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spk01: Greetings and welcome to the Kulik 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 Elgin, Senior Director of Investor Relations. Thank you, sir. You may begin.
spk08: Thank you. Welcome, everyone, to Kulik and Sofa's fiscal second quarter 2024 conference call. Fuzen 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 .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 Sofa that could affect our future results and 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 Fuzen Chen for the business overview. Please go ahead, Fuzen.
spk02: Good morning, everyone. While certain markets including LED, automotive, and the industry continue to be a challenging new term, we remain focused on expanding our market position and driving new and successful customer qualification over the coming quarters in thermal compression, VFO, and advanced expense. 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 results 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 focus growth strategy has been successful and has allowed us to take a share in new market 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 market, expand our shares in leading-edge logic, and actively enable next high-volume packaging format for DRAM. Our advanced expense business is taking a similar customer focus 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 challenge combined with medical factor likely play a role in our customers' decision to discontinue this program, which is a supply chain partners, including KMS. Project related assets and tools, low and finished inventory, as well as open purchase order with our vendor, work accounted for in a second quarter's impairment charge, which have affected both gap and non-gap earnings. Naturally, related to the cancellation of Project W, we have restructures to remain lean and have the LK resource to accelerate other critical business initiative, including fulfilling a sizable purchase order and broadening customer demand for memory, advanced dispense, and advanced packaging solution. Restructuring and the reallocation decision 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 the capacity opportunity in fiscal 2025. Near term, we continue to anticipate demand improvement that by general semiconductor combined with a more resilient memory demand. For general semiconductor, more vendor order activity is improving and supported by utilization trend. Also, customer momentum continue as we broaden advanced packaging engagements. In our second fiscal quarter 2023, we have already experienced an over 50% increase in world-bound 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 the order activity with high volume customers gradually a series. After market close yesterday, we announced a sizable purchase order of 1,000 rapid probe system from a fast-growing assembly and test company, which were upgraded with our probe suite response base mounting and the looping capabilities. Improving utilization rate combined with a high volume order provide us with optimum on near term general low-sand conductor recovery. Next, demand for LED has a demand limited due to low utilization rate across our customer base. The automotive and the industrial market continue to face near term headwind, although this 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 sub-nets, our current quarter automotive revenue long-rate fiscal year 2024 today is 33% above our most recent automotive and industrial Trump long-rate experience throughout fiscal year 2020. This fairly rapid increase in trap to trap performance is largely driven by broad and secure trend we are enabling. These trends are driven by global electric vehicle, sustainable energy and the smart power distribution need, which provide ongoing growth opportunity. 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 chart level 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 application to continue to recover over the coming quarters. Looking ahead, our core business is anticipated to strengthen as the general semiconductor continue to improve. And we remain very focused on near-term execution. New technology win in memory, share gain in advanced dispense and the broadening of our thermal compression customer base. I would like to take a few minutes to explain each. First, win in memory, we continue to actively qualify and develop vertical thermal 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 solution are still emerging, customer momentum is strong and we expect they will transition into higher volume production next year. In addition to leading memory customers, we continue to actively support key vertical wire development with the leading IBM and Fabless company, who are depending these new solutions. The benefit of our unique vertical wire solution extend well beyond the memory market. Vertical wire is currently moving into high volume production for shielding requirement 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 future stack connectivity applications, 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 ongoing evaluation progress are driving momentum and we expect to begin growing our market share in the near term. Our advanced dispense solution are highly competitive due to their micro dispensing capability being equipped with self compensation, in-line inspection and excellent repeatability. Partification 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 summer compression boundary or TCB, which has expanded in revenue by nearly four times comparing the trading for quarters of demand over our fiscal 2021 result. As customer momentum continue to build, it is becoming clear that our TCB solution can broadly support and scale chip and heterogeneous integration. Furthermore, we continue to expect demand for our leading trustless TCB solution to increase significantly in the futures. We have already built a baseline of approximately 60 million dollars of sales during fiscal year 2023 and currently have active new engagement with over 10 separate fluctuate TCB opportunities supporting the IDM, OSAT and the front-end customers. We continue to receive multiple inquiry for additional TCB opportunities with other customers. This funnel of growing demand across a wide customer base serve 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 front-end TCB solution 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, TCB and wafer label packaging system to approach 200 million in annual revenue by fiscal year 2025. Contingent upon near term qualification and the business execution, growth 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 remain very focused on near term customer engagement with the leading IDM, OSAT and Fungi customers. This broad group of customers require a cost effective process that supports high bandwidth, fine pitch interconnect and stack die capabilities. Our leading fluxless TCB solution are well positioned to support high volume copper to copper interconnect with pitch from 35 to 5 micron. Our capability to pick from tray, tap and reel or wafer and bound tube substrate chip or wafer is robust and expected to support the broad future market of summer competition bonding. Today, our fluxless TCB solution are best in class and have allowed us to be first to mass production through our engagement with a leading IDM. In parallel, we have also continued to take the shares with the leading OSAT as they begin to ramp 3D assembly for high growth and high volume market such as mobile, sensing and the core package optics. We made significant progress over recent years to expand our TCB shares across this initial base of IBM and the OSAT customers who we have built long term relationship. Over the past few quarters, we have continued to allocate additional R&D resource to work specific boundary opportunities which we anticipate can present a sizable portion of the future TCB marketplace. Today, our global TCB team is actively engaged to support the future interconnecting need throughout all of our customer engagements. We look forward to announcing additional qualification when 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 continuing to support key technology transitions with our growing memory, advanced expense and the 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.
spk03: Thank you, Fu-Sen. My remarks today will refer to gap results on last 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 Fu-Sen 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 one hundred and seventy two point one million dollars of revenue and a nine point six percent 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 one hundred and five point five million dollars. 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 one hundred and ten million dollars and a high estimate of one hundred and thirty million dollars. By the end of fiscal year twenty twenty four, we expect our total charges to come in below our high estimate of one hundred and thirty million dollars. In addition to reallocating key R&D members to in-demand projects, we prudently reduce resources which have directly and indirectly supported Project W. We booked tax expenses of six point four 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 percent through the remainder of fiscal year twenty twenty four. Our repurchase program remained opportunistic, and we have again increased our repurchase activity sequentially. During the March quarter, we booked thirty seven point three million dollars of open market repurchases activity, which represent a sequential increase of nearly 40 percent 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 fifteen 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 one hundred and eighty million dollars plus or minus ten million dollars with gross margins of forty seven percent. Non-GAAP operating expenses are anticipated to be seventy two million plus or minus two percent, which includes additional wind down expenses of approximately two point five million dollars. Collectively for the June quarter, we expect GAAP EPS of 17 cents per share and non-GAAP EPS of 30 cents 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.
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone 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 Chris Sankar with TD Cowan. Please proceed with your question.
spk09: Thanks for taking my question. I had two of them. First one on your general semi-code wire-bounded business. It looks like that's kind of bouncing off the bottom. Fujin, do you think that is this a cyclical recovery for the wire-bounded business, i.e. utilization rates are going up for OSATs and you're beginning to see true and demand pull through, or is this more bouncing off the bottom until visibility gets better?
spk02: I believe in general, the recovery was not strong enough. As explained last quarter, automotive power semi and LOD was the center of stubbornness when we have a general semi-compared recovery. But even with this, actually, second quarter is mitigated by stronger board-bounded improvement. In fact, board-bounded has increased revenue by 55% in Q2 of 24 versus 23. Going to Q3, even general semi continues to go up, but the LOD and the power semi and the auto also incrementally get weaker. I think this industry probably needs a little bit more board-bounded recovery. Even we have a general semiconductor recovery, we also have a headwind in the auto. That's why I told you. As a result, part of that, they cancel together. But what I can say is I think 25 would be a better year for us. If we see some recovery in PC, phone, and auto, this should be very easy to add on board-bounded in a much bigger way. So I don't know if I answered your questions. I think recovery is on the way. But when we have an increase in general semi, we also see the weakness in the auto. That was the reason I think it was this. But looking forward, we expect the recovery to be more broader in PC, phone, and auto. And at this moment, even with a stronger board-bounded, 55% above the 12, 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 needs a little bit broader recovery.
spk09: Got it. One other quick follow-up. Can you give us an update on your PCB qualification in the Taiwan foundry? I thought the quality is expected to be done around this time, where the end customers moving from hybrid-bounding to TCB. Can you give us an update there?
spk02: OK, Krish, let me first to tell you, I think the hybrid-bounding and the TCB actually they are quite in this market. But so what I said, OK, I can tell you this. The foundry is one of several priority engagements for us at this moment. And we have actually engagement and qualification for multiple applications with our new fluxless technology there. So it's not only a single project. As I mentioned, we are currently the first and only fluxless technology provider in the mass production for the whole industry. And the advanced technology process in the foundry is already is always very lengthy. And the production of this new advanced technology for production is intended for CY25. And we are in early discussion for treatment to begin in the first half of CY25. So we expect to reach a new short term milestone and give you an update or prior to our next call. So I try to tell you, I think we feel like progress is good. But the qualification in the foundry really take a very, very lengthy. Let me give you an example. We anticipate this foundry relationship to progress similar to our engagement on the IBM side. We began to engage in 2021 and then began to actually take a shares 18 months later. So, you know, qualification can take a little bit longer. And this is a TCB application. And TCB actually is increasing importance in the beginning. And we have a very good presence in OSET as well as IBM. And we do expect, you know, it's just a matter of time. Since we have multiple projects, we will grow our shares in the foundry in coming quarters.
spk09: Thank you very much for the time.
spk01: Our next question comes from Dave Dooley with Steelhead Securities. Please proceed with your question.
spk04: Good evening. Thanks for taking my question.
spk05: 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?
spk02: Thanks. Okay, so we actually believe TCB right now is a production tool. And the next generation will still be TCB. One reason I think is capability. The other reason is really the cost. We are engaging next generation of HBM. And our 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 phone factor of a memory package by 40%. And also increase the IO as well as the, you know, improve the actual performance. The first, you know, production actually is intended for, you know, low power DDR. But one of the memory customers also have a roadmap, you know, for HBM. But will not be for the next generation HBM. But actually one of the customers has the potential to be as a HBM. So we actually work on both ways. TCB, we actually focus on heterogeneous integration and CHLEP. 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 a use, is a simple and capable. And we believe current generation and next generation of HBM is going to be TCB.
spk05: Okay, great. And my second question has to do with the core business. You know, you announced a thousand unit order, I guess, 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 OSATs or IDMs, because they all kind of tend to order at the same time. Is that the assumption that we should start to make here, is that you're starting to roll up these big orders on a more consistent basis?
spk03: Well, Dave, it's Lester. We are definitely seeing over the last couple of months, you know, you know, gradually improving 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 Pusen said earlier, the second half, we bet in first half, but definitely early FY 25. That's when the ramp probably should kick off. Thank you. Thanks,
spk01: Dave. Our next question comes from Tom Dispey with DA Davidson. Please proceed with your question.
spk07: Yes, I appreciate the chance to ask a question here. Pusen, 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.
spk02: Actually, thank you for the question, Tom. At this moment, memory market is recovering. At this moment, we believe NAND a little bit stronger low. But go back to your question, you know, this vertical fan out. We are working with all the memory customers. This is a very exciting, all the memory customer. And behind that actually is, you know, a big ITM company. We actually have the DRAM with all the memory customers. But we also have one NAND company, you know, working with us for a 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 start for the development. In the future, you know, it's going to be applicable for other applications, not only memory only. So I hope I answered your question.
spk07: 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?
spk02: OK, so let me answer your second question. I think, you know, the micro LED vis speed is somewhat unclear due to, you know, the project cancellation. The impact of 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, a tight transfer system is still needed, you know, for the mini LED application. And this will be still a good opportunity for our Luminix. And at this moment, actually, we are still targeting smaller die size mini LED for direct-emission large format display with a high volume opportunity for our Luminix in the second half of CY 25. So the project is ongoing. But in terms of people, actually, you know, really depend on the capability of people, right? You know, either project cancel for sure impacts some of the people. But for some people, if we can actually, you know, continue for them to contribute in the company, I think a mechanical engineer is a mechanical engineer. So we do also keep, you know, a big part of the people. And, you know, useful project, you know, for the futures.
spk07: Great. Now, it's very helpful. Appreciate your time today.
spk02: Thank
spk01: you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Ross Cole with Needham & Co. Please proceed with your question.
spk06: Hi, thank you for taking my call on behalf of Charles Shi. 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-bonder systems? Thank you.
spk03: Well, Ross, I guess this is one of our more advanced ball-bonder system. It's a China based customer. Again, it's about a thousand machine order and again, serve 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.
spk06: 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?
spk03: Sure. So I think the book to bill for the quarter was approximately about 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 improved 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 eight to 12 weeks for ball-bonder and about 12 to 16 for wedge-bonder.
spk08: Great, thank you.
spk03: Thanks, Ross.
spk01: There are no further questions at this time. I would now like to turn the floor back over to Joe Elking for closing comments.
spk08: 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.
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