Greetings, and welcome to the Kulicke and Soffa 2018 fourth 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, Hector. Welcome, everyone, to Kulicke and Soffa's fourth quarter fiscal 2018 conference call. Joining us on the call today are Fusen Chen, President and Chief Executive Officer, and Lester Wong, General Counsel and Interim 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. 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 30th, 2017. 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 despite macro and the industry concerns. While broader macro forces are out of our control, we believe the near-term industry softness is somewhat limited and does not impact our long-term fundamental targets or plans. Some perceived concerns, such as ongoing challenge of two-dimensional node shrink and also pricing reduction in the NAND market, have little near-term impact to our business and may actually improve our long-term prospects. Our confidence in our long-term strengths, demonstrated by our aggressive repurchase activity, is supported by the following key points. First, our business is highly diversified. It is not overly dependent on any one package type, application, or customer. We broadly support a majority of semiconductor applications in productions. This includes major markets such as consumer, mobility, memory, LED, and automotive.
Second, as mentioned on our prior conference call, two-dimensional node shrink continue to have challenge, and it's failing to drive the significant cost improvement it has historically provided. This is driving demand for mature node equipment and also advanced packaging. Our advanced packaging solution provide new alternative to drive form factor, performance, power efficiency, and the cost, depending on the applications. We anticipate this shift in value proposition from node shrink to advanced packaging for years and are now beginning to see real traction. Looking ahead, we are excited to participate and are well-positioned to benefit from this fundamental technology transition. Finally, we continue to expand our served market opportunities. Over the prior years, we have maintained our dominant position in general semiconductor, connectivity, and automotive, and we have further strengthened market shares in key areas like LED.
We continue to aggressively seek our new opportunity that will further increase our end-market diversity and will further expand our served market. For example, our recent partnership and the solution for micro and the mini LED opportunities is facilitating increased access to the sizable display market, a market we historically did not participate in. Turning back to our September quarter's performance, we achieved the midpoint of our revenue guidance of $184.8 million. Although this represents a sequential decline from the strong June quarters, September quarter revenue was 15% above our prior three-year September quarter average. We also generated strong gross margin of 46.4% and delivered $0.43 of EPS. All four fiscal years net revenue of $889.1 million represents sequential growth of 9.9% and a 35% increase relative to our average of prior three years period.
Non-GAAP income for the year was $171.1 million, which generated a strong $2.43 of non-GAAP EPS. The expected sequential quarter revenue decline was largely driven by our short-term softness in our capital equipment offering, primarily within our high-volume bonders business. [Wafer] bonding business decreased slightly, while our electronic assembly, thermal compression, and the die attach business line has sequentially improved. Also of note, we continue to make progress toward our long-term aftermarket product and service strategy. realize a sequential APS revenue improvement of approximately 11%, even in the September quarters. We strongly believe these improvements are driven by our fundamental effort over the prior two years to optimize our current market positions, expand our product portfolio, and further enhance cash flow generation. 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 $184.8 million. Strong growth margins of 46.4% generated $85.8 million of gross profit. Growth margins exceeded our prior expectations, largely due to product mix and favorable pricing. We continue to target margins of roughly 45% over the near term. Our operating expense came in lower than expected due to foreign gains and cost control, which drove meaningful operating income of $24.6 million. Going forward, we are maintaining our existing operating expense target of $53 million of fixed quarterly expense, plus 5%-7% of variable quarterly expense tied to revenue. We booked a net tax benefit of $1.75 million and continue to maintain our 15% long-term effective tax rate target going forward.
Turning to the balance sheet, we ended the September quarter with a total cash and investment position of $614.1 million or $8.94 on a per share basis. During the quarter, we have continued to return capital to investors. We deployed $23.7 million in open market repurchases during the September quarter and also paid out our first $0.12 dividend. Throughout fiscal 2018, we have returned $91.1 million in cumulative repurchases, more than any prior year. At the end of the fiscal year, we had approximately $98 million remaining under the current board authorization for share repurchases. We will continue to opportunistically execute the existing repurchase authorizations in the most tax-efficient way. On a book value per share basis, we closed the September quarter with $12.82, an increase of approximately $0.27 from the June quarter.
Working capital, defined as accounts receivable plus inventory, less accounts payable, increased by $8.3 million to $309.5 million. From a DSO perspective, our days sales outstanding increased from 86 days to 118 days. Our days sales of inventory increased from 78 days to 105 days, and days of accounts payable decreased from 50 days to 44 days. This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the December quarter business outlook.
Thanks, Lester. As evident in peer guidance and also analyst industry expectations, there is clearly some softness in the December quarters, particularly around the Chinese market. From our business, we believe the outlook is in part due to near-term uncertainty around the additional incremental capacity need after several very capital-intensive quarters. We also believe a near-term hesitation to add capacity is also partially due to increased uncertainty around the impact and the potential escalation of tariffs. While 2017 and 2018 were very strong years for the space, we anticipate momentum to ramp in the second fiscal half of 2019. As discussed on today's earnings review, we are guiding revenue for the December quarter to be between $150 million-$160 million. This midpoint represents a decrease of approximately 16% sequentially, although is higher than four of the five past December quarters.
Our software demand, especially within our bonding business, is largely driven by our customer base in China. Looking forward, we are increasingly focused on further strengthening our fundamentals, driving our ongoing development, gaining traction on new business, and keeping costs under control. In addition to those mentioned earlier, I wanted to clarify a few additional points that highlight our unique position and strengthen our outlook. First, there continue to be a lot of focus on the memory market, especially price decline in the NAND. Overall, we view the NAND market to be price inelastic and expect ongoing demand for our memory-related equipment into the long term. The capital intensity of the memory and our dominant position within the memory assembly process. NAND is one of our largest specific end market, accounting for about 11% of our revenue over the past 12 months.
We anticipate near-term price reduction to drive long-term unit growth and further increase longer-term demand for our memory solution. Secondly, we continue to enjoy strong exposure to several positive and long-term trends in the automotive space. Our automotive exposure further increased our end market diversification and the long-term growth potential. Automotive and industrial customers represent approximately 17% of fiscal year 2018 revenue, slightly up from last year. Over the coming years, as semiconductors become more critical to traditional, electric, and autonomous vehicles, we anticipate our automotive-centric products to outpace overall semiconductor growth. Finally, we continue to gain traction on our various growth initiatives within advanced packaging and also on our micro and mini LED initiatives. During the September quarter, we recognized revenue on multiple thermal compression tools and the iStack die attach tool.
We have also recently introduced our latest high accuracy, high productivity flip chip tool, Katalyst, in the September quarter, which is a promising architecture and is driving strong customer interest. We are also pleased to announce that during the current December quarter, we anticipate shipping the first Katalyst tool to a major customer for evaluation in high volume production environment. Finally, we officially launched our micro and mini LED solution, PIXALUX, during the September quarter, providing us access to the emerging LED display market. PIXALUX continues to be a very interesting unit and opportunity as we look ahead. We remain very positive on our outlook. Our core and dominant share positions are increasingly aligned with several major long-term trends, supporting global consumer, mobility, memory, LED, and automotive applications. In parallel, we continue to execute on our development goal and the market expansion strategy.
Our December quarter outlook is softer than expected, we believe this is only a short-term concern. Considering our balance sheet, broad and diversified portfolio, ongoing development plan, organizational efficiency, thoughtful capital allocation, and our renewed focus on profitability enhancement, we are very confident on our fundamental position and will further enhance as we exit this near-term soft period. 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 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 Tom Diffely with D.A. Davidson. Please proceed with your question.
Yes. Good afternoon. When you look at the guidance for the December quarter versus the strong December quarter you had a year ago, which of the segments are the softest on a compare on a year-over-year basis?
Tom, you are asking the segment difference, the number comparison this year compared to last year?
Yeah, just comparing the different segments. It sounds like obviously NAND is a little bit weaker, but just in general, I'm curious, what are the biggest impacts on a year-over-year basis for the December quarter?
Tom, this is Lester. I think general semi, particular our ball bonder business unit, as Fusen said, particularly in China, I think there's obviously a lot of uncertainty around that. I think that and memory, I would say those are the two main ones.
Tom, maybe if I can add it. Actually, there's still a lot of plans in China, but I think this probably trade tension and cause a delay of investment, and that's all we are seeing. Ball bonder is still the biggest revenue source for us. The impact, particularly, I think, is in the ball bonder business.
Okay.
We believe after certain periods, the demand will continue to pick up.
Do you think the biggest impact comes from just the trade uncertainty, or is it just the weaker than expected iPhone supply chain?
Yeah, I think it's a little bit of everything. I think supply chain is a little bit, but we are very diversified, right? Not only ball bonder products, we have a very wide product portfolio. We see actually, I would say probably majority is delay on investment for us. We already know the mobile space is not as strong as two years ago.
Okay. Then what's happened with your utilization rate in the field over the last quarter? Where is it today versus where it was a quarter ago?
Well, I think maybe a quarter ago, probably close to 70%, 80%. Right now, probably we believe it's probably lower. High-end, I think our customers still very high, the low end probably is a little lower, probably below 70%.
Okay. We got to a little-
Maybe for this short term, [below 70%]. Yeah.
Okay. You'd have to see a little bit of absorption of the excess capacity for a couple of quarters before you saw the orders pick up again?
Yeah. We believe it will pick up in probably next one quarter or so.
Okay. Finally, what is your view for just unit growth for the broad semi for the out year for 2019?
Yeah. Tom, overall 2018 is a very good year for us, even with sales slow down in the second half.
We still grow 10%. This is our view. We believe the current business level is quite low, hopefully we will stabilize our business through next March quarter, followed by a ramp, 2019 can be as good as 2018. Unit growth, I think we still expect next year can still grow a couple percent, maybe like 5%, and that's our view.
Okay. Great. Well, thank you. I'll get back in the queue.
Thank you.
Our next question comes from the line of Krish Sankar with Cowen and Company. Please proceed with your question.
Yeah. Hi, thanks for taking my question. I just have a couple of ones. Number one is, given that you guys are reporting probably halfway into your December quarter, what's your line of sight into the March quarter? Historically, when December has been down this much, March has had a decent snap back. Given what is going on in the industry today, how do you think March is going to look directionally from December?
Okay. Krish, I think that we assume that trade tension will not get worse. Our business level actually is low at this moment. If the trade tension won't get worse, we expect March quarter to stabilize till March. Right? Hopefully, a lot of our delayed investment can turn into a ramp, and that's our current expectation. The second half of fiscal year, we expect a ramp, maybe start beyond March quarters.
Got it. I remember looking at some of my old notes, that looks like across all your products, your exposure to China is roughly 50%. Is there a way to parse it down into how much of it is from your core ball bonder, how much of it is from auto/wedge bonders, and how much from LED?
Krish, it is company-wide, about 50%. I think LED is higher than that, while I think automotive is probably lower than that. I think that's probably a good way of gauging it.
Got it. All right, fair enough. Then the last question I had was, I think, Lester, you kind of alluded to the OpEx to think about is $53 million in fixed cost. Is that the right number? Because I thought that with all the employee headcount reduction and everything that you'd done, I thought the fixed cost must be lower.
No, we're still guiding around $53 fixed cost, then $5- $7 variable tied to revenue. As you know, it kind of moves in and out quarter-by-quarter depending on certain performance. I think that's still the target we're looking at.
Got it. All right. Thank you, folks.
Our next question comes from the line of Craig Ellis with [B. Riley Securities]. Please proceed with your question.
Thanks for taking the question. The first is really just a clarification. Lester, in the fiscal fourth quarter, we had strong gross margin performance, strong operating expense performance. The clarification is that just good execution on the variable cost model, or were there any one-time items in either of those line items?
The gross margin, I think as we said, I think, Craig, it's a little bit of a mix. We sold a little less LED bonders, because I think as you know, the market's a little softer there right now. We saw higher performance machines, therefore our gross margin is better. As far as the OpEx is concerned, there are some one-timers, nothing really significant.
Great. Thank you. The second question, Fusen, I wanted to follow up on your comments around the potential for revenues to ramp off of March, which may show some stability in the fiscal second half. Are you, in your conversations with customers, uncovering strong customer interest for either technology or capacity needs at that timeframe? Is the issue just getting beyond Lunar New Year or having some visibility beyond the potential imposition of tariffs, what are you hearing from customers that lends confidence in a stronger fiscal second half?
I think, number one, the memory softness has been a few quarters already, right? That's number one. We expect t he memory long-term outlook, we are strong believer, hopefully will continue to improve. For example, every time when NAND price reduce, it always take additional market share against hard disk drive. Memory fundamental, we are positive. Semiconductor demand is always there. There are short-term, people have a hesitation to put investment at this moment, we don't believe this will continue for several quarters. March quarter, beyond March quarter, June quarter is a strong quarter for us. A little bit indication from customers. Hopefully, this trade tension will not be forever. It's not in anybody's interest. We feel positive about second half of our fiscal quarters.
That's helpful. Two longer-term questions. The first one is for you, Fusen. Can you just talk about how you feel about your objectives to drive the significant improvement in services towards 30% of mix in the fiscal 2021 target model timeframe? What are some of the things that you can chalk up as accomplishments as we look back at fiscal 2018, what are some of the things that you feel like the team needs to execute in 2019 to have you on track for that target?
Okay. Our APS includes a lot. It includes consumer spares, service, refurbish. There's many things, we put them together, we actually have more portfolio in working with our customers. Actually, we start to see a result. As I mentioned, I think September quarter, just this quarter alone, compared to last quarter, actually, we grew about 11%. We also put a lot of effort in our capillary production. Actually, this quarter probably is a historical quarter revenue for us. I think the team has done a very good job. The company will focus on APS growth because in the long term, I think, APS actually is a high margin business and pay for everybody's paycheck. We feel comfortable, hopefully, probably in another four years, we will be able to achieve 30% of total revenue for us.
That's helpful. Just the last question, both for you and Lester. Just looking at the fiscal 2021 target financial model, can you express areas where you're more confident in the target financial model, whether it be revenues or gross margins or other parameters like operating margin or earnings, any that may be more of a challenge given the macro environment that we have right now and the impact that may have on any of the programs that were embedded in that target model? Thank you, guys.
Sure, Craig. Let me take that. We are actually still relatively confident in all the targets that we shared on the Analyst Day. As far as revenue is concerned, as Fusen indicated, we believe we have aligned very well with some of the fastest moving trends in the industry. Yes, there is a little bit of softness, but as we have been saying throughout the call, we think it is short term. Long term, semiconductor growth is going to continue. Semiconductor and automotive is also going to continue, and we are very well aligned there. We have, as we indicated, now also entered into the flip chip market, which we have not been in before with the Katalyst and is being received very well. We believe that will also drive revenue going forward. Also, again, with the micro mini LED with PIXALUX.
On the revenue line, again, we still believe we can outgrow semiconductor unit growth, which is about 5%-7%. As far as the margins are concerned, again, we believe that we are entering into some higher margin products such as automotive, such as micro LED, such as flip chip. While the margin expansion will probably come later on, not over the next year and a half, we do believe by our target date, we would reach those targets. Finally, OpEx, we are always very cautious of cost. This is something Fusen drives with us every day, and we are looking at cost reduction and also very cautious on discretionary spending, particularly in the softer periods. We are still confident, unless something significant happens in the macro market, of meeting our targets for 2021.
Thanks for that color, Lester. Thanks, guys.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. One moment, please, while we pull for questions. Our next question comes from the line of David Duley with Steelhead Securities. Please proceed with your question.
Thanks for taking my question. Just as a clarification, I think you mentioned that your advanced packaging revenue was up during the quarter and your bonder revenue was down during the quarter. Could you give us some sequential changes or year-over-year changes in those categories, or however you can frame it for us?
Yeah, David. I think for the quarter, ball bonder was down, core was down, and AP business was up. Again, our AP business at this point is still at a lower base than our core business, therefore, the fluctuation obviously is much higher quarter-over-quarter.
I think percentage-wise, we expect actually year-over-year, same quarter actually. I think this quarter will probably significantly in terms of percentage.
Yes.
What is the percentage? Could you clarify that last comment? I didn't hear you.
I think Fusen said that for the quarter, our advanced packaging business actually grew significantly during this quarter.
That led me to one of my other questions is, you talked about thermal compression bonding, recognizing revenue there, and die attach. Could you just talk about the applications that each one of those tools that you're seeing interest in or...
Okay.
Or which areas might be growing or ramping for you?
I think the TCB, the market we participate right now is in the apps processor. Of course, High Bandwidth Memory, we are working with the customer, and hopefully we will see more results next year. TCB, I think, is also very important for high-performance logic in a 2.5D integration, like an ASIC plus memory. For the Katalyst, I think we expect it's going to be very important for the fan-out and the high-performance microcontroller. Memory right now, DRAM, particularly DRAM, shifts a lot of capacity to actually 3D chip. Our newly introduced Katalyst, we believe, is going to be very beneficial to us. The iStack, actually, we are in CMOS imaging sensor and also 3D sensing. That's the area we participate. Of course, also in the memory.
Could you talk a little bit about the trends? We hear a lot about how customers are migrating some of these memory stacks, these high-performance memory stacks to, as you mentioned, I guess, an advanced packaging type connection versus a wire bonder or a wire bonding connection. How does that impact you guys?
Oh, I'm sorry, Dave. Talk about DRAM. I think DRAM, there was, of course, a lot of ball bonder, but we see a shifting DRAM capacity. DRAM actually from a ball bonder to the 3D chip. We do believe we have very unique architectures and a lot of interest from customers. That's really good for us. The High Bandwidth Memory, I think it's going to be TCB, and we are engaging with customers. That's for DRAM. For the NAND, it's both two-dimensional and also 3D [DRAM] is stacking. We believe in the next five years, also foreseeable future, ball bonder are still predominant, and we have every intention and every belief we will continue to have very high market share in this market.
It's very advanced 3D grouping, we call this really a kind of 3D packaging for the NAND flash. We are very proud. We have very good tools to serve in this market. Yeah, hopefully I answered your questions.
Yes, does it. Very much so. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the floor back to Joseph Elgindy for closing comments.
Thank you, Hector. Before closing, we wanted to inform investors that we will be participating in several roadshows as well as two upcoming New York conferences, the Midtown CAP Summit on December 11th and again at the 21st Annual Needham Growth Conference on January 16th. Thank you all for the time today. As always, please feel free to follow up directly with any additional questions. Operator, this concludes our call. Good day.
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