Kulicke and Soffa Industries, Inc.

Q2 2023 Earnings Conference Call


spk08: Hello and welcome to the Kulik and Salfa 2023 second quarter results conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Joel Gindy, Senior Director of Investor Relations. Please go ahead, Joel.
spk00: Welcome, everyone, to Keelkens Office Fiscal Second Quarter 2023 Conference Call. Fu Xinchen, 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, are 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 complete discussion of the risks associated with Kuehl-Gonzalfa that could affect our future results and financial condition, please refer to our recent SEC filing, specifically the 10-K for the year ended October 1st, 2022, and the 8-K filed yesterday. With that said, I would now like to turn the call over to Fuzan Chen for the business overview. Please go ahead, Fuzan.
spk03: Thank you, Joe. We continue to operate in a very dynamic global environment. and remain focused on expanding the surf market through cross-customer engagement, 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 market and the broadening customer adoption and interest of our latest advanced packaging system. At this point, our delivery schedule for higher-volume systems put our confidence we are past 12. We now see an uptick in core activities, which support further improvement over the coming quarters. Overall, Our longer-term industry outlook remains fairly consistent and aligned with the third-party market forecast. We continue to anticipate positive semiconductor unit growth in fiscal year 2023 and a higher level of capacity and technology-related demand through fiscal year 2024. In addition to improving level 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 innovation, and the broadening of connected electronics and power semiconductor needs. As discussed in late February, we have completed the dispense acquisition and we welcome AGA to the KNS team. As a reminder, This new market provides access to adjacent dispenser 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 KNS resources, including our flexible and efficient manufacturing capabilities. our direct sales and distribution network, and our broad portfolio of system and subsystem architectures. We have identified several target market areas for AJA, which we anticipate will ramp in later fiscal 2024. Pending to March quarter's results, we generated $173 million of revenue and $0.38 of non-GAAP EPS. significantly above our prior expectations due to beta growth margin and operating expense performance. Our total capital equipment revenue was $133.7 million in March quarters, with a similar competition across end market 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, which are occurring both in leading-edge and high-value markets, are enabling share gain and higher-margin opportunities. Regarding TCB, we generated record quarterly revenue during the March quarters in support of IDM demand for higher-value mobility production. and high-performance computing. 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, OSAT, Fungi, and IBM customers during the June quarters. In addition to heterogeneous, Assembly complexity trends are also increasing technology-driven replacement for our future-rich high-volume system, which will continue to enhance corporate labor growth 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 strength and ongoing inventory digestion. Moving to LED, we are beginning to see gradual improvement within lighting opportunity and remain engaged with industry leader for both backlighting and the direct emission applications. In addition to supporting ongoing capacity addition with the piezo lamps. We are progressing Luminex engagement and the final qualification in support of large format direct emission application 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 the industrial, we continue to participate in power storage and the power semiconductor growth, which support transition to electric vehicle and the sustainable energy. We are currently preparing to launch our next battery bundler for higher form factor using both ultrasonic and laser interconnect solution in addition to supporting the production ramp for customer and the commercial vehicles. Within power storage, our base of engaged battery customers continue to grow steadily with renewed interest from our largest EV customers. Due to safety and reliability needs, we are also beginning to see high volume applications such as e-bike transitioning to higher reliability ultrasonic bonding. Finally, we have also engaged in a promising new opportunity supporting the emerging EV toll market. Within power semiconductor, we continue to see a strong ongoing demand driven by charging and inverter applications. which are directly supporting this industry transition. Like many other areas of semiconductor assembly, we see stronger growth in high-tech value and the 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 wage-bounded systems. Next, while memory remains sluggish near term, we are also anticipating improvement toward the end of fiscal 2023. Finally, our aftermarket product and solution segment generated $39.3 million of revenue, fairly consistent with the last quarters. 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 supermarket. These transitions are providing 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 toward organic development, internal capacity expansion, new inorganic opportunity and return value to shareholders through a competitive dividend and an aggressive pace of open market and accelerated share repurchase. Finally, core activity for high-volume business has recently improved, which provides additional optimism. We are positive. This trend is anticipated to continue improving through fiscal 2023 and 2024. Despite macro 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 completion and assure cycle profitability. I look forward to demonstrating our effort over the coming quarters. With that said, I will now turn the call over to Lester, who will discuss our financial performance and outlook. Let's start. Thank you, Fusheng.
spk05: My remarks today will refer to GAAP results unless noted. As Fusheng 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 profits increased by nearly two times versus the similar trough period in fiscal 19. We expect our 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 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 48.6% gross margin 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 remained 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 margin of 48%. Non-GAAP 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 dispense business. We remain focused on controlling and limited any non-critical activities and maintain 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 32 cents. We're 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, electronic assembly, and automotive markets, we remain excited for the future. Looking into 2024, we remain optimistic on broader macro trends and remain extremely focused to support the technology needs of our customers. This concludes our prepared comments. Operators, please open the call for questions.
spk08: Certainly. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 at this time. 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. Our first question today is coming from Tom Diffley from DA Davis City. The line is now live.
spk02: Yeah, good morning. And congratulations on getting past the trough. Always a nice thing. Fusin, I was wondering, when you talk about sequential recovery here from the trough levels, Yu, can you frame the industry or your business as far as utilization rates and where you're seeing pockets of strength?
spk03: Okay, maybe I can make a few comments, and let's have maybe information provided to you. So actually, last quarter, we feel we are pretty bottom because the bull bond revenue is quite low. But we do believe our second half will recover. But actually, we did not forecast a banking crisis, which actually likely will impact our spending patterns. So therefore, actually, the Q3 and Q4, actually, the growth is not as original as expected, as fast. So at this moment, we still believe second half will be up, but the growth rate maybe is worse will be impacted by the banking crisis. So that's what we are seeing right now. And utilization rate?
spk05: Hi, Tom. So utilization rate is around 65%. But in pure inventory digestion, the absolute percentage of utilization rate is not as important as the trend of utilization rate. So we've seen actually for Q1 and Q2 utilization has basically been a bit flat, and then from what we see from our customers, utilization is going up in Q3.
spk02: Okay, and then just the pockets of strength from regional basis, are you seeing even in China some pockets of strength?
spk03: Actually, yeah. We actually have more on the demand actually from China. And our wedge-bounder actually deal with high-power devices, actually quite strong. But wedge-bounder, other than the EV and the automotive, we really see the strength in the power semi. And the wedge-bounder is a record year for this year. We also see other opportunity, like I mentioned, the eVTOL. This is the electrification of an aircraft. And we also seen some transformation There are some low-cost welding, we call resistant welding, used to make low-cost applications like e-bike transition into ultrasonic 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 the next year, advanced display will be very positive for us.
spk02: Okay, great. And as a follow-up, 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?
spk03: Yeah, so let me update a little bit of our advanced display. So we actually recognize total of advanced display revenue. about $240 million since we shipped the first piece of Lux. And the past two years, from June 21 to March 23, actually, we recognized $160 million of advanced disparate. I think at this moment, the industry really needs very disruptive, high productivity for the fast-growing mini-AOD and micro-AOD mass transport technology. 23 is transformation years for us, for the advanced display business. At this moment, both our Luminex and the W project are progression-aware. So, very short summary. I think Luminex, because it is going to be a product for many, many customers, our qualifications take 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 emission application with a 3x productivity compared to a piece of Lux by September this year. And we will win multiple customers in FI24. And we also expect W project will go to initial production early 24. So we are preparing for a ramping. So in addition, I think 23 is a little bit tough for everyone. It's a transformation year for us and also a very challenging year for any incremental capital expenditure. So majority of our disparate business probably will We expect probably in Q4. But beyond that, I think it will be quite positive for us from there.
spk02: Great. That's helpful. Appreciate the time.
spk03: Okay. Thank you.
spk08: Thank you. Next question is coming from Dave Dooley from Steelhead Securities. Your line is now live.
spk07: Yes. Thanks for taking my question. I have a couple questions. I guess, Lester, in one of your slides, it talks about executing margin enhancement strategy. I guess this is for your core wirebonder business. Could you just update us on how much gross margin improvement you would expect from that new product and the timing?
spk05: Yeah. So, Dave, I think we've been very focused on our ballbonder optimization in terms of increasing the gross margin. Some of the technology changes have helped. I think Fusun's mentioned before capital intensity. I think we're also doing some SIP packages, which also requires the higher pin count, more advanced bonders, which gives us better margin. I think we're in the process of introducing a new suite of products 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 ball bond, the gross margin will continue to rise.
spk06: Okay.
spk07: And then, just out of curiosity, one of your competitors talked about introducing a thermal compression bonder on their conference call, and they've historically been 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?
spk03: So let me answer this. I think the heterogeneous integration, this is a large triplet process together, consists of multiple packaging technologies, such as heavy bonding, TCB, and CFA. Now, there are many technologies that can coexist. So at this moment, the hybrid bonding and the RTCB are really not necessary to be competing. And in a certain technology, actually, they can coexist. So KN as a solution actually serves both a fine pitch C2S and C2W process. And both of them are very sizable. And we expect a C2S probably is about the same size as a C2W. So C2W, actually, they are two-way. We love hybrid bonding, and I think there's still a big market. The current pitch is about 35 microns. And the hybrid bonding actually focus on actually below 10 microns, probably 10 microns. So there are a lot of volume, actually, with TCB. And hybrid bonding actually more for process. In some area, hybrid bonding and the TCB can be complementary for our C2W. For example, our C2W TCB is capable to place a hybrid bonding bond, you know, a bonding die, actually on a silicon interposal. So your question is, is a TCB, the market size can be bigger? We tend to agree, but of course, you know, We are not, you know, the major player yet for hybrid bonding, but it's a capable technology and some customer actually start to use in production. So Dave, I wish I answered all your questions.
spk07: 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 you know, now that you've started to ramp this product, what kind of revenue levels you can reach on an annual basis at any time in the future here, annual target?
spk03: So, I think last time Chris asked it, I can give you a little bit of a cut. So, this quarter, our dedicated, you know, AP, dedicated, you know, we have AT Premier, it's a wafer-level stock bumping, and plus SIP, you know, you know, active passive altogether, SIP, plus TCB. So this quarter, Q2 total dedicated revenue is $33.7 million. And this $33.7 million, the TCB alone is about $20 million. So that's for the Q2. And for the Q3, I think, we say we are going to expect to shift, you know, numerous fluxes and the momentum will continue. So at this moment, our TCB, actually customers including IDM, Oset, and Fengji. I think last quarter, when we give the guidance, this year, our TCB alone, our TCB alone will be lower than $68 million. And I think last quarter, we declined. you know, next year will be a sequentially higher. So maybe later part of this year, maybe another one or two quarter, we have a more concrete number. We can guide, you know, the CCB, you know, for the next year. Thank you so much. But this year, I think we expect $68 million. Excellent.
spk08: Thank you. Next question is coming from Chris Sankar from Cowan & Company. Your line is now live.
spk06: Yeah, hi. Thanks for taking my question. Thanks for the color on, you know, the June and September guidance. I'm just kind of curious when I look at it, you know, six months ago we thought FY23 would be about, you know, $900 million. Last quarter you said it would be about $840. Now it looks like more like $750 million. So I understand that we are probably at the trough. but it looks like the recovery seems to be more gradual. So I'm kind of curious, A, number one, what is the reason for a slow recovery versus three months ago besides the banking crisis? And number two, what gives you the confidence that we might not be stagnating at these levels for a longer time?
spk03: Okay, Krish, I think we was expecting faster recovery. 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 we are seeing the high volume business particularly broadband we always expect will actually grow faster but actually the quotation activity is still increasing very, very dramatically. But come to, you know, our scheduling, you know, we've seen Q3, Q4 also seeing some push out. And we are hoping if our third-party forecasts are right, this year I think unit growth is about 3%, and market right now is forecast about 10%. So if you ask me, I think maybe the inventories are not fully depleted yet, and also the banking crisis probably cause consumer confidence and impact their spending pattern. This is up to I can think of. But we do believe 24, will be a better year for everyone.
spk06: Got it, got it. Fair enough. And then quick question. Did you guys say what your backlog or book-to-bill was?
spk05: Yeah, so our backlog is right now, as I think we've discussed this 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 without delivery dates, that's another $250 million. So that's basically where our backlog stands. And backlog is pretty healthy. That's also another reason we think the recovery is we are past trough and we're going towards recovery.
spk06: Thank you very much.
spk08: Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Charles Shee from Niedermann Company. Your line is now live.
spk04: Hey, good evening, Fusa 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 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, they are seeing a calendar second half possibly slightly lower than a calendar first half. I know you're only guiding to your fiscal year end, which ends in September, but can you kind of help us understand, given that where your September numbers are looks like your calendar second half
spk03: uh probably is flat to up uh relative to the character first half uh can you help us uh reconcile what's the differences here between what you're seeing and what your competitors are seeing sorry yeah yeah so i think i look at the uh the uh the company that we have two of them you know i uh only remember rough number i will not you know, be the best person to come and compare those financial performance. If you'd like to make a comment, we welcome your comment.
spk05: Yeah. 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 Fushun mentioned earlier, as well as power management. So again, I mean, they see what they see, we see what we see, right? And as we indicated, we believe that the second half will be stronger than the first half.
spk03: Right, and so I think sometimes compare same quarter with a different company might not be the best one. For example, in 2021-22, I think we go up to $1.5 billion. And one quarter, I remember, is almost $500 million. So pick up a quarter to make a comparison. I don't know, you know, is the best comparison. I think just for KNS, we want to make sure, you know, in this difficult environment, we ramp up, you know, our future products and we watch our spending. and we respect, as you know, we have a good competitor, and we respect them. But for the quarter-to-quarter competition, actually, I actually don't have accurate number. So if you would like to make a comment, we will make a comment.
spk04: Yeah, no problem. Thank you for the comment. 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 some of the movement within the backlog is a little bit stagnant. When do you expect the backlog to return to a normal range in terms of how much it covers the quarterly revenue? I remember maybe it's somewhere between 1% to 1%. Two quarters will be the more normalized backlog level, and when do you expect that to happen? Thank you.
spk05: 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, historically that has been true in some quarters. But I think actually for us, also the way we define backlog, I think the backlog will continue to go down, but it's difficult for us to say when it will match two quarters of backlog going forward.
spk04: yeah and what's the book to bill ratio you're seeing in march quarter certainly i understand that you are seeing increased quote activities but what's the actual book to bill in march quarter it's less than one uh do you expect that book to be able to come back up above one maybe in june just just try to understand the ordering trend here thank you well
spk05: Charles, I think, again, as I indicated before, it fluctuates quite a lot. I would not say we expected to go above 1 in June. I think, you know, over the next couple of quarters, it'll move up and down. I mean, historically, it's been around, last couple of quarters, it's been around 0.8 to 1, so. Got it. Thank you.
spk04: Yeah. Go ahead. Go ahead, Charles. Yeah, no, no, no. I just want to say good to hear you guys are passing the 12, but Fusheng, please, if you have a comment, please make it. Thank you.
spk03: So try to give you an example. I think we start to see core activity increase, but actually some of bigger customer we start to engage, they give you indication of, you know, a period time, for example, maybe like beginning of 24. You know, there's no definite date. So even if we get a PO, actually we didn't put that into our backlog. You know what I mean, right? So even we get a PO, unless it's definitely that we put this as a backlog. That's what we're talking about. But let me repeat again. We do actually get an inquiry much, much often. And I think last quarter we started to see actually a smaller one, and they probably need to have much, much less lumber. But right now, I think we are actually working with a few actually mid-size. So we do believe, I think, a recovery will happen on the way. Of course, unless something happens, you know, it's going to impact everyone.
spk04: Yeah. Thank you, Fusa and Lester, for the color. And I'll get back to the Q. Thank you.
spk08: Thank you, Chuck. Thank you. Our next question today is coming from Tyler Burmeister from Craig Hallam. Your line is now live.
spk01: Hey, guys. Thanks for letting us ask a couple questions here. So first, maybe a little bit of a 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 kind of see that going next year?
spk03: Okay, I think this year, of course, semiconductor radio is going down, but the number, if I remember correct, unit number still up a little bit, but you know, like some device, the price can go down a lot. That's why I think semiconductor radio go down, right? So I think this year is about maybe slightly above zero. Next year, if third party all together, we feel like it will be between 8 to 10. That's the number we are getting.
spk01: All right, perfect. And then, you know, last quarter, I guess, just a little update from last quarter. You guys highlighted advanced packaging, some inroads you're 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?
spk03: Well, you know, we don't talk specific, you know, customer, but we do believe we have a differentiated tool. And, you know, the engagement, we have numerous customers and also in a different area, like we have an IDM, you know, we have OSAT, we have Fungi. I think, you know, we probably will... report the progress, but the engagement with Foundry is probably a little bit later than the IDN. But I think as we go on, we will give you more call. But the progress, actually, we are quite happy at this moment.
spk01: Perfect. That's very fair. I appreciate that. All right. That's all for us. Thanks, guys.
spk08: Thanks, Alex. 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.
spk00: 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.
spk08: Thank you. You may now disconnect and have a wonderful day. We thank you for your participation today.

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