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Kulicke & Soffa Industries, Inc. (NASDAQ:KLIC)

F1Q10 (Qtr End 01/02/10) Earnings Call Transcript

February 4, 2010 9:00 am ET

Executives

Tom Johnson – Director, IR & Corporate Communications

Scott Kulicke – Chairman & CEO

Mike Morris – Interim CFO, VP of Finance and Treasurer

Analysts

Gary Hsueh – Oppenheimer & Co.

Paul Thomas – Bank of America/Merrill Lynch

David Dooley – Steelhead Securities

Andy Schopick – Nutmeg Securities

Operator

Greetings and welcome to the Kulicke & Soffa December quarter results call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tom Johnson, Director of Investor Relations for Kulicke & Soffa. Thank you Mr Johnson, you may begin.

Tom Johnson

Thank you Melissa. Good morning everyone and welcome to Kulicke & Soffa's first quarter fiscal 2010 conference call. For those of you who have not seen the results announced this morning, they are available in the Investor Relations section of our Web site at www.kns.com. An audio recording of this entire conference call, including any questions or comments that participants may contribute may be accessed from the Kulicke & Soffa Web site for a limited period of time.

During today's call, we will make reference to non-GAAP financial measures. Reconciliation of those measures to the most directly comparable GAAP results are also posted on the Investor Relations section of the Web site via the GAAP to non-GAAP reconciliations link. The content of this conference call is owned by Kulicke & Soffa Industries and is protected by US Copyright Law and international treaties. You may not make any recordings or copies of this conference call; you may not reproduce, distribute, adapt, transmit, display or perform the content of this conference call in whole or in part without the written permission of K&S.

Today's remarks will be governed by the Safe Harbor provisions of the 1995 Private Securities Litigation Reform Act. Actual results may turn out significantly better or worse than indicated by any forward-looking statements that we may make this morning. For a complete discussion of the risks associated with operations of Kulicke & Soffa, please refer to our SEC filings, particularly the 10-K for the year ended October 03, 2009, and our other recent SEC filings.

It's now my pleasure to introduce our host for today's call, Scott Kulicke, CEO and Chairman of the Board. Scott?

Scott Kulicke

Thanks Tom and welcome to this conference call the purpose of which is to discuss K&S’ financial results for the December quarter. In a moment, I will turn the floor over to Mike Morris, our CFO, so he can describe the salient points of the quarter, but before that I would like to place the quarter in a broader context.

First and foremost, it was a very good quarter for K&S. Revenue was up, earnings were up, cash was up, ROIC was up, and our revenue forecast for the next quarter was up as well. Considering where we and the whole semiconductor industry were a year ago, these results are even more impressive.

Our order book continues to be strong with a broad range of customers requiring large number of ball bonders in the near term. The principal driver seems to be IC unit growth with additional demand stimulated by the copper wire conversion and by expansion in LED manufacturing. We are also starting to see strong demand for heavy-wire wedge bonders along with the financial performance from that business unit that has caused us to buy this business in 2008. These trends drove the December quarter’s revenue to $128 million and as a foundation for this quarter’s revenue guidance of $140 million to $150 million.

Looking beyond the March quarter, we see several optimistic indicators such as how quickly our order book filled up this quarter and some of our customers that negotiated multi-quarter blanket orders, net shipments are strong for the month of April. But the truth is our visibility is limited to about 12 weeks, but I would point out that even that is an improvement to the eight to ten-week visibility that we have been used to.

Mike, why don’t you take our audience through the quarter’s financial details?

Mike Morris

Thank you Scott and good morning everyone. My remarks today will include non-GAAP measures as a supplement to our GAAP results in order to provide a better view of our financial performance. The items we exclude to determine our non-GAAP measures are explained in our earnings release and are also provided on our Web site. On today’s call, I will compare the December quarter to the September quarter and will refer to non-GAAP numbers unless otherwise noted.

As Scott mentioned, results for the December quarter were very good. Net revenue for the period was $128.4 million, up $17.9 million from last quarter. The revenue increase was driven by a 23% pickup in ball bonder volumes. Ball bonder unit sales were weighted towards subcontractors who comprised 72% of our ball bonder shipments.

Gross profit was $56.4 million, up $9.2 million from last quarter. Our gross margin was nearly 44%, up 1.2 percentage points from the September quarter, as the ball bonder volume pickup drove improved absorption of our fixed manufacturing costs. Operating expenses were roughly flat at $34.7 million. Increased expenses associated with our higher revenue level were offset by various other reductions. We do not expect these offsets to continue next quarter and see OpEx rising 5% to 10%.

As a measure of our operating leverage, 52% of our incremental revenue this quarter fell through to operating profits. Concerning taxes, we are projecting a book and cash tax rate of between 3% and 5% as we expect our increased earnings to come from territories that have low tax rates or where we have tax holidays or net operating losses.

Turning to the balance sheet, we ended the quarter with total cash and investments of $175.2 million, an increase of $30.6 million from last quarter. Working capital, defined as accounts receivable plus inventory less accounts payable, fell $16.5 million to $80.9 million, as good collections and payables management more than offset an increase in our inventories. From a days perspective, our working capital performance was also good. DSO was down 19 days to 59 days, DSI was up 03 days to 52 days, and our days payable was up 10 days to 67 days. We expect that our working capital metrics will return to their historic trend as revenues rise for the March quarter. Our ROIC for the December quarter was 35.4%.

One last comment on our balance sheet, you will notice that our debt is roughly $16 million lower on a GAAP basis. This does not reflect a real reduction in our debt; rather it is the result of our implementing the new convertible debt accounting for this quarter. We did not buy back any of our debt this quarter and the amount we owe is still $159 million. Scott?

Scott Kulicke

Thanks Mike. While we are pleased with this quarter’s results, we remain focused on further improving K&S’ financial performance in the future. As we have outlined in recent investor presentations, we expect to continue to reduce our cost structure both at the COGS line and the OpEx line over the next year or so. For those of you who have not seen that presentation, it is available on our Web site. The key takeaway from that presentation is that at any given level of wire bonder demand, a year from now our operating performance should be higher than it would be today if there is same demand levels, and that is before you add in the contribution of our iStack die bonder.

Today we are in die bonder iStack mode. We have machines in qualification. Their performance is very impressive although we are experiencing usual new machine bugs [ph] and request for customer specific features. We have booked the first order as we have installed those bug pictures [ph] and feature enhancements over the next few orders, we expect to book many more orders. As that incremental die bonder revenue starts to flow in, it will also have a positive effect on our financial results.

So all in all, we feel good about where K&S is today. Demand from our core ball bonder customers is strong driven by IC unit growth coupled with LED growth in the industry’s ongoing conversion to copper wire. Heavy wire wedge bonder demand is also picking up and our die bonder initiative should start to bear fruits soon. All this leads to our good current financial results and as our various cost reduction programs mature, we expect even better performance in the future.

With that Melissa, let’s take a few questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) Our first question is from Gary Hsueh from Oppenheimer & Co. Please proceed with your question.

Gary Hsueh – Oppenheimer & Co.

Great numbers here.

Mike Morris

Hi Gary.

Gary Hsueh – Oppenheimer & Co.

A quick question here, just on the opportunity of the transition from gold to copper wiring, I noticed that the reports I think in the press that it is expanding perhaps to silicon wire, just wondering if a) you are able to start driving market share gains in the traditional kind of wire bonder business when you go from gold to copper and b) where are we in terms of the replacement cycle of legacy gold wire bonders, I know you talked about copper kits but I am interested in where we are in terms of the replacement cycle for actual age legacy gold wire bonders, and in terms of where we are, what is the size of that replacement cycle for you guys in 2010, and I have got a few follow-ups.

Scott Kulicke

Okay Gary. First about market share, we believe that we have a significantly better copper package than our principal competitor ASM Pacific especially with fine wire high-density long loop kinds of applications. Yes, we think we are picking up shares because of that I cannot quantify it for you. Secondly, about replacement cycle, our theory has always been that people will kit their existing bonders for as long as they can and defer actually replacing older bonders until they have kitted older newer bonders. And when we look at the installed base, roughly half of the bonders, half of ball bonders are kittable the other ones are not. So, in all our internal models we do not project the strong replacement market to come for a while. That would not be in 2010. Now, having said that, when we try and run the numbers (inaudible) that some of the bonders that we are shipping today are in fact replacement bonders.

We mentioned in the press release that we shipped about 1500 kits in the December quarter; a little over half of those kits were already installed on our bonders. So our customer was buying a pre-kitted bonder if you will. Now some of that is that people are simply expanding and while they are expanding, they are buying their expansion capacity with copper but some of those may in fact have been replacement bonders, it is very hard for us to make that distinction especially when you are talking about subcontractors who vary their applications and in fact will take a copper kitted bonder and occasionally one gold wire on it depending on what is in their cue.

So, that is a lot of background cover but does not really answer your question because we are not sure, our model all along has been that the heavy part of the replacement cycle would come probably starting in 2011 and beyond. If we are getting some of it now, it is better than we forecast. I guess your last question is what is the potential for replacement bonders, the math that we run says that there is something like 40% of the installed base today will probably have to be replaced over the next few years, next three to five years but keep in mind that they will be replaced with higher productivity bonders. So it is probably a 2:1 replacement ratio that is to say can we place two old bonders with one new bonder? So 40% of the installed base gets replaced with the equivalent of 20%. Our models have called for the installed base to be around 80,000 bonders so 20% of 80,000 are what the potential replacement business is. Again, that is all very round numbers (inaudible) assumptions.

Gary Hsueh – Oppenheimer & Co.

Okay, great answer, thank you Scott. Second question here is just to kind of get me recalibrated on the model, I am assuming since POs were really only booked in January of 2010 that the December quarter really had no revenue benefits in the die bonder kind of penetration, just wondering exactly how much of the OpEx in the December quarter was unabsorbed coming from the die bonder business?

Scott Kulicke

Okay, first it is only a single PO to date. Yes, it was booked in January; the machine is not shipped yet, so there is no revenue yet. Die bonder OpEx is in the $5 million, $6 million per quarter. So it is a big hunk.

Gary Hsueh – Oppenheimer & Co.

Okay, fantastic. Last question, just can you give me what the utilization rate was in the December quarter across your bonder installed base? I mean, I am looking at your expendable tools business, not that it really matters but it is just down 7%, so I would have expected that to be up since utilization rates I am assuming are up, is there anything you could do to help me understand that?

Scott Kulicke

First, I am trying read through this, through the quarter, it averaged in the low 80s, the factor utilization rate. The tools business has not been growing as quickly as you might otherwise expect for two reasons. First, customers are increasingly embracing so called long life capillaries, which last about twice as long, they cost about 15% more than old conventional capillaries. So there is some (inaudible) compression in the tools business. Secondly, our tools business line includes the wedges used in heavy-wire wedge bonders and the heavy-wire wedge business like the heavy-wire wedge bonder business that whole market segment has been one of the last segments to start to accelerate whereas the bonder business started to accelerate almost six months ago, the wedge bonder business is just beginning to accelerate and that means wedge tool consumption is also just beginning to accelerate. Improvements in the wedge bonders and wedge part of the business is one of the reasons why the guidance for the March quarter is so strong. We are really excited about that what that Orthodyne acquisition is going to start to kick into the rest of the company.

Gary Hsueh – Oppenheimer & Co.

Okay, great Scott, thank you.

Scott Kulicke

Next question Melissa.

Operator

Thank you. Our next question is from Krish Sankar from Bank of America/Merrill Lynch. Please proceed with your question.

Paul Thomas – Bank of America/Merrill Lynch

Good morning, this is Paul Thomas for Krish Sankar. Thanks for taking my question. So Scott, you were just talking about Orthodyne, so just wondering now with the gains you have seen so far, do you think we are going to see kind of a peak cyclical quarter along the revenue line that they had previous to acquisition or where do you think that is going to go this year?

Scott Kulicke

We don’t –

Paul Thomas – Bank of America/Merrill Lynch

I guess I will stick to directionality, I know you cannot give a forecast but –

Scott Kulicke

Yes, it is a little hard for us to say, the wedge bonder business is going to have a very strong March quarter, and like the rest of our businesses, visibility beyond that is not very good, that does not mean that they are going to go down, it just means that we cannot see into the future.

Paul Thomas – Bank of America/Merrill Lynch

Okay.

Scott Kulicke

We certainly think that there is long-term growth over the previously demonstrated peak, the heavy wire wedge bonder business is ultimately driven by power management and it is hard to imagine the power management is not going to have a bright long-term future, whether it is the cars or the industrial equipment or other kinds of electronics, smart management of power is got to be in everybody’s future and there is no more principal beneficiary of that trend in heavy wire wedge bonder business.

Paul Thomas – Bank of America/Merrill Lynch

Okay and on the LED shipment, those were about 10% of bonder shipment, how does that –

Scott Kulicke

I am not sure where you got that.

Paul Thomas – Bank of America/Merrill Lynch

Sorry, that was last quarter, you said just roughly a ball bonder.

Scott Kulicke

Last quarter, what we said last quarter is we expected that part of our shipment that went to LEDs would probably be relatively constant as the 100 odd bonders per quarter. Now what that is as a percent of the whole depends on the denominator. So because we shipped the whole lot more bonders to everybody else as a percent of the total, it actually came down in the quarter although on an absolute number it actually went up in the quarter.

Paul Thomas – Bank of America/Merrill Lynch

Okay so unit numbers are still going up and what you spent per share, I think you spent maybe 25% or so roughly –

Scott Kulicke

I think that we will stay in about that range for a while in the LED segment, supposed [ph] to have much, much higher shares in other parts of the market.

Paul Thomas – Bank of America/Merrill Lynch

Okay, thanks a lot.

Operator

Thank you. Our next question is from David Dooley [ph], Steelhead Securities [ph]. Please proceed with your question.

David Dooley – Steelhead Securities

Congratulations on a nice quarter guys.

Scott Kulicke

Thanks David. I think we are going to look even better in March.

David Dooley – Steelhead Securities

Yes, it would appear that that is the case and I guess my first set of questions are around profitability levels, you mentioned the drop rate that you just achieved in the current quarter I think at 52% and then also mentioned that your operating expenses would be going up in this upcoming quarter. Can we just kind of take that drop rate and add the increases in operating expenses and get to the drop rate we expect in the current quarter?

Scott Kulicke

Mike you want to take that?

Mike Morris

That would be David; it is like (inaudible) estimate.

David Dooley – Steelhead Securities

Okay. I have not run the numbers but I noticed that the last couple of quarters the consumable business’ gross margins seemed to be much higher than I recollect in the past. It is certainly up a lot. What is your reason behind that?

Scott Kulicke

Okay. If you are talking back sort of pre-subcontractor note there David, you are looking at a segment that has included the gold wire business and of course the gold wire business is a very low margin business, high revenue low margin number, low gross margin number because of the content of the gold. In fact our tools businesses have always been our highest gross margin businesses. They are wonderful businesses; the problem is that they are just not very big. We like them for a lot of reasons. One of course is the profit contribution they make. Second, they are the closest thing to counter cyclical we have in our revenue stream. Thirdly, we are the only bonder manufacturer who also makes his own tools and our ability to drive tool design which is a very important contributor to the whole process and wire bonding, our ability to drive tool designing in conjunction with bonder design we think is one of the reasons why we have such better bonder performance than our competitors.

So we love the businesses and our only complaint with them is that they are not bigger. About their profitability, worse as you know from our previous presentations, we historically made those tools in two different sites, the ball bonder tools we are consolidating that in China, it is part of our cost reduction efforts, that program is only partly through. In the quarter, we carried a fair amount of non-recurring expenses associated with the transfer and consolidation in China and as that program winds up over the next couple of quarters, our tool profitability should actually go up further.

David Dooley – Steelhead Securities

Excellent. Let us talk a little bit about – you just talked about the LED market, could you talk a little bit about the DRAM market, that is another market where over the last two years you have made some inroads, I was wondering if you could tell us what state of acceleration that market is in and what you would expect going forward?

Scott Kulicke

Okay let me talk not explicitly about DRAM but about memory in general and combine DRAM and Flash. That is the market, you are right, historically we under served that market. In the 2006, 2007 timeframe we really made a converted run on it and took a significant amount of share especially away from (inaudible) in Korea and in Taiwan. And part of our previous cyclical peak in 2007 included a strong contribution from memory and it was both Flash and DRAM. Since that time, as everybody knows, the memory business has been a really tough business and with quite virtually no incremental assembly capacity.

Even in the current quarter, the March quarter, we are just beginning to see equipment flow into what we think are memory applications and I say we think because they are not going to the traditional micron Samsung, Imex, Toshiba type names were rather subcontractors that we believe are servicing those accounts. It appears that the memory guys will add assembling capacity in this cycle mostly through subcontractors not in their own factories. And of course that always makes it hard for us to say whether we are actually selling memory machines or not, but our best guess is that some of the March quarter shipments, not very much but some are going to memory applications in the subcontract space.

David Dooley – Steelhead Securities

In fact in 2007 or whenever you kind of had was it a couple of hundred units a quarter, was that it I remember you saying that?

Scott Kulicke

In the memory?

David Dooley – Steelhead Securities

Yes.

Scott Kulicke

No, the number that comes to my mind is 700 or 800 bonders that 2000 bonders cyclical peak were for memory applications probably more for Flash than DRAM. Stack Flash is a particular strong spot for us; to build stack Flash parts you need some unique looping characteristics that we are very, very good at. So we think we sold a lot of bonders into that space.

David Dooley – Steelhead Securities

Okay, I think I saw the backlog number in the press release was $53 million, what was the backlog number at the end of September quarter?

Scott Kulicke

While my guys look through their sheets to try and find that number, I will have to give you the obligatory caveat. Backlog is not a very important number and you ought to think that this is a turns business, when we take a big blanket order from a customer, a multi-quarter blanket order, we don’t book it, we only book what is released in the short term. So that is not included in that number and orders are cancelable at will by our customers so I would not point out, I would not build an investment thesis on backlog, In our internal reviews, I generally take the view with my managers, my manufacturing guides especially at backlog it is customer desires that are going unfulfilled that is a bad thing. So, what was the September backlog number Bill [ph]?

Mike Morris

42.

Scott Kulicke

42.

David Dooley – Steelhead Securities

Thanks guys.

Scott Kulicke

Next question?

Operator

Thank you. (Operator instructions) Our next question is from Andy Schopick of Nutmeg Securities. Please proceed with your question.

Andy Schopick – Nutmeg Securities

Thank you and good morning.

Scott Kulicke

Good morning Andy.

Andy Schopick – Nutmeg Securities

So Scott, my challenge to you is to sustain this for four quarters in a row. I have got a few questions for you. First, I want to be sure that I understood one comment you made in response to another question, did I understand that the operating expenses associated with the die bonder business is $5 million to $6 million per quarter?

Scott Kulicke

Roughly.

Andy Schopick – Nutmeg Securities

Can you give us any indication in terms of your internal planning purposes what the die bonder business is likely to contribute in this current fiscal year? Do you want to give it any kind of range or parameter?

Scott Kulicke

No.

Andy Schopick – Nutmeg Securities

Okay. That would be really helpful that we could get some sense of what you are really planning and thinking on there but I guess we are going to be all surprised when it happens. The convertible debt situation Mike, I must admit I am not as familiar with this new accounting ruling as I was with previous convertible debt accounting rulings, and for my purposes, I have only made this more confusing. I am not sure that I understand why the debt as it is presented on the balance sheet of just under $143 million is $16 million or so less than what your principal amount outstanding is?

Mike Morris

So at a high level what these new rules will require us to do is to value the equity component of that convert and to take it out as a debt and to put it into common stock and the amount that we valued per equity in that convert was roughly $30 million. Then you take your debt down when you take that $30 million out and you apply a higher interest rate, the interest rate that we would have borrowed term debt at the time to that lower debt balance, so you see higher GAAP interest expense then as you move forward on the life of the bond, that gain that you took in your equity slowly creeps back into the debt, you end up at $110 when it is time to pay it off. So we had to retroactively implement this and new accounting rules are coming about halfway through the maturity thus far. So we had to put it back into our previous financials, but when you roll it forward, about half of that 30 has already crept back up. So over the next two-and-a-half years that remaining $15 million, $16 million will creep back into the debt. Hope that answers your question.

Andy Schopick – Nutmeg Securities

I am going to have to look at this more closely when you file Qs or look at other folks Qs to see the broader explanation of this because it is confusing, the other thing that I have noticed here is on the non-GAAP adjustment, there is a non-cash interest related component as an adjustment or exclusion from the non-GAAP numbers, is that also associated with the convertible debt?

Mike Morris

It is. It is that $1.5 million of extra interest per quarter that the new accounting rules would have us show, it is not cash.

Andy Schopick – Nutmeg Securities

And Mike can you give us some indication as to – can you estimate what that will be for the year based on your current debt structure what that non-cash is?

Mike Morris

$6 million, it is about four times the $1.5 million per quarter.

Andy Schopick – Nutmeg Securities

Okay, so it is going to be fairly steady?

Mike Morris

Yes.

Andy Schopick – Nutmeg Securities

Any plans to reduce the debt outstanding during the course of the fiscal year, are you looking at it at all?

Mike Morris

Yes.

Andy Schopick – Nutmeg Securities

Cash flows are clearly going to be very good through the first half of this year.

Mike Morris

Yes, we have sufficient cash on our balance sheet to pay off the $49 million that is coming due in June 2010 and we are going to do that, that is going to reduce our debt and then we are running our models looking forward and we have a good chance of paying off the $110 million when it comes due in 2012. We are past the delevering.

Scott Kulicke

(inaudible) as we said before, the board has set a goal for management to get this company debt free as quickly as we can. So we are going down that path. We will pay off the June debt on schedule, we will not try and roll it over any of that stuff and we are now focusing on what is the best way to deal with the remaining $110 that is due in June of 2012, and as Mike indicated, given current cash flows we may just pay it off as we go.

Andy Schopick – Nutmeg Securities

Let’s hope that the business and the cash flows will give you more than adequate flexibility to do that. Mike to come back to cash flow for a second, there are some (inaudible) that I think may be offsetting factors in the upcoming quarter where you expect to have even better revenue performance than we have seen reported today, can we anticipate that cash flows will at least equal what we have seen here for this quarter?

Mike Morris

No, I think we are going to see working capital requirements absorb more cash than they did this quarter consistent with the higher revenue levels.

Andy Schopick – Nutmeg Securities

Alright, so cash flow from operations is going to be somewhat lower than what we are seeing right now.

Mike Morris

At these revenue levels, I am expecting we are going to see a lot of the cash going to working capital.

Andy Schopick – Nutmeg Securities

Okay.

Scott Kulicke

Let me also amplify on that a little bit Andy. We had extraordinarily good accounts receivable performance in the December quarter that Mike pointed out in his opening comments –

Andy Schopick – Nutmeg Securities

I see it.

Scott Kulicke

And it is unlikely that our DSO will be that good again in the current quarter. So that is where a lot of cash will go into accounts receivable.

Andy Schopick – Nutmeg Securities

Okay, just one final thing for you Scott, on the ball bonder shipments, they were up 23% of revenues.

Scott Kulicke

I think that is the number.

Andy Schopick – Nutmeg Securities

The average price that you are receiving on your ball bonder shipments today is about – how did it compare with a year ago?

Scott Kulicke

It is low 50s and it is about the same, maybe a shade less, when you get into bigger volume of orders from the subcontractors, you typically feel a little bit of volume discounting, but it is not materially different.

Andy Schopick – Nutmeg Securities

Okay, excellent, thank you so much.

Scott Kulicke

Thank you Andy.

Operator

Gentlemen, there are no further questions at this time, I would like to turn the floor back over to Scott Kulicke for closing comments.

Scott Kulicke

Actually I am going to turn it over to Tom, but thank you all for your time this morning.

Tom Johnson

Thanks Scott. Before closing our call, I would like to remind you that K&S will be hosting its Annual Shareholders Meeting on February 09, 2010 at the Embassy Suites Hotel at Santa Ana, California. A webcast of this meeting will be posted to our Web site following the conclusion of this call.

K&S will also participate in the Oppenheimer’s Semiconductor Summit on February 18 and will present at the Jefferies Technology Conference on March 09. Details will be published shortly. Thank you operator, this concludes our call.

Operator

Thank you. You may disconnect your lines at this time.

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