Greetings, and welcome to the Kulicke and Soffa 2019 Fourth Fiscal Quarter Results Call. At this time, all participants are in listen-only mode. A brief 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 is now my pleasure to introduce our host, Joseph Elgindy, Senior Director, Investor Relations and Strategic Initiatives for Kulicke and Soffa. Joseph, you may begin.
Thank you, Roya. Welcome, everyone, to Kulicke and Soffa's fourth quarter fiscal 2019 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 29th, 2018. I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.
Thank you, Joe. Since the March quarter, we observed a gradual recovery in our overall businesses. Improved field utilization rate, increased demand within both capital equipment and the APS segment. Continued progress within our advanced packaging progress, we recognize revenue of several PIXALUX and Micro-LED and the Mini-LED systems. Considering this improvement and the state of our industry, we will include comparison from the March quarter in addition to sequential comparisons to provide a broader perspective during today's call. In parallel with improving market conditions, we continue to operate very efficiently, generating strong gross margin and executing on near-term cost-saving opportunities without jeopardizing our ongoing development projects. For the September quarter, we recognized revenue of $139.8 million, an increase of approximately 10% sequentially, and over 20% from the March quarter.
The sequential increase in both capital equipment and the aftermarket product and service segments was driven by improvement in general semiconductor, LED, and advanced packaging. Demand from the general semiconductor and the LED, our largest end market, increased by nearly 17% sequentially and 74% from the March quarters. We have also continued to see improving demand from our OSAT customers during the September quarter. As you may recall, demand from memory and the automotive end market declined fairly dramatically in the June quarters, partially offsetting the same period improvement within the larger general semiconductor and the LED market. However, demand has largely stabilized within automotive and memory end markets through the September quarters. This stabilized demand, improved NAND pricing, and the growing semiconductor opportunities in automotive provides confidence. Overall, our automotive and memory solution remain highly competitive, and we anticipate general recovery in memory and automotive throughout fiscal 2020.
Capital equipment sales within the September quarters increased 12% sequentially and increased 25% from the March quarter, which again, we believe represent trough demand. The prior two quarters of sequential revenue improvements help to highlight the resilience of our end market and also our ability to generate demand for new products through the cycle. Within capital equipment, we experienced increased sales within many of our businesses: ball bonding, wedge bonding, electronics assembly, and advanced packaging. Within advanced packaging revenue, four, five more PIXALUX system, our Mini-LED and the Micro-LED tool were recognized. These system sales provide strong margins, which Lester will share more detail on shortly. Our aftermarket product and service segment, APS, has increased by 11% from our March quarters and 6% sequentially to $39.4 million in September quarter.
This demand is consistent with our longer-term quarterly APS average of approximately $40 million in quarterly revenue, which support our view of healthy utilization rate for our large install base of ball and wedge bonding systems. Healthy APS sales, improved utilization rate, increased demand from global OSAT, and ongoing traction with our new products provides increasing confidence for stronger 2020 performance. As we look ahead, we remain focused on customer engagement and the operational readiness of our new products and are very confident of our competitiveness in this new market. 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 be referred to GAAP results unless noted. Net revenue for the quarter was $139.8 million. Gross margins of 46.8% generated $65.4 million of gross profit and net income of $6.4 million or $0.10 per diluted share. Gross margins were clearly stronger than we expected last quarter. This was partially due to our ability of recognizing five PIXALUX tools ahead of schedule. In addition to receiving acceptance earlier than anticipated, these initial PIXALUX systems generated gross margins above corporate average. Similar to other newly developed products, the majority of the bill of materials is expensed through R&D until products have received market acceptance. We anticipate recognizing revenue on the final two fully expensed PIXALUX systems during the December quarter.
Operating expense also came in more favorably than our expected target model of $53 million of fixed expenses, + 5%-7% of variable expense tied to revenue. We have also restructured a small fraction of our global R&D team, which resulted in a discrete $1.6 million expense in the September quarter. We continue to seek out opportunities that will enhance the quality and efficiency of our global organization. Over the coming quarters, we maintain our current operating expense target of $53 million of fixed quarterly expense, + 5%-7% of variable quarterly expense tied to revenue. While we are cautious of costs in the soft environment, we continue to invest heavily in our ongoing R&D programs, which will drive meaningful long-term value and market share expansion. Turning to tax. We booked a net tax expense of $3.8 million, which was in line sequentially.
Over the long term, we continue to target an average effective tax rate of approximately 18%. Turning to the balance sheet. We ended the September quarter with a total net cash and investment position of $532 million or $8.28 on a diluted share basis. During the September quarter, we have continued our repurchase activity and deployed $15 million to repurchase 680,000 shares. At the end of our September quarter, we had approximately $97.1 million remaining under the existing share repurchase authorization. Cumulatively, over the last five years, from the repurchase program's inception through the September quarter, we repurchased 17.2 million shares in open market transactions at a total value of $302.8 million. Roughly 1/3 of this total value, $100.6 million, was deployed in our fiscal 2019 period alone.
The repurchase program, combined with our dividend program, prudent M&A, and aggressive market expansion through new product development, provide a powerful platform for long-term sustainable shareholder value creation and delivery. On a book value per share basis, we closed the September quarter with $12.06, an increase of $0.03 from the June quarter. Working capital, defined as accounts receivable plus inventory, less accounts payable, was effectively flat at $207 million, down $1 million sequentially. From a DSO perspective, our day sales outstanding increased from 107 days to 126 days. Our day sales of inventory decreased from 129 days to 108 days. Days of accounts payable decreased from 56 days to 44 days. This concludes the financial review portion of our call. I will now turn the discussion back to Fusen for the December quarter business outlook.
Thanks, Lester. We have clearly experienced a recovery in the general semiconductor and the LED related business. While automotive and the memory seems to be near or at a trough level, we continue to anticipate ongoing and a greater recovery in all of the end market we serve over the coming quarters. Uniquely for K&S, we are also aggressively pursuing several new revenue opportunities through FY 2020 that expand our end market and further increase the diversification of our broadening portfolio. Looking into December quarters, we are forecasting a revenue in a range of $130 million-$150 million, representing a fair outlook. Considering the historical seasonality in our business, we believe this support our view of gradual and ongoing demand recovery for our products and services.
Over the past five years, the sequential revenue change December over September represent an average of 14% reduction with a range of +3% to a -45%. Considering this five-year trend, our December outlook indicates an improving and a fairly resilient end market demand. We have also made fundamental improvement to our core business development process, ability to identify and target new market opportunities, and also delivering shareholder returns. More specifically, for the past three fiscal years, we have dramatically increased our market shares in high volume LED business, rapidly developed and recognized revenue on several new tools, entered the high growth media and the Micro-LED market, and collectively returned approximately $250 million to investors through the repurchase and the dividend programs.
We continue to believe these improvements are fundamental in nature, demonstrate our ability to expand the market, and provide a sustainable platform for further value creation. With that said, I would like to provide a brief update on our advanced packaging initiatives. Overall, we continue to be very focused on working toward new customer qualification within all of our advanced packaging business, Liteq, APAMA, Katalyst, and the PIXALUX. These tools continue to be very promising and highly competitive. We expect they provide new growth prospect and will contribute meaningful to long-term profitability. Our lithography, thermal compression, and high accuracy flip chip business continue to be at the various engagement level at multiple customers, supporting qualification and also high volume productions. Overall, these products are delivering new solution to our customers, higher level of productivity, and are continued to driving new customer interest.
In addition to our view of gradual core market recovery, we also anticipate our advanced packaging progress to accelerate through fiscal 2020 as we ramp production with existing customer and proliferate this solution to new customers. For our Mini-LED and Micro-LED tool, PIXALUX, we recognize revenue on an additional five system in the September quarters. Eight system in total. We are currently aggressively preparing for a production ramp. As a reminder, the lighting within the display market is a main target market for PIXALUX system. Although, we are also focused on opportunities within direct view display, automotive, and also consumer electronics. We continue to anticipate PIXALUX will ramp through 2020 and enhance overall profitability. In summary, we are highly confident our core market is past trough, and also that our newly developed market expanding offering will provide the industry with enabling technologies.
We believe our enabling solutions are increasingly aligned with major trends, such as evolution of electric and autonomous vehicles, the rollout of 5G technology, the proliferation of IoT devices, the increasing attention of advanced packaging, and the emerging opportunity within the display market. Our entire organization remains extremely committed to execute toward our long-term strategy of value creation and delivery. This concludes our prepared remarks. Operator, we will now be happy to take questions.
Thank you. We'll now be conducting your question and answer session. If you'd like to be placed into 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 a 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 pull for questions. Our first question today is coming from Tom Diffely from D.A. Davidson, your line is now live.
Yes. Good afternoon, good evening. Thanks for the call. Just first question on the PIXALUX line, obviously very nice to see that being accepted by customers. Curious, you talked about how it benefited the margins during the quarter. Was that because some of the tools were already accounted for? Or is that the true margin structure of the product that's helping the margins?
Hi, Tom. It's Lester. For the quarter, the contribution to the high gross margin by PIXALUX was because of the fact that like many new tools, it's already been expensed through R&D until market acceptance. All five tools was a complete fall through into the gross margin.
Okay. On a go forward basis, do we expect the tools to be above corporate average for margins or?
Yes, we do. We believe the gross margin for the PIXALUX will be the higher among the company. PIXALUX is the most technologically advanced and fastest tool on the market, and so it's a very low cost of ownership for our customers. We believe that the margins will remain high.
Okay, good. How big do you think that market is at this point?
Tom, can you repeat the questions?
Yeah. How big is the market for the PIXALUX or for other Micro-LED or Mini-LED solutions?
Okay. We believe this market is going to grow significantly, we are at the early stage of big lighting application for consumer electronics. For us, we do believe, depend on the ramping schedule of our customers, we target about 5%-10% in annual revenue, in 2020. That's our plan. I think in the future could getting bigger, as adoption of Mini-LED and Micro-LED continues.
Okay. Just for clarification, is this for mobile screens or computer screens? What size screens is this for today?
Well, actually, the display size can be vary from a small to big screen. The big screen actually is direct view, right? Direct view display, actually, probably in the future, we still need to increase the productivity. Actually, we are working with multiple customers and including the customer in consumer electronics, display, and auto industries.
Okay, great. Quick question on the model itself. Sounds like the OpEx is similar to where it's been. I was wondering on the margin front, though, when you look at relatively flat revenue, a lot of times in the fourth quarter, you see a little bit of a boost in the margins because you're higher on the wedge bonder side, a little lower on the ball bonder side. Curious if you're going to expect any differences sequentially on the margin front.
Well, Tom, I think the margin, what we're looking at, still probably between 45%-47%. That's the corporate margin that we've been looking at.
Okay. Thank you very much.
Thanks, Tom.
Thank you. Our next question today is coming from Craig Ellis from B. Riley FBR. Your line is now live.
Thanks for taking the question and congratulations on the strong earnings performance in the quarter, guys. The first question I had was really more of a clarification. It relates to one of Tom's questions. I think what I've heard is that there are eight systems that have shipped for sale in the last two quarters, three a couple of quarters ago, five in the most recent quarter. Can you just discuss how broadly those are being accepted by customers? Are we talking about one customer, a couple, or even more than that?
Hi, Craig. It's Lester. We're talking about a couple of customers, so it's not one customer. Now it's going through evaluation at several customers. The sales have been spread among several customers. We believe that going forward, the ramp will be, as Fusen said, probably in the second half and at one or two different customers.
Okay. Clearly, the expectation since this product was announced back at SEMICON West, certainly it sounds like from Fusen's commentary that there would be a material ramp in front of us. As we look at the business's shipment and rev rec capability on five systems, are there any capacity issues that we need to be aware of? What's your internal capacity to ramp this system? Is it in the tens of systems? If so, where would that be?
Well, no, Craig, we've prepared for the ramp. We've known it's come for a while, so we do not believe that our production capacity will be a bottleneck during the ramp. I think we're ready to produce as many systems as is required.
Excellent. I wanted to go back, Fusen, to one of your questions. You mentioned that there were a number of new revenue opportunities that the company was pursuing, and it sounds like you've got very good visibility on growth there. I was just wondering if you could help us just by ranking some of the new revenue opportunities that you see. I assume PIXALUX is near the top, but could you help us prioritize that list? Thanks.
Okay. First of all, I think there are a few positive signs from the industry, and that make us quite positive about 2020 and onward. Historically, the semi-downturn is no more than six quarters, and clearly we see that March 2019 is our trough. We also see in the OSAT adding the capacity, and they are adding capacity for the whole industry, not only for themselves. The memory, I think, is a good story ahead of us. We see the big growth, actually quarter-to-quarter for the past two quarters, and the industry actually expects to spend memory recovery throughout calendar year next year, 2020, with the NAND first and then followed by DRAM.
For us specifically, in addition to the market conditions I just described, I think PIXALUX actually is the bright spot for us, and it's going to be a ramping year in 2020. I said this a few times, depending on customers' ramping schedule, can be one or two months late or whatever, but we do expect 5%-10% of calendar year revenue. That's a good one. We also expect a 3D-IC and the TCB show good traction in the market because we are engaging multiple customers for qualification and also some of our customers already have it in production. We do believe a good traction in 2020 and show first growth, both of 3D-IC and TCB in 2021. That's what we are seeing in our market and for the industry.
Okay. That's very helpful. I'll ask a longer-term question on gross margin to Lester. Lester, with the benefit of some favorable mix, the business is operating well on the gross margin side, and yet here we are, very near the trough, and the company has the target model out there. Can you just help us understand, as you look at the things that are going to bridge the gap between where we are to the low end of the target model, I believe, at 49%, what does it take to get into the long-term target model range?
Craig, I think on the long-term target model range, what we're looking at is at some of those tools that Fusen talked about. As PIXALUX becomes more of the company's revenues beyond 2020 and 2021, 2022, as well as Katalyst, as well as the APAMA and the new, what we call TCB 2.0 kicks in. Those are higher margin tools. We believe that that would drive the gross margin forward. As you well know, a huge focus for Fusen always has been cost. We continue to reduce costs across the board in terms of our core businesses. One of the initiatives that Fusen's been pushing for over three years is increase our APS sales. APS carries higher gross margin than our capital equipment. I think between those different elements, we believe we can drive towards the gross margin target we presented.
Okay, last one for me, and then I'll hop back in the queue. Fusen, you were quite prescient in terms of being very early to call the March quarter as a trough. The company really did a great job putting its money where its mouth is with the $100 million of share buyback in the quarter. Can you gentlemen just help us understand how you're looking at buyback intensity at this point now that we're into what looks like the early stages of a recovery? Should we expect a similar level of share repurchase activity or something closer to what we were seeing in the six or seven quarters prior to the most recent quarter? Thank you.
Okay. Craig, before I answer you with the number, I want to tell you our thinking logic. I do believe the company, the most important is to have capability. We can organic growth, right? For us, I think our capital allocation, including dividend buyback, stock repurchase, and M&A. At a certain point, for sure, I think we will engage with M&A. We want to make sure our organic development in a program, we have strength, we have knowledge, we have commitment, and I think we are seeing attraction. I think near-term low horizon, I would say yes, a year from now, we will really seriously consider M&A. Because we need to use the capital among M&A, reposition, and also dividend, I think it's going to be a balanced view.
It's very difficult to answer you with a precise amount, but we are committed continuing to our repurchase and we are committed to the dividend, and we'll continue the repurchase program. The amount will depend on when we decide to trigger the M&A activity. I hope I answered your questions.
Yeah, that's very helpful. Thanks, Fusen. Thanks, Lester.
Thanks, Craig.
Thank you. Our next question today is coming from David Duley from Steelhead Securities. Your line is now live.
Yeah, thanks for taking my questions. Just a clarification. I think in your prepared remarks, you said, in reference, was it to the wire bonder business or the total bonder business, that it was up 17% sequentially and up 64% from the bottom?
I think probably it's the overall equipment. Of course, the ball bonder is a big part of that. I think in the past few quarters, we actually see wire bonder coming back, and strongly. I think they represent about 50% of our revenue. I would say, we're talking about overall, including ball bonder.
Okay. Could you talk about, I don't think you mentioned the utilization rates of the wire bonder fleet. Could you perhaps give us a measure there? Help us understand if the utilization rates are higher or lower in China, or what you're seeing from that market.
Sure, Dave. Utilization rate we see in the field is in the high 70s. However, I like to point out that it is not uniform across all the businesses as well as end customers and the regions. Specifically to your question about China is actually at the highest utilization rate of all the regions we see, actually it's in the 90s, while Taiwan has come down in low 70s and Korea is in mid-70s. I think a lot of the utilization rate growth has been driven by China.
Okay. That's very helpful. As far as, you mentioned the automotive and the memory businesses have stabilized now, and I guess you're kind of expecting a gradual improvement in 2020. Could you just talk about in each one of those segments, what the key trigger is to spur growth? For instance, in the automotive space, is it more electrical vehicles or more electrical vehicle content? What will get these two segments of the business up and running again?
Dave, we will assume the memory, we will assume I think server and high performance computing, this will consume fairly large amount of the memory. Automotive right now, I think in the bottom. We do believe, based on our historical result, we can expect auto also increase from here. Auto, I don't think will consume that much of memory. I would still believe it's traditional in server and also in the computing areas. That would be the memory growth. The first sign is the big growth quarter- to- quarter. I think we already see two quarter growth. The next step is the price holding up, and then how industrial recover, and that will be our expectation.
Okay. As far as maybe just look into next year, it seems like you have core business recovery happening, and you have a bunch of new product contributions starting to ramp up in the LED space and some of these other spaces. I guess first question is there any reason to think that you can't get back to peak revenue levels? Is there any segment of business that may not recover and allow you not to get back up to $200 million or $250 million per quarter kind of run rates?
Dave, I think we are cautiously optimistic about the recovery, both in general semi, LED, as well as eventually, as Fusen said, auto and memory with PIXALUX coming in. I think the $250 million a quarter is a pretty high target. While we think there will be a significant recovery, I'm not sure we're going to hit that in 2020.
Maybe I can add a little bit more color. We do believe this recovery is a gradual recovery from our view. Let me give you an example. I think Christian asked me a few times about our model 2021, the original model for the $1.1 billion. This probably, if I answer it, probably can give you a little bit of the color in our mind. Assume the current recovery will bring 2022, I'm talking about 2022, a year after we set an original goal of the 2021, to 2018 level of $900 million as a baseline. I'm talking about as a baseline. That's a $900 million revenue as a baseline. In the next three years, 2021, 2022, three years, we believe we probably can add additional $200 million, additional revenue from the organic growth product we introduced to the market.
This is including flip chip, TCB, PIXALUX, and also Lester mentioned APS additional revenue. To reach $250 million quarterly average revenue, this is about $1 billion. Right now, as we look at it, I think probably 2022 will be the time we probably can reach $1.1 billion-$1.2 billion. Spotty, I do believe we will hit $250 million from time to time. Maybe later part of 2020 and beyond 2021. That will be our expectation.
Thank you very much. That was very helpful.
Thank you. Our next question today is coming from Christian Schwab from Craig-Hallum Capital Group. Your line is now live.
Great. Thanks for taking my question. Fusen, can you give us an idea in both the automotive and memory business, peak to trough quarterly revenue, if you have that, this cycle?
Christian. Hi, it's Lester. Right now, we believe auto memory is near the trough. Auto is roughly 50% of what our 2018 quarterly run rate was, while memory is about one quarter to 1/3.
Okay. Fantastic. If we have a true memory cycle and equilibrium supply and demand equals out in second half of this year, we get back to spending money again on the CapEx side, that could ramp up more quickly, in my opinion. Is that fair? Is that a fair assessment?
I think that's fair. Right now, memory is close to 4%- 5% of our revenue. At its height, it's closer to 20%. I think if there is a recovery, we're seeing some recovery in NAND. If DRAM comes back, I think significantly, both, I think it could be a faster ramp.
Yeah. Christian, as you know, we actually have very high market shares in the memory space.
Right. On the automotive side, a recovery in that business, I know there was a series of questions about it. It wasn't clear to me. Is an automotive recovery based upon units, or can that business, if units should stay at these type of levels for the next year or two with greater electronification, for lack of a better word, going into vehicles, could that see a nice recovery over time, or is the automobile business much more of just a gradual recovery?
Well, Christian, you know any segment recovery will not be sudden, right? It's really my expectation that auto will take a little bit more digestion and maybe show stronger momentum, I would say maybe second half of next year.
Okay. Fabulous. All my other questions have been asked. Thank you.
Thank you, Christian.
Thank you. As a reminder, ladies and gentlemen, it's star one to be placed into question queue. One moment, please, while we poll for further questions. Our next question is coming from Krish Sankar from Cowen and Company. Your line is now live.
Hi, this is Robert Mertens on behalf of Krish. Thanks for letting me ask this question. Just a real quick housekeeping one first, and then I had a follow-up. What was the size of the advanced packaging business this quarter?
Size advanced packaging was about 14%.
Okay. Great. You're guiding next quarter sort of flat quarter-over-quarter, where it's typically seen some seasonal weakness. Could you just give some sort of puts and takes around which areas you're seeing strengthen into the December quarter? Is this sort of broad-based continuation, or is there one area that's going to be a little bit stronger and some softness in other ones?
Well, I think as we have indicated on the call, we still think memory and auto is recovering, but they're still soft right now. I think the recovery is much more ahead in general semi and LED, and particularly in China. As I indicated, the OSATs are running at a very high utilization rate in China. We believe that the growth or the maintenance of the revenue at flat is coming from general semi and LED.
Okay, great. Thank you. That's helpful.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
Thank you. Before closing, we wanted to inform investors that we'll be participating in several upcoming conferences and roadshows throughout the December quarter in Dallas, New York City, and London. Additional details can be found at investor.kns.com. Also, going forward, we will be adjusting the timing of our earnings release to pre-market at approximately 8:00 A.M. Eastern Time. Thank you all for the time today. As always, please feel free to follow up directly with any additional questions. Operator, this concludes our call. Good day.
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.