Earnings Call Transcript - KLIC Q4 2024

Operator, Operator

Greetings, and welcome to Kulicke and Soffa’s 2024 Fourth Quarter Results Earnings Call. At this time, all participants are on a listen-only mode. A 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 Joe Elgindy, Senior Director Investor Relations. Thank you. You may begin.

Joe Elgindy, Senior Director Investor Relations

Thank you. Welcome everyone to Kulicke & Soffa’s Fiscal Fourth Quarter 2024 Conference Call. Fusen Chen, President and Chief Executive Officer; and Lester Wong, Chief Financial Officer are also joining on today’s call. Non-GAAP financial measures, referenced today, should be considered in addition to, not as a substitute for, or in isolation from, our GAAP financial information. GAAP to non-GAAP reconciliation tables are included within our latest earnings release and earnings presentation. Both are available at investor.kns.com, along with prepared remarks for today’s call. 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, and are subject to risks and uncertainties that may cause our actual results and financial condition to differ materially from the statements made today. 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 and upcoming SEC filings, specifically our latest Form 10-K, as well as the 8-K filed today. With that said, I will now turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.

Fusen Chen, President and CEO

Good afternoon, everyone. While some of our key markets are still adjusting, we expect to see capacity growth in the Ball, Wedge, and APS segments throughout fiscal 2025, as we increase our market share through technology advancements in advanced packaging and dispense. We made some encouraging announcements yesterday about a promising foundry win, our Copper First Hybrid bonding process, which should achieve a three-micron pitch, and an expansion of our shareholder return initiatives. Our leadership in Fluxless Thermo-Compression continues to strengthen. The hard work of our advanced solutions teams and the implementation of various customer development programs have helped us drive market adoption of this innovative process. These recent successes mark important milestones that showcase our market potential, system-level competitiveness, and the broader impact chiplet and advanced packaging can have on high-volume, more established sectors of semiconductor packaging. Firstly, these milestones emphasize that FTC is an extremely competitive solution capable of directly supporting various stacked-die applications, including the most advanced logic and memory production, as well as high-volume logic markets transitioning from older flip-chip processes. We take pride in our innovations in TCB technology and our strong foundational relationships with leading customers, which reflect current market needs and the long-term potential of this competitive technology. Secondly, our current successes and innovations reaffirm our leadership in this technology transition. K&S is the only provider of Fluxless systems validated in production settings. Currently, we have installed over 100 TCB systems globally and anticipate nearing $200 million in cumulative TCB sales. Of this installed base, around 30 systems are actively operating FTC for development or production across five significant IDM, OSAT, and Foundry customers. Our dedicated Advanced Solutions team has been crucial in sustaining this level of support across various emerging applications and customer locations. Close engagement with customers has been vital in developing our FTC platform – APTURA, providing the market insights necessary to create a highly flexible and capable system architecture that can accommodate a wide array of new packaging formats. Although there are many marketing terms used to describe the growing variety of advanced packaging offerings, we have developed a system that supports numerous material handling configurations and meets the most sophisticated TCB requirements, whether chip-to-chip or chip-to-wafer. As demand for advanced fine-pitch FTC and Copper-First hybrid increases, we anticipate continued improvement in our competitive stance within high-performance applications. Ultimately, these announcements underline that the future of semiconductor assembly will demand more complex assembly solutions that can enhance transistor density at the package level, beyond just the most advanced process nodes. Emerging packaging technologies offer significant value to counter the limitations of two-dimensional node-shrink. Our current product lineup, including vertical wire, HPI, FTC, and copper-first technologies, provides robust solutions aimed at improving package-level transistor density across various markets. We have devoted significant efforts to this transition over the years, are pleased with our recent developments, and are eager to see further adoption. Regarding our fourth-quarter results, we achieved revenue of $181.3 million and a non-GAAP EPS of $0.34. In terms of end markets, significant segments such as General Semiconductor, Automotive/Industrial, and Memory have improved as expected, although LED demand remains weak. We anticipate a joint recovery of our two primary end-markets, General Semiconductor and Automotive/Industrial, throughout fiscal 2025. In the September quarter, General Semiconductor saw a sequential decline, mainly because strong TCB revenues in the previous June quarter created variability due to shipment schedules and revenue recognition timelines. Excluding TCB, the general semiconductor sector grew by 11% sequentially, driven by capacity adjustments and returning demand from global OSATs as expected. Although the December quarter typically experiences seasonal softness, averaging a 10% sequential decline over the past three years, we are confident that general Ball Bonding demand will continue to grow through fiscal 2025 due to reasonable unit growth and high field utilization rates. In the Automotive and Industrial sectors, we are noticing improved demand following a difficult year. As we mentioned last quarter, the improvements in General Semiconductor driven by Ball Bonding were completely offset by challenges in Automotive and Industrial during fiscal 2024. At this juncture, we believe both important markets are beyond their lowest points and expect a coordinated recovery to accelerate in fiscal 2025. Despite a recent period of capacity adjustments, we are still actively involved in emerging transitions driven by steady growth in electric vehicles and sustainability trends. We have a strong global customer network that is crucial in facilitating these transitions, which we continue to support. Over the past four years, many countries, in addition to the European Union, have established targets or policies to encourage EV adoption. Recently, the International Energy Agency reported that 7 million EVs were sold globally in the first half of calendar 2024, reflecting a 25% year-over-year increase. While our core wedge, SMT, and battery assembly solutions are directly facilitating these essential transitions within the automotive market, we continually seek new solutions to broaden our market access. In the recent September quarter, we recorded revenue from an Advanced Dispense system aimed at a solid-state EV battery manufacturer. This signifies a new market for our Advanced Dispense business and diversifies our increasing set of battery-related opportunities in the US, Europe, and Asia. We expect follow-up orders in upcoming quarters to aid this customer's production ramp. Overall, LED demand within Ball Bonding has remained soft and continues to face challenges in the traditional wire-bonded high-bright lighting sector. Although this demand level is likely to persist in the near term, we are focusing on promoting our Luminex, laser-based mini-LED placement system, which is positioned for adoption in direct-emissive and advanced backlighting applications. During the September quarter, we recorded revenue from one Luminex system that is nearing production readiness. We anticipate qualifying additional customers seeking ultra-fast LED placement throughout 2025. Lastly, we see ongoing strength related to capacity expansions and technological advancements in the Memory market. In addition to the rising capacity demands for traditional stacked NAND applications, we are collaborating with key memory customers to leverage vertical wire applications in next-generation low-power DRAM packages, as previously discussed, and within NAND applications too. Initial vertical wire LPDDR solutions, utilizing a vertical-fan-out configuration, are currently being tested at two major memory customers, which we expect to transition into low-volume production next year. Similarly, memory customers are also exploring new stacked packaging formats for NAND memory that employ our unique vertical wire solutions. Both approaches promise smaller package footprints and performance enhancements concerning improved die layout, reduced parasitic capacitance, and lower parasitic resistance. These specialized vertical wire solutions exemplify how new packaging formats are addressing node-shrink issues. We foresee similar strategies extending beyond memory to high-volume general semiconductor applications in the coming years. We are pleased with our recent advancements and emerging role in supporting advanced packaging applications in the compute market. This leading-edge sector, now bolstered by chiplet and heterogeneous packaging techniques, was previously outside our served market, despite our strong position in ball and wedge bonding, and has been a central target of our Advanced Solutions strategy. We take pride in showcasing our strengths, progress, and potential through this long-term Advanced Solutions strategy, as further technological developments are creating opportunities in various other sectors as well. While our current TCB victories with Foundry, IDM, and OSAT customers involved in leading-edge applications are enhancing our market potential, we also want to inform investors that leading-edge applications are not the sole opportunity for advanced packaging. Beyond Copper-First hybrid and FTC technologies, our production-ready assembly techniques, including vertical wire, are offering innovative solutions for memory and high-volume general semiconductor. Additionally, High Power Interconnect is improving approaches in power semiconductor and battery assembly, all representing significant technological transitions that enhance the value of our respective assembly processes. We are fully prepared for these transitions and possess numerous market-ready solutions to support our extensive customer base. Our involvement in consortiums, expanding market engagements, securing key customer adoption, and our wide array of advanced packaging solutions underscore our readiness to tackle the next set of industry challenges. Following an extended period of capacity adjustment, we expect continued improvements and cyclical recovery in key end markets, particularly in general semiconductor, Automotive, and Industrial. Looking ahead to fiscal 2025, we remain optimistic due to recent technology wins and favorable market conditions. The relatively high global ball bonding utilization rates, along with reasonable semiconductor unit growth, should spur additional growth in our core market during fiscal 2025. Moreover, the anticipated broader recovery in the Automotive and Industrial sectors aligns with our results this quarter. Lastly, improvements in the macroeconomic landscape are also expected to stimulate global semiconductor unit growth through fiscal 2025. I will now turn the call over to Lester for the financial update.

Lester Wong, CFO

Thank you, Fusen. My remarks today will refer to GAAP results, unless noted. As we anticipate a broader cyclical recovery for our Ball and Wedge businesses, we remain focused on supporting many different customer engagements and new technology requirements to expand market access further into fiscal 2025. We continue to execute our broad growth strategy intended to expand our market competencies and market share in support of emerging technology transitions. This has been demonstrated in many different markets and applications over the years, including stacked wire bonding, battery assembly, display and most notably fluxless thermo-compression today. The success of this strategy relies on our technology strengths, close customer collaborations and also our ability to hedge customer and project-related risks where possible. Considering the extent of the Project W related charges booked during the March quarter of our fiscal 2024, we are pleased to announce we reached a customer agreement for reimbursement of a significant portion of our prior impairment charges. We intend to book this benefit within the current December quarter. Looking back at our September quarter results, we generated $181.3 million of revenue, and a 48.3% gross margin, largely due to an improving mix of higher performance ball and wedge systems. Non-GAAP operating expenses came in above our expectations due primarily to foreign exchange, and end-of-year accrual adjustments. During the September quarter, we booked a net income tax benefit of $2 million, primarily due to a $6.5 million tax benefit from a US Tax Court case, which reduced our one-time transition tax. Prior to today’s call we also announced several updates to our capital allocation programs. First, we received approval for our fifth consecutive dividend raise. We continue to appreciate the consistency and continuity of the dividend program, which allows us to provide our long-term holders with a competitive dividend yield and income stream for their support. Secondly, we announced the authorization of a new repurchase program which we anticipate will seamlessly transition as we complete the existing program. Finally, we wanted to remind investors we have repurchased 10.3 million shares over the prior three fiscal years and continue to maintain a consistent and fairly aggressive repurchase cadence. Over the long-term, growing our market access through organic and inorganic activities remains our priority, although we expect to further enhance long-term EPS growth for investors by continuing our proven repurchase strategy. For the December quarter, we expect revenue of approximately $165 million, plus or minus $10 million, with gross margins of 47%. Non-GAAP operating expenses are anticipated to be $70.5 million, plus or minus 2%. Collectively, we expect GAAP EPS of $1.45 per share and non-GAAP EPS of $0.28 per share. This outlook includes customer reimbursements associated with the cancellation of Project W. As Fusen mentioned, we remain very focused on many different customer engagements and also very focused to drive market adoption of our growing portfolio of solutions. We look forward to announcing additional product success as we prepare for a broader core market recovery in fiscal 2025. This concludes our prepared comments. Operator, please open the call for questions.

Operator, Operator

Thank you. The floor is now open for questions. Today's first question is coming from Krish Sankar of TD Cowen. Please go ahead.

Steven Kinney Chin, Analyst

Hi, thanks for taking my question. This is Steven calling on behalf of Chris. My first question is for Fusen regarding your overall semiconductor end market. It's encouraging to see the sequential growth during the September quarter. However, I would like to know more about the utilization rates at your OSAT customers. Last quarter, you mentioned that these rates would be in the high 70% range during the September quarter. Did you meet or exceed that expectation? Additionally, do you still consider 80% utilization rates to be the right point for when your customers will add capacity, or is the more traditional 90% utilization rate still a better benchmark?

Lester Wong, CFO

So Steven, it's Lester. Let me answer the question on utilization. I think for the September quarter, the utilization rate differs in different regions, right, as well as in different end-markets. So for example, in China utilization rate is over 80%, while for the rest of the world is probably in the mid-70s, but every last couple of quarters, it has been going up. So I think for now general semiconductor utilization rate is also going up. And I think 80% is sort of the threshold we've always said where people start doing more capacity-wise.

Steven Kinney Chin, Analyst

Thank you for that, Lester. For my follow-up, regarding the Foundry customer win for the TCB APTURA tool, congratulations on that announcement. I’m curious if that’s at a major timeline foundry. Additionally, can you provide insight into the longer-term opportunity for APTURA sales next year and the time horizon for that?

Fusen Chen, President and CEO

Okay. The recent win actually with the multiple system deal, this is for the near-term production. Why we believe we actually have upside for the next year and onward? Actually, we have not received a long-term forecast, but we do believe it can be significant for the future. So we probably will give you more update a bit early in next year. But I think this, as a conclusion however actually was a successful to quantify our products. And we believe the long-term will be good. So short-term, I think we probably will update you in the next couple of quarters.

Steven Kinney Chin, Analyst

And Fusen, just a quick follow-up to that, for that FTC win. Are you guys the sole supplier for that solution? Or are you sharing that business with another industry peer, Fusen?

Fusen Chen, President and CEO

Well, I think at the recent moment, we don't want to comment on future possibilities, but we are quite confident in our capability and also are confident about the opportunity we have for the next couple of years or longer-term.

Operator, Operator

Thank you. The next question is coming from Tom Diffely of D.A. Davidson. Please go ahead.

Tom Diffely, Analyst

Yes. Good morning. Thanks for the question. Curious, just on the general semi business, how much did that recover during your fiscal '24? And then what are your projections for fiscal '25? Maybe you can put it in the context of where that market is kind of on a normal basis.

Fusen Chen, President and CEO

In the semiconductor sector, can you provide insights on the general semiconductor outlook for fiscal year 2025?

Tom Diffely, Analyst

Yes, just kind of where we are in the cycle. I mean, obviously, two years ago trough and then it came up a bit last year, and then your growth like again this year.

Fusen Chen, President and CEO

Okay. Let me provide an overview of the market forecast from industry analysts and our perspective. For Q1, we guided $165 million. Industry attrition appears to be taking longer than anticipated, but we expect Q2 to outperform Q1. Analysts predict that next year, unit growth will be around 7% to 8%, with revenue growth nearing 14%, according to Gartner. The growth in semiconductor revenue is primarily driven by AI, automotive, and general semiconductor markets. Many believe that the automotive sector may have already moved past its lowest point. As for general semiconductors, growth in 2025 is expected to come from IoT and AI-edge devices, which include AI-capable PCs and smartphones. We project $165 million for Q1 and are confident that Q2 will show improvement. Regarding the current generation rate, we estimate an average of about 77%, which is close to the 80% threshold that would trigger capacity expansion. Focusing on our products, our Ball Bonder reached a peak of around $1 billion in fiscal '21. While we anticipate a recovery in '24 compared to '23, it has been affected by weakness in the automotive sector. On average, our Ball Bonder has only seen around $300 million in '21, '23, and '24. However, we believe there’s significant growth potential. Historically, our Ball Bonder strong performance typically occurs in the second half of the year. Prior to the pandemic, our long-term expectation was between $500 million to $600 million, and we anticipate reaching this figure in the latter half of '25, primarily due to capacity additions in China, particularly in the 28-nanometer and above range. Southeast Asia, especially Malaysia, is also expected to see increased demand due to the China Plus One strategy. We are optimistic about the Ball Bonder's growth and also have a positive outlook for Wedge Bonder, with a rise in orders in recent quarters. Additionally, we expect our TCB expenses to increase. This summarizes our view along with the industrial forecast for fiscal '25.

Tom Diffely, Analyst

Yes. No, I appreciate the color. That's very helpful. And then as a follow-up, Lester, if you could just talk a little bit about the recovery from Project W you're getting in the first fiscal quarter here, and how that compares to what the total charge-off was, that would be helpful.

Lester Wong, CFO

Sure, sure. As you recall, in Q2, Project W was canceled by the customer and we took an impairment in Q2. So as we indicated in our remarks, I'm very pleased that we've reached an agreement with the customer for the customer to reimburse a significant part of our impairment charges as reimbursement for our costs. So this reimbursement will be recognized in Q1 and it's already in our current GAAP and non-GAAP guidance. So we provide in our earnings release, Tom, at the back, there is a table that shows our anticipated non-GAAP items included in the outlook. And there's a $75 million item related to discontinued business claims and proceeds in that table, which is overwhelmingly related to Project W.

Tom Diffely, Analyst

Okay. Great. Can you just remind us what the total impairment charge was in the second quarter?

Lester Wong, CFO

$105 million.

Tom Diffely, Analyst

Great. Okay, very helpful. Thank you very much.

Operator, Operator

Thank you. The next question is coming from Dave Duley of Steelhead Securities. Please go ahead.

Dave Duley, Analyst

Thank you for taking my questions and congratulations on the impressive TCB wins. I was curious about the various applications you mentioned in the press release. Based on your initial assessment, do you think the foundry win will be more focused on chip-on-wafer or wafer-on-substrate? It seems that chip-on-wafer represents the higher value-added step, so I'm interested to know if you have completed one or both of these steps.

Fusen Chen, President and CEO

Yes. Actually, to answer your question short, this application is for the fluctuates qualification, but it's at the chip-to-wafer level. And this is the most advanced, probably, chip-to-wafer application and use our fluxless. And our fluxless actually can qualify processes for both chip-to-substrate and chip-to-wafer. But for this case, I think now with chip-to-wafer to qualify fluxless. But I think there will be numerous opportunity and numerous projects.

Dave Duley, Analyst

Okay. Will these be for mobile applications, or do you think they will be for high-performance compute AI applications?

Fusen Chen, President and CEO

So I actually mentioned, I think this probably is the most advanced TCB process for the very high-end products.

Dave Duley, Analyst

I was curious about your comments regarding a coordinated recovery in the general semiconductor market. Your utilization rates have improved, so have customers started inquiring about available slots or larger orders? What other signs in the semiconductor business give you confidence in a recovery?

Lester Wong, CFO

Well, Dave, you mentioned that utilization rates are in the high 70s across most end markets, and in China, they are already over 80 and growing in the rest of the world. China has shown strong performance over the last couple of quarters, and we believe the rest of the world is starting to catch up for the reasons Fusen mentioned. There are many fabs coming online in China, which will need wafers to be packaged, and wire bonding remains the most cost-effective interconnect method. Additionally, we are noticing some macroeconomic recovery in the economy, although a bit of volatility persists. Overall, we are seeing increased customer interest both in China and globally.

Dave Duley, Analyst

Okay. Great. One more question for me is you had a very robust gross margin in the quarter. I think it was just over 48%. And I was kind of curious, I've asked this question on previous conference calls, you've introduced a bunch of new products in the core, wedge and wire bonder business that have higher margin profiles. I'm wondering, as we move into next year, what can we expect for the gross margin profile for the wire and wedge bonder business? Thank you.

Lester Wong, CFO

Yes. So for the overall profit margin, I mean, we are still aiming towards 50%. And then you're right, we have started introducing higher gross margin products in both our ball and wedge bonder businesses, and now they are getting qualified and I think they're becoming a high and high percentage of our overall ball and wedge sales. So I think as we move further into fiscal year '25, I think the margin will start expanding. And also, as we've mentioned many times before, Fusen is very focused on cost reduction efforts, which is still ongoing.

Operator, Operator

The next question is coming from an indiscernible analyst of B. Riley Securities. Please go ahead.

Unidentified Analyst, Analyst

Hi. I'm actually calling on behalf of Craig Ellis. And I wanted to ask about something you said to Tom earlier, which is that you expect a stronger Q2 than Q1. That's sort of been a theme across the board with selling season. Are there any dynamics that you see that lead you to believe that Q1 might be somewhat depressed unusually?

Fusen Chen, President and CEO

Well, Q1 is typically one of our weakest quarters. I believe seasonality played a role in this, and over the past three years, we've seen about a 10% decline during Q1. This year's performance aligns with that trend. However, for Q2, we already have a few customers lined up due to our schedule, so we expect Q2 to perform better than Q1 based on the data we have so far.

Unidentified Analyst, Analyst

Okay. Thank you. Yes. That makes a lot of sense. And then so another thing, obviously, auto and industrial have been picking up for I guess three consecutive quarters now. Do you expect that linearity to continue into the next year? And do you think that we've seen the trough of the cycle and now entering into a more sustainable expansion?

Fusen Chen, President and CEO

Well, I think it impacts us the most in auto, there are two products: one is Ball Bonder, one is the Wedge Bonder. So all we can tell you is that we believe the Wedge Bonder is recovering. And so is Ball Bonder. So in terms of the linearity, some of the Wedge Bonder actually have a big customer, both in the US and also in China, too. The indiscernible actually can be big. And so to achieve linearity probably is not easy. But we do believe the Wedge Bonder in the auto industry will do well for 2025.

Unidentified Analyst, Analyst

Okay. Great. Thank you. And then just one last question. Congrats on the TCB fluxless wins. The way that I'm talking about is that it might relate to these leading-edge advanced packaging uses. Am I thinking about this the right way? And what sort of end-markets are carrying this order pickup?

Fusen Chen, President and CEO

We believe the end-markets I mentioned are critical, and their precision and reliability are very important. This technology can be relevant for multiple industries, including future autonomous applications and high-end computing. We see this as a significant application, and once it is qualified, it should last many years.

Unidentified Analyst, Analyst

Okay, yeah. That’s all I have. Thank you so much.

Operator, Operator

Thank you. The next question is coming from Charles Shi of Needham. Please go ahead.

Charles Shi, Analyst

Good evening Fusen and Lester. Congratulations on the TCB announcement. I have a few follow-up questions on that. First, it seems you are referring to the order as a production order. Can you confirm that? Second, from a technical perspective, can you explain why the customer is making the switch to TCB? We've all heard about the issue with the shrinking bump pitch and smaller bumps, but I suspect there might be something related to the large die assembly that necessitates TCB. Can you elaborate on that? Specifically, regarding the large die aspect, is that part of the reason your tools are being adopted? Thank you.

Fusen Chen, President and CEO

I think the qualification I mentioned is related to fluxless technology. We believe we have a strong direction in this area. This is a solder process that does not use solder. It's important to establish a good contact without any upside. Our fluxless process utilizes localized delivery to clean the surface before entering the bonding stage, and we believe this is the right approach. There is no wait time for in-situ cleaning, and we are confident in the bonding quality between copper components. Additionally, we are also exploring the use of plasma. Handling large die is part of our roadmap, and we believe we are equipped to manage very large die, especially as die sizes continue to increase. We have the capability for large die, and we are confident in our technology's reliability and effectiveness. To answer your question, yes, we are ready for production.

Charles Shi, Analyst

Got it. So regarding the current order, is it primarily focused on the two technologies you mentioned? One involves plasma, and the other appears to be a different technology. Which one is currently being shipped?

Fusen Chen, President and CEO

Okay. Of course, we are the ones shipping and we use chemical clean; it's a forming essence.

Charles Shi, Analyst

Got it. Thank you very much. Maybe the other question regarding high bandwidth memory, any progress you can update us on the TCB for that particular market?

Fusen Chen, President and CEO

Sure. We are quite excited about our focus on memory, which has two main areas. The first is vertical wire, specifically for low-power DDR. Preliminary indications suggest that low volume production may begin at the end of 2025. Utilizing vertical wire in our process could reduce costs in the phone sector by about 35%, which we find very promising. The second area is high bandwidth memory (HBM). We have dedicated significant effort to engage with our memory customers to showcase our capabilities, making this a priority for fiscal year 2025. In the next quarter or two, we should be able to provide further updates. We are confident in our technical advantages and have already initiated a lot of work, with more details to come in the near future.

Charles Shi, Analyst

Make sense, Fusen.

Operator, Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Elgindy for closing comments.

Joe Elgindy, Senior Director Investor Relations

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