Q3 2019 Earnings Call
Greetings and welcome to Kulicke and Soffa 2019, the third fiscal quarter results call. At this time all participants are in a listen only mode. After your question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Joseph Elgindy Senior director Investor Relations and strategic initiatives for Kulicke and Soffa Joseph you may begin.
Welcome everyone to Kulicke and Soffa third quarter fiscal 2019 conference call.
Joining us on the call today are foods, and Chen President and Chief Executive Officer, and Leicester Wong Chief Financial Officer, and General Counsel.
For those of you who have not received a copy of todays results the release as well as latest investor presentation are both available in the Investor Relations section of our website at Investor Doc can as dotcom.
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 90 95, our actual results and financial condition may differ materially from what is indicated in those forward looking statements.
For a complete discussion of the risks associated with Kulicke and soffa that could affect our future results and financial condition.
Please refer to our recent SEC filings specifically the 10-K for the year ended September 29 2018.
I would now like to turn the call over to Susan Chen for the business overview. Please go ahead.
Thank you Joel slow these unique industry conditions, we continue to generate a profit.
In this too will organ deep into the program.
Reduced our shares outstanding and the market acceptance of several new openings.
Several of our end market continue to be generally salt.
With that let me capital spending will be partially due to the colon.
Michael you moment.
Despite these are deeming near term visibility.
We are confident in general improving demand and also our longer term bucket driver in the product opportunity into fiscal 2020.
We reported earlier today that we had to ship several piece would look system.
To multiple locations in the June quarter, and expect additional shipments in the current September quarters.
The shipment over this tool.
Ongoing customer interest and the addition of trends Schuman further increased our confidence that piece on us will help accelerate market adoption of meaning and the Michael LCD technology.
As many of you are aware.
This is not only a high potential market expansion opportunity.
Ill come up.
Similar converging tour is very competitive and the in production for a premium logic application.
Similarly catalyst our high accuracy fleet EUV tool was recently show at the Semicon West and the continued to generate significant customer interest for leading edge memory and the logic applications.
I will provide a more detailed update to our growth initiative of pillar financial review.
For the June quarter, we recognized revenue of $127.1 million.
Hey increase over nearly 10% sequentially driven by an increase in demand from our wholesale customers.
With exposure to general semiconductor.
And also an increase in demand for our products.
Somebody is continue in automotive memory and the for advanced packaging products.
Capital equipment sales increased by 11.5% sequentially to 89.9 million driven by a strong increase in the ball bonding and the partially offset by decreased which bonding and our E.
Businesses.
Sequentially revenue increased by 65% in mobility, driven by increased demand from our all set in the annuity customers.
A significant change over in the March quarter.
This helped to highlight the diversity of our business, but also improve improving underlying market conditions due to our relatively short lead times for ball bonding.
Our aftermarket product in the services segment EPS.
The spreads similar trend and the sales increased 5.4% sequentially to $37.2 million.
This change was driven mainly by an increase in the ball bonding business.
Contributing though a brother negligible uncertainty.
Our global organization continued to be focused on cost control, while also prioritizing ongoing business development and the effort to drive fundamental business optimizations.
Stronger both on the demand.
The increased consumable sales.
The improved customer sentiment and the ongoing improvement to our outlook the increase confidence that this industry is showing signs of improvement.
As we look ahead, we remained focus on market adoption of our new tool and the continued to be operationally prepared for the men improvements.
I would now like to turn the call over to less the one who will cover this quarter's a financial overview in greater detail Lester.
Thank you to set my remarks today will refer to GAAP results unless noted.
Net revenue for the quarter was $127.1 million, a gross margin of 46.2% generated $58.8 million of gross profit.
We anticipate gross margins to be approximately 45% in the September quarter.
We continue to benefit from the flexibility of our manufacturing operations and continue to drive SGN a efficiencies through the June quarter.
We are all very focused on limiting controllable and discretionary costs and driving workforce efficiency.
As mentioned on our last earnings call. This cost containment exercise is extremely selective and we do not intend to jeopardize our long term growth initiatives.
Compared to the June quarter, one year ago, our global workforce has been reduced by over 12%, while we are maintaining an elevated level of R&D investments.
In the long term, we plan on maintaining our existing operating expense target of $53 million of fixed quarterly expenses, plus 5% to 7% of variable quality expenses tied to revenue.
Due to aggressive focus on controllable and discretionary spending in the near term we are targeting to gain achieved the lower range of our variable expense components in the current September quarter.
Turning to tax we booked a net tax expense of $3.9 million, resulting in a rate above our long term effective tax rate target of 15% as mentioned on last quarter's call.
The higher June quarter tax rate is due to the dynamics of our business in a lower demand period.
Specifically, our jurisdictional incoming income mix and valuation allowances on certain deferred tax assets impact our effective tax rate more significantly during lower demand periods going forward. We have raised our long term effective tax rate target to approximately 18%.
Looking into the September quarter, we are anticipating the absolute tax expense, excluding discrete items to be around $2.5 million.
Turning to the balance sheet.
We ended the June quarter, with a total net cash and investment position of $572 million or $8.75 on a diluted share basis.
As a reminder, we have begun to drawdown from our overdraft facility during the March quarter.
At the end of the June quarter, we have drawn down $71.2 million to support us cash needs, including the repurchase program.
During the June quarter, we have again increased our repurchase activity and deployed $33.2 million to repurchase 1.5 million shares.
At the end of our June quarter, we had approximately $112.1 million remaining under the existing share repurchase authorization.
Cumulatively from our initial program inception through the June quarter, we have repurchased 16.6 million shares outstanding for a total value of $287.9 million.
Our overall repurchase activity has accelerated in coordination with our organic development program over the past few years.
While we began our initial repurchase program nearly five years ago, 68% of the total value was deployed in the past two years, we have approximately 30% deployed in the past nine months.
On a book value per share basis, we closed the June quarter was $12.03. A decrease of 46 cents from the March quarter, due primarily to adopt ongoing repurchase activity.
Working capital defined as accounts receivable plus inventory less accounts payable was effectively flat at $207 million down $1 million sequentially.
From a deal perspective, our days sales outstanding decreased from 108 days to 107 days.
Our days sales of inventory a decrease of 153 days to 129 days and days of accounts payable increased from 50 days to 56 days.
This concludes the financial review portion of our call.
I will now turn the discussion back to two cents for the September quarter business outlook.
Since Lester.
While we continue to operate in a very dynamic macro environment is difficult to predict.
We remain cautiously optimistic considering recent demand improvement at our global offset.
Additionally, we are also uniquely positioned to create meaningful value through our market expansion ever in advanced packaging and the next generation.
Opportunities.
As mentioned in today's press release, we believe the soft demand environment is gradually improving and the we expect revenue to be approximately $130 million to $150 million, representing a 10% sequential improvement.
We remain extremely focused on several of our Dibrom initiative and our ongoing effort to drive market and the customer adoption of our newly introduced advanced packaging Muni and the micro Elbit systems.
This ongoing development effort provide an opportunity to emerge this period of softness a much stronger and the higher gross organization.
A few weeks ago, we participate in the Semicon west ratio.
Well advanced packaging techniques and approaches was highlighted by several leading logic and foundry companies.
This focus all advanced packaging highlights our long term view like new picture approach provide alternative to nor shrink by delivering power efficiency performance and the Formfactor benefit for next generation devices.
We are well positioned to therapy published in this transition through our comprehensive.
And the comprehensive labels packaging offerings.
Over the coming years, we anticipate meaningful leverage in our operating model as our serve market expense through share again in this new businesses.
During semicon, we exhibit our catalyst acquisition free chip to the broader market due to unique architectures throughput and accuracy.
We are pleased with the competitiveness of this tool.
Our rapid development approach of facilitated by our R&D organization has allowed us to develop and the into introduced this tour in just over one year.
The Coca Cola system provide increased placement accuracy and dramatically enhance throughput for next generation high density free trip devices.
Today, if richer equipment is the second largest in the country market behind a wire bonding with a total available market size of approximately $250 million.
Over the coming years, we anticipate new forms of advanced packaging suggests I guess your friendship some more competition and the fan out wafer level packaging to depressed traditional feature tool.
The market, we do not participate significantly in.
Okay and as these anticipate transition will enhance our share of leading edge logic and the memory applications.
Also as mentioned in last quarter's apama or similar conversion system continued to perform well and will remain very competitive versus alternative system, Ed leading offset for a high volume larger application.
Separately.
We shipped our first division of Laitek five handle this algavia system during the June quarter.
This system has been installed essentially and the own schedules.
We have received positive feedback on the system ease of use and are targeting to ship a second evaluation system to a separate customers early in calendar year 2020.
Finally in just over a year, we engage with a technology partner and our subsequently Deborah ship and recognize revenue for our mini and the Michael LPD tool piece Sawlogs.
This to a set a new benchmark for high speed Prisma and operate up to five times faster than computing pick and bridge solution.
Considering this capability.
Our recent sales.
And the end customer interest we expect this to award enable cost effective and the high volume production of media in the micro devices in the new futures.
Over the coming years, we anticipate new phones on the lighting to drive initial adoption of peace on Aucs tool.
In the longer term that review LG display are also a high potential and applications for these two.
While we are focused on many and the micro LNG you see for high resolution displays.
There is also meaningful potential for lighting and the general information off the split within automotive and consumer electronics.
As of today, we have shipped a total of seven system.
Several of which we have already recognized revenue.
We continue to operationally prepared for an initial production ramp.
We are confident that our colon and the new technology solutions are extremely a night with significant long term trend in advanced packaging.
Automotive.
Org and the display market.
In addition to our new system revenue contributions, which are anticipated to deliver meaningful operating leverage benefit over the longer term.
We also continue to anticipate more near term wager demand recovery in our core business as a seasonal dynamic including smartphone cycle, followed by us and the Asian holiday season truck capacity additions and the incremental capacity supplement into fiscal 2020.
Our strong balance sheet.
Expanding portfolio.
Tom in a market position.
Ongoing repurchase activity and the high potential customer engagements provide us with an increasing confidence that we will exit this is something the environment with enhanced fundamental strengths and the gross prospects.
This concludes our prepared remarks, operator, we will now be happy to take your questions.
Thank you we will now be conducting a question and answer session.
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One moment please poll for questions.
Thank you. Our first question comes from the line of Christian Schwab with Craig Hallum. Please proceed.
Hey, great. Thanks for taking my question last quarter, who is the new talked you know accurately that you kinda felt that the March quarter would be the trough for your business, but the timing of the magnitude of recovery in the growth from there would be you know somewhat difficult to predict.
But it seems like we've got a couple of quarters here going in the right direction with that in mind have you guys given any updated thoughts to what your you know your long term target model isn't the timeframe to get there.
Potentially the trajectory of that recovery.
Oh, Okay. Thank you for question Christian.
So we discovered this question comes as a bit from where it is today.
So all of publication revenue was about $900 million equities at $890 and.
We generated 170 million dollar profit.
So old 2021 model did not come she does on the 19 Duncan and Bill was purely based on a 10% annual gross from 2018.
And the Hubble gross actually assumption come from semi unit goes.
And I'm not a hot actually will come from a new product introduction plus our NPS.
Gross.
So we see the formula.
Well come to $1.2 billion target for 2021 revenue.
So.
At this moment as you mentioned I think we guided in March a whats our trough.
And I believe we are at the beginning of a recovery in phase recovery pace.
So, let's do a reasonable assumption you know the showroom in 2021.
Our industry can reach full recovery. So it means the same products. We've had in 2018 can contribute some revenue in 2021, so I mean is $90 million.
And plus the contribution from the new product people and then we.
Introduced and although it's going to introduce or introducing.
Including people not the free chip TCV is which I believe can generate additional 100 to 200 million dollar revenue.
In 2021.
So I think our our 20 on model will likely be delayed.
12 to 18 months due to a 119 Duncan.
This included in.
He is including.
The memory don't come and also the trade dispute between the two countries.
But obviously you know with our new product introduction and collaborating with our current stock repurchase plan. We believe we will.
Very good shareholder value, which I will show whether in into a 2021.
So that will be.
My answer to your questions.
Fabulous and other new products you know.
Which which one in particular are you most excited about if if were in 2021, and we do 200 million in revenue, which which product is the one most likely of your of your new product introductions that we should be keeping a close eye on.
Okay. So I think we ensure summary.
We believe.
There are two areas one is the advanced packaging and one is.
Media and likely will be.
Okay LNG market is a huge market and when people can now shift.
Green energy actually people to the solar energy. So it really is a big market and the next phase is going to be media in the micro LNG the bottleneck.
Actually located at whole to transfer is a small die right. So I believe.
Okay. So Alex.
And has a video ultra high speed and the.
Transfer rate is about four to five times compared to commission of pick and pay solution.
So number one I think we have or would hope.
The second one XD light into advanced packaging. This included three chip, we introduced and we are very satisfied with the performance we have.
By engaging with few customer at this moment.
And also.
PCB is in transition to Ico, TCB, too, which is capable to handle bigger die.
Up to this.
Seven centimeter by seven centimeter.
And.
Also in our.
Given how interface contact.
So.
Also included in our MPS I think you know, we see a slight improvement in our engagement with our customers. So there are areas, let me make a short summary, I think.
This additional $100 million to $200 million revenue I, just mentioned will come from medium duty.
Michael Rodis and also all advanced packaging, including features including a new TV.
Engagement with customer and also 18 as it grows.
Okay, great. Thank you no other questions.
Thank you.
Thank you. Our next question comes from the line of Craig Ellis with B. Riley. Please proceed.
Yes, thanks for taking the question I'll start with that clarification. So another quarter of very strong gross margin performance at 46% plus so.
What I was hoping to do is just how do you guys reflect a little bit on some of the trends that are driving that because.
Given that given the volumes that wouldn't normally expect crush margins coming back I think in such a healthy fashion.
Hi, Hi, Craig So I think as you know our gross margin is highly contingent on product mix.
So in in the quarter, the margin went down a little bit because.
We sell more ball Bonders led Bonders first is our wedge bonder and our ATM are.
Equipment.
Second place equipment I think as we go into the September quarter, our fourth quarter, we got it around 45%, we believe that the ball bonder.
And Larry will continue to recover I think the wedge bonder is a little soft because automotive, but I think going into 2020, I think we're confident it will recover.
That's helpful. Thanks cluster and Jason I, just wanted to follow up on some of your six Iwocs commentary right.
Nice to see some traction in the marketplace in June and September . The question is I think the company believes that that business could be one that adds 5% revenues next year, maybe double that in two years time.
How should we think about the path between some initial engagements and shipments now versus much more material levels do you envision that being fairly linear or.
Are there things related to the engagements that you're having with customers sit witty you either argue for a more front end or a more backend loaded ramp.
Okay. So.
I think at this moment.
We have shipped seven system and recognized most of the revenue.
And that we expect over the next two quarters, we will have additional appeal and de lever and.
For Christmas and also looking as rigs.
Visa system, a sudden prosser next few of them.
It's going to be a system looking customer cycling qualification.
So we don't expect this going to be linear I won't feel the mass production and casino site, a pump qualification, but a company because yes, we do expect next year can contribute.
Meaningful living into us what we mean is probably.
In the mid to high single digit overall revenue you have to use qualification.
We'll be successful.
And that will be.
The total head into your revenue.
Because of.
We probably cannot precisely predict.
Which months, it's going be high volume production.
Our study like so nobody is I don't know what you said is for your questions.
Yeah. That's helpful. Thanks for that piece and then lastly, I just wanted to go back to some of your higher level commentary. You noted you were a little bit more confident in a general improvement in demand and you mentioned some things you are seeing on the prototype.
I was hoping you can elaborate a little bit further on what you're seeing and whether some of the confidence either comes from a customer interactions or or other things you've seen.
And are there any concerns that you have seen and incremental.
Negatives that we need to bear in mind. This we look forward to it.
Potentially coming off a cyclical bottom up from the March quarter through your guidance in the September quarter. Thank you.
Okay. So.
Let me let me answer these rates I think.
You know it really is about to treat in semiconductor devices.
Finish the process and they need to do a packaging.
The majority what I mean maturities of all.
80% and I don't see going to be dramatically change mix for next couple of years, 75%, 80% usable.
So you wouldn't see any.
Upcoming with Duncan.
I think a little long, but you said you didn't indicator.
So.
If you recall, our quandary weekend.
Q3 revenue was pretty high I remember this was a $270 million.
And but actually we suffer these duncan.
Including the trade tension between us and China and also memory Duncan.
Actually I think going to kind of pretty fast.
So much quarter actually we believe we reached to a trough.
And.
We just deeper June quarter about 10 percentage points of growth and we are guiding September quarter would be but not a 10% increase.
And we will all hot and the hoping maybe some of weather.
We'll also showed sequential growth low is too early to say.
So what we are feeling right now.
By individual customer.
Hopefully after the Chinese new year, 2020, and we can see.
The most significant gross yes.
Make will be moment don't deteriorate anymore right. So thats, what we are seeing at this moment.
That's helpful. Thank you and good luck guys.
Yes, Thats correct.
Thank you. Our next question comes from the line of Krish Sankar with Carlin and co. Please proceed.
Hi, Thanks for taking my question I had a couple of them number one is.
On the Pixelworks product for the mini micro leidy.
If it's really like mid single percentage of revenues I'm, just trying to figure out the math.
I'll do it doesn't work like shipment or maybe like 60 or so.
Pixelworks tools is that in the ballpark or.
Sorry, Hi, crush is less 60 or 70 picks let's talk ship when I'm, sorry, I'm not clear on my calendar 20.
I would say would be north of that.
Most of them got it.
All right fair enough and then.
How much was advanced packaging as a percentage of revenues in June .
So Chris as you know we everyone defines advanced packaging differently. We include advanced memory and.
Our advanced packaging.
Give me a historically, we've been around 20%, but due to the downturn I would say for the quarter were probably around 12% to 13%.
Got it got it okay. Okay.
Alright, and then just another question on.
You are the sales into China, how much was that.
[noise] around 52%.
And this includes everything okay across all products.
Across all products.
Got it got it alright fair enough and then a final question like food and you kind of make mention how.
No I mean, it's nice to see the do you guys have passed a cyclical bottom and.
Hopefully probably grow in December quarter also sequentially and I'm, just trying to understand like you know.
Dot.
Is not a normal seasonality for you right, but is it because that you're going through coming off a downturn that we should not think about traditional seasonality.
So.
Actually.
I think she is and that is steel plate.
But if you look at it.
The.
The fuels.
Have some excess capacity right. So the first step is to purchase these excess capacity.
And that's why I mentioned this is just an idea because that just some.
Some of the collision and whole 40 stuff roll next year.
February after Chinese new year.
Kevin have a more significant growth for the whole industry not only.
Let me look at it.
And.
For December quarters.
Is this still elevated lead little early for us to predict but I think that we will work hard to see if we can show to girls. This in the quarters.
And all she will still have a hope is it because of.
We believe.
Got you know she's a net is still there and I think a lot of people didn't buy and they have a chance as you have to buy single quarters.
Only to say, but I think that we will work hard on that.
Gotcha Gotcha Thats very helpful.
And I think those are the questions I had just one thank you very much Susan Thank listed for thank you Francis.
Thank you.
Again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. Your press Star two if you will that you remove your question from the Q and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Thank you. Our next question comes from the line of Tom Diffely with D.A. Davidson. Please proceed.
Hi, good afternoon, good evening.
Question on the Pixelworks tool sounds like some nice momentum there I was wondering is that with multiple customers at this point.
Hi, yes actually.
I think we do have a multiple customers actually we work together with our partner low if you need to decide you know customer bases and as they have a aim customer they walk in consumer electronics auto and display industry. So at this moment we.
Actually engaging with multiple customers.
Okay, and we've talked in the past about how this assumes the mini and where the market is it the same tool that does micro woody as well.
This is going to do Michael.
Oh, yes.
HM tool as a.
So hi, Tom is left there.
I think that takes a lot is very well suited for.
Many L.E.D. as Susan said, it's the fastest on the market for the five times faster than the current place. They can take machine for many L.E.D., we believe that even higher speed is needed and I think we're already working on I, what we call basically took let's say the next generation of our.
Meny am I to LCD, which.
Well it will not be the same told that it will be based on the same platform and we will build on the tool that we have now I sort of experience we have from anybody.
So.
So Tom did I got your question right now.
We do believe a media again meglio D will have a huge growth opportunity for the next couple of years and we play we are confident that the piece or Lux provide the colon needed for the industry for initial knee at an aggregate adoption.
Low we still believe on next couple of years the pricing over every day and performance area. So as the mis transfer rate, so we need to be increase and of course.
We are working on that could either be so partner.
You know.
Do do is put a futures.
Yes, all right that makes sense.
And then looking at the catalyst you said the flip chip market is about $215 million right. Now what is the size of the high density flip chip market is that just a small segment of that.
So we think a maybe a height high density high accuracy.
We say maybe have overlap markets that would be Oh, yes, yes.
Okay and then finally, what are the current utilization rates, you're seeing out in the field that it sounds like you are more confident.
Little less seasonality into this year.
Well, Tom as you know utilization rate is not uniform.
Across all customers all regions right. So that patches are doing better than others I think.
Earlier in the quarter, we were seeing it move as we indicated in our last earnings call. It see it moving towards mid seventies.
However, you know with that trade tensions and some of the event in May I think we see a little bit more chomp and obviously today's announcement probably will not help so I think it's going to be a little bit.
Choppy in terms of utilization rate of cost.
Okay that makes sense I appreciate your time.
Thanks.
Thank you there are no further questions in queue at this time I would like to turn the floor back over to Joseph Elgindy for closing comments.
Thank you Roy before closing we wanted to inform investors that we will be participating in several upcoming conferences and road shows through the September quarter.
Including Jefferies in Chicago Da Davidson in New York City, and also several non deal road shows.
Thank you all for the time today as always please feel free to follow up directly with any additional questions right. This concludes our call good day.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.