Kulicke and Soffa Industries, Inc.

Greetings and welcome to the QLIC and SOFA 2024 second quarter results and conference call. At this time, all participants are in a listen-only mode. A brief 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 Elkin, Senior Director, Investor Relations. Thank you, sir. You may begin.

Thank you. Welcome, everyone, to Kuhlkin's Office Fiscal Second Quarter 2024 Conference Call. Fuzin 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. GAAP to non-GAAP reconciliation tables are included within our latest earnings release and our 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 and are subject to risks and uncertainties that may cause our actual results and financial condition to differ materially from the statements made today. For complete discussion of the risks associated with Kulik and Safa that could affect our future results in financial condition, please refer to our recent and upcoming SEC filing, specifically our most recently filed Form 10-K and the 8-K filed yesterday. With that said, I'll now like to turn the call over to Fuzhen Chen for the business overview. Please go ahead, Fuzhen.

Good morning, everyone. While certain markets, including LED, automotive, and the industrial continue to be a challenge in new terms, We remain focused on expanding our market position and driving new and successful customer qualifications over the coming quarters in thermal compression, VFO, and advanced dispense. These expected successes combined with a recovering core market and a significant focus on operational efficiency will be beneficial to customers, employees, and investors over the coming years. Before discussing this quarter's result and outlook, I wanted to briefly discuss Project W and our overriding customer engagement strategy. Since 2017, KMS has evolved by growing intimate customer engagement. This customer-focused growth strategy has been successful and has allowed us to take shares in new markets as we expand our competency. A few recent examples of this engagement approach include our effort to enter advanced display market, enter the core package optics markets, expand our shares in leading-edge logic, and actively enable the next high-volume packaging format for DRAM. Our advanced display business is taking a similar customer-focused approach, which I will explain shortly. While our intimate engagement strategy has provided a new market access, share gain, and profitability. There will always be a potential risk that a project may be canceled by the end customer, which unfortunately was the case for Project W. Industry challenges combined with medical factors likely play a role in our customers' decision to discontinue this program, which is a supply chain partner, including KNS. Project-related assets and tools, low and finished goods inventory, as well as the open purchase order with our in-vendor were accounted for in the second quarter's impairment charge, which have affected both GAAP and non-GAAP earnings. Related to the cancellation of Project W, we have restructured to remain lean and have reallocated resources to accelerate other critical business initiatives, including fulfilling accessible purchase orders and broadening customer demand for memory, advanced dispensing, and advanced packaging solutions. Restructuring and reallocation decisions are never taken lightly, although these actions were necessary to maintain a focused operational model. We continue to expect gradual market recovery through fiscal 2024 with a greater technology and capacity opportunity in fiscal 2025. Near-term, we continue to anticipate demand improvement, led by general semiconductor combined with a more resilient memory demand. For general semiconductor, more boundary order activity is improving and supported by utilization trend. Also, customer momentum continue as we broaden advanced packaging engagements. Since our second fiscal quarter 2023, we have already experienced an over 50% increase in border revenue, despite ongoing headwind within automotive, industrial, and the LED market. We continue to prepare for a more robust demand in general semiconductor applications, as all the activity with high-volume customers gradually sale-less. After market closed yesterday, we announced a sizable purchase order of 1,000 rapid probe systems from a fast-growing assembly and test company, which were upgraded with our ProSuite response-based mounting and looping capabilities. Improving utilization rate combined with high-volume order provide us with the optimum on near-term general low-sand conductor recovery. Next, demand for LED has remained limited due to a lower utilization rate across our customer base. The automotive and the industrial market continue to face near-term headwind, a low based on utilization rate and the customer feedback. We anticipate demand to stabilize with a broader recovery to begin over the coming quarters. Despite the current suddenness, our current quarter automotive revenue runway fiscal year 2024 today is 33% above our most recent automotive and industrial truck runway experience throughout fiscal year 2020. This fairly rapid increase in truck-to-truck performance is largely driven by broad and secure trends we are enabling. These trends are driven by global electric vehicles, sustainable energy, and smart power distribution needs, which provide ongoing growth opportunities. Finally, memory has sequentially reduced from a very strong quarter, largely due to customer exchange. Demand for our memory solution has expanded significantly from the tough labor we experienced last fiscal year. During the first fiscal half of 2024, our memory revenue has nearly doubled from our entire memory revenue in fiscal year 2023. We expect demand across memory applications to continue to recover over the coming quarters. Looking ahead, our core business is anticipated to strengthen as the general semiconductor continues to improve, and we remain very focused on near-term execution New technology win in memory, share gain in advance dispense, and the broadening of our thermal compression customer base. I would like to take a few minutes to explain each. First, within memory, we continue to actively qualify and develop vertical frame out or VFO solution utilizing our wafer label packaging system, which is expected to expand our memory market access over the coming years. While VFO memory solutions are still emerging, customer momentum is strong, and we expect they will transition into high-volume production next year. In addition to leading memory customers, we continue to actively support key vertical wire development with leading IBM and Fabless companies who are depending on these new solutions. The benefit of our unique vertical wire solution extends well beyond the memory market. VerticalWire is currently moving into high volume production for shielding requirements and is well positioned to provide a new cost-effective packaging solution for future high volume system in packaging applications. Our VFO team is currently supporting development of a future stack connectivity application, which can drive high volume adoption. Next, our advanced dispense business continue to gain momentum as we are aggressively penetrating high precision dispense opportunity in advanced packaging, battery assembly, and the display market. Broadening customer interest and the ongoing evaluation progress are driving momentum and we expect to begin growing our market share in the near term. Our advanced dispense solutions are highly competitive due to their micro-dispensing capability being equipped with safe compensation, in-line inspection, and excellent repeatability. Quantification win over the coming quarter will secure a foundation of advanced dispense customers, which will support revenue growth in fiscal 2025 and beyond. Finally, we continue to gain momentum in thermal compression boundary, or TCV, which has expanded in revenue by nearly four times comparing the trading four quarters of demand over our fiscal 2021 result. As customer momentum continues to build, it is becoming clear that our TCV solution can broadly support and scale chip-like and heterogeneous integration. Furthermore, we continue to expect demand for our leading fluxless TCV solution to increase significantly in the future. We have already built a baseline of approximately $60 million of sales during fiscal year 2023, and currently have active new engagement with over 10 separate fluxless TCV opportunities supporting key IDM, OSET, and Fungi customers. We continue to receive multiple inquiries for additional TCB opportunities with other customers. This funnel of growing demand across a wide customer base serves as a testament that we are in the early stage of TCB growth. The need to efficiently create a more transistor dense package will only accelerate this market momentum. All fluxless TCB solutions are extremely well positioned for the next wave of demand, and we remain committed to near-term execution. Upon near-term customer qualification success and the healthy customer demand trajectory, we anticipate our dedicated advanced packaging solution, which including free-chip mass reflow, PCB, and the wafer-level packaging system to approach $200 million in annual revenue by fiscal year 2025. Contingent upon near-term qualification and the business execution goes across advanced packaging application is anticipated to further accelerate. Looking more near-term, new engagement for next generation high bandwidth memory or HBM can potentially begin shipping as early as this calendar year. Also, our unique copper to copper capability has a very strong customer momentum and could potentially delay higher volume adoption of hybrid bonding due to a more competitive cost of ownership. Currently, our advanced solution team remains very focused on near-term customer engagement with the leading IDM, OSET, and Fungi customers. This broad group of customers require a cost-effective process that supports high bandwidth fine pitch interconnect and the stack die capabilities. All leading fluxless PCB solutions are well positioned to support high-volume copper-to-copper interconnect with pitch from 35 to 5 microns. Our capability to pick from tray, tap and reel, or wafer, and bound to substrate, chip, or wafer is robust. and expect it to support the broad future market of thermal compression bonding. Today, all Fractured-STCB solutions are best in class and have allowed us to be first to mass production through our engagement with a leading IBM. In parallel, We have also continued to take the shares with the leading offset as they begin to ramp 3D assembly for high growth and the high volume market, such as mobile, sensing, and the core package optics. We made a significant progress over recent years to expand our TCD shares across this initial base of IBM and the offset customers, who we have built long-term relationship. Over the past few quarters, we have continued to allocate additional R&D resources towards specific foundry opportunities, which we anticipate can present a sizable portion of the future TCP marketplace. Today, our global TCP team is actively engaged to support the future intercontinental needs throughout all of our customer engagements. We look forward to announcing additional qualification wins and the new partnership over the coming quarters. In closing, we continue to look forward to a brighter 2025. We have an intense focus on enhancing operational efficiencies, are preparing for a core market recovery, and are continuing to support key technology transitions with our growing memory, advanced expense, and advanced packaging opportunity. We look forward to sharing our near-term progress which will solidify our foundation for future growth. I will now turn the call over to Lester for the financial review update. Lester?

Thank you, Fuze. My remarks today will refer to GAAP results unless noted. While there continues to be headwinds across specific end markets related to macroeconomic and industry conditions, it continues to remain an exciting time for the company. As Susan mentioned, we are pleased to see improving order activity with higher volume customers and anticipate additional groups of customers to begin ramping for both capacity and technology needs over the near term. During the March quarter, we generated $172.1 million of revenue and a 9.6% gross margin. Without this quarter's unique charges, gross margin would have been similar to the prior quarter. During this recent quarter, we booked pre-tax charges, including impairments, in the amount of $105.5 million. As you recall, we announced in March 11th that the company has anticipated pre-tax charges, including impairments, relating to the cancellation of Project W to be between the low estimate of $110 million and a high estimate of $130 million. By the end of fiscal year 2024, we expect our total charges to come in below our high estimate of $130 million. In addition to reallocating key R&D members to in-demand projects, we prudently reduced resources which have directly and indirectly supported Project W. We booked gap tax expenses of $6.4 million for the March quarter, which included tax items related to unique events during the quarter. we continue to anticipate an effective tax rate above 20% through the remainder of fiscal year 2024. Our repurchase program remained opportunistic, and we have again increased our repurchase activity sequentially. During the March quarter, we booked $37.3 million of open market repurchases activity, which represent a sequential increase of nearly 40% over the December quarter. Although gradual, recent order activity increases expectations of broader general semiconductor end market growth. We continue to anticipate near-term headwinds within the automotive and power semiconductor end markets, and also anticipate approximately $15 million of lost revenue relating to the cancellation of Project W in the second fiscal half. Looking into the June quarter, we expect revenue of approximately $180 million plus or minus $10 million with gross margins of 47%. Non-GAAP operating expenses are anticipated to be $72 million plus or minus 2%, which includes additional wind-down expenses of approximately $2.5 million. Collectively, for the June quarter, we expect GAAP EPS of $0.17 per share and non-GAAP EPS of $0.30 per share. Over the coming quarters, We look forward to providing additional updates as we reach new milestones which will help build a foundation in memory, dispense, and thermal compression opportunities over the coming years. This concludes our prepared comments. Operator, please open the call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes from Krish Sankar with TD Cowen. Please proceed with your question.

Thanks for taking my question. I have two of them. First one on your general semi-core why-wander business. It looks like that's kind of bouncing off the bottom. Susan, do you think that is this a cyclical recovery for the wild-wanderer business, i.e. utilization rates are going up for OSATs and you're beginning to see true end-demand pull-through, or is this more bouncing off the bottom until visibility gets better?

Well, Krish, I believe in general the recovery – was not strong enough. You know, I explained it last quarter. Automotive power semi and LED was the center of stubbornness when we have a general semiconductor recovery, right? But even with this, actually, second quarter mitigated by stronger, you know, bull bounder improvement. In fact, bull bounder actually increased in revenue by 55%. in Q2 of 24 versus over 23. So, you know, going to Q3, you know, even Teno Semi continue to go up, but the LED and the Power Semi and Auto, you know, also incrementally also get weaker. So what I'm trying to say is I think this industry you know, probably need a little bit more, more on the recovery. And even we have a general semiconductor, you know, recovery, we also have a headwind, you know, auto, that's what I should say. As a result, you know, actually part of that, they actually cancel together, right? But what I should say is I think 25 would be a better year for us. You know, if we see some recovery in PC, phone, and auto, you know, this should be very easy, you know, to in a much bigger way, right? So I don't know if I answered your questions. I think our recovery is on the way, but when we have an increase in the general semi, we also see the, we can, you know, not what's the reason, I think it must be slower, but looking forward, we expect the recovery will be more broader and add in a PC, phone, and auto. And, you know, at this moment, even with a stronger bull bounder, 55% above the 12th, but still only 40% of FY24 revenue compared to the peak. So I think our recovery still has a long way to go. and probably this industry need a broader recovery.

Got it. One other quick follow-up. Can you give us an update on your PCB qualification in the Taiwan foundry? I thought the qual is expected to be done around this time where the end customer is moving from hybrid bonding to PCB. Can you give us an update there?

Okay. Let me first tell you, I think the... the hybrid mountain and the TCB actually exist in this market. OK, I can tell you this. The Foundry is one of several priority engagement for us at this moment. And we have actually engagement and qualification for multiple application with our new technology there. So it's not only a single project. As I mentioned, we are currently the first and the only fluxless technology provider in the mass production for the whole industry. And the advanced technology process in Fungi is always really lengthy. And the production of this new advanced technology for production is intended for CY25. And we are in early discussion for shipment to begin in the first half of C125. So we expect to reach a new short-term milestone and give you an update sooner or prior to our next goal. So what I try to tell you, I think we feel like the progress is good, but the qualification in the foundry really takes a very, very lengthy. Let me give you an example. We anticipate this Fung-G relationship to progress similar to our engagement on the IDM side. We began to engage in 2021 and then began to actually take a shares 18 months later, right? So, you know, qualification can take a little bit longer and this is a TCV application and TCV actually is increasing importance in the beginning And we have a very good presence in OSET as well as IDM. And we do expect, you know, it's just a matter of time. Since we have multiple projects, we will grow our shares in Foundry in coming quarters.

Got it. Thank you very much for the time. Thank you.

Our next question comes from Dave Dooley with Steelhead Securities, please proceed with your question.

Good evening. Thanks for taking my question. I also have a follow-up on thermal compression bonding. I guess one of your competitors had a conference call a few days ago talking about how they thought that all the memory guys were going to pursue kind of a dual strategy with both thermal compression bonding and hybrid bonding. And I think they implied that thermal compression bonding would be the kind of technology of choice for HBM3 and HBM4. I'm just wondering where we are at as far as working with the memory guys with thermal compression bonding, and do you see TCB as the near-term solution for stacking these memory die, or will they continue to use the current technology? Thanks.

So we actually believe, you know, TCB, you know, right now is a production tool, and next generation will still be TCB. One of the reasons, I think, is capability. The other reason is really the cost. We are engaging, you know, next generation of HBM, and our, you know, working together system, you know, probably potentially will be shipped by end of... this year, physical calendar year. I think we also have another exciting project we call VFO. This is a project actually can physically reduce the form factor of a memory package by 40% and also increase IO as well as improve electrical performance. The first production actually is intended for low-power DDR, but one of our memory customers also have a roadmap for HBM, but will not be for the next-generation HBM, but actually one of our customers has the potential to be as an HBM. So we actually work on both ways. TCB, we actually focus on heterogeneous integration and 2DAP. This is for advanced logic. But for the memory, actually we have VFO, actually both of our project will increase our potential revenue. So to answer your question, I think TCB is the focus, and we believe TCB is used, is simple and capable, and we believe current generation and next generation of HBM is going to be TCB.

Okay, great. And my second question has to do with the core business. you know you announced a thousand unit order I guess for for a new wire bonder I'm assuming this is the first big order that you've received would it be fair to assume you know usually when you get one big order you start to collect other large orders from the other OSAPs or IDMs because they all kind of tend to order at the same time is that the assumption that we should start start to make here is that you're starting to roll up these big orders on a more consistent basis

Well, Dave, it's Lester. We are definitely seeing over the last couple months, you know, gradually improving, you know, order requests as well as customer inquiries, RFQs. The POs are starting to come, as we indicated, this one big PO is starting to come in. We do see the utilization rates also creeping up, so that also is an indicator of, you know, higher volume purchases. And even in the weaker end markets, we are starting to get some discussion with customers about their sort of future demand. So, yeah, I would say that we do believe that, as Fusun said earlier, the second half we bet in first half, but definitely early FY25, that's when the ramp probably should kick off. Thank you. Thanks, Dave.

Our next question comes from Tom Disby with DA Davidson. Please proceed with your question.

Yes, I appreciate the chance to ask a question here. Fusen, on the memory side, nice explanation of the vertical fan out and the thermal compression bonder. Curious, though, are those all just focused on the DRAM market? Because historically you've been stronger on the flash side or the NAND side. So curious, if these technologies are looking at both memory types or just DRAM?

Actually, thank you for the question, Tom. At this moment, memory market is recovering. At this moment, we believe NAND is a little bit stronger law. But go back to your question, this is a vertical thing now. We are working with all the memory customers. This is a very exciting, all the memory customer, and behind that actually is a bigger IBM company. We actually have the DRAM with all the memory customers, but we also have one main company working with us for the vertical panel. So to answer your questions, this vertical panel we believe just at the initial stage. Start with low-power DDR, and even then, I think it's a good study for the development. In the future, it's going to be applicable for other applications, not only memory only. So I hope I answered your question.

Yeah, perfect. And then a follow-up on the display side, I guess two-part question here. First is, how fungible is the team going from display to TCB and dispense? And then with the exit of Project W, what is your outlook for display for your other sets of tools?

OK. So let me answer your second question. I think the micro-AOED vSpeed is somewhat unclear due to you know, the project cancellation, the impact on industry actually is really there. So micro-LED, we do believe, is a setback for the whole industry, you know, for a few years. Not sure, two years, three years. But despite change in micro-LED, a high-speed pick-and-place die transfer system is still needed, you know, for the mini-LED, you know, application. And this will be still, you know, a good opportunity for our Luminex And at this moment, actually, we are still targeting smaller die size, mini-LD, for direct-emissive large-format display with a high-volume opportunity for our Luminex in the second half of CY25. So the project is ongoing. But in terms of people, actually, you know, really depends on the capability of people, right? If a project is canceled, for sure it impacts some of the people. But for some people, if we can actually continue for them to contribute in the company, I think a mechanical engineer is a mechanical engineer. So we do also keep a big part of the people in a useful project for the future.

Great. No, it's very helpful. I appreciate your time today.

Thank you.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Ross Cole with Needham & Co. Please proceed with your question.

Hi. Thank you for taking my call on behalf of Charles Shee. So my question is, can you describe the significance of the 1000 system order from this fast growing assembly and test customer? What kind of ASP uplift should we be thinking about relative to your more standard ball blunder systems? Thank you.

Well, Ross, I guess this is one of our more advanced ball bonder system. It's a China-based customer. Again, it's about 1,000 machine order. And again, it serves mostly the general semi-applications, consumers, smartphones, PC. Again, this is some of our most leading technology. And again, the customer not only bought a significant amount of new bonders, they also upgraded their existing bonders with our new pro suite, which is our advanced bonding looping software.

Great. Thank you. And then could I ask a second question as well? What was the backlog like exiting the March quarter? Can you provide some directional color if you don't want to quantify it?

Sure. So I think the book to bill for the quarter was approximately one, which has pretty much it's the normalized level other than when you're in a ramp or in a trough cycle. So we have seen bookings increase. In Peru, backlog has come down, as we said, as we burned down some of the orders that we received during the ramp. So I think it's much more at a normalized level now, similar to our lead times, which is about 8 to 12 weeks for ball bonder and about 12 to 16 for wedge bonder.

Great. Thank you.

Thanks, Russell.

There are no further questions at this time. I would now like to turn the floor back over to Joe Elke for closing comments.

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