Earnings Call Transcript - KLIC Q2 2023

Operator, Operator

Hello and welcome to the Kulicke & Soffa 2023 Second Quarter Results Conference Call and Webcast. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Joe Elgindy, Senior Director, Investor Relations. Please go ahead, Joe.

Joe Elgindy, Senior Director, Investor Relations

Welcome everyone to Kulicke & Soffa’s fiscal second quarter 2023 conference call. Fusen Chen, President and Chief Executive Officer, and Lester Wong, Chief Financial Officer, are both also joining 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. Complete GAAP to non-GAAP reconciliation tables are available within our recently filed earnings release, as well as our earnings presentation. This information, in addition to our prepared remarks for today’s call, is available at investor.kns.com. In addition to historical statements, today’s remarks will contain statements relating to future events and our future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a complete discussion of the risks associated with Kulicke & Soffa that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10-K for the year ended October 1, 2022, 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. We continue to operate in a very dynamic global environment and remain focused on expanding served markets through close customer engagements, prudent acquisitions, and ongoing development activities. Macro factors such as global banking issues, inflation, and downstream inventory digestion are all contributing to a slow, but still gradual, rate of demand improvement over the coming quarters. While the pace of macro-driven recovery remains gradual, we see strengthening demand in our high-volume markets and broadening customer adoption and interest in our latest advanced packaging systems. At this point, our delivery schedule for higher-volume systems provides confidence we are past the trough. We now see an uptick in quote activity which supports further improvements over the coming quarters. Overall, our longer-term industry outlook remains fairly consistent and aligned with third-party market forecasts. We continue to anticipate positive semiconductor unit growth in fiscal year 2023 and higher levels of capacity and technology-related demand through fiscal year 2024. In addition to improving levels of demand, our end-market opportunities have expanded significantly over the prior years due to more complex assembly needs including heterogeneous integration, electric vehicle and infrastructure adoption, new display innovations, and broadening connected electronic and power-semiconductor needs. As disclosed in late February, we have completed the Dispense acquisition, and we welcome AJA to the K&S team. This new market provides access to adjacent Dispense opportunities in both semiconductor and electronics assembly, collectively representing a $2 billion addressable market and providing a new set of long-term opportunities. Our integration priorities ensure the AJA team can efficiently leverage K&S resources, including our flexible and efficient manufacturing capabilities, our direct sales and distribution network, and our broad portfolio of system and sub-system architectures. We have identified several target market areas for AJA which we anticipate will ramp in later fiscal 2024. Turning to the March quarter results, we generated $173 million of revenue and $0.38 of non-GAAP EPS, significantly above our prior expectations due to better gross margin and operating expense performance. Our total capital equipment revenue was $133.7 million in the March quarter, with a similar composition across end markets as last quarter. Within General Semiconductor, we continue to see technology-related demand for IoT applications, high-performance compute, and growth in emerging applications such as artificial intelligence and co-packaged optics. These trends, occurring in leading-edge and high-volume markets, are enabling share gain and higher margin opportunities. Regarding TCB, we generated record quarterly revenue during the March quarter in support of IDM demand for higher-volume mobility production and high-performance computing. During the March quarter, we also shipped several fluxless TCB solutions and are preparing to ship our largest number of quarterly fluxless TCB systems, to leading OSAT, foundry and IDM customers during the June quarter. In addition to heterogeneous assembly, complexity trends are also increasing technology-driven replacement for our feature-rich, high-volume systems, which will continue to enhance corporate-level gross margins. We remain on track to introduce several new wire bonding systems through the first half of 2024. Over the near term, we expect customer demand to continue improving due to seasonal strengths and ongoing inventory digestion. Moving to LED, we are beginning to see gradual improvements within lighting opportunities and remain engaged with industry leaders for both backlighting and direct-emissive applications. In addition to supporting ongoing capacity additions with PIXALUX, we are progressing LUMINEX engagements and final qualifications in support of large-format, direct-emissive applications, and also emerging automotive display opportunities. Lastly, we are preparing to ramp production related to Project W, so that we are ready to move into higher production upon receiving the customer’s next phase demand. Within Automotive and Industrial, we continue to participate in power storage and power semiconductor growth which supports transitions to electric vehicles and sustainable energy. We are currently preparing to launch our next battery bonder for larger-form factors using both ultrasonics and laser-interconnect solutions in addition to supporting the production ramp for consumer and commercial vehicles. Within power storage, our base of engaged battery customers continues to grow steadily, with renewed interest from our largest EV customer. Due to safety and reliability needs, we are also beginning to see high-volume applications such as E-Bikes transitioning to higher-reliability Ultrasonic Bonding. Lastly, we have also engaged in a promising new opportunity supporting the emerging eVTOL market. Within power semiconductor, we continue to see strong ongoing demand driven by charging and inverter applications, which are directly supporting these industry transitions. Like many other areas of semiconductor assembly, we see stronger growth in the highest-value and most advanced applications such as power-modules. Compound semiconductors, such as Gallium Nitride and Silicon Carbide, are accelerating this growth and are directly supported by our market-leading portfolio of Wedge Bonder systems. Next, while memory remains sluggish near-term, we are also anticipating improvements toward the end of fiscal 2023. Finally, our Aftermarket Products and Solutions segment generated $39.3 million of revenue, fairly consistent with last quarter. Before handing it to Lester for the financial review, I wanted to summarize a few key points. First, we are actively participating in several fundamental and long-term transitions across our served markets. These transitions provide both market expansion and profitability opportunities. Next, we remain in a very strong financial position, which has allowed us to invest through this recent period of market softness. Over the past year, we aggressively deployed resources towards organic development, internal capacity expansion, new inorganic opportunities, and returned value to shareholders through a competitive dividend and an aggressive pace of open market and accelerated share repurchase. Finally, quote activity for our high-volume business has recently improved, which provides additional optimism that we are past the trough. This trend is anticipated to continue improving through fiscal 2023 and 2024. Despite macro and industry headwinds, it remains a very exciting, transformational time for the company as we are on the verge of several new product ramps, which can further enhance our long-term revenue composition and through-cycle profitability. I look forward to demonstrating our efforts over the coming quarters. With that said, I will now turn the call over to Lester who will discuss our financial performance and outlook, Lester?

Lester Wong, CFO

Thank you, Fusen. My remarks today will refer to GAAP results unless noted. As Fusen mentioned, it is a very exciting time for the company as our core market is showing clear signs of improvement, and our new technology solutions are reaching final stages of development and customer acceptance. Additionally, our prior market expansion efforts have directly contributed to a much stronger trough-to-trough performance level. Over the trailing 12 months, our net revenue has increased by nearly 40%, while operating profit increased by nearly two times compared to the similar trough period in fiscal '19. We expect our fiscal year '23 financial performance to significantly exceed our fiscal year '19 results. Despite this material progress, macro dynamics will largely determine the trajectory of near-term growth and we remain extremely vigilant to conduct our operations and development efforts in the most efficient and cost-effective manner. Additionally, we are actively building out our Kranji facility here in Singapore. This site increases our capital equipment production footprint by 44% in support of these meaningful new opportunities. During the March quarter, we generated $173 million of revenue, with a gross margin of 48.6% and $0.38 of non-GAAP EPS. Gross margins came in above our guidance midpoint at 48.6%, due to product mix throughout capital equipment and Project W-related accounting. Non-GAAP operating expenses came in at $64 million, below our prior expectations, due to the capitalization of specific expenses associated with Project W and ongoing cost control activities. Finally, tax expense for the quarter was $5.6 million. Turning to the balance sheet, working capital days decreased to 517 days in the March quarter, primarily due to a sequential reduction in accounts receivable. Our repurchase program remains opportunistic and price dependent. Activity has slowed through the March quarter, and we anticipate increasing the cadence through fiscal year-end. Looking ahead to the June quarter, we anticipate revenue of approximately $190 million, plus or minus $20 million, with gross margins of 48%. Non-GAAP operating expenses are anticipated to be approximately $73 million, plus or minus 2%, due to additional R&D investments, largely associated with our set of emerging opportunities as well as the inclusion of the new Dispense business. We remain focused on controlling and limiting any non-critical activities and have maintained our hiring freeze. Our collective cost control efforts have reduced our June quarter operating expenses by over $5 million from our original budget. Non-GAAP net income for the June quarter is expected to be approximately $18 million with non-GAAP earnings per share of approximately $0.32. We are anticipating an additional increase in tax expense during the June quarter. Looking into September, we currently anticipate seeing sequential revenue growth of approximately 10% over our June quarter’s expectations. As we see gradual improvements in our high-volume business and participate in several long-term transitions affecting the semiconductor, advanced display, electronics assembly, and automotive markets, we remain excited for the future. This concludes our prepared comments. Operator, please open the call for questions.

Operator, Operator

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

Tom Diffely, Analyst

Yes. Good morning. And congratulations on getting past the trough, always an extent. Fusen, I was wondering when you talk about sequential recovery here from the trough levels. Could you frame the industry or your business as far as utilization rates and where you're seeing pockets of strength?

Fusen Chen, President and CEO

Okay. Maybe I can make a few comments, and let's have maybe additional information provided to you. So actually, last quarter, we were at the bottom because both on the revenue is quite low. But we do believe the second half will recover. However, we did not forecast a banking crisis, which is likely to impact our spending patterns. Therefore, actually, the Q3 and Q4 growth is not as originally expected, as fast. At this moment, we still believe the second half will show growth but may be impacted by the banking crisis. So that’s what we are seeing right now. And utilization rate?

Lester Wong, CFO

Hi, Tom. So utilization rate is around 65%. But during inventory digestion, the absolute percentage of utilization rate is not as important as the trend of the utilization rate. So we've seen actually for Q1 and Q2, utilization has basically been a bit flat. From what we see from our customers, utilization is going up in Q3.

Tom Diffely, Analyst

Okay. And then just the pockets of strength from a regional base. Are you seeing even in China some pocket of strength?

Fusen Chen, President and CEO

Actually, yes. We are seeing demand actually from China. Our bond deals for high-power devices are quite strong. We see strength in the power semiconductor and bond as a record year for this year. We also see other opportunities, such as the eVTOL market, transitioning into more cost-effective applications like E-Bikes. This will also provide the strength for us moving forward. Our advanced packaging is continuing to be strong, and we believe next year's trend will be very positive for us.

Tom Diffely, Analyst

Okay, great. And then as a follow-up, you previously talked about perhaps seeing the recovery or resumption of some display activity for you in the second half of the year. Is that still on track?

Fusen Chen, President and CEO

Yes. Let me update a little bit on our advanced display. We recognized total advanced display revenue of about $240 million since we shipped the first product. Over the past two years from June 21 to March 23, we recognized $160 million of advanced display revenue. At this moment, the industry really needs a disruptive high productivity for the fast-growing mini-LED and micro-LED mixed transfer technology. For us, this year is a transformative year in the advanced display business. Our Luminex and W projects are progressing well. In summary, Luminex is intended for many customers, and qualification takes time to serve various requirements. We expect successful qualification of large-format direct-emissive applications by September of this year, which will attract multiple customers in FY '24. We expect the W project to go into initial production early '24, so we are preparing for the ramp. 2023 is challenging but will be better once we get past it. Thank you.

Operator, Operator

Thank you. Next question is coming from Dave Duley from Steelhead Securities. Your line is now live.

Dave Duley, Analyst

Yes. Thanks for taking my questions. I have a couple. I guess, Lester, in one of your slides, it talks about executing a margin enhancement strategy. I guess this is for your core wire bonder business. Could you just update us on how much gross margin improvement you would expect from that new product and the timing?

Lester Wong, CFO

Yes. So Dave, I think we've been very focused on ball bonder optimization to increase the gross margin. Some technology changes have helped. As Fusen mentioned, we are also doing some SIP packages, which require higher in-count, more advanced bonders that give us better margins. We're in the process of introducing a new suite of products from LED bonders to high tenant bonders in late '23 to '24, so we believe the ball bonder gross margin will continue to rise.

Dave Duley, Analyst

Okay. And then just out of curiosity. One of your competitors talked about introducing a thermal compression bonder on their conference call, and they have historically focused on the hybrid bonding opportunity. From your perspective, do you think thermal compression bonding is a bigger opportunity than hybrid bonding? And if so, why?

Fusen Chen, President and CEO

So Dave, let me answer this. I think heterogeneous integration includes a lot of processes together that consist of multiple packaging technologies, such as hybrid bonding, TCB, and many technologies can coexist. So at this moment, hybrid bonding and our TCB do not necessarily compete. In certain technologies, they can complement each other. K&S solutions actually serve both processes, and we expect C2 is about the same size as C2W. We are very optimistic about hybrid bonding as there is still a significant market. However, regarding whether TCB's market size can be bigger, we tend to agree. Of course, we are not the major player yet in hybrid bonding, but it's capable technology and some customers are starting to implement it into production.

Dave Duley, Analyst

Yes. And then as a follow-on, I think you mentioned you had record revenue in this area. So maybe give us an expectation for the future, now that you've started to ramp this product. What kind of revenue levels can you reach annually?

Fusen Chen, President and CEO

So I think last time, Christopher asked it, and I can provide a bit of color. Our dedicated revenue for TCB is $33.7 million in Q2. For Q2, TCB alone is about $20 million. We expect our TCB alone to be $68 million this year, and we believe in the next year there will be sequentially higher numbers.

Dave Duley, Analyst

Excellent.

Operator, Operator

Thank you. Next question is coming from Krish Sankar from Cowen and Company. Your line is now live.

Krish Sankar, Analyst

Yes, hi. Thanks for taking my question. Thanks for the color on the June and September guidance. I'm just curious, given the prior guidance, we're seeing a decline in forecast for FY '23 from about $900 million to now looks like more like $750 million. I understand we are at the trough but the recovery seems to be more gradual. So I'm curious, a) what is the reason for the slow recovery versus three months ago besides the banking crisis? And b) what gives you confidence that we might not be stagnating at these levels for a longer time?

Fusen Chen, President and CEO

Okay. Krish, we were expecting a faster recovery. Unfortunately, not only us but the industry and some of our peer groups are also seeing this phenomenon. There are a couple of factors affecting this. The majority impact is that we expected our high-volume business, particularly ball bond, to grow faster, but quotation activity has been increasing dramatically. However, our scheduling shows pushouts in Q3 and Q4. If third-party forecasts are right, we expect unit growth of about 3% this year and market rent of around 10%. The inventories are not fully depleted yet, and the banking crisis might impact consumer confidence and spending patterns.

Krish Sankar, Analyst

Got it. Fair enough. And then a quick question. Could you say what your backlog or book-to-bill was?

Lester Wong, CFO

Yes. Our backlog is about $500 million. If you add the POs with delta delivery dates, that's another $250 million. Our backlog is pretty healthy, which is the reason we believe we are past the trough and moving towards recovery.

Krish Sankar, Analyst

Thanks a lot, Lester.

Operator, Operator

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

Charles Shi, Analyst

Hi. Good evening, Fusen and Lester. Thank you for letting me ask a couple of questions. I think your guidance for June and September looks very encouraging. You're seeing sequential growth for two consecutive quarters after the trough in March. This is certainly encouraging. I wonder if you can help me reconcile what your two competitors are seeing versus what you're seeing. The two competitors are projecting a possible slight decline in the calendar second half versus the first half. I know you're only guiding to your fiscal year-end, which ends in September. But can you help us understand how your September numbers look, and your calendar second half probably being flat to up relative to the calendar first half?

Fusen Chen, President and CEO

Yes. So I think regarding the competitors, there are two that I will not best comment on their financial performance. If you would like to make a comment, you could. We've indicated that we see our order book going up, and backlog going up. We’re involved in a couple of strong recovery vectors, such as advanced packaging, automotive, and electric vehicles that Fusen mentioned earlier. Therefore, we believe that the second half will be stronger than the first half.

Lester Wong, CFO

So Charles, I mean, the backlog obviously spiked tremendously during the ramp due to supply chain issues and long lead times. It's been coming down, and we expect it to continue to decrease. Regarding when backlog will match two quarters, historically, that has been true for some quarters. It’s challenging to predict when that will return.

Charles Shi, Analyst

Yes. And what's the current book-to-bill ratio in the March quarter? I understand you're experiencing increased quote activities, but what's the actual book-to-bill?

Lester Wong, CFO

It's less than one.

Charles Shi, Analyst

Do you expect that book-to-bill to come back up above one maybe in June? Just trying to understand the ordering trend here. Thank you.

Lester Wong, CFO

Well, Charles, I think, again, as indicated before, it fluctuates quite a lot. I would not say we expect it to go above one in June. I think it will move up and down over the next couple of quarters. Historically, it has been around 0.8 to 1.

Charles Shi, Analyst

Got it. Thank you. It's good to hear you guys have passed the trough. Fusen, please make a comment if you have one. Thank you.

Fusen Chen, President and CEO

I'll give you an example. We're starting to see core activity increase. However, with some of the larger customers, we start to engage and get indications over a period of time, potentially beginning of '24. There's no definite date. Even if we receive the PO, we won’t count that in our ways just yet. We are indeed receiving more frequent smaller orders. At this moment, I think we are working with several mid-sized customers, and we believe that recovery will happen unless something unexpected happens to impact everyone.

Charles Shi, Analyst

Thank you, Fusen and Lester, for the color. I'll get back in the queue. Thank you.

Fusen Chen, President and CEO

Thank you.

Operator, Operator

Thank you. Our session for questions has concluded. I'd like to turn the floor back for any further or closing comments.

Joe Elgindy, Senior Director, Investor Relations

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

Operator, Operator

Thank you. You may now disconnect. Have a wonderful day. We thank you for your participation today.