庫力索法 (KLIC) 2013 Q4 法說會逐字稿

Greetings welcome to the Kulicke and Soffa fourth fiscal quarter 2013 results call.

(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 and Soffa. Thank you, Mr. Elgindy. You may begin.

Thanks, Rob.

Welcome, everyone, to Kulicke & Soffa's fiscal 2013 fourth quarter and full year conference call. Joining us on the call today are Bruno Guilmart, President and CEO, and Jonathan Chou, 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 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 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.

Thank you, Joe. Thank you all for joining our call today.

Revenue in the fourth quarter fiscal 2013 was $173.6 million which represents a 23% increase over the $141.2 million in the third quarter of 2013, which was slightly below the guidance range of $175 million to $185 million. For the most part the quarter developed as expected but was a lot more dynamic than anticipated. The slight variance between actual revenue and outlook was primarily due to a higher number of both spooling and pushouts than usual. We believe this reflects more incentive in our customers' end markets and not in any competitive losses.

Demand remains solid for ball bonders, especially for our copper solutions and also recovered for wedge bonders. We remain confident as we continue to build on our leadership position driven by our technological strengths, comprehensive equipment and expandable tool portfolios. We were able to ramp to meet the higher demand level through the efficiency and flexibility of our manufacturing model. We held operating costs low and utilized selective temporary workforce additions when required.

Our collective expertise allows for performance optimization in periods of both rapid expansion and contraction. We understand what needs to be done in order to meet customer demand levels on short notice and are able to work with our supply chain partners to avoid longer lead time and higher sourcing costs. As a result, we delivered a gross margin of 46.5% for the quarter.

We remain focused and understand that from the high level our performance will continue to be driven by our brand premium, highly efficient manufacturing model and technology leadership in the marketplace. This is evident in our closeness to customers, understanding of their road maps and our ongoing efforts to consistently release new solutions to serve their needs. For example, at the SEMICON Taiwan trade show in early September we announced several new products, including our new CuPRAplus solutions, together with our ACS Pro capillaries that are targeted to delivered improved wire bonding capabilities at the 28 nanometer node and below. As explained in our investor materials, node shrink in addition to copper continues to be a major technology trend that is historical driven and continues to drive gross and replacement demand for our equipment.

In terms of additional insight, our copper capable bonded sales in the September quarter represented 80.2% of our total bonded sales, down from 85.7% in the June quarter. Looking back at the longer trend September quarter copper shipments remain much higher than the historic average. On the past three years, copper capable bonders represented 68% of our total bonded sold. More importantly, this percentage has steadily increased.

Looking back on an annual basis, fiscal 2010 through 2013 our copper capable shipments as a percentage of total ball bonders sold have grown steadily from 57% to 78%, in line with our original expectations of the gold to copper transition. We currently estimate that approximately 39% of the total field capacity of ball bonders are currently copper capable and believe 75% of wire bonded devices will ultimately be eligible to convert. We've recently adjusted this up from our recent expectation of 70% of all wire bonded devices being eligible to convert to copper.

Switching to ABB, over 5% of our ball bonders sold were configured for ABB market, which continues to present moderate growth opportunities. The cost and performance benefits of consumer devices are becoming more and more competitive, which is driving ABB as option.

Turning to our wedge bonded equipment, the overall market dynamics remain soft, although we have seen a rebound in demand during the September quarter with equipment sales nearly twice that of the June quarter. We have taken a number of actions, including the launch of our PowerFusion line earlier in the fiscal year, as well as cost and road map re-engineering, and expect to drive further improvement in fiscal 2014.

Our R&D team is focused on executing to plan on our advanced packaging tool development. Over the next week we plan to ship the first Alpha product to key strategic customers for (inaudible). We believe advanced packaging is a competing growth opportunity and will keep everyone updated as we progress on this new exciting market opportunity.

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

Thank you, Bruno.

My remarks will only refer to GAAP results and will compare the September quarter to the June quarter. Net revenue for the quarter was $173.6 million, up $32.4 million from the June quarter. Net income for the September quarter was $29.5 million. This represents a 56% increase over the $18.9 million of income reported in the June quarter.

From a GAAP EPS perspective, we achieved $0.39 per share in September versus $0.25 per share in June. We generated $80.7 million of gross profit with strong gross margin at 46.5%. While sequentially gross margin was down slightly from 46.7% reported in June, this represents solid performance as product mix generally drives gross margin down in higher volume quarters such as this past September quarter. During September, we continued to keep operating expenses low at $46 million compared to $47 million in the prior quarter.

Our tax provision came in at $5.2 million for the September quarter. Our effective tax rate for the fiscal 2013 was 11%. We continue to target a long-term effective tax rate of approximately 10%. We ended the quarter with a total cash and investment position of $525 million. This is equivalent to $6.86 of cash and $9.36 of book value per diluted share. With our strengthened debt free balance sheet and increasing cash position, we continue to pursue both organic and non organic growth opportunities.

Considering the 23% revenue increase from the June quarter, we managed our operations well with working capital up modestly by 10%. Working capital, defined as account receivable plus inventory, less accounts payable, increased to $163.8 million. From a DSO perspective, our days sales outstanding decreased to 84 days, compared to 94 days in the prior quarter. Our days sales inventory decreased from 57 days to 37 days. Our days of accounts payable decreased from 55 days to 36 days.

Due to the ramp in September quarter, we decided to delay our move-in date of our Singapore build-to-suit manufacturing facility and corporate headquarters. We originally planned on moving in during the September quarter, and delayed this slightly to the December quarter. Despite this delay, we expect to incur capital expenditures that were related to the move. Of the approximately $11.2 million of CapEx in the September quarter, approximately $5.8 million was associated with the move.

We will also have $6.4 million of move-in related CapEx in the December quarter. For the subsequent March quarter, we expect CapEx to return to our normal run rate of approximately $2 million per quarter.

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

Thank you, Jonathan.

In terms of our guidance for December, we expect our business to follow the typical seasonal demand patterns, with revenue expected to be in the range of $70 million to $80 million as customers generally install equipment capacity by September in anticipation of demand driven by the coming holiday season. While we won't call out guidance past the current quarter, some quality market research firms, such as VLSI and Gartner expect semiconductor wire bonding demand to improve to higher more normalized levels in calendar 2014 versus 2013.

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

(Operator Instructions)

Krish Sankar with Bank of America.

I have a couple of them.

One -- Bruno, are you seeing any memory customers come back? And, if so, what is the memory of the mix in September?

Memory has never played, I would say, a very significant role in our overall business and I don't think we have seen any particular, I would say, surge compared to the previous quarter coming out of our memory customers. I don't have -- as you know, we don't disclose [the personal page], but overall I think it was maybe in terms of units, fairly stable.

Got it.

Then the other question is, in the past you guys have always been consistent with your capital allocation priorities being focused on organic and inorganic growth opportunities compared to a dividend or a buyback. Just wanted to find out, is that still the way you are thinking about the business? Or has any of it changed in the recent past?

No, there is no change in our strategy. As I have said many times, the Company has not been, for a very long time, in that, I would say enviable position of having cash resources. As you know, we have made a very large investment to get into advanced packaging -- probably one of the largest the Company has ever made.

Just to give you some sort of magnitude, we started this program about a year ago or so with a couple of engineers. Today we have close to 90 or 100 engineers and we have been able to develop a very complex machine. We are not talking about a 70,000 wire bonder here. We have been able to develop our first [of the] machine which will be shipped this month to a very strategic customer of ours in about 12 months. That has required, obviously, operating expenses, as well as some, I would say, limited capital expenditure.

As far as the overall market is concerned, we are seeing -- obviously continuing to see consolidation in the front end. Lately with the large merger of AMAT and TEL, we are actively looking at non-organic opportunities to basically augment our portfolio of products and services, and even accelerate and potentially increase our potential participation in the advanced packaging space. And we believe that we are getting closer to a point where the back-end market, which used to be very fragmented -- now you have about five suppliers in the front end, you have two in [cash], you still have a lot of suppliers, many niche ones in the back end -- but we believe that the environments and the market, especially in advanced technologies is getting more favorable for pursuing more marketing growth opportunities.

And therefore it's important for us to keep the balance sheet flexibility that we have, should we have to make a move quickly. Obviously, not recklessly, for the right company at the right price.

Got it. Thanks, Bruno. Thanks, guys.

Thanks, Krish.

Tom Diffely with D.A. Davidson.

First, Jonathan, I hope you can update us on what the current breakeven level is, and based on guidance, just what you think operating cash flow might be next quarter?

Okay, unfortunately we don't provide basically a cash flow for the quarter. But I can give you a sense of the breakeven.

In the past we have actually said breakeven point has been at $95 million, but based on our cost containment programs, which we have actually run for the last several years, just to give you a sense, last fiscal year we underspent by $11 million against our plans from a cost savings perspective. So, we are able to basically, if you go back to last year's earnings call, we guided $90 million to $100 million in the quarter going to the December quarter last year. There was a question about how flexible we can in terms of some of the cost containment. So, we could probably bring it down closer to $90 million or so in terms of breakeven.

Okay.

That gives you a sense of where we are at.

Okay, and then Bruno -- when you look at the business today versus where you were a year ago, I realize that the seasonal dropoff on a percentage basis is the same. But last year the guidance was for business to be 50% higher. What has changed over the last year, or what changed with this environment versus where we were a year ago?

Well, I don't think it's a change over the last year. I think you have to take, I would say, a longer-term view backwards as well as forwards. As you know, we are the undisputed leader in ball bonders; you can look at the data publicly available. And we have actually gained market shares, significant market shares in the last three years and we basically essentially dominate the copper space.

Initially we had anticipated some rate of adoption of copper, and I think what we have seen in the first three years is this adoption rate was probably a lot faster and stronger than what we initially saw. And -- not that the trend is not going to continue, but the trend is going to continue, albeit at a slower pace. Just to give you a couple of maybe more data points, we still believe that we can reach -- or the industry will reach a rate of adoption of about 75%. Actually we've increased that rate from 70% to 75%, okay. If you look at today the total install base of wire bonding machines, ball bonding machines -- and not talking about wedge bonders here -- it is in the range of 120,000 machines also.

40% -- that's based on our estimate -- around 40% have been converted. Yes, we had the early adopters, namely the two big guys in Taiwan that drove a lot of this early adoption. When you look at what is left, we believe that there is the potential for an additional 45,000 copper-capable machines if we achieve this 75% adoption rate over the next three years. So if you tried to make the math and said, okay, so how many machines per year this equates to -- as you know, this is a cyclical business, this is very hard to track. But we believe that a range of 6,000 to 9,000 machines a year for the next three years is achievable.

But, of course, there is all the, I would say macroeconomic conditions that we do not control. As you know, this year was not a great year for semis; there were a lot of uncertainly among our customers and reluctance to overspend, or to just spend as we are getting closer to the end of our fourth quarter and fiscal year. Because most of the capacity has to be in place and they were running in the mid-70%s in terms of utilization, which is below what I call the comfort level that triggers further investment, which is more in the 80% and above range, okay.

Okay. You talked a bit in there about how nodes were a big driver for your business. I know with the 28-nanometer build out right now, most of that is going to flip chip. At what point do you see some of this capacity at the leading edge move over to wire bonding?

So, right now, the solution we've been trying is capable of bonding, as I mentioned during the remarks, at 28 nanometer. Unfortunately there are challengers. It is clear the most [traficky] solutions, and I think when customers can, I would say, have the option to choose wire bonding for their interconnect solution, they will still go for that option.

Now just remember that for the time being the 20-nanometer node, it's still a very small portion of the total wafers that are being shipped, and they are mostly for a node that is used for high-end SPGAs, processors, graphic processors, application processes, and so on. Most of them are using a flip chip because of the high ASP, and less sensitivity to price and also the performance requirements that they need.

So, again, with all the developments in advanced packaging, we think we will be able to address interconnect requirements from both the traditional wire bonding technology space as well as new technologies that are emerging. Because this is a market today still very small in terms of dollars, but there is a lot of activity, obviously, because if you look at the data that's available, this market is the only expected market to grow significantly over the next five years. Whether you look at front end, back end or test, they are all expected to be flat, even sometimes down, while the advanced packaging space is expected to be a $4.5 billion market or so by 2017, 2018.

So, of course, it generates a lot of interest, not only from people like us, but also from the larger guys, because this is going to be the only space where you can grow. But it is going to have to be at the right price points, because all of these devices are going in, 80% today in terms of dollars of the semiconductor demand is going into consumer mobile applications and they have to have the right price points to be able to sell. I think there is still some challenges to overcome to get to that level. And there is quite a number of solutions; I would say, different approach when it comes to [interpreting] in advanced packaging, but we have a road map. It's not just one product. We believe we have an excellent solution with the possibility to put us in a leadership position again in that space.

Okay, thanks.

Finally -- when you talked about VLSI and Gartner talking about how the wire bonder market should grow in 2014 over 2013, and I assume that is in line with what you are hearing from your customers or you wouldn't have brought it up?

Yes, they didn't say it should grow. They said actually they are a little more cautious, I should say to a more normalized level. And obviously, that should be driven by more customers.

Here, I would say, we have been, the two guys in Taiwan have been early adopters, but there are still some other large OSATs who are now adopting also fairly quickly. But you have also quite a number of large Tier 2 customers who are also growing quite aggressively and spending capital as well as also we start to see emergence of a few home grown companies -- Chinese companies, not an AC or a steel factor in China -- that also have needs for that. If you want more of a target for us to generate business and growth for the years to come, but we still expect, obviously, the big guys to continue to order as they see the business is pointing in the right direction.

Okay. Thank you.

Thanks.

(Operator Instructions)

Dave Duley from Steelhead Securities.

Could you talk about -- first question is -- could you talk about what you think your market share will end up being for calendar 2013?

Again, we do not disclose that number because we do not provide that number, number one. It's available through VLSI or Gartner, and they lag by about a quarter. If I remember correctly, I believe that Gartner was a little higher than VLSI, but if you look at both, our market share -- and again, they work on calendar quarters -- the latest data that was available was for, I believe, the second quarter -- no, actually, they actually published some initial data for the third calendar quarter. Our market share was in the 70% range overall.

That's everything, David, okay? That is all wire bonders, wedge bonders, manual bonders -- it's everything. They don't provide any more granularity than that.

Okay. I'm just assuming based on what your guidance is for December that, that would be a good target market share number for us to apply to you for the calendar 2013 -- roughly 70% share of all the bonders.

It's up to you to make that assumption. If you get our track record, we basically have increased our market share or kept it and really have not lost any. As I mentioned in my remarks, I would say the dynamism that we have seen in the third quarter was more due to our customers deciding at the last minute to push out or pull in rather than what we believe would be any sort of competitive losses.

Okay. Now, the guidance for December is below your breakeven level that you just highlighted. It sounds like you are going to lose money in December. I believe that is the first time you've lost money since 2009.

I'm wondering, are you taking any actions to lower the breakeven? Or, going forward, do you think we are going to have quarters where we lose money on an annual basis? I'm just trying to figure out what you think is going on here in the December quarter.

Well again, we don't guide on the bottom line. As I mentioned a number of actions that we are -- I would say we have already taken so that we can further lower our breakeven point. But thank you for mentioning that we have not lost any money since 2009, which is a pretty good track record that not many equipment manufacturers can claim that they have.

So, even in the [aquasetis] that we would lose money one quarter, it's not the end of the world. We have over $500 million of cash, we have plenty of resources, we are very focused on the future of the company and there is no reason to panic at this stage. We are pretty confident on the future of the company and confident on the execution of our road map; and, as I've said, delivered and maximized shareholder value for the future.

John has a few things to add.

David, I just want to let you know, I mentioned that last fiscal year we underspent against our planned $11 million. This particular quarter we are continuing to put the brakes on all basically discretionary spending and we will continue to do that quarter on quarter as long as we need it. I just wanted to provide a little color and -- in terms of the cash position.

We ended the quarter, September quarter at $525 million. We are continuing to actually collect from the receivables as well. So, we are at this point in time, our forecast is still looking at continuing to accumulate cash to about $550 million or slightly north of that. So that will give you a little bit of color in terms of the cash position.

But we are pretty disciplined so far based on our cost containment program. But at this point in time, yes, it's the lowest point of the cycle that we have experienced so far, but we are managing that as well as we can.

Okay. You mentioned about how the third party folks are predicting what you call the more normalized year in wire bonding in 2014, which I think the crowd here is thinking that, that means that there is going to be growth in the overall market. Can there be growth in the bonder market next year if your two largest customers don't change their spending patterns?

Well --

Where's the growth going to come from? That's maybe a better question. It doesn't sound like it's going to come from [ABB] or [siliconwire] going forward, so I'm wondering where it does come from.

Our two largest customers made some announcements fairly recently about their prediction of CapEx for the, I believe, the first and second quarters, if I'm not wrong, of next year. But these customers, as you know as well, react very quickly one way or the other. Now if we look in retrospect to FY13 -- and you will be able to see more information when we file the K about this -- you will see that our mix of top customers has changed. That, the fact that definitely we have a very high penetration rate at both these Taiwanese customers and I think that they will continue to invest in copper. There is no reason for them not to do so, because they will have more demand, has given us also an opportunity to redeploy resources and be a lot more aggressive and diversify our customer base. Which is why we have been very active in, I would say, areas which we are going to be less active and also where customers were not as ready to make the transition.

If you ask me, it depends what your reference point in terms of growth. I gave you some numbers. We think that the potential for the next three years in terms of copper overall will be between 6,000 to 9,000 bonders per year, to arrive within three years or so at this 75% overall penetration rate, at which point it will become mainly a replacement market. Which is why the importance of looking at other technologies, which we have been doing for quite some time. And as I've mentioned already, that our new first major milestone product in advanced packaging in the coming weeks shared to a strategic customer, which will give us a foothold in the fastest and highest growth potential market in the semi equipment space.

Okay. Final question for me is -- talking about this new, I think it's a thermal compression bonder for the advanced packaging space. Could you just remind us of the timing of when you think that product will be ready for production. And then maybe comment about the other competitors. I believe they have some specific -- has a system already and is working on a new one. Maybe just talk about the competitive dynamics here.

Okay. So, just to give you an idea of timing, if everything goes according to plan -- and so far it has -- we expect to have commercially available product very early calendar 2015, okay. As far as the competition is concerned, there is competition. It is, I would say, all over the map, okay. There are solutions available today that give you the speed, that do not give you the accuracy that is necessary for advanced packaging. And therefore these type of competitors are trained to tweak their existing machines to give more accuracy, which is still not enough; but the customer has no other choice because there is nothing else available on the market.

On the flip side of that is when you push a machine to the extreme, it becomes very unstable and requires constant maintenance and you have constant process [deviations], on -- again, we are not talking about $70,000 wire bonder here. We are talking about $1 million pieces of equipment with maintenance contracts and services and other things. So, this is a different ball game than where we have played earlier. AS&P, as you know, has always been focused on the lower end piece of the market and I have not seen, I would say, any significant or heard significant developments to basically focus in the area which we are focusing on, which is accuracy -- accuracy of about 1 to 2 microns together with speed, okay.

On the other spectrum you have a few small companies who are able to produce in extremely small volumes. When I say extremely small, it's extremely small machines which are multiple R&D purpose, where they do have the accuracy capability, but there is no way this machine can be industrialized, because they are essentially built by engineers. These companies do not have the resources to basically transform the machine from an R&D machine into a machine that can be manufactured into what will be called for this type of business of several thousands of machines per year.

At K&S as you know, we have demonstrated and proven over the years that we have the scale, the [suprage] and expertise, and to directly go up and down the cycles. But that has taken -- we have 50 years of history and we have that capability as well. And obviously the reason why we had to develop a machine from scratch in 12 months is because we basically put a lot of resources on this project and we have leveraged all the knowledge that we have acquired along the years on speed and accuracy, which has always been a strong point of K&S.

All right. Thank you.

(Operator Instructions)

David Wu from Indaba.

I just want a quick recap -- I was late in getting on. What is your breakeven quarterly run rate at this point? Can you repeat that?

Sure.

And I have a question on something else.

Sure, David.

Our normal breakeven is at $95 million. Because of the programs that we have put in place in the last year and a half or so, we are able to actually lower that breakeven point to below $95 million; and for this particular quarter we did allude to earlier, that similar to a year ago, it's probably around $90 million, give or take, because of the other program. We continue to be very vigilant to basically contain all the costs and spending, all discretionary spends are basically being reviewed right now and continue to be managed.

Okay. There are beginning 3-D chips on both logic and NAND. I wonder is there anything that you are planning on to address the packaging that -- assembly packaging of those kind of 3-D structures in the future.

I'm sorry. You got cut at the beginning of your question. Could you repeat the beginning?

Yes. In both logic and NAND there is a move towards 3-D structures and I was wondering what implication that has for your assembly business?

So, basically, this is all wafer going into advanced packaging. 3-D means a lot of things. And it's used as kind of a buzz word for advanced packaging.

Basically I think where the industry is going is towards integrating a number of interconnect solutions, which could be TSE, which could be through bonding, maybe with a combination of wire bonding, and go towards more into system in packages, okay. So, the machine that we have developed, and I was mentioning, we are shipping our first machine in the coming days. It's a thermal compression chip bonder, and that will address, I would say, some of what we believe our opportunities for interconnect especially in the consumer mobility space. But that is not the end.

We have a road map, we are looking at -- right now there is a number of technologies. There is no standard, but it is true that this advanced packaging space is going to be the only market that is going to grow to a significant level in the next five years from the couple hundred million dollars it is today.

Yes, we have a plan and a strategy. We want, obviously, to capture and to lead where ever we can. Obviously the prediction of Forbes, something like a $4.5 billion market in the next five years, we won't be able to capture everything, because there is all the little parts that we won't get into because this is not our [corporal] tendency, unless we were to do, I would say, a non-organic move. But if you look at the purely the[interneck] space, it would be probably about one third of that market. We are very proactive again in leveraging our core competencies, and also looking around for more market opportunities to come and broaden our offering and solution in that space.

Thank you.

Thank you. Ladies and gentlemen, we have come to the end of our allotted time for today's question-and-answer session. I will turn the floor back over to Joseph Elgindy for closing comments.

Thank you all for the time today. Our latest investor relations presentation, which provides additional background on the Company as well as insight to the underlying demand drivers and longer-term forecast of our business was recently updated on the Investor Relations section of our website this morning.

Additionally, we would like to mention that the Company will be presenting at the 2013 Morgan Stanley Asia Pacific Summit in Singapore on November 13 and 14. For those unable to attend in person, a webcast will be available on the Investor section of our website, at kns.com.

Please feel free to follow-up after today's call with additional questions. Again, thank you all for the time today. Operator, this concludes our call. Thanks.

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