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In the final minutes of a ball game - when it is still on the line - those players who can put their bruised feelings aside and focus on the final inning often can pull victory back from the brink. Yogi Berra had seen it so many times he never discounted the possibility of a surprise comeback, and that's why he said "It ain't over 'till it's over."

This is precisely the environment IC investors find themselves in today - and Kulicke and Soffa  (NASDAQ:KLIC) investors in particular – at trough and cycle levels for orders and deliveries in the semiconductor sector.  

Kulicke and Soffa has just reported a lighter quarter than they expected (like most everyone else in chip equip) – with an expected “turn” in orders in the June quarter not manifesting itself (yet) – yet with a firm look towards the December quarter and a solid 2009. Thus there’s two more quarters at the plate before the year is out. I think it’s a matter of when – not if – one of these upcoming quarters is going to hit the ball out of the park. Like most things in semiconductors, it could happen when you least expect it. The timing is never revealed beforehand. 

Notes from the CC on the recent (Q4) quarter (See also K&S Q3 Report):

  • $83 ML in revenues vs. $81ML Q3
  • $37 ML profitability vs. $36 ML Q3
  • $37 ML Opx vs. $36 ML Q3
  • $183 ML in cash vs. $171 ML cash for Q3
  • $60 ML additional cash will be added to balance sheet after the wire sale to Heraues and the close of the Orthodyne acquisition at the end of this Q. See also: K&S To Acquire Orthodyne Electronics; Divest Wire Business Unit to Heraeus.
  • 73 days sales outstanding (DSOs) vs. 81 days for Q3
  • 44.2% gross margins
  • $146 ML in accounts receivable
  • -$2.6 ML currency loss (from Swiss France, Israeli Shekel)

With respect to the semiconductor equipment cycle and K& S’s place in it, CEO Scott Kulicke and CFO Maurice Carson offered some commentary:

  • Mr. Kulicke doesn’t think the current soft conditions are going to last much longer and is looking for a meaningful 12% increase in 2009 for overall capex/assembly equipment. He said there is not significant excess capacity in the assembly sector (including DRAM); fabs are busy assembling ICs; and it won’t take much to push capacity up towards new purchases.
  • He believes K&S is at trough and cycle levels for unit shipments, and that ball bonders and die bonders will show significant ASP increases in 2009.
  • When asked by Bill Ong (American Technology Research) about equipment level purchases for 2009, K&S management reiterated some publicly-known industry estimates from VLSI below (cash basis).
    • Ball Bonders - $650 ML
    • Die Bonders - $700 ML
    • Wedge Bonders – $175 ML
  • The estimated profit margins for these machines are as follows:
    • Ball Bonders – 42%
    • Die Bonders – 45%
    • Wedge Bonders – 45%
  • With the current extravagant cost of gold ($857/oz), Mr. Kulicke said K&S’s new line of bonders will help customers realize the cost benefits of working with copper. It requires only small changes with their new equipment’s settings to work with copper and the current cost of the metal is infinitesimal when compared to gold (30 cents/oz). Since gold wire is 25% of the cost of packaging, for many applications copper offers a dramatic reduction in assemblers’ supply costs. He believes copper will be a significant contributor going forward (2009), which bodes well for replacement cycles and new product sales. Dozens of their customers and subcontractors are now experimenting with copper for applications formerly run on gold wire.
  • Divesting the wire business will “free up” about $95 ML in working capital each quarter. This large amount of cash will no longer be required as up-front payments for gold, resulting in a dramatic effect on the balance sheet. Along with the absence of the gold “pass-through” effect, profit margins will be closer to the 44% level that is in line with their core business – bonders. The profits of the bonder divisions will also go directly to cash flow rather than to the working capital previously set aside for the gold pass-through. To my mind this makes the “new” K&S an almost “pure play” on the state of the back end assembly market.
  • Their new die-bonder line – Discovery – is being readied for launch in the December 08 quarter. The in-field tests performed at a subcon were very successful and the product is almost ready for launch.

Conclusions:

  • K&S has now been profitable full cycle (trough to peak and back again at cycle lows). Their small loss this quarter resulted only from currency devaluations associated with the Swiss Franc and Israeli Shekel.
  • They have de-levered the company net of cash, and continue to pay down long-term debt. I estimate that K&S will be approximately $75 ML net of all debt after the recent deals close at the end of this Q, yielding a $1.36/per share in cash. At today’s price that’s 24% of each share. You get the K&S business for $4.40/share and zero net debt. I hope they decide to clear all debt off the balance sheet and never look back.
  • They have eliminated the prior working capital restraint required for the gold pass-though and can now apply that money to quickly ramp unit shipments upon demand. This extra cash helps their credit rating and simplifies and accentuates their profit margins.
  • The share price is trading near trough lows ($5.76) consistent with all previous downturns. The historical share price increase for K&S from such trough lows has been a minimum of 100%.

Disclosure: I have a long position in KLIC.

Source: Kulicke and Soffa: It Ain't Over 'Till It's Over