Greetings, welcome to the Kulicke & Soffa second quarter fiscal 2020 earnings conference call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Joe Elgindy. Please go ahead, Joe.
Thank you. Welcome everyone to Kulicke & Soffa second quarter fiscal 2020 conference call. Joining us on the call today are Fusen 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.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 condition, please refer to our recent SEC filings, specifically the 10-K for the year ended September 28th, 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 end market categorization. These end market categories will now refer only to our Capital Equipment segment 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 reported in the management discussion analysis section of our quarterly and year-end SEC filings.
With that said, I would like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.
Thank you, Joe. This is clearly an unprecedented period for our industry and the world. First, I hope your family, friend, 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-19 situation. Over the past six years, our global development and manufacturing sites have designed and carried out detailed business continuity planning and testing exercise. This effort have streamlined and prioritized critical communication flow and allow our individual site management teams in effective area to operate site in the best interest of employees, customers, and the business partner, while allowing decisive response to local and regional guidelines and orders.
More recently, over the past few months, we have also taken many precautionary steps, including significant travel reductions, increased site cleaning, rigorous social distancing practice, visitor limitations, and an increased use of 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 IT infrastructure has provided adequate bandwidth to support the need of this temporary remote working environment. Despite this working from home transition, we continue to make progress on our development initiative and do not anticipate significant disruption to critical customer commitments. From a manufacturing standpoint, our operational site in Singapore, Europe, and China remain fully operational. Our operation in China returned to 100% capacity within the March quarter.
Regarding supply chain, there continue to be disruption in many parts of the world, although we believe the situation remain manageable. We experienced temporary disruption of supplier within China, although production gradually recovered in March. Several U.S. and European vendor are running at a 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 close partnership with customers and also with new and existing suppliers. Overall, I'm very proud of our organization's resilience, dedication, and effort in navigating this unique situation. Turning to the business dynamic, demand challenge and uncertainty were triggered by mandate customer shutdown early in the quarter.
Demand has recovered rapidly in certain areas like China and has softened in other regions currently implementing social distancing practice, such as Europe, Southeast Asia, and the U.S. During the March quarter, revenue came in at $150.7 million, a sequential increase from the December quarters. We generate $11.9 million of net income, and the earnings per share of $0.19. From the December quarter, the Capital Equipment segment revenue increased by 11%, with stronger demand for our high volume ball bonder and the wire bonding system. The APS segment decreased by roughly 11% sequentially. This change was largely due to the lower customer utilization rate in the week following Chinese New Year. Considering a higher portion of Capital Equipment sales, gross margin of 46% came in better than expected, generating $69 million of gross profit.
General semiconductor increased the most dramatically by nearly $17 million, over 33% from the December quarter. Automotives and industrial also improved, while LED advanced packaging and memory declined sequentially. During the June quarter, we continue to anticipate demand improvement to stem primarily from general semiconductor and the LED market, although anticipate ongoing shelter-in-place order to create regional demand disruptions. I would now like to turn the call over to Lester Wong, who will cover 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 $150.7 million. Gross margins of 46% generated $69.3 million of gross profit, and net income of $11.9 million or $0.19 per diluted share. As Fusen mentioned, despite the lower relative APS 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 $550,000 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 million of fixed expense plus 5%-7% of variable expense tied to revenue. Turning to tax. We booked a net tax expense of $1.2 million. 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 $524.7 million, 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 deployed $18.5 million to repurchase 872,000 shares. Over the trailing two years, we deployed roughly $191 million to repurchase 8.5 million shares. Since initiating the program in 2014, we have repurchased 18.3 million 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 $73.3 million 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 $255.4 million. 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.
Thanks, Lester. This is currently a unique and a 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 optimism as we look ahead. Fundamentally, we continue to have adequate cash on hand to support our operational ramp, 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 continue to be pocket 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 memory as well. Finally, I'm happy to report that adoption and progress of our APAMA and the Katalyst advanced packaging system, and also PIXALUX, our advanced LED system, continue as planned. Customer feedback continue to be positive, and we are aggressively working toward increasing production and also additional customer acceptance. This new product might enable new packaging capabilities, add an additional layer of diversification to our business. I will provide a brief update for each of these new systems. Katalyst, our high accuracy flip chip tool, continue to be in several parallel evaluations, which are progressing according to plan. We have attained the first Katalyst PO and acceptance from an OSAT in April, supporting high volume logic application.
This first market acceptance of Katalyst highlights our ability to rapidly develop a competitive flip chip solution and expand our market reach further into leading-edge logic market, a market where the wire bonding was historically less dominant. We are currently building multiple Katalyst tools 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 feature in mobile sensor applications. Our progress and expectation on PIXALUX, our advanced mini LED and micro LED system, remain consistent and 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 and December quarters. We anticipate consistent demand for PIXALUX through fiscal year 2021, largely driven by backlighting application in the display market.
Despite a challenging working environment globally, we have maintained focus on our longer-term market expanding development effort. These initiatives are increasing our prospect for next generation display and also leading-edge logic integration. Considering 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 million to $160 million. While this production challenge across the industry may linger, we are reassured by the resilience of the general semiconductor and the LED market in areas like China, which are now less affected by the current global pandemic. 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.
Utilization rate recover quickly in China, and we are hopeful other region will resume higher level of productivity once social distancing practice begin to ease. Longer term, ongoing technology transitions within the automotive market, display market, and within 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 initiatives provide a positive outlook and ongoing confidence as we look ahead. I'm very proud of the dedication and adaptability of our employees through this dynamic period. I'm confident we will exit this current environment as stronger and even better positioned organizations. This concludes our prepared remarks.
Operator, we will now be happy to take questions.
Thank you. We're now conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. one moment, please, while we poll for questions. Our first question today is coming from Craig Ellis from B. Riley FBR. Your line is now live.
Thanks for taking the question, gentlemen, congratulations on the execution in the quarter, despite a very dynamic environment. Fusen, 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, auto was up. We've heard from some other companies that memory utilization rose through the quarter. Can you give us your view of how memory looks as we move into the latter part of April? 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. Craig, I think you asked about memory and auto, right?
Right.
Let me talk about memory first. I think in the recent months, we see actually a price of both NAND and DRAM started going up. I do believe recovery is ongoing and will grow even stronger, in the next couple of months and quarters. Memory is a very important component for the whole food chain. I'm a fan to believe it's going to go bigger, compared to the current level, because of 5G, because of many AI and other technologies. For us, I think still a little bit slow. Our quarterly revenue compared to our average revenue, still low. That's why I think we say it's a little bit softer. I do believe the recovery is ongoing. I think in the next couple months and a quarter, we will see the stronger revenue contribution from memory. That's my opinion about memory.
Okay. On the automotive market?
Automotive, for us, I think we still have a room to go. Relatively, I think the whole world, auto is still a little bit low, but I think auto is going through some revolution, right? I think electrical car and a lot of change, information, and also memory content in the auto will continue to increase. Hopefully, I think we're going to see the recovery, I think, in the next couple of quarters as well. Relatively to us, I think it's still a little bit slow. We see an upside in the memory and the auto.
Great. That's helpful. The next question is really a follow-up on a point in the press release and an artifact of the guidance range. I think a quarter ago, the guidance range was $30 million. It's back to $20 million. Does that signal just increased confidence with the way the supply chain is working? I noticed from the release backlog ending, the fiscal second quarter was $136 million, so about 90% of the guidance midpoint. How would you characterize the strength of the backlog and would you expect to be building backlog as you go through the fiscal third quarter, given the view for gradual sequential growth through the year?
Okay. Craig, let me put it this way. We believe our customers are under-invest in 2019, right? Currently, I think the iteration rate in the industry is quite healthy, and we see many technology driver, like 5G and AI, many things. We already experience a few quarter of a sequential growth, right? We can see that fundamental demand for our core business, I think, is very strong. Coupling with our new product introduction in APA and LED, and also new customer we are engaging, I think that we are quite optimistic for 2020 and beyond. Unfortunately, I think that we have this pandemic situation. It's just not practical for some of our customers. Do you need a secure account to give us a PO and then for us to deliver the system, and then service the system in their fab?
At least the pandemic actually weaken a little outlook. Fundamentally, I think the situation will improve and our growth will resume. At the beginning of this coronavirus, I think start probably in China, end of January. Actually, impact and unknown is much more than we expected. That's why I think we give a little bit wider range. Fortunately, I think with a lot of effort, we almost hit the center point, right. With a lot of effort, with our team putting together, we believe we know how to respond to a lot of pandemic much better. That's why I think this time we actually tighten the range. Right. I will sure.
Hey, Craig, it's Lester. Just to give you a little more specificity around the backlog. We are seeing backlog growing over the last couple of quarters. Over each last four quarters, the backlog of the company has increased.
That's great color on both fronts, guys. My last question before I hop back in the queue. Fusen, it was really helpful to get your perspective on some of the emerging product growth drivers for the company, Katalyst, APAMA, and PIXALUX. I know we've had a view that PIXALUX could potentially generate $50 million to $100 million in revenue. The two-part question is, first, is that still a reasonable revenue expectation for PIXALUX this year and next year? As you look at the three new products, Katalyst, APAMA, and PIXALUX.
Yeah.
Which would be the most significant growth drivers this year and then next year? Thanks so much for the help, guys.
Okay. I think I talk about PIXALUX in my script. Currently, I think we expect about $40 million. For the calendar year revenue, roughly $40 million. Some of system is going to be shipped in June, but majority of the system is going to be shipped, I think, in September and December. Altogether, I think we are look at roughly $40 million, because we only have a half of the year to learn these products. The number actually is due to the shipment schedules, and there is not a change in end demand. We continue to expect the demand for PIXALUX to increase further in our fiscal 2021. Compared to a lot of global market disruption, I think this performance, $14 million, is a very good performance.
In short summary, I think that PIXALUX is on track and on schedule. We are quite happy with it. That's PIXALUX. The next year will be bigger. The AP, I think we are also quite confident. If you look at the AP, I think increasing the transistor density is very important, right? Most of [inaudible] actually increase the transistor packing density at the wafer level by level. AP actually increase packing density in transistor level. It's much more affordable and much more effective, right? This actually very favorable to our TCB and flip chip. We are aiming at high performance logic, High Bandwidth Memory, and also next generation of our imaging sensor. AP, I think, many player. We are actually a little bit late, but we are quite confident.
We are in the process to gain the market shares, establish a good foundation. To see AP getting much bigger probably will be 2021, and we are quite confident 2022 will be much, much bigger. We will see the sizable increase, I think, in 2021. That's PIXALUX and the AP. The other one is the APS. I think we are much stronger in APS, put much focus. Hopefully, we will see from now to 2022, we can contribute probably close to $200 million in the AP plus advanced LED, and maybe additional $15 million for the APS.
That's very helpful. Thank you, guys.
Thank you. Next question is coming from Krish Sankar from Cowen and Company. Your line is now live.
Yeah, 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 would the June quarter guidance have been?
Okay. Actually, Krish, June quarter actually has a constraint both on supply chain and also the shelter-in-place . I mentioned, it's also not practical to expect some of the customer to place a PO, and the thing need is a period time, and we deliver system in their fab when they are shut down. I think we are impacted both by supply chain disruption and also the shelter-in-place . I would say shelter-in-place actually will impact more than supply chain disruption. Our operation team, I think, has done a very, very good job. If you want me to quantify, I think that probably these two adding together, probably about 15% of the total revenue outlook. I think this is temporary. This order did not disappear. I think it's going to show up in the next couple quarters in our revenue.
Got it. That's helpful, Fusen. 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?
Krish, let me rephrase it. I think memory will come back much faster than auto. With the current financial situation, I think auto actually will be weak for a while. This will be our a little bit longer term opportunity. Actually, I'm quite confident there will be a lot of innovation and electrical car will get much, much bigger. In the battery area, there are many things, information, the display, the silicon content. I think auto will come back. Let me modify a little bit. I think this will take a while to come back. This will be our longer term opportunity.
Got it. All right. Just a final housekeeping question for Lester. I may have missed it in the prepared comments, what did you say March quarter, the 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?
Yeah. Regional sales in China, and also out of the total sales, how much was semi and auto in March?
Out of the total sales in China for the quarter is about 63%. For Capital Equipment sales, we do auto and industrial together, so it's about 18% of total Capital Equipment sale. What was the other one you were asking? Sorry.
Semiconductor, like your general semi exposure.
The general semi is about 60%.
All right. Thank you very much. Appreciate it. Thanks a lot, folks.
Okay. Thanks.
Your next question is coming from David Duley from Steelhead Securities. Your line is now live.
Good morning. Thanks for taking my question. Could you just repeat what you said? Was China 63% of revenue in the quarter? Is that what you said, Lester?
Yes. 63%.
63%. Okay. General semi was 60%, so therefore, advanced packaging would be the other 40%?
No, no. We break out our general semi, LED, advanced packaging, memory, as well as auto industrial, right?
Okay. Could you just review those percentages?
Sure. General semi was 60%, LED was about 9%-10%, AP is around 6%-8% or so, memory was around 8%-10%, and auto industrial was about 18%-20%.
Okay. Thank you. What do you think the overall utilization rates are now? 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, Fusen. 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. In general, I think Taiwan is actually also pretty strong as well. I would say Taiwan and China are the two leading ones right now on utilization.
Excuse me. Okay. 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.
For us, as Fusen indicated, we're working with our partners, our suppliers throughout the world, first through China, now Malaysia, as well as in the U.S., to manage the supply chain constrictions. We're also looking for new partners, second source and so on. For Malaysia, yes, 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 being renewed every two weeks in terms of the MCO. For us right now, it's still definitely manageable. It did not have a huge effect on the March quarter, it will have some effect on June quarter, as Fusen said, with both shelter in place and movement control.
Okay. Final question from me is, as far as the LED product goes going forward, you talk about doing $40 million in the back half of this calendar year. Could you help us understand how many customers that is and what are some of the end market products that you would expect to be behind this ramp?
Okay. Dave, I think I mentioned this in my script last time. Actually, we have a partner, Rohinni. Actually, together, we identify our customers. They also have a networking, for example, in consumer electronics, auto industry, and the display industry. Actually, we have numerous customers. For sizable customers, I think we can probably have two or three sizable customers. At this moment, it's a little bit concentrated on a few of the customers, but we do have multiple customers.
Thank you.
Thank you. As a reminder, ladies and gentlemen, that is star one to be placed in the question queue. 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 mini LED question. We've been talking about a $30 million-$70 million market, midpoint of $50 million. Now you're saying it's $40 million. Is it just the timing of when these shipments happen in the second half that's changed the midpoint of that guide?
Okay. Tom, first, I think we talked about this probably a long time ago, a year ago. Personally, actually, I am quite happy with this program. We talked about maybe second half of this year start to ramp. Actually, the demand is originally expected, and the revenue really depends on the shipment schedule. It's really when the customer needs the system, right?
Due to a recent customer's request, I think that we are seeing it's about $40 million from now to end of year. We see next year, our demand will be stronger than the current level. It's really not demand issue. It's really a shipment schedule. We need to make a system and according to customer's request, and when the system reaches the customer side, and we ship out from this, and we claim that the revenue.
Okay. The shipment schedule is dictated by the customer, not your supply capabilities?
That's correct. I don't think it's our manufacturing constraint.
Okay.
Not the main constraint. I think demand is very healthy.
Okay, great. Lester, I was hoping to get a little color on the utilization rates and how they've changed over the last quarter, because I remember going into the year, China was really strong at the end of last year, maybe dipped a bit in the beginning of this year. 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, or 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. were soft before, and they continue to be soft now.
Okay, that's helpful. Finally, when you look at 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?
Tom cost controls is a subject near and dear to Fusen's heart, we always look at it. 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. I would say at this point, I would not say it's structural in the model. I think $53 million plus 5%-7% is still what we're saying, but we are coming in on the low side of that, both for last quarter, this quarter, and as I guided, probably for next quarter as well.
Okay, great. Thank you.
Thank you. 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 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 someplace in the supply chain. Is that correct?
Yes, it's many things. Sometimes they cannot go to the office to make a part for us. It's really a lot of things together. Sometimes we are short on part, we got to find the second supplier. Actually this is quite time-consuming to manage all the disruption.
Okay. Would you say that given the economic dislocation due to the COVID-19 environment, that the business, a couple of quarters here, we're kind of stable at $150 million. Should we begin to reopen successfully globally, can you give us any idea about how big a recovery or snapback in your revenue could be two to three quarters out?
We don't guide more than one quarter, but if you ask my feeling, I can give you my feeling. I already mentioned, I believe our customers, they are under-invest in 2019. At this moment, actually, if you look at the utilization rate is quite healthy. We already have a few quarter sequential growth. Unfortunately, I think I would really want to guide higher, but we really need to weigh the risk for the pandemic. Fundamentally, I think demand is there. Hopefully, I think this will not go for more than two quarter. Hopefully we can see a better Q4. If you look at it, all customer actually concentrated in China and in Asia. Europe already being impacted, U.S. already being impacted, and they are opening up. I think this quarter actually, Southeast Asia impact us a lot.
I really don't think this will be more than another quarter. All the semiconductor company looks like most of them are impacted already. If there is no second wave of the infection, hopefully we can see better Q4 coming back. Hopefully opportunity, we can see the data building up.
Okay. That's very helpful. Thank you. I don't have any other questions.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further 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. That 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.