Kulicke & Soffa Industries Inc Q4 FY2022 Earnings Call

Greeting and welcome to the Kulicke & Soffa fourth quarter fiscal 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 is now my pleasure to introduce your host, Joseph Elgindy, Senior Director of Investor Relations for Kulicke & Soffa. Joseph, you may begin.

Thank you. Welcome everyone to Kulicke & Soffa's fiscal fourth quarter 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 the recent results, the earnings 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. Over the past five years, we have evolved into a more resilient, growth-oriented, and dramatically more profitable company by focusing on our corporate culture, strengthening our established positions, and expanding our served available market. In parallel to this fundamental internal effort, semiconductor assembly within both the high-volume and leading-edge markets is now a more significant contributor to the industry’s value chain. Over the past year, we flexed our capacity and overcame broad supply chain disruptions to support customers through a rapid period of industry expansion. In parallel, we executed on multiple advanced development projects and continued our market expansion strategy. Collectively, these efforts have increased our base level of revenue and are clearly represented in our financial results. Through fiscal 2022, we again generated over $1.5 billion of revenue, in line with fiscal 2021, although our non-GAAP earnings per share increased by 21% over the same period. This higher level of performance increases our resiliency as we look into fiscal 2023. Over recent months, industry leaders and forecasters lowered WFE and semiconductor unit outlooks due to increased uncertainty related to interest rates, global trade tensions, and ongoing supply chain disruptions, which negatively impact both inventory and demand levels across the general semiconductor, LED, and memory end markets. Considering this dynamic environment, we recently conducted scenario planning across our individual business lines. Based on this detailed feedback, we currently expect fiscal 2023 revenue to meet or exceed our previous cyclical peak revenue in fiscal 2018. This outlook suggests a more typical seasonal pattern through fiscal 2023, with ongoing digestion in the first fiscal half, followed by gradual demand improvements in the second fiscal half. Expected second-half improvements are supported by well-known seasonal dynamics in addition to a heavier weighting of advanced display and advanced packaging revenue. Despite this dynamic macro and industry environment, secular trends in advanced display, advanced packaging, and automotive have continued to be very resilient. Lester will provide additional details on our outlook shortly. Over the prior year, we generated revenue of $1.5 billion and non-GAAP EPS of $7.45, representing an increase of more than two times over our prior 2018 peak year, which helps to highlight how our cyclical performance has improved. While semiconductor growth has contributed, since 2018, prudent partnerships, acquisitions, and aggressive development expanded our served available market by 51% to approximately $4.7 billion. This change, which excludes our pending acquisition, provides a more sustainable and consistent path for growth going forward. We remain focused on our long-term strategy and outlook over the coming years. Fiscal 2023 is a critical adoption period for our higher-growth solutions supporting Advanced Packaging, Automotive, and Advanced Display, which are increasingly aligned with long-term, fundamental technology transitions already underway. Despite the softer environment, customer engagements and interest for our growing portfolio of solutions continue to expand. I will provide an update on these key growth initiatives shortly. In addition to our ongoing organic development efforts, we have been seeking competency-based acquisitions that can further accelerate our growth potential. On September 8th, we announced an agreement to acquire Advanced Jet Automation, AJA. AJA’s technology portfolio will further expand our served available market while also materially increasing our access to the evolving micro and mini LED opportunity. Over the past three years, success with our Assembleon acquisition has allowed us to enter the advanced display market. This access offered the opportunity to identify and engage with innovative providers, including AJA, who are also supporting this emerging, high-growth opportunity. AJA’s unique and complementary dispense solutions, which provide market-leading placement accuracy and repeatability, already addressed the high-accuracy needs of Advanced Display and are positioned to address the growing complexity of semiconductor and consumer electronics assembly. In total, AJA provides K&S access to roughly $2 billion total addressable market in dispense, providing an additional layer of growth. This sizable new market access and impressive competencies in the emerging advanced display space supplement our broad organic growth initiatives. Our existing technical competencies, sales and distribution network, and operational strength can help AJA better commercialize new solutions and accelerate growth potential. Turning to our end-markets, we generated $242.1 million of sales from our capital equipment businesses in the September quarter, which represents a 23% increase over our five-year average. Within the general semiconductor market, a softer outlook is expected due to lower consumer spending levels and also indirect effects of new trade restrictions. However, we continue to execute on share gains in the power semiconductor market, Advanced Packaging, and soon also within electronics assembly. Our Advanced Display business is progressing better than expected, and we significantly exceeded our $80 million advanced display revenue target. Advanced Display represented nearly 60% of our total LED revenue. As we execute on development and further drive adoption across a growing customer base, we expect this market to grow materially. After several quarters of rapid automotive capacity expansion, we have returned to a more reasonable level of demand for our core automotive solutions. We continue to closely support our automotive customers through our leading semiconductor, electronics, and battery assembly solutions, which are directly addressing many of the sensing, power management, storage, and distribution needs for current and future electric and autonomous vehicles. These trends are significant and expected to continue supporting above-average automotive semiconductor growth over the long term. Today, we continue to extend our fundamental strength by supporting our own capacity expansion plans and new product initiatives while delivering on several intimate customer engagements. Our ongoing progress and execution increase optimism as we look ahead to FY 24. Allow me to provide a brief update. First, we now have multiple facility expansion and renovation programs in Singapore and Pennsylvania which are providing critically needed clean-room, lab, and metrology space that will enhance our manufacturing and development capabilities. These expansion efforts better support the growing trends and demand for our new advanced packaging and advanced display solutions. Our dedicated semiconductor Advanced Packaging Business has grown by 34% over fiscal 2021 and is projected to continue growing materially over the coming years. Customer interest and feedback for our fluxless-thermocompression systems have increased over the past quarter, and we continue to expect this process will address the majority of heterogeneous assembly needs down to a 10 micron pitch. We currently have an industry leadership position in the chip-to-substrate process and have multiple promising new opportunities with key customers in chip-to-wafer processes over the coming year. In addition to our focus on emerging heterogeneous integration opportunities, TCB also supports the high-growth, high-volume, System-In-Package market for emerging logic, processor, mixed signal, silicon photonics, and sensing applications. This new access to high-growth opportunities provides specific examples of how we expanded our market reach and are raising our base level of business. As the value of semiconductor assembly increases, our engagements with multiple fabless companies have also increased. While these are not traditional end-customers, the assembly process is clearly becoming a more significant factor in IC design than in the past. Demand for our new solutions continues to improve across our growing base of fabless, foundry, IDM, and OSAT customers, and we are working aggressively to support broadening customer engagements. Considering this new momentum, we anticipate thermo-compression to provide meaningful growth over the coming years. To highlight this momentum, our thermo-compression business grew by nearly five times year-over-year. We have also recently identified specific TCB customer opportunities of over $300 million, cumulatively, through 2025. In addition to Advanced Packaging, we are strategically focused on extending market share through the pending release of our latest electronics assembly system. Looking back, our 2015 acquisition of Assembleon provided several market expanding opportunities for K&S, including additional access into the automotive market, new access into the system-in-package flip-chip market, and also new access into the emerging mini and micro LED space through the success of PIXALUX. After securing positions in these adjacent markets, we are also targeting share gains within the core electronics assembly market. Recent and ongoing development efforts have positioned us well to expand our access within electronics assembly, which represents a served available market in excess of $2 billion. Over the past year, we have developed a new system architecture which addresses the growing accuracy and throughput needs of next-generation electronics assembly. Initial customer feedback has been well-received, and we look forward to officially releasing our latest system in the second half of fiscal 2023. The last update is regarding our growing portfolio of advanced display solutions, which continues to track to expectations as we head into fiscal 2023. Sustained development efforts have created multiple advanced display solutions, PIXALUX, LUMINEX, and also close customer development programs, which comprehensively address the LED placement requirements of emerging backlighting and direct-emissive applications. At a high level, LCD technology, which represents the vast majority of display production, will benefit significantly from emerging backlighting trends over the long term. To be clear, LCD technology offers a lower production cost and longer useful life than current alternative display technologies such as OLED. Emerging backlighting trends supported by the success of PIXALUX and growing interest in LUMINEX further optimize the cost/performance tradeoff for LCD technology, specifically with larger-format displays. Alternatively, OLED technology provides a thinner, higher-quality image, supporting high relative share with smaller-format displays, although image degradation and production costs have limited broad OLED adoption in high-volume, larger-format display markets. Over the coming years, direct-emissive displays, using only a dense matrix of very small LEDs, have the potential to challenge OLED technology from a performance and power efficiency standpoint. This trend is only beginning to play out, and we are well positioned to participate through our close customer development initiatives and the success of LUMINEX over the coming quarters. For both advanced backlighting and direct-emissive approaches to be adopted, lowering production costs is critically important to driving market adoption. While production costs of mini and micro LED will improve, we are most focused on delivering higher throughput solutions which support both of these long-term trends. Our first-mover position and success with PIXALUX has provided us with the largest installed base of ultra-high-speed pick-and-place tools for advanced display. This level of performance improves with the LUMINEX laser-based transfer method. With LUMINEX, we are on track to achieve three times the productivity benefits of PIXALUX over the coming months. Our R&D teams are actively supporting several ongoing qualifications in parallel for LUMINEX as they reach this new milestone. We continue to expand our advanced display installed base and pursue multiple LUMINEX engagements while making consistent progress across several customer development initiatives. Customer interest for our latest LUMINEX system remains strong. We have also recently shipped a new customer-specific advanced display solution that further increases our optimism and long-term potential with these broad technology trends. While near-term industry growth rates routinely change across the semiconductor market, our positions have fundamentally improved and better correlate with secular trends shaping the future advanced packaging, automotive, and advanced display markets. Through ongoing execution of our development programs, integration of AJA, and driving customer adoption, we are well positioned to further enhance our market access, growth prospects, and fundamental strength over the near term. 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 otherwise. First, I would like to address the recent changes to U.S. trade regulations, which have clearly impacted many front-end solution providers’ ability to support existing production and ship tools to many Chinese companies involved in IC fabrication. While we are still receiving confirmations from customers, we do not anticipate any material direct impacts to demand. The vast majority of the systems we ship into China are simply not restricted. Additionally, none of our products support IC fabrication; our products only support IC assembly, which is excluded from the new restrictions. While we don’t anticipate direct impacts, the new rules will likely create near-term supply chain disruptions which may indirectly impact demand for our products. As Fusen explained in detail, the current macro-environment remains dynamic, and we remain committed to expanding our product portfolio and market access in a fundamental, long-term, and sustainable way. Our strategic path includes many facets: customer engagements, technology partnerships, development programs, qualifications, and highly selective acquisitions – which sustainably enhance our technology-oriented growth. As we strategically expand our market access and product diversification, through-cycle operating leverage and free cash flow generation will continue to improve. Over the past fiscal year, we quickly flexed our manufacturing to meet an unprecedented level of demand for our high-volume ball bonder business, generating revenues of over $1.5 billion, non-GAAP net income of $455.6 million, and non-GAAP earnings per share of $7.45. As Fusen mentioned, non-GAAP EPS actually increased by 21% year-over-year, despite a similar level of revenue. The largest individual driver to this benefit was due to our 380 basis point improvement in gross margin during fiscal 2022. To be clear, the growing capital intensity of the semiconductor assembly process is directly benefiting the value proposition and long-term growth rates of our leading ball bonding solutions. Our strengthening positions in advanced display, advanced packaging, automotive, and electronics assembly may be easier for investors to digest, although we have also optimized the core, high-volume ball bonder business. While ball bonding has historically been underappreciated, the underlying business has fundamentally improved. Since fiscal 2020, our ball bonder gross margins have increased by 340 basis points, largely due to stronger demand for our high-performance systems that are more capable of running multi-die applications. Specifically, the Rapid series of ball bonders, our most advanced architecture, grew from representing only 21% of total ball bonder units in fiscal 2020 to representing 69% of total ball bonder units in fiscal 2022. New complex packaging trends enhance our existing leadership position and the longer-term growth rates within this large, well-established process. Turning to our recent results, during the September quarter, we generated revenues of $286.3 million, gross margins above 46%, non-GAAP net income of $70.2 million, and non-GAAP EPS of $1.19. Gross margins came in slightly below our guidance range, largely due to accounting associated with customer-related development efforts. Non-GAAP operating expenses during the quarter came in better than expectations due to immediate cost control efforts, a reduced pace of hiring, and foreign exchange gains related to a strengthening U.S. dollar. Finally, tax expense for the quarter came in at $6.6 million, slightly better than expectations. Over the past year, our total cash position increased by $35.7 million after committing $322.2 million to investors through dividends and share repurchase activities. Working capital days increased to 341 days in the September quarter, representing a sequential reduction in revenue, a sequential increase in cash, and a collective decline in accounts receivable, inventory, and accounts payable. Through fiscal 2022, we generated $367.4 million of adjusted free-cash flow, highlighting our longer-term earnings potential. Through the September quarter, we repurchased an additional $60.2 million of shares, bringing our fiscal year total to $282.8 million, which represents 5.6 million shares or nearly 10% of our fiscal 2022 weighted diluted share average. At the end of the September quarter, we had nearly $250 million remaining under our repurchase authorization and continue to manage an active, open-market repurchase strategy. In addition to the repurchase activity, we have also just announced our third consecutive annual dividend raise, bringing our total dividends per share to $0.76 annually and maintaining a competitive dividend yield. The ongoing repurchase program and steadily growing dividend help stabilize our valuation while optimizing our fundamental market expansion efforts on a per share basis. For the December quarter, in line with Fusen’s comments regarding softening macro and industry environments, we anticipate revenue of approximately $175 million, plus or minus $20 million. Gross margins are expected to reduce to 45%, plus or minus 50 basis points, due to product mix, accounting related to our customer development initiatives, additional expediting fees, near-term facility resizing effects, and also higher than expected inflation. Non-GAAP operating expense is anticipated to be approximately $68 million, plus or minus 2%, due to ongoing expansion efforts in addition to inflation. Over the last month, we have reduced our rate of hiring and limited non-critical expenses as we have during prior soft demand periods. Non-GAAP EPS is expected to be $0.20, plus or minus 10%, which considers an effective tax rate of just over 20%. This increase is partially related to regional income mix, although it is primarily due to the mandatory capitalization of R&D expenses under Section 174 beginning in fiscal 2023. Unless repealed or modified, this provision of the Tax Cuts and Jobs Act of 2017 is expected to broadly affect all U.S. corporate taxpayers with R&D activity. As we look further out through fiscal 2023, we continue to anticipate a period of capacity digestion to extend into the March quarter, with typical seasonality trends driving more distinct capacity needs in the second fiscal half. It remains a very exciting time for the Company as we have significantly broadened our alignment with fundamental technology changes across the semiconductor, advanced display, electronics assembly, and automotive markets. As the industry recovers and we continue to execute, we are well positioned to reach new levels of financial performance beyond 2023. While there are near-term challenges for the entire industry, our fundamental improvements, enviable financial position, and active roles enabling several long-term technology transitions will allow us to emerge as an even stronger and more profitable company. This concludes our prepared comments. Operator, please open the call for questions.

Thank you. Our first questions come from the line of Krish Sankar with Cowen. Please proceed with your questions.

Yes, hi. Thanks for taking my question. I had a few of them. First one, Fusen, when you look into the December quarter and subsequently into March, is it fair to assume pretty much all segments are sequentially down in December and then March, like general semi, memory, auto, and LED, or is there a trend in any of them into the December quarter?

Well, I think what we are seeing, our revenue in perspective of the previous quarters, we feel that other than the unit growth of related products, actually other products hold pretty well. So we feel like Q1 and Q2 are probably stable, and we could expect the situation to probably get better after that. And I think, yes, I hope that answered your question.

Got it. And then just out of curiosity, what gives you the comfort that your fiscal second half demand will recover, i.e., from the June quarter onwards?

So, there are a few things. One is, of course, our customer feedback. We continue to talk to the customers. I think our inventory digestion has been easing, and people feel like they are more focused, actually, in the second half. Our second half has more advanced display and advanced packaging revenues, which are also weighted more significantly. I think a few market forecasts in relation to our 10-K probably suggest that after the March quarter, the situation will be better.

Got it. Got it. All right. And then I just had two other quick questions. In the September quarter, what was your percentage of sales to China?

It's just around 50%, Krish.

50. So it's kind of been in the same range for a while now, right?

Yes, but 20% of that, actually, is not, it's the international customers, but with their factories in China.

Got it. And then a final question, in the past, I think you mentioned that in FY 2022, Advanced Display is about 60% of total LED sales. Do you expect that dollar value to decline in FY 2023 for Advanced Display given the LED revenues right now? Or do you actually think year-over-year FY 2023 Advanced Display revenues would grow?

Well, we anticipate that Advanced Display for FY 2023 will be about similar to FY 2022, or roughly about $100 million.

So, I think in my script I mentioned all these initiatives. In fact, for 2023, you're looking at additional projects hitting the market. So that's the PIXALUX and LUMINEX, which we are actually targeting multiple areas where both direct initiatives and larger projects could lead to further gains. While the downturn has impacted advanced display, we are optimistic about meeting our revenue targets for 2023.

Got it. Got it. Thank you very much.

Thank you. Our next questions come from the line of David Duley with Steelhead Securities. Please proceed with your questions.

Thanks for taking my questions. I guess first of all, you talked a lot about the thermal compression bonding opportunity. I was wondering if you could just elaborate a little bit more on what you think the size of that market is in dollars on an annual basis and what your market share is? And then your competitor, I think, on their conference call was making a big deal about working with AMD or a logic provider. Could you talk about who your key customers are? What end markets your efforts are in?

Okay. So I think TCB, recently, the prospects have actually increased a lot. Part of that is due to the transition to advanced thermal compression. So I think in my previous call, we mentioned our backlog of $80 million. Of course, we ship to our customers, and in the meantime, we also get new purchase orders. However, our purchase orders require specific delivery times, so sometimes a backlog isn't the best judgment of market demand. We conducted a study after visiting many customers, including design houses and foundries. We feel this is a very promising market. Let me clarify that I think TCB, particularly we're talking about fluxless TCB. We have this as when TCB processes go above 30 microns, the flux becomes a contamination issue. We also have a proprietary technology that allows for very clean silicon-to-silicon bonding. Currently, the largest volume is between 30 to 10 microns, which is a substantial market.

Yes. Just as a follow-on to the thermal compression bonding, this process is used mainly with the logic segment, right? Are there other markets that would be adopting this technology?

Well, you mean thermal compression, right? Yes, I think we are also seeing interest from some memory companies, and of course, our focus is on hybrid bonding, but that's a different area. So to reiterate, we identified high potential opportunities over $300 million. Previous calls indicated an $80 million backlog, which we expect to ship through 2023. The $300 million opportunity mostly falls into advanced packaging and logic applications.

Okay. And then I just wanted to clarify, in your prepared remarks, I think you said something comparing your current business levels to 2018. Could you just repeat what you said? I just didn't hear that.

Sure. Given our business cycle, the upturn began in 2020 to 2021. Our 2020 revenue was approximately $630 million. We ended 2021 with $1.5 billion. Hence, this gross rate is up about 168%. So I think during the downturn following the trade restrictions with China, many companies dialed down their wafer set expansions by roughly 15% to 20%, which will indirectly affect demand for the back end. We are positive that we can meet or exceed the 2018 revenue levels of around $900 million, which we feel is achievable.

Okay. Final question from me, Lester, you mentioned how you'd seen improvement in the core wire bonded gross margin over the last two years. I think it was 340 basis points, a very robust number. But correct me if I'm wrong, don't you have a new wire bonder coming out next calendar year that should also help improve gross margins? Could you elaborate a little bit more on that?

Yes, we continue to introduce new products into our core business. So we believe that the ball bonder gross margin will continue to remain high, and we'll continue to look for ways to increase the margin on our core business in ball bonder as well as wedge bonder.

So David, in the downturn, the demand and market share have some correlations. We'll do our best to improve gross margins while also ensuring we capture enough market share.

Yes, I guess what I was referring to is, in the past, you've talked about being able to improve overall margins by 400 or 500 basis points, and I think that was kind of from a 47% level. And I realize you're going into a downturn, so during that period, gross margin improvement doesn't happen. But when we get back to normal levels at one point or another, do you still think you can improve the overall gross margins to that level?

Yes. Our target has always been 50% gross margins in a non-downturn year, and we believe that in 2024 and beyond, we can reach that goal and go higher.

Thank you. Our next questions come from the line of Craig Ellis with B. Riley. Please proceed with your questions.

Hey, thanks for taking the question. And team, congratulations on the dividend increase and cash used for share buybacks and focused M&A. So Fusen, I wanted to start just by seeing if you could provide some color around some of the fiscal 2023 commentary. So very helpful to hear that it seems reasonable from the company's view that sales might be down 30% to 40%. The question is, as you look at that and going back to the comments about customer interaction and conviction that they have that things can move up in the back half of the year, how should we look at trends for general semi, advanced display, auto and industrial, and memory? Which of those would be relatively stronger next year, which relatively weaker based on what you're hearing from your customers?

Well, I think memory is looking more favorable towards 2024, but for the earlier part of 2023, there could be some improvement. However, for the display market, consumer demands are under pressure, but long term, we're focusing on high throughput needs. For advanced display, we are looking at around $80 million for the upcoming fiscal year, while in advanced packaging, we see a strong demand that exceeds our capacity, and we are working to meet that demand.

Yes, that's really helpful, Fusen. Thank you for that. Lester, I wanted to understand more about what was happening with operating expense control. I think you talked about slowing hiring and a few other things that happened tactically, and there was some, I think, FX benefit. So can you quantify the FX benefit and what should we expect with operating expenses quarter-on-quarter? I'm sure we were down just given the variable cost model, but are there incremental tactical or structural cost savings that are coming into the model as we look at fiscal 1Q?

Yes, so thanks, Craig. I think for Q4 we did have about $4 million positive forex that helped bring OpEx down. I think the other thing is we are implementing cost control, but as we have always done, we focus on our critical projects. We continue to invest in our critical projects. And I think in Q4, we budgeted in hiring certain personnel in critical projects and R&D. The labor market is still a bit tight; hence, some of those hires did not happen. We expect that to happen in Q1. We will continue to look at non-critical, controllable costs, pushing them out to the second half if we can or delaying them all the way to FY 2024. But for critical projects in Advanced Display and Advanced Packaging, we will continue to invest in Q1 and throughout FY 2023. We believe that this will place us in a strong position when the recovery arrives in 2024.

That's helpful. Thanks, Lester. And then lastly, the deck talked about some positives that you're seeing in the compound semi part of the business, and I was hoping you could just elaborate on what you're seeing and what investors could expect in fiscal 2023?

I'm sorry, I probably miscommunicated. I was actually speaking about high-power semiconductors, right? So that is linked to our automotive applications.

Is that IGBT, Fusen, or are you talking about silicon carbide?

It is IGBT, yes.

Yep. Okay. And then I think that that's auto-related application.

Yes.

That's correct. It’s related to power control.

Thank you for taking my questions. I want to revisit your comments about the fiscal 2023 revenue number. Do you believe it will meet or exceed the fiscal 2018 figure of around $900 million? You've already projected the first quarter to be about $175 million, and you mentioned that the March quarter is expected to show a lower run rate. However, you anticipate that the second half will drive more growth to achieve roughly $900 million for the year, which would require second-half run rates near $300 million per quarter. How do we reconcile your guidance for the first quarter and second quarter, which is significantly below $200 million, with a shift toward $300 million in the latter half? That’s my first question. Thank you.

Hi, Charles. Thanks for the question. Traditionally, the second half for us has been much stronger than the first half. In fact, historically it has been 60% plus of the year's revenue in the second half. And as Fusen did indicate that, yes, the first half is softer, the drop in Q1 is likely, but in Q2, we expect it to be flat. However, as we indicated, macroeconomic factors may improve in the second half of fiscal 2023; and some of the new projects will provide more significant revenue in the second half of 2023. We believe that the second half will be stronger than the first half and provide a pathway to exceed FY 2018 levels.

Yes. But you are assuming, I think you mentioned about capacity digestion. That's going to only last a couple of quarters for you this down cycle, but if I look at it historically, at least the 2018-2019 cycle, the digestion actually lasted about two years. How do you think this cycle is going to be different from the last down cycle if you assume a relatively brief capacity digestion here?

Yes, so Charles, we are not saying it will be at a very, very high level. At this moment, if you look at the related products, inventory is very low already. If we have two quarters of this, so that's about 360. So let me comment on this. Historically, our second half is about 60%, and if we assume $900 million for the year, that's about $540 million from the second half. So you add this up to around $900 million, and we feel that we probably have strength in some products in the second half. Even $300 million compared to the peaked quarter we reached was $418 million before, and I think this cycle is unique. The downturn in 2019 coincided with trade tensions and then the pandemic, and hence much more volume was in the pipeline in China. It's more difficult to predict our business cycle, but we believe we can achieve $300 million if there’s an improvement in unit-oriented products. Coupled with advanced product momentum, I believe this goal is achievable.

Got it. Got it. So you have stopped disclosing quarterly backlog, but I think you are still obligated to disclose your annual backlog number, since this is your fiscal year end. Can you provide what the number is?

531.

How much again? Sorry…

531 million.

Got it, got it, got it. Thank you. So next question, you talked about AJA acquisition. How much of annualized revenue run rate is that business? Can you give us some number there?

Well Charles, I think obviously for FY 2023 we're integrating the business, right? So we think there's significant growth given the size of the dispense market. For FY 2023, we expect it to be a little over $10 million for AJA, but we will only have AJA for part of the fiscal year, likely just the second half.

Got it, got it. So maybe for the sake of time, my last question and really I want to ask you about OpEx. You've guided, well, first off, for your September quarter non-GAAP OpEx was about $59 million, if my math is right. But you are guiding December quarter non-GAAP OpEx $68 million. I think that's still a big increase from the September quarter level. Given the macro environment, should we think about more cost control than what's implied in your guidance?

Well, Charles, we do have stringent cost control, as I've already mentioned, right? For non-critical controllable expenses, we are watching very carefully as we did in the previous soft quarters, and we'll continue to do so. But as I indicated in my earlier remarks or answer to a question, we will continue to invest in critical projects, particularly in Advanced Display, Advanced Packaging, electronic assembly, as well as our core business, because we think those present very exciting opportunities. We've mentioned that we believe we will have some strong positions in Advanced Display and Advanced Packaging in 2024 and beyond. When recovery comes back, with the investments in our core business, we will be able to increase margins and gain additional market share. So we are cautious on cost control while understanding the need for future investments.

Thank you.

Thank you. Our next questions come from the line of an unidentified analyst with D.A. Davidson. Please proceed with your questions.

Thank you for taking my questions. I have a couple. First, what's the underlying assumption for semi unit growth for fiscal 2023? You've given your commentary on 2023 let's say something nearly like $900 million. What's the assumption for semi unit growth for that?

We assume semi unit growth for FY 2023 to be about flat to plus or minus 2%.

Got it. So far, we believe we can achieve $900 million in top-line revenue for 2023, and we plan to continue investing in 2024 and beyond. From a bottom line perspective, the number seems to be on target, likely around the levels we saw in 2018. Can you provide any insight regarding the bottom line for fiscal 2023?

Well, we don't guide beyond the quarter, right? But I think as far as the EPS or the GAAP net income, at least for FY 2023, we think we can do revenue better than 2018. I think the gross margin for the year is probably going to be around 46% to 48%, increasing to better as we move into the second half of the year. We've given an indication what the OpEx number should be, so I think your model should be able to generate what you think the EPS would be.

Okay. Got it. And lastly, I think last time you talked about the SMT opportunity, and I just wonder if there is any update? It seems that you are talking about a share gain story on new generation tools. What can you tell us about your competitive advantage that allows you to achieve that? Is that more of a second half 2023 story or more likely in 2024?

Yes, actually, this is a new SMT system. There are many competitors in this space. We believe that our new innovation concerning the head speed is very impressive due to our multiple capabilities, and we are set to officially release this in the second half of 2023. The revenue impact will likely be more visible in 2024, but we have had positive feedback during market testing, and we feel confident in our throughput and reliability.

Got it. That's helpful. Thank you.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Joe Elgindy for any closing comments.

Thank you, Darrell, and thank you all for joining today's call. Over the coming months, we will be presenting at several investor conferences hosted by Needham, the Susquehanna Financial Group, in addition to the Annual New York City Summit. As always, please feel free to follow up directly with any additional questions. This concludes today's call. Have a great day everyone.