庫力索法 (KLIC) 2010 Q1 法說會逐字稿

Greetings and welcome to the Kulicke & Soffa December quarter results 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.

It is now my pleasure to introduce your host, Tom Johnson, Director of Investor Relations for Kulicke & Soffa. Thank you, Mr. Johnson, you may begin.

Thank you, Melissa. Good morning, everyone, and welcome to Kulicke & Soffa's first-quarter fiscal 2010 conference call.

For those of you who have not seen the results announced this morning, they are available in investor relations section of our website at www.kns.com. An audio recording of this entire conference call, including any questions or comments that participants may contribute, may be accessed from the Kulicke & Soffa website for a limited period of time.

During today's call we will make reference to non-GAAP financial measures. Reconciliation of those measures to the most directly comparable GAAP results are also posted on the investor relations section of the website via 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 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 operations of Kulicke & Soffa, please refer to our SEC filings particularly the 10-K for the year ended October 3, 2009, and our other recent SEC filings.

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

Thanks, Tom, and welcome to this conference call the purpose of which is to discuss K&S's financial results for the December quarter. In a moment I will turn the floor over to Mike Morris, our CFO, so he can describe the salient points of the quarter, but before that I would like to place the quarter in a broader context.

First and foremost, it was a very good quarter for K&S. Revenue was up, earnings were up, cash was up, ROIC was up, and our revenue forecast for the next quarter is up as well. Considering where we and the whole semiconductor industry were a year ago, these results are even more impressive.

Our order flow continues to be strong with a broad range of customers requiring large numbers of ball bonders in the near term. The principal driver seems to be IC unit growth with additional demand stimulated by the copper wire conversion and by expansion in LED manufacturing. We are also starting to see strong demand for heavy wire wedge bonders, along with the financial performance from that business unit that caused us to buy this business in 2008.

These trends drove the December quarter's revenue to $128 million under the foundation for this quarter's revenue guidance of $140 million to $150 million.

Looking beyond the March quarter we see several optimistic indicators, such as how quickly our order book filled up this quarter and that some of our customers have negotiated multi-quarter blanket orders and shipments are strong for the month of April. But the truth is our visibility is limited to about 12 weeks. But I would point out that even that is an improvement in the eight- to 10-week visibility that we have been used to.

Mike, why don't you take our audience through the quarter's financial details?

Thank you, Scott, and good morning, everyone. My remarks today will include non-GAAP measures as a supplement to our GAAP results in order to provide a better view of our financial performance. The items we exclude to determine our non-GAAP measures are explained in our earnings release and are also provided on our website.

On today's call I will compare the December quarter to the September quarter and will refer to non-GAAP numbers unless otherwise noted.

As Scott mentioned, results for the December quarter were very good. Net revenue for the period was $128.4 million, up $17.9 million from last quarter. The revenue increase was driven by a 23% pick up in ball bonder volumes. Ball bonder unit sales were weighted towards subcontractors, who comprise 72% of our ball bonder shipments.

Gross profit was $56.4 million, up $9.2 million from last quarter. Our gross margin was nearly 44%, up 1.2 percentage points from the September quarter as the ball bonder volume pick up drove improved absorption of our fixed manufacturing costs.

Operating expenses were roughly flat at $34.7 million. Increased expenses associated with our higher revenue level were offset by various other reductions. We don't expect these offsets to continue next quarter and see OpEx rising 5% to 10%. As a measure of our operating leverage, 52% of our incremental revenue this quarter fell through to operating profit.

Concerning taxes we are projecting a book and cash tax rate of between 3% and 5% as we expect our increased earnings to come from territories that have low tax rates or where we have tax holidays or net operating losses.

Turning to the balance sheet, we ended the quarter with total cash and investments of $175.2 million, an increase of $30.6 million from last quarter. Working capital, defined as accounts receivable plus inventory less accounts payable, fell $16.5 million to $80.9 million as good collections and payables management more than offset an increase in our inventories.

From a days perspective, our working capital performance was also good. DSO was down 19 days to 59 days, DSI was up three days to 62 days, and our days payable was up 10 days to 67 days. We expect that our working capital metrics will return to their historic trends as revenues rise for the March quarter. Our ROIC for the December quarter was 35.4%.

One last comment on our balance sheet. You will notice that our debt is roughly $16 million lower on a GAAP basis. This does not reflect a real reduction in our debt. Rather it is a result of our implementing the new convertible debt accounting rules this quarter. We did not buy back any of our debt this quarter and the amount we owe is still $159 million. Scott?

Thanks, Mike. While we are pleased with this quarter's results, we remain focused on further improving K&S's financial performance in the future. As we have outlined in recent investor presentations, we expect to continue to reduce our cost structure both at the COGS line and the OpEx line over the next year or so.

For those of you who haven't seen that presentation, it is available on our website. The key take away from that presentation is that at any given level of wire bonder demand a year from now our operating performance should be higher than it would be today at those same demand levels. And that is before you add in the contribution of our iStack die bonder.

Today we are in die bonder starting mode. We have machines in qualification. Their performance is very impressive, although we are experiencing the usual new machine bugs and requests for customer-specific features. We booked the first order and as we install those bug fixes and feature enhancements over the next few orders we expect to book many more orders.

As that incremental die bonder revenue starts to flow in it will also have a positive effect on our financial results.

So all-in-all we feel good about where K&S is today. Demand from our core ball bonder customers is strong driven by IC unit growth coupled with LED growth and the industry's ongoing conversion to copper wire. Heavy wire wedge bonder demand is also picking and our die bonder initiative should start to bear fruit soon. All this leads to our good current financial results and as our various cost reduction programs mature we expect even better performance in the future.

With that, Melissa, let's take a few questions.

(Operator Instructions) Gary Hsueh, Oppenheimer & Co.

Great numbers here. Quick question here just on the opportunity of the transition from gold to copper wiring. I have noticed that the reports I think in the press that it's expanding perhaps to silicon ware. Just wondering if, A, you are able to start driving market share gains in the traditional kind of wire bonder business when you go from gold to copper, and, B, where are we in terms of the replacement cycle of legacy gold wire bonders?

I know you have talked about copper kits, but I am interested in where we are in terms of the replacement cycle for actual aged legacy gold wire bonders. In terms of where we are, what is the size of that replacement cycle for you guys in 2010? Then I have got a few follow-ups.

Okay, Gary, first about market share. We believe that we have a significantly better copper package than our principal competitor, ASM Pacific, especially with fine wire, high density, long loop kinds of applications. Yes, we think we are picking up share because of that. I can't quantify it for you.

Secondly, about the replacement cycle, our theory has always been that people will kit their existing bonders for as long as they can and defer actually replacing older bonders until they have kitted all their newer bonders. When we look at the installed base, roughly half of the bonders, half of our bonders at least, are kitable. The other ones are not.

So we haven't -- in all our internal modeling we don't project the strong replacement market to come for a while. That would be not in 2010.

Now having said that, when we try and run the numbers it seems that some of the bonders we are shipping today in fact are replacement bonders. We mentioned in the press release that we shipped about 1,500 kits in the December quarter. A little over half of those kits were already installed on a bonder so a customer was buying a pre-kitted bonder, if you will.

Now some of that is that people are simply expanding and while they are expanding they are buying their expansion capacity with copper, but some of those may in fact have been replacement bonders. It is very hard for us to make that distinction, especially when you are talking about subcontractors who vary their applications and in fact will take a copper kitted bonder and occasionally run gold wire on it depending on what is in their queue.

So that is a lot of background color that doesn't really answer your question because we are not sure. Our model all along has been that the heavy part of the replacement cycle would come probably starting in 2011 and beyond. If we are getting some of it now that is better than we forecast.

I guess your last question is what is the potential for replacement bonders. The math that we run says that there is something like 40% of the installed base today will probably have to be replaced over the next few years, next three to five years. But keep in mind that they will be replaced with higher productivity bonders, so it's probably a two-to-one replacement ratio. That is to say you can replace two old bonders with one new bonder.

So 40% of the installed base gets replaced with the equipment of 20%. We run -- our models call for the installed base to be around 80,000 bonders. So 20% of 80,000 is what the potential replacement business is. Again, that is all very round numbers, back of envelope kinds of assumptions.

Okay, great answer. Thank you, Scott. Second question here is just to kind of get me recalibrated on the model. I am assuming since POs were really only closed in January of 2010 that the December quarter really had no revenue benefits in the die bonder kind of penetration. Just wondering exactly how much of the OpEx in the December quarter was unabsorbed stemming from the die bonder business.

Okay. First, it's only a single PO to date. Yes, it was booked in January, the machine has not shipped yet so there is no revenue yet. Die bonder OpEx is in the -- per quarter -- $5 million, $6 million per quarter. So it's a big [nut].

Okay, fantastic. Last question just can you give me what the utilization rate was in the December quarter across your bonder installed base? I am looking at your expendable tool business and that is just -- not that it really matters but it's just down 7% so I would have expected that to be up since the utilization rates I am assuming are up. Is there anything you can do to help me understand that?

First, I am trying to read through the -- through the quarter it averaged in the low 80s, the factory utilization rate. Te tools business has not been growing as quickly as you might otherwise expect because the -- for two reasons. First, customers are increasingly embracing so-called long life capillaries, which lasts about twice as long but costs about 15% more than old conventional capillaries, so there is some TAM compression in the tools business.

Secondly, our tools business line includes the heavy wire wedge bonder. I am sorry, the wedges used in heavy wire wedge bonders. And the heavy wire wedge business has -- like the heavy wire wedge bonder business, that whole market segment has been one of the last segments to start to accelerate whereas the bonder business started to accelerate almost six months ago.

The wedge bonder business is just beginning to accelerate and that means wedge tool consumption is also just beginning to accelerate. Improvements in the wedge bonder and wedge part of the business is one of the reasons why the guidance for the March quarter is so strong. We are really excited about that and what that Orthodyne acquisition is going to start to kick in to the rest of the Company.

Okay, great. Thank you.

Next question, Melissa.

Krish Sankar, Bank of America-Merrill Lynch.

Good morning. This is Paul Thomas for Krish Sankar. Thanks for taking my question.

So, Scott, you were just talking about Orthodyne. So we are just wondering now with the gains you have seen so far do you think we are going to see kind of a peak cyclical quarter along the revenue line that they had previous to the acquisition? Or where do you think that is going to go this year?

We don't --

I guess I will stick to directionality. I know you can't give a forecast, but --.

It's a little hard for us to say. The wedge bonder business is going to have a very strong March quarter, and like the rest of our businesses visibility beyond that is not very good. That doesn't mean that they are going to go down it just means that we can't see into the future.

Okay.

We certainly think there is long-term growth over their previously demonstrated peak. The wedge bonder -- the heavy wire wedge bonder business is ultimately driven by power management. And it's hard to imagine that power management is not going to have a bright long-term future.

Whether it be cars or industrial equipment or other kinds of electronics, smart management of power has got to be in everybody's future. There is no more principal beneficiary of that trend than the heavy wire wedge bonder business.

Okay. And then on the LED shipments, those were about 10% of bonder shipments. Or I guess --

I am not sure where you got that.

Sorry. That was last quarter you said just roughly in ball bonders. (multiple speakers)

What we said last quarter is we expected that the part of our shipments that went to the LEDs would probably be relatively constant in the 100-odd bonders per quarter. Now what that is as a percent of the whole depends on the denominator. So while -- because we shipped a whole lot more bonders to everybody else, as a percent of the total it actually came down in the quarter. Although on an absolute number it actually went up in the quarter.

Okay. So the unit numbers are still going up. What is your spend per share? I think you had said maybe 25% or so roughly.

Yes, and I think that we will stay in about that range for a while in the LED segment. Of course we have much, much higher shares in other parts of the market.

Okay, all right. Thanks a lot.

[David Dooley], [Steelhead Securities].

Congratulations on a nice quarter, guys.

Thanks, David. I think we are going to look even better in March.

Yes, it would appear that that is the case and I guess those are -- my first set of questions are around profitability levels. You mentioned the drop rates that you have just achieved in the current quarter, I think at 52%, and then also mentioned that your operating expenses would be going up in this upcoming quarter.

So what -- can we just take that drop rate and add the increases in the operating expenses and get to the drop rate to expect for the current quarter?

Mike, do you want to --?

David, it's Mike. That would be a fair estimate.

Okay. I haven't run the numbers but I have noticed the last couple of quarters the consumables business gross margins seem to be much higher than I recollect in the past. It's certainly up a lot. What is the key reason behind that?

Okay. If you are talking back to the sort of pre-sub prime meltdown, David, you are looking at a segment that at that time included the gold wire business and of course the gold wire business was a very low margin business. High revenue, low margin number -- low gross margin number because of the content of the gold.

In fact, our tools businesses have always been our highest gross margin businesses. They are wonderful businesses. The problem is that they are just not very big, but we like them for a lot of reasons. One of course is the profit contribution they make. Second, they are the closest thing to countercyclical we have in our revenue stream.

Thirdly, we are the only bonder manufacturer who also makes his own tools and our ability to drive the tool design, which is a very important contributor to the whole process envelope of wire bonding. Our ability to drive tool design in conjunction with bonder design we think is one of the reasons why we have such better bonder performance than our competitors.

So we love the businesses. Our only complaint with them is they are not bigger.

About their profitability, as you know from our previous presentations we have historically made those tools at two different sites. At least the ball bonder tools we are consolidating that in China. It's part of our cost reduction efforts.

That program is only partly through. In the quarter we carried a fair amount of non-recurring expenses associated with the transfer and consolidation in China. And as that program winds up over the next couple quarters our tool profitability should actually go up further.

Excellent. Could you talk a little bit about -- you just talked about the LED market. Could you talk about the DRAM market? That is another market where over the last three years you have made some inroads. I was just wondering if you could tell us what state of acceleration that market is in and what you would expect going forward.

Okay. Well, let me talk not explicitly about DRAM, but about memory in general and combine DRAM and flash. That is a market -- you are right; historically we underserved that market. In the 2006, 2007 time frame we really made a converted run on it and took a significant amount of share, especially away [Shinkowa]. We took them away from [Shinkowa] Korea and in Taiwan.

And part of our previous cyclical peak in 2007 included a strong contribution from memory and that was both flash and DRAM. Since that time, as everybody knows, the memory business has been a really tough business and they have bought virtually no incremental assembly capacity.

Even in the current quarter, the March quarter, we are just beginning to see equipment flow into what we think are memory applications. And I say we think because they are not going to the traditional micron Samsung, Hynix, Toshiba type names but rather subcontractors that we believe are servicing those accounts.

It appears that the memory guys will add assembly capacity in this cycle mostly through subcons, not in their own factories. Of course, that always makes it hard for us to say whether we are actually selling memory machines or not. But our best guess is that some of the March quarter shipments -- not very much but some -- are going to memory applications in the subcontract space.

And back in '07 or whatever you kind of had a few -- was it a couple hundred in this quarter? Was that what I remember you saying back then?

In the memory?

Yes.

No, the number that comes to my mind is 700 or 800 bonders out of that 2,000-bonder cyclical peak were for memory applications. Probably more for flash than DRAM.

Stock flash is a particular strong spot for us. To build stock flash parts you need some unique looping characteristics that we are very, very good at. So we think we sold a lot of bonders into that space.

Okay. One final thing from me is I think I saw the backlog number in the press release was $53 million, but what was the backlog number at the end of September quarter?

While my guys look through their cheat sheets to try and find that number, I will have to give you the obligatory caveats. Backlog is not a very important number at K&S. You ought to think of this as a turns business.

When we take a big blanket order from a customer, a multi-quarter blanket order, we don't book it. We only book what is released in the short term so that is not included in that number. And orders are cancelable at will by our customers so I wouldn't point out -- I wouldn't build an investment thesis on backlog.

In our internal reviews I generally take the view with my managers, my manufacturing guys especially, that backlog is customer desires that are going unfulfilled and that is a bad thing. So having said all that, what was the September backlog number, Phil?

42.

42.

Thanks, guys.

Next question.

(Operator Instructions) Andy Schopick, Nutmeg Securities.

So, Scott, my challenge to you is to sustain this for four quarters in a row.

I have got a few questions for you. First, I want to be sure that I understood the one comment you made in response to another question. Did I understand that the operating expenses associated with the die bonder business are $5 million to $6 million per quarter?

Roughly.

Can you give us any indication in terms of your internal planning purposes what the die bonder business is likely to contribute in its current fiscal year? Do you want to -- do you have any kind of range or parameter --?

Nope.

Okay. That would be really helpful if we could get some sense of what you are really planning and thinking on there, but I guess we are going to all be surprised when it happens.

The convertible debt situation, Mike, I must admit I am not as familiar with this new accounting ruling as I was with previous convertible debt accounting rulings. And for my purposes I have only made this more confusing.

I am not sure that I understand why the debt as it is presented on your balance sheet of just under $143 million is $16 million or so less than what your principal amount outstanding is?

So at a high level what these new rules would require us to do is to value the equity component of that convert and to take it out of the debt and to put it in to common stock. The amount that we valued for equity in that convert was roughly $30 million.

Then you take your debt down when you take that $30 million out and you apply a higher interest rate, the interest rate that we would have borrowed term debt at the time, to that lower debt balance. So you see higher GAAP interest expense.

Then as you move forward on the life of the bond that gain that you took in your equity slowly accretes back into the net. And you end up at $110 million when it's time to pay it off. We had to retroactively implement this and we are -- these new accounting rules are coming about halfway through the maturity of this bond. So we had to put it back into our previous financials, but when you roll it forward about half of that $30 million has already creeped back up. So over the next 2.5 years that remaining $15 million, $16 million will accrete back into the debt. I hope that answers your question.

Well, yes. I am going to have to look at this more closely when you file Qs or look at other folks Qs to see if they have a broader explanation of this because it is confusing.

The other thing that I have noticed here is on the non-GAAP adjustment there is a non-cash interest related component as an adjustment or exclusion from the non-GAAP numbers. Is that also associated with the convertible debt?

It is. It's that $1.5 million of extra interest per quarter that the new accounting rules would have us show. It's not cash.

And, Mike, can you give us some indication as to -- can you estimate what that will be for the year based on your current debt structure? What that non-cash --?

$6 million; it's about four times the $1.5 million per quarter.

Okay. So it's going to be fairly steady?

Yes, yes.

Okay. Any plans to reduce the debt outstanding during the course of the fiscal year? Are you looking at it at all?

Yes, --

Cash flows are clearly going to be very good through the first half of this year.

Yes, I mean we have positioned cash on our balance sheet to pay off the $49 million that is coming due in June of 2010. We are going to do that. That it's going to reduce our debt.

And then we are running our models looking forward and we have a good chance of paying off $110 million when it comes due in 2012. We are on a path to delevering.

(multiple speakers) And you want to amplify on that and we have said before, the Board has set a goal for management to get this company debt free as quickly as we can. So we are working down that path.

We will pay off the June debt on schedule. We will not try and roll it over or any of that stuff. We are now focusing on what is the best way to deal with the remaining $110 million that is due in June of 2012. And as Mike indicated, given current cash flows we may just pay it off as we go.

Well, let's hope that the business and the cash flows will give you more than adequate flexibility to do that.

Mike, to come back to cash flow for a second, there is some puts and takes here that I think may be offsetting factors in the upcoming quarter where you expect to have even better revenue performance than we have seen reported today. Can we anticipate that cash flows will at least equal what we have seen here for this quarter?

No, I think we are going to see working capital requirements absorb more cash than they did this quarter, consistent with the higher revenue levels.

All right. So cash flow from ops is going to be somewhat lower than what we are seeing right now?

Yes, because we are going to -- at these revenue levels I am expecting we are going to see a lot of the cash go in to working capital.

Okay.

Let me also amplify on that a little bit, Andy. We had extraordinarily good accounts receivable performance in the December quarter --

I see it.

-- that Mike pointed out in his opening comments. And it's unlikely that our DSO will be that good again in the current quarter.

Okay, understood.

So that is where a lot of cash will go into accounts receivable.

Understood. One final thing for you, Scott, on the ball bonder shipments they were up about 23% or as revenues?

I think that is the number.

And the average price that you are receiving on your ball bonder shipments today is about what and how did it compare with a year ago?

It's low 50s and it's about the same, maybe a shade less. When you get into bigger volume orders from the subcons you typically see a little bit of volume discounting, but it's not materially different.

Okay, excellent. Thank you so much.

Thank you, Andy.

Gentlemen, there are no further questions at this time. I would like to turn the floor back over to Scott Kulicke for closing comments.

Well, actually I am going to turn it over for Tom but thank you all for your time this morning.

Thanks, Scott. Before closing our call I would like to remind investors that will K&S will be hosting its annual shareholders meeting on February 9, 2010, at the Embassy Suites Hotel in Santa Anna, California. A link to our webcast of this meeting will be posted to our website following the conclusion of this call.

K&S will also participate in the Oppenheimer Semiconductor Summit on February 18 and will present at the Jefferies Technology Conference on March 9. Details will be made public shortly.

Thank you, operator. This concludes our call.

Thank you. You may disconnect your lines at this time. Thank you for your participation.