Greetings, welcome to the Kulicke and Soffa 2019 first fiscal quarter results call. At this time, all participants are in a 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 your host, Joseph Elgindy, Director of Investor Relations and Strategic Initiatives for Kulicke and Soffa. Joseph, you may begin.
Thank you, Jeremy. Welcome everyone to Kulicke and Soffa's first quarter fiscal 2019 conference call. Joining us on the call today are Fusen Chen, President and Chief Executive Officer, and Lester Wong, General Counsel and Chief Financial Officer. For those of you who have not received a copy of today's results, the release as well as the latest investor presentation are both available in the investor relations section of our website at investor.kns.com. In addition to historical statements, today's remarks will contain statements relating to future events and/or future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
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 29, 2018. I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.
Thank you, Joe. We were again able to achieve our quarterly revenue targets through this tougher period of demand. Despite the current market headwinds, which we believe are near-term in nature. Our entire organization remains extremely focused to drive long-term business enhancements and the sustainable growth. Specifically, we expect to benefit from three primary areas. Execution of our fundamental optimization plan, ongoing semiconductor unit growth within our core offerings, and the higher volume production of advanced packaging. We have made a meaningful improvement to the business over the past two years, including a more aggressive approach to capital allocation and shareholder return, and also fundamental improvements supported through organizational change and a renewed set of priorities, which have already strengthened our position and provide new vectors of growth. Today, we also announced our fourth $100 million shares repurchase authorization. Lester will provide some additional detail on our repurchase activity shortly.
Despite the near-term environment, we are very excited about our current business prospects. Our product portfolio and the development pipeline is extremely aligned with LED, NAND, and IoT capacity expansion, electric and autonomous vehicle adoption, and several technology inception providing new advanced packaging opportunities. Our development team continue to rapidly develop new tools to strengthen our competitive position and expand our served market. The entire organization is committed to exiting this near-term period a stronger, more diversified, and a more profitable organization. Looking back at the December quarter, we delivered revenue of $157.2 million. At the higher end of our guidance, gross profit of $74.8 million, gross margin of 47.6%, and a non-GAAP EPS of $0.25. Product mix, combined with a prudent but aggressive cost control, helped to enable this level of profitability.
Compared to the December quarter a year ago, we have reduced our global workforce by nearly 15%, while increasing the rate of our development effort. This added flexibility is facilitated through our mix of fixed and temporary headcount, which allow for consistent gross margin performance. Over the December quarter, many of our end markets, including advanced packaging, general semi, and LED, as well as memory, experienced a softness in demand. Whereas automotive and industrial demand increased sequentially. From a regional standpoint, the largest sequential reduction in sales stemmed from demand of our Chinese outsourced semiconductor and assembly. We call OSAT customer, and specifically our ball bonding business. While our equipment shipments to China have increased over the years, it's very important to remind investors that our market share of semiconductor ball bonding equipment in China is similar to our market share in other parts of the world.
China has simply been absorbing the majority of incremental capacity over the past few years. We believe that aggressive capacity addition over the past few years, combined with the broader trade tensions, are both contributing to this softness. In addition to the emerging China dynamic, our ball bonding business has positively benefited by the long-term growth of our OSAT customer base, where we are overwhelmingly the tool of choice. As many of you know, over the long term, our OSAT customers have grown faster than the industry due to growth in the fabless and the fab-lite model, as well as through improved operational efficiency, which let's say, also generally have the most variable ordering pattern as they generally provide the industry's flex capacity. Our wedge bonding equipment demand, which is more aligned with the long-term automotive and industrial trend, was effectively flat sequentially.
Overall, automotive and industrial demand, including service, sequentially increased. Revenue from APS, our aftermarket product and service segment, represents 26% of total revenue and decreased only by 5% sequentially. APS gross margin improved from 55.2% to 57.6% sequentially. We continue to make progress on our long-term APS strategy and are committed to growing this high-quality recurring revenue base of business into the long term. 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 Chen. My remarks today will refer to GAAP results unless noted. Net revenue for the quarter was $157.2 million. Strong gross margins of 47.6% generated $74.8 million of gross profit. Gross margins of 47.6% exceeded our prior expectations due to product mix between capital equipment and APS. We continue to target margin of roughly 45% over the near term. Operating expenses came in lower than expected due to tight controls on discretionary spending and also headcount reductions, as Fusen Chen mentioned. 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 applied to revenue. We booked a net in tax expense of $10.6 million to continue to maintain our long-term effective tax rate target of around 15% going forward.
$7.7 million of this tax expense is related to an additional provision associated with the Tax Cuts and Jobs Act of 2017. Specifically, this additional provision was related to new guidance issued by the U.S. Department of Treasury on November 28th, 2018. Turning to the balance sheet. We ended the September quarter with a total cash and investment position of $632.9 million, or $9.33 on a per share basis. During the quarter, we have continued to return capital to investors. We deployed $25.5 million, and repurchased 1.1 million shares, and also paid our second $0.12 dividend. At the end of our December quarter, we had approximately $72 million remaining under the existing share repurchase authorization. We were happy to announce the additional $100 million increase to our share repurchase authorization as disclosed in today's earlier press release.
Since our initial repurchase authorization in August 2014 through the recent December quarter, we have deployed $227.8 million and repurchased a total of 13.8 million shares at an average price of $16.51. Our fundamental effort to organically expand our served markets and increase share gains has the greatest potential towards sustainable value creation. The ongoing share repurchase activity provides an additional lever and enhances our value delivery process. We also want to remind investors that we continue to operate under many tax jurisdictions outside of the U.S. This global entity structure creates near-term constraints on the movement of our cash balances and the availability of U.S. cash. We're currently reviewing several short-term funding alternatives to allow us to continue to optimistically execute the existing repurchase authorization in the most efficient way.
On a book value per share basis, we closed the December quarter with $12.65, a slight decrease of $0.17 from the September quarter. Working capital, defined as accounts receivable plus inventory, less accounts payable, decreased by $60.3 million to $250.5 million. From a DSO perspective, our day sales outstanding decreased from 119 days-107 days. Our day sales of inventory increased from 105 days-120 days, and days of accounts payable increased from 44 days-51 days. This concludes the financial review portion of our call. I will now turn the discussion back to Fusen Chen for the March quarter business outlook.
Thanks, Lester. We continue to believe the soft demand environment is only a near-term headwind, and it stems from a number of factors, including a fairly aggressive rate of capacity addition over the past two years. A hesitation of a new capacity addition due to global trade tension, and the seasonal softness, and the reduced visibility ahead of Chinese New Year. We do not believe this short-term correction has any material effect on our competitive position or any material effect on the longer-term market trends, driving semiconductor content in automotive, the growth of more connected consumer electronics, the ongoing adoption of solid state memory, and the increasing value advanced packaging has on the broader industry. As mentioned in today's press release, we anticipate revenue to be $120 million ± $10 million. Are anticipating a general recovery in demand into the June quarter.
Although the softer market environment creates a near-term challenge, we will continue to benefit from three specific areas into the long term. Execution of our fundamental optimization plan, semiconductor unit growth benefiting our core offerings, and higher volume adoption of advanced packaging. First, our fundamental optimization strategy is to gain shares in the recurring APS business and also improve profitability of our high-volume core equipment offerings. There continue to be sizable opportunities to grow our mix of service, spare parts, and software in our core businesses and also those winning advanced packaging. This opportunity is being facilitated through a more rapid and parallel development effort. A dedicated APS business organization, more structured ownership and accountability, and performance-based incentive compensation, very aligned with both shareholders and corporate goals. Secondly, the maturity of semiconductor unit growth will continue to drive demand for our core and market-leading ball bond and wedge bonding businesses.
These businesses have and will continue to be central in enabling fundamental and significant trends such as those in LED lighting, the global adoption of connected consumable electronics, growth and share gain of solid state memory, and the increasing content of semiconductor in automotive. These are all key areas where we already have dominant leadership positions. Finally, our investment in advanced packaging has provided access to a new and growing market, where the anticipated technological replacement and share gains. Over the past few months, we have started seeing true advanced packaging being utilized in graphic processors, high bandwidth memory, and most recently, a major IDM announced utilizing advanced packaging technique in their future logic architectures. Compared to the 1 trillion semiconductor packages produced in 2019, advanced packaging are currently a niche application, although the future is promising.
We continue to view calendar 2019 a qualification year for several of our advanced packaging products, and we continue to anticipate more material revenue contribution from our AP portfolio into 2020. As a brief update, we are currently in one qualification and are preparing for two additional qualifications for our Katalyst high accuracy, high throughput flip-chip tool , which targets several high-density memory and logic applications. We are very happy with our industry-leading performance in both equipment accuracy and productivity in this market. We are also in production at a major OSAT with our APAMA thermo-compression tool, supporting a logic application not previously utilized a traditional flip chip package. We anticipate several additional shipments over the coming years. In addition to advanced packaging opportunities to support the LED market, we are also aggressively pursuing our micro and mini LED opportunities, supporting the evolving display market.
This opportunity provides a wide array of potential end applications and customers, and our development is progressing well. In our view, the major obstacle limiting commercial adoption of this LED technology is that there is no existing solution that has the necessary combination of speed and accuracy for efficient production. We believe our tool directly addresses this challenge and is up to 5 times faster than traditional pick-and-place tools, and is currently being evaluated by a few potential customers. We continue to anticipate several initial orders by the end of fiscal 2019 and higher volume adoption into 2020. We look forward to updating you on the progress and the customer acceptance of this tool. The entire organization remains extremely focused on executing toward a multifaceted business strategy.
This strategic execution, combined with thoughtful capital allocation, can drive tremendous operations leverage through our business model and deliver significant value to investors over the coming years. Considering our balance sheet, broadening portfolio, future development potentials, and our ongoing focus on profitability, we are very confident our fundamentals and growth prospects will continue to be further enhanced as we exit this period of near-term softness. As always, we appreciate your ongoing support. This concludes our prepared remarks. Operator, we will now be happy to take your questions.
At this time, we will be conducting a question and answer session. 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 may 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. One moment please while we poll for questions. Our first question comes from the line of Krish Sankar from Cowen. Please proceed with your question.
Yeah. Hi. Thanks for taking my question. I have a few of them. First one is for Fusen or Lester. If I look at your gross margin guidance and OpEx kind of covered, are you guys going to be breakeven, or are you going to be operating at a loss in the March quarter?
Well, Krish, we're very focused on cost, and I think for the March quarter, the breakeven will be around $130 million. Based on the midpoint of our guidance, I think we would have a small loss.
Got it. Okay. Thank you. That's helpful, Lester. Then, two other questions. One is, in the past, typically, based on your customers, you kind of get visibility into the March quarter or beyond right after Chinese New Year when customers come back to place new orders based on demand. Do you think there's a similar dynamic going on right now? Or do you think because end markets are so slow and there's high levels of inventory, that you might not see that dynamic this time around?
Well, Krish, I think this downturn actually has two forces. One is memory cycle as everybody experiences, right? We are part of that. The memory is about our roughly 10% of our revenue. The other dynamic I call China effect, actually has a more pronounced impact to us. Because China is a big part of our revenue. We believe the current softness can actually potentially translate into the revenue for next few quarters. I understand, I think visibility is a little bit less than before due to our trade tension, additional complicated factors.
Got it. Then, just a final question, Fusen, for you. It looks like you guys are upping the buyback. You've been pretty aggressive about it. Kind of curious, is that because you're not seeing any other interesting assets out there? Or what do we think about capital allocation with regards to buyback over M&A? Thank you.
Krish, why don't I answer that? I don't think the increase in the authorization of the share buyback means we don't see interesting opportunities out there. As you know, we have a very balanced capital allocation program between share buyback and dividend, as well as funding organic growth, as well as looking for M&A opportunities. Given the, I guess, softness in the market as well as lack of visibility, I think right now we're not really focused on M&A. That does not mean that if an interesting opportunity that is adjacent and also is a good return of investment comes up that we would not do that.
Krish, maybe I can add a little bit. We believe 2019 is the year for our multiple products penetration. We introduced multiple products, and we want to make sure it will be successful. We were seriously in preparation and in terms of action, we believe it's going to be post 2019. This year, we are going to focus actually in our market share again, and also penetration of new products. In terms of M&A, we believe the future target need to provide quality of the growth, right? It is going to be in adjacent or complementary industry, and it need to fit a few criterias. Number 1, it need to have a comparable gross margin and fit into the culture, cost and synergy. These are few criterias. Also, a product need to have industry leading position. There are a few criterias.
I just want to assure you, we are not giving up, but we are very careful. Number 1, focus in the short term, make sure our new product will be successful. Number 2, we want to make sure the target is going to have a quality of the growth to match KNS culture and also growth margin portfolios.
Thanks, Fusen. Thanks, Lester.
Our next question comes from the line of Craig Ellis from B. Riley FBR. Please proceed with your question.
Yeah. Thanks for taking the questions and congratulations on the strong margin execution and the continuation of the capital return program. Lester, I wanted to follow up on margins to start. Gross margins were 260 basis points better than what we thought, and operating expense was materially lower. Can you just go into a little bit more detail in terms of what it was that drove those two positive variances? While I know you're not changing some of the longer-term target parameters around either of those line items, is there a reason why those wouldn't persist as we look into the March quarter?
Craig, I think the growth, as you know, our gross margin depends a lot on product mix, right? The product mix for the quarter in capital equipment actually, was less LED and more on the IC market, which has higher margins. In addition, the wedge bonder and the APMR segments of our businesses actually did very well in the December quarter, and they're also high margin, I guess, businesses. That accounts for the, I guess, growth margin variance. As far as the OpEx variance, as Fusen said, we're very careful on cost control. Both in discretionary spending as well as we have a very flexible manufacturing model. Based on those two items, the OpEx came in lower than we anticipated. As far as going into the March quarter, I think, we will continue to look at cost.
As far as the mix is concerned, obviously, that depends upon the customers. I think, we're sticking to the $53 million plus 5%-7%, because we think that will probably be where it's going to end up.
That's helpful. Fusen, the next question is for you, and it's more of an intermediate term question. Clearly, I think we're hearing from companies that there's a lack of very near-term visibility, potentially for back-end companies. Some of that starts to clear after Lunar New Year here in another, a couple of weeks. As we think about the typical profile of the business, typically, I think we would see a strong second half-on-half. The question is this: as you talk to your customers and how they're thinking about their capacity needs and their technology needs, do you see potential for that half-on-half increase to occur for some reason? Is the capacity situation such that we wouldn't see something similar to the typical seasonal profile where the business has a nice gain in the second half?
Okay. Craig, thank you for the questions. If we look at it, I think we are still in the middle of a slowdown. If you look at the previous slowdown, it's in 2015. It last about three quarters, right? I believe right now, the supply chain efficiency is much, much higher. If we look back, we start to see the softness in second half calendar year of 2018. Including the March quarter, it's already three quarters. There's a possibility the current weakness, part of current weakness can become some revenue in the next couple of quarters. Also, if you look at the forecast annual semiconductor unit growth rate, still positive. That means, whatever weakness right now, will view a better revenue profile for everyone, for these industries.
For the June quarters, beyond March quarter, we feel like in LED and also in OSAT can be better. I also mentioned, in our AP portfolio and the mini-LED are low in the initial stage, can also contribute to the growth. In short summary, I think, we are more confident than second half than first half. I think that most of the industry feel this way. I wish I answered your questions.
That's helpful. Thank you. The final question I have, and then I'll get back into the queue, is regarding the capital return program. It's a little bit different than the former one, and it's this: clearly, the industry is going through, in large part, a macro-driven correction, and that's had significant pressure on industry stock prices over the last four to six months. As we think about the pacing of the new $100 million program, is there any color you can provide in terms of how we might think about the timing with which it would be executed and the degree to which you would tend to be more opportunistic at lower levels versus just choosing a more ratable approach over a certain period of time? Thanks, guys.
Craig, we certainly believe our stock is undervalued, and we have a lot of confidence in our future growth initiatives, which is why the board has authorized an additional $100 million in the share repurchase program. As far as the cadence is concerned, we will continue to be opportunistic. There are some restrictions in terms of U.S. cash based on our overall tax structure, but we believe that we have sufficient funds both for the dividend as well as the share buyback. I think, the cadence will depend a lot on the macroeconomic factors.
That's helpful. Thank you.
Our next question comes from the line of David Duley from Steelhead Securities. Please proceed with your question.
Yes, a couple questions from me. Could you talk about what you think your utilization rate of your wire bonders fleet is now?
Sure, David Duley. Based on what we're seeing, I think for the ball bonder, it's probably around 70%.
Okay. Is the wedge bonder and other equipment in the similar range?
I think wedge bonder is probably a little bit higher.
Okay.
As well as the APMR.
I think, I had trouble hearing some of the prepared comments, I was just wondering if you could repeat. You talked about China being weak. Could you just review which end markets were the weakest during the quarter or the outlook, I guess, just as a clarification.
Okay. David, I think in my script preparation, I mentioned, actually, the weakness actually is in the OSAT customers in China. As you would know, the OSAT in China in the past few years, they really provide additional capacity for the whole world. That's really the weakness, we are seeing right now is in the OSAT customers.
The end markets that those OSAT customers serve, if it's in China, I imagine there's a cryptocurrency impact. Is there any other end markets that stand out as weaker than others?
Well, everybody know already, smartphone is not very strong. Actually, this world actually have a lot of still faster growing segment. We anticipate memory should be better in the, probably beyond second half of this year. 5G, actually although is initial stage, can be better. I think there are weakness. I think there are also some strong segments.
Okay. Then, could you just help us understand as far as 2018 goes, how big do you think the overall wire bonder market was? If you could take a stab at what you think it would be for the whole year in 2019, that would be great.
Okay. David, we don't actually provide the guidance beyond one quarter. You see, I think this market, as I mentioned, has a true external force. One is that we are going through a cycle in a semiconductor, we call memory cycle. The other one, I think, is macro. It's probably a little bit difficult to forecast. If you can see that, from 2016 to 2017, we grew 30%. Things can change quickly, right? Overall, we feel positive to move forward. The recovery, I think, depends a lot on the macro, on the trade talk. I am a firm believer that this industry fundamental is very strong, including memory, and including our technology that provide a better life for us in the future.
We cannot control up and down, actually, we focus on what we can do, in the new product production, make the product better, and have the right cost structure for the company.
Okay. Final observation or question from me is, I think you talked about growing unit volumes. I think I've seen forecasts in the 5%-6% range this year, down from, let's say, 10% or 11%. That combined with utilization rates of your wire bonder fleet being in the 70% range. If you think you have growth in units, wouldn't it stand to be that you would have some snap back in your wire bonder business sometime in the June or September quarter for, if units grow overall?
David, as I mentioned, we feel like the current level is quite low for us already. We believe, moving forward, in ball bonder, there are two areas I think that can benefit us in terms of growth. One is in LED and also, the other one in the OSAT customers. This dimension, the utilization rate is 70%, but I think that's still varied in our customers. Some customer is stronger. I want to remind you that, in terms of capacity, our revenue actually is additional capacity, just talking about capacity for that, overall customers. There are some customers still very positive. Overall, we believe this is quite low volume for us and move forward, the business situation for the bonder should start to coming back. Also, I think we have multiple new product introduction.
We feel good about the direction and path and the strategies for the company.
Thank you.
Our next question comes from the line of Tom Diffely from D.A. Davidson. Please proceed with your question.
Yes. Thanks for taking my question. I guess getting back to the utilization rate of 70%, when you look at the normal utilization rate for this time of year, kind of the weak part of the year, how does that compare to, say, 70%?
Hi, Tom. I think as everyone knows that as we indicated, as Fusen indicated, that it's a little bit lower. Utilization rate goes down a little bit obviously in this quarter because the Chinese New Year, but again, China and the rest of Southeast Asia.
Yeah
I think 70% is low, again, due to the softness in the market and a little bit of overcapacity.
Yeah. Tom, as we discussed, the weakness actually we've seen in OSAT, particularly in China. The ordering pattern can change quickly, right? They can quickly turn it off, they can quickly turn it up. I think at this moment, also depends on the macro issue. We firmly believe this will be resolved sooner or later, and hopefully this will be sooner than later.
Okay. I know in the past-
I think Go ahead, Tom.
Oh, I was just going to add, I know in the past, when utilization rates got up into the 80% range, that's when customers started to order for capacity buys again. Is it still the same dynamic on an average basis?
Yeah. We believe so. Again, as Fusen indicated earlier. 70% is an average across all the customers.
There are pockets of customers that are probably above 80%. There's some, frankly, that are very low. I think, definitely as it reaches above 80%, they would start buying, but it doesn't have to be at 80% for all customers.
Right. Also, Tom, I think, as we mentioned, the challenge right now also a lot to do with the trade talk.
Yeah.
Hopefully with the result, things can turn quickly. Although there's no assurance.
Yeah. No, that makes a lot of sense. I guess the next question leading into that is, what are your lead times right now? If business was to pick up, how long would it take you to grab the order, build and ship to get the revenue?
Well, Tom, we kind of changed our sort of production strategy a while back, we actually do hold more inventory now. In the event that there is a ramp, we believe we can react to it very quickly.
Okay, great. Finally, when you look at the Well, I guess two more questions. First of all, you talked about the LED market potentially being a nice nearer term driver than some of the other things like memory.
Yeah.
How big is the LED market for you today? Is it still around that 10% range? If LED was to ramp significantly, would that have a material impact on the margin structure?
Tom, actually, I'm sorry. I think we hear you break up a little bit. Your question is the LED?
Mm-hmm. Yes.
I think LED for the March quarter, actually, we feel is a little bit low. Beyond that, I think LED can pick up a little bit. In addition, I think in my script, we mentioned about mini-LED and micro-LED, and we are quite positive on the prospect of mini-LED and micro-LED. There are several discussions, and we believe this year can be initial qualification, and we can see a better result probably 2020.
Okay. I know we've talked a lot in the past about the micro-LED and what you would do there. How is the mini-LED different? What is the setup there?
The LED actually, going to mini-LED and micro-LED, there are two parts. One is general lighting, and actually we are in backlighting. This provides alternatives to the OLED, and which can actually save the battery life with the tiers. This is another alternative to have better technology for display rather than OLED, and we probably can see initial adoption in 2020.
Okay. Thank you.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes to the line of Christian Schwab from Craig-Hallum Capital Group. Please proceed with your question.
Hey, good evening, guys. Fusen, in your slide on the website, I was kind of surprised that you left your long-term target model for fiscal year 2021, for the business to recover to roughly $300 million, or get to $300 million a quarter from where we're going to start here in March of 2019. Can you walk us through how that could be remotely in the right zip code, please?
Christian, I think when we have the model actually in the SEMICON, actually July last year. I think our industry is in upturn. In 2016, we grew 30%, 2018 actually we grew about 10%. With our product portfolio, including the AP, TCB, and the flip chip, and also we have PIXALUX and our APS, I think it's also in a growth phase. We believe 10% is sustainable. This macro economy is really not everybody's control. In long-term, we are still very positive. If this China weakness can actually resolve quickly, I think 2021 is still doable for us.
At what point would we need to see clarity and growth return to the Chinese market to begin that type of trajectory? Is that something that needs to get resolved in the next quarter or two in order to get there? Could you give us a generic baseline to keep track of?
I think if we see the positive momentum in the second half calendar year, I think that we should have a good chance to achieve that.
Great. Thank you. No other questions.
We have reached the end of the question and answer session, and I will now turn the call back over to management for closing remarks.
Thank you, Jeremy. Before closing, we wanted to inform investors that we will be participating in several upcoming roadshows, as well as the Susquehanna Technology Conference in New York City on March 12th. Thank you all for the time today. As always, please feel free to follow up directly with any additional questions. Jeremy, this concludes our call. Good day.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.