Greetings. And welcome to the Culligan Software Second Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, As a reminder, this conference is being recorded.
It's not my pleasure to introduce your host, Joe Algindy. Please go ahead, Joe.
Thank you. Welcome everyone to Kewell Consulting Second Quarter Fiscal 2020 Conference Call. Joining us on the call today are Fuzen Chen, President and Chief Executive Officer and Lester Wong, Chief Financial Officer. For those of you who have not received a copy of today's results, the release as well as the latest investor presentation are both available in the Investor Relations section of our website at investor.canace.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 condition may differ materially from what is indicated in those forward looking statements. For a complete discussion of the risks associated with Jewel Consulta, that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10 K for the year ended September 28, 2019, and the 8 K filed yesterday. Before moving on to our prepared comments, I'd like to make an additional announcement. Beginning on today's call, we will provide additional details and updates to our and will isolate the general and advanced LED market from the general semiconductor end markets and advanced packaging IC market.
Additional information regarding these end market categories are available within the latest investor presentation and will be supported in the Management Discussion And Analysis section of our quarterly and year end SEC filings. With that said, I would like to turn the call over
to Fuzen Chen. The business overview. Please go ahead, Fusen.
Thank you, Joe. This is clearly an unprecedented period for our industry and the reward. 1st, I hope your family, friends and colleagues remain safe and healthy through this unique period. Before reviewing our quarterly business update, I would like to briefly discuss our response and the status relating to the global COVID-nineteen situation Over the past 6 years, our global development and the manufacturing side have designed and carry out detailed business continuity planning and testing exercise. This effort helps streamline and prioritize critical communication flow and allow our individual site management team in effective area.
To operate site
in the
best interest of employee, customers and the business partner. While allowing decisive response to local and regional guidelines and the orders. More recently, over the past few months, we have also taken many precaution steps. Including significant trouble reductions, increased site cleaning, rigorous social distancing practice, visitor limitations. And an increased use of a virtual collaboration tool and software.
Where it is in the best interest to employees and the local community, where we operate. We have also reduced our physical presence in the office and the facilities to provide a safe working environment for essential staff. Our IP infrastructure has provided adequate bandwidth to support the need of this temporarily in more working environment. Despite this working from home transition, we continue to make a progress on our development initiative and do not anticipate significant disruption to critical customer commitments. From a manufacturing standpoint, our operational side in Singapore, Europe and China remain fully operational.
Our operation in China returned to 100 percent capacity within the March quarter. Regarding supply chain, there continued to be disruption in many part of the world, although we believe the situation remains manageable, We experienced temporary disruption of supply within China allowed production gradually recovered in March. Several U. S. And the European vendor are long in at the reduced capacity.
Currently, the situation in Malaysia may create additional disruption in the June quarter. Again, we believe this current situation is manageable, and we are mitigating this identified supply chain risk through cross partnership with customers and also with a new and existing supplier. Although, I'm very proud of our organization's resilience, dedication, and the effort in navigating this unique situation. Turning to our business dynamic. Demand challenge and uncertainty were triggered by mandate customers shut down early in the quarter.
Yemen has recovered rapidly in certain areas like China and has softened in other region currently implementing social distancing practice, such as Europe, Southeast Asia, and the US. During the March quarter, revenue came in at $150,700,000, a sequential increase from the December quarters. We generated $11,900,000 of net income and the earning per share of $0.19. On the December quarter, the capital equipment segment revenue increased by 11% with stronger demand for our high volume board and which bundle system. The APS segment decreased by roughly 11% sequentially.
This change was largely due to the low customer utilization rate in the week following Chinese New Year. Considerably a higher portion of capital equipment sales, gross margin of 46% came in better than expected, generating 69 $1,000,000 of gross profit. Within capital equipment, general semiconductor increased the most dramatically by nearly $17,000,000 over 33 percent from the December quarters. Automotive And Industrial also improved wire LED advanced packaging and the memory declined sequentially. During the June quarter, we continued to anticipate demand in improvement to stem primarily from general semiconductor and the LED market, a low end display ongoing shutter in place order to create regional demand disruptions.
I would now like to turn the call over to Lester Wong who will will this quarter's financial overview in greater detail. Lester?
Thank you, Fusen. My remarks today will refer to GAAP results unless noted. Net revenue for the quarter was $150,700,000. Gross margins of 46% generated $69,300,000 of gross profit and net income of $11,900,000 or $0.19 per diluted share. As Susan mentioned, despite the lower relative ATS contribution, gross margins of 46% were stronger than expected.
This stronger performance is largely due to product mix within equipment and a higher proportion of feature rich equipment. Looking into the June quarter, we anticipate gross margins to be lower due to an increased demand of LED wire bonding system. Operating expenses again came in more favorably than our expected target range. This is largely due to a sustained focus on cost control prior restructuring efforts, but also due to lower travel expense. Travel expenses were approximately 5 $50,000 lower in the March quarter versus the December quarter.
As we continue to prioritize order fulfillment and near term project development, we expect June quarter operating expense to again fall on the lower side of our target operating expense range. As a reminder, this GAAP operating expense target range consists of $53,000,000 of fixed expense, plus 5% to 7% of variable expense tied to revenue. Turning to tax. We booked a net tax expense of $1,200,000. We continue to target a long term average effective tax rate of approximately 18%, although anticipate our fiscal 2020 period to come in below that long term target.
Regarding the balance sheet, we ended the March quarter with a total net cash and investment position of $524,700,000, or $8.17 on a diluted share basis. Considering our long term perspective on the repurchase program, we view the recent market dynamics as an opportunity. During the March quarter, we increased our repurchase activity by over three times and deploy $18,500,000 to repurchase 872,000 shares. Over the trailing 2 years, we deployed roughly $191,000,000 to repurchase 8,500,000 shares. Since initiating the program in 2014, have repurchased 18,300,000 shares, which is equivalent to over 28% of our diluted share count in the March quarter.
We continue to take a long term and very structural approach to this repurchase program. At the end of the March quarter, we had approximately $73,300,000 remaining under the existing share repurchase authorization. On a book value per share basis we closed the March quarter with $11.89. Working capital defined as accounts receivable plus inventory less accounts payable increased slightly to $255,400,000. From a DSO perspective, Our day sales outstanding decreased from 124 days to 119 days.
Our day sales of inventory increased from 116 days to 117 days and days of accounts payable increased from 55 days to 56 days. This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the June quarter's business outlook.
This is currently a unique and dynamic period in our history. While we cannot predict the futures, our strong fundamental position expectation of core business improvements and the growing market prospect for our new products provide confidence and the optimum as we look ahead. Fundamentally, we continue to have adequate cash on hand to support our operational maintain a path of development while supporting shareholder return through the dividend and our opportunistic repurchase activity. Also, our served market have diversified over the years and we continue to aggressively expand our market reach. Next, despite supply chain challenge throughout the world and ongoing uncertainty.
There continued to be a part of the strong demand for our core high volume systems. After several low volume quarters, many customers are beginning to demand incremental capacity. This is primarily evident in the general semiconductor and the LED market, although we continue to anticipate gradual improvement in automotive and the memory as well. Finally, I'm happy to report that adoption and the progress of our APAMA as a catalyst. Advanced packaging system and also Pixelox, our advanced LED system, continue as planned.
Customer feedback continued to be positive and we are aggressively working toward increasing production and also additional customer acceptance. This new product like enable new packaging capabilities at an additional layer of diversification to our business. I will provide a brief update continue to be in several parallel evaluations, which are provision according to plan. We have attained the 1st Catalyst PO and acceptance from an OSAT in April, supporting high volume logic application. This first market acceptance of Cadenas highlights our ability to rapidly develop a competitive free chip solution and expand our market reach further into leading edge logic market, a market where the wirebonding was historically less dominant.
We are currently building multiple capabilities to be shipped over the coming quarters. Apama, our thermal compression system is qualified for production for several high end mobile chipset at a major OSAT and we are also actively working towards several additional qualifications supporting new features in mobile sensor applications. Our progress and the expectation on Pixelox, all advanced mini and the micro LED system remain consistent and the optimistic. We expect higher volume production to begin in the June quarter and the majority of the calendar year sales to ship in the September December quarters. We anticipate consistent demand for piezo Labs through fiscal year 2021, largely driven by backlighting application in the display market.
In spite of challenging working environment globally, we have maintained focus on our longer term market expanding development effort This initiative are increasing our prospect for next generation display and also leading edge logic integration. Continuing the current dynamic environment and the ongoing impact of regional stay at home order on semiconductor assembly production and our customers' equipment capacity plan. We are guiding June quarter revenue of $140,000,000 to $160,000,000. While this production challenge across the industry in Meidinger, we are reassured by the resilience of the general semiconductor and the LED market in areas like China, which are now less effective by the current global pandemic. Again, we believe the recovery is partially due to ongoing demand improvement within select end market, but also to the relatively strong and improving utilization rate we have seen in the December quarters.
Integration rate recovered quickly in China, and we are hopeful other region will resume higher level of productivity once social distancing prejudice begin to ease. Longer term, ongoing technology transitions within the automotive market, Israel Market And William Advanced Packaging are driving the need for new equipment capabilities. Ongoing progress of this technology transition will further diversify our unit driven businesses. We continue to believe this improving condition and the longer term opportunity will be much more meaningful to our business than the near term headwinds. In summary, the strength of our fundamental resilience of our core market and the progress of new growth initiative provide a positive outlook and ongoing confidence as we look ahead.
I'm very proud of the dedication and the adaptability of our employees through this dynamic period. I'm confident we will actually this current environment are stronger and even better positioned organizations. This concludes our prepared remarks. Operator, We will now be happy to take your questions.
Our first question today is coming from Craig Ellis from B. Riley FBR. Your line is now live.
Yes, thanks for taking the question. And gentlemen, congratulations on the execution in the quarter, despite a very dynamic environment. Houston, I just wanted to start by following up on some of the trends in the quarter. I think I heard you say that memory was down quarter on quarter, but auto was up. We've heard from some other companies that memory utilization rose through the quarter.
So, can you give us your view of how memory looks as we move into the latter part of April. And secondly, on auto, there are a lot of concerns about auto units sequentially in the second quarter. What's your view of the automotive market as it stands today?
Okay. So, Craig, let's talk about, I think you asked about memory and auto, right? So let me talk about memory first. I think the recent months is we see actually a price of both NAND and DRAM started to come up. So I do believe, recovery is ongoing and will go even stronger, in the next couple months and quarters, I think our memory is a very important component for the whole food chain.
And I'm a fan to believe it's going to go bigger, you know, compared to a current label, you know, because of 5G, because of many, AI allows the technology. So for us, I think a little bit, slower. Our quarterly revenue compared to average revenue still low. That's why I think we say it's a little bit suffer. But I do believe, the recovery is ongoing.
I think in the next couple of months and the quarter, we see the stronger revenue contribution from memory. So that's my question about the memory.
Okay. And then on
automotive, I think, for us, I think we're seeing a little bit ago. You know, relatively, I think the whole world, the total was still, a little bit low, but I think, also going through some of the evolution, right? Think electrical car and a lot of change, information, information and also, mainly content in the auto into increase. So hopefully, I think we're going to see that recover, I think, in the next couple of quarters as well. But relatively to us, I think, it's a little bit.
So we see an upside in the memory and the auto.
Great. That's helpful. And the next question is really a follow-up on a point in the press release and and then part of fact of the guidance range. So I think a quarter ago, the guidance range was $30,000,000. It's back to $20,000,000.
So just that signal just increased confidence with the way the supply chain is working. And I noticed from the release backlog ending, The fiscal 2nd quarter was $136,000,000, so about 90% of the guidance midpoint how would you characterize the strength of the backlog and would you expect to be building backlog it should go through the fiscal 3rd quarter given the view for, gradual sequential growth through the year.
Okay. So, Craig, let me put it this way. We believe our customers on the industry in 2019. So currently, I think the utilization rate in the industry is quite healthy. That we see many technology driver, you know, like the 5G and AI are many things.
And that we all experienced a few quarters over a sequential growth, right? So we can see that fundamental demand for our core business, I think, is very strong. And coupling with our new product introduction in AP and LED and also new customer we are engaging. I think that we are quite optimistic in for 2020 and beyond. But unfortunately, I think that we have this a pandemic situation.
It's just not practical, you know, for some of our customers, giving you superior time to give us the PO and then for us to deliver the system. And the services system in their fab. So it is a pandemic that we can review our loop. But fundamentally, I think, the situation will improve and, you know, our growth will, will resume. So, at the beginning of this coronavirus, I think I'll start probably in China end of January.
I think impact in unknown is much, much more than we expected. So that's why I think we give a little bit wider, wider range. And fortunately, I think there's a lot of effort we almost hit the center point, right? So, with a lot of effort, with a team putting together, we believe, we know how to respond to a lot of dynamic much better. That's why I think this time, we actually tighten the range So I wish you a good shot.
Hey, Greg, it's Lester. Just to give you a little more specificity around logs, we are seeing backlog growing over the last couple of quarters. So over each last four quarters, the backlog and capital equipment has increased.
That's great color, on both fronts guys. And then my last question before I hop back in the queue, Houston, it was really helpful to get your perspective on some of the emerging product growth drivers for the company, catalyst to trauma and big deluxe. And I know we've had a view that Pixelux could potentially generate $50,000,000 to $100,000,000 in revenue. So the 2 part question is first, Is that still a reasonable revenue expectation for Pixelux this year and next year? And if you look at the 3 new products, catalyst department, pixelusa.
Which would be the most significant growth drivers this year and then next year. Thanks so much for the help guys.
Okay. So I think I talked about piece of that, in my script. So, currently, I think we expect about $40,000,000 for a calendar year revenue. So roughly $14,000,000. And, summer system is going to be shipped in June, but majority of the system is going to be shipped, I think, in September December.
So altogether, I think we are looking at, roughly $14,000,000 because we don't have a half over the year to learn these products. So, the number actually is due to the shipment schedules and there is not a change in an end demand, end demand, we continue to expect the demand for piece products to increase further in the fiscal 2021. So, compared to, you know, a lot of global market disruption, I think this performance, $40,000,000, It's a very good performance. So ensure somebody, I think, a piece of that is on track and on schedule, and I'm happy with it. So that's a piece of locks and the next year will be bigger.
And, the AP, I think, we are also quite confident If you look at the AP, I think in increasing the transistor density is very important, right? So most of it will actually actually increase the transistor picking density at the wafer level by label, but AP actually increased the picking density in transitory label, it's much more affordable and a much more effective, right? So, these actually are very favorable our TCB and, flip chip, and we are aiming at high performance logic, high bandwidth memory also next generation of imaging sensors. So AP, I think, many players, and we are actually a little bit late. But we are quite confident.
So we are in the process to get the market shares established a good foundation. So to share AP getting much bigger, probably would be 2021. And we are quite confident 2022 will be much, much bigger, but we will see the size 4 increase, I think, in 2021. So, that's, a piece of locks and the AP, and the other one is the APS. I think we are much stronger in APS, pull a much focus.
So, we hopefully, we will see, from now to 2022. We can contribute probably close to $200,000,000 in AP plus advanced LED and maybe additional $50,000,000 for the APS.
Thank you. Our next question is coming from Chris Sandgaard from Cowen and Company. Your line is now live.
Hi, thanks for taking my question. I had a few of them. First on Fusen, You spoke about supply constraints, which seems to be a common theme across most companies. Just curious if you did not have any supply constraints, What is the June quarter guidance have been?
Okay. So actually, Krish, June quarter actually has a constraint both own supply chain and also, the, the, charter increase. So I mentioned, it's also not practical to expect some of the customer to place a PO. And the thing is period time and we deliver a system in their fab when they are shut down. So I think we are impacted both by supply chain disruption and also the charter increase.
I would say charter increase actually will actually impact more than supply chain disruption. Our operating team, I think it's done a very, very good job, right? So if you don't do me to quantify, I think probably these two areas together, probably about 15% of our total revenue outlook. But I think this is temporarily this order did not disappear think it's going to show up in the next couple of quarters in Olevina.
Got it. That's helpful. And then I think you mentioned about auto coming back. I'm just curious, is that a function of what your customers are telling you, or is it just the fact that auto has been weak for a while, so it's expected to have a cyclical rebound?
Well, so question, let me, let me, let me rephrase it. Your memory will come back much faster than auto, right? You know, with the current financial situation, I think auto actually will be for a while. So this will be our a little bit longer term opportunity. But Actually, I'm quite confident there will be a lot of innovation and the electrical car will get much, much bigger.
And in the Bay Area, there are many things information, the displays, the semiconductor content. So I think auto will come back. But let me multiply a little bit. I think this will take a while to come back. So this will be our longer term opportunity.
Got it. Got it. All right.
And then just a final housekeeping question for Lester. I made a mistake in the prepared comments. What did you say in March quarter, the semi semiconductor revenues, auto revenues, China exposure was?
Sorry. I don't think I specifically said that. Are you asking what, regional sales in China? Is that your question, Krish?
Regional sales in China and also out of the total sales, how much was semi an auto in March?
So out of the total sales in China for the quarter is about 63%. And, for capital equipment sales, auto was, we do auto and industrial together, so it's about 18% of total capital equipment sale. And what was the other one you're asking?
Or Semi connected, like a general semi exposure?
The general semi is about 60%.
Thank you very much. Appreciate it. Thanks a lot, folks.
Thank you.
Thank you. Our next question is coming from David Duley from Steelhead Securities. Your line is now live.
Could you just repeat what you said was China 63 percent of revenue in the quarter? Is that what you said last year?
Yes. 63.
62. Okay. And General Semi was 60%. So therefore, Advanced Packaging would be the other 40%.
No, no, no, we break out our general semi LED of air packaging memory as well as auto industrial, right?
And could you just sort of view those percentages?
Sure. So general terms of 60 LED was about 9 to 10. AP is around 6 to 8 or so. Memory was around 8 to 10 and auto industrial is about 18 20.
And what do you think the overall utilization rates are now and I'm assuming utilization rates in China are higher than in other regions. If you could help us understand what the difference is, that would be great.
Sure. I'll take that, Susan. For utilization rate actually is quite healthy. I would say, again, globally, it's close to 80%. China, we see it above 90%.
Obviously, it's much softer in Europe as well as in the U. S. And, Korea and Japan. So, in general, I think, Taiwan is actually also pretty strong as well. So I would say Taiwan and China are the 2 leading ones right now.
In on utilization.
Excuse me. Okay. And Did you mention what the specific supply disruptions are that you're seeing, I guess, in Malaysia, if you could just help us understand what it is that's in short supply for you?
I think for us, we're still, as Susan indicated, we're working with our partners suppliers, throughout the world, first through China, now Malaysia, as well as in the U. S. To manage supply chain constrictions. We also looking for, new partners, second sources on. But I think for Malaysia, yes, it's, obviously, there's a movement control order in place.
Even though some of the semiconductor companies have gotten exceptions as well as suppliers, but it's always, and seeing we need every 2 weeks in terms of the MCO. So I think for us, right now, it's still definitely manageable. It did not have a huge effect on the March quarter, but I think it will have some effect in the June quarter food thin size with both shelter in place and move the control.
Okay. Final question for me is, as far as the LED product goes going forward, many costs you talk about doing $40,000,000 in the back half of this calendar year? Is that could you help us understand how many customers that is And what are some of the in market products that you would expect to be behind this ramp?
Okay. So, as I said, I mentioned this, in my script last time, actually, we have a partner in the low hanging actually together, we identify our customers. So they also have a networking, for example, in consumer electronics, industry, in the display industry, So, actually, we have numerous customers. But 4 sizable customers, I think we can probably have 2 to 2 or 3 sizable customers. And at this moment, it's, yeah, it's quite a little bit concentrated on a few of our customers, but we do have multiple customers.
Thank you.
Our next question is coming from Tom Diffely from D. A. Davidson. Your line is now live.
Yes. Good morning and good evening. Following up on Dave's in the LED question. We've been talking about a $30,000,000 to $70,000,000 market midpoint of $50,000,000. Now you're saying it's 40 Is it just the timing of when these shipments happen in the second half that's gone change the bid point of that guide?
Okay. So, Dave, I think, 1st, I think it took about is probably a long time ago, a year ago. So personally, actually, I am quite happy with this program, you know, we talk about maybe second half of this year's Tableau Bank. So actually, the demand actually is, it's always been expected and the revenue really, depends on the shipment schedule, right? It's really when the customer needs the system, right?
So, and due to a recent customer's request I think that we are seeing it's about $40,000,000 from now to end of the year. And we see our next year, our demand will be stronger. Than the current level. So it's really not the main issue. It's really a shipment schedule, right?
And we need to make a system and according to the customer's request. And whether a system meets the customer side and we ship out for this and we claim that everything.
Okay. So the shipment schedule is dictated by the customer, not your supply capabilities?
That's correct. I don't think it's our julien, you know, our constraint and not demand constraint. I think it remains a bit healthy.
Okay, great. And then Lester, I was hoping to get color on the utilization rates and how they've changed over the last quarter? Cause I remember going into the year, China was really strong at the end of the last year. Maybe dipped a bit in the beginning of this year, but curious as this quarter has gone on, how have the different utilization rates changed?
I think the utilization rate, frankly, Tom hasn't changed that much. I think it probably changed more, maybe a little bit in the June quarter. Particularly as more shelter in place, depending on what gets lifted, China was pretty strong, even in Q1. I think it's stronger even in Q2. I think Taiwan also has remained pretty robust.
I think, Southeast Asia has fluctuated a little bit, but most, I think Europe and the U. S. Have, they were soft before and they continue to be soft now.
Okay. That's helpful. And finally, when you look at the, the operating expenses, obviously, some very good cost controls going on right now, are those just temporary measures or has anything changed structurally that would change the operating expense equation going forward?
Well, Tom, you know, cost control is a subject near and dear to sweetheart. So we always look at it, but I think, as I indicated, some of the reduction is due to, for example, reduction in travel, because of obviously COVID 19. Obviously, our rate of hiring also slowed down a little bit, given the difficulties of hiring, So I I would say at this point, I would not say it's structural in the model. I think, 53+5 to 7 is still what we're saying. But we are coming in, on the low side of that, both for last quarter, this quarter, as I guided probably for next quarter as well.
Our next question is coming from Christian Schwab from Craig Hallum. Your line is now live.
Great. Thanks. Fusen, I just want to make sure I understand on the supply chain with disruptions. That's really like movement controls and shelter in place that's causing supply chain disruptions, correct? There is not components that you're waiting for, that are in short supply some place in the supply chain.
Is that correct?
Yes. It's many things, right? You know, sometimes, you know, they cannot go to the office to make a part for us. So it is really a lot of things together, right? So, sometime we are short on part, we got to find the, the second our supplier.
So, actually, this is quite, quite time consuming to manage all the disruption. Okay.
Okay. And and and and would you say that given the the economic, you know, dislocation due to the COVID-nineteen environment that the business a couple of quarters here were kind of stable at 150 should we begin to reopen, successfully globally? Can you give us any idea about, you know, how big a recovery or snapback in your revenue could be, you know, 2 to 3 quarters out?
So, you know, we don't guide more than 1 quarter, but if you ask my feeling, I can see my feeling. Right? So, I already mentioned, I believe our customers, they are under invest in 2019. And at this moment, actually, if you look at the utilization rates are quite healthy, we already have a few, quarters going to grow. Unfortunately, I think I would really want to guide higher, but we really need to win the risk for the pandemic.
So fundamentally, I think it remains there. So, hopefully, I think this will not go for more than 2 quarters. And hopefully, we can see a better Q4. If you look at it, our customer actually concentric in China and in Asia. So it will only be impact, U.
S. Already been impacted and they're opening up. And I think this quarter, actually, Southeast Asia also is the Asia impacted a lot. But I really don't think that this will be more than another quarter, right? So all the semiconductor company looks like it's already more.
Most of them are intake already. If there's no second wave of the infection, Hopefully, we can see data Q4 coming back. So hopefully, up to Q3, we can see the data living off.
Okay. That's very helpful. Thank you.
I don't have any other questions.
Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.
Thank you, Kevin. Thank you all for the time today. As always, please feel free to follow-up directly with any additional questions. Have a great day, everyone. Operator, this concludes our call.
Thank you. It does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.