庫力索法 (KLIC) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Kulicke & Soffa third-quarter financial results. 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.

Thanks, Joe. Good morning, everyone, and welcome to Kulicke & Soffa's third 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 the call will also be available on the K&S website after the completion of the 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 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.

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. Welcome to this call, the purpose of which is to discuss K&S's June quarter financial results, which we released earlier this morning. In a moment, I will ask Maurice Carson, our CFO, to go through the key financial highlights of the quarter. But first, I will take a moment to put the quarter's results in a broader context.

Demand for K&S's products, especially for wire bonders, progressively strengthened through the June quarter. That demand is broad-based, with both IDNs and subcontractors in all sales regions buying bonders for a broad range of applications, including analog, logic, and memory. This dramatic increase in bonder demand plays to one of K&S's core competencies, our ability to rapidly ramp production. We increased bonder shipments over the course of the June quarter, a trend that is continuing into the current quarter. Wire bond demand and our rapidly ramping shipments are the principal driver of the June quarter 18% increase in sales, as well as the September quarter revenue guidance we gave last week of $212 million.

As most of you know, K&S acquired a die bonder company last fall. Die bonders also contributed to the June quarter revenue increase. More generally, we are executing our die bonder plan, with improved versions of our existing die bonders launched since the acquisition, and with manufacturing of much of the product line moving to China. This move to China will be substantially complete this quarter, and the benefit of those cost reductions will begin in the December quarter.

We continue to be excited about the growth potential of our die bonder business. This acquisition is roughly double the [TAM] of our equipment businesses. We expect die bonders to be one of the principal drivers of K&S's future growth.

As for our materials business, that team once again turned in a solid performance, with $3.4 million in earnings for the quarter. Among the many highlights of the quarter were the steps we have taken to continue to strengthen our balance sheet. I would like Maurice to take you through the quarter's financials, including that balance sheet activity.

Thank you, Scott. As always, I'm going to be talking about the current quarter compared to the prior quarter, in this case the June quarter versus the March quarter.

Let's start with revenue, which increased by 18% to $169 million from $143 million last quarter. As Scott pointed out, this is an equipment story, with wire bonder growth of 63% and die bonder growth of 40% -- those are revenue growth.

Equipment growth margin improved from 40% to 41.5% due to product mix and the higher proportion of logic and analog customers. Package materials' gross margin was flat.

The gold metal pass-through component of our financials increased by $2 million, from $72 million to $74 million. While this change is small in dollars, it includes the impact of 1% lower volume and 5% increase in average gold price.

For the total Company, our gross margin percent improved 320 basis points from last quarter. This higher gross margin is consistent with our higher top-line volume and a higher mix of equipment segment business. We expect the margin improvement will continue in the September quarter.

Operating expenses were up quarter-over-quarter, primarily due to the incentive compensation expense associated with our profitable quarter. As you will recall, last quarter, we had no incentive compensation, as our program only pays when we're profitable. All of this resulted in a net profit of $5.5 million, or $0.08 earnings per share from continuing operations.

On the balance sheet, cash, cash equivalents, and short-term investments increased to $200 million from $129 million last quarter. During the quarter, we issued $110 million of new debt. We used $40 million of the proceeds to buy back 4.2 million shares of common stock. This quarter's EPS reflects only a portion of the share reduction, since the buyback occurred late in the quarter.

We intend to use the remaining proceeds to retire 0.5% Notes when they come due in 2008, or earlier if they are available for a reasonable price. These newly-issued notes are net share settled, meaning we intend to settle the principal in cash, not shares. For this reason, the notes do not increase the diluted share count. This will change if our stock trades above $14.35, or if the accounting rules change.

Working capital increased only slightly, by $5 million, as would be expected during a period of significant growth. AR days were down; Inventory and AP days were up slightly. ROIC came in at 11% for the quarter, significantly up from last quarter. As I mentioned to you last quarter, we do not anticipate closing purchase accounting until the end of the fiscal year for the Alphasem acquisition. There may be a significant change to goodwill.

One additional note. In July, we fully funded our defined benefits plan. This does not show up in the financial statements you are looking out, but we want to give a heads up for the next quarter or two. We froze this plan in 1995 and have funded it subsequently with contributions of stock. We made the decision to annuitize this plan and fully funded the deficit with $1.9 million of cash in July.

All pension benefits will be paid at 100%, and the Company will have no further obligations once the plan termination is approved, which we expect in fiscal 2008. When these approvals are received, we expect to take a significant non-cash charge to earnings of approximately $10 million pretax. Again, $1.9 million of cash already funded and $10 million of non-cash accounting charges.

Taken all together, the Company finished the quarter with very good results and we're looking forward to the September quarter. Scott?

Thanks, Maurice. Before we take your questions, let me summarize our view of the quarter. The industry is going through a period of rapid unit growth. K&S benefits from that rapid unit growth through significant increased demand for wire bonders. That demand is coming from all segments and regions of our customer base and we have responded by ramping production.

Of course, our ability to do all this is based first on our portfolio of leading-edge products and second on our industry-leading manufacturing capability. These competitive differentiators, coupled with the strong market, point to a great September quarter.

Joe, we are happy to take a few questions.

(OPERATOR INSTRUCTIONS) Edward White, Lehman Brothers.

With the higher momentum that you're seeing and your busy activity on the wire bonder side, will there be any change in terms of the development plan for the next-generation wire bonders? Can you talk a little bit about how that is going?

You're really putting in a hard position here. You know me for a long, long time, and I would love to talk about our development plans, but I have got Maurice kicking me under the table, saying, no, Scott, you cannot talk about next-generation products, whether they are wire bonders or die bonders, until we are ready to launch. So I'm going to have to duck your question. But thanks for trying.

Okay. The other thing I was interested -- when you're seeing this kind of momentum and you talk to the customers about what they are doing, what their requirements are, how much sense do you get -- I mean, are they filling a capacity need they have right now, or do you get a sense that there is some degree of sustainability to the momentum that we are seeing?

Well, yes and yes. I think they are filling the capacity need they have right now. Customers are quite insistent on they want the bonders ASAP. They've been really aggressive about it, and that says it is for current demand. They are not buying on forecast.

And because of that, we believe that there is some sustainability to this demand, specifically because they are not overbuying. They are exercising good discipline in managing their capacity. We think that what's behind all of this -- at least, I think what's behind all of this is the fruits of the 65 nm nanometer feature size shift.

You know, I am a big believer in the whole Moore's Law thing. You get feature size reduction. That triggers a new round of better devices, better ICs and/or cost cuts on existing ICs, both of which stimulate more unit demand as people either design a new capability into their systems or reduce the cost of their systems. That unit demand flows through to us, first in terms of incremental bonders, and later on as the industry -- as bonders go into production, as increased pullthrough for our packaging materials.

And we see that the 65 nanometer transition is not over. There's still a lot of legs left in it. We are pretty optimistic looking ahead.

Great. Thank you.

Dave Dooley, Merriman.

Yes, nice quarter. Maurice, you mentioned something about shipment rates of die bonders and wire bonders. Was that a sequential number? Could you just give us a reference point there?

That was a revenue, not unit, and that was quarter-over-quarter. So the June quarter over the March quarter increase in revenue, and how it split out in the equipment segment.

Great, thank you for the clarification. One thing I think you also mentioned in your prepared comments is that the volume of the materials business was down, I think, 1% or gold was down 1%. Maybe you can talk about that and how that business may lag that of the spike in wire bonders.

There's a couple different trends going on in the wire business. Yes, we think overall wire consumption is going up. It goes up because units are going up and the units are a little more complicated. They have more wires. The wires are mostly likely a little longer, so the wire goes up.

But the dynamic in our wire business is offset by a pruning of our customer list. We have gone through and are really driving that business in particular for profitability growth as opposed to revenue growth. And we have decided to walk away from some very low margin business.

As you know, Dave, and most of the regular listeners know, about 18 months ago we embraced ROIC as our principle, not sold metric, but principal metric for financial goodness. And we're looking at every wire order, every wire quote that we send out -- we're saying what is the incremental ROIC on this guy?

And we have decided not to chase some of our competitors to the bottom. We would rather have a slightly smaller but more profitable business. So you are not seeing the wire business track up the way you might expect; but again, that is just good financial discipline in that product group.

Okay, speaking of ROIC, could you talk a little about where your targeted number there is? It's nice to see it up nicely at 11%. That is a very respectable number --.

From our point of view, it is okay. But I guess the best way to talk about it is in terms of our incentive program. Maurice mentioned incentives. We fund our incentive pool based on ROIC, assuming we're profitable. If we're not profitable, we make no contribution to the incentive pool, even if the ROIC is positive.

Secondly, how much we fund is a direct function of ROIC -- again, assuming we're above that profitability thresholds. But for us to earn our full incentives, we have to earn a 30% ROIC. So that is where we set the bar for the Company.

Different business units have different contributions to that 30%, but at the corporate level, we feel we're doing real well when we hit 30% ROIC. We fully earn our incentives. At 11%, we earn -- whatever it is -- a little over one-third of our incentives. That is all. So we think we should do better than this, and we certainly will do better than this in the future.

Along those lines, is there a target for the September time frame for year-end or however --? How should we progress from 11 to --?

There's a target every quarter for 30%. Sometimes we make it, sometimes we don't. A target is not the same as a forecast.

Okay.

But it was a good try, Dave.

How should we view the trends in gross margins and operating expenses in this upcoming quarter, with another 26% increase in the top line?

Maurice, why don't you handle that one?

OpEx will trend -- it's strictly on the EICP, the incentive comp number. As you see, it was a variable number. And I think you can go back in your history and take a pretty good shot at us meeting that number.

Gross margins, as I said, will be up for the Company. And that is really all that we ever talked about in future gross margins.

And in your operating expense trend, so just incentive comp, that is the only thing that would grow sequentially in the total (inaudible) area?

There is some sales comp, but it is not a big number to include. So there is always variability, but that is the only one that's a pure variable cost.

Okay. Final thing from me is I noticed the backlog was up nicely year-over-year, from the press release. I did not see there was an order number in there. Could you maybe talk about how the orders trended in quarter?

You can get orders as shipments plus change in backlog. Orders were strong, but for us, backlog is not a particularly useful number. Backlog are customers are calling up every day and wishing they had their equipment sooner. We try to keep our backlog short in response to customer demand. So again, it is not useful number from our point of view.

Thanks.

Tom Diffely, Merrill Lynch.

Just quickly first on taxes. Last couple quarters have been lower than they have been over the last couple years. Is that a trend that is going to continue going forward here?

Well, yes --partially yes. As profitability increases, they will increase proportionate to that. But we did change our tax structure a couple years ago, and that is flowing through the P&Ls. The overall trend will be lower than it was two years ago, but they will vary with profit.

Okay. What is your current level of NOLs, then?

180 something, maybe a little higher than that.

Okay.

(multiple speakers) valuation allowance on them, though.

I'm sorry?

Full valuation allowance. Most of our profits are not anticipated to come in the United States.

Okay. And you mentioned something about a $10 million charge. Is that showing up in the September quarter and where is it going to show up?

We do not know when it will show up, because it is pending IRS approval of our pension -- annuitizing our pension plan. And they have nine months, 10, 12 months. It could go as soon as the September quarter or as late as a year from now. And we do not get better forecasts from the IRS. So unfortunately, I cannot tell you when that hits exactly.

But it will show up in SG&A as an accounting charge. Emphasize again, no cash component of that. The $1.9 million of cash contribution which is our obligation, financial obligation, will show up in the September quarter.

Okay. In SG&A?

Yes, in cash from operations.

All right. Then on the business side, what is your current lead time for wire bonders and how has that stretched out over the last quarter?

You know, we had this conversation a week ago, and I think you were there actually, Tom. Lead time is a funny thing because there is a standard lead time, but we negotiate a lot around it. So standard lead times are running out a quarter or more.

But the way we manage our production schedules is, based on relationships and forecasts, we pencil people into the build schedule. And we always leave a little bit of slack in there. So the lead times are longer than total backlog because we weave some in there and they move around, and customers call up and say, hey, I really need some bonders in a hurry, and things like that.

So I can give you a number, but I am afraid it will be misinterpreted. We are pretty fully penciled in -- I guess we are fully penciled in for the current quarter. We are penciling people in for October and November.

Okay. I was just trying to get a sense for whether or not the December quarter was starting to get pretty full at this point.

Because we elaborately run the Company on a short backlog position, it should not be full at this point. We are not satisfying customers if it is full at this point. So that would be a negative indicator, although I realize you are fishing for it as a positive indicator.

Right.

From a customer satisfaction point of view, that would be a bad thing. And we're real good at satisfying our customers.

Fair enough. Thank you.

Satya Kumar, Credit Suisse.

Scott, just wanted to talk a little bit more about the breadth of your [pickup]. I know you mentioned that is was pretty broad-based, but there is always a distribution. If there was one geography or customer group that you would pick as being the strongest, would it be fair to say it was maybe subcons in Taiwan or --?

Subcons in Taiwan are very strong, and of course they are the biggest part of the business. You know, you've got the usual suspects there -- ASE, SPIL, also [Ancore], also STATS ChipPAK in there somewhere. You've got a lot of -- you've got a handful of big IDMs. You've got a bunch of smaller names out of China.

We were reviewing the list and preparing for this, and we're saying, who are these guys? I've never heard of these guys. They are all over the place. It is a very broad-based upturn. So it's broad-based both regionally and -- both geographically and application-wise.

That's useful. This is probably a difficult question for you to answer, but do you think that the spending levels that you from, particularly, the subcon customers is rational and proportional to the demand levels? Or do you see that there is perhaps a little bit of a drive there to add a bit more capacity among that customer segment?

No, as I said earlier, we think these guys are being remarkably disciplined. They are buying bonders because they need bonders. They're buying bonders, especially the subcons, because they have contracts in hand or wafers piling up at the shipping dock, the loading dock. No, we do not think this is a bubbled capacity that is being added speculatively.

Okay. What are the utilization rates for packaging in the installed base right now?

We have stopped following -- tracking that number or reporting that number, because we found that we did not think the data had as much integrity as we would have hoped.

Okay. And in terms of September, is the linearity more first-half weighted that gives you added confidence about September or is it more even through the quarter?

The September quarter is well, it is gated -- it is really gated by our supply chain's ability to supply us. There is a little bit of -- a tiny little bit of slump in the middle, based on some European suppliers' vacation schedules. But we actually are production limited in the September quarter, not demand limited.

Okay, and can you give me a sense of what the relative size of your die bonder business is? Are we closer to say 15 or 20 a quarter, or is it more like $5 million or $10 million a quarter?

Maurice, why don't you help me with that one?

We made a conscious decision, just as we do in our other business units, that we report only on the segment basis. So that is not a number that, at this point, we break out between any of our business units that fit into the segments.

Okay. The reason I was trying to get at that was if I look at your equipment gross margins, I'm just trying to see where this can go eventually with your [cost selection] initiatives here. I was trying to get a sense as to where your bonder gross margins are relative to die bonder as related to wire bonders, and are these a parity, and eventually where will that go to?

The best way I think I can answer that is to say that wire bonder gross margins are as strong as they have ever been at this point in the cycle. Die bonders, there is no improvements relative to any of our costs initiatives [that] won't flow through until to December quarter. Volume is not significantly different than it was when we bought the Company in the die bonder business.

Okay, thank you very much.

Andy Schopick, Nutmeg Securities.

A couple of follow-ups, Maurice. On the tax rate provision for the September quarter, the year-to-date tax rate is considerably higher than it was for the quarter just reported. So I'm wondering what type of guidance you can give us for an anticipated tax provision for the September quarter, given the expectations you have.

Of course, we have that number, but we do not forecast individual lines on the P&L, Andy. We try and estimate it on a year basis and look at it proportionally spread out over the year. But we do not provide guidance on any of the individual P&L line items.

Why was the tax provision lower as a percent of income in the current quarter than it was in the prior six months?

I think, Andy, as anybody among the people that follow the company, you'd know that our tax provision is made up primarily of foreign taxes. So it does not always follow the Company P&L; it depends on the profitability of the individual foreign tax locations. That and AMT. So it is very difficult to tie it back to the Company numbers, because Singapore or Switzerland or Israel may have income that tracks at a different point in time. And it is very difficult to try and dissect that.

I'm just surprised you would not want to give a little more clarity or range of the tax provision for the September quarter.

I appreciate that you're surprised by that, but I'm really not going to.

Okay, I won't push that any further. The gold metal content in the September quarter, implicit in your assumption, your revenue assumption, are we talking something in the $75 million to $80 million range for gold metal?

Yes, that it is implicit in the numbers. You've got that right.

Okay. Composition of the backlog. Can you talk a little bit about the composition of the backlog? And in terms of the delivery schedule, as you define backlog, is it typically less than six months?

Okay. I cannot give you composition of backlog by segment. I can tell you it is defined more explicitly in the K, our backlog rules. But we have to have a firm PO. We have to have an agreed-upon delivery -- mutually agreed upon delivery schedule, mutually agreed-upon technical specifications. And then it had to get through our credit department. And it has to be for delivery in less than a year.

I will tell you qualitatively the vast majority of the backlog is for relatively short deliveries.

Okay. When was the last time you had a backlog over $100 million? Do you recall?

No, I do not recall.

We really do not track it (multiple speakers)

Honestly, (multiple speakers). I deal with backlog once a quarter, and it is for this call. It is just not an operational [indice] for us.

Well, if we can't get your stock price up before Thanksgiving this year, it's hopeless. Thank you.

Peter Kim, Deutsche Bank.

I had two questions. One was, you talked about moving your manufacturing of the die bonders to Asia. And I suspect that that will have some financial impact in the costs line -- the COGS line, maybe as well as some in the OpEx line. I was wondering if you could characterize that for us.

You're talking about moving die bonder manufacture to China?

Yes.

Okay, that will kick in a positive COGS -- have a positive COGS impact; that is COGS will go down for die bonders starting in the December quarter. The OpEx -- you asked about OpEx. The work of doing that is just part and parcel of the operating expenses and manufacturing overhead. And it has been reported on a current basis quarter-over-quarter. We have been working on this since the day after the acquisition.

I don't know if I misunderstood the question, but there may be some small resizing associated with this, but you're not going to see a big number for that. It is nothing set to look for.

Yes, it will fit in the normal quarter-to-quarter variance. It will not poke you in the eye.

Would you care to size the COGS impact?

No.

Okay. Let me then move on.

In keeping with Maurice's already very-well-articulated theme, we're not going to go into that kind of subsegment breakout.

Okay. The second question is that with your demand for wire bonders increasing, I am kind of curious as to how you see your internal capacity to meet with shorter lead times and increasing orders for equipment. Do you feel like your capacity utilization is running at a very high level and that you may need to invest in infrastructure?

We are running at high levels by historic norms. We are not maxed out, though, in terms of fixed assets, floor space, factory fitout stuff. We could go higher. We have been bringing in labor, direct labor. That is not a problem. We're real good at that. The Singapore labor market works very well for us in that regard.

For us in general, our ability to flex the manufacturing upward has to do with the supply chain. And we hit a bit of a barrier, not a killer barrier, but a bit of a barrier this quarter with one particular subsystem -- not subsystem, but component we buy from a European supplier, and we got tripped up over his vacation schedule. But other than that, it is basically a question of our willingness to commit to inventory into our supply chain.

Thank you.

Andy Schopick, Nutmeg Securities.

You know, I think I missed one thing, Maurice, in your commentary. The stock-based comp, did you specify what that was in the quarter?

No, I did not do that, but I can certainly give it to you. It was $1.7 million.

Okay. And can you give any kind of color to what you expect it to be in the fourth fiscal quarter?

No, but I think I answered this -- not with you, with somebody else -- and said there is no additional grant coming out until October, so you would not expect any significant changes up or down.

That's fine. Thank you.

Dave Dooley, Merriman.

I have one simple question -- perhaps you'll answer this one -- is based on your current lead times and your comments regarding Ed White's question, would you guess that your December quarter is up at this point versus September?

I wondered who was going to ask that question. We only give our revenue guidance one quarter at a time. So I am not going to answer that one, David.

Okay, but a good old-fashioned upturn means more than one quarter, doesn't it?

Joe, do we have a next question?

(OPERATOR INSTRUCTIONS)

Okay, we're done with questions. Mike, can you give some wrapup to housekeeping announcements?

Sure. 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 through the K&S website at www.kns.com. Thanks, everyone, and have a great day.

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