Kulicke & Soffa Industries Q1 2009 Earnings Call Transcript

| About: Kulicke and (KLIC)
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Kulicke & Soffa Industries, Inc. (NASDAQ:KLIC) Q1 2009 Earnings Call April 28, 2009 9:00 AM ET


Geoff Grande - CFA and IR of FD Ashton Partners

Scott Kulicke - Chairman and Chief Executive Officer

Maurice E. Carson - Senior Vice President and Chief Financial Officer


Brett Hodess - Banc of America

Gary Hsueh - Oppenheimer & Company


Greetings ladies and gentlemen and welcome to the Kulicke & Soffa Second Fiscal Quarter Results Conference Call. (Operator Instructions).

At this time, I would like to introduce, Geoff Grande of FD. Thank you, Mr. Grande, you may begin.

Geoff Grande

Thanks Rob. Good morning everyone, and welcome to Kulicke & Soffa's second quarter 2009 conference call. For those of you who have not seen the results announced this morning, they are available in the Investor Relation section of the company's website at www.kns.com.

An audio recording will be made of this entire conference call, including any questions or comments that participants may contribute. This recording may be and also be accessed from Kulicke & Soffa website for a limited time.

During today's call, we will make reference to non-GAAP financial measures. Reconciliations of those measures to the most directly comparable GAAP results will be posted on our website after the completion of this call. To view them, go to the Investor Relations portion of our website, click on the GAAP to non-GAAP reconciliations link.

The content of this conference call is owned by Kulicke & Soffa Industries and is protected by U.S. copyright law and international treaties. You may not make any recordings or other 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 more complete discussion of the risks associated with the operations of Kulicke & Soffa, please refer to our SEC filings, especially the 10-K for the year ended September 27, 2008, and our other recent SEC filings.

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

Scott Kulicke

Thanks, Geoff. Good morning and welcome to our call, the purpose of which is to discuss K&S's financial results for the March 2009 quarter.

The semiconductor business environment during the second quarter was horrible. Our customers and their customers drastically reduced output in order to burn off inventory. The challenge for K&S has been to make corresponding reductions in our cost structure, put the balance measures against the ongoing investments and product development necessary to maintain our technology leadership.

To that end, we cut wages 5% to 20% for salaried employees and reduced hours to our direct labor force as announced in January. We reduced our global workforce by about 250 employees in February. This is over and above the 240 employees laid off in November. We expect that this latest workforce reduction will be substantially complete in May.

And subsequent to the end of the quarter, we announced a plan to transfer our manufacturing activities from Israel to China. This action is part of our plan to consolidate our manufacturing and low labor cost locations close to our customer base, while preserving engineering expertise in centers of excellence around the world.

We expect to complete the Israel workforce reduction in the end of 2010 as we transfer most of these job station locations.

The data that is available to us supports a growing consensus of the inventory reduction phase that this downturn is behind us. Towards the end of the quarter, we began to see positive trends from our customer base that has continued into the current quarter.

These trends include improvement in customer capacity utilization, increased orders for expendable tools and increases in requests for quotation for ball bonders. On that basis, we are forecasting our June quarter revenue to be sequentially up and in the range of $32 million to $37 million.

Maurice Carson, our CFO, will provide additional details for the quarter in a moment. Before turning the call over, I'd like to reiterate that we are appropriately reducing our cost while preserving the core competencies that have maintained as the technology leader in this field. These actions will benefit us both in the short and the long-term.

Business conditions, though they remain challenging are improving and I am confident that with the actions we are taking K&S is well positioned to take advantage of the industry's recovery.

With that, I'll turn the call over to Maurice.

Maurice E. Carson

Thank you Scott. Good morning everyone. As is typically the case, my remarks today will include non-GAAP measures as the supplement to our GAAP results in order to provide a better view of our financials.

Non-GAAP measures exclude equity based compensation, contractual commitments for former test facilities, amortization of intangibles, severance costs, goodwill impairment, debt extinguishment and the Israeli tax settlement.

As of the case last quarter, all operating results associated with our wire business are reported as disc ops and are not included in the current or prior quarter discussions. Finally, I will compare the March quarter to the December quarter and will refer to non-GAAP numbers unless otherwise noted.

Net revenue from continuing operations during the quarter was $25.2 million, down $12.2 million from last quarter. Volumes dropped across all of our product lines, particularly in expendable tools and wedge bonding equipment.

Ball bonder sales, which were relatively flat, were weighted heavily towards integrated device manufacturers, was approximately 73% of sales going to IBM and the remaining to subcontractors.

Gross profit was $8.1 million, down 5.8 million from last quarter. Our gross margin was 32%, down 515 basis points. Reduction in gross margin was driven by several factors. A larger proportion of ball bonder sales were legacy models, as we sold much of the remaining inventory, under utilized factories and a shift in product mix also contributed.

During the quarter, the company took an impairment charge of $2.7 million related to the write-down of the goodwill associated with our die-bonder business. The impairment charge is due to an earlier than anticipated end of life for our legacy models, Swissline and Easyline.

Operating expenses were $33.7 million, down $2.0 million from last quarter. The June quarter is expected to be down another $3 million as our cost reductions continue to take effect.

Looking at the balance sheet, we ended the quarter with total cash and investments of $130.2 million, down $44.8 million from last quarter. Accounts receivable and inventory minus accounts payables provided $10.3 million during the quarter, mostly due to a decrease in AR. However, DSO were 114 days, up from 98 days last quarter.

Let me take a minute to walk you through the $44.8 million decrease in cash during the quarter. Cash from operations, including working capital, was down $18.3 million. We paid the Israel tax settlement which was another 13.6 million. We also paid $10.2 million to close out the tender offer for our 1% bonds.

As Scott mentioned earlier, we adjusted our cost structure during the quarter. The lower wages for salaried employees announced in January is expected to generate annual savings of about $6.8 million.

The reduction of our global workforce by approximately 250 employees announced in February will result in around $14.9 million in annualized savings. Combined these actions will result in a net cost reduction of $21.7 million on an annualized basis and $4.0 million in severance cost.

We expect our plan to transfer manufacturing activities from Israel to China that Scott just mentioned to be fully implemented by 2011 and to result an approximately $4.1 million in annualized cost savings. The plan is expected to cost $5.7 million spread over the next 2.5 years.

Finally in February, we completed the tender offer for our 1% notes and we've hired 25% of these notes since September. Given these unprecedented market conditions, I'd like to provide a bit more color on our product line revenue and provide some insight into where we see the sales going by product line next quarter.

Expendable tools, which includes cap waves, wedges and blades were down 40% from the December quarter to the March quarter due to significantly reduced hours at our customer factory. This is also the area where we have seen the earlier signs of recovery and anticipate the revenue for these products to increase by about 25% in the June quarter.

Both die-bonders and ball bonders have signal digit percentage declines. Ball bonder revenue is forecasted to more than double in the June quarter, while die-bonders will decline as the legacy products are now in the blade.

Wedge bonding equipments fell by 50%. As expected when we repurchased this business, the wedge bonders product line has a different set of drivers and the sales cycle will often be out of sync with the traditional K&S product line. Wedge bonders are expected to reach down about 50% in the June quarter.

Finally, we had a significant decline in our spares and service business, which dropped 38% and will recover with the 25% forecasted growth rate. For the recovery that we're starting to see and that Scott described is very much a ball bonder story, but all the product lines are seeing increased business. Scott?

Scott Kulicke

Thanks Maurice. As I mentioned earlier, while we are taking necessary steps to reduce our costs in response to the economic slowdown, we are equally focused on maintaining the competitiveness of our product portfolio. So that as the industry begins to recover K&S is equipped with the rights products to grow the business.

In our second quarter, this focus was reflected in the launch of the following important new products. First it was the iStack, our next generation die-bonder for advanced stacked die and high performance BGA applications.

Secondly, the ConnX-VLED, an extension of our leading ConnX ball bonder. In this case specifically tailored for vertical LED applications. And lastly, we introduced the 7600 series wedge bonder, a product targeted primarily at the market for small power packaged applications. The 7600 will extend our wedge bonders into real-to-real applications.

iStack, developed under the project name Discovery, is capable of delivering up to 30% productivity increases over the current generation of die-bonders and we expect it to reset the standard in die-bonding.

iStack will be evaluated by customers over the next few months and when the industry recovery begins in full, we expect iStack to be an important growth vehicle for K&S. With the launch of the ConnX-VLED, we now offer an excellent bonding solution for the entire spectrum of LED applications.

The LED market has been one of the recent bright spots in the semiconductor industry as interest in energy saving lighting solutions remains robust even amid the current economic weakness.

We've already received initial orders for ConnX-VLED and expect that the LED market will continue to grow and this is on energy efficiency becomes standard in public policy and private practice.

The 7600 series wedge bonder was a product targeted primarily at the market for small power packages. This market requires handling and processing of high density matrix lead frames neither strip nor real form. The 7600s enhanced lead frames and handling capabilities. Together with its power with in process, allows us to expand into this growing applications niche.

We're pleased that all three products received a favorable response from customers when they were shown in Semicon, China last month. These products continue the ConnX's (ph) tradition of advancing our customer's capabilities, while reducing our costs. By capitalizing on our technology leadership to new products, we ensure our ability to meet our customer's future needs and our competitiveness going forward.

Looking ahead, I'm encouraged by the improving business conditions we are experiencing. As I said earlier, this upturn reinforces my conviction that our customers are through the inventory reduction phase of this downturn. Next comes the recovery. Until then we will continue to prudently manage our costs. while sustaining our ability to capitalize on potential growth opportunities.

With that, Rob, can we take a few questions?

Question-and-Answer Session


Sure sir. Ladies and gentlemen, we'll know be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question is from the line of Brett Hodess from Banc of America. Please proceed with your question sir.

Brett Hodess - Banc of America

Good morning. So, I have couple of questions for you. First when you look at the improvement in utilization that you mentioned in the beginning of your comments, can you talk to us a little bit about is the utilization improving both in your IDN and your sub-con customers and maybe do you have some kind of estimate of where we're at on that utilization rate now?

Scott Kulicke

Sure, Brett. Let me talk a little bit about utilization. I'll start with a preamble. For those of you who don't know about this, we spend a lot of time measuring our customers' utilization. We go out every week and poll about 20,000 bonders worth of customers and get a sense of how many buyback we often by product line are being used at that point in time and it is a data stream that we've had to a long time.

I would caution you... I will give you some numbers and then I would caution people to not put huge faith in the absolute accuracy rather than thinking this is an analog measure and to what's important are shifts over time. Most of 2008, capacity utilization the way we measured it bounced around in the middle 70% range and that's down from the middle 80s at the peak of the last cycle.

Then in October of 2008 capacity utilization again as we measure it fell off a cliff so that by the holiday it was down in the 40%, middle or high 40% ranges. It was a funny 15 point bounce in early January, then it collapsed again back down into the 45%-46% range.

But since then we've seen it steadily climb. So its now back in the high 60s. It's really dramatic when you look at the curve both at how it went down and how it's come back up again and that's a period that we're characterizing as an inventory burn phase for our customers and their customers.

We are quite heartened that it is come back as quickly as it has. It is still by any kind of objective measure not good but it's a whole lot less bad than it was and the body language and the commentary we're getting from our customers is that they expect continued sequential improvement in their capacity utilization.

Brett Hodess - Banc of America

Great. And so now that the customers are coming back, it sounds like they are moving pretty quickly on to the new products in both the wire bonder and the die-bonder area with the end of lives of these legacy products?

Scott Kulicke

Yes, we're surprised about that. I went out and talked to a couple of big customers myself in the late fall and I was getting answers like don't come back and see me until 2010 and some of these same customers are already pricing POs. So the business has comeback much more quickly than we would have expected even a quarter or quarter and a half ago.

Brett Hodess - Banc of America

So it does sound like that the new products, there will be a higher percentage of the mix fairly quickly and I was wondering if that's replaced on the end of life; things you said about the legacy product and maybe Maurice can give us a little bit of insight if that's correct, and Scott maybe quickly when we might except for margins if revenues were in that 32-37 range because my guess is it should be better than what where we were recently in that range.

Scott Kulicke

Well, I'll let Maurice comment on the margins in a minute. But yes, we are making the transition to new products just as quickly as we can. One of the things that I'll compliment on our manufacturing guys on is that we've done a pretty good job not letting our inventory balloon out of hands. So we're able to make that transition I think faster than some of our competitors and certainly whether it's the ConnX and the IConn on the ball bonder side, iStack on the die-bonder side, we will go into an upturn with absolutely industry leading product.

Maurice Carson

So without taking away from anything that Scott said as a compliment to the manufacturing guys which have done a great job, we will still be selling about half old models in the ball bonder as you go into the June quarter. But after that it will really only be the new models in ball bonding.

So you'll still see a mix of gross margins as we fell through that remaining inventory through this quarter. And I also want to mention, Brett, that we're going to... so, it's still a pretty low number although we're thrilled that's its going in the right direction in absolute terms that there will still be some utilization issues as we go through in this quarter.

On the die-bonder side, you're right about the end of life as kind of finished that out and although we don't anticipate selling and delivering the new die-bonder until the September quarter at the earliest.

So next this June quarter will be filled with qualifications and data test and getting people up to speed on their machines. So don't expect as big an increase in gross margins as you might have thought for the June quarter, although it will be improved, we still have to work through some of these things.

Brett Hodess - Banc of America

Just as a final question then. In the December quarter you did about 37 million in sales and just under 30% gross margin. So, with some improvement in mix of the June quarter and as things rise up and with the cost reductions you've been doing, should we think that that it is around 30% sort of a good baseline if we're in that range?

Maurice Carson

Yes, without having a lot of details to go into about that is probably a little bit better than that. We're still waiting to see exactly how the wire (ph) bonders come in and the mix of their products. So it's a little hard to tell. There is still some open orders on that side and we're still identifying who is going to be the buyers in some of these ball bonders. But probably reasonable a little bit, we could be a little better than that.

Brett Hodess - Banc of America

Great. Well thank you very much for the questions.

Maurice Carson

Thank you Brett.

Scott Kulicke

Thanks Brett. Rob?


Yes, sir. We do have another question. That question is coming from the line of Gary Hsueh of Oppenheimer & Company. Please go ahead with your question sir.

Scott Kulicke

Hey Gary.

Maurice Carson

Hey Gary.

Gary Hsueh - Oppenheimer & Company

Yes, hi. How are you guys, great? Just a quick question here Scott. You seem to be implying that we're beneficiary at a situation where we worked down inventory levels to a relatively low level, but we're still in front of a real recovery here with no visibility on that.

So what happens to KLIC here between basically low inventory levels that we are at today with relatively low in demand and any kind of visibility on a real recovery? Are we kind of in at no man's land that KLIC was in sort of in 2002 and 2003 and just as a reminder back then, the equipment revenue number was actually two times higher than in your guidance for the June quarter today.

Scott Kulicke

I don't know Gary. I'm little struck by your question. You seemed to have ghost over the fact that the entire global economy is in shambles right now? GM is talking about filing for bankruptcy. I've got a little bit of good news and you're trying to turn it into something horrible.

We're not going to see, my opinion, a strong recovery until the global economy recovers. And ultimately it's the end consumer that decides whether to go out and buy stuff or not and then consumers are sitting on his money these days. What we are through is it a very difficult period where our customers were burning inventory, people are now getting back to a pattern where there is some capital investment being made based on market share shifts, based on technology upgrades, based on the few bright spots in the business like LED's where we're starting to get some traction in that area. We will fight through those things and as we said in the opening comments we do need to balance our cost management and technology investments.

I wouldn't characterize that as being in a no man's land. I'd characterize that as General Managers get paid to do.

Gary Hsueh - Oppenheimer & Company

Yes, Scott, actually I was just trying to ask a simple question around about way. That simple question is what do you think.. all the companies I think in the semiconductor supply chain are benefiting from a renormalization in spending here coming off Q1. What does that renormalization process do for KLIC? I mean does it get the equipment revenue or equipment unit numbers up to support our 30 million a kind of number per quarter or are we looking at a 40 million to 50 million number a quarter. If there's any help you can kind of give us around that would be helpful.

Scott Kulicke

As best we can tell. This is clearly a crystal ball shot. We expect to see modest sequential growth over the next few quarters with the potential will be surprised with a faster growth. Right...

But modest sequential quarter-over quarter-over-quarter-over-quarter growth is what we're currently modeling.

Gary Hsueh - Oppenheimer & Company

Okay, well that sounds like a pretty... that almost sounds like a recovery.

Scott Kulicke

Well I guess. Although... as you pointed out, in absolute numbers that are still not really exciting.

Gary Hsueh - Oppenheimer & Company


Scott Kulicke

But going in the right direction and I'll take that decision.

Gary Hsueh - Oppenheimer & Company

Scott, let me ask one final question here on end customers. I think we know pretty well which end segments and which companies are gaining share on the chip side. What particularly do you think is benefiting KLIC. Its just curious because it seems like legacy ball bonders in terms of sales are relatively large percentage in the March quarter and still a relatively large percentage in the June quarter and you would normally think it would only be a leading edge ball bonders that are getting traction here and now So, I just kind of hoping to get some kind of connection between those two?

Scott Kulicke

Actually a lot of the ball bonders sales are going into two separate... are being driven by two separate sets of issues. One is China's stimulus policies. We're seeing strength out of our Chinese customers who tend to not be leading edge applications to kind of middle of the road applications.

Secondly, the LED business is surprisingly strong, you know because you've followed this for a while but I'm sure but everybody in the call knows it. Historically, K&S was not focused on LEDs. We really only started to get in miles in that market segment in the last year. But in the current quarter LEDs will represent about a quarter of our shipments. Chinese bonders are just eying for LED applications. But that quarter of our shipments are all new customer names who are paying us over the last year, all cases where we've been taking business away from somebody else.

Gary Hsueh - Oppenheimer & Company

Okay. Great. Thanks a lot, Scott.

Scott Kulicke

Okay Gary.

Maurice Carson

Thanks Gary.


Thank you gentlemen. There are no further questions at this time.

Scott Kulicke

All right. Geoff, you want to give some closing comments.

Geoff Grande

Thanks everyone for joining us today. We look forward to updating you our next quarter with our results.


Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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