Greetings, and welcome to the Kulicke and Soffa 2019 First Fiscal Quarter Results Call. At this time, all participants are in a listen only As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Elgendy, Director of Investor Relations And Strategic Initiatives for Kula Kinsofa. Joseph, you may begin.
Thank you, Jeremy. Welcome everyone to Culligan's Office First Quarter Fiscal 2019 Conference Call. Joining us on the call today are Fuzan 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 our 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 Sulfa 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 Fu Zhen Chen for the business overview.
Please go ahead, Fusen.
Thank you, Joe. We were again able to achieve our quarterly revenue targets through a softer period of demand, despite the current market headwind, which we believe are near term in nature. Our entire organization remains extremely focused to drive long term business enhancements and a sustainable growth. Specifically, we expect to benefit from 3 timely areas, execution of our fundamental optimization plan, ongoing semiconductor unit growth within our core offering and the higher volume production of advanced packaging. We have made a meaningful improvement to the business over the past 2 years, including a more aggressive approach to capital allocation and the shareholder return and also fundamental improvements supported through organization change and a renewed set of priorities, which have already strengthened our position and provide new vectors of growth.
Today, we also announced our 4th $100,000,000 shares repurchase authorization. This will provide some additional detail on our reported activity shortly. Despite the near term environment, We are very excited about our current business prospects. Our product portfolio and the development pipeline is firmly aligned with LED, NAND and the IoT capacity expansion, electric and autonomous vehicle adoption and the several technology inception providing new advanced packaging opportunities. Our development team continued to rapidly develop neutral to strengthen our competitive position and expand our served market.
In that organization is committed to exiting this near term period, a stronger, more diversified and a more profitable organization. Looking back at the December quarters, we delivered revenue of $157,200,000. At the higher end of our guidance, gross profit of $74,800,000, gross margin of 47.6 percent and the non GAAP EPS of $0.25. Product mix combined with the 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 the temporary account which allow for consistent gross margin performance. Over the December quarters, many of our end markets, including advanced packaging, General Semi and LOE as well as memory experienced a softness in demand. Whereas automotive and industrial demand increased sequentially. From the regions standpoint, the largest sequential reduction in sales stand from demand of our Chinese households, semiconductor and assembly.
We call OSAT customer and specifically our ball bonding business. While our equipment shipment to China have increased over the years. It's very important to remind investors that our market share of semiconductor broadband independent 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 a greater capacity addition over the past few us come out with the broader trade tensions are both contributing to this softness.
In addition to the emerging channel dynamic, our BongAn business has positively benefited by the long term growth of our OSAT customer base. Where we are overwhelmingly the tool of the 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 light model as well as a true improved operational efficiency. With that said, OSAT also generally have the most valuable ordering pattern as they generally provide the industry's frac capacity. Always funding equipment demand, which is more aligned with the long term automotive and industrial trend, was effectively flat sequentially.
Overall, automotive and industrial demand increased. Revenue from APS, our aftermarket product and service segment we present 26% of total revenue and the decrease only by 5% sequentially. APS gross margin improved from 55.2 percent to 57.6 percent 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, Susan. My remarks today will refer to GAAP results unless noted. Net revenue for the quarter was $157,200,000, strong gross margins of 47.6 percent generated $74,800,000 of gross profit. Gross margins of 47.6 percent in seen 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 Susan mentioned. In the long term, we plan on maintaining plus 5% to 7% of variable quarterly expenses tied to revenue. We booked a net tax expense of $10,600,000 to continue to maintain our long term effective tax rate target of around 15% going forward. 7,700,000 dollars 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 Treasury on November 28, 2018. Turning to the balance sheet. We ended the September quarter with a total cash and investment position of $632,900,000, or $9.33 on a per share basis. During the quarter, we have continued to return capital to investors.
We deployed $25,500,000 and repurchased 1.1 1,000,000 shares and also paid our 2nd 12 net dividend. At the end of our December quarter, we had approximately 72,000,000 remaining under the existing share repurchase authorization. We were happy to announce the additional $100,000,000 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 $227,800,000 we purchased a total of 13,800,000 shares at an average price of $16.51. Our fundamental efforts to organically expand our served markets and increase share gains as the greatest potential towards sustainable value creation.
The ongoing share repurchase activity provides an additional lever and enhances line 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 the availability of U. S. Cash.
We're currently reviewing several short term funding alternatives to allow us to continue to opportunistically 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 for finance accounts receivable plus inventory less accounts payable decreased by $60,300,000 to $250,500,000. From a DSO perspective, our day sales outstanding decreased from 119 days to 107 days. Our day sales of inventory increased from 105 days 120 days and days of accounts payable increased from 44 days to 51 days. This concludes the financial review portion of our call.
Will now turn the discussion back to Susan for the March quarter business outlook.
Thanks, Lester. We continue to believe The soft demand environment is only a near term headwind and stems from a number of factors, including a fairly aggressive rate of capacity additions over the past 2 years. A hesitation of a new capacity addition due to global trade tension and assistance of softness and the reduced visibility of Chinese New Year. We do not believe this short term collection 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 service and memory and the increasing value advanced packaging has owned the product industry. As mentioned in today's press release, we anticipate revenue to be $120,000,000 plus or minus $10,000,000 and are anticipating a general recovery in demand into the June quarter.
Although the several market environment create a near term challenge, we will continue to benefit from 3 specific areas into the return. Execution of our fundamental optimization plan, semiconductor unit growth benefiting our core offering and the higher volume production 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 offering. There continue to be sizable opportunities to grow our mix service, mix of service, spare parts and software in our core businesses and also load winning advanced packaging. This opportunity is being facilitated through a more rapid and parallel development effort, but dedicated APS business organization.
More structured ownership and accountability and performance based incentive compensation. Very aligned with both shareholders and the corporate goals. Secondly, the majority of semiconductor unit growth will continue to drive demand for our coal and the market leading ball and the wedge bonding businesses. This business has and will continue to be central in enabling fundamentals and the significant trends such as lows in LED lighting. The global adoption of connected consumable electronics, growth and the share gap of solid state memory and the increasing content of semiconductor in automotive.
This are all key areas where we already have alumni leadership positions. Finally, our investment in advanced packaging have provided assets to a new and growing market, where the anticipated technological replacement and the share gains. Over the past few months, we have started seeing true advanced packaging being utilized in graphic processor, high bandwidth memory and recently, a major IDM announced utilizing advanced packaging techniques in their future logic architectures. Compared to a trillion semiconductor package produced in 2019, but advanced packaging are currently a niche application below the future is promising. We continue to build calendar 2019 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 2 additional qualifications for our customers, high accuracy, high throughput, 3 chip tool which targets several high density memory and the larger applications. We are very happy with our industry performance in both equipment accuracy and the productivity in this market. We are also in production at a major OSAT with our APAMA thermal compression tool supporting a larger application that previously utilized a traditional feature package. We anticipate several additional shipments over the coming years. In addition to advanced packaging opportunities to support the Asian market, We are also aggressively pursuing our micro and mini LED opportunities, supporting the evolving display market, This opportunity provides a wide array of the potential and application and the 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 such as the necessary combination of speed and the accuracy for efficient production. We believe our tool directly addresses this challenge and it's up to 5 times faster than traditional Pick N Pay store and it's currently being evaluated by a few potential customers. We continue to anticipate several initial order by the end of the 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 multifaceted business strategy.
This strategic execution come back with a thoughtful capital allocation can drive tremendous operating 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 the gross prospect will continue to be further enhanced as we exit this period of intermittent softness. As always, we appreciate your ongoing support.
At this time, we'll be conducting a question and Our first question comes from the line of Krish Sankar from Cowen. Please proceed with your question.
Fusan or Lester, if I look at your gross margin guidance and OpEx kind of color, are you guys going to be breakeven or are you going to be like operating loss in the March quarter?
Well, Krish, well, we're very, very focused on cost. And I think for the March quarter, the breakeven be around $130,000,000. So based on the midpoint of our guidance, I think we would have a small loss.
Got it. Got it. Okay. Thank you. That's helpful, Lester.
And then, two other questions. One is in the past, typically, based on your customers, you kinda get visibility into the March quarter or beyond right after Chinese 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 the dynamic this time
Well, so, Krishna, I think in this downturn, actually it has 2 4s. One is, you know, memory cycle as a antibody experience, right? So, we are part of that and the memory is about our roughly 10% of our revenue. And the other dynamic I call China effect actually has a more impact, more pronounced impact to us. And because China has, you know, it's because of our revenue.
And, so we believe the current softness can actually potentially translate into the revenue for next few quarters. And I understand, I think visibility is a little bit less than before due to our trade engine additional complicated.
Got it. Got it. And 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, do we think about, like, capital allocation in regards to, you know, buyback over M and 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 And 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 And A, but that does not mean that it's an interesting opportunity that is adjacent and also is a good return of investment comes up that we would not do that.
So, Krishna, maybe I can we believe 2019 is a year for our multiple products, you know, our penetration. We introduced multiple products and we want to make sure it's always etcetera. So we were seriously in preparation and in terms of action, we believe it's going to be post 2019. So this year, we are going to focus actually in a market share gain and also, penetration of new products. In terms of M and A, we believe the future target need to provide quality of the growth, right?
So it's going to be in suggestion. Or complementary industry and it needs to fit a few criteria. Number 1 is need to have a comparable gross margin. And, you know, fit into a culture, process synergy. So these are a few criteria and also a program which you have a industry leading position.
There are a few criteria. So I just want to assure you we are not giving up, but we are very careful. Number 1, focus in a 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 K And X culture and also gross margin on portfolios.
Our next question comes from the line of Craig Ellis from B. Riley FBR. Please proceed with your question.
Yes, 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 2 positive variances? And, and while I know you're not changing some of the, the 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? So, 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 segment of our businesses actually did very well in the December quarter. There are also high margin, I guess, businesses.
So that accounts for the, I guess, gross margin variance. As far as the OpEx variance, as Susan said, we're very, very careful on cost control. So, in discretionary spending as well as we have a very flexible manufacturing model. So 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 costs.
And, as far as the mix is concerned, obviously, that depends on the customers. I think, we're sticking to the $53,000,000 plus 5 to 7 percent, as, as because I think that's we think that will probably be where it's going to end up.
That's helpful. If you send that the next question is for you, and it's more of an intermediate term question. So clearly, I think we're hearing from, companies that there's a lack of very near term disability potentially for, back end companies. Some of that starts to clear after lunar New Year here in another couple of weeks. But as we think about the, the typical profile of the business, typically, I think we would see a wrong second half, 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. Thank you for the questions. So, if we look at this, I think we are still in the middle of a slowdown. So if you look at the previous slowdown, it's in 2015, it's last about 3 quarters. Right?
And I believe, right now, the supply chain efficiency is much, much higher. So, if we look back, we saw several Sealy's softness in second half calendar year of 2018. So including the March quarter is already three quarters. Right? So, so there's a possibility, the current weakness part of current weakness can become some revenue in the next couple of quarters.
And also if you look at the annual, the forecast annual semiconductor unit growth rate still positive. So, let me answer, you know, whatever, you know, we can use right now, we'll view, a better revenue profile for 8140 industries. So for the June quarters, beyond March quarter, we feel like in LED and also in OSAT can be better. And, I also mentioned, you know, in our APE portfolio and the linearity, alone in the initial stage. Can also contribute to the growth.
So in short summary, I think, we are more confident than second half first half, I think that most of our industry fear is wet. I wish I answered your questions.
That's helpful. Thank you. And then 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 1. And and it's this.
The clearly, the, the industry is going through, in large part of macro driven correction, and that's had significant pressure on industry stock prices over the last, 4 to 6 months. As we think about the pacing of the new $100,000,000 program, there any color you can provide in terms of, of how we might think about the, the timing with which it would be 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.
So, Craig, we, as we certainly believe our stock is undervalued and, which is why we have very a lot of confidence in our future growth initiatives, which is why the board has authorized an additional $100,000,000 in the share repurchase program. As far as the cadence is concerned, we will continue to be opportunistic. I mean, there are some restrictions in terms of, U. S. Cash based on our overall tax structure we believe that, we have sufficient funds to, both for the dividend as well as the, share buyback.
So 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 of questions from me. Could you talk about what you think your utilization rate of your wire bonder's fleet is now?
Sure, David. Based on what we're seeing, I think for the ball bonder is probably around 70%.
Okay. And is the wedge bonder and other equipment similar in the similar range?
I think Wedgebond is probably a little bit higher. Okay. As well as BMP allow.
Then I think I have trouble hearing some of the prepared comments. And so 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. So, I think in my script preparation, I mentioned Actually, the weakness actually is in the OSAT customers in China. And as you would know, the OSAT in China in the past few years, they really provide additional capacity for the whole world, right? So that's really the weakness we are seeing right now. It's in the OSAT customers.
And the end markets that those OSAT customers serve. If it's in China, then I imagine there's a cryptocurrency impact. But is there any other end markets that stand out as weaker than others?
Well, everybody know already, smartphone is not very strong. But actually, you know, this will actually have a lot of us here for the growing segment. We anticipate memory should be better in the probably beyond second half of this year. And, 5 g actually, low is a initial stage, can be better. So I think that weakness, you know, but I think there are also some, strong segments.
Okay. And then, could you just help us understand as far as 2018 goes, how big do you think the overall wire bonder market was. And if you could take a stab at what you think it would be for the whole year in 2019, that would be great.
Okay. Maybe, you know, we don't actually provide the guidance beyond on quarter. But you see, I think this market as I mentioned, has a true external force. 1 is that we are going through, cycle in a semiconductor, we call memory cycle. The other one, I think it's a Mako, it's probably a little bit difficult to, you know, focus But if you can see that, you know, from 2016 to 2017, we grow 30%.
So things can change quickly, right? So, overall, we feel positive, you know, to move forward, but the recovery rate, I think, depends a lot on the nickel, you know, on the trade talk. But I am a firm believer that this industry fundamental is very strong, including memory and that including technology that provide a better life for us in the future. And, we cannot control up and down, but actually we focus on what we can do. In the new product production like the product better and have a wide cost structure for the company.
Okay. I know observation or question for me is, I think you talked about growing unit volumes. I think I've seen forecasts in the 5% to 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.
So, as I mentioned, we feel like the current label, is quite low for us already. And we believe, move forward, in mobile, there are 2 areas I think that can benefit us in terms of cloud. 1 is in LED. And also, general one in our old set, you know, customers. Lisa mentioned, the utilization rate is 70.
But I think that's still varied in our customers. So some customers is stronger. And I want to remind you that, internal capacity our revenue actually is additional capacity just talking about capacity for that overall customers. And there are some customers still very positive. So, overall, we believe this is a quite low volume for us and move forward, the business situation for the bolt on the shore start to coming back.
And also, I think we have multiple new product introductions So, we feel good about our direction and pass and the studies for the company.
Our next question comes from the line of Tom Diffely from D. A. Davidson. Please proceed with your question.
So, I guess getting back to the utilization rate of 70%. When you look at the normal utilization rate for this time of the year, kind of the part of the year. How does that compare to say 70%?
Hi, Paul. I think everyone knows that as we indicated, Susan indicated that it's a little bit lower I mean, utilization rate goes down a little bit obviously in this quarter because of Chinese New York, but again, China and the rest of Southeast Asia. But I think 70% is low, again, due to the softness in the market and a little bit of overcapacity.
Tom, as we discussed, the weakness actually we've seen in OSAT particularly in China, the ordering pattern can change quickly, right? So they can quickly turn it off, they can quickly turn it off. Think that this moment also depends on the macro issue. And we firmly believe this be results in order and hopefully this will be sooner than later. Go ahead, Tom.
Oh, I was just gonna say, 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?
Yes, yes, we believe so, but again, as Fusen indicated earlier, right, 70% is an average across all the customers. So there are pockets of customers that are probably above 80%. There are some, frankly, that are very low. So I think definitely as it reaches above 80%, they will start buying, but it doesn't have to be 80% for all customers.
But And also, Tom, I think, as we mentioned, the Chinese segment now also allowed to do with the trade talk. So, hopefully that is a result since content quickly, right, although there's no assurance.
Yeah, that makes a lot of sense. So I guess the next question leading to that is what are your lead times right now? So business was to pick up? How long would it take you? To 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, and we actually do home more inventory now. So in the event that there is a ramp, we believe we can react to it very, very quickly.
Okay, great. And then finally, when you look at the, well, I guess more questions. So first of all, you talked about the LED market potentially being a nice, you know, a near 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? And, you know, what if LED was to ramp significantly, would that have a fuel impact on the margin structure?
So, Tom, actually, I I'm sorry. I think we hear you break up a little bit. So your question is, the LED? So I think LAD for, the March quarter, actually, we feel it's a little bit low. And beyond that, I think LED can pick up a little bit.
In addition, I think in my script, we mentioned about the mini LED micro LED. And we are more we are quite positive on the prospect of mini LED and micro LED. There are several discussion And we believe this year can be an initial qualification and we can see a better result for 2020.
Okay. I know we've talked a lot in the past about the, the micro LED and what you would do there. How is the mini LED different? What is the the setup there?
So, you know, the, LED actually, going to mediator, they are 2, part. 1 is the general lighting. And actually, we are in the back lighting. And, this provides alternative to the OLED and which can actually, you know, save a better life, you know, with the deal, right? So this is another alternative you have, better, you know, technology for, display, rather than audit.
And, we probably would see, you can see initial adoption in the 2020.
Our next question comes from the line of Christian Schwab from Craig Hallumcap group. Please proceed with your question.
Hey, good evening guys. Fusen, in your slide on the website, I was kind of surprised that you you left your long term target model for fiscal year 2021 for the business to recover to roughly 300 or get to $300,000,000 a quarter from where we're going to start here in in March of 2019. Can you, walk us through how that could be remotely in the right zip code, please.
Okay. So, Christian, I think when we have the model actually in the same account actually July last year. And I think our industry is in the upturn. And 2016, we grew 30 percent, 2018 actually grew about 10%. So with our product portfolio, including the AP, GCD and the free chip.
And also we have a piece of that and our APS, I think it's also in the grocery. We believe 10% is sustainable. But, you know, at least a mega economy is really not everybody is a control. But in the long term, we are still very positive. If this, China weakness can actually, resolve quickly.
I think 2021, you know, this is good to look for us.
At what point would we need to see clarity and growth return to the Chinese market to to begin that type of trajectory. Is that something that needs to get resolved in the next quarter or 2 in order to get there Could you give us a generic baseline to keep track of?
So I think we've, you know, we see the positive momentum, you know, in the second half calendar year, and I think that we should hit a good chance to achieve that.
We have reached the end of the question and answer session. 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.