庫力索法 (KLIC) 2016 Q3 法說會逐字稿

Greetings and welcome to the Kulicke and Soffa third quarter FY16 results call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Elgindy, Director of Investor Relations and Strategic Initiatives for Kulicke and Soffa. Mr. Elgindy, you may begin.

Thank you, Melissa. Welcome, everyone, to Kulicke and Soffa's third-quarter FY16 conference call. Joining us on the call is Jonathan Chou, Interim CEO, CFO. As in prior quarterly 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 and Soffa that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10-K for 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 we announced earlier this morning, we are very pleased to have once again exceeded the high end of our guidance with $216.4 million of revenue for the third fiscal quarter. This steep 38% sequential revenue improvement marked the second consecutive quarterly ramp.

As a reminder, our top line increased steeply by 44% during the March quarter. This solid performance was largely due to continue demand of our core ball and wedge solutions, as well as consistent strength within our advanced packaging business supporting system and package opportunities.

The June quarter's top-line revenue of $216.4 million generated $100 million of gross profit, a 46.2% gross margin and $38.6 million of operating profit. Our 38% sequential top-line improvement drove a 230% operating profit improvement and highlights our excellent fall-through performance during higher volume quarters.

Our ball bonding sales increase 64% sequentially, with broad-based pick-up in demand from global [OSATs], which accounted for 93% of all total ball bonding sales this quarter. At OSATs effectively provide the industry with buffer capacity, such a high percentage of OSAT sales implies a very healthy wire bonding utilization throughout the installed base.

Utility and premium smartphones, as well as NAND flash applications drove our wire bonding strength. While the smartphone market is more sizable and is fairly well understood, NAND flash also represents a very interesting and attractive application for our wire bonding solution. The lower price of solid state storage is accelerating consumer and business adoption of NAND-based solid state drive.

Both 2D and 3D NAND production heavily relies on stacks of die connected using wire bonding technology. While we have historically served this space, the emerging trends within memory market related to thinner die, taller die stacks, and complex stacking arrangements have demanded new wire bonding features and process capabilities.

We directly address this market opportunity with a recent released and feature-rich memory bonder, that is well-positioned to meet the growing demand of NAND and also DRAM applications into the future. Since its release, it has been very well-received. During the quarter, copper shipment continued to be significant and accounted for 90% of all machines sold, and LED sales accounted for approximately 5% of all ball bonders sold.

Turning to the wedge bonding business, we were again able to further increase our sequential sales over a strong March quarter. June quarterly sales increased sequentially by 22%, largely driven by emerging applications in alternative energy and storage, as well as share gain within the traditional industrial and automotive segments.

Moving on to APMR, our advanced packaging mass reflow business line, revenue increased slightly over the strong March quarter. This ongoing strength was driven by the continuation of a sizable order supporting a high volume system and package application for the premium smartphone segment. As expected, this demand will taper off during the September quarter.

Finally, for advanced packaging APAMA business, during the June quarter, we have sold our second thermal compression tool, our APAMA bonder. Also just last week, we received our third purchase order, which will be delivered to a global memory manufacturer.

We continue to pursue new feature development across our advanced packaging portfolio and close engagement with a selected group of IDM and OSAT customers through our active evaluation program in our global applications lab in Korea, Singapore, Taiwan, and the US I'll provide some additional details after the financial review. Although in short, we continue to believe the challenges and higher costs related to two-dimensional [no strength] continues to be a key factor driving adoptions of our advanced packaging solutions.

I would like to turn the call over to Joe Elgindy, who will cover this quarterly financial review in greater detail. Joe?

Thank you, Jonathan. 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 $216.4 million, gross margins were strong at 46.2% with $100 million in gross profits.

This higher revenue-driven operating margin of 17.8%, which was up from 7.5% in the prior quarter. The incremental sequential revenue fell through to net income at approximately 44%. During the June quarter, we generated $38.6 million of operating income, $31.8 million of net income, and $0.45 of EPS.

Moving on to tax, during the June quarter, we incurred tax charges totaling $7.5 million. Turning to the balance sheet, we ended the June quarter with a total cash and investment position of $516.1 million. From a diluted share standpoint, this cash position is equivalent to $7.29 and our book value equivalent is $11.23.

Working capital defined as accounts receivable, plus inventory, less accounts payable increased by $7.7 million to $190.2 million, due to the current ramp. From a DSO perspective, our days sales outstanding decreased from 94 days to 71 days, our days sales of inventory decreased from 83 days to 69 days, and days of accounts payable decreased from 62 days to 55 days.

As mentioned in prior quarters, the availability of US-based cash continues to be a major constraint. As a result of this constraint, we have paused our open market repurchase activity and have not made any share repurchases during the June quarter.

Finally, before we end the financial discussion, I'd like to touch on the recent Brexit referendum and provide some insight to our global hedging strategy. At the highest level, we have no meaningful direct operating-related exposure nor sizable customer base within the UK, although we do conduct business within the European Union and other non-USD regions.

Our year-to-date revenue and COGS is overwhelmingly USD-denominated with about 16% in euros. Operating expenses are more diversified, with about 40% in USD, 35% in Singapore dollars, 10% in euros, and another 15% in a mix of other currencies.

Operating expenses denominated in euros are effectively hedged naturally with our euro revenue exposure. For the larger Singapore dollar exposure, we enter into forward contracts with maturities up to six months to limit near-term currency fluctuations through our operating plan.

In summary, we do not anticipate any direct business impacted related from Brexit. We continue to monitor our natural hedges and have the capacity and processes in place to hedge our transactional currency exposures.

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

Thanks, Joe. As disclosed in this morning's press release, we're targeting revenue coming in between $135 million and $145 million for the September quarter based on current visibility. As we look ahead, we are eagerly anticipating meaningful industry expansion into calendar year 2017 and specific opportunities, such as solid state drive growth, and the ongoing adoption of new advanced packaging techniques such as [FANLP] system and package and thermal compression.

Looking at the semiconductor units alone, the incremental growth of the calendar year in 2015 was about 2.8% and is anticipated to be only 1.4% for calendar 2016. In comparison, this is dramatically below the average annual growth rate for the prior five-year period. During the calendar year 2009 through 2014, semiconductor unit growth increased at an average of 6.1% annually.

Looking ahead to calendar year 2017 and 2018, forecasters are anticipating a return to a more normal growth rate, which is expected to drive capacity additions for our solutions. Furthermore, while this unit growth is measured at the package level, the interconnect capacity to place and connect the growing number of die within these packages is expected to also increase.

SIP and NAND are high-volume, fast-growing, multi-die packages that are driving incremental die-to-die capacity requirements and served with our growing base of solutions. The other significant trend that has driven our internal investment is the more meaningful technology replacement cycle, triggered from the ongoing challenges of front-end [nose shrink].

We continue to believe these physical [shrink] challenges can be better resolved with fundamental technology adoption to the back-end process, to drive form-factor reductions, higher performance, and energy efficiency. We are well-positioned to address this long-term trend, as we continue to dedicate R&D resources to extend the market and feature sets of our advanced packaging solutions.

As we continue to be well-aligned with meaningful technology trends, executing on new business growth, driving innovation, and feature expansion within our core businesses, and leveraging our growing balance sheet, we continue to be increasingly optimistic as we look ahead to the September quarter and beyond.

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

(Operator Instructions)

Thank you. Our first question comes from the line of Tom Diffely with D.A. Davidson. Please proceed with your question.

Good morning and good evening. First on the model itself, what is the current break-even level for the Company? Then you talked about an incremental drop-through of -- I think it was 44%. What do you think that is on a go-forward basis?

Yes, the break-even level, Tom, is $120 million per quarter in terms of top-line revenue. That's in line with what we had shared earlier. The fixed cost is $45 million and the variable cost component, which is tied to revenue, is [6% to 7%]. That hasn't changed.

Okay. Great. All right. Then you gave some nice data about how units are a little slower this year and you expect it to go back to normal levels next year and the year after. When you look at the unit growth in the out year, what is your own projection for the unit growth of wire bonded units versus advanced package units, within the context of maybe a 5% or 6% growing market?

Actually, while the unit growth is actually growing, I'd say, 5%, there will be actually throughput improvement or UPH improvement for our machines. So we generally will actually bring that down a couple of percentage points in terms of what could drive the demand for our solutions. So we generally -- would basically allow us to model in the low single-digit, 2%, 3% [about].

And Tom, just generally for the wire bonded packages, they are usually just a hair under that average rate. Right now, VLSI and Gartner from a unit standpoint into 2017 are around 7% from a unit standpoint. But the advanced packaging piece is usually on the higher side, usually approaching 10%, but there's also a good amount of technology replacement at that advanced packaging side, which is the interesting piece. It's a smaller market than wire bond.

Right, okay. Then you look at the -- it sounds like there's three compression bonder customers right now. Are those all three memory customers initially?

Actually, we only referred to only one as memory customers. The other ones, we were silent.

Okay. In general, does this technology -- do you think the adoption -- the wide-scale adoption was memory first for stacked memory chips or is it going to be, do you think, a combination of memory logic components?

Yes, we always believed the memory market will be the first adoption of the TCB as well as actually in terms of the advanced packaging side. Logic will follow later. But obviously, this market, while we do believe it's quite attractive in terms of the market that will eventually develop, which could actually be quite sizable, the timing of it is hard to gauge, but we still believe that memory will go first, ahead of logic.

Okay. Then finally, in the press release, you referred to a slightly shifted seasonal pattern. What do you think is behind that? Obviously, I know the units are down this year and so maybe the utilization rates aren't what they normally are this time of year, but is there something specific, project-based stuff, that is starting to trump seasonality?

If you look at Q4 from a year ago, we actually guided $135 million to $145 million top line and then we actually issued a revenue guidance, which -- between $100 million and $110 million. We ended at $119.2 million, exiting that adjusted guidance last year.

That was the first Q4 fiscal year quarter, a lower quarter compared to -- at least sequentially, and this one will be the second quarter that we're guiding sequentially lower than the prior quarter. But year-on-year, if you look at the quarter compared to the last fiscal year, every quarter is higher than the previous in terms of the improvement for us. So, that is the first point.

The second point is really about, typically we have this seasonal cyclicality, which is tied to the selling season based on the US or western selling season for the holiday season, having all the consumer devices ready for the shelves. We are starting to see some trends where it is starting to shift toward the Chinese New Year holiday season, so there is actually some shifting of that seasonality.

And also the smartphone releases have also switched it a little bit. Specifically, with this cycle, we saw a pause around the same time last year, which basically was also a major driver, we think, in shifting some of the demand into Q3 from Q4.

Okay. The move to Chinese New Year versus the western holidays, wouldn't that push out the business or push it into the fourth quarter versus the third quarter then?

Yes, it could be, but this year is a little bit interesting because of the fact that the utility smartphone makers are actually driving a lot of capacity investments early on, which we actually have seen some pick-up in terms of our ramp as early as Q2 of this year. So there is actually some shift in terms of that, but we're still watching in terms of how the Asian holiday is impacting what we previously experienced in terms of the westernized seasonal selling season.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Please proceed with your question.

Hi. Thanks for taking my questions. I had two quick ones. On the topic of seasonality, as you look it at on the fan-out wafer level packaging, is it fair to assume most of that is front-half loaded or do you see that throughout the year?

Sorry, Krish, we didn't quite get that.

Can you repeat that question? You didn't come in as clear as we'd like.

The fan-out wafer level packaging model that you see, is that typically front-half loaded?

We haven't discussed any specific fan-out wafer level packaging orders, but generally, I don't know if there is a specific seasonality to some of the emerging advanced packaging trends. These broader technology replacement demands don't usually follow the broad seasonal patterns we see in wire bonding, for example.

Got you. Got it. And then the thermal compression bonder, is that still -- the revenue potential still a year out or do you think you're going to see some revenue this year?

The [third order] itself, it is thermal compression bonder that we just received the order for, but thermal compression bonder, you look at some specific applications like high-bandwidth memory, it has been actually pushed out for one or two years. That is something that we believe we are well-positioned for that market when the market is available for us and we continue to actually work with selected customers on that eventual application.

And just to clarify, for the APAMA advanced packaging business, as well our APMR business, that basically gives us a pretty comprehensive set of solutions that serves thermo-compression, fan-out, embedded die, and high accuracy flip chip. Those are covered collectively, somewhat in each, but depending on accuracy and future requirements, the both sets of equipment cover pretty big groups.

We are prepared for pretty much all of the advanced packaging trends, it's just always difficult to know exactly when they come on. But different customers are clearly engaged at different levels and have different sets of activity.

Thanks, guys.

No problem, Krish.

(Operator Instructions)

Our next question comes from the line of Jeff Feinberg with Feinberg Investments. Please proceed with your question.

Thank you very much. Can you guys give a little bit of flavor on the potential growth available to you guys next year with the improved industry trends you've cited?

In terms of our outlook, we certainly -- based on what VLSI has actually projected and what Gartner has, just to recap, VLSI is [projecting] 7.6% in terms of growth rate through 2017 and for 2018, it's 8.4%. And Gartner, they basically project in revenue, not units, which we tend to follow units. It's much more relevant for us, and Gartner has 4.7% and 5.7%, respectively, for 2017 and 2018.

So we tend to -- we certainly would basically be more correlated to the unit growth side, and if you compare to last year, last two years, overall the market actually has [shrunk a little] and now actually in the next coming two years, we should be in the low single-digits side.

Low single-digit what? The industry, you're saying?

It is tracking the unit growth side, as I mentioned. So for our side, we tend to be, we should be around low single-digit, 2%, 3%, thereabout, because this takes into account the performance improvements of our machines, as well.

And Jeff, when we talk about the other opportunities in advanced packaging, in a lot of ways these are new to us. When we look out longer-term market forecasts between SIP, fan-out, thermal compression, package-on-package, this is collectively roughly a $600 million equipment opportunity. In addition, there's flip chip, which is another roughly $400 million.

Currently, we're focused on high accuracy alone, flip chip, but also potentially the larger flip chip market. That collectively is roughly $1 billion opportunity over the next five years, which is fairly significant. When we talk about advanced packaging, it covers basically all those areas.

Just stepping back, big picture, based on what you got for the nine months and the fourth quarter guidance, your revenue growth will be about 15% or so this year. It sounds like there's strong -- I want to make sure I understand the context of the industry improvement -- that there should be nice growth available to you next year also?

Yes. Obviously this is -- so far, we're tracking on a pretty good year-on-year growth. But a lot of it is also the way we position and capture some of the demands in the SIP applications through our wire bonding business, as well as through our advanced packaging solutions for the SIP. Those are, I would say, additional share capture for those markets.

But if you look at the general market from a unit growth perspective, that's really -- for our ball bonder, which is where the bulk of our volume is coming from, we tend to look at it from a low single-digit growth rate perspective. But we'll continue to actually try to offer technology as we have in the past. In terms of copper offering, for example, there will be other type of offerings in the future to try to increase that growth rate.

I'm looking at it from a third-party perspective when we're talking about strong industry growth the next couple of years. The analyst consensus if for declining revenue next year. It doesn't seem consistent. It seems conservative?

Yes (multiple speakers) I agree.

Wanted to make sure I understood the context. Okay. Thanks very much. Thank you.

Thanks, Jeff. Thanks for your questions.

Thank you. Our next question is a follow-up from the line of Tom Diffely with D.A. Davidson. Please proceed with your question.

Getting back to the overall ball bonder business right now, where do you think the split is between wire bonded units and advanced package units, and what do you think the conversion rate from wire to advanced packaging is over the next few years?

Right now, it's just over about 80% of all semiconductor units are wire bonded. Over the last, what, six, seven years, that moved about 2% or 3% so I wouldn't expect it to really accelerate. It seems like that is the saturation point or the limiting -- the [fore] from a wire bonding standpoint.

When we look at advanced packaging, it seems like a lot of that 15% to 20% of what was historically traditionally flip chip is moving to some of these new package types. That gives us the entrance into the advanced packaging market with some of those changes. So again, we don't see a lot of shifted plans to shift the large, low-cost, wire bonded applications to more advanced packaging applications, again a lot of those probably from traditional flip chip.

From a percentage perspective, the degradation from say -- when we start to provide the mix between wire bonding and flip chip was actually started out on the 85% level. The degradation is 1% per year, but in a growing pie from a units perspective.

Yes. When you look at the capacity that's been added over the last couple years now, a lot of it has been at the 28 nanometer node. I know that initially a lot of that was flip chip, but have you seen your contributions from a wire bonding point of view grow at the 20 nanometer and below nodes?

The big runner in the sub-28-nanometer node for us is memory applications and NAND. A lot of other devices under that node are mostly in logic, which moved to flip chip in the late 1990s in a lot of ways. So, it's important, when you look at it, to not look at nodes, but look at the IO count per die -- where at some of those memory applications are at even well under 20 nanometers and still have a stacked wire bond approach because they only have about 60 to 100 IO count.

So when we look at devices, we usually look at the market forecast. We usually take -- assume that devices under 800 IO count would generally be wire bonded. Devices over 800 IO count would usually fall to that advanced packaging world. That's usually a more consistent methodology than just looking at node alone, but when we also look at node shrink alone, it's tough.

Node shrink is becoming pretty challenging, and after SEMICON West, some of the foundries that have a lot of 28 and above capacity have actually taken on some of the new IoT-type applications because they don't require that the shrink at that level, below 28 nanometers and definitely don't want to pay for the cost. Even on 3D NAND, that was a market, which actually went the other way from 10 nanometers to 28 recently, again for the not requiring the multi-patterning approach and the additional costs.

So generally for wire bonded devices, they could go below 20 nanometers. Again, it depends on the pitch and the IO for each one. Right now our wire bonders go in the 35 micron range from a bond pad standpoint, and that is usually below the normal bond pads that are out in the market.

Okay. When you look at projections for the next, we'll call it five years, it seems like a vast majority of additional or new wafer starts are going to be in the 3D NAND world versus logic or DRAM. It sounds like you are pretty well-positioned there, both for current packaging, but also the high density packaging that might arise?

Yes, 3D NAND is really interesting for us.

Okay. Then finally, have you seen any changes on the competitive front between your dominant position on the copper side of the business and then your less than optimal position on the LED side?

In terms of our traditional core business, we haven't seen that much changes in terms of the players that's competing with it. We are still a dominant leader, but we have seen a lot of pricing, let's just say competitiveness through pricing, especially in China. This could be a Japanese player who has actually 5% or actually the second player with 20% market share, but I would say, in terms of the competitive landscape, it is still the same.

Okay, thank you.

Thank you.

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

Yes, thank you. Congratulations on a very strong June quarter. The APMR business, I would have thought that you would have seen more growth in the June quarter. Was it just sequentially a tough comparison because the March quarter had grown quite rapidly?

The second question is, given your comments earlier on the industry outlook, it sounds like, from your perspective, as well as the industry, that you continue to expect ball bonding, your traditional ball bonding business to grow. Advanced packaging may be growing faster, but the traditional business will continue to see growth, as well. Thank you.

Let me just address the APMR side and then maybe, Joe, you can get the other one. The APMR business, as we actually had communicated and shared with the Street, is that we had a sizable order that came through, which really accelerated the performance of that unit. That's actually related to an SIP application order of 60-plus in terms of units and is actually multi-quarters. That went from the March quarter to June quarter and it will taper off in this current quarter.

So this is all in line with expectation and this is for the more performance-oriented smartphone sector. So from a performance perspective, even though it is actually a modest increase from March to June quarter, it is still reflective of that volume order that we received. So from a performance perspective, we are very pleased actually with the performance of APMR and we continue to actually look for other opportunities going forward. Obviously, this sizable multi-quarter order was actually fantastic for us and we'll continue to look for something, but that is something that doesn't come quite as consistent as we like it to be.

But what it proves to us though is that the acquisition of actually Assembleon and through the hybrid platform, it really positions well for the advanced packaging, how we serve our customer in the semiconductor space through these advanced packaging solutions. Whether or not it's APAMA, which is definitely a more accurate -- has higher accuracy, but the hybrid machine definitely has the higher speed and the necessary accuracy to meet the customer's needs in today's requirement.

And then the second question?

The second question on ball bonder and AP, clearly most of the growth we're focused on and have been over the last couple of years has been in advanced packaging and all the new opportunities that are driving that technology replacement of the performance top 20% of semiconductor units. But yes, we also see ongoing growth driven by overall semiconductor units and also the big replacement market within wire bonding, too. From an attractive growth opportunity standpoint, clearly wire bonding is not as attractive, but yes, it's still a growing market because overall semiconductor units are also growing.

And the SIP order that you mentioned, the large unit one-time order, given that it's been delivered and presumably the customer is satisfied, do you expect follow-up orders from other customers? Do you think that, that product of yours has some legs, or you expect to see other orders over the next few quarters?

Well, we do expect the fact that we -- at least with this higher-end performance segment, smartphone segment, we do have actually quite sizable share with this particular customer through an OSAT. So we do expect future, let's just say demand, possible demand, for the same type of applications, perhaps through other makers of these high-end smartphones.

Thank you so much.

You're welcome.

Thank you. Mr. Elgindy, at this time there are no further questions. I would like to turn the floor back over to you for final remarks.

Thank you, Melissa, and thank you all for the time today. One final note before we close the call. K&S will be presenting at the Credit Suisse 17th annual Asian Technology Conference in Taipei on September 7. Please feel free to follow-up directly with any additional questions. Melissa, this concludes our call. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation.