庫力索法 (KLIC) 2014 Q1 法說會逐字稿

Greetings, and welcome to the Kulicke & Soffa FY14 first-quarter results call.

(Operator instructions)

As a reminder, this conference is being recorded. (technical difficulty) Planning for Kulicke & Soffa. Thank you. You may begin.

Thank you, Melissa. Welcome, everyone, to Kulicke & Soffa's FY14 first-quarter 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, as well as our latest investor presentation, are both 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 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 28, 2013, 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. Revenue in our first fiscal quarter 2014 was just over $79 million, which was the high end of our $70 million to $80 million guidance range.

During the December quarter our operations group adjusted our manufacturing capacity quickly and efficiently to reflect current market conditions. This flexibility has allowed us product mix to drive gross margin to 48.5%, up 200 basis points from September. Looking beyond gross margins, operating expenses were again very tightly controlled at $40.6 million. Jonathan will provide some additional insight to this item during his financial review.

Our copper-capable bonded sales in the December quarter represent 81.5% of our total number of bonded sales, up from 80.2% in the September quarter. We maintain our position that copper-capable bonders account for approximately 40% of the overall fill capacity today. And it will take several more years for copper-capable bonders to reach the anticipated 75% of install base. With an average useful life of about 10 years, we anticipate there to be a meaningful wire bonder replacement demand towards the tenet of the copper transition.

Switching to LED, about 5% of our ball bonders sold were configured for the LED market, which continues to present moderate growth opportunities. As mentioned last quarter, the cost and performance benefit of consumer devices are becoming more and more competitive, which continues to drive LED adoption. The LED business continues to provide attractive gross profits and an alternative revenue stream beyond our traditional core business.

Turning to wedge bonder equipment, revenue in the December quarter was up by 7% over the September quarter. Quarter on quarter we saw a pick up in demand for the automotive segment. And we anticipate the power semiconductor segment to continue recovery throughout the fiscal year.

While we seem to be recovering from a seasonal trough, we want to take a second to remind investors of the underlying strength of our core business. Due to the ease of configurability, lower manufacturing costs, and significant install capacity, wire-bonded semiconductors are expected to remain as the process of choice for the overwhelming majority of semiconductors. Looking ahead, costs will continue to be a competing driver for the broad industry and definitely for the consumer-based devices in both developed and emerging markets.

Earlier this month, the Consumer Electronics Show has helped to support the expectations for the ongoing roles of semiconductor units by showing innovative products that are driving adoption of the Internet of Things. There were a significant number of connected devices such as wearable electronics, smarter vehicles, Wi-Fi-enabled sensors containing relatively basic wire-bonder semiconductors and/or micro electro-mechanical systems, or MEMS. And this is very positive for our core business as these specific application types overwhelmingly use wire bonders and/or stud bumpers in their manufacturing process.

During the December quarter, we successfully shipped our first alpha version of our advanced packaging product, which is a thermal bonding compression machine, to a key strategic customer. Overall feedback from this customer was very positive. And we are currently targeting an additional customer as well as another shipment towards the end of June 2014. This continues to be an exciting opportunity and we look forward to sharing additional information as it becomes available.

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

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

Net revenue for the quarter was $79.1 million dollars, down $94.5 million from the September quarter. Net loss for the December quarter was $2 million. From a GAAP EPS perspective we lost $0.03 per share in December versus a gain of $0.39 per share in September.

We generated $38.4 million of gross profit with a strong gross margin of 48.5%. Gross margin was up from the 46.5% reported for the prior quarter. This was primarily due to a shift in product mix with expendable tools becoming a larger portion of our total December sales. While product mix clearly plays a larger role, this gross margin improvement would not have been made possible without the relentless execution of our flexible manufacturing model by our operational teams.

During the December quarter, we were able to keep operating expenses exceptionally low at $41 million, compared to $46 million in the prior quarter. With the help from our performance enhancement actions, we were able to reduce our operating expense by 12%, while increasing our R&D spending by more than $2 million over the September quarter.

For the December quarter, our operating loss was $2 million, as mentioned earlier. And we had a tax benefit of $91,000. As noted in our prior calls, we continue to target long-term effective tax rate of approximately 10%.

We ended the quarter with a total cash and investment position of $557 million, up from $525 million. From a diluted share standpoint, this cash position is equivalent to $7.34, which increases our book value equivalent to $9.46. We continue to evaluate the uses of cash that will maximize shareholders' value.

Working capital, defined as accounts receivable plus inventory less accounts payable, decreased by $36.4 million to $127.4 million. From a DSO perspective, days sales outstanding increased to 129 days compared to 84 days in the prior quarter. Our day sales of inventory increased from 37 days to 80 days. Our day sales of accounts payable increased from 36 days to 49 days.

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

Thank you, Jonathan. In terms of our guidance for the March quarter, we expect our business to improve and to be in the $110 million to $120 million revenue range.

Despite softness in the short-term outlook, we remain optimistic for several reasons. From a macro standpoint, 2014 semiconductor unit forecast have been improving as inventory is being digested through the supply chain, and are expecting an 8% to 10% year-on-year growth in units versus 4% growth in 2013. Also our competitive position remains very strong in all products exposed to this trend.

We continue to make great progress on our advanced packaging developments, as mentioned earlier. Customer feedback has been very positive, and our R&D team continues to execute on all our initial time lines. This concludes our prepared remarks. Operator, we are now happy to take any questions.

(Operator Instructions)

Krish Sankar with Bank of America Merrill Lynch.

Hi, thanks for taking my question. I had two quick ones. First, good job on the gross margin, guys. So, trying to figure out is this the new norm for gross margin going forward?

What kind of gross margins do you expect for the March quarter? And also, as a follow-up, any changes in your view on capital allocation? Or is it still focused on organic and inorganic growth? Thank you.

Hi, Krish. Let me answer that question. Gross margin, as you know, historically has been on the average about 45%. The reason why the gross margin actually has picked up, about 190 basis points, actually, of that 2% came from the lower volume of the ball bonders.

Based on product mix, generally that will go up. Once volume comes back in the later quarters we expect the gross margin to be in line with historical trends. In terms of use of cash, we continue to evaluate actually how best to actually enhance shareholders' value.

At the same time also evaluate the later technologies like advanced packaging and other type of technology, that will actually position us well in the future. So, we do actually, as mentioned to many of the investor during conferences, we do evaluate these options with our Board on an annual basis, and will continue to do that.

If I can add to Jonathan a few words. As you know, as Jonathan mentioned, we have increased our R&D spending, even as our revenue went down in the first quarter. So, we are extremely committed to basically R&D development, and especially advanced packaging.

If you look at advanced packaging, I mentioned one machine which we have publicly disclosed, or which was publicly disclosed about a year ago. Actually we are not looking at one machine, we are looking at a family of machine, which will basically use a platform, LEGO concept-based, which will enable us to basically provide a multiple number of solutions for customers.

In addition, we believe that, again, this is probably one of the most strategic turning points in its history in terms of what is happening in the wire bonding industry, in the technology. The limitation that we know, that there will be a 20-nanometer and beyond. And right now, again, as Jonathan said, we believe the best use of our cash to maximize shareholder value is to basically be conservative, keep the flexibility, because as you can read all the analyst reports are mentioning now about this [mid-end] space that I have been talking about for one year.

And that is the only space which is going to grow for the foreseeable future. Everything else is going to go down. And basically our goal is to take a significant portion and play a significant role in this mid-end space.

Thanks, Bruno.

Tom Diffely with DA Davidson.

Yes, thank you. The first question is in regards to the Internet of Things. Obviously we see a lot of expansion in this area with recent shows.

I'm curious, how do you view that affecting your business? Is that going to drive the copper adoption, or do you see just the units, the actual unit growth, is going to be the need for extra capacity?

I think it's a little bit of both. Basically, you have a combination of unit growth, as I have mentioned during the prepared remarks, and also more and more copper adoption, as more and more units are either converted or coming out basically in copper.

The good thing about all these internet things is that they are, in terms of complexity, when you compare it to a tablet or a smartphone, a lot less complex devices. That, therefore, the need for more advanced packaging or interconnect technologies is less. And, therefore, we believe that will provide an opportunity for growth for K&S in the future once all these products starts to really pick up.

Okay. So you're actually seeing the initial designs go straight to copper instead of going to --?

Basically, most of the initial designs, unless they are automotive or medical or in the space of military are basically now going to copper. Very few are using another type of material. So, it is really now fairly pervasive all customers.

At the beginning it was mostly driven by Taiwanese customers. But now we see that coming from Europe, from US. There is such, I would say, a benefit in terms of cost to come up and design first in copper, that the majority of the products either come in wire bonding technology with copper or flip-chipped.

Okay, great. When we look at the new nodes, you talked in the past about how a lot of times a new node comes in, a lot of times it is the advance guys that do it first and so it's flip-chipped and then converts over to wire bonder later. Have you seen any of the 20-nanometer capacity move to wire bonding at this point?

We have, I would say, some customers using wire bonding at 20 nanometer. Not, I would say, in high volume production, because, remember, that the core of the wafers that are in the market today are still 90, 65 and 40 nanometer. So, at 20 nanometer, you start to see some opportunities.

We do believe that beyond 20, it will become, because mostly of the real estate and some other technical challenges, it will become more and more difficult to use wire bonding alone. An advanced packaging will be actually a combination of a number of technologies in which wire bonding will play a role, but also other technologies will play a role. As you know, right now it is a very small market, it's in constant movement, there is no standard.

Sorry. Tom, I just want to be sure your question is really about 28 nanometer.

It was 28 initially but I'd like to hear about the --.

28, okay. So, definitely yes. We have customer at 28. I understood 20, so I was answering at 20. There is, right now, also, we've done some demonstration at 20 nanometer that wire bonding can be used. I was talking beyond 20 nanometer.

That's all helpful. Jonathan, looking at the tax rate, you talked about a long-term tax rate of 10%. Is that what you would use for this year, as well, or are we in a transition period?

I think using 10% would be good in terms of our long term, in terms of the effective tax rate for this year.

Okay. And what is your current onshore/offshore cash?

About 80% offshore.

Okay. And then, finally, when you look at the thermal bonding, I just want to clarify, you said you shipped the first one during the quarter and you expect a second shipment in the June quarter?

That's correct.

Okay. And is that to a different customer or same customer?

Different customer or same customer, it is a different customer and the same customer. Both. But it is obviously a different customer. Either way, in advanced packaging one thing which is critical is to get excellent feedback. And, therefore, we are very selective as to whom we basically ship the machines so that we can maximize the feedback so that the machines can go into beta and then obviously being commercialized. So the choice for customer is very important for us.

Okay. And have you seen any resembling competitive products out there at this point?

They are, I would say, you can call them competitive or alternatives. There are a few numbers -- because we're not talking about a lot of suppliers out there -- that have tried to push beyond the limit of what their existing machine can do.

As you know, there is two parameters that are very important in advanced packaging. One is accuracy; two is speed. You can push pace and you lose accuracy. You can slow the machine and you get more accuracy.

Flip chip is not new. But to make the typical accuracy in flip chip has been in a 10 micron, 20 micron. We're are talking here about 1 micron, 2 micron accuracy.

There is a handful of very small companies that can deliver, I would say, our new machines with this type of accuracy, but are incapable of going into manufacturing because they are way too slow. There are also other suppliers which have been establishing a flip chip business for quite some time that are trying to push their machine beyond what they can do.

And as a result, what happens is that you get a machine that is very unstable and a process which is also very unstable and requires constant babysitting. And, obviously, customers don't like that too much. So, our machine was designed from scratch, and we hope that we will have the best solution available on the market that basically will fulfill these two major requirements of speed and accuracy for the advanced packaging market, starting with the first machine. Because, as I said, it is a family, which is a semi compression die bonder.

Great. Okay, thank you.

(Operator Instructions)

[Kevin McGlee] with [Leesfield Capital].

Thank you for taking the call. I would like to touch on the capital allocation question again. I understand and appreciate the need to continue to invest in organic growth going forward, and technology changes. The significant R&D that you guys spend that you referenced I believe is all financed through operating cash flow.

And I just don't really understand the need to have as much cash on the balance sheet as you do if you are able to fund most of your organic growth through operating cash flow. And it seems a little imprudent to not at least have a share repurchase program in place that would offset dilution that's issued to employees and management, especially at these evaluations.

You mentioned that you have $7.34 in cash. That represents 70% of your share price.

Kevin, this is Jonathan. Let me address that question. You are absolutely right.

We have actually talked about this and analyzed this. It is just at this point in time our Board has asked us to prioritize in terms of the organic initiatives in looking at potentially technology acquisitions or other forums that would actually help complement our portfolio. But, rest assured, that this is a topic that is actually talked about quite regularly, certainly more than just annually, as I mentioned earlier, in terms of how best to use cash and enhance shareholders' value.

So, at the minimum, in terms of if we actually launched to address the burn rate, which we just mentioned in terms of the additional dilution from our equity program for our employees, that is definitely something that we have looked at and will continue to analyze that going forward.

And just to add to Jonathan, it is not like the Company has been hoarding cash for the last 20 years, okay? The Company has only been net cash positive for about three years.

As I said, we are at a strategy turning point today because we know exactly what is going to happen long term to the wire bonding. It is going to become a nice cash cow replacement market. I have mentioned about advanced packaging which is critical to the success of the Company for the future.

As far as when we look at M&A, we are not reckless. As you can see, we have not done any so far. It doesn't mean that we're not looking. If you are familiar with what is happening in the technology space today, you will see that actually good acquisitions come few and far between. And some can be actually quite expensive, because they trade at a very high premium. And that is the way it works in this business.

So we do want to keep that flexibility, at least until for a little bit more time before. And that is basically a discussion we have with the Board all the time, every quarter. What do we do with our cash?

Does it make sense to do a share buyback? Does it make sense to do a one time dividend? Does it make sense to keep the cash a little bit longer because we know that if we want to get a bigger share of this fast-growing mid-end market, which is going to be the only semiconductor equipment market, we are going to have to make non-organic moves.

We cannot just do it alone. And right now we are at this point where we believe that strategically it is the best for the shoulders to be a little bit patient. And obviously there is a point that if nothing comes, we will look at options to return that cash to the shareholders. But I think now is not the time.

I don't mean to be critical, and I really am not critical of what you guys have done. And, like you said, the massive cash balance is something that is a rather new phenomenon. And that is why I'm saying it. I think that obviously you were not in a position to have a share repurchase program in place in 2008, 2009, 2010.

It is just it's gotten to the point where things have changed so dramatically that I think you are in the enviable position to be able to be buying back stock. And I'm not saying go out and buy -- you're not going to be able to buy back $200 million worth of stock in a month or something like that, but you should have an ongoing program at this point where you are at least out there buying back some stock.

Yes, Kevin, that is well noted. We certainly are looking at this and will continue to look at this.

Yes, I just don't think it has to be one or the other. I don't understand what the board's resistance to it is. It seems like they are saying choose what you want to do. I don't know that going out and doing a massive acquisition carries a significant amount of risk.

Like you said, they come along when they come along and I think you would be able to do that even if you had a share repurchase program in place. It doesn't seem to make sense to me.

David Duley with Steelhead.

Thanks for taking my question. Do you have any idea of the numbers, how big was the wire bonder market in 2013? And do you expect it to grow in 2014? And where is the growth going to come from?

There is some publicly available data on the market in 2013. I don't have it in front of me. If you want to know in dollars, it's roughly about -- ball bonders and wedge bonders, you want both?

Sure.

It is roughly about 90% of our turnover, rough, ball play between 80% and 90% of our turnover. Analysts are forecasting that numbers should go up in 2014. Now, whether you want to believe them or not, that is the different question.

Now, something also that happened last year is we had a drastic change in our customer makeup. It is no surprise and it is public information that the [AAC] and [Steel] have made very clear that they will not make significant ball, wedge bonder acquisition this year. So, in other words, that has give us the opportunity, because they were large customers and very resource consuming, to look and expand actually quite significantly our base of customers.

And so, for instance, we have customers in China that we've never had before. We have customers in Taiwan that are actually increasing their demand. We have customers that are among the large ones that have been slow to come to copper that all of a sudden have decided to accelerate the move to copper.

That is the kind of business, that is why actually what you are seeing is why we are still able to grow despite a fairly low Q1 [foot] line, is because, that is what I keep saying to the team, there is life without AAC and Steel. Of course, they have been a large portion of our business. But going forward we have to live with the fact that they will not be a large portion of our business, because they are already pretty much 75% penetrated from the copper.

The latest average for the next five years, which doesn't include LED, is basically about $850 million a year. That's where the market is forecasted to be before it will start the next phase, where it will obviously further go down. And if you ask me a guess, maybe stabilize around the $500 million, $600 million market and become a replacement market.

And I think it was roughly $700 million or $750 million in size in calendar 2013?

Calendar year? Okay. Our fiscal year in 2012 was $791 million. You're talking about our revenue?

What are you talking -- the size of the market?

Not your revenue. I'm asking for the size of the market on a calendar year basis.

I think it was close to $1 billion. And we did about $750 million, which is basically much as with our market share.

Okay, great. Can you give us an idea of the relative size of the wedge bonder business for you guys? And do you expect that segment of business to grow going forward? I imagine it would given what you said but I'm just trying to size up your commentary.

It is a relatively small market. Always has been. You are talking about, depending on the year, maybe $100 million to $150 million market.

But it is an important market because all the power devices need that technology. And we see that there are some growth opportunities, as well, in everything which is battery, like electric [mako] and so, operated. They have been slower to come than we anticipated.

Our market share in there is in the 60%. So, it's not a market that is growing at double digit per year. And therefore we basically are in a recovery phase, and we do not anticipate that market to grow in any big fashion in the coming future. Do you want to add something to that?

Yes. David, actually I have some Gartner's data instead of the RSI. Gartner has basically the wire bonder TAM at just a little over $1 billion in 2013.

They have $1.022 billion. According to the forecast in 2014, it will grow to $1.087 billion. This is based on the September 2013 forecast by Gartner.

And that is calendar, by the way. So it doesn't really match with our -- you have to correlate it back to our fiscal.

Okay. And could you talk about roughly, when you look at your R&D budget, how much is it you are spending on your historical business, and how much are you spending on the new opportunities that you are looking at?

We don't disclose that. But I'll tell you roughly half and half? Very roughly. The reason why is because it is still critical for us to continue to invest in the ball bonder and wedge bonders. Which is why we've actually released some new products last year in the ball bonder space and also in the wedge bonder space.

As you know, we dominate the market in copper. We had a huge headroom over our competitors. When that market comes to a replacement market it will be a significant cash flow for K&S.

This market continues to evolve technology. You need also to invest in that market to continue to keep your market share, even increase your market share. So, it is important that, I would say, to continue to invest in what enabled us, actually, to look at other opportunities.

Therefore, we want to keep and continue being in the leadership position both in wedge and ball bonders. What may change, on the other hand, is the cadence at which we introduce new products. But it still requires quite a bit of investment.

On the other half, what I can to tell you to give you an idea of our investments in advanced packaging, is about a year-plus ago, we had maybe five people and now we are probably at about 120. So it's a significant move.

One of the main reason we decided to do it internally was because we couldn't find anything attractive externally. It is always the measurement of buy versus make. And we have made the decision that there was nothing out there that was interesting. And we decided that we had all the key expertise.

And when we didn't have it, we recruited. And that's why we actually have been able to progress extremely fast. And, as I said, we are on time, based on our initial timeline on advanced packaging area.

On that front, Bruno, I'm assuming that the 20-nanometer node, the one that's going to ramp up in the middle of this upcoming year, is going to be the first node where you really need one of these thermo compression bonders. And I'm not sure your unit is going to be ready for prime time production mid year this year.

I'm wondering, is that the right way to think about it -- that the 20 nanometers is the first node that you want to address with your system? Or are you really targeting 14, or whatever the next node is for the introduction of the system?

It depends on the application. But I think if you want to take some sort of benchmark, 20 nano is probably a good benchmark. But, again, it will not start in any big volumes until next year, which will basically match with our first product that we'll bring to the market on a commercial basis.

And so your product is scheduled to be available, when again, just remind me -- commercial basis?

We have not announced that because this is really a competitive question. What we have said is we shipped last quarter our first (inaudible) machine. What I can tell you it that it is the most complex product developed in K&S history.

From start to scratch it was less than 12 months for the (inaudible) machine. Again we are not talking about a $70,000 bonder. This is more like a $1 million piece of equipment, and there is a lot of moving parts.

And we are on the time schedule that basically we fix ourselves for commercialization. Which obviously we want to do as soon as possible. But, as I said, we are on time. And I cannot publicly reveal our timetable because it is really information that I don't want the competition to have.

Thank you very much.

Thank you. Ladies and gentlemen, we have come to the end of our allowed time for questions. I would like to turn the floor back over to management for closing remarks.

Thank you all for the time today. Additionally, we'd like to mention that the Company will be presenting at the 2014 Stifel Technology Internet and Media Conference in San Francisco on February 10 and 11. Also the Bank of America Merrill Lynch Taipei conference on March 19.

And also the Morgan Stanley Asia Conference in Hong Kong on March 20 and 21. For those unable to attend in person, webcasts will be available on the investor section of our website at kns.com. Please feel free to follow-up after today's call with any additional questions.

Again, thank you all for the time today. Melissa, this concludes our call. Thanks.

Thank you, ladies and gentlemen. Thank you for your time. Today's call has ended. You may disconnect your lines at this time.