Kulicke and Soffa Industries Inc. Q2 2023 Earnings Call

Speaker 2: Hello and welcome to the Culex and Salfit 2023 Second Quarter Results Conference Calling Webcast.

Speaker 2: If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation.

Speaker 2: As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Joe Elguindy, Senior Director of Investor Relations. Please go ahead, Joe.

Speaker 3: Welcome everyone to Kewelkin's Office Fiscal Second Quarter 2023 Conference Call. Fu Xin Chen, President and Chief Executive Officer and Lester Wong, Chief Financial Officer are both also joining today's call.

Speaker 3: 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.

Speaker 3: 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 are available at investor.kns.com.

Speaker 3: 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 in 1995. Our actual results and financial condition may differ materially from what is indicated in those forward-looking statements.

Speaker 3: For a complete discussion of the risks associated with fuel consofa that could affect our future results and financial condition, please refer to our recent SCC filing, specifically the 10K for the year ended October 1, 2022 and the 8K filed yesterday. With that said, I would now like to turn the call over to Fuzhen Chen for the business overview.

Speaker 4: Please go ahead, Fuzan. Thank you, Joe. We continue to operate in a very dynamic, global environment and remain focused on expanding the surf market through cross-cultural engagement, proven acquisitions, and ongoing development activities.

Speaker 4: Make-up 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.

Speaker 4: While the pace of make-out driven recovery remains richer, we see strengthening demand in our high-body market and the broadening customer adoption and the interest of our latest advanced packaging system.

Speaker 4: At this point, our delivery schedule for higher volume system put a confidence we are past 12.

Speaker 4: We now see an update in quote activities which support further improvement over the coming quarters.

Speaker 4: Over, our longer-term industrial outlook remains fairly consistent, and a night with a third-party market forecast.

Speaker 4: We continue to anticipate positive semiconductor unit growth in fiscal year 2020 and a higher level of capacity and the technology related demand through fiscal year 2024.

Speaker 4: In addition to improving level of demand, our M market opportunity has expanded significantly over the past few years due to more complex assemblies needs including energy and energy and energy integration, electric vehicle and the infrastructure adoption.

Speaker 4: New display innovation and the broadening, common-effect electronics and the power semi-contact lineers.

Speaker 4: As discussed in late February , we have completed the dispense acquisition and we welcome AJA to the Canvas team.

Speaker 4: As a reminder, this new market provides access to adjacent dispenser opportunities in both semiconductor and electronics assemblies.

Speaker 4: Correctively, we present a 2-villain dollar addressable market and providing a new set of a long-term opportunity.

Speaker 4: Our integration priorities ensure the AJA team can efficiently leverage CAN as a resource, including all flexible and efficient manufacturing capabilities.

Speaker 4: our characteristics and the distribution network.

Speaker 4: and our broad portfolio of systems and the subsystem architectures.

Speaker 4: We have identified several target market areas for AJA, which we anticipate will run in later 3-4-2024.

Speaker 4: 22 March-quarters result, which generated $170.3 million of revenue and a 30-essence of NGAR EPS, significantly above all prior expectations due to beta-course margin and operating expense performance.

Speaker 4: Our total capital equipment revenue was $133.7 million in large quarters, with a similar competition across N market as last quarters.

Speaker 4: Within General Semiconductor, we continue to see technology-related demand for IoT applications.

Speaker 4: High performance compute and growth in emerging applications such as artificial intelligence and package optics.

Speaker 4: This trend, which are occurring both in DBH and the high-body market, are in able to share again and higher market opportunities.

Speaker 4: Regarding PCB, which is already Raker-Cotally-Lavin-U, Dune in the March-Coters, in support of IDM demand for higher-valent mobility production and high performance computing.

Speaker 4: During the March quarters, we also shipped several fluxless TCB solutions and are preparing to ship our largest number of quarterly fluxless TCB systems to D-Link, OSAP, Fungji and IBM customers during the June quarters.

Speaker 4: In addition to heterogeneous, assembly complexity trends are also increasing technology driven replacement for our future rich high-volume system, which will continue in hence corporate labor growth margins. We demand on track to introduce several new wild-bounding systems through the first half of 2024. Over near term, we expect customer demand to continue improvement. We demand on track to introduce a new wild-bounding system through the first half of 2022.

Speaker 4: due to seasonal strengths and ongoing immaterialization. Moving to LED, we are beginning to see greater improvement within lighting opportunity and the remote engage with industry leader for both Black Lighting and the Terrick Imageship applications.

Speaker 4: In addition to supporting ongoing capacity addition with the PISOLUX.

Speaker 4: We are progression rooming next engagement and the final qualification in support of large format that is initiative application and also emerging automotive display opportunities.

Speaker 4: Lastly, we are preparing two 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 and counter-control, which support transition to electric vehicles and sustainable energy.

Speaker 4: customer and the commercial.

Speaker 4: vehicles. We didn't pause storage. Always of English battery customers continue to go steady.

Speaker 4: with renewed interest from our largest EV customers.

Speaker 4: Here to step here and the reliability need, we are also beginning to see high volume applications, such as e-bike, transitioning to higher reliability as a sonic bounding. Finally, we have also engaged in promising new opportunities supporting the emerging EV toll market. We have also introduced UTV.

Speaker 4: We continue to see strong ongoing demand driven by charging and the inverter applications.

Speaker 4: which are directly supporting this industry transition. Like many other areas of semiconductor assembly,

Speaker 4: We see stronger growth in high-disk value and the most advanced applications such as power modules.

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Speaker 4: Next, one memory remains service near term.

Speaker 4: We are also anticipating improvement toward the end of the physical 2020 series.

Speaker 4: Finally, our aftermarket product and solution segment generated $39.3 million of revenue fairly consistent with the last quarters.

Speaker 4: key point. First, we are actively participating in several fundamentals and the long-term transition across our self-market. These transitions are providing both market expansion and the profitability opportunities.

Speaker 4: Next, we relate 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 to work organic development.

Speaker 4: interlock capacity expansion.

Speaker 4: new in organic opportunity and the return value to shareholders through a competitive dividend and an aggressive pace of open market and a accelerated share of repurchase.

Speaker 5: Finally

Speaker 4: Poor activity for high volume business has recently improved. Would you provide additional optima learn? We are past 12.

Speaker 4: This trend is anticipated to continue improving through fiscal 2023 and 2024.

Speaker 4: Despite MECO and the industry headwind, 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 compilation and through cycle profitability. I look forward to demonstrating our ever-overcoming quarters.

Speaker 4: We shall say, I will now tell a call over to Leicester who will discuss our financial performance and outlook. Leicester?

Speaker 4: Thank you, Fussan. My remarks today will refer to gap results unless noted.

Speaker 4: As Susan mentioned, it is a very exciting time for the company as our core markets are showing clear signs of improvement and our new technology solutions are reaching final stages of development and customer acceptance.

Speaker 4: 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 profits increased by nearly 2 times versus the similar trough period in fiscal 2019.

Speaker 4: We expect our fiscal relative fiscal year 23 financial performance to also 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

Speaker 6: in the most efficient and cost effective manner.

Speaker 6: Additionally, we are actively building our Kronji facility here in Singapore.

Speaker 6: This site increases our capital equipment production footprint by 44% in support of these meaningful new opportunities.

Speaker 6: During the March quarter, we generated $173 million of revenue, 48.6% gross margin, and 38 cents of non-DAT EPS.

Speaker 6: Gross margins came in above our guidance midpoint at 48.6% due to product mixed throughout capital equipment and project W related accounting.

Speaker 6: 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.

Speaker 6: 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 remained opportunistic and price-dependent.

Speaker 6: Activity has slowed through the March quarter and we anticipate increasing the cadence through fiscal year end.

Speaker 6: Looking ahead to the June quarter, we anticipate revenue of approximately $190 million plus plus or minus $20 million with gross margin of 48%.

Speaker 6: Non-GAP operating expenses are anticipated to be approximately 73 million plus or minus 2% due to additional R&D investment largely associated with our set of emerging opportunities as well as the inclusion of the new dispensed business. We remain focused on controlling unlimited any non-critical activities as maintained on-

Speaker 6: approximately 32 cents. 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 quarters expectations.

Speaker 6: As we see gradual improvements in our high-volume business and participate in several long-term transitions affecting the semiconductor, advances play, electronic assembly and automotive markets remain excited for the future.

Speaker 6: Looking into 2024, we remain optimistic on broader macro trends.

Speaker 6: and remain extremely focused to support the technology needs of our customers. This concludes our prepared comments. Operators, please open the call for questions.

Speaker 2: Certainly, we're now beginning to have a question and answer session. If you'd like to be placing the question, Q, please press star 1 at this time.

Speaker 2: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment please while we poll for questions.

Speaker 2: Our first question today is coming from Tom Diffley from DAA-B-C-Y. He's now live.

Speaker 7: Yeah, good morning and congratulations on getting past the trough. That was a nice thing. Fusin, I was wondering when you talk about sequential recovery here from the trough levels, do you frame the industry or your business as far as…

Speaker 7: utilization rates and where you're seeing pockets of strength?

Speaker 4: Okay, maybe I can make a few comments and let us have maybe you have some information provide to you.

Speaker 4: So actually our last quarter we feel we are pretty bad because the Bobang the revenue is quite low.

Speaker 4: But we do believe a second half will recover. But actually we did not forecast a banking crisis, which actually likely will impact spending patterns.

Speaker 4: So, therefore, actually the Q3 and Q4, actually the growth is not as original expect as fast. So, at this moment, we still believe second half will be up.

Speaker 4: or the ghost rate maybe is what will be impacted by the banking crisis.

Speaker 6: So that's what we are seeing right now and utilization rate. So yeah, hi Tom. So utilization rate is around 65%. But in pure inventory digestion, the absolute percentage of utilization rate is not as important at the trend of utilization rate. So we've seen actually for Q1 and Q2 utilization has...

Speaker 6: basically been a bit flat and then from what we see from our customers, utilization is going up in Q3.

Speaker 7: Okay, and then just the pockets of strength from regional bases. Are you seeing even in China, some pockets of strength?

Speaker 4: Actually, yeah, we actually have a ball-bounded demand, actually, from China. And our wedge-bounded actually deals with high-powered devices, actually quite strong. But which one other than the EV and the automotive?

Speaker 4: We really see the strength in the power semi and the wedge boundary is record year for this year. We also see other opportunities like I mentioned the EVTOL. This is the electrification of aircraft and we also seen some transformation. There are some low cost welding.

Speaker 4: We call our resistance welding used to make a low cost application like a e-bike transition into our suddenly welding. So this will also provide the strength for us to move forward. And I think our AP is continuing to be strong and we do believe that

Speaker 4: the next year, 2020 will be very positive for us.

Speaker 7: Okay, great. And as a follow up, you know, previously you 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? Yeah, so let me update a little bit of our advanced display.

Speaker 4: So, we actually recognized total of advanced display revenue about $240 million. Since we should look for the piece of logs.

Speaker 4: And the past two years, from June 21 to March 23, actually we recognized $160 million of advanced display. I think at this moment, the industry really needs a very disruptive, high productivity for the fast-growing mini-AOD and micro-AOD mesh transport technology. So, uh…

Speaker 4: 23 is transformation years for us for the advanced Disney'starich.

Speaker 4: At this moment both our room in next and the third project Progression will so very show somebody I think room in next Because this is going to be a product for

Speaker 4: Many, many customers, our qualification takes a little bit longer time to serve many, many requirements. But we expect a successful qualification of both big lighting and a large format direct image application with a 3x productivity compared to a PSLX by September this year.

Speaker 4: and we will win multiple customers in FI24. And we also expect W project will go to initial production early 2024. So we are preparing for a ramping.

Speaker 4: So in addition, I think 23 is a little bit tough for everyone.

Speaker 4: It's a transformation year for us and also a very challenging year for any incremental capital expenditure. So, the maturity of our display business is probably what we expect in Q4. But beyond that, I think...

Speaker 2: will be by positive laws. So, here. Great. That's helpful. Appreciate the time. Okay, thank you. Thank you. Next question is coming from Dave Dooley from Steelhead Securities, your line is not live. Yes. Thanks for taking my question. I have a couple. I guess, Lester, in one of your slides, it talks about executing margin enhancement strategy, I guess. Thank you.

Speaker 6: 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? Yeah, so Dave, I think we've been very focused on ball bonder optimization in terms of increasing the gross margin.

Speaker 6: Some of the technology changes have helped. I think Fusen's mentioned before, capital intensity. I think we're also doing some SIP packages, which also requires the higher-income account, more advanced bonders, which gives us better margin. I think we're in the process of introducing a new suite of products.

Speaker 6: from all the way from our LED bonders, all the way up to our high-pin count bonders in late 23 to 24, so we believe that will help us the bulb on the gross margin will continue to rise.

Speaker 2: Okay. And then just out of curiosity, we have a question from the audience.

Speaker 2: One of your competitors talked about in introducing a thermal compression bonder on their conference call and they Historically been hope focused on the hybrid bonding opportunity. I guess from your perspective Do you think thermal compression bonding is a bigger opportunity than hybrid bonding? And if so, why?

Speaker 4: So, let's see what diabetes asks.

Speaker 4: I think heterogeneous integration, this is a large triplet process together, consists of multiple packaging technologies such as a heavy welding.

Speaker 4: TCB and CFA now, there are many technologies that can co-exist.

Speaker 4: So, at this moment the hybrid bonding and the RTCB are really not necessary to be completed.

Speaker 4: and in a certain technology, we actually can coexist. So KNS solutions are actually serve both a fine-teach C2S and C2W process, and both of them are very sizable. And we expect a C2S lovely is about same size as a C2W.

Speaker 4: So C2W actually, they are two ways, you know, we love hybrid bonding, and I think there's a big market, the current, the pitch is about 35 micron, and the hybrid bonding actually focus on

Speaker 4: Actually below 10 microns, we'll probably 10 microns.

Speaker 4: So there are a lot of volumes actually with TCB and hybrid bounding actually more for random process.

Speaker 4: Highway bounding and TCB can be complementary for our C2W. For example, our C2W TCB is capable to place a highway bounding bound, bounding tie on a silicon interposer.

Speaker 4: So your question is, is TCB, the market size can be bigger? We tend to agree. Well, of course, we are not the major player yet for hybrid bonding.

Speaker 2: but it's capable of technology and some customers actually start to use it in production. So Dave, I wish I answered all your questions. Yes. And then just as a follow on, I think you mentioned you had record revenue in this area. Can you maybe give us an expectation for now that you've started to ramp this up?

Speaker 4: So I think last time Chris asked it. I can give you a little bit of color.

Speaker 4: So this quarter, our dedicated AP, dedicated, we have 80-primemer premier, it's a wafer-level stop bumping, and plus SIP, active passive core together, SIP, plus DCB.

Speaker 4: So this quarter Q2 total dedicated revenue is $33.7 million.

Speaker 4: And this $33.7 million, the TCB alone is about $20 million. So that's for Q2. And for Q3, I think we say we are going to expect to shift numerous flux lines.

Speaker 4: and the momentum will continue. So at this moment, our TCHV actually customers including IDM, all set and the function. I think a last quarter, when we give the guidance, this year our TCHV did belong up.

Speaker 4: Our TSB alone will be lovely $68 million.

Speaker 4: And I think I'll last quarter.

Speaker 4: we can guide, next year will be sequentially higher. So maybe later part of this year, maybe another one or two quarters, we have more concrete lumber, we can guide the TCB for the next year. Thank you, Fuzumu. This year, I think we expect 68 million dollars.

Speaker 5: Excellent!

Speaker 2: Thank you. Next question is coming from Chris Sankar from Cowan & Company. Your line is now live.

Speaker 8: Hi, thanks for taking my question. Thanks for the color on the June and September guidance. I'm just kind of curious when I look at it, six months ago we thought FY23 would be about $900 million. Last quarter it would be about $840 million. Now it looks more like $750 million. So I understand that we are probably at the trough.

Speaker 8: But it looks like the recovery seems to be more gradual, some kind of curious. A number one, what is the reason for a slow recovery versus three months ago besides the banking crisis? Number two, what gives you the confidence that we might not be stagnating at these levels for a longer time? Okay, I think we...

Speaker 4: was expecting faster recovery. You know, unfortunately, I think not only us, the industry and also, you know, some of our peer group also see the same phenomena. So maybe there are two things. I think majority impact to us actually is we are seeing the

Speaker 4: high-volume business, particularly Bobaungd. We always expect will actually grow faster, but actually the quotation activities still increase very, very dramatically. But come to you, you know, scheduling, you know, we see in Q3Q4 also, see some push-out. And we are hoping

Speaker 4: if a third-party forecast are right. This year I think unit growth is about 3% and market right now is a forecast about 10%. So if you ask me, I think maybe the inventory is enough for the.

Speaker 4: depleted yet and also the banking crisis probably cause you know customer confidence and the spending impact their spending pattern this is up to I can think of but we do believe 24

Speaker 8: will be a better year for everyone. Got it, got it, fair enough. And then quick question, did you guys say what your backlog or book to bill was?

Speaker 6: Yeah, so our backlog is right now, as I think we've discussed before, Krish, backlog for us, we define it as POs with delivery dates. So that's about $500 million right now, but if you add the POs with Delta delivery date, that's another $250 million. So...

Speaker 6: That's basically where our backlog stands. And backlog is pretty healthy. That's also the reason we think the recovery is, we're past 12 and we're going towards recovery. But thank you, Mr. Thank you very much.

Speaker 2: Thank you. As a reminder, that star one to be placed in the question queue. Our next question is coming from a troll sheet from Neiman Company. Your line is now live.

Speaker 7: Hey, good evening, Fusen and Lester. Thank you for letting me ask a couple questions. I think your guidance for June and September looks very encouraging. You're seeing sequential growth.

Speaker 7: for two consecutive quarters of the 12th in March. And that's certainly encouraging. I just wonder, can you help me reconcile a little bit of what your two other competitors are seeing versus what you're seeing, the two other competitors of yours that are seeing.

Speaker 4: number. So it looks like your calendar second half probably is flat to up relative to the calendar first half. Can you help us reconcile what's the difference is here?

Speaker 9: I've eaten with your and where your competitors are saying sorry. Yeah.

Speaker 4: Yeah, so I think I look at the computer, we have two of them.

Speaker 4: The only November law of lumber, I would not build best person to come and compare this financial performance. If you like to make a comment, we will come to your comment.

Speaker 6: And also Charles, I think, I mean, we've already indicated that we see our order book going up, backlog going up, and also we're involved in a couple of, I guess, vectors where there is a strong recovery, right? You know, AP, automotive, electric vehicles that Fusin mentioned earlier, as well as power management. So, again, I mean...

Speaker 4: go up to 1.5 billion dollars and one quarter I remember is almost 500 million dollars. So pick up a quarter to make a comparison.

Speaker 4: I don't know, you know, is the best comparison. I think of just for KNS, we want to make sure, you know, in this difficult environment, we ramp up our future products and we watch your spending.

Speaker 4: And we respect, again, we have a good competitor and we respect them. But, you know, for the quarter, quarter, comparison, actually, I actually don't have an accurate number.

Speaker 4: If you like the mega comment, I will work with you.

Speaker 9: Yeah, no problem. Thank you for the call. So maybe another question on backlog and book to bill. Your backlog has been kind of covering probably three plus quarters of the revenue for a while. Looks like that some of the new friends.

Speaker 9: and one to two quarters would be the more normalized the backlog level and when do you expect that to happen? Thank you.

Speaker 6: So Charles, I mean, thanks for the question. I mean, the backlog obviously spiked tremendously during the ramp, right, due to supply chain issues and long lead times. So it's been coming down. We continue to expect it to come down. As far as when backlog will match exactly to, you know, two quarters, I mean, that historically, that has...

Speaker 6: been true for some in some quarters, but I think actually for us also the way we define backlog. I think the backlog can do to go down, but it's difficult for us to say when it will match two quarters of backlog going forward. Yeah, and what's the book to build ratio you're seeing in March quarters?

Speaker 6: above one maybe in June . Just to try to understand the ordering trend here, thank you. Well, Charles, I think, again, as I indicated before, it fluctuates quite a lot. I would not say we expected to go above one in June . I think over the next couple quarters.

Speaker 6: you know move up and down I mean historically it's been around last couple quarters it's been around 0.8 to 1 so. Got it thank you and what yeah go ahead go ahead go ahead go ahead Charles.

Speaker 4: Yeah, no, no, I just want to say good to hear you guys are passing the 12th, but Fusan, please, if you have a comment, we'll make it. Thank you. So, to give you an example, I think we start to see core activity increase, but actually some of our bigger customers, we start to engage.

Speaker 4: they give you indication of a period time, for example, maybe like the beginning of 24. You know, there's no definite date. So even though we get a PO, actually, we didn't put that you know into our backlog. But you know what I mean, right? So even we get a PO.

Speaker 4: This is definitely the way we put this as a backlog. That's what we're talking about. But let me repeat again. We do actually get the inquiry much, much often. And I think last quarter we started to see actually a smaller one, and they probably didn't need to have a bigger one.

Speaker 4: Of course, unless something happens, it's going to impact everyone.

Speaker 9: Yes, thank you Fusa and Lester for the color and I'll get back to the queue. Thank you.

Speaker 2: Thank you, Jones. Thank you.

Speaker 10: Hey guys, thanks for letting us ask a couple questions here. So first, maybe a little bit of clarification and if you could expand. Your assumption for semi-unit growth, I think you said this year is up maybe 3% if that's correct and any update on where you guys see that going next year. Okay, I think this year of course, a semi-continental rating.

Speaker 4: zero next year if a third party all together we feel like it will be between eight to ten that's the number we are we are getting. All right perfect.

Speaker 10: And then, you know, last quarter, I guess just a little update from last quarter, you guys highlighted advanced packaging, some inroads you were making, I believe with the large foundry, you know, setting yourself up for some potential market gain shares down the road. Any comment or update on progression there and how that's tracking? Well, you know, we don't talk specific, you know,

customer, but we do believe that we have a different shape to it. And the engagement, we have a numerous customer and also in a different area like we have an idea, we have a set, we have a phone G.

I think we probably will report the progress by the engagement with Fengji. It's probably a little later than the IDN. So, but I think as we go, we'll give you more color. The progress actually we are quite happy at this moment.

Perfect, that's very fair. I appreciate that. All right, that's all for us. Thanks, guys.

Perfect, that's very fair. I appreciate that. All right, that's all for us. Thanks guys. Thanks Tyler.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments. 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.