Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC)
Annual Investor Analyst Seminar Conference
March 19, 2013, 12:30 PM ET
Joe Elgindy - Director, IR and Strategic Planning
Jonathan Chou - SVP and CFO
Alan Schindler - SVP, Global Operations
Deepak Sood - VP, Global Engineering
Bob Chylak - VP, Global Process Engineering
Hello everyone and thanks for joining today. For those on the webcast thanks for listening in. My name is Joe Elgindy, the Director of Investor Relations and Strategic Planning at Kulicke and Soffa. We are very excited to have this forum to provide a more in-depth perspective in to our fundamental positioning, operational leverage and R&D strength.
Before we jump in to the presentation, I want to cover a few housekeeping items. For those of you who are in person, we have a large amount of material to review with no planned breaks. So we’d like to keep this as informal as possible. During the presentation if you need to get up, go grab some food, go have a drink at the back, feel free. Just want to try and keep this as informal as possible.
During today’s presentation we will reference some historic and forward-looking statements which include a number of risks and factors that should be reviewed. Of note, we will reference internal and third party forecast that can and do change frequently. This full presentation including the safe harbor can be found on the investor relations section of our website.
For today’s agenda we have some great speakers with over  years of semi-cap experience, are clear industry veterans. We’ll cover a wide range of topics and have two set periods for Q&A; the first after our R&D review and the second after our marketing review, towards the end. We plan to wrap up around 3.30 pm. At that time we will be participating in the closing bell ceremony and we invite all of you to attend.
Our first speaker joined K&S in 2010 and has previously served senior management roles for several Fortune 500 companies. He has contributed significantly to enhance and simplify our corporate tax structure and redesign our long term planning process. He heads both our Finance and IT organizations. It’s my pleasure to introduce our Senior Vice President and Chief Financial Officer, Jonathan Chou.
Thanks Joe. Before I start, I just wanted to point out in front of you actually you have a thumb drive and just want to point out that thumb drive is actually bonded with K&S bonders. So all the presentations are loaded on that thumb drive for you. So you can take home. For those of you on the webcast, you can download them from our investor site. As Joe mentioned, I was attracted to this company K&S that’s got wonderful history in terms of over 60 years, and it was in 2010.
The company was founded in 1951, it actually went public in 1961 and NASDAQ was formed in 1971. We were one of the first companies to actually to be invited to form this group of tech companies and to be listed here. And today we are NASDAQ select company, which actually meets a certain compliance standard of NASDAQ which is different than the global market.
In 2010 as mentioned we have also moved our headquarters making us a unique US company with its headquarters in Asia. So we are headquartered in Singapore, and in the next few slides we will talk about some of the things that we've done. We have leadership positions in the markets we serve and with global presence of over 90% of our sales in Asia Pacific region, okay. And the employee count is about 2600. So one of the first things we've done, I won't read through this, but is to really review our vision statement which we actually had all the inputs from all the key management team and employees. So the vision itself has to be the leading technology provider of comprehensive interconnect solution for the microelectronic industry and we also set the core value of the company for us to actually live by.
In terms of the global presence we have five R&D sites across the world, with really a center of excellence in Irvine, California for wedge bonding business. Our Washington center of excellence where we develop our ball bonder equipment as well as actually the next generation of equipment such as advanced package. We also have actually Joe Elgindy, Investor Relations as well as legal, comp and benefits basic resources (inaudible) for Washington. In terms of the manufacturing, it’s all based in Asia and Alan Schindler will actually go into more details in his presentation.
In terms of the product offering this is a summary of our product offering, the ball bonder as you all know it’s actually part of our core portfolio. It uses gold and copper bonder as the leading interconnect equipment out there in terms of best performance. Our wedge bonders are actually power semi. The microelectronic equipment side, the stud bumping side, the AT-Premier it’s something that has a lot of potential in terms of how we are selling that.
The manual bonder actually is for the laboratory sector, die bonder, the pick and place equipment there. The consumables that are on the bottom, the capillaries and the hub blades and that actually is what we consider a bit more recurring revenue and has a certain life span and (inaudible) every 40 hours in terms of the capillary life. So we have leadership position in four segments that actually we serve in terms of the wire bonding, wedge bonder, stud-bump and capillaries. It’s got fantastic technical advantages which Dr. Sood will actually go into more details later on as well as Bob Chylak. Our customer base, our customer names are actually on the bottom in terms of the local on the bottom of the page.
So let me just go into a little bit of the December quarter financial performance. If you look at the top left hand side of the revenue chart, we finished fiscal year ’11 which is September ending fiscal year at 830 million top line revenue, which was a record breaking revenue year for us and the following year, fiscal year ’12, we ended up with 791. It's also our best net income year during that year. We basically ended up with 160 million of (inaudible) net income.
Our last reported quarter at December was 114. We guided 95 to 114, ending up at the high end of the revenue side. Our operating margin is an average of about 18.3% in terms of operating margin. There is actually one-off item in here that actually [happens to be below] [ph] in the December quarter and R&D spend has been consistently at about 16.5 million to 16.9 million per quarter. So we consistently have invested in terms of its resources.
So with that, let me move on to the next slide. In terms of balance sheet, our working capital as of Q1, fiscal year ‘13 is $133 million, and if you look at our working capital metrics, it's going in the right direction. We're holding DSO well. The inventory is actually down compared to 2011 fiscal year, from 60 to 36 and accounts payable basically to 35 days from 30. Our cash conversion cycle has actually improved from 91 to 64 days and if you look at the balance sheet, we're debt free as of June 1, 2012. We paid of $110 million of convertible notes and our ending cash position as of today is over $500 million.
So we measure actually based on our ROIC. So the target ROIC in terms of intensive stock is actually 18%. So the new organization is really looking at ways to basically improve shareholders values in terms of return for shareholders. So we believe we are well positioned for ongoing value creation and this is based on the operational platform we have which we’ll go into more detail momentarily. A world-class R&D team, clear market leadership position in terms of the market we are serving, and couple with that we also have a fairly robust business development process which is really tied in to the [strat] plan which Joe alluded to. We have a three to five year long term strategic planning process, where the annual operating plans really fits into that nicely, and as far as the long-term plan, we do look at the core market adjacencies and how we actually can look at opportunities to whether or not we develop that internally, organically or actually through inorganic activities.
So we do look at ways to how that fits in to our total portfolio. So in summary basically, we have a fairly robust corporate foundation now and we are continuing to actually be flexible and be efficient in terms of the corporate foundation we are setting. Our market leadership position and very strong balance sheet, we have ample amount of resources for us to basically support the growth of the company. And this is all supported by the great operational platform and the R&D team that we have.
So with that I would like to turn the podium over to Alan Schindler, our Senior Vice President, Global operations.
Thanks Jonathan. Hope you all can hear me. So welcome, I would like to try to add some color around our manufacturing. Firstly when you think about manufacturing it's really cut and dry, nuts and bolts; but I can tell you at Kulicke and Soffa manufacturing is by far one of our largest differentiators between us and our competitors. So today what we are going to talk about is we’ll be talking about our peer benchmarking, supply chain and sales, our distribution network. We will talk about our facilities analysis and show you our breakdown with respect to facilities and how we go and manage that. Significant ability to leverage our ball bonder assets across our platform of products, and then we will have an operational summary.
We’ll go to the next page. So K&S manufacturing from an overview perspective really has its root primarily based in quality, cost and productivity and our movement from fixed cost manufacturing to variable cost manufacturing. So this manufacturing allows us to go and when we ramp up, we can pull in much of the needed resources that are required and then when we ramp down we don't need those resources, so therefore we can go and move those cost off our books.
Because of this, this really is a major quality and cost play for us at K&S. When we look at our suppliers, we try to partner with suppliers that are not only going to build products for us, but they are going to provide us with mind share that either we have some amount of or they have more. So we look for suppliers that are primarily key in their industries and they work us in the same model that we do, which is moving us fixed cost to variable cost.
So that’s the alignment that I am talking about. If you look at some of these pictures you can see that there is the guys in the blue coat are in our equipment factory, where we make our wedge bonders and ball bonders and die bonders and the guys on the right hand side with the masks on, the bunny suit they are in the class 1000 clean rooms that we have in our factory in Suzhou, China.
This next slide for me is really a very important training chart that will show you what we have to deal with in the hi-tech semiconductor capital equipment manufacturing. If you take a look at this, you are going to see that this is the overall trend from 1991 to the year 2012. What this shows is the total spend of the capital equipment market. So this is a cycle that we have to work on and this is every year. This breaks down going back to 1991.
So remember that within each one of these years, we had these micro cycles. So business will go up in Q1-Q2, go down in Q3, go up in Q4. But this is the overall trend that you see historically. So I want to talk about what K&S had to do to transform the company in order to be able to meet this type of manufacturing profile, this type of customer demand. Most importantly for us, back in the 1990s early on we went and we began to outsource many of the subsystems that we built in-house. So we were a vertically integrated manufacturing company right outside of Philadelphia and in the early 1990s we began to do that outsourcing.
Once you start doing outsourcing you are now moving from your fixed cost base to the variable cost base. That is not a one quarter, one year endeavor when you’ve never done it before; it’s more of a marathon. And we started that marathon in the early 1990s and we took that well into mid-90s to get that completed. So that was the first major step in our realignment of cost. The second major step happened in 1994-1995 where K&S went and changed its manufacturing process from a batch manufacturing process to a flow line, a demand flow line. Once we went and did that, now K&S was able to ramp up and down to meet the needs of our customers. So previously you would have a craftsman that would go in and build a machine from the beginning to the end. Well, you can't really ramp up to these types of figures as shown on this chart if you only have one person who can build the entire machine. So this happened in the mid 1990s. That also is a major organizational change, a major change in how we do business.
And then in mid-1997 through 2000 we took a final step, and the final step was our move to Singapore. We went, we localized our supply chain in Singapore and we honed the skills that we learned about from 1990 up to ’97 and it all culminated in the year 2000 with the opening of our factory in Singapore. And if you look and you see in the year 2000 that was a very high year for the entire market. So the important aspect for us is K&S needs to have the ability in its manufacturing to ramp up very quickly. But more importantly you need to have the ability to ramp down very quickly. So prior to 2000 I would say we really focused on that ramping up. Now we focus on the ramping up and how effectively we can ramp down, because it's the ramp down that is really the most important thing when it comes from a cost perspective.
So in the next slide, I am going to kind of show with you, an illustration of how we ramp up and how we ramp down with our direct labor force. You are going to see a bold line here, and this bold line, that’s our core work force. So we picked one factory, we picked the Singapore factory and this is the core work force that we utilize to build our product day in and day out. The dotted line you are see on top of that is the contract manufacturers or the temporary labor that we have come in to our factory and build our product when we begin to ramp.
So this allows us to have our core (inaudible) and then our variable component, and as you can see, our ramp can be 4x from a manpower perspective, and we ramp up and down within a quarter and across the quarter. The earlier chart that I showed was looked at a yearly basis. This primary is looking at a much larger or a much more definitive smaller scheme. This slide that we have here talks about where K&S market share is with respect to its ball bonders. If you take a look at the red bar that you see up there that is the wire bonding segment that we have. At wire bonding segment, as you can see it’s larger than our die patch and larger than our advanced interconnect. We leverage significantly off of that wire bonding equipment. Our suppliers, our engineers, our skill sets, much of that is fundable and it allows us to keep our cost down in manufacturing, because we control over the skill-set from one product line to another product line.
Not only because it goes across equipment, it also goes across to our consumables product that we make in China. We have skilled and micro machine for example within our equipment segment, which we can go and we can put it over to use in our China business. This is a look at our backend IC gross margin and it's sort of some pure benchmarking that we have. If you take a look at this bold line shows our gross margin as compared against our competitors, our peers. As you can see it's rather steady to the left, say 2.5 years we have really had what I consider to be an excellent gross margin. If we take a look at our peers they are lagging significantly in that space.
Much of the ability for us to have that gross margin stay as steady as it is, is our ability to continually cost reduce our product. The cost reduction of our product is done not just by manufacturing, but also with engineering. Much of the cost reduction that we bring to table is used to dampen a lot of the macroeconomic effects that are happening in the industry. So we are always out there looking to reduce our cost, so that we can achieve our standard margin our gross margin where it should be. And if you look at our cash conversion cycle, we will see that K&S is at 91 days much better than our peers.
So previously I mentioned ramping up and ramping down. So because we do a significant amount of outsourcing, what we do is pay special attention to our supply chain management. So in order to ramp up Kulicke and Soffa can ramp up its part of the manufacturing process, but since the outsource subsystems to leaders in the subsystem manufacturing space, we can make sure they are ramping up also, and because of this we put a significant amount of effort on our inventory. And if you look here also you can see that we are best-in-class inventory where we have 57 days of inventory and you can look at the trend of inventory, the red bars where they are proceeding up and then proceeding down.
It’s an interesting phenomenon because our inventory tracks quite well with our demand requirements from our customers. When K&S goes and builds, we do not build to a forecast, we build for customer order. If there is no order we do not build. So because of it we are able to push and pull because we have a demand flow manufacturing process and we can keep our inventory levels, I guess properly aligned with demand. So if the factory is going to build 10 machines today for example, we make sure that we have enough inventory coming in to support that 10 machines on that [day].
This is an overview of our supply chain to show you where we are getting our material from. So you can see that 40% of our materials is coming from China, 20% we get from the United States, Singapore very heavy in Singapore 16%, the Europe 9% and then we have other Asian countries. One of the most important things that we have is its continuing effort to always try to reduce our material cost and that reduction in material cost primarily comes through sourcing.
So we have a lot of international procurement offices for example in Malaysia, we have them in China but we are always focusing on trying to reduce that cost. If you look at the highlights, we have one single ERP system. So if something happens in Malaysia someone in China can see it. If something happens in China, someone in Japan can see it. So it’s a very healthy thing to be on one system.
And with all the different acquisitions of the past, we've really put an effort over the past couple of years to go make sure we have one system and its really paying off in dividend. Lean manufacturing starts, I mentioned before, we built through customer order. From my perspective, I'd rather have a direct labor standing there doing nothing and not have that inventory in-house, okay.
So we sequence the way we build. So we make sure that if there's an order we build it. If there's an order we bring in the direct labor to build that order and because of that alignment our fixed and variable costs really help us to save (inaudible). Our supplier and deliveries are tied directly to the floor as I said when we ramp up and we are working three shifts. Our suppliers will deliver multiple times a day.
In our model you can have the [subsystem] that comes in by truck and we will actually have that supplier four or five kinds of shifts delivering the material. That's how fast the (inaudible) is to the factory and these are extremely highly complex machines. This was a quick snapshot of our hybrid sales and distribution network.
In this system right here I'm going to talk about that we leverage our own indirect sales along with direct sales. We have a very strong direct sales force but we also have other channels. There is other channels that (inaudible) end distributors and we take a look at where they are you can see for example Europe 54% of our sales are direct.
We have those relationships with those customers, 36% of them are coming through indirect sales. So because of this relationship with our sales organization and our service organization we have the ability to make sure that we are utilizing all channels and we are utilizing the relationship that we built over the years. And we don't know that relationship but the relationships are based on our technology we have the ability to meet our customers’ requirements from a technology standpoint and our sales and service through our distributors and to our direct sales force are very apt in trying to capture that.
And you see in this that 30% of our sales are from China, 16% from various other places and Taiwan was 32%. So here I would like to go through some of the structural improvements that we've made over the last couple of years. So if we take a look at this you will see that in the year 2000 we moved manufacturing to Singapore I had mentioned that.
During 2000, the Singapore factory came up and came up actually for flawlessly. They really took what we did in the US and took it to a whole new level of performance. In the year 2002, we opened a factory in Central China. This factory was primarily in Israel, we moved that factory, a large percentage of it to China and that's been quite successful after 10 years in business there.
In 2005, we moved our blades manufacturing that we had in San Jose. We moved that to China. Also, 2006, we acquired Alphasem. And then in 2008, we acquired Orthodyne Electronics and we also moved the balance of our consumable bill from Israel to China.
So now our China facility is full fledged capillary manufacturing, blade manufacturing and heavy wire wedge manufacturing and it is a very large factory we will talk about in a second. Actually I will talk about it now. There is a 155,000 square feet. We had 930 employees and we build these extendible tools in the manufacturing components that are required by the K&S customers as well as other customers.
So there are people led by other people machinery that still buy our consumables because of the type of consumables and we have number one market share in our capillary business.
In 2009, we integrated the Orthodyne manufacturing into Singapore. So we had the acquisition in 2008. By the end of 2009, we were building the machines in Singapore and this is where that leverage comes in. We leveraged our supply chain in Asia to drive the cost down, to build their products away. We build it in (inaudible). So it's that whole leverage component.
In 2010, which was talked about by Jonathan, we moved our corporate headquarters to Singapore and that’s been a great move. I mean having everybody in Singapore and having the CEO there, having Jonathan on board, things have really begun to gel and a lot of the positive things that we had in the past couple of years I think it's because we're now on one location. We have manufacturing in our location and we had corporate headquarters in that location. And I am proud to say that in 2012, we're going to open a new building.
It's our new corporate headquarters as well as manufacturing it will be in Singapore, it's can be right around the corner for longer, where we are now, the building is being build, expect and we really excited about it, it's can be an open format, no fix offices and there will be a lot of good or dialogue in collaboration amongst our employees.
So we are really happy with these structure improvements in order to have two primary factories, our equipment factory, and our consumable factory, okay.
So let me say about what happens in each one of the factories, okay. So within Singapore, we are assisting the integration and test facility and that's the reserve, we are not vertically integrating, where we make very single part, we have top tier subcontractors that we deal with high technology components that we deal with, we bring their men, we integrate them with nuts and bolts and then we go in testing. And we are very stringent in testing.
Today we have six different product lines as you can see a ball bonders, wedge bonders and die bonders in one factory and we make the majority of these all on the same production lines. So if an order comes in for ex-customer with this configuration, it goes into the line, the three machines after it could be a total different configuration and it will run right down the line. The problem is this allows us to really (inaudible) power of the manufacturing, we are extremely lean from a workforce perspective, and we are very lean from the way we go and build and test our products.
And the 17 different variations of those products, so it's a very complex algorithm that we utilize but it works, in future we will make 20,000 unique numbers, okay. The capillaries are blade in a heavy wire wedge, we ship more than 35 million capillaries since 2002, it’s a remarkable building, it’s a remarkable business and the three shift operation with the great general manager there and this is really one of the price of K&S with this business.
Okay, so this is kind of what the products look like. You may assume this from Jonathan I think, but along the long the top you see the ball bonders and get the wedge bonder is down there, you see the different product lines and this different variations for this, okay. And when I talk about variations, I talk about there is a lot of commonality between them and I will show you chart on commonality.
The first I am going to talk about leverage, okay. This green block that you see here is that ball bonder manufacturing. It's our supply chain, it’s our R&D, it's part of logistics, it is a very large piece of K&S but because of that piece operates with such efficiency, we are able to go and use that in our other equipment space as well as in our expandable tools.
I will argue that our best in class manufacturing process can be put it over for any type of products because the skills and the basic tenants of the remanufacturing of our suppliers are very fundable. So this is the takeaway from this. Capillaries again, so we have more than 20,000 unique part numbers, if you look at it and you can see it looks like a needle some people say well its looks like the needle to a selling machine.
The (inaudible) on these are in microns, I will tell you that it is a very interested component to make, highly automated and its done quite well I must say. In blades manufacturing, its 70 to 20 proprietary processes, okay. We run 24/7 in this place also and we have various types of blades that we sell to many different types of customers.
So once again at K&S but you know what is the advantage? Well, we've leveraged and we dominate within our market space and what that would do for us, it gives us growth advantage, okay. We've consolidated our facilities with greater economy of scale, what has that done for us, cost advantage.
We have a very flexible direct labor force, what has that done for us? It’s really given us cost advantages. In our space that is what we focus on, we focus on cost reductions. Also we have a strong industry knowledge to our distributors, our direct sales folks. We've established relationship not only from our sales team but also our process engineering teams.
We understand what's happening at our customers and what has that done for us, we can meet our industry demands and we have a very well managed supply chain and distribution network and because of that we can ramp up but more importantly we can ramp down and we believe this is really a true differentiator for K&S.
The last thing I want to talk about is our ball bonder product. If you take a look at this chart right here, you will see that our icon product line and our pro copper product line there is a 100% overlap on the core machine. So when we want to go we want to build this machine. The differentiator or the differential material is really on top of a significant amount of core costs.
So it allows us to be extremely efficient when we go and we sell these machines into the market. When you look at our product line where we have three versions the LED, the VLED and the [Plus] 70% of those materials are also common to the icon and the icon pro copper. So what does this do for us? This allows us to really leverage our supply chain to keep our costs in line and to build products very, very seamlessly through our production process.
And as I said before, these are not cookie cutter machines; these are extremely intricate machines that have been redesigned by an excellent engineering teams. So this allows us to drive our unit costs down. This overlap of material so the takeaway in summary, is we have a very elastic supply chain and distribution network which I talked about, very robust variable manufacturing costs and we believe we have best in class manufacturing and I think all the numbers that you've looked at that I've shown you really show that.
Thank you for the opportunity to talk to you and I'm going to now turn this over to Joe and then Joe will turn it over to Dr. Deepak Sood. Thank you.
Many different roles within engineering we are a highly effective team within software vision and also electrical engineering. Deepak Sood is with the company for 18 years. He heads our global engineering team and also serves around business development. While we prefer and just your reference size first thing it’s my pleasure to introduce Dr. Deepak Sood, Vice President of Global Engineering.
Thank you Joe. Welcome everybody. As you just heard my introduction. One thing Joe didn’t mentioned is that I am in the process of moving to Singapore to our headquarters from our Fort Washington office where I spent 18 years. So I am in that process and hopefully over the next six months or so, I will be living in sunny, warm Singapore.
So, let me just go over the agenda for the presentation. I will start with an overview of the Kulicke software technology leadership and provide a little introduction to the engineering team that makes that technology leadership position happen for K&S.
I will go in to the details of the framework we use for technology development and which actually we use what is called the knowledge driven product development process along with core competency areas which form our golden arrows. So it's a concept that I will detail in the next few slides.
After that I will go over some of our core competencies that we use in our materials as well as in equipment businesses to show you why we are technology leader. So here you can see that K&S actually provides equipment with the highest throughput in the industry. This chart shows you that we have consistently provided greater than 10% improvement in throughput in every generation of the equipment we have put in the market, so this equipment is made possible by world-class engineers that work in our advanced labs with state of the art equipments and tools and you can see pictures of some of those equipment and tools in our labs over here on the slide.
So the makeup of the engineering team that makes all this happen and that gives us the technology leadership is spread over four different R&D centers. So we are a global company. We have engineering centers in Europe, which is actually Israel as well as in Switzerland, in China, in Singapore, and Hanford, Washington, Pennsylvania, and Irvine, California.
So you can see the pictures are, all our a side (inaudible) so this is the global team that works together, 80% of our engineers are focused on new product development and 40% of that team actually has tenure greater than 15 years at K&S. So they bring a lot of knowledge to bear, when we design new products.
And K&S engineering has actually fuelled gains in market share throughout technology inflexion point over the industry ball bonding and wedge bonding and capillaries marketplace. So how do we do this, we create an unfair advantage for ourselves by hiring the best talent from around the world. So you can see on this chart, the who’s who of all the best universities all around the world and we have engineers from all these places working for us designing equipment that make us the technology leader in what we do.
Now as details of product development process, this process is based on the Toyota production system, so it is a few years ago, we went to the marketplace try to figure out and what is the best way to improve our efficiency in product development and we came with a knowledge driven product development process which can actually use as a core competency architecture across the golden arrow and in that golden arrow is where we do development for our technologies.
So we take our common systems and subsystems and divide them into core competencies and this golden arrow is actually advanced the core competencies and create reusable knowledge, so Alan mentioned a lot about how we leverage in manufacturing but we also leverage in hearing from one side to the other where we use our reusable knowledge and share it so that we can progress our equipment to the market.
So you can see that these core competencies are actually fueled by market drivers and some of those market drivers are growth strategy, industry trends, customer road maps and industry collaborations. The product development people, the business unit is actually exhort innovative customer solutions as well as products out of the golden arrows and brings them to the market. So the next chart shows how this all takes place. So you can see that engineering executes new development along the core competency lanes and in this Golden Arrow here on the picture you can see some of our core competencies highlighted. The business units work at extracting innovative solutions and products out of this golden arrow using a stage gate process. And the engineers actually use advanced development technique, modeling and simulation techniques to create knowledge within the golden arrow and that knowledge is actually reusable across business units and all our businesses.
Over the next few slides I'll detail the core competencies from our different business units. So first I'll go over the core competencies involved in our tools and expandable business units. So you can see the core competencies here are materials besides machining, process expertise, wet chemistry and high volume manufacturing. So these core competencies are what are used to create products that are brought to the market from the expandable tools business unit. So those products are capillaries, hub blades and wedge tools.
Alan mentioned that these products are actually built in our Suzhou factory. Now for some core competencies from our equipment business. So the core competencies from the equipment business are motion systems, material handling systems, special mechanism, fusion systems, machine control and application software, and of course process knowledge and recipes. So these core competencies are used to create world class ball bonders, wedge bonders, stud bumpers, die attach machines and manual wire bonders, and you can see all the market variants for these equipment segments on the chart. So you’ll see we create high end gold and copper wire bonders, LED bonders like Alan was showing. From the wedge bonder business units we are creating variants for automotive and power, semiconductor and in our other equipment segment we have a stub bumper which actually does gold and copper stud bumping for wafers and we have a die attach equipment that is going to be the basis for our advanced packaging product that Bob is going to talk about in his segment.
So the next few slides are actually going to be detailed about each one of those core competencies I mentioned from our equipment segment. So the first competency and the most important competency that K&S uses that gives us such a position in the market is the motion systems. So you can see from this chart between speed and precision where different pieces of equipment from the semiconductor industry lie. So you can see that the pick & place chip shooter is actually a high speed equipment with relatively low precision, whereas the wafer stepper is relatively high precision equipment with lower speeds. But the K&S ball bonder falls in the category of high speed, high precision piece of equipment.
So the way we do this is, we use high stiffness and low mass structures made out of advanced materials and we use motion control systems that we design to move these part. So this chart actually, the picture here shows the head of an ant and you can see the wires we are bonding and you can see the antlers of the ant and the wire about the same size. So at the bottom of your chart you can see what one micron is right. So a micron, so if you look at the picture of the ruler of the bottom of your page, you can see one millimeter actually contains a thousand microns. So you can see the scale at which we operate. We can do wire bonding at 18 wires per second with an accuracy of less than two micrometers. So two micrometers means two 1,000 of a millimeter. Right; so you can appreciate the scale that which we operate and we can do these motions with our high speed motion systems and that’s one of the core competencies that bring unparallel successful K&S with our equipment. These pieces of equipment are obviously designed for 24/7 production environments, so these machines never stop.
The next core competency is, the material handling competency where we actually enable high equipment throughput for our customers and they can use whatever packages are available in the market for bonding. So we can handle diverse array of materials going through our machines. Our machines are fully programmable and configurable, so that the customer has the flexibility for using or choosing a package that is available in the market place. So this chart actually shows you an array of lead frames and subsets that are available that our machine can be programmed to handle.
You can see the magazines of parts that come into the machine, you can see the material handling, indexing section, where the machine is actually moving parts through the bonding station and output is back into a magazine of fully bonded parts. We also provide interfaces for third party application handling parts and tooling. So this competency actually allows our customers the flexibility for dealing with substrates and packages that are available and that are suitable for various semiconductor segments.
Next I want to talk about is some of the special tools and mechanisms that are used in our wire bonders and our wedge bonders. This picture here shows you the ultrasonic transducer which is the heart of our equipment. So this ultrasonic transducer actually vibrates the capillary and the capillary is the tool that Alan talked about is built in Suzhou factory is made out of ceramics. That capillary vibrates plus minus one micron at 60 kilohertz, or the 120 kilohertz and that actually is the process for bonding. So you can see the picture here from a finite elements analysis and we have used sophisticated modeling techniques to design these transducers and ultrasonics. So we have state-of-the-art digital ultrasonic controls and drivers and this core competency is what actually allows our customer to mass production without any variability in the process. Other special tools and mechanisms that are used in our bonder are the wire spool, the wire feed and the wire clamps. Later on I will have a video that shows the transducer in action.
Moving onto the next core competency of Vision Systems. So every wire bonder, every wedge bonder, every die bonder in fact has at least one Vision System on it. So the idea of having a vision system on every bonder is to actually allow it to bond with the precision that we talked about. So we are able to put bonds down to less than two micrometers at three standard deviations, and the way to do that is to find the part every time a part comes on to the bonding station. So we have strong vision system, core competencies that enable high throughput and high meantime between assist. What that means is that our customers are able to bring in parts various parts from the semiconductor industry, program our wire bonders to run those parts and our wire bonders will not stop, no matter what kind of parts are coming in to be bonded.
We design our optics and illumination using advanced stimulation techniques and tools, and we can do both 2D and 3D, two dimensional and three dimensional image processing. On the next slide are some more details of our vision systems and you can see on the top left corner is the actual image or picture of the optical system on the wire bonder. Right next to it is a schematic of the optics design and below that is a ray from our optical design tool. On the right hand side, you can see pictures of image processing for various parts. You can see some pictures of three dimensional capability for finding epoxy dispensed on to a part and at the bottom you can see wires, so image processing being used to find the wires on our wire bonder.
The next core competency that I'll talk about is the machine control software. So on this picture you can see that there's a picture of a wire bonder on the bottom right hand corner, and what I put on top there is a graphical user interface for our machine, and at the bottom in front of the door of the wire bonder you can see the control system from inside the wire bonder. So our wire bonder runs about 1.5 million lines of code. This software is what actually brings all the core competencies together. This software is the glue for allowing our customers to use all the features available on a wire bonder. So this wire bonder is fully automatic, fully programmable machine, and that software is what brings all the features to bear at the customer’s side.
Our software team is an agile software development team. On the left hand side, you can see a software scrum room. So we have daily scrums and actually use a visual method for managing our projects. The next chart shows the core competency of our process development team. So what this talks about is actually the recipes that we create for our customers, or that our customers can create with training from us that will make all these complex packages, like package on package, stacked die, ultra low loops and also bring in technologies like Low-K bonding and copper wire bonding and bring it to the market in different packages. So that process knowledge and process recipe is what gives K&S the market share that we’ve gained over the past year.
So you can see that this chart shows us gaining market share from 2008 to 2012, and it's pretty much leaving the competitors behind. So we have best-in-class copper wire bonding and we do a lot of package-on-package, stacked die, ultra low loop packages that are the technology enablers for our customers. In our process development theme, 40% of our engineers have tenures longer than 15 years and these engineers are what are enabling our customers to get their customers the technology edge. So this picture actually is what makes K&S an excellent technology company. We actually enable our customers to go from R&D to production.
So you can see on the left hand side is one bonder, one or two bonders doing process optimization, developing a new process, but using K&S equipment we can go very quickly and seamlessly from the left to the right, to high volume production. So you can see process development happening on one or two bonders, verification happening in 5 to 10 bonders, and then production happening in thousands of bonders on entire factory floors of customers.
Actually, going to start up a video if I can. So this video, I will talk through the video little bit, but you can see a wedge bonder in action. So the part is being indexed in and you can see the wedge bonder has a rotary bond head and the part is being bonded a couple of wires being bonded and the part being indexed out towards the right. So here we are using green illumination, green LEDs for imaging the part and the choice of the illumination depends upon the material that is coming in to the wire bonder or the wedge bonder. Here you can see ribbon bonding in process and this is again on our wedge bonder product, and this is aluminum ribbon bonding.
Moving forward is 3600 large area wire bonder, and you can see alignment happening, which means at the vision system is figuring out, where the parts are and after that happens the bonding will start, and you can see the wires being bonded on this package, so this is a large area table on which the part is placed and the wires are being bonded using a wedge bonding process. Again there is a rotary bond head, so this bond head can rotate and put wires down. So this process is different from the ball bonding process.
Here you can see a 3700 plus in action and it is bonding small wires again using the wedge bonding process. This tool that is doing the wedge bonding is one of our products also. So moving on to the wire bonding, you can see an icon of bonding of K&S test die. This is our follower series machine. Shown here is a schematic of the wire bonding process. So you can see a die in a lead frame, and the wire comes out of the capillary. There is a wire clamp on top the glue. So you can see the wire bonding happening and you can notice the speed at which the bonds are being put down by this machine.
So the wire clamps open, we come down make the first bond. You can see ultrasonic vibrations and the wire cycle, the wire looping happening so we move, this is one of our core competencies where we can move in X, Y and Z with ready control motions and this is a high speed video of that process.
So you can see the wire coming out of the capillary, the motion happening in free space and being put down and that wire being created from the wire bonder. This picture here shows you the defamation of a ball in the ball bonding process and now you are watching the gas coming out of our copper, the forming gas that comes out of our copper flow head.
A lot of different packages get bonded by our equipment. You can see the preciseness at which we bond, you can see the difficulty for the wire loop and the different tiers packages that we do. So it’s actually quite amazing how fast these machines go and how precise they are. This section here talks about our die bonding equipment and you can see that placing die. The equipment has unique architecture of quick transfer in place and this architecture actually helps us with speed as well as accuracy.
So you can see here die being placed on a BGA substrate being picked from a wafer and put down. The reason we are talking about this equipment is because this is going to be the foundation of our advanced packaging equipment that Bob’s going to talk about. Here you can see stack die being put down, so you can see at the same spot multiple dies being put down. A package with stack die is wire bonded with our equipment, multiple tiers of wire bonding happening. I think that's the last of my slide. So I think we will open this up for questions, right.
So we are going to open it up for Q&A and (inaudible) around if anybody has a question I'm sure its webcast and we can get a mic. Is there any? Any questions?
Unidentified Company Representative
So the question was vague the consumable market how and how big can it get? So do you want to?
I mean so far we have about 60% share in consumables especially in capillaries and for hub blades we have probably around 35% to 40% market share. So for those two products I wouldn't want to say we are saturated but it’s approximately about $80 million from a run rate standpoint for consumables business gross margins are in the 60% range, this adds nice sort of steady continuous flow of contribution margins and helps support our operating model.
Where in terms of the ultimate pitch for copper and gold wire bonding and how much, is there a more headway to improve the pitch for the technologies?
So, I think I heard your question is what is the ultimate pitch for copper and gold bonding? So right now…
So right now we can bond at a pitch copper. We can bond at a pitch of 40 micron.
Yeah, I did saw some slides and roadmaps and we tied them the pitch to the technology note.
So we can talk in more detail about that but we have capability for bonding 40 microns for copper process and 35 microns, even 30 microns for gold process.
Jonathan, I would like to direct this question to you. You ended your presentation by stating you are well positioned for ongoing value creation. By any measure, this company has performed exceptionally well in terms of executing on various strategies to improve its operating efficiencies and its returns. What we haven't really seen those of us in this slide where investors, analysts, portfolio managers, we really haven't seen a great deal of shareholder value realized in the marketplace. So the question I really want to ask you what shareholder initiatives do you think are really necessary to most probably reflect the improvement in this company’s results and the value that materially exist?
Yeah. If we look at, what we have actually communicate in terms of the earnings call, our focus in terms of for (inaudible) at this moment on is really addressing those fundamental business in terms of the business model. We recognize the fact that is there is cyclicality involved now, we have actually talk about improving our business model to basically additional service or recurring revenue.
We believe that by addressing those fundamentals first that we can basically be recognize to have a more of a premium or --- on the marketplace and this is really looking at what strategically fit in terms of our current portfolio, if you look at our board has actually provided some additional incentive to our management team or actually (inaudible) that we will actually grow beyond where we have in terms of our core business itself. So as far as the growing the top line revenue, we are looking at these things, however actually --- getting a better quality of earnings for say, so that eventually we can actually be recognized for to have the value creation and hopefully the market will actually recognize that and it's provide the additional premium.
And I think if you look at the last couple of years, we have some pretty amazing performance in terms of the innovation, the proper solution and we actually have quite a bit of cash and I think through then in itself is really the first step that how we can actually use that additional resources to --- and value for our shareholders over the next period next couple of years.
I think you created along the way but it hasn't really been recognized?
That is correct and I think along there is also in terms of how we can continue to execute against of what we think is actually the right way to grow the company and I think there is at this point in time there is still obviously a lot of wait and see you know, people on the slide lines looking at us. We hope that through the discipline that we have in terms of having a plan and discipline as a company and also executing and hopefully we have more announcements in the future, (inaudible) said in the last call that we looked at a number of deals and that's part of our business development process looking at internal initiatives that's (inaudible) actually outside.
While we haven't made any announcements yet, we are looking at quite a bit of the, we are trying down quite of bit, so we are taking more of the conservative approach but we think it will actually pay off in the future.
Unidentified Company Representative
I need a small question.
Bob it serves critical role in helping the company navigate through many different technology trends over the past 30 years, serious leadership our process engineering group has help to significantly expand the company's integrated advantage and keep their markets. He currently serves as a Vice President of Global Process Engineering and also it serves the key role in our office and business development. It’s my pleasure to introduce Bob Chylak.
Hi. Okay. I'm going to do a marketing presentation basically. I'm not a marketing guy, I'm an engineering guy. I'm in charge of packaging R&D basically for K&S. I represent K&S in the packaging community; work in collaboration with our customers on the roadmap.
My team I guess is probably 80 process engineers at K&S. We bring the product to the customer and we would like to say we don't deliver a machine, we deliver a process. So I'm going to talk a little bit about market strengths and the future of interconnect with this kind of potential title I hope it was up to it. So its three areas that I'll go over, semiconductor market overview with the drivers and dynamics and how the industry is going to grow.
Then there's what we would like to call our market opportunities in semiconductor packaging what's going on in semiconductor packaging the shifting paradigm, talk about the future of wire bonding, you know Jonathan’s slide he showed our vision statement. If you read it, it doesn't say we want to be the wire bonding leader, we want to be the interconnect leader and there's a difference.
So I'll talk a little bit about wire bonding and where, with technologies we've developed for packaging and where that's going and then we will talk about advanced packaging technology and how does K&S fit in.
So first, the big overview, cost in semiconductor packaging costs always wins. There's the increasing chip complexity leads to rising design costs and cuts down on the new entrants to semiconductor packaging. Our consumer market is the leading user of semiconductors now. So this leads the greater market volatility and of course cost sensitivity. We all want to pay less for what we buy, increased manufacturing costs and scale that leads to manufacturing outsourcing, need for innovative solutions.
In fact to payback on the rising cost of R&D partnerships and collaborations, we can't do it alone. Volatility of the global economy of course leads to careful inventory management to control cost. So what drives all this, well the macro economics, so if you take a look at gross domestic product you know of the world and compare that to the semiconductor market you’ll see it attracts rather closely?
So you can predict where semiconductors are going to go by taking a look at where the world economy is going and as it goes up we go up and down. And the semiconductor market let's take a look at its projection it’s projected to grow at a 4.1 CAGR by Gartner. You can take a look, I talked about consumer, I don't know, does this have, okay you can't really see it but if you look at the purple line, you will see that’s consistent, the green area, that's consumer, the way Gartner broke it down, you can see the consumer CAGR isn’t growing at all in terms of dollars.
And so we will wait a minute. How can that be there is more and more electronics in everything I use but the market is growing, I guess the modest rate of predicted to be 4.1%. So let’s take a look at units and that’s what K&S is most interested in because we make machines that make parts. So the more parts that are required in the world, the more machines will be required from us and then take a look at the growth of the consumer market, it goes from a flat dollar gross to almost 10% growth rate and this year it's predicted that 189 billion parts will be made, sort of an incredible number about 25 parts for every person in the world to 267 billion by the year 2016.
So that’s a big growth in terms of electronic units and there are other areas that have high growth rates. Particularly automotive, you all can see in our cars that there are many more electronic gadgets than there have been in the past and will continue to be and also industrial applications are growing at over 10%. So that’s healthy forecast in terms of demand in billions of units and that’s where K&S being an interconnect company wants to be.
So let’s take a look at all this. You have the consumers and we want features, we want lots of applications. We wanted that work and now more and more at home, we want to be mobile and constantly connected if my internet doesn’t work on the train, long battery life, every phone I get has longer life, better user interfaces, so that takes electronic device manufacturers and they ask to develop the hardware, the affordable functions, the foreign factors, the static (inaudible) and then it comes to the semiconductor manufacturers and they need to have a new IP that develop a better and better performance that as our semiconductors in terms of silicon technology and immigrating things together more compactly and deal with power management and package it smaller and make it costless, that’s quite a mouthful right, all that stuff needs to happen.
So, you can look at and consumers drive it out where there you can say that innovation here kind of results in what the consumers’ want. So take a look at some of the aspects of the trends that I have been talking about this is just a simple graph that shows that in 2011, the amount of revenue from mobile phone exceeded PCs for the first time, so for most of micro PCs drove this semiconductor market and the way more and more PCs were used and that’s something we tracks very closely but now it switch to mobile and personal applications and that will gap will continue to grow.
So what's in these packages, so here’s an A6, Apple A6 processor, it’s the correct extend I guess by the University of (inaudible) provided us with information there is two packages here, there is a memory on top, you can see that memories wire bonded and there is a PC board is on, you can see the simple PC board, and this is a process its (inaudible) and its might be a (inaudible) processor where actually for Apple, we made the Samsung and its very complicated PC board underneath it.
And these two packages is called the package on the package, where this package is connected to this package through that ball and so talk to the memory this processor has to go through this PC board up through here, up through the wire bond and right to the memories. So you can remember that when I show some of the future packages greater but this is a complicated package and maybe state of the art package right now. Again I will also talk besides consumer about automotive and our power electronics, industrial applications.
So in automotive there is legislation on lower carbon emissions which result in more electronics required for automobiles, increase in avoidance safety features, based for higher energy efficiency of course with electrical and hybrid cars it enhanced liability on electronics components. All these drive more sophisticated and more use of electronics. In industrial we might improve power densities, better thermal management, higher reliability and cost reduction and those things drive power electronics and that's K&S’s; we took this opportunity to show K&S’ new machine that we just introduced or are introducing this week at SEMICON China where we have a productivity improvement of previous machines of 22%. So our wedge bonder which is developed in Irvine, California and manufacturing in Singapore is targeted for that marketplace.
So just to summarize where we are so far; total semiconductor sales in 2012 is $245 billion. The expected unit growth in 2013 is 7%; mobile devices and smartphones along with tablets continue and will be the driver for the semiconductor market. So the question is what's next for semiconductor packaging, and I will show two things which we things which will be the main focal point for semiconductor packaging in the future. Copper wire bonding continue to grow, from the 30% penetration that it has now to up to 70%, and advanced packaging development has accelerated. And we’ll talk about how that factor, you know those advanced packages that we saw on the Apple cell phone how will those packages continue to evolve and how does K&S fit into that.
So they call it the virtual cycle of the semiconductor industry. This was taken I took this out of (inaudible) international technical roadmap for semiconductors more than more white paper. So basically technology nodes are transistor scaling; so we have the 90 nanometer node, the 65 nanometer node, the 45 nanometer node, the 32 nanometer node and the 20 nanometer node which is Moore’s law. Every cycle there's a shrink of 0.7 and that shrink they think you know it can pack more transistors into a smaller package and that leads to better cost performance. So the fab can on their wafer can have more circuits, so the cost of one wafer is not that much more but there's many more circuits on it which leads to market growth because you have cheaper things that do more and people want to buy more of them and then people want to invest. So this is the cycle that we've been going through.
But here's a graph that IDS put together, and this shows the increased cost of [gate], the difference in the cost of [gate] at every semiconductor technology node. So when people went from the 130 nanometer node to the 90 nanometer node, they got a 46% cost improvement. When they went to the 65, 12%, 45, 8%, 32, 2% and wait a minute, at the 20 nanometer node things cost more. So what happens to this virtuous cycle? So the virtuous cycle, the transistor scaling will no longer give you the performance to cost improvement. There is no further; that's what they mean by the end of Moore’s law. It's over. And [ITRS] talks about more than more. So what's more than more? So more than more is packaging innovation. So people have to put things together, integrate them tighter, make them smaller and they don’t just standalone as a single entity, but they have to be packaged.
So here is a chart from you all. Look at all that. There are so many different packages that they show I can’t explain that actually. All of it says 3D on it. They show it's happening right now or even already. Doesn’t seem to be too much wire bonding on it right, but it's story, I went to the [ITRS] assembly and packaging committee meeting four years ago and 300 R&D people were there from Intel and Qualcomm and Broadcom and every technology company to think of it. Every one of them, all of them were talking about with 3D packaging and they said, wow, I almost heart attack. I am a wire bonding guy. I thought wire bonding would surely going to be over and of course we've seen what’s happen in the last four years. Wire bonding certainly was over and I will try to talk to that a little bit.
So 3D packaging. So it turns out, 3D packaging is wire bonding. When you put a package on a package, most of the package on packages are wire bonds on top of wire bonds. Some of them are wire bonds of top of flip chips that I showed you and evolving new ones are these stacked packages which eliminates wire bonding. So driving wire bonding, what's driving this 3D packaging? They want higher density for the same footprint, higher performance, wider bandwidth, lower power consumption and heterogeneous integration meaning they want to put chips of different types in the same package. If I make a chip in a 28 nanometer node fab and I have to put may be a control on it that I could design in a 130 nanometer node fab, I don't want to use the wafer in the 32 nanometer fab capacity in the wafers space, I want to take this cheap chip and package it so tightly together that they almost seem as one. And so that what’s they mean by heterogeneous integration, through silicon (inaudible) is the heart of 3D packaging, wire bonds very mature but the one problem with TSV is it's going to achieve this is from Samsung, TSVs have a 35% lower package size in memory, consume 50% less power, have eight times the bandwidth because there is one problem, they cost more.
So that’s what people are trying to do, is they are trying to make these packages cost less. So let’s take a look at the maturity of 3D packaging. There is the 3D packaging, which have wire bond stacked and I have packages believe it or not with up to 16 dies stacked on one another at companies like SanDisk and Samsung and Hynix, Micron. So that’s a very mature package in that production. Package on package stacking is also mature package and companies like Invensys or (inaudible) push this packaging further by enabling higher density; that’s a mature package. Chip-for-chip, and chip-to-wafer and wafer-to-wafer stacking are still in R&D. You are seeing see a lot of announcements from companies (inaudible) announced their silicon interposer which has chips on it. Over a year ago and of course last weekend (inaudible) told us that they made 20,000 of those packages last year.
So compare that to the 267 billion packages which were produced, it’s a trifle. And then way out in the future our wafer-to-wafer stacking. So let me talk a little bit about wire bonding, and then I am going to get back to this advanced packages and where K&S fits in. So this is our road map and we show the 45 nanometer technology nodes, the 28 nanometer node and the 20 nanometer nodes, and the key area I would like to show is our wire bond pitch. So when packages were designed for the 45 nanometer node we made wire bond technology at 45 micron. The 28 nanometer node, we had devices from [TSMC] and we qualified the wire bond design rules for 40 micron, and now we are getting packages from the 20 nanometer node and we are going to qualify them at 35 micron, and along with that the die thickness is getting lower, the wire diameters required for these packages are also getting lower. So this roadmap is a consolidation of dozens of our customers’ roadmaps and how we view wire bond technology development over time.
So what's going to happen? So here's a chart we put together and I have another one. But this shows the billions of units of packages that will be the pie chart of them done by 2016. So by 2016 82% of the packages will still be wire bonded, the remaining 18% are going to be flip chips. And so the key driver are the QFN packages here and so that's where we are focusing on in wire bonding and that's the market it’s in billions of units. So how does that look in terms of equipment? So in 2012 the [OSI] research said that there was about $1.4 billion worth of equipment for the semiconductor market, a little bit over 1 billion was - 1.046 was wire bonded and the rest was flip chip equipment and that will grow in terms of wire bonding and flip chip equipment for 2016 to those percentages. So the wire bond market is still there.
So how do, Deepak showed the market share growth and so what happened there; and so its copper wire bonding. K&S has got a dominant position in copper wire bonding. My estimate is that we have about 80% market share in copper wire bonding, it’s not more, and copper wire bonding is not new. It’s been around since 1985 maybe and we sat on the sidelines because it was a niche market and we sat on the sidelines and it wasn’t by accident in 2008 we decided to invest heavily in copper wire bonding. I was at a meeting with Scott Kulicke, who was our CEO at the time where he made a decision, he said we are going to enable copper wire bonding and so we took the bulk of our R&D at sometime I think we had close to 200 engineers working on copper wire bonding and it took a while. And this chart is the sales of our copper wire bonding machines and kit and that totals 30,000.
So you can see when we first started to close the knowledge gaps, we weren't selling any copper wire bonders. We gained process knowledge, but it wasn’t until we started to work on reliability and we collaborated with companies like Hitachi and Sumitomo to make moving compounds and ASC, our customer and once we got reliability under control look at the copper wire bonding chart for K&S, and it’s actually not reaching in there in our opinion. So we invested heavily and Deepak talked a lot about our technology. We actually have to form the copper oxidizers easily so we have to form it in an inert environment. So we use nitrogen with a little bit of hydrogen and we didn’t know anything about gas flow. We had to hire engineers who knew how to do computational fluid dynamics model and we built that in to our machine and we became the leaders.
So, rather than our projection of the copper wire bonding market, we thought we would show everybody someone with a different perspective. So this graph is from Heraeus. Heraeus is about 50% market share in bare copper wire and they are showing a percentage of gold wire bonded packages versus copper wire bonded packages, and also aluminum wire and you can see they said that at 2012 we were at 30% saturation, at 2013 they predict 41%, 2014, 50% and 2015, 57%. So that shows there is still some lag in the future of conversion of gold to copper wire bonding, which is very good for K&S since we're the leaders. We're dominating the copper wire bonding market.
So here is another chart and this is from ASC. ASC just presented this in January at an IMAP’s symposium in California. So ASC presented their wire bond roadmap. So they took ball grid array and those QFN quad flat packs that I was talking about and showed when copper wire bonding capability would be available for the 28 nanometer node. They say now. They say next year for the 20 nanometer node and for the QFN they say next year for the 28. So this will lag one from the BGA packages. So ASC is predicting that the next technology nodes will also be copper wire bonded. So the takeaway from wire bonding is that wire bonding is and will continue to be the most cost effective interconnect solution. Our QFN package growth is going to be highest and the wire bonding road maps extend to the 20 nanometer nodes.
So okay, now what about advanced packaging? We talked about wire bonding and while it’s a big business, maybe it's not the growth story our investors want to hear. So how are we are going to grow. So advanced packages come in many styles, stack die with wire bonds, stack die package on package, fan-out packages, and these through silicon via 3D packages, some that give us three quick slides on the different technologies that people are building in to 3D and then talk about how K&S is going to be relevant.
So first a little bit about bandwidth, this is the iPhone bandwidth, the original iPhone 523 megabytes per second. These are iPhone 3, iPhone 4, iPhone 5, 8526 megabytes per second. So just from the iPhone 16 times bandwidth requirements. So here is a memory chip in this graph bandwidth versus power; and if you take DDR2 single channel and go to dual channel, the bandwidth increases by more than two and the power increases by more than two. So if you take that same chip and do it in 3D, the power requirements are lower. So this comes from Intel, this chart. If we did in normal packaging wire bonding, the power requirement will be a lot. So this is significant power dream, the memory. So that is why people are trying to put memory in 3D.
So here is very simply, you start take a memory another memory eight of them stack them and put [VS] through them within a connect and Elpida, Hynix, Micron, Nanya and Samsung have all demonstrated this in their labs. Then there is the 2.5D the Xilinx with the interposer. So you take a silicone interposer and you put it down on a PC board, this has Through Silicon Via’s on you put the logic and the memory on top of that, so they can communicate after, and with less power and higher bandwidth. The only problem with this is, this is another part in the bill of material. So the silicon interposer adds cost. And then the third advanced package is when they want to put the logic chip and the memory chip right on top of it. So this logic chip would have Through Silicon Via’s and the memory chip would communicate to it and through the PC board directly. It may have wire bonds, it may not. So the three different types of 3D packages of memory, memory on logic on a interposer and memory in logic stack and they are basically, I mean there is lot of different variants but these are three types of 3D interconnects that people are trying to develop cost effectively. So we stood on the sidelines and saw all of this development going on and now we think its time for K&S to participate. We developed with our Alphasem acquisition we developed a high accuracy die bonders and actually the die bonder has too much technology built into it for the normal die bonding market and we decided to leverage that machine and develop and advanced packaging bonder for a 3D interconnect using that machine.
So we are going to develop what we would like to refer to as the next generation thermal compression bonder and use our engineering our several expertise that difference and our existing machine which we have over a 100 in the fields out to develop this next generation machine.
So this is a chart that we got from SET and this shows throughput versus accuracy. So right now there's two kinds of machines in the world. There's these really super accurate machines made by SET and (inaudible) that go really slowly maybe a 100 units per hour and there's these really fast machines from Datacon and maybe Panasonic that have low accuracy and K&S is redeveloping our goal is to develop a machine at the high accuracy and the high throughput.
So that's, we think these machines people are using in labs they are too slow for high volume production. These machines don't have the accuracy capability built into them for the 3D. So when we go to Semitech, we see this machine in their cleaning room and we say well this is only a lab machine, how could this you know, how could TSM see or ASC ever gone into production with this machine. It’s way too slow.
And then they say yeah but we can't use the Datacon machines that are not accurate enough. So we have been studying that, that's the area, that's our target for advanced packaging. So again, take our current machine which already has accuracy and then die handling capability and develop it into a 3D machine that supports all those packages that I showed you.
So we already have 50 engineers working on this for the last I don't know six months or so. We plan to expand that and make that you know take some of the key engineers, the talented engineers that developed our wire bonders and put them, have them to develop the next generation thermal compression bonders.
So where will that leave us in 2016. So this is a picture of interconnect served to market for K&S in 2016. So we will have this wire bonder market which would be almost $1.2 billion which right now we have 60% to 70% market share of and we intend to maintain that market share and then we will have a machine that will target one of these advanced packages.
So you can see any one of these segments, any one of these slices is small but together I just end at about $600 million. So this excludes the standard flip chip of $200 million market that will still be there. These are advanced packages. So, right now we would be shooting for 30% market share by 2016 in this market with our new machines. So that’s our growth story for organically developed equipments and I guess, we also, Jonathan talked a little bit about other inorganic opportunities that we may have for growth.
So the takeaways are, consumers are driving semiconductor growth and influencing the evolution of packaging. Cost is the key area and people cannot transition without achieving the cost. Advance packaging, we will see a faster growth rate in the next few years and K&S wants to participate in that growth.
Copper wire bonding still has three to four more years left and that’s good new for K&S investor and K&S lead the industry in wire bonding and advance packaging technologies.
Thanks, Bob. So we --- pretty quick. We have some time for another Q&A session. If there are some questions that you would like to ask.
Just wanted to ---more granularity on this 1 billion market for wire bonding going to 1.2 by 2016. Is that more of top down forecast looking at some of the data you showed from showing what part of their consumables you know versus aluminum versus, gold versus copper or is it a bottom that (inaudible) your customers are using currently gold are saying that they find --- migrated to copper?
We consolidated the market information in that regard, from research gardener and IC insights and our own view of the market. So we feel that the top-down analysis is done by those three organizations and then we had the bottoms up, so we have been, we have the luxury of having great breath in the marketplace and we can see what packages are wire bonder is being used for, so we have seen how each of those package segments are growing and we try to rationalize the numbers that we are getting from the market research companies. So that chart is a consolidation of the three market research companies top-down and again it's bottom-up.
Can you give us a little bit more detail on the timeframe of the roll out of the thermal compression products that you are (inaudible)?
Of course, our development schedules are changing to a target, but we targeting having a prototype. We have a prototype machine basically right now, and we would like to get by the end of next year into production may be so trials between now and then, so we think 2015 would be at inflection point and we want to be there before 2015.
And then also I think you already mentioned about some you said the market opportunity in the LED and the lens market, I guess that 5% your revenue whereabouts today?
Yeah, that is like originally at time if you go into LED and MEMS, we do offer our great LED wire bonding solutions and in MEMS we have so many machines in market and we have a weight for the levels, a MEMS are wire bonders and we are this wafer level MEMS and wire bonder is being used for image sensors which are similar to lens and that they have two interconnects through two set of interconnects and so dry --- [TSMC, ASC] (inaudible) machines for their R&D labs and we are working together with them in collaboration on MEMS packages.
The pack and so, we would wire bonds to MEMS at a wafer level and its exciting technology but it is also very secretive, all these companies are independently trying to get a competitive advantage over each other. So it’s a little bit more difficult for us to share the detail, but MEMS although it’s a smaller area of packaging, Its definitely the growth area that K&S wants to participate in.
So a lot of information about the wire bonder market in 2012 and in 2016 what's your view of ‘13, ‘14 and ‘15 in a sense that you think its kind of the stable growth market or see cyclicality in there?
Yeah there's always going to be cyclicality there. There's definitely in the world economy and there's capacity that fluctuates. People at certain points of time are competing for business and willing to have over capacity in other points in time they don't want anymore capacity and it looks like gloom and doom. But and there's also transition of applications through flip chip.
So if a one big manufacturer moves to flip chip then there's a discontinuity. So I believe that the market is overall going to be you know there will be a linear curve set but it will be cyclical and your guess is as good as mine, you know if you look at the trends of our revenue every Q1 calendar is always low and then from (inaudible) I think I would personally predict that I'm not sure [Kenneth] will predict that exactly. Do you want to add to that?
Unidentified Company Representative
As I said you know we only got the current quarter, but we are seeing basically a softer year but we do track entirely the utilization rates of our general customers and generally when the utilization rate gets to the mid-80s that's really when the orders will, the panic starts coming in terms of the additional deal.
So based on the projection that in terms of the number of IT units would be wire bonded versus flip chip and how its actually going to be split into traditional subset and advanced packaging, now we believe the wire bonding side will still be you know and basically still has certainly the copper conversion cycle still has legs in terms of next two to three years and before it becomes a big place in the market.
So we believe that based on units the demand for our wire bonding still has many years to come.
And it looked like in ’11 and ’12 the other sets were the big driver. Do you see the IBM has a bigger part of that business going forward then?
Well, I think in terms of any demand that comes from IBM we certainly would capture that because of our direct versus the indirect distribution channels and the IBM is based on, based on our understanding is going through a sort of after life approach and certainly from an investment and currency capacity it will maintain a certain level of capacity but most of the active volume will --- that. So in terms of future demand it depends on really how strategic it is to have that capacity now.
Maybe I'll just add on a little bit. I think everybody knows that there's few main customers who bought a lot of copper machines from us over the last few years. There's a lot of other customers who have also purchased machines if not in that higher volumes and we've seen over the last few quarters that there's sort of secondary customers picked up purchases a little bit.
So I'd say that while the great news was the main is that CapEx forecast for 2013 seems that there's probably some of the secondary customers that would help mitigate some of that shortfall. There probably would likely not displace the entire amount but that should probably be something to consider through the 2013 program for that.
Okay and in general would you see a broadening of your customer base away from the two big players that's good for the margin structure?
Would you see a broadening of the customer base beyond the top two generally pretty good for your margin structures as well?
Yeah, actually it is, if you look at historically, you know, our action margin when the volume is not there, actually the margin picks up. So based on you know the two top customers they do get more favorable pricing. So that we can actually extend the broad customer base and the next, where the pricing can be more favorable and margin can be supportive.
Can you go back to slide seven? What I am trying to do is understand that says accelerating copper wire transition. Again if I look at the theory from 2013 to 2016 and look at the percentages, the percentages in terms of saturation move up by 11 percentage points and then it moves up by 9.4, and then it moves up by 7.1. If you use absolute numbers rather than percentages, doesn’t --- them fire year-to-year decline in terms of how rapidly the market maybe growing and even reflect that the annual numbers would show slight declines.
I mean, we can argue about the header, how it's labeled. I mean the point is that the copper transition is continuing. I think that (inaudible) forecast (inaudible) presentation on a quarterly basis, which is the initial first two years were steeper in adoption rate than the forecast looks like. I mean that’s because with the decline (inaudible) customers transitions to copper sort of over windfall and now this is secondary test customers are converting a little less (inaudible) global contributors from our (inaudible) to that the data from last year to the last quarter of six quarter are internal forecast from a unit standpoint, but I will be at secondary phase as likely to be a slower adoption rate in the first stage thought except its right.
Well, you saturate the market at a slower pace. If you use saturation probably you will find out that when you get probably as around 40% rate to beat the market properly, down these sales will you will have your first flag here best down here. In other words you don't saturate the market it ever increasing and that’s why I think accelerating I didn’t quite understand how that trend was accelerating?
Right. I mean we are accelerating copper wire the transition just because we continue to work with our customers on a quarter - we have 80 process engineers that are working hand-in-hand with customers to convert - so we try to enable it, because that enable us copper wire transition maybe (inaudible).
I don't want to belabour it too long but if you switch the percentages to absolute numbers don't the numbers go down on an annual year-to-year basis?
Is that correct?
And what is that imply?
I guess maybe it's a - I don’t think we are accelerating the copper wire adoption rate; I think we are just accelerating the copper transition. And maybe the other way to look at it's we weren’t involved they are probably wouldn’t be a copper transition.
I am just trying to understand the trend between 2013 and 2016 and what that implies?
2013 to 2015 will probably be a slower adoption rate than 2009 through 2012.
Yes, so you be selling cooper wire bonders but the number of unit you’re selling annually, the annual change will actually probably decline?
We actually have posted on our current IR presentation I think is about 10,000 machine a year, but the incremental units is sort like continue sort of flattish from a pure machine unit count perspective.
I think Jonathan you said that you track the utilization rates of the customers, and you mentioned that they order at around…?
But you didn’t mention where they are now how far where - where are they now, where did they come from at what rate are they increasing utilization?
I guess K&S historically did actually publish it and I guess about four or five years ago we stopped that but we do track internally and we are currently looking at the high 70s right now. We don't know the trend to say but, it depends on, now we do expect the utilization rate to get higher over time and certainly with a softer quarter as we are experiencing currently with inventory (inaudible) depleted their capacity, the utilization will actually increase over time.
Just to add on there is historically if you took that utilization trend and we’re below 80 I mean that's pretty clear and overrated you know we sold a lot of machines but with the copper transition over the last few years now there's 30% of the machines in the field are copper. So there's basically two utilization trends and if you listen to some of the bigger (inaudible) they usually give a little insight to what the copper utilization rates are specifically because if either of those are over 80% that drives demand for our equipment - again the dynamic has changed from the historic utilization perspective that might be helpful.
On another subject, I think you mentioned in terms of potential acquisition in the advanced packaging area in your last conference call. Do I recall that correctly?
Acquisitions are really you know it could actually, if there's acquisition of technologies out there that can actually help us accelerate or meet the (inaudible) that we want to do, to get a product out in terms of advanced packaging, we will consider and we actually have looked at some. And but I would say the inorganic activities mainly related to other areas that were considered adjacencies to our core business and our core the way we define it is really our wedge bonder, wire bonder you know the ball bonder side.
So advanced packaged the way we have incentivized the management is actually grow the top line for advance package plus we've identified probably six other areas that we are looking into.
Okay, could you elaborate a little bit more detail about the advanced packaging area and what companies may meet your criteria and what is your criteria?
Unfortunately we can't share actually what kind of company but certainly it’s a solution. So you really have to look at where we are today and really how to actually close those gaps. So sometimes basically there are companies out there with basically areas that that can help us accelerate that development process and this could be any of the area where we may be very strong in but yet still combining with some other company’s technology and research we can actually accelerate that.
Okay, is it fair to say it’s not a particularly high priority?
I think for us we need to get that product out there from a time to market perspective. So I'd say yes if the opportunity out there to acquire a company with technology that can help that would be a priority. So it really depends on the situation.
So you could move pretty quickly?
Adding to that so if you were to do a deal, because you have obviously a lot of cash on your balance sheet and so the obvious question how do you look at in terms of financial metrics of the deals that are purely strategic in terms of timing to get to market or if you look at the dilution or the return on - you have a timeframe for a return on investment.
Well, we have, yes, great question. We do have a screening criteria where we are screening out a lot of, actually opportunities out there. Obviously if you look at it from a technology development perspective what's available, but if you look at the financial screening criteria, we obviously want to continue to maintain our current gross margin at 45% level.
So you have these types of criteria that actually kind of screens that out. We do look at companies that ideally the company we do will be accretive from day one but there are always going to be situation perhaps not in the first week orders. So I would say, if we do want to make sure it is a discernable technology that you can differentiate yourself so that you can command the kind of margin you can command.
Back on that subject, if you don’t find candidates that make sense, when will you basically give the cash back and what is the, it's been, I mean you got this question several times but it's a lot of cash, (inaudible) balance sheet. Is there are (inaudible) date on your acquisition?
Another great question. We – this subject is always talked about very consistent and regularly at our Board level and as part of our responsibility, we provide the different scenarios as well as actually analysis for our Board to discuss and debate and during our last earnings call, we did call out that we at this point in time, we are prioritizing ourselves to basically develop, to really grow the company to have more product offerings, get into advance packaging areas, look at basically these half a dozen areas of actually adjacencies that make sense for us based on our skill sets.
And at the same time trying to smooth our earnings - increasing the quality of our earnings is very important so that hopefully we will get recognized and be rewarded by the market.
We don’t have a set timeline to answer when we will stop kind of reset the priorities but I would say it's fair to say probably in next four to six quarters, which generally you are looking at the party that we have set by the current Board.
Any more questions? I think if there are no more questions, we will probably end the webcast. And I thank for those of you here, if you would like to join us at 3.30 we are going to downstairs and do the closing bell ceremony, you are welcome to join us.
Thank you all for joining today.
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