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

F(4)Q10 Earnings Call

November 11, 2010 9:00 am ET

Executives

Joseph Elgindy - Manager of Investor Relations

Bruno Guilmart – President & Chief Executive Officer

Mike Morris - Chief Financial Officer

Christian Rheault - Senior VP of Business Operations

Analysts

David Duley – Steelhead Securities

Krish Sankar – Bank of America/Merrill Lynch

Gary Hsueh – Oppenheimer & Company

Andy Schopick – Nutmeg Securities

Tom Diffely – D.A. Davidson

Operator

Greetings and welcome to the Kulicke & Soffa fourth fiscal quarter and fiscal 2010 year end 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, Joseph Elgindy, Manager of Investor Relations for Kulicke & Soffa. Thank you, Mr. Elgindy. You may begin.

Joseph Elgindy

Thanks you. Good morning, everyone, and welcome to Kulicke & Soffa's 2010 fourth quarter and fiscal year-end conference call. For those of you who have not seen the results announced last night, they are available in the Investor Relations section of our website at www.kns.com. An audio recording of this entire conference call may be accessed from the Kulicke & Soffa website for a limited period of time. 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, and 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 are 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 the operations of Kulicke & Soffa, please refer to our SEC filings, particularly the 10-K for the year ended October 3, 2009, and our other recent SEC filings.

For the call today, we are joined by Bruno Guilmart, President and CEO, Mike Morris, CFO, and Christina Rheault, Senior VP of Business Operations. It is now my pleasure to introduce our host for today’s call, Bruno Guilmart, Bruno.

Bruno Guilmart

Thank you, Joe, and thank you all for joining our call today. We are very pleased with our September quarter results, which was another quarter of record revenue and profitability for K&S. We ended with Revenue of $250 million at the top of our guidance range, up 17% sequentially and the sixth consecutive quarter of revenue growth since the March quarter of 2009. During that timeframe, our sales increased tenfold and such an accomplishment would not have been possible without the outstanding execution of the entire K&S team around the world. Of note, our ball bonder unit volumes in the September quarter were roughly 2% higher than our previous peak which was three years ago. We have also finished the September quarter with a backlog of $262 million.

The significant revenue growth was driven by a number of macroeconomic and semiconductor-specific factors. In response to rebounding IC unit demand in the middle of 2009, our customers started to aggressively order new machines beginning in late 2009 and through most of 2010. As many of you are already aware, a very significant transition is taking place as the industry switches from gold to copper wire for an increasing stage of work semiconductor device.

Additionally, because of the profits requirements for copper, legacy equipment is not suitable and a significant number of all of the machines have been retired.

As gold price continues to significantly rise, the drive to transition additional devices to copper will likely accelerate. We believe that K&S has the best solutions available on the market to continue to capture this business opportunity. Most of our outside and IBM customers have been aggressive adapters of our copper wire bonders and copper conversion teams. We shipped more ball bonders in the September quarter than any quarter in the company’s history and the majority of these machines were configured for copper.

Let me now give you some color on our wedge bomber business. Wedge bonders use aluminum wires from any power management application in semiconductors, alternative, and other applications. The September quarter was another strong quarter for wedge bonders, as this business tends to drag our ball bonder business by quarter, we expect to see substantial increase in the sales in the December quarter. As wedge bonders’ revenue potential rises, so does its contribution margin. We are also in the final stages of moving our wedge bonder manufacturing and supply chain operations from California to our Asian facility, which will provide the potential for further growth margin improvements.

Now a few words on our wire bonder business. We sold our first iStack in January of this year, booked several more machines and began qualification with several customers mid-year, and in the September quarter achieved our initial volume shipments. We have made progress with our wire bonder business and we continue to see potential for growth.

Finally, our expandable tool business, which is a considerable portion of the total solution we offer to our customers, has remained a steady contributor to our business and gross margin.

I will now turn the call over to Mike Morris for a more detailed financial review of the September quarter. Mike.

Mike Morris

Thank you Bruno 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 website. On today's call, I will compare the September quarter to the June quarter and will refer to non-GAAP measures unless otherwise noted.

Net revenue for the period was $259.3 million, up $38 million from last quarter. The revenue increase was driven by a 22% pick-up in ball bonder volume. Ball bonder unit sales were weighted towards subcontractors who comprised 79% of our ball bonder shipments. This is up from the June quarter when subcontractors were 72% of these shipments.

Gross profit was $112.4 million, up $13.2 million from last quarter. Our gross margin was 43.4%, down slightly from last quarter. This margin reduction was driven primarily by mix within our equipment businesses as most of the revenue increase came from ball bonders, which carry lower gross margins than some of our other equipment products.

Operating expenses were $49.5 million, up $5.3 million from the June quarter and higher than the guidance we gave during our June earnings call. This cost increase was largely driven by one-time charges related to year-end pension accruals as well as compensation costs associated with our CEO transition. Our operating margin was 24.3% and, as a measure of our operating leverage, 20.7% of our incremental revenue this quarter fell through to operating profit

For the December quarter, we estimate our total operating expenses at roughly $43 million. On previous calls, we explained that the fixed component of our operating expenses is roughly $30 million and that the variable component is roughly 7% of revenues. While we still feel this is a good rule of thumb, next quarter we expect the variable component to be roughly 10% of revenues, since wedge bonders are expected to be a bigger portion of next quarter’s revenue and these products carry higher sales commissions. As a reminder, these amounts are all non-GAAP. When you add back the non-GAAP adjustments, our GAAP operating expenses should be roughly $49 million for the December quarter.

Concerning taxes, we had a $1.3 million tax benefit this quarter which was driven by reversals of valuation allowances we had against deferred tax assets related to some of our net operating losses. Considering the strength of this cycle and our manufacturing consolidation in Asia, we are better able to project profitability for some of our legal entities going forward which triggered the relief. From a modeling standpoint, however, I would use a book-and-cash tax rate of between 5% and 10% because this better reflects our steady rate consolidated tax expense.

Turning to the balance sheet, we ended the quarter with total cash in investments of $181.3 million, which reflects $19.3 million of operating cash flow for the September quarter. Working capital, defined as accounts receivable plus inventory less accounts payable, increased $47.5 million to $187.6 million.

From a days perspective, our DSO increased by six days to 68 days, our DSI was down six days to 45 days, and our days payable was down nine days to 50days. ROIC for the September quarter was 70.3%

This concludes the financial review portion of the call. I will now turn things back over to Bruno for the December quarter business outlook.

Bruno Guilmart

Thanks Mike. Since August, most OSAT’s, within the last 18 months represented roughly three-quarters of our revenue, have seen a slowing in growth and have widely publicized their reduced scheduled spending plans for the December quarter, which is a primary driver for our reduced output. We have previously expected the December quarter to be roughly comparable to the September quarter, based on orders already in hand. A large percentage of these orders have been pushed out to the March and June quarters. As a result, we now expect our December quarter revenues to be in the range of $125 million to $135 million. Our other customers, including IBM, Memory, and ADD customers have moderated their order activity but not as significant.

We are still seeing growth in some areas, especially in wedge bonders. We continue to refine and improve our flexible operating model, which enables us to significantly reduce our expense and near-term liabilities if we see a drop-off in our shipments. In response to the expected shipment decline for the December quarter, we have already scaled down our capacity with headcount reductions in our bonders manufacturing operations. That said, our flexibility will allow us to react quickly and our business improves.

On the product side, we just announced our next generation of copper wire bonders. This new product which is based on the very successful IConn platform is named IConn Pro-Cu. IConn Pro-Cu delivered outstanding cost-of-ownership with superior process capability and process improvements. We have complimented this equipment solution with our latest generation called CuPRA3G, which has already completed initial qualifications and its first production order installed at an Asian customer.

In addition to our efforts to be the technology and market share leader in all wire bonder equipment and supporting consumables, we are constantly exploring new market opportunity for our application that will extend our business beyond our traditional space. As an example, we are expecting significant growth in our wedge bonder business during the December quarter driven by demand in power management applications. Moreover, we see some potential use for this product in select solar applications.

Finally, we continue to see increased demand for specialized equipment such as our AT Premier Stud Bumper for image sensor and iBrightnet applications, which are commonly used in Smartphones.

While our business tends to be subject to sharp swings in customer spending patterns, our business mold is one that is nimble, adjusting quickly to changes in demand, whether up or down. We believe that with our product offering and our leadership in copper wire bonding will continue to represent significant growth opportunities for K&S.

Our goals remain the same, develop and deliver the best equipment and supporting consumables in the industry and continue to focus our efforts on improving our operating performance and return on investment capital, so as to maximize shareholder value.

In closing, while we are all aware and understand the cyclical nature of our business, we believe the opportunities in front of us are far greater than at any other point in the company’s history. We are all focused on bringing to market the best technology solutions for our customers, while at the same time imprison our business and operating models, keeping tight control on all costs, and we expect to achieve further improvements as we capture additional market share. This concludes our prepared remarks. We will now be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from David Duley with Steelhead Securities

David Duley – Steelhead Securities

Good evening. Congratulations on a nice quarter. I notice your backlog number kind of implied that orders were roughly $248 million or $250 million in the quarter. Given the big decline in the revenue that you forecasted, I am a little curious as to why the order rate was so strong.

Bruno Guilmart

We continue to see a strong pattern of ordering, basically up to the end of August, it started to slow down in September and what we have really experienced is a number of push out, as we said in the prepared remarks in the March quarter and the June quarter. We have not really seen any cancellation from customers, just pretty much some push out and rescheduling so far.

David Duley – Steelhead Securities

Just kind of changed the plan in June rather than taking them down in December?

Bruno Guilmart

Yes. That is what we are seeing right now.

David Duley – Steelhead Securities

Mike, one for you, with the big decline in the revenue that you are forecasting, what would be the best guess for the corporate gross margins?

Mike Morris

David, I do not want to guide you to gross margin, but I would tell you to keep in mind that if the ball bonders’ sales drop, other products which have higher gross margins are going to play a greater role in the mix. You could see gross margins rise, but I do not want to point you to a particular number.

David Duley – Steelhead Securities

So, at the very least, we should keep it in this range for the upcoming December quarter?

Mike Morris

I think it depends on how much ball bonder sales fall. I would use that as your metric.

David Duley – Steelhead Securities

Housekeeping question, did you have any 10% customers during the quarter? Could you talk about what the percentages were, who they were?

Bruno Guilmart

We had two customers, two 10% customers during the quarter. Two large from Taiwan.

David Duley – Steelhead Securities

Final thing from me, the two big Taiwanese customers have both had their conference calls and talked about their plans to continue to migrate to copper, I think mentioned that they are going to get to 20% this year and to 40% or 505 by the end of 2011. That would certainly imply that they are probably going to buy a lot of bonders, at least that is what they are saying to investors on their calls. I was just wondering how their acting and how you see this copper unfolding in 2011 as a driver to your business.

Bruno Guilmart

We still believe that copper is going to be a significant driver for our business, as you may have read, we had a press release yesterday or two days ago about pro-copper, the ICONN ProCu, which we believe is the best solution on the market today. We have already shipped production in volume to one customer in Taiwan and we are very hopeful this machine is actually going to do very well for us in 2011.

David Duley – Steelhead Securities

More specifically, they would need between 2,500 and 3,000 bonders to get to roughly 20% copper. If they move from 20% copper to 40% or 50% copper, theoretically, the efficiency of your machines have not gotten dramatically better. They should buy roughly the same number of bonders in 2011 as they did in 2010?

Bruno Guilmart

You can make any assumption you want, we are not controlling our customers, David. If you believe what they are saying, you can make your own model.

David Duley – Steelhead Securities

The efficiency of your new machine is not going to make a significant difference in the number of bonders?

Bruno Guilmart

No, but it is getting close to the efficiency goal.

David Duley – Steelhead Securities

That is good to know. Thank you.

Operator

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

Krish Sankar – Bank of America/Merrill Lynch

Bruno, if you look at a typical cycle, usually when the OSAT customers pull the plug, it is just a matter of time before your IBM customers and the Memory guys go away too. Do you think there will be anything different this cycle?

Bruno Guilmart

I think it is too early to tell. As you know, we are the first one to proceed. Whenever the markets react, whether it is up or down, we are typically the first one to see it and the OSAT’s are also the first ones to see that as their customers stop adding value to their products. It is difficult to predict if what we are seeing now is just the close or if it is just what is a more typical cycle, as we have seen in the past. I guess it is too early to comment on what is happening.

One thing I can tell you, on the other, is our wedge bonder business, which is used by a lot of IBM, wire bonding for applications. If you look at what is happening in the analog space, there is still a lot of these analog IBM, there is still very strong backlog and they are typically the last one to order equipment because they want to make sure that the backlog is secure, which is what is happening right now, what we are seeing, our wedge bonder business is continuing to grow, will continue to grow this quarter, at a pretty significant rate. Basically, you are seeing some different signals and I guess it is still too early to comment on what is going to happen in this cycle.

Krish Sankar – Bank of America/Merrill Lynch

If I can ask the same question a different way, from the last cyclical peak in September 2007, it took you two quarters to get down to about a 60% decline in bonder shipments. I do the math for December and you are almost there with your guidance already. In other words, when you look at your internal forecasting, I am not looking for any numbers, but is there a sense that the wire bonders is bottoming out or is it too hard to say at this point?

Bruno Guilmart

I think it is too early to say at this point.

Krish Sankar – Bank of America/Merrill Lynch

Final two questions, is there any seasonality in the wedge bonder business?

Bruno Guilmart

Yes, there is, but one thing you have to remember, as I said, typically it lags about a quarter or two behind the ball bonder business. What you have to remember is that the volume is much smaller. The cycle is obviously a lot less, but you do have some.

Krish Sankar – Bank of America/Merrill Lynch

The final question is your early bonder from September to December, do you expect it to be flat or increase?

Christian Rheault

Just a slight decrease, but holding up pretty good.

Krish Sankar – Bank of America/Merrill Lynch

Thanks Bruno, thanks Mike.

Operator

Thank you. Our next question is from Gary Hsueh with Oppenheimer & Company.

Gary Hsueh – Oppenheimer & Company

Thank you. Hi Bruno, congratulations here on assuming the helm at K&S. Quick question here, along the same lines as the other questions, what level of ball bonder revenues are imbedded in your guidance for the December quarter?

Bruno Guilmart

We don’t break out that number.

Gary Hsueh – Oppenheimer & Company

Of the backlog, how much of that is shippable or is shipping in December and how much of that is shippable in March and June? How much business are you seeing in December?

Mike Morris

You want to answer that Christian?

Christian Rheault

I do not have the exact figure here. There is a significant portion, obviously of the backlog that is pushed out in March and June. Ballpark figure, instead of guessing a number Gary, I would like to make a quick calculation of it.

Gary Hsueh – Oppenheimer & Company

Maybe you can kind of circle back and answer that. Bruno, longer term, K&S has done a fantastic job here in securing market share in the copper ball bonder business in 2010, what do we see in terms of the prospects of holding on to that sizable market share in 2011 and 2012? I am assuming now that business levels are sort of tapering off, if there is a resurgence in copper wire bonding addition, lead times will be a little bit more managing this cycle and if lead times are a little bit more manageable, maybe your competitor in Hong Kong has a better shot at grabbing some market share, is that a fair way to think about how market share should shake out in 2011 and 2012 on copper?

Bruno Guilmart

I am not so sure that that is actually the right way to look at it. As I have said, we are not truly seeing--We are in a leadership position in the copper business and we just introduced a new machine which is the ICONN ProCu, which is coupled with the (“inaudible”) which is (“inaudible”) that goes with it which is the best solution on the market, form a performance perspective, form a UPH perspective. We are investing a lot of R&D money into maintaining our lead in copper. I fully believe that we do have a pretty significant technological advantage versus what is available with our competitors. In other words, we are investing hard to maintain and even, if possible, increase our market share in copper.

Gary Hsueh – Oppenheimer & Company

I think what you are saying is that maybe lead times was one of the big criteria in terms of determining share in 2010, but now in 2011 and 2012, it is more based on UPH and performance?

Bruno Guilmart

Yes, customers are always looking at—a steady, significant, up to now, drop in performance when switching from gold to copper. That is definitely going to be, we believe, a big deciding factor for them is to to get the best performance machine and the best return on their investment from a cost perspective.

Christian Rheault

Just a few more words, Gary, to first answer your previous question it is about 25% of our backlog that is shippable in December quarter, ballpark figure. To add on to what Bruno was saying, if you look at ball bonder in the 2010 timeframe, it was obviously a constraint of supply which some were getting more share because of availability and we get some benefit of it. But, in the case of copper, it was definitely because of process capabilities. We do not have any official figure or any third-party figure about our market share, but we believe it is very high from a copper process standpoint and we gain market share and establish market share on copper because of our technical leadership. To Bruno’s point, this leadership will go on in 2011 and I do not think we will be affected by supply at all.

Gary Hsueh – Oppenheimer & Company

Great. Thanks Bruno, Thanks Michael.

Operator

Thank you, our next question is from Andy Schopick – Nutmeg Securities.

Andy Schopick – Nutmeg Securities

Hi, good morning. The move to Singapore, why is this being done, when will this move be completed? Impact on employment, what is going to happen in Pennsylvania, what will be left?

Bruno Guilmart

This is not something new. This is something that was started quite some time ago. Basically, if you are looking at 12 to 18 months down the road what K&S is going to look like, it is going to be a global company, listed company in the U.S. with operational headquarters in Singapore, with operations in Asia, supply chain in Asia, 99% also the customers in Asia, five R&D centers of expertise if you count Singapore; one in California, one in Fort Washington, one in Switzerland, and one in Israel. In addition to that, Fort Washington will have a small number of people in legal and finance to be close, and investor relations as well to be close to our shareholders and also be able to comply with all the necessary requirements. If you ask me, Fort Washington will be mostly a center of expertise for ball bonders.

Andy Schopick – Nutmeg Securities

What will be the impact on G&A and operating expenses in the year ahead?

Bruno Guilmart

It is, again, Mike had some models, but I think it is just too early to tell right now. We are not prepared to give any numbers yet.

Mike Morris

I do not think there is going to be any meaningful impact, Andy, we are just moving the decision-making.

Bruno Guilmart

We are moving the decision-making. I think we are going to look at ways of maybe optimizing some of our sales, business models, especially for our wedge bonder business, which has a little bit different size of a model than the wire bonder business. The biggest impact we are going to see is as we continue to move all of the manufacturing that we have left in California to Asia and Singapore.

Andy Schopick – Nutmeg Securities

There really will not be any restructuring or facilities-related costs, one-time costs anticipated with the completion of this move?

Bruno Guilmart

I think everything has already been done or provided for in the past.

Andy Schopick – Nutmeg Securities

Did I understand that the IR function will partially remain her in Fort Washington?

Bruno Guilmart

That is correct.

Andy Schopick – Nutmeg Securities

iStacker, have any customers purchased production quantities, more than a handful?

Bruno Guilmart

I would say, a little bit more than a handful. It is a different market than the ball bonder. The volumes are a lot less. When you buy a handful of wire bonders, it is quite significant. It is a very different business model than the ball bonder.

Andy Schopick – Nutmeg Securities

Understood. That leads me to my next question. Will this product line any material incremental growth opportunity in the fiscal year ahead and beyond, or should we consider it to be more of a secondary product line, like tools?

Christian Rheault

Definitely the market side, itself, potential is there. From the standpoint, could it be a significant part if we achieve our growth strategy from a die bonding standpoint. Yes, it could be a significant part. There is time required, customers have been very active in the last few quarters at penetrating both subcon as well as large IDM’s that requires these iStack machines or conflagration. The time constraint of that, I do not think will have a significant impact in this fiscal year, but our goal is to have a significant impact in the other fiscal years.

Andy Schopick – Nutmeg Securities

I think it has been four years since Alphasym was acquired and I think there has been some frustration and disappointment that this really has not developed to have more impact on the company’s overall performance and outlook, whether or not it ever will.

Christian Rheault

It has definitely been a longer struggle than we expected, we have, on the other hand, the performance of the system has been well established both in accuracy and through-put. We are really trying to establish our market position right now, the fact that we are not engaged with all the major guys and trying to get the first production orders and not just qualification, I think is the first right step. We are still confident that we are going to be able to take the Q2.

Bruno Guilmart

There is a lot of focus internally on that product. We are looking at that very carefully.

Andy Schopick – Nutmeg Securities

Follow up on wedge bonders, curious to ask you whether the resurgence, if I can use that word, in GM and Ford’s outlook, has any positive implications for you in the auto sector, whether those are significant customers or potential customers for additional business. When you acquired in Orthodyne in 2008, I believe that the prior year’s revenues were about $110 million in 2007, how is the wedge bonder or the Orthodyne business tracking relative to where is had been at the time of acquisition?

Bruno Guilmart

We do not disclose that number by business unit, but I can tell you it is actually doing very well. The automotives portion of the business, I would say, it is the smaller portion of the overall business. Still the main driver of the business is semiconductor. Definitely we will see some benefits of the overall automotive industry worldwide, by the way, but I think the biggest benefit we are seeing is from semi-conductor and especially the power management space. By the way, also, we are just exploring, investigating in new opportunities in very selective power application as well.

Andy Schopick – Nutmeg Securities

That is a new market opportunity?

Bruno Guilmart

It is, yes.

Andy Schopick – Nutmeg Securities

A few financial questions, Mike. Tools, what happened to margins? Operating income dropped sharply to $1.2 million versus $4.9 million, year-over-year, on flattish revenues. What has happened there, what are the prospects going forward and did the company sell a portion of its tools business to any former employees?

Mike Morris

The tools business gross profit margin, quarter-over-quarter, was up. The tools business outlook, from my perspective, I do not see any material changes. Steady.

Bruno Guilmart

It is a steady business, from a revenue and gross margin perspective.

Mike Morris

We did dispose of a small part of the tools line, which we called CMT, customized micro tooling, to a former K&S employee, but it was not a material number.

Andy Schopick – Nutmeg Securities

Okay. Question about cash flow outlook. Given the likely changes in working capital, going forward, especially in terms of receivable and what I would expect would be a strong selection period in the upcoming quarter, how should we think about the cash flow outlook in the next quarter or two, as the revenue side of the business weakens, but the working capital portion of the business changes significantly as that is occurring?

Mike Morris

I am not going to guide you to a particular number, but you got the message in what you just said, with lower revenue levels we are going to generate less cash from the business. As the cycle turns down, you are going to see working capital unwind into the cash line. If you want to get an estimate, go back to what happened when we came off our last cyclical peak in the beginning of our fiscal 2008, you can look at our DSO’s and DSI’s, metrics from there that might give you a good idea, if you want to put those in your model.

Andy Schopick – Nutmeg Securities

Will manufacturing headcount change significantly on the lower revenue anticipated? The headcount you have shown is 2,950 versus 2,202? How should we think about that now in terms of the flexibility that you may have in the business you adjust at a lower revenue?

Bruno Guilmart

We have already started to reduce headcount. We are adjusting that on a preemptive basis. We started making some adjustments actually in September. That is the model and we have to be careful not to go overboard one way or the other. We will watch that and how it evolves on a quarterly basis. One more question from you Andy.

Andy Schopick – Nutmeg Securities

Last one then, is on the ICON Pro-Cu. This seems like it is going to be a fairly significant product. How its efficiency may impact units bonded per hour and, if this goes up significantly, will new bonder requirements be lessened or lowered, quantities of bonders needed?

Christian Rheault

First of all, Andy, you are absolutely right, this is a significant product. We are quite excited about this product. We think it is going to further our leadership. To answer specifically your question, no we do not think that the productivity improvement that we are enabling with Pro-Cu will have a significant impact on volumes of purchases in the future. With that said, the advantage of that equipment and the transition to go to copper, which we think is going to remain strong and it has been quite clear in the transcript of two of our major subcontractors, will continue that. The challenge here is process-related. What Pro-Cu is offering and has already been proven and we continue to improve that, to enable these applications that were not yet moved from gold to copper because of some process capabilities that were not there. It is not necessarily, sometimes you can have the through-put, but if you cannot run the part, you are back at square one. To answer your question, I do not expect it to have any significant impact.

Andy Schopick – Nutmeg Securities

Thank you so much.

Operator

Our next question is from Tom Diffely with D.A. Davidson. Please proceed with your question.

Tom Diffely – D.A. Davidson

Good morning. Real quickly, in the past you talked about how the copper had to go 10% to 20% slower than the gold wire bonders, does this close the gap?

Christian Rheault

There is still going to be a gap, but it is closing the gap. There is still going to be a slight gap. It is application-dependent. In some cases, the gap is getting close to being zero and in some cases, the gap is bigger, therefore it will be still a significant gap.

Tom Diffely – D.A. Davidson

More on a broad basis, what are you seeing right, where are the utilization rates in the field? What is the impact on pricing that you have seen just recently?

Christian Rheault

Pricing, from an equipment standpoint?

Tom Diffely – D.A. Davidson

Yes, ball bonders.

Christian Rheault

Utilization has been in the mid-80’s, hovering around 80%. It has been quite stable for the last few weeks. As of yet, we have not seen any impact on pricing. Obviously it is always depending on what technology brings to market and we hope to get the value out of our position.

Tom Diffely – D.A. Davidson

On utilization rates, it went from the low-90’s in the summertime, now to the mid-80’s.

Christian Rheault

Yes.

Tom Diffely – D.A. Davidson

It seems like historically when you got above, to the mid-80’s it was actually a pretty healthy market still. Do you think that the utilization rate comes down a little further or do you think that we are just in a bit of a digestion period here?

Christian Rheault

It is tough to predict. Nobody can really know what the future will hold, but there is definitely some digestion. The number machine that has been put in the market in the last fiscal year, last calendar year, is by far greater than any years before. I think the industry is absorbing a lot of that capacity. From a pure volume standpoint, you can see all the news in the market that confirms that, but what I think is unique to us is two things, again what Bruno was mentioning, one is the copper transition, which is not necessarily volume-related but cost-related and we will continue to increase, I think our customer will not have a choice to make that transition. The wedge bonding business has a different dynamic, which is quite strong right now.

Bruno Guilmart

One thing I just want to add here, of course, if you look on a sequential basis, it is a pretty significant drop, but if you look at in absolute terms, what we are guiding, if you take the midpoint at about $130 million, it is still a pretty decent quarter, in absolute terms. I think you have to take things with a pinch of salt here.

Tom Diffely – D.A. Davidson

It should lead to some nice profitability too. On the operating expense line, you said that the variable component went up to 10%. I did not catch what was driving that increase.

Mike Morris

It is not 10% for the quarter that we are reporting on, but for next quarter. I just wanted to signal that it will be in the neighborhood of 10% The driver here is we are anticipating growth in wedge bonder within our revenue guidance and wedge bonders carry higher sales commissions which we treat as a variable cost in our guidance. Just wanted to help the model for next quarter. We still think the rule of thumb that we put out in the past is a good one to use, but next quarter is just going to be anomaly.

Tom Diffely – D.A. Davidson

With the wedge bonders being stronger next quarter, I was under the impression that those were produced in a higher cost region, if you will, I thought that would hurt gross margins, but it sounds like they are actually strong enough margins where it actually benefits overall.

Bruno Guilmart

Yes, that is true, but we are also in the process of transferring the operation, the manufacturing of these machines from California to Asia, at the same time running up the volume. That will have a positive effect for us on gross margins.

Tom Diffely – D.A. Davidson

The Margins are very strong already and only will get stronger next quarter?

Bruno Guilmart

Yes.

Tom Diffely – D.A. Davidson

Final question, what do expect the subcon mix to be in the December quarter? Should it come down substantially from the 79%?

Christina Rheault

It can come down to about 50%

Tom Diffely – D.A. Davidson

Thank you very much.

Operator

(instructions)

Our next question is a follow-up from Krish Sankar with Bank of America/Merrill Lynch. Please proceed with your question.

Krish Sankar – Bank of America/Merrill Lynch

Quick follow up. What do you think is your market share in the wire bonders?

Christina Rheault

We do not have an exact data on that. We think we are maintaining about the same thing as we said on the last call, about 30%.

Krish Sankar – Bank of America/Merrill Lynch

Thank you.

Operator

Our next question is another follow-up from David Duley with Steelhead Securities. Please proceed with your question.

David Duley – Steelhead Securities

I saw in the press release you mentioned, a percentage of the ball bonder business that was copper, I believe, could you give us a reference point in the June quarter for that number. What was it in June quarter?

Christina Rheault

The June quarter, roughly, I am looking at it right now, about 58%.

David Duley – Steelhead Securities

Do you expect, when you look at the backlog, you look at what your customers are doing, would you expect to continue to have this kind of percentage on the copper side?

Christina Rheault

Yes, we believe that percentage, although we cannot commit to it, we think that it will remain strong. Again, as I was saying earlier, the cost reduction associated with the transition is very significant, therefore, we think that this will maintain or maybe even increase.

Bruno Guilmart

Even what is happening with gold price, more and more customers have a huge incentive to switch. We think that there is more potential going forward.

David Duley – Steelhead Securities

Given that you have got a strong backlog and you have heard the conference calls of your large Asian customers and looked through their transcripts, they have talked about coming into the marketplace in the first half the calendar of next year dramatically. What they are saying they are going to buy 800 or 900 that was pushed out. Do you see those volumes that they need to buy 2,500 or 3,000? What they are saying is your two biggest customers in the most recent quarters are going to be back at the table in the March and June timeframe, with that in mind, could you give us some comments about what you think the first part of calendar next year looks like?

Bruno Guilmart

We will not give any comments beyond the current quarter, David. We are providing the items for Q1 and that is where we will stop. You can make any assumptions you want based on what in Taiwan they are saying, but we will provide the items only on the current quarter.

David Duley – Steelhead Securities

That is it from me.

Operator

Our next question is from Andy Schopick with Nutmeg Securities. Please proceed.

Andy Schopick – Nutmeg Securities

Bruno, what investor conferences are you anticipating presenting at here over the next few months or early next year?

Bruno Guilmart

It is still too early. It is my first month on the job. I have not really finalized my plan yet from that perspective, but we will keep you informed. I am in the mist of working with our investor relations department as to which conference I am going to be in next year.

Andy Schopick – Nutmeg Securities

Will Joe Elgindy remain here as an IR contact?

Bruno Guilmart

Yes.

Andy Schopick – Nutmeg Securities

I think that will do it for me. Thank you.

Operator

There are no further questions at this time. I would like to turn the floor back over to Bruno Guilmart for closing comments.

Bruno Guilmart

Thank you for joining us today. Goodbye.

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Source: Kulicke & Soffa Industries, Inc. F4Q10 (Qtr End 10/02/10) Earnings Call Transcript

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