庫力索法 (KLIC) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Kulicke & Soffa first fiscal-quarter 2012 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, Mr. Joseph Elgindy, Manager of Investor Relations for Kulicke & Soffa. Thank you, Mr. Elgindy. You may begin.

Thank you, Jackie. Good morning, everyone. Welcome to Kulicke & Soffa's fiscal 2012 first-quarter conference call. Joining us on the call today are Bruno Guilmart, President and CEO; Jonathan Chou, Senior Vice President and CFO. Both will be available for Q&A after the prepared comments. For those of you who have not received a copy of today's results, the release is available in the investor relations section of our website at kns.com.

In addition to historical statements, today's remarks will contain statements relating to future events and our future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a complete discussion of the risks associated with Kulicke & Soffa that could affect our future results and financial condition, please refer to our SEC filings, particularly the 10-K for the year ended October 1, 2011 and our other recent SEC filings. I would now like to turn the call over to Mr. Bruno Guilmart. Please go ahead, Bruno.

Thank you, Joe, and thank you all for joining our call today. We are pleased to report that revenue for the December quarter is at the high end of our prior guidance. We knew entering the quarter that business would remain under pressure, given the overall macroeconomic environment, combined with weaker demand from our OSAT customers. Our prior -- of streamlining our cost structure (inaudible) comfortable benefit in the quarter. Specifically even with revenue significantly declining in the December quarter compared to the September quarter, we were able to maintain our gross margin of 46.1% while generating $55.3 million of gross profits. As you can see from our results, we also kept our (inaudible) expenses in check. The other takeaway is that we generated an additional $19.2 million of cash during the quarter, ending with a record cash investment position of $403.8 million.

While the overall global market continues to impact the [overall] levels in our outlook, we continue to focus on operational excellence, extending our product offerings, and managing our business efficiently through the cycle. During the December quarter, lower demand in our ball bonder business had the greatest impact on our results, with ball bonder revenues declining 37% from our September quarter. The decreased spend predominantly from our OSAT customers, which accounted for 69% of all our ball bonders sold in the quarter. From an application standpoint, approximately 32% of our ball bonders sold during the quarter were configured of copper capable bonders. Given the [competing competency] to copper and broadening customer acceptance, we expect to see continued gains as we move through 2012. Approximately 9% of our ball bonders sold were configured for the [AV] market. These represent a proportional increase from our prior quarter. We continue to view the [ATE] space as an attractive, profitable, and great market in the future and remain focused on participating [in long term] (inaudible) officially in commercial and general lighting applications.

Turning to our wedge bonder equipments, revenue were down approximately 18%. This reduction was driven primarily by softening in both semiconductor and (inaudible) market, while one-third of some of these markets remain reasonably strong. The ongoing preservation of semiconductor-based devices and the impact they have on consumers' daily life is clearly a macrotrend working in our favor. The consumer electronics show held a few weeks ago served as the latest bright spot for future semiconductor demand, with [political recourses] of innovation, inventory level and new products, such as ultra-books, Wi-Fi connected TVs, (inaudible), smartphones, in addition to all the supporting infrastructure necessary to keep them connected.

With that said, we remain focused in accomplishing our mission objectives of growing our industry position, broadening our product portfolio, leveraging our (inaudible), and leveraging our technical competencies in an effort to deliver consistent performance to our shareholders. Over the past year, we have initiated methodical approaches to guide and measure our [governments] in each of these categories, specifically geared toward leveraging our technical competencies and growing our product portfolio, we have enhanced our internal (inaudible).This and other [focused] cross-functional teams [scrubbed] the organization as a (inaudible) of an outcome to our new tier strategic planning process, which is solutions, functional guidelines, objectives and the road map to execute on the Company's long-term goals.

I will not turn the call over to Jonathan Chou for a more detailed financial review of the December quarter. Jonathan?

Thank you, Bruno. My remarks today will only refer to GAAP results. On today's call, I would compare the December quarter to September quarter. Net revenue for the quarter was $120 million, down $60.3 million from September quarter. The net revenue change was driven primarily by lower equipment volume. Considering the 33.5% reduction in net revenue, gross margin improved to 46.1%, with gross profit at $55.3 million. This strong and continued gross margin performance is attributable to our flexible manufacturing model and our ability to provide a steady flow of new equipment features which supports higher average selling prices. Operating expenses were $42.9 million, down $17.2 million from September quarter. This significant reduction reflects a combination of the impact of our ongoing cost control and efficiency efforts and some additional items in both the September and December quarters.

These additional items, which totals approximately $10.4 million, include a non-cash building write-down, foreign exchange loss, higher AR reserve, and a favorable gain on a pension curtailment. Additionally, we've (inaudible) considerable reduction in controllable costs totalling $7.1 million. This includes a $3.4 million reduction in variable expense, primarily associated with selling and employee incentives. A $2.2 million savings related to our corporate-wide initiatives on lowering discretionary spending during low revenue quarters and a $1.5 million reduction of quarterly head count expense.

Looking ahead to the March quarter, we estimate total operating expenses will increase to $47.2 million. Income from operation was $12.4 million, and our tax provision came in at $2 million for the December quarter. We continue to target a long-term effective tax rate of 15%. During the December quarter, we generated an impressive $33.8 million of cash flow from operation. We ended the quarter with stronger total cash and investment position of $403.8 million, or $5.41 per diluted share. With this strong cash balance, we have ample resource to redeem our $110 million convertible note this coming June, maintain our ongoing R&D road map, and continue to explore other external areas of growth.

Working capital is defined as accounts receivable plus inventory less accounts payable decreased by $24.9 million sequentially to $150.5 million. From a DSO perspective, primarily due to credit extension and change in customer and product mix our days sales outstanding increased 14 days to 83 days. With respect to inventories, our day sales of inventory increased by 16 days to 83 days. This increase is largely a function of rapid selling reduction over the prior quarter of our accounts payable days decreased by 6 days to 27 days.

This concludes the financial review portion of our call. I would now turn the discussion back over to Bruno for the March quarter business outlook.

Thank you, Jonathan. Looking forward to the March quarter, we have issued guidance for revenue to be in the range of $125 million to $135 million, which represents an improvement over the December quarter. This guidance reflects continued economic environments and ongoing conservative spending on our customer sites. We exited the December quarter in one of the best financial positions K&S has ever been in. We continue to have an industry-leading product portfolio, which we expect to further improve with a series of planned new product launches for 2012.

We will continue to invest in (inaudible) support of our gold, copper and LED ball bonder solution as well as wedge bonder solutions to maintain our leadership in this key market. We will also continue our R&D efforts on new market opportunities, while continuing to improve (inaudible) efficiencies and our balance sheet strengths. These efforts are central to our long-term business strategy of broadening our product offering in order to improve cross-technical performance.

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

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is coming from Krish Sankar of Bank of America, Merrill Lynch.

Bruno, if you look into the March quarter, can you tell us the directionality of the different business between ball bonders, wedge bonders, and within ball, what do you think about LED?

That degree I would say from a mix perspective, not a huge change. The drivers, the main driver for us is continued to be copper. If you see, I think -- if you look at what happened in the past versus what we have tried to achieve, you see that even in a down cycle we have managed the Company very tightly in order to stay basically profitable. We have been able, with some customers, to manage our business and to linearize it that it will be better than we have in the past, mostly because in anticipation that in the second half of this year looking at the calendar, business should pick up significantly. And a large portion of all of the new design that we are receiving right now from their customers are required copper. So that's one of the main driver. And that's probably the most important driver.

Another driver, and we've mentioned that in previous calls, is we are getting a fairly strong momentum, although the scale is much different with our AT Premier equipment, which are a way for level bumping equipment. And there is a, more and more, I would say devices requiring [semo-sensor] for tablets and smartphone applications. We have seen, I would say a regain and (inaudible) in demand for these products. And to the point that this is one of the things we are looking at further on our road map. But I would say by and large, copper will remain the main driver again for this year as far as demand is concerned.

All right. And then a question for Jonathan -- really strong cash flow generation. I understand the conduit that's coming through, but longer term, what are the uses of cash you are thinking about?

I think that, I mentioned in my prepared remarks, in addition to that, we are continuing to actually support the R&D side. We also mentioned the fact that we have a multi-year strategy in terms of the strategic plan. And as part of that plan, as part of our annual operating plan, there is actually areas that we like to basically grow organically as well as non-organic. And so we have a very well thought through methodical screening process in how we actually look at some of the technologies out there that could actually complement our existing portfolio. So those are the areas that we are looking at.

All right. Then a final question for Jonathan. Really you have done a good job in the cost control. Where are we in the cost control, like the late innings and most of the low-hanging fruit has been removed, or do you think there's still a lot more cost control to come down the road? Thank you.

I think the cost control side, this Company has always been fairly, I would say, from a cost control perspective, it's always been there. I think what we have done this quarter compared to prior quarters is that we are able to, just like our flexible manufacturing, we are able to actually have a bit more flex in terms of our cost in a lower revenue quarter. And if you can see, we are actually looking at next quarter -- this current quarter at about the same level, about $37 million of fixed cost. But we are able to actually bring that down a bit because of some of these one-time cost initiatives that we did. So I think we are at the right level right now. Obviously there is always some slight improvement, more so on the cost side. And we will continue to look for those over time. But I think we are at a fairly good cost pace right now.

If I may add one point, Krish, I think in the past the Company has reacted also very quickly in reducing headcounts in the [temporary] categories. We are able to manage our customers without doing any of that. So we are using our flexible work force in operations, as it is a flexible work force. We have temporary workers. But we have not basically gone through any reduction of full-time employee work force as we have reduced our cost structure. And as Jonathan said, we believe that keeping investing in R&D is critical for the Company's future. We have a number of new markets that we are, I would say, in the process of integrating and qualifying, and defining how we can enter. And this is an area where we will be focusing [wide areas] of other [nomination-critical] areas where we have the ability to either deserve or judge decide not to spend the money at that time.

Our next question is coming from Tom Diffely of DA Davidson.

Just one more on the R&D side. You talked about the internal development efforts going up in R&D. There was a pretty big sequential decrease in the R&D line, and I was curious, are there one-time savings in that number? Or is that a natural number, that $14 million?

Well, I believe that R&D side is really part of our last quarter's basically a cost containment. We did actually defer some of the R&D spend actually allow it to come down a bit.

Okay, so you expect it to bounce back up to that $16 million range?

Yes.

Okay.

We basically would track about $69 -- $16 million per quarter.

And then based on the mix you see for the current quarter, any insights into the gross margin profile you expect to see?

Insights into gross margin profile?

Yes, for the March quarter based on the mix that you are seeing.

Yes. I think there shouldn't be any surprises in terms of what we have been tracking. But as you know, we don't guide to gross margin.

Okay, fair enough. And then Bruno, you talked about a significant increase in demand for copper from your customer base, but then you also talked about assuming your customers are conservative right now. So, the $125 million to $135 million, does that assume that we may not see a big slag of the copper business in the current quarter then to have it revent?

It probably will remain. It's not -- we are guiding sequentially up, but not significantly up. So, from a profit perspective, I don't think you will see a huge change from, in terms of mix, from what we've done in the first quarter, versus what we will do in the second quarter.

Okay. And it sounds like a lot of the customers are talking about ramping up their copper capacities pretty significantly this year again. But it sounds like -- I guess maybe asked another way -- what is your current visibility in terms of lead times, and how it's changed post Chinese New Year?

Well, again, we -- I think we have taken the (inaudible) to guide the current quarter. And we are -- one fiscal quarter. We do believe that we've touched the bottom, which is why we felt fairly confident to be able to guide some modest growth. But it's still [we'll adjust basically]. Here in Asia I would say restarting the factories after about a two-week halt with Chinese New Year, and everybody looked at what is going to happen. And I think we are going to see that starting from next week. The factories are shut down this week. A lot of hope done of what happened after Chinese New Year.

Right now, the visibility we have is the visibility we have a good quarter. As I've said, we have deals with a number of customers, a lot more I would say intimacy. And we have been able to, I would say, manage a little bit better the business than we have done in the past. So that, as opposed to these big peaks and valleys, hopefully we have a little bit more linearity as OSAT customers, it's also to their advantage to try to plan in advance, as they can see anyway that all the new designs from their customers are all coming in copper. So there is a lot of anticipation here. It's not pervasive, not just (inaudible) in Thailand. It's just across the board. If you do not have the best-in-class solution, [which is] copper, you are going to lose that business.

Okay. And at this point, are you starting to see an expansion of your customer base using copper? It's pretty heavily focused -- well, last year. I was wondering if it's starting to migrate more to the IDMs and other OSATs?

Well, if it's with OSAT, it depends because OSAT is about 80% of our business. And the IDMs have been always slower to move than the OSAT. And on top of that, more and more of them are outsourcing to OSATs. They keep to -- they tend to focus on more of their legacy products, so I don't think we are going to see a huge traction coming out of the IDMs. And the traction will continue to come from the OSAT-based customer, except that instead of having -- last year we had more than two [MEs] started to expand. Now it's pretty much expanded to the entire OSAT, I would say, players who basically have to get into copper if they do not want to lose their business to the competition.

(Operator Instructions) Our next question is coming from Satya Kumar of Credit Suisse.

So, basically I was trying to get a sense of what's happening seasonal versus particular in the business. If I look at Q1 revenue guidance the last couple of years, obviously they went up a lot more, 20% to 40% versus this year, where you are guiding closer to 10%. If you look at the cost to sub-cons maybe they have converted about 40% to 50% to copper at the moment. Are we -- is this Q1 guidance a reflection of perhaps the slowing copper conversion at the top sub-cons, or is it more of the seasonal business trends in the industry?

No, Q1 -- actually the good thing about Q1, which is our Q2, I suppose this is more linked to the overall global economic environment that we are in. If you are -- there is a lot of companies that have announced their results, and I would say by and large they are announcing either flat or declining sequential quarter versus the December quarter. We are one of the few companies who are actually able to have a little bump over the previous quarter.

Let's not forget that it's still a pretty rough microeconomic environment. Our customers and their customers are still very cautious. There is a lot of issues still to be sorted out in Europe. There is some uncertainty in Asia, should the [Europeans] take all the money out of Asia.

However, a good sign is that there is still a lot of -- as we all seen at the last consumer electronics show that there is still a lot of new applications coming to the market. Inventory has been worked out, so we are -- I would say, and I say we, the industry are hopeful that the -- as we pass this quarter, the business should accelerate. But again, I speak again to the current quarter. This is a short quarter because of the two-week shut down of Chinese New Year, so that's 10- to 11-weeks quarter. And despite all of that, we are still able to manage to grow slightly our business.

Okay. I think I might have missed this, Bruno, apologize but what did you say was the proportion of the revenue to the sub-cons?

Our sub-con is close to 80%.

80%. Okay. And one last reconciliation thing from the industry perspective. If I look at the commentary from one of the other back-end equipment providers in the test phase, it actually saw a pretty big uptick in the orders from the sub-cons on the test side. I guess on the packaging side, you guys were saying that bonders there's been some decline. Is this due to the mix of chips -- mobility might be driving more high-end chip type demand versus what you guys are seeing? Is that what's going on?

Okay. I'm not sure -- you cut off at a few points. I'm not sure. I will try to repeat your question so I understand it clearly. You say that the demand for the AT guy versus the back-end equipment guy?

The AT guys have reported stronger orders on the sub-cons on the test side versus what your commentary is. I was just wondering what the discrepancy is.

The AT issue is not necessarily the same. That is not (inaudible) the same cycle as the back-end equipment, (inaudible) the entire back end. On the AT side, it might be more technology driven, which is by the way what we should look at and compare with some other back-end suppliers. You will see that one of the reasons that we are able to guide up in our second quarter, it's really, it's technology driven is because we have the best copper solutions in the market and in that marketplace. So I think you can't really exactly map the AT demand versus what's happening with the back-end equipment. It may be more AT is market condition specific-wise, back end is more (inaudible) on the capacity.

(Operator Instructions) Our next question is coming from David Duley of Steelhead.

Congratulations on the excellent operational execution. Just a couple of quick questions from me. I guess as a follow-up to one of the previous questions, where do you think we are in the overall copper adoption cycle? Where is the overall market as a percentage in adopting copper? I realize the tests in [semi houses] might be in the low 30% range moving to 40% range, but I get the impression the overall market is at a much lower percentage. Could you give perspective there?

There are, I would say, a number of reports on that. I think it's in the range of 20% to 30%, depending on whom you want to believe. There are obviously some customers which are way ahead of that, and there are customers that are way behind. If you look at it overall, it's somewhere in that range of 20% to 30%.

Okay. And if I have -- if I were to place a large order right now, how many weeks would I have to wait for delivery of the order?

Well, as you know, David, our mode is primarily the mode of system integration. So, it depends how large the order would be, but I would say our lead times do not vary that much when we are in an up quarter, it's about 12 weeks, right now it's about 8 weeks. If you wanted to have a large order for next quarter, we would be able to deliver without any problems.

So, some of the big OSATs could order intraquarter and get delivery at the end of the quarter?

End of the quarter, early next quarter. But I would say we still have some flexibility right now as we stand, I would say for five weeks in a quarter to be able to deal more, should the demand come.

Okay. And maybe I asked this on the last conference call, but now we have probably rolled up all of the year-end numbers. Where do you think your market share is in copper or in overall ball bonding, or however you would like to characterize it?

Well, there is still -- ball bonder, there is the data, which is striking probably, it's becoming [stale]. The latest data that was published by [DSI] it's Q2 calendar last year. I don't have it in front of me. But I believe it was that time frame, Q2 or Q3, and we had overall 55%. There is no data -- there is no official data for copper. However, as I've said before, we largely dominate the copper marketplace. So, dominate, I think you can put a number, but right now we have the best solution on the market, and we aren't resting on our laurels. And now we need to continue to dominate that market.

Okay. And I'm a bit curious about some -- when you talk about new products or new applications, and you are spending R&D dollars on those. Could you point us in the idea of what we might be spending the money on, or what the applications, or what you might be interested in, anything that you can tell us? I realize it's somewhat sensitive, but love to hear your thoughts there.

Just to correct, I will come back to your question you were asking in a minute. But I have the data, which was at 65% -- 65% that's Q3 of last year, I believe. So, DSI lagged by about a quarter or so, okay? The latest available data from DSI in the quarter -- it was June quarter of last year, we had 65% market share. If you ask me, I don't think we lost any market share. If anything we may even have gained some. So that's just to clarify the previous question.

To answer your next question, which is about what our guys are doing in R&D, when we are looking -- obviously our copper [competency] is [Intefenex], and we are looking at how we can participate in these new (inaudible) technologies. And obviously it depends, but they are well-known. They are various technologies, depending on the silicon geometry node. And again, we are looking at it from, I would say, a technical competency on how we can leverage some of the existing platforms and work that we have done, as well as looking at the outside by also looking at technology acquisition opportunities. But we like this Intefenex space. So that's really where -- I'm not saying that we won't expand beyond that, but right now we have been pretty active at this organically to look at expanding our space within the Intefenex space.

(Operator Instructions) Thank you. There are no further questions at this time. I would like to hand the floor back over to Mr. Joe Elgindy for any closing remarks.

Thank you all for the time today. Before we end, I would like to take this opportunity to remind investors that management will be presenting at the Bank of America, Merrill Lynch Taiwan Technology and Beyond Conference, which will be held at the Far Eastern Plaza Hotel in Taipei in March -- on March 13, 2012. If you are unable to attend in person, a link to the webcast will be accessible from the investor events page of our website. Again, thank you all for the time today. Jackie, this concludes our call.

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