庫力索法 (KLIC) 2009 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 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 Geoff Grande of FD. Thank you, Mr. Grande, you may begin.

Thanks, Rob. Good morning, everyone and welcome to Kulicke & Soffa's second-quarter 2009 conference call. For those of you who have not seen the results announced this morning. They are available in the Investor Relations section of the Company's website at www.kns.com. An audio recording will be made of this entire conference call, including any questions or comments that participants may contribute. This recording made also be accessed from the Kulicke & Soffa website for a limited time.

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, click on the GAAP to non-GAAP reconciliation 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 and 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 and especially the 10-K for the year ended September 27, 2008 and our other recent SEC filings. It is now my pleasure to introduce the host for today's call, Scott Kulicke, CEO and Chairman of the Board. Scott?

Thanks, Geoff. Good morning and welcome to our call, the purpose of which is to discuss K&S' financial results for the March 2009 quarter. The semiconductor business environment during the second quarter was horrible. Our customers and their customers drastically reduced output in order to burn off inventory. The challenge for K&S has been to make corresponding reductions in our cost structure, but to balance those measures against the ongoing investments in product development necessary to maintain our technology leadership.

To that end, we cut wages 5% to 20% for salaried employees and reduced hours to our direct labor force as announced in January. We reduced our global workforce by about 200 [net] and 50 employees in February. This is over and above the 240 employees we laid off in November. We expect that this latest workforce reduction will be substantially complete in May.

And subsequent to the end of the quarter, we announced a plan to transfer manufacturing activities from Israel to China. This action is part of our plan to consolidate our manufacturing and low labor cost locations close to our customer base while preserving engineering expertise in centers of excellence around the world. We expect to complete the Israel workforce reduction in the end of 2010 as we transfer most of these jobs to Asian locations.

The data that is available to us supports a growing consensus that the inventory reduction phase of this downturn is behind us. Towards the end of the quarter, we began to see positive trends from our customer base that have continued into the current quarter. These trends include improvement in customer capacity utilization, increased orders for expendable tools and increases in requests for quotation for ball bonders. On that basis, we are forecasting our June quarter revenue to be sequentially up and in the range of $32 million to $37 million. Maurice Carson, our CFO, will provide additional details for the quarter in a moment.

Before turning the call over, I would like to reiterate that we are appropriately reducing our costs while preserving the core competencies that have made K&S the technology leader in this field. These actions will benefit us both in the short and the long term. Business conditions, though they remain challenging, are improving and I am confident that with the actions we are taking, K&S is well-positioned to take advantage of the industry's recovery. With that, I will turn the call over to Maurice.

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 financials. Non-GAAP measures exclude equity-based compensation, contractual commitments for former test facilities, amortization of intangibles, severance costs, goodwill impairments, debt extinguishment and the Israeli tax settlement.

As was the case last quarter, all operating results associated with our wire business are reported as disc ops and are not included in the current or prior quarter's discussion. Finally, I will compare the March quarter to the December quarter and will refer to non-GAAP numbers unless otherwise noted.

Net revenue from continuing operations during the quarter was $25.2 million, down $12.2 million from last quarter. Volumes dropped across all of our productlines, particularly in the expendable tools and wedge bonding equipment. Ball bonder sales, which were relatively flat, were weighted heavily towards integrated device manufacturers with approximately 73% of sales going to IBM and the remaining to subcons.

Gross profit was $8.1 million, down $5.8 million from last quarter. Our gross margin was 32%, down 515 basis points. The reduction in gross margin was driven by several factors. A large proportion of ball bonder sales were legacy models as we sold much of the remaining inventory, underutilized factories and a shift in product mix also contributed.

During the quarter, the Company took an impairment charge of $2.7 million related to the write-down of goodwill associated with our die bonder business. The impairment charge is due to an earlier-than-anticipated, end of life for our legacy models, Swissline and Easyline. Operating expenses were $33.7 million, down $2.0 million from last quarter. The June quarter is expected to be down another $3 million as our cost reductions continue to take effect.

Looking at the balance sheet. We ended the quarter with total cash and investments of $130.2 million, down $44.8 million from last quarter. Accounts receivable and inventory minus accounts payable provided $10.3 million during the quarter, mostly due to a decrease in AR. However, DSO were 114 days, up from 98 days last quarter.

Let me take a minute to walk you through the $44.8 million decrease in cash during the quarter. Cash from operations, including working capital, was down $18.3 million. We paid the Israel tax settlement, which was another $13.6 million and we also paid $10.2 million to close out the tender offer for our 1% bonds.

As Scott mentioned earlier, we adjusted our cost structure during the quarter. The lower wages for salaried employees announced in January is expected to generate annual savings of about $6.8 million. The reduction of our global workforce by approximately 250 employees announced in February will result in around $14.9 million in annualized savings. Combining these actions will result in a net cost reduction of $21.7 million on an annualized basis and $4.0 million in severance costs.

We expect our plan to transfer manufacturing activities from Israel to China that Scott just mentioned to be fully implemented by 2011 and to result in approximately $4.1 million in annualized cost savings. The plan is expected to cost $5.7 million spread over the next 2.5 years.

Finally, in February, we completed the tender offer for our 1% notes and have retired 25% of these notes since September.

Given these unprecedented market conditions, I would like to provide a bit more color on our productline revenue and provide some insight into where we see the sales going by productline next quarter. Expendable tools, which includes capillaries, wedges and blades, were down 40% from the December quarter to the March quarter due to significantly reduced hours at our customer factories. This is also the area where we have seen the earliest signs of recovery and anticipate the revenue for these products to increase by about 25% in the June quarter.

Both die bonders and ball bonders have single-digit percentage declines. Ball bonder revenue is forecasted to more than double in the June quarter while die bonders will decline as the legacy products are now at end of life. Wedge bonding equipment fell by 50%. As expected when we purchased this business, the wedge bonder's productline has a different set of drivers and the sales cycle will often be out of sync with the traditional K&S productline. Wedge bonders are expected to rebound about 50% in the June quarter.

Finally, we had a significant decline in our spares and service business, which dropped 38% and will recover with a 25% forecasted growth rate. So the recovery that we are starting to see and that Scott described is very much a ball bonder story, but all the productlines are seeing increased business. Scott?

Thanks, Maurice. As I mentioned earlier, while we have taken necessary steps to reduce our costs in response to the economic slowdown, we are equally focused on maintaining the competitiveness of our product portfolio so that as the industry begins to recover, K&S is equipped with the right products to grow the business.

In our second quarter, this focus was reflected in the launch of the following important new products. First was the iStack, our next-generation die bonder for advanced stack die and high-performance BGA applications. Secondly, the ConnX-VLED, an extension of our leading ConnX ball bonder, in this case, specifically tailored for vertical LED applications. And lastly, we introduced the 7600 series wedge bonder, a product targeted primarily at the market for small power package applications. The 7600 will extend our wedge bonders into reel-to-reel applications.

iStack, developed under the project name Discovery, is capable of delivering up to 30% productivity increases over the current generation of die bonders and we expect it to reset the standard in die bonding. iStack will be evaluated by customers over the next few months and when the industry recovery begins in full, we expect iStack to be an important growth vehicle for K&S.

With the launch of the ConnX-VLED, we now offer an excellent bonding solution for the entire spectrum of LED applications. The LED market has been one of the recent bright spots in the semi-conductor industry as interest in energy-saving lighting solutions remains robust, even amid the current economic weakness. We have already received initial orders for ConnX-VLED and expect that the LED market will continue to grow as emphasis on energy efficiency becomes standard and public policy in private practice.

The 7600 series wedge bonder is a product targeted primarily at the market for small power packages. This market requires handling and the processing of high-density matrix [suite] frames in either strip or reel form. The 7600's enhanced leadframe handling capabilities, together with its power ribbon process, allows us to expand into this growing application's niche.

We are pleased that all three products received a favorable response from customers when they were shown in SEMICON China last month. These products continue the K&S tradition of advancing our customers' capabilities while reducing their costs. By capitalizing on our technology leadership through new products, we ensure our ability to meet our customers' future needs and our competitiveness going forward.

Looking ahead, I am encouraged by the improving business conditions we are experiencing. As I said earlier, this upturn reinforces my conviction that our customers are through the inventory reduction phase of this downturn. Next comes the recovery. Until then, we will continue to prudently manage our costs while sustaining our ability to capitalize on potential growth opportunities. With that, Rob, can we take a few questions?

(Operator Instructions). Brett Hodess, Bank of America.

Good morning. Scott, a couple questions for you. First, when you look at the improvement in utilization that you mentioned in the beginning of your comments, can you talk to us a little bit about -- is the utilization improving both at your IDMs and your subcon customers and maybe do you have some kind of guesstimate of where we are at on the utilization rate now?

Sure, Brett. Let me talk a little bit about utilization. I'll start with a preamble. For those of you who don't know about this, we spend a lot of time measuring our customers' utilization. We go out every week and poll about 20,000 bonders worth of customers and get a sense of how many, by factory, often by productline, are being used at that point in time. And this is a data stream that we have had for a long time.

I would caution you -- I will give you some numbers and then I would caution people to not put huge faith in the absolute accuracy of it, but rather think of this as an analog measure and what is important are shifts over time.

Through most of 2008, capacity utilization, the way we measured it, bounced around in the middle 70% range. And that is down from the middle 80%s at the peak of the last cycle. Then in October of 2008, capacity utilization, again as we measure it, fell off a cliff, so that by the holidays, it was down in the middle high 40% ranges.

There was a funny 15-point bounce in early January and then it collapsed again back down into the 45%, 46% range. But since then, we have seen it steadily climb, so it is now back in the high 60%s. It is really dramatic when you look at the curve, both how it went down and how it has come back up again. And that is a period that we are characterizing as an inventory burn phase for our customers and their customers.

We are quite heartened that it has come back as quickly as it has. It is still by any kind of objective measure not good, but it is a whole lot less bad than it was. And the body language and the commentary we're getting from our customers is that they expect continued sequential improvement in their capacity utilization.

Great. And so now that the customers are coming back, it sounds like they are moving pretty quickly onto the new products in both the wire bonder and the die bonder area with the end of lives of these legacy products.

Yes, we are surprised about that. I went out and talked to a couple big customers myself in the late fall and I was getting answers like don't come back and see me until 2010 and some of these same customers are already placing POs. So the business has come back much more quickly than we would have expected even a quarter or a quarter and a half ago.

So it does sound like that the new products though will be a higher percentage of the mix fairly quickly and I was wondering if that is accurate based on the end-of-life things you said about the legacy products. And maybe Maurice could give us a little bit of insight if that is correct, higher new product mix quickly, what we might expect from margins if revenues are in that 32 to 37 range because my guess is it should be better than where we were recently in that range.

Well, I will let Maurice comment on the margins in a minute, but yes, we are making the transition to new products just as quickly as we can. One of the things that I will compliment our manufacturing guys on is that we have done a pretty good job of not letting our inventory balloon out of hand. So we are able to make that transition I think faster than some of our competitors and certainly whether it is the ConnX and the ICONN on the ball bonder side, the iStack on the die bonder side, we will go into an upturn with absolutely industry-leading product.

So without taking away from anything that Scott said as a compliment to the manufacturing guys, which have done a great job, we will still be selling about half old models in the ball bonder side as we go into the June quarter, but after that, it will really only be the new models in ball bonding. So you will still see a mix of gross margins as we sell through that remaining inventory through this quarter.

And I also want to mention, Brett, that we are going to -- it's still a pretty low number; although we are thrilled that it is going the right direction. In absolute terms, there will still be some utilization issues as we go through in this quarter.

On the die bonder side, you are right about the end of life, kind of finish that out. Although we don't anticipate selling and delivering the new die bonder until the September quarter at the earliest. So this June quarter will be filled with qualifications and beta tests and getting people up to speed on their machines. So don't expect as big an increase in gross margin as you might have thought for the June quarter; although it will be improved. We still have to work through some of these things.

Just as a final question then, in the December quarter, you did about $37 million in sales and just under 30% gross margin. So with some improvement in mix in the June quarter and as things rise up and with the cost reductions you have been doing, should we think that -- is around 30% sort of a good baseline if we are in that range?

Yes, without having a lot of details to go into about that, it is probably a little bit better than that. We are still waiting to see exactly how the wedge bonders come in and the mix of their products. So it is a little hard to tell. There is still some open orders on that side and we are still identifying who is going to be the buyers on some of these ball bonders. But probably reasonable or a little bit -- we can do a little better than that.

Great. Well, thank you very much for the questions.

Gary Hsueh, Oppenheimer & Co.

Just a quick question here, Scott. You seem to be implying that we are beneficially at a situation where we have worked down inventory levels to a relatively low level, but we are still in front of a real recovery here with no visibility on that. So what happens to KLIC here between basically low inventory levels that we are at today with a relatively low end demand and any kind of visibility on a real recovery? Are we kind of in that no man's land that KLIC was in sort of in 2002 and 2003? And just as a reminder, back then, the equipment revenue number was actually two times higher than in your guidance for the June quarter today.

Gary, I am a little struck by your question because you seem to have glossed over the fact that the entire global economy is in shambles right now. GM is talking about filing for bankruptcy. I've got a little bit of good news and you are trying to turn it into something horrible. We are not going to see, my opinion, a strong recovery until the global economy recovers. And ultimately, it is the end consumer that decides whether to go out and buy stuff or not and the end consumer is sitting on his money these days.

What we are through is a very difficult period where our customers were burning inventory. People are now getting back to a pattern where there is some capital investment being made based on marketshare shifts, based on technology upgrades, based on the few bright spots in the business like LEDs where we are starting to get some traction in that area.

We will fight through those things and as we said in the opening comments, we [keep needing] to balance cost management and technology investments. I wouldn't characterize that as being in a no man's land. I would characterize that as being what managers get paid to do.

Yes, Scott, actually I was just trying to ask a simple question in a roundabout way. That simple question is what do you think -- all the companies I think in the semiconductor supply chain are benefiting from a renormalization and spending here coming off Q1. What does that renormalization process due for KLIC? I mean does it get the equipment revenue or equipment unit numbers up to support a $30 million kind of number for a quarter or are we looking at a $40 million to $50 million number per quarter? If there's any help you can kind of give us around that, that would be helpful.

As best we can tell, and this is clearly a crystal ball shot, we expect to see modest sequential upgrowth over the next few quarters.

With the potential to be surprised.

Yes, with faster growth.

So modest, sequential, quarter-over-quarter-over-quarter-over-quarter growth is what we are currently modeling.

Okay, well, that sounds like a pretty -- that almost sounds like a recovery.

Well, I guess. I mean as you pointed out, absolute numbers that are still not really exciting.

Yes.

But going in the right direction and I will take that this season.

Let me ask one final question here on end customers. I think we know pretty well which end segments and which companies are gaining share on the chip side. What particularly do you think is benefiting KLIC? It is just curious because it seems like legacy ball bonders in terms of sales are a relatively large percentage in the March quarter and still a relatively large percentage in the June quarter and you would normally think it would only be leading-edge wire bonders that are getting traction here and now. So just kind of hoping to get some kind of connection between those two.

Actually, a lot of the ball bonder sales are going into two separate -- are being driven by two separate sets of issues. One is China's stimulus policies. We are seeing strength out of our Chinese customers who tend to not be leading-edge applications, but kind of middle-of-the-road applications.

Secondly, the LED business is surprisingly strong. You know because you have followed us for a while, but I'm not sure everybody on the call knows it, historically K&S was not focused on LEDs. We really only started to get involved in that market segment in the last year. But in the current quarter, LEDs will represent about a quarter of our shipments. Trailing edge bonders are just fine for LED applications, but that quarter of our shipments are all new customer names for K&S over the last year, all cases where we have been taking business away from somebody else.

Okay, great. Thanks a lot, Scott.

Thank you, gentlemen. There are no further questions at this time.

All right. Geoff, do you want to do some closing comments?

Thanks, everyone, for joining us today. We look forward to updating you next quarter with our results.

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