Greetings, and welcome to the Keulik and Safa 2018 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Elguindy, Director of Investor Relations and Strategic Initiatives for Culik and Sapa.
Joseph, you may begin.
Thank you, Darren. Welcome, everyone, to Culik and Sapa's 1st fiscal quarter 2018 conference call. Joining us on the call today is Susan Chen, our President and Chief Executive Officer and Lester Wong, our 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 dotcom.
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 SOPHAA that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10 ks for the year ended September 30, 2017. I would now like to turn the call over to Susan Chen for
the business overview. Please go ahead, Susan. Thanks, Joe. This quarter, we booked a $105,000,000 charge specifically related to the impact of Tax Cut and Jobs Act of 2017. Due to these large charge and our ongoing plan to further expand our market, drive share gains and improve overall profitability.
We have supplemented our earnings release with non GAAP financial metrics. Lester will provide some additional information shortly regarding our non GAAP approach. Going forward, our remarks will refer to GAAP's results unless noted. For the December quarter, we started our fiscal 2018 with strong results. We delivered $213,700,000 of revenue, well above guidance.
Gross margin of 46.3 percent and operating income of $38,600,000 dollars Excluding the impact of tax reform and our other non GAAP items, non GAAP diluted EPS was $0.54 This operational performance was stronger than our expectations a few months ago and dramatically stronger than our trailing December quarter average, largely due to favorable semiconductor related industry condition and also the slightly earlier than anticipated recognition of revenue associated with automotive related shipment from prior periods. Our significant exposure to positive trends in advanced packaging, automotive, flash memory, LED in addition to industry's ongoing capital intensity are anticipated to continue driving strong operating performance through fiscal 2018. Much of our incremental earnings were driven by our Capital Equipment segments, while Aftermarket Products and the Service segment, APS, performed in line with our aggressive plans. The strength from capital equipment was driven by strong demand, primarily for our ball bonding, wedge bonding and wafer label packaging offering. Our bowbonding business was up 10% from the same period last year.
Ongoing strength in NAND flash, LED and the general semiconductor were the primary driver of this upside. Additionally, we enjoy continuous strength within our advanced packaging business, specifically with our wafer level packaging offering. This platform supports optical and non optical sensor capacities and continue to benefit from premium mobile image and the 3 d sensor assembly needs. Looking forward, the compound annual unit growth rate for non optical sensor 2017 through 2021 is projected to grow at nearly 11% and that the larger optical sensors market is anticipated to grow at nearly 16% over that same period. We continue to seek out new opportunities for this unique and competitive advanced packaging offering.
Finally, revenue of our APS business had increased by 19% over the same period in the prior year. We remain focused in driving share gain and further enhancing these recurring revenue basis business as we move forward. I would now like to turn the call over to Lester Huang, who will cover this quarter's financial overview in greater detail. Lester?
Thank you, Poussin. My remarks today will refer to GAAP results unless noted. Net revenue for the quarter was $213,700,000 Healthy gross margins of 46.3 percent generated $99,000,000 of gross profit. This represented a nearly 45% increase in gross profit over the same period in the prior year. During the quarter, we generated $38,600,000 of operating income and booked a net income loss of $69,300,000 and negative EPS of $0.98 On a non GAAP basis, which primarily excludes a one time tax charge related to the $105,000,000 impact of the Tax Cuts and Reform Act of 2017, EPS was in $0.54 As Luca mentioned, this is a very strong performance during what has historically been viewed as a seasonally soft quarter.
At 46.3%, gross margins came in stronger than we anticipated, largely due to product mix between automotive, advanced packaging and LED equipment. While wedge bonding and advanced packaging contribution benefited December quarter's gross margin, we anticipated LED demand to increase substantially and forecast a March gross margin of slightly below 45% as we discussed in our September quarter conference call. Turning to the balance sheet. We ended the December quarter with a total cash and investment position of $650,200,000 or $9.21 on a per share basis. On a book value per share basis, we closed the December quarter with $12.05 Working capital, defined as accounts receivable plus inventory less accounts payable, decreased by $57,100,000 to $212,100,000 From a DSO perspective, our days outstanding decreased from 83 days to 73 days.
Our days sales of inventory decreased from 99 days to 84 days and days of accounts payable increased from 42 days to 54 days. As a result, our cash conversion cycle reduced from 140 days to 103 days sequentially. Lastly, I want to briefly discuss the impact of the recent tax reform and our non GAAP methodology. For tax reform, we ultimately expected to allow greater flexibility of our global resources, further simplicity of our global entity structure and ultimately a reduced cost of future U. S.
Cash deployment. While the impact of the associate regulations of the Tax Cuts and Jobs Act of 2017
to our
global entity
structure is
not yet crystal clear, Our near term strategy of driving fundamental improvement to organic development and strategic M and A, while opportunity executing the open market repurchase program is unlikely to change. Due to the significant size of this extraordinary item and also our focus on operational efficiency and business expansion, we decided to introduce non GAAP reporting beginning in the December quarter. We believe this provides the investment committee with an additional level of transparency to supplement our GAAP reporting as we work to expand our markets, drive share gains and improve overall profitability. This concludes the financial review portion of our call. I will now turn the discussion back to Stephen for the March quarter's business outlook.
Thanks, Lester. Looking into the March quarters, we are targeting revenue to come in between $205,000,000 $215,000,000 and are anticipating another very strong fiscal year. While we have historically enjoyed a steep sequential increase in the March quarters, as discussed earlier, our freight guidance was largely related to earlier than expected revenue recognition of some automotive related solutions in December quarters. Regardless, considering the strong guidance, the first fiscal half is anticipated to be approximately 21% higher than the 1st fiscal half of twenty seventeen, setting a new record for the company. Ongoing effort to broaden our base of solution and drive fundamental business improvement are expected to further mitigate seasonal and cyclical effect while driving new record for the company.
Through 2018 and beyond, we continue to be aligned with some of the fast growing segments in the semiconductor space, including automotive, memory and the front end expansion in China as well as Korea. Automotive IC units are expected to increase by 16% in calendar 2018 and are forecast to be growing electronic system market Our focus to be the fastest growing electronic system market through 2021. We will continue to support the capacity and the new technology need of our global automotive customers throughout this long term evolutions. Within memory, our shipment of NAND flash effectively doubled in fiscal 2017 over fiscal 2016. We continue to anticipate flash memory capacity to be added at roughly the same pace as it was in 2017, when it amounted to approximately 10% of total revenue.
Next, global semiconductor capital equipment spending is projected to increase again in calendar year 2018 after a fairly significant increase in 2017. This high level expectation is anticipated to drive additional demand for our core Wounding, Wounding and APS offering. In addition, we continue to seek out new advanced packaging opportunities that will further broaden and diversify our business. Overall, we are very excited with our position and the development opportunities as we look ahead. We thank you for your continued support.
We all remain extremely committed to execute our strategy and deliver value to our shareholders. This concludes our prepared remarks. Operator, we will now be happy to take your questions.
Thank you. We will now be conducting a question and answer session. Our first question comes from Craig Ellis of B. Riley and Company. Please proceed with your question.
Thanks for taking the question and congratulations on a strong quarter. Yifuza and I wanted to start off just by following up something that was topical on the last call, which was an interest from the company to pursue the lower end of the LED market. I think at the time, the company noted that there might be some gross margin impacts as you hope to gain share. Can you give us an update on what's happening in that area in 2018?
Sure. Compared to 2017, I think we will gain about 10% more of our LED binder compared to total binder. So 2018, I think we shipped roughly 20% of our bounder will be LED bounder and this is a significant increase. And as I discussed in the previous earnings call, our gross margin will be slightly impacted, slightly below 45%. But we are working hard to recover above 45% gross margin.
Okay. And then moving on to the automotive item that you identified impacted the Q1 favorably and presents a tough comp to the Q2. Can you talk about what you see in that business as we move through the rest of the year? And were there any other early shipments that occurred or was it just in automotive?
Okay. So when our revenue policy is after we accept it by customers, it become a recurring revenue. But for the new customer or existing customer in the new facility, our revenue recognition policy is by acceptance. Once accepted in a new location and the revenue is by shipment. So for this case, actually a low customer already pay when we ship the system.
We wait until customer recognize the performance of the system and we start to recognize the revenue. So original expectation is this amount of revenue roughly $20,000,000 we expect to recognize in Q2. But customer actually accepted few weeks compared to our expectation. Therefore, we have much higher revenue in Q1 compared to Q2.
That's helpful. Moving on to the NAND business, clearly that was very strong last year. There's been some recent concerns about NAND pricing and its impact to capital spending, even though I think bit growth expectations remain about 40% to 45% year on year, at least 40% was the number that Samsung referred to last night. So if we have an environment where bit growth is flat and pricing is down, what kind of impact, if any, does that have on your exposure to the NAND market and your expectations for growth?
Well, I think if you look at memory, we roughly calculate will be about maybe 10% of our total revenue and we are exposed to a multi industry. So one way I look at it, we're still very bullish on the memory and the up and down is really part of our life. If you look at it, the industry actually transitioned from a 48 to a 72 layers. This will make actually solid state drive more competitive compared to hard drive. Therefore, they will issue again for a solid state drive.
That probably will spur more capacity in the future. So short term, I think, up and down is the nature of our life. We just try to diversify our products and focus on our priority. And we assume we try to mitigate the seasonal and cyclical effect and I believe we should do well.
That's helpful. And then the last one for me and I'll hop back in the queue. Can you mention if there was any share repurchase in the quarter? And if so, how significant was it?
I will give Ernesto to talk about it.
Yes. Hi, Craig. We repurchased about 148,000 shares, roughly about $3,000,000
Okay. And then just related to that, given the tax change that's been made, how should investors think about the appetite for share repurchase activity in 2018 versus a continuation of some of the inorganic initiatives that we saw last year?
Look, Craig, I think our capital allocation strategy is the split deployment between roughly evenly between acquisitions, new organic development and also shareholder turns in the longer term by the optimistically, the open market repurchase program. I think while obviously the U. S. Tax reform has allowed the repatriation of cash a little bit easier, I think for now we are continuing with that strategy. However, the Board as well as management continuing to look at what's the best way of capital allocation to drive the company's growth as well as returns increased shareholder value over the short and longer term.
Thanks, Fusen. Thanks, Lester.
Thank you.
Our next question comes from Tom Diffely of D. A. Davidson. Please proceed with your question.
Yes, good afternoon. So I guess first, something to get a little more on the wedge bonded business. It had been a pretty nice growth driver over the last couple of years. Curious what has been performing lately and what you expect for 2018?
Well, actually, we are very bullish in our witch bond business. As you know, other than the boat bond, we are number 1 market shares in the industry, which bounder we are also number 1. And I think we would gain the shares in automotive in particularly and also a lot of high current applications like in the battery and that's the area I think we are quite confident. Okay.
So you think that continues to outpace your core business in 2018?
On a growth rate? We try to grow both Advanced Packaging and our core business. While Advanced Packaging market side were getting bigger, we also expect our core business including bolt bounding, which bounding, EA, so as APS will also grow as well.
Okay. So just to clarify, you said in 2018, you think you can get the LED to be bonded business to be 20% of your revenue. Is that a doubling of LED bonded business year over year?
So actually, let me clarify. 20% of our total broadband is shipped.
Okay.
On a unit basis?
Yes. So in terms of total system, total unit, if we ship this year, we ship, say, 10,000 system, 20% is going to be LED 1, number unit.
Right. Okay. So it's a very nice percentage increase just for overall unit shipments for you and a big increase for revenue alone.
Yes. And we do believe there will be more market shares to gain in coming years.
Okay. And then maybe just quick question on the operating expenses. Any impact from the recent changes on tax or anything at all that would impact how you view different expenses or plans to grow expenses or expand into different regions?
Tom, this is Lester. No, we're still looking at about $53,000,000 per quarter on a GAAP basis, so 5% to 7% variable, what we've always guided.
Okay. And then finally, if you look at the non GAAP $0.54 that you provided us with, is that only excluding the tax impact or are there other non GAAP items in there as well?
There are other non GAAP items in there. There's the tax impact, there's amortization as well as there's a small restructuring charge.
Okay, good.
All right, thank you.
Our next question comes from Greg Isen of Singular Research. Please proceed with your question.
Thank you and good afternoon and congratulations on what seems like a bang of results. My question is your recognition of the tax effect of this new legislation, you have a large deferred large income tax payable amount that's in long term liabilities now of $89,000,000 and change. I think it's my understanding that this comes from the tax law and the ability to defer over a number of years the tax bill for allowing repatriation, of what time frame will you actually pay that income taxes payable?
Hi, Greg, it's Lester. Yes, so the total charge, which was reported today was 105,000,000 dollars However, the total cash charge will be below that as there's other deductions and things that we can take. As far as the time of payment, according to the tax act, we have 8 years to pay and the initial 5 years we pay about 8% and then it goes up in the later part of the year. So it's interest free over the next 8 years and the 1st 5 years is only 8% of the required tax.
And it's interest free. That's quite nice. Okay. And I don't think I heard maybe correct me if I'm wrong, you didn't quote a growth rate for the wedge bond of business
this quarter, you've discussed that
in prior quarters. How much did the wedge bonded business grow this quarter?
I think it will be significant because of 81%. Actually, because of we have earlier than the revenue recognition, so it actually is very high, it's close to 80%. But we will say actually this will not be normal compared to our previous case. But growth rate of Oujibond for this quarter is significantly high.
Right. And the revenue growth and the revenue this quarter was of course above your well above your guidance and the gross margin was well above 45 percent even though you've been last quarter you talked down the idea of being above 45%. Am I to understand because I didn't hear I didn't understand exactly everything you said before. Am I to understand that is really the automotive industry business, which drove both revenues and gross margin ahead of your expectations and guidance?
So Greg, this is Lester. I think for the quarter, for us, the gross margin is largely dictated by product mix. And for the quarter, we had a very strong automotive as well as memory. As we have indicated and we discussed earlier on the call, we are aggressively moving to execute our strategic direction in terms of LED, which has slightly lower margin. So I think, again, that's as we have guided going forward for the year, we believe that the gross margin will be slightly below 45%.
Got it. You just answered my question. Thank you very much. I'll let someone else go.
There are no further questions at this time. I would like to turn the floor back over to Mr. Joseph El Gigi for closing comments.
Thanks, Darren. Before closing, we wanted to inform investors that we will be participating at several upcoming investor events in Hong Kong, Taipei and Singapore. Additional details on past and future events are available at investors. Kns.com. Thank you all for the time today.
As always, please feel free to follow-up directly with any additional questions. Darren, this concludes our call. Have a good day.
This concludes today's teleconference. You may disconnect your lines at this time.