庫力索法 (KLIC) 2012 Q4 法說會逐字稿

Greetings and welcome to the Kulicke & Soffa fourth 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, Joseph Elgindy, Director of Investor Relations and Strategic Planning for Kulicke & Soffa. Thank you, Mr. Elgindy, you may now begin.

Thanks, Rob. Good morning everyone. Welcome to Kulicke & Soffa's fiscal 2012 fourth quarter and full-year conference call. Joining us on the call today are Bruno Guilmart, President and CEO; and Jonathan Chu, Senior Vice President and CFO. Both are 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 on the Investor Relations section of our website at kns.com.

In addition to historical statements, today's remarks will contain statements related 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 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. The fourth quarter ended a very strong fiscal year for K&S [with results] at the high end of our revenue guidance. We are succeeding in a challenging market due to our multi-segment leadership, flexible manufacturing strategy, R&D strengths, free cash flow generation and our improving debt-free balance sheet. Our success is clearly evident in our full year results as we achieved record net income of $160.6 million, a slightly lower revenue than the prior fiscal year. For the September quarter, revenue came in at $269.2 million. This represents a 5.3% increase over the prior June quarter, which came in stronger than expected.

Overall, our strong revenue and gross margin results combined with the benefits of our operational cost control resulted in an operating profit of $70.3 million, and an operating margin of 26.1%. Our focus remains on working with customers to maximize our leadership position in copper. We believe, as we said, how the [manufacture] in the copper solution is sustainable with copper demand [expected] to continue for several years. We have [innovative] solution in copper based on our technology and profit expertise and our superior offerings.

Strong demand for our Ball Bonder business continues through the second quarter. 79% of wire bonders sold were to [all LED] customers. A mulit-integrated demand for copper capable wire bonders continues to remain robust. In the September quarter, approximately 84.5% of our wire bonders were sold as copper capable. We see our copper package roughly 15% to 25% less expensive than of [wafer-based counterparts], transitioning to copper remains one of the most compelling cost-saving options for our customers today. A current [color] on the extent of our copper products penetration across our customer base, over 30% of our 140 active ball bonder customers have purchased copper-capable solution over the last two years. This encompasses over 100 unique customers with an excess of the top two 10% customers.

We continue to work with LED customers particularly in the surface mount and high bright portions of the market where our products are technically best suited and where we can continue to differentiate. In the first quarter, less than 5% of our ball bonders were considered for the LED market. This is an interesting segment for us with the potential to become a significant contributor to our results over time. We are approaching the LED market conservatively and working to use our existing technology and our [core competencies] to tailor solutions for this segment. There has been crossover with our traditional customer base but the majority of customers in the segment represents a new relationships for us.

Turning to wedge bonders, our equipment sales improved by 21% in the September quarter compared to the June quarter. This improvement was driven by higher demand from our industrial and automotive customers while sales to the power semiconductor segment remained relatively flat. We [obviously expect] wedge bonder volumes will gradually increase over the coming quarters as existing capacity is being digested.

In summary we are pleased with our business performance in the September quarter, and for our full fiscal year 2012. We continue to drive revenue, margin, and operation improvements and remain focused on extending our technology offering and market leadership positions. Operating success has allowed us to materially improve our balance sheet and even the flexibility to support ongoing [processes]. I will now turn the call over to Jonathan Chu for a more detailed financial review of the September quarter. Jonathan?

Thank you, Bruno. My remarks today will only refer to GAAP results. On today's call, I will compare the September quarter to the June quarter. I will also provide some full fiscal year 2012 financial highlights. Revenue for the quarter was $269.2 million, up $13.6 million from the June quarter. The net revenue change was driven by higher equipment volume, as Bruno highlighted earlier, we achieved quarter-on-quarter growth coming from a strong June quarter. Revenue for the full fiscal year in 2012 came in at $791 million which was 4.7% lower than fiscal year 2011. The important takeaway, which Bruno also highlighted earlier, is that we generated a record net income of $160.6 million dollars; this was up 25.8% over the prior year, or up about $33 million.

From an EPS perspective we achieved $2.13 in fiscal year 2012 versus $1.73 in fiscal year 2011. This significant improvement in operating performance comes from three key areas -- strong and continued performance in the current market we serve; ongoing corporate-wide cost operational effectiveness and continuing capital structure improvement.

Moving back to the fourth quarter, gross margin came in at 45.7% with gross profit at $123 million. This is lower than the 47.9% in the June quarter which was partially contributed by higher mix of ATPremier [Stud]. Operating expenses were $52.7 million, up by $6.5 million from the June quarter. Operating expenses in the December quarter are anticipated to fall between $43 million and $46 million. Income from operations was $70.3 million and our tax provision came in at $3.2 million. We are pleased to lower our long-term effective tax rate target to 10% as we continue to simplify our tax structure. We ended the quarter with a total cash and investment position of $440 million, equivalent to $5.80 per diluted share. Our book value as of September 29, 2012, was $8.53 per diluted share.

We continue to examine internal and external growth opportunities in an effort to diversify our revenue stream and broaden our product portfolio. Working capital, defined as accounts receivable plus inventory less accounts payable, increased by $17.7 million to $190.7 million. From a DSO perspective, our days sales outstanding remained flat at 63 days. Our days sales of inventory decreased from 44 days to 36 days. Our accounts payable days decreased by 12 days to 35 days. This concludes the financial review portion of our call. I will now turn the discussion back over to Bruno for the December quarter business outlook.

Thank you, Jonathan. In terms of our guidance for the typically slower fiscal first quarter, we expect revenue to be approximately $95 million to $115 million. We are well-positioned as we enter Q1 even with a lower demand in play now given the structural changes we have already made. During the current December quarter, we begin to initiate our corporate-wide cost containment program. This program was previously rolled out in our first quarter fiscal 2012 as a more sustainable way to reduce discretionary operating expenses in an effort to maximize profitability in lower demand quarters. We're proud of the structural changes made at K&S over the past several quarters. We are taking these actions while achieving profitability. This [resounds] the discipline of our management team and a long-term view we have as we work to leverage our leadership position in our [bid] to expand our Company and increase shareholder value. This concludes our prepared remarks. Operator, we'll be happy to take any questions.

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

One moment please why we pool for questions. Krish Sankar, Bank of America.

Thanks for taking my question. I have a few of them. Bruno, when I look at your December guidance, is there any way to figure out how much of it is seasonal versus cyclical from the slowdown going on in semis?

I think it's a combination of both. As you know, we've always had a -- our Q1, which is a Q4 calendar is always a low quarter for us given that all the capacity our customer has to be [sold] pretty much by, we said the September timeframe, to be able to manufacture all the [electronic goods] for the holiday season. And as you know 80% of the semiconductor industry today is driven by the consumer. So, if you combine this plus a slow down across business industry that basically results probably in a slightly lower quarter than we had in the past.

Of. And then if you go by the analogy and say you are going to start seeing some pick-up in March, is it fair to assume that typically from your business standpoint, you'd actually really start seeing any demand flow through for wire bonders after the Chinese New Year? Or do think it will start picking up right in the beginning of January?

It's usually the same question you ask every year, Krish. Typically after right about Chinese New Year or thereabouts is when we start to get good visibility on what the business going is to look like, [how it's supposed to throughout] second quarter on some indication on the following quarter but it's, that's the way it this. So that doesn't -- in our business, business could pick up real quickly and we are prepared to fulfill that demand should that business come in our second quarter right up to Chinese New Year.

Got it. And then I had two more questions. One for Jonathan, what is your breakeven right now?

Our breakeven has been about $95 million in terms of top line revenue for us to breakeven. And obviously, we have some flexibility in terms of managing our cost structure so it's about there at this point.

Got it. And then obviously you guys have a good job with the cash and have been doing pretty nicely so curious to know what your capital allocation priorities are as we start looking into calendar 2013?

I think our capital allocation priorities have not really changed. We are focusing on the advanced packaging technologies, I think I mentioned that in the previous calls, we want to, within our space, expand our [product] portfolio. We've always had a strategy of being the number one in the market reserve and that also has not changed. We think that there is opportunities for us in this 3.5D, 3D wafer-level packaging. We've actually already started in organic efforts and there is a lots of fees around that in the next, I would say four, five years.

Most of the growth is going to come from that space that we designed at [Midland] which is in between the foundries and the OSATs. We're obviously focusing on our space which is generating assembly-type equipments and so therefore, we want to keep the flexibility of the cash we have on our balance sheet to look at non-organic possible opportunities. However, we keep discussing on a regular basis with our Board another option to use the cash such as potential share buyback. I think in our case, dividends do not really make great sense because of the [diversity] of the business but we explore options to make the best use of our cash. Jonathan, do you want to add on that?

Yes, that's all part of our planning process. I just wanted to give you a little bit more color, Krish. CapEx historically has been about $7 million or so a year, but this current year FY 2013, we do have some capital allocation for, say, our build-to-suit building with our landlord and that's about $30 million for the new build-to-suit building here in Singapore as we continue to actually consolidate our manufacturing for [feto].

Got it. Is this CapEx just a one-time thing that goes away after fiscal '13 or --?

That's correct.

Tom Diffely, D.A. Davidson.

So, first I was wondering if you could just give us a feel for what the business looks like today versus a year ago. This past -- is it like normal seasonality or is there like something else is going on versus what you saw here a year ago and also two years ago?

It's -- every year is a little bit different from the previous year. As you get a year ago, our second quarter was our peak quarter and we started to see a decline in the business in the fourth quarter. This year actually it didn't happen. We actually grew quarter-on-quarter from Q4 over Q2, which is, I would say, not unusual but when you look at what's going on in the industry, we feel pretty good about our fourth quarter and the penetration and that we keep improving on our -- creating our customers.

So as for Q1, the drop is probably a little bit with a steeper than we've seen last year and probably the previous year before that but it is not, I would say, a cause for alarm. The main reason for that is because we are spending a lot of effort in restructuring the Company so that we can lower our breakeven points to about $95 million. So even if, I think it's a consequence of there is some uncertainty in the business, in the industry, typically it's the low quarter for us because of the seasonality but overall we are well-positioned to manage to stay above water in our first quarter fiscal '13.

Okay. Is there anything in the fourth quarter as far as the split between IDMs and OSATs? Or do you have that --

Yes, I gave you the breakdown. We gave a [sense] of our [39%] with OSATs so I think it was probably when we have a strong quarter, always the OSAT in terms of percentage is quite high. So it was just, no, I would say no major drastic changes versus the previous quarter. It's pretty much the same mix as we've seen in the past.

Okay. You talked about how there's still, it looks like there's several more years of the gold to copper transition that's going to happen, and that's -- some of what we've heard from the big OSAT customers as well. I'm curious though when you look out over the next couple years, do you think the business shift moves a little bit from the OSATs who have been ramping up more to the IDMs that are still a little behind the copper transition?

Yes, the thing is that the IDMs, I mean, I agree the IDM are behind the curve in terms of transitioning to copper. They've actually transitioned to copper on the smaller [power chip] packages which doesn't necessarily offer the best cost advantages because you have very little [gold] content in them. But what's happening again as you can see, there are very few IDMs increasing capacity, except for the large guys whether it's front-end or back-end and they tend to rely more and more on the OSAT to do their assembly and test or a large portion of their assembly and test. So on the OSATs, especially when you talk about the 2D guys are [already quick now] from a copper perspective, to take that business and [aren't] afraid to invest more to increase the capacity in that space. So I do not, if you want, anticipate a really strong growth [depending variety] from the idea just because they tend to access more as it in the past.

Okay so if we're seeking that deal sets that some of the big guys are close to 6% copper, we shouldn't worry with this increase capacity to absorb some of the increased outflows from the IDMs then?

Yes, you can say that, yes.

Okay. And finally, you talked about the LED business being 5% today; it's nice potential there. Where could that possibly go over the next couple of years?

This is a big question mark. It already depends when the LED lighting for, I would say, general purpose consumer purpose is going to pick up. And for that, you need to [arrive] to reach the right price point. So there is a lot of different views on when this is going to pick up. It could be a year or two from now or maybe later but that, for us, is the market we are really watching closely. Automotive is also another market but there is not a huge volume of ATE consumes in the automotive, in the [industrial] space despite to see more and more [carbon] than what there is. There's just not that many of them. The big drive for us is going to be general lighting and for that, again, it's a matter of consumer acceptance from a price point perspective.

David Duley, Steelhead Securities.

A couple questions for me. What -- just rough guidance on the gross margin for the December quarter?

David, this is Jonathan. We have not actually guided on gross margins but as you can see historically in the last couple of years, we've been averaging about 46% gross margin so it really ranges from 46% to 47% if you can go back another year from there. So this is, in terms of what we achieved this past quarter, Q4, it is coming off a fairly strong, I would say, higher-margin quarter of 47.9% because of the mix of products, equipment products at [OCH] had higher-margin contributions, for example, [18-nanometer]. So this quarter, we felt, unfortunately, we're not guiding to it but I think you should expect we should be at average.

So similar to the previous couple years when your revenue declines a lot, your mix gets a little richer and the margin goes up a little bit.

That's correct.

Okay. Just talk about have you seen competitive copper offering yet from anyone? Could you just talk about what you think your market share ended up currently?

You mean from a copper perspective?

Both copper and the overall market, whatever data you can give us?

Okay, so yes, I mean there is some, we've seen a little bit of competitive offering coming up. One of our main competitors, that I won't name, has introduced a copper solution but I would say probably but I think with Semicon China so that's probably about six months ago or so. But it's more in that lower of [in-house] products. There is another solution on the market which are not [syndicated] solution which is a net built [objective] using a traditional gold wire bonder and putting a kit copper chips with forming gas and transforming that into a copper wire bonder but obviously, you won't get the optimized solution in that case.

So in other words, I would say, by the way, our goal solution is still probably the best in the market in terms of bond pitch and speed UPH and that's the engine, if you want, because we have a strategy of [offering] one engine, one platform and derivative products around that. So we are still dominating the market in all our ball bonder products. That's similar to the data from the other side was about, we say, either Q2 calendar and the [figure] was a little bit about 60% market share for all ball bonder products. They don't disclose the data for copper but as I said many times in the past, we know that we are leading in this space. So that's the [reading and hearing] in the space by the statements by both from our two largest customers in Taiwan. They have 100% market share and pretty much all the major set, we are in the fewer sets. We have a very, very significant market share. I can't disclose this because they don't disclose that but we are in good shape.

From a wedge bonder perspective, we have a number of new products that are going to be introduced early next year and that is going to help us. We have also, I would say, probably about 65% market share despite the markets being despite, I would say, a fairly weak market for the last few quarters. But obviously, as we said, it's picking up a decent 21% up versus the previous quarter but the fact that we're going to introduce these new products is going to help, again, provide better solutions for our customers. So the key, again, we focus on the technology, we introduce new products on a regular basis, and we want to keep our lead over the competitors.

What do you think the utilization rates of your bonders or your copper bonders are in the field right now?

I am not sure I have this data available but I mean you can find it from our customers. They do disclose that utilization so, I mean, if you can get again, in Taiwan, I think ASE disclosed that they were about 85% utilized and they [reported] a pretty strong fourth quarter. I'm not sure for Steel; I don't think they disclose that but overall, our [internal] data it's about utilization right now it's about for all ball bonders combined, it's about 70%, 75%, 78%, in that range.

That includes the gold bonders, too?

That includes everything, yes. That's our data, okay? We try to estimate it, obviously.

Okay. One of the things that ASE and Steel talked about was a lot of the customers are moving to higher pin count devices on the copper front and that's slowing the bonders down a bit. What are you doing to help offset that trend as far as, first of all, are you seeing that same thing? And are you trying to make your bonders more productive?

Of course, we try and we work very closely with our customers, especially our top customers. We are working, as I said, I mean, we don't rest on our laurels. So we introduce new products constantly and the solution we have today is not a solution forever so we are working on optimizing. Copper is a very tricky material; it's very much application-specific dependent and it needs to be tweaked almost for every specific IT so we work very closely with our customers to optimize that productivity.

Are you seeing the same trends where you're seeing the parts becoming more complex and higher pin counts?

Yes, of course, I mean that's our biggest advantage and that's the big advantage for customers, too. The higher pin counts, the higher number of wires, the more savings you realize because if you are going to use gold, the gold content would've been a lot more. So that's the advantage of our solution is it's in the high-end application where we can provide the most savings for our customers' customers.

Okay final thing for me is, do you think that any 28-nanometer parts are going to end up being wire bonded?

Well, the answer to that is yes, we have customers in, I said 28-nanometer, 30-nanometer, 32-nanometer, okay? It's the same anyway. A lot of the applications anyway are more [power] limited so you cannot make the [pad] so small so as to not bond them. We have many of our customers already, I would say, working on that node. The next node, which is going to be 22-nanometer and now they're talking about 14-nanometer is going to be, I think, requiring different solutions than wire bonding. It's going to be more towards wafer-level packaging which is why we [affected the major], I would say, including the Company to go in this direction.

Thank you.

(Operator Instructions)

Clint Coghill, Coghill Capital Management.

I have a couple questions here for you. The first one is, this is just on a working capital front. Last year we saw working capital go down from basically accounts receivable versus accounts payable fall down. And now where accounts receivable went from $138 million to $110 million. This year, would you expect the accounts receivable at the end of the December quarter to be somewhere similar to where it was last year considering the revenue guidance?

Yes, we basically are watching our accounts receivable by focusing in terms of managing our working capital. I would say it is in line with previous year.

That would mean that you guys' accounts receivable would generate roughly $78 million more in cash at the end of the year?

From a cash generation perspective, it should, just looking at, from our information here. I would say it's generally in line with our DSO where it actually heads up a little bit in terms of the current quarter.

Got it. So I'm just looking at where ball is and where the ball would be. It looks like at year-end, you guys may have closer to $6.80 a share in net cash. I understand that you guys are, you want to pursue growth opportunities; however, considering you guys are priced at 2 times cash earnings and 2 times free cash flow, if you strip out the cash, I question why we are still waiting or why the Board is still deciding on what to do with the cash if you guys potentially return cash to shareholders through the buyback program?

Let me answer that, Bruno. I think it's, this is obviously, in terms of how we actually use the cash on hand is a topic that is constantly discussed. We continue to do analyses and we plan ahead so it is something that the Board as well as the management actually spend a lot of time on. So it is something that, clearly, we have to just make sure we are comfortable in terms of the best use for the capital to enhance our shareholders' value on a longer term basis. I would say, and Bruno has actually alluded to in a, his earlier response to Tom's question is the fact that we are looking at the next generation of actually basically bonders in terms of packaging. So there's actually a lot of effort in terms of what we can do with in terms of technology, acquisitions and development in terms of in-house. So there's a lot of efforts in that area in terms of how do we actually eventually replace some of these in terms of the current technology.

If we look at it though, I mean we believe that there is a secular trend if you, with regard to the transition from gold to copper and you guys are the industry leader. So you guys will be generating, we believe, free cash flow at a high rate for the next few years. So it's just hard for me to try to understand the return on investment part of it from a shareholders' perspective when you guys, your core business with the powerful secular trends trading for 2 times cash earnings. I understand that you guys can't -- want to grow and have the next generation of products but I just don't -- in conversations with you guys it was also, it doesn't sound like you guys are planning on making a $500 million, or $600 million acquisition.

I guess I would argue that it's -- you could do both, especially at this point in time, considering you guys are trading where you are. I guess I would like to understand a little bit more about why, if you benchmark buying back stock versus these growth initiatives, what return on investment you think you can get from these growth initiatives as compared to the return on investment with purchasing, or buying back stock?

At this point in time, I mean obviously everything, we do have a fairly active development program within the Company as well as actually a screening M&A for our inorganic activity. We do have screening criteria that looks at a certain threshold hurdle rate margins and eventually, hopefully the targets we look at will be also accretive. At the same time, we have to be realistic. We can't have everything in terms of everything that's going to be perfect from an acquisition perspective. So it is conceivable we could actually have both in terms of having enough basically investments in terms of the organic and inorganic-type activity and possibly a share buyback depending on how much cash we really want to hold and on our balance sheet with these development opportunities. So we are looking at this and this is a common topic, I would say, at our Board level.

Last question, if you don't mind, just maybe for Bruno, which is Bruno, how big of an acquisition would you conceive of making? Or what's -- if you guys were to grow through acquisition, what would be the expected boundaries?

We do not have a preset, I would say, number when it comes to acquisitions. I mean we go through a very rigorous cross-sets of [companies] of that's [Saugus]. It could be a slow technology acquisition. We've looked at, we are looking at almost an acquisition [per month]. We are very cautious in the way we approach it because it's not everything on [PowerPoint] that's always visible. But once you do get married, that's when the heartbreak stops. So we want to make sure that we're doing the right thing. One thing I can tell you is that there is no doubt that in three years, in four years, and in five years down the road, the ball bonder market is going to plateau, okay? The secular trend of copper will have been already, it will be well penetrated. You will have moved in terms of technology from 65-nanometer, to 40-nanometer, to 35-nanometer, to 22-nanometer and there is, so therefore, the ball bonder market is going to become mostly a (inaudible) market. So we know that; okay?

And therefore, we've decided, I think since day one I joined the Company, we want to find new records of growth which is why, for the time being, we're being prudent. We've only had, I would say, we've been debt free for two quarters, okay? We've only been in that position for maybe six or seven quarters so it's not like we are holding cash in our coffers for like years so which is why at this time, we know that we want to take the Company to the next level and want to keep the flexibility. Nonetheless, we are always looking at the possibility of buying shares back and that's a discussion we have at almost every Board meeting and so their question is at what price point?

If I can just add one thing from, obviously from a financial perspective, I certainly would like to see some recurring revenue in addition to the equipment side, something that is just, will hopefully smooth out some of the cyclicality of this business. So that's something that I know we, internally, we are looking at in terms of servicing revenue for our existing footprints as well as especially if we have opportunities outside, we'd certainly like to look at that, too.

It's a good problem that you guys have which is you guys will have generated by the end of this year close to $7 in cash per share over the past 2.5 years or so. So it's, my hats off to you guys. I guess the one thing that's hard for me to get my head around is I understand you on growth, I understand you want to grow organically and potentially through acquisitions and smooth out the revenue stream. But it's just as you benchmark you guys trading at 3 times earnings and 2 times cash flow versus some of the other potential acquisitions, I can't imagine you guys finding lots of other companies that are trading at 2 times earnings and cash flow that have a good secular trend that market leadership position within their respective area. I think you guys are going to make a lot of money for many years to come and so it's not just a cash balance you have on your books today but also the cash balance and the cash that you'll generate over the course of the next three to five years.

Yes. We're with you.

We agree with you and for the timing again, we are keeping our options open.

I would just urge you, just don't wait until it's too late and then all of a sudden, and now you're buying back stock at $13 rather than, or $14.00 rather than at $11.

Thanks.

Thank you.

Thank you.

(Operator Instructions)

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Joseph Elgindy for closing comments.

If there are no further questions, thank you all for the time today. Rob, this concludes our call. Thanks.

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