Earnings Call Transcript - KLIC Q4 2023

Operator, Operator

Greetings and welcome to the Kulicke & Soffa Fourth Quarter 2023 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. At this time, I would like to turn the call over to Joe Elgindy, Senior Director, Investor Relations. Thank you. You may begin.

Joseph Elgindy, Senior Director, Investor Relations

Thank you. Welcome, everyone, to Kulicke & Soffa’s fiscal fourth quarter 2023 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. Complete GAAP to non-GAAP reconciliation tables are included within the 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. 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 and upcoming SEC filings, specifically the 10-K for the year ended September 30, 2023, and the 8-K filed yesterday. 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

Thank you, Joe. Before discussing our business performance, I want to first reference the humanitarian crisis in the Middle East. Like many of our industry peers, we have had a long-term presence in Israel where we develop and produce our precision capillary products. Our teams based in our Haifa facility have delivered meaningful innovations and leading products over the years and we are pleased to report that they are not in a high-risk area; however, we continue to hope for a quick and peaceful resolution. As a global company with a diverse employee and customer base, we are committed to strengthening our diversity and inclusion initiatives to foster collaboration, mitigate inherent biases, and create growth opportunities. Earlier this week, we successfully hosted our inaugural Elevating Women in Engineering and Tech Summit in Philadelphia. This well-attended event featured several keynote speakers from K&S, as well as esteemed members from the external community. We’re grateful to be able to host these types of events which stand as a testament to our dedication to enabling change and exercising leadership within our local communities. Turning to the business, we have seen clear sequential improvements in key markets, although broader market recovery will be gradual. We anticipate the sequential change into the December quarter being largely seasonal and in line with our long-term average. Furthermore, based on discussions with customers, external forecasts, and gradually improving utilization data, we anticipate a moderate demand improvement into the March quarter and stronger second-half driven recovery. Since our prior March quarter, we have seen significant improvements in the general semiconductor end market and some recovery within LED. At the same time, automotive and memory continue to be soft near-term. Regardless of near-term industry conditions, we remain very aligned with major technology transitions and are actively and intensively engaged in qualifications for our advanced packaging, automotive, dispense, and advanced display solutions with multiple industry-leading customers. Coupled with ongoing improvements in the Ball Bonding business, these focused engagements will create more traction and momentum in the second half which we anticipate will be sustained through 2025. We have also increased our repurchase activity and remain optimistic as we execute on several key long-term projects. We recently announced the fourth consecutive annual dividend raise, and we continue to maintain the highest dividend yield relative to U.S. industry peers. For the September quarter, we delivered $202.3 million of revenue, $23.4 million of net income and $0.51 of non-GAAP EPS. We continued to see improvements in general semiconductor, which increased 50% sequentially, providing another clear indicator that we are well beyond trough market conditions. This sequential improvement was primarily due to higher demand for our RAPID Series Ball Bonder platform which is best suited for the most complex wire bonding applications. We have also seen a pickup in demand for emerging vertical wire applications increasingly deployed in mobile and IoT-based applications to mitigate RF interference between bands. We look forward to ongoing technology-driven change and improving conditions within this key Ball Bonding market. Separately, we are well positioned to further optimize our high-volume business with the recently introduced POWERCOMM and POWERNEXX platforms. These new systems will provide additional value and margin opportunities as they ramp over the coming year. Within LED, we have also seen sequential improvements in general lighting which we associate with the U.S. incandescent ban that took place this past April. Within advanced display, we continue to make technical progress with the LUMINEX platform and are approaching five 9s yield and we also continue to execute towards Project W deliverables. For automotive and industrial, macro dynamics including high interest rates have impacted end user demand and also near-term industry CapEx needs. Our automotive and industrial business remains a value-added enabler of battery assembly and power semiconductor applications which are supporting long-term electric vehicle and sustainable energy transitions globally. We have recently accepted an order of 120 battery assembly systems, which will be recognized primarily in the March and June quarters of 2024. Finally, as indicated in recent weeks, the memory market remains challenging near-term. We currently see improving price dynamics as well as specific technology-driven opportunities within next-generation high-bandwidth memory and continue to execute on emerging Vertical Fan-Out, or VFO applications. As briefly discussed last quarter, VFO is being deployed as an alternative to Through-Silicon-Vias, or TSVs, to assemble low-power dynamic RAM in a 3D format. This cost-effective and flexible VFO approach enables higher-density DDR which supports large and established markets such as power-efficient mobile devices and other edge-based applications. We are currently engaged in evaluations with several memory leaders and are well positioned to support this emerging 3D-based memory architecture. Both emerging HBM and VFO opportunities will add new layers of diversification to our memory portfolio over the long term. Next, I wanted to discuss our participation within broadening artificial intelligence applications and provide brief updates on advanced display and dispense. First on AI. Similar to how PCs, smartphones, and connected devices have increased the capacity needs for the industry, artificial intelligence applications are directly creating both unit and technology-based growth opportunities for many of our businesses. To be very clear, we have gained shares with optical, with high-volume logic and also with leading-edge heterogeneous devices. These new positions have all enhanced our ability to support long-term AI trends, which are very much centered on emerging assembly techniques. Considering our growing alignment with key artificial intelligence trends, I would like to outline how we are specifically exposed to what we consider to be the three key building blocks of AI: Machine learning, network infrastructure, and devices on the edge. First, machine learning has received the most attention over the past few quarters. Here we see increasing multi-die applications such as high-bandwidth memory, multi-die GPU-based applications, and emerging chiplet and heterogeneous-based CPUs. We continue to directly support leading heterogeneous applications with our Thermocompression portfolio and anticipate both high-bandwidth memory and multiple GPU-based applications will begin transitioning to finer and finer pitches, increasing the need for our precision solutions. As both HBM and GPU-based applications continue to move to finer I/O pitches, we expect our solutions to be increasingly competitive. As we work with several key customers, we continue to believe K&S is a significant enabler to the success of the most leading-edge applications supporting AI. Our tools in both qualification and production are extremely competitive and customer engagements have strengthened over the past two quarters. We look forward to sharing more feedback on the current evaluation and qualification status of our key leading-edge logic opportunities over the coming months. Next, as AI becomes more integrated with existing user applications deployed at work, at home, and through the cloud, there is a growing need for higher bandwidth, and more efficient networking solutions. This need is being met with emerging silicon photonics technology deployed in co-packaged optics devices, which are anticipated to grow at a 66% CAGR through 2033. Currently, our silicon photonics systems are supporting a leading customer’s co-packaged optics production used to support network switching applications. These applications have unique assembly challenges which our competitive systems support well and have triggered the interest of multiple new customers. Today, we are engaged with seven different customers who are critically supporting this emerging silicon photonics opportunity and remain well positioned for future growth. Yesterday evening, we announced winning the first in a series of expected orders to support a customer’s aggressive silicon photonics capacity expansion. The momentum and interest for our current solution is very high. This recent win serves to highlight our incumbent position and technical leadership in this emerging silicon photonics and co-packaged optics market. In addition to machine learning and network infrastructures, the AI trend will continue demanding greater complexity and higher volume production of devices on the edge such as cameras, sensing, connectivity, and logic-based applications, which are deployed in power-efficient mobile, IoT, and other client-facing applications. These applications will continue to leverage proven and cost-effective assembly approaches such as system-in-package applications in which Ball and Wedge Bonding play a dominant role, as well as emerging opportunities for standing wire applications used in both connectivity shielding and power-efficient stacked DRAM. Over the coming years, Ball, Wedge, and Thermocompression are positioned very well to directly support these three AI trends. More complex assembly requirements are increasing the value of our market-leading Ball, Wedge, and dedicated Advanced Packaging portfolio. Despite the gradual industry recovery, customer interest for qualification and evaluation remains very strong. In addition to AI, we continue to make progress on our advanced display opportunities supporting advanced backlighting and future direct-emissive displays. As mini and micro LED wafer production costs improve and die size continues to shrink, end market use cases will grow and the efficiency and capabilities of assembly will also increase. Our dedicated, high-throughput, high-accuracy LUMINEX system is well positioned to support this upcoming market need. Additionally, we continue to execute on Project W, and expect to provide additional visibility into Project W’s outlook over the coming quarters. Finally, the integration of our new dispense business continues to proceed very well with key engagements across our extensive customer network. Market feedback on these new solutions from multiple leading customers has been very promising. Our micro dispense solutions are extremely efficient, capable, and accurate, which adds significant value for critical applications supporting advanced display, battery, medical, and sensing trends. The market opportunities for dispense are broad and I will provide more specifics on our targeted applications and evaluations over the coming quarters. Looking into fiscal 2024, we continue to anticipate above-average semiconductor unit growth and also anticipate taking share in new markets. We have very strong customer interest and momentum across our emerging portfolio, have already seen clear cyclical improvements in our core market and look forward to releasing a steady pace of new systems, new features, and also announcing new customer and technology wins over the coming quarters.

Lester Wong, Chief Financial Officer

Thank you, Fusen. My remarks today will refer to GAAP results unless noted. While the business environment remains challenging for the entire industry, it remains a very exciting time for the company with clear signs of improvement within our core market and ongoing progress within our emerging opportunities supporting long-term technology transitions which address AI, battery assembly, dispense, and advanced display. During the September quarter, we generated $202.3 million of revenue, 47.4% gross margin, and $0.51 of non-GAAP EPS. Gross margins came in slightly softer than expectations, largely due to product mix. Non-GAAP operating expenses came in just below $70 million, in line with our prior expectations. Finally, tax came in slightly better than expectations due to favorable jurisdictional mix and discrete items. We continue to target the long-term 20% effective tax rate, although we anticipate coming in slightly above this level in December. Turning to the balance sheet, working capital days decreased from 465 to 448 days in the September quarter, primarily due to the sequential revenue improvement. Our repurchase program remains opportunistic, and we have increased our repurchase activity sequentially to $9.2 million during the September quarter. As Fusen mentioned, we have also increased our dividend payout, maintaining a very competitive dividend yield. This growing and consistent dividend commitment highlights the confidence in our long-term outlook. Combined with the ongoing reduction in share count due to our opportunistic repurchase program, our dividend program provides additional long-term value to shareholders. Looking ahead to the December quarter, we anticipate revenue of approximately $170 million, plus or minus $10 million with gross margins of 47%. Non-GAAP operating expenses are anticipated to increase slightly to $71 million, plus or minus 2%. We remain focused on controlling and limiting non-critical activities, although continue to ramp headcount to support our growing set of customer engagements. Non-GAAP net income for the December quarter is expected to be approximately $14.2 million with non-GAAP earnings per diluted share of approximately $0.25. In closing, we are uniquely positioned to capitalize on the growing value of semiconductor and display assembly. Our market access is steadily expanding, and we are positioned well to support and enable major long-term technology trends for the industry. As our core business gradually improves and increases in complexity, we remain focused on expanding our access to positive long-term advanced packaging, advanced display, automotive, and dispense needs. We look forward to sharing our progress over the coming quarters. This concludes our prepared comments. Operator, please open the call for questions.

Operator, Operator

Our first questions come from Krish Sankar with TD Cowen.

Krish Sankar, Analyst

Thanks for taking my question. I actually have three of them. First one, Fusen, when I look at your commentary into the March quarter and beyond, is it fair to assume you think the worst of the ball bonder bottom is behind us? And what kind of visibility do you have and conviction on why it should continue improving?

Fusen Chen, President and CEO

Okay. So Krish, you asked why ball bonder in the second half is high. Is that right?

Krish Sankar, Analyst

Yes. Why do you think the worst is behind us?

Fusen Chen, President and CEO

Okay. So I think there are a few reasons. One is, of course, our customers' feedback. And also historically, we have second-half actually higher than the first half and the industry actually went through a few inventory digestion. So we feel like it should grow. And also recent forecasts from IDC and Gartner all point to a strong CY over '24. So especially, I think we see OSAT orders, although I think we believe that they will even order more in the second half. Actually, we are quite close to our customers. So I hope I answered your questions.

Krish Sankar, Analyst

Got it. That's really helpful, Fusen. I wanted to follow up on your comments regarding HBM and GPU applications. First, I'm curious about the status of your Thermocompression bonder evaluation at one of the large Taiwan foundries. Secondly, considering that many GPUs for AI are currently using CoWoS, do you anticipate a shift towards TCB in the future?

Fusen Chen, President and CEO

Yes, we are excited about the prospects of our TCB. Looking back at 2020, our revenue was in the single digits, and by 2023, we reached $64 million. We anticipate that our TCB will exceed $100 million by 2025. By then, our entire dedicated AP will likely surpass 200. The progress has been strong, supported by robust technology. Currently, we have multiple engagements with OSAT, IDM, and various foundries, with each company potentially handling several projects. Engagement has increased significantly over the past two quarters. In response to your question, we are currently engaged in both C2W and C2S, which are strong solutions expandable to fine pitch. The feedback has been positive, and we aim to complete all qualifications in the coming months. Regarding AI, GPU, and HBM, these also require TCB for the top two mega integrations. Our tools support multiple applications, and AI is one of them. I hope that answers your questions.

Krish Sankar, Analyst

Thanks, Fusen. Yes, that was very helpful. And then maybe a quick follow-up for Lester. Can you give some color on how much the backlog was? And how much was China of your total sales?

Lester Wong, Chief Financial Officer

Yes. Krish, thanks for the question. The backlog was $423 million at the end of Q4. And then as far as China is concerned, are you talking about how much was China revenue?

Krish Sankar, Analyst

Yes, that's right. Yes.

Lester Wong, Chief Financial Officer

So for Q4, China revenue was 49%, but 46% those are China headquarters, so not MNCs. And for the year, actually, China headquarters actually dropped down to about 40% for FY '23. And FY '24, it was actually closer to 46%.

Operator, Operator

Our next questions come from the line of Dave Duley with Steelhead Securities. Dave, could you please check if you are self-muted?

David Duley, Analyst

Yes. Thank you. I was muted. Could you just talk a little bit about the general semi business recovery that you saw? How much that grew sequentially? What you would expect it to do in the following couple of quarters? And then as a follow-on, I think you mentioned that one of the IDC was forecasting strong unit volume growth in 2024. Could you talk about what sort of forecast you're expecting for unit volume growth in 2024?

Fusen Chen, President and CEO

In discussing our business expectations for the quarter, historically, the second half tends to be stronger than the first half. This indicates a seasonal change from the second half to the first half, affecting the period from September to December. On average, we see a 13% sequential revenue change from our September quarter to December, which aligns our Q1 FY '24 guidance with this historical average. For Q2, based on our current insights and customer feedback, we anticipate sequential growth. Regarding the second half, we are currently engaged in extensive qualifications with customers on advanced packaging, receiving very positive feedback, particularly in the dispensing sector and a broader recovery in the ball bonder business. IDC projects a 20% growth in semiconductors, and Gartner's average forecast is around 6%, close to 10%. Even if we settle at around 7%, which is slightly above historical trends, it would be beneficial for us. Historically, our second half revenue has been about 60% compared to 40% in the first half. With strong momentum in advanced packaging qualifications and advanced display, we expect a robust second half for K&S. I hope this addresses your question, and perhaps Lester can provide some additional insights.

Lester Wong, Chief Financial Officer

So you're right. General semi revenues did increase 50% quarter-on-quarter. And I think, as you know, general semi is always our biggest end market segment. It accounts for between 50% to 70% of our revenues. I think another point to pick up is utilization rates. So general semi has been below 70% for a couple of quarters now. But in the last quarter, it's broken 70%. We think it's actually going to continue to rise. Actually overall utilization has increased 10% from the beginning of FY '23 to Q4. So those are all signs pointing out towards a much stronger FY '24, particularly in the second half, as Fusen said.

David Duley, Analyst

I have a follow-up question. Could you provide more details about the new battery assembly order you mentioned? I believe you said it involves 125 systems or units. Please discuss what that entails and the delivery schedules. Additionally, Lester, I'm curious if the new wire bonders you referenced in your press release are the ones meant for the new general semi bucket. Can you give an update on that specific wire bonder and when we can expect that higher-margin product to begin ramping up and entering the market?

Lester Wong, Chief Financial Officer

So for the battery assembly equipment, we see that coming into Q2 and Q3 of our year. It's one of our traditional customers who haven't bought for a while but now is back in the market again. So we're very, very happy to see that. As far as the new products, it's POWERNEXX and POWERCOMM, they have been introduced. Those are ball bonders that serve the high-end or mid-end general semi market. Those should become more meaningful in Q3 and Q4 as they qualify and deploy and then that should be accretive to our gross margins.

Operator, Operator

Our next questions come from the line of Tom Diffely with D.A. Davidson.

Tom Diffely, Analyst

So you talked a little bit about some tech advances for the LUMINEX. What about the market update? What are you seeing right there in that marketplace for those tools?

Fusen Chen, President and CEO

I believe we introduced a very successful product, PIXALUX. At the same time, we recognize that there is a demand for higher productivity technology in the industry. In 2023, we focused on two technologies: LUMINEX, which offers a laser transfer that can operate at speeds significantly faster than PIXALUX, and Project W. In our previous earnings call, I mentioned several notable technical milestones we've achieved. Currently, we are engaging with multiple customers but are particularly concentrated on one leading customer to finalize high-volume production qualification by the end of March. This should allow them to begin production in Q3, which is very exciting for us. The mini and micro LED sizes will continue to decrease, and the industry requires high productivity tools. Right now, larger die scales are still supported by low-end wire bonder technology, but we believe a transition will happen in the next one or two generations. We aim to bring one major customer into high-volume production and complete all qualifications with them to start production in Q3. Additionally, regarding Project W, we will be delivering initial production tools this year and preparing for production ramp-up in 2024. We are optimistic about these two technologies moving forward and are targeting $50 million in revenue this year from them, with expectations for even greater results in 2025. I hope that answers your questions.

Tom Diffely, Analyst

Yes, no. I appreciate the extra color on the marketplace. Fusen, you obviously acquired a dispensing company a few quarters ago. Maybe just a quick update on how that integration is going and if you're able to expand the customer base for that product?

Fusen Chen, President and CEO

You mean dispensing, right? We are very excited about it. I believe dispensing is a significant market. I work across various industries, and our customers in the AD sector and those using ball bonders all have this need. It’s straightforward for us to gain insights by engaging with customers. We're currently focusing on a select few and demonstrating our capabilities. Right now, dispensing has reached a critical point, particularly in micro dispensing, where precision and accuracy are essential. This has become a bottleneck for many customers, and we are concentrating on several major ones. The feedback has been extremely positive, and we feel confident about it. We anticipate initial success around the middle of 2024, and we believe we can significantly increase revenue for this product over the next few years.

Tom Diffely, Analyst

And then final question. You talked a little bit about increasing headcount. Any sense on the magnitude of that?

Lester Wong, Chief Financial Officer

We mentioned that we would increase headcount in critical areas, specifically related to the R&D projects and growth initiatives that we discussed, which are expected to deliver results in the mid to long term. We are being very cautious with costs, including headcount in all other departments, due to some uncertainty. Therefore, we are not aiming for a significant increase in headcount. Overall, it is likely to remain stable or decrease slightly.

Operator, Operator

We have reached a question-and-answer session. I would now like to turn the floor back over to Joe Elgindy for any closing remarks.

Joseph Elgindy, Senior Director, Investor Relations

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