Kulicke and Soffa Industries, Inc. (KLIC) Earnings Call Transcript & Summary

Greetings, and welcome to the Kulicke and Soffa's Third Quarter (sic) [ Fourth Quarter ] Results Conference call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Joe Elgindy, Senior Director of Investment Relations for Kulicke and Soffa. Thank you. Mr. Elgindy, you may begin.

Thank you. Welcome, everyone, to Kulicke and Soffa's Fourth Quarter Fiscal 2020 Conference Call. Joining us on the call today are Fusen Chen, President and Chief Executive Officer; and Lester Wong, Chief Financial Officer. For those of you who have not received a copy of today's results, the release as well as the supplemental earnings presentation are both available in the Investor Relations section of our website at investor.kns.com. This new supplemental earnings presentation provides additional details regarding end market trends and our outlook. 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 a complete discussion of the risks associated with Kulicke and Soffa that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10-K for the year ended September 28, 2019, the 10-Q for the period ending March 28, 2020, the 10-Q for the period ending June 27, 2020, and the 8-K filed yesterday. With that said, I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.

Thank you, Joe. We are pleased to report that despite global COVID-19 related challenges, our operations, pace of development and supply chain remain healthy, as they were through the June quarter end. Our focus on employee welfare, collaboration and safety has allowed our global workforce to operate efficiently through this unique period. We are proud of the resilience, flexibility and dedication of our employees. We are also pleased with our pace of development, new product traction and the improving state of our core business. Our global development teams continue to make significant and meaningful progress on several fronts, increasing our long-term alignment with significant technology transitions impacting the semiconductor assembly market, the automotive market and the display market. Within our core semiconductor assembly space, memory, logic and image sensor applications are adopting more complex, heterogeneous integration, which is increasing interest and adoption of higher-density packaging options, such as high-accuracy flip chip and thermo-compression. Fundamental challenges with two-dimensional node shrink are well reported and new packaging approach provide an alternative path to deliver both cost savings and performance. This fundamental change is essentially extending the value of back-end assembly, which benefits our core high-volume businesses as well as our dedicated advanced packaging solutions. Customers are seeking solutions and technology partners for emerging 2D and 3D multi-chip assembly techniques. Here, we see heterogeneous integration for complex logic systems, memory, mobile applications processors and image sensors driving a need for our Katalyst and APAMA dedicated advanced packaging systems. In parallel, we are seeing general system-in-package applications for high-volume, cost-sensitive devices, which continue to benefit our core wire bonder business. We are actively engaged and well positioned to support this ongoing transition and anticipate adoption to accelerate over the coming years. Next, major trends, such as autonomous, plug-in hybrid and fully electric vehicles are increasing semiconductor demand for the broad automotive market. Our multiple products and broad base of automotive customers provide insight to the progression of this transition. We anticipate demand for our high-reliability and performance-focused automotive systems to grow along with demand for plug-in hybrid and fully electric vehicles. Our initial success in automotive power storage and distribution solutions has been beneficial even with electric vehicles, representing only a tiny fraction of today's global production. We have recently experienced increased demand for power semiconductor applications supporting electric vehicles as well as charging station infrastructure. Although traditional automotive demand has been below our long-term average, we expect a gradual recovery to continue and remain well positioned to support this broader technology transition. Finally, within display, we continue to ramp production of our PIXALUX system, which is a critical solution to enable new forms of backlighting. This transition is a logical evolution that can deliver performance and power efficiency for the high-volume display market. Advanced LED unit growth forecasts are significant. Mini- and micro-LED annual unit production is expected to approach 500 billion units, roughly half of current annual semiconductor production by calendar year 2022 and will continue growing aggressively for several years. This represents a significant capital equipment opportunity for sorting, mixing and final placement. We are pleased with the performance, market acceptance and the rapid development of PIXALUX and are committed to developing additional technology solutions that support this broad advanced LED transition. As we execute toward these long-term trends supporting advanced packaging, automotive and display, we also anticipate a more fundamental recovery in our core businesses driven by an improving semiconductor unit growth rate. As a reminder, semiconductor unit production declined steeply in early fiscal year 2019, which dramatically reduced the industry's need for incremental equipment capacity. This extended decline in production is historically uncommon and seems to be behind us. Based on our September results, near-term outlook and recent customer feedback, we continue to anticipate an ongoing unit-driven recovery throughout fiscal 2021 and expect unit growth, excluding advanced LED, to return to a more normal growth rate over the coming years. After an extended period of low capacity additions, unit growth recovery is being driven by 5G, work from home, consumer products and smartphone recovery. These end market dynamics and our advanced LED ramping are anticipated to shift our seasonal demand pattern through fiscal year 2021. Historically, demand for our products is stronger during the second fiscal half, although we are anticipating demand to be first half weighted in fiscal 2021. While demand is currently strong, the broad macroenvironment remains dynamic. Considering the uncertain environment and our limited visibility, we are anticipating revenue within fiscal year 2021 to increase by approximately 20% to 25% over fiscal year 2020. This estimate assumes annual semiconductor unit growth, excluding advanced LED, will return to a historic average of 6% to 7% during the fiscal 2021 year. Turning back to the September quarter's performance, capital equipment increased by 21% and APS increased by 9% sequentially. Capital equipment represents 76% of overall revenue and the sequential growth was largely due to a steep recovery within the general semiconductor market. General semiconductor is our largest end market and the most OSAT-based customers fall into this category. In prior calls, we have consistently discussed how the installed base of wire bonders has been running near full utilization rates. At this point, incremental semiconductor output is triggering the need for broader capacity additions in the general semiconductor space. We see strength in 5G, smartphones, gaming, IoT and an increasing demand for multi die, wire bonded packages. While our general semiconductor end market showed the steepest sequential change, we also experienced sequential improvements within the advanced LED market. LED overall was sequentially down due to a sizeable set of general lighting orders in the June quarter, although our advanced LED sales for the display market increased sequentially. We expect healthy demand for both general lighting and advanced LED applications over the coming quarters. The auto and industrial end market as well as our memory end market improved sequentially, although remain well below their long-term average. Within auto and industrial, we are seeing a gradual recovery in the traditional automotive market. In memory, we are beginning to see a few customers adding overall capacity and we expect this market to recover as general semiconductor also recovers. The advanced packaging end market also grew sequentially and represents our dedicated advanced packaging systems that support high-accuracy flip chip, stud bumping, mass reflow system in package and thermo-compression, and includes our Katalyst, APAMA and AT Premier systems. While this dedicated advanced packaging end market represents just 9% of capital equipment sales, it's important to note that multi die advanced packages and advanced LED assembly are becoming material components of our higher (sic) [ higher volume ] general semiconductor, memory and now LED end markets. Collectively, we estimate that over 30% of our capital equipment sales during the September quarter support advanced packages. Looking into the December quarter, we anticipate general semiconductor and LED to be the primary drivers of near-term demand. We anticipate strong demand through the December quarter, which again suggests fiscal 2021 will not follow a historical seasonal pattern. Operationally, we are focused on ramping production levels to satisfy the strong demand level anticipated for December. Over the past few years, the broader industry and macro environment was challenging, although the strength of our balance sheet and market positions allowed us to execute our market expansion strategy, create new long-term growth vectors and return capital to investors. I am confident in the company's direction and expect new opportunities in automotive, display and advanced packaging, combined with a broader general semiconductor recovery, to fundamentally enhance our business model over the coming years. I would now like to turn the call over to Lester Wong, who will cover this quarter's financial overview in greater detail. Lester?

Thank you, Fusen. My remarks today will refer to GAAP results unless noted. While fiscal 2020 clearly came with challenges, we were able to generate full-year revenue of $623.2 million, representing a 15% year-over-year increase. Income from operations during fiscal 2020 came in at $58.5 million and represented a 171% sequential increase, highlighting our business model's operating leverage and potential as we execute on our strategic goals. For the September quarter, net revenue was $177.7 million, up 18.1% sequentially. Gross margins came in at 50% and generated net income of $15.8 million and $0.25 of EPS. On a non-GAAP basis, we generated net income of $18 million or $0.29 per diluted share. Gross margins came in much better than expectations. This was partially due to the favorable product mix and also a favorable end-of-year adjustment related to our warranty accrual. Without this favorable adjustment, gross margins would have been approximately 47%. However, we are anticipating gross margins to be around 45% over the coming quarters. Operating expenses for the quarter came in on the higher end of our long-term target range due to end-of-year incentive compensation accruals associated with the stronger September financial performance. As Fusen mentioned, our global development and operational teams continue to aggressively work towards several long-term initiatives, while we also ramp near-term production capacity. We also have several SG&A related projects that have been delayed due to the softer demand environment over the past year. We anticipate our GAAP operating expense model to remain consistent at $53 million of fixed expense plus 5% to 7% of variable expenses tied to revenue. However, we are anticipating the variable component to approach the higher side over the coming quarters. Tax expense for the quarter came in at $8 million due to increased profitability and jurisdictional (sic) [ end-of-year jurisdictional ] adjustments. Our total effective tax rate for the year came in just above our long-term tax target of 18%. Turning to the balance sheet. We ended the September quarter with a total net cash and investment position of $530.1 million, which was up sequentially by $14.3 million and represented $8.49 per diluted share. On a book value per share basis, we closed the September quarter with $12.30, representing a slight sequential improvement. We generated $25.8 million of free cash flow in the September quarter, driven by higher operating income and strong working capital performance. From a days standpoint, we improved working capital efficiency during the September quarter. Days of accounts receivable was down from 117 to 101 days, days of inventory improved from 127 to 113 days and days of accounts payable increased from 55 to 58 days. For the December quarter, we are guiding revenues to be approximately $240 million plus or minus $10 million. We are guiding gross margins to be approximately 45% plus or minus 50 basis points due largely to product mix and higher freight charges. This margin forecast also supports a near-term market share strategy for a recently introduced product in our wedge bonding business. GAAP operating expenses is expected to be approximately $70 million plus or minus 2% and non-GAAP EPS to be $0.53 plus or minus 10%. This guidance suggests operating income should increase by over 60% sequentially and highlights the business model's leverage. This also highlights our potential to create meaningful long-term shareholder value as we support the significant transitions within the semiconductor, automotive and display markets. This concludes our prepared comments. Operator, please open the call for questions.

[Operator Instructions] Our first question today is coming from Craig Ellis from B. Riley.

Congratulations on the strong recovery in the business guys. The first question I wanted to follow-up on with some of the elements related to guidance. I believe that one of the things you mentioned Lester was that, that OpEx will be on the high side of the typical model. So can you just help us understand how long that will play out and give us some further insight into the specific expenses that are keeping OpEx towards the high end of the modest range.

Sure, Craig. I mean, as we've indicated before over the last couple of quarters, we've had a lower level of spending over the past 6 quarters due to lower travel, initially cost reduction reasons during the semi downturn in '19 and, obviously, because of COVID now. We also have lower variable expenses. And also, as I said, during 2019, we had a very focused corporate-wide reduction on less critical and discretionary related expenses. Basically, we pushed out certain projects that was not critical at the time. Some of these projects are now being more critical. And we're also actually increasing our technology engagement with new customers. So I think for the rest of FY '21, again, I don't guide beyond the quarter, but I would say that it would probably be on the high side of the that 7% -- 5% to 7% variable.

That's helpful. And then I'll turn to a couple of product questions, if I could. First, Fusen, can you just give us a better sense of what you're seeing for PIXALUX, APAMA and Katalyst as we go through fiscal '21? It sounds like end market demand is coming back fairly broadly and it seems like you've got good traction with those products. But any color and an update on PIXALUX's fiscal '21 prospect specifically would be helpful.

Sure. For the PIXALUX, we previously, in our call, we gave a target to achieve our $40 million revenue for FY '20. So I am very happy to report that we achieved the goal. For the FY '21 -- actually, first quarter of FY '21, we see a sequential growth compared to Q4 of FY '20. And we are guiding maybe a run rate for next couple of quarters, FY '21 Q1 to Q4. I think roughly it's going to be between $15 million to $20 million. So we actually will expect conservatively, we will achieve $60 million to $80 million for PIXALUX for FY '21. I think at '22, we have a goal to be $100 million business and somewhere around '21, '22, we intend to introduce a new product to the market. And beyond '22, we believe we -- this business should grow faster. And our plan is to reach above $100 million and we'll grow positively. So our goal is along '24, '25 hopefully, I think, 20% of our K&S revenue product revenue probably will be display related, right? So that's PIXALUX. In advanced packaging, particularly our TCB, I think heterogenous integration is very important in my script. And we believe we make a very good traction, and we believe we will intend to have a few design wins in '21. And for the advanced packaging, we expect to be much bigger, I think, in '22. So any other questions?

That was helpful. Yes, 1 more question, then I'll hop back in the queue. So I appreciate the color on fiscal '21's revenue potential. So it looks like if I'm doing the math right, that the company expects around $760 million in revenue, and that assumes 6% to 7% and semi unit growth. I think in the past, you noted that it's possible that semi growth would be as high as 10% in '21 and '22 following 2 years of below seasonal growth. So if we see semi unit growth more in the double-digit range versus 6% to 7%, how would we think about the model's potential for upside versus the 20% to 25% or $760 million-ish in revenue?

So maybe, Craig, I can answer this. We feel good about the current business recovery. And we feel this is sustainable. So at this moment, what we plan is for the 20% to 25%. And you mentioned at least close to maybe $760 million to maybe $790 million translate. So at this moment, that's our plan. And we plan to have revenue more weighted in the first half, but I think we will have a better outlook about the strength of our second half. So that's what we are planning. But it looks like this recovery is sustainable, and we'll give you more update may in the next quarter.

Your next question today is coming from Tom Diffely from D.A. Davidson.

Maybe just a follow-up on the last line of questioning. So what is driving the unusual seasonality or lack of seasonality this year versus previous years? Is it really just a recovery in the general semiconductor ahead of expectations?

Okay. So Tom, let me give you a little bit of color on the area of strength we are seeing, right? So currently, we are seeing strength in 5G, consumer products, IoT, smartphone and the increase in SiP, also multi-die wire bonding package, right, and we also see ongoing strength in both traditional LED and advanced LED for display, the product we just introduced. So I can summarize, I think there are few reasons behind the strength. So number one. In 2019-2020, I mentioned a few times, our customers underinvest, right? So when you got to reach over a certain number are triggering another large to actually in critical business. So it's because of underinvestment in our core product from customers. And number 2, I think this recovery is also related to consumer pattern change, such as the work from home and also stay at home, that drives more need in PC, gaming and the other home application, right? So number 3 reason, I think, is significant for us. Actually, we see 5G investment. 5G actually is a key end market. That drives a lot of increase in demand for SiP and very complex multi-die wire bonded module in the packages. So the increase in complexity in these devices actually drive incremental capacity, capacity requirement for our advanced wire bonder. So that's what we are seeing. In simple language, I think wire bonder actually is also important part of the 5G investment. So the last reason, as I mentioned already, in this upcycle, we also see ongoing strength for both our traditional LED and advanced LED products, which we introduced. So these are few reasons behind the current strength we are seeing.

Okay. No, I appreciate the color. That's pretty impressive. Okay. And then just to follow-up on the PIXALUX 2. When we look at the growth from $40 million this year to $80 million or so next year, does that require an expansion to multiple customers? Or does it require a new tool from you? What are the individual growth drivers? Or is it just the market itself is it going to be a little stronger?

Okay. I think that it's -- actually, it's both, but actually more probably it's our intention in the next 2 years also or 1 year also, we intend to introduce multiple products to broaden our advanced LED portfolio. And we do expect ongoing development activities. The effort we put in will sustain our competitive advantage as we broaden our advanced LED portfolio. So I mentioned $40 million in '21 about $80 million, and beyond that, I think that we will need multiple products to drive this business, and we are preparing for that.

Great. Okay. And then finally, maybe just a quick overview of what your expectations are for the APAMA and Katalyst in '21 as well?

Okay. So '21 -- I think we're still working on a few design wins, although we already had a few, but we actually will try to complete all our targets. And we feel confident in '21 to win a few more design wins. I think the '22 will be a more significant one, right? So in '22, I mentioned our PIXALUX and the display business is around $100 million, that's our goal. We also expect maybe at that time, our dedicated dedicated advanced packaging, we talked about the flip chip TCB and also AT Premier, all these together can also reach about $100 million. That is really our current goal.

Our next question is coming from Krish Sankar from Cowen and Company.

Congrats on the very impressive guidance. I have a couple of them. First one, Fusen, if I try to take your comments on FY '21 revenues growing 20% to 25% and more first half fiscal year weighted, it looks like the December quarter midpoint of $240 million is probably going to be the highest revenue quarter in FY '21. I just want to doublecheck on that math if that's true? And secondly, is that mainly because the PIXALUX is really front-loaded with new products like mini LED coming out in Q1 of next year, calendar Q1, and, therefore, it will like slow down after that?

So Krish, let me answer that. I don't think we said the December quarter will be the highest quarter for fiscal '21. We did say that seasonality has switched to the front end -- sorry, the front part of the year. And as Fusen said, for now, this is what we see, we see 20% to 25%. But in response to an earlier question, I mean, as we go ahead -- further into our fiscal year, we will get better visibility in the second half. And at that time, we will revise guidance if we believe that's necessary. And again, your second question is, the ramp is not because PIXALUX is front loaded. I think the ramp is, as Fusen already indicated, across the board, both in advanced display as well as traditional LED as well as general semi, driven by, again, 5G and IoT, and we're seeing a little bit of recovery in automotive and memory as well.

Got it. Lester but we since -- yes, go ahead.

If you remember, our trough actually was Q1 of '19, right? So it's almost 2 years. And since we reached trough, every quarter, from that point, either we guide up or we guide trough. So until this moment, we even changed the seasonality to guide up in the next quarter, Q1 '21, right? So we didn't see -- we didn't say it's going to be a highest one. But at a certain point, right, this will not be every quarter for many, many years, right? So that's what we are planning because of the business coming back is so strong, we just cannot plan every quarter going up. That's why we have our current business is -- at 20% to 25% growth. But situation can be stronger than that. And we already mentioned, next quarter, we will take a look. We will have a better outlook for second half of '21, and we probably will provide update at that time.

Got it. Got it. That's very helpful. And I do remember you guys definitely called the bottom beginning of last year. A couple of other questions. One -- second one is, Lester, it does look like in the December quarter, there's going to be more mini -- PIXALUX shipments relative to the September quarter. But I understand you gave some reasons why the margins might still be like around -- gross margin around 45%. I am just trying to figure out, is there a drop-through happening? Because my understanding was that PIXALUX is super high margins for you and there should be a pretty nice drop-through all the way to the bottom line.

Yes. There's drop-through, Krish, but, as you know, I mean, the drop-through is at $175 million. We get very good operation flow through. And if you look at what we are guiding in terms of non-GAAP EPS, I mean, it's growing by 60%, meanwhile revenue is going to go up by 35%. So that does show that the operating leverage is happening. And as far as why the gross margin went down, I think, as I indicated, it's as -- for us, it's product mix. So there's more traditional LED ball bonders as well as ball bonders in general and also capital equipment is a larger piece of the quarter rather than APS and our APS business has high margins, plus, I did call some unique items like the freight charges because of the great demand by customers, we're doing more things by air freight and sea freight and that increases our cost as well as we are introducing a new product in our wedge bonder business unit. And as part of the market penetration strategy, the margins are down a little bit.