Kulicke & Soffa Industries Inc (KLIC) Q3 2020 Earnings Call Transcript

Hello, and welcome to the Kulicke and Soffa Third Quarter Fiscal 2020 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Joe Elgindy, Senior Director, Investor Relations and Strategic Initiatives. Joe, please go ahead.

Thank you. Welcome everyone to Kulicke & Soffa’s third quarter fiscal 2020 conference call. Joining us on the call today are 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 the latest investor presentation, are both available in the Investor Relations section of our website. 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 September 28, 2019 and the 10-Q for the period ending March 28, 2020. 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. Considering the increasing dynamic environment we are operating in, we wanted to start today’s call by highlighting three specific points that may help to clarify our position and strategy. First, our manufacturing facilities are operating at nearly full capacity and the development progress is continuing as planned. Last quarter, we specifically identified supply chain concerns associated with regional shelter in place and the movement control orders, which constrained capacity at several suppliers. These supply chain issues were resolved by early May, and we no longer anticipate supply chain challenges in the near term. Secondly, although U.S. reopening challenges may adversely affect near-term macro and industry-related dynamics, we continue to anticipate a robust recovery, and semiconductor unit growth is inevitable. With over 80% of global semiconductor packages utilizing the wire bonding process, our core market is clearly correlated with the semiconductor unit growth. Total semiconductor unit production in the calendar year 2018 was estimated to be about 5% higher than unit expectations in the calendar year 2020. This decrease in production is unique historically and has impacted demand for our core products. Currently, recent semiconductor forecasts from Gartner support our view that semiconductor unit count will grow by 10% to 11% annually for both calendar year 2021 and also 2022. Again, this anticipated return to unit growth is expected to directly and positively trigger capacity investments for our core products. Last, our visibility and longer-term roadmap within the fast-growing next-generation LED market has improved. We are technically executing on our production ramp in the near term and are also very focused on next-generation tools to increase our competitiveness and drive more share gains in this rapidly developing new market opportunity. During the June quarter, revenue came in at $150.5 million. We generated $69.4 million of gross profit, $11.2 million of net income, and $0.18 of earnings per share. Capital equipment revenue decreased by 1.6%, while aftermarket product and service revenue increased by 4% sequentially into the June quarter. Within capital equipment, we experienced softer sequential demand in the general semiconductor, memory, and automotive end markets. This softness was largely offset by improved sequential demand for our systems supporting technology transitions within the advanced packaging and advanced LED market. While we believe we are approaching an inevitable unit-driven market recovery, I want to remind investors that our entire organization remains extremely committed to fundamentally expanding our served market and the market share through ongoing development efforts. Organizational improvements over the past few years have allowed us to introduce several new and competitive systems, which are providing new assets to advanced packaging, automotive, and display opportunities. Specifically, within advanced packaging, we recognized revenue on our first Katalyst high-accuracy free chip systems and also recognized revenue from the new APAMA thermocompression customers during the June quarter. Within the LED space, we are especially excited for the technology transition within the display market. During the June quarter, we recognized revenue on 25 Pixalux systems, our largest quarterly shipment of our advanced LED tool. Some level of cyclicality will always persist in our business, although we expect ongoing product adoption and share gain within this new high-potential market to provide added diversification and create a meaningful and sustainable value for shareholders over the coming years. I would now like to turn the call over to Lester Wong, who will cover this quarter’s financial overview in greater detail. Lester?

Thank you, Fusen. My remarks today will refer to GAAP results, unless noted. Net revenue for the quarter was $150.5 million, gross margins of 46% generated $69.4 million of gross profit, and net income of $11.2 million, or $0.18 per diluted share. On a non-GAAP basis, we generated net income of $12.9 million, or $0.21 per diluted share. Operating expenses for the quarter came in on the lower end of our long-term target range, as expected. This was due to ongoing cost-control efforts, reduced travel, and some local government assistance. We continue to be very focused on cost control in the near term and we also continue to be very focused on development. We are anticipating GAAP operating expenses to fall back into our target range within the September quarter. This target range consists of $53 million of fixed quarterly expenses, plus 5% to 7% of variable expenses tied to revenue. Turning to the balance sheet, we ended the June quarter with a total net cash and investment position of $515.8 million, or $8.21 per diluted share. During the June quarter, we also paid down our overdraft facility as we repatriated a portion of our cash balance to the United States. We intend to maintain some capacity within the overdraft facility, which provides additional flexibility on U.S. related expenses, such as ongoing development, dividends, and share repurchase programs. Considering our long-term perspective on the repurchase program, we continue to view the recent market dynamics as an opportunity. Through the June quarter, we further increased our repurchase activity and deployed $22.4 million to repurchase just over 1 million shares. While we intend to create meaningful and sustainable value through fundamental market expansion and market share gains, we strongly believe our long-term share repurchase program provides an additional lever to further maximize and efficiently deliver this value to shareholders. In early July, we announced an increase and extension to our current repurchase program. This marked the third $100 million increase to the current program since its inception in August 2017. Including this recent authorization extension, at the end of the June quarter, we would have had approximately $151 million remaining under the share repurchase authorization. On a book value per share basis, we closed the June quarter with $11.93, a slight sequential improvement. Working capital, defined as accounts receivable plus inventory less accounts payable, increased slightly to $260 million. From a days sales outstanding perspective, our days sales outstanding decreased from 119 days to 117 days. Our days sales of inventory increased from 117 days to 127 days and days of accounts payable decreased from 56 days to 55 days. This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the September quarter business outlook. Fusen?

Thanks, Lester. Despite the limited visibility and the challenging operating environment throughout the semiconductor capital equipment space, we were able to maintain our development roadmap, expand our repurchase program, and most importantly, we have maintained or increased our outlook consistently for five sequential quarters. Looking into the September quarter, which over the past five years has shown an average 19% reduction from the June quarter. We are again increasing our outlook and anticipate September quarter’s revenue to be $165 million plus/minus $10 million. Our steady business and outlook improvement since March 2019 is a reminder that our business is more diversified and now operates very differently than it has in the past. While our end market has not improved in lockstep, and occasionally offset each other, they have all collectively improved. Despite this gradual improvement, we are still operating below what we view as a sustainable level of capital expenditure to support long-term semiconductor unit growth. This growth rate has averaged 6.5% over the long term, which is expected to support our core annual revenue of approximately $700 million. Again, average semiconductor unit growth from calendar year 2018 through calendar 2020 is expected to decline, which is historically abnormal. This unique environment has created clear demand challenges for our core products. With that said, we anticipate a return to more normal growth next year. As I mentioned earlier, this expectation is shared with external marketing forecasts, which anticipate unit count growth to exceed 10% in each of the coming two calendar years. While there are clear challenges associated with the U.S. reopening, and we are entering a seasonal period with historically limited visibility; a return to normal, or an above-normal level of semiconductor unit growth will have a direct and meaningful impact on demand levels for our core products. In parallel with this expected recovery, our new products deliver new capabilities and increase access to fundamental technology transitions within advanced packaging, automotive, and display. These three specific markets are becoming increasingly dependent on technology transitions, which we expect will continue to provide an additional layer of diversification over the long term. Within each of these categories, we have competitive and proven products that are already in high-volume production and are very well-positioned to support the underlying technology transitions. Specifically, within Advanced Packaging, current opportunities are providing new and value-added techniques, which are offsetting the well-known challenge of technology node shrink. We continue to target several new customer engagements, which are providing access to the high-performance logic applications that were dominated by traditional free-chip applications. Transitions within the Automotive market are increasing the requirement for high-reliability and efficient power control, power storage, and power distribution applications, especially for Electric Vehicles. Our current products, development roadmaps, and customer relationships are very aligned with the evolving opportunities within this dynamic automotive space. Finally, our recent entry into the display market has significant potential to enable the adoption of high-volume, cost-effective mini and micro-LED solutions. Over the course of the June quarter, clarity on longer-term prospects and the roadmaps supporting advanced, micro, and mini-LED applications have improved, and I would like to provide a few additional details on why this new business is important for us. Under conservative expectations, we anticipate mini and micro-LED diode shipments to be over 100 billion units this year and will potentially reach over 1 trillion units by 2024. Over the same period, we anticipate our mini and micro-LED served available market to grow at a compound annual growth rate exceeding 40% through 2024. We continue to expect demand for our current system to grow more significantly through our next fiscal year. We have prioritized our focus on developing, qualifying, and ramping production of our mini and micro LED systems, which target the final placement step within this fast-growing market. We wanted to remind investors that there are also several additional advanced LED process steps, which can leverage our platform’s unique high-throughput capabilities. These include processes such as sorting, mixing, re-positioning, and re-calibration. Over the near term, we have a clear roadmap to extend our reach into these other process steps and are also very focused on pursuing additional customer engagements. We are very focused on executing this strategy and look forward to sharing our progress and additional opportunities over the coming quarters. While the near-term environment is clearly uncertain, we are confident that unit count will eventually return positive as it has in past cycles. As this underlying core market condition improves, we intend to further diversify the business by enabling meaningful technology transitions within the advanced packaging, automotive, and display markets. This concludes our prepared remarks. Operator, we will now be happy to take questions.

Thank you. We’ll now be conducting a question-and-answer session. Our first question today is coming from Krish Sankar from Cowen & Company. Your line is now live.

Hi, thanks for taking my question. I have a few of them. Fusen, one thing is, in terms of your guidance, when you look into the September quarter, which verticals are driving the strength? Is it primarily semis? Or are you seeing strength in memory, packaging, LED? Any color on that would be helpful.

So Krish, I think our current market view points to bright spots, but there are also some feasibility issues. Let me give you a few bright spots. Number one is our mini and micro LED business is in high-volume production. We also see that 5G is expanding and the memory is recovering. Additionally, I mentioned that in the past two years, 2019 and 2020, the semiconductor unit count growth rate was actually negative. We believe, and many others believe, that unit count growth will tend to be positive, not only positive but over 10% for the next two years. So that is really a bright spot, along with the challenges associated with COVID-19. But I think we just need to deal with that, just like the U.S. reopening and the inventory level throughout the supply chain. Compared to last quarter, we are more confident than we were a quarter ago. I hope that answered your question, Krish.

Yes, absolutely, that does. Thanks for that. Then as a follow-up, I had a two-part question on the Pixalux. Number one is, I was under the impression the Pixalux was a much higher-margin product. At what point will you start seeing that drop through? Because it looks like, compared to March and June numbers, you had incremental Pixalux sales, but the margin profile was pretty much similar. So at what point will the drop-through kick in as you ship the Pixalux? And also, is it being used – I mean I was under the impression that Pixalux was used mainly for mini LED, not micro LED, because the pick-and-place sands are not fast enough for micro LED. So I just wanted to get some clarification on that.

Sure. We have Lester to answer your question.

So Krish, hi. How are you? Let me answer the last question first. Yes, the Pixalux is for mini LED. As far as the margin is concerned, the margin is consistent with what we’ve always said. It is one of our highest-margin products. The overall margin actually got pulled down a bit because there was a significant amount of LED bundles in the quarter. So Pixalux actually helped pull it back up along with our other APMR. That’s why the gross margin was flat for the quarter.

So Krish, if you remember, I think in our last quarter, Lester mentioned, we had a lot of LED bundling. And Pixalux had a low gross margin. And he did actually guide it to be slightly below 45%. But with the mini and micro LED Pixalux, it actually pulls it above – closer to 46%.

Got it, got it. That’s very helpful and informative. Thanks, Fusen and thanks, Lester.

Thanks, Krish.

Thank you. Our next question comes from the line of Tom Diffely with D.A. Davidson. Please proceed with your question.

Yes. Good morning, good afternoon. I guess following up on your comments about a recovery in 2021 and 2022 to 10% growth plus in each year. I’m curious, on a near-term basis, based on what you’re seeing from utilization rates of your tools in the industry, have we hit the bottom at this point? Or do you expect the bottom to come over the next couple quarters? Or what is the near-term outlook for just the core unit-driven business?

Okay. So Tom, historically, you’re talking about a quarter beyond September, that will be the December quarter, right? So December quarter historically has been a low quarter for us. As we are going into Christmas time and the Chinese New Year, we have less visibility. So actually, we are seeing two factors pulling each other. One is some bright spots, I mentioned. The 5G is expanding, and the memory is recovering. We also believe the recovery is on the way. We also have a negative factor with the reopening and the second wave of infections in other countries. But I think that we are quite hopeful, and maybe the recovery can be stronger after the Chinese New Year. If you count the whole year, it’s 10%. We are in the fiscal year ending in September, right? So probably, we will benefit half of this more than 10% of unit growth count. That’s what we are seeing right now.

Okay. So what are the actual utilization rates you see in the field right now?

I’ll let Lester answer it.

Tom, so utilization rates mainly for our bundled products because that’s what we track, right? It actually has remained quite strong in June, even though it reduced slightly sequentially. We expect utilization rates to remain that way through the September quarter for most of the end markets. We think maybe memory and general semi is going to improve the most. Automotive, probably the least. Regionally, we think there will be improvements in Southeast Asia, Taiwan, and Korea through the September quarter.

Okay. And then, Fusen, when we look at the likely near-record levels of WFE spending this year, how much of that will ultimately translate into your business? And what is the time frame do you think before turning that capital equipment purchase into unit growth?

I’m sorry, can I ask you to repeat that again?

Sure. Yes. When you look at the near-record level of WFE spending this year, I’m just curious how much of that spending because it’s advanced packaging or advanced nodes, how much of that translates into your business over time? And what is the lag between capital spending and then the unit growth that you would benefit from?

Well, I think front-end capacity inventory will come to back-end, right? So probably, in a few quarters, it will be higher. But for our back-end, we also see our driving force. For example, the increase in transitive packaging can be accomplished not only through more traditional methods, but this can also be done by advanced packaging. Using advanced packaging can increase package-level overall transition packing capacity. So there are correlations between the front-end and the back-end, but the end is also very unique. We have different types of driving forces. So I think next year, overall, it will also be very positive for back-end.

Okay. Thank you.

Thank you. Our next question today is coming from Carlin Lynch from B. Riley FBR. Your line is now live.

Hey, guys. This is Carlin on for Craig. Two quick questions for me. One, you had mentioned – or you detailed kind of previously how the traditional and kind of core semi business can do $700 million to $800 million in a normalized environment. As we look into 2021 and onto 2022, do you guys have a sense of when we can kind of get back to that level on a run rate, given what we’ve seen this year with COVID and the 10% unit recovery next year? Is that something that might happen in calendar 2021? Or is it really a calendar 2022 item?

Well, I think, as Fusen said earlier, in response to Tom’s question, we believe that the semiconductor unit growth of 10% is going to kick in probably in the second half of calendar 2021. So, as you said, it will be part of our fiscal 2021, part of our fiscal 2022, because we are September quarter year-end. So, we definitely think the recovery, again, subject to the uncertainty around COVID and some of the other macros. Based on historical patterns, two years in a row down is unusual. Usually, there’s a pickup after that. Again, Gartner is calling for 10%, 11%, semiconductor unit growth over the next two years. So, we think there will be some in 2021.

Got it. And then I guess just for my follow-up, in the auto segment, and I apologize if I missed this. We’ve seen from a variety of people in the auto semiconductor chain that things are maybe less bad than feared. Things are maybe picking up a little bit quicker than expected. Are you guys seeing any of that? Or is that kind of something that maybe you would see next quarter just due to a delay?

Yes. So we are still seeing auto as relatively soft. Right now, our June quarter revenue is roughly at a 36% five-year run rate. So we think auto will take a little bit of time to get back. We think that the improvements in the EV space will probably pick up first in the next couple of quarters.

Got it. All right. That’s it from me. Thanks, guys.

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

Yes, great. Thank you. Just a follow-up on the automotive question, if you could put some numbers to that. I think most people are talking about automotive business bottoming in the September quarter with a gradual recovery from there, at least on units and equipment that we talk to. That being the case in a 36% run rate, can you just quantify that as a number for us quickly, what that business is doing a quarter and if things normalize in the semiconductor unit recovery at some point in 2021, how big that business could recover to on a yearly basis? Can you give us any color around that?

Sure, Christian. So, for the June quarter, we do auto industrial together. It went down quite a bit. It's only about $8 million to $9 million. So you talk about on a normalized rate that will give you some idea. Previously, in the high quarters back in the strong years of 2018, I mean auto and industrial was over $25 million.

Okay, perfect. And then on the memory side, listening to everybody last night, I think it's crystal clear, if it hadn't been already, that memory is going to have strong CapEx here in 2021. Is there any type of number that you can kind of walk us through with an increase in spending and technology transitions with some new wafer starts, etc.? Is there the same type of math you can give us for a recovery in the memory business?

Well, I think, Christian, we start to see the strength for us actually in the September quarters. Probably this is the first quarter we start to see a more significant recovery. In the last quarter, I remember, I think memory was less than half of our historical run rate. We start to see a positive sign, I think starting from the second quarter. I think on Friday you will probably see a stronger recovery than us.

Yes. So Christian, to use the same metric, June quarter memory revenue is roughly about 30% of the five-year run rate.

Okay. Perfect. Okay. Great. And outside of memory and industrial and automotive, is there any particular applications given the fact that 80% of chips use wire bonding? Is there any other big pockets or markets that investors should be paying attention to get more confident in 2021 unit growth of being 10% plus for the industry outside of – well, I'll let you just answer that question if you can. Sorry.

I think 5G is expanding right now. As in wearable devices, it is doing very well. These are two areas I think the market is doing well.

Okay. Fabulous. And then my last question, there seems to be a lot of enthusiasm about mini and micro LEDs. And I think you guys have one of maybe the only machines out there functioning. Can – if some of those big – there's some really large expectations for that marketplace. Is this something that could – if growth rates kind of prove out, I mean could you kind of paint us a picture of how big that market potentially could be for you three to four years out?

Okay. So Chris, I think our own mini and micro LED, what we are focusing on right now are two applications: one is big lighting, and one is direct view. For big lighting, we expect the penetration rate will be about 15% in 2024, and for the direct view, we got initial display, really a large display. I think the penetration rate will be lower, maybe around 5% to 10%. But I want to give you an example of how big the opportunity is. One very large display – if we are in the direct view TV market, we need to transfer about $25 million at a time from one place to another. The traditional transformation is very, very low. So just one display will provide a huge opportunity. So we believe this is a huge, huge market for us. At this moment, I think we only work on one other process that we call final placement. There are many processes involved, and we believe this year, our guidance originally was $14 million for the whole calendar year, but actually, in the short term, we are seeing more positive. We probably can have $14 million in revenue just for our 2020 fiscal year. Next year, we are looking at fiscal year to fiscal year. Our expectation is we probably can do $60 to $80 million. If we push into other spaces, like I mentioned: sorting, mixing, repositioning, and recalibration. If we get to other processes, it will be much bigger. If not, just on the final personal step, we expect probably more than $100 million. The following year will see much more significant growth than this. In a few quarters, we'll provide you more clarity, but we do believe we are very excited. This is really a huge market for us.

Great. I don’t have any other questions. Thank you.

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

Thank you, Kevin. Thank you all for the time today. Also, we'll be presenting at several upcoming virtual conferences throughout August and September. As always, please feel free to follow up directly with any additional questions. Have a great day, everyone. Kevin, this concludes our call. Thanks.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.