Earnings Call Transcript - KLIC Q2 2021

Operator, Operator

Hello, and welcome to the Kulicke and Soffa 2021 Second Fiscal Quarter Results Conference Call and Webcast. 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.

Joe Elgindy, Senior Director, Investor Relations and Strategic Initiatives

Thank you. Welcome, everyone, to Kulicke and Soffa's fiscal second quarter 2021 conference call. Joining us on today's call is 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 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 and 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 3, 2020, 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.

Fusen Chen, President and CEO

Thank you, Joe. In addition to our normal quarterly update during today's call, I will also share our perspective on the underlying driver contributing to the global semiconductor shortage. Clarify which drivers are expected to be transitional versus secular and also highlight recent customer wins and the progress within our growing portfolio. Before addressing these items, I would like to first discuss our ongoing ESG focus. As we continue progress on this evolving ESG journey, we have continued to expand our reported metrics while ensuring we are organizationally prepared to meet our future goals. During the March quarter, we issued our fifth annual sustainability report, a 75-page document that tracks our accomplishments in addressing environmental, social and governance topics. In addition, I am pleased to report that we have recently brought on dedicated staff to support our global diversity and inclusion initiative. We look forward to sharing more information in the future. Turning to our current business condition. We would like to share our perspective on the underlying demand driver, positively impacting our business today. At a high level, we see two transitional drivers and several additional and meaningful secular drivers that are expected to continue positively impacting demand for our products and solutions over the long-term. First, the two transitional drivers stem from dramatic capital equipment underinvestment in fiscal year 2019 and 2020 and also the incremental end market demand due to work from home applications such as PCs and gaming. While we expect these drivers to be transitional, lead times for our new core products and also capacity utilization of our installed base remain at a very high level. These data points give us confidence that these transitional drivers are likely to extend into fiscal year 2022. The most comparable period of underinvestment in the past was during 2008 and 2009, which then led to an extended period of strong demand. In addition to these two transitional drivers, I would like to clearly highlight the more material and secular long-term trends such as the anticipated data explosion, supported by global 5G, IoT and artificial intelligence adoption. The electric and autonomous vehicle transition, and also the increasing capital intensity needed to support next-generation, higher density semiconductor assembly requirements. These new applications are expected to create an additional layer of demand, structurally supporting the above-average semiconductor growth over the coming years. Specifically for K&S, we are also addressing the increasing capital intensity needs within our core-served market while we are actively expanding our core market reach. As I discussed last quarter, this new capital intensity dynamic is being driven by growing demand for multi-chip applications. Placing several dies into one semiconductor package provides an effective high-density assembly solution that supports smaller form factor, feature-rich, connected consumer electronics. Higher density packages such as System-in-Package, multichip modules and heterogeneous assembly techniques are market-ready solutions to mitigate the well-known challenge of two-dimensional node shrink. Today, we estimate approximately 40% of wire bonder shipments are supporting multi-die assembly. This rate has effectively doubled in the past years, highlighting our direct participation in supporting more complex assembly. Added complexity creates the need for more advanced assembly solutions, which extends our value proposition within this core-served market. On average, multi-die packages consist of approximately four individual dice. Looking ahead, we expect this to be the beginning of a long-term trend and anticipate the percentage of bonders supporting multi-die applications to grow along with the average number of dice per package, creating a new and significant growth driver for our large and dominant core business. An increasing number of dice per package increases the number of interconnects per package, which in turn, increases the capital intensity of the assembly market. Similar to the increasing complexity, we are experiencing within our core market. Multi-die packaging is gaining momentum for leading-edge logic, memory and optical applications. We continue to anticipate adoption will increase over the longer term, driven by the need to reduce design costs while enhancing power efficiency and performance in a post-Moore's world production environment. We are very well prepared to support customers through this transition, and I'm pleased to announce that we have recently won several qualifications at the top OSATs, IDMs and the foundries supporting complex assembly of leading-edge applications, enabling next-generation logic, memory and image sensing capabilities. As a reminder, we are participating in this fundamental assembly change at the leading edge through four competitive systems: the APAMA thermocompression system, the Katalyst high accuracy flip-chip system, the Liteq500 lithography system and our hybrid System-in-Package solution, which is uniquely positioned to support high-speed placement for high-density multi-chip, flip-chip applications. Over the coming quarters, we are extremely focused on expanding our customer engagements and expect these recent qualification wins to further enhance our product diversification and long-term growth rate. Within mini LED, we shipped over 130 PIXALUX systems collectively through the March quarter. This rapidly growing installed base highlights our leadership and enabling position within this exciting, emerging mini LED opportunity. Our execution and the current run rate is on track to achieve the high end of our fiscal 2021 target of $60 million to $80 million. We also anticipate market opportunities to broaden in the second half of fiscal year 2022. We have a clear leadership position in this market and have materially enhanced our technical competency since releasing PIXALUX in fiscal 2019. Our development initiatives remain on track as we actively extend our existing competitive position and market presence. Mini LED technology is expected to penetrate the broader display market, addressing consumer, IT and commercial applications. We remain very engaged with prospective customers and expect market adoption to accelerate throughout fiscal 2022 and a multi-year ramp to continue. I look forward to sharing additional updates as we expand our portfolio of mini and micro LED solutions. Turning to the March quarter's results. We generated $340.2 million of revenue, representing a 27% increase from the December quarter and an over 125% increase from the same period in the prior year. The APS segment increased by over 15% sequentially, driven by higher utilization of the installed base. We continue to make ongoing progress to expand our shares within the APS market. Capital equipment represents 85% of overall revenue and increased by 29% sequentially, due to improvement across all of our end markets. Within the March quarter's capital equipment sales, general semi-competitors which support a broad set of applications such as smartphones and consumer electronics continued to be very strong and increased 16% sequentially. As discussed earlier, increasing complexity adds an additional layer of demand and higher growth to this sizable end market. Across our other end markets, we saw the largest sequential trends within the automotive and industrial end market, which increased 83% sequentially. These sales are helping to address near-term automotive semiconductor production needs and also much longer-term production supporting the transition to electrification and autonomous driving. Next, memory increased by over 60% sequentially. Although it continued to remain relatively soft, we currently see high utilization within the memory market and anticipate further improvements within memory over the coming quarters. Finally, LED increased nearly 60%, driven by sequential improvement in both general lighting and advanced LED. For the March quarter, we estimate approximately 35% of capital equipment sales supported more complex, advanced packaging applications, which highlights the increasing capital intensity of the general semiconductor, LED and memory market. During last quarter's earnings call, we guided revenue to be $1.1 billion for the full fiscal year. Despite a very strong demand environment, we anticipated supply chain constraints would limit our production capacity in our second fiscal half. Although both known and unknown supply chain challenges remain, I'm pleased to report that our efforts to mitigate recent supply chain constraints strengthen our ability to support customers and improve global semiconductor production capacity. Additionally, as we have aggressively worked to improve the known supply chain constraints, our outlook has also improved. For the full fiscal year, we now anticipate revenue to be between $1.3 billion to $1.4 billion, representing a significant increase over our prior guidance of $1.1 billion and an over 100% sequential change from fiscal year 2020. Over the remaining fiscal year, we anticipate some incremental manufacturing and operating expenses as we continue to address these controllable supply challenges. Lester will provide more details shortly. In summary, we are confident that current market drivers, including 5G, IoT, transitions in automotive and the fundamental change within our core equipment market increases our value proposition for our customers and the broader industry. Additionally, our progress and execution entering new higher growth markets supporting leading-edge IC assembly and the mini and micro LED panel assembly add additional and meaningful layers of business that further support the inherent leverage in our operating model. I would now like to turn the call over to Lester Wong, who will cover this quarter's financial overview in greater detail. Lester?

Lester Wong, CFO

Thank you, Fusen. My remarks today will refer to GAAP results unless noted. As Fusen mentioned, demand for our products and services remained strong in the March quarter with revenue of $340.2 million, up 27% sequentially. We were again able to quickly flex our operational capacity while mitigating supply chain challenges within our control. Gross margins in the March quarter came in at 43.7%, below our target due to the strong growth in equipment, but also additional costs largely related to spot purchases and expediting fees. These incremental fees amounted to $4.9 million during the March quarter. Considering ongoing global supply chain challenges and our strong business outlook, we anticipate these incremental expenses to temporarily continue through the second fiscal half. As demonstrated last quarter, we are now generating a higher level operating margin, which we believe is sustainable and helps to reinforce the longer-term potential of our model. We generated non-GAAP operating margins of 26.4%, which represents a 410 basis point improvement from the December quarter. Over the coming quarters, we continue to be very focused on cost control, but also on new longer-term growth initiatives within the dramatically changing semiconductor and display markets. Overall, non-GAAP net income came in at $79.4 million or $1.26 of non-GAAP EPS during the March quarter, which highlights the leverage in our model. Considering this operating leverage and traction with our outlook, we expect to generate strong free cash flows over the coming years. Operating expenses in the March quarter came in below our previous guidance due to several favorable items, including foreign exchange gains, credit, and asset sales. Collectively, these favorable items reduced March quarter operating expenses by approximately $4.7 million and are not anticipated to continue nor are they considered in the June quarter's outlook. Separately, we previously explained our OpEx model on a GAAP basis, although we have adjusted this model to conform to non-GAAP to better align with peers and analysts' reporting. On a non-GAAP basis, we expect quarterly operating expenses to represent roughly $48 million of fixed expenses plus 5% to 7% of variable expenses tied to revenue. Outside of this adjustment to non-GAAP, this OpEx model remains consistent. Tax expense for the quarter came in at $12.2 million, and we continue to target an 18% long-term effective tax rate. Through fiscal 2021, we continue to anticipate the effective tax rate will come in closer to 15%. Turning to the balance sheet. We ended the March quarter with a total net cash and investment position of $564.3 million, down $12.3 million sequentially, representing $8.92 per diluted share. This decrease in cash is largely due to an increase in working capital due to the demand environment and also accounts for the Uniqarta acquisition, which was closed during the March quarter. Despite the absolute increase in working capital, we have maintained efficiency. Days of accounts receivable increased slightly from 76 to 81 days. Days of inventory improved significantly from 77 to 66 days, and days of accounts payable increased slightly from 55 to 58 days. Similar to last quarter, demand continues to strengthen although our outlook remains supply chain constrained. Our operational and development teams continue to work aggressively to mitigate supply chain challenges within our control. For the June quarter, we expect revenues to be approximately $400 million, plus or minus $20 million. Gross margins are expected to be approximately 44%, plus or minus 50 basis points due largely to product mix and additional costs related to spot purchases and expediting fees. Non-GAAP operating expense is expected to be approximately $72 million, plus or minus 2%, and non-GAAP EPS to be $1.35, plus or minus 10%. In summary, demand patterns continue to be very strong, with transitional drivers expected to continue well into fiscal year 2022 and many structural drivers, such as big data, 5G, IoT, automotive transitions and higher density packaging to continue well into the long term. We also anticipate our successful and aggressive market expansion plans will continue to provide new growth opportunities and support a higher sustainable level of operational leverage. We look forward to sharing additional information regarding these new opportunities over the coming quarters. This concludes our prepared comments. Operator, please open the call for questions.

Operator, Operator

Thank you. Our first question today is coming from Tom Diffely from D.A. Davidson. Your line is now live.

Tom Diffely, Analyst

Yes. Good morning, and good afternoon, good evening. Maybe just start with the health of the end markets, some of the traditional metrics like utilization rates. We hear that lead times for wire bonders maybe extending up to upwards of a year right now. And so I just wanted to hear your view of this huge ramp in how you protect yourselves against the concern of double ordering?

Fusen Chen, President and CEO

So Tom, let's talk about – the first one is utilization rate. I think our utilization rate currently is very high and that's why I can trigger a lot of capacity. The second question to answer you is a double booking. We check carefully about customer double bookings. I think at this moment we feel quite comfortable. But if this run rate continues into, say, the middle of next year, we might expect maybe a little bit more double booking. But at this moment, I think for all business, we don't think that booking, double booking is significant. The third question I think you asked is the lead time. So at this moment, actually, I think our lead time is about 10 months. The gating item actually is supply chain bottlenecks. Our engineering and operational teams are working closely with our supplier partners to ensure we address these supply chain shortage issues and also increase the capacity to meet the demand that customers really need from us. Is there any question I haven't answered?

Tom Diffely, Analyst

Okay, great. Yes. No, that's perfect. And just one quick follow-up, when you look at just the core wire bonding market, is there any way to quantify the benefit you're getting from capital intensity increases for, I assume having to slow down the wire bonders to do more accurate bonding with these multi-chip packages?

Fusen Chen, President and CEO

Okay. Let me tell you what I know, then we can come back if additional questions. Actually, when we entered from 4G to 5G, we saw a lot of additional demand for these multi-chip packages. So, right now, we are not only seeing the actual amount of demand needed, but the multi-chip packages also have additional capital intensity; because you interconnect a lot of connections within the package. So maybe I'll answer the other way. Tom, if you remember, two, three quarters ago, I mentioned our best line for our core business is about $750 million. In a normal year, which represents 6% to 8% unit growth, during a high-growth year, like 10%, our core business probably will be about $850 million. But I estimate this multi-die package will probably add an additional $100 million to $150 million annually to our baseline. So I think you can roughly deduce the ratio of improvement due to the multi-die package.

Tom Diffely, Analyst

Okay. Now that's very helpful. Thank you. I appreciate your time.

Operator, Operator

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

Krish Sankar, Analyst

Yes. Hi, thank you for taking my questions. I had a couple of them, and congrats on really strong results. First, Fusen or Lester, I just wanted to square this first. You said fiscal 2021 revenue is $1.3 billion to $1.4 billion, which implies September revenues have to be down sequentially from June. Why is that the case?

Fusen Chen, President and CEO

Krish, I think we guided this outlook as we move on and visibility is getting better. Previously we guided $1.1 billion, but this time we guided actually between $1.3 billion to $1.4 billion, so that's our new guidance.

Lester Wong, CFO

And Krish, I think also, there’s a lot of volatility in the supply chain, right? So I think right now, we're still looking in terms of the visibility getting better, as Fusen said in his script, for the second half, which is why we increased guidance. But we're still being a bit cautious in terms of the quarter a little further out.

Fusen Chen, President and CEO

So Krish, if you do the math, I remember the first quarter roughly $270 million. And this quarter $340, so that gets us about $600 million. So if we do our Q3 at $400, we hit about $1 billion, right? And if you remember two quarters ago, during my remarks, I also mentioned we might experience slight seasonality in Q4. So $1.3 billion to $1.4 billion, if you take the midpoint, say, it's $350. So that's exactly what we're talking about.

Krish Sankar, Analyst

Got it. Got it. Fair enough. Thanks for the color. And then I just had two quick follow-ups. One is, I think, Fusen, you mentioned how lead times are now 10 months. Is the gating factor for your OSAT customers more on the substrates, not wire bonders? Or is wire bonder also a big issue for the OSAT customers?

Fusen Chen, President and CEO

Yes. Actually, from all the information we got right now, the demand for wire bonders is very strong in OSAT. We continue to get calls not only from OSAT but from different industries like automotive. So we have a lot of high-level discussions to see how we can work together and ensure we are not the bottleneck. But I can tell you, I think OSAT actually called us to be a bottleneck, but hopefully, we want to remove the bottleneck.

Krish Sankar, Analyst

Fair enough. Fusen, just last quick follow-up. How much was China as a percentage of total sales?

Lester Wong, CFO

So for the quarter, China was 61% followed by Taiwan at 21%.

Operator, Operator

Thank you. Our next question is coming from Charles Shi from Needham & Company. Your line is now live.

Charles Shi, Analyst

Thanks for taking my question. Congrats on the strong results. I think I want to start from your visibility in terms of the orders. I understand you guided for a flat fiscal fourth quarter or slightly down. I wonder, what's your outlook today regarding where you stand about the December quarter right now?

Fusen Chen, President and CEO

Well, so Charlie, I think from all the information we have, the next few quarters into FY 2022 look very strong. And when we give our guidance, we also want to make sure we can address the supply chain issue, right? So I think the December quarter for us, we still believe will be very good. But we are not only dealing with one supply chain issue. Occasionally, we need to manage key unknown supply chain issues. That's why I think the only thing we can tell you is that right now, the order really is not an issue. Extend through the next few quarters. But last year had some uncertainty if everybody can work together to increase the capacity according to everybody's need. So I think we have good visibility to the December quarter and even for early next year.

Charles Shi, Analyst

Got it. Got it. Thanks, that's very helpful. Also a follow-up to one of the previous questions: it seems like you are expecting your baseline business, the core business, with multi-chip packages, I mean, four dies per package, even at the same semiconductor package unit growth rate; you are sort of expecting revenue of about $150 million from your core business. Is that right?

Fusen Chen, President and CEO

Yes. I think, of course, in a normal year to normal year, it's probably about $900 million something. So yes, close to $1 billion. I think we are in a much stronger position to support future $1 billion business with a net profit probably around 20%, right? So with the current change from 4G to 5G and with the increased demand for multi-chip and our new business in the market, we feel much better in a stronger position to support baseline around $1 billion and above.

Charles Shi, Analyst

Got it. Got it. Sorry, allow me to ask the last question. Regarding mini LED, we recently hear that a premium electronics company in the U.S. is seeing some yield issues, but it's more likely due to PCBs and adhesive materials, as per the press report. I wonder whether that changes your very near-term outlook for mini LED shipments and revenues in terms of supporting the ramp of that latest tablet model equipped with mini LED. And if you can provide any color, what do you think about whether that can proliferate to the premium laptops within this year or early next year as a suitable technology?

Fusen Chen, President and CEO

Okay. So PIXALUX is our first-generation tool. And for FY 2021, we guide $60 million to $80 million in revenue. So we started to ship higher volumes of our PIXALUX in Q3 of 2020. So it's almost a four-quarter run rate like Q3, Q4, and then our Q1, Q2. In the past few quarters, I think we shipped around $20 million per quarter. And this quarter, we are close to $18 million to $19 million in shipments for the PIXALUX family. So we believe, from now to mid-2022, this run rate will likely hold steady. Our second-generation tool, Luminex, which is in the final stage of development, will probably make some contributions to revenue in the latter part of 2022. So this is my view of our revenue for our advanced display for the next few quarters. We do not expect shipment to our customers for PIXALUX to slow down. Of course, some quarters will be higher, while others will be lower. But on average, I think this year, we guide for $60 million to $80 million, and we are on track to achieve the high end of our guidance. Next year, I think with Luminex, our second generation, we project it to contribute to revenue in 2022. The whole year's looking to be about $100 million at this moment, and we expect it to grow higher due to Luminex serving multi-step, multi-process industries. PIXALUX only serves one step in the process, which is the final placement. This is a huge market, and we are very excited. At this moment, I think we are working with the industry, and the feedback has been very positive.

Charles Shi, Analyst

Got it, got it. Thank you for the second time. I want to go back to the queue. Thank you.

Fusen Chen, President and CEO

Okay. Thank you.

Operator, Operator

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

Christian Schwab, Analyst

Hi. Fantastic quarter, and very impressive outlook for the year. I guess my only question is tying up a lot of the questions that have been asked, Fusen. I'm wondering, given the long-term structural changes you highlighted regarding capital intensity in multi-die packaging as well as the opportunity in mini LEDs in the near term, and micro coming a little later, as we look to next fiscal year, what would be the puts and takes for your revenue to be flat, up, or down from the extremely strong guidance this year? Is there any puts and takes that you can walk us through?

Fusen Chen, President and CEO

Sure, sure, Christian. I think it's a little bit early to forecast precisely for next year. But I think in the next few quarters, we will provide more details. But I can tell you our preliminary view of the FY 2022 outlook. Based on our market study and customer feedback, 2022 will continue to be a very strong year for us and driven by robust secular growth. As I mentioned in my remarks, 5G, IoT, AI, EV, memory growth will increase, and our advanced display prospects remain strong. However, we might see some slowing in transitional drivers. This transitional driver will slow down a little bit at a certain point. Let's make a hypothetical scenario; if we finish our FY revenue around $1.3 billion to $1.4 billion this year, it may not be unreasonable to expect a pullback to around $1.1 billion to $1.2 billion as we consolidate. A little slowdown in FY 2022 after a massive run-up is reasonable. But even with a slight dip in FY 2022, we remain optimistic because we have many growth initiatives. We believe that even if we pull back a bit in 2022, we should be able to restore revenue to 2021 levels or even beyond in FY 2023 and beyond. This is not a forecast, just our preliminary view.

Christian Schwab, Analyst

Thank you for that. That's fantastic. Now, I don't have any questions. Thanks, guys.

Operator, Operator

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

David Duley, Analyst

Thanks for taking my question. Most have been answered. But as far as the advanced packaging products, the APAMA and Katalyst and the lineup of products there, what is a reasonable target for those advanced packaging products in terms of revenue, perhaps in fiscal year 2021 and maybe a target for fiscal year 2022?

Fusen Chen, President and CEO

Okay. So Dave, I think in my remarks, I mentioned we are actively working with customers and have multiple wins. I can tell you there are areas where we have wins in the applications for processors, imaging sensors, and also leading-edge logic customers. These are all task qualification wins that will likely grow next year. We have a position in OSAT for free chip, and our hybrid system, which can support both passive and active components in the same package, has also won qualification. With these new qualifications, we do expect to grow an additional $40 million to $50 million of revenue on top of 2021. We hope this can grow bigger beyond 2022.

David Duley, Analyst

When you talk about – you kind of talked about having revenue be in the $1.1 billion to $1.2 billion range in 2022. If some of the advanced packaging products grow as you expect, wouldn't you think your revenue would be more flat rather than down a little bit?

Fusen Chen, President and CEO

So Dave, when Christian asked his questions, we just tried to express our preliminary feeling. I think this market really is very difficult to precisely forecast. In our next two quarters, we will likely have a better discussion. This is just what we see right now. The transitional trend may turn out as good as this year, or it can be a little worse than what I mentioned. What I would say is that to expect continued growth after doubling in revenue so rapidly isn't very reasonable for us. I think there will be a slight slowdown. However, we are in a better position to support revenues above $1 billion anytime soon. We have a very strong operational margin when we surpass the $1 million revenue mark, and operating net profit rates are up to 25%. We cannot precisely predict the market, but I think the company is poised to move forward positively.

Operator, Operator

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

Joe Elgindy, Senior Director, Investor Relations and Strategic Initiatives

Thank you, Kevin. Thank you all for joining today's call. We will be presenting at several upcoming conferences over the coming months, including conferences with Cowen, Craig-Hallum, Stifel, Jefferies, and also the CEO Summit. As always, please feel free to follow up directly with any additional questions. Have a great day, everyone. Operator, this concludes the call. Thanks.

Operator, Operator

Thank you. This concludes today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.