Greeting and welcome to the Kulicke and Soffa 2022 Third Fiscal Quarter Results Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Joseph Elgindy, Senior Director, Investor Relations for Kulicke & Soffa. Joseph, you may begin.

Thank you. Welcome everyone to Kulicke & Soffa's fiscal third quarter 2022 conference call. Fusen Chen, President and Chief Executive Officer; and Lester Wong, Chief Financial Officer are both also joining on today's call. 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. Today I would like to provide an update on the progress and status of our key growth initiatives around advanced packaging, advanced display, electronics assembly and automotive. These initiatives are progressing well and provide upside potential to our long-term financial targets. Before discussing these growth specific opportunities, I wanted to step back and discuss the broader macro and industry environment. As we have discussed last quarter, the industry continues to be constrained by supply-chain challenges, largely around wafer capacity, which softens the near-term rate of semiconductor assembly expansion. In addition to these known industry challenges, which we have explained on previous calls, we also face an increasingly dynamic macro environment. Regional COVID lockdowns and logistical challenges are continuing, broader inflation, consumer confidence trends and wafer fabrication equipment forecasts are now also impacting our near-term outlook. Although not unique to K&S, consumption of consumer goods, such as smartphones, PCs, and general electronics play a significant role in impacting semiconductor growth rates in the near-term. While we do not yet have clear visibility into fiscal 2023, we intend on providing additional details and a longer-term outlook during our upcoming November earnings call. However, during today’s call, Lester will provide additional commentary that highlights our cash-flow and profitability improvements over the past few years and expectations over the coming quarters. At this point, I would like to provide an update to our strategic execution and progress supporting the broader trends in advanced packaging, advanced display, electronics assembly and automotive. At a high-level, our global research, development, procurement, and business teams continue to be very engaged supporting several exciting opportunities with top customers. We have developed several enabling systems and our growing base of customer engagements serves as a testament to our competitiveness which implies upside to our long-term financial expectations.…

Thank you, Fusen. My remarks today will refer to GAAP results, unless noted. As Fusen mentioned, we continue to remain very focused on mid and long-term growth prospects by executing on our internal development goals, maintaining our pace of customer development engagements while actively returning value directly to shareholders through our growing dividend and aggressive repurchase programs. It’s also very important to remind callers today, that our financial performance has already improved dramatically due to several technology changes which reduce our reliance on annual capacity expansion. In parallel we have continued to strategically expand our served market. During the June quarter, we generated revenues of $372.1 million and very strong gross margins of 51.2%, up by over 500 basis points, year-on-year. This strong gross margin performance highlights our consistent operational efficiency and improving product mix, and also highlights our incremental value-add to the industry. Non-GAAP operating expenses during the quarter came in better than expectations due to a $4.5 million foreign exchange gain. Tax expense for the quarter came in at $5.2 million, significantly better than expectations. This favorable benefit was driven by a partial release of a valuation allowance, previously recorded against a net deferred tax asset. This favorable benefit is directly related to the success and outlook of our Advanced Display solutions. Non-GAAP net income for the June quarter was $125.1 million, representing a very strong non-GAAP net margin of 33.6% and non-GAAP EPS of $2.09. Turning to the balance sheet, days of accounts receivable decreased slightly from 86 to 85 days. Days of inventory increased from 104 to 107 days and days of accounts payable remained flat at 49 days. Over the past four quarters, we have generated $380 million of free-cash flow, highlighting our longer-term potential. During the June quarter alone, we generated free cash flow…

Our first question coming from Krish Sankar from Cowen.

I actually had a few of them. First one, Lester, I just wanted to clarify. Did you say FY '23 quarter should be similar to September quarter revenue run rate?

No, I didn't say that. What I said was, as Fusen indicated, Krish, given the volatility uncertainty into the market right now, we are not in a position to FY '23 will provide more details on November call. What I did say is that if FY '23 was at the same run rate as Q4, we would generate EPS of $3.50, which shows the company is actually very profitable even at a lower revenue level, much more profitable than the last down cycle.

Got it. Got it. That's very helpful. A couple of other questions. I just wanted to check, you guys highlighted the decrease is due to macro concerns BE Semiconductor highlighted that some of the Chinese costs are also slowing. So I'm kind of cut, have you seen any weakness in China? And what person you have seen for China for you?

So Krish, are you asking the set in China also slowing down?

Yes. And what percent of sales for you is from China?

Okay. So I think it's well known that nearer factor impacting the consumer demand. And that case show period of capacity digestion for some of our customers. And of course, all set is a big pool. On top of that, I think the China LED also slowing. So these are the 2 areas we are seeing a slowing down. And maybe last area, is we still see steady supply chain challenge that causes the bottleneck for our customers, right? So -- if the weakness, I think, in this area and the capacity dilution period of time for us, we are seeing maybe about 2 quarters. Beyond that, we are quite optimistic about the strength coming back second half of '23. And in the meantime, we also anticipate to generate a strong cash flow even together with this very short period of southern periods.

And Krish, did you ask what the percentage of revenue in China was?

Yes, yes.

It's 52%, same as the previous quarter.

Okay. Got it. And then just 2 quick housekeeping questions Lester. You guys didn't mention in a backlog. Can you just tell us what the backlog is? And what is the lead time for wild bonders today?

Well, Krish, I actually -- we actually don't think backlog is a very good indicator for our investors in terms of looking forward in terms of different for, particularly now that we give long-term guidance. The reason is that backlog can be a little bit confusing because different people use different definition of backlog. For example, a lot of people use backlog in terms of just the POs they have. Our definition of backlog is actually the POs we have with a specific determined delivery date. We also have POs, obviously, that do not have a specific delivery date, which we don't put into backlog. So we don't think backlog is actually a very good metric for us. And in any event, for the backlog, the backlog has been pretty consistent in terms of the variation over the last quarters or so, each quarter-on-quarter has probably reduced about 10%. So again, we don't think backlog is a great indicator and that's why we didn't include any more. I think also the final point is that, as you know, Krish, a lot of our U.S. listed peers don't use provide backlog information they only do it during the annual report on the K level. To answer your question, lead times now is a little bit over 3 months.

Next question is coming from Craig Ellis from B. Riley Securities.

Yes. And Fusen, I really appreciate the deep dive on the market expansion initiatives to kick things off. So I wanted to follow up just on some of the order dynamics and the implications for the business, given what you're seeing in the order book. So it looks like the business is returning to more typical seasonality with revenues being down meaningfully in fiscal fourth quarter. The question is this, as you look beyond that to the fiscal first quarter one, what is the historic range for seasonal performance of the business? And related to that, how would investors reasonably expect the business to perform versus historic seasonality this year?

So actually, I don't think is a seasonality issue. I think what we are facing is the whole industry. The customer demand actually is impacted by global macro issue, right? You can see from a lot of customer products actually; this slowdown looks like it's quite dramatic in the recent months. So it might not be seasonality. I think it's softness capacity projection to actually to the effect on this demand issue. And we do believe this probably would last about 2 quarters and maximum 3 quarters. And second half, we expect in the market should pick up globally for the whole industry.

Got it. And then just a clarification with regard to the very strong gross margin performance in the quarter, another above guidance result Lester what were the specific factors that cause gross margin to exceed initial guidance? And what was our relative contribution?

Well, I think, Craig, what caused gross margin to be very strong in the quarter is, I think, as usual, is our product mix, right? We had higher contribution from our advanced packaging business unit as well as our Wedge Bond business unit, which did very well during that quarter. We also had that for Leadtec. We had the machine that the one fail, which was -- came in a very high margin because it's been expensed before. So I think it's mainly product mix that caused the margin to be higher than anticipated.

The next question is coming from Charles Shi from Needham & Company.

Fusen, I want to go back to your comment on capacity digestion. Did I hear -- you think it's going to last about 2 quarters and second half of your fiscal or calendar '23, you think the demand is going to pick up. And also tying to the same question, I think in September last year, you were expecting $1.5 billion average revenue through 2024-2025, I kind of forgot, but what is 2023 shaping up relative to that $1.5 billion average revenue guide?

Okay. So Charles, I think I remember in the Investor Day, that's what we say. I think our 2020 revenue was $632 million, if I remember correct. '21, I think is in the middle of Investor Day, we didn't finish that yet. But I say it's $1.52 billion and we did say '22, we feel like will be as good, as good that means it's also to $1.5 billion. And we also say average of our next few years will be $1.5 billion. So at this moment, I think we see actually macro slowdown and inventory correction and the capacity digestion and so this will last maybe 2 to 3 quarters. So with this unexpected phenomena, we do expect right now first half maybe it will be lower and a pickup in the second half. And so to achieve $1.5 billion probably will not be quite possible. But we do believe with '24, we are looking for very, very strong '24 with a lot of new products and even at this moment, if there's a correction happened, I think '24 even will push even higher for the core business. So we still have a chance in a testing with what we say. The next few years, '21 is $1.5 billion, '22 is $1.5 billion, in the next couple of years. I think average we can be still higher than $1.5 billion. I hope I answered your questions.

Yes. So maybe a second question. I understand that for your wire bonder business, maybe the visibility is a little bit not as great as, let’s say, 3 to 6 months ago because of macro. The advanced display side, I would assume that there’s things that are more under control because you have a lead in that market, and you probably – your customers are probably engaging with you over longer term. Any thoughts on what your advanced display outlook for fiscal ‘23, are you going to exceed the level of fiscal ‘22? And adding on top of that, I want to see if you have any comment on recent market chatters that Pixalux customer seems to be moving to OLED for their premium product lines around 2024, which could mean the mini-LED may be displaced? And are you hearing anything like that? A –Fusen Chen: Okay. So let me talk about our advanced display. So we entered this market in FY ‘19. So up to date, I think cumulatively, we generated over $200 million in advanced display. And this is including FY ‘22, we expect the revenue for advanced display is going to be higher than $90 million. So for ‘23, it’s a year because of qualification and adoption year for the Luminex. And because of qualification, we will add not hiring business, but we do expect in ‘23 over $100 million of sales as we continue to drive Luminex qualification for advanced display revenue through ‘23. And we do expect significant growth in FY ‘24. So I don’t know if I answered your question. Okay. The second question is OLED compared to micro LED or mini LED, I can tell you, think a lot of people try to make a micro LED and mini LED work and with a lot of effort from throughout the whole industry than – the reason is that there are a lot of LCD capacity is a layer. And people really like they want to reuse it, right? So Avis layer. The commitment is a layer. Forecast, I think, is a layer. And the growth rate, I think, year-by-year by analysts, I think, is really show significant growth. Customer can at a certain point, actually have a dual strategy, but I can tell you all the customers we are working on have a very, very strong commitment. All the customers have a strong commitment in this mini-LED and micro-LED.

Our next question is coming from Christian Schwab from Craig-Hallum Capital Group.

Just for a little bit further clarity on the commentary of 2 to 3 quarters of a digestion. Do you believe the baseline of the business during this digestion period falls below the kind of the '21 baseline of $900 million over the course of the next year? Or do you see it greater than that?

So Christian, I think we are really confident on the long-term growth prospect for the whole industry. And since this capacity digestion and mega demand inflation or macro factor is really recently started to impact the whole industry. That's why I think listers not assumption. Actually, as an example. I think it's not unreasonable assumption since we are going to see first half is going to be lower because compared to our previous few quarters. This quarter is a low and we actually expect this will not bounce back right away. So we hope to water and mix more we think is the 3 quarters. And compared to $1.5 billion EBIT, we think you pick up free long rate of course, it's not going to be flat. And if you use the number, we just guide and the long 4 quarters, is, of course, will be between $1 billion to $1.5 billion, right? So that's what we see and try to be realistic, I think 1.5% probably will be difficult. But we do believe our second half will pick up, and we will still generate very healthy cash flow for the company and the investor.

Great. And then what do you think utilization is at your leading OSATs today and would it have to return to for more aggressive capacity additions?

So Christian, utilization right now is running pretty flat around 80%, but then you do have pockets, both in terms of end markets obviously, automotive is strong end market and also in terms of regionally, I think China, because of the rolling Covet issues are a little bit lower. As far as what we need it to be, I think historically, if it's above 80% and the mid-80s, I think that was when basically there's capacity expansion. But again, these are, as you know, very dynamic and volatile environment. So right now, I think everyone is trying to figure out exactly how the next couple of quarters are going to play out. But we do believe, as Fusen said, the second half of FY '22 will be much stronger.

Your next question is coming from David Duley from Steelhead Securities.

Could you just update us on -- you gave some pretty good detail about what's left in the buyback? Going forward, could you just detail what the plan is for the buyback in the September quarter and going forward, will you be adding to it? That's the first question.

Okay. So Dave, I think we have -- we indicated we have about $309 million left at the end of the quarter in our authorization. As you know, we did the ASR. We finished that and we reinitiated our OMR program. I think we will continue to aggressively utilize our OMR program to the stock as we believe it is undervalued. So again, we don't provide specific guidance. But I think going forward, we will continue to utilize our OMR program.

The guidance you gave for the September quarter, what would you guess would be the cash flow from operations based on that guidance.

I would say cash flow from that would be probably similar to the EPS.

Okay. And then, Fusen, you gave us a lot of detail about, I think, the ramp-up in the thermal compression bond business. Could you just review again you mentioned, I think, 3 or 4 applications? It sounds like it's a pretty broad-based ramp. If you could just do some of the bigger applications for the thermal compression bonder going forward. And then if you could just remind us what your revenue targets are perhaps in this fiscal year and next fiscal year?

Sure, sure, sure. So actually, we are quite proud and also show a lot of confidence on this product. I think in the next few years, we will see a significant growth. Our product actually address a variety of customer and application. This including 3D sensing and silicon photonics and also our mobile logic and also chip that heterogeneous application, right? So we cover a lot of the customer and more and more people actually come to us. And we do believe our heterogeneity integration is going to grow significantly. And the $80 million we mentioned and it's not only PO, it's appeal with the delivery there and continue to grow. This $80 million largely will be shipped within FY '23. And the solution we have, I think the fluxless TCB, we believe, will be the mainstream interconnect for future heterogeneity integration down to a 20-micron pitch, right? Of course, smaller than 20-micron pitch, there will be somewhat niche product architectures and also other technology, but we are quite bullish. I think for the heterogeneity integration for the next many, many years. I think our TCB should have a high volume and we are working with more and more customers. So I think I can probably give you a little bit update about the total advanced packaging revenue. So this quarter alone, we're talking about dedicated I think different companies have different definition of advanced packaging. But all dedicated advanced packaging, we're talking about our TCB, like some compression and we also have a high accuracy free chip. This time, we didn't talk about it, but it's picking up momentum, maybe we'll update for the next couple of quarters. And also including advanced display and SIP and also AT Premier. I think I mentioned in my script, we're talking about the vertical were to replace TV for the next couple of years, and this is like AT Premier frame. All this together, I think this quarter, we are $64.9 million. It did not include ICO advance bond, including advanced wonder, I think is about $130 million for this quarter. And ICR, this area is our growth area. We are quite confident you will commit.

Okay. And then just as a clarification, the weakness you're seeing in the September quarter, what end markets or product lines are you seeing weakness in September versus June?

Okay. Mainly, I think is really bull bonder. And if you hear the script I mentioned, I think every year right now is about 1 trillion finished die, finished wafer and you cut it about 1 trillion die and need to have a package. Actually, 80% of totes 1 trillion die. The packaging measure, I think majority actually is a ball bonder. So this explains why I think when the industry slowed down, the bull bond was impact first, right? So actually, which bonder actually is very, very strong because we actually will continue to be strong. I think it's auto related and also power semiconductor also put a very important law, right? So to answer your question, I think it's very easy. During the capacity titration period, I think bonds impacted. And again, when the industry pick up, the bond will be the first one. So that's really the nature of the bond. But we still see both on the AV cycle will continue to grow because it's the easiest way to do the interconnect and this will represent the most high market shares for the whole semiconductor packaging measure, right? And we see the ball bonder -- if you don't -- if you look at every cycle, we do believe every cycle ball bonder will continue to grow. And we are seeing a new use of ball bonder. For example, in the memory -- we are working with a DRAM leading company to our replace TSV. And we see the early adoption, lower volume production maybe in 2023. And in the previous few scripts, I talked about our multi-chip. So every package, the number will we go from 1,000 to 2,000. So this is the market expansion and the capacity extension. And also, I think 5G, there's a lot of multiple bandwidths even have ball bonder to create a fitch in isolation to prevent the interference of next die, right. So more longer, I think next week -- next quarter, maybe a 2, 3 quarter will be lower. But when it's a pickup, it will also pick up very, very fast.

Okay. And then final question for me. Just curious, you talked about a 2-quarter inventory correction or 2 quarters of weakness. What gives you confidence? Is that your customers telling you that? Or are you picking up on what TSMC has said on their conference call. Just kind of curious why can you monitor the customers' level of inventory. Why do you think it's just 2 quarters?

Well, they are from a 2-way. One is, of course, I talked to you, actually our sales team. And of course, we also reached out to our customers. And that was the indication to give us higher confidence that the second half will pick up. And that's the first reason. The second reason they are multiple mature nor technology capacity is going to finish construction and they will start to need to put the capacity to do in a package, right? I think just China alone, they are mainly -- I actually don't have the number. I think they are close to 30 mature node capacity will come up. And the first one, they need is going to be a ball bonder. And also, historically, we see the weakness of the ball bonder is no more than for headquarters. And if you see, I think I actually reach our pick probably 2 quarters ago when we reached $480 million. Actually, it was really average real demand. And I mentioned it was another customer need hurry to put the capacity. So actually, we quickly just put in. So there was one quarter. We reached $480 million. One quarter, we reached about $420 million. And actually, after that, ball bonder start to drop a little bit. So -- but at this moment, we never see ball bonder lowered pipe quarter for us, right? So with these 2, we see some confidence in our second half will be better.

Next question is coming from Hans Chung from D.A. Davidson.

So first, I was wondering, what's the semiconductor unit growth for this year based on your September quarter guidance? And also, what is your view on 2023?

Sorry, Hans, can you repeat that? You broke up a little bit.

Sorry. Can you hear me better now?

Yes. Yes.

So yes, my first question is just what's the underlying assumption for semiconductor unit growth based on our September quarter guidance? And also, what's your view on next year?

For the quarter for FY '22, I think we think it's about 10%-unit growth for the year. I think for '23, based on what we see and based on industry experts, I think it will be close to normalized level is about 6.5%-unit growth.

Okay. And then for the Automotive segment, so during the quarter, why the revenue coming down a little bit -- because I think across the industry, the automotive has been pretty strong. And then I mean it's very strong across the supply chain, either is a semi company or equipment guy. So I'm just curious what's the dynamic during the quarter for the automotive segment?

Well, I think we came down just a little bit in the 1 segment, Hans. And I think a lot of it is just customer schedules. I think we had a very strong automotive business from our wedge bonder business, as Fusen said, and still continues to be strong. I think for the ball bonder of the automotive business, there's been some -- a little bit of shifting maybe into the next quarter. So I don't think the automobile business is soft. I think it's just soft, maybe it came down a little bit.

Got it. And then last one, just -- do you have any update on the Luminex regarding any customer feedback or any new clarification going on? Just any update on the Luminex?

So we are actually engaging close to more than 10 high-potential customers, and we ship out our few system and diner clarification. So our goal actually in the next 9 months, 2 or 3 months, we want to make sure we have a few set we hope to finish our qualification. But all in all, this is probably the most productive system is going to hit the market. And if you know to move the display big spread from 1 place to the other place, you need to move about 25 million. And our speed actually is much, much faster than any competitor can claim and can do. So we are quite optimistic about the progress, and we'd like to finish the qualification in the next 9 to 12 months. And we have a goal, the whole advanced display to go more than $100 million, and we believe is attributable in 2023, right? So if we do a 2023, the whole advanced display business since we introduced this segment of business after 2030, it will be more than $300 million. And we believe that '24 will be even bigger than that.

Sorry. Can I you say $300 million after '23?

Okay. So 2022, okay, 2022 actually is about $19 million. But up to date, it's about $200 million, right? So up to date, it's $200 million, including the '22 and '22 is we target greater than $90 million. We still have 1 quarter to go. And so about $200 million to days and a cumulative including ‘23, we should be above $300 million. In 2024, we believe our advanced display will even grow is a higher rate.

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 closing comments.

Thanks, Kevin, and thank you all for joining today's call. Over the coming months, we will be presenting at several virtual and in-person investor conferences with D.A. Davidson, Needham and Credit Suisse. As always, please feel free to follow up directly with any additional questions. This concludes today's call. Have a great day, everyone.