Greetings, and welcome to the Culligan Software 2020 fiscal 1st Quarter Results Conference Call. At this time all participants are in a listen only mode. As a reminder, this conference is being recorded. Now my pleasure to introduce your host, Joseph Alguindy, Senior Director, Investor Relations And Strategic Initiatives for Kulickemsulfa. Choke, please go ahead.
Thank you. Welcome everyone to Culligan's Office first quarter fiscal 2020 conference call. Joining us on the call today are Susan Chen, President and Chief Executive Officer and Lester Wong, Chief Financial Officer And General Counsel. 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 atinvestor. Kns.com.
In addition to historical statements, today's remarks will contain statements relating to future events and or 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 in those forward looking statements. For a complete discussion of the risks associated with Tula 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. I would now like to turn the call over to Susan Chen for the business over you.
Please go ahead, Susan.
Thank you, Joe. Through our December quarters, we experienced expected seasonal softness in a general semiconductor market, which has been more than offset by a resurgence in the demand for our advanced packaging, memory and the automotive focused solutions. In addition, during this year's recent CES event in Las Vegas, we were pleased to see the strong alignment and deliverance our broad equipment offering have with new and the future consumer devices. I will provide more detail to this later, but first a review of the December quarter. Over the past several years, our sequential revenue change December over September.
Has averaged a 14% sequential reduction. This year was quite different and we were able to generate 144 $300,000 of revenue, representing a slight 3% sequential improvement. We were also able to deliver very strong growth margin of 48.8 percent, net income of 13,500,000 and the GAAP EPS of $0.21. The revenue improvement was driven by both capital equipment and aftermarket products in the service segment. Again, due to improved demand for our advanced packaging, memory and the automotive focus systems.
General semiconductor and the general LED focused customers to present 50% of our December quarter sales. Which was sequentially down by approximately 15%. The law includes a large proportion of our future reach, recognized of all founders. Our dedicated advanced packaging solution represents 17% of December quarter sales, an increase of 29% sequentially. During the December quarter, our APMR business has strengthened.
We had a new APAMA customer's win. We are engaged in multiple qualification with catalysts and we continue to exceed our plan target for Pixel Labs, our mini and micro LED systems. Memory, we present just over 10% of December revenue, a material increase of nearly 200% sequentially. Demand winning automotive industry application represent approximately 20% of December quarter's revenue, an increase of lobby 24% sequentially. This was driven by traditional automotive OEM customers and the new demand for battery assembly capacity.
While key markets such as the memory automotive have improved, we do not believe this market has fully recovered we anticipate additional improvements through fiscal 2020. Overall, healthy utilization rates and aftermarket sales as well as meaningful improvement within key automotive and the memory end markets to increase our confidence in an ongoing market recovery, which we expect to improve further throughout fiscal 2020. Ongoing market traction within our dedicated advanced packaging systems, including our mini and micro LED towards added confidence to our longer term revenue target. I will now like to turn the call over to Lester Wong, who will cover this quarter's financial overview in greater details. Lester?
Thank you, Fucem. My remarks today will refer to GAAP results unless noted. Net revenue for the quarter was 144 point $3,000,000. Gross margins of 48.8 percent generated $70,400,000 of gross profit and net income of $13,500,000 or $0.21 per diluted share. Gross margins came in better than expected largely due to product mix.
This mix include a higher relative contribution of our APS business, stronger feature rich ball bonder demand as well as a few higher margin advanced packaging sales. Looking into the next quarter, we anticipate gross margin to return to approximately 45%. We expect product mix to drive this reduction, which includes increased LED sales and a lower proportion of APS relative to capital equipment. Operating expense, the gain came in more favorably than our expected target range. This is due to an ongoing and focused effort on discretionary and non critical costs.
Looking into March quarter, we anticipate returning plus 5% to 7% of variable expense tied to revenue. Turning to tax. We booked a net tax expense of $2,100,000, an improvement from last quarter, we continue to target a long term average effective tax rate of approximately 18%. Turning to the balance sheet. We ended the December quarter of a total net cash and investment position of $540,400,000 or $8.43 on a diluted share basis.
During the December quarter, we have continued our repurchase activity and deploy 5,400,000
$91,800,000
remaining under the existing share repurchase authorization. On a book value per share basis we closed the December quarter with $12.09, an increase of $0.06 from the September quarter. Working capital defined as accounts receivable plus inventory less accounts payable reduced to $249,100,000. From a DSO perspective, our base sales outstanding decreased from 100 and 26 days to 124 days. Our days sales of inventory increased from 108 days to 116 days and days of accounts payable increased from 44 days in to 55 days.
This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the March quarter business outlook.
Thanks, Lester. From our standpoint, lower semiconductor unit volume have cause the demand for our products to be below the longer term seasonal patterns due to broader industry and the macro trade dynamics. Over the past decade, annual semiconductor unit production grew at a compound annual growth rate of just over 6%. Over the past year, we believe the industry has expanded at a much slower rate. Looking ahead, 5g capabilities, artificial intelligence, new IoT devices, The growth in big data
and the
end automotive evolution are anticipated to a service semiconductor unit growth to a rate above this historical 6% average. This additional growth is very positive for our unit even products, supporting the general semiconductor and the LED space. In addition, our new market opportunities are disruptive and are expected to grow much faster than the industry as they provide a very compelling value proposition relative to existing approaches. This is apparent in the display market as well as winning advanced logic and memory applications. Over the past few years, we improved our organization expand our served available market with new innovative and extremely comparative offering to become a true multiple products and a multiple market company.
This added diversification is critical and provides higher growth opportunity that are debodeling fundamental new capabilities are less exposed to inherent cyclical nature of semiconductor unit reduction and have the potential to dramatically enhance corporate level profitability. Considering these efforts, we are now entering a very exciting time. Our new products are gaining traction and that we believe the recent period of software demand is behind us. While we remain very confident in the longer term, short term uncertainty triggered by extended facility closures, through our China has caused us to broaden our guidance range. For the March quarters, we are anticipating revenue to be between $140,000,000 $170,000,000.
It marks the 4th sequential quarters of revenue improvements. We present over a 7% increase from a December quarter and a 34% improvement from the same period last year. Looking to long term All broad solutions are increasingly aligned with major semiconductor packaging trend, as well as a trend that are likely to impact the broad consumer market The consumer electronics show in Las Vegas this month helped to highlight these new possibilities. We are not going to provide a detailed summary. A lot is clear, lot from toothbrush.
To door lock to oven, to television, there is a growing appetite for connected semiconductor rich devices. New devices in addition to faster and higher bandwidth connectivity service like 5G will drive more streaming Cloud Processing And Artificial Intelligence Applications. Over the coming years, we confident this new technology will support an increased growth rate of global semiconductor production and attract increased demand for our products and services. In parallel, we continue to make a meaningful progress with our new advanced packaging products. These new products continue to represent fundamental long term market opportunities, providing more collaborative customer engagement, increased diversity and the new growth factor.
The key products providing these new opportunities including Apartment, our thermal compression system, catalysts, our high accuracy free chip system and the piece of our Mini and the micro LED systems. We continue to achieve our aggressive growth rate in peril for all of these new initiative Okay, Dennis. We are working aggressively to our new customer qualification and continue to reshape pass give customer feedback.
Specifically,
our catalysts will begin to ramp production in the high volume leading edge logic application this past quarter. Cetherlands continue to be extremely competitive and we are very focused to seek our new customer engagement and the over the coming quarters. Next, we are able to recognize revenue on 2 Apartment system in this quarter. Aparma has been longing production at a major OSAT for several quarters, supporting a high volume smartphone application. And we were recently able to penetrate a new high potential image sensor application.
Our customer continued to leverage comparation technology for application we haven't initially anticipated, such as in more complex multi chip packages, and also image sensor. Our system is performing very well in high volume production environment and will remain very competitive. More recently, we have also engaged a longer term technology collaboration with a high potential customers, which further diversifies our end market opportunities. Finally, the piece of advanced LED system continue to perform well and we recommend revenue on 5 additional systems supporting new direct view and the backlighting application within the display market. We continue to operationally prepare for peaceful app demand to begin ramping materially during the 2nd calendar half and anticipate this new opportunity to extend considerably through calendar 2021 and beyond.
Pisorax and our other advanced packaging tool are all extremely competitive. And our global team continue to engage and drive new customer adoption. Over the coming years, we anticipate the pace of new customer engagement and the demand our products to increase meaningfully. Overall, we are very excited to demonstrate our value creation recovery over the coming quarters. The entire K and S organization We remain extremely committed as we execute our strategy of creating and the delivering shareholder value.
This concludes our prepared remarks. Operator, we will now be happy to take questions.
Thank you. Our Our first question today is coming from Tom Diffely from D. A. Davidson. Your line is now live.
Yes, good morning and good afternoon. First, I want to start on the coronavirus. It sounded like the impact of the unknown from the coronavirus caused you to reduce the end of your guidance by about $10,000,000. Is that a good way to read it?
Com actually, this actually is very difficult to quantify, but all we can tell you is, so far, we did not see any other push out or cancellation in March quarters. But this expanded facility closure actually impact our production in China. So, but impact actually is manageable at this moment. And we need to monitor if this shutdown will be fully extended or not. And But what I can tell you is the demand actually is quite strong.
So as long as the people come back to work until future is still very bright for us. And this phenomena should be done. Our company, we actually saw a case like a sauce sitting in a second.
Oh, okay. And I know last quarter we talked about, you talked about how the utilization rates in China were upwards of 90%. Are you still seeing that level utilization rates with your tools in the field there?
Hi, Tom. It's Lester. So China has softened slightly. I think that more seasonal softenerysendconductor segment. Taiwan has strengthened a little bit.
So I think China is it's still around 90% while Taiwan has improved, a little bit closer to 80% now.
Okay, great. And then, just a couple of questions on the new products. You talked about the image sensors being a new market you penetrated here. What is the size or opportunity in that marketplace?
I'm sorry. What product can you repeat?
Yes, the El Palma for the image sensor market.
Oh, okay. So, actually, I think,
for the new product, I probably can
lovely give a very high level updates. I think this year, the second half we prepare the LinkedIn, for the pizza logs. And, really depends on the precise schedule. We are targeting 5 percent to 10 percent
of our calendar revenue. So that
is about maybe $35,000,000 to $70,000,000. And we believe this product has a lot of potential because of, there will be a lot of devices who need to have new mini LED applications. So we are positive about these drugs. And this is a year we believe are very important for our advanced packaging. We have multiple qualification ongoing for our panelists, free chip.
And also a common TGB. So, upon successful qualification and the design win, we expect to render our AP in 2021. So that's our focus. I think this is going to be a year in 2020 to rent, future loans and 2021. To rank AP including a free chip in Apama.
And Apama right now, I think that we
have more and more customer.
Stuff from 1000 major customers. And right now, we start to penetrate a few other customers.
Okay, great. And then finally, when you look at the
oh, go ahead.
Think we are talking about maybe, in 2021 and beyond, we're talking about maybe $7,000,000,000 is roughly like that.
Okay, that's helpful. And then as we look at the ramps of some of these new products, unless you're wondering on the margin side, are these the accretive to margins? Or do they hit margins a little bit? How do you view margins as we roll into some of these new product strengths?
Well, Tom, I think as a as we wrote the new product, I think we've indicated before, the newer products, whether it's, advanced packaging or mini and micro LED, their margins above the corporate margin. So they definitely should be accretive to margins.
Thank you. Our next question is coming from Krish Sankar from Cowen and Company. Your line is now live.
Hi, thanks for taking my question and congrats on the good results. First question, either for Fusen or Lester, how much was China as a percentage of sales in December? And how much do you expect it to be in March?
Hey, Trish. China in December quarter was, about 53%. And in March, we believe it would be about the same.
Gotcha. And, Lester, since you kind of highlighted that March, the mix shifts more towards LED, and that's one of the reasons why you see us it's a slight impact or negative impact on gross margin. Is it fair to assume pretty much all that LED business is coming from China?
Yes.
Got it, got it. All right. And then a question for Susan, I think in the past, you've spoken about the micro being maybe a the rumbarite is like a $50,000,000 in calendar 20. Is that still the case?
Yeah. I think, the rent is going to happen in calendar, you know, 2nd half. So it really depends on the precise schedule, right? We haven't, you know, the schedule can be earlier and can be pushed out, say, a couple of weeks. So really depend on a research schedule.
I think we are targeting maybe between $35,000,000 to $70,000,000 for the whole calendar year. We've got a successful implementation to the market. Hopefully, 21 and Cian can be bigger.
Got it. That's very helpful. Then just a final question, Susan, you know, when I look at the auto auto industry, you said it was like 20% of the mix. In the past, some of this auto business you had, like actually is extremely lumpy. It comes up and then like goes away for a few quarters at a time.
Is there anything different this time or do you think the auto market is more sustainable for you?
Well, so I think we are quite positive about auto business in a long time. Because of using the 1, it's a semiconductor content per vehicle is gonna increase. Right? And number 2, I think there are many belongs, the battery packaging and assembly in the greenfield. So, at the beginning, you are always super lumpy.
And, we do believe at a longer term, it should be a good job. So, I do agree. I think, you know, for past few quarters, it's going to be lumpy, but for a longer term, I think we have
Got it, guys. Thank you very much, Susan, and congrats.
Okay, thank you. Thanks.
Thanks. Our next question today is coming from David Duley from Steelhead Securities. Your line is now live.
Yeah, thanks for taking my question. I had a couple. You've talked on the last couple of conference calls about the ramp up in Pixel Luxe and how it should produce, I guess, $35,000,000 to $70,000,000 in this upcoming year. Why you seem highly confident about that ramp happening. What is it that gives you confidence that you will see that level of business with this new product?
Okay. I think that we have a few customers, right? And we work closer with Zwend and, just like any other business, then they have a plan. I think we're working together and come out of forecast. So, I think this really depends on the their production schedule and, it can be, can be, you know, push ahead maybe a few weeks or push back a few weeks really are still a little bit of a modification.
That's right. But, mainly, the revenue is going to happen in the second half of the year. And, as you can see, this quarter, we recognized the revenue of 5 system. At the beginning, I think right now, customer ordered the system for the pilot production. And upon ramping up the year, the volume production is going to happen and that will be the 2nd half of the fiscal year.
And what are the lead times on that tool? If the in market product is going to ramp in the second half of the calendar year, will they be ordering? Well, what are the lead times?
Well, actually, from an order to deliver, I think, would be will be a few months, in a few months means maybe like a 2 months.
Okay. And then you mentioned
in your prepared remarks and gave us
a lot of data about the auto automotive and the memory market recovering for you in a very substantial way. Is there some reason why it jumped so much or what was behind the rapid growth in both the automotive and the memory space?
Well, I think, namely, everybody expect, this is going to be a year for a memory to recover with a NAND to start first followed by DRAM. And, before I actually raised already indication, I think, last year, the big growth already, happened. And the December quarter actually is about 10% of our revenue for the memory. And compared to you, you know, 5 year trading average, we still believe that there's upside for us in the memory and also in the auto space.
Thank you.
Our next question is coming from Peter Peng from B. Riley. Your line is now live.
Hi, this is Peter Peng calling in
for Craig Ellis and thanks for taking just following up on the memory question. It seems like, do the math, memories about $40,000,000 and at the peak, you guys were doing about $35,000,000. I'm just wondering what the trajectory of memory is. Do you see it stabilizing at this rate or do you see it kind of closing into that 35 that we go through the year?
Hi, Peter. I think as Susan said, has prepared remarks and in response to, Dave's question.
I think memory is recovering. So for the the Q4 for us,
it was very soft. Now it's, you know, rebounded, you know, it was 10% for this for the December quarter. We believe it will continue to grow for all the reasons we've discussed before. Memory prices are going back up, both NAND and DRAM as well as Vic Road, So we believe that our memory business will continue to grow back towards, I guess, where it was historically.
And then just on the, you mentioned some utilization rates in China. What's the overall utilization rate?
I think the overall utilization rate again, as I've mentioned several times before, it's varied across regions as well as customers, but I think it's closing in on 80%.
And just, and I think you mentioned that you're seeing more aggressive capital spending throughout fiscal 2020. Are you expecting more of a seasonal ramp as we go into the back half of the calendar year, or is it going to be somewhat below seasonal, just like the March quarter. I just wanted to
see if you have any visibility into that.
I think what this dimensional capital spending is really customer's capital spending.
Yeah. No, I think in terms of the ramp, Peter, I think, again, we believe that there are, we believe I feel comfortable sequentially. I mean, Q1 was done in Q4. We believe, even though we don't got Q2 is done in Q1, I don't guide into further quarters. We believe that the second half of the year will be stronger than the first half of the year.
That's helpful. Thanks guys. Congratulations on the strong quarter.
Our next question is coming from Christian Schwab from Craig Hallum. Your line is now live.
Great. Solid quarter guys. Most of my questions have been, asset, but I wanted to just ask a couple customers specific questions maybe. I know Infineon just announced that they're moving production and autos to flip chip. Is that enough opportunity for you Fusen?
Well,
so the short answer is yes, right? So I think our future is, is always important and will become more and more important for advanced packaging. And our system is very competitive and that has been recognized by our customers. So, we are in multiple qualification in many customer sites. And we believe we are able to.
Okay. Fabulous. And then another customer specific question, given the success of Tesla, is there an opportunity for them to become a material customer for you again at any time in the next year, year and a half or so?
Hey, Craig, it's Lester. Obviously, we don't specifically talk about any individual customers. So I think it Tesla has been identified previously as a top customer. And Tesla has they did great yesterday on their results and they're growing both in Shanghai as well as in Germany. So, we believe that there's opportunities there.
Fabulous. Great.
I don't have any other questions. Thanks guys.
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 or closing comments.
Thank you, Kevin. Before closing, we wanted to inform investors that we will be participating in several upcoming conferences and road shows throughout the March quarter in New York Chicago, Montreal, Minneapolis, and Portland. Additional details can be found at investor. Kns.com. You all for the time today.
As always, please feel free to follow-up directly with additional questions. Have a great day, everyone. Operator, this concludes our call. Thanks.
Thank you. That does
conclude today's teleconference. You may disconnect your lines at this time. You have a wonderful day. We thank you for your participation today.