Kulicke and Soffa Industries, Inc. (KLIC) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Kulicke and Soffa Fourth Fiscal Quarter 2016 Results Call. At this time all participants are in a listen only mode. [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. Joseph, you may now begin.

Thanks Rob. Welcome everyone to Kulicke and Soffa's Q4 and full FY16 conference call. Joining us on the call today is Dr. Fusen Chen, our recently appointed President and Chief Executive Officer; and also Jonathan Chou, our Executive Vice President and Chief Financial Officer. For those of you who have not received a copy of today's results, the results released, as well as the latest investor presentation are both available in the investor relations section of our website at www.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 the year ended October 3, 2015. I would now like to turn the call over to Dr. Chen for the business overview. Please go ahead.

Thanks Joe. Before I begin the business overview. I wanted to spend a few minutes to introduce myself and to share my underlying interest in joining K&S at this unique and exciting time for our industry. For the past 29 years my professional experience has been focused on working with front end semiconductor and equipment technology companies, largely based in Bay Area. I am delighted to join K&S as it is my first U.S. company with its headquarters in Singapore and with such a dominant and entrenched back-end packaging position. While this role is clearly very interesting on a standalone basis, the timing could not have been more perfect to make a move to the back-end. Over the past 50 years the accessibility and proliferation of semi-conductor technologies was largely driven by transistor level cost reductions. These cost reductions were undoubtedly facilitated with front end technology improvements. The most consistent of these improvements was the ability to shrink which allowed more transistors to fit onto each wafer. Due to increasing physical limitations and the challenge surrounding each new node, node shrinking is failing to drive the same cost-benefit as it has in the past. In a effort to supplement these lost benefits, this fundamental industrial-wide challenge has spurred an explosion of investment and interest in backend technologies to create new alternative solutions serving both cost sensitive devices as well as more performance centric devices. Through prudent acquisitions and consistent R&D investments, our Company has positioned itself very nicely to directly address these new advanced packaging opportunities. In addition to the significant advanced packaging growth opportunity triggered by node shrink, K&S is also very aligned with other meaningful trends which are collectively addressed through our non AP business. These trends cover three key areas, first, within the IoT opportunity there is a growing demand within automotive we continue to see for price sensitive small connected devices; second, within automotive we continue to see a proliferation of sensing, control and infotainment driving reliability requirements. And the third, within high current applications we continue to see an increasing need for power control and storage. These all presents promising opportunities as we look into 2017 and beyond. I look forward to sharing our collective progress and our dedication infiltrating these expanding opportunities. Turning to the September quarter update, we are very pleased to have exceeded our revenue guidance range of $135 million to $145 million, with $145.8 of revenue for the fourth fiscal quarter. This was a result of nearly every business exceeding its initial target. While we continue to execute on a relative basis, it's extremely important to acknowledge that the current state of broad industry growth has been very limited. While we are confident demand will rebound into calendar 2017, there are no major macro tailwinds as we look ahead into December quarter. During this period of softer demand, we continue to seek out more near term niche opportunities within our key business lines. Softer demand within our ball bonder business was the major driver on our sequential revenue change. While OSATs generally absorb the incremental capacity requirements of the industry our shifting OSAT sales, which account for 93% of our ball bonders sold in the June quarter and only 66% in the September quarter indicate that there is a fairly widespread reduction. Throughout this softening environment, we have again taken full advantage of the flexibility of our operation, operational and the supply chain to scale in a highly efficient manner. Despite the current environment, our ball bonder business performed better than expected as we continue to be positioned for the growing NAND and LED opportunities. The outlook and expectations on capacity requirement to support a growing NAND market continue to be meaningful with our near term outlook. During the September quarter roughly 30% of ball bonders sold supported memory up from our historical average of about 10%. Also copper configured ball bonders accounted for 84% of machines sold and the LED sales come in stronger than our recent run rate, accounting for approximately 11% of ball bonder sales. Turning to wedge bonder business, we continue to gain meaningful traction and are improving our position with major OEMs. Our future rich, Asterion, and the recent launch Asterion EV platforms, continue to penetrate deeper into the automotive and the alternative energy segment and are expanding our served market beyond our traditional space. Additionally, the growing install base of our wedge solutions has also strengthened our position for recurring consumable sales. Consumable account for nearly 25% of our comprehensive wedge offerings. Turning to advanced packaging, within the APAMA business, we continue to be engaged with a broad set of customers through our global application labs and demo tools in the field. We are working very closely with several specific opportunities and we anticipate to ramp significantly in 2018. For our other advanced packaging business, based on our AP hybrid platform, we completed delivery and acceptance of high volume SiP order which spanned the March and the June quarters, shipments decreased as expected into September. We anticipate that the SiP market will be robust in the coming years and K&S will continue to play a significant role in this process adoption. As a reminder, this hybrid performance stemmed from our January 2015 Assembleon acquisition. This business was purchased for just over 1 times revenue and has dramatically improved our presence in advanced packaging and also traditional mass reflow. It also has significant alignment with longer-term, higher reliability opportunity surrounding the automotive segment and the growing need for more accurate placement within the electronics assembly market. Adjusting for the full-year 2015, we have grown this business by 37% in FY16, with the new market opportunity driven by upcoming R&D synergies. We continue to leverage our reuse approach and the collective bandwidth of our global R&D team, while we are also aggressively adding new R&D capacity to drive SAM expansion and feature development. The development pipeline continued to be interesting while major feature releases planned in our second fiscal half of 2017. While we continue to be in softer current demand period and heading into a seasonal softer quarter, we continue to anticipate the growing 3D NAND market will drive capacity requirement in the short term and the industry recovery to a more normalized semiconductor unit growth rate in the midterm. As discussed in last quarter's commentary, the expectation of calendar year 2017 and 2018 we'll return to a more normalized industry compound growth rate of 7% annually. This improves our optimism as overall package semiconductor unit growth was in the 1% to 2% range over calendar year 2015 and 2016 and is clearly a major driver of capital equipment requirements. I would now like to turn the call over to Jonathan Chou, who will cover this quarter's financial overview in greater detail. Jonathan?

Thank you, Fusen. My remark today will only refer to GAAP results and will compare to September quarter to the June quarter. Net revenue for the quarter was $145.8 million, gross margin were strong and 45.7% with $66.6 million of gross profit. As part of the restructuring of our international operations to drive operating efficiency, the Company booked a restructuring reserve of $7 million within operating expenses. Also, associated to the same exercise, the Company recorded a discrete tax benefit of $7.6 million which resulted in a net tax benefit of $5.7 million for the September quarter. We anticipated that this is largely a unique and onetime related benefit as we continue to maintain our 20% longer term effective tax rate. Collectively, we generated $10.3 million of net income for the quarter and $47.1 million for the full fiscal year. Turning to the balance sheet, we ended the September quarter with total cash and investment position of $548 million. From a diluted share standpoint this cash position is equivalent to $7.72, and our book value equivalent is $11.36. Working capital defined as account receivable plus inventory less accounts payable, decreased by $14.3 million to $175.9 million. From a DSO perspective, our days sales outstanding increased from 71 days to 81 days, our days sales of inventory increased from 69 days to 99 days, and days of Accounts Payable decreased from 55 days to 48 days. Also, before I turn the call back to Fusen, I want to share an additional point on changes to our incentive compensation plan from a quarterly to an annual payout. This change now requires us to make an accrual in the first two quarters of the year that is largely unrelated to quarterly performance. These quarterly accruals have an accounting impact on our revenue breakeven level. While this quarterly process provided consistency with our external reporting, the change now provides better alignment for participants focused on longer term growth and development activities. While these changes are fully expected to improve our performance and drive better alignment across the Company, the longer term nature of the plan will cause us to accrue expenses regardless of the quarterly results. Due completely to the fixed nature of these accruals, we are adjusting our quarterly operating expense model to $48 million of fixed expense plus 4% to 6% of variable expense, based on revenue. Based on this shift to fixed expense, we are now targeting a breakeven revenue level of about $125 million. This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the December quarterly business outlook.

Thanks, Jonathan. As discussed in this morning's press release, we are targeting revenue to come in between $135 million and $145 million for December quarter based on our current visibility. As a reminder, during the same period 12 months ago, our December quarter guidance was $90 million to $100 million. As a reference, the current guidance is over 45% higher than in the same period last year. Based on this guidance, we are expecting this to be our best December quarter in the past five years. While we continue to be in the midst of a cyclical correction and entering into a typical quarter of seasonal softness, we are somewhat insulated due to our alignment with many positive near term trends. As mentioned earlier, this trend are within our core business such as a new wedge opportunity and the strength in ball bonder, memory and LED applications; also, within our advanced packaging business associated with a shift in value chain from wafer shrink to packaging as well as across a growing electronic assembling opportunity as high accuracy, high reliability placement is becoming a more essential need in the higher volume electronic assembly space. In short, considering the softer demand environment, every one of our business line continued to be very well positioned in their respective market space and that we continue to further improve this positioning with ongoing and focused R&D investment. Furthermore, we continue to anticipate meaningful industry expansion into calendar year 2017 and 2018 which strengthens our longer term outlook. As we continue to be well aligned with meaningful technology trend and are further driving business growth through ongoing innovation and the feature development, we continue to be increasingly optimistic on our ability to create and deliver material shareholder value. I look forward to connecting with investors and analysts over the coming months to share our progress. This concludes our prepared remarks. Operator, we will now be happy to take questions.

[Operator Instructions] Thank you. Our first question comes from line of Krish Sankar with Bank of America Merrill Lynch. Please proceed with your question.

Thanks for taking my question, and Fusen, congrats on joining the team. I have two quick questions. First one is, in terms of the December quarter guidance. What is exactly the [understanding around] not seeing normal seasonality, is the main core wire bonder business stronger than normal or are you seeing strength in the other segments? And then I had a follow up.

I think the December quarter is a little bit higher than originally we expected from China in our demand, and we also see in our SiP products strength in the memory and automotive, so naturally our wire bonder, wedge bonder and also our SiP hybrid products.

Got it okay, all right that's very helpful. And then a follow up for Jonathan. How much was from [indiscernible] September quarter and of your 548 million in cash how much is onshore, how much is offshore?

I'm sorry, you broke up for a second, I think it's [ready] to cash is terms of cash onshore and offshore?

That's right, and also how much is advanced packaging in September?

How much is advanced packaging in September? At this point in time, we're not breaking out the AP yet, but let me just address the cash question right now. As you know, we actually -- basically in terms of the percentage of actually offshore is roughly I would say substantially most of the cash offer. We have probably about 50 million to 70 million at this point in time onshore in the U.S., and basically the rest are offshore at this point in time.

Our next question is from line of Tom Diffely with D.A. Davidson. Please proceed with your question.

Good afternoon and welcome back, Fusen, good to hear your voice again.

Thank you.

When you look at the utilization rates at the OSATs, are they running at higher than normal levels at this point? It sounds like there's pretty much relative strength across the board for this seasonally weak quarter and so I'm just curious if just overall business activity is higher than it normally is? And if the utilization rates among your tools in the field is higher than it normally is?

As you know, we're seeing the average utilization rate is about 81% in the past one or two months, and was up compared to 78% a few weeks ago.

Okay and you would expect that to stay at high levels then once we get to Chinese New Year you start to see ordering once again?

From a utilization perspective, yes, when we are seeing that is looking pretty good and I think you also asked a question about the OSATs. We basically had about 66% in terms of OSAT compared to IDM so volume has actually not what we consider as high. So when the volumes are lower you tend to see the OSAT percentage come down and the IDM pick up. So I think we're seeing that in terms of this current quarter as well until basically, hopefully by, before Chinese New Year or after Chinese New Year we will get to see more volume. But I think we did mention in the past there is some shift in terms of demand before Chinese New Year in the past two years, so perhaps this upcoming Chinese New Year we may see that again.

Okay. And then you mentioned memory, specifically 3D NAND. Has something changed with the package type going from 2D to 3D NAND that gives you a bigger opportunity, or is it just the fact that there is a lot of 3D NAND construction going on today that requires initial packages?

At this moment it's still normal packaging. We see the demand increasing capacity of NAND at this moment. I'm sorry, NAND and the 3D NAND But they do not use a change in technology of packaging at this moment.

Okay. So you mentioned it was 30% this quarter usually is around 10%. Do you expect it to be up maybe a little bit from 10%, but 30% just represents more of a slug of business going through?

We are seeing memory demands very strong, but I think it's a very difficult to predict the percentage change from here.

Okay. All right. And then when you look at the automotive, how much of that is sensor versus LED business for you at this point?

At this moment majority is not LED. And we are quite actively looking into LED space.

Okay. And then finally, when you look at the, Jonathan when you look at the tax rate of around 20%, historically you guys were going to be a little bit lower than that. I'm curious, is it just a new advanced packaging piece? Or what is it that drove the tax rate up a little bit over the last year or so?

I think it's we have been actually lower than that, but if you look at the last year or even 18 months we've been basically rounding out about the 20% level and we continue to see that. We certainly would try to book most of our revenue as much as we can in a low tax jurisdiction like Singapore, but we are because of the various different product that we sell in the U.S. or Japan, those markets have actually higher tax rates. So this is what we're looking at this point in time.

Okay. I guess one final question, if you look at the cash that's onshore, what kind of cash balance do you need onshore for both operations as well as stock repurchases?

I think at this point in time we are constantly assessing what kind of cash we have onshore. We are in the tail end of our three year $100 million stock repurchase plan, and if we actually do make that proposal to continue on with that after we finish that program, then we will have to bring more cash back. And we will do so. We certainly would need that to bring cash back to support our new program.

[Operator Instructions] The next is from the line of Craig Ellis with B Riley. Please proceed with your question.

Thanks for taking the question guys and Fusen congratulations on coming back. My first question is a qualitative question. It reflects questions that we're hearing from investors. Fusen, as you come aboard and assess the quality of the product portfolio and the intellectual property, where would you say the greatest strengths are and are there areas of the portfolio that you think are in need of either organic technology and product development or inorganic technology and product development?

So Craig if I understand your question right, you are asking how is my view on our product portfolio in terms of IP?

Right. And product that's relative to where there's growth in the market, and are there, based on your assessment, areas where you need to either shift the direction of product development organically or do something inorganically?

Okay. So let me put it this way. I think we all know K&S we have core business in the ball bonder and the wedge bonder. And last year I think this largely account for our maybe a little bit more than 90% of our total revenue. And our advanced packaging is a little bit less than 10%. So what our target 2017 is 15% to 20% of advanced packaging. And advanced packaging we have two products in the market. One is we call APAMA, this is with more accuracy and with a thermo compression capability. And the other product, I think you know that, and we call hybrid system. And with these two system together, actually we can address all high growth in our market. You know that we enter AP a little bit late, but I am confident, I think our target is going to be 15% to 20% revenue for 2017. And I see we have a good product and not of course, we don't address everything with leadership at this moment, but I'm confident I think we will continue to increase our throughput and we will make a meaningful improvement in 2017, and hopefully 2018 we'll get even more market shares. So I don't know if I answered your questions. The high market growth area we define as SiP, I think is a very important technology, and also fan out as well as the high accuracy flip chip and also our C2S, C2W with a thermo-compression products.

That's very helpful. Thanks for the color. The follow-up question is, is something that tacks onto Tom's question and that is regarding the cash balance and where it's domiciled. There's clearly potential for significant changes to onshoring rates under the changing US administration, we're onshoring to become much more favorable. How would that impact the Company's view of what it could do with this cash balance and the priorities for use, whether it be share repurchase or inorganic growth potentially in higher market growth areas?

Okay. I'll answer that. I think in terms of the cash, we reported $547 million and substantially that's mostly offshore. I think with the, obviously with the new administration coming in, the President elect, it sounds like we have to wait and see, it sounds like things could actually positive, if they put through some of the things that he basically made from a promise perspective during the campaign. So we certainly are anxious to see if any of these tax reforms actually go through. Clearly the 10% repatriation rate will be fantastic, but we're always not sitting on our laurels. We basically are always planning on ways to actually bring back cash with minimum cash leakage and we are continuing to improve our efficiency, how we operate our international business as we go which we actually mentioned earlier. So I think given time, in terms of if we have more efficient ways to bring back cash, we certainly have a lot of use for that and that could include all things that you mentioned, including stock repurchase.

Thanks guys and nice job on the quarterly execution.

Thank you. At this time I would like to turn the floor back to Joseph Elgindy for closing comments.