Kulicke and Soffa Industries Q2 2023 Earnings Call Transcript

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May 4, 2023

There are 9 speakers on the call.

Operator

Hello, and welcome to the Culiacan Sulfa 2023 Second Quarter Results Conference Call and Webcast. 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 Joe Alguindy, Senior Director of Investor Relations. Please go ahead, Joe.

Speaker 1

Welcome everyone to the Kuelke's Office fiscal 2nd quarter 2023 conference call. Tuzin Chen, President and Chief Executive Officer and Lester Wong, Chief Financial Officer, are both also joining today's call. Non GAAP financial Complete GAAP to non GAAP reconciliation tables are available within our recently filed earnings release as well as our earnings presentation. This information, in addition to our prepared remarks for today's call, are available at investor. Kns.com.

Speaker 1

In addition to historical statements, today's remarks will contain statements relating to future events and or future results. These statements are forward looking Please refer to our recent SEC filings, specifically the 10 ks for the year ended October 1, 2022, and the 8 ks filed yesterday. With that said, I would now like to turn the call over to Susan Chen for the business overview. Please go ahead, Susan.

Speaker 2

Thank you, Joe. We continue to operate in a very dynamic global environment and remain focused on expanding served market Through cross customer engagement, prudent acquisitions and ongoing development activities, legal factors such as global banking issues, Inflation and the 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 remain greater, We see strengthening demand in our high volume market and the broadening customer adoption and the interest of our latest advanced packaging system. At this point, our delivery schedule for higher volume system provides confidence we are past trough. We now see an uptick in core activities, which support further improvement over the coming quarters.

Speaker 2

Overall, our longer term industry outlook remains fairly consistent and aligned with the 3rd party market forecast. We continue to anticipate positive semiconductor unit growth in fiscal year 2023 and a higher level of capacity and the technology related demand through fiscal year 2024. In addition to improving level of demand, our end market opportunity 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 Connected Electronics and the power semiconductor needs. As discussed in late February, we have completed the dispense acquisition, and we welcome AJA to the KNS team. As a reminder, this new market provide access to address and dispense opportunity in both semiconductor and the electronics assembly, collectively representing a Our integration priority ensure that AJA team can efficiently leverage K and A as a resource, including our flexible and the efficient manufacturing capabilities, our direct sales and distribution network and our broad portfolio of system and the subsystem architectures.

Speaker 2

We have identified several target market areas for AJA, which we anticipate will ramp in later fiscal 2024. Turning to March quarter's results, We generated $173,000,000 of revenue and $0.38 of non GAAP EPS, significantly above our prior Our total capital equipment revenue was 100 $33,700,000 in March quarters with a similar competition across end market as last quarters. Within General Semiconductor, we continue to see technology related demand for IoT applications, High performance compute and the growth in emerging applications such as artificial intelligence and core package upticks, These trends, which are occurring both in leading edge and the high volume market are enabling share gain and higher margin opportunities. Regarding TCV, we generated record quarterly revenue during the March quarter in support of IDM demand for higher volume mobility production and high performance computing. During the March quarter, we also shipped Several fluxless TCV solutions and are preparing to ship our largest number of quarterly fluxless TCV system to leading or set foundry and the IDM customers during the June quarters.

Speaker 2

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 We remain on track to introduce several new wire bonding systems through the first half of twenty twenty four. 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 greater improvement within lighting opportunity and remain engaged with industry leader for both backlighting and direct initial applications, in addition to supporting ongoing capacity addition with the PISOLARX. We are progressing Luminex engagement and the final qualification in support of large format, very initiative 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 customers' next phase demand.

Speaker 2

Within Automotive and the Industrial, we continue to in power storage and the power semiconductor growth, which support transition to electric vehicle and sustainable energy. We are currently preparing to launch our next battery bonder for higher form factor using both ultrasonic and Laser Interconnect Solution in addition to supporting the production ramp for customer and the commercial 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 promising new opportunities supporting the emerging EV talk market. Within power semiconductor, we continue to see strong ongoing demand driven by charging and the inverter applications, which are directly supporting this industry transition.

Speaker 2

Like many other areas of semiconductor assembly, We see stronger growth in high disk value and the most advanced applications such as power modules. Next, while memory remains sluggish near term. We are also anticipating improvement toward the end of fiscal 2023. Finally, Our Aftermarket Products and Solutions segment generated $39,300,000 of revenue, fairly consistent with the last quarter's. Before handing it to Lester for the financial review, I wanted to summarize a few key points.

Speaker 2

First, we are actively participating in several fundamental and the long term transition across our served market. These transitions are providing both market expansion and the Next, we remain in a very strong financial position, which has allowed us to invest through is a recent period of market softness. Over the past year, we aggressively deployed resource organic development, internal capacity expansion, new inorganic opportunity and the return value to shareholders through a competitive dividend and an aggressive pace of open market and the accelerated share repurchase. Finally, core activity for high volume business has recently improved, which provide additional opinion, We are past strong. This trend is anticipated to continue improving through fiscal 2023 2024.

Speaker 2

Despite Mako and the industry headwind, it remains a very exciting and transformational time for the company As we are on the verge of several new product ramp, which can further enhance our long term revenue competition and the full 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, We will discuss our financial performance and outlook. Mr. Stu?

Speaker 2

Thank you, Susan.

Speaker 3

My remarks today will refer to GAAP results unless noted. As Susan mentioned, it is a very exciting time for the company as our core markets 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 2 times versus the similar trough period in fiscal 2019. We expect our fiscal relative fiscal year 'twenty three financial performance to also significantly exceed our fiscal year 'nineteen results.

Speaker 3

Despite this material progress, macro dynamics will largely determine the trajectory of near term growth, and we remain 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 $173,000,000 of revenue, 48.6 percent gross margin and $0.38 of non GAAP EPS. Gross margins came at above our guidance midpoint at 48 came in at $64,000,000 below our prior expectations due to the capitalization of specific expenses associated with Project W and ongoing cost activities. Finally, tax expense for the quarter was $5,600,000 Turning to the balance sheet.

Speaker 3

Working capital days decreased to 5 17 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 $190,000,000 plus or minus $20,000,000 with gross margin of 48%. Non GAAP operating expenses are anticipated to be approximately $73,000,000 plus or minus 2 percent due to additional R and D investment largely associated with our set of emerging opportunities as well as the inclusion of the new defense business.

Speaker 3

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 $5,000,000 from our original budget. Non GAAP net income for the June quarter is expected to We are anticipating an additional increase in tax 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.

Speaker 3

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. Operator, please open the call for questions.

Operator

Certainly, we will now be conducting a question and answer session. Our first question today is coming from Tom Diffely from D. A. Davidson. Your line is now live.

Speaker 4

Yes, good morning and Congratulations on getting past the trough, always a nice thing. Fusen, I was wondering when you talk about Sequential recovery here from the trough levels. Can you frame the industry or your business as far as Utilization rates and where you're seeing pockets of strength?

Speaker 2

Okay. Maybe I can make a few comments and Lester have Maybe you have additional information provided to you. So actually, last quarter, we feel We are pretty bottom because of broadband revenue is quite low. But we do believe our second half will recover. But actually, we did not forecast the banking crisis, which actually likely will impact our spending patterns.

Speaker 2

So therefore, actually, the Q3 and Q4, actually, the growth is not as Original expect as fast, right? So at this moment, we still believe second half will be up, Well, the growth rate maybe is what's will be impacted by the banking crisis. So that's what we are seeing right now and utilization rate?

Speaker 3

So, yes, hi, Tom. So utilization rate is around 65%. But in period inventory digestions, 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, it's been a bit flat. And then from what we see from our customers, utilization is going up in Q3.

Speaker 4

Okay. And then just the pockets of strength from a regional basis, are you seeing even in China some pockets of strength?

Speaker 2

Actually, yes, we actually have a bow binder demand actually from China. And our which boundary actually deal with higher power devices is actually quite strong. But which boundary other than the EV and the automotive, We really see the strength in the Power Semi and the watch binder is a record year for this year. We also see other opportunity like I mentioned the EBITDA. This is the electrification of aircraft, and we're also seeing some transformation That some low cost welding, we call resistant welding used to make low cost application like eVAC transition So this will also provide the strength for us to move forward.

Speaker 2

And I think our AP is continuing to be strong and we do believe the next year, our advanced display will be Very positive for us.

Speaker 4

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?

Speaker 2

Yes. So let me update a little bit of our advanced display. So we actually recognized total of Advanced Display revenue about $214,000,000 since we shipped the first Pixellux. And the past 2 years, from June 21 to March 23, actually, we recognized $160,000,000 of Advanced Discrete. I think at this moment, the industry really need Very disruptive high productivity for the fast growing mini ALD and micro ALD mix transfer technology.

Speaker 2

So 20 3 is a transformation year for us for the Advanced Display Business. At this moment, both our Luminex and the Adobe project are progressing well. So very short summary. I think Luminex, Because it is going to be a product for many, many customers, our qualification takes a little bit longer time We expect a successful qualification of both big lighting and the large format direct initial application with 3x productivity compared to a piece of luck by September this year, And we will win multiple customer in FY 'twenty four. And we also project expect W project will go to initial production early 2024.

Speaker 2

So we are preparing for a ramping. So in addition, I think our 'twenty three is a little bit tough for everyone. It's a transformational year for us And also a very challenging year for any incremental capital expenditure. So majority of our display business Probably, we expect probably in Q4. But beyond that, I think, will be quite positive for us

Operator

Thank you. Next question is coming from Dave Dooley from Steelhead Securities. Your line is now live.

Speaker 4

Yes. I have a couple. I guess, Lester, in one

Speaker 5

of your slides, it talks about executing margin enhancement Strategy, I guess this is for your core wire bonder business. Could you just update us on how much gross margin improvement you would expect from that new product and the Timing?

Speaker 3

Yes. So Dave, I think we've been very focused on ball bonder optimization In terms of increasing the gross margin, some of the technology changes have helped. I think Fusen has mentioned before capital intensity. I think we're also doing some SIP packages, which also requires the higher count more advanced bonders, which gives us better margin. I think we're in the process of introducing a new suite of products from all the way from our LED bonders, all the way up to High teen count bonders in late 'twenty three to 'twenty four.

Speaker 3

So we believe that will help us the ball bonder gross margin will continue to rise.

Speaker 4

Okay. And then just out of curiosity, one of

Speaker 5

your competitors Talked about introducing a thermal compression bonder on their conference call and they 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?

Speaker 2

So let me answer this. I think The heterogeneous integration, this is allowed to triplet process together, consists of multiple packaging technologies such as a hybrid bounding, TCV and cell phone. They have many technology can coexist. So at this moment, the highway bonding and the our TCV Really not necessary to be competing. And in certain technology, actually, they can coexist.

Speaker 2

So Kines' solution Actually, both are fine pitch C2S and C2W process, and most of them are very sizable. And we expect C2S globally is about same size as C2W. So Actually, they are 2 way. We love highly bonding and I think that there is still a big market. The current The pitch is about 35 micron and the highway mountain actually focus on Actually, below 10 microns, roughly 10 microns.

Speaker 2

So there are a lot of volume actually over TCB and highly bounding actually more In some area, heavy bonding and the TCB can be complementary for our C2W. For example, our C2W TCV is capable to place a highly bounding bond, bounding die actually on silicon in So your question is, is TCV, the market size can be bigger. We tend to Agree. Well, of course, we are not the major player yet for high rebounding, But it's capable of technology and some customer actually start to use So Dave, I wish I answered all your questions.

Speaker 4

Yes. And then just as

Speaker 5

a follow on, I think you mentioned Record revenue in this area. Maybe give us an expectation for now that you've started to ramp this product, like What kind of revenue levels you can reach on an annual basis at any time in the future here, annual target? So

Speaker 2

I think last time, Chris will ask it, but I can give you a little bit color. So this quarter, our dedicated AP dedicated, we have 80 Premier. It's a wafer label start bumping and plus SiP, Active Passive altogether, SiP plus TCB. So this quarter, Q2 total dedicated Revenue is $33,700,000 And this $33,700,000 The TCV alone is about $20,000,000 right? So that's for the Q2.

Speaker 2

And for the Q3, I think we say we are going to expect to shift Numerous fluxes and the momentum will continue. So at this moment, our TCV actually customer including IDM, OSAT I think last quarter, when we give our guidance, this year, our TCV alone Our TCV alone will be roughly $68,000,000 And I think last quarter, We could guide. Next year will be sequentially higher. So maybe later part of this year, Maybe another 1 or 2 quarters. We have a more complete number.

Speaker 2

We can guide the TCV for the next year. Thank you, Kew so much. But this year, I think we expect $68,000,000

Speaker 6

Excellent.

Operator

Thank you. Next question is coming from Krish Sankar from Cowen and Company. Your line is now live.

Speaker 7

Yes. Hi. Thanks for taking my question. Fusil, let's say, thanks for the color on the June September guidance. I'm just kind of curious, when I look at it, 6 months ago, we thought FY 2023 would be about $900,000,000 Last quarter, you said it would be about $840,000,000 Now it looks like more like $750,000,000 So I understand that we are probably at the trough, but it looks like the recovery seems to be more gradual.

Speaker 7

So I'm kind of curious, A, number 1, what is the reason for a slower recovery versus 3 months ago besides the banking crisis? And number What gives you the confidence that we might not be stagnating at these levels for a longer time?

Speaker 2

Okay. Krish, I think We was expecting faster recovery. Unfortunately, I think not only us, The industry and also some of our peer group also see us in phenomena. So Maybe there are 2 things. I think majority impact to us actually is we are seeing the high volume business, Particularly, Bo Bonder, we always expect will actually grow faster, but actually, The quotation activity is still increasing very, very dramatically.

Speaker 2

But come to our scheduling, We've seen Q3, Q4 also are seeing some push out. And we are hoping If our 3rd 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 the maybe the inventories, you're not fully Depleted yet. And also, the banking crisis probably caused Consumer confidence and the spending impact their spending pattern, This is up to I can think of, but we do believe 2024 will be a better year for everyone.

Speaker 7

Got it. Fair enough. And then quick question, did you guys say what your backlog or book to bill was?

Speaker 3

Yes. 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 $500,000,000 right now. But if you add the POs without delivery date, that's another $250,000,000 So That's basically where our backlog stands and backlog is pretty healthy. That's also the reason we think the recovery We have passed off and we're going towards recovery.

Operator

Got it. Thanks a lot, Richard.

Speaker 2

Thank you very much.

Operator

Thank you. Our next question is coming from Charles Shi from Needham and Company. Your line is now live.

Speaker 6

Hi. Good evening, Fusen and Lester. Thank you for letting me ask a couple of questions. I think your guidance for June September looks very encouraging. You are seeing sequential growth 2 consecutive quarters of the 12 in March and That's certainly encouraging.

Speaker 6

Just wonder, can you help me reconcile a little bit of what your 2 other Competitors are seeing versus what you're seeing, the 2 other competitors of yours, they are seeing a calendar second half possibly slightly lower than the 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, Keith, given that where your September numbers are, it looks like your calendar second half Probably is flat to up relative to the calendar first half. Can you help us reconcile what's the differences here

Speaker 2

So I think I look at The competitor, we have 2 of them. I only remember rough number, I will not I'll be the best person to comment on competitor's financial performance. If you like to make a comment, we welcome your comment. Yes.

Speaker 3

So, 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, AT, automotive, Electric vehicles that Fusen 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.

Speaker 2

Right. So and Charles, I think sometimes Compare same quarter with a different company might not be the best one. For example, in 2021, 2022, I think we go up to $1,500,000,000 and 1 quarter, I remember, is almost $500,000,000 So pick up a quarter to make a comparison. I don't know It's the best comparison. I think just for K and S, we want to make sure in this difficult environment, We ramp up our future products and we watch our spending and we respect as you know, we have a good competitor and we respect them.

Speaker 2

But for the quarter to quarter comparison, actually, I actually don't have accurate number. So If you would like to make a comment, we will hear from them.

Speaker 6

Yes. No problem. Thank you for the color. So maybe another question on Backlog and book to bill, your backlog has been kind of covering probably 3 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 more normal range in terms of how much it covers The quarterly revenue, maybe I remember maybe it's somewhere between 1 to 2 quarters would be the more normalized backlog level and When do you expect that to happen?

Speaker 6

Thank

Speaker 3

you. 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.

Speaker 3

As far as when backlog will match exactly to 2 quarters, I mean, that historically, that has Been true for some in some quarters, but I think actually for us also the way we define backlog, I think the backlog continue to go down, but it's Before I say when it will match 2 quarters of backlog going forward.

Speaker 6

Yes. And what's the book to bill ratio you are seeing March quarter, certainly, I understand that you are seeing increased quote activities, but what's the actual book to bill in March quarter?

Speaker 3

It's less than 1.

Speaker 6

Do you expect that book to bill to come back up above 1, maybe in June? Just trying to understand the ordering trend here. Thank you.

Speaker 3

Well, Charles, I think, again, as I indicated before, it fluctuates quite a lot. I would not say we expect it to go above 1 in June. I think over the next couple of quarters, it will move up and down. I mean, historically, it's been around last couple of quarters has Been around 0.8 to 1. So

Speaker 6

Got it. Thank you, Isaac. And what Yes. Go ahead, Fusen.

Speaker 2

Go ahead, Charles. Yes. No, no, no. I just want

Speaker 6

to say, Good to hear you guys are passing the 12%, but Susan, please, if you have a comment, please make it. Thank you.

Speaker 2

So, I'll 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 a period of time, for example, Maybe like beginning of 2024, there's no definitive date. So even though we get a PO, actually we didn't put that into our backlog. You know what I mean, right?

Speaker 2

So even we get a PO on this is definitely the we produce as a backlog. That's what we're talking Let me repeat again. We do actually get the inquiry much, much often. And I think last quarter, we started to see Actually, a smaller one and they probably need to have a much, much less number. But right now, I think we Actually working with a few, you actually missized.

Speaker 2

So we do believe I think a recovery will happen and on the way. Of course, unless something happens, it's going to impact everyone.

Speaker 6

Yes. Thank you, Fusen and Lester for the color, and I'll get back to the queue. Thank you.

Speaker 3

Thank you, Charles.

Operator

Thank you. Our next question today is coming from Tyler Burmeister from Craig Hallum. Your line is now live.

Speaker 8

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?

Speaker 2

Okay. I think this year, of course, semiconductor revenue is going down. But the number, if I remember correct, unit number Yes, a little bit. But like some devices, the price goes down a lot. That's why I think silicon revenue go down, right?

Speaker 2

So I think this year is about maybe slightly above 0 next year. If a third party altogether, we feel like it will be between 8% to 10%. That's the number we are getting.

Speaker 8

All right, perfect. And then 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, set yourself up for some potential market gain shares down the road. Any comment or update on progression there and how that's tracking?

Speaker 2

Well, we don't talk specific customer, but we do believe we have a differentiator. The engagement, we have numerous customers and also in a different area like we have IDM, we have OSAT, we have foundry. I think we probably will report the progress, but the engagement with Foundry is probably a little bit later than the IDM. So but I think as we go, we'll give you more color. But the progress, actually, we are quite happy at this moment.

Speaker 8

Perfect. That's very fair. I appreciate that. All right. That's all for us.

Speaker 8

Thanks, guys.

Speaker 6

Thanks, Tyler.

Operator

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 or closing comments.

Speaker 1

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, This concludes today's call. Have a great day everyone.

Operator

Thank you. You may now disconnect and have a wonderful day. We thank you for your participation today.

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