Hello and welcome to the Kulicke and Second Quarter Results Conference 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 turn the call over to Joseph Elgindy, Senior Director of Investor Relations for Kulicke & Soffa. Please go ahead.

Thank you. Welcome everyone, to Kulicke & Soffa’s fiscal second quarter 2022 conference call. Joining us on today’s call we have Fusen Chen, President and Chief Executive Officer; and Lester Wong, Chief Financial Officer. For those of you who have not received a copy of today’s results, the release, as well as our supplemental earnings 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 2, 2021, and the 8-K filed yesterday. With that said, I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead Fusen.

Thank you Joe. We continue to make significant progress toward our long-term targets and remain well positioned to support significant and fundamental transitions occurring within the Automotive, Semiconductor and Advanced display markets. I will provide a brief update to each shortly. In parallel, industry growth through calendar year 2022 is still anticipated to remain well-above average, creating the ongoing need for capacity expansion across our served markets. We continue to be in a multi-year industry expansion period, which is consistent with market assumptions shared at our Investor Day last September. Before discussing our business performance, I would like to provide our perspective on the Russia-Ukraine war and COVID-related shutdowns. At this point in time, we do not anticipate these events will materially impact our outlook and would like to provide some additional context. First, I would like to address the humanitarian crisis and express our concerns and compassion for a prompt resolution of the Russia-Ukraine war. We do not expect K&S will have any meaningful direct-operational or demand impacts due to this conflict. For the broader semiconductor industry, material and commodities costs for items such as noble gasses, may increase, although we do not anticipate this to be a major concern to our business. Separately, we wanted to also provide an update related to the Shanghai COVID lockdown. Our consumables facility in Suzhou China, where we produce capillaries and hub blades, continues to be fully operational. Logistic challenges increased temporarily, but our production and supply-chain teams proactively identified alternative routes mitigating the impact. To reiterate, we do not anticipate either of these recent events, to significantly impact our outlook, and we remain focused to continue proactively managing our own supply-chain risks very closely, as we have successfully demonstrated over the past two years. Overall, the industry remains very resilient, and…

Thank you, Fusen. My remarks today will refer to GAAP results, unless noted. As Fusen mentioned, during the March quarter we continued to enhance our fundamentals and growth prospects by executing on internal development goals, driving external partnerships, and returning value directly to shareholders through our increased dividend and aggressive repurchase activity. We believe our business and cash generation potential, have improved in a consistent and sustainable way due to our ongoing strategic execution and participation in long-term technology transitions Fusen outlined. In addition, we continue to make progress to achieve our long-term financial targets. During the March Quarter, we generated revenues of $384.3 million and very strong gross margins of 52.5% up over 400 basis points sequentially. This strong gross margin performance highlights our consistent operational efficiency and improving product mix, which includes an accounting true-up related to a long-term and ongoing customer project. Without this true-up, gross margins would have been just above 51%, in line with our long-term targets. Non-GAAP operating expenses came in at $66.8 million during the March quarter as some of our SG&A plans were re-prioritized delaying spending to the June quarter. Tax expense for the quarter came in at $13.7 million and we anticipate an effective tax rate of around 13% for the full fiscal year. Non-GAAP net income came in at $121.5 million driving $1.95 of non-GAAP EPS during the March Quarter, significantly above expectations, due to stronger gross margins and lower expenses. Turning to the balance sheet, days of accounts receivable increased slightly from 84 to 86 days, days of inventory increased from 75 to 104 days and days of accounts payable decreased from 56 to 49 days. During the March quarter we generated free-cash-flows of $69.8 million and ended the quarter with a net cash balance of $415.6 million. In…

Thank you [Operator Instructions] Our first question today is coming from Craig Ellis from B. Riley. Your line is now live.

Yes, thanks for taking the question and guys congratulations on the very strong strategic initiative execution. First two product related questions. First on the LUMINEX side, can you give us some color on whether the orders you’re receiving are for R&D related use or are those production tools, and can you give us some indication on order size and then on the NAND side, is it your sense that the demand For NAND is additional layer count work that customers are doing or is it capacity or both?

So Craig, our first generation is LUMINEX, is a PIXALUX and LUMINEX is a second system is a laser base and provide much higher productivity. So, I think this is really a huge market in the meantime, customer need to have a higher productivity. That’s why we introduce this system. So to answer your first question, we actually ship, we already in a three side for qualification, normally qualification will take about six months to nine months to finish it or sometimes take a little bit longer, really depend on complication in the customer side. So after that, I think even successful will be a high volume order. So actually LUMINEX are at the initial stage for qualification. We have a three qualification side and the order actually probably is also actually will be shipped and then also need to be qualified. So at that is a stage, I think are many customer are waiting for our system for qualification. And hopefully after qualification, we will see higher growth of our revenue related to LUMINEX probably second half of 2023. So that’s our view. So if I miss any other questions?

Got it. Yes. So one following up in demand drivers for strength is that layer account work for customers or capacity ads. And then on the financial side Lester, can you just comment on two items, one what drove the upside to gross margin, excluding that true-up that you mentioned? And in the past, I think the company identified potential for $1.58 billion in revenues this year. What’s the company’s view on revenue potential this year versus what it expressed three months ago? Thanks team.

So Craig, I think your question about NAND. I expect even stacked NAND. Okay. So actually in my, stacked NAND we have absolutely, leadership position, a dominant position and we see actually NAND grows nicely, in my script, actually I mentioned about stack DRAM. So the stack DRAM actually, the process for connection between stack DRAM was user TSV, right? So in this case, we are working with a leading customer, try to actually replace a TSV by vertical wire provided by our actually process waiver label packaging stud bumping process, so to reduce a cost and also for putting all the phone factor of TSV. So that was my remark in the script.

Got it. Okay.

Hi Craig. So as far as the gross margin upside yes. Besides the onetime accounting true-up. I think the upside was again, as we talked about many times before, it’s a lot depending on product mix. So I think both in the ball bonder business unit we sold less LED bonders and more higher power computing bonders, which gave us better margins. That’s also true in wedge bonder, we also sell the higher margin product in wedge bonder for power management. And then also for this quarter, the split between capital equipment APS, APS actually was a little bit higher percentage this quarter and APS as has a higher margin. And finally, we also besides product mix, what affects the gross margin is customer mix. So our customer mix shifted a little bit more to the IDMs versus the OSATs which generally also give us a slightly higher margin. So all those factors together, in addition to the onetime accounting true up gave us a very strong over 52% gross margin.

Excellent. And then finally, on the full year revenue view Lester.

Yes. So Craig, in this moment actually, although we still seen some shortage some a little bit headwind for industry like a shortage in the material mainly is a component, I see, and a waiver capacity also COVID related challenge cause some logistic and shutdown in the customer side. But we also still seen the wafer capacity will increase in the second half of 2022, this year. So at this moment, the end marketing demand, we remain still very strong. So it’s our view. We still think, 1.58 actually is achievable accountable at this moment.

Thanks guys.

Thank you. Our next question is coming from Tom Diffley from D.A. Davidson. Your line is now live.

Yes. Good morning. Thanks for the questions. So first I just following up on your last comment, what is your expectation for industry unit growth? And perhaps if you can quantify the wafer capacity growth you see for this year as well and where that, how it compares to a normal or typical year?

This year actually I think is a less than last year. So, we actually already put into our focus. So it’s our view probably wafer capacity will increase a little bit more because we only have we – our year actually finishing in September, right. So, we probably only have initial three months to probably enjoy if it’s come additional wafer capacity. So actually our view of unit count [ph] does not change, from beginning of the year. Right. But was a significantly lower than last year. I think last year was much higher than 10%. Right. So this year is a normal years.

Okay. And I think you made a comment earlier that you thought that the wafer growth, you could see it going through 2024. Does that for 10, I guess then for pretty strong unit growth over the next couple years as well then.

Yes, I think that’s third party view also, I think the next few years, the unit count, I think normal for us probably is above 6%, maybe 6% to 8%.

Okay, great. And then a lot of the equipment guys are seen fairly mixed business between the leading edge wafer growth capacity and the trailing edge. From your point of view, is there one of those that particular better driver? I know historically the trailing edge has been a better driver of wire bonding, but since you have so many projects, now that’s near the leading edge. I was curious if that also is going to be a fairly nice driver for you for the next two years.

Well, I think in my remark, I mentioned this quarter, the majority of our bounder actually go to the fair, just finish our construction, right? So I think both, leading edge and no more like IoT, all these devices, both capacity will expand, of course at this moment, I think because of front end capacity need to take a much longer time to prepare. Right. So I think probably investment a little bit heavy, but at this moment, I think both again and the front end waiver advance and the, the normal wafer actually both capacity will increase in the second half.

Okay, great. And then finally can you talk a little bit about your partnership with PDF Solutions and the creation of the closed loop assembly solution? How does that, do you think impact revenue going forward? Are you going to be able to create some recurring revenue streams just from the data flow or how do you view that longer term?

Right. So I think at this moment, the real time monitoring, all the information convert, become a closed group is a very important because of the process and everything gets in a more complex. So partnership we do believe is added value to customers in terms of efficiency, throughput and the [indiscernible] analysis. So this I think at the first one or two years later on after we get an enough experience. We probably will help our APS revenue. Right. That’s our view.

Okay. Thank you for your time today.

Okay. Thank you.

Thank you. Our next question is coming from Krish Sankar from Cowen and Company. Your line is now live.

Hi, thanks for taking my question. I had a few of them. First one, can you guys tell, where the wire bonder lead times are today?

Yeah, so Chris, I think wire bonder lead time is about four and half months.

Four and a half months. Got it, got it. Okay. And then I think if remember, right. I think Fusen kind of, I understand there’s a lot of capacity constraints, et cetera, but you see, okay. With the $1.58 billion number for this year, I’m just kind of curious at what point do you think some of these, growth initiatives like the auto advanced display et cetera will start offsetting your legacy wire bond or is that like the way down the road?

Okay. So Krish maybe I answer maybe not from a number point of view, right. As you know ball bonder actually is a big business and used to be very cyclical, but in our, in my view, actually I think what we try to do is make sure the ball bonder, we have leadership position and also ensure ball bonder grow on top of a new initiative we have. Right. So actually overall, I am quite bullish about future of the ball bonder, right? So let me give you example, I think the whole wall, the ball bonder represent about 65% of a market share for total IC packaging solution, right? So whatever capacity increase, in a war in is can be high end, can be medium end, can be low end devices. The ball bonder actually represents 65% of market share to packaging, over all is IC. And so I think ball bonder demand will continue to grow actually because of in addition to yearly semiconductor unit growths, and we see the global ball bonder continue to find new application to grow. I’ll give you a few example. I think we talk about the multi die, right? This multi die actually provide, actually in the connect, not only between a die to substrate, but also between a die to die. So because of this, it’s also, kind of a, advance packaging. You put, a difficult to that maybe it’s not advantage to that, but actually, increase actually transistor density, right? So increase actually also work, the capital intensity. So we really see the growth of this multi-die. The second application I am telling you is we are entering 5G a lot and they are, multi-die actually in a package between a die to diet there may be a different…

Got it. Very helpful, Fusen. Then the last question in the past, you mentioned TCB Thermo compression revenues, could be around [indiscernible] million to an $80 million FY 2023. Is that still a good number to you?

Yes. Actually we are quite bullish on our TCB. And TCB actually we are full market, right. We focus on mobile. We also focus on heterogeneous integration, and also I think in the CMOS imaging sensor and also heterogeneous integration, and all this full application, I think will grow nicely. So, I think we – our goal right now is higher than original we show during our Investor Day, I think also [indiscernible] mentioned a little bit about for this. We believe a TCB will continue to grow strongly. But one concern about TCB is fracs of course contamination that will not be able to extend to very fine pitch like the below like 20 microns. But all fluxless in a capability it’s a very unique process, can actually provide very clean copper to copper service, and we believe it extendable almost to like a 15 micron space, right? So, we actually already have a customer in mobile, also in a CMOS imaging sensor, silicon photonics, for optical transceiver and also heterogeneous integration. So, I think 2023, next year, we actually aiming, close to $100 million. I think the numbers should be, what we show to our Investor Day, right. But we do believe TCB provide really significant gross opportunity for us for coming years.

Got it. Thank you very much, Fusen. Thanks, Lester.

Thank you. [Operator Instructions] Our next question is coming from Christian Schwab from Craig-Hallum. Your line is now live.

Hey, good morning guys. Great quarter. Just a couple quick questions that haven’t been asked. As we ramp the LUMINEX, should we expect that gross margins to be in line with a corporate average, or is that going to be slightly better or slightly worse?

Hi, Christian it’s Lester? We expect LUMINEX again, as we said previously, because it is an advanced display. One of our more advanced products. We believe that actually it’ll be higher than in terms of a little bit higher than the corporate margin. We think it’s going be one of our higher margin products, because we believe it’s going to be one of the leading products in the space. And also I think there’s great demand for the products in mini and our micro LED.

Perfect. And then, can you remind us, I know you guys talked about this being a substantial market opportunity years by your bonding business, given the acceleration adoption of being micro LED, and your dialogue. I mean, can you give us a three to four year path about how big you think that business could be again?

So Christian talking about the advance display right?

Yes.

Okay. So if you remember, I think 2021 is the first years, we enter this high volume production. In 2021 we guide $80 million we attribute, this year we also guide about $80 million, $80 million to $100 million. We believe this year, we will end close to a high end, close to between $80 million to $100 million close to a high side. And the next year I think, we will have most revenue from PIXALUX and LUMINEX, but our goal is LUMINEX, I think should be much higher in the futures, but because of – we are still in a qualification stage, the qualification can take a long time, but we are quite bullish in qualification should do very well. So second half of 2023, we should have some meaningful revenue from LUMINEX. So, we expect a $100 million and more. And after that, I think it can grow much, much faster. Right. So we will probably share more detail in the next few quarters when we have a more detail information.

Okay, great. Thank you for that clarity. And then as it relates to the aggressive buyback plan, and then a slight follow up to the partnership with PDF Solutions. Do you think we’re at a stage where, there’s limited M&A opportunities to create greater scale for the business through M&A versus just repurchasing stock, or do you think the best way is, doing what you’re doing invest aggressively in which you know and understand in a stock that’s undervalued as well as expand opportunities through partnerships, but like a PDF Solution versus maybe more consolidation in the backend if you will.

So, Christian, I think we look at all three of the areas you talked about. I mean, as we’ve shown for capital return, we have a very attractive dividend, which we increased every year, right. In addition to that on a share buyback, we did a very on an opportunistic basis, the open market repurchase, which we’ve also been pretty aggressive on. And then obviously we did do the ASR of $150 million. So, we do believe that the stock is undervalued currently and definitely undervalued considering all the exciting growth factors that Fusen talked about. As far as partnerships, we’re always open to partnerships, whether with PDF, other people, in terms of providing better solutions to our customers, and also monetizing, these solutions, and then hopefully these will become more sustainable. But we don’t actually think that M&A is not something we would look at. We’ve always looked at it. And I’m not sure whether we look at it from a consolidation standpoint in the back end. I think what we look at is to basically adjacency, particularly in things that, again, we think there’s a lot of opportunity and automotive and advanced display along the supply chain for mini and micro LED. I think we look; we’re looking a lot of different things there, as well as, things that enhance our core technologies, and basically accelerate our development. And that was shown for example, in the Uniqarta acquisition. Right. So, I think we consider both capital returns to share repurchase and dividend definitely partnerships with people like PDF. But also we definitely are not saying that M&A is not something we would consider. We think definitely there are opportunities in M&A.

Great. thank you for that clarity. No other questions. Congrats on a great quarter, and a great outlook. Thank you.

Thank you, Christian.

Thank you. Our next question is coming from David Duley from Steelhead. Your line is now live.

Yes. Thanks for taking my question. Lester, I was wondering, I think it was at your Analyst Day, you talked about having gross margins improved by about 500 basis points from, I believe a 47% rate. And we just saw that you achieve that gross margin target or rate in this current quarter, but it was mainly driven by mix. And as you mentioned, a onetime true up. I think when you were referring to the 500 basis points improvement of gross margins before it was going to be driven by lower costs and new products, particularly, I think a new wire bonder product. I was wondering, if you could give us an update where you are with the new product initiatives, and if the new products continue to come out in the future, will gross margins perhaps grow higher than the 50% or 52% range?

Well, Dave, I think we said 51% to 52%, and you’re correct. You have a great memory. We did talk about the core business. I mean, Fusen’s really driven cost reduction over the last couple years, we’re continuing to drive cost reduction down, which will help our margins. I think also we do have new products in our core business, both in ball bonder as well as wire bonder. And these new generation products actually, we’ll have very attractive ASPs because with their UPAs as well as their accuracy, the cost of ownership to our customers actually are falling. So therefore we can maintain healthy ASPs. We look at cost reduction always; we built that in right from the beginning. Now, Fusen has really instilled a culture of cost savings from engineering, all the way through supply chain. So, I think going forward, we do believe we will reach a long term target of the gross margin in the 51%, 52% range. And that’s both from our very strong core business to cost reduction and new products, as well as the new vectors in automotive advanced display and advanced packaging.

Okay. And a clarification question. What should the share count be? Maybe you mentioned this, but I might have missed it. What’s the share count going to be in Q2 and going forward?

Dave, you should use $60.1 million, sorry.

Okay. Excuse me. And Fusen, you mentioned, we’ve talked about this in the past, there’s a higher capital or wire bonder intensity with some of these heterogeneous packages and multi chip modules. I’m wondering if you could, maybe update us on what you think versus just a standard die, how much more capital intensive you’re seeing some of these newer advanced packages are from just standard parts?

Well, I actually, we don’t have this on hand right now. But roughly, I think we continue to see this multi-die the growth rate, actually, all of growth majority are focus on a new area. I mentioned in three new area. You need to – you like multi-die not only die to substrate. You also need to connect, die to die. So therefore increase capital intensity. And this new sheer environment after you bond connect to a substrate, and you also need to view a fence or catch a long the die to make sure it is not interfered to next die. This also increased capital intensity. Right? And continue to find application. So we, I think before the – say two or three years ago, our wire bonder maybe dealing with like one soldering wire, and right now we are doing about two soldering wire. Right. So actually if you count actually a capital intensity will productivity increase, probably almost double.

Okay. Could you just remind us of the mix in the wire bonder business between OSATs and IDMs and what would you expect that mix to look like in the back half of this calendar year?

Well, David, I mean, the mix between IDM and OSAT does shift from quarter-to-quarter, right? So, I mean, it’s been running for ball bonder, sorry, the core business. I think the core business, in the last couple quarters because of the huge ramp incapacity, and as you know, when things ramp for based on capacity, the OSAT tends to be more active because they are generally where customers go when they need immediate capacity, right? So, that was close probably to, I would say almost 90% OSAT, 10% IDMs, in the most recent quarter, Q2. It shifted a bit I think it’s close now to about 75/25 in terms of OSAT and IDM. The IDMs now have become much more active, particularly again as the automotive business is very strong, as you know, and automotive business actually is quite focused on the IDMs.

Also David, like to add, I think that we have a very diversity by customers in both OSAT and IDM. And sometime I think some OSAT probably have enough capacity, not necessarily all OSAT has a full capacity, right? So, I think we have a pretty good relationship with all customers and we work with the customers and especially I think ball bonder in my opinion is reaching to another cycle. I think our next cycle, we believe will be longer and ball bonder on couple of unit growth, I think will also grow with the special application. I mentioned like a multi-die, the initial requirement and potentially can be used for the memory, not only for the name, which we have very, very high market shares. I think different, we still have much room to go to get the market shares.

Okay. Final question from me, is you talked about, I think, I see new volumes getting a bit better in the back half of the calendar year. I was kind of curious how you might be looking at this is, I guess it was my understanding in the middle of this year, you kind of have a 5-nanometer transition, at the big foundry in Taiwan, and that’s definitely going to drive higher units. But I was under the impression a lot of this trailing edge capacity wasn’t going to come online until early next year. What’s your view of both the kind of the front end, advanced and capacity and the trailing capacity and when it will come online and I’m imagining that the trailing edge capacity is more relevant for you as far as a wire bonder opportunity, but maybe not.

That’s correct. I think David, I think you are right. I just try to, I think, I’ll give an example. I think ball bonder continue to the extent, right? Even 6-nanometer. I think a new application is going to be a big application is in a mobile space. And so I think a lot of people believe ball bonder actually is a very old technology, but I can just tell you, there’s a lot of very sophisticated technology over there. And it’s continued to extend, because ball bonder, wire bonder is the most effectively for interconnect, right? So, we believe – a lot of people believe a 20-nanometer, but would be more free chip, but actually continue to extend. And people is activity working on the 6-nammeter might not be high volume production by end of this year. But for sure, the volume will come quickly.

Thank you.

Thank you. We reached end of our question-and-answer session. I’d like to turn the floor back over to Joe for any further and closing comments.

Thank you, Kevin. Thank you all for joining today’s call over the coming months. We will be presenting at several virtual and in-person investor conferences in New York, and San Francisco. As always, please feel free to follow-up directly with any additional questions. Have a great day, everyone.

Thank you. That does conclude today’s teleconference and webcast. We disconnect your line and have a wonderful day. We thank you for your participation today.