庫力索法 (KLIC) 2015 Q3 法說會逐字稿

Greetings and welcome to Kulicke and Soffa third quarter -- third fiscal quarter 2015 results.

(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 now begin.

Thank you, Rob. Welcome, everyone, to Kulicke and Soffa's FY15 third quarter conference call. Joining us on the call 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 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 the of risks associated with Kulicke and Soffa that could affect our future results and financial condition please refer to our SEC filings specifically the 10-K for the year ended September 27, 2014 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. As anticipated we continue to face softness in overall demand during the June quarter. This seems to be directly the result of broad industry cyclicality driven by slower growth in smart phones as well as other mobility and connected devices and lower expectations in the PC markets. These factors have increased inventory levels across the supply chain and reduces the short-term need for incremental back-end production additions for most customers.

We will provide some additional insight on these market conditions and also how we have prepared the organization to handle the cyclicality as we look ahead. Despite the current softness we have reached the midpoint of our June quarter guidance ending the quarter with $165 million of revenue and $16 million of operating income. From a fiscal year-to-date standpoint total revenue is up only slightly in the core business and our recent APMR acquisition has driven the incremental volume.

While cyclicality is a constant issue we have elected through our overall corporate history to size, depth and on our competitiveness of our core markets in addition or our more recent growth initiatives has further strengthened in our long-term view. Considering this view and the overall market softness since our last call, we have a significant opportunity to accelerate our repurchase program, however, we announced a meaningful reduced shares outstanding to drive immediate value at the shareholder level. To date we have executed a significant portion of the overall program and have repurchased about 6% of our share value outstanding. Jonathan will provide additional insight to our repurchase activity after my brief review of the last quarter's business line performance.

From a business line standpoint our ball bonding sales have increased by about 16% over the March quarter due to a mix of OSAT and IDM demand.70% of our units sold were configured for copper capability and less than 5% were configured for LED applications. During the June quarter wedge bonding sales were up only slightly, and our APMR sales increased by approximately 24% over the March quarter.

While our first quarter with APMR, our Advanced Packaging Mass Reflow and SMT business line, started lower, this was largely due to lower general demand and a shorter first period, we believe the June quarter's business level is a more accurate short term run rate for this business with additional growth expected from Advanced Packaging exposure and new product solutions.

The integration process is moving smoothly and our R&D and sales teams have been working very closely together to extend market reach and customer awareness to our collective solutions. While the R&D collaboration adds longer term value likely beyond FY16 meaningful development projects are in progress. Meanwhile our sales teams continue to receive much interest for our APMR solutions across our existing base of customers.

This has also driven the immediate need for additional demo equipment which has increased in our working capital. While these efforts are anticipated to drive mid term growth and long term competitiveness, in the short term the weakened euro has slightly diminished the contribution from this new business line.

As a reminder the APMR business provides K&S with exposure to an excellent group of customers while also dramatically increasing the breadth of our Advanced Packaging efforts providing immediate market access to high growth areas such as fan-out wafer level packaging, system-in package advanced package on package and embedded die. We continue to look forward to sharing our progress with this new exciting opportunity.

Finally for our APLR advanced packaging local reflow customer engagements are progressing well. We currently have 6 machines in the field and plan to add a total of 12 in the field at 90 different customer sites by the end of the calendar year. These machines include both chip to substrate and chip to wafer variants which collectively targets 3D applications largely within the high performance logic and memory segments.

We expect our APMR business to begin generating revenue in the first half of FY16. I will now turn the call over to Jonathan Chou for a more detailed financial review of the June quarter. Jonathan?

Thank you, Bruno. My remarks today will only refer to GAAP results and will compare the June quarter to the March quarter. Net revenue for the quarter was $164.6 million, gross margins were 47.1% with $77.6 million of gross profit. We generated $16.1 million of operating income, $25 million of net income and $0.33 of EPS. We ended the March quarter with a total cash and investment positions of $475.9 million. From a diluted share standpoint this cash position is equivalent to $6.27. The value equivalent was $10.02.

As Bruno mentioned, a recent valuation adjustment has provided an attractive opportunity to expedite the pace of our repurchase program during the June quarter. During the June quarter we repurchased 3.8 million shares at approximately $50.5 million. Since the program was initiated we have repurchased 4.6 million shares or approximately 6.1% of our June quarter's diluted weighted average shares outstanding.

This increased level of recent activity reflects our continued belief in the fundamental long term value of our core business and incremental value associated with our new growth related activities. We continue to deploy capital in an effort to enhance shareholders' value through the repurchase program but also through selective M&A opportunities and organic initiatives.

Our effort around M&A continues to be an ongoing focus within our leadership team. The potential for near term opportunities that would require the use of US cash can affect the execution rate of our repurchase program. At the same time, we continue to invest in our organic initiatives. Looking ahead to the December quarter we expect to purchase approximately $7 million of prototype material to support our advanced packaging development program and customer engagement efforts.

Turning to tax, in the June quarter, we recorded a favorable discrete tax benefit of $13.7 million. This benefit was primarily related to the reduction of deferred tax liabilities due to the change in permanent reinvestment insertion associated with our business structure reorganization. Without these benefits, our quarterly effective tax rate would have been higher than our long term target. This is primarily due to the relative contribution of profit across our entity structure which is largely driven by overall volumes. In higher volume periods the proportion of income generally becomes distributed to lower effective tax rate entities. Our restructuring efforts to simplify our legal entity structure will continue through the September quarter, and we anticipate an additional net favorable discrete tax benefit of approximately $20 million at that point. In the long term, we continue to maintain our 15% effective tax rate target.

Working capital defined as accounts receivable plus inventory less accounts payable increased by $27.6 million to $202.8 million. The higher level of working capital was largely due to increase in business over the prior quarter. From a DSO perspective our days sales outstanding increased slightly from 93 days to 94 days. Our day sales of inventory decreased from 90 days to 81 days, and days of accounts payable decreased from 60 days to 50 days.

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

Thank you, Jonathan. In terms of our guidance for the September quarter we are currently anticipating revenue to fall in the $135 million to $145 million revenue range. As mentioned earlier, this seems to be the result of a broad industry softness which is causing high inventory levels across the supply chain and slower than anticipated growth in emerging smart phone and PC markets.

Based on our general perspective supported by industry research, customer feedback and also comments made by peers over the last several weeks it seems the current outlook is not just affecting the wire bonding market but is much more broad based. In addition to higher inventory levels for most fabless companies in the March quarter some big foundries and IDMs have cut their year-on-year CapEx forecasts, and some have -- will reduce full year revenue targets. Semi industry research and statistic groups recently updated their mid year forecast and expect 2015 to be roughly 8.5% below 2014. Clearly this is not new information for the investment community as many peer valuations and outlooks have been adjusted in general over the prior few weeks.

The second reason explaining a portion of the near term headwind in our core business is associated with some production shift from wire bonding to flip chip. Clearly this is a long established trend that has been occurring since the mid '90s.

Over the last 20 years flip chip has cannibalized roughly 16% of the IC units at a rate of less than 1% of relative flip chip share gains per year. Historically semiconductor unit growth has greatly exceeded this relative share loss, and our wire bonding business has experienced a tremendous amount of growth since the mid '90s. We largely expect this long term trend to continue although production shifts are generally not linear and can drive pockets of volatility. From our perspective higher I/O count at the die level is a more significant driver of flip chip adoption than node shrink.

From a I/O standpoint wire bonding generally is the lower cost production option and therefore the preferred process for devices below 800 to 900 lead count range. While changing packaging types continued to drive cyclicality for our core business and many other equipment manufacturer, semiconductor growth is expected to exceed these headwinds in the long term. As a reference point looking at the total connection required in the industry, VLSI Research expect the necessary connection for 100 to 500 pin count ICs to grow between 8% and 10% CAGR from 2014 to 2019.

Connection for devices in next category about 500 pin count are expected to grow slightly faster at around 11% CAGR from 2014 until 2019. What I mentioned last quarter that at some point wire bonding may become a replacement market, based on this forecast the amount of wire-bonded chip production as well as the install base are expected to continue to grow over the next several years, albeit at a slower rate.

In the short term, we expect excess capacity to be reabsorbed assuming overall unit growth continues. Overall, while we continue to expect wire bonding to be a material portion of our revenue, due to the sheer size of the install base which drives the replacement market, significant growth prospects are inherently limited. Our strategy and efforts over the last three years has driven us to add flexibility to our manufacturing model, closely monitor our costs, reallocate existing resources, add incremental investments toward our organic growth prospects and take a prudent approach to M&A opportunities that provide better exposure to higher pin counts, technology driven and less cost sensitive applications.

This strategy has extended our reach into many new market segments and collectively exposes us to nearly every fast growing application within packaging technology from embedded die and QFN to thermo compression and fan-out wafer level packaging. We continue to anticipate that these new investments will add meaningful long term fundamental improvement to our overall business. This completes our prepared remarks. Operator, we'll be happy to take any questions.

Thank you.

(Operator Instructions)

Our first question is from the line of Krish Sankar with Bank of America. Please go ahead with your question.

Hi. Thanks for taking my question. Bruno and Jonathan, I have a couple of them. I understand that your visibility is limited, but I am curious, given your comments on the September quarter, how far do you think the slow down is going to last? Is this a one quarter slow down or do you think it's going to last into the December quarter?

Well, as usual it's very difficult to predict our business, or to predict the semicon business; even more so our business. If you refer back to previous years, our first quarter has been typically a low quarter, although I have said that a number of new products are going to be introduced, and revenue should start to show up in first and second quarter of next year. So at this point in time, I would say that you know it is difficult for me to answer you on how the first quarter, or the first half of the year for our FY16 is going to turn out.

This is Jonathan. Based on what we see in terms with the various different peers' announcements and data out there, there just seems to be inventory -- basically high level inventory in the marketplace. I think most of the companies were expecting a much better second half of 2015 and it obviously is now much softer. So we believe that it's going to probably take a number of quarters for them to actually digest to get the utilizations up over time.

Got it. Got it. That's helpful. Then on the thermo compression bonders, it looks like you updated a couple of memory shops and you said it might extend beyond to the logic players also. Do you subscribe to the part that this is a very niche market or do you think there is enough demand that you can ship a sizeable number of TCBs down the road?

Well, when you look at the TCB market, whether chip to chip or chip to wafers, there are really two distinct markets. There is a memory market, which has picked up and which we've be involved for probably more than 18 months and that's part of the development of the product. And that will continue to grow and be used in this application because these are the type of technology that you need to build the memory cubes and so on, and we will definitely will see some growth.

And then there is the logic piece of it. We have always said that the logic piece of it will be the beginning of smaller market because the logic guys are going to try as much as possible to postpone the technology for probably two, three years, as the cost of this technology is quite expensive. However, there are multiple views that you can get the way we have designed APAMA machine where you can actually use them in many different applications than purely thermo compression bonding.

One example is fan out WLP package, which are picking up strength, as you know, very quickly. And another one is high accuracy flip chip for high end applications. And these are applications that could actually boost very significantly this segment of advanced packaging market in FY16.

Got it. Helpful. A final question for Jonathan, how much do you have left in the $100 million buyback program?

We have about half of it left. 50. Close to 50, little shy of 50.

Thank you very much. Thanks.

No problem.

Next question is from the line of Tom Diffely with D.A. Davidson. Please go ahead with your question.

Good evening. First question for Jonathan, what is the current break even level?

The break even level in terms of revenue break even is currently about $126 million in terms of our calculation, in terms of the break even from a revenue perspective.

I was wondering how much that can vary depending on mix?

I would say it varies really more related to the level of our organic investments over the next several quarters, where we are continuing to invest in the advances packaging side. Just to give you a sense of our OPEX, it continues to be $50 million for fixed cost and about 6% in terms of variable tied to revenue. We continue to actually watch our costs very closely and we continue to look for opportunity to manage that as we go forward.

Okay. And that's before the $7 million of incremental spending you talked about?

That's right.

Okay. Great. And then Bruno when you look at the customer base out there, where are utilization rates today? And what is the difference between the OSAT utilization rates and the IDM utilization rates for your wire bonding equipment?

Do not disclose their utilization rates. We can't just guess, but I think everybody is more or less in the same boat. The latest data I have seen on the utilization rates for the OSAT are around 75%. That was for September. I would imagine the IDM would probably be there, or maybe even slightly lower, because they tend to outsource more and more. It's now more and more difficult to bring this outsourcing into the factory, because they would rather shut them down or dispose of the assets.

Okay. Then I know over the last couple years you've had a little bit of a diversification of your customer base. What about kind of the mid to smaller OSAT players verses the large players? Is there a difference there? I am trying to scan our which companies, or what customers you think recover first for you?

Well yes, I mean I would say three, four years ago we had essentially the two big guys in Taiwan which accounted for a very large portion of our revenue. Now revenue is over much, much larger base. We have customers in Southeast Asia. But more important, I said on the last call, China is now our first region from a revenue perspective. We disclosed at the end of the fiscal year, but that's where we have made the most progress.

Let me give you a little bit more color. About 62% of our ball bonder volume came from eight customers. Usual suspects from previous years from Taiwan were in there.

Okay. Thanks. Jonathan, when you look at the September quarter, what is the share count that you are looking at?

In terms of the fully diluted share count?

Correct, yes.

After September about 73 million shares.

Say that again, please.

73 million.

73 million. Okay. Great.

When you look at the earnings release and schedule, that's weighted average.

Okay. Then just to clarify you said there was additional $20 million tax benefit in September and that's on top of the 13.7 million you just posted?

That's correct. That's an estimate. That number could actually move a little bit as we actually pursue with the restructuring of the legal entity this quarter.

Finally what was the actual FX impact on you this quarter?

Actually, it's less than 1% in terms of the headwind from APMR.

Great. Okay thank you.

Other expenses we sell and source in US dollars.

Okay. Thanks.

Our next question is from the line of David Duley with Steelhead. Please go ahead with your questions.

Thanks for taking my questions. I was wondering if you can give us what the contribution was of your recent acquisition in the June quarter? What was the size of the revenue there?

The size in terms of the revenue?

Yes. I am just trying to figure out what happened to the core business year over year without the impact of the acquisition.

We have not changed our policy. We don't disclose the business line.

24% or something like that. Can you give us the base number, or repeat what you did say about it?

I cannot give you a number. I can tell you we are on track to execute the information we provided at the time of the acquisition in terms of gross and revenue. If you, of course, compensate for the exchange rates that were tremendous in the first quarter from US to Europe.

Maybe since you don't want to give me the total on June quarter, just tell us what you have said in the past about the size of that business. Where you bought it.

In the past when we acquired it was about $100 million.

Okay. So, roughly $25 million a quarter.

Yes. This is when Euro was actually at about 1.3.

Okay. So does that surprise you about the decline in your core business year over year, or is that what you were planning for?

I see most of the volume is from our core business. It is before APMR. It is due to the Ball Bonder volume that we were experiencing in terms of the soft market. I think APMR is continuing to in terms of being in line with our projection and we continue to integrate that.

I think question was about the core business. The last quarter, we said we would analyze if this was a secular or cyclical trend. Our results talking to customers looking and talking to many analysts is that this is, I would say, more cyclical than secular. Of course when you have a big number and you just go down by a few first ones, you get a big number.

This year I think peers and everybody business here and we are seeing the same thing. That we still hope that this business will recover and see some growth forward, but at a smaller rate.

Okay. Maybe let me ask it a different way. Given you're halfway through the year here and you can see September quarter what do you think the size of the wire bonder business is going to be, or the wire bonder market is going to be in 2015? Or maybe you can remind us how big it was in 2014 and what the direction is? Either number would be helpful at this point.

From VLSI and Gartner, basically for 2005 I have here some numbers here. 2015, ball bonder, which includes stud bump, is an $825 million sum. Yes. That's the number for the other wedge bonder, and advanced packaging bonding equipment. That's what it is, but if you add up wedge bonders, packaging and capillaries, and spares and so on, you are looking at roughly $1.2 billion market versus $1.1 billion last year. So again these were from official source, VLSI and Gartner. And I am not sure; the last estimate given probably was from 2Q, actually. They will revise the number for 2015.

Downward just because the market is obviously not going to grow this year.

I am sorry?

The market's obviously not going to grow this year, so the Gartner and VLSI guys are going to have to adjust their number down.

I don't think it will be flat compared to last year.

Okay. As far as compression bonding revenue you mentioned I think you expect to have revenue in the first half of 2016. Maybe you could help us understand how you think that ramp is going to look. Obviously you are doing zero now. Any hints that you can help us with about how you expect that to unfold would be great.

I think at this stage it is just too early to give you some color on how this is going to develop. But our operation for next year it's not going to be a small number. Okay. So I would be able to give you more color, more updates next quarter or the quarter after.

Did you say it was going to be a small number? I am not quite sure what you just said there.

No, no, no. It's not going to be a small number.

All right. Okay. Thank you. That's it for me.

Okay. Thanks.

Our next question is from the line of [Moheet Gana] with Value Investments. Please go ahead with your question.

Could you talk a more about advanced packaging and apart from that, I have another question. What other platforms do you think that can take off maybe next year? Thank you.

You are talking about from market perspective or K&S?

Both actually. or whether you see moving forward apart from and what do you see and how do you see market going forward?

So I mean I am going to rather stay on K&S, okay? On APMR, we'll have a number of solutions, such as fan out, embedded die, package in package, package on package, and I would say this, well cover more the [lead in] of the market. Okay.

So APMR is the acquisition we have done during the year and we are in the midst to develop two products that are going to be introduced early next year. So if you want to look at this acquisition, there is really two parts of the business. Advanced packaging covered this application I have talked about and also SMT.

Let's not forget that Assembleon or APMR is the larger part of their business. SMT, not just simple SMT, but very sophisticated high end majority of the business industry or market in which we are investing quite a bit so that they can continue, or we can continue to lead in this market which which is a diversification market for us.

If you look at now the other product line, which is the APLR, local reflow versus max reflow, this is a lot more driven for high performance advanced application. So what it means is basically everything if you want to simplify what it means, the main specification for that, for instance wafer fan out is water reconstitution: there is different solution for that. But we believe that we may have a superior one, because speed and accuracy is what counts. If different applications require different type of wafer reconstitution.

So this basically is pack and place and that goes after that into a wafer, and with APMR you can add some other competence that will turn it into package and package or package and package, whatever. That's really that market that we are going after. As far as APLR, which is local reflow, here again what counts is speed and accuracy, but the requirements are a lot, I would say tighter, in terms of accuracy especially, and also in terms of speed.

So they will both if you want, compliment each other in two different markets, one which is high performance market and part of it driving the memory market where TCB is largely used. The other where our machine, which can do TCB, obviously can also do, as I mentioned other things, such as very advanced flip chip application, as well as fan out wafer WLP, but to address, again, different markets. Okay. So that's the spread of application solution that we will launch to the market next year.

All right. And last one for me is a normal smart phone cycle is a two year cycle, so do you think our ball bonding is quite similar to that, or it follows the smart phone cycle?

I would say based on what we have seen there is really no -- it is hard to say there is a normal cycle for wire bonding. It used to be about 19 months, but it shifts.

As you look at the equipment business, it's really a cycle within the semicon business. It is all a matter of utilization. As you follow the front end and back end utilization, in the case of back end, when you see utilization at 75%, it's not good. Because typically customers are not going to order new equipment except if it's for technology transition or technology needed. When the utilization starts to get to the 95% rate or even 85%, then it's very good because they need to buy more capacity. So for the time being at the level we are and we don't know for how long that is going to last the most CapEx need for capacity expansion are going to be, I would say, fairly restrained.

Okay. Thank you. Thank you.

Thank you. The next question is from the line of Albert Sebastian with Prospect Advisors. Please go ahead with your question.

Thank you. Just a clarification Jonathan. What was the share count at quarter end, and do you have an updated number subsequent to the quarter end?

Think I mentioned earlier about 73 million shares, just slightly above it. You will see that when we file our Q. Actually that will be in the schedule mentioned as the weighted average number.

And did the share repurchase program continue after the quarter end?

We continue to implement that program. It's a three-year program.

Can you give us an update to that?

No update at this point. I gave you the update during my script. That's, basically, we're halfway through the program and have another 50 million it to go.

We made an announcement when we announced the program, which was early this year or late last year, so I don't know exactly the time frame, and since that we have bought back $50 million worth of shares. This is an ongoing program that is going to keep going for the next $50 million that we still have.

We'll give you an update during the next earnings call for this current quarter.

Okay. Just one other point of clarification. My understanding is you expect the first purchase order for thermo compression bonding in the first or second quarter of your fiscal year?

That is right.

Thank you.

You're welcome.

Thank you. Our next question comes from the line of Craig Ellis with B. Riley. Please go ahead with your question.

refer thanks for taking the questions. Sorry if I missed it but did you provide any commentary on expectations for gross margins and operating expense in the September quarter?

We only guide to the revenue, Craig. As you know we do internal focus to maintain 45% growth margin. So everything we do we try to actually keep it above that.

Then the second question is a follow up to some of the commentary around OSAT utilization levels, which was very helpful. If the Company's working on a number of new product programs it expects to roll out next year, but if we're currently looking at an OSAT utilization backdrop with 75% with seasonality typically being softer late 4Q and early 1Q, but with real spending pressure not occurring until utilization gets into the mid 80s to high 80s. What does that mean for the ability to really drive material revenue with new product programs next year?

That's a great question, Craig. I think the fact that we are driving off our customers' CapEx budget, you know the timing can shift. Sometimes actual utilizations are up in the 85% they can still delay it. So it is hard to predict and forecast when they're going to actually invest in new equipment.

Typically as a rule of thumb, if our customers' utilization is above 85%, they start to increase their CapEx, okay? Because in the OSAT world when you run your factory at 90% you are essentially full, as you need about 10% capacity freedom to be able to move the parts within your factory to keep some flexibility. If it's a technology move like we have seen, for instance, for copper, it's a totally different story.

Then you may see capacity or capital expenditure done in a way which is not linked to utilization or cyclicality because it's just the new technology that they want and that they will need because it's a customer requirement. In this case you will just see that purchase of that technology be done when they need it. So there are two scenarios.

Thanks.

You're welcome.

Thank you. At this time we have reached the end of our Q&A session. I will turn the floor back to management for closing comments.

Thank you for the time today. As usual feel free to follow up directly with additional questions. Rob, this concludes our call. Thanks.

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