庫力索法 (KLIC) 2016 Q2 法說會逐字稿

Greetings, and welcome to the Kulicke & Soffa Second Quarter Fiscal 2016 Results Conference 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 Initiatives for Kulicke & Soffa. Joseph, you may begin.

Thanks, Christine. Welcome everyone, to Kulicke & Soffa's Second Quarter Fiscal 2016 Conference Call. Joining us on the call today is Jonathan Chou, Interim CEO/CFO. As in prior quarter calls, I will assist with the financial and Q&A portion of this call.

For those of you who have not received a copy of today's results, the release as well as the 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 of the risks associated with Kulicke & Soffa that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10-K for the year ended October 3, 2015.

I would now like to turn the call over to Jonathan Chou for the business overview. Please go ahead, Jonathan.

Thanks, Joe. As announced earlier this morning, we are very pleased to have again exceeded the high end of our guided range of $156.4 million of revenue for the second quarter. This solid performance was largely due to increasing demand of our core businesses, in particular the latest ball bonder offerings.

Strong sales within our advanced packaging mass reflow offerings, which all-in-all demonstrates our customers' continued interest and demand for leading K&S interconnect solutions.

Historically, the Chinese New Year holiday season clouds our visibility and understanding of the depth and duration of seasonal slowdowns. Our nearly 45% sequential revenue increase and strong OSAT demand gives us confidence that this recent soft period is behind us.

For our second quarter business results, the top-line revenue of $156.4 million generated $69.6 million of gross profit, a 44.5% gross margin, and $11.7 million of operating profit, up from a slight operating loss in the December quarter.

Our ball bonding sales increased 55% sequentially, with broad-base pickup in demand supported by OSATs in Taiwan and China. This recent ramp and continued demand for our latest [core] bonder offerings reaffirms this technology's critical role in the semiconductor assembly process, and its flexibility in meeting new interconnect requirements.

With the economics of ball bonding firmly intact, we continue to invest in product roadmap and new feature sets aligned to higher-growth segments such as memory, automotive, power applications, as well as fast-growing package types, such as QFNs and SIPs.

During the quarter, copper [shipment] continued to be significant and accounted for 93% of machines sold, and LED sales accounted for approximately 5% ball bonders sold.

Within our ball bonder business line, we also had a nice pickup in demand for our wafer-level stud bumping solution, ATPremier. This offering provides a unique alternative interconnect solution for small form factor image sensors such as CMOS sensors and micro-electromechanical systems, or MEMS, which are both expected to exceed the broader semiconductor industry's growth rate.

Turning to the wedge bonder business, we were able to further increase our sequential sales over a strong December quarter. This continued strength stems from emerging applications in alternative energy and storage, as well as the more traditional industrial and automotive segments.

As we look ahead to longer-term drivers of semiconductor and electronic growth, the automotive segment is expected to play a more significant role than it has historically, and we are well-prepared to execute against this key opportunity. Our deep-rooted long-term customer relationships and install base within wedge and our APMR businesses provide a solid platform to leverage going forward.

Moving on to APMR, our Advanced Packaging Mass Reflow business line, revenue increased significantly, 153% quarter-on-quarter. This dramatic increase came primarily from a sizeable order supporting a high-volume system in package SIP application for the performance smartphone segment. This demand is expected to continue into the June and partially into the September quarter.

Orders of this magnitude were previously uncommon for this business, and were facilitated by the sell synergies anticipated and realized with our acquisition of Assembleon.

Our operational and supply chain teams did an excellent job of executing this higher level of demand. In parallel, our global R&D organization continued to drive new functions and features to further extend our served markets.

Finally, for APLR, our Advanced Packaging Local Reflow business line, we continue to receive inquiries from a broad base of customers and continue to facilitate customers' engagement through our evaluation programs and our global applications labs in Korea, Singapore, Taiwan and the US.

While high-volume thermo compression applications are currently very limited relative to the broader assembly process, we look forward to high-bandwidth memory to be next material driver of this technology. While we are prepared to compete for this business, the market [has] not yet demand mature capacity additions.

We continue to prioritize our development resources to support this program as well as our ongoing collaboration activities with customers.

I would now like to turn the call over to Joe, who will cover this quarter's financial review in greater detail. Joe?

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

Net revenue for the quarter was $156.4 million. Gross margins were 44.5% with $69.6 million of gross profit. Gross margins were down sequentially largely due to product mix.

During the quarter, we generated $11.7 million of operating income, $5.1 million of net income, and $0.07 of EPS. Our operating expenses were slightly lower than our prior expectations due to lower prototyping expenses. Into the near term, we expect to spend approximately $2.5 million per quarter for APLR-related prototyping expenses, although we continue to model quarterly operating expenses as $45 million fixed expense plus an additional 6% to 7% of variable expense based on revenue.

Moving on to tax, during the March quarter we incurred tax charges totaling $7 million. This larger-than-normal tax expense included discrete tax items that netted to approximately $4.4 million. This amount was largely associated with the tax liability arising from a settlement with a foreign tax authority for a previous period.

Turning to the balance sheet, we ended the March quarter with a total cash and investments position of $482 million. From a diluted share standpoint, this cash position is equivalent to $6.82 and our book value equivalent is $10.80.

Working capital defined as accounts receivable plus inventory, less accounts payable, increased by $38 million to $182.5 million, due to the current ramp. From a DSO perspective, our days sales outstanding increased from 90 days to 94 days. Our days sales of inventory decreased from 108 to 83 days. And, days of accounts payable increased from 52 days to 62 days.

Through the March quarter, we have slowed the share repurchase program due to US cash constraints as highlighted during last quarter's call. During the quarter we repurchased 169,000 additional shares at an average price of $10.12, which accounted for approximately $1.7 million of cash outflows. From the program's inception through the March quarter, we have repurchased nearly 7.9 million shares, or 10.1% of our initial diluted share count when the program was initiated.

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

Thanks, Joe. As disclosed in this morning's press release, we're targeting revenue to come in between $195 million and $205 million for the June quarter. A material portion of this incremental demand is stemming from traction within SIP applications, [adjust] in our APMR solutions as disclosed earlier, and we are pleased to confirm it is also within the ball bonding business.

The significant trend of integration, unique feature sets and time-to-market requirements, are clearly contributing to the adoption of the SIP package applications, mostly for connectivity associated with IoT and smartphone applications. As a result, market research indicate SIP unit demand is forecasted nearly double from roughly 13 billion units today, to 25 billion in 2020. This is at the package level, [and dies] within each package will also likely increase over this time period.

SIP applications are integrating individual die through existing and new assembly methods such as wire bonders, mass reflow, thermo compression, and fan-out wafer level packaging to create a uniquely tailored solution contingent on device requirements.

Our technology leadership across our existing business lines and also development efforts towards new features and functions, positions us to provide unique customer solutions for current and future SIP applications.

The ball bonding SIP opportunity is driving current capacity, and capacity requirements driven by the emerging smartphone market where wire bonding serves as a very flexible interconnect to draw a connection between individual die within a system in package. A material portion of our incremental ball bonding demands through the June quarter is stemming from both capacity and technology replacement among top OSATs.

SIP is creating new ball bonding requirements, which are creating new growth opportunity, which we will clearly leverage our market-leading position and capabilities.

Looking longer-term, we also see very nice opportunities in our wedge and SMT solutions, which are providing new avenues of growth specifically within advanced SMT, automotive, and industrial segments.

Considering this opportunity, we have made the decision to more closely organize our marketing team within our wedge and SMT business line to better provide a comprehensive set of interconnect solutions to better serve markets.

Over the next five years, more incremental semiconductor units are anticipated to go into automotive and industrial segments than every other end market combined. While the scale of absolute unit growth is interesting, more important for K&S are the unique automotive and industrial application requirements. Our comprehensive product lineup, designed for performance and reliability, in addition to our deep customer engagement throughout the automotive and industrial space, provide a solid foundation to build from.

In summary, we continue to demonstrate fundamental long-term and sustainable business improvement by expanding our solutions, driving cost reduction efforts, focusing on critical development projects, and prudently deploy capital throughout the cycle. We look forward to sharing progress on our development efforts as we move forward.

This concludes our prepared remarks, Operator. We would now be happy to take any questions.

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

Yes, thank you very much. So, first question, on the APMR ramp, here. Is this the same customer adding, creating this volume ramp, or is this multiple customers that you expect? And, did you say that it was over the next -- the June and the September quarter, as well?

Yes, I would say primarily it's a narrow concentration of customers, but there is one higher-volume customer within that narrow group, Tom.

Okay. You said you thought the ramp would continue through the September quarter?

That's right.

Okay, and can you say what the specific end market is for the large customer? Or for the majority of this business?

It's for the performance smartphone segment.

Okay. Okay, and then in general, what is the relative margin of the SIP business versus kind of the core ball bonder business?

Well, I would say the ball bonding business is clearly, the margin hasn't really changed much. We're holding our ASP well, and the additional, kind of the requirements on the phones in terms of the SIP requirement from the looping side, it is allowing us to continue to actually meet that demand as we speak.

Now, from an APMR perspective, this is a new area that basically for that business line to go into, and we are continuing to actually invest in the business, to basically to better differentiate ourselves [with others] out there. So, I would say the pricing power will increase over time.

Okay, so maybe a little bit of a hit to the margin, but nice margin dollars?

Yes.

Okay. And then, you highlighted the automotive and industrial markets as growth for longer-term. What's your exposure there today, and where do you think it can go over the next couple years?

Well I think, you know, if you look at our existing business like wedge bonding, the power semis, we are already serving the automotive side in terms of the automotive customers. With the assembly on acquisition [of the] APMR business, we actually are serving automotive plus industrial customers such as medical device, other industrial customers in that space. So, we'll continue to actually build on that, and internally we're actually making some adjustments and modifications how we organize ourselves to better focus on those verticals, to better serve those customers.

Is it -- it's a much smaller market today for you than say the mobile consumer is?

At this point in time, but we believe that's actually a growth area for us, especially in the automotive side.

Okay. And finally, when you look at the core ball bonder business, are you seeing diversification in the customers right now? Are you starting to see the second or third tier packaging houses start to move towards copper?

Well, I think the copper side, you know, we're selling 93% copper this quarter, this past quarter, Q2. But, if you look at the top tier as well as actually the non-usual suspect of OSAT, the demand that we're seeing here are across the board. In fact, we have seen a demand coming from the fact that the slightly older ball bonding machines as well as actually some of our competitors' machines, could not meet the requirements that's needed in these, I would say, these lower-end smartphone packagings. So therefore, they -- basically, the [demand] coming from across the board for our latest ball bonding machine to perform the -- to meet that requirement for them.

Okay. Thank you.

Thanks.

Our next question comes from the line of Craig Ellis with B. Riley, please proceed with your question.

Yes, thanks for taking the question. The first question is just a follow-up to that last comment. With the strength in the ball bonding business, in part driven by what sounds like low- to mid-end smartphone demand, can you talk about the duration with which you would expect that dynamic to be in place? If we're seeing stronger low-ends from our current demand out of emerging countries, is that something that should have sustainability through this year and more of a longer-term impact, or is that something that you perceive to be something that's a very short-term dynamic?

Okay, Craig, thanks for that question. I think it's always hard to kind of forecast how long these -- you know, the current ramp will go, but I can say that the current demand is coming primarily from the -- from the Chinese smartphone makers, and through their requirements there's actually demand coming through. We are seeing our capacity being pushed in terms of our assembly capacity right now, and we're seeing some pretty good demand throughout this current quarter and potentially into Q4 for us.

Thanks, Jonathan, and then -- oh, go ahead?

No, no, go ahead. I'm done.

The follow-up, in the press release and in your prepared comments, you identified three key opportunities: longer-term auto; industrial and advanced packaging; and you're reorganizing marketing and field efforts around some of those objectives. Can you just comment on the relative growth of those three opportunities, which are the more material items and where will we see the P&L impacted most significantly as we look out over 2016 and into 2017 from those three drivers?

Those are great questions, and the way we're actually organizing ourselves right now, I'd say previously, is that we do look at these, I would say, verticals. But, it's not as well-coordinated across the [BL win] and that's something that we internally have actually put some emphasis on. We actually have recently announced internally that we're creating a team that can look at solutions, that goes across all the BLs, and it just serves these vertical in terms of industrial, automotive side.

From a growth rate perspective, we are in the process of again, our strategic planning process, which is going from now until the end of May, possibly into early June. And, that's when we actually get the latest data and analyze what the growth rate may be, and see what resource we need to put into that plan for the next three years. So, you can hold that until our next call, we'll have some growth rates and what we think we can do in that area, for you.

Okay, thanks, Jonathan. Then lastly, on the break-even point, it was expected that [it'd] step down into the $115 million to $120 million range after prototyping expenses, which sounded like they were $1 million better in the March quarter -- so maybe around $5 million. Is that still the expectation? And if not, what would the variance be?

Yes, that's still intact in terms of that, what we had communicated earlier, in terms of the drop in terms of break-even level on the revenue. So, that hasn't changed in terms of what we had shared earlier.

Thank you.

No problem.

Our next question comes from the line of Sandy Mehta with Value Investment Principals. Please proceed with your question.

Yes, thank you. Congratulations, Jonathan and Joe, on a very strong quarter and a very strong outlook. The guidance you guys have -- that you've given for the June quarter, that looks to be the strongest quarter you've had in the last 14 quarters, so since 2012. And given that the industry and [click] was sort of at the top just a few months ago, such a strong ramp-up, how should we read that? Does that imply that this upcycle will have a greater length and longevity, or does that also -- or does that mean that there's a change in the mix? So, perhaps with advanced packaging, that your revenues will be both at the trough as well as the peak, would be sort of in a structurally-higher level long-term? How would you read that?

Yes, if you -- the way we actually planned out 2016 during the last planning cycle, we thought 2016 was actually going to be a soft year, and that the [tall] cycle actually will continue clearly through this past quarter. But, clearly, we have seen the kind of demand I just described coming from some of our key customers. So, the way we're looking into it, we're just -- it is hard to forecast in our business, but we do look at basically data from third-party analysts. 2017 should be a reasonable year, at least based on the [fair views] as well as 2018.

So, we believe the [tall cycle] has actually, it is behind us in terms of what I referred to as a soft period, given the kind of ramp that we're looking at currently. The question now is, really, would this continue through 2017, 2018? That's hard to say, to be honest with you, but we certainly are ensuring that we are better-organized to capture these demands, if those opportunities are out there, and we're also looking at ways to actually serve our customers better through just closer coordination across all our offerings within the Company.

So, do you feel like, that you're going to be at a structurally higher level so that the -- you know, the troughs as well as the peaks going forward sort of, that has been ratcheted up a bit for various reasons?

I think part of that is definitely associated with the APMR business, where we're getting some traction, some real sales synergies there from some specific customers in the semi space. Also, I think that on the last couple of years, we had some pretty significant headwinds due to the initial phase of that copper replacement cycle, that sort of ended around the 2013 time frame in a big way for us. That delayed some capacity adds for ball bonding equipment. And it seems like that's largely behind us based on your thesis on that one, that would probably impact your overriding hypotheses on that.

Okay, and just one final quick question. Does it -- since you said that you are constrained a little bit by the cash that you have in the United States, does it make sense to perhaps borrow some amount of money given the current balance sheet, maybe $50 million, $100 million, of borrowing at low interest rates in the US for the repurchase stock? Thank you.

Yes, that's a good question. You know, obviously we're always kind of planning ahead and analyzing how best to bring cash back with minimum cash leakage. As you also have seen, we did add a $25 million line for basically working capital for US usage. But, our ability to borrow is there. The question is really, when we borrow, we do have to pay it back. We have to think about the longer-term repayment options that we have. So, we certainly can do that, but we just want to make sure that first of all, the use of cash is actually appropriate and the best way to manage our business, and best for our stakeholders as well, before we go down that path.

Okay, thanks, and congratulations again on the strong outlook. Thanks.

Thank you. Thank you, Sandy.

(Operator instructions) Our next question comes from the line of Rishabh Jain with Singular Research. Please proceed with your question.

Hi, so my question is where exactly do the ball bonding utilization rates stand at this point of time, given the (inaudible) and then the core -- where exactly -- have you guys seen an upward trend in the ball bonding utilization rates in this quarter?

I think right now, the utilization rates have been largely in line where they have been over the last couple weeks, even into the last quarter, around 75%. And just as a reminder, that's an average mix of through a lot of different customers. It doesn't break out the differences between copper and gold, so they each have their own utilization rates, and I think clearly that some customers' utilization rates are well above that sweet spot at 80%.

I also saw a slight decrease in margins this time around, to about 44.5% from somewhere around 46%, 47% in the previous quarters. So, what exactly do you attribute the lower gross margins to this time around?

Yes, if you look at what we said in Joe's prepared script, it's actually about product mix. So, if you look at also historically, we've been averaging about 75% OSATs and 25% IBM, but this particular quarter is 95% OSATs. So, when OSATs actually, the mix kind of picks up, our margin tends to kind of trend down a little bit. That's also part of the reason.

Okay, and you didn't mention last time around, the APMR market, $250 million or $300 million, and your market share is going to be around 30%. So, is there like, a relation to a guidance or where exactly do you see the APMR market as of today, given the mood about for instance in the market at this point in time?

Well, I would say we are in the process of actually planning out the plan for APMR as a business line for the next three years. What we are excited about is the advanced packaging portion of that business. We're also very excited about the SMT market as well, and that market is if you look at the SMT market, is $2.5 billion to $3 billion depending on the different breakup of that particular total market.

So, our team as we speak, is actually looking at that. How do we continue to be competitive with all offerings in that market, and that's why we have some additional alignment of actually SMT and our wedge bonding team for that, because the portion of that market is actual automotive and industrial, which I had mentioned earlier in the earlier questions.

On the advanced packaging side, we're getting nice traction, so we're continuing to focus on what could be available from a market perspective. But, I did mention in my remark that the TCB side, from the high-bandwidth memory, that seems to be pushed out a little bit to 2017 to 2018, on the advanced packaging side.

So, I think what I like about our current advanced packaging portfolio is the fact that we have an organic kind of developed platform (inaudible) versus the platform that comes from the Assembleon acquisition, we are able to kind of a different part of the needs of our customers within the semiconductor advanced packaging space.

So, in due course, we'll have better information for the market, and what I like about the fact that it's -- we are pretty well-positioned now to at least address the inquiries from our customers and continue to refine and improve our solutions.

And there's not just that, on a little bit I think from the APLR side, the thermal compression business side, I think it's -- new technology adoption is just inherently very difficult to forecast. We continue to believe that advanced [three] packages will drive form factor performance, benefits, and transistor density, to offset the challenges associated with [node shrink], and our R&D team continues to be pretty flexible on drive and prioritize these new development issues based on our market outlook going forward.

Okay, and my last question basically is -- there are two questions, basically. So, due to a high level of cash or any acquisitions on the parts in the common [corridors] then [technically], the potential revenues for the next quarter are about $195 million to $205 million which is substantially higher than this quarter. So, is it mainly because of higher utilization rates, [prime] facilities in terms of the ball bonding [movement]? Or, is it mainly due like, how are [core cap] sales for APMR equipment?

Let me just address your second question, first. I mentioned the demand is actually coming from a lot of the lower-cost smartphone segment, for our ball bonding solution which is actually meeting the SIP requirements. So yes, APMR clearly have contributed to our last quarter's results, and will continue to do so throughout this current quarter which is in our guidance. And so, I would say the growth are -- as far as being compared sequentially -- is coming from those two areas.

In terms of cash, cash on hand, mostly outside US. Our M&A pipeline hasn't stopped. We continue to look at, and we continue to screen out, a lot of busy opportunities. What I'm pleased to see, then, in terms of our kind of pipeline on the management side, we're getting a little bit more refined in terms of our analyses on how we can screen things faster, and so we always say we have actually quite a few. But, the question is, we'll continue to be cautious and conservative in terms of which acquisition we will go for.

So, when we're ready, we'll return, and we'll be pleased to make that announcement. But, at this point in time, we don't have anything to announce.

Okay cool, all right. Thanks a lot.

Thank you.

(Operator instructions) Our next question comes from the line of Mohit Khanna with Value Investment Principals. Please proceed with your question.

Hello guys, congratulations for the strong set of reserves and guidance there. I just wanted to talk about a little bit on (inaudible) SMT market strategy. What do you think, could you get a higher market share? Do you believe it is pricing power that you have, or better and latest technology in these two segments? Thank you.

Yes, I think on -- from the SMT side, there's a pretty big pool of customers that are set aside to that niche automotive and industrial market, which is a small segment of the broader SMT market, although it requires a higher liability, high quality interconnects that we're largely qualified with. In addition, from a wedge bonding standpoint we also have a nice pool of strong customers that are associated with those same segments, and in a lot of cases those customer names don't necessarily always overlap. So, there's a lot of cross-selling opportunities that we see.

With that, we decided to help reshape the marketing teams by closely organizing those from a business line management standpoint, and I think generally in the longer term, a fairly significant portion of the APMR business from a recurring revenue standpoint as well as the new business is also associated with that SMT space. And I think we can have, we have some pretty nice leverage again from as a multi-business-line standpoint that's involved in both of those automotive and industrials side.

Okay, fair enough. And on the ball bonding side, do you think BBA bonding is something new that is driving up sales of ball bonders currently? Thank you.

This really was interesting, I think we mentioned it about two years ago on our earnings call, and where they basically use wire bonders and more of a -- as sort of a replacement to copper filler, right? And [that's] the angle. And I think it's interesting, again, changes like this don't always happen that fast on the back end side although as fast as the changes that happen on the consumer front, and sure -- you know, we're interested. Our engineers in [Fort Washington] worked with them, those guys, a couple years ago. Yes, it's always interesting. Just like [sep width] wire bonding, it's always nice to see the flexibility of a wire bonder get reused in a newer kind of process, and we've seen that in the past with EGAs, we've seen it with QFN, we're seeing it with SIP, and potentially with [DVA]. So, it's nice, and I think from a performance technology standpoint within wire bonding, our wire bonders have the capabilities to do other things than just direct LED or simple discrete wire bonding. That sort of separates us from our competitors.

All right, thank you. Thank you guys.

Thanks, Mohit.

Thank you. We have reached the end of the question-and-answer session. Mr. Elgindy, I would now like to turn the floor back over to you for closing comments.

Thanks, Christina. As a final note, the Company will be presenting at the Stifel Technology, Internet and Media Conference June 6 and 7 in San Francisco. Thank you all for the time today. As usual, please feel free to follow up directly with any additional questions. Christina, this concludes our call. Good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.