Earnings Call Transcript - KLIC Q1 2022

Operator, Operator

Hello, and welcome to the Kulicke and Soffa 2022 First Fiscal Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Joe Elgindy, Senior Director, Investor Relations. Please go ahead.

Joe Elgindy, Senior Director, Investor Relations

Welcome everyone to Kulicke and Soffa’s fiscal first quarter 2022 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 our supplemental earnings presentation are both available in the Investor Relations section of our website. In addition to historical statements, today’s remarks will contain statements relating to future events and our future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a complete discussion of the risks associated with Kulicke 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 2, 2021, and the 8-K filed this morning. 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, CEO

Thank you, Joe. It’s continued to be a very exciting and transformative time for the company. Our core business is being fundamentally enhanced as the importance of semiconductor assembly increased in most high-volume and leading-edge semiconductors. Additionally, we continue to make significant progress expanding our market reach as the interest and adoption of our advanced packaging, automotive, and advanced display offering are accelerating. Our confidence in these high-potential new initiatives is improving as our market engagement is tracking better than expected during our Investor Day in September. I will spend a few minutes to cover each. Within our dedicated advanced packaging business, we continue to gain access to the logic networking and mobility market. This portfolio, including our lithography, thermo-compression, high-accuracy flip chip, and system-in-package flip chip solutions, is extremely competitive and addresses the broad and growing semiconductor assembly market. We continue to drive adoption across this growing portfolio, and APAMA, our thermo-compression platform, is making significant progress. Heterogeneous integration or Chiplet integration is one of the long-term opportunities that we are pursuing aggressively, although this is not the only market. In addition to Heterogeneous integration, we are also extending access within mobility for both high-volume logic and next-generation 3D sensing applications and also for co-package optics necessary for ultra-high-speed network communications, such as high bandwidth transceivers. The key benefits of Thermo-Compression, our TCB process includes an efficient solution for higher bandwidth interconnect assembly down to 10-micron pitches, which is well beyond the current interconnect pitch for most leading logic applications. Additionally, TCB enables us to address emerging 2.5D and 3D architectures. This shift to emerging multi-chip structures is increasing the value-add of packaging technology and is increasingly necessary to support year at the leading edge. In addition to this fundamental benefit within leading-edge logic, TCB also enables assembly for components, which are heat sensitive, including substrates and optical components used for communication and sensing. We recently received acceptance and recognized revenue for a high potential silicon photonics application, supporting the optical transceiver market, with increasing cellular bandwidth needs. Network-to-network communication is expected to grow dramatically, with high bandwidth optical transceiver expected to grow at a 50% CAGR through calendar 2025. We are very early in this transition and we’re positioned to help enable this growth. The next update is related to our automotive opportunities. The transition to electrification and autonomy is accelerating semiconductor growth in the automotive market at an overprice the industry average. Over the coming year, our high-performance, high-reliability systems match well with this end market. In addition to our historic leadership position within the automotive semiconductor applications, we have also been developing new battery assembly systems. Over the past several years, we had one core battery solution that was adopted and globally deployed by one customer. While this solution was very successful, the market was limited. Today, many more customers are entering this space, and we are working to bring new innovative solutions, supporting both cylindrical and prismatic battery opportunities to market. Recently, our engagement and the market interest with our current and new battery offerings have expanded dramatically. At this pace, we are tracking better than the expectations set during the recent Investor Day. We are currently engaged with over five high-potential customers eager to run battery production for the commercial and consumer vehicle market. We are also experiencing growing interest in emerging industrial applications, such as battery backup and agriculture. Finally, the third key growth focus area is advanced display. We continue to deliver our market-leading PIXALUX system and are ramping production of several LUMINEX quantification tools. Over the coming quarters, we anticipate several new LUMINEX qualifications and to gain more visibility on a broader industry ramp. Turning to our results this quarter, we achieved $460.9 million of revenue and a non-GAAP EPS of $2.19. We generated $408.6 million in capital equipment, and the demand remains strong across all end markets. General semiconductor remained very strong, softening by 16% sequentially as anticipated. In general semiconductor, the more capacity-driven bonding business declined by 8%. The larger sequential reduction stemmed from very strong September quarter demand for our wafer label, logic, and power assembly solutions. Utilization rates remain strong across this broad installed base. As a reminder, general semiconductor revenue in the recent December quarter is currently over 50% higher than the same period last year. Within the LED market, we continue to support rapid growth in leading advanced display. Advanced display increased by 28% in the December quarter, representing 56% of our total LED revenue, up from 40% in the September quarter. We continue to aggressively work toward expanding our presence in this exciting area and anticipate advanced display will grow dramatically over the long term. Next, automotive and industrial remain a long-term growth opportunity for us. In September, automotive demand increased by 92% sequentially and was driven by improvements in our battery assembly, power distribution, and sensing solutions. We are very eager to continue participating in the long-term transformation of the automotive space. Finally, demand for our memory solutions increased by 17% sequentially from the very strong September quarter. Overall, current market conditions and our long-term outlook are tracking better than expected, and we remain very positive over the coming years. Near-term, we are very focused on driving new customer engagements and winning new qualifications across advanced packaging, automotive, and advanced display portfolios. Over the prior year, our focused development efforts have aligned our business with long-term, technology-driven market opportunities, which we are executing on. While broader industry supply chain and global logistics challenges are part of the current operating environment, we believe they are very short-term and anticipate greater improvement through fiscal 2022. Over the coming years, the future is very bright, and we look forward to sharing our progress over the coming quarters. With that said, I will now turn the call to Lester, who will discuss our financial performance. Lester?

Lester Wong, CFO

Thank you, Fusen. My remarks today will refer to GAAP results unless noted. During the December quarter, we continued to perform in a very dynamic supply chain environment, and we were able to recognize revenue of $460.9 million. Considering our above-average LED-related revenue during the September quarter, underlying demand in other end markets remains robust. Gross margins came in strong at 48.4%, which stemmed from sequential improvements in both capital equipment and aftermarket products and services, particularly related to a lower amount of expediting and logistics expenses in the December quarter. Non-GAAP operating expenses came in below our expectation at $65.4 million during the December quarter. This is primarily due to a delayed start in a few internal projects, which favorably benefited SG&A and R&D-related expenses. Tax expense for the quarter came in at $17.9 million, and we anticipate an effective tax rate of approximately 15% for the full fiscal year. Non-GAAP net income came in at $138.8 million, generating $2.19 of non-GAAP EPS during the December quarter. Turning to the balance sheet, working capital has remained efficient. Days of accounts receivable increased from 78 to 84 days, days of inventory increased from 59 to 75 days, and days of accounts payable increased from 55 to 56 days. During the December quarter, we generated free cash flow of $92.7 million. Our net cash balance totaled $464.7 million at the end of December. From a capital allocation standpoint, we continue to deliver value in several areas. For the dividend, which was just increased by 21% for the January payout, we intend to continue increasing in a consistent and long-term manner while maintaining a competitive yield relative to our peer group. Separately, we have and are continuing to accelerate the cadence of our open market transactions under the existing repurchase program. During the December quarter, we repurchased over four times as many shares relative to the September quarter. Our total share repurchases in the December quarter were 50% higher than our entire fiscal 2021 repurchase activity. We continue to take a long-term view on the repurchase program and expect to gradually increase our repurchase cadence throughout the current fiscal year. As outlined last quarter, we continue to expect the industry will expand aggressively through fiscal 2022, although at a slightly lower rate than fiscal 2021. In line with our Investor Day assumptions, we continue to anticipate above-average semiconductor growth will continue through fiscal 2023. We have assumed global logistics challenges improve and industry supply chain constraints begin to ease as wafer production improves in the second half of the calendar year. Under these general assumptions, we currently anticipate revenue to be approximately $1.58 billion in fiscal 2022. For the March quarter, we expect demand to remain strong, and we anticipate approximately $380 million of revenue plus or minus $20 million. We anticipate gross margins to be 48% in the March quarter, plus or minus 50 basis points. Non-GAAP operating expense to be approximately $75 million, plus or minus 2%, and non-GAAP EPS to be $1.45, plus or minus 10%. We are very focused on supporting this period of aggressive industry expansion and are also extremely focused on driving new engagements, qualifications, and ramping production within the advanced packaging, automotive, and advanced display portfolios. Our engagement and new qualification execution throughout fiscal 2022 can potentially drive meaningful upside to the fiscal 2024 targets we shared during our Analyst Day. This continues to be a very exciting period in the company’s history, and we see a direct path to dramatically and sustainably extending our business as we continue to execute on this multifaceted growth strategy. 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

Certainly. We will now be conducting a question-and-answer session. Our first question today is coming from Charles Shi from Needham & Company. Your line is now live.

Charles Shi, Analyst

Thank you for taking my question. I just want to go back to the comments on OpEx. This is a multipart question. First off, I want to ask you, given your guidance for fiscal 2022, which seems to imply flat to slightly up in terms of revenue growth, is the non-GAAP OpEx going to follow the same trend? Secondly, you commented something about the OpEx upside in the fiscal first quarter – some of that you attributed to a delayed start of some of the R&D activities – can you provide some color on that?

Lester Wong, CFO

Sure, Charles. As far as OpEx for FY2022, I think as we are guiding $75 million non-GAAP, I think that will continue through the rest of the fiscal year. Regarding why Q1 was a little bit lower, there were some delays in some R&D projects as well as some SG&A spend. Part of it was because December is the holiday season for a lot of our R&D sites. I think people actually took time off this year, as well as certain recruitment that we budgeted for – those projects experienced delays. It will be kicking in this quarter as well as in the following quarters. The reduction in OpEx had no basic effect on our schedule in terms of our R&D projects; it’s still basically tracking where we want it to be.

Charles Shi, Analyst

Thank you, Lester. The second question, I want to ask you about your fiscal 2022 guidance. If I run some quick math here, say your fiscal 2022 revenue is $1.58 billion, with the fiscal first quarter revenue at $460 million, you will need to deliver roughly about $1.1 billion over the next three quarters for the fiscal year. I noticed your fiscal first quarter backlog was already close to $700 million. You only need to book another $400 million orders, but your assumption for bookings seems a little low. Are you thinking that the $1.58 billion revenue guidance is just a worst-case scenario rather than a base case scenario?

Lester Wong, CFO

Well, I think $1.58 billion is what we consider the base case. As you went through the math, we did about $840 million, well between $460 million and the guidance today is about $840 million for the first half. To reach the $1.58 billion, I think revenue becomes a little more linear than we originally anticipated, due to supply chain issues in the first half, particularly wafer shortages. We think revenue will be a bit linear as I mentioned, and as for the upside to the $1.58 billion, there is always a possibility, but there are also a lot of supply chain constraints currently.

Charles Shi, Analyst

Got it. My last question is on the split of revenue from China and non-China. Can you provide some color on that?

Lester Wong, CFO

Yes, China actually is much higher than 50%. In this quarter, it's about 70% of revenue. I think it will continue to be a strong contributor. Taiwan and China are always our two strongest markets. Taiwan went down a little bit in Q1, but we expect a rebound in the second half.

Charles Shi, Analyst

Thank you, Lester. That’s all from me.

Lester Wong, CFO

Thank you.

Fusen Chen, CEO

Thank you.

Operator, Operator

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

Krish Sankar, Analyst

Hi, thanks for taking my question. I have three of them. First one, Fusen or Lester—last quarter, you called out supply constraints, especially wafer and substrate shortages at your OSAT customers. This time, you did not. Is it fair to assume at the margin, the constraints are easing relative to three months ago?

Fusen Chen, CEO

So, Krish, let me answer this way. You’re talking about OSAT customers, right? We have a very diversified customer base in both OSAT and IDM. Each customer has a very different and unique investment schedule. For OSAT, we did see also very strong investment in 2021. But at this moment, I think we are seeing strength more in IDM in the first half of 2022, helped by additional revenue from dedicated AP, advanced display, and auto. We expect stronger OSAT investment will be aided by improvements in wafer shortages in the second half of 2022.

Krish Sankar, Analyst

Got it. I just had a couple of quick follow-ups. One is on the thermal compression bonders; how should we think about the revenue opportunity for TCB?

Fusen Chen, CEO

Okay. So Krish, I think our view on TCB is quite positive. We believe TCB is in a stage to grow rapidly, driven by networking, silicon photonics, and optical transceivers, as well as mobility logic. We are very bullish on our approach, especially with our proprietary process, and we believe we will make a significant impact in the TCB market. As I mentioned in our Investor call four months ago, we indicated FY2024 revenue could reach up to $100 million, with the majority coming from TCB. We are tracking much better than anticipated, and we’ll provide updates in the next one or two quarters.

Krish Sankar, Analyst

Got it. A follow-up question—do you think the metrology issue is limiting hybrid bonding upside in the near term?

Fusen Chen, CEO

Yes, metrology is one factor, but I believe hybrid bonding is quite niche. Our approach is more focused on TCB, as we believe it will have a broader market impact in the coming years.

Dylan Patel, Analyst

Thanks, Lester. I wanted to ask about the timing of orders. Big automotive and trailing edge semiconductor firms are doubling their CapEx year-over-year. Has this new front-end capacity translated to back-end?

Fusen Chen, CEO

Yes, Dylan, your question is similar to what Tom asked. The semi-unit growth was around 20% last year. Front-end investment continues to fluctuate back-end, but it normally takes a year to two years for this to ramp up. Wafer capacity growth is expected to improve in the second half of the calendar year, but it’s hard to put an exact number on it right now.

Dylan Patel, Analyst

Thank you.

Craig Ellis, Analyst

Thanks for taking my question. I wanted to follow up on the wafer improvement. What are you hearing from customers about wafer output improvement?

Fusen Chen, CEO

The supply chain shortage particularly affects us. The industry-wide challenge is really a chip shortage and wafer shortage. Different customers have varied experiences regarding this. We feel confident in guiding towards $1.58 billion, but we need time to gather more data.

Craig Ellis, Analyst

Got it. And regarding the automotive business, when will engagements start to become more material to revenues?

Lester Wong, CFO

Some of the five engagements will bear fruit in fiscal 2022, while others will take longer. Overall, we expect revenue contributions to begin in fiscal 2022, gaining more traction in 2023.

Craig Ellis, Analyst

Very helpful, thanks. What do you see happening with operating expense in fiscal 2022?

Lester Wong, CFO

OpEx for the remainder of fiscal 2022 will likely remain around $75 million to $77 million non-GAAP. That number should be consistent through Q3 and Q4.

Craig Ellis, Analyst

Thanks for the clarity in cash generation in the quarter. Following the dividend increase, how is the company prioritizing dividends, buybacks, and potential inorganic growth?

Lester Wong, CFO

For fiscal 2022, we want the dividend to continue to grow and maintain a competitive stance among peers. Our share repurchase program is seeing increased cadence, evidenced by our recent activities. In terms of inorganic opportunities, we are always open to exploring but expect more significant initiatives to arise in FY 2023.

Craig Ellis, Analyst

Thanks for the help, Fusen and Lester.

Fusen Chen, CEO

Thank you.

Operator, Operator

Thank you. Our next question today is a follow-up from Krish Sankar from Cowen and Company. Your line is now live.

Krish Sankar, Analyst

Thanks for taking my follow-up. Fusen, looking at the last six months, your backlog has declined and lead times are beginning to moderate. How do you handicap that concerning double ordering?

Fusen Chen, CEO

We don't feel double booking is a significant issue for us. The strong demand is primarily from IDM, and capacity is increasing, hence we’re optimistic about the outlook. China accounts for about 70% of total revenue. While both OSAT and non-OSAT contribute, we expect to see a rebound in Taiwan and strong growth from China.

Joe Elgindy, Senior Director, Investor Relations

Thank you, Kevin and thank you all for joining today’s call. As always, please feel free to follow up directly with any additional questions. Have a great day, everyone.

Operator, Operator

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