Earnings Call Transcript - KLIC Q1 2021

Operator, Operator

Greetings and welcome to the Kulicke & Soffa 2021 First Fiscal Quarter Results Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Joe Elgindy. Please go ahead.

Joe Elgindy, Moderator

Thank you. Welcome everyone, to Kulicke & Soffa’s fiscal first quarter 2021 conference call. Joining us on the call today are Fusen Chen, President and Chief Executive Officer, and Lester Wong, Chief Financial Officer. For those of you who have not received a copy of today’s results, the release, as well as the supplemental earnings presentation, are both available in the Investor Relations section of our website at investor.kns.com.

Fusen Chen, CEO

Thank you, Joe. We are pleased to report strong financial performance, progress in our advanced display business, and improvements to our outlook on today’s call. First, we have recently acquired US-based Uniqarta, Inc. in an all-cash transaction, which enhances our competencies and potential in the fast-growing advanced display market. Even prior to the acquisition, we worked closely with Uniqarta to accelerate the adoption of advanced mini-LED backlighting. By combining Uniqarta’s domain knowledge and unique intellectual property with our operational and development competencies, we have improved our position in this exciting advanced display marketplace. We expect our next-generation advanced display systems will accelerate broader adoption of advanced displays that utilize locally controllable backlighting and also direct-emissive micro LED approaches. By the close of fiscal year 2021, we expect to introduce and initiate qualifications for our next-generation advanced display system. We anticipate strong demand for these solutions throughout fiscal year 2022, as the broader LCD market begins to adopt new forms of backlighting. Next, the ongoing strength of the general semiconductor and LED end-markets, and the ongoing recovery in automotive demand, has improved our fiscal year outlook. Broad trends such as 5G and advanced display, as well as the fundamental transitions in the automotive market have only recently become meaningful to our business. We expect these new secular trends to provide significant growth and market expansion opportunities over the coming years.

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 December quarter with revenue at $267.9 million, up 51% sequentially. We were again able to quickly flex operational capacity to support this dramatic sequential improvement. Gross margins in December came in at 45.4%, and we generated net income of $48.4 million, with non-GAAP EPS of $0.86. At this level of business, our operating leverage becomes significant. During the December quarter, we generated operating margins of 20%, an increase of over 700 basis points from the September quarter. Considering the operating leverage and our outlook, we expect to generate strong free cash flows over the coming years. We continue to be very focused on cost control despite the more favorable business conditions, which has helped drive our December quarter operating expenses to be slightly better than expected. We also expect operating expenses to follow our historic model of approximately $53 million of fixed quarterly expense plus 5% to 7% of variable expense tied to revenue. We do not anticipate a material increase to our operating expense model as a result of the Uniqarta acquisition. Tax expense for the quarter came in at $6.3 million, and we continue to target an 18% long-term effective tax rate target, although we anticipate the effective tax rate coming in closer to 15% in fiscal 2021. Turning to the balance sheet, we ended the December quarter with a total net cash and investment position of $576.7 million, up $46.5 million sequentially, which represents $9.19 per diluted share. The Uniqarta acquisition closed in the March quarter, and the cash impact will be reflected in our March quarter’s results.

Tom Diffely, Analyst

Yes, good morning. Good afternoon. So, just wanted to confirm the new outlook for fiscal 2021 is $1.1 billion, up 75% year-over-year?

Lester Wong, CFO

That is correct.

Tom Diffely, Analyst

Well, so, when you look at obviously the very strong growth this year, you can split it between how much of it is driven by this unit growth industry versus share gains maybe versus increased intensity for your tools?

Fusen Chen, CEO

So, Tom, I think due to a few reasons: number one, of course, in the past two years, '19 and '20, because of the semiconductor downturn and underinvestment from customers, we have seen growth. So we expect this year will be slightly higher than 6% to 6.9%. So, number one is really the unit growth coming back. The second reason, I think it's a very significant shift. For example, the transition from 4G to 5G has increased the demand for multi-die packages. An example is our SIP module, which typically has between four to 40 dies. The demand increased significantly due to the transition to 5G. Not only has the amount of the multi-die package increased, but the dies are much more complicated. Therefore, the time to process this package has also increased dramatically. We believe we can give guidance in a normal year, our base should be around $750 million. If we take a three-year average, I think 2017 is a normal year, '18 was a very strong year, and '19 was a very bad year. The average is about $750 million. This should be a reasonable baseline for a normal year.

Tom Diffely, Analyst

Okay, that's great. That's good color. So I guess I want to switch gears here and look at the acquisition of Uniqarta. So I guess a couple things. First, is that a competitor to Lohini? Do they have any revenue associated with them, and can you give us a rough idea of what the cost was?

Fusen Chen, CEO

Okay, so I will have Lester answer the cost. So I think Lohini is our first partner, and the product is called Pixalux. This is our first generation of mini and micro LED systems. In 2020, last year, we guided the industry, and also we accomplished revenue of around $40 million. In the last earnings call, I think we guided the revenue for 2021 to be $60 million to $80 million. I think we are closer to the high end. All the systems we are going to ship are Pixalux. By the close of fiscal 2021, we expect to announce our next-generation advanced display system. This will use 100% of our KNS Intellectual Property after the acquisition of Uniqarta. The second-generation system is expected to contribute to our fiscal 2022 revenues. Regarding the difference between these two systems, how do we position them? I think around mid-2022, we will have an overlap of these two systems, but we believe our second-generation system, which utilizes 100% of our own IP, will have much higher productivity and should take off around mid-2022. I hope I answered your question, Tom.

Tom Diffely, Analyst

Yes, that's great. Thanks.

Lester Wong, CFO

The acquisition price was around $26 million.

Tom Diffely, Analyst

Okay, was there any revenue associated with that or was it just purely IP technology?

Lester Wong, CFO

It's a purely technology acquisition.

Tom Diffely, Analyst

Great. Okay. Thank you for your time.

Lester Wong, CFO

Thanks, Tom.

Operator, Operator

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

Krish Sankar, Analyst

Hi, thanks for taking my question. I had a couple of them. Fusen, you mentioned how there has been underinvestment in backend spend, especially wire bonding. ASC this morning also spoke about the wire bonding demand being tight throughout all of 2021. So I'm just curious what your visibility today is on wire bonders, given what your big customers are saying? Should we assume that, if wire bonding is going to remain tight throughout all of 2021? Are they going to add excess capacity this year or do you think it’s going to be smoother for the next couple of years?

Fusen Chen, CEO

Krish, I don't know if I fully understand your questions. Can you repeat that quickly?

Krish Sankar, Analyst

Sure. You spoke about underinvestment in wire bonding by the customers over the last couple of years. Now that they're doing a catch-up investment, how long do you think it's going to last?

Fusen Chen, CEO

Okay. So let me put it this way. I think the estimate from the market this year is about a trillion semiconductor dies produced—roughly a trillion dies. The estimate of the market share for the ball bonder is that about 65% of these dies are processed by ball bonders, between 65% to 70%. So ball bonders are here to stay, and the technology improvements we have implemented are very beneficial. Although we did not provide very detailed information, there are many technological advancements associated with ball bonders. Currently, the majority of the semiconductor segments actually rely on ball bonders, and many complex multi-die packages, including SIP, also involve very complicated ball bonder processes. To answer your question, I think this year, the revenue for ball bonders is very strong. It might be stronger than needed due to two years of underinvestment. We are quite optimistic that ball bonders are here to stay and that the industry needs them to support overall growth.

Krish Sankar, Analyst

Got it. That makes sense. And then two other quick questions: One is on Pixalux. Did you guys update your FY 2021 revenue targets for Pixalux, or is it still $60 million to $80 million?

Fusen Chen, CEO

Yes, that’s correct. That's what we guided last quarter. But right now, we are estimating this quarter to be about $22 million. Hopefully, we will reach the higher end for FY 2021.

Krish Sankar, Analyst

Got it. And then a final question: Fusen, on the Uniqarta acquisition, is it fair to assume that your Pixalux, the pick and place technology that works well for mini LED, might not scale up for micro LED? That's why you need a laser transfer approach for micro LED? Is that the way to think about the acquisition? Or are you going to still work in parallel to improve Pixalux placement speed?

Fusen Chen, CEO

We believe the laser-based technology has the potential for much quicker productivity. Large TVs will require placement of about 25 million dies, and we are just at the entrance stage of this industry's growth. We are currently talking about possibly needing less than 100 hours to place this volume. In the future, the speed must improve significantly to support overall industry growth. This is why we chose Uniqarta to be our next generation technology partner. As I mentioned, we have Pixalux, and we have the next generation which will crossover around mid-2022. The industry will ultimately decide which technology will be faster, and we feel we will have significant productivity advantages with Uniqarta, based on industry trends.

Krish Sankar, Analyst

Got it. Thanks, Fusen. And really, congrats on the strong listings.

Fusen Chen, CEO

Thank you.

Operator, Operator

Okay. Our next question is coming from Craig Ellis from B. Riley. Your line is now live.

Craig Ellis, Analyst

Yes. Thanks for taking the question. And, and congrats as well on the strong execution in the quarter and meeting the tremendous upside demand. Fusen, I wanted to start by going back to some of your comments on the market for fiscal 2021. The question is this: as we look at the new fiscal 2021 demand outlook for revenues of $1.1 billion, can you help us understand, as you look into the back half of the fiscal year, where you have relatively higher and lower demand visibility across your different end market opportunities?

Fusen Chen, CEO

Okay, so correct in the first quarter, I think we delivered $267.9 million, right, Lester? So, the second quarter, I think we expect $300 million. If you add this together, it is a little bit more than $550 million. So, conceptually, if the second half mirrors the first half, we expect Q4 to have seasonality as usual, but it won't be very significant. So if we model Q1 comparable to Q4 and Q2 and Q3 as comparable, we should get about $1.1 billion. So does that help?

Craig Ellis, Analyst

It does. My question was actually a little bit different, and it really related to the visibility that you have into the demand that makes up that profile. So underneath that profile, is your visibility similar across automotive and other end markets like 5G, smartphones, and gaming consoles? I noticed, at least from the investor deck, that memory revenues are very low in the quarter. Do you see memory coming back, and if so, to what extent through the back half of the year?

Fusen Chen, CEO

Okay. General semiconductor demand is strong from Q1 to Q4. I think automotive will start to strengthen this quarter. I think our conventional automotive segment is also recovering, and LED demand is helping. From Q1, we are starting to see automotive strength which will certainly benefit our wedge bonder business. For memory, at this moment, we don’t see a full recovery yet, but we do see initial positive signs. We anticipate that the next few quarters will show memory demand starting to increase. Memory appears to be the last segment to stabilize, but there are encouraging indicators of initial investment resuming there. Utilization rates in the industry started rising, and we believe a compound annual growth rate of close to 30% per year is feasible in the future.

Craig Ellis, Analyst

That’s very helpful. My next question goes back to some of the comments and prepared remarks from you and Lester, and it relates to supply. Clearly, there was phenomenal operational performance in the December quarter to meet demand, and that is reflected in the outlook for March with the $300 million in revenue. The question is this: if demand this year were to exceed the current $1.1 billion forecast, would you have the ability to flex up supply further to meet that demand? Or do you see constraints or bottlenecks capable of preventing revenues from exceeding current guidance in any of the discussed end markets?

Fusen Chen, CEO

Yes, Craig. The demand is very strong right now. However, the industry is experiencing some minor, possibly more than minor supply chain constraints. We know there are component shortages as well as semiconductor die shortages, and some of our largest fiscal providers have difficulties. We are comfortable with our $1.1 billion goal, although we do see potential upside, it may be constrained by this global supply chain issue. We won't back down; we'll do our best, but the situation is dynamic. At this time, we can say that there is still upside potential, but also significant headwinds due to these supply chain shortages. $1.1 billion is a number we feel comfortable with, but we will monitor the situation closely.

Craig Ellis, Analyst

That's very helpful. My last question is a longer-term question, regarding the target model set a few years ago. It’s clear that there is significant demand strength across most end markets driven by multi-year trends. Given that, what might it take to see the mid-term model revenues approach in fiscal 2022? I believe a key assumption in the model was a significant increase in services revenues. Can those revenues ramp quickly enough to help reach the model midpoint, or might there be other strengths, particularly in advanced packaging uptake that could assist if services fall short?

Fusen Chen, CEO

With significant ramp-up, it’s somewhat challenging to predict the next year. I mentioned today in the Q&A, originally our guidance for a normal year was about $750 million. We see effective capital intensity increasing due to the current demand trends. This places our expected revenue much closer to $1 billion than before. Additionally, we see upside with the introduction of new products like flip chip and TCB. These are crucial for our growth. For the long term, I believe that as the industry continues to be healthy, our core business will thrive, and we anticipate growth potential from LED opportunities and advanced packaging solutions.

Lester Wong, CFO

To add on what Fusen said, given our tremendous operating leverage, we believe that at above a billion dollars in revenue, which as Fusen indicated, there's a clear path to it on a sustainable basis, our operating leverage would allow for an earnings per share of close to $3 on a sustainable basis.

Craig Ellis, Analyst

That's very helpful. Gentlemen, thank you very much.

Operator, Operator

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

David Duley, Analyst

Thanks for taking my question. Congratulations on great results. My question is, when I look at your backlog, it certainly suggests your order rates were substantially above the revenue just reported, probably around $140 million above. Has your overall visibility extended? Could you help us kind of understand how much more visibility you have now, and have your lead times extended? What are your current lead times for wire bonders?

Lester Wong, CFO

So, Dave, our visibility has extended. As we build our backlog, customers are placing purchase orders at a tremendous rate not just for the next quarter but for the remainder of the fiscal year, given the high demand for both our products and all products overall. Lead times have increased significantly. I would say they are now about 30 to 40 weeks. We have much better visibility, which is why we can confidently provide guidance of $1.1 billion for the year.

David Duley, Analyst

Okay, great. As far as contribution, I think on the last conference call, your guidance for the year was roughly $780 million, and now you've bumped it up to $1.1 billion. Could you talk about the difference between the $780 million and the $1.1 billion in segments of business? Where did the upside come from?

Lester Wong, CFO

So Dave, I think it's across all sectors, to be honest. General semi is really driving the business. General semi was around 74% of our revenues for this quarter, which increased significantly. Automotive more than doubled, with a rise of about 100%, and LED increased above 80%. We are seeing strength across all segments. Automotive is definitely coming back, as seen in various headlines about automotive companies facing line shutdowns. So the difference is a significant uplift across the board.

David Duley, Analyst

Excellent. With $1.1 billion as the target for the year, how do you expect operating margin performance to progress? You just achieved a number we haven't seen in a while. Should we expect to see a 19% or 20% run rate throughout the year?

Lester Wong, CFO

Well, Dave, I don’t guide below for the year regarding revenue. But if you do the math, we believe the gross margin will remain consistent around the level we achieved this quarter of between 45% and 46%. We’ve stated that operating expenses should be about $53 million plus 5% to 7% variable expenses. Overall, I think you’ll come close to the numbers you mentioned.

David Duley, Analyst

That does generate a bit more than $3 in earnings. So congratulations. I look forward to continued business improvements throughout the year.

Lester Wong, CFO

Okay, thank you, David.

Operator, Operator

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

Christian Schwab, Analyst

Excuse me, congratulations to everyone on just a fabulous quarter and outlook and the ability to ramp that. Fusen, as we listen to this, I’m curious your thoughts on this. It seems to me we're seeing a tremendous industry shift where capital intensity is beginning to meaningfully increase, something we saw during the NAND industry’s transition to 3D, and when foundry logic had to shrink sub-28. The trend is evident in general semiconductors, where increased volumes and complex chips—chips that used to be packaged as one are now four to six or eight. Furthermore, drivers such as 5G, automotive, medical, and upgrades in Wi-Fi are causing disproportionate volume growth even greater than the general industry. Multi-die packaging involves increased complexity, which causes more capital intensity growth. I do not see any technologies that could disrupt this trend. It seems this industry might experience a three to five-year capital intensity cycle unless major economic disruptions occur globally, possibly due to COVID challenges. Am I thinking about that right? Is that what you’re suggesting as well?

Fusen Chen, CEO

Yes, we agree. We are optimistic about the overall industry, and Christian, in addition to what you mentioned, we're excited about the new business opportunities that we are pursuing. We believe we are well positioned against any potential competitors. With the strength in the industry and the trends evolving beyond Moore's law, and along with new opportunities, we feel very hopeful about our growth.

Christian Schwab, Analyst

My last question is regarding cash. As we analyze the trends in revenue, we will have substantial cash on our balance sheets in the coming years. Can you give us an idea regarding efforts as a historically shareholder-friendly company, with emphasis on share repurchase, what your plans are moving forward with cash?

Fusen Chen, CEO

Sure. I'll say this: In the short term, we are confident in our growth paths. For example, Pixalux took just over two years to generate revenue after its development. And we see potential similar milestones ahead with other products. We're actively focusing on organic growth with Uniqarta as a key partner in advancing our technology. While we'll continue dividends and stock buybacks, significant M&As are not on the immediate agenda. For long-term growth, our key focus remains on organic initiatives including Pixalux and adjacent technologies.

Lester Wong, CFO

Christian, we have consistently reallocated cash when available. Since 2015, we have returned approximately 80% of our free cash flow to shareholders through share repurchases as well as dividends. Last year, for example, we returned close to 110% of our free cash flow. We're actively monitoring our cash usage, and we address capital allocation decisions in our quarterly discussions with the board, ensuring we action what's most prudent for both organic initiatives like Pixalux and investments in technology, including appropriate share returns.

Christian Schwab, Analyst

That's fantastic. No other questions; congratulations on a great outcome and outlook. Thank you.

Operator, Operator

Thank you. We have reached the end of our question and answer session. I'll turn the floor back over to Joe for any further or closing comments.

Joe Elgindy, Moderator

Thanks, Kevin. And thank you to our participants for joining today's call. We'll be presenting at several upcoming conferences over the coming months. As always, please feel free to follow up directly with any additional questions. Have a great day everyone. This concludes our call. Thanks.

Operator, Operator

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