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Kulicke & Soffa Industries, Inc. (KLIC)

F3Q12 Earnings Conference Call

July 31, 2012 8:00 AM ET

Executives

Bruno Guilmart - President and CEO

Jonathan Chou - SVP and CFO

Joseph Elgindy - Manager, IR

Analysts

Krish Sankar - Bank of America/Merrill Lynch

Thomas Diffely - D.A. Davidson & Co., Research Division

Lee Simpson - Jefferies & Company

Satya Kumar - Credit Suisse Group

David Duley - Steelhead Securities

Clint Derek Coghill - Coghill Capital Management, LLC

David Wu - Indaba Global Research

Andy Schopick - Private Investor

Operator

Greetings, and welcome to the Kulicke & Soffa Third Fiscal Quarter 2012 Results Call. At this time, all participants are in a listen-only mode. A 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

Thank you, Claudia. Good morning, everyone, and welcome to Kulicke & Soffa’s fiscal 2012 third quarter conference call. Joining us on the call today are Bruno Guilmart, President and CEO; Jonathan Chou, Senior Vice President and CFO. Both are available for Q&A after the prepared comments. For those of you who have not received a copy of today’s results, the release is available in the Investor Relations section of our website at kns.com.

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

For a complete discussion of the risks associated with Kulicke & Soffa that could affect our future results and financial conditions, please refer to our SEC filings, particularly the 10-K for the year ended October 1, 2011 and our other recent SEC filings.

I’d now like to turn the call over to Mr. Bruno Guilmart. Please go ahead, Bruno.

Bruno Guilmart

Thank you, Joe and thank you all for joining our call today. Results for the quarter were above the high end of our prior guidance, driven by our market leading copper position, as well as strong market demand for our AT Premier solution. The key themes to our continued success include our multi-segment leadership, flexible manufacturing strategy, R&D strength, free cash flow generation, and including debt-free balance sheet.

Our continued operating effectiveness is allowing us to maximize new opportunities that can provide to both near and long-term growth. We are clearly the market leader in the segments we serve. We continue to carefully evaluate synergistic opportunities where we can further broaden our reach by leveraging our technology leadership position.

For the June quarter, revenue came in at $255.5 million. This represents a 75% revenue improvement over the March quarter and was further strengthened by 230 basis points gross margin improvement, which was attributable to strong demand for our AT Premier product as well as pro copper equipment.

Later on during the call, I will provide some insights to the markets served by this unique AT Premier solution. Overall, strong revenue and gross margin results combined with continued operational cost control resulted in operating profits of $76.3 million. Our focus remains on extending our technology and market leadership, while pursuing areas that can reduce the cyclicality of our business.

We continue to capture all opportunities possible related to the ongoing and broadening transition from gold to copper and look ahead at wedge bonder volume improvements, LED expansion and advanced packaging growth opportunities. We are effectively managing our supply chain efficiency and keeping inventory at a healthy level.

In the June quarter, we experience an improvement of our equipment business, which was driven by higher ball bonder demand, 88.4% of wire bonders sold were to OSAT customers, an increase from the prior quarter. Demand for copper-capable wire bonders continued to remain strong, since the introduction of our pro copper machine almost three years ago, we’ve seen a steady increase in demand for this market leading solution.

Our considerable investments in R&D and process expertise, continues to strengthen our competitive advantage through this transition. This remains one of the most competitive cost saving options for our customers to-date. Approximately 79.7% of our wire bonders were sold as copper-capable. From our perspective, the transition from gold to copper will continue for the foreseeable future based on our current capacity levels and our understanding of our customers demand. We also believe the significant secular driver is very unique in the industry and it will continue to give us business advantage as we look ahead.

Slightly less than 5% of our ball bonders sold were configured for the LED market. We continue to work with LED customers, particularly in the high end of the market where our products are technically best suited and where we have a competitive advantage.

Turning to wedge bonders, our sales improved in the June quarter compared to the March quarter due primarily to modest improvements in the power semiconductor segment. Our sales in the auto and industrial segments were fairly flat. We anticipate our wedge bonder volumes to gradually increase over the coming quarters as existing capacity is been digested.

In summary, we’re pleased with our business performance in the June quarter. We continue to drive revenue margin and operational improvements and remain focused on expanding our technology and market leadership position.

I will now turn the call over to Jonathan Chou for a more detailed financial review of the June quarter. Jonathan?

Jonathan Chou

Thank you, Bruno. My remarks today will only refer to GAAP results. On today’s call, I will compare the June quarter to the March quarter.

As Bruno mentioned earlier, net revenue for the quarter was $255.5 million, up $109.2 million from the March quarter. The net revenue change was primarily driven by higher equipment volume. Gross margin came in at 47.9%, up from 45.6% with gross profit at $122.4 million. In addition to our competitive equipment position, the gross margin improvement was also positively affected by broader market acceptance of our AT Premier bonder and pro copper machine.

Operating expense were $46.2 million, down slightly from the March quarter. For the September quarter, we estimate operating expenses to be approximately $51 million. This includes some additional expenses associated with growth initiatives.

Income from operations for the June quarter was $76.3 million and our tax provision came in at $6.8 million. We are maintaining a long-term effective tax rate target of below 15%, as we continue to simplify our tax structure.

We ended the quarter with a total cash and investment position of $380.7 million, equivalent to $5.01 per diluted share. This $45.4 million quarter-on-quarter cash reduction reflects our recent $110 million note repayment, eliminating roughly $8 million of annual note related expenses. Since June 1, 2012, the Company is debt free.

We look forward to deploying a portion of our cash to new and existing internal product development, while continuing to explore other external areas of growth in order to maximize shareholder value. Working capital defined as accounts receivable plus inventory less accounts payable, increased $22.3 million to $173.1 million. This increase was driven by higher account receivable down, considering our relatively steeper revenue increase on the March quarter. This highlights the cash generation capability of our business model.

From a DSO perspective, our days sales outstanding decreased by roughly 20 days. Our days sales inventory decreased substantially from 72 days to 44 days, due to our strong top line performance and operational effectiveness. Our accounts payable days decreased by 6 days to 47 days.

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

Bruno Guilmart

Thank you, Jonathan. Before we close, I wanted to touch quickly on our AT Premier product as just another example of the growth opportunities we’re executing on. As mentioned in previous calls, the AT Premier is a wafer level stud bumper that offer a wider bumping area, improved throughput and presents customers with a significant value proposition over alternative solutions. These products serve the LED, MEMS and CMOS image sensor markets, widely used in consumer mobile devices including smartphones and tablets. This solution represents a sizable market opportunity for the current fiscal year with the potential for growth prospects beyond that.

In terms of our guidance for the September 2012 quarter, we expect revenues to be approximately $250 to $270 million. This guidance further demonstrates our technology leadership position in the key markets we serve. We keep focusing on improving our flexible manufacturing model, R&D strength, free cash flow generation and balance sheet strengthening.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from the line of Krish Sankar with Bank of America Merrill Lynch. Please state your question.

Krish Sankar - Bank of America/Merrill Lynch

Yeah. Hi, thanks for taking my question. A couples to Bruno, if I look at your guidance, given the impressive guidance of roughly flat in September, how do you think the different segments trend between the ball bonders, wedge bonders, LED?

Bruno Guilmart

It’s probably going to look very much the same. We maybe – as I said, the wedge bonder business is starting to recover. We had a great year last year, fiscal year with our wedge bond of business. I think there is some digestion going through the supply chain. So, I would say we do expect based on the guidance some modest growth, but I would say that most of it will come from again our copper bonding solutions.

Krish Sankar - Bank of America/Merrill Lynch

All right. And then, another thing I wanted to find out was, if you look at what the foundries are saying in the second half, where they seem to be slowing, I understand OSATs utilization is at pretty high right now. I was trying to get a sense of how you look at the disconnect between what the foundries view in the second half and what you’re hearing from your OSAT customers?

Bruno Guilmart

That’s actually a tough question. I talk to a couple of foundry people that I know in the industry and it seems that yes, you’re right, that there is a disconnect. I think in – I would say, maybe as the leading edge technology, there is many – the demand is not as strong as maybe the subs are not as prepared as they should be. But when you talk about again those bulk of the core technology to that 65 nanometer and also going to 40 nanometer, the demand is pretty strong.

And again, we have the secular trend of demand for copper wire bonding that is directly increasing now across all customers around the world. And we’re seeing now a lot of demand especially from U.S. OSAT customers, which was not the case maybe one or two years ago because the lack of reliability data for copper wire bonding. But now it’s pretty much behind us and we see that there is actually a green trend from all the OSAT, big ones and small ones so was adopting copper processes because if they don’t have it, they won’t get the business.

Krish Sankar - Bank of America/Merrill Lynch

Got it. All right. And then, Bruno the other question I had with, I mean, given that your 1/3 of the way into the quarter and looking at your guidance, can you talk a little bit about how you think the linearity of your revenue would be in the September quarter? Is it mostly front half loaded or do you think it’s going to be equally stays through the three months?

Bruno Guilmart

I think, again we guide the current quarter and you know that our business is seasonal, it has always been like this. And that’s the nature of our business, we end our fiscal year on September 30, most probably investments with IDMs and OSAT could have been done in order to be able to supply all the consumer goods for the Christmas season. So, obviously we – although I won’t provide any guidance for Q1 for the time being, but we will see the natural seasonality that we’re seeing at Kulicke & Soffa for the last few years.

Krish Sankar - Bank of America/Merrill Lynch

All right. And then just a last question from my end, what percentage of your copper-capable bonders was from pro copper?

Bruno Guilmart

We don’t disclose that, but what I can tell you is in the last three years we have drastically increased the number of pro copper bonders that we sell versus the standard issue of the gold wire bonder with the copper capability and it is now a very significant part of our business.

Krish Sankar - Bank of America/Merrill Lynch

Got it. Thank you very much and congrats on the good numbers.

Bruno Guilmart

Thank you, Krish.

Jonathan Chou

Thanks.

Operator

Our next question is coming from the line of Tom Diffely with D.A. Davidson. Please state your question. Mr. Diffely your line is live.

Thomas Diffely - D.A. Davidson & Co., Research Division

Sorry about that. Yeah, great. I’d first like to talk about the margins. Typically when you have a very strong quarter it means, if big customers came in and typically when the big customer orders, big volumes that they get a little bit better pricing and as I’m surprised that the margins were still strong in this quarter. Maybe if you could just talk a little bit more about how you got that 200 plus basis point improvement?

Bruno Guilmart

Well, as we stated in our prepared remarks, I mean the margin improvements was due mostly to, I would say a higher mix of pro copper machines and a steady high demand of our AT Premier Stud Bumping Machine, that’s the main reason.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. I guess maybe then looking at the customer base itself, have you seen an expansion if you will, of the number of different customers coming in during the quarter whereas year-ago with a couple of large guys that dominated?

Bruno Guilmart

Yeah, I mean we’ve seen an expansion of our customer base. As we were very focused, I’d say on the two or three larger guys, now the transition especially to pro copper is basically steady wide spread across the majority of the OSAT. As for the AT Premier, it’s a little bit of a different animal. The subcontractors are – it’s not OSAT free its different set of subcontractors and that is not a huge business for us, but it’s quite a profitable business.

Jonathan Chou

Okay, Tom, this is Jonathan, let me add, basically it’s still the usual top 10 list in terms of our customer base, but the top five customers contribute to that 80% of our ball bonders.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay, all right. And what are you seeing from the IDMs, it sounds like you’re still very heavily on the OSAT side, but are you seeing an increase in adoption of copper by the IDMs as well?

Bruno Guilmart

Well I think the IDMs are not investing a lot in back-end capacity. But on the other hand, they tend to outsource more to the OSAT which is the result of why our business is actually doing quite well because there is more and more customers that are relying on OSAT for outsourcing. So, yes, IDMs are adopting copper but again the trend here is for IDM to become more and more asset light and for the OSAT to categorize on these opportunities.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay, that makes sense. And then Jonathan, did you say the OpEx is expected to be around $51 million in the September quarter?

Jonathan Chou

Yeah, we – it’s about that – around that ballpark range, slightly yet higher than this past quarter.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And does that include the intangibles as well, amortization intangibles? That’s everything?

Jonathan Chou

Yes, it does.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay.

Jonathan Chou

And I also included that in my remarks there is some growth initiatives there that basically allow to spend a little bit more on some of these internal and external results.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And then Bruno you talked a little bit about the stud bumper. How big is this market?

Bruno Guilmart

It is not a huge market, I think we can probably estimate that $60 million to $70 million per year, I mean for this year. We’re obviously trying to understand better that market and size it. One thing is clear, is we dominate clearly and we’re actually going to come up with a new version of our AT Premier that will be introduced in September at the Taiwan SEMICON Show. So there is definitely demand because the advantage of that solution is first -- number one, is the throughput, number two, is you can use either gold or copper, and number three, instead of using a soldering process you can just basically bump the Good Die and so there is some cost efficiencies as well for customers and as you know tablets and mobile phone being consumer devices the main thing is about cost, okay. So, we’re just trying to see how sustainable long-term the core of the business today is CMOS sensor, but we’re seeing some actually new interesting application especially in the LED and MEMS area.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay, thanks. And then I guess finally, can you talk a little about the LED market and you said that you did very well in areas where you had the competitive advantage; well first of all, how big is the LED market and in which areas do you bonders work the best in?

Bruno Guilmart

Well, I mean I don’t have an idea exactly of the size of the LED market and I am sure you can find some data from the analyst above that, I mean that’s the solution we have. As you know our strategies we develop a platform for ball bonder, wire bonders products which is a high performance platform, and then we have derivatives. And so we’ve introduced ConnX Plus, which kind of serves the – I would say more of the low-pin-count to medium-pin-count market at SEMICON China, we have the IConn, we have the pro copper and we have the LED versions. And therefore because they cannot use the same platform all bonders are aimed at high performance LED – the high performance LED market, that means automotive, that means industrial applications, and obviously when it picks up, home applications – home lighting applications. And so therefore because again of our price points we do not re-compete in, as I said many times during the call in the low end side of LED markets that requires $30,000 ball bonders, this is not where we compete. We compete in the high end where you need the high quality, high reliability bonding for long-term use.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. Okay, thanks for your time this morning.

Bruno Guilmart

Thank you.

Operator

Our next question is coming from the line of Lee Simpson with Jefferies. Please state your question.

Lee Simpson - Jefferies & Company

Hi, good morning gentlemen, and well done on a good set of numbers. I wonder if I could maybe start off with a question on wedge bonding dispended to recovery here and really how that pertains to power semi’s? As I understood in your comments at the start, the existing capacity now has been digested, but it seems clear to us that Chinese industrial spend is not going to go into recovery until we get a change on monetary or fiscal policy, and if you look at autos, what a third-party analyst is talking about a slowdown next year in at least unit volumes. I know there’s a disconnect with how the power train is developing. But I wonder if you could maybe put all those dynamics into some sort of shape for us to understand how wedge bonders might recover next year?

Bruno Guilmart

Well again it’s difficult to predict the business a year down the road. I think that our wedge bonder business is recovering. I wouldn’t say it’s a major recovery, but it’s getting better. We believe that there is applications especially in the automotive space that could actually drive our wedge bonder business up and we have also a series of new products that could be introduced to the markets in a few months that we hope will help categorize on our market share position, which again in this space we’re dominating.

So, in summary we do not anticipate the wedge bonder business to grow crazy over the next quarters or so, but it’s going to be a modest recovery as the last year was an exceptional year for the power semi phase new installed capacity.

Lee Simpson - Jefferies & Company

And maybe if a quick follow-on to that question, can you give us a sense for the key apps maybe on a medium or long-term perspective that we should be looking for in automotive that could be a driver for the wedge bonders business?

Bruno Guilmart

Well, in automotive I mean for wedge bonders, I mean its hybrid vehicle application, electric vehicles, this type of – when this really picks up, but it is good for our wedge bonder business.

Lee Simpson - Jefferies & Company

Okay, great.

Bruno Guilmart

Especially electric vehicles.

Lee Simpson - Jefferies & Company

Especially electric vehicles. And maybe just a sort of wider question and if you look at cycle-on-cycle the progression there for Kulicke, it’s a lot more stable now with debt free $370 million net cash, you’ve effectively become the market now for bonders, I think about 70% market share more or so with copper bonders. So as to look at into the next couple of cycles, it seems the challenges how do you outgo your markets? And it’s tempting as investors to think, the cash power has to be used to look for, if not a transformative acquisition, something of a new strategic direction. Is there anything you can share with us as far as earlier thoughts might be emerging in that sense?

Bruno Guilmart

Yes, well I mean basically by the way on copper, we have way more than 70% market share will be gold, no official data. I think we clearly dominate the space. But there is no doubt that we're looking as Jonathan mentioned there will be an increase in operating expenses although modest, and so we’re looking at the advanced packaging solutions. This is definitely an area of interest for us. We want to leverage our copper balance sheet, which is again precision engineering and 2.5D/3D; this is the kind of application we’re very active looking into organically and also through technology acquisition.

Lee Simpson - Jefferies & Company

Great. Maybe if I could have maybe one final follow-on, it’s just – it’s becoming aware that maybe your – one of your competitors is fast developing a copper bonding solution. I wonder if you or anyone of your team has got a chance to have a look at what's in the market there or perhaps share with us what your customers think of that toolset when it compares next to yours in the factory?

Bruno Guilmart

Well, as you know I mean it’s no secret that we have 100% market share at AT and all bonders pretty much and definitely on all copper, SPIL made a public announcement, I believe last quarter, that for copper they would have only one supplier which is K&S. We have had a chance to – there is only really one competitor who has introduced a solution that its really a solution that aimed towards, I would say, more lower-pin-count to medium-pin-count devices, which we can address by the way we have a solution for that as well. But our pro copper dedicated solution, its really for complex stacked dies, thousand wires type of application where you get the bigger return on the investments and then you get banked for the above in terms of savings for your customers.

So we haven’t had real chance yet because there that our competitor’s machine has not been greatly deployed and I guess also accepted by the market yet to do what we call an apple-to-apple comparison, but we do believe that our solution is far superior. We’ve had the product in the market for almost two years and we’re working on the next generation one. So we’re not risking on a lot, we’ve spend a lot of money on copper. We have been working on copper for many, many years and it’s not just the matter of the machine, it’s really a matter also of understanding the process.

Lee Simpson - Jefferies & Company

Great. Maybe if I could squeeze one last question and – lot of other people on the call waiting. If we look to the order book billed for the September quarter, does it speak more to the usual December sales seasonality or does it talk to some of the commentary that ASE and SPIL have talked about where the CapEx may slowdown into the back half of the year?

Bruno Guilmart

Well, I mean we’re half way or not half way, we're one third through our fourth quarter fiscal and again our backlog as I said many times is not really a good indication of the health of the business because it’s all risk endurable and considerable. And we all know that historically in the category equipment business it maybe a little bit different in the front end space but this is equal to the backend. The last quarter of the year is typically a low quarter for investments as most of the investments had to be made by the end of September in order to be able to produce all the devices that would be needed for the holiday season.

Lee Simpson - Jefferies & Company

Yeah, great. Great talking to you again guys. Thanks so much.

Bruno Guilmart

Thank you.

Jonathan Chou

Thank you, Lee.

Operator

Our next question is coming from the line of Satya Kumar with Credit Suisse Group. Please state your question.

Satya Kumar - Credit Suisse Group

Yeah, hi. Thanks for taking my question. I was wondering if you could talk a little bit about some of the larger sub-con customers, it seems like they have reached about 50% plus in terms of the copper conversion. How high can this copper conversion grow at the larger companies and can you also remind us where you think we are on the overall industry copper conversion?

Bruno Guilmart

Well again on individual customer basis, I think its better that you read the public reports that are available. What we think is that we’re roughly slightly less than one third through the copper conversion. And our estimation roughly is that about four, five years down the road is 70% -- again because it’s driven by cost because all of the consumer demand about 70% of all IC assembled -- 70% to 80% of all IC assembled worldwide will still be wire bonded. So yes, Flip Chip is increasing but fairly slowly and you only use Flip Chip if you needed performance. Advanced packaging is very exotic and it will only pick-up if it can reach the right price points, and if you look at the growth of the market it’s going to be wire bonded. And if you take this market, if you look at it, we estimate that about 70% of the total IC that are going to be wire bonded will be copper wire bonded. So in other words we believe that we have quite a bit of runway ahead of us.

Satya Kumar - Credit Suisse Group

Got it. You mentioned that you’re increasing your OpEx into September. Did you talk about any particular product area’s that’s going to be focused on and as you move into December and next year, is this sort of a permanent step up in the OpEx or will it sort of come back down?

Bruno Guilmart

Well again, it’s kind of with R&D, so I mean, I’m not going to give you too much detail about that, but it’s primary advanced packaging application.

Satya Kumar - Credit Suisse Group

And beyond September is this new level of OpEx or would that sort of coming …

Bruno Guilmart

Yeah, I mean that will keep going, I mean this is a decision we have made. We want to participate in that market. We would only start it as a sizable market in the next three to four years, and there are not that many players yet, and this is definitely a space where we see that we have the knowledge and the technology, not all the technology by the way. So it’s going to be a combination of organic growth working with technical institutes and in consortia as well as possibly making some strategies to technology acquisition.

Satya Kumar - Credit Suisse Group

Got it. And the on the LED business you mentioned that 5% of the bonders in the quarter were from LED and you expect the mix would be about the same in September. Is there some talk of higher utilization rates in the LED space, I was wondering if you could talk a little bit more about the trends that you’re seeing, is there a possibility of more meaningful recovery in the ball bonder demands really be over the next few quarters?

Bruno Guilmart

Again, I won't guide beyond the current quarter, but for LED as I’ve mentioned is we're very, very focused on the higher hand LED and until really the home lighting market picks up, I don’t think we should anticipate a significant uptick I would say of our LED bonders. So, obviously depending on the revenue it tends to be a little bit more stable quarter-over-quarter than the rest of the business. So the percentage – as the percent of the revenue tends to change thus the growth will really come when LED lighting starts to pick up which in our view is probably about three years, if not more down the road.

Satya Kumar - Credit Suisse Group

Got it. Thanks a lot.

Operator

Our next question is coming from the line of David Duley with Steelhead. Please state your question.

David Duley - Steelhead Securities

Yeah, just a couple of quick housekeeping questions; did you have any 10% customers during the quarter?

Jonathan Chou

Yes, we do. We have two 10% customers.

David Duley - Steelhead Securities

Can you get throughout what the percentages were?

Jonathan Chou

I am sorry, we don’t break that out in terms of the 10%, but clearly the two – the usual suspects are the two top 10 percentage.

David Duley - Steelhead Securities

Okay. And what should we expect from the other income line now that we don’t have any convertible there or any debt?

Jonathan Chou

Well, they should be very minimal in terms of the income in terms of going forward. The other income is basically a …

David Duley - Steelhead Securities

It will just be interest income and because I was just wondering if you could kind of give us an idea of what this line should look like going forward for modeling purposes?

Jonathan Chou

Yeah, we expect about 200K of interest income in that line.

David Duley - Steelhead Securities

Okay. Bruno, could you just talk a little bit about, you mentioned that you have a broader swath of customers – U.S. type of customers I guess is what you mentioned moving to copper. Could you talk about what segments seem to be moving to copper now and maybe just talk a little bit about the cost savings that some of these customers are recognizing by moving to copper?

Bruno Guilmart

So I would say its steady broad based. I think that most of the knowledge tablets companies in the U.S. that you know are now moving to copper. The savings that can be represented to them varies on the complexity of the device and the gold contents and it’s basically anywhere from 15% to 25% versus a gold equivalent wire bonded product. And even some I would say customers in -- I won't name any of them, but I am sure you can figure them out in infrastructure communications are coming up with wire bonded products instead of Flip Chip because they need to serve some large customers in China that deployed their infrastructure in I would say emerging countries who requires a fairly low cost from an infrastructure perspective.

So, again as I said several times over the course of this call, there is some limitation in terms of performance with copper. Copper doesn’t behave very well about 1 gigahertz with gold you can probably grow maybe up to, I would say, 6 gigahertz to 10 gigahertz depending on the application. Then above that, then you would use Flip Chip. But the bulk of the applications again I mean unless you talk about TSV and these types of things which are not deployed broadly across the world, yet you can use copper wire bonding.

David Duley - Steelhead Securities

Okay. And could you talk about what areas that you’re focusing in on, on the advanced packaging area either internally or externally. What are the types of applications we should think of that Kulicke would like to get involved in this 2.5D/3D packaging trend?

Bruno Guilmart

Yes, David that’s something that we're not prepared to disclose. But basically just wafer level packaging, 2.5D/3D packaging; this is an area of interest for us, but again leveraging on our core competencies we are not convinced, we are not precision engineering. So you’re not going to see us very likely moving into a space that we cannot leverage on our current copper benefits, but again this is a very confidential and strategic I would say efforts within K&S and I can't tell you more than that.

David Duley - Steelhead Securities

Okay, inside K&S what products do you currently have that addresses this market; it’s only the stud bumper that you’re referring to?

Bruno Guilmart

Today, yes. But I mean today this market is less than 1% of the total market. So, I mean it’s just – that’s why and there is many, many solutions to address wafer level packaging, which is why it’s the right time today to start work with customers and understand exactly what they want. So I think again, but then the key point here is, this exotic type of packaging is only going to make it if it gets through the right cost points.

If it’s going to be like the Flip Chip, which is today still above 25 – 20% more expensive than the gold equivalent wire bonded products, it is not going to pick up by start because everybody is hoping. So, the whole key here is as this industry is now primarily driven by the consumer, they needs to get to the right cost point. And that’s why we’re working with customers, that’s why we’re working with technical institutes and try to figure out exactly what are the requirements. So, we put everything together in R&D, if you look at that, but right now, I mean, its really we’re exploring the possibilities and what the attraction for us is as you know K&S has always been – we want to be the number one in the market we serve and that’s the same approach for advanced packaging. So we want to make sure that what we’re going to address in advanced packaging, we can be positioned as the leader in terms of technology.

David Duley - Steelhead Securities

One final thing from me Bruno, as you have a lot of experience in the OSAT market, and I was just wondering as we move to this 2.5 and 3D packages, do you think the foundries are going to play a bigger role or will they turn over the business to the OSAT? In other words, are you going to have to start to focus on a different set of customers or do you think you will be their traditional customer when these new packages will ramp up.

Bruno Guilmart

I think it remains to be thin. Again, that there are solutions that could be developed entirely by foundry, which may not be the most cost effective. I think the OSAT players are going to fight obviously to get a piece of this pie because that’s the only sizable market that is anticipated to grow for the foreseeable future and from a customer perspective because they’ve been also on the other side of the fence, you do not want to rely solely on one partner or one supplier to do everything. So, my view is that at least for the time being that this will be shared, there might be some opportunities for the foundries to do some little provisions that by and large, this will be shared between the foundries and the OSATs.

David Duley - Steelhead Securities

Thank you very much and congratulations on nice numbers.

Bruno Guilmart

Thank you.

Jonathan Chou

Thank you.

Operator

Our next question is coming from the line of Clint Coghill with Coghill Capital Management. Please state your question.

Clint Derek Coghill - Coghill Capital Management, LLC

Hey guys, great quarter and even better guidance. I understand your desire to diversify the business for long-term. However, with $5 in current net cash and seem to be over $6 a share, that equates to roughly $450 million in cash. Also you guys are currently trading at three times EBITDA and less than three times earnings if you strip out the cash. I guess, as I sort of think – try to think about things from your standpoint, I cant imagine you guys being able to find a business to buy that is good of a position as – and expensive as you’re and so I just wanted to kind of get your thoughts on uses of cash over the course of the next 6 to 12 months. And I’ve one other question regarding – with regarding listing in the Hong Kong Exchange?

Bruno Guilmart

I didn’t quite catch your second question, what’s …?

Clint Derek Coghill - Coghill Capital Management, LLC

Sorry about that, I had another question – I will ask it after you wrap the first one.

Bruno Guilmart

Okay. Let me address – as I mentioned, our key focus here is really basically how do you actually use the resources that we have to deliver a good return for our shareholders. So we are going through a lot of planning, lot of analysis in terms of what is the best way to use it. At least for now we’re looking at basically organic and inorganic type of opportunities, but at the same time, we’re looking at different things. So, we continue to look at that on a regular planning basis and that the key focus is to generate a return for our shareholders that we – and that’s really how we’re measured against. So, its hard for me to give you any specifics in terms of what we plan to do with the cash, but we generally have a approach to it.

Clint Derek Coghill - Coghill Capital Management, LLC

Okay. I guess the second question just – and it’s a great problem to have by the way is just you guys are generating enormous amounts of cash and the balance sheet continues to grow and as compared to where you were three years ago, lets say four years ago, lets say you guys are in a great position.

I guess the second question is just with – as to with your relocation to Singapore, your proven flexible manufacturing model where you’ve shown your ability to make money in trough quarters. If you kind of look in more and more like perhaps ASM and I kind of notice that ASM trades that roughly 20 times earnings in the Hong Kong exchange and you guys are trading at a third of that and that including all the cash in the balance sheet. Have you guys thought about listing on the Hong Kong exchange? It doesn’t seem like your business is being properly valued in the U.S.

Jonathan Chou

Well, certainly Hong Kong Stock Exchange where our peers is actually listed, it is a different market. But this is again one of those things that we continue to look at as well as part of our yearly planning process. Certainly for now I think we’re getting the right recognitions, at least the right investor base for us right now in the U.S. Our volume right now obviously in the last couple of days has actually picked up quite a bit, but even with the average $200 million volume where we’re still trading at a reasonable basis. So we will continue to look at where one makes sense. I think the Company has already made some fairly significant strategic movements in terms of relocating our global headquarter. And we will continue to actually look at what’s right for the Company and our shareholders for that.

I certainly recognize the fact that the multiples are very different, but I think we can actually address the business model through what we can do it organically and inorganically and hopefully that will smoothen our cyclicality of our business model and hopefully that would – basically have more investors than we actually recognize and provide the kind of premium that we have and our peers have actually currently demanding it in Hong Kong.

Clint Derek Coghill - Coghill Capital Management, LLC

Got it. Thanks. Great quarter again.

Operator

Our next question is coming from the line of David Wu with Indaba Global Research. Please state your question.

David Wu – Indaba Global Research

Yes, good evening. And I’m sorry, I was late getting on and I have lot of questions answered already. But there is one that’s in the quarter – in the June quarter, a number of the semiconductor companies have seen their business fall off in the – especially in the month of June and I was wondering if that’s going to spread to more companies when is the earliest you would see it in your owned orders from OSAT or fabless or IDMs?

Bruno Guilmart

Well, again – yeah, I mean so we don’t – obviously, we don’t sell any equipment to fabless companies. So our customers are primarily OSAT, about 80% of our customers are OSAT, actually slightly over that. The rest are IDMS. We assume if you look at the trend quarter-on-quarter of our business for that few years is that our – usually our fourth quarter – sort of fourth quarter are strong quarters, our fourth quarter being the current one ending at the end of September because that’s where all the CapEx needs to be invested and in place for the production of all the electronic especially mobile devices for the holiday season. So usually our first quarter, which mean our December quarter and our March quarter are seasonally lower than the previous quarter, which is the fourth quarter. And I do not expect to see any change last year from the – just the way our business behaves.

David Wu – Indaba Global Research

Okay. Just one clarification, I miss when you said your OSAT customers account for what percentage of your business in the last quarter?

Jonathan Chou

Yeah this is – David, this is Jonathan. I mentioned 80% …

David Wu – Indaba Global Research

Okay.

Jonathan Chou

basically the ball bonder revenue came from the top five.

David Wu – Indaba Global Research

Okay. Terrific. Thank you.

Jonathan Chou

You’re welcome.

Operator

The next question is coming from the line of Andy Shapic, a Private Investor. Please state your question.

Andy Shapic - Private Investor

Thank you and good morning. Two quick ones. Jonathan, how the calculation of fully diluted shares in the September quarter would be impacted by the repayment of the convertible debt where we see a little bit of a dip in the fully diluted share count?

Jonathan Chou

Well, basically by us repaying the note we basically eliminated the value centers, no valuation at all. We basically …

Andy Schopick - Private Investor

I understand. So, my question is how with that fully diluted share count be affected in the September quarter from the 76 million reported for this quarter?

Jonathan Chou

Yeah, not much at all. Actually we still – I mean, we continue to be about 74 million of shares in the total outstanding.

Andy Schopick - Private Investor

On the basic?

Jonathan Chou

Yeah.

Andy Schopick - Private Investor

And the diluted share count really won’t be affected much at all then?

Jonathan Chou

No, not much at all. That’s correct.

Andy Schopick - Private Investor

Okay. Did you make any commentary about fixed versus variable costs in the quarter and whether there was any material change over the course of this fiscal year?

Jonathan Chou

Yeah, our cost structure remain to be about $30 million-$36 million fixed and 6% to 7% where I have mentioned 6% to 8%, its probably about 6% to 7% that’s tied to the revenue on the variable cost side. So that remains the same.

Andy Schopick - Private Investor

Okay. Thank you.

Jonathan Chou

You’re welcome.

Operator

There are no further questions at this time. I’d like to turn the floor back over to Joseph Elgindy for closing comments.

Joseph Elgindy

If there are no further questions, thank you all for the time today. Operator, this concludes our call.

Operator

Ladies and gentlemen, this does include today’s teleconference. You may disconnect your lines at this time. And we thank you for your participation.

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