Kulicke and Soffa Industries, Inc. (KLIC) Q2 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Kulicke & Soffa Second Fiscal Quarter 2017 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 & Soffa. Thank you, Mr. Elgindy. You may now begin.

Thank you, Manny. Welcome, everyone to Kulicke & Soffa’s Second Quarter Fiscal 2017 Conference Call. Joining us on the call today is Dr. Fusen Chen, our President and Chief Executive Officer; and 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 release as well as the latest investor presentation are both available in the Investor Relations section of our website at investor.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 1, 2016. I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.

Thanks, Joe. We are very pleased to have exceeded our guidance with 199.8 million of revenue in the March quarter. This 33% sequential ramp reasonably surpassed our expectations and has generated 29 million of net income. Our execution during this rapid phase of industry expansion highlights the flexibility of our operating model and the strength of our core business. This strength drove diversified base of customers during our March quarter, adding much credibility to the anticipated 2017 semiconductor growth forecast. While Advanced Packaging continued to be central to our long-term strategy, and that is anticipated to create meaningful value in the future. The current demand is being driven by our dominant market positions within our large and the highly cash generative businesses. The current robust level of wire bonding, wedge bonding and the expendable tools demand highlights the pervasiveness of our core solutions. These solutions are directly supporting the industry’s broad capacity ramp serving a breadth of high volume production from the most cost sensitive to the most technically challenging applications. Considering healthy utilization rate and improving semiconductor unit forecasts and our broad customer mix in the March quarter, there are many underlying end market driving the current level of business. Specifically, we are seeing continued demand within automotive, industrial, mobile, LED, in addition to IoT and other wireless connectivity related applications. Although equipment capacity is fundamentally cyclical, these underlying markets are expected to continue supporting longer-term unit count forecast as packaging requirements for these applications are all highly complementary to our core offerings. For the March quarter, wire bonding sales increased by 46.1% over the December quarter. The end markets driving this demand was mobile, LED as well as IoT and wireless communication applications supporting RF, WiFi and LTE build-outs. As we have mentioned in many prior calls, this end applications nicely complement our wire bonding solutions. While we had very strong demand stemming from NAND memory last quarter, we have seen this demand return to more normal level during the March quarter. Considering growing need for storage and the solid state drives being more constant, more cost competitive to hard disk drives, we anticipate to continue being a beneficiary of NAND capacity expansion over the coming years. Our wedge equipment business continued strong and that has grown by 5.5% sequentially in the March quarter, after a steep 36% sequential improvement in the December quarter. This ongoing strength is being driven by a diversified mix of global automotive and the industrial application within the U.S., Japan, China, Europe and the Southeast Asia. We continue to target and penetrate into higher growth applications in general automotive, power storage and the industrial applications. Our relatively new power storage market as well as industrial scale solar power generation and the distribution opportunities continue to be current secular driver, supporting our overall Wedge Bonding business. Our Advanced Packaging program continued to be central to our corporate strategy and a key long-term growth driver. In an effort to further enhance collaboration and that drive engagement with customers, we have recently opened our sixth process application lab. This new lab is located in our Eindhoven, Netherlands facility and helps to further enhance engagement with our global electronic assembly and Advanced Packaging customers. Additionally, our cadence on Advanced Packaging future development continues. Later this month, during an industry trade show in Nuremberg, Germany, we are anticipating a key product release to further enhance our Advanced Packaging market exposure. 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 remarks today will only refer to GAAP results and will compare the March quarter to the December quarter. Net revenue for the quarter was $199.6 million, healthy gross margins of 45.2% generated $90.3 million of gross profit. During the quarter, we generated $32.6 million of operating income, $29 million of net income, $0.40 of EPS, very robust performance supported by strong operational execution during a broad-based market ramp. As Fusen highlighted, this strong performance adds further confidence in the growth potential of our advanced wire bonding, wedge bonding and other packaging solutions. Our effective tax rate during the quarter was 14.4%, largely driven by a higher proportion of Asia sales. Looking ahead, we are adjusting our long-term tax rate from 20% to 18%. Turning to the balance sheet. We ended the March quarter with a total cash and investment position of $574.2 million or $7.95 on a per share basis. This net $3.2 million sequential reduction in cash was due to a building purchase and a net working capital increase. On a book value per share basis, we ended the March quarter with $11.83. During the March quarter, we purchased our Fort Washington, Pennsylvania facility for $30 million as previously disclosed in a 8-K filed on January 17. This purchase was highly strategic, financially sensible and secures a critical element of our value creation strategy moving forward. Working capital defined as accounts receivable plus inventory less accounts payable increased by $31.5 million to $187.9 million. From a DSO perspective, our days sales outstanding increased from 72 days to 77 days. Our days sales of inventory decreased from 93 days to 81 days, and days of accounts payable increased from 51 days to 66 days. This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the June quarter’s business outlook.

Thanks, Jonathan. As disclosed in this morning’s press release, we are targeting revenue to come in between $235 million and $245 million for the June quarter. The midpoint of this guidance represents an additional 20% sequential top-line increase over the already strong March quarter. This level of revenue can drive significant operating leverage for our business. As we have mentioned today as well as on prior calls, this demand is coming from broad-based industry expansion and also, a return to a more normalized wire bonding environment. Excess capacity related to our copper ramp 5 years ago is largely digested or eligible for replacement. Our ongoing and the relentless focus on targeted feature development to drive market expansion has undoubtedly enhanced our competitiveness as well as longer-term sales prospect. Our alignment with current market trend driving automotive, industrial, LED, memory and the SiP-related demand was all previously defined as long-term strategical focus areas. This focused market strategy also drives our longer-term development plan in our electronic assembly and our advanced packaging initiatives. Collectively, we are well positioned to benefit from several existing opportunities and also, focus on enhancing our pipeline of new opportunities. We look forward to sharing updates on future calls. This concludes our prepared remarks. Operator, we will now be happy to take questions.

[Operator Instructions] Our first question is from Craig Ellis of B. Riley. Please go ahead.

My first question is just a clarification back to the fiscal second quarter results. Certainly, the revenue came in at the very high end of the guidance, maybe a little bit better. I’m just wondering versus management’s expectations going into the quarter, where were trends perhaps a little bit better than expected.

Yes, I think Craig, this is Jonathan. Let me answer that question. I think we all experienced a fairly long cycle, and we actually had visibility into this kind of a quarter ramp as early as early last year. And I mentioned earlier on previous calls that we got visibility even before Chinese New Year. So going into this quarter and also having experienced a fairly robust December quarter, which is typically our seasonally low quarter, going to Q2, when we set the guidance we knew there was something basically a more bullish kind of a trend. So I think, we said as usual, we set our guidance fairly conservatively, and we generally hit the high end of the range, and we did that. We exceeded again as previously. So the drivers are pretty broad-based as mentioned in the script. And early on, calendar year, last year, it was basically utilities smartphone and then basic memory picked up and all those drivers that Fusen said in his earlier remarks are in line with what we are experiencing currently.

Great. And then more forward-looking, but somewhat similarly in terms of sticking with the product trends. Within the businesses, as we look at the 20% sequential growth that’s indicated in the guidance midpoint, can you just characterize the dynamics across wedge bonders, ball bonders, advanced packaging and expendable tools, so we can better understand the dynamics that you’re seeing bottoms up?

Okay. So Craig, actually, we see the strengths in the multiple front, almost in all every product lines. So wire bonding, actually, I think, high utilization rate in the industry actually helps. Other than that, we see the strengths from wire bonding, SiP and also basically stronger LED and the memory in the end users. For the wedge bonder, actually, traditional automotive device is very healthy. Other than that, our automotive power storage like battery and the industrial power control actually help a lot. In advanced packaging products, a low, I think, this year, revenue is stronger than expected. We still believe our advanced product were coming in roughly about 15% of this year’s total revenue. So I hope that is...

Yes. That’s helpful. And then lastly from me and I’ll hop back in the queue. Nice to see the tax rate come down to 18%, Jonathan. Can you just talk about some of the things that are enabling the company to reduce its tax rate by 2%? And how should we think about the intermediate- to long-term implications of this directional move? Is this where we stay? Or is there potential for the tax rate to even work lower over some longer period of time?

Yes. Good question, Craig. As you all know, we’ve been basically continue to drive more efficiency through our legal entity restructuring that we did last year. And for this particular quarter, we were able to actually capture, first of all, when the volume picked up. We’re able to capture a lot of these volume book in the revenue here in Singapore. As you know, in Singapore, we do enjoy a 5% tax rate. Thanks to the local government here in Singapore. So adjusting our guidance from a, in terms of tax rate from 20% to 18%, it is considered conservative, and we think there’s still some slight room for movement in longer term. But we like to set at 18% at this point in time. It could go down another percent if we see some, more of a sustainable reduction in terms of a effective tax rate.

The next question is from Tom Diffely of D.A. Davidson. Please go ahead.

So you referenced the utilization rates have been healthy. I’m curious what have they done and where are they? And what have they done over the last quarter or so? And what does that tell you for sustainability of this very strong business?

Yes, Tom, this is Jonathan. If you look at the utilization rate that we actually track, you can see that it is actually, is on a, in a sort of positive curve, going from kind of mid-70s to a high-70 percentage level at this point in time. So that’s how we track in the last number of months since the beginning of this year. We’re hoping to see at some point in time, yes. We hope that it may actually go above closer to 80% in the coming months and quarters.

Okay. Great. And is there any way to determine how much of the strong business today is catch up from underinvesting last year versus true end market demand?

Actually, Tom, I think, this is a little bit difficult. Industry ramp, I think, some product they already have. They cannot use anymore because of our ball bonding, we put a lot of R&D in mega product to be very capable. For example, the 3D NAND, we can use our ball bonder even to do a 3D looping. So when a customer need to use a ball bonder to do advanced product, they actually upgrade the system. Other than that, I think, our industry very strong, a lot of IoT demand, wireless actually help a lot. And we also believe, we gain some market shares in the industry. We are also very focused in the spares consumable. So I think everything add together helps.

Okay. Great. I know in the past that you haven’t been strong in the LED market, but last couple of quarters, you’ve really referenced that so I assume that’s one of the areas where you gained some share?

We do believe, we gain shares in the LED market, and that’s our company strategy. Yes.

Okay. Great. And then when I look at the memory market, we get companies in advanced packaging talk about how that’s been a great driver for the 3D NAND and you talked about it being driver for the wire bonder business. Just curious right now, what you seen as far as how 3D NAND is packaged today, and what those trends are going forward?

Well, actually our 3D NAND at this moment are packaged majority by our wire bonding and that which cannot be done before. But since we have advanced looping capability, we can do high pin count, we can do very complicated structures, and that we can do 3D structures. So at this moment, we believe the spend -- the packaging for 3D is wire bonding at this moment.

Okay. And what -- and for how long has wire bonding been able to do the 3D NAND?

We really, given -- of course, this is going to be our hope. We do believe we are very capable, continue to improve our density and also in our looping capability. So for foreseeable future, we believe our ball bonder is capable to do a 3D NAND. Yes.

Yes, maybe. Tom, let me give you an example that we use for the SiP application. If you recall from several calls ago, I did mention that one of our customers try to use a 3-year-old bonder, trying to do certain looping requirement with the 3-year-old machine and that was not possible in terms of the looping requirement, so they had to buy new machines from us. So it has actually progressively improved. And in looping, Fusen said, high pin count we can go up to 2,000 wire now for these highly complex packages.

So Tom, indeed, we see actually some change for SiP used to be done by flip chip. Actually, there, we see some transition go back to wire bonding. So we do believe our wire bonding is the most effective and cost-effective interconnect as long as we can keep up the customer demand. So this ramp I think, is a very healthy and the customer can still use our wire bonder to do advanced product. So that’s why, in my remark, I mentioned pervasiveness of our wire bonder.

Yes. Okay. Great. And then I wonder if you’re starting to see, sounds like in certain applications you are but overall, you’re starting to see any kind of replacement for the copper wire bonders you put in, five plus years ago?

Yes. We are seeing that.

Okay. And then finally, Jonathan, on the model itself. The mix of 6% versus variable cost is kind of similar going forward, no changes there?

Yes, it’s still intact. We mentioned basic 46 -- $48 million plus 6% variable tied to revenue, that’s still intact.

[Operator Instructions] The next question is from David Duley of Steelhead Securities. Please go ahead.

Could you -- it sounds like the wire bonder businesses has shown a nice recovery overall. Do you have an idea of what you think the size of the market will be in 2017 versus ‘16? I’m trying to figure out how much faster you’re growing than the overall market?

Well, we estimate the wire bonding business this year, the total spend maybe about 650, probably in that ballpark.

I’m assuming, it’s up from last year. Is there a number for last year that we compare the 650 to?

Yes, we do believe that this year is bigger. I really don’t have a number, but it’s only to guess. I think this year, probably increase $50 million, $80 million. That will be a ballpark.

Well, actually, I think, VLSI actually, has gone a little higher than what Fusen just said. It’s probably around 700 and change thereabout, but it’s hard to forecast these kind of the TAM does fluctuate a bit, but it is actually a little higher.

Yes. And I would guess just looking at your year-over-year growth rates that the growth of your ball or the wire bonder and consumable businesses is higher than the growth rate that VLSI is forecasting?

Yes. Yes.

And then could you talk a little bit more about your advanced packaging revenue. I guess, I think, it’s mainly you’re getting a lot of stuff from the SiP area. Could you talk about what the trends are in that segment of the market? And I believe, you have some new products coming out to further expand your market in advanced packaging. Could you talk about the timing and whatever you can tell us about those new products?

Right. So we gave the guidance advanced products will all be coming in about 15% of year revenue. The reason, I think, we gave a yearly guidance is because of our advanced packaging, the capacity, still relatively low for overall packaging capacity. We estimate about 15% to 20%. So our goal is really in park or actually, outpaced this growth rate. But at this moment, I think, from quarter-to-quarter, depending on customers investment pattern and sometimes is very, very tricky. So we all seeing copper sales a little bit stronger. We still are seeing about 15% of our revenue coming in from advanced packaging this year. So we see actually, our AT Premier are doing very well. Acting together with the hybrid, and also APAMA, we expect this year will finish along 15% of 2017 revenue.

And just the timing of new products. I think, you have some products coming in this area. What you can tell us about them as far as what they address, and when they will hit, be available?

Okay. So the product for advanced packaging is a thermo compression. And SiP product and the AT Premier. AT Premier is the Wafer Level Packaging. It’s very similar to copper pillar structures, which provide vertical interconnect between chip-to-chip or Chip-to-Substrate. And it’s really unique product, and we are seeing very healthy growth this year. Other than that, I think, it’s our goal in this company, we will continue to diversify our products, and now, we are still in planning phase. So if it more materialize, we would let you know.

[Operator Instructions]The next question is from Manas Tiwari of Value Investment. Please go ahead.

I have a question regarding your order backlog, which has grown phenomenally in second quarter. Can you highlight the segment of the industry which is primarily driving this growth?

I would say the bulk of it is still coming from our wire, the core business in terms of the ball bonder as well as wedge bonder side. That’s really where the volume came from. We did mention sequentially, the ball bonder was actually up quite significantly, somewhere around 46%. But that’s really the volume that’s coming from the broad-based demand for our wire bonding equipment solutions.

So Manas, if I understand your questions, I think you asked about booking. So actually, we did not provide booking. Well, we actually make a judgment and just give our guidance for next quarter’s revenue and only on a quarterly basis.

The next question is from Greg Eisen of Singular Research. Please go ahead.

Could you talk a little bit about the pricing environment and how it worked out this quarter versus last quarter? And what trends you’re seeing say, for the new quarter in terms of industry pricing and how that’s working out?

Well, pricing has always been quite competitive in our space, and particularly in the, our core wire bonding business. But fortunately, because of our throughput, our accuracy in terms of the performance of our machine, we do have some price advantage. So most of the time when there is a competitive environment, our peers in our space tend to use pricing to differentiate themselves. Sometimes they bundle other things too, but clearly pricing is there. That’s another reason why we continue to invest in R&D and improve our solutions, so that we can stay ahead of the, in terms of the competition.

So Greg, let me answer this way. I think in this industry we are clearly #1 in the wire bonder, and we are also number 1 in wedge bonder. So when you are number one, I think you see a less pressure compared to peer in this industry. But in the industry, normally people factor in may be few percents of price erosion and in the meantime, I think the company is doing a productivity improvement, like improve throughput and a cost reduction. So [lovely] I think, this will be watched. So I would say current price environment is not, is healthy for us at this moment.

I understand. I understand. Is it, and just an unrelated question. Is there any change to your capital spending guidance for the year. I realize you spent $13 million on the building and you talked about that last quarter, but any change to what you said previously?

No, there hasn’t been any change in terms of our capital allocation strategy. We’ve been pretty consistent with that. Of course, we do actually present to our Board based on our annual planning process in terms of whether or not there should be any adjustment to that strategy, and we do that once a year as part of our [stock] planning process.

Okay. And finally, the overall semiconductor market growth is, you’ve talked about that before in general terms. Are you just seeing the overall market growing faster than previously? Or again, as someone else asked earlier, is this a catch up from the past?

Are you talking about the overall industry, or specifically, for our company?

Yes. I think he’s referring to...

Both.

He talks about what in that is replacement catch up on previous investment. I would say, overall, obviously, in terms of the volume, there’s still more demand than ramp. This cycle is actually unique, I think, compared to previous cycles that I’ve seen.

I’ve seen that when our customer have a demand for specific products. If they need additional capacity, of course, this will trigger new buy, but if there are products, for example, is obsolete, or it’s not capable to do advanced product I think not only capacity, we also get a replacement. So we believe we’re seeing both. And how to quantify? Actually, I don’t think we have a clear number in terms of percentage. But will be fair to say, I think, the replacement probably will be less than 50%. That will be my guess at this moment in here.

Greg, the other thing is we have seen the Gartner and VLSI adjusting their growth rate upwards. Gartner, I believe was actually, somewhere around 11%, 12% recently. So historically, our industry based on IC unit kind of growth is about 60%. So there’s certainly some bullish sentiments out there by the analysts committee.

The next question is from Tom Diffely of D.A. Davidson. Please go ahead.

Just a quick follow-up. What was the mix of OSAT versus IDM? And then, as you look forward, it seems like you’re seeing a nice diversification of the customer base. Just wondering if you have any comments on that.

Yes. The mix of the -- it’s roughly 80-20 in transit of subcons, OSATs versus IDM comp. [indiscernible] of course.

Okay. Just diversification in the customer base over time, maybe gotten more from a first year heavy load to your second, third tier customers?

Yes. Yes, I would say compared to the copper conversion years of 2011, our customer base continued to be more broader and diversifying, less concentrated since those years and given the fact that especially our solutions like -- in the wedge bonding side are actually, again, to more and more of the automotive, the industrial customers. We are getting -- we do have more and more new customers and that we have to kind of process through with our operations. So I think our customer base, overall, is definitely more broader and more diversified compared to the previous years.

And in general, that’s been pretty good for margins?

Generally, we’re still maintaining our 45% and now even though we said if we kind of broadened the range a bit from 40% to 45% at the group level. In case there’s actually some market share but we are still targeting that 45% or higher.

Thank you. There are no further questions in the queue at this time. I’d like to turn the conference back over to Mr. Elgindy for closing remarks.

Thanks, Manny. Thank you all for the time today. Before we close, we wanted to inform investors that we will be participating in a number of conferences and events over the coming months in Boston, Los Angeles, New York and San Francisco. Additional details are available at investor.kns.com. As always, please feel free to follow up directly with any additional questions. Manny, this concludes our call. Thank you.