Greetings, and welcome to the Kulicke and Soffa 2020 fiscal first quarter results 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. Now, my pleasure to introduce your host, Joseph Elgindy, Senior Director of Investor Relations and Strategic Initiatives for Kulicke and Soffa. Joe, please go ahead.
Thank you. Welcome, everyone, to Kulicke and Soffa's first 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 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 at investor.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 indicated in those forward-looking statements.
For a complete discussion of the risks associated with Kulicke and 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. I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.
Thank you, Joe. Throughout the December quarters, we experienced expected seasonal softness in the general semiconductor market, which has been more than offset by a resurgence in the demand for our advanced packaging, memory, and automotive-focused solutions. In addition, during this year's recent CES event in Las Vegas, we were pleased to see the strong alignment and the relevance 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 $144.3 million of revenue, representing a slight 3% sequential improvement. We were also able to deliver very strong gross margin of 48.8%, net income of $13.5 million, and a GAAP EPS of $0.21.
The revenue improvement was driven by both capital equipment and aftermarket products in the service segment. Due to improved demand for our advanced packaging, memory, and automotive-focused systems. General semiconductor and general LED-focused customers represent 50% of our December quarter sales, which was sequentially down by approximately 15%. The low includes a large proportion of our future-rich revenue of bonders. 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 APMR customers win. We are engaged in multiple qualifications with candidates, and we continue to exceed our planned target for PIXALUX, our mini and micro LED systems. Memory represents just over 10% of December quarter revenue, a material increase of nearly 200% sequentially.
Demand within automotive and industrial application represents approximately 20% of December quarter's revenue, an increase of roughly 24% sequentially. This was driven by traditional automotive OEM customers and the new demand for battery assembly capacity. While key markets such as memory automotive have improved, we do not believe this market has fully recovered, and we anticipate additional improvements through fiscal 2020. Overall, healthy utilization rates and aftermarket sales, as well as meaningful improvement within key automotive and memory end markets, 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 tools, add confidence to our longer-term revenue targets. 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 $144.3 million. Gross margins of 48.8% generated $70.4 million of gross profit and net income of $13.5 million or $0.21 per diluted share. Gross margins came in better than expected, largely due to product mix. This mix includes 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 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 again 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 to our target range of $53 million of fixed expense, plus 5%-7% of variable expense tied to revenue. Turning to tax, we book a net tax expense of $2.1 million, 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 with a total net cash and investment position of $540.4 million or $8.43 on a diluted share basis. During the December quarter, we have continued our repurchase activity and deployed $5.4 million to repurchase 224,000 shares. At the end of our December quarter, we had approximately $91.8 million 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 $249.1 million. From a DSO perspective, our days sales outstanding decreased from 126 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 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, low semiconductor unit volume have caused the demand for our products to be below the longer-term seasonal patterns due to broader industry and 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 automotive evolution are anticipated to accelerate semiconductor unit growth to a rate well above this historical 6% average. This anticipated growth is very positive for our unit-driven 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 within advanced logic and memory applications. Over the past few years, we improved our organization, expanded our available market with new, innovative, and extremely competitive offerings to become a true multiple product and a multiple market company. This added diversification is critical and provide higher growth opportunity that are delivering fundamental new capabilities, are less exposed to inherent cyclical nature of semiconductor unit production, 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 we believe the recent period of softer demand is behind us. While we remain very confident in the longer term, short-term uncertainty triggered by extended facility closures throughout China has caused us to broaden our guidance range.
For the March quarters, we are anticipating revenue to be between $140 million and $170 million. This marks the fourth sequential quarters of revenue improvements, represent over a 7% increase from the December quarters, and a 34% improvement from the same period last year. Looking to long term, our broad solutions are increasingly aligned with major semiconductor packaging trends, as well as trends 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, although it's clear that 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 are confident this new technology will support an increased growth rate of global semiconductor production and attract increased demand for our products and services. We continue to make 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 a new growth vector. The key products providing these new opportunities including APAMA, our thermo-compression system, Katalyst, our high-accuracy flip chip system, and the PIXALUX, our mini and micro LED systems. We continue to achieve our aggressive growth rate in parallel for all of these new initiatives. For Katalyst, we are working aggressively toward new customer qualification and continue to receive positive customer feedback. Our Katalyst tool began to ramp production in a high volume leading-edge logic application this past quarter.
Katalyst continues to be extremely competitive, and we are very focused to seek our new customer engagement and qualification over the coming quarters. Next, we are able to recognize the revenue on two APAMA systems in this quarter. APAMA has been running 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 continue to leverage thermal compression technology for applications 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 environments and remains very competitive. More recently, we have also engaged a longer-term technology collaboration with high potential customers, which further diversifies our end market opportunities.
Finally, the PIXALUX advanced LED system continued to perform well, and we recognize the revenue on five additional systems supporting new direct view and the backlighting application within the display market. We continue to operationally prepare for PIXALUX demand to begin ramping materially during the second calendar half and anticipate this new opportunity to extend considerably through calendar 2021 and beyond. PIXALUX and our other advanced packaging tools 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 for our products to increase meaningfully. Overall, we are very excited to demonstrate our value creation potential as we pursue these new opportunities in coordination with the expected industry recovery over the coming quarters.
The entire K&S organization remains extremely committed as we execute our strategy of creating and delivering shareholder value. This concludes our prepared remarks. Operator, we will now be happy to take questions.
Thank you. We'll now be 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 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 or the unknown from the coronavirus caused you to reduce the low end of your guidance by about $10 million. Is that a good way to read it?
Tom, actually, this actually is very difficult to quantify. What we can tell you is, so far, we did not see any order push out or cancellation in March quarters. This extended facility closure actually impact all production in China. Impact actually is manageable at this moment, and we need to monitor if this shutdown will be further extended or not. What I can tell you is the demand actually is quite strong. As long as people come back to work, I think our future is still very bright for us. This phenomenon should be done. We actually saw a case like a SARS sitting in the same room.
Oh, okay. I know the last quarter you talked about how the utilization rates in China were upwards of 90%. Are you still seeing that high level of utilization rates with your tools in the field there?
Hi, Tom, it's Lester. China has softened slightly. I think it's more seasonal, soft to semiconductor segment. Taiwan has strengthened a little bit. I think China is still around 90%, while Taiwan has improved a little bit, closer to 80% now.
Okay, great. 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?
Yeah. The APAMA for the image sensor market.
Okay. Actually, I think, for the new product, I probably can roughly give a very high-level update. I think this year, the second half, we prepared the ramping for the PIXALUX. Really depends on the precise schedule. We are targeting 5%-10% of calendar revenue, that is about maybe $35 million-$70 million. We believe this product has a lot of potential because there will be a lot of devices will need to have new Mini LED applications. We are positive about PIXALUX. This is a year we believe very important for our advanced packaging. We have multiple qualification ongoing for our Katalyst, III-V chip, and also APAMA TCB. Upon successful qualification and the design win, we expect to ramp up our AP in 2021. That's our focus.
I think this is going to be a year, 2020, to ramp PIXALUX, and then 2021 to ramp AP, including III-V chip and APAMA. APAMA right now, I think that we have more and more customer, start from one old major customers, and right now we start to demonstrate a few other customers.
Okay, great. Finally, when you look at the.
Tom-
Oh, go ahead.
I think, Tom, you were talking about imaging sensor. I think we are talking about maybe in 2021 and beyond, we're talking about maybe $30 million, roughly like that.
Okay, that's helpful. As we look at the ramps of some of these new products, Lester, I'm wondering on the margin side, are these 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 we roll the new product, I think we've indicated before the new products, whether is advanced packaging or mini and micro LED, their margins are above the corporate margin, so they definitely should be accretive to margins.
Okay, thanks for your time.
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. 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, Krish. China in December quarter was about 63%, and in March, we believe it would be about the same.
Got you. Lester, since you kind of highlighted that March, the mix shifts more towards LED, and that's one of the reasons why you see a slight negative impact on gross margin. Is it fair to assume pretty much all that LED business is coming from China?
Yes.
Got it. All right. Then a question for Fusen. I think in the past, you've spoken about the micro LED opportunity being maybe, if I remember right, it's like a $50 million in calendar 2020. Is that still the case?
Yeah. I think the ramp is going to happen in calendar second half. Really depends on the precise schedule, right? The schedule can be earlier and can be pushed out, say, a couple of weeks. Really depend on a precise schedule. I think we are targeting maybe between $35 million-$70 million for the whole calendar year.
Got it.
Upon successful implementation to our market, hopefully 2021 and beyond can be bigger.
Got it. That's really helpful. Just a final question, Fusen, when I look at the auto industrial, you said it was like 20% of the mix. In the past, some of this auto business you had, actually is extremely lumpy. It comes up and then 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?
Actually, we are quite positive about auto business in the long term because a few things. One, is the same kind of the content per vehicle is going to increase, right? Number two, I think there are many [OEMs], the battery packaging and assembly in a green field. At the beginning, you will always see the lumpy, and we do believe at the longer term, it should average out. I do agree, I think, for the past few quarters, it will be lumpy, but for the longer term, I think we are quite positive for the prospect.
Got it. Thank you very much, Fusen, and congrats.
Okay. Thank you, Krish.
Thank you.
Thank you. 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 conference calls about the ramp-up in PIXALUX and how it should produce, I guess, $35 million-$70 million in this upcoming year. 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, and we work closely with them, and just like any other business, they have a plan. I think we're working together and come out with forecasts. I think this really depends on their product introduction schedule, and it can be pushed ahead maybe a few weeks or pushed back a few weeks, really, still a little bit open to modification. That's why. Mainly the ramping is going to happen in the second half of calendar year. As you can see, this quarter, we recognize the revenue of five systems. At the beginning, I think right now, customer order the system for the pilot production and upon ramping every year, the volume production is going to happen, and that will be the second half of the calendar year.
What are the lead times on that tool? If the end market product's going to ramp in the second half of the calendar year, what are the lead times?
Well, actually, from order to deliver, I think would be a few months, minimum maybe like two months, something like that.
Okay. You mentioned in your prepared remarks and gave us a lot of data about the automotive and the memory market recovering for you in a very substantial way. Is there some reason why it jumped so much? What was behind the rapid growth in both the automotive and the memory space?
Well, actually, on memory, everybody expect this is going to be a year for memory to recover, with NAND to start first, followed by DRAM. Before that, actually, there is already indication, I think last year, the big growth already happened. The December quarter actually is about 10% of our revenue for the memory. Compared to five-year trailing average, we still believe there's upside for us in the memory and also in the auto space.
Thank you.
Thank you. Our next question is coming from-
Thank you, David.
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 our question. Just following up on the memory question. It seems like, do the math, memory is about $14 million, and at the peak, you guys were doing about $35 million. 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 million as we go through the year?
Hi, Peter. I think as Fusen said, both in his prepared remarks and in response to David's question, I think memory is recovering. For the Q4 for us, it was very soft. Now it's rebounded significantly 10% 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 on NAND and DRAM as well as [BiCS role]. We believe that our memory business will continue to grow back towards, I guess, where it was historically.
You mentioned some utilization rates in Changchun. What's the overall utilization rate?
I think the overall utilization rate, again, as I've mentioned several times before, it varies across regions as well as customers, but I think it's closing in on 80%.
Just, 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 want to see if you have any visibility into that.
I think what this dimensional capital spending is really customer capital spending.
Yeah. No, I think in terms of the ramp, Peter, I think, again, we believe it will continue to grow sequentially. I mean, Q1 was better than Q4. We believe even though we don't guide Q2 is better than Q1. Even though 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.
Okay. That's helpful. Thanks, guys. Congratulations on the strong quarter.
Thanks, Peter.
Thank you. As a reminder, that's star one to be placed into question queue. 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 asked. I want to just ask a couple customer-specific questions maybe. I know Infineon just announced that they're moving production in autos to flip chip. Is that an opportunity for you, Fusen?
Well, the short answer is yes. I think our flip chip is always important and will become more and more important for advanced packaging. Our system is very competitive, and that has been recognized by our customers. We are in multiple qualifications in many customer sites, and we believe we are very good, too.
Okay, fabulous. 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 and a half or so?
Hey, Craig. It's Lester. Obviously, we don't specifically talk about any individual customers, but I think Tesla has been identified previously as a top customer, and Tesla did great yesterday on their results, and they're growing both in Shanghai as well as in Germany. We believe that there's opportunities there.
Fabulous. Great. I don't have any other questions. Thanks, guys.
Thank you, Christian.
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. Before closing, we wanted to inform investors that we will be participating in several upcoming conferences and roadshows throughout the March quarter in New York, Chicago, Montreal, Minneapolis, and Portland. Additional details can be found at investor.kns.com. Thank 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 line at this time and have a wonderful day. We thank you for your participation today.