庫力索法 (KLIC) 2010 Q3 法說會逐字稿

Greetings and welcome to the Kulicke & Soffa third fiscal 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, Joseph Elgindy, Manager of Investor Relations for Kulicke & Soffa. Thank you, Mr. Elgindy, you may begin.

Thanks, Katie. Good morning, everyone, and welcome to the Kulicke & Soffa's third-quarter fiscal 2010 conference call. For those of you who have not seen the results announced last night, they are available in the investor relations section of our website at www.k&s.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.

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 the 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 the host for today's call, Scott Kulicke, CEO.

Thanks, Joe. Good morning and welcome to this conference call, the purpose of which is to discuss K&S's June quarter financial results, which were announced last night. And what a great quarter it was.

Before Mike Morris, our CFO, takes you through the financial details of the quarter, I thought I would describe our view of the industry and trends driving K&S. After Mike is done, I will talk a little more about how we see the future.

Mobile electronics demand continues to be strong and is in turn driving IC unit shipments at record levels. This is reflected in our customers' capacity utilization rates, which as we measure them continue to run in the 85% to 90% range or about 5 points higher than previous peak cyclical levels.

Our customers are busy and they are continuing to expand their capacity by buying among other things lots of wire bonders, lots and lots of wire bonders. Those of you who follow K&S know that this strong wave of demand started in January and looks to continue at least through the rest of this year. That wave of demand has been most pronounced at the big Taiwanese subcontract houses ASE and SPIL as they race for leadership in the industry's conversion from gold to copper wire.

While these two customers combined accounted for about 36% of our sales in the June quarter, our extraordinary level of shipments isn't just an ASE and SPIL story. We ship ball bonders to about 100 other customers as well. We see demand from IDMs as well as subcontractors and from all application spaces.

Especially important is the OED space, where demand continues to grow and the memory sector, including both DRAM and flash, which has finally come alive.

Another way to look at the ball bonder space is in terms of the copper wire transition. In the quarter, about 60% of our ball bonders shipped configured for copper wire as the industry continues to convert to copper for cost reduction. K&S has the most robust fine copper wire process running today and we are winning the lion's share of orders for copper configured bonders.

In the face of this unprecedented wave of demand, our immediate task has been to increase our own production rates. We have been capacity limited since the winter. June quarter ball bonder volumes were about 48% above the March quarter and 80% above the December quarter, reflecting the excellence of our manufacturing organization. That team including our network of suppliers and subcontractors doesn't normally get much mention in these calls, but I want to acknowledge their contribution to K&S's success and also to remind them that I expect even more this quarter.

So far I've only talked about ball bonders. We see a similar pattern in our wedge bonder business with strong demand from all sectors and the Company rapidly increasing shipments in response to an overflowing order book.

In both the ball and wedge bonder market spaces, K&S is the supplier of choice with the best products and the most responsive manufacturing organization. We believe our market share is continuing to grow.

As for the financial implications of these successes, let me turn the call over to Mike.

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 guidance 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 June quarter to the March quarter and will refer to non-GAAP measures unless otherwise noted. unless otherwise noted.

As Scott mentioned, results for the June quarter were outstanding. Net revenue for the period was $221.3 million, up $67.4 million from last quarter. The revenue increase was driven by a 48% pick up in ball bonder volumes and a 69% pick up in wedge bonder volumes.

Ball bonder unit sales were weighted towards subcontractors to comprise 72% of our ball bonder shipments. This is down from the March quarter when subcontractors were 79% of these shipments.

Gross profit was $99.2 million, up $31.4 million from last quarter. Our gross margin was 44.8%, up nearly 80 basis points from last quarter. Our margin improvement was driven by a more favorable pricing for ball bonders as our customer mix was less dependent on subcontractors and also by improved absorption of our fixed manufacturing costs given the volume increase.

Operating expenses were $44.1 million, up $4.1 million from the March quarter and in line with the guidance we gave during our last earnings call. Our operating margin was nearly 25% and as a measure of our operating leverage, 41% of our incremental revenue this quarter fell through to operating profit.

Last quarter I spoke about the fixed and variable components of our operating expenses. I would like to reiterate that over the next few quarters short of any surprises we expect our fixed operating expenses to come in around $30 million and our variable operating expenses to be around 7% of our revenues.

For the September quarter, we see our total operating expenses at roughly $46 million. As a reminder, these amounts are all non-GAAP. When you add back the non-GAAP adjustments, we see our GAAP operating expenses at roughly $50 million for the September quarter.

Concerning taxes, we had a $1.1 million tax benefit this quarter, which was driven by a $3 million partial reversal of a valuation allowance we have against deferred tax assets related to our US net operating losses. Considering the strength of this cycle and our manufacturing consolidation in Asia, we are better able to project profitability for our US legal entity going forward, which triggered the release. From a modeling standpoint, however, I would continue to use a book and cash tax rate of between 3% and 5% as this better reflects our steady-state consolidated tax expense.

Turning to the balance sheet, we ended the quarter with total cash and investments of $163.1 million, which reflects $27 million of operating cash flow for the June quarter before considering our $49 million debt repayment at the end of the quarter. There were 3.8 million common shares underlying these redeemed notes which will no longer be in our fully diluted share count.

For the September quarter, this redemption will reduce our fully diluted share count for purposes of determining quarterly earnings per share by approximately 5%. No common shares were issued in connection with this redemption.

Working capital defined as accounts receivable plus inventory less accounts payable increased $33.6 million to $140.1 million, which is good performance considering this ramp. We can see this good performance from a days perspective. Our DSO was better by a day at 62 days. Our DSI was down nine days to 51 days, while our days payable was down two days to 59 days.

Finally, our return on invested capital for the June quarter was 73%. Scott?

Thanks, Mike. Before we take your questions, I want to take a few moments to talk about the next few quarters. For most of our equipment businesses, our order book is full into the month of December. Our revenue guidance for the September quarter is in the $250 million to $300 million range. Like the June quarter, September revenue will for the most part be manufacturer limited, not order limited.

What is different from the June quarter is that while our two biggest subcontract customers are planning, as they discussed on their own recent conference calls, to moderate their growth rates, other customers, especially LED and memory customers, are continuing to ramp demand. We interpret this transition to a more balanced order distribution as healthy for both K&S and the industry.

Similarly, we are seeing a certain amount of volatility creep back into our order book as customers, especially subcontractors, shift back to their traditional tactical ordering patterns. This will happen as we work bonder leadtimes back to a traditional eight to 10 weeks or about half of what it has been running. Again, we view this as healthy and not necessarily a harbinger of the next downturn.

This is perhaps the place where I pause and remind investors of our customary warning about industry volatility. There will be sooner or later a next industry downturn. But we just don't see it happening yet. Please read the risk factors in our latest SEC filings.

While it is too early to give December quarter guidance, based on our current order book and our manufacturing plans, we expect the December quarter to be about comparable to September.

Over the last few quarters, our dialogue with investors has been dominated by the wire bonder demand and resulting production ramp story. Inside K&S, there's been a lot more going on. We are making good progress with our iStack die bonder. We have successfully qualified about a half-dozen customers including both memory and subcontract houses. iStack shipments started in earnest this quarter.

Also of note is our ongoing work consolidating manufacturing in Asia and reducing the Company's cost structure accordingly. We are about finished consolidating (inaudible) manufacture in China and are on schedule to finish consolidation of all our equipment manufacturing in Asia next spring.

As a result of these actions, at any given level of revenue, you should expect better financial performance as gross margins improve and operating expenses decrease. We are committed to continue to improve our financial performance across the whole of the semiconductor cycle.

In summary, things are going well for K&S. Sales are up, driven by a strong electronics market as well as increasing market share. Costs are being well managed with further structural cost reductions in the pipeline. Cash flow is good and our balance sheet continues to strengthen and we expect the next few quarters to be even better.

And I think I'm embarrassed because Mike just handed me a note that said that I gave guidance of $250 million to $300 million and I apologize. We are having -- it's late at night. We're calling actually from Singapore. We expect our revenue guidance for the September quarter to be in the $250 million to $260 million range and I apologize for that.

Katie, why don't we take a few questions?

(Operator Instructions). Krish Sankar, Bank of America Merrill Lynch.

I had a couple of questions. First, you mentioned that some of the push-outs that you'd spoken about a few weeks ago at Semicon were reinstated. Can you talk a little bit about what is the actual magnitude of the push-outs and what is the percentage or magnitude that got reinstated back in the quarter?

It was originally a couple hundred bonders that were pushed out. About half were pulled back in and -- I'm sorry I have to give you rough numbers because I don't remember the exact. And the other half were -- we sold to other people.

Okay, and the second question --

And I will remind you that we said at the time that it was not going to be -- have any effect on the quarter that we had lots of demand, that it was not a big deal.

All right. And the second question, I know you guys don't break out how much actual number of bonders you guys ship, but if I do the rough math, I just want to get this right. Are you running -- it's about 40% higher than the last peak levels from an actual bonder shipment standpoint?

Let me get my calculator out. Roughly maybe a little higher than that.

Okay, and the last one (inaudible) might be less than that?

You know, what we've said is that we are going to ramp up to and possibly just through the 300 machine per week level. We are still on that path.

All right, and --

We are still ramping production in ball bonders and in waste bonders.

And for June than, and possibly (inaudible) can you tell what percentage of bonders was from (inaudible)

September I'm not going to comment on because we are not there yet or it is still relatively small numbers, but accelerating. It was about 12% in June.

12% in June, okay. And the final question from my side, you have been saying for a couple of weeks now that customers are coming back to more normalized behavior. Does this mean we should start to see the normal seasonality in your business once these move past the December quarter?

The comment that customers are getting back to normal behavior was less about seasonality and more about volatility in the orderbook, moving the orders in, moving orders out, switching them around from one factory to another or another -- one application to another. This is specifically the subcontractors based on who won the latest contract from whom. That's what I was really referring to.

It is -- for us to comment about patterns past the end of the year really is a crystal ball shot.

Thank you, guys.

Gary Hsueh, Oppenheimer & Co.

Thanks. Hi, Scott. A quick question. You know, if you're ramping capacity from let's say 250 per week, to 300 per week, [compare] over the second half, would it make sense here to speak about guidance in the December quarter to be fundamentally higher than the September quarter? And if not, what is sort of holding you back? What's keeping you a little bit conservative? Has anything changed recently despite your capacity ramp plans?

Okay, first the advice I get from everyday I talk to is it doesn't make sense to give guidance that far in advance at all. This is the semiconductor industry. (expletive) happens. So we have actually gone beyond our normal pattern just simply to give you a qualitative comment about the December quarter, which again I will repeat is roughly comparable for the September quarter, but there's a lot that can happen there between now and then.

A lot can happen both on the demand side and on the production side. So that's the most you are going to get out of me right now.

All right, because I was going to say the $250 million to $300 million sort of number you threw out there would make sense for me in the December quarter, but I will let that lie.

Yes, that was cool. Again, that was nice growth. It was $250 million to $260 million. Also as I said, that is not order limited right now that is factory limited, production limited.

Okay, great. If you could help us get a baseline as to where we are in the cycle, I think there's a lot of cylinders firing and I think we lose track. But could you break out exactly what the percent of revenue or percent of wire bonders that the Taiwan OSATs are versus the China OSATs? And then (multiple speakers)

Gary, it's a great question but it's not the way we do our data because, for instance, we think of the ASE as ASE and that's factories in China. That's factories in Taiwan. That's factories in Korea and Penang as well, so it's just not the way we look at the data.

Okay, but there are other -- guys like housing, industrial, other guys that have been greater than 10% in the past. I'm just wondering if the Taiwanese subcontractors are indeed moderating the December quarter, what's left in terms of cylinders that fire and offset that or more in the December quarter?

Well, first, when we say they are moderating, it means they are going from extraordinarily high levels to only very high levels. They are still giant consumers of wire bonders. Secondly, as we said, LED is continuing to grow. Memory is continuing to grow. And other subcontractors are continuing to grow as well.

So we don't see the moderation of the big two guys in Taiwan -- again from extraordinarily high to very high -- we don't see that as [bending] the overall shipment level. There's a lot of other demand to fill in.

Okay, and how about LED? Is there any way I can get a firm absolute value baseline of where we are in terms of the LED business?

We shipped 231 machines for LED applications.

In the June quarter?

In the June quarter.

Okay. Thanks, Scott.

Which is not quite double what we shipped in the March quarter. So it's got a great growth curve. It's still, as we have been saying all along, it's still not an ASE or a SPIL or one of those big guys, but we like the trend line. We think that part of the cycle has some legs to it and we like taking it away from ASM Pacific.

Absolutely. I have to ask this question. Have you seen any more push-outs beyond that one customer that you've partially pulled back in?

No, and that one customer as we've discussed at length is really an issue that ultimately starts with tax problems from white box makers in China, flowing through a cell phone chip manufacturer, flowing through their subcontractor to us. It is not a raw demand issue. It is a very localized and obscure tax problem in China.

Okay, understood. A little bit of a bigger picture question, Scott. Can you help me understand what's going on right now in terms of subcontractors and their visibility relative to die versus wafer bank and how that might help or hurt you guys in the December quarter going into the first half of 2011?

No, the truth is that we haven't been talking to our customers about that lately. Mostly we've been talking about trying to satisfy their delivery demands.

Okay, last question here for Mike Morris. Mike, I'm used to seeing with increased volume a little bit of deflation in gross margin. But it looks like your gross margin number is holding up extremely well. Could you talk about what the dynamics are in terms of gross margin, what's propping up extremely well relative to increasing unit volumes?

Gary, as I tried to touch on in my script, we saw subcontractors constitute relatively less of the revenue mix than we did last quarter and that carries a slightly better ASP, which is helping the improvement in gross margin plus what you would expect the utilization, better utilization of factories. Does that answer your question?

Yes, I heard something about wedge bonder growth as well being beneficial to gross margins. So --

Yes, the wedge bonders are going to be driving the improved factory utilization because they have a greater fixed component of their costs.

I see. Okay, great.

Just a higher gross margin to begin with. So it's a mix issue.

Okay, got it. Thank you so much.

David Duley, Steelhead Securities.

Congratulations on a nice quarter.

Thank you. A lot of people worked very hard to make this quarter come true.

Yes, I don't recall earnings levels of this high, so again congratulations. Just a couple of questions. What would you expect the cash flow to be in the September quarter?

That's not normally a number we would guide to. But tease him a little, Michael.

Yes, you know, the issue when you say cash flow, the issue is working capital performance as well as cash generated from the business, right. I think you could extrapolate from our performance in the third quarter and you would probably get in the neighborhood, Dave, but take out the bonder (inaudible).

Right. Of course, right, right.

So we will continue to add -- we expect to continue to add reasonably significant amounts of cash in the earning quarter.

And should the drop rate continue to be similar to what it was last quarter?

Yes, there's going to be a certain asymptote that will happen as the revenues continue to rise, but you will be in the neighborhood would be my best guess.

Okay, two final questions. Can you take a guess at -- as far as the ball bonders go, what percentage do you think were sold into copper applications and were there any other 10% customers during the quarter?

Well, first, it was about 60% were sold in the copper applications. I'm not sure what you meant by any other. Other than whom?

Well, you mentioned two customers made up 36% of your revenue, so I'm --

Yes, ASE and SPIL. Were there other 10% customers besides ASE and SPIL, Mike?

Let me look it up for you.

Yes, we will look that one up, David.

Okay. That's it for me, so again congratulations.

Thank you, David. You have been one of the true believers in this story. I'm glad we are making you look good. Katie, next question?

Tom Diffely, D. A. Davidson.

Good evening over there. Just getting back to the LED tool business, you talked about 230 or so tools. What's your sense of the market size or your share of that space?

Our sense is not real tight, but I'm going to guess that it's our best internal estimate is between 600 and 700 tools.

For the quarter?

Yes, for the quarter.

Okay, and then do you have any specific capacity constraints with that or does it just fall into your normal lines?

The LED machine comes off the same line. It's probably 98% same parts as the other bonders, so it's all part of the same set of supply constraints.

Okay, and do you have any estimates as far as how many tools are necessary per like MOCVD front-end tool?

No, we haven't been able to correlate that at all. I'm sorry. It would be an interesting extrapolation, but it's hard. There's a lot of variables based on exactly the part being made. There's implicit assumptions about device yield, wafer fab yield, and it is too amorphous for us to be able to get any kind of useful correlation on that.

I will go back to Dave's -- just a minute, Tom. Dave, I hope you're still out there. There are no other 10% customers besides the two big subcontractors in Taiwan. So I'm sorry, are you done?

No, just moving on to the wedge bonder business, are there any new trends there that you are seeing or does it just fit into the broad-based electronics (multiple speakers)?

The broad-based story is good. We are also surprised to start to see some life in the automotive segment. Who would've thought six months ago that automotive would ever need any capacity, but we are seeing some purchase orders from our automotive customers there. So we feel really good about that. Great margin story in that part of the business.

Okay, and then on the cost structure side, when you are ramping capacity, how much fixed cost does that add to your operations that will be around during the slower time as well?

It's at the round [offer] level. We have added very little fixed capacity or fixed costs. It's a little bit of amortization on things like tooling, fixtures and all that our manufacturing model is not capital-intensive. So it is just not a problem for us.

Okay, well thank you very much.

Andy Schopick, Nutmeg Securities.

Thank you and good morning, Scott. I only wish that the stock performance would start to begin to track the financial performance and improvements that we've seen at this Company over the years, but it's frustrating.

Tell me about it.

Let me ask a couple of questions. On the copper, what -- did I understand that 60% of the machines that were shipped were fitted for copper in this quarter?

That's correct, and that doesn't include kits that we shipped as stand-alone kits. I unfortunately don't have the kit number in front of me.

What was -- (multiple speakers) what was that comparable percentage in the prior quarter?

It was actually a little higher. It was 67. What you're seeing is some mix shifting a little bit away from a subcontractors, as we discussed earlier, although I think probably the absolute number of machines shipped for copper went up significantly, went up like 40% or something.

How does the throughput of copper compare to gold? Obviously I would assume it is slower and I wonder if that is a factor in helping to drive a somewhat higher demand for equipment?

Well, I think that is exactly correct. The throughput penalty associated with copper varies by application and we see it anywhere from 10 to -- we see some applications where it is 30% 40%. I think a good benchmark number is the number SPIL gave on their conference call two quarters ago where they said it averages around a 20% throughput penalty. So that's still small compared to the savings, the material cost savings, so it's a great overall value proposition. But yes, it's clearly driving incremental bonder units right now.

To what extent are there any reliability questions with respect to copper-based devices?

That is a complicated question. As we see it, the fundamental metallurgy of a copper wire bond is -- should be more reliable than the fundamental metallurgy of a gold wire bond, which has a built-in long-term reliability problem associated with atomic migration or diffusion of aluminum into gold. So the basic metallurgy should be even better than the traditional gold ball bond.

The issue, the reliability issue is one principally of potential pad damage or sub pad damage associated with a harder wire, and that's where the kind of process magic of the K&S process comes in. People need to go and do reliability qualifications on a device by device basis before they can convert over. It's one of the things that gates the rate of change and people have converted over first the lowest reliability parts which tend to be low-end consumer electronics, things like white box phones and the like.

But we are seeing people continue to progressively work up the reliability curve. What you have to do is prove to yourself through accelerated light testing that you have a process that will work for each particular die design. That just takes a long time. We haven't seen any examples. Nobody has certainly come back to us with any examples of reliability nightmares. It's just doing the work.

Great. Mike, a question for you. I noticed in the press release the number of employees has increased from 2144 to 2953 and it is footnoted and says increased primarily due to manufacturing headcount. Could you explain that a little bit more? How much of that is a variable cost?

I think it's nearly all a variable cost with our flexible manufacturing model --

No, actually most of those are DL, direct labor, so they are not variable in the OpEx sense of the word. But -- and most of them, almost all of them are temporary employees. Our manufacturing model in all three of our factories here in Singapore, in subsystem factories (inaudible) and in the tools factory in China is built around the idea of a cadre of permanent employees that are scaled more or less the bottom of cycle conditions, bottom of cycle requirements for that particular factory. And then we bring in temporary employees for the rest of the cycle and flex the factory up and then flex it back down again with a minimum of drama and a minimum of severance charges.

Okay, thank you for explaining that. You know, Scott, I do want to ask you one additional question because when you made the comment in front of the presentation in July, it clearly created a lot of concern and did some damage to the stock. And I don't really think it is fully recovered from that.

I'm not sure what it was you were really trying to communicate at that time. There clearly was no real impact financially to the performance as things turned out. You know, would you do things differently if you had to do it all over again?

It's an interesting question. I'm sitting here with my two principal advisers on this stuff, Mike Morris, our CFO, and Dave Anderson, our General Counsel. And Mike is vigorously shaking his head I would do it exactly the same or I would do it the same way. Dave is shaking his head he would do it the same way. I am less sure and we are continuing debate about that internally.

We were in a situation where we were going to a financial conference, we had information that we had to make FD compliance, we had to 8-K it. We were in the early days of trying to understand what was going on with that customer and when we first made the decision to disclose it, we weren't completely sure among ourselves whether it was something as localized and innocuous as it turned out to be or whether it was the first of what could be a long, ugly series of changes in the industry. So at that point we were more or less committed to the disclosure and then as it turns out, it wasn't a big deal, but we were already committed.

So we're still talking about it. We're still arguing among ourselves. There is not consensus in the Company except that there continues to be a very strong consensus that we have to take our Reg FD obligations very seriously and we did. That we have -- that we want to continue the Company's tradition of candor and transparency with the investing public and try and treat the investment public like grown-ups and if they sometimes overreact, I'm not sure how I can help that problem.

All right, listen, are there any programs or initiatives underway to increase shareholder value? However you want to define that.

Well, I would've thought record profits, great cash flow should increase shareholder value. If it doesn't, I missed something when I went to business school.

Yes, we all have. So again, I just want to ask that question. In view of the absence of the kind of response that you might normally expect given the financial metrics here, are there other initiatives or programs that you are even considering?

There is nothing new or different from what we've talked about in the past. The Company is continuing to build balance sheet strength. It's continuing to delever. Once we get past that milestone, then we will worry about what we do next with our cash. But right now we are on the same path we have been for the last some quarters.

Great job. Great job, Scott. Thanks, goodbye.

Lee Simpson, Jefferies.

Good afternoon, good evening, guys, depending on where you are.

Hey, Lee, are you doing?

Not too bad. Yourselves?

Pretty good, a little tired but pretty good. After these kind of quarters, it's hard to feel bad.

I don't doubt it. Just ask you a couple questions on SPIL if I could, actually. SPIL said last week or when they reported at least that the wire bonder orders were going exclusively to yourself now. I think they say 100% and delivery dates were -- they were looking at the four or five month period -- you know, December-January period. It sounds like you should have a decent idea already of how much your level should be from subcons in the December quarter. And I wondered if you have an idea, do we get an asymptote to the level of subcons in the mix for sales going into next year, is it going to stop at the 60% level or do you see some other dynamic that might change this?

Okay, first, both SPIL and ASE were remarkably explicit in outlining their expected wire bonder purchases through the balance of this year. Normally we would try not to talk about those customers, but since they blabbed about their numbers, we are happy to confirm that what we have in our backlog pretty much exactly matches what both companies put out in their conference calls or in their subsequent filings in Taiwan.

And ASE goes up, it goes down and then goes up again over the -- when I talk about Q3, Q4, Q1, our fiscal quarters. When I talk about June, September, and December quarters, still goes up and goes up and then goes down a little bit in the December quarter. (inaudible) are currently loaded.

We really haven't had a lot of dialogue with them into the next March quarter, which I think is what you have just asked about. So I really can't comment on that.

Sorry, I was actually asking about the December quarter, so (multiple speakers)

The numbers that they put in their filings and talked about in their conference calls match our numbers.

Okay, great. And I just wanted to maybe ask a question again which I think others have asked, but just for clarity here, SPIL mentioned that their customers' behavior in the last two weeks of July had changed and as a result their backlog declined -- I think they're talking about die banks there. Does this act as a driver for the customer change that you have been talking about today, the sort of moderation of behavior or slight moderation at least? Or is this in reference to the original push outs that we had at Semicon last month?

Well, I don't know why everybody connects those push-outs to SPIL. That was one particular customer and I don't know -- I don't think you can generalize from that situation. As I said before, that's a unique -- our customers' customers' customers tax problems in China, as we understand the story.

So this sounds more like the moderation behavior starting with your customers' customers at the end of July?

Yes, I think there is some seasonal stuff in there. I think the reality is that neither SPIL nor ASE could have maintained the pace they were on. They have in our estimation been taking share from other companies based on copper qualifications, but that's going to have to moderate, as we say.

But I also don't want people to misread moderation. If you go and look at the absolute numbers that those two companies have disclosed in their reports, you will see they are still at very, very high levels of bonder consumption. Just not extraordinarily high.

Okay, and maybe one quick question at the end there. If indeed we see this moderation of ordering and a move to a steady pullback towards eight to 10 weeks ordering level, more tactical ordering I think you said, does this have a direct impact in working capital in the December quarter or should we not see it until maybe early in fiscal year '11?

I don't think it will have a particular impact on working capital at all. It doesn't change our inventory turns where we continue to drive the factory for the most inventory turns. And for instance, in the ball bonder factory as we measure it, they turned their inventory 23 times last quarter. Or on an annualized rate, 23 times.

So I mean they are doing great and the fact that the backlog may extend out beyond the inventory position, it doesn't affect the working capital issue at all. I don't know if that made sense.

At the higher levels of revenue, you're going to see -- you are (technical difficulty) a pickup in AR, and that's going to have a (inaudible). Net AR AP, that is going to have a working capital effect.

Yes,

You can extrapolate it from how we did this quarter.

Yes, but it doesn't -- it's a higher levels of revenue, yes, but it's shorter lead times. That doesn't affect working capital. That was the point I was trying to make.

That's great, guys. Thanks a lot.

David Wu, GC Research.

Good morning, Scott and company. Number one, is we are back to the stock price is back to pre-8-K lease levels, so we did a round trip. But really I was going to ask two questions. Number one on the March quarter, typically when you look at SPIL and ASE, their business falls off in Q1 seasonal reason. And I was thinking (technical difficulty) that those guys over a third of your business. Do you think that you could find enough customers to backfill the seasonal pattern that these two companies historically have seen?

The second thing is if you look at the semiconductor industry, the growth rate this year is extraordinary at somewhere between 30% to 35% in calendar '10 and next year the number -- the growth rate, while positives, has to be coming down. And I was wondering given how fast you folks ramp in your bond business, how conceptually from a 30,000 feet level, how would you think about what kind of growth would bonder be next fiscal year or next calendar year versus this year?

David, it sounds like you are trying to get me to call the top of the cycle. It was a good try, but we don't know. People have been trying to call the top of the cycle and use our data to call the top of the cycle since last summer. There will be a top of the cycle. There will be a roll-off in the cycle. We don't have any great crystal ball, any magic way to see it any better than anybody else.

We clearly worry about it. We have been worrying about it for six months. We -- our manufacturing model is tuned so that as quickly as we have been able to ramp up, we can ramp down just as quickly and on very short notice. But we are continuing to load our factory week by week. We load it 14 weeks in advance. That's our material procurement cycle and we are loading for 300 machines a week right now in the month of November.

I can't comment on January or February or March yet. We don't see that far in advance, never have.

You asked about seasonal patterns. I mean the March quarter is traditionally a difficult quarter if for no other reason than it's a 12-week quarter instead of a 13-week quarter. Everybody essentially takes a week off for Chinese New Year.

You asked about if ASE and SPIL were to have a significant pullback, how much could we fill in with other customers? The -- I'm not saying it would or would not happen this way, but it is interesting to note that at the last cyclical peak in whatever it was, 2007, memory was something like 40% of our total volume. Now that's a mixture of flash and DRAM. Right now I said in response to somebody's earlier question, memory was I think 11% of our total volume.

So there is precedent for memory consuming a whole lot more wire bonders than they are today. I'm not forecasting that one way or another, but it is a plausible thing to think about. We are starting to see the memory business come alive. If you look at the wafer fab investments that are being made by the big memory houses and project them out as additional wafers out and ultimately additional units out, that would argue for a lot of wire bonders. It would also argue on the flash side for a lot of iStack type die bonders.

We will have to see how that develops, but that's a plausible scenario.

Okay, my last quick question is on the move to Asia and the consolidation of manufacturing. How much gross margin points do you think if the -- assuming volume is flat and the mix is flat, as you go into Q1 and Q2 calendar year mix here, which is your second and third quarter, how much benefit would you have relative to your current state of things? Everything on a revenue side stays static?

David, I'm going to be a little bit annoying and not exactly answer your question because we haven't -- off the top of my head, I don't think we've done the analysis based on those particular conditions. But what I would refer you and other investors to is the website. In there there's a presentation we made -- oh, probably two or three presentations ago (multiple speakers) -- where we specifically quantified at what we talked about was a theoretical mid-cycle quarter, the improvements of this stuff and that it takes you through a full model income statement.

You can see the gross margin effect. You can see the OpEx effect and my recollection is it almost doubled the operating profit level at the midcycle. But I would recommend you to go look at that on the website.

Thank you.

Satya Kumar, Credit Suisse.

Thanks, nice quarter, guys. I jumped on a little late. I was just wondering if you talked about how much your LED bonder shipments would go from the June quarter through the December quarter and if you (multiple speakers)

I'm not going to project into the December quarter right now. But -- where is that sheet? What I did say was in the June quarter they were 231 units. That's not quite double what they were in the March quarter. They continue to grow on our current plan and I have to warn you there is some volatility in the order book as we move around between customers and customers pull in and push out, [shift] their delivery slots. It continues to grow in the current plan through the end of the calendar year. Somewhat slower rate.

Is there a way to think about the LED bonder opportunity? Supposing you were to maintain the December run rate, I am just trying to get a sense of what the opportunity might look like for 2011. Secondly, you mentioned that your [thing] got pulled in and pushed out on the LED front.

No, no, whoa, whoa, whoa, I'm sorry. I misspoke if you read it that way. First, let me answer your first question. There's no way I'm going to forecast through the whole of 2011 what the LED opportunity is. That would be very brave of us. The LED market is growing right now in response to continuing -- significant continuing investments in LED wafer fab capacity. I think you can -- you probably have actually done your own extrapolations based on the shipments of people like Aixtron and Veeco.

Every time they ship a reactor, people have to buy a bunch of wire bonders. Don't ask me how much; we missed that question earlier, I think. But people do have to buy some bunch of wire bonders to level off that -- even out that capacity.

When I talked about push-ins and pull-outs, one, it's probably not the right way to put it. But where people sit in the delivery -- and our order book does move around week to week based on customer conditions and based on our own manufacturing leadtime issues and limitations. So the order book has some volatility in it.

That is normal and nobody should overreact to that. It is not LED-specific. It is across the board and, again, that's normal. That's the way the wire bonder business typically runs.

Okay, that's helpful. Thank you.

Okay, thank you very much. I'd like to turn to call back over to Joe Elgindy to announce some upcoming events.

Thanks, Scott. Before closing this call, I would like to remind investors that K&S will attend the Oppenheimer annual technology, media, and telecommunications conference at the Four Seasons Hotel in Boston on Wednesday, August 11. And we will also attend the Kaufman Brothers 13th annual investor conference in New York, tentatively scheduled for September 14. Additional details regarding these conferences will be made public shortly, and links to each event's webcast will be posted to our website following the conclusion of this call.

Thank you all for your time. Katie, this concludes our call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.