Kulicke & Soffa CEO Discusses F1Q11Results - Earnings Call Transcript

Feb. 1.11 | About: Kulicke and (KLIC)

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

F1Q11 (Qtr End 01/01/2011) Earnings Call

February 1, 2011 8:00 am ET

Executives

Joseph Elgindy - Manager, IR

Bruno Guilmart - President and CEO

Jonathan Chou - SVP and CFO

Christina Rheault - SVP Business Operations

Analysts

Krish Sankar - Bank of America

Tom Diffely - D.A. Davidson

David Duley - Steelhead

Andy Schopick - Nutmeg Securities

Operator

Welcome to the Kulicke & Soffa first fiscal quarter 2011 results call. (Operator Instructions) It is now my pleasure to introduce your host, Joseph Elgindy, Manager of Investor Relations for Kulicke & Soffa.

Joseph Elgindy

Good morning, everyone, and welcome to Kulicke & Soffa's first fiscal quarter 2011 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.

In addition to historical statements, today's remarks will contain statements relating to future events and/or future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and financial condition may differ materially from what is indicated in these forward-looking statements.

For a complete discussion of the risks associated with Kulicke & Soffa that could affect our future results and financial condition, please refer to our SEC filings, particularly the 10-K for the year ended October 2, 2010, and our other recent SEC filings.

For the call today, we are joined by Bruno Guilmart, President and CEO; Jonathan Chou, Senior Vice President and CFO; and Christian Rheault, Senior Vice President of Business Operations.

I would now like to turn the call over to Mr. Bruno Guilmart.

Bruno Guilmart

Thank you, Joe, and thank you all for joining our call today. Revenue in the December quarter came in better than expected. While we experienced a sequential decline in ball bonder shipments, the decline was significantly less than expected. We benefited from a very strong shipment of our higher margin wedge bonder and AT Premier equipment lines which helped to offset the sequential reductions from our ball bonder business.

We earned $15.1 million of net income at the finish of December quarter with a backlog of $193 million.

The reduction in our ball bonder business was across all type of customers, although greater with our OSAT customers. From an application standpoint, approximately 50% of all ball bonder business shipments were sold out of either copper or LED capable. Of the 50%, roughly 37% shipped as copper bonders and the remaining 13% as LED bonders.

With respect to copper, we believe we are maintaining our leadership position and have the best solution available on the market. We continue to see strong momentum in the growth of copper transition and achieved initial volume orders of our newly produced IConnPS ProCu machine.

Given the proven productivity advantage of our ProCu machine, we expect to see increased demand and occupancy-based gains in market share. We also expect to benefit from replacement orders from customers who are ordering our latest-generation ball bonders as all the generation machines are unable to handle the latest technologies in terms of pitch and bonder size.

Our wedge bonder equipment line continues to perform very well with rapidly increasing 66% in the December quarter compared to the September quarter. The increase was driven by higher sales from the solid semiconductor market, but also continued demand in the automotive and the renewable energy markets. The increased volume of wedge bonder equipment during the December quarter contributed to the higher overall gross margin for the company.

Furthermore, our wedge bonder manufacturing transition to Asia is going as planned. We remain on track to complete this transition by the June quarter, and we are confident in our schedule as we have started to ship wedge bonder machines in December that we are producing in our Asian-based facility.

Finally, we continue to execute on several strategic and tactical objectives as we work to mitigate volatility, improved profitability and ensure our long-term goals. We also continue to move critical functions to our new Singapore headquarters and we welcome anyone on today's call to schedule a meeting with the management when your travels take you here.

At the start of our transition to Asia, we appointed Jonathan Chou, our new Chief Financial Officer in December. Jonathan has more than 20 years of global financial leadership with a proven track record of strengthening companies' operational focus and financial discipline. His drive, leadership and experience make him a great fit for K&S. Jonathan has been working closely with our outgoing CFO, Mike Morris, during this transition. I want to take this opportunity to thank Mike for his continued support throughout this period.

I would now turn the call over to Jonathan Chou for a more detailed financial review of the December quarter.

Jonathan Chou

Thank you, Bruno. My remarks today will only refer to GAAP measures. At the beginning of this fiscal year, we have decided to discontinue our non-GAAP reporting. Therefore, please note that the most recent non-GAAP measures are represented in operating expense and supplemental financial data section of our income statement which was published this morning.

On today's call, I will compare the December quarter to the September quarter. Net revenue for the quarter was $148.9 million, down $110.4 million or 42.6% from last quarter. The net revenue decrease was driven by a $119.6 million reduction in ball bonder volumes. However, this ball bonder reduction was partially offset by a $15 million increase in wedge bonders.

Ball bonder unit sales were weighted toward OSATs, which comprised 57% of our ball bonder shipments. This is down from September quarter when OSATs were 79% of the shipments.

Gross profit was $72.1 million, down $40.2 million for the last quarter. Our gross margin was 48.4%, up 510 basis points from last quarter. This gross margin increase was largely attributed to a combination of our equipment sales business and lower percentage of sales to our OSAT customers.

Operating expenses were $50 million, down $5.6 million from the September quarter. These lower costs were largely driven by one-time September quarter charges related to yearend CEO transition expenses and pension accruals. Our operating margin was 14.8% and we generated $22.1 million of income from operations.

For the March quarter, we estimate total operating expense to be roughly $53 million. Of the $53 million, roughly $38 million represents our fixed component, and the remainder our variable component. For the March quarter, our variable components projected to equal, roughly 9% of revenue, due to continued strength from our wedge bonder business. As stated on previous call, this business relies on more variable sales model.

Our tax provision for December came in at $5.1 million, which includes cash and non-cash expenses. For the remainder of fiscal 2011, we anticipate a cash tax rate between 10% and 15%. This rate is higher than our previous guidance as we anticipate a greater portion of our 2011 income to be derived from the U.S. And we have previously released essentially all of our remaining U.S. NOLs. Looking past 2011, I suggest maintaining a longer-term effective tax rate between 5% and 10%.

Turning to the balance sheet, we ended the quarter with total cash in investment of $203.6 million, which reflects $24.8 million of cash provided by operations during the December quarter. Working capital, defined as accounts receivable plus inventory less accounts payable, increased $6.6 million to $194.1 million.

From a days perspective, due to change in customer and product mix, our days sales outstanding increased by 29 days to 97 days. However, we expect improvements during the current quarter as we continue to actively manage our receivables. With respect to inventories, our days sales inventory increased by 43 days to 88 days as we continue to ramp our capacity. Our account payable days stayed constant, down just one day to 49 days.

This concludes the financial review portion of our call, and I will now turn the discussion back over to Bruno for the March quarter business outlook.

Bruno Guilmart

Thanks, Jonathan. Looking forward to the March quarter, we expect our ball bonder business to benefit from our technology leadership as customers continue to transition from growth of copper wire bonding, replacement demand and improving OSAT volumes.

We also expect continued strength from our wedge bonder business. As a result, we now expect our March quarter revenues to be in the range of approximately $175 million to $195 million. The increase in ball bonder demand now extends from continued copper acceptance from our key OSAT customers.

For the March quarter, we forecast approximately 80% of our ball bonders will achieve these copper capabilities. For wedge bonders, we expect continued strong demand in the March period from higher demand from the automotive and renewable energy market and sustained demand from the power semiconductor markets.

In closing, we remain focused on bringing to market the best technology solution for our customers and capturing additional market share while at the same time improving our business and operating model and keeping tight control on the overhead costs.

This concludes our prepared remarks. Operator, we will now be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Krish Sankar of Bank of America.

Krish Sankar - Bank of America

Bruno, when you look at what your OSAT customers are telling you, does it feel like there is going to be more of a front-end loaded year for you guys, or do you think things are going to get better as the year progresses?

Bruno Guilmart

Well, as we read. so there have been announcements made by major OSAT guys as far as CapEx plans for their fiscal year, which tends to be this calendar year. Again, I am focusing on the guidance for the next quarter. Again, we have access to the same information as you have. So we don't know more than you do on that.

Krish Sankar - Bank of America

Let me ask you another way then. Where do you think we are in the corporate goal to corporate transition? Are we like 80%-plus way through and going forward there is going to be more of a pure cyclical demand? Are we still like 50% of the way through?

Bruno Guilmart

As I said, right now there is a number of things that's driving the demand up. There is no doubt that the gold-copper transition, especially with OSATs, but also more and more with IBM is driving more demand. And remember that we have a couple of options for copper bonder.

We have an option, which is the best solution on the market, with the gold-copper and our CuPRA 3G capillary which offers by far the best solution in terms of productivity, efficiency and performance, but it's also possible to buy copper kits to our standard Iconn ball bonders, which will provide as well copper bonding capability.

At the same time, there is also a drive for replacing the older machines as the technology of the (chip), especially 65-nanometer and beyond has come into play, that are not at all to handle the pitch and the bond pipe size required by this new technology. So there are a number of drivers that are pushing the demand up.

Krish Sankar - Bank of America

In terms of your wedge bonder business, is there any seasonality in the business? And as you transition to Singapore, how much upside to the gross margin should we expect from current levels?

Jonathan Chou

Well, we don't provide a real guidance on how much gross margin improvement we're going to get by moving to Singapore. As you know already, all our ball bonder and AT Premier equipment and die bonder equipments are manufactured in Asia. We are in the midst of transitioning our wedge bonder manufacturing from California to Asia. And as I mentioned during the prepared remarks, we have already shipped quite a few number of systems out of Asia in the last quarter. And we expect that transition to be done by next quarter.

And that of course will give us some improvements in gross margins. As the overall ball bonder business increases, if you want, which tends to be slightly lower margins as a wedge bonder business, you will see, there is the effects on gross margin improvement only as much as we have seen from this quarter versus the previous quarter, where the ball bonder shipments were lower and in terms of overall proportion the wedge bonder equipments in terms of shipments were high.

Krish Sankar - Bank of America

Okay. Back in '08 when you guys bought Orthodyne, I think at the time you disclosed Orthodyne had like a mid-50's gross margins. So let's hypothetically assume that that's still the case. From there onwards, how much do you think we get incremental gross margin improvement because of just if you are moved to Singapore?

Jonathan Chou

Again, we don't provide guidance for that. But I can tell you there will some gross margin improvement by moving the manufacturing from California to Asia, as we streamline the supply chain and obviously as we are more efficient in (polishing) mostly in two facilities as opposed to multiple facilities in the past.

Krish Sankar - Bank of America

How do you look at your LED bonder shipment this year? Given that you had a pretty strong year in 2010, do you think it is going to incrementally improve this year too, or do you think you have some digestions this year?

Bruno Guilmart

As far as we can see, it's going to be, I would say fairly sluggish this year.

Krish Sankar - Bank of America

And then final question, do you have any forecast for the mix of OSAT business in the March quarter?

Jonathan Chou

No, we didn't have that in the semi-equipment. Our semi-equipments and our shipments will be for the OSAT customers. That's for ball bonders only. That doesn't include wedge bonders, AT premier and die bonders.

Operator

Our next question is coming from the line of Tom Diffely of D.A. Davidson.

Tom Diffely - D.A. Davidson

So first, the last comment you made about the 73% from the OSAT, does that compare then to the 57% number you just gave us or is that an overall number?

Bruno Guilmart

That compares to the 57%, yes.

Tom Diffely - D.A. Davidson

Then can you give us a feel for what utilization rates of your equipment in the field are?

Christian Rheault

Obviously it's not an absolute number; we are always careful, smart, based on our intuition and is around 1% through 82%, the low-80's.

Tom Diffely - D.A. Davidson

Okay. And does that take into account a lot of the OSATs or some of the OSATs? Lastly week they actually took a lot of equipment offline. Does that include the obsolete tools as well?

Bruno Guilmart

We are not that precise. The problem is, we are doing a sample; so if you lucky and ended up to be capturing the one that was picking up, fine, you will capture it. So actually not as sure that was captured. There is also another discrete thing that's happening right now which is the Chinese New Year. And we always feel that it is slowing down just during that period. So it's a little bit fuzzy as far as data right now from utilization.

Tom Diffely - D.A. Davidson

That's very impressive; you have fairly good growth sequentially with the Chinese New Year. So quick question on your new product. Is there some way to couch what the efficiency gain is of that, or, three of the new tools did what five of the old tools did, that type of thing?

Christian Rheault

Basically, everything is application dependent, but in the case of copper we try to achieve at least a 10% productivity improvement. We have seen greater than that on some applications. But the real benefit is more to enable them on some applications that are not possible to be done with internal legacy equipment because of advanced process capabilities. And that has a huge advantage because some of these applications have to remain in gold wire and now being able in copper wire and get the benefit of the cost reduction.

Tom Diffely - D.A. Davidson

Does that increase the ultimate size of the copper market or anything?

Bruno Guilmart

Can you repeat the question?

Tom Diffely - D.A. Davidson

Does that increase your view of what the ultimate size of the copper market's going to be?

Christian Rheault

I think it increased the FEM. The FEM is not going to change obviously as far as interconnect, but it will increase the FEM and that's the way we look at it. Maybe tied up to one comment that Bruno said earlier, the transition of copper has initially been started mostly with Asian customers.

And right now what is interesting, the phase, as you have been reading was a major offset. They are now qualifying European and U.S. customers in the transition to copper. I think that's a very important move as more reliability data and confidence level is built across the supply chain and across the customer base, that means the FEM's going to continue to increase and we believe that growth opportunity is over there.

Bruno Guilmart

And Tom, just one more data point which might be of interest. We know of some customers actually doing some, I would say more at this stage experiments at actually using copper wire bonding down to 30-nanometer technology, which is something which we were not really expecting.

So I think that there is a lot more, I would say from some perspective than we're currently seeing as far as potential for copper acceptance. Even some of the automotive guys are also looking at copper, which is something that they've never looked at a few years ago.

Tom Diffely - D.A. Davidson

Based on the OSAT comments last week, it sounds like they are in that 15% to 20% range today, trying to go to 30% by the end of the year. So still plenty of room to grow. When you look at the new tool, does that impact revenue recognition at all right now?

Bruno Guilmart

No, we're basically going through the same process we always do for revenue recognition, and let's not make any issue from that then.

Tom Diffely - D.A. Davidson

Okay. And then your customers who have switched to copper, is it still that 10% to 12% slower speed they have to run at or is that coming down?

Bruno Guilmart

That's consistently coming down, and it will vary again on application and will also vary on customers. So that gap has continued of course, which makes it even more attractive.

Tom Diffely - D.A. Davidson

Okay. And then finally, what are you seeing as the memory markets for wire bonding?

Bruno Guilmart

It's still quiet. I think most of the memory suppliers, as you have been reading, have been careful about their capital investment. There are some activities and some provocative activities, but it's not widespread, so it's much quieter in the other markets.

Operator

(Operator Instructions) Our next question is from the line of David Duley of Steelhead.

David Duley - Steelhead

I was wondering, just quick question, as housekeeper, was there any 10% customers during the quarter.

Bruno Guilmart

Maybe we can come back to you on that. We don't have the data in front of us.

David Duley - Steelhead

Okay. And I was amazed by the gross margin performance. I don't think I've seen a company report 43% down sequential revenue and has gross margins increase by 500 basis points. But I understand there's mix driven in.

Could you just help us with, in the current quarter the guidance of the mid-point of $185 million, what should be kind of the gross margin range we should be looking at, at that mid-point?

Bruno Guilmart

Again, we don't typically guide on gross margin, but you can make I would say your own assumptions. We basically, we're going to have to sustain a slightly improving wedge bonder business, which typically generates better gross margin, as well as, also, as you've seen from the numbers, 80% of the ball bonders that wasn't shipped in the second quarter are going to be copper-capable. And we obviously have programs in the company to constantly reduce our cost of goods sold.

So again, I won't provide guidance, but I think you can make your own assumptions from the numbers here.

David Duley - Steelhead

Certainly down sequentially, because of mix.

Bruno Guilmart

I did say that.

David Duley - Steelhead

Okay, and could you maybe take a stab at what you think your market share is in wire bonding in 2010 overall? And then a follow up question on copper. What do you think your share is there compared to the overall markets?

Jonathan Chou

I'll do better with the second question because it's more the numbers.

Bruno Guilmart

Firstly, your first question was about the wire bonder market share. There's no official number yet published. We usually use VLSI and also Gartner and they won't be available for another few weeks or months right now as we tally it.

Our belief is that we'd gain share. The data was showing, quarter-to-quarter, up to Q3 was showing a substantial gain in share. We think we are in the 50% range, and we're going to wait for the confirmation of that when it becomes available.

On copper, there is no independent way of saying where copper is of market share; nobody reports on it. But internally we think that we did have quite a high share, especially on the fine wire copper. We have to make this distinction here where copper is done into fine wire, also heavy wires, we call it larger diameter one, which has been around for ages. The bulk of the market now is the fine wire and we think that we have by far a majority share on the copper fine wire market.

David Duley - Steelhead

Okay. And have you seen the copper business expand above and beyond the two big OSATs in Taiwan? It seems like for the most part, in 2010, the copper story was kind of centered around those guys. Are you seeing it expanding to Korea and Singapore and other major countries?

Christian Rheault

Yes, definitely. That's happening as we speak.

Bruno Guilmart

And well, answering a similar question before, beyond the traditional space where copper has been used before, we are seeing new application that ultimately which we'd never hoped in copper before.

We are seeing also some customers pushing the limit of couple of wire bonding to the smallest geometries from a silicon perspective down to 30-nanometer or 28-nanometer. So it's a lot more than just the two big guys in Taiwan. I would say it's becoming more involved in pretty much all of the OSATs wherever they are allocated and also from an application perspective, a larger, I would say footprint from an application perspective as well.

Jonathan Chou

The answer to your question about the customers exceeding 10%, we don't have any customers exceeding 10%. We just double-checked that.

Operator

(Operating Instructions) Our next question is coming from the line of Andy Schopick of Nutmeg Securities.

Andy Schopick - Nutmeg Securities

I have got a balance sheet question. I like to ask you first, and it regards the converts that are outstanding. I think there are about $100 million of principal amount that are still outstanding that are due to mature in June. Can you tell us what date they mature? Am I correct that they would convert into about $7.7 million shares and are convertible at a price of over $14?

Jonathan Chou

The maturity date is June 1, 2012, and the conversion price is $14.36.

Andy Schopick - Nutmeg Securities

Its $14.36 and its June, 1, 2012. Do you have any plans with respect to those converts, whether or not to possibly retire some or all of them prior to maturity?

Jonathan Chou

At this point in time we're basically just planning on basically repaying it at maturity.

Andy Schopick - Nutmeg Securities

Okay. Also, could you comment a little bit on your general philosophy and approach toward GAAP measures only reporting, now for this fiscal year?

Jonathan Chou

The decision was actually made at the beginning of the fiscal year. I think going back three, four years ago, the reason the wire was actually introduced was because it was especially the sale of the wire business that was discontinued. They wanted to provide some additional visibility in terms of how to pass through that, and that's why it was introduced. And then a little bit here is, actually we have less of the discontinued non-GAAP measure just because most investors or analysts are actually just contradicting themselves. That's why we have actually provided them at the end of the earnings release, the supplemental financial statement section.

Andy Schopick - Nutmeg Securities

Yes, could you breakout amortization from depreciation for me?

Jonathan Chou

It's in the back section. That amount is in there.

Operator

(Operator Instructions) 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, Rob. Thank you all for joining us today, and if you have no further questions this concludes our call. Good-bye.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you so much for your participation.

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