庫力索法 (KLIC) 2009 Q1 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Kulicke & Soffa first fiscal quarter 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 Mr. Geoff Grande from FD. Please go ahead.

Thank you Melissa. Good morning everyone, and welcome to Kulicke & Soffa's first quarter 2009 conference call. An audio recording will be made of the entire conference call this morning, including any questions or comments that participates may contribute. The audio record 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 US 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 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 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 27th, 2008, and our other recent SEC filings.

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

Thank, Geoff. Good morning, and welcome to this call, the purpose of which is to discuss K&S' financial results for the December quarter. For those of you who have not seen this morning's press release, these results are available in the Investor Relations section of the Company's website at www.kns.com. The first quarter was a challenging quarter for us. Demand for our products has been severely affected by the global economic slowdown.

Our business environment remains very weak. The dramatic deterioration of activity across the semiconductor industry during the fourth fiscal quarter continued through our Q1, as evidenced by our customers reduced spending on capital equipment and lower capacity utilization. Our visibility continues to be extremely poor, which precludes us from making any prediction as to when the market will begin to recover.

Before get to the results of the quarter, I would like to bring your attention to some of the aggressive actions we have taken the past few months, in response to current market conditions. In November we announced a headcount position of 240 positions, and the cancellation of annual salary increases. In January we initiated significant wage cuts for salaried employees, reduced hours for our direct labor force, and announced that further work force reductions are coming.

The goal of these steps ultimately is to preserve the Company's liquidity position, so we will be able to scale our business as the industry recovers. I will provide more commentary on our results and on these financial conditions in a moment, but first I will ask Maurice Carson, our Chief Financial Officer, to take you through the details of the quarter.

Thank you, Scott. Good morning, everyone.

As is typically the case, my remarks today will include non-GAAP measures as a supplement to our GAAP results, in order to provide a better view of our profitability. Non-GAAP measures exclude equity-based compensation, amortization of intangibles, the recent settlement of our Israeli tax assessment, actions in response to the economic downturn, things like resizing and severance, and the gains from early debt extinguishment.

My remarks will include the results of Orthodyne Electronics, our new wedge bonding business, for Q1, but not for any prior periods. All operating results associated with our wire business are reported as discontinued operations, and are not included in the current or prior quarter's discussions. This applies to the gain on the sale of the business of $22.7 million. I will compare the December quarter to the September quarter, and will refer to non-GAAP numbers unless otherwise noted.

Net revenue from continuing operations during the quarter was $37.4 million, down from $61.2 million last quarter. The majority of the decline came in the equipment segment. Ball bonder sales were weighted heavily towards integrated device manufacturers, with approximately 85% going to IDMs, and only 15% to subcontractors.

Gross profit was $13.9 million, down from $24.9 million last quarter. Our gross margin was 37.1%, down 357 basis points. The reduction in gross margin was driven primarily by an increase in inventory reserves, due to reduced near-term forecasts for equipment, and the step-up in inventory valuations for wedge bonders, due to purchase accounting. The last piece, the valuation caused a $900,000 increase in COGS this quarter, and this charge will continue as we burn down the inventory on the books at the time of purchase. The key point here is that purchase accounting is somewhat skewing the short-term, the good margins that wedge bonders provide.

Operating expenses were 35.7 million, down $0.5 million from last quarter. This was due to lower engineering costs, increased foreign exchange gains, lower wedge bonding integration costs, lower selling and marketing costs. This was all offset by the inclusion of operating expenses from wedge bonding. With the Israeli tax settlement behind us, we anticipate less volatility in foreign exchange going forward, than we have had in the past.

The non-GAAP adjustments, and there is a lot going on in the accounting this quarter, the non-GAAP adjustments actually increase our loss from $18.2 million to $22.2 million for the quarter. This is because we excluded the gains on the Israel tax settlement of $12.2 million, and we also excluded a $1.6 million reversal of equity compensation expense, related to the 2007 and 2008 performance-based restricted stock, and $900,000 of new equity compensation.

We excluded $1.2 million gain on extinguishment of the bonds, and we excluded $2.8 million of expense related to the amortization of intangible assets. This includes the new $2.7 million of intangible motion that comes from Orthodyne, that you will see on an ongoing quarterly basis. $2.6 million of expense related to contractual commitments on former test facilities, $2.6 million of severance, and $2.2 million of expenses related to legal.

Referring to the reversal of equity compensation I talked about a moment ago, the performance hurdles that the Compensation Committee set for employees under the restrictive stock plan were high, and clearly in hindsight difficult to achieve, and we anticipate vesting a very small portion of the 2006-2007 grants, if any.

Turning to the balance sheet, we ended the quarter with total cash and investments of $175 million, down $11 million from last quarter. Accounts Receivable and inventory less AP decreased by $20 million. In other words working capital made up for some of the losses that we had from operations on an operating line. Most of this is mostly due to Accounts Receivable. However, DSO was 98 days, up 15 days from last quarter, with most of this increase due to the inclusion of wedge bonding.

In this difficult economic environment, we realize that investors are trying to determine where and when the bottom of market activity will occur, and that investors continue to look at liquidity closely for all companies. Like everyone else in our industry, poor visibility precludes us from make predictions on the bottom of the market. However, we have continued to look at a number of scenarios for 2009, and we remain comfortable with our liquidity position in all of them.

One reason we are comfortable with our liquidity is, as Scott mentioned earlier, the fact that we have taken actions to adjust our cost structure. Just to be clear about these. A reduction of 240 positions in November, which resulted in $7.6 million of annualized savings, with a $2.6 million severance bill.

We deferred annual salary increases, which will result in $4.7 million of cost avoidance, and subsequent to the quarter end, we announced the reduction of hours for our direct labor, wage cuts for all salaried employees, and other personnel-related actions that are expected to generate annual savings of $8.1 million. So between these cost savings and cost avoidance, there is a net cost reduction of almost $18 million annualized.

We also announced that additional headcount reductions are forthcoming, but the scale and scope of them are not yet known, so I can not give you the forecasted impact. During the quarter, we also continued our stated strategy of using cash to retire debt. We settled the $72.4 million of balance of our 0.5% notes due November 30th. In addition, we launched a tender offer for our 1% notes, due in June 2010. We offered to purchase these notes at 72% of their face value. We do not yet know how many bonds will be tendered.

In closing, our approach to positioning ourselves for the economic recovery includes continued investment in our product portfolio, and ensuring that we have the cash balance to finance our business once the upturn arrives. We have taken significant steps to cut costs and reduce our debt, in preparing to advance our competitive standing once the environment improves.

Scott?

Thanks, Maurice. As we commented last quarter, the weak demand levels we are experiencing reflect a broad collapse of consumer and business demand for electronic goods. This in turn has lead to a contraction IC unit demand, which flows through the industry supply chain, and disproportionately affects the capital equipment business.

Purchases of capital equipment by our customers have gone below maintenance or replacement levels. With that in mind, we are forecasting our March quarter revenues to be about $30 million, though we caution that there is a larger than normal range of possible results, because of the unusual low visibility. We have taken and will continue to take those steps necessary to protect the financial health of the Company.

At the same time, we are equally focused on maintaining the competitiveness of our product portfolio, and on the scalability of our corporate infrastructure. Demand will return to this industry, and K&S will be prepared with the right products and the resources, both human and financial to grow this business.

Speaking of products, our recent strategic moves of divesting the wire business and purchasing Orthodyne have expanded our footprint in the semiconductor assembly area. The industry will eventually recover and return to a more normal pattern of year-over-year IC unit growth, and when it does, the number of chips that need to be die bonded and wire bonded will increase.

Our product portfolio will enable us to win an increasing share of that business. Our market leadership in wire bonding is well-known. On the ball bonder front, the transition to our new IConn and ConnX bonders is continuing smoothly.

IConn, our high performance ball bonder for high pin count applications, continues to achieve the technical performance we anticipated, and it is generating the ASP premiums we expected. The first units of ConnX our ball bonder for LED, discrete, and low pin count applications, were sold during the quarter, and the product continues to generate positive feedback with customers.

With the acquisition of Orthodyne, our market leading wedge bonding business, we have expanded our TAM, and provided access to power management and power hybrid markets. And Orthodyne is also moving forward, as evidenced by their recent agreed to 2-year development project with a major European automotive supplier, for the qualification and implementation of it's PowerRibbon interconnect solution for automotive power modules.

On the die bonding side of K&S, development of Discovery is on schedule. Feedback and results of the alpha test were positive, and just last week, over 200 customers attended a private demonstration of Discovery at SEMICON Korea. Expanding our TAM and extending our technology leadership while protecting our balance sheet, will ensure our competitiveness when growth returns to the semiconductor industry, and until that point in time arrives, we will continue to manage our costs carefully, while preserving our ability to capitalize on these future growth opportunities.

With that, we would like to have a few questions, Melissa.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from Mr. Brett Hodess with Merrill Lynch. Please state your question.

Good morning.

Brett?

How are you doing?

Surviving.

That's about all we can say, right?

It is those kind of times.

Scott, can you do me a favor and walk through what the equipment TAM increase is, with all of the product lines that you just walked through, say versus what the wire-bonding TAM was last cycle? Give us an idea of what you think that expansion is?

I am sort of doing this by memory, and I'm working off of VLSI numbers, which I think are a pretty good sense of the size of it. The ball bonder business of course goes up and down, but it normalizes to something around $600 million a year. Die bonder business is about the same, and the wedge bonder business is probably 120 million to $140 million, something like that. Is that a 2 or a 7, Maurice?

7.

I am sorry. Maurice is writing things up on the board for me to help me out. $170 million. So the die bonder doubles the TAM from our traditional ball bonder space, and then you have the wedge bonder on top of that.

So in the wedge bonder market you already have a pretty dominate share with Orthodyne, and in the die bonder market, can you remind us of what kind of share you think you can get, say two years out? Hopefully we are in a decent kind of upturn, and things like that?

Yes, the die bonder market is a segmented market. What we think is the sweet spot of it, which is stacked I applications, and that is not just memory stacks, but all kinds of memory and logic, and logic and logic stacks as well, and the high end BGA is the single biggest segment, it may be a quarter of that market. And we think we can take a pretty big chunk out of that.

With Discovery where we are setting the technical standards of that market is measured by things like accuracy, thin die capability, and of course, productivity or UPH. We just blew people away last week at Korea, doing absolutely leading-edge very thin die, multi-die stacks, that nobody else in the industry has been able to do so far, and we are doing it faster than anybody else. So we think that we are going to go ahead and take a big chunk out of that business, as soon as people start to free up capital.

Okay. One other question, slightly different, maybe for Maurice, obviously volumes are super low now, but when volume starts to recover, how much volume do you have to get as you restructure the business, to get to a point where your gross margins can expand pretty rapidly? Does it happen immediately? Or do you have to get back above a certain revenue volume level, given how low you are now versus historical?

So this, really, I think gets to the factory absorption issue, and the inherent leverage in our factory model, and I just remind everybody that the margins look low this time, because of the two things I mentioned that even at these levels, we would have been above 40% margins without the purchase accounting, and without the reserve we took on inventory, but both wedge bonding and ball bonding have a model that can scale quickly, and bring back increased gross margin very quickly as business turns. And die bonder, I can't even, with such low volumes right now in the new product, the margin increase on volume will be very significant, very quickly.

Okay. So even a modest pickup, excluding one-timers, even a modest pickup will be back above 40%?

Yes.

Thank you.

Thank you, Brett

Thanks, Brett.

Thank you.

Next question, Melissa.

Our next question is from Gary Hsueh with Oppenheimer, please state your question.

Hi, thanks for taking my question. Stepping back, I think it is pretty well understood that in front end wafer fab equipment spending, it is roughly down 50, maybe 60%, what is your sense, in terms of specifically the wire or assembly equipment market, down less or down more? What exactly do you think is a realistic sort of model right now for 2009, relative to WFE?

Capital equipment spending in the back end is off a lot more than that already. The good news is it can't go much lower. We think we are at a bottom, and on the ball-bonder side, doing the numbers off the top of my head, I mean it is off 80% from the peak, something like that. It is a big, big number.

A big amount from the last trough.

Yes, even from the last trough it's off, well, from what we thought was trough of the cycle levels it is off 70% or 60%. I mean, we are off a huge amount.

And as I say customers aren't even buying enough right now to replace machines that wear out and die. So there is no down side from here on the capital business I don't think, or in the assembly equipment business, at least our end of it.

Yes. I was just trying to make that point that yes, even if you try to flatten out off of the levels in your guidance from March, you would still be significantly underperforming the overall capital spending environment, so I would agree with that.

Just the other question I wanted to kind of run through real quickly here, just since it is the first quarter of with Orthodyne, what was revenue and net loss contribution from Orthodyne in the wedge bonder business in the December quarter?

I am not going to get in to the net loss part, because they had a lot of one-time costs, the purchase accounting costs, and things like that. But let me take you through just the revenue which, to let everybody know we don't normally report revenue on a product line basis. We will do so for the first couple of quarters to get everybody enabled to build the models correctly. And then it will just roll into our equipment segment. Okay?

So without one-timers they had $11 million of revenue, almost $12 million of revenue, including equipment and wedges. Remember there is a consumable business there, and they had a little over 45% gross margin without the inventory step-up. They contributed to our loss, I am not going to give you the exact amount because there is still already things starting to get mixed together, but with the recent actions that the Company took, they have gotten themselves closer to a breakeven point also.

Okay. So that again, 11 million to $12 million contribution to revenue in your December quarter?

That is correct.

That is a pretty big number. You guys have historically, or in the past, talked about Orthodyne and their fundamentals kind of lagging the rest of K&S' business by roughly one or two quarters. So is that kind of what is driving, or what we are seeing in terms of your guidance here in the March quarter, a delayed one or two quarter sort of trough in the wedge bonder business?

There are a couple of different factors that account for the quarter-to-quarter decline. Orthodyne is off a little bit more, although we think Orthodyne will not fall off as much from their previous peak, as the ball bonder and die bonder businesses have done. The energy efficiency angle of wedge bonding will continue to drive that business, we think. But they are off, they will fall off a little bit more quarter-to-quarter. Our tools business, our traditional capillary businesses also continue to come down quarter-over-quarter.

It is tracking total IC unit output pretty closely, and the good news there is that once our customers get through the inventory burn, and get back to a more normalized run rate, we expect all of our expendable tools businesses to pop back up some. And the ball bonder business is also off a little bit quarter-over-quarter. The die bonder business is also off a little bit quarter-over-quarter. So it is not just Orthodyne, it is everybody.

Okay, Scott. Maurice in terms of taxes, what is the effective tax rate on a non-GAAP basis in the December quarter? And what should we will modeling for taxes going forward here?

So on a rate basis, 1%. I think the total cash tax was $0.25 million for the quarter, and that related only to the normal suspects, AMT and Pennsylvania exclusions on NOLs, so I think you can continue to model rates close to that, between 1 and 2% going forward, Gary.

Okay. And I will go away after this question, Scott. [Bessy] buying [Essec B] Semiconductor how does that impact your market, that consolidation play? Is there any impact to the die bonder market, particularly with your launch of the Discovery and disconsolidation?

What to say about Bessy and Essec. First more than anything, I am impressed about how brave my friend Richard [Bookman] is, to make this move at this point in time. On the die bonder side, what customers tell us is that Essec is struggling with their new platform drag, in which they have been trying to launch for the last two years. Just failed a competitive qualification in Korea. They still don't quite have the handle on that machine.

It is really focused at this different market segment than Discovery. And we don't see it as a particular threat to us. The market segment that stacked die high-end segment has been dominated for the last three or four years by a Japanese company, Renesas, and Essec has really been marginalized in the stacked die side. And on the ball bonder side, for the longest time we they built, again, built the wrong product for the marketplace, and I think that is evidenced by their single-digit share market numbers.

That is helpful. Thanks Scott.

Thank you. Our next question is from Andy Schopick with Nutmeg Securities, please state your question.

Thank you and good morning. Scott, I don't know anyone that has had more issues to deal with than you for the last five or six years.

Life is exciting, and it keeps me young.

Well it is a good thing you did most of what you already did. I have a couple of questions for Maurice. Inventory, what did you say the reserve on inventory was this quarter?

We increased reserves by a little over $1 million.

And in terms of the compensation of the current inventory, which is up about 25 million quarter to quarter, how much of that is finished goods?

Well, it is first of all, most of the increase is due from the Orthodyne inventory.

I forgot about that. Yes.

So we didn't build, I promise everybody out there that we did not build $25 million worth of inventory this quarter.

How much of that then was related to Orthodyne?

A little over 20, $22 million, I believe, something close to that.

Okay. Also with respect to an issue that could come up later in the year. Would there be goodwill impairment if this was September 30, 2009, and the situation that we see today with your stock price, and everything else right now were the same? Would there be a goodwill impairment right now?

I have to ask you a question, first. Have you been talking to our auditors?

No. But I have seen many of these things.

I will adjust that quickly, without boring everybody to death. It is a hot topic in the news these days, although as a company we don't believe that the mere fact that the market cap is below book value, means that it is impaired. It means that you have to look at it, impairment. But the impairment model is driven off of a long-term net present value, discounted cash flow model.

Okay.

In all honesty this situation with the economy the way it is, we look at impairment every quarter, and we run those models for the long-term forecast every quarter, so the answer is, right now there isn't, we checked it this quarter. There is no impairment. We will continue to monitor it irrespective of if our stock price, or our market cap, moves above or below our book value.

Okay. I have a couple of other things here. I wanted to ask about the discontinued operations, and the effect that is having on cash flows right now. How much longer will we see an impact, and what would the overall trend on results be from discontinued operations? Can you characterize that at all?

Okay. Well first of all it is not having any real impact on cash flow. We will see the effect mostly through our transition services agreement, where we are still collecting cash and then turning it back over to them. We still have maybe some severance payments or something that we are still making, but --

I think Andy was asking about the rental in Phoenix. The lease in Phoenix.

Really, I am asking more, in a general sense, to include whatever it includes.

Okay. So are you specifically referring to the charge we took this time on the $2.6 million for the rental?

That is part of it, yes.

Right. So that is the last of that. We had assumed when we sold Test, that we would rent that building for at least part of the time that we continue to have the lease, which is through 2012.

Okay.

With the commercial real estate market affected as it is, there is no opportunity to lease that building, so we took the final charge. Meaning that we have completely reserved all of the charges related to that building through the end of the lease. There is no more to take.

Fine. So the net cash used in discontinued operations was just about what, $779,000? Is that what I see here? Or was that a credit?

No, it is a use, I think. And it is mostly related, I believe, to severance payments. Remember a lot of these people has severance that got continuations.

Okay.

And so that will decrease pretty quickly over time.

All right. The last thing is the amortization of intangibles, that $2.7 million, is that annual or quarterly?

Quarterly.

It is quarterly. Okay. Thank you, and what can I say, best of luck in the year ahead.

Thanks, Andy.

Thanks, Andy.

Thank you. (Operator Instructions).

Okay.

Okay. Melissa, if we have no more questions, we would thank everybody their attention.

Closing by Geoff.

Geoff, do you have any closing remarks? No, I don't think so. Then we thank everybody, and we will talk to you in a quarter.

Thank you.

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