Greetings, welcome to the Kulicke and Soffa 2019 third fiscal quarter results call. At this time, all participants are in a listen-only mode. A Q&A 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 your host, Joseph Elgindy, Senior Director, Investor Relations and Strategic Initiatives for Kulicke and Soffa. Joseph, you may begin.
Welcome, everyone, to Kulicke and Soffa's third 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. Throughout these unique industry conditions, we continue to generate profit, invest toward our organic development program, reduce our shares outstanding, and drive market acceptance of several new offerings. Several of our end markets continue to be generally soft, with limited capital spending visibility, partially due to the current macro environment. Despite this limited near-term visibility, we are confident in general improving demand and also our longer-term market driver and the product opportunity into fiscal 2020. We reported earlier today that we had shipped several Pixalux systems to multiple locations in the June quarter and expect additional shipments in the current September quarter. The shipment of this tool, ongoing customer interest, and additional planned shipments further increase our confidence that Pixalux will help accelerate market adoption of Mini LED and MicroLED technology. As many of you are aware, this is not our only high-potential market expansion opportunity.
Our APAMA thermal compression tool is very competitive and in production for a premium logic application. Separately, Catalyst, our high-accuracy flip chip tool, was recently shown at the SEMICON West and continue to generate significant customer interest for leading-edge memory and logic applications. I will provide a more detailed update to our growth initiatives after the financial review. For the June quarter, we recognized revenue of $127.1 million, an increase of nearly 10% sequentially, driven by an increase in demand from our OSAT customers, with exposure to general semiconductor. Also an increase in demand for our LED products. Strength is continued in automotive, memory, and for advanced packaging products. Capital equipment sales increased by 11.5% sequentially to $89.9 million, driven by a strong increase in the ball bonding and partially offset by decrease in wedge bonding in our EA businesses.
Sequentially, revenue increased by 65% in ball bonding, driven by increased demand from our OSAT and LED customers, a significant change over the March quarter. This helped to highlight the diversity of our business, but also imply improving underlying market conditions due to our relatively short lead times for ball bonding. Our aftermarket product and service segment, APS, displayed similar trends, and the sales increased 5.4% sequentially to $37.2 million. These trends were driven mainly by an increase in the ball bonding business. Considering the broader macro-driven uncertainty, our global organization continued to be focused on cost control while also prioritizing ongoing business development and effort to drive fundamental business optimizations. Stronger ball bonding demand, increased consumable sales, improved customer sentiment, and ongoing improvement to our outlook increased confidence that this industry is showing signs of improvement.
As we look ahead, we remain focused on market adoption of our new tool and continue to be operationally prepared for demand improvements. 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 $127.1 million. A gross margin of 46.2% generated $58.8 million of gross profit. We anticipate gross margins to be approximately 45% in the September quarter.
We continue to benefit from the flexibility of our manufacturing operations and continue to drive SG&A efficiencies through the June quarter. We are all very focused on limiting controllable and discretionary costs and driving workforce efficiency. As mentioned on our last earnings call, this cost containment exercise is extremely selective, and we do not intend to jeopardize our long-term growth initiatives. Compared to the June quarter one year ago, our global workforce has been reduced by over 12%, while we are maintaining an elevated level of R&D investment. In the long term, we plan on maintaining our existing operating expense target of $53 million of fixed quarterly expenses, plus 5%-7% of variable quarterly expenses tied to revenue.
Due to our aggressive focus on controllable and discretionary spending in the near term, we are targeting to again achieve the lower range of our variable expense component in the current September quarter. Turning to tax, we booked a net tax expense of $3.9 million, resulting in a rate above our long-term effective tax rate target of 15%, as mentioned on last quarter's call. The higher June quarter tax rate is due to the dynamics of our business in a lower demand period. Specifically, our jurisdictional income mix and valuation allowances on certain deferred tax assets impact our effective tax rate more significantly during lower demand periods. Going forward, we have raised our long-term effective tax rate target to approximately 18%. Looking into the September quarter, we are anticipating the absolute tax expense, excluding discrete items, to be around $2.5 million. Turning to the balance sheet.
We ended the June quarter with a total net cash and investment position of $572 million, or $8.75 on a diluted share basis. As a reminder, we have begun to draw down from our overdraft facility during the March quarter. At the end of the June quarter, we have drawn down $71.2 million to support U.S. cash needs, including the repurchase program. During the June quarter, we have again increased our repurchase activity and deployed $33.2 million to repurchase 1.5 million shares. At the end of our June quarter, we had approximately $112.1 million remaining under the existing share purchase authorization. Cumulatively, from our initial program inception through the June quarter, we have repurchased 16.5 million shares outstanding for a total value of $287.9 million. Our overall repurchase activity has accelerated in coordination with our organic development progress over the past two years.
While we began our initial repurchase program nearly five years ago, 68% of the total value was deployed in the past two years, with approximately 30% deployed in the past nine months. On a book value per share basis, we closed the June quarter with $12.03, a decrease of $0.46 from the March quarter, due primarily towards our ongoing repurchase activity. 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 decreased from 108 days to 107 days. Our day sales of inventory decreased from 153 days to 129 days, and days of accounts payable increased from 50 days to 56 days. This concludes the financial review portion of our call. I will now turn the discussion back to Fusen for the September quarter business outlook.
Thanks, Joseph Elgindy. While we continue to operate in a very dynamic macro environment that is difficult to predict, we remain cautiously optimistic considering recent demand improvements at our global OSAT. Additionally, we are also uniquely positioned to create meaningful value through our market expansion effort in advanced packaging and the next-generation LED opportunities. As mentioned in today's press release, we believe the soft demand environment is gradually improving, and we expect revenue to be approximately $130 million-$150 million, representing a 10% sequential improvement. We remain extremely focused on several of our development initiatives and our ongoing effort to drive market and customer adoption of our newly introduced advanced packaging, mini and micro LED systems. This ongoing development effort provides an opportunity to emerge this period of softness, a much stronger and higher growth organization.
A few weeks ago, we participated in the SEMICON West trade show, where advanced packaging techniques and approaches was highlighted by several leading logic and foundry companies. This focus on advanced packaging highlights our long-term view that new packaging approach provide alternative to non-shrink by delivering power efficiency, performance, and form factor benefit for next generation devices. We are well-positioned to directly participate in this transition through our competitive and comprehensive advanced packaging offering. Over the coming years, we anticipate meaningful leverage in our served market expands through share gain in these new businesses. During SEMICON, we exhibit our Catalyst high-accuracy flip chip to the broader market due to unique architectures, throughput, and accuracy. We are pleased with the competitiveness of this tool.
Our rapid development approach, facilitated by our R&D organization, has allowed us to develop and introduce this tool in just over one year. The Catalyst system provides increased placement accuracy and dramatically enhanced throughput for next-generation high-density flip chip devices. Today, flip chip equipment is the second largest interconnect market behind wire bonding, with a total available market size of approximately $250 million. Over the coming years, we anticipate new forms of advanced packaging, such as high accuracy flip chip, thermal compression, and fan-out wafer level packaging to depress traditional flip chip tool, a market we do not participate significantly in. For K&S, this anticipated transition will enhance our share of leading-edge logic in the memory applications. As mentioned last quarters, APAMA, our thermal compression system, continue to perform well and remain very competitive versus alternative system as a leading OSAT for a high volume logic application.
Separately, we ship our first evaluation of LITEiC 500 lithography system during the June quarter. This system has been installed successfully and on schedules. We have received positive feedback on the system ease of use and are targeting to ship a second evaluation system to a separate customer early in calendar year 2020. In just over a year, we engaged with a technology partner and subsequently developed, shipped, and recognized revenue for our Mini LED and MicroLED tool, Pixalux. This tool set a new benchmark for high-speed placement and operate up to five times faster than competing pick-and-place solution. Considering this capability, our recent sales, and the end customer interest, we expect this tool will enable cost-effective and high volume production of Mini LED and MicroLED devices in the near future. Over the coming years, we anticipate new forms of back lighting to drive initial adoption of Pixalux tool.
In the longer term, direct view LED displays are also a high potential end applications for this tool. While we are focused on Mini LED and MicroLED usage for high-resolution display, there is also meaningful potential for lighting and general informational display within automotive and consumer electronics. As of today, we have shipped a total of seven systems, several of which we have already recognized revenue. We continue to operationally prepare for an initial production ramp. We are confident that our current and new technology solutions are extremely aligned with significant long-term trend in advanced packaging, automotive, IoT, and the display market.
In addition to our new system revenue contributions, which are anticipated to deliver meaningful operating leverage benefit over longer term, we also continue to anticipate more near-term gradual demand recovery in our core business as a seasonal dynamic, including smartphone cycle, followed by U.S. and Asia holiday season, drive capacity digestion, and the incremental capacity demand into fiscal 2020. Our strong balance sheet, expanding portfolio, dominant market position, ongoing repurchase activity, and high potential customer engagements provide us with increasing confidence that we will exit this soft demand environment with enhanced fundamental strength and growth prospect. This concludes our prepared remarks. Operator, we will now be happy to take questions.
Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, 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 the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Christian Schwab with Craig-Hallum. Please proceed.
Hey, great. Thanks for taking my question. Last quarter, Fusen, you talked accurately that you felt that the March quarter would be the trough for your business. The timing and the magnitude of the recovery and the growth from there would be somewhat difficult to predict. It seems like we've got a couple quarters here going in the right direction. With that in mind, have you guys given any updated thoughts to what your long-term target model is and the timeframe to get there, and potentially, the trajectory of that recovery?
Okay. Thank you for the question, Christian. We discussed this question a few times. Let me answer in different way this time. Our 2018 revenue was about $900 million. Actually, it's $898 million. We generate $170 million profit. Our 2021 model did not consider 2019 downturn and was purely based on a 10% annual growth from 2018. The half of the growth, actually assumption come from semi-unit growth. Another half actually will come from new product introduction plus our APS growth. With that formula, we'll come to $1.2 billion target for the 2021 revenue. At this moment, as you mentioned, I think we guide much was our trough. I believe we are at the beginning of a recovery phase. Let's do a reasonable assumption. Assume in 2021, our industry can reach full recovery.
It means the same products we had in 2018 can contribute same revenue into 2021. It is $900 million. Plus the contribution from the new product development we introduced and/or is going to introduce or introducing, including Pixalux, the flip-chip TCB, and the APS, which I believe can generate additional $100 million-$200 million revenue into 2021. I think our 2021 model will likely be delayed 12-18 months due to 2019 downturn. This including the memory downturn and also the trade dispute between the two big countries. Regardless, with our new product introduction and coupling with our current stock repurchase plan, we believe we will create very good shareholder value to our shareholder into 2021. That will be my answer to your questions.
Fabulous. Of the new products, which one in particular are you most excited about? If we're in 2021 and we do $200 million in revenue, which product is the one most likely, of your new product introductions, that we should be keeping the closest eye on?
Okay. I think in short summary, we believe there are two areas. One is advanced packaging, and one is Mini LED and MicroLED. I think LED market is a huge market, and when people cannot create green energy, actually, people try to save energy. LED is a big market, and next phase is going to be Mini LED and MicroLED. The bottleneck actually locate at how to transfer this small die. I believe, our Pixalux has a very ultra-high speed, and the transfer rate is about 4 to 5 times compared to conventional pick-and-place solution. That's one. I think we have a good hope. The second one actually lie into advanced packaging, and this including the flip-chip we introduced. We are very satisfied with the performance we have by engaging with a few customer at this moment.
Also TCB is in transition to, I call TCB2, which is capable to handle bigger die, up to 7 centimeter by 7 centimeter, and also different kind of interface contact. Also including our APS, I think we see a lot improvement in our APS engagement with our customers. There are areas, let me make a short summary. I think this additional $100 million-$200 million of revenue I just mentioned will come from Mini LED, MicroLED, and also our advanced packaging, including flip-chip, including a new TCB engagement with customer and also our APS growth.
Okay, great. Thank you. No other questions.
Thank you.
Thank you. Our next question comes from a line of Craig Ellis with B. Riley. Please proceed.
Yeah, thanks for taking the question. I'll start with a clarification. Another quarter of very strong gross margin performance at 46%-plus. What I was hoping to do is just have you guys reflect a little bit on some of the trends that are driving that, because given the volumes, I wouldn't normally expect gross margins to come in that, I think, in such a healthy fashion.
Hi, Craig. I think, as you know, our gross margin is highly contingent on product mix. In the quarter, the margin went down a little bit because we sold more ball bonders, basically more LED bonders versus our wedge bonder and our APMR equipment, our pick-and-place equipment. I think as we go into the September quarter, our fourth quarter, we guided around 45%. We believe that the ball bonder and LED will continue to recover. I think the wedge bonder is a little soft because of automotive, I think going into 2020, I think we're confident it will recover.
That's helpful. Thanks, Lester. Fusen, I just wanted to follow up on some of your Pixalux commentary. Nice to see some traction in the marketplace in June and September. The question is, I think the company believes that that business could be one that adds 5% to revenues by next year, maybe double that in two years' time. How should we think about the path between some initial engagements and shipments now versus much more material levels? Do you envision that being fairly linear, or are there things related to the engagements that you're having with customers that would either argue for a more front-end or a more back-end loaded ramp?
Okay. I think at this moment, we have shipped seven systems and recognized most of our revenue, and we expect our next two quarters, we will have additional appeal and deliver to customer side and also recognize revenue. This system, seven plus next few of them, is going to be a system looking customer side doing qualification. We don't expect this is going to be linear until next production from customer side upon qualification. Upon qualification, we do expect next year can contribute meaningful revenue to us. What we mean is probably in the mid to high single digit of our revenue, if this qualification will be successful. That will be the total calendar year revenue, because we probably cannot precisely predict which month is going to be high volume production started. That will be my answer. I don't know if I satisfy your questions.
Yeah, that's helpful. Thanks for that, Fusen. Lastly, I just wanted to go back to some of your higher level commentary. You noted you were a little bit more confident in a general improvement in demand, you mentioned some things that you were seeing on the OSAT side. I was hoping you could elaborate a little bit further on what you're seeing and whether some of the confidence either comes from customer interactions or other things that you've seen. Are there any concerns that you've seen and incremental negatives that we need to bear in mind as we look forward at potentially coming off a cyclical bottom up from the March quarter through your guidance in the September quarter? Thank you.
Okay. Let me answer this way. I think every year it's about 2 trillion semiconductor devices finish the process, and they need to do a packaging. The majority, what I mean, majority is about 80%, and which I don't see going to be dramatically changed for next couple of years. 75%-80% use ball bonding. During any upturn or downturn, I think ball bonding is a leading indicator. If you recall, our 2018 Q3 revenue was very high. I remember it was $270 million. Actually, we suffered this downturn, including trade tension between U.S. and China and also memory downturn. Actually, I think we decline pretty fast. In March quarter, actually, we believe we reached to a trough. We just delivered June quarter about 10% sequential growth, and we are guiding September quarter will be another 10% increase.
We will work hard and hoping maybe December quarter will also show a sequential growth. Although, it is too early to say. What we are feeling right now, by engaging with customer, hopefully after Chinese New Year 2020, and we can see more significant growth if macro environment don't deteriorate any more. That's what we are seeing at this moment.
That's helpful. Thank you and good luck, guys.
Thank you.
Thanks. Bye.
Thank you. Our next question comes from a line of Krish Sankar with TD Cowen. Please proceed.
Yeah. Hi. Thanks for taking my question. I had a couple of them. Number one is, on the Pixalux product for the Mini MicroLED. If it's only like mid-single % of revenues, I'm just trying to figure out the math. Are we talking about shipment of maybe 60 or so Pixalux tools? Is that in the ballpark or?
Sorry. Hi, Krish, it's Lester. 60 or 70 Pixalux tool ship when? I'm sorry, I'm not clear on the question.
In calendar 2020.
I would say it would be north of that.
North of that. Got it. All right. Fair enough. How much was advanced packaging as a percentage of your revenues in June?
Krish, as you know, everyone defines advanced packaging differently. We include advanced memory in our advanced packaging. Excuse me. Historically, we've been around 20%, due to the memory downturn, I would say for the quarter, we're probably around 12%-13%.
Got it. Okay. All right. Just another question on your sales into China, how much was that?
Around 52%.
This includes everything across all products?
Across all products.
Got it. All right. Fair enough. The final question, Fusen, you kind of mentioned how it's nice to see that you guys are past the cyclical bottom and hopefully probably grow in December quarter also sequentially. I'm just trying to understand. That is not a normal seasonality for you, right? Is it because that we are going through coming off a downturn that we should not think about traditional seasonality?
Actually, Krish, I think seasonality still played. But if you look at it, the fabs still have some excess capacity, right? The first step is to digest this excess capacity, and that's why I mentioned, this is seasonality. If we can digest some utilization, then hopefully start from next year, February, after Chinese New Year, we can have more significant growth for the whole industry, not only limited to K&S. Of course, for December quarters, it's still a little early for us to predict, but I think we will work hard to see if we can show the growth in December quarters. Our share still have hope is because we believe, I think seasonality is still there, and I think a lot of people, they don't buy, and they have a chance and still to buy in December quarters.
Early to say, but I think we will work hard on that.
Got you. All right. That's very helpful. I think those are the questions I have at this point. Thank you very much, Fusen. Thanks, Lester.
Thank you.
Thanks, Krish.
Thank you. Again, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Our next question comes from line of Tom Diffely with D.A. Davidson. Please proceed.
Hi, good afternoon. Good evening. Question on the Pixalux tool. Sounds like some nice momentum there. I was wondering, is that with multiple customers at this point?
Yes. Actually, Tom, I think we do have multiple customers. Actually, we work together with our partner Rohinni to decide our customer bases. As they have end customer network in consumer electronics, auto, and display industry. As of this moment, we actually are engaging with multiple customers.
Okay. We've talked in the past about how this serves the Mini LED market. Is it the same tool that does MicroLED as well?
It's the same tool for Micro.
Oh, yeah. Same tool as a-.
Hi, Tom. It's Lester. I think the Pixalux is very well suited for Mini LED. As Fusen says, it's the fastest tool on the market, four to five times faster than the current pick and place machine. For Mini LED, we believe that even higher speed is needed. I think we're already working on what we call basically Pixalux 2, the next generation of Mini and MicroLED, which it will not be the same tool. It will be based on the same platform. We will build on the tool that we have now as well as the experience we have from Mini LED.
Tom, I think I got your question right now. We do believe Mini LED and MicroLED will have a huge growth opportunity for next two years, and we are quite confident that the Pixalux provide the current need for the industry for initial Mini LED and MicroLED adoption. We still believe our next two years, the pricing of LED and performance of LED, as the next transfer rate speed need to be increased. Of course, we are working on that together with our partner for the futures.
Yeah. All right. No, that makes sense. Then looking at the Catalyst, you said the flip chip market is about $250 million right now. What is the size of the high density flip chip market? Is that just a small segment of that?
We think maybe high density, high accuracy, we say maybe half of the market. That would be our guess. Yeah.
Okay. Finally, what are the current utilization rates you're seeing out in the field that sounds like you're a little more confident of a little less seasonality at the end of this year?
Well, Tom, as you know, utilization rate is not uniform across all customers, all regions, right? There's patches that are doing better than others. I think, earlier in the quarter, we were seeing it move, as we indicated in our last earnings call, we're seeing it moving towards mid-70s. However, with the trade tensions and some of the events in May, I think we see a little bit more chop, and obviously today's announcement probably will not help. I think it's gonna be a little bit choppy in terms of utilization rate across.
Okay. That makes sense. I appreciate your time.
Thanks.
Thank you. There are no further questions in queue at this time. I would like to turn the floor back over to Joseph Elgindy for closing comments.
Thank you, Roya. Before closing, we wanted to inform investors that we will be participating in several upcoming conferences and roadshows through the September quarter, including Jefferies in Chicago, D.A. Davidson in New York City, and also several non-deal roadshows. Thank you all for the time today. As always, please feel free to follow up directly with any additional questions. Roya, this concludes our call. Good day.
Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.