Kulicke and Soffa Industries, Inc. (KLIC) Q2 2023 Earnings Report, Transcript and Summary

Hello and welcome to the Kulicke & Soffa 2023 Second Quarter Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to, Joe Elgindy, Senior Director, Investor Relations. Please go ahead, Joe.

Welcome everyone, to Kulicke & Soffa’s fiscal second quarter 2023 conference call. Fusen Chen, President and Chief Executive Officer and Lester Wong, Chief Financial Officer are both also joining today’s call. Non-GAAP financial measures, referenced today, should be considered in addition to, not as a substitute for, or in isolation from our GAAP financial information. Complete GAAP to non-GAAP reconciliation tables are available within our recently filed earnings release, as well as our earnings presentation. This information, in addition to our prepared remarks for today’s call, are available 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, 2022, 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 operate in a very dynamic global environment and remain focused on expanding served markets through close customer engagements, prudent acquisitions, and ongoing development activities. Macro factors such as global banking issues, inflation and downstream inventory digestion are all contributing to a slow, but still gradual, rate of demand improvement over the coming quarters. While the pace of macro-driven recovery remains gradual, we see strengthening demand in our high-volume markets and broadening customer adoption and interest of our latest advanced packaging systems. At this point, our delivery schedule for higher-volume systems provides confidence we are past trough. We now see an uptick in quote activity which supports further improvements over the coming quarters. Overall, our longer-term industry outlook remains fairly consistent and aligned with third party market forecasts. We continue to anticipate positive semiconductor unit growth in fiscal year 2023 and higher levels of capacity and technology related demand through fiscal year 2024. In addition to improving levels of demand, our end-market opportunities have expanded significantly over the prior years due to more complex assembly needs including heterogeneous integration, electric vehicle and infrastructure adoption, new display innovations and broadening connected electronic and power-semiconductor needs. As disclosed in late February, we have completed the Dispense acquisition, and we welcome AJA to the K&S team. As a reminder, this new market provides access to adjacent-Dispense opportunities in both semiconductor and electronics assembly, collectively representing a $2 billion addressable market and providing a new set of long-term opportunities. Our integration priorities ensure the AJA team can efficiently leverage K&S resources, including our flexible and efficient manufacturing capabilities, our direct sales and distribution network and our broad portfolio of system and sub-system architectures. We have identified several target market areas for AJA which we anticipate will ramp in later fiscal 2024. Turning to the March quarter results, we generated $173 million of revenue, and $0.38 of non-GAAP EPS, significantly above our prior expectations due to better gross margin and operating expense performance. Our total capital equipment revenue was $133.7 million in March quarter, with a similar composition across end markets as last quarter. Within General Semiconductor, we continue to see technology related demand for IoT applications, high-performance compute, and growth in emerging applications such as artificial intelligence and co-packaged optics. These trends, which are occurring both in leading-edge and high-volume markets, are enabling share gain and higher margin opportunities. Regarding TCB, we generated record quarterly revenue during the March quarter in support of IDM demand for higher-volume mobility production, and High-Performance Computing. During the March quarter we also shipped several fluxless TCB solutions and are preparing to ship our largest number of quarterly fluxless TCB systems, to leading OSAT, foundry and IDM customers during the June quarter. In addition to heterogeneous, assembly complexity trends are also increasing technology-driven replacement for our feature-rich, high-volume systems which will continue to enhance corporate-level gross margins. We remain on track to introduce several new wire bonding systems through the first half of 2024. Over the near-term, we expect customer demand to continue improving due to seasonal strengths and ongoing inventory digestion. Moving to LED, we are beginning to see gradual improvements within lighting opportunities and remain engaged with industry leaders for both backlighting and direct-emissive applications. In addition to supporting ongoing capacity additions with PIXALUX, we are progressing LUMINEX engagements and final qualifications in support of large-format, direct-emissive applications and also emerging automotive display opportunities. Lastly, we are preparing to ramp production related to Project W, so that we are ready to move into higher production upon receiving the customer’s next phase demand. Within Automotive and Industrial, we continue to participate in power storage and power semiconductor growth which supports transitions to electric vehicles and sustainable energy. We are currently preparing to launch our next battery bonder for larger-form factors using both ultrasonics and laser-interconnect solutions in addition to supporting the production ramp for consumer and commercial vehicles. Within power storage, our base of engaged battery customers continues to grow steadily, with renewed interest from our largest EV customer. Due to safety and reliability needs, we are also beginning to see high-volume applications, such as E-Bikes, transitioning to higher-reliability Ultrasonic Bonding. Finally, we have also engaged in a promising new opportunity supporting the emerging eVTOL market. Within power semiconductor, we continue to see strong ongoing demand driven by charging and inverter applications, which are directly supporting these industry transitions. Like many other areas of semiconductor assembly, we see stronger growth in the highest-value, and most advanced applications, such as power-modules. Compound semiconductors, such as Gallium Nitride and Silicon Carbide, are accelerating this growth, and are directly supported by our market-leading portfolio of Wedge Bonder systems. Next, while memory remains sluggish near-term, we are also anticipating improvements toward the end of fiscal 2023. Finally, our Aftermarket Products and Solutions segment generated $39.3 million of revenue, fairly consistent with last quarter. Before handing it to Lester for the financial review, I wanted to summarize a few key points. First, we are actively participating in several fundamental and long-term transitions across our served markets. These transitions are providing both market expansion and profitability opportunities. Next, we remain in a very strong financial position, which has allowed us to invest through this recent period of market softness. Over the past year we aggressively deployed resources towards organic development, internal capacity expansion, new inorganic opportunities, and returned value to shareholders through a competitive dividend and an aggressive pace of open market and accelerated share repurchase. Finally, quote [ph] activity for our high-volume business has recently improved, which provides additional optimism we are past trough. This trend is anticipated to continue improving through fiscal 2023 and 2024. Despite macro and industry headwinds, it remains a very exciting, transformational time for the company as we are on the verge of several new product ramps which can further enhance our long-term revenue composition and through-cycle profitability. I look forward to demonstrating our efforts over the coming quarters. With that said, I will now turn the call over to Lester who will discuss our financial performance and outlook, Lester?

Thank you, Fusen. My remarks today will refer to GAAP results, unless noted. As Fusen mentioned, it is a very exciting time for the company as our core market is showing clear signs of improvement, and our new technology solutions are reaching final stages of development and customer acceptance. Additionally, our prior market expansion efforts have directly contributed to a much stronger trough-to-trough performance level. Over the trailing 12 months, our net revenue has increased by nearly 40%, while operating profit increased by nearly two times verses the similar trough period in fiscal '19. We expect our fiscal - relative fiscal year '23 financial performance to also significantly exceed our fiscal year '19 results. Despite this material progress, macro dynamics will largely determine the trajectory of near-term growth and we remain extremely vigilant to conduct our operations and development efforts in the most efficient and cost-effective manner. Additionally, we are actively building out our Kranji facility, here in Singapore. This site increases our capital equipment production footprint by 44% in support of these meaningful new opportunities. During the March quarter, we generated $173 million of revenue, 48.6% gross margin and $0.38 of non-GAAP EPS. Gross margins came in above our guidance midpoint at 48.6%, due to product mix throughout capital equipment, and Project W related accounting. Non-GAAP operating expenses came in at $64 million, below our prior expectations, due to the capitalization of specific expenses associated with Project W and ongoing cost control activities. Finally, tax expense for the quarter was $5.6 million. Turning to the balance sheet, working capital days decreased to 517 days in the March quarter, primarily due to a sequential reduction in accounts receivable. Our repurchase program remains opportunistic, and price dependent. Activity has slowed through the March quarter and we anticipate increasing the cadence through fiscal year end. Looking ahead to the June quarter we anticipate revenue of approximately $190 million, plus or minus $20 million with gross margins of 48%. Non-GAAP operating expenses are anticipated to be approximately $73 million, plus or minus 2%, due to additional R&D investments, largely associated with our set of emerging opportunities as well as the inclusion of the new Dispense business. We remain focused on controlling and limiting any non-critical activities and have maintained our hiring freeze. Our collective cost control efforts have reduced our June quarter operating expenses by over $5 million from our original budget. Non-GAAP net income for the June quarter is expected to be approximately $18 million with non-GAAP earnings per share of approximately $0.32. We are anticipating an additional increase in tax expense during the June quarter. Looking into September, we currently anticipate seeing sequential revenue growth of approximately 10% over our June quarter’s expectations. As we see gradual improvements in our high-volume business and participate in several long-term transitions affecting the semiconductor, advanced display, electronics assembly, and automotive markets, we remain excited for the future. Looking into 2024, we remain optimistic on broader macro trends and remain extremely focused to support the technology needs of our customers. This concludes our prepared comments. Operator, please open the call for questions.

Certainly. [Operator Instructions] Our first question today is coming from Tom Diffely from D.A. Davidson. Your line is now live.

Yes. Good morning. And congratulations on getting past the trough, always have an extent. Fusen, I was wondering when you talk about sequential recovery here from the trough levels. Could you frame the industry or your business as far as utilization rates and where you're seeing pockets of strength?

Okay. Maybe I can make a few comments, and let's have maybe [indiscernible] information provide to you. So actually, last quarter, we are pretty bottom because both on the revenue is quite low. But we do believe the second half will recover. But actually, we did not forecast a banking crisis, which actually likely will impact our spending patterns. So therefore, actually, the Q3 and Q4, actually, the growth is not as originally expect as fast, right? So at this moment, we still believe second half will be up on the growth rate, maybe it was - will be impact by the banking crisis. So that's what we are seeing right now. And utilization rate?

Hi, Tom. So utilization rate is around 65%. But in period inventory digestion, the absolute percentage of utilization rate is not as important as the trend of the utilization rate. So we've seen actually for Q1 and Q2 utilization has basically been a bit flat. And then from what we see from our customers, utilization is going up in Q3.

Okay. And then just the pockets of strength from a regional base is - are you seeing even in China, some pocket of strength?

Actually, yes, we actually have bond [ph] on the demand actually from China. And our which bonder actually deal with high-power devices is quite strong. But which one other than the EV and the automotive, we really see the strength in the power semi and which bonder is a record year for this year. We also see other opportunities, like I mentioned, the eVTOL. This is the electrication of aircraft, and we're also seeing some transformation that are some low-cost welding, we call resistant welding used to make low-cost application like EBAC [ph] transitioning into [indiscernible] So this will also provide the strength for us to move forward. And I think our AP is continuing to be strong, and we do believe the next year attentive spread will be very positive for us.

Okay. Great. And then as a follow-up, previously, you talked about perhaps seeing the recovery or resumption of some display activity for you in the second half of the year. Is that still on track?

Yes. So let me update a little bit of our advanced display. So we actually recognized total advanced display revenue about $240 million since we ship the first product. And the past 2 years from June 21 to March 23, actually, we recognized $160 million of advanced display. I think at this moment, the industry really needs a very disruptive high productivity for the fast-growing mini-LED and micro-LED mixed transfer technology. So for this really is a transformation year for us for the advanced display business. At this moment, both our Luminex and W [ph] projects are progressing well. So very short summary. I think Luminex because it is going to be a product for many, many customers, qualification takes a little bit longer time to serve many, many requirements. But we expect a successful qualification of both big lighting and the large-format direct initiation application with a 3x productivity compared to a piece of last - by September of this year, and we will win multiple customers in FY '24. And we also project - expect a W project will go to initial production early '24. So we are preparing for the ramping. So in addition, I think '23 is a little bit tough for everyone. It's a transformation year for us and also a very challenging year for any incremental capital expenditure. So a majority of our display business probably we expect - probably in Q4. But beyond that, I think it will be quite positive for us from here.

Great. That's helpful. Appreciate the time.

Okay. Thank you.

Thank you. Next question is coming from Dave Duley from Steelhead Securities. Your line is now live.

Yes. Thanks for taking my questions. I have a couple. I guess, Lester in one of your slides, it talks about executing margin enhancement strategy. I guess this is for your core wire bonder business. Could you just update us on how much gross margin improvement you would expect from that new product and the timing?

Yes. So Dave, I think we've been very focused on our ball bonder optimization in terms of increasing the gross margin. Some of the technology changes have helped. I think Fusen mentioned for capital intensity. I think we're also doing some SIP packages, which also requires the higher in-count, more advanced bonders, which gives us better margin. I think we're in the process of introducing a new suite of products from - all the way from our LED bonders, all the way up to our high tenant bonders in late '23 to '24, so we believe that will help us - the ball bonder gross margin will continue to rise.

Okay. And then just on curiosity. One of your competitors talked about introducing a thermal compression bonder on their conference call, and they historically been focused on the hybrid bonding opportunity. I guess from your perspective, do you think thermal compression bonding is a bigger opportunity than hybrid bonding. And if so, why?

So Dave - so let me answer this. I think the heterogeneous integration, this is a lot of triplet process together, consists of multiple packaging technology, such as hybrid bonding, TCB and now, there are many technology that can coexist. So at this moment, the hybrid bonding and our TCB really not necessary to be competing. And in certain technology, actually, they can coexist. So K&S solutions actually serve both with C2S and C2 public process, and most of them are very sizable. And we expect C2 [ph] is about same size as a C2W. So C2W actually, they are two ways. We love hybrid bonding and I think there is still a big market. The pitch is about 35 micron. And hybrid bonding actually are focused on actually below 10 micron, probably 10 microns. So there are a lot of volume actually with TCB and hybrid bonding actually more brand and process. In some areas, hybrid bonding and TCB can be complementary for our C2W. For example, our C2W is capable to place a highly bonding bond - bonding type, actually on silicon interposer. So your question is, is the TCB, the market size can be bigger? We tend to agree. But of course, we are not the major player yet for hybrid bonding, but it's capable technology and some customers actually start to use production. So Dave, I wish I answer all your questions.

Yes. And then just as a follow-on, I think you mentioned you had record revenue in this area. So maybe give us an expectation for now that you've started to ramp this product. What kind of revenue levels you can reach on an annual basis at any time in the future here, the annual target?

So I think last time, Christopher asked it, I can give you a little bit color. So this quarter, our dedicated - AP dedicated, we have 80 premium. It's a wafer label to bumping and plus SIP, active, passive altogether SIP plus TCB. So this quarter, Q2 total dedicated revenue is $33.7 million. And this $33.7 million, the TCB alone is about $20 million, right? So that's for the Q2. And for the Q3, I think we say we are going to expect to shift numerous fronts and the momentum will continue. So at this moment, our TCB, actually customers, including IDM, OSAT and foundry. I think last quarter, when we give our guidance this year, our TCB alone – our TCB alone will be $68 million. And I think our last quarter, we can guide in the next year will be sequentially higher. So maybe later part of this year, maybe another one or two quarters, we have a more concrete number. We can guide the TCB for the next year. But this year, I think we expect $68 million.

Excellent.

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

Yes, hi. Thanks for taking my question. Thanks for the color on the June and September guidance. I'm just kind of curious, when I look at it, 6-figure, we thought FY '23 would be about $900 million. Last quarter, you said it will be about 840. Now it looks like more like $750 million. So I'm just - I understand that we are probably at the trough, but it looks like the recovery seems to be more gradual. So I'm kind of curious, a, number one, what is the reason for a slow recovery versus three months ago besides the banking prices? And number two, what gives you the confidence that we might not be stagnating at these levels for a longer time?

Okay. Krish, I think we was expecting faster recovery. Unfortunately, I think not only us the industry and also some of our peer group also see this phenomenon. So maybe there are two things. I think majority impact to us, actually, we are seeing the high-volume business, particularly ball bonder. We always expect will actually grow faster. But actually, the quotation activity still increasing very, very dramatically. But come to our scheduling, we see in our Q3, Q4 also are seeing some push out. And we are hoping if our third-party forecasts are right. This year, I think unit growth is about 3%, and market rent now is focused about 10%. So if you ask me, I think the - maybe the inventories are not fully depleted yet and also the banking crisis probably caused consumer confidence and the spending impact - their spending pattern. This is up to I can think of. But we do believe '24 will be a better year for everyone.

Got it. Got it. Fair enough. And then a quick question. Could you guys say what your backlog or book-to-bill was?

Yes. So our backlog is right now, as I think we've discussed this before, Krish, backlog for us, we define it as POs with delivery dates. So that's about $500 million right now. But if you add the POs with delta delivery date, that's another $250 million. So that's basically where our backlog stands. And backlog is pretty healthy. That's also the reason we think the recovery is - we are past off and we're going towards recovery.

Thanks a lot, Lester. Thank you very much.

Thank you. [Operator Instructions] Our next question is coming from Charles Shi from Needham and Company. Your line is now live.

Hi. Good evening, Fusen, Lester. Thank you for let me ask a couple of questions. I think your guidance for June and September looks very encouraging. You're seeing sequential growth for two consecutive quarters of the trough in March. And that's certainly encouraging. I just wonder, can you help me reconcile a little bit what your two other competitors are seeing versus what you're seeing? The two other competitors of yours, they are seeing a calendar second half, possibly slightly lower than the calendar first half. I know you're only guiding to your fiscal year-end, which ends in September. But can you kind of help us understand given that where your September numbers looks like, your calendar second half probably is flat to up relative to the calendar first half. Can you help us reconcile what's the difference this year between what you're seeing and what your competitors are seeing?

Yes. So I think I look at the competitor we have two of them. I - only the member number, I will not be the best person to comment this financial performance. If you'd like to make a comment, we welcome your comments.

So and also Charles, I think - I mean, we've already indicated that we see our order book going up, backlog going up. And also we're involved in a couple of, I guess, vectors where there is a strong recovery, right? AP, automotive, electric vehicles that Fusen mentioned earlier, as well as to management. So again, I mean, they see what they see. We see what we see, right? And as we indicated, we believe that the second half will be stronger than the first half.

Right. So - and so I think sometimes compare same quarter with a different company might not be the best one. For example, in '21, '22, I think we go up to $1.5 billion. In one quarter, I remember, it's almost $500 million. So pick up a quarter to make a comparison. I don't know it's the best comparison. I think just for K&S, we want to make sure in this difficult environment, we ramp up our future products, and we watch our spending, and we respect, we have a good competitor, and we respect them. But for the quarter-to-quarter comparison, actually I - actually don't have accurate number. So if you would make a comment, we will...

Yes. No problems. Thank you for the color. So maybe another question on backlog and book-to-bill. Your backlog has been kind of covering probably 3-plus quarters of the revenue for a while. It looks like some of the movement within the backlog is a little bit stagnant. When do you expect the backlog to return to more normal range in terms of how much it covers the quarterly revenue? Maybe I remember maybe it's somewhere between one to two quarters will be the more normalized backlog level? And when do you expect that to happen? Thank you.

So Charles, I mean, thanks for the question. I mean the backlog obviously spiked tremendously during the ramp, right, due to supply chain issues and long lead times. So it's been coming down. We continue to expect it to come down. As far as when backlog will match exactly to two quarters, I mean, that - historically, that has been true for some - in some quarters. But I think actually, for us, also the way we define backlog. I think the backlog continue to go down, but it's difficult for saying when it will match two quarters of backlog going forward.

Yes. And what's the book-to-bill ratio you're seeing in March quarter? Certainly, I understand that you are seeing increased quote activities. But what's the actual book-to-bill in March quarter?

It's less than one.

Do you expect that book-to-bill to come back up above one maybe in June? Just trying to understand the ordering trend here? Thank you.

Well, Charles, I think, again, as I indicated before, it fluctuates quite a lot. I would not say we expect it to go above one in June. I think over the next couple of quarters move up and down. I mean, historically, it's been around the last couple of quarters has been around 0.8 to 1. So...

Got it. Thank you. And

Go ahead Charles.

Yes. No, no, no. I just want to say good to hear you guys are passing the trough, but Fusen, please, if you have a comment, please make that. Thank you.

So I'll give you an example. I think that we start to see core activity increase. But actually, some of the bigger customers, we start to engage. They give you indication of a period of time, for example, maybe like the beginning of '24. There's no definite date. So even if we get the PO, actually, we didn't put that into our way. But you know what I mean, right? So even we get a PO on this it's definitely that we put this as a big lock. That's what we're talking about. But let me repeat again, we do actually get [indiscernible] much often. And I think last quarter, we start to see actually a smaller one, and they probably need to have a much, much less number. But right now, I think we are actually working with a few - actually midsized -- so we do believe, I think it'll recover will happen on the way. Of course, unless something happens, it's going to impact everyone.

Yes. Thank you, Fusen and Lester for the color. And I'll get back to the queue. Thank you.

Thank you, Charles.

Thank you. Next question today is coming from Tyler Burmeister from Craig-Hallum. Your line is now live.

Hey, guys. Thanks. A couple of questions here. So first, maybe a little bit of a clarification and if you could expand it. Your assumption for semi unit growth, I think you said this year is up maybe 3%, if that's correct. And any update on where you guys kind of see that going next year?

Okay. I think this year, of course, Semiconductor revenue is going down, but the number, if I were correct, unit number still up a little bit, but like some devices, the price kicked down a lot. That's why I think Semiconductor revenue go down, right? So I think this year it's about maybe slightly above zero, next year, If third-party altogether, we feel like this will be between 8 to 10. That is the number we are getting.

All right. Perfect. And then last quarter, I guess, just a little update from last quarter, you guys highlighted advanced packaging some inroads you're making, I believe, with the large foundry setting yourself up for some potential market gain shares down the road. Any comment or update on progression there and how that's tracking?

Well, we don't talk specific customer, but we do believe we have a differentiated tool. And the engagement, we have numerous customer and also in a different area, like we have IDM, we have OSAT, we have foundry [ph] I think we probably will report the progress by the engagement with foundry is probably a little bit later than the IDM. But I think as we go on, we will give you more color. But the progress actually, we are quite happy at this moment.

Perfect. That's very fair. I appreciate that. All right. That's all for us. Thanks, guys.

Thanks, Tyler.

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

Thank you, Kevin, and thank you all for joining today's call. Over the coming months, we will be presenting at several investor conferences. As always, please feel free to follow up directly with any additional questions. This concludes today's call. Have a great day, everyone.

Thank you. You may now disconnect. Have a wonderful day. We thank you for your participation today.