庫力索法 (KLIC) 2010 Q4 法說會逐字稿

Greetings and welcome to the Kulicke & Soffa fourth fiscal quarter and fiscal 2010 year-end 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.

Thank you, Melissa. Good morning, everyone and welcome to Kulicke & Soffa's 2010 fourth-quarter and fiscal year-end 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.kns.com. An audio recording of this entire conference call 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.

For our call today, we are joined by Bruno Guilmart, President and CEO; Mike Morris, CFO and Christian Rheault, Senior VP of Business Operations. It is now my pleasure to introduce our host for today's call, Bruno Guilmart. Bruno?

Thank you, Joe and thank you all for joining our call today. We are very pleased with our September quarter results, which was another quarter of record revenue and profitability for K&S. We ended with revenue of $260 million, at the top of our guidance range, up 17% sequentially and the sixth consecutive quarter of revenue growth since the March quarter of 2009.

During that timeframe, our sales increased tenfold and such an accomplishment would not have been possible without the outstanding execution of the entire K&S team around the world. Of note, our ball bonder unit volumes in the September quarter were roughly two-thirds higher than our previous peak, which was three years ago. We have also finished the September quarter with a backlog of $252 million.

This significant revenue growth was driven by a number of macroeconomic and semiconductor-specific factors. In response to rebounding IC unit demand in the middle of 2009, our customers started to aggressively order new machines beginning in late 2009 and through most of 2010. As many of you are already aware, a very significant secular transition is taking place as the industry switches from gold to copper wire for an increasing percentage of the world's semiconductor devices.

Additionally, because of the profits requirement for copper, legacy equipment is not suitable and a significant number of older machines have been retired. As the gold price continues to significantly rise, the drive to transition additional devices to copper will likely accelerate. We believe that K&S has the best solutions available on the market to continue to capture this business opportunity.

Both our OSAT and IDM customers have been aggressive adopters of our copper configured wire bonders and copper conversion kits. We shipped more ball bonders in the September quarter than any quarter in the Company's history and the majority of these machines were configured for copper.

Let me now give you some color on our wedge bonder business. Wedge bonders use aluminum wire for many power management applications in semiconductors, automotive, solar and other applications. The September quarter was another strong quarter for wedge bonders. As this business tends to lag our ball bonder business by a quarter or two, we expect to see a substantial increase in the sales in the December quarter.

As wedge bonders revenue contribution rises, so does its contribution margin. We are also in the final stages of moving our wedge bonder manufacturing and supply chain operations from California to our Asian facilities, which will provide the potential for further gross margin improvements.

Now a few words on our die bonder business. We sold our first iStack in January of this year, booked several more machines and began qualifications with several customers midyear and in the September quarter achieved our initial volume shipments. We have made progress with our die bonder business and we continue to see potential for growth.

Finally, our expendable tool business, which is a consumable portion of the total solution we offer to our customers, has remained a steady contributor to our business and gross margin. I will now turn the call over to Mike Morris for a more detailed financial review of the September quarter. Mike?

Thank you, Bruno 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 September quarter to the June quarter and will refer to non-GAAP measures unless otherwise noted.

Net revenue for the period was $259.3 million, up $38 million from last quarter. The revenue increase was driven by a 22% pickup in ball bonder volumes. Ball bonder unit sales were weighted towards subcontractors who comprised 79% of our ball bonder shipments. This is up from the June quarter when subcontractors were 72% of these shipments.

Gross profit was $112.4 million, up $13.2 million from last quarter. Our gross margin was 43.4%, down slightly from last quarter. This margin reduction was driven primarily by mix within our equipment businesses as most of the revenue increase came from ball bonders, which carry lower gross margins than some of our other equipment products.

Operating expenses were $49.5 million, up $5.3 million from the June quarter and higher than the guidance we gave during our June earnings call. This cost increase was largely driven by one-time charges related to year-end pension accruals, as well as compensation costs associated with our CEO transition.

Our operating margin was 24.3% and as a measure of our operating leverage, 20.7% of our incremental revenue this quarter fell through to operating profit. For the December quarter, we estimate our total operating expenses at roughly $43 million. On previous calls, we explained that the fixed component of our operating expenses is roughly $30 million and that the variable component is roughly 7% of revenues.

While we still feel that this is a good rule of thumb, next quarter, we expect the variable component to be roughly 10% of revenues since wedge bonders are expected to be a bigger portion of next quarter's revenue and these products carry higher sales commissions.

As a reminder, these amounts are all non-GAAP. When you add back the non-GAAP adjustments, our GAAP operating expenses should be roughly $49 million for the December quarter.

Concerning taxes, we had a $1.3 million tax benefit this quarter, which was driven by reversals of valuation allowances we have against deferred tax assets related to some of our net operating losses. Considering the strength of this cycle and our manufacturing consolidation in Asia, we are better able to project profitability for some of our legal entities going forward, which triggered the release. From a modeling standpoint, however, I would use a book and cash tax rate of between 5% and 10% 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 $181.3 million, which reflects $19.3 million of operating cash flow for the September quarter. Working capital, defined as accounts receivable, plus inventory, less accounts payable increased $47.5 million to $187.6 million. From a days perspective, our DSO increased by 6 days to 68 days. Our DSI was down 6 days to 45 days and our days payable was down 9 days to 50 days. ROIC for the September quarter was 70.3%.

This concludes the financial review portion of the call and I will now turn things back over to Bruno for the December quarter business outlook.

Thanks, Mike. Since August, most OSATs within the last 18 months have represented roughly three-quarters of our revenue, have seen a slowing in growth and have widely publicized their reduced capital spending plans for the December quarter. This is a primary driver for our reduced outlook.

Whereas we previously expected the December quarter to be roughly comparable to the September quarter based on orders already in hand, a large percentage of these orders have been pushed out to the March and June quarters. As a result, we now expect our December quarter revenues to be in the range of $125 million to $135 million. Our other customers, including IDMs, memory and LED customers, have moderated their order activity, but not as significant as the degree. We are still seeing growth in some areas, especially in wedge bonders.

We continue to refine and improve our flexible operating model, which enables us to significantly reduce our expenses and near-term liabilities if we see a drop-off in our shipments. In response to the expected shipment decline for the December quarter, we have already scaled down our internal capacity with headcount reductions in our various manufacturing operations. That said, our flexibility will allow us to react quickly when our business demand improves.

On the product side, we just launched our next generation of copper wire bonders. This new product, which is based on the very successful IConn platform, is named IConn ProCu. IConn ProCu delivers outstanding cost of ownership with both superior process capability and process improvements. We have complemented this equipment solution with our latest generation copper capillary called CuPRA3G, which has already completed initial qualifications and its first production order installed at a key strategic customer.

In addition to our efforts to be the technology and marketshare leader in all wire bonder equipment and supporting consumables, we are constantly exploring new market opportunities or applications that will expand our business beyond our traditional space.

As an example, we are anticipating significant growth in our wedge bonder business during the December quarter, driven by demand in power management applications. Moreover, we see some potential use for this product in select solar applications.

Finally, we continue to see increased demand for specialized equipment such as our AT Premier Stud Bumper for image sensor and high brightness LED applications, which are commonly used in smartphones. So while our business tends to be subject to sharp swings in customer spending patterns, our business model is one that is nimble, adjusting quickly to changes in demand whether up or down. We believe that our product offering and our leadership in copper wire bonding will continue to represent significant growth opportunities for K&S.

Our goals remain the same, develop and deliver the best equipment and supporting consumables in the industry and continue to focus our efforts on improving our operating performance and return on invested capital so as to maximize shareholder value.

In closing, while we are all aware and understand the cyclical nature of our business, we believe the opportunities in front of us are far greater than at any other point in the Company's history. We are also focused on bringing to market the best technology solutions for our customers while at the same time improving our business and operating models, keeping tight control on all costs and we expect to achieve further improvements as we capture additional marketshare.

This concludes our prepared remarks. Operator, we will now be happy to take any questions.

(Operator Instructions). David Duley, Steelhead Securities.

Good evening. Congratulations on a nice quarter. A couple questions from me. I noticed your backlog number kind of implied that I think orders were roughly $248 million, $250 million in the quarter. Given the big decline in the revenue that you forecasted, I am a little curious as to why the order rate was so strong.

Well, we continue to see a strong pattern of ordering basically up to the end of August. It started to slow down in September and what we have really experienced is a number of push-outs, as we said in the prepared remarks, in the March quarter and the June quarter. So we have not really seen any consolation from customers, but just pretty much some push-out in rescheduling so far.

Okay, so this kind of changed their slot plans into March and June rather than taking them down in December?

Yes, yes, that is what we are seeing right now.

Okay. And Mike, one for you, with the big decline in the revenue that you are forecasting, what would be the best guess for the corporate gross margins?

I don't want to guide you to gross margin, but I would tell you to keep in mind that if the ball bonder sales drop, other products, which have higher gross margins, are going to play a greater role in the mix. So you could see gross margins rise, but I don't want to point you to a particular number.

So at the very least, we should just kind of keep it in this range for the upcoming December quarter?

I think it depends on how much ball bonder sales fall. I would use that as your metric.

Okay. And a housekeeping question, did you have any 10% customers during the quarter? Could you talk about what the percentages were, who they were or (technical difficulty)?

Yes, we had two customers, we had two 10% customers during the quarter, the two large iStacks in Taiwan.

Okay. And final thing from me, then I will get back in the queue is the two big Taiwanese customers have both had their conference calls and talked about their plans to continue to migrate to copper. I think ASE has mentioned that they are going to get to 20% this year and to 40% or 50% by the end of 2011. That would certainly imply that they are probably going to buy a lot of bonders, at least that is what they are saying to investors on their calls. I was just wondering how they are acting and how you see this copper unfolding in 2011 as a driver to your business.

Well, we still believe that copper is going to be a significant driver for our business. As you may have read, we had a press release yesterday or two days ago about ProCu, the IConn ProCu, which we believe it is the best solution on the market today. We have already shipped production volume to one strategic customer in Taiwan. And we are very hopeful that this machine is actually going to do very well for us in 2011.

I guess I'll get a little bit more specific. ASE I think bought between 2500 and 3000 bonders to get to roughly 20% copper. If they move from 20% copper to 40% or 50% copper, theoretically, if the efficiencies of your machines haven't gotten dramatically better, they should buy roughly the same number of bonders in '11 that they bought in '10?

Well, I guess you can make any assumption you want. We are not controlling our customers. So I mean you should believe what they are saying. You can make your own models.

Well, I guess the efficiency of your new machine isn't going to make a significant difference in the number of bonders they --.

No, no, no.

Okay, that is what I was trying to drive at.

Okay, but it is getting close to the efficiency of basically our goal, okay?

Okay, that is good to know. Okay, thank you. I will get back in the queue.

Krish Sankar, Bank of America-Merrill Lynch.

Yes, thanks for taking my question. I had a couple of them. Bruno, if you look at a typical cycle, usually when the OSAT customers pull the plug, it is just a matter of time before your IDM customers and the memory guys go away too. Do you think it is going to be anything different this cycle?

Well, I think it is a little bit too early to tell, right? As you know, we are the first one, okay, to see whenever the markets react, whether it is up or down, we are typically the first one to see it and the OSATs are also the first ones to see that as their customers basically stop adding value to their products, okay? So it is difficult to predict if what we are seeing right now is just a pause, okay, or if it is just a -- if we are going through a more typical cycle, semi cycle as we have seen in the past. So I guess my take is it's just too early to comment right now on what is happening.

One thing I can tell you, on the other hand, is our wedge bonder business, which is used by a lot of IDMs, it is aluminum wire bonding mostly used for analog applications. If you look at what is happening in the analog space, there is still a lot of these analog IDMs have still very strong backlogs and they are typically the last one to order equipment because they want to make sure that the backlog is secure, which is what is happening right now, which we are seeing is actually our wedge bonder business is continuing to grow, will continue to grow this quarter at a pretty significant rate.

So basically we are seeing some different signals and I guess it is still too early to comment on what is going to happen in the cycle.

Got it. If I can ask the same question a different way. From the last cyclical peak in September '07, it took you two quarters to get down to about a 60% decline in your bonder shipments. If I do the math for December, you are almost there with your guidance already. In other words, do you think there is, when you look at your internal forecasting -- I am not looking for any numbers -- but is there a sense that the wire bonders is bottoming out or it is too hard to say at this point?

I think it is too early to say at this point.

Okay. And the final two questions, is there any seasonality in the wedge bonder business?

Yes, there is, but one thing you have to remember, as I have said, typically it lags about a quarter or two behind the ball bonder business, but what you have to remember is that the volume is much smaller. So the amplitude of the cycle is obviously a lot less. But you do have -- (technical difficulty), okay?

Okay. And then the final question is your LED bonder units from September to December 2, do you expect it to be flat or increase? Thank you.

Slight decrease.

Slight decrease?

Just a slight decrease, but holding up pretty good.

Got it. Thanks, Bruno. Thanks, Mike.

Gary Hsueh, Oppenheimer & Company.

Yes, thank you. Hi, Bruno. Congratulations here on assuming the helm at K&S. A quick question here just along the same lines as the other questions. Just what level of ball bonder revenues are sort of embedded in your guidance for the December quarter?

We don't break it out.

Yes, we don't break out that number.

Okay. And then of the backlog, how much of that is shippable or is shipping in December and how much of that is shippable in March and June? I mean how much turns business are you seeing in December I guess?

Do you want to answer that, Christian?

I don't have the exact figure here, and we can get back to that, but there is a significant portion obviously of the backlog that is pushed out in March and June. Ballpark figure, instead of guessing a number, Gary, I would like to make a quick calculation of it.

Okay. Maybe you can kind of circle back and answer that. And my next question, Bruno, is just, longer term, K&S has done a fantastic job here in securing marketshare on the copper ball bonder business in 2010. Just what do we think in terms of the prospects of holding onto that sizable marketshare in 2011 and 2012? I am assuming now that business levels are sort of tapering off that if there is sort of a resurgence in terms of the copper wire bonding additions, that leadtimes will be a little bit more manageable this cycle and if leadtimes are a little bit more manageable, maybe your competitor in Hong Kong has a better shot at grabbing some marketshare. Is that a fair way to kind of think about how marketshare should shake out in 2011, 2012 in copper?

I am not so sure that that is actually the right way to look at it because, as I have said, we are introducing -- we are in a leadership position in the copper business and we have just introduced a new machine, which is the IConn ProCu, which is -- coupled with the CuPRA3G, which is the capillary that goes with it, which is the best solution on the market, okay, from a performance perspective, from a UPH perspective. And so we are investing a lot of R&D money into maintaining our lead in copper. And so I firmly believe that we do have a pretty significant technological advantage versus what is available with our competitors.

So in other words, we are investing in how to maintain and even if possible increase our marketshare in copper.

Okay. So I think what you are saying is that maybe leadtimes was one of the big criteria in terms of determining share in 2010, but now in 2011, 2012, it is more based on UPH and performance?

Yes. I mean basically I mean customers are always looking at -- we had a fairly significant, up to now, drop in performance when switching from gold to copper. So that is definitely going to be, we believe, a big decision factor for them is to get the best performance machine and the best return on their investment from a cost of ownership perspective. Do you want to add something, Christian?

Yes, just a few more words, Gary, to that first answer to your previous question. It is about 25% of our backlog that is shippable in the December quarter, ballpark figure. But to add on to what Bruno was saying, if you look at total demand for ball bonder in the 2010 timeframe, it was obviously a constraint of supply, which some would gain more share because of availability and we got some benefit of it.

In the case of copper, it was definitely because of process capabilities. We don't have any official figure or any third-party figure about our marketshare, but we believe it is very, very high from a copper process standpoint. And we gain marketshare and we establish marketshare leadership on copper because of our technical leadership. And to Bruno's point, this leadership will go on in 2011 and I don't think we will be affected by supply at all.

Okay, great. Thanks, Bruno. Thanks, Michael.

Andy Schopick, Nutmeg Securities.

Hi, good morning. I have quite a few questions. I don't know if I am the last in the queue. If I am, I would like to just run through them. If not, let me ask a handful of them and I can step back in. Is that okay?

Yes.

Okay, fine.

We will stop you when we have had enough.

The move to Singapore, why is this being done, when will this move be completed, impact on employment? What is going to happen in Pennsylvania, what will be left?

Okay, so I mean this is not something new, okay? This is something that has started quite some time ago. Basically, if you are looking at 12 to 18 months down the road what K&S is going to look like, it is going to be a global company, a listed company in the US with operational headquarters in Singapore, with operations in Asia, supply chain in Asia, 99% also the customers in Asia and four R&D centers of expertise or actually five, if you count Singapore -- one in California, one in Fort Washington, one in Berg, Switzerland and one in Israel.

In addition to that, Fort Washington will have a small number of people in basically legal and finance so as to be close and investor relations as well so as to be close to our shareholders and also be able to comply with all the SEC requirements. So that if you ask me basically Fort Washington will be mostly a center of expertise for ball bonders.

What will be the impact on G&A and operating expenses in the year ahead?

I mean, again, I think Mike had some models, but I think it is just too early to tell right now. I mean we are not prepared to give any numbers yet.

Yes, I don't think there is going to be any meaningful impact, Andy. We are just moving the decision-making.

Right, we are moving the decision-making. I think we are going to look at ways of maybe optimizing some of our sales, business model, especially for our wedge bonder business, which has a little bit of a different sales model than the wire bonder business. But I mean the biggest impact we see, we are going to see is really on cost of goods sold as we continue to move all the manufacturing that we have left in California, in Malaysia and Singapore.

Okay. So there really won't be any restructuring or facilities-related costs, one-time costs anticipated with the completion of this move?

Not really. I think everything has already been done or provided for in the past.

And did I understand that the IR function will partially remain here in Fort Washington?

That is correct, yes.

Okay. iStacker. Have any customers purchased production quantities, more than a handful?

We have people that have bought a little bit more than a handful.

A little bit more than a handful. Okay, it is a different market than the ball bonder. The volumes are a lot less and so when you buy a handful of die bonders, I mean it is quite significant. So it is a very different business model than the ball bonder, okay?

Understood. So that leads me to my next question. Will this productline provide any material incremental growth opportunity in the fiscal year ahead and beyond or should we consider it to be more of a secondary productline like tools?

Christian, do you want to answer that?

Definitely the market size itself potential is there. So from a standpoint is could it be a significant part if we achieve our growth strategy from a die bonding standpoint? Yes, it could be a significant part, but there is a time required to put (inaudible) customers. We have been very active in the last few quarters at penetrating both subcon, as well as large IDMs that require these iStack machines or a stacked die configuration. So as a time constant to that, I don't think will have an impact, significant impact in this coming fiscal year, but our goal is to have a significant impact in the other fiscal years.

All right. I think it has been four years since Alphasem was acquired and I think there has been some frustration and disappointment that this really hasn't developed into -- had more impact on the Company's overall performance and outlook and whether or not it ever will.

Well, it has definitely been a longer struggle than we expected. We have -- on the other hand, I think the performance of the system has been well established, both from accuracy and throughput. And we are really trying to establish our market position right now. And the fact that we are now engaged with all the major guys and finally got the first production orders and not just qualification I think is the first right step. And we are still confident that we are going to be able to execute to it.

There is a lot of focus internally on that productline, I can tell you. So we are looking at that very carefully.

Okay. A follow-up on wedge bonders. Curious to ask you whether the resurgence, if I can use that word, in GM and Ford's outlook has any positive implications for you in the auto sector, whether those are significant customers or potential customers for additional business. When you acquired Orthodyne in 2008, I believe that their prior-year revenues were about $110 million in 2007. How is the wedge bonder or the Orthodyne business tracking relative to where it had been at the time of acquisition?

We don't disclose that number. We don't disclose our number by business unit. What I can tell you is the Orthodyne business is actually doing very well. The automotive portion of the business, I would say, it is the smaller portion of the overall business. I mean still the main driver of that business is semiconductor. So definitely we will see some benefits of the overall automotive industry recovering worldwide, by the way. But I think the biggest benefit we are seeing is from semiconductor and especially the power management space. And by the way, also, we are just exploring, testing new opportunities in very selective solar applications as well.

That is a new market opportunity?

It is, yes.

Okay. A few financial questions, Mike, for you. Tools, what happened to margins? Operating income dropped sharply to $1.2 million versus $4.9 million year-over-year on flattish, basically flattish revenues. What has happened there, what are the prospects going forward? And did the Company sell a portion of its tools business to any former employees?

Okay, so the tools business gross profit margin quarter-on-quarter was up. The tools business outlook from my perspective and Christian, you can chime in, I don't see any material changes in tools. It is a good steady earner for K&S.

It is a fairly steady business from a revenue and gross margin perspective.

We did dispose of a small part of the tools line, which we called CMT, customized micro-tooling, did I get that right?

Very good.

To a former K&S employee, but it was not a material number here.

Okay. A question about cash flow outlook. Given the likely changes in working capital going forward, especially in terms of receivables and what I would expect would be a strong collection period in the upcoming quarter, how should we think about the cash flow outlook in the next quarter or two as the revenue side of the business weakens, but the working capital portion of the business changes significantly as that is occurring?

So I am not going to guide you to a particular number, but you got the message in what you just said. At lower revenue levels, we are going to generate less cash from the business, but as the cycle turns down, you are going to see working capital unwind into the cash line. And if you want to get an estimate, go back to what happened when we came off our last cyclical peak in the beginning of our fiscal '08 and you can look at our DSOs and DSI metrics from there and that might give you a good idea if you want to put those in your model.

Okay, will manufacturing headcount change significantly on the lower revenue anticipated? I think the headcount you have shown is 2950 versus 2202 and how should we think about that now in terms of the flexibility that you may have in the business to adjust to the lower revenue?

Well, Bruno, you mentioned it in your script that we have already --

We have already started -- we have already started to reduce headcount, okay, so we are adjusting that. Actually we are doing that on a preemptive basis, okay? So we started doing some adjustments actually in September and that is the model and we have got to be careful obviously not to go overboard one way or the other. So we will watch that and how it evolves on a quarterly basis. So Andy, we will take one more question from you because we have some people waiting.

Okay, last one then I would like to ask is on the IConn ProCu. This seems like it is going to be a fairly significant product. The question I want to ask is how its efficiency may impact units bonded per hour and whether if this goes up significantly, will new bonder requirements be lessened or lowered quantities of bonders needed?

I will let Christian answer that.

So first of all, Andy, you're absolutely right. This is a significant product. We are quite excited about this product. We think it is going to further strengthen our leadership. To answer specifically to your question, no, we don't think that the productivity improvement that we are enabling with ProCu well have a significant impact on volumes of purchases in the future.

With that said, the advantage of that equipment and the transition to go to copper, which we think is going to remain strong and it has been quite clear in the transcript over the two of our major subcontractors, will continue to happen and the challenge there is process-related. And what ProCu is offering and has been already proven and we are going to continue to improve that is to enable these applications that will not yet move from gold to copper because of some process capabilities that were not there. So it is not necessarily -- sometimes you can have the throughput, but if you cannot run the part, you are back at square one. But to answer your question, I don't expect it to have any significant impact.

Thank you so much.

Tom Diffely, D.A. Davidson.

Yes, good morning. Just following up on that real quickly, in the past, we have talked about how the copper had to go 10% to 20% slower than the gold wire bonders. Does this close the gap?

There still may be a gap, but it is closing the gap. But there is still going to be a slight gap and it's application-dependent. So in some cases, the gap is getting close to be at zero. In some cases, the gap was bigger, therefore there will still be a sufficient gap -- significant, I am sorry.

Okay. And then just more on a broad basis, what are you seeing right now? Where are the utilization rates in the field and what kind of impact on pricing have you seen just recently?

Pricing from an equipment standpoint or pricing --?

Yes, for the ball bonders.

Utilization has been in the mid-80%s, hovering around the 80%s, 80%. It has been quite stable for the last few weeks, hovering plus or minus a few percent. As of yet, we have not seen any impact on pricing and obviously it is always depending on what technology brings to the market and we hope to get the value out of our position.

Okay. So on the utilization rates, they went from the low 90%s in the summertime now kind of in the mid-80%s?

Yes. (multiple speakers)

Okay. It seems like historically when you got above 80%, to the mid-80%s, it was actually a pretty healthy market still. So do you think the utilization rate comes down a little further or do think we are just in a bit of a digestion period here?

It is tough to predict. Nobody can really know what is the future going to hold, but there is definitely some digestion. The number of machines that have been put in the market in the last fiscal year, the last calendar year is by far greater than any years before. So I think the industry is absorbing a lot of that capacity.

So from just a pure volume standpoint, you can see all the news in the market that confirms that, but what I think is unique to us is two things again that Bruno was mentioning. One is the copper transition, which is not necessarily volume-related, but cost-related and with gold continuing to increase, I think our customer will not have a choice to make that transition, as well as the wedge bonding business has a different dynamic, which is quite strong right now.

And one thing I just want to add here is I mean, yes, of course, if you look at it on a sequential basis, it is a pretty significant drop. But if you look at it in absolute terms, what we are guiding, if you take the midpoint at about $130 million, it's still a pretty decent quarter in absolute dollar terms. So I think you have to take things with a pinch of salt here.

Oh yes. It should still lead to nice profitability too. One more question on the operating expense line. You said that the variable component went up to 10%. I didn't catch what was driving that increase.

Yes, Tom, it's Mike. It is not 10% for the quarter that we are reporting on, but for next quarter, I just wanted to signal that it will be in the neighborhood of 10%. The driver here is we are anticipating growth in wedge bonder within our revenue guidance and wedge bonders carry higher sales commissions, which we treat as a variable cost in our guidance.

Okay.

Just wanted to help the model for next quarter. We still think the rule of thumb that we've put out in the past is a good one to use, but next quarter is just going to be an anomaly.

Okay. And then I guess with the wedge bonders being stronger next quarter, I was under the impression those were produced in a higher cost region, if you will and so I thought that would be -- that would hurt gross margins. But it sounds like they are actually strong enough margins where it actually benefits overall?

Yes, I mean that is true, but we are also in the process of transferring the operation, the manufacturing of these machines from California to Asia. So -- and at the same time ramping up the volume. So that will have a positive effect for us on gross margin (multiple speakers).

Okay. So the margins are very strong already and they are getting even stronger (multiple speakers).

Yes.

Okay. Final question, I guess. What do you expect the subcon mix to be in the December quarter? Does it come down substantially from the 79%?

It came down. It is about 50/50.

Great. Thank you very much.

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

I had a quick follow-up. Who do you think is LED (technical difficulty) today? Thank you.

Could you repeat the question?

(technical difficulty) market share in the LED wire bonders?

We don't have an exact data on that. We think we are maintaining about the same thing as we said in the last call. We are about 30%.

Got it. Thank you.

David Duley, Steelhead Securities.

Yes, I saw in the press release you mentioned a percentage of the ball bonder business that was copper, I believe. Could you give us a reference point in the June quarter for that number as well? What was it in the June quarter?

The June quarter.

Roughly.

Roughly. I am looking at it right now. It is about 58% for the June quarter.

Okay. And do you expect, when you look at the backlog and you look at what your customers are doing, would you expect to continue to have this kind of percentage on the copper side?

This is Christian again. Yes, we believe that that percentage, although we cannot commit to it, but we think it is going to remain strong and again, as the comment I was saying earlier, the cost reduction associated with the transition is very significant. Therefore, we think that this is going to maintain or even maybe increase.

Given what is happening with gold price, I mean more and more customers have a huge incentive to switch and so we think that there is more potential going forward.

Okay. Given that you have got a strong backlog and you have seen -- you have heard -- you mentioned you have listened to the conference calls of your large Asian customers and looked through their transcripts and whatnot, they have talked about coming into the marketplace in the first half of calendar next year dramatically. Like Siliconware is saying they are going to come back in and buy the 800 to 900 bonders that was pushed out and ASE is coming back in and buying their typical volumes that they need to buy 2500 or 3000 again.

So at least what they are saying is your two biggest customers in the most recent quarters are going to be back at the table in the March and June timeframe. So with that in mind, could you just maybe give us some qualitative comments about what you think the first part of calendar next year looks like?

We won't give any comments beyond the current quarter. We are providing guidance for Q1 and that is where we will stop. I mean it is just -- that is where we will stop. So you can make any assumptions you want based on what the large OSATs in Taiwan are saying, but we will provide guidance for only the current quarter.

Okay. That is it for me.

Okay, thank you.

Andy Schopick, Nutmeg Securities.

Yes, Bruno, what investor conferences are you anticipating presenting at here over the next few months or early next year?

Yes, it is still too early. It's my first month and a half on the job, so I have not really finalized my plan yet from that perspective. But we will keep you informed, okay? I am in the midst of working with our Investor Relations Department as to which conference I am going to be at next year.

Will Joe Elgindy remain here as an IR contact?

Yes.

Okay. And I think that'll do it for me. Thank you.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to Bruno Guilmart for closing comments.

Thank you all for joining us today. There are no further questions. This concludes our call. Thank you. Bye-bye.

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