庫力索法 (KLIC) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Kulicke & Soffa second fiscal quarter 2013 results call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. (Operator Instructions)

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 begin.

Thank you, Claudia. Good morning, everyone, and welcome to Kulicke & Soffa's fiscal 2013 second quarter conference call. Joining us on the call today are Bruno Guilmart, President and CEO; Jonathan Chou, Senior Vice President and CFO. Both are available for Q&A after the prepared comments.

For those of who have not received a copy of today's results, the press 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 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 our SEC filings, particularly the 10-K of the year ended September 29, 2012, and our other recent SEC filings.

I would now like to turn the call over to Mr. Bruno Guilmart. Please go ahead, Bruno.

Bruno, please go ahead.

Okay, thank you, Joe, and thank you all for joining our call today. Sorry, my line got disconnected for a second.

Revenue in our second fiscal quarter of 2013 was a $106 million, compared to $114 million in the first fiscal quarter of 2013. This exceeded the high end of our Q2 revenue guidance of $90 million to $100 million. In terms of color on our business dynamics in Q2, ball bonder volumes slightly increased although remained soft. This primarily reflects the ordering pattern of selected OSAT customers as well as shorter quarter due to the Chinese New Year holidays.

During the March quarter 85% of bonders sold were sold to OSATs, which an increase from the prior quarter. We do not attribute our volume softness to market share loss, nor do we view this as an indication underlying slowing in the copper transition. Rather OSAT demand picked up later in the quarter, largely due to broader economic drivers.

While consumer demand lowered somewhat in the quarter and impacted many suppliers in the value chain as well, we believe the main reason that caused our softness was lower demand from OSAT [cores] group of customers and also IDMs that generally reduced their OSAT requirements in softer quarters. Although these ordering patterns increased our operational challenges, the volume benefits of supporting the world's largest OSATs clearly outweighs the downside in such circumstances.

In addition, the flexibility of our operational model greatly optimizes our ability to handle the soldering patterns and remain profitable. While we still do not have a high level of visibility to the nature of our customers orders, we continue to have confidence in the longer opportunities for our business.

Wire bonding remains the significant profits that for the overwhelming majority of global semiconductor products. We do not expect this strength to drastically change over the foreseeable future, as wire bonding is and will likely continue to be the most cost effective interconnect solution. If you do a back of the envelope calculation on the replacement market alone, we are well positioned in an attractive market.

Based on our internal estimates, we believe there is an install base about 120,000 wire bonders in the field today. Adjusting for throughputs, this equates roughly to about 90,000 to 100,000 current generation machines. Most customers tend to replace their machines every six to 12 years, which suggest a normalized total demand for wire bonders to be in excess of 7,500 machines annually.

In addition to these normalized maintenance markets, wire bonder semiconductor units are expected to continue to grow and the technology to improve. Internally, we use a [lead and pin count] forecasts rather than semiconductor unit forecasts to more precisely gauge the [incremental] capacity requirements for wire bonding equipment.

We include [several dates] of these forecasts on our quarterly investor presentations. Our latest March quarter investor presentation is currently available on the investor website relation section of our website. Again, all of this information relates to the replacement and [incremental] capacity needs for wire bonded equipment in the semiconductor market. It does not include any insight to future [LED] wire bonder demand.

Moving on to copper. Our copper [capable] bonders sales represented 67.7% of total bonder sales in the fiscal second quarter, down from 74.8% in the previous quarter. This slight decrease quarter on quarter is primarily due to our proportional increase of LED bonder shipments. About 14.3% of our ball bonders sold were configured for the LED market, up 5.9% in the December quarter. This remains an attractive, profitable and growing market for K&S, especially in commercial and general lighting applications.

Turning to our wedge bonder equipments, both key markets, power modules and power semiconductors, remain fairly soft, but we expect customer utilization to progressively improve throughout the year. We recently launched a new line of power fusion wedge bonder offering, which we have received positive customer feedback. This new solution will help to maintain and possibly increase our market leadership by improving our competitive positioning.

We also released a new line of [auto] hot blade tools and expanded our service offerings through the introduction of K&S care. We expect this too to improve our [vectoring] revenue base over the coming years. Overall, the main things that drove our performance in the March quarter were in line with what was highlighted at our [Northeastern] investor meeting held at NASDAQ in Time Square. For those of you that were unable to attend, the webcast and presentation are available on our websites.

The key takeaway is that we continue to leverage our operating expertise across cycles. We are able to scale up demand and as efficiently able to scale down. For example, we exited December 2012 with about 2,600 employees worldwide, and exited the March quarter with closer to 2,300.

The change is possible due to our flexible temporary workforce in Singapore. This optimized workforce flexibility allows K&S to be more nimble and quickly adjust to the sharp variations of the industry cycles. Importantly, by moving fixed costs to variable costs over the past few years we have been able to maintain a stable gross margin.

At the same time, our operating leverage helped us to remain cash flow positive on the lower revenue base of the March quarter. We exited the March quarter with about $499 million in cash and our debt free balance sheet.

During the month's investor day, the team also outlined opportunities and details to our advance packaging program. Growth in advanced packaging is being driven by the need to improve package density, power efficiency and performance while minimizing incremental costs. Current capital equipment solutions are able to accommodate either high accuracy or high throughput, but not both on the same platform. The industry is in need of more robust higher performance solution. This is where we see a clear opportunity to leverage our technology expertise and leadership.

Today we are in the midst of developing a next-generation semicompression bonder for the industry's future advanced packaging process. We already have a manual [feasibility] machine and are targeting mid-2014 to begin distributing demo machines and going to full production by the end of 2014.

In terms of the potential financial impact, this project is anticipated to cost around $30 million -- incremental dollars over a 2.5 period and is expected to provide access to high growth segments were we expect to leverage our supply chain, sales, service, and technology synergies. We are currently targeting a minimum of 30% market share of what is estimated to be about a $400 million market by 2016. This high level cost-benefit breakdown hopefully provides insight to our fairly conservative investment criteria.

I will now turn the call over to Jonathan Chou for a more financial review of the March quarter. Jonathan?

Thank you, Bruno. My remarks today will only refer to GAAP results and will compare March quarter to the December quarter.

Net revenue for the quarter was $106 million, down $8 million from the December quarter. As Bruno noted earlier, we are pleased to exceed the high end of our revenue guidance. Net income for the March quarter was $7.3 million. This compares to the $3.6 million in the prior quarter.

From an EPS perspective we achieved $0.10 per share in the second quarter compared to $0.05 per share in the first quarter of fiscal year 2013. Gross margin remained healthy at 46%, with gross profit at $48.8 million. This compares to a gross margin of 45.2% and gross profit of $51.5 million in the prior quarter.

Operating expenses were $41 million compared to $47 million in the prior quarter. While we remain focused on our cost containment initiatives throughout both December and March quarters, the $6 million quarter on quarter expense reduction was primarily due to the recognition of the Research Incentive Scheme for Companies -- IRSC --grant receivables related to prior year product development and activities.

This amounted to a net delta benefit relative to the December quarter of $5.4 million. This benefit positively impacted our March quarter R&D expense line. Without this one time item, our EPS would have been $0.06 for the quarter.

Our operating experience in the occurring June quarter are anticipated to be $46 million. Excluding the risk grant adjustment, this is in line with our March quarter. For the March quarter income from operations was $8.2 million, and our tax provision came in at $1 million. As noted on the prior call, we continue to target our long term effective tax rate at 10% as we further simplify our tax structure.

As Bruno mentioned earlier, we ended the quarter with a total cash and investment position of $499 million. This is equivalent to $6.51 of cash, and $8.64 of book value per diluted share.

In addition to our work in advance packaging program, our debt free balance sheet and strengthening cash position provide the support to examine over internal and external growth opportunities in an effort to diversity revenue stream and broaden our product portfolio. Working capital, defined as accounts receivable plus inventory less accounts payable, decreased by $3.7 million to $136.4 million.

From a DSO perspective, our day sales outstanding increased to 99, compares to 78 days in the prior quarter. Our day sales of inventory decreased from 78 days to 72 days. Our accounts payable days increased from 29 days to 41 days.

Finally, let me provide an update on our CapEx and operational activities. We plan to move into our new state of the art manufacturing facility and corporate headquarters by end of the fiscal year.

While our historical CapEx run rate has been about $1.7 million per quarter over the last two years, for the June quarter we expect CapEx to be about $10 million and for the September quarter to be about $13 million. This increase is primarily due to one-time incremental $14 million to cover lease hold improve of our new lease facility.

This is very exciting for us, as we expect efficiency gains through a redesigned and open operational layout. It is also worth highlighting that this is a larger facility with lower cost per square feet, which will allow us to further improve our scalability. We are coordinating our current lease expiration with our move-in date, which is targeted for the end of the 2013 fiscal year.

This concludes the financial review portion of our call. I will now turn the discussion back over to Bruno for the June quarter's business outlook.

Thank you, Jonathan. In terms of guidance for our fiscal third quarter, we expect revenue to be approximately $120 million to $130 million. This reflects a modest increase in demand while general softness continues at major OSAT customers.

Despite this near term outlook, we remain well positioned given our operating leverage, technology leadership, continued gold to copper transition, and attractive long term growth opportunities. We continue to have clear leadership position in the markets we serve. With a financial strength to support our customers' R&D road map, we also remain fully committed to pursuing internal and external growth opportunities.

This concludes our prepared remark. Operator, we are now happy to take any questions. Operator?

(Operator Instructions) Our first question comes from the line of Tom Diffely with D.A. Davidson. Please state your question.

Yes, good morning. Bruno, first I want to look at your -- kind of your long term view of the gold to copper transition. Does the data you look at, does that come directly from the customer base, or is it third party research houses? What is it -- or how is it that you accumulate the data?

So we basically have two ways of looking at the data. We have the official data, which is provided by Gartner [and Vilaside], but the problem -- especially we track -- I would say Vilaside at bit closer, as they tend to come up also with the data a little bit closer. Lagged by about a quarter, okay? So if you want right now, we have data which is basically about a quarter old. As well as we do track on a [basically] weekly basis utilization at our customers.

As you know, we have had significant penetration movement I would say in the two largest OSATs. Or maybe not the two largest OSATs, but two of the largest OSATs in the last three years in Taiwan. And what we are seeing I would say is somewhat of [a close] to adjust [permitted] capacity to the demand. But on the other hand, what we are seeing is also a pick up in the other largest OSATs and also in some tier two and tier three OSAT customers that, especially in [tier three] case, tend to demand more efforts as they order lower quantity and are scattered around a larger geographic area.

Okay, and is your big picture view that we just are maybe half way through the whole gold to copper transition at this point?

I think our view has not changed. We are probably about halfway through. We do not believe that gold prices, now hovering at $1,500, are going to change anything to the equation, because again this is a major technology change.

I was recently in the US talking to some key customers, customers of our customers obviously, in the mobility [states], and they started the conversion on virtually all their new products that could go to wire bonded. Because as I mentioned during the call, wire bonding still is the most cost effective solution in the market. So when they can do it through wire bonding they will do it through wire bonding, and they are not retrofitting the old product because it just is not cost effective as all the new products that are being launched. And as you can imagine, it is quite often that the technology evolves fairly quickly are going to be launched on copper.

In addition to that, we talked a little bit -- we are talking more -- I guess since the NASDAQ conference we started to be a lot more open about our views and what we are doing in the advanced packaging market. And as I think many of us, a lot of you stop to realize it is far from a trivial area, a lot of people used to love this as a -- I would say some kind of a buzz word. We have a very I would say straight definition of what advanced packaging means for us.

We have close to 70 people now in R&D working on it, so that's for real. We have a number of I would say discussions and pre-engagements with various partners to make sure that we develop the best possible machine, because as there are solutions today on the market, there is not really a standard, by the way. And by the way, advance packaging encompasses many, many different aspects, and so going forward will be a lot more of a solution approach than just the box approach -- a piece of equipment approach.

And there is nobody that can readdress the performance that is expected today in advanced packaging in order to bring the interconnect at the right price point. Because let's not forget it, we are in the mobility world, we are in a consumer world. 80% of the total semiconductor demand is coming from mobile devices, whether it's public or phones, and if you don't come at the right price points from an interconnected perspective, then you end up with an [IP]that's is going to be basically overpriced verses the rest of the [available] material. This potential solution is not going to make it.

So that's the key here, is to be able to arrive at a solution that is going to deliver what the customer wants, which is speed and accuracy, and we have this [bulbous] fortunately now [core competencies] at the right price point.

Okay. Thanks. And then, Jonathan, when you look at the $5.4 million R&D -- call it credit, I guess I'm having a hard time figuring out how you would have gotten $0.06 without that. Seems like your EPS would have been much lower than that.

Actually, our margin actually improved. But let me just kind of give you a little bit more detail. We did have actually a provision in the first quarter, which was [bad guy] of 2.34 -- 2.35 if you round off in terms of that [bad guy]. And then we did have actually release of those provisions, and also unrecognized basically receivables of about 3.04 or so thousand. and that really -- you double that up, it is actually 5.4.

But actually from a market perspective we have actually improved, and we actually -- through our cost containment it does follow through pretty well, and we did end up with $0.06 per share.

Okay. So what is the right R&D number to use going forward? Still in the $17 million, $18 million range? Or is that [ramping because of the] (inaudible -- multiple speakers)?

The R&D number -- R&D, the way you should model it is around $16.5 million R&D per quarter. Okay? Obviously we do actually manage that pretty well. It does ranges from $16 million to $16.5 million. I would use $16.5 million instead of the $16 million.

Okay. And then finally, Bruno, when you look at the replacement market, you talked about 7,500 advanced tools kind of an annual basis in a few years. I assume you are having a much higher percentage of that business going forward just because of the copper you have had in the last couple years? And so --

Yes, I mean --

Go ahead.

Keep going, I'm listening. Sorry to interrupt you. Keep going with the rest of it.

I guess I'm assuming you are going to see a nice increase in your kind of the replacement business over the next five years, call it, that -- it looks like it can be upwards of $400 million just for replacement alone?

Right. So this has been a [negative size] that we have been through and we actually currently are going through internally. We are in the midst -- we are coming to our sub quarter fiscal. This is a time of the year where we stop to look into our next fiscal year annual operating plan. This is the time of the year where we do strategic planning, and we are trying to size where are we going to land?

And obviously, that's what I said, let's be careful when we talk about advanced packaging. And that's why we wanted to give you some idea about the size of the investments that you are making in that space. It's still a very small market today.

Wire bonding, it's still the dominating market force. We are making huge investments in wire bonding, whether it's ball and wedge, to maintain and if possible even increase our market share to grab as much as possible of this replacement market, because we all know this replacement market is going to be the business that is going to enable the cash generation to form other businesses in the future.

So it is not something that we are saying let's just forget about that. For us it is really important to actually maximize and even I would say pull further away from the competitors on technology, on UPH, on new materials, so that we really come to even a more dominant position if we can than we are today in that ball bonding [replacement] -- or ball bonding or wedge bonding. Wedge bonding will continue to grow at a single rate, but it is a much smaller market. But definitely for the ball bonding market we want to be -- we want to have the lion's share of that replacement market.

Great, thank you.

Yes. Tom, if I can just -- Bruno, let me add a few points just to give a little bit more granularity to where we think the copper conversion into something -- this refers to Tom's earlier question, and before again to the replacement market.

Is that the -- we basically have 120 machines basically out there, and we believe it's going to go to 70% of the copper basic converted in terms of the [all the install] base. So basically, roughly 31% in terms of the field capacity at this point in time at the end of fiscal year 2012 is about 31%.

So we believe at the end of this fiscal year 2013 this number will basically go from 37,000 of copper capable to about 46,000 copper capable machine, which is 37% by the end of this fiscal year. So while our large customers are actually early adopters of this breakthrough technology, we still think there's a lot more legs to the conversion cycle in terms of for this -- for the non -- the smaller OSATs out there. So it still has at least a few more years to go before we get into the replacement cycle.

The other point of action I would like to point out, there is a new presentation on the website as well. You can refer to slide 14, which talks about that.

Great, thank you, that's very helpful.

Yes, we are not yet there. We still believe that for copper we still have at least two years -- a minimum of two year run rate ahead of us before -- because that's the key here. How big is going to be this replacement market, and when is it going to happen. I mean, we are not there yet. We still have some off power driving the copper market that is going to generate growth over the years, okay? The question is when it is going to become a replacement market and at what size?

Okay, thank you.

(Operator Instructions). Our next question comes from the line of David Duley with Steelhead Securities. Please state your question.

Thanks for taking my question. As far as your guidance in June, what do you think is going to grow in June as far as LED, ball bonders and wedge bonders? Which segments are going to be the key drivers in growth in June?

David, this is Bruno. Good morning, how are you?

Good.

My view, and it's -- we don't really break down by segment what is growing, by my view is it is going to be mostly ball bonders.

Okay. And --

Yes, Dave, I can just provide a little bit of color in terms of the LED side. Just historically our LED basically represents 5% of our total revenue, but this past quarter we did actually have -- from a unit perspective it did actually nearly triple. However, these are basically coming from spots or I would say some demand where -- spotty demands where we actually were able to capture, which actually drove that percentage up from an LED percentage perspective.

But, yes, I agree with Bruno, that ball bonder would actually drive the volume for this quarter, the current quarter.

So -- the key reason that you're sequential guidance in June is not up as much as the last couple of years is -- what's the key reason for that?

Well, as I mentioned at the beginning of the call, David, I think that we have had three great years, especially with the two big guys in Taiwan. The other big guys in Korea and Singapore have not been as, I would say, aggressive at converting their install base into copper.

Now they are a lot more aggressive, but their install base is obviously smaller because their customers are asking for it which was not really always the case in the past. So I think that -- we still do business with our two large copper consumers in Taiwan, but not to the extent that we have done in the last year, as [they are] basically I think digesting and redistributing all this capacity that they have -- that they put in place. So (inaudible -- multiple speakers) --

Okay, and do you think that the growth -- how long do you think [adjusted rate] do you have with your two biggest customers? [By I think] (inaudible -- multiple speakers) --

We can expect -- yes, we can expect that to last probably until probably the end of our fiscal year.

Okay.

But again, it is difficult to predict. The business [tends] to pick up for the best. One of the Taiwanese customers was -- [it was] a public announcement, was very much behind advance packaging. So they basically redirected a lot of their front end equipment investment into that space.

But as I said, in that space, there is not a finished solution. You have solutions that are very slow, but very accurate and do not work in the manufacturing environment. And you have solutions that are very fast but very inaccurate and that are not good for the advance packaging solutions. So everybody is kind of scrambling right now to get this ideal machine that would be able to provide a solution at the right price point.

Okay. And at the run rate you expect into June, what will be the rough cut on the gross margin.

We don't provide guidance on gross margin, David. You should know that. I mean but typically, as you can see from historical, our gross margins do not vary hugely from one quarter to the other.

Sometimes you will give us an up or a down based on the mix. That's just kind of what I was looking for. That's it for me, Thanks.

We just don't do it. We just don't guide on gross margin, because it is so unpredictable. It depends on customer [mix] and customer -- on product mix and everything. So some products enjoy higher gross margin, some a lower gross margin. And we are very early in the quarter, and so we just don't provide guidance on gross margin. That has been the policy of the Company for a few years.

David, if I can just adjust one point to -- I guess your question is really what's the outlook -- and just wanted to point out, even in a historically, in terms of [past two] reported quarters, ASE and SPIL, they just recently announced, and they added 2,200 bonders as well, even in a slower quarter. So I think we are starting to see some signs of actually improvement in terms of the outlook.

Who added 2,200 bonders?

2,200 wirebonders.

I thought ASE added 29 wire bonders during the quarter? So don't know how many SPIL has added (inaudible -- multiple speakers) what you are referring to.

You have to -- you have to be careful when you read the reports. You -- there's different way to account when you add -- you may add a machine, but it's not accounted for as added yet. Because you have commissioning time and everything, so they can [stay] around a little bit as far as when you decide to add it on your balance sheet.

Okay.

Okay.

(Operator Instructions). One moment please while we poll for any additional questions. It appears there are no further questions at this time. I would now like to turn the floor back over to Joe Elgindy for closing comments.

Thank you, Claudia. Thank you all for the time today. Please feel free to follow up with us after today's call with any additional questions.

Before we go I would just like to inform investors that K&S will be participating in several events in the June quarter. We will present at the Jefferies Global Technology Media and Telecom Conference in New York City on May 7, the Credit Suisse Annual Semi-Cap EDA and LED Conference in Boston on May 29, and finally we will participate in D.A. Davidson's Fourth Annual Technology Forum and also the Cowen Group's 41st Technology, Media and Telecom Conference both in New York City on May 30. For those that can't make these events in person, please reference the webcast replays which will be available on our investor site.

Again, thank you for the time today. Claudia, this concludes our call, thanks.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your partition.