy who historically has said DRAMs weren't a big driver of wire bond capacity, so what do I know. What I can tell you is that as a result of a lot of good effort in the product group and in the engineering force, we've been able to optimize the Ultra plus specifically for DRAM applications because the DRAM guy who likes a slightly different flavor of wire bonder and we think we're getting way over half of the DRAM wire bonders that are going into the field right now.

And can you talk a little bit about where you think your customers' utilization rates are and if you have any information between subcons and IDMs. And then what was the split between those two groups during the quarter?

I can give you some information on the IDM subcontractors during the quarter. But for the utilization, as we've you in past calls, we find that to be an increasingly useless number so we've stopped tracking it. As for the subcontractor IDM split, it was down to about 25% subcontractors, 75% IDMs which is a very low number, typically trough of cycle kinds of numbers. We're projecting that to bounce back to where subcontractors would be a little over half in the current June quarter.

So they're definitely the category behind the recent spike then?

Yes, yes and that's all consistent with our view of a recovery -- back end recovery.

Final thing from me is could you talk a little bit about ASP's here at the trough and how they might act over the next quarter or two?

Well, obviously at the trough customers had the most purchasing power. So we saw some ASP pressure, we saw some of our competitors get a little muddy. We've been able to hold our own. We continue to bear down on the cost side of our business. Plus the fact that we have the best performing equipment out there allows us to get a premium.

And the recent pressures wouldn't change the margin profile when we get back to some of the more robust shipment levels?

Well, inevitably you expect to see some margin recovery -- as volume goes up you get better overhead absorption and of course our margins are much affected by customer mix and product mix. So right now margins will be tough for a while but they'll come back.

Great, thanks.

Also one more thing on that. On the die bonder side in particular we're shifting production to Asia, we're starting to get our supply chain to kick in and you won't really see those results until the fourth fiscal quarter and then the first quarter of next year. But we expect to see meaningful improvement in those results as well. And that's a long-term change, that's not cycle driven.

Great.

Edward White, Lehman Brothers.

Scott, can you talk about the kind of customer mix and product mix changes that you expect going forward? It sounds like you think most of the margin improvement near term will come from the volume. But how do you see the customer mix and product mix changing as we go forward?

First, we expect the DRAM guys to continue at about their current unit volume in the June quarter, not their percentage of total, obviously the total is going up significantly. But then we're seeing other IDMs, non DRAM IDMs and subcontractors come in and start to take meaningful numbers of bonders. So I'm not sure if that answered your question or not, Ed.

It sounds like the mix then ought to be getting more favorable because you've got other customers in that might order higher configurations with more accessories and things like that. Is that -- in other words, if you look at the mix DRAM versus non-DRAM for the June quarter it ought to be higher than the mix DRAM versus non-DRAM for the March quarter.

Absolutely, absolutely. Some of the non DRAM IDM guys buy a more [fully] configured bonder and of course the subcontractors buy a more fully configured bonder but they never know what they're going to do with it.

Okay. And then the other question is how does the unit picture look in terms of the materials business. In other words I think you measure it in terms of feet of wire or something like that, how does that look right now?

The materials business inevitably comes back less quickly than the equipment business and that's what we're seeing in the forecasts right now. Those forecasts haven't moved a ton yet, and when they move, they move more slowly, but corresponding benefit is that they went down a whole lot less and a whole lot less quickly. So they're following their traditional pattern as well.

Okay. And then finally, I know it's a little early to be able to say a lot about this, but as you look forward on the die bonder side how are you beginning to feel about the market share opportunities there? You talked about a new product for the DRAM market, you've had a chance to do some integration, what are your thoughts on that?

First, we've seen customers quite receptive to the idea of K&S style value proposition in the die bonder space. That is to say a bigger company with deeper resources and more committed to customer satisfaction than a lot of other guys and a lot of the smaller players are able to be. So we've had no reluctance from the customer side to come in to listen to anything we want to offer them.

They are pleased with the short-term improvements we're making in the Alphasem productline, things like the HSL-Plus and the 8202 which are upgraded versions of the existing or the historical Alphasem equipment. And of course they're all looking forward, as we're looking forward, to the next generation die bonder discovery which we're working very hard at but which is not a fiscal '07 issue.

Okay, great. Thanks.

Satya Kumar, Credit Suisse.

Thank you for taking the question. This is Obeshek Shah on behalf of Satya Kumar. On the margin side you said that your margins were lighter due to the impact of adverse product mix. Was any pricing also involved in your lower margins? And if so, can you quantify the contribution from mix versus pricing? And I have a follow-up question, how do you see the margins trending in June?

I'm going to let Maurice answer that one.

So as Scott likes to always point out to us, ASP comes from multiple sources. There's the same product sold to the same customer in an increase or decrease there which we did not see a lot of this quarter. So from a customer-on-customer basis nobody changed less. More and in fact the entire impact came from shifting between products, as I mentioned in my comments, to the lower featured elite from the higher featured ultra, and this from the shifting market and customer base which had a big impact on the total margin, but it wasn't the ASP degradation that you guys traditionally think about in that a specific customer pays less one quarter than last quarter.

We don't guide margins on future quarters, as you probably know. But as I mentioned in my comments, we only see a slight improvement in the June quarter and the real improvements will come further out into the year.

I just have a follow-up on the gross margins. As your contribution from die bonders increases how do you think it will impact your equipment gross margins?

Good question, we talked a little bit about that last time. Long run and I know that that's not what you guys are focused on, but long run it will have a positive impact. Die bonders industry wide get a -- generally have a higher margin than wire bonders and they'll have a positive impact. However, that is several quarters -- three or four quarters away for us because, as Scott mentioned, we need to get the supply chain in order and ultimately we need the new platform. So it's an '08 issue, but at that point we anticipate still that die bonders will have a higher margin than wire bonders and contribute positively to the equipment margin.

Okay, thank you.

Peter Kim, Deutsche Bank.

Good morning, thanks for taking my questions. My first question is it seems like to you're seeing more focus and more business out of memory. Do you expect that to shift your mix overall going forward and do you expect that to have a margin implication just from that component of it in the future cycle?

First, yes, we are seeing more business from memory and it surprises us historically we have not been memory-focused. I think that's kind of an interesting story in general. The truth is that over the last say five years K&S was overfocused on the subcontractor and a handful of big IDMs because that's where most of the industry growth is coming from. Last year we decided to refocus our sales efforts and to broaden them, riding the subcontract big IDM horse, while it's gotten us leading market share wouldn't take us to the next step in market share.

Clearly our long term goals are to rise well above this high 40s% level that we're at in the wire bonder space. We think we can achieve a much bigger footprint in the wire bonder segment. So to do that we've broadened our focus on our selling efforts -- now that includes DRAMs, that includes a bigger effort on low-end applications, on opto applications, things that we generally haven't talked much about which actually consume a lot of wire bonders.

So it's not just DRAM going forward, it's all these other -- what have traditionally been viewed as minority application spaces. And you'll see us bearing down on them both with the wire bonder and the die bonder productlines.

Do you think that there's an increasing complexity in DRAM that is maybe giving your products a little bit more opportunity in that market? And also I'd like to just quickly follow-up and ask about the ball bonders, because you keep listing your ball bonder market share gains and I'm wondering is that due to DDR3?

No, I don't think any of this is particularly DDR3. These are just regular run of the mill whatever people are buying for DRAMs. In terms of the complexity -- now the DRAM -- I've talked about optimizing the bonders for DRAMs. The optimization of the DRAM is not so much a process complexity, it has to do with MTBA. But contrasted to a subcontractor who's bonding a different product every few hours on a wire bonder, a DRAM guy sets up the machine and runs it and runs it for weeks and weeks and weeks. And he gets his benefit from the wire bonder more from high productivity, high MTBA, low indirect labor charges.

Great, thank you.

Oh, I'm sorry. Maurice is saying not everybody knows what MTBA is. I'm sorry, meantime between assists. How often do you have to go and touch the bonder to keep it going. In a typical subcontract operation meantime between assists might be measured in the 90 to 120 minute range. In a DRAM line, they like to run it -- see it run 4, 5, 6 hours before somebody has to go and do something to the bonder to keep it going.

So it's a different point of optimization based on different product mix in the customer's factory. So we've borne down on that, it's giving us a much more reliable bonder, more robust both than we were in the past and our competitors are. And the other nice thing about that work is it carries over into the other application spaces as well. So the increasing competitiveness comes not just in the DRAM space, but also in our other spaces.

Thank you so much.

Andy Schopick, Nutmeg Securities.

A couple of questions really for Maurice. I want to be sure I understand this. In the second paragraph where you make reference to the $1.1 million of expenses related to the die bonder integration, now that's a net loss after-tax, the $1.1 million, right? It's not a pretax number?

That is an expense number from the -- it shows up on the expense so it's not tax affected at all. It's just the pure expenses associated with the integration efforts.

Okay. Also I want to ask you about what fully diluted share count is going to look like when you return to profitability here in the June quarter on a fully diluted basis. Are we looking at share count still being something under $70 million?

Yes.

Okay. And also with respect to the forecast of $167 million, what's the implied gold sales or revenue in that revenue forecast?

Around $73 million, $73.5 million.

That was a good guess. I was guessing it could be as high as $75 million. I want to talk a little bit about the Packaging Materials segment. I'm just doing some very quick calculations here, adjusting for the gold related revenue and pass-through of costs. It looks to me like the gross margin on that business, excluding the gold, is right around 55% but that the operating income margin looks to me to have dropped down to about 7.5%. Over time really we've been looking at about kind of a 10% operating margin in that business. I'm wondering if you can give us any insight into what's happening there and whether the commentary I've just made is essentially correct.

First of all, it's essentially correct. I think it's pretty close. We've had some real focus in that business on a couple different things that are -- the business is getting tougher, we're getting tougher and going after high ROIC business with a big focus on that. The competitive pressures in the capillary businesses are stronger than they were in the past and that's impacting the fall through that gets down to the operating margin. However, we are forecasting that it will return to close to where it was in the past in a couple quarters, but it's going to be a tough road.

But it doesn't really seem to be on the gross margin line where you're experiencing the pressures. It really seems to be in the operating expense area.

It's primarily the operating expenses are flat though, Andy, and the gross margin dollars that are getting through are just going against the same expense base.

Okay. Scott, are you happy with the operating efficiencies that you have achieved to date? Given the many things that you have done in the business over the past few years how much more can you really hope to achieve? And have you achieved really what you hoped to achieve in terms of seeing the performance in the business?

Interesting question, Andy, and right on the money. First, yes, I'm happy with what we've achieved, but don't confuse happy with satisfied. We've made huge steps in the last few years; credit to a lot of people, more than anybody, Maurice, who is chief (expletive) and that's what you need to get better in that.

But having said that, we think we've worked through the vast majority of the low hanging fruit, but there's another round of issues that we have to do which is not so much doing the same job for less money, but now let's get more effectivity out of the people we've got working -- effectivity of R&D dollars spent I don't think is adequate, effectivity of sales dollars spent is probably a little soft.

So we think there's room for continuous improvement in those parts of the business. So again, we're happy with what we've achieved, but we're not satisfied with what we've achieved.

Are there specific goals and strategies in place to improve upon what's been achieved?

There are some specific goals for some specific issues, for instance software productivity. Software represents the biggest lump of our engineering expense and we think that there's a step function increase in software productivity available to us. Other areas like sales productivity we're still wrestling with and I couldn't quantify the kinds of improvements we look for yet.

Okay, thank you.

Thomas VanBuskirk, McMahan Securities.

Just a quick question for you. The gain on -- the $4 million gain on debt repurchase I think it is, can you just elaborate on what that is? Did that have to do with the acquisition because I didn't see debt change from (multiple speakers)?

I think that's in last year's numbers.

Yes, I think you're looking at the --

Last year, six months into last year?

You're absolutely right.

Last year we did a swap, remember, we did the equity for debt swap where we retired some of our (indiscernible) bonds and issued equity in cash and that's the gain on that.

You're absolutely right; I've only had one cup of coffee so far this morning. Sorry about that.

That's okay, it's Monday.

Edward White, Lehman Brothers.

Scott, if you go back far enough I remember that in the ball bonder market for the DRAM sector, the Japanese competition, I guess particularly Shinkawa, used to build really highly reliable bonders with the MTBA and the meantime between failure was very, very long. And that was well-suited to that market segment. If we fast forward to where we are today, where do you think you are now, especially with the upgrades you've done to your wire bonders to support the DRAM market relative to competition in Japan?

Most of the DRAM expansion is not in Japan, it's in Korea. Although it is against Shinkawa and we have been running head to head with Shinkawa and the way those producers typically reward us is who gets the bigger part of the split. They want dual vendor sourcing strategies. So do they split it 60/40, 40/60, 70/30, what have you? And since we moved into above the 50% range it's clear that we're delivering better overall productivity and better MTBA than Shinkawa.

Great, thanks.

Brett Hodess, Merrill Lynch.

It's actually Tom Diffely here with Merrill Lynch. A quick question, you talked a lot about memory and DRAM, but what about your NAND exposure?

We have been selling a fair number of bonders into flash; although for us that is a less differentiated customer. A lot of those flash parts are being built in subcontractors so they're just part of our subcontract business.

Okay.

And for us it's one of many stack die applications. So I can't give you the focus on it the way we can with DRAM which is our very specific and dedicated IDMs.

It just seems like with the stack die going into the handsets [that] could potentially be an even bigger market than the DRAM market.

Oh, I think so. The DRAM looked big in the March quarter in part because the March quarter was a weak quarter. As I said earlier, we'll sell about the same number of machines into DRAM in the June quarter but we won't talk about it much because there will be a much bigger denominator to that ratio.

Right, okay. And just a quick clarification, when you said the gross margins were improving in the June quarter, are we talking about the equipment gross margins or overall because of the mix?

Overall. There will be a slight improvement in equipment but overall the mix will help the Company upward.

Okay, thank you very much.

Thomas VanBuskirk, McMahan Securities.

Let me give this one a try. The quick mention of the impact on profitability from moving die bonder production to Asia, I think you said it would start to impact the results in Q4 and Q1. Were you talking calendar or fiscal?

Fiscal.

Okay, thanks.

Okay, Mike, I think you have some closing housekeeping notes.

Yes, thanks, Scott. I would like to announce some upcoming events which will be webcast. We will be participating at the upcoming Credit Suisse conference in New York on May 15th at 9 AM Eastern Time and we will also be participating at the Deutsche Bank Tech conference in San Francisco on May 16th at 10:20 AM West Coast Time.

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 website at www.KNS.com. Thanks, everyone, and have a great day.

Ladies and gentlemen, you may disconnect your lines at this time. Thank you for your participation.