庫力索法 (KLIC) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Kulicke & Soffa second fiscal quarter results conference call. At this time, all participants are in 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, sir.

Thanks, Ryan. Good morning, everyone and welcome to Kulicke & Soffa's second-quarter conference call. An audio recording will be made of the entire conference call this morning, 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.

During today's call, we will make reference to non-GAAP financial measures. Reconciliations of those measures to the most directly comparable GAAP results will be posted on our website after the completion of this call. To view them, go to the Investor Relations portion of our website and click on the GAAP to Non-GAAP Reconciliations link.

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 and you may not reproduce, distribute, adapt, transmit, display or perform the content of this conference call in whole or in part without 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 29, 2007 and our other recent SEC filings. And now it is my pleasure to introduce the host for today's call, Scott Kulicke, CEO and Chairman of the Board. Scott?

Thanks, Michael. Good morning and welcome to this call; the purpose of which is to discuss K&S' financial results for the March quarter. For those of you who may not -- may have not seen this morning's press release, those results are available at the Company's website at www.kns.com in the Investor Relations section. Before I offer my commentary on these results, I will ask Maurice Carson, our CFO, to take you through the important details of the quarter.

Thank you, Scott. Good morning, everyone. This is the second earnings release and conference call where we are providing non-GAAP measures as a supplement to our GAAP results. As a reminder for everyone, we are removing the gold metal pass-through from our net revenue and cost of sales so that investors have a better view of our profit margins. We are also adjusting for other non-cash items, including a $9.2 million pretax pension termination charge, which I've discussed with you over the last few quarters.

I am going to discuss our current quarter compared to the prior quarter. All of my comments today will be about non-GAAP measures for the March quarter versus the December quarter. The gold metal pass-through of our component -- the gold metal pass-through component of our net revenue was $95 million compared to $91 million last quarter. We are currently planning for an increase in the price of gold, bringing the pass-through component to approximately $101 million in the June quarter.

Net revenue was $81 million, down from $135 million last quarter. Equipment and Packaging materials both declined in line with the anticipated cyclical downturn following two very strong quarters. We continued to extend our market leadership in copper wire, supplying products for the growing number of automotive power and high performance analog devices that are now using copper wire. We are also leveraging our leadership position in copper with more than 20 customers that are currently developing advanced packages using fine pitch copper wire. Copper wire volume increased 10% quarter-on-quarter, bringing current copper production up to around 7% of total wire volume.

Gross profit was $36 million compared to $59 million last quarter. Gross margin was 43.8%, an improvement of 25 basis points over the prior quarter's gross margin. Equipment ASPs and gross margins improved slightly this quarter due to a higher percentage of IDM customers. We anticipate the customer mix shifting back to subcons in the June quarter.

We announced the launch of our next generation ball bonder at the end of the March quarter. As is always the case with our new bonders, they have advanced packaging capabilities, as well as higher throughput, which supports their introduction to the market at a higher selling price than our current models. Normal qualification time and ramp for completely new machines is three to four quarters, so we expect the new products to begin contributing to gross margin in a meaningful way in the September quarter.

Operating expenses were $36 million compared to $39 million last quarter. Incentive pay makes up the largest portion of this reduction with no payments during quarters when we are not profitable.

Turning to the balance sheet, we ended the quarter with total cash and investments of $171 million compared to $139 million last quarter. Short-term investments do not contain any auction rate securities. Operations generated $35 million of cash versus a use of $25 million last quarter. The difference all coming from working capital.

To improve liquidity, we amended the credit facility, which we use to support our gold purchases. In a difficult credit market, we increased the size of this facility from $20 million to $35 million. This increased credit capacity enabled a $6 million reduction in cash margins this quarter and will better meet the wire business' liquidity needs going forward.

In summary, this is the point of the cycle where we collect cash from working capital and position ourselves for continued technology and market leadership. With new products and a stronger balance sheet, we look forward to peak-to-peak improvements in financial performance. Scott?

Thanks, Maurice. Looking beyond the details of the quarter, which paint a picture of a tightly run company operating in the ugly half of the semiconductor cycle, I think two questions ought to be in the forefront of investors' considerations. The first question has to do with the timing of the next upswing in demand for our products. The second is about how well-positioned will K&S be to take advantage of that upswing when it occurs.

The second question is easier to answer. That we are not complacent about our leading marketshare position is evident from this quarter's launch of our new Power Series of wire bonders, the IConn and the ConnX. These two products will replace our industry-leading Maxum Ultra and Maxum Elite bonders. Both machines offer improved productivity relative to their predecessors, as well as better technical performance as measured by indicators such as accuracy and process repeatability. They reset the state of the art of wire bonding and we expect their superior performance will allow us to reset the price point of wire bonders as well. We have started our first customer qualifications of the Power Series and expect these machines to start to make a material contribution to revenues starting in the September quarter.

Product development at K&S isn't limited to just wire bonders. As mentioned in our press release, we have started volume shipments of Formax, a new gold wire product targeted at stack die applications and we are making good progress with the development of our next-generation die bonder, Discovery. We expect revenue from Discovery starting in the first half of calendar 2009.

Of course positioning K&S for the next upturn isn't just an issue of new products. Equally important is maintaining customer relationships, even when customers aren't buying very much. This is especially true in China, the fastest-growing territory in our market. Last quarter, we shipped almost half of our bonders to Chinese sites.

Regardless of territory, our engagement with customers is cycle-independent. Whether the discussion is about new products, such as IConn or ConnX or Formax or about maximizing performance of existing bonder fleets or about new and evolving packaging technologies such as copper wire bonding or stack die, our field force is as busy as ever.

Also key is manufacturing infrastructure. Our equipment business utilizes an outsource manufacturing model optimized towards short cycle times and high inventory turns. During the last upturn, we were able to more than triple bonder shipments in two quarters in response to a sudden surge in customer demand. That capability will be key in the next upturn as well. I am confident that that next upturn will find K&S well-positioned with state-of-the-art products and the organization that has made us an industry leader.

The harder question to answer is when will that upturn happen. As we noted in the press release, some of our customers are telling us we are about at the bottom of the cycle or at least the bottom of the back-end cycle. They are talking about an upturn in bonder demand coming as soon as later this year. Other customers are less bullish, leaning towards 2009.

Regardless of scenario, I worry some investors will miss this upcoming opportunity just as they did in 2007. Throughout that spike in our shipments, we saw investor confusion as many of you seemed to discount our increasingly bullish guidance because you were not able to correlate it with the more modest forecasts from front-end equipment companies.

Our reading was that many of you were using an outdated industry model that predicts front-end demand to follow back-end demand, both up and down by a quarter or two as it did in the ;90s. We think that because those investors were never able to reconcile front-end and back-end order patterns, they missed the buying opportunity created as we ramped bonder shipments. The result was that our stock performance trailed our fundamentals instead of leading.

We believe that old cyclical model has been made obsolete by the evolution in the industry. Our view is that the front end and the back end will increasingly move independently. Front-end demand is more and more influenced by the long development cycles associated with new fab technologies, the economics of feature size transitions, the concentration of investment in just a handful of IDMs and foundries and the growing divergence between the memory, logic and analog segments of this business.

The back end, by contrast, seems to us to be a simpler market, primarily driven by unit demand and unit complexity, especially in the case of wire bonders because delivery times are short and the granularity of investment is small. As soon as I see units are forecasted to trend up, our customers buy and at least in the short term, that will be entirely independent of order rates at Applied or KLA or Novellus or ASML. Whether our next upturn comes in the fall or next year, the incremental units our customers will bond will have been fabbed on front-end equipment already installed. This is because the cycle time for wafer fab expansion, as measured from fab equipment PO to full output, is long, measured in quarters as opposed to weeks for bonders.

So we suggest investors ignore that traditional broken model and instead focus on IC unit forecasts. Today, those forecasts are calling for modest unit growth in 2007, say 4% or 5%, that with IC consumption accelerating in 2009. If those forecasts prove correct, sometime soon, our customers will start to build capacity in anticipation of that surge.

Historically, the big four subcontractors -- ASE, Amkor, Spill and STATS ChipPAC -- have led the way, if for no other reason than to protect their customer relationships. Sometimes they even jump the gun trying to gain marketshare from each other and from the smaller subcontractors.

Later in the cycle, when they can be assured of keeping incremental capacity fully loaded, we would expect IDMs to start to buy bonders as well. At least that is the way it has happened in the past and so far, we don't see any reason why this next upturn should be different. We know we will be ready with state-of-the-art products, an experienced, engaged field force and nimble factories capable of ramping shipment levels quickly. I hope our investment community will be equally prepared. Ryan, we would like to take a few questions now.

(OPERATOR INSTRUCTIONS). Bill Ong, American Technology Research.

Just a quick question. On your packaging materials, it has been flat at $119 million from quarter-to-quarter and your gross margins have only been in the 13%, 14%, but it looks like it declined in the March quarter. Maybe some insight there?

It did decline partly because the gold price continued up a little bit and it was a little bit of absorption that is consistent with this time of year, the absorption as the volumes were down. The Chinese New Year remember effects our package materials more than the bonders and that caused a little bit of absorption hit.

Okay, but it usually has been pretty steady for the last couple of quarters out, so it seems like maybe a little bit of each sort of magnified it and caused a little bit of depression?

Yes.

Okay, thank you.

Gary Hsueh, Oppenheimer.

Hi, thanks for taking my question. Scott, just you are guiding your basic business flat ex gold content and I think you have said in the past your business is anything but flat. So you seem to be getting a little bit more positive. Are you just sort of handicapping that hopeful kind of positive outlook on the second half with any kind of macroeconomic slowdown that may still be impending? Is that the message here?

Well, you sort of gave me three or four different things at once to deal with. Certainly the short-term guidance is for business to be flat. There is no question about that. Quarter-to-quarter, we expect business to be about the same. The more positive posture has to do with looking beyond the near-term guidance, beyond the June quarter guidance. Clearly this business will turn. The $64 question is which quarter will it turn in and as I said, as we tried to indicate in the press release and in my comments, the optimists are calling for the fall, the pessimists are calling for early 2009. So take your pick in between there.

I think none of those forecasts take into account major macroeconomic disturbances. That is something that is beyond our expertise, so you will have to add your own spin on that. But I will point out that, increasingly, this is -- IC consumption is a global phenomenon, not a U.S. phenomenon. I hate to see anybody overreact to strictly U.S. issues and generalize -- overgeneralize from that. So that is just some commentary. We have no major macroeconomic changes built into our forecast one way or the other. We leave that to our customers.

Okay, and just a follow-up question or questions here for Maurice. Maurice, you talked about I think a mix kind of favorably helping improve your equipment gross margins despite revenue decline. Does that kind of work against you? Do you get that mix sort of reverting back to a more normalized sort of ratio here in the June quarter?

Yes, we will have some of that in the June quarter. In quarters when business is down, the steady services and spares business has a bigger proportion of it and that it is a better margin overall. And then it swings wildly between the quarters where we have less subcon business and quarters when we have more and at this point, we are anticipating that the June quarter will have a higher proportion of subcon sales of equipment.

Okay. And finally, just longer term, you talked about these products coming to bear on the P&L here in the September quarter via IConn and the ConnX. What kind of margin expansion can we expect here on gross margin? Is it 100 basis points, 200 basis points, what kind of impact will this new productline have on gross margin?

Well, over time, we have described in the past that we try and get about half of the increased productivity in ASP, but you have to mix that in with the ramp of the products. So I think you can look towards sub 100 basis points in the September quarter, growing to 300 basis points probably in December and March quarters as it ramps to take over 100% of the product.

Okay, fantastic. And the same sort of ramp for the Discovery as well?

We haven't forecasted that level of detail on the Discovery ramp yet. The impact will be larger initially, but we haven't -- we don't think that it is going to ramp as quickly, but by the end of 2009, there will be, I think, a material impact on the equipment margins from the Discovery.

Great. Thanks for that detail.

Tom Diffely, Merrill Lynch.

Good morning. As we kind of bounce along the bottom here, can you talk a little bit about what you're seeing in terms of capacity buys for just spot fill versus technology buys and what technology might be driving a little bit of demand near term?

We think most of the buys that we are seeing right now are capacity buys. Although we also, as part of that, we see an interesting pattern where as the year ago, the memory guys were buying assembly capacity aggressively. They are right now putting their incremental unit demand into subcontractors. So we are seeing that same demand, but at the subcontract level, not at the memory IDM level.

In terms of what is the new things going on in the packaging world, we have a scad, over 70 customer qualifications/evaluations going on for copper wire. That remains a very hot item as everybody struggles with $900 gold prices. So that is one big issue.

Stack die continues to be really hot and continues to evolve as people build higher stacks and more complicated stacks and try and cram more and more different pieces of silicon into a single package and stack die applications chew up a lot of wire bonder capacity, so it is great for us. In some ways, the stack die phenomenon causes people to underestimate the wire bonder density needed to support even modest increases in unit capacity because it counts as one unit, but, in fact, it might be three or four or five die being bonded. So there is a lot of wires in those packages. So that is most of what is driving this.

I guess the last thing that is evolving on the technology forefront is an intensification about discussions around pad pitch. For some years now, pad pitch had stalled out at the 40, 45 micron range as people went to multiple rows of bond pads. The available wiring density increases that come from multiple rows of bond pads has been exhausted and we are now seeing discussions again about pad pitch. And people are asking us when can they start to qual 30 micron pad pitch for instance.

This plays right into the ConnX and the IConn, which are incredibly accurate machines. Accuracy in process repeatability being the underlying tools needed to support tight pad pitch. So we think that the timing of those machines and the technical performance exactly fits into that part of that market trend and we think it will help us continue to gain share with those products.

Okay. And when you look out a couple quarters to when the Discovery takes off, what type of technology requirements are there going to be at that point to drive incremental demand?

The Discovery product is more than anything geared at stack die applications. It means it can also do other applications, but we thought that stack die with real challenging processes necessary for that machine to excel in the marketplace and all our characterization work to date is around those kinds of applications. So we think that is where its real sweet spot will be.

Okay. And then finally, you've talked a lot about how copper is starting to take off. Are we going to be talking about a copper pass-through here pretty soon?

No, no. Copper is cheap. We won't do that yet.

All right. Thanks.

Let me add something on the copper discussion. These evaluations that customers are doing of copper doesn't manifest itself just as increased copper wire sales, but copper capillaries, where we have a leading product and our bonder sales, will eventually come out of that also where we have a leading product there. So as you are building your model, I wouldn't think of copper just as a wire business improvement, but all of our productlines.

Yes, I agree. Copper, at some point, will drive a replacement cycle in bonders.

Great. Thank you.

Andy Schopick, Nutmeg Securities.

Thank you. I have got a few. I'll try to make them quit. When will you reveal pricing on the new Power Series line?

Well, there are two answers. The long answer is prices are negotiated after qualifications where we have to demonstrate productivity and then we arm wrestle with customers about who gets which share of that productivity increase. So we don't even know pricing right now exactly. We know what our budgetary quotes look like, but how it actually comes out will play out over the next couple of months as these quals wrap up and by the way, the quals in general are going very well. The second answer is, in general, we try not to talk about pricing for competitive reasons, Andy and you will really have to deduce it from gross margin percentages as the volumes ramp.

That is one of the reasons I asked that question because the comment was made about the expected gross margin improvement. I just wondered, at this time, how much confidence you can have in any guidance about the expected impact on GPM going forward. That is really what I was trying to get at.

Look, the GPM guidance issues are difficult to begin with because it is a noisy number based on product mix and customer mix. But yes, we believe that there will be real improvement in gross margin, not [tens] of percentage points mind you, but single-digit percentage points, but it is against a noisy baseline.

I understand. Also, I want to ask you a little bit about the Alphasem acquisition and the whole effort in the die bonder area given that that acquisition closed towards the end of 2006. Looking back, are you where you expected to be at this stage with the overall development and progress being made?

No, we are behind schedule. We thought there was -- we made some changes in the direction of the Discovery after the acquisition that has delayed it some, but we believe that it will be a much stronger product as a result of those changes. So no, we are a little bit behind our projections.

It will have a greater [stand]. Because of the changes we made, the Discovery will now serve a bigger market for a longer time.

And will more deeply penetrate that market.

Absolutely.

Okay. We are all looking forward to seeing that play out. Two more, customer forecast versus the market research forecasts that you are privy to. I'm wondering, at this stage, how much confidence you may have in whatever market research forecasts you are seeing for 2008, 2009 and again, looking back over the past few years, how reliable have the market research forecasts that you have been using tracked to the actual customer forecast?

There is a dichotomy in how we forecast the business, Andy. For the near term, for the next quarter or two, at any point in time, we rely almost exclusively on customer forecasts, which are built from the bottom up, name by name, factory by factory, productline by productline. And the business unit managers go through and they say, I want to load this amount of inventory based on this width of customers and this set of forecasts from those customers discounted by my judgment of our likelihood to actually book those orders. But that only reaches out a quarter or two, but that is -- a quarter or two encompasses all of our material commitments. So the things that really drive cash flow inventory turns all those things. For longer planning purposes, because our customers are not great at long-term forecasts, then we start to rely on industry forecasts. You asked me about the accuracy of industry forecasts --.

Yes, especially over the past few years.

Typically the forecasters tend to revise their forecasts so that by the end of the period, their forecasts are spot on. And you have seen it where people have taken down IC unit forecasts for 2007 recently. So there is a process of [successive] approximation and we use it as a guide to longer-term discussions and longer-term expense plans, but we generally don't use it as a guide to say inventory purchases.

Okay. And the last question is on the non-GAAP measures. I noticed in the explanation, Maurice, that gold fabrication costs and gold profit are excluded from the non-GAAP. What would give rise to a gold profit? Would that be FIFO-type accounting on inventory?

No, I'm sorry. If that came across, we misspoke. Gold fabrication costs and profit are included in the non-GAAP P&L and any profit on the gold that is also included and there is a variety of things that lead to margin on that, including the different exchanges where we [fix] the price and a variety of other kind of technical aspects that come out.

I am not sure if I misread the press release or not, but I could have sworn I saw something in there, and I am trying to find it right now as I am speaking to you, that there was a specific exclusion. So either I am wrong or you may just want to go back and look at that.

Yes, it's just a [phrasing]. It says fabrication charges and profit on gold metal are not excluded.

Okay. Thank you.

You are welcome, Andy.

That is the problem with double negatives.

We'll make it a triple negative next time.

Yes, that's the last time we let the lawyers write the language. Sorry. I am poking Dave Anderson, our General Counsel, who is sitting here in the room with us.

All right. That's it for me, guys.

(OPERATOR INSTRUCTIONS).

Well, then I think if there are no more questions, Ryan, we will thank everybody for their attendance and we will talk to you next quarter. Michael?

Thanks, Scott. I would like to let everyone know that we will be participating at the Sidoti & Co. Emerging Growth Conference in Boston. Our presentation will be June 3 at 10:25 a.m. Eastern time. We will also participate in the Oppenheimer Communications and Technology Conference in Boston on June 4, which will be webcast.

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 kns.com. Thanks, everyone and have a good day.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.