Greetings, and welcome to the Kulicke and Soffa 2018 third 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. Thank you. Please begin.
Thank you, Gloria. Welcome everyone to Kulicke and Soffa's third quarter 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 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 these 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 30, 2017. I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.
Thanks, Joe. Before discussing this quarter's performance, I wanted to highlight a few takeaways from our recent Analyst Day, held on July 10th. In summary, multiple growth opportunities, diverse end market, our product positioning, and the organizational alignment have enabled us to provide long-term financial targets. Over the past 10 years, the bonding equipment market has increased by roughly 7.5% annually. By the end of fiscal 2021, our goal are to exceed market growth by growing revenue at an average rate of 9%-11%. We have a diverse set of growth opportunities stemming from a diverse set of end market. We categorize as general semiconductor and LED, automotive and industrial, and advanced packaging. Roughly half of our growth expectations are anticipated to support capacity expansion. The other half targets new capabilities. We also adjust our capital allocation targets during the Analyst Day.
Over the long term, from announcement of our 2014 repurchase program through the recent June 2018 quarter, where we aggressively repurchase shares, we returned approximately $175 million of capital, or about 37% of operational cash flow. By 2021, we intend to increase shareholder return through both dividends and the share repurchase to 50% of operational cash flow. In the June quarter, we initiated a dividend of $0.12 per share and acquired $42.5 million in open market share repurchase. We are committed to creating and delivering long-term value. With that said, I would now like to briefly discuss our June quarter's performance. During the quarter, we generated $268.8 million of revenue and a strong gross margin of 47.2%. Combined with our lean operating model, we drove an operating profit of $64.5 million, equivalent to an operating margin of 24%.
Revenue for the quarter increased 10.2% from the same period in the prior year, and 21.2% sequentially. Most period improvements were largely driven by increased demand for our capital equipment. Gross margin came in at 47.2%. Gross profit dollars of $127 million represents an increase of nearly 28% from the prior period and over 11% from the same period in the prior year. This higher-than-expected gross margin was due primarily to product mix. Lester will provide some additional insight shortly. Sequentially, capital equipment increased by 29.5%. This increase was supported by strong and incremental demand for our higher performance ball bonder tool as a major OSAT, as well as incremental demand for semiconductor and automotive wedge bonder equipment. During the quarter, we were established as tool of record at a major OSAT and also recognized revenue for one APAMA thermal compression system.
We also received additional follow-on orders for several APAMA TCB systems, supporting high volume production for new capability in mobile. Within APS, our status and traction continue to be positive. Although reported revenue had a sequential decline into the June quarter. This decrease was uniquely driven by our APMR APS business, where we recognized system upgrade related parts in the capital equipment segment. Our other APS businesses have remained consistent from the strong March quarter. Going forward, we continue to be very focused on our effort to enhance our recurring revenue base business. We maintain our goal of increasing APS towards 30% of our total revenue 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. My remarks today will refer to GAAP results unless noted. Net revenue for the quarter was $268.8 million. Strong gross margins of 47.2% generated $127 million of gross profit. Gross margins exceeded our prior expectations largely due to product mix. A lower relative proportion of LED tools, a higher relative proportion of performance ball bonding, wedge bonding, and also advanced packaging tools. Back to our June quarter results, we generated $64.5 million of operating income, which represented a 24% operating margin. Going forward, we are maintaining the existing operating model of $53 million of fixed quarterly expense, plus 5%-7% of variable expense tied to revenue. Tax expense for the quarter was $7.3 million, and we continue to maintain the 15% effective tax rate target going forward. Turning to the balance sheet.
We ended the June quarter with a total cash and investment position of $621.2 million or $8.81 on a per share basis. As Fusen mentioned, during the quarter, we deployed $42.6 million in open market share repurchases and also booked a $0.12 dividend, which was paid in the September quarter. On a book value per share basis, we closed the June quarter with $12.55, an increase of approximately $0.23 from the March quarter. Working capital, defined as accounts receivable plus inventory, less accounts payable, increased by $40.6 million to $301.2 million. From a DSO perspective, our day sales outstanding decreased from 91 days to 86 days. Our day sales of inventory decreased from 86 days to 71 days, and days of accounts payable decreased from 60 days to 50 days. Finally, I want to mention a few words on our capital allocation process.
Over the past five years, we have completed two acquisitions that have expanded our served markets. We purchased approximately 21% of current shares outstanding, developed a portfolio of advanced packaging products, and sourced new opportunities in areas such as next generation LED. Our recently announced dividend of $0.12 per quarter adds structure to our capital return process. This new dividend program, which had an inaugural payout on July 16th, 2018, will consume approximately $33 million of cash annually and is largely funded through our fairly consistent APS segment and supplements our ongoing open market repurchase program. Additional, in early July, our board of directors extended the existing share repurchase authorization by an additional $100 million. This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the September quarter business outlook.
Thanks, Lester. Since late in our fiscal 2015 year, seasonality of our business has shifted, and we experienced an average sequential revenue decline September over June quarter of approximately 23%. In addition, we are also seeing some softness in mobile and the memory market, which has a result in some delayed investment by our customers. We are targeting September quarter revenue to be between $180 million-$190 million. The midpoint of our guidance will represent an approximately 14% decrease over the same period in the prior year, and will still result in a full fiscal year revenue of approximately $890 million, representing revenue growth of approximately 10% over fiscal 2017. We believe this current market dynamic is short term and we remain confident as we look ahead into fiscal 2019.
We continue to be extremely focused on executing on new revenue opportunities stemming from capacity addition, shares gain, and the new capability in general semiconductor, LED, automotive, and advanced packaging market. During SEMICON West three weeks ago, we introduced our high accuracy flip chip tool, Katalyst, which add an additional mass reflow offering to our growing advanced packaging portfolio. This tool increase our logic and memory exposure, supporting end markets such as mobile application processor, blockchain, DRAM, and artificial intelligence. Our team also continue to seek out new opportunity in the emerging thermal compression market. Our recent APAMA TCB win highlight the promising higher volume adoption of TCB technology and also our competitiveness within this emerging market opportunity.
This recent TCB win, combined with our ongoing initiative in die bonding high accuracy flip chip, next generation LED, and also opportunity within APS provide us with additional assurance to deliver on our longer-term and aggressive financial target. Despite the current market softness, we remain very confident in the fundamental of the industries, the fundamental of our business, and our ability to create and deliver long-term value to our shareholders. 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. Thank you. Our first question comes from the line of Krish Sankar with Cowen. Please proceed.
Hi, this is Steve calling on behalf of Krish. I had a couple questions, starting with the first one. I was wondering, Fusen, if you could provide some more color on the September quarter guidance in terms of the trends that you're seeing or expecting for your ball bonder business and also for your wedge bonder business.
The trend into September quarters or December quarters?
This current September quarter guidance that you just provided.
I see. Well, as I stated, I think we see actually a very strong demand in the wedge bonder and the ball bonder. The demands are from overseas company. This is for a very high-end ball bonder and the wedge bonder.
I guess in terms of the guide-
Okay.
Yeah, in terms of the guidance-
Okay. For Q4, actually, as I mentioned, we are experiencing a little bit soft market, actually in the mobile and also in the memory. As a result, I think there are some actually requests from some of the customers, to push all the delivery from September quarters to December quarters. Major requests actually is a ball bonder.
Got you. I guess as a follow-up.
Also, as I mentioned, I think we have a very unique seasonality. Since later part of 2015, from June quarter into September quarters, averagely, I think the revenue decline approximately about 23%. I think this is unique to us, it's a unique seasonality. In terms of softness, in the mobile and memory market, I think is really not unique to us.
Okay. Got you. Just a quick follow-up. Can you tell us what % of your sales in the June quarter was from advanced packaging?
Okay. Actually, the definition of our advanced packaging, of course, it's a dedicated tool. We have a TCB. When we introduce a flip chip, we also have a stud bumping. We also have die attach. If we also count all advanced memory packaging, as well as ball bonding SiP, I think we are looking at about 16%, roughly into our revenue.
Okay, great. Thank you for that.
Thank you. Our next question comes from the line of Craig Ellis with B. Riley FBR. Please proceed.
Yeah, thanks for taking the question, congratulations on the very strong execution in the quarter, team. The first question I want to ask you, since you noted that there are some customers that have requested tools be delivered in the December quarter rather than the September quarter, can you just talk about the visibility that you have in other parts of your business, such as automotive and other areas, and the confidence that you have in the other parts of the $180 million guidance?
I think, Craig, personally, I believe, this is a short-term phenomenon. As I mentioned, I think I have very strong confidence in the fundamental of the industry. Currently, we have a multiple product, multiple technology to drive the growth of this industry. I also have very strong confidence on the fundamental of our business. Majority of semiconductor IC finished products will use a ball bonder as a tool to do a packaging. We are the leader in the ball bonder and also wedge bonder. In the meantime, we explore a lot of growth paths, advanced packaging in also other areas. I'm confident. I think demand is there for the industry, and we are suffering maybe short-term phenomenon. I believe, we relatively confident for the guidance and we are quite confident, move ahead into 2019.
Okay, that's helpful. Secondly, you mentioned your view of seasonality for the September quarter. As you look ahead to the December quarter, what's the company's view of typical December seasonality, since some quarters, revenues can move up, some quarters they can move down?
Okay. If I remember, I think in the past few years, I think Q4 and our Q1, relatively suffer, and we have a strong Q2 and a Q3. That's the pattern we established. We discussed seasonality. I think for us, I'm confident that seasonality has less impact to us. It's less significant because we diversify our business. However, I think seasonality is always there. The biggest, I think, strongest sign for seasonality, I think is from June to our September quarters.
Okay, got it. Tying in the guidance for the September quarter with the recently established longer-term target model. The longer-term target model really signals 9%-11% annual growth that the guidance would imply, I think, a 14% year-on-year decline. When do you think the business will be back to year-on-year growth? Would it be in the December quarter, Fusen, or would it be in the March quarter sometime thereafter?
Well, I think really a lot to do with what is the uncertain period, right? I think that we have short-term uncertainty, and it is really not unique to us. Hopefully, this kind of, for example, the trade tension, can be resolved by itself in the next couple quarters. Hopefully Q4 can be higher for us. Again, I think that this is not unique to us. This probably is a whole industry. I am hopeful this can be very short-term. Q4, hopefully will go up. The latest, I think Q2, that means in the March quarter, will be a strong quarter for us.
Got it. Certainly we have heard other companies talking about smartphones and memory. Getting a few questions in for Lester. Lester, particularly strong gross margins in the quarter. Was there anything in the quarter that was one time in nature, that would not recur in the September quarter?
Hi, Craig. Not really. I think the high gross margins, as we indicated, was mainly driven by the mix. We have less LED ball bonders and much more high performance ball and wedge bonder. Our gross margin is pretty tied to the mix of our business. Right now, we do not see the mix changing significantly. I think we are still looking towards the guidance we usually provide for the year of around 45% gross margins.
Got it. Lastly, on operating expense, it was much better than I had expected. It looked like it outperformed the variable expense model. There too, what accounted for the excess performance and would any of those things be more structural than temporal and therefore carry into either the September quarter or into further in the second half of the year? Thanks, Lester.
Craig, I think there's a little bit of both. Structurally, I think, as we discussed on Analyst Day, and Fusen has emphasized since he joined the company, we're driving down cost reduction, trying to get leaner. There is a temporal aspect in terms of in higher volume quarters are again, our variable OpEx, while still 5% and 7%, does allow us the fixed cost actually always is not as high. I think it's a little bit of both. I think the cost reduction obviously will continue into the September quarter and, going forward.
Thanks for the help, guys.
Thanks, Craig.
Thank you. Our next question comes from line of Tom Diffely with D.A. Davidson. Please proceed.
Yes. Thank you. First, I was kind of curious what your outlook is on the automotive side, and if you could, address both the IC automotive part of the market as well as the EV battery side.
Tom, are you talking about September quarters?
No. Well, just over the next couple quarters, yeah. September would be helpful, I was thinking more just over the next few quarters.
Okay. I think automotive is always very strong for us. In the Analyst Day, we categorize our business into a few segments. One is general semi, one is automotive, one is other packaging. We believe auto in this year probably will be about 24% of our total revenue and will continue to be very strong. The short-term impact, the softness, I think, is more related to capacity. This will be impact related to more on general semiconductor.
Yeah. A little bit on the battery side. I know that can be quite lumpy.
Actually, we are tool of record for a major EV company. A lot of people, for example, in China, actually also adopt the same technology. In the meantime, I think we also see the strong demand from China.
Okay, great.
We believe with wedge bonder, we will do well. We will continue to do well.
Okay. Yeah. No, a lot of times wedge bonder helps OSAT some seasonality in the fourth calendar quarter. I guess, looking at your customer base, with the consolidation of the two largest OSAT players, has that impacted your market at all?
Well, actually, we didn't see that. I think at this moment, financially, they consolidated, operation-wise, it's really not consolidated yet. We work closely together with both companies, have a good relationship. No matter combined or not combined, I think we will continue have a very strong relationship and help each other to develop a relationship to the next level.
Okay. Finally, at your analyst meeting, you talked about the three areas of growth going forward, the general semi LED, auto, industrial, and advanced packaging. Which of those markets have the best chance of driving growth in 2019?
Okay. Actually, I think all of them. For example, advanced packaging. We start to establish tool of record in the OSAT company. From now to end of the year, the second half, we expect revenue maybe five, six tools, we hopefully next year will be bigger. Our die attach also getting traction. It's a restart on iStack. In 2018, I think we probably only focus on one customer, engagement with multiple customer already started. We believe 2019 can be start of our advanced packaging, we expect 2020 will be a bigger year for our advanced packaging because this will be including not only TCB, not only die attach, also including recent announce of high accuracy flip chip.
Okay.
Thank you. Again, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You'll press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Our next question comes from line of Dave Duley with Steelhead Securities. Please proceed.
Thanks for taking my question. A couple from me. First of all, could you talk about what is the application for the OSAT TCB win that you were referring to?
Okay, I think this is for high-end mobile device and for the application processor.
Okay. All right. How large do you expect this piece of business to be over this year and next year? I guess you just were talking about five or six tools. Is that kind of the expectation? Or maybe you could frame it in dollars?
Yeah
you think it'll account for in 2019, let's say.
This year, I think we are talking about maybe about $4 million. Hopefully we can double next year. Other than that, I think there are new variant of TCB. The industry need to deal with the bigger die, larger die, and we are currently engaging with multiple customers. Actually, finally we do see the traction of our TCB business.
Will a lot more artificial intelligence and those really large NVIDIA type chips, those are the ones that you might see further traction on in the future?
Yeah. I think for AI, both our TCB and our high accuracy flip chip participate in AI.
Okay. On a different topic, you mentioned that you saw some pushouts from, I think, the September quarter to the December quarter. Could you help us understand what sort of magnitude you think that you saw there and what areas it came from? Did it come from memory or mobile or Help us quantify how big the pushout was and what segment it came from.
Okay. We don't think it's significant. For example, we got about $180 million to $190 million. Maybe we're talking about 10% of customers, 10% of revenue, people actually consider to push to next quarters.
Okay. As far as, does that mean that you think December will be up sequentially? Will it snap back by this 10% that you didn't get this quarter? Any commentary about December that you can help us understand would be great.
Well, Dave, I wish I have crystal ball. As I mentioned, I think this question is really not unique to our company. It's really the whole industry have a short-term softness. Hopefully we like to see this can be a low quarter for us and going to next year will be higher revenue. As I mentioned, I have very strong confidence on the fundamental of the industry, right? A lot of technology, a lot of products is driving the growth. Demand is there. For example, I'm strong believer of memory demand. The overcapacity is always followed by undercapacity. Under-investment always followed by over-investment. This is the nature of our business, and as long as the demand is there, annual IC growth unit actually has now been revised down. If this holds true, we like to see this quarter is low quarter.
I think our latest, our March quarter, will be a strong quarter.
Okay. Final question from me is just could you give us an idea what % of revenue you get from the memory markets and from the LED markets?
Hi, Dave, it's Lester. LED is just about under 15%. For memory, it fluctuates from quarter to quarter. It's around, for the June quarter, it's approximately around 10%.
Great. Thank you.
Thank you. We have no further questions in queue at this time. I'd like to hand the floor back over to Joseph Elgindy for closing remarks.
Thanks, Roya. Before closing, we wanted to inform investors that we will be participating at the Oppenheimer's 21st Annual Technology, Internet, and Communications Conference in Boston on August 8th and D.A. Davidson's 10th Technology Forum in New York City on August 9th. Thank you all for the time today. As always, please feel free to follow up directly with any additional questions. Roya, this concludes our call. Good day.
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